<PAGE>

     AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 30, 2007

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

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 20-F

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

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006

                        COMMISSION FILE NUMBER 000-30020

                           DELTA GALIL INDUSTRIES LTD.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

                                     ISRAEL
                 (Jurisdiction of incorporation or organization)

                    2 KAUFMAN STREET, TEL AVIV 68012, ISRAEL
                    (Address of principal executive offices)

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

                     TITLE OF CLASS             NAME OF EXCHANGE
             ------------------------------   --------------------
                   Ordinary Shares (1)
             American Depositary Shares (2)   Nasdaq Global Market

----------
(1)  Not for trading, but only in connection with the listing of the American
     Depositary Shares.

(2)  Evidenced by American Depositary Receipts, each American Depositary Share
     representing one ordinary share, par value NIS 1.00 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

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

          AS OF DECEMBER 31, 2006 THE REGISTRANT HAD 20,113,711 ORDINARY SHARES
OUTSTANDING (INCLUDING 1,206,802 ORDINARY SHARES OWNED BY THE REGISTRANT AND
166,031 ORDINARY SHARES HELD BY A TRUSTEE IN CONNECTION WITH THE REGISTRANT'S
STOCK OPTION PLANS).

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

                                 Yes [_] No [X]

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

                                 Yes [_] No [X]

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

<PAGE>

requirements for the past 90 days.

                                 Yes [X] No [_]

          Indicate by check mark which financial statement item the Registrant
elected to follow:

                             Item 17 [_] Item 18 [X]

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

                                    Yes [_] No [X]

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

  Large Accelerated filer [_] Accelerated Filer [_] Non-Accelerated Filer [X]

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

<PAGE>

                                TABLE OF CONTENTS

                                                                         Page
                                                                         ----
Introduction   ........................................................    4
Item 1         Identity of Directors, Senior Management and Advisers...    5
Item 2         Offer Statistics and Expected Timetable.................    5
Item 3         Key Information.........................................    5
Item 4         Information on the Company..............................   11
Item 4A        Unresolved Staff Comments...............................   21
Item 5         Operating and Financial Review and Prospects............   22
Item 6         Directors, Senior Management and Employees..............   38
Item 7         Major Shareholders and Related Party Transactions.......   46
Item 8         Financial Information...................................   48
Item 9         The Offer and Listing...................................   48
Item 10        Additional Information..................................   50
Item 11        Quantitative and Qualitative Disclosures About Market
                  Risk.................................................   59
Item 12        Description of Securities Other Than Equity Securities..   60
Item 13        Defaults, Dividend Arrearages and Delinquencies.........   60
Item 14        Material Modifications to the Rights of Security Holders
                  and Use of Proceeds..................................   60
Item 15        Controls and Procedures.................................   60
Item 16A       Audit Committee Financial Expert........................   60
Item 16B       Code of Ethics..........................................   60
Item 16C       Principal Accountant Fees and Services..................   60
Item 16D       Exemptions from Listing Standards for Audit Committees..   61
Item 16E       Purchases of Equity Securities by the Issuer and
                  Affiliated Purchasers................................   61
Item 17        Financial Statements....................................   61
Item 18        Financial Statements....................................   61
Item 19        Exhibits................................................   61


                                      -3-

<PAGE>

                                  INTRODUCTION

          As used herein, references to "we," "our," "us," "Delta Galil" or the
"Company" are references to Delta Galil Industries Ltd. and to its consolidated
subsidiaries, except as the context otherwise requires. In addition, references
to our "financial statements" are to our consolidated financial statements
except as the context otherwise requires.

          In this document, references to "$," "US$," "U.S. dollars" and
"dollars" are to United States dollars and references to "NIS" and "shekels" are
to New Israeli Shekels.

          Our financial statements included in this annual report are prepared
in accordance with U.S. GAAP, and the accompanying discussion of the results of
our operations is based on our results under U.S. GAAP. See "Item 18. Financial
Statements" and "Item 5. Operating and Financial Review and Prospects-Operating
Results".

          Delta Galil had 20,113,711 ordinary shares outstanding as of March 25,
2007, including shares held by Delta Galil itself and shares held by a trustee
in connection with Delta Galil's stock option plans. Percentages of outstanding
shares used herein are based on 18,740,878 ordinary shares outstanding as of
March 1, 2007, which excludes 1,206,802 ordinary shares held by Delta Galil, and
166,031 ordinary shares held by a trustee in connection with Delta Galil's stock
option plans.


                                      -4-

<PAGE>

                                     PART I

ITEM 1: IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not Applicable.

ITEM 2: OFFER STATISTICS AND EXPECTED TIMETABLE

Not Applicable.

ITEM 3: KEY INFORMATION

3.A SELECTED FINANCIAL DATA

          The selected consolidated statement of income data set forth below
have been derived from Delta Galil's audited consolidated financial statements,
which were prepared in accordance with U.S. GAAP. The selected consolidated
financial data set forth below should be read in conjunction with "Item 5.
Operating and Financial Review and Prospects" and Delta Galil's consolidated
financial statements and the notes to those financial statements included in
Item 18 of this annual report.


                                      -5-

<PAGE>

<TABLE>
<CAPTION>
                                                                            YEAR ENDED DECEMBER 31,
                                                             -----------------------------------------------------
                                                               2002       2003       2004        2005       2006
                                                             --------   --------   --------   ---------   --------
                                                                    ($ IN THOUSANDS, EXCEPT PER SHARE DATA)
                                                             -----------------------------------------------------
<S>                                                          <C>        <C>        <C>        <C>         <C>
STATEMENT OF INCOME DATA:
Net revenues .............................................   $567,298   $580,130   $654,269   $ 684,481   $706,699
Cost of revenues .........................................    454,238    463,863    533,036     582,799    574,246
                                                             --------   --------   --------   ---------   --------
Gross profit .............................................    113,060    116,267    121,233     101,682    132,453
Selling, marketing, general administrative expenses ......     84,135     82,089     98,646     107,008    107,752
Amortization of intangible asset .........................                                          779        739
Loss (gain) from realization of assets ...................         92     (3,645)      (922)         77       (686)
Impairment of fixed assets ...............................                                        7,415
Restructuring expenses ...................................      1,065      1,007      1,100       9,102      1,663
Goodwill impairment ......................................                                        5,505
                                                             --------   --------   --------   ---------   --------
Operating income (loss) ..................................     27,768     36,816     22,409     (28,204)    22,985
Financial expenses - net .................................      5,456      5,637      6,231      10,218     13,558
Other income - net .......................................        960        252        958         300
                                                             --------   --------   --------   ---------   --------
Income (loss) before taxes on income .....................     23,272     31,431     17,136     (38,122)     9,427
Income tax benefit (expense) .............................     (5,779)    (7,340)    (2,846)      2,302     (5,784)
                                                             --------   --------   --------   ---------   --------
Income (loss) after taxes on income ......................     17,493     24,091     14,290     (35,820)     3,643
Share in profits (losses) of associated companies - net ..        158       (300)      (237)        (27)
Minority interests - net .................................     (1,025)      (439)    (1,368)       (500)      (495)
                                                             --------   --------   --------   ---------   --------
Net income (loss) ........................................   $ 16,626   $ 23,352   $ 12,685   $ (36,347)  $  3,148
                                                             ========   ========   ========   =========   ========
EPS:
Basic ....................................................   $   0.88   $   1.28   $   0.69   $   (1.94)  $   0.17
                                                             ========   ========   ========   =========   ========
Diluted ..................................................   $   0.88   $   1.24   $   0.67   $   (1.94)  $   0.17
                                                             ========   ========   ========   =========   ========
Weighted average number of shares used in computation(1)
   Basic .................................................     18,914     18,313     18,478      18,695     18,700
   Diluted ...............................................     18,927     18,763     18,834      18,695     18,742
Cash dividend per ordinary shares ........................   $   0.37   $   0.52   $   0.45         -,-        -,-
</TABLE>

(1)  See note 11g of the notes to Delta Galil's consolidated financial
     statements included in Item 18 of this annual report for a discussion of
     the shares used to compute net income per share for the years ended
     December 31, 2004, 2005 and 2006.


                                       -6-

<PAGE>

<TABLE>
<CAPTION>
                                             YEAR ENDED DECEMBER 31,
                               ----------------------------------------------------
                                 2002       2003       2004       2005       2006
                               --------   --------   --------   --------   --------
                                                ($ IN THOUSANDS)
                               ----------------------------------------------------
<S>                            <C>        <C>        <C>        <C>        <C>
   BALANCE SHEET DATA:
Cash and cash equivalents ..   $ 14,491   $ 17,699   $ 22,150   $ 14,595   $ 10,342
Working capital (1) ........     67,945     56,612    127,382     80,949     54,853
Total assets ...............    441,058    450,884    534,497    476,573    450,862
Shareholders' equity .......    197,829    212,334    221,081    184,314    188,217
Amount of Share Capital ....     21,792     21,830     21,840     21,840     21,851
</TABLE>

(1)  Working capital is computed as total current assets less current
     liabilities.

3.B  CAPITALIZATION AND INDEBTEDNESS -

Not applicable.

3.C  REASONS FOR THE OFFER AND USE OF PROCEEDS

Not applicable.

3.D  RISK FACTORS

          The following factors, in addition to other information contained in
this annual report, should be considered carefully.

          This annual report includes certain statements that are intended to
be, and are hereby identified as, "forward-looking statements" for the purposes
of the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. We have based these forward-looking statements on our current expectations
and projections about future events. These forward-looking statements are
subject to risks, uncertainties, and assumptions about Delta Galil, including,
among other things:

          o    our anticipated growth strategies;

          o    our intention to introduce new products;

          o    increased competition, especially from the Far East;

          o    anticipated trends in our business;

          o    future expenditures for capital projects; and

          o    our ability to continue to control costs and maintain quality.

          Forward-looking statements can be identified by the use of
forward-looking terminology such as "may," "will," "expect," "anticipate,"
"estimate," "continue" or other similar words. These statements discuss future
expectations, contain projections of results of operations or of financial
condition or state other "forward-looking" information. When considering such
forward-looking statements, you should keep in mind the risk factors and other
cautionary statements in this annual report.

          These statements may be found in Item 4: "Information on the Company"
and Item 5: "Operating and Financial Review and Prospects" and in this annual
report generally. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of various factors,
including all the risks discussed in "Risk Factors" and elsewhere in this annual
report.

          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.

RECENT CHANGES IN WORLD TRADE ORGANIZATION QUOTAS COULD PUT PRESSURE ON APPAREL
PRICES.

          Effective January 1, 2005, the World Trade Organization's 148 member
nations lifted some of the quotas on apparel and textiles. As a result, some of
the textiles and textile apparel manufactured in a member nation are no longer
subject to quota restrictions, although in 2006, some of the quotas on products
from China were re-imposed. This change allows retailers, apparel firms and
others to import unlimited quantities of apparel and textile items from China,
India and other low-cost countries. As a result, prices of textiles and apparel,
including our products, have faced downward pressure and may continue to
decline. If


                                       -7-

<PAGE>

prices decline faster than we are able to cut costs, our business and results of
operations could be affected adversely.

MOST OF DELTA GALIL'S SALES ARE TO A FEW SIGNIFICANT CUSTOMERS. ANY REDUCTION OF
PURCHASES BY ANY SIGNIFICANT CUSTOMER COULD MATERIALLY ADVERSELY AFFECT DELTA
GALIL'S REVENUES.

          A majority of Delta Galil's revenues is from sales to three customers.
In 2006, 22% of Delta Galil's revenues were from sales to Marks and Spencer,
Delta Galil's largest customer. Sales to Wal-Mart reached 21% of revenues and
sales to Target reached 8% of revenues. Delta Galil's contracts with its
customers, including Marks & Spencer, Wal-Mart and Target are short-term and do
not contain minimum purchase requirements. It is possible that, in the future,
Delta Galil's customers will not purchase Delta Galil's products in the same
volumes or on the same terms as in the past. Any reduction of purchases by Marks
& Spencer, Wal-Mart, Target or other key customers could adversely affect Delta
Galil.

DELTA GALIL HAS BENEFITED FROM ITS SHIFT OF LABOR-INTENSIVE PRODUCTION TO LOWER
LABOR COST COUNTRIES. A RISE IN WAGE LEVELS IN THOSE COUNTRIES COULD ADVERSELY
AFFECT DELTA GALIL'S FINANCIAL RESULTS.

          Delta Galil owns production facilities and outsources production in
countries that have low labor costs. In 2006, Delta Galil produced goods in
Jordan, Egypt, Turkey, Eastern Europe and the Far East that accounted for
approximately 88% of its revenues. Historically, Delta Galil's operating results
have benefited from this shift of labor-intensive production to lower labor cost
countries, and Delta Galil intends to increase its production in low labor cost
countries. Delta Galil's financial results could be harmed if wage levels
increased dramatically in the countries in which Delta Galil produces. In
addition, there can be no assurance that we will be able to shift additional
production to lower labor cost countries.

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

          Products produced in Egypt, Jordan and Turkey accounted for 35% of our
2006 revenues. Delta Galil's operations in these countries depend largely on
their relationship with the State of Israel. In the past, there have been
hostilities between Israel and Jordan and Egypt. In addition, since October
2000, there has been an increase in hostilities between Israel and the
Palestinians. As a result, several Arab states reduced the level of relations
with the State of Israel, principally regarding economic and commercial
activities. A deterioration in Israel's relations with Jordan or Egypt could
interrupt Delta Galil's foreign production operations and would adversely affect
Delta Galil.

DUE TO SEASONAL FLUCTUATIONS, DELTA GALIL'S OPERATING RESULTS IN ANY QUARTER MAY
NOT BE REPRESENTATIVE OF FUTURE PERFORMANCE.

          Delta Galil has experienced fluctuations in its annual and quarterly
operating results, and may continue to experience these fluctuations in the
future. Delta Galil's revenues have fluctuated in certain years due to seasonal
purchasing by consumers. Revenues in the last two quarters of certain years
exceeded revenues in the first two quarters due to back-to-school and holiday
purchases. Because of these fluctuations, Delta Galil's operating results in any
quarter may not be representative of its future performance. These fluctuations
may make it difficult for investors to properly evaluate Delta Galil's
prospects.

DELTA GALIL'S INTERNATIONAL OPERATIONS EXPOSE IT TO THE RISK OF FLUCTUATIONS IN
CURRENCY EXCHANGE RATES THAT COULD HARM ITS OPERATING RESULTS.

          Although Delta Galil is an Israeli company, its functional currency is
the U.S. dollar. Delta Galil has operations and sales in many countries that are
not denominated in dollars, and is therefore exposed to fluctuations in the rate
of exchange between the dollar and those currencies. In 2006, Delta Galil
derived 24.3% of its revenues from customers in Pounds Sterling, 8.5% in NIS,
and 7.6% in Euros. More than 10% of Delta Galil's expenses in 2006 were in NIS.

          Some of Delta Galil's expenses in Israel are linked to the Israeli
consumer price index. Consequently, Delta Galil is exposed to risk to the extent
that the rate of Israeli inflation exceeds the rate of the NIS devaluation in
relation to the U.S. dollar and to the extent that the timing of such
devaluation lags behind inflation in Israel, resulting in a negative effect on
Delta Galil's profitability in dollar terms in those periods.

          In order to limit Delta Galil's exposure to fluctuations in the
exchange rate between the U.S. dollar and other currencies, Delta Galil from
time to time purchases forward contracts for the exchange of foreign currencies
into dollars at a fixed rate. Nevertheless, these hedging transactions will not
protect Delta Galil if the decline in those currencies against the dollar
continues for longer than the term of the forward contracts. See Item 11:
"Quantitative and Qualitative Disclosures About Market Risk".



                                       -8-

<PAGE>

INTEGRATION OF RECENT ACQUISITIONS WITH DELTA GALIL REQUIRES SUBSTANTIAL
MANAGERIAL RESOURCES, AND DELTA GALIL MAY BE UNABLE TO ACHIEVE INTEGRATION
SUCCESSFULLY.

          In December 2004, Delta Galil acquired Burlen Corporation, and in
November 2003 Delta Galil completed the acquisition of Auburn Hosiery Mills and
its subsidiaries. We are continuing to integrate the facilities and personnel of
these acquired companies. The integration diverts substantial attention of our
senior management team from Delta Galil's daily operations, places significant
pressure on our staff and other resources and poses financial, operational and
legal risks. The integration may be impeded by general economic conditions,
failure to integrate financial and operating systems, adverse response of
competitors or clients, or regulatory developments. Any failure to complete the
integration successfully could adversely affect Delta Galil.

THE APPAREL INDUSTRY IS SUBJECT TO CHANGES IN FASHION PREFERENCES. IF DELTA
GALIL AND ITS CUSTOMERS MISJUDGE A FASHION TREND, SALES COULD DECLINE.

          Delta Galil's success depends, in part, on its ability to design and
manufacture products that will appeal to consumers' changing fashion
preferences. Delta Galil may not be successful in anticipating and responding to
fashion trends in the future. If Delta Galil and its customers misjudge a
fashion trend, the customer's orders may decline, which could adversely affect
Delta Galil.

DELTA GALIL MAY BE UNABLE TO COMPETE WITH OTHER MANUFACTURERS THAT HAVE
FINANCIAL, GEOGRAPHIC AND OTHER ADVANTAGES.

          Delta Galil competes directly with numerous manufacturers of apparel,
which enjoy better economies of scale and/or lower effective labor costs, are
closer geographically to customers and/or suppliers, and enjoy greater financial
and marketing resources than Delta Galil. Increased competition could result in
pricing pressure or loss of market share and adversely affect Delta Galil's
revenues and profitability. There can be no assurance that Delta Galil will be
able to compete successfully against existing or new competitors.

IF PRIVATE LABEL CUSTOMERS PRODUCE THEIR OWN PRODUCTS AND CONTRACT DIRECTLY WITH
MANUFACTURERS SUCH AS DELTA GALIL, OUR SALES COULD DECLINE.

          Recently, some large retailers have attempted to bypass private label
underwear manufacturers and to contract directly with factories to produce their
own products. This trend is most likely to occur in the more basic, mass-market
products, in which design is less of a factor. If this trend continues and
grows, it could have an adverse effect on Delta Galil's sales in those
categories.

IF DELTA GALIL'S CUSTOMERS ARE UNABLE TO SUCCESSFULLY COMPETE IN THEIR MARKETS,
DELTA GALIL'S REVENUES COULD DECLINE.

          Delta Galil's customers operate in an intensely competitive retail
environment. In the event that any of its customers' sales decline for any
reason, whether or not related to Delta Galil or its products, Delta Galil's
sales to such customers could also decline.

GMM CAPITAL AND DOV LAUTMAN OWN OVER 50% OF DELTA GALIL'S OUTSTANDING SHARES,
AND TOGETHER CAN CONTROL DELTA GALIL'S MANAGEMENT.

          GMM Capital beneficially owns 5,323,793 ordinary shares, representing
28.4% of the outstanding ordinary shares of Delta Galil. Mr. Dov Lautman the
Chairman of the Board of Directors of Delta Galil, beneficially owns 4,644,993
ordinary shares, representing approximately 24.8% of the ordinary shares
outstanding. Mr. Lautman and the companies that he controls have a shareholders'
agreement with GMM Capital that requires each party to vote the shares it
beneficially owns to elect directors designated by GMM Capital to compose 30% of
the board of directors, other than independent directors, and to elect Mr.
Lautman's designees for the remainder of the board, other than independent
directors. In addition, the agreement provides that the appointment of a new
Chief Executive Officer requires the consent of GMM Capital, and the consent of
both GMM Capital and the companies controlled by Mr. Lautman is required for a
number of major decisions, as described in "Item 7 -- Major Shareholders And
Related Party Transactions - Shareholders Agreements." Mr. Lautman and GMM
Capital have also given one another the first opportunity to buy any shares the
other party wishes to sell. Mr. Lautman and GMM Capital together have the power
to elect all of the directors other than independent directors, appoint
management and approve actions requiring the approval of a majority of Delta
Galil's shareholders.


                                       -9-

<PAGE>

DOV LAUTMAN, DELTA GALIL'S CHAIRMAN, FOUNDER AND ONE OF THE PRINCIPAL
SHAREHOLDERS, HAS SIGNIFICANTLY CONTRIBUTED TO ITS SUCCESS. IF DOV LAUTMAN WERE
TO LEAVE, DELTA GALIL COULD BE ADVERSELY AFFECTED.

          Dov Lautman, the Chairman of the Board of Directors, a founder and one
of the principal shareholders of Delta Galil, has made significant contributions
to its growth. Delta Galil does not have an employment agreement with Mr.
Lautman. Should Mr. Lautman discontinue his service, Delta Galil's business may
be adversely affected.

DELTA GALIL HAS NO CONTROL OVER FLUCTUATIONS IN THE COST OF THE RAW MATERIALS IT
USES OR THE COST OF FREIGHT. A RISE IN COSTS COULD HARM DELTA GALIL'S
PROFITABILITY.

          The primary raw materials used by Delta Galil in the manufacture of
its products are cotton yarn, Lycra(R) and elastics. Delta Galil's financial
performance is dependent to a substantial extent on the cost and availability of
these raw materials. The price of these raw materials, as well as freight costs,
fluctuate due to varying supply and demand and other market factors over which
Delta Galil has no control. Delta Galil may not be able to transfer the
increased costs due to a rise in prices of raw materials to its customers. This
would likely adversely affect Delta Galil's profitability and financial
condition.

BECAUSE DELTA GALIL OPERATES INTERNATIONALLY, IT IS EXPOSED TO CHANGES IN
FOREIGN REGULATIONS, TARIFFS, TAX LAWS AND OTHER RISKS INHERENT TO INTERNATIONAL
BUSINESS, ANY OF WHICH COULD AFFECT DELTA GALIL'S OPERATING RESULTS.

          Delta Galil's international purchases, sales and production expose it
to risks inherent in doing business in international markets such as:

     o    adverse changes in foreign regulations, export restrictions, tariffs,
          trade barriers and tax rules;

     o    difficulty in staffing and managing international operations; and

     o    changes in social, political and economic conditions.

     Any of these factors could adversely affect Delta Galil's ability to
deliver or receive goods on a competitive and timely basis and its results of
operations.

DELTA GALIL HAS NO ESTABLISHED DIVIDEND POLICY AND CANNOT ASSURE THE AMOUNT OR
FREQUENCY OF FUTURE DIVIDENDS.

          Delta Galil does not have an established dividend policy. Delta Galil
distributed cash dividends to shareholders from time to time in the past and may
do so in the future. However, Delta Galil cannot assure the amount, frequency or
any distribution of future dividends. Delta Galil's board of directors will
determine future dividends, in light of several factors including Delta Galil's
earnings, financial condition and capital requirements. In addition, under
Israeli law, Delta Galil may pay dividends only out of accumulated earnings or
out of net earnings for the two years preceding the distribution of the
dividends.

A REVIVAL OF HOSTILITIES INVOLVING ISRAEL COULD ADVERSELY AFFECT DELTA GALIL'S
INTERNATIONAL TRADE AND OPERATIONS.

          Delta Galil is incorporated under the laws of the State of Israel,
where it also maintains its headquarters and a significant part of its
manufacturing facilities. Political, economic and military conditions in Israel
directly influence Delta Galil. Since the establishment of the State of Israel
in 1948, Israel and its Arab neighbors have engaged in a number of armed
conflicts. A state of hostility, varying in degree and intensity, has led to
security and economic problems for Israel. Despite progress towards peace
between Israel, its Arab neighbors and the Palestinians, major hostilities may
revive. Such hostilities may hinder Israel's international trade and lead to
economic downturn. This, in turn, could have a material adverse effect on Delta
Galil's operations and business.

          Generally, male adult citizens and permanent residents of Israel are
obligated to perform military reserve duty annually. Additionally, these
residents may be called to active duty at any time under emergency
circumstances. The full impact on Delta Galil's workforce or business if some of
Delta Galil's officers and employees are called upon to perform military service
is difficult to predict.

DELTA GALIL BENEFITS FROM ISRAELI GOVERNMENT PROGRAMS THAT COULD BE REDUCED OR
ELIMINATED, INCREASING DELTA GALIL'S COSTS.

          Many of Delta Galil's existing production facilities in Israel were
entitled to Israeli government grants and tax benefits. Delta Galil received
grants until 2004 under these programs. The grant levels have been reduced in
the past by the Israeli government and there can be no assurance that the
Israeli government


                                      -10-

<PAGE>

will not further reduce these investment grants. See Item 10: "Additional
Information - Israeli Taxation."

          Due to existing losses for tax purposes, Delta Galil has not used any
of the tax benefits to which it is entitled under these government programs
since 1999, except with respect to accelerated depreciation on real-estate
property. The remaining tax benefits may be available for use in future years.
See Item 10: "Additional Information - Israeli Taxation."

          The termination or reduction of these Israeli government programs,
particularly benefits available to Delta Galil as a result of the "Approved
Enterprise" status of its existing facilities, would increase Delta Galil's
costs of acquiring machinery and equipment for its production facilities, which
could have an adverse effect on Delta Galil.

          In order to maintain eligibility for these grants and tax benefits,
Delta Galil must continue to meet various conditions, such as investment in
fixed assets and operations in specified zones. If Delta Galil fails to meet
these conditions in the future, it could be required to forego tax benefits and
to refund grants already received, in whole or in part, with interest, linked to
the consumer price index in Israel. To secure its obligations, Delta Galil gave
the Israeli government a security interest over all its assets in Israel.

DELTA GALIL BENEFITS FROM PRODUCING IN COUNTRIES THAT HAVE FREE TRADE AGREEMENTS
WITH COUNTRIES WHERE ITS CUSTOMERS ARE LOCATED. A LOSS OF THESE FREE TRADE
ADVANTAGES WOULD ELIMINATE AN IMPORTANT COMPETITIVE ADVANTAGE.

          Delta Galil benefits from Israel's free trade agreements with the
United States, Canada, the European Union and the European Free Trade
Association. The trade agreements permit Delta Galil to sell its Israeli
manufactured products to the United States, Canada, and the member countries of
the European Union and the European Free Trade Association free of customs
duties and import quotas. The United States has extended the benefits of the
Israel- United States Free Trade Area Agreement to goods processed in the area
of Jordan in which Delta Galil has its facilities. Due to a free trade agreement
between the European Union, the United States and Egypt, Delta Galil's products
manufactured in Egypt can enter the EU countries and into the United States,
free of duties and quotes, as well. A loss of these free trade advantages would
eliminate an important competitive advantage.

YOU MAY NOT BE ABLE TO ENFORCE CIVIL LIABILITIES IN THE UNITED STATES AGAINST
DELTA GALIL'S OFFICERS AND MOST OF ITS DIRECTORS.

          Most of Delta Galil's officers and 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 Delta Galil's assets are
located outside the United States, any judgment obtained in the United States
against Delta Galil or any of its directors and officers may not be collectible
within the United States.

ITEM 4: INFORMATION ON THE COMPANY

4.A HISTORY AND DEVELOPMENT OF THE COMPANY

          Delta Galil Industries Ltd. was incorporated in Israel in 1975 and
operates as a public company with liability limited by shares under the Israeli
Companies Law, 1999. Our registered offices are located at 2 Kaufman Street,
Tel-Aviv 68012, Israel and our telephone number is (972) 3-519-3636. Delta
Galil's ordinary shares have been listed on the Tel Aviv Stock Exchange since
1982. In 1999 the trading of Delta Galil's ADSs commenced on the Nasdaq National
Market, currently named the Nasdaq Global Market. Delta Galil, with its
consolidated subsidiaries, is a global manufacturer and marketer of quality
private label ladies' intimate apparel, men's underwear, socks, shirts,
babywear, bras, leisurewear and nightwear, knitted fabrics, dyeing, trimmings
and elastic ribbons. Delta Galil sells its products to leading retailers,
including:

     o    Marks & Spencer (U.K.)
     o    Wal-Mart (U.S.)
     o    Target (U.S.)
     o    Victoria's Secret (U.S.)
     o    Hema (Holland)
     o    JC Penney (U.S.)
     o    Kmart (U.S.)
     o    Mervyn's (U.S.)



                                      -11-

<PAGE>
and to marketers of leading brand names, including:

     o    Calvin Klein (U.S.)
     o    Nike
     o    Hugo Boss (Germany)
     o    Pierre Cardin

          Delta Galil also sells its products under brand names which are
licensed to Delta Galil, such as Wilson(R), Barbie(R), Maidenform(R), Nicole
Miller(R), as well as under the Delta brand name (in Israel).

          Delta Galil's ability to provide its customers with a comprehensive
package of services has enabled it to develop and maintain strong long-term
relationships with its customers. These services include:

     o    product line planning and design;

     o    manufacture of high quality knitted apparel using automated
          manufacturing processes; and

     o    marketing, packaging and distribution of finished products tailored to
          the requirements of the customers in Europe and the United States.

          Delta Galil designs and develops its products primarily in the United
States, England and Israel. Most of Delta Galil's products are manufactured in
lower labor cost countries, such as Egypt, Jordan and Turkey as well as
countries in the Far East.

CAPITAL EXPENDITURES

          The following table shows Delta Galil's fixed assets purchases in
thousands US dollars for the last three years on a cash flow basis, broken down
by regions. These capital expenditures were financed from Delta Galil's
operating cash flow.

                           YEAR ENDED DECEMBER 31,
                         --------------------------
                           2004      2005     2006
                         -------   -------   ------
     Israel ..........   $ 6,602   $ 3,424   $2,364
     China ...........               3,665      855
     Egypt ...........     3,253     3,100      619
     North America ...       851     2,233      790
     Thailand ........                          501
     India ...........                          340
     United Kingdom ..       314       209       70
     Eastern Europe ..     1,112       109       16
     Jordan ..........       914        38       83
     Others ..........       438       256       68
                         -------   -------   ------
      Total              $13,484   $13,034   $5,706
                         =======   =======   ======

4.B  BUSINESS OVERVIEW

COMPETITIVE STRENGTHS

          The apparel market is highly competitive and fragmented. Delta Galil's
products compete with the products of other manufacturers located throughout the
world.

          Competition in the apparel market is generally based on price, quality
and customer service. Delta Galil believes that it has a relative advantage over
its competitors for the following reasons:

     o    HIGH QUALITY INNOVATIVE PRODUCT LINES. Delta Galil produces a broad
          selection of fashionably designed product lines using high quality
          knitted materials and attractive packaging. In 1998, Delta Galil
          introduced seamless intimate apparel, known as "seam-free" products.
          These products are produced using techniques that minimize
          labor-intensive production functions. In 2005 Delta introduced the
          next generation cotton "Real Cool Cotton" (RCC). RCC(TM) uses a
          nano-technology process along with special treatment to increase the
          absorption capacity of the fabric, simultaneously transferring
          moisture to the surface and enabling swift evaporation.

     o    LONG-TERM RELATIONSHIPS WITH LEADING RETAILERS AND BRAND NAME
          MARKETERS. Delta Galil has developed long-term relationships with its
          customers, many of whom control significant market shares in their
          respective countries. Although Delta Galil's customer contracts are
          generally short-term and do not contain minimum purchase requirements,
          Delta Galil has enjoyed relationships of more than five years with
          most of its major customers. Delta Galil and its in-house design teams
          and technology experts work closely with customers to provide a
          comprehensive package of services, including design, development,
          manufacturing and marketing of new product lines.



                                      -12-

<PAGE>

     o    UNIQUE FREE TRADE STATUS. Israel has free trade agreements with each
          of the United States, Canada, the European Union and the European Free
          Trade Association. Delta Galil's operations in Jordan and Egypt also
          benefit from advantageous trade agreements.

STRATEGY

The key elements of Delta Galil's strategy are to:


     o    ENHANCE SALES TO EXISTING LARGE CUSTOMERS. Delta Galil seeks to
          increase sales of existing products and to introduce new product
          categories to existing customers. Delta Galil believes its broad
          product offerings, emphasis on customer service and proven reliability
          provide a competitive advantage as retailers consolidate purchases
          from a smaller number of suppliers. Delta Galil intends to continue
          capitalizing on this trend by expanding the scope of its existing
          customer relationships.

     o    DEVELOP RELATIONSHIPS WITH SELECTED NEW CUSTOMERS. Delta Galil is
          developing relationships with new customers who require high quality
          products to sell under their private labels or brands, are capable of
          ordering in significant volumes, demonstrate substantial growth
          potential and require Delta Galil's high level of service. Recent
          customer additions include Tommy Hilfiger(R), Puma(R), Polo(R), and
          Carrefour(R) (Europe), and Nicole Miller(R) (North America).

     o    CONTINUOUSLY IMPROVE ITS MANUFACTURING EFFICIENCY. Delta Galil
          continuously seeks to increase manufacturing efficiencies by (1)
          moving labor intensive functions to lower cost countries, (2) further
          automating its operations and (3) introducing new technologies.

     o    PURSUE STRATEGIC ACQUISITIONS. In December 2004 Delta acquired Burlen
          Corporation. Delta Galil may pursue additional strategic acquisitions
          of businesses that would complement its product lines and customer
          relationships.

     o    BRANDING. The market positioning of brands is becoming more prominent.
          Behind each such brand there is a message, which brings the consumer,
          an emotional attachment to the product. Delta Galil, traditionally a
          private label manufacturer, began licensing leading brand names in the
          last few years for use in socks and men's and ladies' underwear. These
          brands include, Nicole Miller(R) worldwide; Wilson(R) and Converse(R)
          for socks and men's and ladies' underwear for the European and North
          American market; Barbie(R) for girls' sleepwear in the United States
          and Maidenform(R) for girls' bras in the United States. Delta handles
          all aspects of production from the initial processes to finished
          products and inventory management. Delta Galil is looking for
          additional brands to license.

2004 ACQUISITION

ACQUISITION OF BURLEN

          In December 2004, Delta Galil acquired Burlen Corp., a leading private
label manufacturer of ladies intimate apparel. Burlen's customers are mass and
mid-market retailers. Burlen has been supplying Wal-Mart, its largest customer,
for nearly 40 years. Burlen's design, merchandising and marketing teams are
located in New York and its logistics, operations and distribution facilities
are located in Tifton, Georgia. Burlen manufactures primarily through
subcontractors in the Far East and the Caribbean.

          Delta paid Burlen's selling shareholders $48.2 million in cash and
$2.2 million in ordinary shares comprised of 215,684 ordinary shares valued at
$10.43 per share transferred from Delta's treasury shares. In addition, Delta
paid $8.2 million of Burlen's bank debt. Delta Galil also accrued $1.0 million
in other cost related to the transaction, which were paid in 2005.

          During 2005, Delta Galil made a $1.3 million additional payment to the
selling shareholders with respect to additional costs incurred by the Company as
it was agreed in the purchase agreement. This payment was recorded as additional
goodwill.

          In addition, under the agreement Delta Galil was required to pay
additional amounts of up to $15 million in the aggregate to the selling
shareholders, subject to achieving certain revenues and operating profit targets
over a period of three years, from 2005 to 2007.

          In February 2006, the parties signed an amendment to the stock
purchase agreement based on which the aggregate additional amount which could be
paid to the selling shareholders was increased to a maximum of $18 million,
subject to achieving adjusted targets over a period of six years, from 2006 to
2011. On March



                                      -13-

<PAGE>

15, 2006, a non-refundable payment of $1.3 million was made against future
consideration with respect to 2007 and 2008 targets. In March 2007, Delta Galil
made an additional $2.4 million payment to the selling shareholders with respect
to 2006 targets, as agreed in the purchase agreement. This payment was recorded
on December 31, 2006 as additional goodwill.

PRODUCTS

          Delta Galil works closely with its customers to design and manufacture
high quality knitwear. Delta Galil produces a variety of products using cotton
and man-made fibers, which are generally sold at all price levels.

          The following table outlines representative products in each of Delta
Galil's product categories, key customers/brands and the percentage of total
revenues that each product category represented during 2004, 2005 and 2006.

<TABLE>
<CAPTION>
                                                                                     % OF REVENUES
                                                                                YEAR ENDED DECEMBER 31,
                                                                                -----------------------
PRODUCT CATEGORY   KEY PRODUCTS                          KEY CUSTOMERS/BRANDS      2004   2005   2006
----------------   -----------------------------------   --------------------      ----   ----   ----
<S>                <C>                                   <C>                        <C>    <C>    <C>
Ladies' Intimate   Fashion and basic panties and bras    Marks & Spencer            54%    61%    58%
Apparel            Women's nightwear                     Wal-Mart
                   Girl's nightwear                      Target
                                                         JC Penney
                                                         Victoria's Secret
                                                         Calvin Klein

Socks              Men's, women's and children's         Marks & Spencer            23%    20%    19%
                   leisure, dress and sport socks        Nike
                                                         Wal-Mart
                                                         Hema

Men's Underwear    Briefs                                Calvin Klein               13%    11%    15%
                   Boxer shorts                          Hema
                   Mini-briefs                           Hugo Boss
                   Undershirts                           Marks & Spencer
                   Men's nightwear                       Wal-Mart
                                                         Target

Leisurewear        T-shirts                              Marks & Spencer             4%     3%     4%
                   Polo shirts
                   Sweatshirts
                   Leisure clothes

Babywear           Fashion and classic items, focusing Marks & Spencer               4%     3%     3%
                   on newborns

Others             Fabrics, elastic tapes and other                                  2%     2%     1%
                   operations
                                                                                   ---    ---    ---
                                                                                   100%   100%   100%
                                                                                   ===    ===    ===
</TABLE>

o    LADIES' INTIMATE APPAREL: Delta Galil's intimate apparel items include both
     fashion and basic underwear, bras and seam-free panties, tops and control
     underwear. The decrease in this category as a percentage of total revenues
     in 2006 is mainly due to the decrease in sales to Marks & Spencer due to
     increased competition from the Far East.

o    SOCKS: Delta Galil manufactures men's, women's and children's socks in the
     leisure, dress and sports categories. Among the varieties of socks that
     Delta Galil manufactures are socks with popular cartoon and other
     characters that Delta Galil licenses. The decrease in this category in 2006
     is mainly due to the decrease in sales in North America due to Delta's
     decision to cease its activity in Canada.


                                      -14-

<PAGE>

o    MEN'S UNDERWEAR: Delta Galil manufactures men's fashion and basic underwear
     for customers that include marketers of fashion brands and department store
     private labels. The increased sales in this category in 2006 are attributed
     to a general increase in orders from most of our customers and due to the
     introduction of new Real Cool Cotton products.

o    LEISUREWEAR: Delta Galil manufactures basic and fashion leisurewear in a
     wide variety of styles and fabrics. The products range from T-shirts, polo
     shirts, sweatshirts and jogging suits to leisure and fashionable blouson
     jackets.

o    BABYWEAR: Babywear includes fashion and classic daywear and sleepsuits in a
     wide variety of styles and fabrics, with a focus on newborns.


CUSTOMERS

          Delta Galil maintains long-term relationships with its customers, many
of whom control significant market shares in their respective countries. Delta
Galil premises its marketing strategy on its ability to offer customers a
package of services, including product planning and design tailored to the
customers' needs, high-tech quality manufacturing, distribution and logistics
setup and computer-linked accounts.

          Delta Galil has strong in-house creative teams of designers and
technology experts, consisting of fashion designers, textile designers, yarn
experts, knitting experts and dyeing and finishing experts. Delta Galil's design
specialists remain constantly apprised of technological innovations in textile
equipment and the state of the art in yarns, fabrics and accessories worldwide.
Delta Galil's presence in both the United States and Europe also enables its
design personnel to offer significant sales and marketing advice in both
markets. Although Delta Galil's products are sold predominantly under the
private labels and brands of its customers, Delta Galil's design specialists
collaborate closely with its customers to design and develop products. The
design teams prepare presentations for customers, including analysis of previous
season successes and failures, and, with the customer's participation, develop
the concept, product, packaging and product specifications, tailored to the
customer's specific needs. Delta Galil believes that the comprehensive nature of
the services it offers is a major factor in the strength of its relationship
with its customers.

THE NORTH AMERICAN MARKET

          Recognizing the North American market's size and diversification,
Delta Galil targeted this market as its major strategic market for growth and
profitability. Through internal growth and a series of acquisitions, Delta Galil
has been successful in rapidly increasing its presence in the North American
market. Sales to North America grew from $47.3 million (which represented 16% of
total sales) in 1998 to $418.0 million (which represented 59% of total sales) in
2006. Our five largest customers in North America, Wal-Mart, Target, Victoria's
Secret, JC Penney and Calvin Klein, represented approximately 79% of our 2006
sales in North America. The increase in 2006 sales in North American is mainly
due to the increase in sales of ladies fashionable intimate apparel products to
Victoria's Secret.

MARKS & SPENCER RELATIONSHIP

          Delta Galil is one of Marks & Spencer's five largest suppliers and has
been doing business with Marks & Spencer for more than 20 years. Marks & Spencer
sells all of its products under its own brand name and is one of the leading
retailers of men's underwear, women's underwear and men's socks in the United
Kingdom. Delta Galil is a diversified supplier to Marks & Spencer, selling to 12
different departments of the chain. Each department is independently managed,
has autonomy in procurement decisions, and establishes its own product standards
and supply requirements.

          Delta Galil's sales to Marks & Spencer grew from $1 million in 1981 to
$49 million in 1990, to $92 million in 1995 and to $156 million in 2006,
representing 22% of Delta Galil's revenues in 2006. In 2006 sales to Marks &
Spencer decreased by 3% compared to 2005 mainly in the ladies category due to
the increased competition from the Far East which led to erosion in selling
prices and to loss of sales.

ISRAELI MARKET

          Delta Galil believes that it is among the market leaders in Israel for
men's underwear, ladies' intimate apparel and socks, with $54.3 million of sales
in 2006. These sales include products Delta Galil manufactures, as well as goods
it imports into Israel or purchases from other Israeli suppliers. Of Delta
Galil's sales in Israel, 42% were made through retail department stores and
supermarkets, and 58% were made through Delta Galil's Delta Plus chain stores.
As of December 31, 2006 Delta Plus had 86 stores.



                                      -15-

<PAGE>

SEASONALITY

          Delta Galil's revenues fluctuate due to seasonal purchasing by
consumers. Revenues in the last two quarters of certain years exceeded revenues
in the first two quarters due to back-to-school and holiday purchases.

MANUFACTURING

MANUFACTURING PROCESS

          Delta Galil's manufacturing techniques enable it to provide its
customers with a wide array of consistently high quality products customized to
their individual needs at competitive prices. The production process includes
the following steps:

          o    RAW MATERIAL PROCUREMENT: The raw materials Delta Galil requires
               include, primarily, cotton yarns, blends of cotton and synthetic
               yarns (such as cotton-spandex, cotton-Lycra(R) and cotton-
               viscose) and other accessories such as elastic tapes, laces and
               other textile components. Delta Galil purchases its raw materials
               from several international and domestic suppliers and
               historically has not experienced any difficulty in obtaining raw
               materials to meet production requirements. The price of these raw
               materials fluctuates due to varying supply and demand and other
               market factors over which Delta Galil has no control. Delta Galil
               purchases its raw materials only against actual orders, except
               for basic cotton yarn. As a result, Delta Galil can effectively
               manage its raw material inventory. Typically, Delta Galil does
               not maintain inventory of raw materials for a period of more than
               eight weeks. From time to time, when market conditions are
               favorable, Delta Galil enters into contracts with various
               suppliers of basic cotton yarn for delivery over a period of
               three to six months.

          o    KNITTING: Delta Galil produces the knitted fabric required for
               the underwear and other garments it manufactures in Israel and in
               Egypt. Delta Galil produces various types of fabric. Delta Galil
               operates approximately 160 automatic knitting machines, with a
               total production capacity of approximately 600 tons of fabric per
               month depending on the type of fabric produced. During 2006,
               Delta Galil produced approximately 410 tons of fabric per month,
               approximately 91% of which Delta Galil used and the remainder was
               sold to third parties. Delta Galil does not have any long-term
               supply obligations and is able to adjust its capacity for its own
               use when necessary. Delta Galil outsources from various suppliers
               the rest of the knitted fabric it requires.

               Delta Galil operates approximately 2,000 knitting machines for
               the production of socks, including machines owned by
               sub-contractors, with a total production capacity of
               approximately 12 million pairs per month.

          o    DYEING AND FINISHING: Delta Galil has its own dyeing plant in
               Israel for fabrics and products. The dyeing plant is principally
               engaged in supplying Delta Galil's own requirements. Delta Galil
               outsources the dyeing and finishing for production in Egypt.
               Delta Galil's ability to control the dyeing and finishing of its
               products and accumulated expertise in this area are key elements
               in its ability to provide quality products to its customers.

          o    CUTTING: Delta Galil uses computerized, automatic cutting
               equipment, which minimizes fabric waste.

          o    SEWING: Cut fabrics are sewn to complete the product, including
               the addition of accessories such as elastic waist and leg bands
               and labels. Delta Galil is currently operating at its sewing
               capacity, which is, on an average basis, approximately 6 million
               units per month (depending on the type of product). Delta Galil
               operates its sewing plants, in Jordan, Egypt and the Far East.
               Delta Galil also subcontracts sewing functions, primarily to
               contractors in Israel, Egypt, the Far East and Central America.

          o    TESTING AND QUALITY ASSURANCE: Delta Galil places significant
               emphasis on quality control and uses quality assurance teams at
               each stage of the manufacturing process. Delta Galil's quality
               assurance procedures meet the very strict quality control
               standards of its customers.

SEAM-LESS MANUFACTURING

          Applying technology utilized in the manufacture of hosiery, Delta
Galil produces one-piece seam-less panties and bras. Seam-less technology
enables the direct conversion of yarn into a nearly completed final product by a
single machine. After the machine knits the basic garment, all that is required
to complete the garment is dyeing and a limited amount of sewing and finishing.



                                      -16-

<PAGE>

         The seam-less process eliminates most stages of the manufacturing
process, which required special equipment such as knitting machines, cutting
equipment and extensive sewing machine operations, and personnel. This advanced
computer-intensive technology enables the production of a substantially wider
range of fabrics, styles and product lines. The use of the seam-less machines
also improves Delta Galil's potential to manufacture fashionable products with
consistently higher quality, durability and comfort.

          Delta Galil is making a major effort to capitalize on this unique
technology. Delta Galil continuously engages in research and development to
create additional products that use the seam-less technology. Sales of seam-less
products decreased from $40.2 million in 2000 to $25.7 million in 2006. In 2006
sales increased by 7%, compared to $24.0 million in 2005. As of December 31,
2006, Delta Galil owned 270 seam-less knitting machines.

OUTSOURCING OF PRODUCTS

          Subcontractors manufactured goods in Egypt (babywear and underwear),
Turkey (socks), Bulgaria (socks), Thailand, Hong Kong, Vietnam, India,
Bangladesh, Dominican Republic and China (all ladies intimate apparel), which in
2006 accounted for approximately 70% of Delta Galil's revenues. Delta Galil
personnel closely supervise the production by subcontractors in these countries.

JORDANIAN JOINT VENTURE

          Since 1995, Delta Galil has maintained a joint venture with Century
Investment Group, a Jordanian company. Delta Galil supplies cut fabric to the
joint venture and purchases sewing services. Delta Galil holds a controlling
interest in this joint venture and purchases virtually all of the goods produced
by the joint venture. As a result of the controlling interest, Delta Galil
consolidates this entity in its consolidated financial statements.

SALES AND MARKETING

          Delta Galil customizes its sales and marketing strategy according to
individual customers' geographic regions and the market segment. For example,
one sales and marketing group handles the Marks & Spencer account, another
handles sales to the U.S. mass market, and a third focuses on accounts for
middle and upper market customers in the United States. Depending on where a
target customer is located, Delta Galil's sales offices in Europe, North America
or Israel implement the marketing strategy in coordination with headquarters.
Delta Galil staffs sales offices with experienced personnel who maintain ongoing
contact with its customers and respond to customers' needs promptly and
effectively.

MANAGEMENT INFORMATION SYSTEMS

          Delta Galil has invested in information technology as a tool to reduce
overall costs, improve internal controls, enhance the efficiency of its garment
design and manufacturing, and support the sale and distribution of its products
to its customers. Delta Galil's production software processes customer orders,
schedules production for such orders and monitors the products ordered during
all stages of production, from knitting to sewing and during packaging and
distribution. Delta Galil believes that its information technology system has
been effective in meeting its demands. Delta Galil spent approximately $6.5
million in 2006 and intends to spend approximately $8 million in 2007 to improve
its system's capabilities.

CONDITIONS IN ISRAEL

          Delta Galil is incorporated under the laws of, and a significant
portion of its offices and manufacturing facilities are located in, the State of
Israel. Accordingly, Delta Galil is directly affected by political, economic and
military conditions in Israel. The operations of Delta Galil 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

          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 problems for Israel. However, a peace agreement between
Israel and Egypt was signed in 1979, a peace agreement between Israel and Jordan
was signed in 1994 and, since 1993, several agreements between Israel and
Palestinian representatives have been signed. As of the date hereof, Israel has
not entered into any peace agreement with Syria or Lebanon. There can be no
assurance as to how the "peace process" will develop or what effect it may have
upon Delta Galil.



                                      -17-

<PAGE>


          Despite progress towards peace between Israel, its Arab neighbors and
the Palestinians, major hostilities may revive. Since October 2000, there has
been an increase in hostilities between Israel and the Palestinians. In July
2006, a conflict with "Hezbollah" escalated significantly on Israel's northern
border with Lebanon. The unrest in and around the areas administrated by the
Palestinian Authority and on Israel's northern border may hinder Israel's
international trade and lead to economic downturn. This, in turn, could have a
material adverse effect on Delta Galil's operations and business. In addition,
certain countries, companies and organizations continue to participate in a
boycott of Israeli firms. Delta Galil does not believe that the recent violence
or the boycott have had a material adverse effect on Delta Galil, but there can
be no assurance that further violence or restrictive laws, policies or practices
directed towards Israel or Israeli businesses will not have an adverse impact on
Delta Galil's business.

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 member of the World Trade
Organization and is a signatory to the General Agreement on Trade in Services
and to the Agreement on Basic Telecommunications Services. In addition, Israel
has been granted preferences under the Generalized System of Preferences from,
Australia, Canada and Japan. These preferences allow Israel to export the
products covered by such programs either duty-free or at reduced tariffs.

          Delta Galil benefits from Israel's free trade agreements with the
United States, Canada, the European Union and the European Free Trade
Association as well as the QIZ Free Trade Agreements between the US, Israel,
Jordan & Egypt. The trade agreements enable Delta Galil to sell its products to
the above mentioned countries duty & quota free. Delta Galil is in a period of
major changes in the global business environment, following the elimination of
quotas as part of the WTO agreement which resulted in strong pressure to lower
prices and widen the competition and supply.

4.C  DELTA GALIL'S ORGANIZATIONAL STRUCTURE

          Delta Galil is an Israeli corporation that commenced operations in
1975. It currently has thirty-four subsidiaries in which it holds at least a 50%
interest. The main operations are included in the following companies:

<TABLE>
<CAPTION>
                                              PLACE OF       OWNERSHIP
                COMPANY                     INCORPORATION     INTEREST                     FUNCTION
---------------------------------------   ----------------   ---------   -------------------------------------------
<S>                                       <C>                   <C>      <C>
Delta Galil USA Inc.                      Delaware, U.S.A.      100%     Design, development and marketing of ladies
                                                                         and girls intimate apparel.

Burlen Corp.                              Georgia, USA          100%     Design, development and marketing of ladies
                                                                         intimate apparel.

Auburn Hosiery Mills Inc.                 Kentucky, USA         100%     Design, development and marketing of socks.

Delta Textile (New York) Ltd.             New York, U.S.A.      100%     Marketing

Delta Galil Europe Ltd.                   U.K.                  100%     Distribution center and marketing services.

Delta Galil Holland B.V.                  Holland               100%     Contract manufacture and holding company.

Delta Textile Egypt  - Free Zone S.A.E.   Egypt                 100%     Manufactures men's and women's underwear and
                                                                         leisurewear.

Century Wear Corporation (WLL)            Jordan                 50%(*)  Joint venture that performs sewing
                                                                         services.

Thai Progress Garment Co. Ltd             Thailand              100%     Manufactures ladies intimate apparel.

Delta Textile Marketing Ltd.              Israel                100%     Retail and wholesale in Israel.

Delta Elastic Tapes Industries, Ltd.      Israel                 90%     Manufactures elastic tapes and other
                                                                         components used in underwear manufacture.
</TABLE>

(*) Delta Galil effectively controls this joint venture as a result of its
holding of an additional controlling share.

                                     -18-
<PAGE>

4.D PROPERTY, PLANT AND EQUIPMENT

          Delta Galil has manufacturing facilities in Israel, Jordan, Egypt,
Bulgaria, Thailand and India. Delta Galil has also sub-contracts with
manufacturers in Egypt, Turkey, Bulgaria, Central America and the Far East. In
1995, Delta Galil began transferring labor-intensive production functions from
its plants in Israel and Scotland to Egypt, Jordan, Eastern Europe and the Far
East. As a result all manufacturing plants in Scotland were closed by 2003 and
the last sewing plant in Israel was closed in 2005. In 2006, Delta Galil closed
its production facilities in Honduras and Canada as part of the restructuring
plan initiated in 2005. In 2006, 88% of Delta Galil's revenues were generated
from the sale of products produced in low labor cost countries, up from 49% in
2000. In 2006, goods produced in Israel represented 8% of Delta Galil's
revenues, down from 35% in 2000.

          The following table summarizes the distribution of Delta Galil's
revenues by location of production, stated as a percentage of total revenues for
the periods indicated:

<TABLE>
<CAPTION>
                                                                                                 % OF REVENUES
                                                                                            YEAR ENDED DECEMBER 31,
                                                                                            -----------------------
        COUNTRY                           ACTIVITY                       PRODUCTS              2004   2005   2006
---------------------------   --------------------------------   ------------------------      ----   ----   ----
<S>                           <C>                                <C>                            <C>    <C>    <C>
Far East                      Purchase of finished products      Ladies intimate apparel        26%    38%    45%
                              Sewing                             Leisurewear
                              Cutting                            Men's underwear

Egypt                         Knitting(2)                        Ladies' intimate apparel       18%    17%    19%
                              Dyeing(1)                          Men's underwear
                              Cutting                            Babywear
                              Sewing(2)                          Leisurewear
                              Purchase of finished products

Jordan                        Sewing(2)(3)(4)                    Ladies' intimate apparel       13%    10%    11%
                                                                 Men's underwear

Israel                        Design & Development               Ladies' intimate apparel       12%    10%     8%
                              Knitting(2)                        Men's underwear
                              Dyeing                             Socks
                              Cutting & sewing(2)                Knitted fabric
                              Production of fabrics & elastics   Elastic bands
                              Distribution center
                              Purchase of finished products

Caribbean & Central America   Sewing(2)                          Ladies' intimate apparel       10%    10%     4%
                              Cutting                            Socks
                              Knitting(1)
                              Purchase of finished products

Turkey                        Purchase of finished products      Socks                           6%     6%     5%

Eastern Europe                Knitting(1)                        Socks                           9%     5%     4%
                              Purchase of finished products

North America                 Purchase of finished products      Socks                           6%     4%     4%
                                                                                               ---    ---    ---
                                                                                               100%   100%   100%
                                                                                               ===    ===    ===
</TABLE>

                                      -19-
<PAGE>

(1)  These activities are fully outsourced to local contractors.
(2)  A portion of these activities is outsourced to local contractors.
(3)  This activity is performed by a joint venture in which Delta Galil has a
     controlling interest.
(4)  Fabric produced in Israel.

          In Israel, Delta Galil owns six facilities, including its principal
production facility in Karmiel, and leases eight facilities. The leases,
including all extension options, for seven facilities expire on various dates
between 2008 and 2015. One lease expires in 2007. Delta Galil is confident that
it can renew such lease on terms no less favorable than the existing lease. In
addition, Delta Galil leases a warehouse and development center outside London
and leases offices in London. Delta Galil leases manufacturing and storage
facilities in Egypt pursuant to 25-year leases that expire between 2014 and
2029. Delta Galil's joint venture in Jordan leases sewing facilities in Irbid,
and in Amman.

          Delta Galil leases warehouses and offices in Pennsylvania, New Jersey,
Hong Kong, China and India. These leases expire between 2007 and 2014. Delta
Galil is confident that it can renew these leases on terms no less favorable
than existing leases. Delta Galil also owns other facilities in Bulgaria,
Kentucky USA and Thailand. Management believes that Delta Galil's existing
facilities are well maintained, in good operating condition and provide adequate
space for Delta Galil's current level of operations. In addition, Delta Galil
believes that its facilities and operations are in compliance with current
governmental regulations regarding safety, health and environmental pollution.
Delta Galil generally has complied with these regulations and such compliance
has not had a material adverse effect on its capital expenditures, earnings or
competitive position.


                                      -20-

<PAGE>

          During 2006 the Company sold its assets which were held for sale in
Ireland, Scotland and part of its assets in the US for a total consideration of
$3.1 million.

          On December 31, 2006 Delta Galil's unused real estate assets which are
held for sale and include real-estate in Israel, Hungary and the United States,
were classified as current assets at their net book value of $4.5 million. In
January 2007 Delta Galil sold its asset which was held for sale in the United
States.

          The following table shows Delta Galil's main owned and leased
properties and facilities as of March 25, 2007:

<TABLE>
<CAPTION>
         PLANT LOCATION           SQUARE FEET                     MAIN FUNCTION
-------------------------------   -----------   ------------------------------------------------
<S>                                <C>          <C>
Karmiel, Israel                      534,000    Textile manufacturing
Nahariya, Israel                   2,750,000    Undeveloped beach front property held for sale
Rosh Ha'ain, Israel                   75,000    Offices and warehouse
Delta Plus retail chain, Israel      127,000    Retail
Yodfat, Israel                        42,000    Warehouse and office
Daliat El Carmel, Israel              35,500    Elastic tape manufacturing
Tel Aviv, Israel                      10,750    Main office
London, U.K.                          25,000    Offices
Northampton, and Mansfield U.K.      122,000    Warehouse and development center
Jordan                               343,000    Sewing and warehouse
Egypt                                415,000    Knitting, cutting, sewing, warehouse and offices
New Jersey, U.S.                      37,000    Offices
New York, U.S.                        37,000    Offices
Pennsylvania, U.S.                   350,000    Warehouse, logistic center and offices
Kentucky, U.S.                       250,000    Offices & warehouse
Georgia, U.S.                        495,000    Logistic center, warehouse and offices
Hong Kong                             12,000    Offices and warehouse
Hungary                              129,000    Unoccupied Logistic center held for sale
Bulgaria                              95,000    Socks manufacturing
Thailand                              30,000    Cutting and sewing
Guangzhou, China                     157,000    Offices
India                                 76,000    Socks manufacturing
</TABLE>

ITEM 4A: UNRESOLVED STAFF COMMENTS.

Not applicable.


                                      -21-

<PAGE>

ITEM 5: OPERATING AND FINANCIAL REVIEW AND PROSPECTS

          THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION
WITH DELTA GALIL'S CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES TO THOSE
FINANCIAL STATEMENTS INCLUDED IN ITEM 18 OF THIS ANNUAL REPORT. DELTA GALIL'S
CONSOLIDATED FINANCIAL STATEMENTS ARE PREPARED IN CONFORMITY WITH US GAAP.

OVERVIEW

          Following is a discussion of certain topics that will help you better
understand our results of operations discussed below:

REVENUES

          Delta Galil's revenues in 2006 increased by 3.2% and amounted to
$706.7 million compared to $684.5 million in 2005.

          The following table shows Delta Galil's revenues by geographical area,
stated in millions of U.S. dollars and as a percentage of total revenues, for
the years ended December 31, 2004, 2005 and 2006:

                                              YEAR ENDED DECEMBER 31,
                                   ---------------------------------------------
                                        2004            2005            2006
                                   -------------   -------------   -------------
                                     $       %       $       %       $       %
                                   -----   -----   -----   -----   -----   -----
North America ..................   334.8    51.2   401.1    58.6   418.0    59.1
Europe (mainly U.K.) ...........   267.5    40.9   230.3    33.6   225.8    32.0
Israel .........................    52.0     7.9    53.1     7.8    60.1     8.5
Other ..........................                                     2.8     0.4
                                   -----   -----   -----   -----   -----   -----
Total ..........................   654.3   100.0   684.5   100.0   706.7   100.0
                                   =====   =====   =====   =====   =====   =====

          In 2006, sales to North America increased by 4.2% to $418.0 million
representing 59.1% of total sales. The increase in sales to North America is
attributed mainly to an increase in sales of more fashionable products to
Victoria's Secret. Delta Galil's sales to Marks & Spencer, decreased by 3.4% to
$155.8 million in 2006, compared to $161.3 million in 2005. The decrease in
sales to Marks & Spencer is attributed mainly to the decrease in sales in the
ladies category due to erosion in selling prices. This decrease was partly
offset by an increase in sales in the men's category, both in units and in
dollar terms. Delta Galil's sales to the European market, excluding Marks &
Spencer, increased by 2.9% to $53.9 million in 2006 compared to $52.4 million in
2005. Delta Galil's sales to the Israeli market increased by 13.2% to $60.1
million in 2005 compared to $53.1 million in 2005 mainly due to the expansion of
Delta Galil's retail store chain and to a better product mix.

          Effective January 1, 2005, the World Trade Organization's 148 member
nations lifted some of the quotas on apparel and textiles. As a result, some of
the textiles and textile apparel manufactured in a member nation will no longer
be subject to quota restrictions, although in 2006, some of the quotas from
China were re-imposed. This change has allowed retailers, apparel firms and
others to import unlimited quantities of apparel and textile items from China,
India and other low-cost countries. As a result, prices of textiles and apparel,
including our products, have faced downward pressure and may continue to
decline. If prices decline faster than we are able to cut costs, our business
and results of operations could be affected adversely.

          In addition, some large retailers have attempted to bypass private
label underwear manufacturers and to contract directly with factories to produce
their own products. This is known as "direct sourcing". This trend is occurring
in the more basic, mass-market products, in which design is less of a factor
having an adverse effect on Delta Galil's sales in those categories.


                                      -22-

<PAGE>

          The following table shows Delta Galil's revenues by product
categories, stated as a percentage of total revenues, for the years ended
December 31, 2004, 2005 and 2006:

                                                         YEAR ENDED DECEMBER 31
                                                         ----------------------
                                                           2004   2005   2006
                                                           ----   ----   ----
Ladies' Intimate Apparel .............................     53.6%  61.1%  57.8%
Socks ................................................     23.0   20.2   19.3
Men's Underwear ......................................     12.9   11.1   14.7
Leisurewear ..........................................      3.7    3.1    3.6
Babywear .............................................      4.4    2.5    3.3
Fabrics and Others ...................................      2.4    2.0    1.3
                                                           ----   ----   ----
Total ................................................      100%   100%   100%
                                                           ====   ====   ====

          The decrease in revenues in the Ladies Intimate Apparel in 2006
compared to 2005 is attributed mainly to the decrease in sales to Marks &
Spencer, See -"Overview". The decrease in revenues in the Socks category in 2006
compared to 2005 is attributed mainly to the decrease in sales in North America
due to Delta Galil's decision to close its Canadian activity. The increase in
revenues in the men's category in 2006 compared to 2005 is mainly due to a
general increase in orders from most of our customers and as a result of
introduction of the new Real Cool Cotton products.

REORGANIZATION PLAN IN 2006

          As part of the changes Delta decided to make in its organizational
structure, its management has decided during the second quarter of 2006 to focus
its Chinese operations on product development, as well as procurement of
finished goods and raw materials. As a result, Delta Galil has decided to close
its sewing plant in China and to concentrate Far East self-production in
Thailand. This decision is also due to re-imposition of quotas on production in
China starting in 2006.

          The closure of the sewing plant in China resulted in a total
restructuring cost of $1.7 million and in the dismissal of approximately 700
employees. From the total cost of $1.7 million, $0.5 million was in cash
primarily for severance payment and the remaining $1.2 million were non-cash,
impairment of assets.

          This measure continues the efficiency efforts Delta Galil commenced in
the fourth quarter of 2004, which included the closure of its logistics center
in Hungary and continued with its 2005 restructuring plan, which included the
following main steps:

          a.   Closure of a sewing plant in Central America and a distribution
               center in New Jersey, both of which served the Delta Galil USA
               segment, and moving the production of the sewing plant to
               subcontractors in the Far East. The closure of the sewing plant
               and the distribution center resulted in total restructuring costs
               of $1.1 million and in the dismissal of approximately 1,400
               employees.

          b.   Closure of a sock manufacturing plant in Toronto, Canada and
               moving its production to subcontractors in Central America and
               the Far East. The closure of this plant, resulted in total
               restructuring costs of $2.4 million and resulted in the dismissal
               of approximately 100 employees.

          c.   Reduction of manufacturing facilities in Israel and transfer of
               its operations to lower labor cost countries. This action
               resulted in total restructuring costs of $4.1 million and with
               the dismissal of approximately 585 employees.

          d.   Consolidation of various departments into one building in
               Karmiel, Israel in order to cut maintenance and other overhead
               costs. This action resulted in a total cost of $1.1 million.

RESTRUCTURING PLAN - 2007

          In light of continuous changes in the business environment, continued
erosion of the selling prices and increased competition, in March 2007 Delta
Galil decided to adopt a restructuring plan, organizational changes and
additional effeciency measures in order to improve the company's performance and
enhance its ability to compete in the market place.

         Delta Galil intends to take the following measures:

          a.   Closure of some manufacturing facilities in Israel and downsizing
               of others while transferring them to lower cost countries.

          b.   Downsizing manufacturing in Jordan.


                                      -23-

<PAGE>

          c.   Organizational changes in its operational structure, development
               and design functions, marketing and sales operations, as well as
               in the finance department in the Company's headquarter in
               Israel. These changes will contribute to savings in overhead and
               the leveraging of synergies in these areas in the Israeli
               operations.

          d.   Expanding operations in Egypt.

          These measures will include the dismissal of approximately 600 workers
in Israel as agreed with employee representative committee. Delta Galil expects
to record restructuring expenses of $10 to $12 million, or $0.53 to $0.64 loss
per diluted share in the first quarter of 2007. These expenses include an
aggregate of approximately $5 million in cash, mainly for severance obligations.
The remainder, including expenses of between $5 to $7 million, comprises
non-cash provisions for impairment of assets following closures and downsizing
at certain production facilities. The implementation is expected to take place
over the course of a year, commencing in the second quarter of 2007.

          These steps are being taken further to Delta Galil's restructuring
plan that was implemented during 2005 and 2006. Furthermore, Delta Galil plans
additional efficiency measures and overhead reductions in its U.S. and U.K.
headquarters.

RESULTS OF OPERATIONS

          The following table sets forth Delta Galil's results of operations
expressed as a percentage of total revenues for the periods indicated:

                                                        YEAR ENDED DECEMBER 31
                                                        ----------------------
                                                          2004    2005    2006
                                                         -----   -----   -----
Net revenues ........................................    100.0%  100.0%  100.0%
Cost of revenues ....................................    (81.5)  (85.1)  (81.3)
                                                         -----   -----   -----
Gross profit ........................................     18.5    14.9    18.7
Selling, marketing, general and administrative
   expenses .........................................    (15.1)  (15.6)  (15.2)
Amortization of intangible asset ....................             (0.1)   (0.1)
Gain (loss) from realization of assets ..............      0.1      (*)    0.1
Impairment of fixed assets ..........................             (1.1)
Restructuring expenses ..............................     (0.1)   (1.3)   (0.2)
Goodwill impairment .................................             (0.9)
                                                         -----   -----   -----
Operating income (loss) .............................      3.4    (4.1)    3.3
Financial expenses - net ............................     (1.0)   (1.5)   (2.0)
Other income- net ...................................      0.2      (*)
                                                         -----   -----   -----
Income (loss) before taxes on income ................      2.6    (5.6)    1.3
Income tax benefit (expense) ........................     (0.4)    0.4    (0.8)
                                                         -----   -----   -----
Income (loss) after taxes on income (tax benefit) ...      2.2    (5.2)    0.5
Share in losses of associated companies - net .......     (0.1)     (*)
Minority interests- net .............................     (0.2)   (0.1)   (0.1)
                                                         -----   -----   -----
Net income (loss) ...................................      1.9%   (5.3)%   0.4%
                                                         =====   =====   =====

(*) Less than 0.1%.

SEGMENT RESULTS

          We have seven principal segments: Delta USA, U.S. Upper Market,
Europe, Socks, Delta Marketing Israel, Seam-Less and China. Delta USA, U.S.
Upper Market and Europe segments are engaged mainly in manufacturing and
marketing of men's underwear and ladies intimate apparel to various customers in
the U.S. and European markets. The Socks segment is engaged in manufacturing and
marketing of socks to various customers in the U.S. and European markets. Delta
Marketing Israel is engaged in marketing ladies intimate apparel, men's
underwear and socks to various customers in Israel through retail and wholesale
operations. Starting in 2006, Delta Galil decided to present separately the
results of its Seam-Less segment, which were previously included in the U.S
Upper Market results. The Seam-Less segment is engaged mainly in manufacturing
and marketing of ladies intimate apparel products to U.S and European markets.
The facility in China ceased manufacturing operations in the second quarter of
2006 and is engaged with product development and purchasing of raw materials and
finished products.

          Delta Galil made certain changes to the structure of its internal
organization in a manner that caused the composition of its reportable segments
to change. As a result, Delta Galil has restated the corresponding items of
segment information for the prior periods presented in a manner consistent with
segment presentation for 2006.


                                      -24-

<PAGE>

          The following table sets forth Delta Galil's revenues relating to the
various segments:

                                                  REVENUES BY SEGMENT
                                                ------------------------
                                                      ($ MILLION)
                                                ------------------------
                                                 2004     2005     2006
                                                ------   ------   ------
          Delta USA(1) ......................   $186.3   $267.9   $269.7
          U.S. Upper Market .................     90.3     75.7     95.3
          Europe ............................    193.8    163.5    167.3
          Socks .............................    144.2    130.9    122.5
          Delta Marketing Israel ............     46.5     49.0     54.3
          Seam-Less .........................     20.0     19.6     18.0
          China .............................               0.7      1.8
          Other and Inter segment revenues ..    (26.8)   (22.8)   (22.2)
                                                ------   ------   ------
          Total .............................   $654.3   $684.5   $706.7
                                                ======   ======   ======

(1)  Including in 2004 $3.6 million of Burlen revenues, which was acquired in
     December 2004.

SALES BY SEGMENT IN 2006 VS. 2005

          The increase in sales in 2006 compared to 2005 by the U.S. Upper
Market segment is mainly attributed to an increase in sales of more fashionable
products to Victoria's Secret. The increase in sales in 2006 compared to 2005 by
the Europe segment was achieved by increased intersegmental sales, which were
manufactured in Egypt and Thailand factories and were part of this segment in
2006, and despite the decrease in sales to Marks and Spencer. The decrease in
sales to Marks & Spencer was primarily in the ladies category due to increased
competition from the Far East, resulting in loss of sales and erosion in selling
prices. The decrease in sales in the ladies category in Marks & Spencer was
partly offset by an increase in sales of men's underwear and children's
products. Total sales of the European segment to Marks & Spencer decreased by 6%
compared to 2005 in dollar terms and by 7% in pounds sterling. The decrease in
sales in 2006 compared to 2005 by the Socks segment is primarily attributed to
the decrease in sales in North America due to our decision to close the Canadian
activity. The increase in sales in 2006 compared to 2005 by the Delta Marketing
Israel segment is attributed mainly to the expansion of the retail store chain
in Israel and to a better product mix.

SALES BY SEGMENT IN 2005 VS. 2004

          The increase in sales in 2005 compared to 2004 by the Delta USA
segment is attributed to the acquisition of Burlen in the fourth quarter of
2004. Burlen's sales in 2005 amounted to $107.4 million compared to $3.6 million
in 2004. Excluding Burlen, Delta USA sales decreased by 12% compared to 2004,
mainly due to a decrease in sales to Wal-Mart explained by a reduction in sales
in the ladies category. The decrease in sales by the U.S. Upper Market segment
in 2005 compared to 2004, resulted primarily from a decrease in sales to Calvin
Klein, especially in the men's' category and to Victoria's Secret due to
different product mix and erosion in selling prices. The decrease in sales by
the European segment in 2005 compared to 2004, is mainly due to an erosion of
approximately 20% in selling prices to Marks & Spencer partly offset by an
increase of 4% in units. Other factors that contributed to a decrease in sales
by the European segment include: (1) a decrease in volume sales in the ladies
category of Marks & Spencer due to increased competition and (2) a decrease in
the children's category due to the same and due to the reduction of Marks &
Spencer market share in the U.K. in this category. The decrease in sales by the
Socks segment in 2005 compared to 2004 is mainly due to erosion of approximately
15% in selling prices especially to Marks & Spencer, partly offset by an
increase of 6% in units and to the decrease in sales in North America due Delta
Galil's decision to cease its activity in Canada. The increase in sales by the
Israeli Market segment in 2005 compared to 2004 is attributed mainly to a
different mix of products.


                                      -25-

<PAGE>

          The following table sets forth Delta Galil's operating results,
restructuring expenses and impairment of assets by segment (in $ million):

<TABLE>
<CAPTION>
                            OPERATING INCOME (LOSS) BY SEGMENT
                             INCLUDING RESTRUCTURING EXPENSES       RESTRUCTURING     IMPAIRMENT
                                 AND IMPAIRMENT OF ASSETS             EXPENSES         OF FIXED     IMPAIRMENT
                            ----------------------------------   ------------------     ASSETS     OF GOODWILL
                                   2004    2005     2006         2004   2005   2006      2005         2005
                                  -----   ------   -----         ----   ----   ----   ----------   -----------
<S>                               <C>     <C>      <C>           <C>    <C>    <C>       <C>          <C>
Delta USA ...............         $ 5.9    $ 5.7   $13.3                 1.1              1.5
U.S. Upper Market .......           0.6    (12.6)    0.7                 1.6              3.5          2.1
Europe ..................           4.9     (8.8)    7.7          1.1    2.0
Socks ...................           9.1     (5.0)    1.4                 4.1                           3.4
Delta Marketing Israel ..           4.8      5.0     6.8
Seam Less ...............          (1.4)    (9.2)   (2.5)                                 2.4
China ...................                   (2.3)   (4.1)                       1.7
Other Adjustments .......          (1.5)    (1.0)   (0.3)                0.3
                                  -----   ------   -----         ----   ----   ----      ----         ----
   Total ................         $22.4   $(28.2)  $23.0         $1.1   $9.1   $1.7      $7.4         $5.5
                                  =====   ======   =====         ====   ====   ====      ====         ====
</TABLE>

OPERATING INCOME (LOSS) BY SEGMENT IN 2006 VS. 2005

          The increase in the operating results of th e Delta USA segment in
2006 compared to 2005 is mainly attributed to a $1.5 million impairment of fixed
assets and $1.1 million in restructuring expenses, both in 2005, which were
related to the decision to close a sewing plant in Central America and a
distribution center in New Jersey and to a $2.1 million inventory step-up with
respect to the acquisition of Burlen, in December 2004. Higher sales volume in
2006 and improvement in management of surplus inventory also contributed to the
increase in the operating results.

          The increase in the operating results of U.S. Upper Market segment in
2006 compared to 2005 is mainly attributed to the increase in sales, especially
to Victoria's Secret and Calvin Klein and to the fact that the 2005 operating
loss included $6.1 million of restructuring expenses and impairment of assets.

          The increase in the operating results of the European segment in 2006
compared to the loss in 2005 is mainly attributed to the implementation of the
restructuring plan which included the cease of the activity in East Europe, from
a decrease in air freight cost due to improvement in on time deliveries and due
to the improved exchange rates of the pound sterling and the Euro versus the
U.S. dollar.

          The increase in the operating results of the Socks segment from a loss
of $5.0 million in 2005 to an income of $1.4 million in 2006 is due to $7.5
million of restructuring expenses and impairment of goodwill included in 2005
results. Excluding the restructuring expenses and goodwill impairment, the
operating results decreased from an income of $2.5 million to $1.4 million due
to lower sales volume and due to erosion in selling prices, especially to Marks
& Spencer due to the increased competition from the Far East, offset to some
extent by the improved exchange rate of the pound sterling and the Euro versus
the US dollar.

          The decrease in the operating losses of the Seam-Less segment to $2.5
million, in 2006 compared to $9.2 million in 2005 was primarily due to
improvement of the manufacturing processes which led to a decrease in failure
costs, a better product mix, and also due to the fact that the 2005 operating
loss included $2.4 of impairment of assets.

          The increase in the operating losses of the Chinese segment in 2006
compared to 2005 was primarily due to restructuring expenses totaling $1.7
million due to the cessation of the manufacturing activity during 2006. See
"Overview -Reorganization Plan."

OPERATING INCOME (LOSS) BY SEGMENT IN 2005 VS. 2004

          The decrease in the operating income of the Delta USA segment in 2005
compared to 2004 is attributed to a $1.5 million impairment of fixed assets and
$1.1 million in restructuring expenses, both in 2005, which relate to the
decision to close a sewing plant in Central America and a distribution center in
New Jersey and to lower sales volume, especially to Wal-Mart in the ladies
category offset by Burlen's positive contribution of $9.1 million operating
income.



                                      -26-

<PAGE>

          The increase in the operating loss of the U.S. Upper Market segment in
2005 compared to 2004 is attributed to the impairment of fixed assets, which
amounted to $3.5 million, mainly with respect to machinery and equipment in the
fabric facility in Israel in connection with the restructuring plan initiated by
Delta Galil, which also resulted in an additional $1.6 million of expenses
related mainly to workforce reduction in this facility and other overhead
reduction. The operating loss of the US Upper Market segment in 2005 also
included a $2.1 million goodwill impairment, as determined based on the annual
test carried out by Delta Galil which indicated a decrease in the segment
assets fair value. In addition, the operating results of the US Upper Market
segment in 2005 suffered from the decrease in sales volume, especially to Calvin
Klein and Victoria's Secret which also resulted in a lower production level in
the fabric facility in Israel and in the sewing facility in Jordan.

          The decrease in the operating results of the European segment in 2005
compared to 2004 is attributed mainly to the erosion in selling prices to Marks
& Spencer, but also to other customers due to the increased competition from the
Far East, following the downward pressure on prices as a result of the
cancellation of part of the quotas on textile products. Operating results of the
European segment in 2005 were also negatively affected by the low production
volume in Egypt due to the reduction in sales.

          The decrease in the operating results of the Socks segment in 2005
compared to 2004, from $9.1 million profit to a $5.0 operating loss, is
attributed mainly to the $4.1 million restructuring expenses due to our decision
to cease operations in Canada and to reduce manufacturing operations in Israel.
Furthermore the operating loss of the socks segment in 2005, included a $3.4
million goodwill impairment, as determined based on the annual test carried by
Delta Galil which indicated a decrease in the segment assets fair value. Also
attributed to the decrease in operating results is the lower sales volume and
erosion in selling prices, especially to Marks & Spencer, as well as to other
customers due to the increased competition from the Far East and due to
operating losses incurred in North America due to our decision to cease our
activity in Canada.

          Delta Galil started operations in China during the third quarter of
2005. The plant included sewing and cutting executed by approximately 800
employees, focusing on ladies intimate apparel products. The $2.3 million
operating loss of the China facility in 2005 was attributed to the low initial
production volume and also included start-up costs.

YEAR ENDED DECEMBER 31, 2006 COMPARED WITH YEAR ENDED DECEMBER 31, 2005 -
CONSOLIDATED REVENUES

          Total revenues in 2006 increased by 3.2% to $706.7 million compared to
$684.5 million in 2005. The increase in revenues is due mainly to the increase
in sales to the US market, mainly to Victoria's Secret, and to the Israeli
market.

COST OF REVENUES.

          Delta Galil's cost of revenues is comprised mainly of cost of
materials, salaries and related expenses, work performed by subcontractors,
depreciation and amortization and the changes in inventories of finished
products and products in process. While costs associated with depreciation and
indirect salaries are generally fixed, cost of materials, work performed by
subcontractors and directs salaries are variable. Cost of revenues in 2006
decreased by 1.5% and amounted to $574.2 million (81.3% of revenues) compared to
$582.8 million (85.1% of revenues) in 2005. The decrease in the cost of revenues
in 2006 compared to 2005 despite the increase in sales is due to the
implementation of the restructuring plan and improved production processes and
inventory management.

GROSS PROFIT.

          Gross profit in 2006 increased by 30.3% compared to 2005 and totaled
$132.5 million (18.7% of revenues), compared to $101.7 million (14.9% of
revenues) in 2005. The increase in the gross margin is mainly attributed to
increased sales, the implementation of the restructuring plan declared in
Septenber 2005, shifting self production to subcontractors, and due to favorable
exchange rates of the European currencies versus the U.S. dollar.

SELLING AND MARKETING EXPENSES.

          Delta Galil's selling and marketing expenses are comprised mainly of
salaries and related expenses, professional expenses, packaging, transportation
and delivery, advertising, royalties, depreciation and amortization, commissions
and leases. While costs associated with salaries, professional expenses,
depreciation and amortization and leases are generally fixed, packaging,
transportation, delivery, advertising, royalties and commissions are more
variable. Selling and marketing expenses increased by 1.7 % to $ 88.2 million
(12.5% of revenues) in 2006 compared to $86.7 million (12.7% of revenues) in
2005. The increase in selling and marketing expenses is attributed mainly to
higher sales volume.



                                      -27-

<PAGE>

GENERAL AND ADMINISTRATIVE EXPENSES.

          General and administrative expenses are comprised mainly of salaries
and related expenses, entertainment and travel expenses, professional fees,
doubtful accounts and bad debts, depreciation and amortization and other office
expenses. General and administrative expenses decreased from $20.3 million in
2005 (2.9% of revenues) to $19.6 million in 2006 (2.7% of revenues).

AMORTIZATION OF INTANGIBLE ASSET.

          Intangible asset includes customer relations, derived from the
acquisition of Burlen, and is amortized over a period of 20 years. The yearly
amortization amounts to $739 thousands.

GAIN (LOSS) FROM REALIZATION OF ASSETS.

          In 2006 Delta Galil recorded a capital gain of $0.7 million, mainly
from sale of vehicles compared to $0.1 million capital loss in 2005.

IMPAIRMENT OF FIXED ASSETS.

          During 2006 as a result of the restructuring plan in the Far East,
Delta Galil tested the carrying amount of its fixed assets in China and
recognized a total impairment of $1.2 million which is included among
restructuring expenses. During 2005 and as a result of the restructuring plan
following the change in operation in various divisions and the erosion in
profitability, Delta Galil tested the carrying amount of its fixed assets and,
as a result, recognized a total impairment of $9.8 million, of which $2.4 is
included among restructuring expenses and $7.4 million is included among
impairment of assets. The fixed assets which were impaired include mainly
machinery and equipment in the fabric and seam-less facilities in Israel, and
leasehold improvements in real-estate which would be abandoned in connection
with Delta Galil's decision to consolidate most of its premises in Karmiel,
Israel.

RESTRUCTURING EXPENSES.

          Due to a reorganization plan, restructuring expenses in 2006 amounted
to $1.7 million compared to $9.1 million in 2005. See "Overview - Reorganization
Plan".

GOODWILL IMPAIRMENT.

          In 2006 Delta Galil didn't record any goodwill impairment. In 2005
Delta Galil recorded goodwill impairment expenses in the amount of $5.5 million
of which $3.4 million relates to the socks segment and $2.1 million to the U.S.
Upper Market segment.

OPERATING INCOME (LOSS).

          Operating income in 2006 amounted to $23.0 million (3.3% of revenues)
compared to an operating loss of $28.2 million in 2005. Operating income in 2006
included $1.7 million of restructuring expenses, while 2005 operating loss
included $9.1 million of restructuring expenses and $12.9 million of impairment
of assets. Operating income, excluding the above, increased from a loss of $6.2
million in 2005 to an income of $24.6 million in 2006, mainly due to the
improved gross profit.

FINANCIAL EXPENSES - NET.

          Financial expenses increased by 32.7% to $13.6 million in 2006 from
$10.2 million in 2005. Financial expenses are comprised mainly of interest
expenses and exchange rate differences.

          The increase in 2006 financial expenses compared to 2005 is mainly
attributed to the increase in the average interest rates which resulted in
additional $2.0 million interest expenses and due to exchange rate differences
relating to the strengthening of the pound sterling versus the U.S. dollar.

OTHER INCOME- NET.

          Other income in 2006 was zero. In 2005 other income included $0.3
million proceeds from realization of other investment.

TAXES ON INCOME.

          In 2006 Delta Galil recorded tax expenses of $5.8 million compared to
a tax benefit of $2.3 million in 2005. The effective tax rate in 2006 was 61%
compared to 6% in 2005. The high tax expenses in 2006 is mainly attributed to
Delta Galil's decision to increase the valuation allowance in the amount $3.3
million on losses for tax purposes incurred in 2006 in Israel and in China, as
it is considered more likely than not that such losses will not be realized.




                                      -28-

<PAGE>

MINORITY INTEREST- NET.

          Delta Galil operates sewing facilities in Jordan through a partially
owned subsidiary - Century Wear Corporation (WLL). Minority interests in profit
of this subsidiary and also 10% of Delta Elastic Tapes, amounted to $0.5 million
in 2006 and in 2005.

NET INCOME (LOSS).

          Net income in 2006 totaled $3.1 million (0.4% of sales) compared to a
loss of $36.3 million in 2005. The net income in 2006 compared to the loss in
2005 is attributed to the increase in the gross and operating income offset to
some extant by the increase in financial expenses and taxes on income.

YEAR ENDED DECEMBER 31, 2005 COMPARED WITH YEAR ENDED DECEMBER 31, 2004 -
CONSOLIDATED REVENUES

          Total revenues in 2005 increased by 5% to $684.5 million compared to
$654.3 million in 2004. Excluding sales of Burlen, which was acquired in the
fourth quarter of 2004, sales decreased by 11% compared to 2004. The decrease in
revenues is due mainly to an erosion in selling prices, especially to Marks &
Spencer and in the European market.

COST OF REVENUES.

          Cost of revenues in 2005 increased by 9.3% and amounted to $582.8
million (85.1% of revenues) compared to $533.0 million (81.5% of revenues) in
2004. The increase in the cost of revenues is attributed to the acquisition of
Burlen in December 2004. Burlen's 2005 cost of revenues amounted to $84.9
million (79.1% of Burlen's revenues) compared to $2.8 million in 2004. The
decrease in the cost of revenues excluding Burlen in 2005 compared to 2004 is
due to the decrease in sales volumes.

GROSS PROFIT.

          Gross profit in 2005 decreased by 16.1% compared to 2004 and totaled
$101.7 million (14.9% of revenues), compared to $121.2 million (18.5% of
revenues) in 2004. The decrease in the gross margin is mainly attributed to the
erosion in selling prices, mainly to the European operation and especially with
Marks & Spencer following the change in business environment due to the WTO
decision to lift some of the quotas on intimate apparel and textile product
coming from the Far East. This allowed retailers, apparel firms and others to
import unlimited quantities of apparel and textile items from China, India and
other low-cost countries. As a result, prices of textiles and apparel, including
our products, have faced downward pressure.

SELLING AND MARKETING EXPENSES.

Selling and marketing expenses increased by 6.7 % to $ 86.7 million (12.7% of
revenues) in 2005 compared to $81.2 million (12.4% of revenues) in 2004. The
increase in selling and marketing expenses is attributed mainly to the
acquisition of Burlen. Burlen's selling and marketing expenses amounted to $9.1
million in 2005, (8.5% of Burlen's revenues), compared to $0.7 million in 2004.
The increase in the percentage of the selling and marketing expenses of total
sales is attributed mainly to increase in freight cost mainly in the European
segment due to the transfer of part of its operation from Eastern Europe to the
Far East, and to the increased activity in the Israeli market which resulted in
higher salaries and advertising costs.

GENERAL AND ADMINISTRATIVE EXPENSES.

          General and administrative expenses increased from $17.4 million in
2004 (2.7% of revenues) to $20.3 million in 2005 (3.0% of revenues). The
increase in general and administrative expenses is attributed mainly to the
acquisition of Burlen. Burlen's general and administrative expenses amounted to
$3.6 million in 2005, (3.3% of Burlen's revenues), compared to $0.1 million in
2004.

AMORTIZATION OF INTANGIBLE ASSET.

          The amortization of the intangible asset includes customer relations,
derived from the acquisition of Burlen, and is amortized over a period of 20
years.

GAIN (LOSS) FROM REALIZATION OF ASSETS.

          In 2005 Delta Galil recorded a capital loss of $0.1 million compared
to $0.9 million capital gain in 2004 derived from the sale of real estate in
Ireland.



                                      -29-

<PAGE>

IMPAIRMENT OF FIXED ASSETS.

          During 2005 and as a result of the restructuring plan following the
change in operation in various divisions and the erosion in profitability, Delta
Galil tested the carrying amount of its fixed assets and, as a result,
recognized a total impairment of $9.8 million, of which $2.4 is included among
restructuring expenses and $7.4 million is included among impairment of assets.
The fixed assets which were impaired include mainly machinery and equipment in
the fabric and seam-free facilities in Israel, and leasehold improvements in
real-estate which would be abandoned in connection with Delta Galil's decision
to consolidate most of its premises in Karmiel, Israel.

RESTRUCTURING EXPENSES.

          Due to a reorganization plan, Restructuring expenses in 2005 amounted
to $9.1 million. See "Overview- Reorganization Plan" above. Restructuring
expenses in 2004 related to the closure of the logistic center in Hungary.

GOODWILL IMPAIRMENT.

                    In 2005 Delta Galil recorded goodwill impairment expenses in
          the amount of $5.5 million of which $3.4 million relates to the socks
          segment and $2.1 million to the U.S. Upper Market segment.

OPERATING INCOME (LOSS).

          Operating loss in 2005 amounted to $28.2 million compared to an
operating income of $22.4 million (3.4% of revenues) in 2004. The operating loss
is mainly attributed to a decrease in the gross profit derived from the erosion
in selling prices and due to the restructuring expenses and the impairment of
fixed assets and goodwill.

FINANCIAL EXPENSES - NET.

          Financial expenses increased by 64.0% to $10.2 million in 2005 from
$6.2 million in 2004 mainly due to increased bank debt, of approximately $60
million, due to the acquisition of Burlen which resulted in an increase of $2.6
million financial expenses and also due to the increase in the average interest
rate. Financial expenses were composed mainly of interest and exchange
differences.

OTHER INCOME - NET.

          Other income in 2005 decreased by $0.7 million compared to 2004. In
2005 other income included $0.3 million proceeds from realization of other
investment. In 2004 other income included $1.0 million capital gain from
realization of the investment in an associated company, as described above
"Sales of Arad Towels and Standard Textile (Europe) Ltd".

TAXES ON INCOME.

          In 2005 Delta Galil recorded tax benefits of $2.3 million compared to
tax expenses of $2.9 million in 2004. The effective tax rate in 2005 was 6%
compared to 17% in 2004. The lower tax savings in 2005 is mainly attributed to
Delta Galil's decision to create a valuation allowance in the amount of $8.9
million on losses for tax purposes incurred in 2005 in Israel, as it is
considered more likely than not that such losses will not be realized.

SHARE IN LOSSES OF ASSOCIATED COMPANY.

          Delta Galil's share in losses of associated company includes in 2005
and in 2004 its investment in Edomit Ltd., which is accounted for by the equity
method. In 2005 this share amounted to a loss of less the $0.1 million compared
to a loss of $0.2 million in 2004. During the third quarter of 2005 Edomit sold
its holding in a hotel and ceased its operation.

MINORITY INTEREST- NET.

          Delta Galil operates sewing facilities in Jordan through a partially
owned subsidiary - Century Wear Corporation (WLL). Minority interests in profit
of this subsidiary and also 10% of Delta Elastic Tapes, amounted to $0.5 million
in 2005 compared to $1.4 million in 2004. The decrease in the minority interest
in 2005 compared to 2004 is attributed mainly to the decrease in profit of the
Jordanian joint venture due to lower production levels.




                                      -30-

<PAGE>

NET INCOME (LOSS).

          Loss in 2005 totaled $36.3 million compared to a net income of $12.7
million (1.9% of sales) in 2004. The loss in 2005 compared to the net profit in
2004 is attributed to the decrease in gross profit, impairment of fixed assets
and goodwill and due to higher financial expenses and low tax benefit.

CRITICAL ACCOUNTING POLICIES

          To improve your understanding of Delta Galil's financial statements,
it is important to obtain some degree of familiarity with Delta Galil's
principal or significant accounting policies. These policies are described in
Note 1 to the Consolidated Financial Statements listed in Item 18. Delta Galil,
in conjunction with its audit committee and its external auditors, reviews its
financial reporting, disclosure practices and accounting policies annually to
ensure that the financial statements developed, in part, on the basis of these
accounting policies provide complete, accurate and transparent information
concerning the financial condition of Delta Galil. As part of this process,
Delta Galil has reviewed the selection and application of its critical
accounting policies and financial disclosure as at December 31, 2006, and it
believes that the Consolidated Financial Statements listed in Item 18 present
fairly, in all material respects, the consolidated financial position of Delta
Galil as at that date.

          In preparing Delta Galil's financial statements in accordance with
GAAP, Delta Galil's management must often make estimates and assumptions that
may affect the reported amounts of assets, liabilities, revenues, expenses and
related disclosures as at the date of the financial statements and during the
reporting period. Some of those judgments can be subjective and complex, and
consequently actual results may differ from those estimates. However, Delta
Galil believes that, given the facts and circumstances before it at the time of
making the relevant judgments, estimates or assumptions, it is unlikely that
applying any such other reasonable judgment would cause a material adverse
effect on Delta Galil's consolidated results of operations, financial position
or liquidity for the periods presented in the Consolidated Financial Statements
listed in Item 18.

          Delta Galil is also subject to risks and uncertainties that may cause
actual results to differ from estimates and assumptions, such as changes in the
economic and political environment, competition, foreign exchange, taxation and
governmental programs. Certain of these risks, uncertainties and assumptions are
discussed in Item 3D. - Risk Factors and Item 11 - Quantitative and Qualitative
Disclosures About Market Risk. Delta Galil considers its most significant
accounting policies to be those relating to fixed assets and inventory
valuation, both of which, as well as Delta Galil's accounting policy relating to
goodwill valuation are discussed below.

FIXED ASSETS VALUATION

          Fixed assets are stated at cost, net of related investment grants.
Depreciation is computed using the straight - line method on the basis of the
estimated useful life of the assets. Due to rapid changes in technology and due
to the materiality of the fixed assets and depreciation rates on its financial
results, Delta Galil considers this to be a critical issue. On January 1, 2002
Delta Galil adopted FAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets". FAS 144 requires that long-lived assets be held and used by
an entity, be reviewed for impairment and, if necessary, written down to the
estimated fair value, whenever events or changes in circumstances indicate the
carrying amount of assets may not be recoverable through undiscounted future
cash flows.

          Delta Galil's fixed assets cost as of December 31, 2006 amounted to
$188.3 million. Depreciation and amortization expenses with respect to Delta
Galil's fixed assets on an annual basis are approximately $14.1 million. An
increase of 1% in the average annual depreciation rates would increase Delta
Galil's depreciation and amortization expenses by approximately $1.9 million per
year. A decrease in the annual rates would have the opposite effect.

          Delta tests long-lived assets for impairment, in the event an
indication of impairment exists. An impairment loss would be recognized, and the
assets would be written down to their estimated fair values, if the sum of the
expected future cash flows (undiscounted and without interest charges) of the
long-lived assets is less than the carrying amount of such assets. See also note
4f of the consolidated financial statements.

INVENTORY VALUATION

          Inventory, which is a material part of Delta Galil's total assets, is
valued at the lower of cost or market value. Cost of raw and packaging materials
and purchased products is determined mainly on a "moving average" basis. Cost of
finished products and products in process is determined as follows: the raw
material and packaging component -is determined mainly on a "moving average"
basis; while labor and overhead is determined on an average basis over the
production period. If actual market prices for finished goods prove less
favorable than those projected by management, additional inventory write-downs
may be


                                      -31-

<PAGE>

required. Inventory is written down for estimated obsolescence based upon
assumptions about future demand and market conditions. Likewise, favorable
future demand and market conditions could positively impact future operating
results if inventory that has been written down is sold.

          Delta Galil's inventories carrying value as of December 31, 2006
amounted to $131.6 million. This amount is net of an allowance for specific
obsolete and slow-moving inventories in the amount of $26.7 million.

VALUATION OF INTANGIBLE ASSETS - GOODWILL

          Goodwill represents the excess of cost of investments in subsidiaries
acquired over the fair value of the net assets at acquisition. Until December
31, 2001, Goodwill was amortized in equal annual installments usually over a
40-year period, the maximum allowed period under U.S. GAAP. As from January 1,
2002, pursuant to FAS 142," Goodwill and Other Intangible Assets," goodwill is
no longer amortized but rather is tested for impairment annually. Delta
completed the transitional impairment review of goodwill on June 30, 2002, as
required by FAS 142. The various reporting units, for which separately
identifiable cash flow information is available, were identified and the fair
values of such reporting units were determined using the net income multiple of
comparable publicly traded companies in the textile industry. Consequently,
Delta has determined that there is no indication of impairment with respect to
goodwill as of January 1, 2002. Delta has selected September 30 as the date on
which it will perform its annual impairment test for indefinite life intangible
assets. As of December 31, 2005, based on the review made by Delta Galil, the
Company recorded Goodwill impairment expenses of $5.5 million with respect to
the U.S. Upper Market and the Socks segments. In 2006 no impairment resulted
from the annual review performed. See also note 1g of the consolidated financial
statements.

          As of December 31, 2006 the goodwill included in Delta Galil's balance
sheet amounted to $57.3 million, of which $55.5 million relate to the Delta USA
segment and the remaining, $1.8 million relate to the European segment. Based on
the annual test, as mentioned above, the asset fair value of these business
units are estimated to be higher than their respective book value.

NEWLY ISSUED AND RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

          In February 2006, the FASB issued Statement of Financial Accounting
Standards No. 155, "Accounting for Certain Hybrid Financial Instruments - an
amendment of FASB Statements No. 133 and 140" ("FAS 155"). This statement
permits fair value measurement for any hybrid financial instrument that contains
an embedded derivative that otherwise would require bifurcation in accordance
with the provisions of SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" ("FAS 133"), with changes in fair value of such hybrid
financial instrument recognized in earnings. The fair-value election will
eliminate the need to separately recognize certain derivatives embedded in
hybrid financial instruments under FAS 133.

          FAS 155 is effective for all financial instruments acquired or issued
after the beginning of an entity's first fiscal year that begins after September
15, 2006 (January 1, 2007, for Delta Galil). Earlier adoption is permitted as of
the beginning of an entity's fiscal year, provided that no interim period
financial statements have been issued for the financial year. The adoption of
this Statement is not expected to have a material effect on Delta Galil's
financial statements or its results of operations.

          In March 2006 the FASB issued Statement of Financial Accounting
Standards No. 156, "Accounting for Servicing of Financial Assets - an amendment
of FASB Statement No. 140" ("FAS 156"). This Statement amends FASB Statement No.
140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities", with respect to the accounting for separately
recognized servicing assets and servicing liabilities. In accordance with the
provisions of FAS 156, separately recognized servicing assets and servicing
liabilities must be initially measured at fair value, if practicable. Subsequent
to initial recognition, company may use either the amortization method or the
fair value measurement method to account for servicing assets and servicing
liabilities within the scope of this Statement. FAS 156 is effective for fiscal
years beginning after September 15, 2006 (January 1, 2007, for Delta Galil).
Earlier adoption is permitted as of the beginning of an entity's fiscal year,
provided the entity has not yet issued financial statements, including interim
financial statements, for any period of that fiscal year. Delta Galil does not
currently engage in transfers of financial assets and accordingly does not
anticipate that the adoption of this statement will have a material effect on
its financial statements.

          In July 2006, the FASB issued FASB Interpretation No. 48 "Accounting
for Uncertainty in Income Taxes - an interpretation of FASB Statement 109" ("FIN
48"). FIN 48 prescribes a comprehensive model for recognizing, measuring and
presenting in the financial statements tax positions taken or expected to be
taken on a tax return. This Interpretation also provides guidance on
derecognition, classification, interest


                                      -32-

<PAGE>

and penalties and disclosure requirements for uncertain tax positions. FIN 48 is
effective for fiscal years beginning on or after December 15, 2006 (January 1,
2007, for Delta Galil). The provisions of FIN 48 shall be applied to all tax
positions upon initial adoption of this Interpretation. Only tax positions that
meet the more likely than not recognition threshold at the effective date may be
recognized or continue to be recognized upon adoption of this Interpretation.
The cumulative effects, if any, of applying this Interpretation will be recorded
as an adjustment to retained earnings, goodwill, or accumulated gains and
(losses) not affecting retained earnings, as appropriate, as of the beginning of
the period of adoption. The company is currently evaluating the impact of
adopting FIN48 on its financial position, cash flows, and results of operations.

          In September 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 108, "Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements" ("SAB 108"), which provides interpretive guidance on the
consideration of the effects of prior year misstatements in quantifying current
year misstatements for the purpose of a materiality assessment. SAB 108 is
effective for fiscal years ending after November 15, 2006. Delta Galil adopted
SAB

108 in these financial statements and accordingly, follows SAB 108 requirements
when quantifying financial statement misstatements. The adoption of SAB No.108
did not result in corrections of Delta Galil's financial statements.

          In September 2006, the FASB issued Statement of Financial Accounting
Standards No. 157, "Fair Value Measurements" ("FAS 157"). FAS 157 defines fair
value, establishes a framework for measuring fair value in accordance with
generally accepted accounting principles, and expands disclosures about fair
value measurements; however, it does not require any new fair value
measurements. FAS 157 is effective for fiscal years beginning after November 15,
2007 (January 1, 2008, for Delta Galil). Earlier application is encouraged,
provided that the reporting entity has not yet issued financial statements for
that fiscal year, including any financial statements for an interim period
within that fiscal year. Delta Galil is currently evaluating the impact of the
provisions of FAS 157 on its financial position and results of operations.

          In June 2006, the Emerging Issues Task Force, reached a consensus on
Issue No. 06-03, "How Taxes Collected from Customers and Remitted to
Governmental Authorities Should be Presented in the Income Statement (That Is,
Gross versus Net Presentation)". EITF 06-03 relates to any tax assessed by a
governmental authority that is directly imposed on a revenue-producing
transaction. EITF 06-03 states that the presentation of the taxes, either on a
gross or net basis, is an accounting policy decision that should be disclosed
pursuant to Accounting Principles Board Opinion No. 22, "Disclosure of
Accounting Policies," if those amounts are significant. EITF 06-03 should be
applied to financial reports for interim and annual reporting periods beginning
after December 15, 2006 (January 1, 2007, for Delta Galil). Delta Galil does not
expect that the adoption of EITF 06-03 will have a material effect on its
financial position and results of operations.

5.B  LIQUIDITY AND CAPITAL RESOURCES

          Delta Galil finances its operations mainly from cash flow from
operations, supplemented, if needed, by revolving short-term bank loans and
long-term bank loans. Delta Galil repays short-term bank loans if the cash flow
from operations exceeds the cash needs for operations and investment.

          There are no legal restrictions on the ability of Delta Galil's
subsidiaries to transfer funds to Delta Galil in the form of dividends, loans or
advances.

          The following is a breakdown of Delta Galil's cash flows for the last
three years in US $ millions:

<TABLE>
<CAPTION>
                                                                  YEAR ENDED DECEMBER 31
                                                                 ------------------------
                                                                  2004     2005     2006
                                                                 ------   ------   ------
<S>                                                              <C>      <C>      <C>
Net cash flow provided by operating activities ...............   $ 23.0   $ 11.6   $ 26.3
Net cash flow used in investing activities ...................    (68.9)   (14.4)    (7.6)
Net cash flow provided by (used in) financing activities(*) ..     50.2     (4.7)   (23.0)
Translation differences on cash equivalents of foreign
   currency consolidated subsidiary ..........................      0.1     (0.1)    (**)
                                                                 ------   ------   ------
Increase (decrease) in cash and cash equivalents .............   $  4.4   $ (7.6)  $ (4.3)
                                                                 ======   ======   ======
</TABLE>

(*)  Including payment of dividend to shareholders of $8.3 million in 2004.
(**) Less than $0.1 millions.


                                      -33-
<PAGE>

          In 2006, 2005 and 2004 Delta Galil generated excess cash flow from
operations of $26.3 million, $11.6 million and $23.0 million respectively. The
increase in net cash flow provided by operating activities from $11.6 million in
2005 to $26.3 million in 2006 is mainly attributed to the net income in 2006
compared to the loss in 2005. The decrease in the net cash flow used in
investing activities is mainly attributed to a decrease in purchase of fixed
assets accompanied with increased proceeds from realization of fixed assets and
assets held for sale in the amount of $4.4 million in 2006 compared to $1.1
million in 2005. Net cash flow used in financing activities in 2006 amounted to
$23.0 million compared to $4.7 million in 2005. The increase in cash flow used
in financing activities in 2006 is attributed mainly to the improvement in
Delta's free cash flow which enable decreasing its net bank debt.

          We believe that our cash reserves, together with cash from operations,
will be sufficient to meet our anticipated cash needs in both the short and long
term. However, if, in the future, cash generated from operations is insufficient
to satisfy our liquidity requirements, or if our estimates of revenues, expenses
or capital or liquidity requirements change or are inaccurate, we may need to
raise additional funds. We may also need to raise additional funds, or may seek
to take advantage of any capital raising opportunities, to finance expansion
plans, develop or acquire new products or technologies, enhance our existing
product or respond to competitive pressures. We cannot be certain that we will
be able to obtain additional financing on commercially reasonable terms or at
all, which could limit our ability to grow and carry out our business plan.

BANK DEBT

          Set forth in the table below are Delta Galil's bank debt for the last
three years in US $ millions:

                                               YEAR ENDED DECEMBER 31
                                              ------------------------
                                               2004     2005     2006
                                              ------   ------   ------
SHORT-TERM:
   Bank loans .............................   $ 55.6   $ 80.6   $107.1
   Current maturities of long-term loans ..     27.9     29.5     16.9
                                              ------   ------   ------
      Total Short-term ....................     83.5    110.1    124.0
                                              ------   ------   ------
LONG-TERM:
      Total Long-term bank loans ..........     98.4     68.8     32.4
                                              ------   ------   ------
      Total Debt ..........................   $181.9   $178.9   $156.4
                                              ======   ======   ======

          Delta Galil has incurred bank debt mainly for acquisitions, working
capital, capital expenditures and general corporate purposes. Delta Galil's bank
loans bear interest at annual variable rates, which were approximately 6.4% on
average for the year ended December 31, 2006 and are secured by liens on Delta
Galil's assets and part of its subsidiaries. Delta Galil's bank loans are issued
under secured bank lines of credit of up to $269.2 million of which, as of
December 31, 2006, Delta Galil had $90.2 million available for additional
borrowings under the same prevailing rates.

          Delta Galil's bank lines of credit permit either short-term or
long-term borrowings and letters of credits. All of Delta Galil's short-term
loans have maturities of up to three months. Part of Delta Galil's borrowings is
for shorter periods in order to maintain cash management flexibility. Long-term
bank loans mature in periods up to November 2009. Delta Galil and part of its
subsidiaries have granted each other guarantees for each other's indebtedness.

          Delta Galil USA Inc., a subsidiary of Delta Galil is a party to a
credit agreement, dated December 9, 2004, with Bank Leumi U.S.A and Bank
Hapoalim B.M. Borrowings under the credit agreement are secured by substantially
all of the assets of the subsidiary. As of December 31, 2006, the credit
agreement provided for $22.5 million in long term loans, and $60 million are
short term loans. The loan bears interest at a variable rate that is linked to
the Libor. As of December 31, 2006, the interest rate on the long term loan was
7.0% and on the short-term credit was 6.75%. As of December 31, 2006, the
unutilized credit line was $15.0 million.

          The credit agreement included covenants based on (1) the ratio of
Delta Galil USA's earnings before interest, taxes, depreciation and
amortization, or EBITDA, to fixed charges; (2) the ratio of net worth to total
assets of Delta Galil USA; and (3) the ratio of the sum of Delta Galil USA's (a)
loans (b) letters of credit, and (c) acceptances to EBITDA.

          Delta Galil USA and the banks amended the credit agreement in January
and May 2006. The material changes contained in those amendments were the
following: a prepayment of $25 million of the principal amount of the long term
loan; a reduction in the quarterly payment on the long term loan from $3.5
million to $1.9 million; an extension of the expiration date of the revolving
loan facility from January

                                      -34-

<PAGE>

15, 2006 to January 31, 2007; a deposit of $4 million with Bank Leumi USA and a
pledge of that deposit to the banks, an increase of 0.25% in the interest rate;
and a change of the covenant mentioned above as follows:

          1.   The ratio of Delta Galil USA's EBITDA to fixed charges, as
               defined in the credit agreement, may not be below 1 to 1 for each
               three -month period ended June 30, September 30, and December 31,
               2006, with such ratio rising to 1.5 to 1 for the twelve months
               ending March 31, June 30, September 30, and December 31, 2007,
               and 1.6 to 1 for the twelve months ending March 31, June 30,
               September 30, and December 31 2008 and 2009;

          2.   The ratio of net worth to total assets of Delta Galil USA may not
               be below 0.25 to 1 for the twelve months ended March 31, 2006 and
               June 30, 2006, and a ratio of 0.28 to 1 for the twelve months
               ending September 30, 2006 and for the twelve-month period ended
               December 31, 2006, with such ratio rising to 0.4 to 1 for the
               twelve months ending March 31, 2007 and for the end of each
               subsequent quarter until maturity;

          3.   The ratio of the sum of Delta Galil's (a) loans (b) letters
               of credit, and (c) acceptances (or, collectively, debt) to
               EBITDA may not exceed 6.70 to 1 for the twelve months ended
               March 31, 2006; 5.70 to 1 for the twelve months ended June
               30, 2006, and 4.0 to 1 for the twelve months ended each of
               September 30, 2006 and December 31, 2006, with such ratio
               rising to 3.5 to 1 for the twelve months ended March 31,
               June 30, September 30, and December 31, 2007, 3.0 to 1 for
               the twelve months ending March 31, 2008 and for each twelve
               months period ending at the end of each subsequent quarter
               until maturity.

          In July 2006, Delta Galil USA and the banks further amended the credit
agreement to revise, among other things, the prepayment terms of the term loan.

          In January 2007, Delta Galil USA and the banks entered into Amendment
no. 4 to the credit agreement. The material changes contained in this amendment
are the following: a prepayment of the outstanding long term loan in the
principal amount of $22.5 million; an increase of the short term revolving loan
from $60 million to $90 million, a change to the term loan interest rate to
LIBOR + 1.5%; an extension of the expiration date of the revolving loan facility
from January 31, 2007 to January 31, 2008; a subordination of Delta Galil's loan
to Delta Galil USA in the amount of $20 million for a period ending December 1,
2009; a conversion of $5 million of the outstanding Delta Galil's loan to Delta
Galil USA into equity of Delta Galil USA which was executed on December 31,
2006.; a release of the $4 million deposit with Bank Leumi USA; a change to the
financial covenants as follows:

          1.   The ratio of net worth to total assets of Delta Galil USA may not
               be below a ratio of 0.28 to 1 as of December 31, 2006 and as of
               March 31, June 30 and September 30, 2007, and a ratio of 0.3 to 1
               as of December 31, 2007;

          2.   The net worth of Delta Galil USA may not be less than $60 million
               as of December 31, 2006 and as of March 31, June 30 and September
               30, 2007, and $65 million as of December 31, 2007; and

          3.   For the twelve month period ending December 31, 2006, and for the
               rolling twelve month period ending on each subsequent fiscal
               quarter thereafter, Delta Galil USA shall have a profit of at
               least $1.00.

WORKING CAPITAL AND CAPITAL EXPENDITURES

          Working capital at December 31, 2006 was $54.9 million, compared to
$80.9 million at December 31, 2005. The decrease in the working capital is
attributed to the increase in short term loans replacing long term loans and to
the decrease in inventory. Delta Galil believes that its working capital is
sufficient for its present requirements. Delta Galil has no material commitment
for capital expenditures.

5.C  RESEARCH AND DEVELOPMENT

          Delta Galil has strong in-house creative teams of designers and
technology experts, consisting of fashion designers, textile designers, yarn
experts, knitting experts and dyeing and finishing experts. Delta Galil's design
and development expenses amounted to approximately $28 million in 2006, compared
to $29 million in 2005 and $25 million in 2004.


                                      -35-

<PAGE>

5.D  TREND INFORMATION

          Please see "Item 3. Risk Factors - Recent Changes in World Trade
Organization quotas could put pressure on apparel prices," and "Item 3. Risk
Factors - If private label customers produce their own products and bypass
manufacturers such as Delta Galil, our sales could decline." See also "Item 5.
Operating and Financial Review and Prospects" and "Item 4. Information on the
Company" for trend information.

5.E  OFF-BALANCE SHEET ARRANGEMENTS

          Delta Galil does not have any off-balance sheet arrangements that have
or are reasonably likely to have an effect on its financial condition, changes
in financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that is material except hedging
transactions, see Item 11 "Quantitative and Qualitative Disclosures About Market
Risk".

                                      -36-
<PAGE>

5.F  CONTRACTUAL OBLIGATIONS

          Set forth below are our contractual obligations and other commercial
commitments as of December 31, 2006:

<TABLE>
<CAPTION>
                                                     PAYMENTS DUE BY PERIOD
                                           ------------------------------------------
                                                   LESS THAN                MORE THAN
CONTRACTUAL OBLIGATIONS                    TOTAL     1 YEAR    2- 4 YEARS    5 YEARS
                                           -----   ---------   ----------   ---------
                                                      (U.S. $ IN MILLIONS)
<S>                                        <C>        <C>         <C>          <C>
Long-Term Debt (1) .....................    54.0      19.5        34.5
Capital Lease Obligations ..............     0.9       0.1         0.3          0.5
Operating Leases .......................    48.4       8.7        19.1         20.6
Minimum guaranteed royalties ...........     9.9       4.3         5.6
Letter of credits and bank guarantees ..    26.8      22.8         3.8          0.2
                                           -----      ----        ----         ----
Total Contractual Cash Obligations .....   140.0      55.4        63.3         21.3
                                           =====      ====        ====         ====
</TABLE>

(1) Includes expected interest expenses on long-term debt, based on interest
rates in effect as of December 31, 2006. In January 2007, the credit agreement
between Delta Galil USA and Bank Hapoalim and Bank Leumi USA was amended. In
connection with this amendment, Delta Galil USA pre-paid the outstanding long
term loan in the principal amount of $22.5. As a result, Delta Galil USA's term
loan is zero and the Delta's consolidated long term debt as of January 31, 2007
is as follows: $31.5 (Total); $11.7 (less than one year); $19.8 (2-4 years); and
$0 (more than 5 years).

See Item 11: "Quantitative and Qualitative Disclosures About Market Risk"
regarding obligations related to forward currency contracts.


                                      -37-

<PAGE>

ITEM 6: DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

6.A  DIRECTORS AND SENIOR MANAGEMENT

          The directors and executive officers of Delta Galil are as follows:

NAME                  AGE   POSITION
----                  ---   --------
Dov Lautman            71   Chairman of the Board of Directors
Isaac Dabah(3)         49   Director and Vice Chairman of the Board of Directors
Aviram Lahav           48   President and Chief Executive Officer
Yossi Hajaj            39   Senior Vice President & Chief Financial Officer
Tom Witthuhn           52   Senior Vice President & CEO of Delta Galil USA
Imad Telhami           48   Senior Vice President & Chief Operation Officer
Esti Maoz              59   Senior Vice President & Chief Marketing Officer
Israel Baum(2) (3)     68   Director
Gideon Chitayat(3)     67   Director
Aharon Dovrat          76   Director
Harvey M. Krueger      78   Director
Noam Lautman           38   Director
Giora Morag(1) (2)     62   Director
Amnon Neubach(1) (2)   62   Director
Dan Propper            66   Director
Arnon Tiberg           63   Director
Leah Perez             57   Director

(1)  External Director.

(2)  Member of the Audit Committee.

(3)  Mr. Dabah, Mr. Chitayat and Mr. Baum are nominees of GMM Capital LLC,
     pursuant to a Shareholders Agreement between GMM Capital and the Lautman
     Group concerning the election of directors.

          DOV LAUTMAN is the founder of Delta Galil and has served as the
Chairman of the Board of Directors since 1975 and as President and Chief
Executive Officer from February 2006 till October 2006. From 1975 to 1996, Mr.
Lautman was the Chief Executive Officer of Delta Galil. From 1986 to 1993, Mr.
Lautman served as President of the Manufacturers Association of Israel and as
the Chairman of the Coordinating Bureau of Economic Organizations of Israel.
From 1993 to 1995, Mr. Lautman was the Prime Minister's Special Emissary for
Economic Development. Since May 2001, Mr. Lautman has served as the chairman of
the executive council of Tel Aviv University.

          ISAAC DABAH has served as a Director of Delta Galil and as
Vice-Chairman of Delta Galil's Board of Directors since November 2005. He has
been the Executive Director of GMM Capital LLC, one of our principal
shareholders, since it was formed in January 2005. From 2003 to 2004, Mr. Dabah
was CEO of the Denim Division of Jones Apparel Group, which included brands such
as Gloria Vanderbilt, Polo Jeans, L.E.I. From 2002 to 2003, Mr. Dabah was CEO of
Gloria Vanderbilt, a division of Jones Apparel Group. From 1993 to 2002, Mr.
Dabah was CEO of Gloria Vanderbilt Apparel Corp.

          AVIRAM LAHAV has served as the CEO of Delta Galil since November 2006.
Mr. Lahav has been Senior Vice President since 1997. He served as CEO of Delta
Galil's Innerwear USA operations from March 2004 and was appointed as CEO of the
US Upper Market Division of Delta, which merged the former Textile and Innerwear
divisions. From 1997 to 2004 he served as the Chief Financial Officer of Delta
Galil. From 1993 to 1997, Mr. Lahav was Chief Executive Officer of
Europcar/Eurodollar Israel, a car rental company and, from 1991 to 1993, Chief
Financial Officer of Mediterranean Car Agency Ltd. Mr. Lahav is a certified
public accountant (Isr).

          YOSSI HAJAJ has served as Senior Vice President and Chief Financial
Officer of Delta Galil since March 2004. From 1999 to 2004 he served as
controller and corporate secretary of Delta Galil and from 1997 to 1999 he was
Delta Galil's Chief Economist and controller of foreign subsidiaries. Mr. Hajaj
is a certified public accountant (Isr.) and holds a B.A. in Accounting and
Economics from Tel Aviv University. He was a member of the Investment Committee
of Tel Aviv University from 2001 until 2006.

          TOM WITTHUHN has served as the Chief Executive Officer of Delta Galil
USA since September 2006. From 1998 to 2006 he served as the Senior Vice
President International Operations & Global Licensing of Fruit of the Loom.
Prior to that, from 1996 to 1998, Tom served as the Vice President General
Merchandise Marketing Manager of Jockey International. From 1991 to 1996 he
served as the President of


                                      -38-

<PAGE>

the B.D. Baggies Division of Tal Ltd. Mr. Witthuhn holds a B.Sc in Marketing
from Madison University of Wisconsin.

          IMAD TELHAMI has served as Delta's Chief Operation Officer since
January 2007. From 2002 to January 2007, Mr. Telhami has served as Senior Vice
President and CEO of Delta's Innerwear USA Operation since 2002. He started his
career at Delta in 1983 as a sewing plant manager. He managed several sewing
plants until he was re-located to manage Delta's facilities in Scotland. In 1996
he returned to Israel when he was promoted to Lingerie Operation Director. In
1999 he was promoted to Director of Delta's Marks and Spencer Operations. Mr.
Telhami holds a B.Sc in Industrial Management from Shenkar College in Israel. In
March 2004 Mr. Telhami was promoted to SVP and CEO of Delta Galil's European
division.

          ESTI MAOZ has served as Delta's Chief Marketing Officer since January
2007. Ms. Maoz has been with Delta Galil since its inception in 1975, and has
served as Senior Vice President, Global Development and Marketing since November
2002 until January 2007. From September 1991 through October 2002, Ms. Maoz
served as the President of Delta Textiles (New York) Ltd. During these years,
Ms. Maoz developed and managed the marketing operations within North America. In
1987 Ms. Maoz established the new Ladies Underwear Division and managed the
Division through 1991. From 1984 through 1987 Ms. Maoz served as the Corporate
Director of Product Development and Design. From 1978 through 1984 Ms. Maoz
served as the Manager of all the sewing plants in Delta Galil. Ms. Maoz studied
Business and Marketing at the Haifa University in Haifa, Israel. Since April
2005, Ms. Maoz has served on the Board of Directors of Bagir Ltd.

          ISRAEL BAUM has served as a Director of Delta Galil since December
2005. He is currently an entrepreneur, and served as the Chief Executive Officer
of Litam Clothing Ltd., an Israeli apparel manufacturer, from 1994 to 2004. From
1998 to 2005 Mr. Baum served on the Board of Directors of Macpell Industries
Ltd., an Israeli apparel company listed on the Tel Aviv Stock Exchange. Mr. Baum
holds a B.Sc. in Industrial Engineering and Management from Temple University in
Philadelphia.

          GIDEON CHITAYAT, has served as a director since November, 2005. He is
the chairman and CEO of General Management and Business Strategy Consultant
(GMBS) Ltd. since 1985. Dr. Chitayat has served as a consultant to Chief
Executive Officers and to Chairmen of Boards of Directors of several leading
Israeli companies and entities in diversified fields in Israel. His main area of
consultancy is competitive strategy. Dr. Chitayat currently serves on the board
of directors of Paz Oil Industries Ltd., Machteshim Agan Ltd. and Teva-Israel, a
subsidiary of Teva Pharmaceutical Industries Ltd. Dr. Chitayat served on the
board of directors of Bank Hapoalim from 2000 until 2006. Dr. Chitayat holds a
Ph.D. and an M.A. in Business and Applied Economics from the Wharton School of
the University of Pennsylvania, and a M.B.A. (with honors) and B.A. (in
Economics) from the Hebrew University in Jerusalem. Dr. Chitayat has held
numerous academic positions at leading business schools in the United States and
Israel. Dr. Chitayat has published numerous articles and a book on corporate,
boards of directors and business issues.

          AHARON DOVRAT has served as a Director of Delta Galil since December
1998. Mr. Dovrat is the chairman of Dovrat & Co. Mr. Dovrat serves as a Director
of Cognifit Ltd., DS Polaris Ltd., and Solgood Communication Ltd. Until April
2005 Mr. Dovrat served as a Chairman of Isal Ltd. and as a Director of
Technomatix Technologies Ltd. Until 2004 he served as a Chairman of Alvarion
Ltd. From 1992 to 1998.Mr. Dovrat was the chairman of the Dovrat, Shrem & Co.
S.A., an investment banking firm established in 1991, as well as a Director of
Domicar Ltd., Investment Company of Bank Hapoalim Ltd., Oshap Technologies Ltd.
and Ordan Industries Ltd. Until 1991 Mr. Dovrat served as managing Director of
Clal (Israel) Ltd., one of Israel's largest public investment companies.

          HARVEY M. KRUEGER has served as a Director of Delta Galil since August
1999. Mr. Krueger is Vice Chairman of Lehman Brothers and has been involved with
that firm and Kuhn Loeb & Co., one of its constituent firms, since 1959. Mr.
Krueger currently serves as a Director of Chaus Inc., and is also Chairman of
Stockton Partners Inc. In addition, Mr. Krueger is former Chairman of the Peres
Center for Peace, former Chairman of Cooper-Hewitt National Design Museum and
the Smithsonian Institution, former and honorary Chairman of the Hebrew
University of Jerusalem, and a member of the Board of Directors of Beth Israel
Medical Center (NY) and Continuum Health Partners.

          NOAM LAUTMAN has been a Director of Delta Galil since October 2001.
Mr. Lautman served as Director for New Ventures and Strategic Business Planning
at Teva Pharmaceutical Industries Ltd (Nasdaq: TEVA) from 2002 to 2006. Mr.
Lautman previously served in various managerial positions in several Israeli
companies operating in the high-tech field. Mr. Lautman serves as the Chairman
of the Board of Directors of Browzwear Ltd and as a Director of Nasvax Ltd.
(TASE: NSVX). Mr. Lautman holds a B.Sc in Computer Science and Mathematics and
an MBA from New York University. Mr. Lautman is the son of Dov Lautman, the
Chairman of the Board of Directors of the Company.


                                      -39-

<PAGE>


          GIORA MORAG has served as a director of Delta Galil since September
2003. Mr. Morag worked at Bank Hapoalim B.M., for 27 years, until 2002. Mr.
Morag held a variety of managerial positions during his career, most recently as
the General Manager of the bank's UK branches. From 1996 to 1999 Mr. Morag
served as General Manager of American Israel Bank Ltd, a wholly owned subsidiary
of Bank Hapoalim. As of October 2006 Mr. Morag functions as an external director
of Union Bank of Israel. Mr. Morag studied economics and political science at
the Hebrew University.

          AMNON NEUBACH has been an independent business consultant since 1997.
From January 2001 until May 2003, Mr. Neubach served as the Chairman of the
Board of Directors of Pelephone Communications Ltd., an Israeli mobile phone
company. From 1995 to 1997, Mr. Neubach served as country advisor to Goldman
Sachs in Israel, and from 1990 to 1994 he served as the Minister of Economic
Affairs at the Israeli Embassy in Washington, D.C. Mr. Neubach serves as an
external director of Mind CTI Ltd. (Nasdaq: MNDO), a software company, Aspen
Building and Development Ltd. (TASE: ASBD), a real estate company, Leumi Card (
subsidiary of Bank Leumi in Israel Ltd.); and as a director of Direct Insurance
- IDI Ltd., a private Israeli insurance company. Mr. Neubach received a B.A. in
economics and business administration and an M.A. in economics from Bar-Ilan
University.

          DAN PROPPER has served as a Director of Delta Galil since 1986. Mr.
Propper has been the Managing Director of the OSEM Group of Companies since
1981. In April 2006, he stepped down as CEO and become active chairman of the
OSEM group. Until June 1999, Mr. Propper was the President of the Manufacturers
Association of Israel and Chairman of the Coordinating Bureau of Economic
Organizations of Israel. Mr. Propper is also a member of the Board of Directors
of The Weizmann Institute, the Technion, Israel Institute of Technology and Ben
Gurion University as well as a member of the executive committees of Tel-Aviv
University, and Chairman of the Boards of Directors of various industrial and
high tech companies. Mr. Propper received his B.Sc. (summa cum laude) in
Chemical Engineering, and food Technology from the Technion -Israel Institute of
Technology.

          ARNON TIBERG has served as a Director of Delta Galil since March,
2006. He served as Delta Galil's President and Chief Executive Officer from 1996
until January 2006. Mr. Tiberg previously served as a Director of Delta Galil
from 1990 until becoming the Chief Executive Officer in 1996. He is presently a
Director of Nilit Ltd., Ransys Ltd., Kali Insurance Agency Ltd., and The First
International Bank of Israel Ltd. Mr. Tiberg is also the Chairman of the
Academic Club of the Israeli Friends of the Tel Aviv University.

          LEAH PEREZ has served as a Director of Delta Galil since October 2006.
Ms. Perez has been the Head of the Fashion Design Department of Shenkar College
of Engineering and Design since September 2006, and also held that position from
1994 to 2003. From 2003 to 2006 she served as Cultural Attache at the Israeli
Embassy in Bogota, Colombia. Ms. Perez has curated numerous art, design and
fashion design shows around the world and has published a number of articles on
art. Ms. Perez earned a B.A. in History of Art and History of the Western World
from Haifa University and an M.A. in History of Art from the Hebrew University
in Jerusalem.

6.B COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS

          The directors of Delta Galil, other than Dov Lautman who is also an
employee of Delta Galil, and the directors designated by GMM Capital other than
Isaac Dabah, receive a fixed annual compensation of approximately $9,100 for
their services on the Board of Directors or on any committee thereof. In
addition, a sum of approximately $335 is paid for attending each Board or Board
committee meeting and directors are reimbursed for certain approved expenses
incurred in connection with their services to Delta Galil. In 2006, Delta
Galil's expenses for directors' compensation amounted to a total of
approximately $128,000. The following table sets forth the aggregate
compensation paid to or accrued on behalf of all directors and executive
officers of Delta Galil as a group for the year ended December 31, 2006.

<TABLE>
<CAPTION>
                                       SALARIES, DIRECTORS' FEES,   PENSION, RETIREMENT AND
                                        COMMISSIONS AND BONUSES         SIMILAR BENEFITS
                                       --------------------------   -----------------------
<S>                                           <C>                         <C>
All directors and executive officers
   (consisting of 17 persons)                 $2.5 million                $0.1 million
</TABLE>

          As of March 27, 2007, 1,163,758 options to purchase Delta Galil's
ordinary shares were outstanding to certain executive officers and key employees
(consisting of 6 persons who were granted options). See "Stock Option Plans"
below and note 9 of the notes to Delta Galil's consolidated financial statements
included in Item 18 of this annual report.


                                      -40-

<PAGE>

6.C BOARD PRACTICES

TERMS OF DIRECTORS

          Delta Galil's directors are elected at the Annual Shareholders Meeting
to serve until the next annual meeting of shareholders or until their earlier
removal or resignation. Delta Galil's Articles of Association provide that the
directors may appoint additional directors (whether to fill a vacancy or to
expand the Board), provided the number of directors is less than fifteen or such
other maximum number approved at a general meeting of shareholders. The Articles
of Association also provide that the Board of Directors may delegate all of its
powers to committees of the Board as it deems appropriate, subject to the
provisions of the companies law.

          Under an amendment to the Israeli Companies Law, each Israeli public
company is required to determine, no later than April 19, 2006, 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.

          In accordance with the Companies Law, Delta Galil has determined that
the minimum number of directors with "accounting and financial expertise" that
Delta Galil believes is appropriate, in light of the particulars of Delta Galil
and its activities, is two (one of them is an external director). Under the
Companies Law, only one of such "experts" is required to be an external
director, as described below.

          Delta Galil or its subsidiaries have not entered into any service
contracts with its non-employee directors that provide benefits upon termination
of services.

EXTERNAL DIRECTORS AND AUDIT COMMITTEE

          Under the Israeli Companies Law, public companies are required to
elect two external directors who must meet specified standards of independence.
The external directors may not have any economic relationship with the company.
External directors are elected by the shareholders. The votes in favor of their
election must include at least one-third of the votes of the shareholders
attending and voting who are non-controlling shareholders of the company,
without taking abstentions into account. This approval requirement need not to
be met if the total votes of such non-controlling shareholders who vote against
the election represent 1% or less of all of the voting rights in the company.
External directors serve for a three-year term, which may be renewed for only
one additional three-year term. External directors can be removed from office
only by the shareholders at the same majority required to elect them, or by a
court. External directors may be removed from office only if they cease to meet
the statutory qualifications with respect to their appointment or if they breach
their duty of loyalty to the company.

          Pursuant to the Israeli Companies Law at least one external director
is required to have "accounting and financial expertise" and the other is
required to have "professional expertise" or "accounting and financial
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,  in the main business sector of the company or in an
          area relevant to his or her position on the board; 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.

          Any committee of the board of directors must include at least one
external


                                      -41-

<PAGE>

director. An external director is entitled to compensation as provided in
regulations adopted under the Companies Law and is otherwise prohibited from
receiving any other compensation, directly or indirectly, in connection with his
or her service.

          If, when an external director is elected, all members of the board of
directors of a company are of one gender, the external director to be elected
must be of the other gender.

          Messrs. Giora Morag and Amnon Neubach serve as external directors of
Delta Galil. Their terms expire on September 30, 2009 and December 16, 2009,
respectively. The board of directors of Delta Galil determined that Mr. Amnon
Neubach and Mr. Gideon Chitayat have "accounting and financial expertise" and
that Mr. Giora Morag has "professional expertise".

          The Companies Law also provides that publicly traded companies must
appoint an audit committee. The responsibilities of the audit committee include
identifying irregularities in the management of the company's business and
approving related party transactions as required by the Companies Law. An audit
committee must consist of at least three members and include all of the
company's external directors. The chairman of the board of directors, any
director employed by the company or providing services to the company on a
regular basis, any controlling shareholder or any relative of a controlling
shareholder may not be members of the audit committee. An audit committee may
not approve an action or a transaction with a controlling shareholder or with an
office holder, unless at the time of approval two external directors are serving
as members of the audit committee and at least one of the external directors was
present at the meeting in which an approval was granted.

          In addition, the Companies Law requires the board of directors of a
public company to appoint an internal auditor nominated by the audit committee.
A person who does not satisfy the Companies Law's independence requirements may
not be appointed as an internal auditor. The role of the internal auditor is to
examine, among other things, the compliance of the company with applicable law
and orderly business practice.

          Pursuant to the listing requirements of the Nasdaq National Market,
Delta Galil is required to have at least two independent directors on its board
of directors and to establish an audit committee, at least a majority of whose
members are independent of management. Messrs. Morag, Neubach, and Baum, who we
believe meet the definitions of independence under the rules of the Securities
and Exchange Commission and the Nasdaq National Market, currently serve on Delta
Galil's audit committee.

          Nasdaq rules require any foreign issuer that follows home country
practice in lieu of any qualitative listing requirement to disclose in its
annual reports filed with the Securities and Exchange Commission that it does
not follow such qualitative listing requirement and to describe the home country
practice followed by the issuer in lieu of such requirement. While Delta Galil
does have a board of directors the majority of which meets the independence
requirements under Nasdaq rules, and Delta Galil does have an independent audit
committee, as described above, Delta Galil has decided to follow home country
practice in lieu of having an independent compensation committee and in lieu of
obtaining shareholder approval for stock option plans. Home country practice
does not require having an independent compensation committee. Shareholder
approval will be sought for stock options to be granted to persons for whom such
approval would be required under Israeli law, such as directors and controlling
shareholders, as well as any plans that require shareholder approval for other
reasons, such as to achieve tax benefits for the optionees.

6.D EMPLOYEES

          As of December 31, 2006, Delta Galil employed approximately 11,000
employees of these, approximately 8,200 were engaged in production, and the
remainder performed administrative, marketing, logistics and other functions.

          During 2006 following Delta Galil's decision to concentrate it's Far
East self production in Thailand and cease it's sewing activity in China
approximately 700 employees were dismissed. See "Item 5 - Operating and
Financial Review and Prospects - Reorganization plan.".

          The following table shows the geographical distribution of Delta
Galil's employees, as of December 31, 2006:

          COUNTRY          NUMBER OF EMPLOYEES
          -------          -------------------
          Egypt                    4,588
          Israel                   2,075
          Jordan                   2,059
          Far East                 1,489
          United States              603
          United Kingdom             186
                                  ------
          Total                   11,000
                                  ======



                                      -42-

<PAGE>

          Many factory employees are eligible for bonuses based upon the number
of units such employees produce in any given day. Delta Galil has not
experienced any significant labor stoppages.

          Certain collective bargaining agreements between the General
Federation of Labor in Israel, known as the "Histadrut," and the Coordination
Bureau of Economic Organizations (including the Industrialists' Association of
Israel) are applicable to Delta Galil's employees in Israel. In addition, a
collective bargaining agreement relating to members of the Industrialists'
Association, which governs employee relations in the textile and clothing
industry, applies to all of Delta Galil's textile 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, under these
agreements, the wages of most of Delta Galil's employees are automatically
adjusted in accordance with the cost-of-living adjustments as determined on a
nationwide basis and under agreements with the Histadrut based on changes in the
Israeli consumer price index. 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. Delta
Galil currently funds its on-going severance obligations by making monthly
payments to pension funds, employee accounts in a provident fund and insurance
policies. In addition, according to the Israeli National Insurance Law, Israeli
employees and employers are required to pay specified amounts to the National
Insurance Institute. Since January 1, 1995, such amounts also include payments
for national health insurance payable by employees. Until June 30, 2005 the
payments to the National Insurance Institute are determined progressively in
accordance with the wages and range from 10.4% to 16.3% of wages, of which the
employee contributes between 43% and 64% and the employer contributes the
balance. Due to a change in the Israeli National Insurance Law, starting July 1,
2005, the range is 9.8% to 16.1% of wages, of which the employee contributes
between 46% and 65%. Starting January 1, 2006 the range is 8.5% to 17.7% of
wages, of which employee contributes between 41% and 68%. Starting January 1,
2007 the range is 7.6% to 17.7% of the wages of which employee contributes
between 46% and 68%. A majority of Delta Galil's permanent employees are covered
by life and pension insurance policies providing customary benefits to
employees, including retirement and severance benefits. Delta Galil generally
contributes up to 15.8% (depending on the employee) of base wages to such plans
and the permanent employees contribute 5.0% of their base wages.

6.E SHARE OWNERSHIP

          See table under Item 7: "Major Shareholders and Related Party
Transactions".

STOCK OPTION PLANS

          Delta Galil has three stock option plans. The total shares that may be
issued upon exercise of all outstanding options represent approximately 12% of
the outstanding share capital of Delta Galil excluding 1,206,802 ordinary shares
held by the company and 166,031 shares held by a trustee in connection with
Delta Galil's stock option plan after taking into account shares issuable upon
exercise of these options, as of March 25, 2007.

2000 STOCK OPTION PLAN

          In June 2000, Delta Galil adopted a stock option plan. Under the plan,
options to purchase 809,000 ordinary shares were granted to 70 employees,
including 100,000 options to Arnon Tiberg, Delta Galil's President and Chief
Executive Officer till January, 2006. As of March 25, 2007, 119,375 options that
were granted to 20 employees were forfeited, upon the termination of their
employment and 371,500 options were expired without being exercised. The options
vest over a three-year period and have an exercise price of $21.07, equal to the
Tel Aviv Stock Exchange closing price on the last day of trading prior to the
board of directors' approval. The options are to be held in trust by ESOP Trust
Company Ltd., as trustee, for a period of at least two years from the date of
grant pursuant to the requirements of the Income Tax Ordinance. As of December
31, 2006 all of these options were fully vested and 318,125 options were
outstanding under the plan.

2002 STOCK OPTION PLAN

          In October 2002 Delta Galil adopted an additional stock option plan,
under which options to


                                      -43-

<PAGE>


purchase up to 1,100,000 ordinary shares may be granted. Under the plan, options
to purchase up to 1,004,500 ordinary shares were granted to 97 employees,
including 100,000 options to Arnon Tiberg, Delta Galil's President and Chief
Executive Officer till January 31, 2006. The options vest over a four-year
period and have an exercise price of $9.00. The options are to be held in trust
by ESOP Trust Company Ltd., as trustee, for a period of at least two years from
the date of grant pursuant to the requirements of the Israeli Income Tax
Ordinance. As of March 25, 2007, all options were fully vested. The options are
exercisable over a three-year period, commencing one year after the vesting date
of the first batch and on the vesting date of the second, third and fourth
batch. Under the same plan, in May 2003 the Company granted 30,000 options to
three employees of the group at an exercise price of $10.76. The options are
exercisable over a three years period, commencing one year after the vesting
date of the first batch and on the vesting date of the second, third and fourth
batch. On March and August 2004 the Company granted 80,000 and 30,000 options
respectively to six and one employees of the group respectively at an exercise
price of $15.35 and $12.74, respectively. The options are exercisable over a
three-year period, commencing one year after the vesting date of the first batch
and on the vesting date of the second, third and fourth batch. All options
granted after January 1, 2003 may be exercised only following the elapse of two
years after the end of the year in which the options were granted. As of
December 31, 2006, 972,750 options were outstanding under this plan. As of March
25, 2007 options to purchase an additional 112,250 shares remain available for
grant under the plan. As of March 25, 2007, 156,750 options that were granted to
thirty employees were forfeited upon the termination of their employment, and
15,000 options were exercised by two employees.

2006 STOCK OPTION PLANS

          In May 2006 the Board of Directors approved two option plans, one for
Israeli and other non-U.S. employees and the other for U.S. employees. A total
of up to 1,400,000 options, representing approximately 6.5% of Delta Galil's
issued capital on a fully diluted basis, may be issued under the plans. Of such
number, 1,100,000 options are issuable under the plan for Israeli and other
non-U.S. employees and 300,000 options are issuable under the plan for U.S.
employees. Each option may be exercised for one ordinary share of Delta Galil's,
pursuant to terms of the relevant option plan.

          Under the plan options to purchase up to 1,345,018 ordinary shares
were granted during 2006 as follows: The exercise price of 845,016 options
granted in May 2006 is $8.43 equal to the closing price of the ordinary shares
on the Tel Aviv Stock Exchange on May 11, 2006 converted to US dollars based on
the exchange rate of the US dollar on that date. The exercise price of 425,000
options granted in June 7, 2006 is $7.26, equal to the closing price of the
ordinary shares on the Tel Aviv Stock Exchange on June 7, 2006 converted to US
dollars and the exercise price of 25,002 options granted on June 25, 2006, is
$7.59 equal to the closing price of the ordinary shares on the Tel-Aviv stock
exchange on that day. The exercise price of 50,000 options granted on September
21, 2006 is $9.20, equal to the closing price of the ordinary share on the Tel
Aviv Stock Exchange on that day. Of the 1,345,018 options granted, 816,014 were
granted to senior employees. The plan for Israeli employees is treated under the
capital gains track under Section 102 of the Israeli Income Tax Ordinance. The
options granted under the plan for U.S. employees as incentive stock options
have certain tax benefits for those receiving the options. The options granted
vest over up to a four-year period and are exercisable over a period of three
years after vesting. The vesting of 277,000 options, granted to 11 senior
employees, is subject to achievement of financial performance goals. Of these
options, 141,000 will vest if our pre-tax net income, excluding one-time capital
gains, is at least U.S $27.5 million in 2007, and 136,000 will vest if the
Company's pre-tax net income, excluding one-time capital gains, is at least U.S
$32.5 million in 2008. Of these said performance based options, 89,000 were
forfeited as of March 15, 2007 in connection with the departure of four
employees. As a result, the total number of options subject to 2007 and 2008
goals is 96,500 and 91,500, respectively. The fair value of the option granted,
based on the Black and Scholes model, is approximately $1.8 million and is
included in the financial statements over the vesting period.

          As of December 31, 2006, Delta Galil had outstanding options under
this plan to purchase up to 1,202,732 ordinary shares. As of March 25, 2007
options to purchase an additional 255,270 shares remain available for grant
under the plan.

          As of March 15, 2007, 200,288 options that were granted to eighteen
employees were forfeited upon the termination of their employment.

          As of March 15, 2007, 2,435,605 options to purchase ordinary shares
were outstanding under all three plans.


                                      -44-

<PAGE>


          The following table summarizes information regarding options
outstanding at December 31, 2006:
<TABLE>
<CAPTION>
                      NUMBER OF SHARES ISSUABLE UPON EXERCISE OF OPTIONS

                                                                           VESTED &
                                          OUTSTANDING                    EXERCISABLE
                         --------------------------------------------   ------------
                                                            WEIGHTED
                                                            AVERAGE
                                           BALANCE AT      REMAINING    BALANCE AT
                                           DECEMBER 31,   CONTRACTUAL   DECEMBER 31,
          DATE OF PLAN   EXERCISE PRICES      2006           LIFE          2006
          ------------   ---------------   ------------   -----------   ------------
                                                            (YEARS)
          <S>                <C>            <C>               <C>        <C>

          June 2000          $21.07           318,125         1.1          318,125
          October 2002       $ 9.00           840,250         1.6          840,250
          October 2002       $10.76            30,000         2.1           22,500
          October 2002       $15.35            80,000         3.1           40,000
          October 2002       $12.74            22,500         3.3           15,000
          May 2006           $ 8.43           702,730         5.4
          May 2006           $ 7.26           425,000         5.5
          May 2006           $ 7.59            25,002         5.5
          May 2006           $ 9.20            50,000         5.5
                                            ---------                    ---------
                                            2,493,607                    1,235,875
                                            =========                    =========
</TABLE>

          In March 28, 2007 the Company granted 122,000 options to eight
employees at an exercise price per share of $6.95.

          Of the total options granted, 120,000 vest and exercisable as follows:
first third vest on the second anniversary of the date of grant and are
exercisable for three years thereafter, second third vest on the third
anniversary of the date of grant and are exercisable for three years thereafter
and the final third vest on the fourth anniversary of the date of grant and are
exercisable for three years thereafter. The remaining 2,000 options vest and
exercisable as follows: first quarter vest on the first anniversary of the date
of grant and are exercisable for three years from the second anniversary of the
date of grant, second quarter vest on the second anniversary of the date of
grant and are exercisable for three years thereafter, third quarter vest on the
third anniversary of the date of grant and are exercisable for three years
thereafter and the final third vest on the fourth anniversary of the date of
grant and are exercisable for three years thereafter.

          The fair value of the options granted, based on the Black and Scholes
model, is approximately $0.2 million and will be recognized in the financial
statement over the vesting period.


                                      -45-

<PAGE>

ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

7A. MAJOR SHAREHOLDERS

          The following table sets forth stock ownership information (including
all ordinary shares represented by ADSs) as of March 25, 2007, with respect to:

          1)   Each person who is known by Delta Galil to be the beneficial
               owner of more than 5% of Delta Galil's outstanding ordinary
               shares; and

          2)   Directors and senior management (on an individual basis);

          Except where otherwise indicated, Delta Galil believes, based on
information furnished by such owners, that the beneficial owners of the ordinary
shares listed below have sole investment and voting power with respect to such
shares. The shareholders listed below do not have any different voting rights
from any other shareholders of Delta Galil. Other than as disclosed below, none
of Delta Galil's directors or executive officers beneficially owns 1% or more of
Delta Galil's outstanding ordinary shares.

                                         NUMBER OF        PERCENT OF
                                      ORDINARY SHARES      ORDINARY
                                        BENEFICIALLY-       SHARES
          NAME                             OWNED        OUTSTANDING(1)
          ----                        ---------------   --------------
          GMM Capital, LLC(2)             5,323,793          28.4%
          Dov Lautman(3)                  4,644,993          24.8%
          Menorah Holdings Ltd.(4)        1,095,172           5.8%
          Arnon Tiberg-Director(5)          647,588           3.5%
          Aharon Dovrat-Director             30,050          0.16%
          Harvey Krueger-Director            5, 000          0.03%
                                         ----------          ----
          Officers and directors
             as a group (aggregate)      11,746,596          62.68%
                                         ==========          ====

(1)  Based on 18,740,878 ordinary shares outstanding; as of March 25, 2007,
     excluding 1,206,802 ordinary shares held by the Company and excluding
     166,031 ordinary shares held by a trustee in connection with Delta Galil's
     stock option plans.

(2)  The sole member of GMM Capital, LLC is GMM Trust. The trustees of GMM Trust
     are Isaac Dabah, Ivette Dabah (Mr. Dabah's wife) and Donald Hecht the
     administrator trustee.

(3)  Includes 3,264,336 shares held by Nichsei Adinoam Ltd. and 1,380,657 shares
     held by N.D.R.L. Investments (1998) Ltd., each of which is a company
     controlled by Dov Lautman. Noam Lautman is also a director of each of these
     companies.

(4)  Includes shares held by Menorah Holdings Ltd., as well as shares held by
     pension funds and provident funds affiliated with Menorah.

(5)  Includes 439,150 shares held by Ha'lakuach Ha'Neeman (65) Ltd., a company
     controlled by Mr. Tiberg and 58,438 held by Mr. Tiberg. Also includes
     vested options held by Mr. Tiberg to purchase 150,000 ordinary shares, as
     follows: options to acquire 50,000 ordinary shares have an exercise price
     of $21.07 per share converted to NIS on the date of the exercise, and are
     fully vested. Of these options, 25,000 are exercisable until August 2007
     and 25,000 are exercisable until August 2008. Options to acquire an
     additional 100,000 ordinary shares have an exercise price of $9.00 per
     share converted to NIS on the date of the exercise, and are fully vested.
     Of these options 50,000 are exercisable until November 2007, 25,000 until
     November 2008 and 25,000 until November 2009.

SHAREHOLDERS AGREEMENTS

          Dov Lautman, the Chairman of the Board of Directors of Delta Galil,
and two companies through which he holds shares in Delta Galil, N.D.R.L.
Investments (1998) Ltd. and Nichsei Adinoam Ltd., (collectively, the "Lautman
Group"), have a shareholders agreement with GMM Capital.

          The shareholders agreement provides, among other things, that:

          o    GMM Capital is entitled to nominate 30% of the members of Delta
               Galil's board of directors, excluding external directors, with
               fractions rounded up to the next whole number, and Mr.


                                      -46

<PAGE>

               Lautman is entitled to nominate the remainder of the members of
               the board, excluding external directors;

          o    Delta Galil may not issue, allot or grant options over or
               conversion rights into its unissued share capital without the
               prior consent of GMM Capital unless as part of a pro rata
               distribution of fully paid up bonus shares; and

          o    New appointments of a Chief Executive Officer of Delta Galil
               shall require the consent of GMM Capital.

          o    The prior approval of GMM Capital and the Lautman Group shall be
               required for actions by Delta Galil or its subsidiaries with
               respect to (i) acquisitions, dispositions or licenses of assets
               or businesses, other than in the ordinary course of business
               consistent with past practice, involving consideration with a
               value of more than 5% of the total assets of the Company, (ii)
               public issuances or private placements of bonds or similar debt
               securities or the payment of dividends in any fiscal year in
               excess of 5% of the total consolidated assets of the Company,
               (iii) the approval of the annual capital expenditure budget of
               Delta Galil and any material modification thereof, if the
               aggregate amount contemplated by such capital expenditure budget
               to be spent exceeds certain pre-defined thresholds and (iv) any
               merger, consolidation, recapitalization or equivalent transaction
               involving Delta Galil (other than certain intercompany
               transactions) or the commencement of any bankruptcy or insolvency
               proceedings or liquidation or winding up of the Company; and

          o    The approval of the annual operating budget of Delta Galil and
               any material modification thereof shall require the approval of a
               majority of the board of directors of Delta Galil.

          In addition, the Lautman Group and GMM Capital each granted the other
a right to purchase any Delta Galil shares that the other party beneficially
owns and proposes to sell to unaffiliated third parties.

          The term of the shareholders agreement will expire on the earlier to
occur of: (i) the date on which GMM Capital holds less than 10% of the equity
rights of Delta Galil and (ii) the date on which the Lautman Group hold less
than 10% of the equity rights of the Company, provided that GMM Capital then
owns at least 2.5 times the number of shares held by the Lautman Group.

          As of March 25, 2007, GMM Capital owned 28.4% and the Lautman Group
owned 24.8% of the outstanding ordinary shares of Delta Galil.

          As of March 25, 2007, Delta Galil had 21 shareholders of record
resident in the United States, accounting for 29.2% of the outstanding ordinary
shares. One U.S. shareholder, GMM Capital, holds 28.4% of the outstanding
ordinary shares.

7B. RELATED PARTY TRANSACTIONS

          Transactions made during 2006 with a company held by GMM Capital LLC,
one of the main Company's shareholders, in the ordinary course of business,
amounted to $0.5 million of revenues. See "Item 10: Additional Information-
Approval of Related Party Transactions under Israeli Law and item 13 to the
financial statements."


                                      -47-

<PAGE>

ITEM 8: FINANCIAL INFORMATION

8A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION

          See Delta Galil's consolidated financial statements included in Item
18 of this annual report. No significant change has occurred since the date of
the consolidated financial statements included herein, except as otherwise
described in this report or in other published reports of Delta Galil.

LEGAL PROCEEDINGS

          From time to time, Delta Galil is involved in legal proceedings
relating to claims arising out of its operations in the normal course of
business, including claims made by employees and former employees.

          Delta Galil believes that there are no legal proceedings pending or
threatened against it or any of its properties that may have significant effects
on its financial position or profitability.

DIVIDENDS

          Delta Galil has distributed cash dividends to its shareholders from
time to time in the past and will continue to consider, on a quarterly basis,
the payment of dividends to its shareholders. However, Delta Galil does not have
an established dividend policy, and the amount of future dividends, if any, will
be determined from time to time by the board of directors in light of Delta
Galil's earnings, financial condition, capital requirements and other factors.

          Following is a breakdown of dividends per ordinary share paid in the
last four fiscal years:

                2003    2004   2005   2006
                ----    ----   ----   ----
               $0.52   $0.45     --     --
               =====   =====   ====   ====

ITEM 9:

9A. OFFER AND LISTING

          Delta Galil's ordinary shares have been listed on the Tel Aviv Stock
Exchange since 1982. The ordinary shares are not listed on any other stock
exchange and have not been publicly traded outside Israel.

          In the United States, ADSs evidenced by American Depositary Receipts
(ADRs) represent fully paid ordinary shares of Delta Galil and each ADS
represents one fully paid ordinary share. The ADSs are issued pursuant to a
Deposit Agreement entered into by Delta Galil and The Bank of New York, as
depositary. The Bank of New York's address is 101 Barclay Street, New York, New
York 10286. On March 25, 1999, trading of Delta Galil's ADSs commenced on the
Nasdaq National Market under the symbol DELT.


                                      -48-

<PAGE>

          The table below sets forth for the periods indicated (i) the high and
low last reported prices of the ordinary shares (in nominal NIS and dollars) on
the TASE, and (ii) the high and low sales prices of the ADSs as reported on the
Nasdaq since the year 2002. The translation into dollars is based on the daily
representative rate of exchange on the last day of each period, as published by
the Bank of Israel.

                                                                     ADS
                                        ORDINARY SHARES         EQUIVALENTS
                                 ----------------------------   ------------
                                     HIGH            LOW         HIGH    LOW
                                  NIS      $      NIS      $      $       $
                                 -----   -----   -----   ----   -----   ----
YEAR ENDING DECEMBER 31, 2002:   49.35   10.99   32.89   6.76   10.83   6.69
YEAR ENDING DECEMBER 31, 2003:   76.80   17.19   46.71   9.76   16.97   9.33
YEAR ENDING DECEMBER 31, 2004:   74.40   16.81   40.20   9.19   16.15   9.35

YEAR ENDING DECEMBER 31, 2005:   48.38   11.05   28.00   6.10   11.35   5.96
   First Quarter .............   48.38   11.05   38.92   8.89   11.35   9.14
   Second Quarter ............   41.67    9.53   29.56   6.46    9.81   6.50
   Third Quarter .............   36.07    8.06   28.05   6.08    8.10   5.97
   Fourth Quarter ............   33.20    7.08   28.00   6.10    7.26   5.96

YEAR ENDING DECEMBER 31, 2006:   44.33   10.34   27.67   6.01   10.54   6.05
   First Quarter .............   34.86    7.48   27.67   6.01    7.47   6.05
   Second Quarter ............   37.75    8.09   30.05   6.71    8.41   6.55
   Third Quarter .............   40.46    9.42   33.07   7.45    9.50   7.11
   Fourth Quarter ............   44.33   10.34   36.81   8.71   10.54   8.82

   MOST RECENT SIX MONTHS:

   September 2006 ............   40.46    9.42   34.61   7.92    9.50   7.85
   October 2006 ..............   41.70    9.76   38.36   9.03    9.80   8.82
   November 2006 .............   44.33   10.34   39.67   9.26   10.54   9.07
   December 2006 .............   40.85    9.67   36.81   8.71    9.79   8.86
   January 2007 ..............   39.53    9.40   33.76   7.94    9.68   7.85
   February 2007 .............   34.14    8.03   30.29   7.19    8.27   7.40

          As of March 26, 2007, the last reported price of the ordinary shares
on the TASE was NIS 28.85 ($6.86) and the last reported price per ADS on Nasdaq
was $7.13. Fluctuations in the exchange rate between the NIS and the dollar may
affect the price of the ordinary shares on the TASE and, as a result, may affect
the market price of the ADSs in the United States.

9B. PLAN OF DISTRIBUTION

    Not applicable

9C. MARKETS

    See Item "9A. Offer and Listing".

9D. SELLING SHAREHOLDERS

    Not applicable

9E. DILUTION

    Not applicable

9F. EXPENSE OF THE ISSUE

    Not applicable


                                      -49-

<PAGE>

ITEM 10: ADDITIONAL INFORMATION

10A. SHARE CAPITAL

Not applicable.

10B. MEMORANDUM AND ARTICLES OF ASSOCIATION

          Delta Galil is registered with the Israeli Registrar of Companies as a
public company, with registration number 52-002560-2. Delta Galil's Articles of
Association provide that Delta Galil's objectives may include any activity
permitted by law, and that Delta Galil can also contribute reasonable amounts to
worthwhile causes even if such contributions are not based on profit-oriented
business considerations.

APPROVAL OF RELATED PARTY TRANSACTIONS UNDER ISRAELI LAW

          The Companies Law governs the relationships between a company and its
"OFFICE HOLDERS." Under the Companies Law, an Office Holder is a director,
general manager, chief business manager, deputy general manager, vice general
manager, any other person assuming the responsibilities of any of the foregoing
positions without regard to such person's title or any other manager directly
subordinate to the general manager.

     DISCLOSURE OF PERSONAL INTEREST

          A director who has a personal interest in a transaction that is
considered at a meeting of the board of directors or the audit committee may not
be present during the board of directors or audit committee discussions and may
not vote on that matter. If a majority of the members of the audit committee or
of the board of directors has a personal interest in the matter, the director
can participate and vote at such audit committee or board meeting, provided,
however, that if the majority of the members or the directors has a personal
interest in the transaction, shareholder approval will be also required.

          The Companies Law requires that an Office Holder and any controlling
shareholder promptly disclose to the company any personal interest that he may
have, including disclosure of any corporation in which he is a 5% or greater
shareholder, director or general manager or in which he has the right to appoint
at least one director or the general manager. In addition, an Office Holder and
any controlling shareholder must disclose any and all material information known
to him, in connection with any existing or proposed transaction by the company.
In addition, if the transaction is an "EXTRAORDINARY TRANSACTION", the Office
Holder or controlling shareholder must also disclose any personal interest held
by such person's spouse, siblings, parents, grandparents, descendants, spouse's
descendants and the spouses of any of the foregoing. An Extraordinary
Transaction is a transaction that is not in the company's ordinary course of
business, or not at market terms or that may materially affect the company's
profitability, assets or liabilities.

     DIRECTORS' COMPENSATION

          Delta Galil's Articles provide that, unless otherwise approved at a
general meeting, each director shall be paid the same remuneration as paid to
each of Delta Galil's external directors. Remuneration of external directors is
limited by regulations issued under the Companies Law. The directors will be
entitled to be reimbursed for reasonable expenses incurred by them in performing
their services as directors.

     BOARD APPROVAL

          As more fully described below, depending on the circumstances,
approvals of related-party transactions may be required at three levels: board
approval, audit committee approval and shareholder approval.

          The Companies Law provides that transactions between a company and its
office holders as well as transactions with a company in which an office holder
has a personal interest, which are not Extraordinary Transactions, require the
approval of the board of directors, unless another manner of approval is
provided by the articles of association. The transaction may not be approved if
it is adverse to the company's interest. All arrangements as to compensation of
the General Manager, the Chief Executive Officer and the President require
approval of Delta Galil's board of directors. Unless otherwise determined by the
board of directors, the compensation arrangements of office holders, other than
the directors, General Manager, CEO and/or President, are at the discretion of
the General Manager of Delta Galil. With respect to transactions that are
related to the terms of service of a director see "Shareholder Approval" below.


                                      -50-

<PAGE>

     AUDIT COMMITTEE AND BOARD APPROVAL

          The Companies Law requires approval by both the audit committee and
the board of directors for, inter alia, the following types of actions or
transactions:

o    proposed transactions in which an office holder has a direct or indirect
     personal interest and which is beyond the scope of the ordinary course of
     the company's business, which is not in accordance with market conditions
     or which may materially influence the earnings, assets or liabilities of
     the company; and

o    transactions concerning exculpation, indemnification or insurance of an
     office holder, other than a director.

     SHAREHOLDER APPROVAL

          The Companies Law also provides that, in addition to approval of the
audit committee and the board of directors, the shareholders must approve the
following, unless the Companies Law or the regulations promulgated
thereunder provides an exemption for such a case:

o    an Extraordinary Transaction between a public company and a controlling
     shareholder, including a private placement in which a controlling
     shareholder of the company has a personal interest;

o    an Extraordinary Transaction with a third party in which a controlling
     shareholder of the company has a personal interest;

o    the terms of employment of a controlling shareholder (or of such person's
     spouse, siblings, parents, grandparents, offspring, spouse's offspring and
     the spouses of any of the foregoing), if he is an employee of the company;
     and if he is an office holder of the company - the terms of his engagement
     or service; and

o    terms of service of directors, including exculpation, indemnification,
     insurance or compensation and terms of their employment in other positions
     in the company.

          The shareholder approval required for such an Extraordinary
Transaction must constitute at least one-third of the voting shareholders who
have no personal interest in the transaction and does not include abstentions.
The transaction can be approved by shareholders without the required one-third
approval, if the total holdings of those shareholders who have no personal
interest and voted against the transaction do not represent more than 1% of the
voting rights in the company.

BORROWING POWERS

          Article 50 of Delta's Articles of Association provides that Delta
Galil may, from time to time, at its discretion, borrow or secure the payment of
any sum or sums of money for its purposes. Article 51 provides that Delta Galil
may raise the funds for or secure the repayment of such sums in such manner, at
such times and upon such terms and conditions as it deems fit and, in
particular, by the issuance of bonds, perpetual or redeemable debentures,
debenture stock, or any mortgages or charges, on the present or future property
of Delta Galil, including its uncalled capital at that time and its called but
unpaid capital.

CHANGE OF CONTROL

          The Companies Law provides that an acquisition of shares in a public
company must be made by means of a tender offer if, as a result of the
acquisition, the purchaser would become a 25% shareholder of the company. This
rule does not apply if there is already another 25% shareholder of the company
or if the acquisition is from a shareholder that holds 25% or more of the voting
rights of the company. Similarly, the Companies Law provides that an acquisition
of shares in a public company must be made by means of a tender offer if, as a
result of the acquisition, the purchaser would become a holder of more than 45%
of the voting rights of the company, unless there is another person holding at
that time more than 45% of the voting rights of the company or if the
acquisition is from a shareholder that holds 45% or more of the voting rights of
the company.

          The Companies Law provides that mergers require the approval of the
board of directors and the shareholders of the merging parties. Under a recent
amendment to the Companies Law, a merger with a wholly owned subsidiary does not
require the approval of the target company's shareholders. Furthermore, a merger
does not require approval of the surviving company's shareholders if (i) the
merger does not require amending the surviving company's memorandum of
association or articles of association and (ii) the surviving company does not
transfer more than 25% of its voting power as a result of the merger and
pursuant to the transfer no shareholder would become a controlling shareholder.
Approval of the surviving company's shareholders would, nevertheless, be
required if the other party to the merger, or a person holding more than 25% of
the outstanding voting shares or means of appointing the board of directors of
the other party to the merger, holds any shares of the surviving company. For
purposes of the shareholder


                                      -51-

<PAGE>

vote of each party, unless a court rules otherwise, the merger will not be
deemed approved if a majority of the shares not held by the other party, or by
any person, including that person's relatives and any company that person
controls, who holds 25% or more of the shares or has the right to appoint 25% or
more of the directors of the other party, have voted against the merger.
Shareholder approval of mergers will be by a simple majority vote cast at a
general meeting of shareholders, not counting abstentions.

SHAREHOLDERS MEETINGS

          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 annual
general meeting, and convene at such place as determined by the board of
directors. The board of directors may call an extraordinary general meetings of
shareholders and is obligated to do so upon a written request in accordance with
the Companies Law as described below. The Companies Law provides that an
extraordinary general meeting of shareholder may be called by the board of
directors or by a request by 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. Delta Galil generally must give advanced
notice of a general meeting to its shareholders of record at least twenty-one
days prior to the meeting.

     QUORUM; VOTING RIGHTS; RECORD DATE

          The required quorum for any general meeting is two or more
shareholders present in person or by proxy and holding at least thirty-three and
one-third percent (33 1/3%) of the issued voting shares. On all matters
submitted to a vote of shareholders, holders of ordinary shares have one vote
for each ordinary share. 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. Under the Companies Law, the board
of directors can set a record date for the purpose of a shareholder vote. The
record date may be between four and twenty-one days before the date of the
meeting.

DIRECTORS

     ELECTION OF DIRECTORS

          Delta Galil's ordinary shares do not have cumulative voting rights
with regard to the election of directors. As a result, the holders of ordinary
shares that represent at least 51% of the voting power have the power to elect
all the directors. Directors are elected annually by the shareholders at the
annual meeting. Directors hold office until the conclusion of the next annual
meeting or until their removal or resignation at an earlier date. A director is
not required to retire at a certain age and need not be a shareholder of Delta
Galil.

     MEETINGS OF THE BOARD OF DIRECTORS

          The required quorum for any Board meeting is at least thirty percent
(30%) of the current number of directors.

DESCRIPTION OF SHARE CAPITAL

     AUTHORIZED SHARES

          Delta Galil's authorized share capital consists of 26,000,000 ordinary
shares, par value NIS 1.00 per share.

     TRANSFER OF SHARES; NON-ASSESSABILITY

          Fully paid ordinary shares are non-assessable and are issued in
registered form. They may be freely transferred pursuant to the Articles of
Association unless such transfer is restricted or prohibited by another
instrument.

     FOREIGN OWNERSHIP

          Delta Galil's Memorandum and Articles of Association do not restrict
in any way the ownership of ordinary shares by nonresidents of Israel and
neither the Memorandum of Association nor Israeli law restricts the voting
rights of non-residents of Israel, other than citizens or residents of countries
that are in a state of war with Israel.

     DISTRIBUTION OF DIVIDENDS

          Delta Galil's ordinary shares are entitled to the full amount of any
cash or share dividend, declared by the Company. Delta Galil may declare a
dividend to be paid to the holders of ordinary shares in accordance with their
rights and interests in the profits of Delta Galil. In the event of liquidation,


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after satisfaction of liabilities to creditors, the assets of Delta Galil will
be distributed to the holders of ordinary shares in proportion to the nominal
value of their respective holdings. This 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 the shareholders of Delta Galil.

          Under the Companies Law, dividends may be paid only out of accumulated
earnings or out of net earnings for the two years preceding the distribution of
the dividends as calculated under the Companies Law. Dividends may be paid only
if there is no reasonable concern that the distribution of dividends will
prevent the company from meeting its existing and foreseeable obligations as
they become due.

          The Articles provide that the distribution of cash dividends and the
amount to be distributed is made by the board of directors. The distribution of
dividends in kind requires shareholder approval after receiving the
recommendations of the board of directors.

     MODIFICATION OF CLASS RIGHTS

          The Articles may be amended by a resolution approved by the holders of
at least 66% of the shares represented at the shareholders' general meeting and
voting thereon, without taking abstentions into account. The rights attached to
any class of shares such as voting, dividends and the like, unless otherwise
provided for by the terms of issue of such class, may be varied with the consent
in writing of all of the holders of the issued shares of the class, or with the
adoption of a resolution by at least 66% of the ordinary shares present and
voting at a shareholders meeting. This special majority is greater than the
simple majority required by the Companies Law.

          AMERICAN DEPOSITARY RECEIPTS

          The description of American Depositary Receipts appearing in Delta
Galil's Registration Statement on Form F-1 (Registration No. 333-10062) filed
with the Securities and Exchange Commission on February 26, 1999 is incorporated
herein by reference.

DIRECTORS AND OFFICERS INDEMNIFICATION AND INSURANCE

          Delta Galil has obtained directors' and officers' liability insurance
covering the officers and directors of Delta Galil and its subsidiaries for
claims arising from wrongful acts they committed in their capacity as an officer
or a director. Delta Galil has also issued indemnity undertakings to its office
holders to indemnify them for amounts that they may be obligated to pay in
litigation related to their service to Delta Galil arising in one of the types
of events enumerated in the undertaking. Such indemnification is capped at an
aggregate of $15 million for all office holders in respect of the same series of
events, less any amount reimbursed by Delta Galil's directors and officers
insurance, PROVIDED however, that the total amount of indemnity may not exceed
25% of the shareholders' equity of Delta Galil on the date of the payment of
amounts pursuant to the undertaking.

10C. MATERIAL CONTRACTS

          Delta Galil entered into an amendment to the Stock Purchase Agreement
relating to the acquisition of Burlen Corporation. For a description of this
amendment see Item 4 "Information on the Company - Recent Acquisitions". During
2006 and in the beginning of 2007, Delta Galil amended its U.S bank credit
agreement. For a description of a recent amendment to the credit facility of
Delta Galil USA Inc. see "Item 5 - Operating and Financial Review and Prospects
- Liquidity and Capital Resources - Debt." In May 2006, Delta Galil adopted two
option plans. For a description see Item 6E "Share Ownership - Stock Option
Plans."

10D. EXCHANGE CONTROLS

          Non-residents of Israel who acquire any of the ADSs or ordinary shares
using non-Israeli currencies will be able to convert dividends, liquidation
distributions and the proceeds from the sale of such ADSs or ordinary shares,
into non-Israeli currencies at the rate of exchange prevailing at the time of
conversion provided that Israeli income tax has been paid (or withheld) on such
amounts.

          Israeli residents are eligible to purchase securities of Israeli and
non-Israeli companies, and are eligible to purchase the ADSs or ordinary shares.

10E. ISRAELI TAXATION

          Following is a short summary of the tax regime applicable to
corporations in Israel, with special reference to its effect on Delta Galil.
This discussion also includes specified Israeli tax consequences to holders of
our ordinary shares and Israeli Government programs benefiting us. The following
is not


                                      -53-

<PAGE>

intended, and should not be construed, as legal or professional tax advice and
is not exhaustive of all possible tax considerations.

CORPORATE TAX RATE

          The regular tax rate in Israel in 2006 is 31%. This rate is currently
scheduled to decrease to 29% in 2007, and 25% until the year 2010 for
undistributed earnings. However, the effective tax rate of a company, which
derives income from an approved enterprise, may be considerably less, as further
discussed below.

LAW FOR THE ENCOURAGEMENT OF INDUSTRY (TAXES), 1969 (THE "INDUSTRY ENCOURAGEMENT
LAW")

          Delta Galil believes that it currently qualifies as an Industrial
Company pursuant to the Industry Encouragement Law. As such, Delta Galil
qualifies for certain tax benefits, including amortization of the purchase price
of a good-faith acquisition of a patent or of certain other intangible property
rights at the rate of 12.5% per annum and the right to file consolidated tax
returns with its subsidiaries qualified as an Industrial Company and operating
under the same industry. The tax laws and regulations dealing with the
adjustment of taxable income for local inflation provide that industrial
enterprises such as Delta Galil which qualify as an Industrial Company can claim
special rates of depreciation such as up to 40% on a straight line basis for
industrial equipment.

          Eligibility for the benefits under the Industry Encouragement Law is
not subject to receipt of prior approval from any government authority. Delta
Galil cannot assure you that it presently qualifies as an "Industrial Company,"
it will continue to qualify as such in the future, or that the benefits will be
granted in the future.

LAW FOR THE ENCOURAGEMENT OF CAPITAL INVESTMENTS, 1959 (THE "INVESTMENT LAW")

          Industrial projects of Delta Galil have been granted the status of an
"Approved Enterprise" under the Investment Law. This law provides that capital
investments in production facilities may, upon application to the Israel
Investment Center, be designated as 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, i.e., 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 profits attributable to the specific program,
based upon criteria set in the certificate of approval. In the event that Delta
Galil, which has been granted Approved Enterprise status, is operating under
more than one approval or that its capital investments are only partly approved
(a "Mixed Enterprise"), its effective corporate tax rate will be the result of a
weighted combination of the various applicable rates.

          Income derived from an Approved Enterprise is subject to a tax rate of
25%, rather than the usual rate in 2006 of 31% (as mentioned above, gradually
scheduled to be reduced to 29% in 2007 and to 25% until the year 2010), for a
period of ten years, commencing with the year in which the Approved Enterprise
first generates taxable income. This period cannot extend beyond 12 years from
the year of commencement of operations or 14 years from the year in which
approval was granted, whichever is earlier. Income derived from an Approved
Enterprise located in Area A, which have been approved after January 1, 1997 is
exempt from income tax in the first two years.

          Delta Galil first derived income from some of the abovementioned
Approved Enterprises in 1999. In 1999, Delta Galil used tax benefits estimated
at approximately $ 1.6 million. Due to losses for tax purposes accumulated prior
to 1999 and in the years 2000 - 2006, Delta Galil had not used any of the tax
benefits to which it is entitled under these government programs in these years,
except with respect to accelerated depreciation on real estate property. The
remaining tax benefits may be available for use in future years, under the
abovementioned periods of 12 years from the year of commencement of operations
and 14 years from the year of the grant of approval.

          Under the Approved Enterprise programs, Delta Galil has received
grants totaling $ 1.1 million in 2004 and none in 2005 and 2006. The government
of Israel has gradually reduced the investment grants available from 38% of
eligible capital expenditures in 1996 to 24% of eligible capital expenditures in
1998 and thereafter.

          This lower grant rate applies to any applications in 1998 or
thereafter. There can be no assurance that the Israeli government will not
further reduce these investment grants.


                                      -54-

<PAGE>

          Delta Galil is a "Foreign Investors Company" ("FIC"), as defined by
the Investment Law, and is entitled to an extended period of ten years (rather
than seven years), commencing with the year in which the Approved Enterprise
first generates taxable income. This ten-year period cannot extend beyond 12
years from the year of commencement of operations or 14 years from the year in
which approval was granted, whichever is earlier. Delta Galil cannot assure you
that it will continue to qualify as an FIC in the future, or that the benefits
will be granted in the future.

          The benefits available to an Approved Enterprise are contingent upon
Delta Galil's fulfilling the conditions stipulated by the Investment Law,
regulations published thereunder and the conditions of approval for the specific
investments in Approved Enterprises.

          In the event that Delta Galil fails to comply with these conditions,
the benefits may be cancelled and Delta Galil may be required to refund the
amount of the benefits, in whole or in part, with the addition of linkage
differences to the Israeli consumer price index and interest.

          The Israeli Government has enacted legislation in April 2005 that
extensively changes the Investment Law. However, according to a provision in
this legislation, changes in the Investment Law should not affect approved
enterprises plans that were approved as of December 31, 2004 or investments made
as of December 31, 2004. For the meantime, this would seem to preserve the
benefits for Delta Galil's approved enterprises, as described above. However,
there is currently no administrative or judicial guidance relating to the new
legislation. Additionally, there are indications that some of the new sections
may undergo revision or technical correction. Accordingly, Delta Galil provides
no assurances regarding the ongoing application of the Investment Law to current
or future Approved Enterprises.

TAXATION OF NON-ISRAELI SUBSIDIARIES

          Non- Israeli subsidiaries are generally taxed based on the tax laws in
their countries of residence.

CAPITAL GAINS AND INCOME TAXES APPLICABLE TO ISRAELI SHAREHOLDERS

          Prior to the tax reform, sales of our ordinary shares by individuals
were generally exempt from Israeli capital gains tax so long as (1) our ordinary
shares were quoted on NASDAQ or listed on a stock exchange in a country
appearing on a list approved by the Controller of Foreign Currency and (2) we
qualified as an Industrial Company within the definition of the Law for the
Encouragement of Industry (Taxes), 1969.

Pursuant to the Tax Reform, generally, capital gains tax is imposed on Israeli
residents at a rate of 15% on real gains derived on or after January 1, 2003 and
a rate of 20% on real gains derived on or after January 1, 2006 from the sale of
shares in : (1) companies publicly traded on the Tel Aviv Stock Exchange; or (2)
Israeli companies publicly traded on Nasdaq or a recognized stock exchange or a
regulated market outside of Israel as defined in income tax order (definition
stock exchange), 2004; or (3) companies dually traded on both the Tel Aviv Stock
Exchange and Nasdaq or a recognized stock exchange or a regulated market outside
of Israel. This tax rate is contingent upon the shareholder not claiming a
deduction for financing expenses, and does not apply to: (1) dealers in
securities; or (2) shareholders that report in accordance with the Inflationary
Adjustments Law, (3) shareholders who acquired their shares prior to an initial
public offering (that are subject to a different tax arrangement); (4) a sale to
a related party; (5)Where the seller is "substantive shareholder" as defined in
the ITO i.e, a person who directly or indirectly, alone or with another, holds
at least 10% of one or more categories of means of control in a body of persons,
when the shares were sold or at any time within 12 months before the sale, shall
be charged tax at a rate of 25%.

          The tax basis of shares acquired prior to January 1, 2003, with
respect of which the shareholders had been exempted from capital gains tax prior
to January 1, 2003, will be determined in accordance with the average closing
share price in the three trading days preceding January 1, 2003. However, a
request may be made to the tax authorities to consider the actual adjusted cost
of the shares as the tax basis if it is higher than such average price.

TAX REFORM LEGISLATION

          In July 2002, the Israeli Parliament approved a law introducing
extensive changes to Israel's tax law generally effective January 1, 2003. Among
the key provisions of this reform legislation are (1) changes which may result
in the imposition of taxes on dividends received by an Israeli company from its
foreign subsidiaries; and (2) the introduction of the controlled foreign
corporation concept according to which an Israeli company may become subject to
Israeli taxes on certain income of a non-Israeli subsidiary if the subsidiary's
primary source of income is passive income (such as interest, dividends,
royalties, rental income or certain capital gains). An Israeli company that is
subject to Israeli taxes on the income of its non-Israeli subsidiaries will
receive a credit for withholding tax to be paid upon distribution by the
subsidiary in its country of residence.


                                      -55-

<PAGE>

CAPITAL GAINS AND INCOME TAXES APPLICABLE TO NON-ISRAELI SHAREHOLDERS

          CAPITAL GAINS. The basic capital gains tax rate applicable to
corporations effective until December 31, 2002 had been 36%, and the maximum tax
rate for individuals was 50%. Effective January 1, 2003, the capital gains tax
rate imposed upon sale of capital assets acquired after that date was reduced to
25%; capital gains realized from assets acquired before that date are subject to
a blended tax rate based on the relative periods of time before and after that
date that the asset was held. In addition, if the ordinary shares are traded on
a recognized stock exchange (including the Tel Aviv Stock Exchange and the
NASDAQ), gains on the sale of ordinary shares held by non-Israeli tax resident
investors will generally be exempt from Israeli capital gains tax.
Notwithstanding the foregoing, dealers in securities in Israel are taxed at
regular tax rates applicable to business income.

          Under an amendment to the Inflationary Adjustments Law, effective
January 1, 1999, corporate investors that hold listed securities (other than
corporations solely owned by individuals), will generally be subject to the
provisions of the Inflationary Adjustments Law. The Inflationary Adjustments Law
stipulates a comprehensive set of rules for determining the gains or losses from
the sale of listed securities. Gains from sale of negotiable shares which are
subject to the Inflationary Adjustments Law, are taxable at the regular
corporate tax rate. A literal reading of the Inflationary Adjustments Law, may
suggest that its provisions also apply to foreign corporations, although the
foreign corporation may have no activity in Israel other than the shareholding
in an Israeli company. Consequently, unless a tax treaty exemption is
applicable, the capital gain exemption available for individual shareholders may
not apply. A 2006 amendment to the Inflationary Adjustments Law removes the
uncertainty that foreign entities would not owe capital gains tax on traded
securities without the need for an interpretation from the relevant tax treaty.

          Under the treaty between the United States and Israel, the capital
gain derived by a U.S. taxpayer from the sale, exchange or other disposition of
stock in an Israeli corporation would generally be tax exempt when the
shareholder did not own, within the 12 month period preceding such sale,
exchange or other disposition, shares constituting 10% or more of the voting
power in the Israeli corporation.

DIVIDENDS.

          Individuals who are non-Israeli residents are subject to a graduated
income tax on income derived from sources in Israel. On the distribution of
dividends other than share dividends, income tax is withheld at the rate of 20%,
or 15% in the case of dividends distributed from taxable income attributable to
an Approved Enterprise, unless a different rate is provided in a treaty between
Israel and the shareholder's country of residence and a special certificate is
provided.

          Under the United States-Israel Tax Treaty, the maximum withholding tax
in Israel on dividends paid to a holder of ordinary shares who is a resident of
the United States is 25%. This tax rate is reduced to 12.5% for a corporation
that has been holding in excess of 10% of the voting rights of Delta Galil
during Delta Galil's tax year preceding the distribution of the dividend and the
portion of Delta Galil's tax year in which the dividend was distributed.
Dividends of an Israeli company derived from the income of an Approved
Enterprise will be subject to a dividend withholding tax of only 15%. The
withheld tax is the final tax in Israel on dividends paid to non-residents who
do not conduct business in Israel.

          Residents of the United States will generally have withholding tax in
Israel deducted at the source. They may be entitled to a credit or deduction for
U.S. federal income tax purposes in the amount of the taxes withheld, subject to
detailed rules contained in the United States-Israel Tax Treaty and in U.S. tax
legislation.

          A non-Israeli resident who has derived interest, dividend or royalty
income from or accrued in Israel, from which tax was withheld at the source, is
generally exempt from the duty to file tax returns in Israel with respect to
such income, provided such income was not derived from a business conducted in
Israel by the taxpayer.

UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS

          The following discussion is a general summary of the material U.S.
federal income tax considerations applicable to U.S. Holders (as defined below)
of ADSs or ordinary shares, who hold such instruments as capital assets
(generally, property held for investment). This summary is based on provisions
of the U.S. Internal Revenue Code of 1986, as amended (the "Code"), existing and
proposed U.S. Treasury regulations promulgated thereunder and administrative and
judicial interpretations thereof,


                                      -56-

<PAGE>

all in effect as of the date of this annual report and all of which are subject
to change (possibly with retroactive effect) and to differing interpretations.
In addition, this summary does not discuss all aspects of U.S. federal income
taxation that may be applicable to U.S. Holders in light of their particular
circumstances or to U.S. Holders who are subject to special treatment under U.S.
federal income tax law (including, for example, life insurance companies,
dealers in stocks or securities, financial institutions, tax-exempt
organizations, persons having a functional currency other than the U.S. dollar,
persons subject to the alternative minimum tax and persons who have directly,
indirectly or constructively owned 10% or more of the outstanding voting shares
of Delta Galil at any time. EACH U.S. HOLDER IS URGED TO CONSULT WITH ITS TAX
ADVISOR REGARDING THE TAX CONSEQUENCES OF ITS HOLDINGS, INCLUDING THE EFFECTS OF
FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX LAWS.

          This summary is based in part on representations of The Bank of New
York, Delta Galil's depositary, and assumes that each obligation provided for
in, or otherwise contemplated by, Delta Galil's deposit agreement with The Bank
of New York and any related agreement will be performed in accordance with its
terms.

          As used herein, the term "U.S. Holder" signifies a holder of an ADR
evidencing an ADS, or of an ordinary share, who is an individual citizen or
resident of the United States, or that is (i) a corporation or partnership
created or organized in or under the laws of the United States or any political
subdivision thereof; (ii) an estate the income of which is subject to U.S.
federal income taxation regardless of its source or (iii) a trust if (A) a U.S.
court is able to exercise primary supervision over the trust's administration
and one or more U.S. persons have the authority to control all of the trust's
substantial decisions or (B) it has validly elected to be treated as a domestic
trust under the Code.

OWNERSHIP OF ADRS, ADSS AND ORDINARY SHARES

          In general, for U.S. federal income tax purposes, U.S. Holders of ADRs
evidencing ADSs will be treated as the owners of the ordinary shares represented
by the ADSs.

DIVIDENDS PAID ON THE ADSS OR ORDINARY SHARES

          A U.S. Holder will generally be required to include in gross income as
ordinary dividend income the amount of any distributions paid on the ADSs or
ordinary shares (including the amount of any Israeli taxes or depositary fees
withheld therefrom) to the extent that such distributions are paid out of Delta
Galil's current or accumulated earnings and profits as determined for U.S.
federal income tax purposes. Distributions in excess of such earnings and
profits will be applied against and will reduce the U.S. Holder's tax basis in
its ADSs or ordinary shares and, to the extent that they are in excess of such
tax basis, they will be treated as a gain from a sale or exchange of such ADSs
or ordinary shares. Such dividends will not qualify for the dividends-received
deduction applicable in certain cases to U.S. corporations.

          Dividends received in respect of ordinary shares or ADSs will
generally be treated as foreign source income and be "passive category income"
or, in the case of certain U.S. Holders, "general category income" for U.S.
foreign tax credit purposes. Subject to the limitations in the Code (including
minimum holding period requirements), as modified by the United States-Israel
Tax Treaty, a U.S. Holder may elect to claim a foreign tax credit against its
U.S. federal income tax liability for Israeli income tax withheld from dividends
received in respect of ordinary shares or ADSs. A U.S. Holder who does not elect
to claim the foreign tax credit may instead claim a deduction for Israeli income
tax withheld, but only for a year in which the U.S. Holder does so with respect
to all foreign income taxes.

          Certain U.S. Holders (including individuals) are eligible for reduced
rates of U.S. federal income tax in respect of "qualified dividend income"
received in taxable years beginning before January 1, 2011. For this purpose,
"qualified dividend income" generally includes dividends paid by a non-U.S.
corporation if, among other things, the U.S. Holders meet certain minimum
holding periods and the non-U.S. corporation satisfies certain requirements,
including that either (i) the shares (or ADSs) with respect to which the
dividend has been paid are readily tradable on an established securities market
in the United States, or (ii) the non-U.S. corporation is eligible for the
benefits of a comprehensive U.S. income tax treaty (such as the United
States-Israel Tax Treaty) that provides for the exchange of information.
Additional foreign tax credit limitations apply to non-U.S. withholding taxes
imposed on qualified dividend income. We believe that dividends paid with
respect to our ordinary shares and ADSs, should constitute qualified dividend
income for U.S. Federal income tax purposes.


                                      -57-

<PAGE>

DISPOSITION OF ADSS OR ORDINARY SHARES

          Upon the sale or other disposition of ADSs or ordinary shares, a U.S.
Holder will generally 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 ADSs or ordinary shares. Gain or loss upon the disposition of the
ADSs or ordinary shares will be long-term if, at the time of the disposition,
the holding period for the ADSs or ordinary shares exceeds one year. Long-term
capital gains realized by U.S. Holders that are individuals are generally
subject to a marginal U.S. federal income tax rate that is lower than the
ordinary marginal income tax rate. The deductibility of capital losses by a U.S.
Holder is subject to limitations.

          In general, any gain recognized by a U.S. Holder on the sale or other
disposition of ADSs or ordinary shares will be U.S. source income for U.S.
foreign tax credit purposes. However, pursuant to the United States-Israel Tax
Treaty, gain from the sale or other disposition of ADSs or ordinary shares by a
holder who is a U.S. resident (determined under the United States-Israel Tax
Treaty) and who sells the ADSs or ordinary shares in Israel may be treated as
foreign source income for U.S. foreign tax credit purposes. Any loss on the sale
or other disposition of ADSs or ordinary shares may be required to be allocated
against foreign source income for U.S. foreign tax credit limitation purposes.

          Exchanges, deposits and withdrawals by U.S. Holders of ordinary shares
for ADSs will not result in the recognition of gain or loss for U.S. federal
income tax purposes.

PASSIVE FOREIGN INVESTMENT COMPANY

          A non-U.S. corporation classified as a passive foreign investment
company (a "PFIC") for any taxable year (and in some cases for future taxable
years as well) if (i) at least 75% of its gross income consists of passive
income (such as certain dividends, interest, rents, royalties and gains from the
disposition of certain (types of property) or (ii) at least 50% of the average
value of its assets consist of assets that produce, or are held for the
production of, passive income. We believe that we were not a PFIC for the year
ended December 31, 2006 or for any prior year. However, this conclusion is a
factual determination made at the close of each year and is based on, among
other things, a valuation of our ordinary shares, ADSs and assets, which will
likely change from time to time. If we were characterized as a PFIC for any
taxable year, a U.S. Holder would suffer adverse tax consequences, including (i)
having certain gains realized on the disposition of ordinary shares or ADSs
treated as ordinary income rather than capital gains and (ii) being subject to
punitive interest charges on certain dividends and on certain gains from the
disposition of ordinary shares or ADSs. Furthermore, dividends paid by a PFIC
are not eligible to be treated as "qualified dividend income" (discussed above).

INFORMATION REPORTING AND BACKUP WITHHOLDING

          Dividend payments with respect to ordinary shares or ADSs and proceeds
from the sale, exchange or other disposition of ordinary shares or ADSs may be
subject to information reporting to the IRS and possible U.S. backup
withholding. Backup withholding will not apply, however, to a holder who
furnishes a correct taxpayer identification number or certificate of foreign
status and makes any other required certification or who is otherwise exempt
from backup withholding. U.S. persons who are required to establish their exempt
status generally must provide IRS Form W-9 (Request for Taxpayer Identification
Number and Certification). Non-U.S. Holders generally will not be subject to
U.S. information reporting or backup withholding. However, such holders may be
required to provide certification of non-U.S. status (generally on IRS Form
W-8BEN or W-8IMY) in connection with payments received in the United States or
through certain intermediaries.

          Backup withholding is not an additional tax. Amounts withheld as
backup withholding may be credited against a holder's U.S. federal income tax
liability, and a holder may obtain a refund of any excess amounts withheld by
filing the appropriate claim for refund with the IRS and furnishing any required
information.

10F. DIVIDENDS AND PAYING AGENTS

          Not applicable.


                                      -58-

<PAGE>


10G. STATEMENT BY EXPERTS

          Not applicable.

10H. DOCUMENTS ON DISPLAY

          Delta Galil files reports and other information with the SEC. These
reports include certain financial and statistic information about Delta Galil,
and may be accompanied by exhibits. You may read and copy any document Delta
Galil files with the SEC at the SEC's Public Reference Room at 100 F Street
N.E., Washington D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference rooms.

          The SEC maintains an Internet website at http://www.sec.gov that
contains reports and other material that are filed through the SEC's Electronic
Data Gathering, Analysis and Retrieval ("EDGAR") system. Delta Galil began
filing through the EDGAR system beginning in October 2002.

10I. SUBSIDIARY INFORMATION

          Not applicable.

ITEM 11: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     EXCHANGE RATE RISK

          Although Delta Galil is an Israeli company, its functional currency is
the U.S. dollar. Delta Galil has operations and sales in many countries that are
not denominated in dollars, and is therefore exposed to fluctuations in the rate
of exchange between the dollar and those currencies. In 2006, Delta Galil
derived 24.3% of its revenues from customers in Pound Sterling, 8.5% of its
revenue were in NIS, and 7.6% were in Euros. More than 10% of Delta Galil's
expenses were in NIS in 2006.

          Some of Delta Galil's expenses in Israel are linked to the Israeli
consumer price index. Consequently, Delta Galil is exposed to risk to the extent
that the rate of Israeli inflation exceeds the rate of the NIS devaluation in
relation to the dollar and to the extent that the timing of such devaluation
lags behind inflation in Israel.

          In order to reduce the exposure to exchange rate fluctuations between
the dollar and other currencies Delta Galil generally carries out currency
transactions that hedge part of its exposure in respect of its net income in
non-dollar currency for periods of up to 12 months. The financial results in
respect of these hedging transactions are reflected in Delta Galil's
consolidated financial statements, together with the results of the hedged
items, such as revenues and cost of revenues.

          As of December 31, 2006, Delta Galil had entered into hedging
transactions for the exchange of $10 million into pound sterling at an average
rate of $1.91 per Pound Sterling for the first quarter of 2007.

          Based on current sales volumes, expenses and exchange rates, each one
percent devaluation in Pound Sterling or Euro against the dollar on an yearly
average would result in a decrease of approximately $1.0 million or $0.2
million, respectively, in Delta Galil's yearly operating income, and a
strengthening of the Pound Sterling or Euro would have the opposite effect. Each
one percent appreciation of the NIS against the dollar on yearly average would
result in a decrease of $0.5 million in yearly operating income, and a
devaluation of the NIS would have the opposite effect. Most of Delta Galil's
bank debt is generally denominated in U.S. dollars, and, therefore, is not
materially exposed to changes in currency exchange rates.

          In addition, Delta Galil hedges part of its exposure to exchange rate
fluctuations between the Euro and the Pound Sterling rate and the U.S Dollar by
taking part of its bank loans in these currencies.

INTEREST RATE RISK

          Most of Delta Galil's bank debt bears interest at a variable interest
rate linked to the London Inter-Bank Offer Rate, or LIBOR. An increase of 100
basis points, or one percentage point on an annual average basis, in the LIBOR
would increase Delta Galil's financing expenses by $1.6 million per year, based
on


                                      -59-

<PAGE>

amounts outstanding at December 31, 2006. A decrease in the LIBOR would have the
opposite effect.

          For further discussion of Delta Galil's use of financial derivatives
and instruments in the management of risks relating to currency and interest
rate fluctuations, see notes 1(r) and 12 of the notes to Delta Galil's
consolidated financial statements included in Item 18 of this annual report.

ITEM 12: DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

          Not Applicable.

                                     PART II

ITEM 13: DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

          Not Applicable.

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

          Not Applicable.

ITEM 15: CONTROLS AND PROCEDURES

          Delta Galil's Chief Executive Officer and Chief Financial Officer,
after evaluating the effectiveness of Delta Galil's disclosure controls and
procedures (as defined in Rule 13(a)-15(e) of the Securities Exchange Act 1934,
as amended) as of December 31, 2006 have concluded that, as of such date, Delta
Galil's disclosure controls and procedures were effective. Information required
to be disclosed by us in reports that we file or submit under the Exchange Act
is accumulated and communicated to Delta Galil's management, including Delta
Galil's chief executive officer and chief financial officer, to allow timely
decision regarding required disclosure and is recorded, processed, summarized
and reported within the periods specified by the SEC's rules and forms.

          There were no changes in Delta Galil's internal controls over
financial reporting identified with the evaluation thereof that occurred during
the period covered by this annual report that have materially affected, or are
reasonable likely to materially affect Delta Galil's internal control over
financial reporting.

ITEM 16A: AUDIT COMMITTEE; FINANCIAL EXPERT

          The Board of Directors and the Audit Committee have determined that
each of Mr. Amnon Neubach and Mr. Gideon Chitayat is an Audit Committee
Financial Expert.

ITEM 16B: CODE OF ETHICS

          Delta Galil has adopted a code of ethics applicable to all employees
and directors. A copy is available upon request to the Chief Financial Officer,
Delta Galil Industries Ltd., 2 Kaufman Street, Tel-Aviv 68012, Israel.

ITEM 16C: PRINCIPAL ACCOUNTANT FEES AND SERVICES

          Delta Galil paid the following fees for professional services rendered
by Kesselman & Kesselman and other members of PricewaterhouseCoopers
International Ltd., for the year ended December 31, 2005 and 2006:

               2005       2006
             --------   --------
Audit fees   $520,000   $657,000
Tax fees      116,000     51,000
Other fees     90,000     84,000
             --------   --------
Total        $726,000   $792,000
             ========   ========


                                      -60-

<PAGE>

          Audit fees consist of audit work performed in the preparation of
financial statements and services that are normally provided in connection with
statutory and regulatory filings. Tax fees consist of audit work performed in
the preparation of tax returns and other tax planning.

POLICY ON PRE-APPROVAL OF AUDIT AND NON-AUDIT SERVICES

          Delta Galil's audit committee charter provides that the audit
committee shall approve in advance all audit services and all non-audit services
provided by the independent registered public accounting firm based on a policy
attached to the charter.

          Under the policy, proposed services either (i) may be pre-approved by
the audit committee without consideration of specific case-by-case services as
"general pre-approval"; or (ii) require the specific pre-approval of the Audit
Committee as "specific pre-approval". The appendices to the policy set out the
audit, audit-related and tax services that have received the general
pre-approval of the audit committee, including those described in the footnotes
to the table, above. These services are subject to annual review by the audit
committee.

          All other audit, audit-related, tax and other services not mentioned
in the appendices to the charter must receive a specific pre-approval from the
audit committee. Requests or applications to provide services that require
specific approval by the audit committee are submitted to the audit committee by
the chief executive officer, the chief financial officer and the internal
auditor.

ITEM 16D: EXEMPTIONS FROM THE LISTING STANDARDS.

          None.

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

          None.

                                    PART III

ITEM 17: FINANCIAL STATEMENTS

          Not applicable.

ITEM 18: FINANCIAL STATEMENTS

          The Consolidated Financial Statements and related notes thereto
required by this item are contained on pages F-1 through F-60 hereof.

ITEM 19: EXHIBITS

          See "Exhibit Index" and Schedule II to the Consolidated Financial
Statements.


                                      -61-

<PAGE>

                           DELTA GALIL INDUSTRIES LTD.
                            (An Israeli corporation)
                        CONSOLIDATED FINANCIAL STATEMENTS
                      FOR THE YEAR ENDED DECEMBER 31, 2006

<PAGE>

                           DELTA GALIL INDUSTRIES LTD.
                            (An Israeli corporation)
                        CONSOLIDATED FINANCIAL STATEMENTS
                      FOR THE YEAR ENDED DECEMBER 31, 2006

                                TABLE OF CONTENTS

                                                                          PAGE
                                                                       ---------
REPORT OF INDEPENDENT REGISTERED PUBLIC
   ACCOUNTING FIRM                                                        F-2
CONSOLIDATED FINANCIAL STATEMENTS:
      Statements of operations                                            F-3
      Balance sheets                                                    F-4-F-5
      Statements of changes in shareholders' equity                       F-6
      Statements of cash flows                                          F-7-F-9
      Notes to financial statements                                    F-10-F-60

            The amounts are stated in U.S. dollars ($) in thousands.


                                      F-1
<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the shareholders of

DELTA GALIL INDUSTRIES LTD.

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

We conducted our audits in accordance with 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 the Company's Board of Directors and management,
as well as evaluating the overall financial statement presentation. We believe
that our audits and the reports of the other independent registered public
accounting firms provide a reasonable basis for our opinion.

In our opinion, based on our audits, 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 2005, and the consolidated results of their operations, and cash flows for
each of the three years in the period ended December 31, 2006, in conformity
with accounting principles generally accepted in the United States of America.

As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for Share-Based Payments in accordance with
Statement of Financial Accounting Standards No. 123 (revised 2004) effective
January 1, 2006.

Tel-Aviv, Israel                               Kesselman & Kesselman
   March 30, 2007                       Certified Public Accountant (Isr.)
                                        A member of PricewaterhouseCoopers
                                               International Limited


                                       F-2

<PAGE>

                           DELTA GALIL INDUSTRIES LTD.
                            (An Israeli corporation)
                      CONSOLIDATED STATEMENTS OF OPERATIONS
          (U.S. dollars in thousands, except earnings (loss) per share)

<TABLE>
<CAPTION>
                                                              YEAR ENDED DECEMBER 31
                                                          ------------------------------
                                                            2006       2005       2004
                                                          --------   --------   --------
<S>                                                       <C>        <C>        <C>
NET REVENUES                                              $706,699   $684,481   $654,269
COST OF REVENUES                                           574,246    582,799    533,036
                                                          --------   --------   --------
GROSS PROFIT                                               132,453    101,682    121,233
SELLING, MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES    107,752    107,008     98,646
AMORTIZATION OF INTANGIBLE ASSET                               739        779
LOSS (GAIN) ON SALE OF FIXED ASSETS                           (686)        77       (922)
IMPAIRMENT OF FIXED ASSETS                                              7,415
RESTRUCTURING EXPENSES                                       1,663      9,102      1,100
GOODWILL IMPAIRMENT                                                     5,505
                                                          --------   --------   --------
OPERATING INCOME (LOSS)                                     22,985    (28,204)    22,409
FINANCIAL EXPENSES - net                                    13,558     10,218      6,231
OTHER INCOME                                                             (300)      (958)
                                                          --------   --------   --------
INCOME (LOSS) BEFORE TAXES ON INCOME                         9,427    (38,122)    17,136
INCOME TAX BENEFIT (EXPENSE)                                (5,784)     2,302     (2,846)
                                                          --------   --------   --------
                                                             3,643    (35,820)    14,290
SHARE IN LOSSES OF ASSOCIATED COMPANY                                     (27)      (237)
MINORITY INTERESTS, NET                                       (495)      (500)    (1,368)
                                                          --------   --------   --------
NET INCOME (LOSS)                                         $  3,148   $(36,347)  $ 12,685
                                                          ========   ========   ========
EARNINGS (LOSS) PER SHARE:
   Basic                                                  $   0.17   $  (1.94)  $   0.69
                                                          ========   ========   ========
   Diluted                                                $   0.17   $  (1.94)  $   0.67
                                                          ========   ========   ========
WEIGHTED AVERAGE NUMBER OF SHARES (IN THOUSANDS):
   Basic                                                    18,700     18,695     18,478
                                                          ========   ========   ========
   Diluted                                                  18,742     18,695     18,834
                                                          ========   ========   ========
</TABLE>


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


                                       F-3

<PAGE>

                           DELTA GALIL INDUSTRIES LTD.
                            (An Israeli corporation)
                           CONSOLIDATED BALANCE SHEETS
                           (U.S. dollars in thousands)

                                                             DECEMBER 31
                                                         -------------------
                                                           2006       2005
                                                         --------   --------
                        ASSETS
CURRENT ASSETS:
   Cash and cash equivalents                             $ 10,342   $ 14,595
   Restricted cash                                          4,000
   Accounts receivable:
      Trade                                               109,710    104,424
      Other                                                 7,573     13,244
   Inventories                                            131,556    147,142
   Assets held for sale                                     4,474      7,420
   Deferred income taxes                                    4,779      4,726
                                                         --------   --------
         Total current assets                             272,434    291,551
                                                         --------   --------
INVESTMENTS AND LONG-TERM RECEIVABLES:
   Funds in respect of employee rights upon retirement      7,001      7,021
   Long-term receivables and deposits, net of current
      maturities                                            1,023        148
   Deferred income taxes                                      320        267
                                                         --------   --------
                                                            8,344      7,436
                                                         --------   --------
PROPERTY, PLANT AND EQUIPMENT,
   net of accumulated depreciation and amortization        99,263    109,131
                                                         --------   --------
GOODWILL                                                   57,334     53,689
                                                         --------   --------
INTANGIBLE ASSETS                                          13,259     14,499
                                                         --------   --------
DEFERRED CHARGES, net of accumulated amortization             228        267
                                                         --------   --------
         Total assets                                    $450,862   $476,573
                                                         ========   ========

---------------------   -----------------------  ---------------------
      D. LAUTMAN                A. LAHAV               G. MORAG
CHAIRMAN OF THE BOARD   CHIEF EXECUTIVE OFFICER        DIRECTOR

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


                                       F-4

<PAGE>

                           DELTA GALIL INDUSTRIES LTD.
                            (An Israeli corporation)
                           CONSOLIDATED BALANCE SHEETS
                           (U.S. dollars in thousands)

                                                                DECEMBER 31
                                                            -------------------
                                                              2006       2005
                                                            --------   --------
           LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
   Short-term bank credit                                   $107,058   $ 80,560
   Current maturities of long-term bank loans and other
      liability                                               16,981     29,623
   Accounts payable and accruals:
      Trade                                                   59,038     61,255
      Other                                                   34,504     39,164
                                                            --------   --------
         Total current liabilities                           217,581    210,602
                                                            --------   --------
LONG-TERM LIABILITIES:
   Bank loans and other liability, net of current
      maturities                                              33,196     69,677
   Liability for employee rights upon retirement               6,863      7,850
   Deferred income taxes                                       2,159      1,267
                                                            --------   --------
         Total long-term liabilities                          42,218     78,794
                                                            --------   --------
COMMITMENTS AND CONTINGENT LIABILITIES, see note 8
         Total liabilities                                   259,799    289,396
                                                            --------   --------
MINORITY INTERESTS                                             2,846      2,863
                                                            --------   --------
SHAREHOLDERS' EQUITY:
   Ordinary shares of NIS 1 par value
      December 31, 2006 and 2005:
      Authorized - 26,000,000 shares;
      Issued - 20,113,711 and 19,947,849 shares
         respectively;
      Issued and paid - 19,947,680 and 19,901,967 shares,
         respectively                                         21,851     21,840
   Additional paid-in capital                                101,562    100,749
   Retained earnings                                          75,781     72,633
   Accumulated other comprehensive loss                       (1,277)    (1,208)
   Treasury shares, at cost (1,206,802 shares,
      in December 31, 2006 and 2005)                          (9,700)    (9,700)
                                                            --------   --------
         Total shareholders' equity                          188,217    184,314
                                                            --------   --------
         Total liabilities and shareholders' equity         $450,862   $476,573
                                                            ========   ========


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


                                       F-5

<PAGE>

                           DELTA GALIL INDUSTRIES LTD.
                            (An Israeli corporation)
           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
                           (U.S. dollars in thousands)

<TABLE>
<CAPTION>
                                            SHARE CAPITAL
                                          ----------------
                                          NUMBER           ADDITIONAL                  ACCUMULATED OTHER        TREASURY
                                            OF               PAID-IN  RETAINED           COMPREHENSIVE           SHARES,
                                          SHARES PAR VALUE   CAPITAL  EARNINGS           INCOME (LOSS)           AT COST    TOTAL
                                          ------ --------- ---------- -------- -------------------------------- --------  --------
                                                                                                     UNREALIZED
                                                                                 CURRENCY   MINIMUM   LOSS FROM
                                                                               TRANSLATION  PENSION   CASHFLOW
                                                                               ADJUSTMENTS LIABILITY    HEDGE
                                                                               ----------- --------- ----------
<S>                                       <C>     <C>       <C>       <C>         <C>       <C>       <C>       <C>       <C>
BALANCE AT JANUARY 1, 2004                19,861  $21,830   $ 99,735  $104,607               $(788)   $(1,715)  $(11,335) $212,334
CHANGES DURING 2004:
   Net income                                                           12,685                                              12,685
   Net changes in respect of derivative
      instruments designated as a
      cash-flow hedge (net of related
      taxes of $798,000)                                                                                1,715                1,715
   Differences from translation of
      foreign currency financial
      statements                                                                     45                                         45
   Additional minimum pension liability
      adjustment (net of related taxes
      of $30,000)                                                                             (45)                             (45)
                                                                                                                          --------
   Total comprehensive income                                                                                               14,400
   Exercise of employee stock options         41       10        321                                                           331
   Tax benefit in respect of employee
      stock options exercised                                     79                                                            79
   Reissuance of treasury shares on
      acquisition of Burlen (see note 2a)                        614                                               1,635     2,249
   Cash dividend ($0.45 per share)                                      (8,312)                                             (8,312)
                                          ------  -------   --------  --------    -----      -----    -------   --------  --------
BALANCE AT DECEMBER 31, 2004              19,902  $21,840   $100,749  $108,980      $45      $(833)       -,-   $ (9,700) $221,081

CHANGES DURING 2005:
   Net loss                                                            (36,347)                                            (36,347)
   Differences from translation of
      foreign currency financial
      statements                                                                   (321)                                      (321)
   Additional minimum pension liability
      adjustment (net of related taxes
      of $65,000)                                                                              (99)                            (99)
                                                                                                                          --------
   Total comprehensive loss                                                                                                (36,767)
                                          ------  -------   --------  --------    -----      -----    -------   --------  --------
BALANCE AT DECEMBER 31, 2005              19,902  $21,840   $100,749  $ 72,633    $(276)     $(932)       -,-   $ (9,700) $184,314
CHANGES DURING 2006:
   Net Income                                                            3,148                                               3,148
   Differences from translation of
      foreign currency financial
      statements                                                                    118                                        118
   Additional minimum pension liability
      adjustment (net of related taxes
      of $54,000)                                                                               88                              88
   Loss in respect of derivative
      instruments designated as a cash
      flow hedge                                                                                         (275)                (275)
                                                                                                                          --------
   Total comprehensive income                                                                                                3,079
   Stock-based employee compensation                             448                                                           448
   Exercise of employee stock options         46       11        365                                                           376
                                          ------  -------   --------  --------    -----      -----    -------   --------  --------
BALANCE AT DECEMBER 31, 2006              19,948  $21,851   $101,562  $ 75,781    $(158)     $(844)   $  (275)  $ (9,700) $188,217
                                          ======  =======   ========  ========    =====      =====    =======   ========  ========
</TABLE>


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


                                       F-6

<PAGE>

                                                                 (Continued) - 1

                           DELTA GALIL INDUSTRIES LTD.
                            (An Israeli corporation)
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                           (U.S. dollars in thousands)

<TABLE>
<CAPTION>
                                                                           YEAR ENDED DECEMBER 31
                                                                       -----------------------------
                                                                         2006      2005       2004
                                                                       -------   --------   --------
<S>                                                                    <C>       <C>        <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income (loss)                                                   $ 3,148   $(36,347)  $ 12,685
   Adjustments to reconcile net income (loss) to net cash provided
      by operating activities:
      Income and expenses not involving cash flows:
         Minority interests net                                            495        500      1,368
         Share in losses of associated company                                         27        237
         Depreciation and amortization                                  15,626     15,811     15,185
         Impairment of fixed assets                                                 7,415
         Goodwill impairment                                                        5,505
         Deferred income taxes - net                                       839     (4,872)      (279)
         Restructuring expenses                                          1,156      6,470      1,310
         Changes in accrued liability for employee rights upon
            retirement                                                     856        (16)     1,023
         Stock-based employees compensation                                448
         Loss (gain) on amounts funded in respect of employee
            rights upon retirement                                        (784)       120       (416)
         Capital loss (gain) on sale of fixed assets                      (686)        77       (922)
         Capital gain from realization of other investments                          (300)      (958)
          Erosion (Exchange differences) of long-term receivables           25          2         (6)
         Erosion of principal of long-term bank loans                                           (180)
      Changes in operating assets and liabilities:
         Long term deposit                                                (278)
         Decrease (increase) in accounts receivable                       (741)    (2,130)     1,798
         Increase (decrease) in accounts payable and accruals           (9,468)   (17,127)    12,204
         Decrease (increase) in inventories                             15,663     36,469    (20,078)
                                                                       -------   --------   --------
   Net cash provided by operating activities - forward                 $26,299   $ 11,604   $ 22,971
                                                                       =======   ========   ========
</TABLE>


                                       F-7

<PAGE>

                                                                 (Continued) - 2

                           DELTA GALIL INDUSTRIES LTD.
                            (An Israeli corporation)
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                           (U.S. dollars in thousands)
<TABLE>
<CAPTION>
                                                                          YEAR ENDED DECEMBER 31
                                                                      ------------------------------
                                                                        2006       2005       2004
                                                                      --------   --------   --------
<S>                                                                   <C>        <C>        <C>
Brought forward                                                       $ 26,299   $ 11,604   $ 22,971
                                                                      --------   --------   --------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Acquisition of subsidiaries (1)                                                 (1,000)   (56,039)
   Additional payment allocated to goodwill                             (1,245)    (1,274)    (6,700)
   Purchase of property, plant and equipment                            (5,706)   (13,034)   (13,484)
   Investment grants relating to property, plant and equipment                                 1,074
   Other investments                                                                             (58)
   Amounts carried to intangible assets                                              (500)
   Proceeds from sale of property, plant and equipment                   1,274      1,071      4,318
   Proceeds from realization of assets held for sale                     3,117
   Proceeds from realization of other investments                                     300      2,640
   Loans granted to employees                                              (45)       (85)      (260)
   Collection of employees loans                                           111        223        313
   Collection of associated company's loan                                            526
   Loans granted to associated company                                                (80)       (26)
   Dividend from associated company                                                    20
   Restricted cash                                                      (4,000)
   Investment in long term deposits                                        (95)
   Amounts funded in respect of employee rights upon
      Retirement                                                          (998)      (627)      (667)
   Amounts paid in respect of employee rights upon
      Retirement                                                                       13
                                                                      --------   --------   --------
   Net cash used in investing activities                                (7,587)   (14,447)   (68,889)
                                                                      --------   --------   --------
CASH FLOWS FROM FINANCING ACTIVITIES:
   Purchase of long-term bank loans and other long-term liabilities                          119,000
   Repayment of long-term loans and other long-term liabilities        (49,123)   (28,079)   (10,430)
   Dividend to the Company's shareholders                                                     (8,312)
   Dividend to minority shareholders in a subsidiary                      (512)    (1,366)      (863)
   Short-term bank credit - net                                         26,498     24,957    (48,890)
   Amounts carried to deferred charges                                    (263)      (156)      (597)
   Proceeds from exercise of options                                       376                   331
                                                                      --------   --------   --------
   Net cash provided by (used in) financing activities                 (23,024)    (4,644)    50,239
                                                                      --------   --------   --------
   TRANSLATION DIFFERENCES ON CASH AND
      CASH EQUIVALENTS OF FOREIGN CURRENCY
      CONSOLIDATED SUBSIDIARY                                               59        (68)       130
   NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                 (4,312)    (7,555)     4,451
   CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                       14,595     22,150     17,699
                                                                      --------   --------   --------
   CASH AND CASH EQUIVALENTS AT END OF YEAR                           $ 10,342   $ 14,595   $ 22,150
                                                                      ========   ========   ========
</TABLE>

(1)  See next page for details.


                                       F-8

<PAGE>

                                                                 (Concluded) - 3

                           DELTA GALIL INDUSTRIES LTD.
                            (An Israeli corporation)
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                           (U.S. dollars in thousands)

<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31
                                                               --------------------------
                                                                 2006     2005      2004
                                                               -------   ------   -------
<S>                                                            <C>       <C>      <C>
    SUPPLEMENTARY DISCLOSURE OF CASH FLOW
       INFORMATION - CASH PAID DURING THE
       YEAR FOR:
       Interest                                                $10,039   $8,527   $ 4,133
                                                               =======   ======   =======
       Income taxes                                            $ 8,793   $2,268   $ 3,169
                                                               =======   ======   =======
(1) ACQUISITION OF SUBSIDIARIES, SEE ALSO NOTE 2:
    Assets and liabilities of the subsidiaries upon acquisition:
       Working capital (excluding cash and cash equivalents)                      $29,944
       Long-lived assets                                                            9,636
       Intangible asset                                                            14,778
       Goodwill arising on acquisition                                              4,930
                                                                                  -------
                                                                                   59,288
    Reissuance of treasury shares                                                  (2,249)
    Amount payable                                                        1,000    (1,000)
                                                                         ------   -------
    Cash paid - net                                                      $1,000   $56,039
                                                                         ======   =======
</TABLE>

SUPPLEMENTARY INFORMATION ON INVESTING ACTIVITIES NOT INVOLVING CASH FLOWS:

In 2006, 2005 and 2004, the net changes in outstanding balances of trade
payables in respect of the purchase of property, plant and equipment were an
increase (decrease) of $(0.3) million, $0.6 million and $ 0.1 million,
respectively.


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


                                       F-9

<PAGE>

                           DELTA GALIL INDUSTRIES LTD.
                            (An Israeli corporation)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES:

          A.   GENERAL:

               1)   Operations

                    Delta Galil Industries Ltd. (the "Company") is an Israeli
                    corporation which, together with its subsidiaries (the
                    "Group"), is engaged primarily in manufacturing and
                    marketing of intimate apparel, in seven reportable operating
                    segments - Delta USA, U.S. Upper market, Europe, Socks,
                    Delta marketing Israel, Seam Less and China. As to the
                    Group's segments and principal markets see note 14.

                    A significant portion of the Group's revenues is derived
                    from three principal customers. See note 11a and 14c.

               2)   Accounting principles

                    The consolidated financial statements are prepared in
                    accordance with generally accepted accounting principles
                    ("US GAAP") in the United States of America.

               3)   Use of estimates in the preparation of financial statements

                    The preparation of financial statements in conformity with
                    US GAAP requires management to make estimates and
                    assumptions that affect the reported amounts of assets and
                    liabilities, and the disclosure of contingent assets and
                    liabilities at the dates of the financial statements, and
                    the reported amounts of revenues and expenses during the
                    reported years. Actual results could differ from those
                    estimates.

               4)   Functional currency

                    The currency of the primary economic environment in which
                    the operations of the Company and most of its subsidiaries
                    are conducted is the U.S. dollar (the "dollar" or "$").
                    Since the U.S. dollar is the primary currency in the
                    economic environment in which the Company operates, monetary
                    accounts maintained in currencies other than the dollar are
                    remeasured using the representative foreign exchange rate at
                    the balance sheet date. Operational accounts and
                    non-monetary balance sheet accounts are measured and
                    recorded at the rate in effect at the date of the
                    transaction. The effects of foreign currency remeasurement
                    are recorded as financial income or expenses as appropriate.

                    The functional currencies of a subsidiary is it's local
                    currency (EURO). The financial statements of this subsidiary
                    is included in consolidation based on translation into
                    dollars in accordance with the principles set forth in
                    Statement of Financial Accounting Standard ("FAS") No. 52
                    issued by the FASB: assets and liabilities are translated at
                    year end exchange rate, while operating results items are
                    translated at average exchange rates during the year.
                    Differences resulting from translation are presented in
                    shareholders' equity, under accumulated other comprehensive
                    loss.

          B.   PRINCIPLES OF CONSOLIDATION

               The consolidated financial statements include the accounts of the
               Company and all of its subsidiaries. In these financial
               statements, "subsidiaries" are companies controlled to the extent
               of over 50%, the financial statements of which are consolidated
               with those of the Company. Significant intercompany balances and
               transactions were eliminated in consolidation. Profits from
               intercompany sales, not yet realized outside the Group, have also
               been eliminated.


                                      F-10

<PAGE>

                           DELTA GALIL INDUSTRIES LTD.
                            (An Israeli corporation)
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):

          C.   1. CASH EQUIVALENTS

               The Group considers all highly liquid investments, which are
               comprised of short-term bank deposits (up to three months from
               date of deposit) that are not restricted as to withdrawal or use,
               to be cash equivalents.

               2. RESTRICTED CASH

               The restricted cash relates to a desposit of one of Delta's
               subsidiaries in connection to it's agreement with banks. The
               deposit was released during January 2007, see note 7e.

          D.   INVENTORIES

               Inventories are valued at the lower of cost or market. Cost is
               determined as follows:

               Raw materials and supplies, packaging which is part of the
               production line and maintenance materials - on the "moving
               average" basis. Finished products and products in process -
               direct cost (on the "moving average" basis), labor and an
               appropriate portion of indirect manufacturing costs.

               Inventories are written down for estimated obsolescence, based on
               assumptions about future demand and market conditions.

               The Company adopted the provisions of FASB Statement No. 151,
               "Inventory Costs," with effect from January 1, 2006. This
               Statement requires that abnormal idle facility expenses be
               recognized as current-period charges, and that allocation of
               fixed production overhead costs to inventory be based on normal
               capacity of the production facility.

               The adoption of this standard did not have a material effect on
               the financial statement of the company.

          E.   PROPERTY, PLANT AND EQUIPMENT

               Property, plant and equipment are stated at cost, net of
               accumulated depreciation and of related investment grants in the
               amount of $19.2 million and $ 21.9 million at December 31, 2006
               and 2005, respectively.

               A fixed asset leased by the Group under capital lease are
               classified as the Group's asset and included at the present value
               of the minimum lease payments as determined in the lease
               agreement.

               Depreciation is computed by the straight-line method on the basis
               of the estimated useful life of the assets, at the following
               annual rates:

                    Buildings                            2%-7%
                                                      (mainly 4%)
                    Machinery and equipment             7%-25%
                                                      (mainly 7%)
                    Vehicles                            15%-20%
                                                     (mainly 15%)
                    Office furniture and equipment      6%-25%
                                                      (mainly 7%)


                                      F-11

<PAGE>

                           DELTA GALIL INDUSTRIES LTD.
                            (An Israeli corporation)
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):

               Leasehold improvements are amortized by the straight-line method
               over the lease period, which is shorter than the estimated useful
               life of the improvements.

               Long-lived assets to be disposed of by sale are recorded in
               accordance with the lower of carrying amount or fair value less
               cost to sell. Costs to sell include incremental direct costs to
               transact the sale and represent the costs that results directly
               from and are essential to a sale transaction that would not have
               been incurred by the Company had the decision to sell not been
               made. Long-lived assets are not depreciated (amortized) while
               classified as held for sale.

          F.   INTANGIBLE ASSETS

               Intangible assets are comprised of customer relationships and
               exclusive license agreement, and are recorded at cost, less
               accumulated amortization. Customer relationships are amortized on
               a straight line basis over their estimated useful life of 20
               years, and the exclusive license is amortized on a straight line
               basis over the estimated useful life of 3 years, which is
               equivalent to the term of the license agreement.

          G.   GOODWILL

               Under FAS 142 "Goodwill and Other Intangible Assets", goodwill is
               no longer amortized but tested for impairment at least annually.
               The Company has selected September 30 of each year as the date on
               which it performs its annual goodwill impairment test. As a
               result of this test in 2005, the Company recorded an impairment
               of $5.5 million. No impairment resulted from the annual review
               performed on September 30, 2006.

          H.   DEFERRED CHARGES

               Deferred charges represent mainly deferred financing charges with
               respect to bank loans received by the Company which are amortized
               over the credit period by the effective interest method.

               Amortization of deferred charges included among "financial
               expenses- net" were $302 thousand, $ 466 thousand and $ 353
               thousand, for the years ended December 31, 2006, 2005 and 2004,
               respectively.

          I.   IMPAIRMENT IN VALUE OF LONG-LIVED ASSETS AND INTANGIBLE ASSET

               Under FAS 144 "Accounting for the Impairment or Disposal of Long-
               Lived Assets" ("FAS 144"), the Company reviews long-lived assets
               including intangible assets subject to amortization, to be held
               and used, for impairment whenever events or changes in
               circumstances indicate that the carrying amount of the assets may
               not be recoverable. Under FAS 144, if the sum of the expected
               future cash flows (undiscounted and without interest charges) of
               the long-lived assets is less than the carrying amount of such
               assets, an impairment loss would be recognized, and the assets
               are written down to their estimated fair values.

               For assets held for sale, impairment losses are recorded when the
               carrying amount of the asset exceeds fair value less cost to
               sell.


                                      F-12

<PAGE>

                           DELTA GALIL INDUSTRIES LTD.
                            (An Israeli corporation)
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):

          J.   DEFERRED INCOME TAXES

               Deferred taxes are determined utilizing the asset and liability
               method, based on the estimated future tax effect differences
               between the financial accounting and tax bases of assets and
               liabilities under the applicable tax laws. Deferred income tax
               provisions and benefits are based on the changes in the deferred
               tax assets or tax liabilities from period to period.

               Valuation allowance is recognized in respect of deferred tax
               assets when it is considered more likely than not that such
               assets will not be realized.

               As stated in note 10a, a plant of an Israeli subsidiary has been
               granted "approved enterprise" status and, accordingly, upon
               distribution of dividends by this subsidiary to the Company, such
               dividends may be subject to tax. In light of the Group's policy
               not to cause distribution of dividends, which would result in
               additional tax liabilities, any dividends received from the
               abovementioned subsidiary will be distributed to the Company's
               shareholders. Accordingly, no account has been taken of the
               additional tax in respect of the above dividends.

               The Group does not provide for an additional tax liability with
               respect to the excess of the book value over the tax basis of
               investments in non-Israeli subsidiaries, as the Company does not
               expect such temporary differences to be reversed in the
               foreseeable future.

          K.   TREASURY SHARES

               Treasury shares held by the Company are presented as a reduction
               of shareholders' equity, at their cost. The FIFO method was used
               for the costing of the reissuance of treasury shares, and any
               resulting gains (net of related tax) are credited to additional
               paid in capital.

          L.   REVENUE RECOGNITION

               Revenues from sales of products and supplies are recognized when
               an arrangement (usually in the form of purchase order) exists,
               delivery has occurred and title passed to the customer, the
               Company's price to the customer is fixed or determinable and
               collectibility is reasonably assured.

               Volume discounts due to customers are estimated based on the
               terms of the agreements with the customers.

               A reserve for sales returns is recorded based on historical
               experience or specific identification of an event necessitating a
               reserve.


                                      F-13

<PAGE>

                           DELTA GALIL INDUSTRIES LTD.
                            (An Israeli corporation)
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):

          M.   CONCENTRATION OF CREDIT RISKS - ALLOWANCE FOR DOUBTFUL ACCOUNTS

               The Group's cash and cash equivalents as of December 31, 2006 and
               2005 were deposited mainly with major banks in United States of
               America, United Kingdom and Egypt. The Company is of the opinion
               that the credit risk in respect of these balances is remote.

               A large part of the Group's revenues is to 3 principal customers
               (see also note 14d). The balance receivables from these principal
               customers as of December 31, 2006 and 2005 were $51,514 thousands
               and $ 41,070 thousands, respectively (see also note 11a). The
               Group does not hold any collateral from these customers; however,
               based on past experience with those customers and on their credit
               rating, the Group does not anticipate any difficulties in
               collecting the above balances. The balance of the item "accounts
               receivable - trade" is composed of a large number of customers.
               An appropriate allowance for doubtful accounts is included in the
               accounts in respect of specific debts doubtful of collection.

               The net bad debt income for the years ended December 31, 2006,
               2005 and 2004 aggregated $285 thousand, $ 143 thousand and $ 950
               thousand, respectively. The net bad debt income include net
               income that was credited directly to cost and expenses and were
               not reflected in the allowance of doubtful accounts in the
               amounts of $384 thousands, $469 thousands and $866 thousands for
               the years ended December 31, 2006, 2005 and 2004, respectively.

          N.   SHIPPING AND HANDLING COSTS

               The Group's shipping and handling costs are included under
               selling and marketing expenses in the consolidated statements of
               operations. Shipping and handling costs for the years ended
               December 31, 2006, 2005 and 2004 were approximately $19 million,
               $18 million and $20 million, respectively.

          O.   ADVERTISING COSTS

               These costs are expensed as incurred. Advertising costs for the
               years ended December 31, 2006, 2005 and 2004 were $2.4 million,
               $2.5 million and $2.1 million, respectively.


                                      F-14

<PAGE>

                           DELTA GALIL INDUSTRIES LTD.
                            (An Israeli corporation)
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):

          P.   STOCK BASED COMPENSATION

               Prior to January 1, 2006, the company accounted for employees'
               share-based payment under the intrinsic value model in accordance
               with Accounting Principles Board Opinion No. 25 - "Accounting for
               Stock Issued to Employees" ("APB 25") and related
               interpretations. In accordance with Statement of Financial
               Accounting Standards No. 123 - "Accounting for Stock-Based
               Compensation" ("FAS 123"), as amended by Statement of Financial
               Accounting Standards No. 148, "Accounting for Stock-Based
               Compensation - Transition and Disclosure", the Company disclosed
               pro forma information, assuming the Company had accounted for
               employees' share-based payments using the fair value-based method
               defined in FAS 123.

               Effective January 1, 2006, the Company adopted Statement of
               Financial Accounting Standards No. 123 (revised 2004),
               "Share-based Payment" ("FAS 123(R)"). FAS 123(R) supersedes APB
               25 and related interpretations and amends Statement of Financial
               Accounting Standards No. 95, "Statement of Cash Flows" ("FAS
               95"). FAS 123(R) requires awards classified as equity awards be
               accounted for using the grant-date fair value method. The fair
               value of share-based payment transactions is recognized as
               expense over the requisite service period, net of estimated
               forfeitures. The Company estimated forfeitures based on
               historical experience and anticipated future conditions.

               In March 2005, the Securities and Exchange Commission issued
               Staff Accounting Bulletin No. 107 ("SAB 107"). SAB 107 provides
               supplemental implementation guidance on FAS 123(R), including
               guidance on valuation methods, inventory capitalization of
               share-based compensation cost, income statement effects,
               disclosures and other issues. SAB 107 requires share-based
               payment to be classified in the same expense line items as cash
               compensation. The Company has applied the provisions of SAB 107
               in its adoption of FAS 123(R).

               The Company recognize compensation cost for an award with service
               and performance conditions that has a graded vesting schedule
               using the accelerated multiple-option approach.

               The Company elected to adopt the modified prospective transition
               method, permitted by FAS 123(R). Under such transition method,
               FAS 123(R) has been implemented as from the first quarter of 2006
               with no restatement of prior periods. The valuation provisions of
               FAS 123(R) apply to new awards and to awards modified,
               repurchased, or cancelled after January 1, 2006. Additionally,
               compensation cost for the portion of awards for which the
               requisite service has not been rendered that are outstanding as
               of January 1, 2006 are recognized over the remaining service
               period using the grant-date fair value of those awards as
               calculated for pro forma disclosure purposes under FAS 123.

               In November 2005, the Financial Accounting Standards Board
               ("FASB") issued FASB Staff Position No. FAS 123(R)-3 "Transition
               Election Related to Accounting for Tax Effects of Share-Based
               Payment Awards". The Company has elected to adopt the alternative
               transition method provided in the FASB Staff Position for
               calculating the tax effects of stock-based compensation pursuant
               to FAS 123(R). The alternative transition method includes
               simplified methods to establish the beginning balance of the
               additional paid-in capital pool ("APIC pool") related to the tax
               effects of employee share-based payment, which is available to
               absorb tax deficiencies recognized subsequent to the adoption of
               FAS 123(R).


                                       F-15

<PAGE>

                           DELTA GALIL INDUSTRIES LTD.
                            (An Israeli corporation)
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):

               Upon adoption of SFAS 123R, for the year ended December 31, 2006
               no cumulative effect from accounting form accounting change was
               charged to income.

               The fair value of stock options granted with service and
               performance conditions was determined using the Black-Scholes
               valuation model, which is consistent with the valuation
               techniques previously utilized by the Company for options in
               footnote disclosures required under SFAS 123, as amended by SFAS
               No. 148 "Accounting for Stock-Based Compensation - Transition and
               Disclosure." Such value is recognized as an expense over the
               vesting period and in accordance with meeting the performance
               conditions respectively, net of estimated forfeitures.

               Share-based employee compensation cost for the years ended
               December 31, 2005 and 2004 was determined using the intrinsic
               value method. The following table provides pro forma financial
               information as if Share-based employee compensation cost had been
               computed under FAS 123:

<TABLE>
<CAPTION>
                                                                YEAR ENDED DECEMBER 31
                                                                ----------------------
                                                                   2005         2004
                                                                ----------   ---------
                                                                $ IN THOUSANDS (EXCEPT
                                                                    PER SHARE DATA)
                                                                ----------------------
<S>                                                              <C>         <C>
               Net income (loss), as reported                     $(36,347)  $12,685
               Add - stock-based employee compensation
               expense included in reported net income (loss)
                  net of related tax effect                            NIL       NIL
               Less - stock-based employee compensation
                  expense determined under fair value method,
                  net of related tax effect                           (331)     (690)
                                                                  --------   -------
               Pro forma net income (loss)                        $(36,678)  $11,995
                                                                  ========   =======
               Earnings (loss) per share:
                  Basic - as reported                             $  (1.94)  $  0.69
                  Basic - pro forma                               $  (1.96)  $  0.65
                  Diluted - as reported                           $  (1.94)  $  0.67
                  Diluted - pro forma                             $  (1.96)  $  0.64
</TABLE>

               For the assumptions used in estimating the fair value of the
               options, see note 9b5.


                                      F-16

<PAGE>

                           DELTA GALIL INDUSTRIES LTD.
                            (An Israeli corporation)
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):

          Q.   EARNINGS (LOSS) PER SHARE

               Basic earnings (loss) per share are computed by dividing net
               income (loss) by the weighted average number of shares
               outstanding during the year, net of treasury shares.

               Diluted earnings (loss) per share are computed by dividing net
               income (loss) by the weighted average number of shares
               outstanding during the year, net of treasury shares, taking into
               account the potential dilution that could occur upon the exercise
               of options granted under employee stock option plans, using the
               treasury stock method. In 2005 all outstanding stock options have
               been excluded from the calculation of the diluted loss per share
               since their effect was anti-dilutive.

               In 2006, 2,452 thousands options were excluded from the
               calculation of the diluted loss per share since their effect was
               anti-dilutive.

          R.   DERIVATIVES

               The Company enters into forward exchange contracts to hedge the
               cash flows resulting from sales of products, in currencies other
               than the functional currency. The Company does not hold
               derivative financial instruments for trading purposes.

               Under FAS 133 "Accounting for Derivative and Hedging Activities",
               all derivatives are recognized on the balance sheet at their fair
               value. On the date that the Company enters into a derivative
               contract, it designates the derivative for accounting purposes,
               as: (1) hedging instrument, or (2) non-hedging instrument.

               For derivative financial instruments that are designated and
               qualify as a cash flow hedge, the effective portions of changes
               in fair value of the derivative are recorded in other
               comprehensive income (loss), under unrealized loss from cash flow
               hedge and are recognized in the income statement when the hedged
               item affects earnings. Ineffective portions of changes in the
               fair value of cash flow hedges are recognized immediately as
               income among financial expenses. Changes in the fair value of
               derivatives that do not qualify for hedge accounting are
               recognized as income among financial expenses. Cash flows from
               derivatives that qualify as a cash flow hedge are recognized in
               the statements of cash flows in the same category as that of the
               hedged item.

               Losses related to the portion of cash flow hedging instruments
               that were excluded from assessment of hedge effectiveness had an
               impact on earnings of $0.6 million for 2004, and the amount of
               the loss was recorded in financial expenses. There was no impact
               on earnings for 2005 and 2006.

          S.   COMPREHENSIVE INCOME (LOSS)

               Comprehensive income (loss) is composed of net income (loss) and
               other comprehensive income (loss) which includes gains or losses
               in respect of derivative instruments designated as cash-flow
               hedge, differences from translation of foreign currency financial
               statements and additional minimum pension liability adjustments,
               net of related taxes.


                                      F-17

<PAGE>

                           DELTA GALIL INDUSTRIES LTD.
                            (An Israeli corporation)
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):

          T.   NEWLY ISSUED AND RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENT

               1)   In September 2006, the FASB issued FAS 158, "Employers'
                    Accounting for Defined Benefit Pension and Other
                    Post-retirement Plans" ("FAS 158"). FAS 158 requires that
                    employers recognize the funded status of their defined
                    benefit pension and other postretirement plans on the
                    consolidated balance sheet. Gains or losses and prior
                    service costs or credits, net of related taxes, that have
                    not been recognized as components of net periodic benefit
                    cost, are recorded as a component of other comprehensive
                    income. The Company adopted the recognition and related
                    disclosure provisions of FAS 158, prospectively, on December
                    31, 2006, the impact was not material to the Company's
                    financial statements. FAS 158 also requires an entity to
                    measure plan assets and benefit obligation as of the date of
                    its fiscal year-end statement of financial position for
                    fiscal years ending after December 15, 2008. The requirement
                    to measure the Company's plan assets and benefit obligations
                    as of the date of December 31st, which the Company's fiscal
                    year-end, is effective for the Company's fiscal year ending
                    after December 31, 2008. The Company is presently evaluating
                    the impact of the measurement date change.

               2)   On February 15, 2007, the FASB issued SFAS No. 159, "The
                    Fair Value Option for Financial Assets and Financial
                    Liabilities" (SFAS 159). Under this Standard, the Company
                    may elect to report financial instruments and certain other
                    items at fair value on a contract-by-contract basis with
                    changes in value reported in earnings. This election is
                    irrevocable. SFAS 159 provides an opportunity to mitigate
                    volatility in reported earnings that is caused by measuring
                    hedged assets and liabilities that were previously required
                    to use a different accounting method than the related
                    hedging contracts when the complex provisions of SFAS 133
                    hedge accounting are not met.

                    SFAS 159 is effective for years beginning after November 15,
                    2007. Early adoption within 120 days of the beginning of the
                    Company's 2007 fiscal year is permissible, provided the
                    Company has not yet issued interim financial statements for
                    2007 and has adopted SFAS 157. The Company is currently
                    evaluating the impact of adopting SFAS 159 on its financial
                    position, cash flows, and results of operations.

               3)   In July 2006, the FASB issued FASB Interpretation No. 48
                    "Accounting for Uncertainty in Income Taxes - an
                    interpretation of FASB Statement 109" ("FIN 48"). FIN 48
                    prescribes a comprehensive model for recognizing, measuring
                    and presenting in the financial statements tax positions
                    taken or expected to be taken on a tax return. This
                    Interpretation also provides guidance on derecognition,
                    classification, interest and penalties and disclosure
                    requirements for uncertain tax positions. FIN 48 is
                    effective for fiscal years beginning on or after December
                    15, 2006 (January 1, 2007, for the Company). The provisions
                    of FIN 48 shall be applied to all tax positions upon initial
                    adoption of this Interpretation. Only tax positions that
                    meet the more likely than not recognition threshold at the
                    effective date may be recognized or continue to be
                    recognized upon adoption of this Interpretation.

                    The cumulative effects, if any, of applying this
                    Interpretation will be recorded as an adjustment to Retained
                    earnings, Goodwill, or Accumulated Gains and (Losses) not
                    Affecting Retained Earnings, as appropriate, as of the
                    beginning of the period of adoption. The Company is
                    currently evaluating the impact of adopting FIN 48 on its
                    financial position, cash flows, and results of operations.


                                      F-18

<PAGE>

                           DELTA GALIL INDUSTRIES LTD.
                            (An Israeli corporation)
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):

               4)   In September 2006, the Securities and Exchange Commission
                    issued Staff Accounting Bulletin No. 108, "Considering the
                    Effects of Prior Year Misstatements when Quantifying
                    Misstatements in Current Year Financial Statements" ("SAB
                    108"), which provides interpretive guidance on the
                    consideration of the effects of prior year misstatements in
                    quantifying current year misstatements for the purpose of a
                    materiality assessment. SAB 108 is effective for fiscal
                    years ending after November 15, 2006. The Company adopted
                    the provisions of SAB 108 in connection with the preparation
                    of its financial statements for the year ended December 31,
                    2006, however adoption of SAB No.108 did not result in any
                    material corrections of the Company's financial statements.

               5)   In September 2006, the FASB issued Statement of Financial
                    Accounting Standards No. 157, "Fair Value Measurements"
                    ("FAS 157"). FAS 157 defines fair value, establishes a
                    framework for measuring fair value in accordance with
                    generally accepted accounting principles, and expands
                    disclosures about fair value measurements; however, it does
                    not require any new fair value measurements. FAS 157 is
                    effective for fiscal years beginning after November 15, 2007
                    (January 1, 2008, for the Company). Earlier application is
                    encouraged, provided that the reporting entity has not yet
                    issued financial statements for that fiscal year, including
                    any financial statements for an interim period within that
                    fiscal year. The Company is currently evaluating the impact
                    of the provisions of FAS 157 on its financial position and
                    results of operations.

               6)   In June 2006, the Emerging Issues Task Force, reached a
                    consensus on Issue No. 06-03, "How Taxes Collected from
                    Customers and Remitted to Governmental Authorities Should be
                    Presented in the Income Statement (That Is, Gross versus Net
                    Presentation)". EITF 06-03 relates to any tax assessed by a
                    governmental authority that is directly imposed on a
                    revenue-producing transaction. EITF 06-03 states that the
                    presentation of the taxes, either on a gross or net basis,
                    is an accounting policy decision that should be disclosed
                    pursuant to Accounting Principles Board Opinion No. 22,
                    "Disclosure of Accounting Policies," if those amounts are
                    significant. EITF 06-03 should be applied to financial
                    reports for interim and annual reporting periods beginning
                    after December 15, 2006. The Company does not expect that
                    the adoption of EITF 06-03 will have a material effect on
                    its financial position and results of operations.

          U.   RECLASSIFICATIONS

               Certain figures in respect of prior years have been reclassified
               to conform with the current year presentation.


                                      F-19

<PAGE>

                           DELTA GALIL INDUSTRIES LTD.
                            (An Israeli corporation)
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 2 - ACQUISITIONS AND OTHER TRANSACTIONS

          The acquisitions described bellow have all been accounted for by the
          purchase method. The consideration for each acquisition was attributed
          to net assets on the basis of the fair value of assets acquired and
          liabilities assumed.

          A.   ACQUISITION OF BURLEN INC. (BURLEN) - IN 2004

               On December 8, 2004, the Company acquired, through a wholly owned
               subsidiary all of the shares of Burlen, a privately held U.S.
               company, which is engaged in the design, development, production,
               sourcing and marketing of ladies' intimate apparel.

               The Burlen acquisition is another step in the Company's strategy
               to increase its intimate apparel category of the mass market by
               exploiting the synergies between Burlen's operations and the
               Company's existing activities. This acquisition is expected to
               strengthen the Company's position in the U.S. mass market.

               The acquisition price amounted to $ 59.6 million from which $
               56.4 million was paid in cash (including $ 8.2 million paid to a
               bank for discharge of a loan) and $ 2.2 million in ordinary
               shares comprised of 215,684 ordinary shares reissued from
               treasury shares, based on a price per share of $ 10.43.
               Acquisition costs accrued to $ 1.0 million were paid in 2005.

               During 2005, the company paid an additional $1.3 million payment
               to the selling shareholders with respect to additional cost as it
               was agreed in the purchase agreement. This payment was recorded
               as additional goodwill, see also note 5.

               In addition, under the agreement the Company may pay additional
               amounts to the selling shareholders, subject to achieving certain
               revenues and operating profit targets over a period of 3 years,
               2005-2007.

               In February 2006, an amendment to the stock purchase agreement
               was signed which specifies the additional amounts that would be
               paid to the selling shareholders, subject to achieving certain
               targets over a period of 6 years, 2006-2011 up to a maximum of
               $18 million. The purpose of the amendment to the stock purchase
               agreement was to reflect in it the changes in sales volumes, due
               to changes in the structure of the company which were
               contemplated at the time of the original agreement but were not
               executed by the company. On March 15, 2006 a non-refundable
               payment of $1.3 million was made against future consideration
               with respect to 2007 and 2008 targets. The Company considered
               this payment as additional purchase cost.

               In March 2007, the Company paid additional $2.4 million to the
               selling shareholders with respect to 2006 targets, as agreed in
               the purchase agreement. This amount was recorded on December 31,
               2006, as additional goodwill.

               After the said contingent consideration, the maximum outstanding
               contingent consideration amounts to $14.3 million.

               The intangible asset acquired, which amounted to $ 14.8 million,
               represents customer relationships and is amortized over a period
               of 20 years.


                                      F-20

<PAGE>

                           DELTA GALIL INDUSTRIES LTD.
                            (An Israeli corporation)
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 2 - ACQUISITIONS AND OTHER TRANSACTIONS (continued):

               The excess of cost of acquisition over the fair value of net
               assets, on acquisition date - $ 3.9 million - was allocated to
               goodwill and included as part of Delta USA segment. Goodwill and
               customer relationships are deductible for tax purposes.

               The following table summarizes the estimated fair values of the
               assets acquired and liabilities assumed at the date of
               acquisition:

               At December 8, 2004 (in thousands)
               Cash and cash equivalents            $ 2,605
               Account receivable - Trade            20,577
               Account receivable - Other               117
               Inventories                           19,677
               Intangible asset                      14,778
               Property, plant, and equipment         7,805
               Goodwill                               3,873
                                                    -------
                  Total assets acquired             $69,432
                                                    =======
               Short-term bank credit                 3,038
               Accounts payable - Trade               4,341
               Accounts payable - Other               2,452
                                                    -------
                  Net assets acquired               $59,601
                                                    =======

          B.   ACQUISITION OF A MANUFACTURING PLANT IN THAILAND (THAILAND) - IN
               2004

               In December 2004 the Company acquired a manufacturing facility in
               Thailand for a total consideration of $2.4 million. From the said
               amount $0.9 million was paid for the shares and $0.8 million was
               paid to settle debt of the former shareholders. In addition, the
               Company assumed bank debt of $0.7 million. The acquired
               manufacturing facility in Thailand constitutes a "business" under
               EITF 98-3 - "Determining Whether a Nonmonetary Transaction
               Involves Receipt of Productive Assets or of a Business".


                                      F-21

<PAGE>

                           DELTA GALIL INDUSTRIES LTD.
                            (An Israeli corporation)
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 2 - ACQUISITIONS AND OTHER TRANSACTIONS (continued):

               The main strategy behind the Thailand plant acquisition is to
               reduce the sewing cost.

               The excess of cost of acquisition over the fair value of net
               assets on acquisition date of approximately - $1.0 million - was
               allocated to goodwill.

               At December 31, 2004 (in thousands)

               Cash and cash equivalent         $   61
               Account receivable - Trade        1,025
               Account receivable - Other           34
               Inventories                       1,381
               Property, plant, and equipment    1,831
               Goodwill                          1,057
                                                ------
                  Total assets acquired         $5,389
                                                ------
               Short-term bank credit              601
               Accounts payable - Trade            528
               Accounts payable - Other          1,776
               Long term debt                      131
                                                ------
                  Net assets acquired           $2,353
                                                ======

          C.   Hereafter are certain unaudited pro forma combined income data
               which assumes that the acquisition of Burlen had occurred on
               January 1, 2004. The unaudited pro forma financial information is
               not necessarily indicative of the combined results that would
               have been attained had the acquisition of Burlen occurred as of
               January 1, 2004 nor is it necessarily indicative of future
               results.

                                                YEAR ENDED
                                                DECEMBER 31
                                             ----------------
                                                   2004
                                             ----------------
                                               IN THOUSANDS
                                             (EXCEPT EARNINGS
                                                PER SHARE)
                                             ----------------
                                                (UNAUDITED)
                                             ----------------
               Net Revenues                      $763,375
                                                 ========
               Net Income                        $ 19,853
                                                 ========
               Earning per share - Basic         $   1.06
                                                 ========
               Earning per share - Diluted       $   1.04
                                                 ========


                                      F-22

<PAGE>

                           DELTA GALIL INDUSTRIES LTD.
                            (An Israeli corporation)
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 3 - LONG-TERM RECEIVABLES AND DEPOSITS

     COMPOSITION:

                                                               DECEMBER 31
                                                              -------------
                                                               2006    2005
                                                              ------   ----
                                                               IN THOUSANDS
                                                              -------------
               Long term loans to employees (*)               $   37   $148
               Long term Deposits and prepaid expenses (**)      798
               Long term trade receivable (***)                  188
                                                              ------   ----
                                                              $1,023   $148
                                                              ======   ====

(*)   Represent long-term loans to employees - mainly linked to the Israeli
      consumer price index ("CPI") and bearing interest at the rate of 4%.

(**)  Deposits are composed mainly for vehicles under operational lease for a
      period of 3 years, and for offices and other rented facilities over the
      rental period.

(***) Will be paid in 9 equal yearly installments.


                                      F-23

<PAGE>

                           DELTA GALIL INDUSTRIES LTD.
                            (An Israeli corporation)
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 4 - PROPERTY, PLANT AND EQUIPMENT:

          A.   Composition of property, plant and equipment, grouped by major
               classifications, is as follows:

                                                              DECEMBER 31
                                                          -------------------
                                                            2006       2005
                                                          --------   --------
                                                              IN THOUSANDS
                                                          -------------------
               Land and buildings, see (*) and b          $ 33,143   $ 32,205
               Machinery and equipment                     110,421    112,507
               Vehicles, office furniture and equipment
                  and leasehold improvements                44,779     48,205
                                                          --------   --------
                                                           188,343    192,917
               Less - accumulated depreciation and
                  amortization                             (89,080)   (83,786)
                                                          --------   --------
                                                          $ 99,263   $109,131
                                                          ========   ========

(*)  Including building leased under capital lease see note 1e:

               Cost                                       $  1,414   $  1,414
               Less - accumulated depreciation                 593        501
                                                          --------   --------
                                                          $    821   $    913
                                                          ========   ========

          B.   LAND AND BUILDINGS

               Part of the buildings of the Company stand on land leased from
               the Israel Lands Administration for periods expiring in the years
               2016-2037. The leasehold rights have not yet been registered in
               the Land Registry.

               Investment projects of the Company and its subsidiary have been
               approved by the Israeli Investment Center, under the Law for the
               Encouragement of Capital Investment, 1959. The Company has filed
               final reports to the Investment Center during 2005.

          C.   Depreciation and amortization in respect of property, plant and
               equipment totaled $14.1, $14.6 and $14.8 million in the years
               ended December 31, 2006, 2005 and 2004 (excluding impairment of
               assets see f. below and impairment of assets relating to
               restructuring, see note 11e).

          D.   As to pledges on assets, see notes 7d and 10a.

          E.   ASSETS HELD FOR SALE

               In connection with the 2005 restructuring plan, management
               committed to a plan to sell certain real estate properties
               located in Israel, Scotland, Hungary and the US. As a result,
               these assets were classified at carrying value of $7.4 million as
               current assets under the category of "assets held for sale" on
               the balance sheet as at December 31, 2005. During 2006 the
               Company sold the properties in Ireland, Scotland and certain
               assets in the US, resulting in net gain on sale of assets of $170
               thousand in 2006. The remaining assets, which have a carrying
               value of $4.5 million, were not sold in 2006 however the assets
               are actively being marketed for sale in 2007. The Company
               estimates that the rest of the assets will be disposed of during
               2007. See also note 14b, for segmental data.

               During January 2007 the Company sold its asset held for sale in
               the US.


                                      F-24

<PAGE>

                           DELTA GALIL INDUSTRIES LTD.
                            (An Israeli corporation)
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 4 - PROPERTY, PLANT AND EQUIPMENT (continued):

          F.   During 2005, as a result of the restructuring plan, following the
               change in operation in various divisions and the erosion in
               profitability, the Company tested the carrying amount of it's
               long-lived assets and as a result recorded a total impairment of
               $9.8 million, of which $2.4 is included among restructuring
               expenses and $7.4 million is included among impairment of assets.

               The long-lived assets which were impaired include mainly
               machinery and equipment in the fabric and Seam-Less facilities in
               Israel, and leasehold improvements in real-estate which would be
               abandoned as part of the Company's plan to consolidate most of
               it's premises in Carmiel, Israel.

               During 2006, as a result of the restructuring plan in the Far
               East which included the Company's decision to discontinue sewing
               operations in China, the Company tested the carrying value of
               long lived assets and as a result recorded a total impairment of
               $1.2 million, which is included among restructuring expenses. The
               long lived assets which were impaired were mainly lease hold
               improvements. See also note 14, for segment information.


                                      F-25

<PAGE>

                           DELTA GALIL INDUSTRIES LTD.
                            (An Israeli corporation)
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 5 - INTANGIBLE ASSETS AND GOODWILL

          A.   INTANGIBLE ASSETS

               The intangible assets include: a) customer relationship at the
               amount of $ 14.8 million, which is amortized over 20 years
               period, see also note 2a, the amortized customer relationship as
               of December 31, 2006 and 2005 amounts to $13.3 million and $14
               million, respectively; b) exclusive license as of December 31,
               2006 and 2005 at the amount of Nil and $ 0.5 million,
               respectively (as to the write-down during 2006, see below).

               Aggregate amortization expenses for the years ended December 31,
               2006, 2005 and 2004 were $0.7 million, $0.7 million and NIL
               respectively. Estimated amortization expenses over the years
               2007-2011, is $0.7 million per year, and $9.6 million in
               aggregate for the years 2012-2024.

               At the end of 2006, an exclusive license agreement with Levi's
               was terminated, as a result of Levi's decision to cease its Jeans
               operations in Europe. In connection with the early termination of
               the license, the Company received a $0.3 million as a termination
               payment from Levi's. The payment received was recorded against
               the carrying value of the license intangible of $0.3 million.

          B.   GOODWILL

               The Company has selected September 30 of each year as the date on
               which it performs its annual goodwill impairment test. As a
               result of this test in 2005, the Company recorded an impairment
               of $5.5 million.

               Financial results of the U.S Upper Market and Socks segments and
               the expected results of these segments have been reevaluated
               during the goodwill impairment test. The erosion in selling
               prices, due to the changes in the business environment, indicated
               a decrease in the fair value of the reporting unit, which
               resulted in the above mentioned impairment.

               The fair value of these reporting units were estimated using the
               multiple method. No impairment resulted from the annual review,
               performed in September 30, 2006.

               Changes in the carrying amount of goodwill for the two years
               ended December 31 2006, are as follows:

                                                       YEAR ENDED
                                                    DECEMBER 31, 2006
                                               --------------------------
                                                      IN THOUSANDS
                                               --------------------------
                                                DELTA
                                                 USA     EUROPE    TOTAL
                                               -------   ------   -------
               Goodwill at beginning of year   $51,879   $1,810   $53,689
               Changes during the year:
                  Adjustment to purchase
                     price, see note 2a          3,645              3,645
                                               -------   ------   -------
                  Goodwill at end of year      $55,524   $1,810   $57,334
                                               =======   ======   =======


                                      F-26

<PAGE>

                           DELTA GALIL INDUSTRIES LTD.
                            (An Israeli corporation)
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 5 - INTANGIBLE ASSETS AND GOODWILL (continue):

<TABLE>
<CAPTION>
                                                         YEAR ENDED DECEMBER 31, 2005
                                               -----------------------------------------------
                                                                 IN THOUSANDS
                                               -----------------------------------------------
                                                DELTA    US UPPER
                                                 USA      MARKET    EUROPE    SOCKS     TOTAL
                                               -------   --------   ------   -------   -------
<S>                                            <C>       <C>        <C>      <C>       <C>
               Goodwill at beginning of year   $50,605   $ 2,119    $1,810   $ 3,386   $57,920
               Changes during the year:
                  Impairment of Goodwill                  (2,119)             (3,386)   (5,505)
                  Adjustment to purchase
                     price, see note 2a          1,274                                   1,274
                                               -------   --------   ------   -------   -------
               Goodwill at end of year         $51,879       -,-    $1,810      -,-    $53,689
                                               =======   ========   ======   =======   =======

</TABLE>


                                      F-27

<PAGE>

                           DELTA GALIL INDUSTRIES LTD.
                            (An Israeli corporation)
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 6 - EMPLOYEE RIGHTS UPON RETIREMENT:

          A.   Employees related obligations are composed as follows:

                                                    DECEMBER 31
                                                  ---------------
                                                   2006     2005
                                                  ------   ------
                                                    IN THOUSANDS
                                                  ---------------
               Accrued severance pay              $6,826   $6,360
               Obligation in respect of defined
                  benefit plans                       37    1,490
                                                  ------   ------
                                                  $6,863   $7,850
                                                  ======   ======

               As of December 31, 2006 and 2005, the Group had deposits of $7
               million and $5.8 million, respectively, with funds managed by
               major Israeli insurance companies, which are earmarked by
               management to cover the severance pay liability in respect of
               Israeli employees. The amounts deposited with insurance companies
               are marked to market at each balance sheet date, with gains and
               losses recorded in the statement of operations as part of the
               financial expenses. Under FAS No. 132, "Employers Disclosures
               About Pensions and Other Post Retirement Benefits", such deposits
               are not considered to be "plan assets".

               Costs of pension and severance pay charged to income in the years
               ended December 31, 2006, 2005 and 2004 were $5.8 million, $6.2
               million and $7.5 million respectively (in 2006, 2005 and 2004,
               excluding $507 thousand, $5,894 thousand and $190 thousand,
               respectively, relating to the termination of employment, which
               were charged to restructuring expenses, see note 11e).

               The accumulated comprehensive loss from minimum pension liability
               for the years ended December 31, 2006, 2005 and 2004, is net of
               related taxes of $506 thousand, $560 thousand and 495 thousand,
               respectively.

               The profit (loss) from deposits in respect of severance pay were
               $784 thousand, $(120) thousand and $416 thousand in the years
               ended December 31, 2006, 2005 and 2004, respectively.

               The main terms of the various arrangements with employees are
               described in b. below. Further details relating to defined
               benefit plans, as required by FAS 132, are presented in b and c
               below.


                                      F-28

<PAGE>

                           DELTA GALIL INDUSTRIES LTD.
                            (An Israeli corporation)
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 6 - EMPLOYEE RIGHTS UPON RETIREMENT (continued):

          B.   TERMS OF ARRANGEMENTS:

               1)   The Company and Israeli subsidiaries

                    Israeli law generally requires payment of severance pay
                    and/or pensions upon dismissal of an employee or upon
                    termination of employment in certain other circumstances.
                    The following principal plans relate to employee rights upon
                    retirement, as applicable to Israeli companies in the Group:

                    Pension plans for the majority of the Group's employees -
                    under collective labor agreements, these external pension
                    plans cover the severance pay liability. The pension and
                    severance pay liabilities covered by these plans are not
                    reflected in the financial statements as the pension and
                    severance pay risks have been irrevocably transferred to the
                    pension funds.

                    a)   Insurance policies for employees in managerial
                         positions - these policies provide coverage for
                         severance pay and pension liabilities of managerial
                         personnel. Under labor agreements these insurance
                         policies are, subject to certain limitations, the
                         property of the employees.

                    b)   Severance pay liabilities not covered by the pension
                         funds are fully provided for in these consolidated
                         financial statements, as if it was payable at each
                         balance sheet date on an undiscounted basis, based upon
                         the number of years of service and the most recent
                         monthly salary of the Group's employees in Israel.

               2)   Non-Israeli subsidiary

                    A U.S. subsidiary provides various defined benefit pension
                    plans to its employees, see c below.

                    At December 31, 2006, the assets of the defined benefit
                    pension plan are primarily invested in group annuity
                    contracts with an insurance Company. The plan was frozen
                    effective January 1996.

                    The Company maintains two defined contribution 401(k) plans.
                    Contributions are based on a percentage of annual salaries.
                    The Company generally matches 50% of each participant's
                    pretax contribution up to 4% of the participant's annual
                    compensation, depending on the plan. The Company's matching
                    contribution was $239 thousand and $308 thousand for the
                    years ended December 31, 2006 and 2005, respectively.


                                      F-29

 <PAGE>

                           DELTA GALIL INDUSTRIES LTD.
                            (An Israeli corporation)
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 6 - EMPLOYEE RIGHTS UPON RETIREMENT (continued):

          C.   CERTAIN DETAILS RELATING TO DEFINED BENEFIT PLANS:

                                                                2006      2005
                                                              -------   -------
                                                                 IN THOUSANDS
                                                              -----------------
          CHANGE IN BENEFIT OBLIGATION:
             Benefit obligation at beginning of year          $ 3,330   $ 3,140
             Interest cost                                        169       178
             Actuarial (gain) loss                               (196)      204
             Benefit paid                                        (198)     (192)
                                                              -------   -------
             Benefit obligation at end of year                $ 3,105   $ 3,330
                                                              -------   -------
          CHANGE IN PLAN ASSETS:
             Fair value of plan assets at beginning of year   $ 3,088   $ 2,999
             Actual return on plan assets                          90       188
             Employer contribution                                125       125
             Benefit paid, including plan expenses               (235)     (223)
                                                              -------   -------
             Fair value of plan assets at end of year         $ 3,068   $ 3,089
                                                              -------   -------
          RECONCILIATION OF FUNDED STATUS:
             Funded status (carryforward obligations)         $   (37)  $  (241)
             Unrecognized net actuarial loss                    1,346     1,490
             Adjustment to recognize minimum liability         (1,346)   (1,490)
                                                              -------   -------
             Accrued pension cost                             $   (37)  $  (241)
                                                              =======   =======

     The estimated future benefit payments in each of the five years subsequent
     to 2006 are as follows (in thousands):

                    2007          178
                    2008          181
                    2009          192
                    2010          195
                    2011          196
                    2012-2016   1,009
                                -----
                                1,951
                                =====

     The actuarial assumptions used to determine the benefit obligations and
     costs are as follows:

                                               2006    2005    2004
                                              -----   -----   -----
          WEIGHTED AVERAGE ASSUMPTIONS
          AT END OF YEAR:
             Discount rate                    5.41%   5.41%   5.75%
             Expected return on plan assets   6.00%   6.00%   6.25%
             Interest rate                    5.72%    N/A     N/A
             Rate of compensation increase     N/A     N/A     N/A


                                      F-30

<PAGE>

                           DELTA GALIL INDUSTRIES LTD.
                            (An Israeli corporation)
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 6 - EMPLOYEE RIGHTS UPON RETIREMENT (continued):

     ADDITIONAL INFORMATION

     Increase (decrease) in minimum liability included other comprehensive
     income, net of tax, $88 thousand and $99 thousand in year 2006 and 2005
     respectively.

     Information for a pension plan with an accumulated benefit obligation in
     excess of plan assets is as follows (in thousands):

                                     2006     2005
                                    ------   ------
     Projected benefit obligation   $3,105   $3,330
     Fair value of plan assets       3,068    3,089

     Contributions totaling $125 thousand were made in the years ended December
     31, 2006 and 2005. For the year ended December 31, 2007, the Company
     anticipates satisfying any minimum funding requirements by making
     contributions of $178 thousand.

     The consolidated components of net periodic benefits costs are as follows:

                                                 YEAR ENDED
                                                DECEMBER 31
                                           ---------------------
                                            2006    2005    2004
                                           -----   -----   -----
                                               IN THOUSANDS
                                           ---------------------
          Interest cost                    $ 169   $ 178   $ 179
          Expected return on plan assets    (179)   (182)   (122)
          Recognized net actuarial cost       74      72      10
                                           -----   -----   -----
                                           $  64   $  68   $  67
                                           =====   =====   =====

     At December 31, 2006 and 2005, the assets of the defined benefit plan are
     primarily invested in group annuity contracts with an insurance Company.
     The Company recorded the minimum pension liability required by the
     provisions of Financial Accounting Standards Board Statement No. 87,
     Employers Accounting for Pensions.


                                      F-31

<PAGE>

                           DELTA GALIL INDUSTRIES LTD.
                            (An Israeli corporation)
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 6 - EMPLOYEE RIGHTS UPON RETIREMENT (continued):

          D.   CASH FLOWS INFORMATION REGARDING THE COMPANY'S LIABILITY FOR
               EMPLOYEE RIGHTS UPON RETIREMENT:

               1.   The Company expects to contribute in 2007, $600 thousand to
                    insurance companies and $NIL thousand to contribution plans.

               2.   The Company expects to pay the following future benefits to
                    its Israeli employees upon their normal retirement age:

                                      SEVERANCE PAY BENEFITS
                                      ----------------------
                                           IN THOUSANDS
                                      ----------------------
                    2007                       297
                    2008                       261
                    2009                       652
                    2010                       167
                    2011                       247
                    Years 2012-2016            879
                                             -----
                                             2,503
                                             =====

                    These amounts, as they relate to the Israeli subsidiaries
                    were determined based on the employees' current salary rates
                    and the number of service years that will be accumulated
                    upon their retirement date. These amounts do not include
                    additional amounts that might be paid to employees that will
                    cease working with the Company before their normal
                    retirement age.


                                      F-32

<PAGE>

                           DELTA GALIL INDUSTRIES LTD.
                            (An Israeli corporation)

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 7 - LONG-TERM LIABILITIES - BANK LOANS AND OTHER LIABILITY:

          A.   COMPOSITION:

<TABLE>
<CAPTION>
                                                                      WEIGHTED
                                                                      AVERAGE
                                                                   INTEREST RATE
                                                                   -------------       DECEMBER 31
                                                                    DECEMBER 31,   -------------------
                                                                       2006           2006       2005
                                                                   -------------   ---------   -------
                                                                         %              IN THOUSANDS
                                                                   -------------   -------------------
<S>                                                                      <C>       <C>         <C>
               Bank loans - in dollars                                   6.6         $49,289   $98,337
               Other liability - obligation under capital lease,
                  see note 1e and c below - in dollars                   8.6
                                                                                         888       963
                                                                                   ---------   -------
                                                                                      50,177    99,300
               Less - current maturities                                           (*)16,981    29,623
                                                                                   ---------   -------
                                                                                     $33,196   $69,677
                                                                                   =========   =======
</TABLE>

          B.   TOTAL LIABILITIES (NET OF CURRENT MATURITIES) MATURE IN THE
               FOLLOWING YEARS AFTER BALANCE SHEET DATES:

                                               DECEMBER 31, 2006
                                               -----------------
                                                  IN THOUSANDS
                                               -----------------
                    2008                           (*)$16,987
                    2009                            (*)15,587
                    2010                                  105
                    2011                                  114
                    2012 year and thereafter              403
                                                   ----------
                                                      $33,196
                                                   ==========

          (*)       In January 2007 the Company settled $22.5 million of long
                    term loans in the U.S., see amendment No.4 to the credit
                    agreement in e3 bellow.


                                      F-33

<PAGE>

                           DELTA GALIL INDUSTRIES LTD.
                            (An Israeli corporation)
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 7 - LONG-TERM LIABILITIES - BANK LOANS AND OTHER LIABILITY (continued):

          C.   A subsidiary of the Company has entered into capital lease
               agreements for a building it uses; the lease will expire in 2014.

               Following are the future minimum lease payments, by years, under
               capital lease and the present value of the net minimum lease
               payments as of December 31, 2006:
                                                              IN
                                                          THOUSANDS
                                                          ---------
                    2007 - current maturities               $  158
                    2008                                       158
                    2009                                       158
                    2010                                       158
                    2011                                       158
                    2012 and thereafter                        474
                                                            -------
                                                             1,264
                    Less - amount representing interest        376
                                                            -------
                                                            $  888
                                                            =======

          D.   Liabilities to banks are fully secured by floating charges in an
               unlimited amount on all the assets and rights of the Company and
               the assets of part of its subsidiaries.

          E.   Delta Galil USA Inc., a subsidiary of the Company is a party to a
               credit agreement, as amended on December 9, 2004, with Bank Leumi
               U.S.A and Bank Hapoalim B.M. Borrowings under the credit
               agreement are secured by substantially all of the assets of the
               subsidiary.As of December 31,2006 the credit agreement provided
               for up to $22.5 million long terms loans, and up to $60 million
               are short term loans. The loan bears interest at a variable rate
               that is linked to the Libor. As of December 31, 2006, the
               interest rate on the long term loan was 7.0% and on the
               short-term credit was 6.7%. As of December 31, 2006 the
               unutilized credit line was $15.0 million.

               The credit agreement included covenants based on (1) the ratio of
               Delta Galil USA's earnings before interest, taxes, depreciation
               and amortization, or EBITDA, to fixed charges; (2) the ratio of
               net worth to total assets of Delta Galil USA; and (3) the ratio
               of the sum of Delta Galil USA's (a) loans (b) letters of credit,
               and (c) acceptances to EBITDA.

               Delta Galil USA did not satisfy the covenants as in effect prior
               to the amendment in the agreement, for the years ended December
               31, 2006 and 2005. Amendment no. 4 from January 2007 replaced the
               covenants as of December 31, 2006 and for 2007. Management
               believed that Delta Galil USA will satisfy the covenants as
               included in the new amendment.

               2006 Amendment

               Delta Galil USA and the banks amended the credit agreement in
               January 2006 and in May 2006. The material changes contained in
               those amendments were the following: A prepayment of $25 million
               of the principal amount of the long term loan; a reduction in the
               quarterly payment on the long term loan from $3.5 million to $1.9
               million; an extension of the expiration date of the revolving
               loan facility from January 15, 2006 to January 31, 2007; a
               deposit of $4 million with Bank Leumi USA and a pledge of that
               deposit to the banks, an increase of 0.25% in the interest rate;
               and a change of the covenant mentioned above as follows:


                                      F-34

<PAGE>

                           DELTA GALIL INDUSTRIES LTD.
                            (An Israeli corporation)
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 7 - LONG-TERM LIABILITIES - BANK LOANS AND OTHER LIABILITY (continued):

               1.   The ratio of Delta Galil USA's EBITDA to fixed charges, as
                    defined in the credit agreement, may not be below 1 to 1 for
                    each three -month period ending June 30, September 30, and
                    December 31, 2006, with such ratio rising to 1.5 to 1 for
                    the twelve months ending March 31, June 30, September 30,
                    and December 31, 2007, and 1.6 to 1 for the twelve months
                    ending March 31, June 30, September 30, and December 31 2008
                    and 2009;

               2.   The ratio of net worth to total assets of Delta Galil USA
                    may not be below 0.25 to 1 for the twelve months ending
                    March 31, 2006 and June 30, 2006, and a ratio of 0.28 to 1
                    for the twelve months ending September 30, 2006 and for the
                    twelve-month period ending December 31, 2006, with such
                    ratio rising to 0.4 to 1 for the twelve months ending March
                    31, 2007 and for the end of each subsequent quarter until
                    maturity;

               3.   The ratio of the sum of Delta Galil's (a) loans (b) letters
                    of credit, and (c) acceptances (or, collectively, debt) to
                    EBITDA may not exceed 6.70 to 1 for the twelve months ending
                    March 31, 2006; 5.70 to 1 for the twelve months ending June
                    30, 2006, and 4 to 1 for the twelve months ending each of
                    September 30, 2006 and December 31, 2006, with such ratio
                    rising to 3.5 to 1 for the twelve months ending March 31,
                    June 30, September 30, and December 31, 2007, 3.0 to 1 for
                    the twelve months ending March 31, 2008 and for each twelve
                    months period ending at the end of each subsequent quarter
                    until maturity.

                    In May 2006, Delta Galil USA and the banks further amended
                    the credit agreement to revise, among other things, the
                    prepayment terms of the term loan.

                    2007 Amendment No. 4

                    In January 2007, Delta Galil USA and the banks entered into
                    Amendment no. 4 to the credit agreement. The material
                    changes contained in this amendment are the following:

                    A prepayment of the outstanding long term loan in the
                    principal amount of $22.5 million; An increase of the Short
                    Term revolving loan from $60 million to $90 million. a
                    change to the term loan interest rate to LIBOR + 1.5%; an
                    extension of the expiration date of the revolving loan
                    facility from January 31, 2007 to January 31, 2008; a
                    subordination of the Company's loan to Delta Galil USA in
                    the amount of $20 million for a period ending December 1,
                    2009; a conversion of $5 million of the outstanding
                    Company's loan to Delta Galil USA into equity of Delta Galil
                    USA.; a release of the $4 million deposit with Bank Leumi
                    USA; a change to the financial covenants as follows:

                    1.   The ratio of net worth to total assets of Delta Galil
                         USA may not be below a ratio of 0.28 to 1 as of
                         December 31, 2006 and as of March 31, June 30 and
                         September 30, 2007, and a ratio of 0.3 to 1 as of
                         December 31, 2007;

                    2.   The net worth of Delta Galil USA may not be less than
                         $60 million as of December 31, 2006 and as of March 31,
                         June 30 and September 30, 2007, and $65 million as of
                         December 31, 2007; and

                    3.   For the twelve month period ending December 31, 2006,
                         and for the rolling twelve month period ending on each
                         subsequent fiscal quarter thereafter, Delta Galil USA
                         shall have a profit of at least $1.00.


                                      F-35

<PAGE>

                           DELTA GALIL INDUSTRIES LTD.
                            (An Israeli corporation)
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 8 - COMMITMENTS AND CONTINGENT LIABILITIES:

          A.   COMMITMENTS

               The Company and its subsidiaries lease 27 facilities under
               operating leases. The leases (including extension options) for 20
               facilities expire on various dates between 2008 and 2029 and the
               remaining leases expired in 2007. The Company intends to renew
               some of these leases. The minimum future annual lease payment
               over each of the years 2007 to 2011 will amount to $8.7, $8.1,
               $7.2, $3.8 and $2.8 million, respectively. In the period from
               2012 to the end of the lease periods, the cumulative lease
               payments will amount to $17.8 million. The lease expenses for
               each of the years 2006, 2005 and 2004 were $8.5 million, $9.3
               million, $8.6 million respectively.

          B.   The Company entered into agreements which granted the Company
               rights to market certain of its products under brand names owned
               by other parties. Royalties under these agreements are calculated
               as a percentage of the sales. The royalties rate range from 3% to
               15% of sales, the minimum future guaranteed royalties over the
               years 2007 to 2010 will amount to $4.3, $2.1, $2.0 and $1.5
               million, respectively.

          C.   CONTINGENT LIABILITIES - GUARANTEES

               The Company and part of its subsidiaries signed a guarantee, each
               for other, which is unlimited in amount to all of the group's
               liabilities.

          D.   As to contingent consideration, see note 2a.

NOTE 9 - SHAREHOLDERS' EQUITY:

          A.   SHARE CAPITAL:

               1)   The Company's shares are traded on the Tel-Aviv Stock
                    Exchange ("TASE") and in the form of American Depositary
                    Shares ("ADS's"), each of which represents one ordinary
                    share, on the Nasdaq National Market in the United States.
                    On December 31, 2006, the closing price per ADS on Nasdaq
                    was $9.08; the shares were quoted on the TASE on that date
                    at NIS 36.81 ($8.7).

               2)   On December 2004, the Company reissued 215,684 treasury
                    shares as part of the proceeds paid to the selling
                    shareholders of Burlen, see note 2a.

               3)   As of December 31, 2006 and 2005, the balance of shares
                    issued by the Company for the purpose of future exercise of
                    employee stock options, which is held by a trustee company
                    are 166,031 and 45,882 respectively.

               4)   The shares held by the Company ("treasury shares") have no
                    voting rights and are not entitled to receive dividends.


                                      F-36

<PAGE>

                           DELTA GALIL INDUSTRIES LTD.
                            (An Israeli corporation)
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 9 - SHAREHOLDERS' EQUITY (continued):

          B.   STOCK OPTION PLANS FOR EMPLOYEE:

          The company Company adopted various option plans subject to service
          conditions and performance conditions:

          1.        Stock Option plans under subject to service conditions:

               a.   On June 4, 2000, the Company's Board of Directors approved
                    an employee stock option plan for the grant, without
                    consideration, of 809,000 options (including 100,000 options
                    to its former CEO), exercisable of 809,000 ordinary shares
                    of NIS 1 par value of the Company, to 70 senior employees of
                    the Group ("the optionees"). All the options were granted on
                    August 6, 2000. The exercise price of each option is $
                    21.07, based on the quoted price of the Company's shares on
                    the last day of trade prior to the Board of Directors'
                    resolution.

                    The options vested in four equal batches and as of December
                    31, 2006, all are fully vested. The options are exercisable
                    over a three years period, commencing one year after the
                    vesting date of each batch.

                    Any option not exercised within the said three years will
                    expire. The options expire over the years 2005-2008.

               b.   On October 23, 2002, the Company's Board of Directors
                    approved an employee stock option plan for the grant,
                    without consideration, of 1,100,000 options (including
                    100,000 options to its Former CEO), exercisable in purchase
                    of 1,100,000 ordinary shares of NIS 1 par value of the
                    Company. The exercise price of each option is the higher of
                    the quoted price of the Company's shares on the grant day or
                    $ 9.

                    On November 22, 2002, the Company granted 1,004,500 options
                    to 97 senior employees of the Group (including 100,000
                    options to the Former CEO) at an exercise price of $ 9. The
                    options vest in four equal batches and as of December 31,
                    2006 all are fully vested. The options are exercisable over
                    a three-year period, commencing one year after the vesting
                    date of the first batch and on the vesting date of the
                    second, third and fourth batch.

                    In May 2003 the Company granted 30,000 options to three
                    employees of the Group at an exercise price of $10.76. The
                    first three batches vested in May 2004, 2005 and 2006
                    respectively and the fourth batch will vest in May 2007. In
                    March and in August 2004 the Company granted 80,000 and
                    30,000 options respectively, to six and one employees of the
                    Group, respectively, at an exercise price of $ 15.35 and $
                    12.74, respectively. The first, second, third and fourth
                    batches will vest in March and August 2005, 2006, 2007 and
                    2008 respectively. The options are exercisable over a
                    three-year period, commencing one year after the vesting
                    date of the first batch and on the vesting date of the
                    second, third and fourth batch.

                    At December 31, 2006 112,250 options remain available for
                    grant under this plan.


                                      F-37

<PAGE>

                           DELTA GALIL INDUSTRIES LTD.
                            (An Israeli corporation)
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 9 - SHAREHOLDERS' EQUITY (continued):

                    c.   In May 2006 the company's Board of Directors approved
                         two option plans, one for Israeli and other non-U.S.
                         employees and another plan for U.S. employees. A total
                         of up to 1,400,000 options, representing approximately
                         6.5% of Delta Galil's issued capital on a fully diluted
                         basis, may be issued under the plans. Of such number,
                         1,100,000 options are issuable under the plan for
                         Israeli and other non-U.S. employees and 300,000
                         options are issuable under the plan for U.S. employees.
                         Each option may be exercised for one ordinary share NIS
                         1 par value of the Company pursuant to terms of the
                         relevant option plan.

                         A total of 1,018,018 options were granted subject to
                         service condition. The exercise price of 568,016
                         options granted in May 2006 is $8.43. The exercise
                         price of 425,000 options granted in June 7, 2006 is
                         $7.26, and the exercise price of 25,002 options granted
                         on June 25, 2006 is $7.59. Of the 1,018,018 options
                         granted, 489,014 were granted to executive officers.

                         On September 21, 2006 the Company granted 50,000
                         options to an employee of the group at an exercise
                         price of $9.20. The options are vested over a three
                         years period, subject to the same terms as defined in
                         the option plan from May 2006.

                         The options vest and are exercisable as follows:

                         First quarter- vest on the first anniversary of the
                         Date of Grant and are exercisable for three years from
                         the second anniversary of the Date of Grant.
                         Second quarter - vest on the second anniversary of the
                         Date of Grant and are exercisable for three years
                         thereafter
                         Third quarter - vest on the third anniversary of the
                         Date of Grant and are exercisable for three years
                         thereafter
                         Final quarter - vest on the fourth anniversary of the
                         Date of Grant and are exercisable for three years
                         thereafter.

                         As of December 31, 2006, 72,286 options granted to
                         certain employees who left the Company, were forfeited.

                         As of December 31, 2006 and 197,268 options remain
                         available for grant under the plan from May 2006.

                    d.   The weighted-average grant-date fair value of options
                         granted during the years 2006, 2005, and 2004 was
                         $1,900, $NIL, and $420 thousands, respectively. The
                         fair value of each option granted is estimated on the
                         date of grant using the Black & Scholes option-pricing
                         model, with the following weighted average assumptions:

                                                           2006    2004
                                                          -----   -----
                               Dividend yield               4.0%    3.5%
                                                          =====   =====
                               Expected volatility (*)    31.00%  28.00%
                                                          =====   =====
                               Risk-free interest rate        5%      4%
                                                          =====   =====
                               Expected life - in years    4.38    4.25
                                                          =====   =====

                         (*) Based on the historical volatility


                                      F-38

<PAGE>

                           DELTA GALIL INDUSTRIES LTD.
                            (An Israeli corporation)
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 9 - SHAREHOLDERS' EQUITY (continued):

                         The total unrecognized compensation cost on employee
                         stock options at December 31, 2006 is $1,497 thousand
                         (net of forefeiture rate), and it is expected to be
                         recognized over a weighted average period of 3.5 years.

                         The total cash received from employees as a result of
                         employee stock option exercises for the years ended
                         December 31, 2006, 2005 and 2004 was $376, NIL and $331
                         thousands, respectively. In connection with these
                         exercises, the tax benefits realized by the company for
                         the years ended December 31, 2006, 2005 and 2004 were
                         NIL, NIL and $100 thousands respectively.

                    2.   Stock options subject to performance conditions:

                         In May 2006, a total of 277,000 options were granted
                         under May 2006 plans (see 1b ahead) to 11 executive
                         officers, are subject to achievement of certain
                         performance goals. The exercise price of the options is
                         $8.43, equal to the closing price of the ordinary
                         shares of the Company on the Tel Aviv Stock Exchange on
                         May 11, 2006 converted to US dollars based on the
                         exchange rate of the US dollar on that date. The
                         vesting of 141,000 and 136,000 options is subject to
                         the Company's pre-tax net income, excluding one-time
                         capital gains, in 2007, and 2008, respectively.

                         The options vest over a period of two years subject to
                         achievement of certain performance goals and service
                         conditions. One half of the options, which are vested
                         in 2008, will be exercisable for a period of three
                         years commencing two years from the date of grant. The
                         second half of the options, which are vested in 2008,
                         will be exercisable for a period of three years
                         commencing three years from the date of grant. One half
                         of the options, which are vested in 2009, will be
                         exercisable for a period of three years commencing
                         three years from the date of grant. The second half of
                         the options, which are vested in 2009, will be
                         exercisable for a period of four years commencing four
                         years from the date of grant.

                         As of December 31, 2006, 71,000 options granted to
                         certain employees who left the Company, were forfeited.

                         The fair value of option granted during 2006, based on
                         the Black & Scholes option pricing model was $518
                         thousands and will be recorded in the financial
                         statement over the vesting period, subject to
                         occurrence of the performance conditions.


                                      F-39

<PAGE>

                           DELTA GALIL INDUSTRIES LTD.
                            (An Israeli corporation)
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 9 - SHAREHOLDERS' EQUITY (continued):

                    The fair value of each option granted is estimated on the
                    date of grant using the Black & Scholes option-pricing
                    model, with the following weighted average assumptions:

                                                             2006
                                                           --------
                                                           WEIGHTED
                                                            AVERAGE
                                                           --------
                                Dividend yield                4.0%
                                                            =====
                                Expected volatility         31.00%
                                                            =====
                                Risk-free interest rate         5%
                                                            =====
                                Expected life - in years     4.38
                                                            =====

                         The expenses relating to the options which are subject
                         to achievement of certain performance goals were not
                         recorded in the financial statements in 2006 due to the
                         fact that the probability of meeting those goals was
                         improbable.

                    The total unrecognized compensation cost before tax on
                    employee stock options at December 31, 2006 is $518
                    thousands.

                    3.   The grant of options until 2004 to Israeli employees
                         under the Company's plans is subject to the terms
                         stipulated by Section 102 and 102A of the Israeli
                         Income Tax Ordinance. Inter-alia, that Section provides
                         that the Company will be allowed to claim as an expense
                         for tax purposes the amounts credited to the employees
                         as a benefit, when the related tax is payable by the
                         employee. The grant of options in 2006 is subject to
                         the track chosen by the company and pursuant to the
                         terms thereof, the company is not allowed to claim, as
                         an expense for tax purposes, the amounts credited to
                         employees as a benefit, including amounts recorded as
                         salary benefits in the company's accounts, in respect
                         of options granted to employees under the plan - with
                         the exception of the work-income benefit component, if
                         any, determined on the grant date. Treatment of the
                         options granted under the plan for U.S. employees as
                         incentive stock options, which have certain tax
                         benefits for those receiving the options.

                    4.   The rights pertaining to the ordinary shares issued
                         upon exercise of the options will be identical to those
                         of the other ordinary shares of the Company.


                                      F-40

<PAGE>

                           DELTA GALIL INDUSTRIES LTD.
                            (An Israeli corporation)
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 9 - SHAREHOLDERS' EQUITY (continued):

                    5.   Following is a summary of the status of the Company's
                         stock option plans:

                         a. Options subject to service conditions:

<TABLE>
<CAPTION>
                                                                  YEAR ENDED DECEMBER 31
                                           ---------------------------------------------------------------------
                                                    2006                    2005                    2004
                                           ---------------------   ---------------------   ---------------------
                                                        WEIGHTED                WEIGHTED                WEIGHTED
                                                         AVERAGE                 AVERAGE                 AVERAGE
                                                        EXERCISE                EXERCISE                EXERCISE
                                           NUMBER(**)     PRICE    NUMBER(**)     PRICE    NUMBER(**)     PRICE
                                           ----------   --------   ----------   --------   ----------   --------
<S>                                         <C>          <C>       <C>           <C>       <C>           <C>
Options outstanding at beginning of year    1,562,005    $13.21    1,832,071     $13.84    1,830,702     $13.50
Changes during the year:
   Granted - at market price                1,068,018    $ 7.98                              110,000     $14.65
   Exercised(*)                               (45,713)   $ 8.31                              (41,756)    $ 7.91
   Forfeited                                  (88,536)   $ 8.86      (23,000)    $ 9.00      (66,875)    $ 9.34
   Expired                                   (208,167)   $19.14     (247,066)    $18.30
                                            ---------              ---------               ---------
Options outstanding at end of year          2,287,607    $10.50    1,562,005     $13.21    1,832,071     $13.84
                                            =========              =========               =========
Options exercisable at end of year          1,235,875    $12.39    1,238,005     $13.79    1,106,821     $14.69
                                            =========              =========               =========
</TABLE>

(*)  The total intrinsic value of options exercised during the years ended
     December 31, 2006, 2005, and 2004, was $0.2 $NIL, and $0.1 millions,
     respectively.

(**) Represents the number of shares arising upon exercise of options, based on
     the conversion rat.

                         b. Options subject to performance conditions:

                                                                  2006
                                                           ------------------
                                                                     WEIGHTED
                                                                      AVERAGE
                                                                     EXERCISE
                                                           NUMBER*     PRICE
                                                           -------   --------
                Options outstanding at beginning of year       -,-
                Options outstanding at beginning of year       -,-
                Changes during the year:
                   Granted - at market price               277,000      $8.43
                   Forfeited                               (71,000)     $8.43
                                                           -------
                Options outstanding at end of year         206,000      $8.43
                                                           -------
                Options exercisable at end of year             -,-
                                                           -------

               (*) The weighted-average grant-date fair value of options granted
               during the years 2006, 2005, and 2004 was $0.5 millions, $NIL,
               and $NIL, respectively.


                                      F-41

<PAGE>

                           DELTA GALIL INDUSTRIES LTD.
                            (An Israeli corporation)
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 9 - SHAREHOLDERS' EQUITY (continued):

                    6.   The following table summarizes information regarding
                         options outstanding at December 31, 2006:

<TABLE>
<CAPTION>
                            NUMBER OF SHARES ISSUABLE UPON EXERCISE OF OPTIONS
                    ------------------------------------------------------------------
                                                                           VESTED AND
                                        OUTSTANDING                        EXERCISABLE
                    ---------------------------------------------------   ------------
                                                              WEIGHTED
                                                              AVERAGE
                                              BALANCE AT     REMAINING     BALANCE AT
                                  EXERCISE   DECEMBER 31,   CONTRACTUAL   DECEMBER 31,
                    DATE OF PLAN   PRICES        2006           LIFE          2006
                    ------------  --------   ------------   -----------   ------------
                                                              (YEARS)
<S>                 <C>            <C>         <C>              <C>         <C>
                    June 2000      $21.07        318,125        1.1           318,125

                    October 2002   $ 9.00        840,250        1.6           840,250

                    October 2002   $10.76         30,000        2.1            22,500

                    October 2002   $15.35         80,000        3.1            40,000

                    October 2002   $12.74         22,500        3.3            15,000

                    May 2006       $ 8.43        496,730        5.2

                    May 2006 -
                    Performance
                    conditioned    $ 8.43        206,000          6

                    May 2006       $ 7.26        425,000        5.5

                    May 2006       $ 7.59         25,002        5.5

                    May 2006       $ 9.20         50,000        5.5
                                               ---------                    ---------
                                               2,493,607                    1,235,875
                                               =========                    =========
</TABLE>

               Weighted average of exercise prices of the total outstanding and
               of total vested and exercisable options is $10.33 and $12.39
               respectively.

               Weighted average of remaining contractual life of the total
               outstanding and the total vested and exercisable options is 3.5
               years 1.55 years respectively.

               Weighted average of intrinsic value of the total outstanding and
               of total vested and exercisable options is $1.31 and $3.42
               respectively.

               C.   RETAINED EARNINGS

                    In determining the amount of retained earnings available for
                    distribution as a dividend, the Companies Law stipulates
                    that the cost of the Company's shares acquired by the
                    Company (that are presented as a separate item in the
                    statement of changes in shareholders' equity) has to be
                    deducted from the amount of retained earnings.


                                      F-42

<PAGE>

                           DELTA GALIL INDUSTRIES LTD.
                            (An Israeli corporation)
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 10 - TAXES ON INCOME (continued):

          A.   THE COMPANY AND CERTAIN ISRAELI SUBSIDIARIES (HEREAFTER - THE
               COMPANIES):

               1)   Tax benefits under the Israeli Law for the Encouragement of
                    Capital Investments, 1959 ("the law")

                    The Company and certain Israeli subsidiary have received
                    investment grants from the State of Israel. The entitlement
                    to the above benefits is conditional upon the companies
                    fulfilling the conditions stipulated by the law, regulation
                    published thereunder and the instruments of approval for the
                    specific investments in approved enterprises. In the event
                    of failure to comply with the terms attached to the receipt
                    of those grants, the companies may be required to refund the
                    amount of the grants, in whole or in part, with linkage
                    differences to the Israeli CPI and interest from the date of
                    receipt, see note 4.

                    The abovementioned companies have registered floating
                    charges on all their assets in favor of the State of Israel
                    as security for compliance with the terms relating to the
                    grants.

               2)   Measurement of results for tax purposes under the Income Tax
                    (Inflationary Adjustments) Law, 1985 (the "inflationary
                    adjustments law")

                    Under the inflationary adjustments law, results for tax
                    purposes are measured in real terms, having regard to the
                    changes in the Israeli CPI. Under income tax regulations,
                    the Company and certain subsidiaries are entitled to adjust
                    their results for tax purposes on the basis of the changes
                    in the exchange rate of the dollar, instead of the changes
                    in the Israeli CPI. The Company and one of its subsidiaries
                    chose to do so.

                    As explained in note 1a(4), the financial statements were
                    measured in dollars. Paragraph 9(f) of FAS 109 creates an
                    exception which prohibits the recognition of deferred tax
                    liabilities or assets that arise from differences between
                    the financial reporting and tax bases of assets and
                    liabilities that are remeasured from the local currency into
                    dollars using historical exchange rates, and that result
                    from (i) changes in exchange rates, or (ii) indexing for tax
                    purposes.

               3)   Tax rates

                    The income of the Company and its Israeli subsidiaries is
                    taxed at the statutory rate. In July 2004, Amendment No. 140
                    to the Income Tax Ordinance was enacted. In August 2005, a
                    further amendment (No. 147) was published, which makes a
                    further revision to the corporate tax rates prescribed by
                    Amendment No. 140. As a result of the aforementioned
                    amendments, the corporate tax rates for 2006 and thereafter
                    are as follows: 2006 - 31%, 2007 - 29%, 2008 - 27%, 2009 -
                    26% and for 2010 and thereafter - 25%.

                    As a result of the changes in the tax rates, the Company
                    adjusted - in each of the years 2004 and 2005 - at the time
                    the aforementioned amendments were made, its deferred tax
                    balances, in accordance with the tax rates expected to be in
                    effect when the deferred tax asset or liability is expected
                    to be settled or realized. The effect of the change has been
                    carried to income on a current basis.

                    Capital gains are taxed at a reduced rate of 25% on the
                    capital gains derived after January 1, 2003, and at the
                    regular corporate tax rate on the gains derived through the
                    aforementioned date.


                                      F-43

<PAGE>

                          DELTA GALIL INDUSTRIES LTD..
                            (An Israeli corporation)
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


NOTE 10 - TAXES ON INCOME (continued):

               4)   Tax benefits under the Law for the Encouragement of Industry
                    (Taxation), 1969

                    The Company and certain Israeli subsidiary are "industrial
                    companies" as defined by this law. As such, these companies
                    are entitled to certain tax benefits, consisting mainly of
                    accelerated depreciation, as stipulated by regulations
                    published under the inflationary adjustments law, and the
                    right to claim public issuance expenses as a deduction for
                    tax purposes.

                    Pursuant to this law, the Company files consolidated tax
                    returns with the said subsidiary.

          B.   NON-ISRAELI SUBSIDIARIES

                    Subsidiaries that are incorporated outside of Israel, except
                    which incorporated in the free zone, are assessed for tax
                    under the tax laws in their countries of residence. The
                    principal tax rates applicable to main subsidiaries outside
                    Israel are as follows:

                    Company incorporated in the USA - tax rate of 38%-40%
                    Company incorporated in U.K. - tax rate of 30%

          C.   CARRYFORWARD TAX LOSSES

               Carryforward tax losses mainly derived from the Israeli companies
               as of December 31, 2006 and 2005, aggregate to $75 million and
               $59 million, respectively.

               Carryforward tax losses in Israel may be utilized indefinitely.

          D.   DEFERRED INCOME TAXES:

               1)   The deferred income taxes are composed as follows:
                    DECEMBER 31

                                                              2006       2005
                                                            --------   --------
                                                                IN THOUSANDS
                                                            -------------------
              Property, plant and equipment                 $  7,442   $  8,198
              Inventories                                     (1,906)    (1,824)
              Provisions for employee related obligations     (1,113)    (1,377)
              Intangible assets                                  862        255
              Other                                             (907)      (371)
              In respect of carry forward tax losses
              (see c above)                                  (19,572)   (17,539)
              Valuation Allowance                             12,254      8,932
                                                            --------   --------
                                                            $ (2,940)  $ (3,726)
                                                            ========   ========


                                     F-44

<PAGE>

                           DELTA GALIL INDUSTRIES LTD.
                            (An Israeli corporation)
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 10 - TAXES ON INCOME (continued):

               2)   Deferred income taxes are presented in the balance sheets as
                    follows:

                                                          DECEMBER 31
                                                       -----------------
                                                         2006      2005
                                                       -------   -------
                         Among current assets          $(4,779)  $(4,726)
                         Among non-current assets         (320)     (267)
                         Among long term liabilities     2,159     1,267
                                                       -------   -------
                                                       $(2,940)  $(3,726)
                                                       =======   =======

          E.   INCOME (LOSS) BEFORE TAXES ON INCOME IS COMPOSED AS FOLLOWS:

                                                YEAR ENDED DECEMBER 31
                                             ----------------------------
                                               2006      2005       2004
                                             -------   --------   -------
                                                     IN THOUSANDS
                                             ----------------------------
               The Company and its Israeli
                  subsidiaries               $(1,674)  $(26,757)  $ 3,190
               Non-Israeli subsidiaries       11,101    (11,365)   13,946
                                             -------   --------   -------
                                             $ 9,427   $(38,122)  $17,136
                                             =======   ========   =======

          F.   INCOME TAX EXPENSE (BENEFIT) INCLUDED IN THE STATEMENTS OF
               OPERATIONS:

                                                 YEAR ENDED DECEMBER 31
                                               -------------------------
                                                2006      2005     2004
                                               ------   -------   ------
                                                      IN THOUSANDS
                                               -------------------------
                         Current:
                            Israeli            $1,954   $ 1,422   $1,636
                            Non-Israeli         3,498     2,911    1,941
                                               ------   -------   ------
                                                5,452     4,333    3,577
                                               ------   -------   ------
                         Deferred:
                            Israeli            $   53   $(2,970)  $ (498)
                            Non-Israeli           786    (1,902)     219
                                               ------   -------   ------
                                                  839    (4,872)    (279)
                                               ------   -------   ------
                         For previous years:
                            Israeli            $  (80)  $  (173)  $ (516)
                            Non-Israeli          (427)   (1,590)      64
                                               ------   -------   ------
                                                 (507)   (1,763)    (452)
                                               ------   -------   ------
                                               $5,784   $(2,302)  $2,846
                                               ======   =======   ======


                                      F-45

<PAGE>

                           DELTA GALIL INDUSTRIES LTD.
                            (An Israeli corporation)
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 10 - TAXES ON INCOME (continued):

          G.   Following is a reconciliation of the theoretical tax expense
               (benefit), assuming all income is taxed at the regular tax rates
               applicable to income of companies in Israel (35% in 2004, 34% in
               2005 and 31% in 2006) and the actual tax expense (benefit):

<TABLE>
<CAPTION>
                                                                                 YEAR ENDED DECEMBER 31
                                                                              ---------------------------
                                                                               2006      2005       2004
                                                                              ------   --------   -------
                                                                                      IN THOUSANDS
                                                                              ---------------------------
<S>                                                                           <C>      <C>        <C>
               Income (loss) before taxes on income, as reported
                  in the consolidated statements of operations                $9,427   $(38,122)  $17,136
                                                                              ======   ========   =======
               Theoretical tax expense (benefit)                              $2,922   $(12,961)  $ 5,997
               Additional tax expenses arising from reduced tax
                  rate on losses from an approved enterprise                                           73
               Increase (decrease) in tax arising from different tax
                  rate applicable to non-Israeli subsidiaries                    129      1,926    (2,575)
                                                                              ------   --------   -------
                                                                               3,051    (11,035)    3,495
               Increase (decrease) in taxes resulting from
                  permanent differences:
                  Disallowable deductions                                        380      2,455       110
                  Adjustments from previous years                               (507)    (1,763)     (452)
                  Difference between the basis of measurement
                     of income reported for tax purposes and
                     the basis of measurement of income for
                     financial reporting purposes - net                         (636)       453      (807)
                  Valuation allowance                                          3,322      8,932
                  Change in the tax rates on which tax expense was computed               1,154
                  Other - net                                                    174     (2,498)      500
                                                                              ------   --------   -------
                Taxes on income - in the consolidated statements
                  of operations                                               $5,784   $ (2,302)  $ 2,846
                                                                              ======   ========   =======
</TABLE>

          H.   TAX ASSESSMENTS

               Tax assessments for the Company and most of its Israeli
               subsidiaries are considered final through the tax year 2001.


                                      F-46

<PAGE>

                           DELTA GALIL INDUSTRIES LTD.
                            (An Israeli corporation)
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 11 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION:

          BALANCE SHEETS:

                                                                 DECEMBER 31
                                                             -------------------
                                                               2006       2005
                                                             --------   --------
                                                                 IN THOUSANDS
                                                             -------------------
          A. ACCOUNTS RECEIVABLE:
             1) Trade:
                Outside Israel                               $ 94,850   $ 91,126
                In Israel                                      14,860     13,298
                                                             --------   --------
                                                             $109,710   $104,424
                                                             ========   ========
                Principal customers (see note 1n and 14d):
                   Customer 1                                $ 12,681   $  8,556
                                                             ========   ========
                   Customer 2                                $ 27,910   $ 21,361
                                                             ========   ========
                   Customer 3                                $ 10,923   $ 11,153
                                                             ========   ========

             2) Other:
                Government departments                       $  1,651   $  2,935
                Prepaid expenses                                2,601      2,365
                Deposits                                          164      1,009
                Income receivable                                  78        103
                Employees                                         384        311
                Receivables from subcontractors                 1,253      4,159
                Sundry                                          1,442      2,362
                                                             --------   --------
                                                             $  7,573   $ 13,244
                                                             ========   ========

                                                          DECEMBER 31
                                                      -------------------
                                                        2006       2005
                                                      --------   --------
                                                          IN THOUSANDS
                                                      -------------------
          B. INVENTORIES:
                Finished products                     $ 99,154   $108,984
                Products in process                     12,451     16,247
                Raw materials and supplies              14,612     15,914
                Packaging and maintenance materials      5,339      5,997
                                                      --------   --------
                                                      $131,556   $147,142
                                                      ========   ========

          C.   SHORT-TERM BANK CREDIT

               The weighted average interest rate of short-term bank credit as
               of December 31, 2006 and 2005 is 6.3% and 5.1%, respectively. A
               subsidiary is a party to a credit agreement, which was amended,
               as of December 9 2004, 2006 and during 2007, with Bank Leumi
               U.S.A and Bank Hapoalim B.M. Borrowings under the credit
               agreement are secured by substantially all of the assets of the
               subsidiary. The credit agreement provides for up to $90 million
               in short term credit (see note 7e).


                                      F-47

<PAGE>

                           DELTA GALIL INDUSTRIES LTD.
                            (An Israeli corporation)
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 11 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (continued):

               Unutilized short-term credit lines of the Group (under the USA
               credit agreement and other credit agreements) as of December 31,
               2006 and 2005 aggregated to $90 million and $109 million,
               respectively.

                                                                  DECEMBER 31
                                                               -----------------
                                                                 2006      2005
                                                               -------   -------
                                                                  IN THOUSANDS
                                                               -----------------
          D. ACCOUNTS PAYABLE AND ACCRUALS - OTHER:
                Employees and employee institutions            $10,163   $ 8,532
                Provision for vacation and recreation pay        3,594     3,179
                Government department                            4,294     6,571
                Accrued expenses                                13,481    17,008
                Accrued expenses - restructuring expenses          136     3,250
                Provision for additional payment to Burlen's
                   previous shareholders, see note 2a            2,400
                Other                                              436       624
                                                               -------   -------
                                                               $34,504   $39,164
                                                               =======   =======

          STATEMENTS OF OPERATIONS:

               E.   RESTRUCTURING EXPENSES:

          1)   Consolidated statements of operations for the year ended December
               31, 2006 include restructuring expenses in China totaling $1.7
               million. Consolidated statements of operations for the year ended
               December 31, 2005 include restructuring expenses in Delta USA, US
               Upper market, Europe and Socks segments totaling approximately
               $9.1 million. During the year ended December 31, 2004 the Company
               implemented restructuring plan in the European segment totaling
               approximately $1.1 million.

          2)   The primary components of the restructuring expenses are:

                                                        YEAR ENDED DECEMBER 31
                                                       ------------------------
                                                        2006     2005     2004
                                                       ------   ------   ------
                                                             IN THOUSANDS
                                                       ------------------------
               Costs relating to workforce reduction   $  507   $5,894   $  190
               Write-off of fixed assets                1,156    2,370       50
               Receivables write-off                               180      860
               Costs relating to other expenses                    658
                                                       ------   ------   ------
                                                       $1,663   $9,102   $1,100
                                                       ======   ======   ======


                                      F-48

<PAGE>

                           DELTA GALIL INDUSTRIES LTD.
                            (An Israeli corporation)
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 11 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (continued):

          THE 2006 PROGRAM

          During 2006 the Company decided to restructure operations in the Far
          East and closed its sewing plant in China (the "2006 program"), due to
          a decision to focus the Chinese operations on procurement of finished
          goods, raw materials and product development, and also due to
          re-imposed quotas productions in China starting 2006. Restructuring
          expenses included $1.2 million for impairment of leasehold
          improvements and $0.5 million provision for severance payments related
          to employee dismissal.

          The implementation of the 2006 program in China, resulted in the
          dismissal of approximately 700 employees.

          The restructuring program was completed by the end of 2006.

          THE 2005 PROGRAM

          During 2005 the Company initiated a restructuring program designated
          to reduce its cost structure and increase efficiency (the "2005
          program"). Restructuring expenses include the closure of a sewing
          plant in Carmiel, Israel in a total cost of $0.4 million and a
          dismissal of approximately 200 employees and the following steps
          included in the restructuring program initiated in the third quarter
          of 2005 both designated to reduce its cost structure and increase
          efficiency:

          a.   Closure of a sewing plant in Central America and moving the
               production to subcontractors in the Far East, and a distribution
               center in New Jersey, both served Delta Galil USA segments. The
               closure of this sewing plant resulted in total restructuring
               costs of $1.1 million and resulted in the dismissal of
               approximately 1,400 employees.

          b.   Closure of a socks manufacturing plant in Toronto, Canada and
               moving its production to subcontractors in Central America and
               the Far East. The closure of this plant, resulted in a total
               restructuring costs of $2.4 million and resulted in the dismissal
               of approximately 100 employees.

          c.   Reduction of manufacturing facilities in Israel and transfer the
               operations to lower labor cost countries. These actions resulted
               in a total restructuring costs of $4.1 million and will result in
               the dismissal of approximately 585 employees.

          d.   Consolidation of various departments into one building in
               Carmiel, Israel in order to reduce maintenance and other overhead
               costs. This action resulted in a total cost of $1.1 million.

          e.   The plan was completed in 2006.

          THE 2004 PROGRAM

          During the fourth quarter of 2004 the Company initiated a
          restructuring program designed to reduce its cost structure (the "2004
          Program"). The 2004 Program included the closure of a logistic center
          in Hungary and resulted in total restructuring costs of $1.5 million,
          from which $0.4 million included among cost of sales (related to
          inventory).

          The implementation of the 2004 Program in Hungary, consisted of the
          dismissal of approximately 230 persons who had previously been
          employed by the Company's Hungary subsidiary. The 2004 Program was
          concluded in 2005.


                                      F-49

<Page>

                           DELTA GALIL INDUSTRIES LTD.
                            (An Israeli corporation)
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 11 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (continued):

          3)   The following table summarizes changes to in the restructuring
               accrual and other recognized restructuring expenses for the 3
               years ended December 31, 2006, in thousand:

<TABLE>
<CAPTION>
                                               YEAR ENDED DECEMBER 31, 2006
                          -----------------------------------------------------------------
                             ACCRUAL                                              ACCRUAL
                           BALANCE AT                                           BALANCE AT
                          DECEMBER 31,   RESTRUCTURING                         DECEMBER 31,
                              2005          EXPENSE      WRITE-OFF   PAYMENT       2006
                          ------------   -------------   ---------   -------   ------------
<S>                         <C>              <C>          <C>        <C>          <C>
Cost relating to:
   Workforce reduction      (*)$3,408        $  507                  $(3,505)     (*)410
   Asset write-off                            1,156        (1,156)
   Other expenses                 512                                   (512)
                            ---------        ------       -------    -------      ------
                               $3,920        $1,663       $(1,156)   $(4,017)        410
                            =========        ======       =======    =======      ======
</TABLE>

<TABLE>
<CAPTION>
                                                YEAR ENDED DECEMBER 31, 2005
                           -----------------------------------------------------------------
                              ACCRUAL                                              ACCRUAL
                            BALANCE AT                                           BALANCE AT
                           DECEMBER 31,   RESTRUCTURING                         DECEMBER 31,
                               2004          EXPENSE      WRITE-OFF   PAYMENT       2005
                           ------------   -------------   ---------   -------   ------------
<S>                             <C>        <C>             <C>        <C>       <C>
Cost relating to:
   Workforce reduction          -,-        (*)$5,894                  $(2,486)  (*)$3,408
   Fixed asset write-off                       2,370        (2,370)
   Other expenses                                658                     (146)        512
   Receivable write-off                          180          (180)
                                ---         --------       -------    -------   ---------
                                -,-           $9,102       $(2,550)   $(2,632)     $3,920
                                ===         ========       =======    =======   =========
</TABLE>

<TABLE>
<CAPTION>
                                                          YEAR ENDED DECEMBER 31, 2004
                                     ----------------------------------------------------------------------------
                                        ACCRUAL                                                        ACCRUAL
                                      BALANCE AT                                                      BALANCE AT
                                     DECEMBER 31,   RESTRUCTURING                                    DECEMBER 31,
                                         2003           EXPENSE     REVERSAL   WRITE-OFF   PAYMENT       2004
                                     ------------   -------------   --------   ---------   -------   -----------
<S>                                      <C>          <C>            <C>         <C>       <C>           <C>
Cost relating to:
   Workforce reduction                                    $  190                           $  (190)      -,-
   Workforce reduction -relating
      to acquisition of subsidiary        2,063                                             (2,063)
   Fixed asset write-off                                      50                   (50)
   Other accruals related to
      acquisition of subsidiary           4,100          (**)500      (1,863)               (2,737)
   Receivable write-off                                      860                  (860)
                                         ------       ----------     -------     -----     -------       ---
                                         $6,163       (**)$1,600     $(1,863)    $(910)    $(4,990)      -,-
                                         ======       ==========     =======     =====     =======       ===
</TABLE>

(*)  As of December 31, 2006 and 2005, Including $410 and $670 thousand,
     respectively for long term workforce reduction accruals. The Company will
     pay this accrual in 14 equal quarterly installments.

(**) The amount of $500 thousands was charged to other comprehensive loss
     related to differences from translations of foreign currency financial
     statements.


                                      F-50

<PAGE>

                           DELTA GALIL INDUSTRIES LTD.
                            (An Israeli corporation)
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 11 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (continued):

          F.   FINANCIAL EXPENSES - NET:

<TABLE>
<CAPTION>
                                                             YEARS ENDED DECEMBER 31
                                                           ---------------------------
                                                             2006      2005      2004
                                                           -------   --------   ------
                                                                    IN THOUSANDS
                                                           ---------------------------
<S>                                                        <C>         <C>      <C>
                    Interest expenses                      $11,907     $9,891   $4,923
                    Interest income                           (520)      (245)     (42)
                    Exchange differences and other - net     2,010        572      763
                    Losses from derivatives instruments        161                 587
                                                           -------    -------   ------
                                                           $13,558    $10,218   $6,231
                                                           =======    =======   ======
</TABLE>

          G.   EARNINGS (LOSS) PER SHARE

               Following is data relating to the weighted average number of
               shares used in the computation of diluted earnings (loss) per
               share:

<TABLE>
<CAPTION>
                                                                     2006     2005     2004
                                                                    ------   ------   ------
                                                                           IN THOUSANDS
                                                                    ------------------------
<S>                                                                 <C>      <C>      <C>
                    Weighted average number of
                       shares used in the computation of
                       basic earnings (loss) per share              18,700   18,695   18,478
                    Add:
                       Net additional shares from the anticipated
                          exercise of stock options                     42               356
                                                                    ------   ------   ------
                    Weighted average number of
                          shares used in the computation of
                          diluted earnings per share                18,742   18,695   18,834
                                                                    ======   ======   ======
                    Options which were not included in the
                       computation of diluted earnings (loss) per
                       share due to anti dilutive effect             2,452    1,560      798
                                                                    ======   ======   ======
</TABLE>


                                      F-51

<PAGE>

                           DELTA GALIL INDUSTRIES LTD.
                            (An Israeli corporation)
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 12 - FINANCIAL INSTRUMENTS AND RISK MANAGEMENT:

          A.   GENERAL

               The Group operates internationally, which gives rise to exposure
               to market risks mainly from changes in exchange rates of foreign
               currencies in relation to the US dollar. The group utilize
               derivative financial instruments ("derivatives") to reduce these
               risks, as explained in this note. As the counter parties to these
               derivatives are Israeli banks, the Company considered the
               inherent credit risks remote. The Company did not hold or issue
               derivative financial instruments for trading purposes.

          B.   FOREIGN EXCHANGE RISK MANAGEMENT

               The Company usually enters into foreign currency derivatives -
               forward exchange contracts - in order to protect itself from the
               risk that the eventual non-dollar net cash flows resulting from
               sales of products would be affected by changes in exchange rates.
               The term of these contracts is less than one year.

               These transactions were mainly for the exchange of pounds
               sterling and Euro into US dollars.

               For forward exchange contracts designated as cash flow hedges,
               gains and losses were recorded in other comprehensive income
               (loss) until the foreign currency denominated sales, were
               recognized in earnings.

               The following table summarizes changes in other comprehensive
               income (loss) related to derivatives that were classified as cash
               flow hedges held by the Company during the reported years:

<TABLE>
<CAPTION>
                                                                   2006   2005     2004
                                                                  -----   ----   -------
                                                                      $ IN THOUSANDS
                                                                  ----------------------
<S>                                                               <C>      <C>   <C>
                    Balance at beginning of year                           -,-   $(1,715)
                    Changes in effective portion of derivatives
                       designated as cash flow hedges             $(275)             691
                    Reclassification into earnings from other
                       comprehensive income                                        1,822
                    Tax effect                                                      (798)
                                                                  -----    ---   -------
                    Balance at end of year                        $(275)   -;-       -;-
                                                                  =====    ===   =======
</TABLE>

          Loss related to the portion of cash flow hedging instruments excluded
          from assessment of hedge effectiveness had impact on earnings for
          2006, 2005 and 2004 of NIL, NIL and $0.6 million loss respectively,
          classified in financial expenses.

          The fair value of the hedge instrument as of December 31, 2006 and
          2005 are $272 thousand and NIL.


                                      F-52

<PAGE>

                           DELTA GALIL INDUSTRIES LTD.
                            (An Israeli corporation)
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 12 - FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued):

          C.   FAIR VALUE OF FINANCIAL INSTRUMENTS

               The financial instruments of the Group consist mainly of
               non-derivative assets and liabilities in insignificant amounts
               (items included in working capital, long-term receivables and
               long-term liabilities); the Group also has derivatives financial
               instruments.

               In view of their nature, the fair value of the financial
               instruments included in working capital of the Group is usually
               identical or close to their carrying value. The fair value of
               long-term receivables and long-term loans also approximates their
               carrying value, since they bear interest at rates close to the
               prevailing market rates.

NOTE 13 - RELATED PARTIES - TRANSACTIONS AND BALANCES:

          A.   TRANSACTIONS WITH RELATED PARTIES:

<TABLE>
<CAPTION>
                                                   YEAR ENDED DECEMBER 31
                                                   -----------------------
                                                   2006     2005     2004
                                                   ----     ----    ------
                                                        IN THOUSANDS
                                                   -----------------------
<S>                                                <C>      <C>     <C>
                    Net revenues                   $540     $409    $1,303
                                                   ====     ====    ======
                    Purchases and other expenses    -,-     $  7    $   21
                                                   ====     ====    ======
</TABLE>


               The above transactions were made with a company which is held by
               one of the main Company's shareholders in the ordinary course of
               business, at prices agreed upon in negotiations between the
               parties, taking into account the volume of orders, at customary
               supplier credit terms.

               As to options granted to the Company's former CEO, see note 9b.

          B.   RELATED PARTIES BALANCES:

<TABLE>
<CAPTION>
                                                                      DECEMBER 31
                                                                     ------------
                                                                     2006    2005
                                                                     ----   -----
                                                                     IN THOUSANDS
                                                                     ------------
<S>                                                                  <C>     <C>
                    Current receivables - presented in the balance
                       sheets among "accounts receivable - trade"    $128    -,-
                                                                     ====    ===
</TABLE>


                                      F-53

<PAGE>

                           DELTA GALIL INDUSTRIES LTD.
                            (An Israeli corporation)
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 14 - SEGMENT INFORMATION :

          A.   INFORMATION ON OPERATING SEGMENTS:

               OPERATING SEGMENTS:

               1)   General:

                    The Company conducts its worldwide operations in seven
                    operating segments as follows:

                    (i) Delta USA (Mass market); (ii) U.S upper market and (iii)
                    Europe - these segments are engaged in manufacturing and
                    marketing of intimate apparel to various customers in the
                    U.S and European markets; (iv) Socks- the segment is engaged
                    in manufacturing and marketing of socks to various customers
                    in the U.S and European markets; (v) Delta marketing Israel
                    - this segment is engaged in marketing of intimate apparel,
                    mainly under the Delta Brand name, to various customers in
                    Israel through retail and wholesale operations; (vi)
                    Seam-less operation and (vii) China.

                    The Company's reportable segments are based on the 7
                    divisions internally reported and regularly reviewed by the
                    Company's CEO. The Company's CEO is the Company's chief
                    operating decision maker (CODM), for the purpose of making
                    decisions about resources to be allocated to the segment and
                    for assessing its performance. These 7 operating segments do
                    not qualify for aggregation for segment reporting purposes.

                    Commencing early 2006, the Company made certain changes to
                    the structure of it's internal organization in a manner that
                    caused the composition of its reportable segments to change.
                    As a result, the Company has restated the corresponding
                    items of segment information for the prior periods presented
                    in a manner consistent with segment presentation for 2006.

                    Changes to our reportable segments are as follows:

                    1.   The Elastic Tape facility, which was previously managed
                         within the US Upper Market segment, is no longer being
                         managed within this segment, therefore it is has been
                         reclassified within "others" segment.

                    2.   The Seam less operations, which were previously managed
                         and reported as part of the US Upper Market segment are
                         now separately managed and evaluated by the CODM.
                         Therefore, operations have been reclassified as a
                         separate reportable segment, entitled, "Seam-less".


                                      F-54

<PAGE>

                           DELTA GALIL INDUSTRIES LTD.
                            (An Israeli corporation)
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 14 - SEGMENT INFORMATION (continued):

               2)   Information on revenues, profit (losses) and assets of the
                    reportable operating segments:

                    a)   Measurement of revenues, profit (losses) and assets of
                         the operating segments:

                         The measurement of revenues, profit (losses) and assets
                         of the reportable operating segments is based on the
                         same accounting principles applied in these financial
                         statements, except for:

                         1)   The effect of hedging transactions that were
                              excluded from segment data.

                         2)   The Company fully consolidates the operating
                              results of certain subsidiary in its consolidated
                              financial statements, while for operating segment
                              data the Company includes only its share
                              (approximately 50.1%) in the operating profits of
                              this subsidiary as part of the US Upper market
                              segment.

                    Segment profits (losses) reflect the income (loss) from
                    operations of the segment and do not include financial
                    expenses, other income, income tax expenses, share in losses
                    of associated company and minority interest, since those
                    items are not allocated to the segments.

                    Selling prices of intersegment revenues are based on
                    negotiation between the segments and when applicable upon
                    market price.


                                      F-55

<PAGE>

                           DELTA GALIL INDUSTRIES LTD.
                            (An Israeli corporation)
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 14 - SEGMENT INFORMATION (continued):

          b)   Financial data relating to reportable operating segments:

<TABLE>
<CAPTION>
                                           US                         DELTA
                               DELTA     UPPER                      MARKETING
                                USA      MARKET   EUROPE    SOCKS     ISRAEL   SEAM-LESS    CHINA      OTHER   ADJUSTMENTS    TOTAL
                              --------  -------  -------- --------  ---------  ---------  ---------  --------  -----------  --------
                                                                     (U.S. $ IN THOUSANDS)
                              ------------------------------------------------------------------------------------------------------
<S>                           <C>       <C>      <C>      <C>        <C>        <C>         <C>      <C>         <C>        <C>
Year ended December 31, 2006:
Net revenues:
   To unaffiliated customers  $269,722  $94,543  $158,646 $121,980   $54,209    $ 3,015     $   803  $  2,634    $  1,147   $706,699
   Intersegment                         $   754  $  8,630 $   504    $    99    $14,956     $ 1,020  $  3,577    $(29,540)
                              --------  -------  -------- --------   -------    -------     -------  --------    --------   --------
Total net revenues            $269,722  $95,297  $167,276 $122,484   $54,308    $17,971     $ 1,823  $  6,211    $(28,393)  $706,699
                              ========  =======  ======== ========   =======    =======     =======  ========    ========   ========
Operating income (loss)       $ 13,254  $   692  $  7,693 $  1,374   $ 6,777    $(2,452) (3)$(4,116) $    599 (1)$   (836)  $ 22,985
                              ========  =======  ======== ========   =======    =======     =======  ========    ========   ========
Assets (at end of year)       $195,101  $46,695  $ 80,811 $ 49,402   $24,955    $18,002     $ 2,547  $  3,519 (2)$ 25,356   $446,388
                              ========  =======  ======== ========   =======    =======     =======  ========    ========   ========
Assets held for sale          $    191           $  3,517                                                        $    766   $  4,474
                              ========  =======  ======== ========   =======    =======     =======  ========    ========   ========
Depreciation and amortization $  2,639  $ 2,760  $  5,130 $  1,900   $   790    $ 1,100     $   600  $    260    $    447   $ 15,626
                              ========  =======  ======== ========   =======    =======     =======  ========    ========   ========
</TABLE>

(1)  Includes general corporate expenses not assignable to segments.

(2)  Includes general corporate assets not assignable to segments.

(3)  Includes restructuring expenses in the amount of $1.7 million with respect
     of the closing of the sewing activity.


                                      F-56

<PAGE>

                           DELTA GALIL INDUSTRIES LTD.
                            (An Israeli corporation)
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 14 - SEGMENT INFORMATION (continued):

          b)   Financial data relating to reportable operating segments:

<TABLE>
<CAPTION>
                                                                                     DELTA
                                              US UPPER                             MARKETING
                                DELTA USA    MARKET(*)      EUROPE       SOCKS       ISRAEL
                               -----------  -----------  -----------  -----------  ---------
                                                     (U.S. $ IN THOUSANDS)
                               -------------------------------------------------------------
<S>                               <C>          <C>          <C>          <C>        <C>
Year ended December 31, 2005:
Net revenues:
   To unaffiliated customers      $267,887     $ 75,306     $163,245     $126,760   $49,038
   Intersegment                                $    384     $    214     $  4,126
                                  --------     --------     --------     --------   -------
Total net revenues                $267,887     $ 75,690     $163,459     $130,886   $49,038
                                  ========     ========     ========     ========   =======
Operating income (loss)        (1)$  5,625  (2)$(12,623) (3)$ (8,827) (4)$ (4,990)  $ 5,010
                                  ========     ========     ========     ========   =======
Assets (at end of year)           $194,515     $ 45,456     $101,789     $ 50,085   $24,847
                                  ========     ========     ========     ========   =======
Assets held for sale              $    990                  $  4,723     $    941
                                  ========     ========     ========     ========   =======
Depreciation and amortization     $  3,168     $  3,026     $  4,416     $  2,220   $   442
                                  ========     ========     ========     ========   =======

<CAPTION>

                                  SEAM-
                                 LESS(*)    CHINA   OTHER(*)  ADJUSTMENTS(*)    TOTAL
                               ----------  -------  --------  --------------  ---------
                                                 (U.S. $ IN THOUSANDS)
                               --------------------------------------------------------
<S>                               <C>      <C>       <C>          <C>         <C>
Year ended December 31, 2005:
Net revenues:
   To unaffiliated customers      $   140            $2,105                   $684,481
      Intersegment                $19,413  $   718   $3,898       $(28,753)
                                  -------  -------   ------       --------    --------
Total net revenues                $19,553  $   718   $6,003       $(28,753)   $684,481
                                  =======  =======   ======       ========    ========
Operating income (loss)        (5)$(9,126) $(2,313)  $  168    (6)$ (1,128)   $(28,204)
                                  =======  =======   ======       ========    ========
Assets (at end of year)           $21,533  $ 4,760   $4,008    (7)$ 22,160    $469,153
                                  =======  =======   ======       ========    ========
Assets held for sale                                           (7)$    766    $  7,420
                                  =======  =======   ======       ========    ========
Depreciation and amortization     $ 1,671  $    72   $  262       $    534    $ 15,811
                                  =======  =======   ======       ========    ========
</TABLE>

(1)  Includes restructuring expenses in the amount of $1.1 million and
     impairment of fixed assets in the amount of $1.5 million.

(2)  Includes restructuring expenses in the amount of $1.6 million, impairment
     of goodwill in the amount of $2.1 million and impairment of fixed assets in
     the amount of $3.5 million.

(3)  Includes restructuring expenses in the amount of $2.1 million.

(4)  Includes restructuring expenses in the amount of $4.1 million and
     impairment of goodwill in the amount of $3.4 million.

(5)  Includes impairment of fixes assets in the amount of $2.4 million.

(6)  Includes general corporate expenses not assignable to segments.

(7)  Includes general corporate assets not assignable to segments.

(*)  See a1.


                                      F-57

<PAGE>

                           DELTA GALIL INDUSTRIES LTD.
                            (An Israeli corporation)
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 14 - SEGMENT INFORMATION (continued):

          b)   Financial data relating to reportable operating segments
               (continued):

<TABLE>
<CAPTION>
                                                                             DELTA
                                 DELTA    US UPPER                         MARKETING   SEAM-
                                  USA    MARKET(*)     EUROPE      SOCKS     ISRAEL   LESS(*)  OTHER (*)  ADJUSTMENT(*)    TOTAL
                               --------  ---------  -----------  --------  ---------  -------  ---------  -------------  --------
                                                                        (U.S. $ IN THOUSANDS)
                               --------------------------------------------------------------------------------------------------
<S>                            <C>        <C>          <C>       <C>        <C>       <C>        <C>          <C>        <C>
Year ended December 31, 2004:
Net revenues:
   To unaffiliated customers   $186,280   $88,564      $193,638  $138,749   $46,460   $   558    $1,418    (1)$ (1,398)  $654,269
   Intersegment                           $ 1,781      $    165  $  5,435             $19,413    $5,000       $(31,794)
                               --------   -------      --------  --------   -------   -------    ------       --------   --------
Total net revenues             $186,280   $90,345      $193,803  $144,184   $46,460   $19,971    $6,418       $(33,192)  $654,269
                               ========   =======      ========  ========   -------   -------    ------       --------   ========
Operating income (loss)        $  5,911   $   604   (4)$  4,906  $  9,137   $ 4,753   $(1,361)   $  189    (2)$ (1,730)  $ 22,409
                               ========   =======      ========  ========   =======   =======    ======       ========   ========
Assets (at end of year)        $225,744   $64,949      $100,264  $ 56,271   $23,866   $29,227    $3,879    (3)$ 30,297   $534,497
                               ========   =======      ========  ========   =======   =======    ======       ========   ========
Depreciation and amortization  $  1,438   $ 3,964      $  4,326  $  2,463   $   450   $ 1,876    $  257       $    411   $ 15,185
                               ========   =======      ========  ========   =======   =======    ======       ========   ========
</TABLE>

(1)  Includes results of hedge transactions.

(2)  Includes mainly the effect of hedge transactions in an amount of $1.7
     million.

(3)  Includes general corporate assets not assignable to segments.

(4)  Includes restructuring expenses in the amount of $1.5 million relating to
     the closure of a logistic center in Hungary.

(*)  See a1.


                                      F-58

<PAGE>

                           DELTA GALIL INDUSTRIES LTD.
                            (An Israeli corporation)
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 14 - SEGMENT INFORMATION (continued):

          B. GEOGRAPHICAL INFORMATION:

                                                 YEAR ENDED DECEMBER 31
                                             ------------------------------
                                               2006       2005       2004
                                             --------   --------   --------
                                                      IN THOUSANDS
                                             ------------------------------
          1) Net revenues
             attributed to geographic area
             (based on the location of the
             customers):
             North America                   $417,985   $401,050   $334,833
             United Kingdom                   171,879    177,950    202,831
             Europe (other than U.K.)          53,896     52,360     64,605
             Israel                            60,132     53,121     52,000
             Other                              2,807
                                             --------   --------   --------
                                             $706,699   $684,481   $654,269
                                             ========   ========   ========

          2)   The net balance of the Company's long-lived assets, by geographic
               location, are as follows:

                                    DECEMBER 31
                           -----------------------------
                             2006      2005       2004
                           -------   --------   --------
                                    IN THOUSANDS
                           -----------------------------
          Israel           $42,015   $ 45,508   $ 57,685
          Egypt             24,616     26,270     24,464
          United States     12,061     13,582     15,637
          Jordan             7,066      8,212      9,470
          Eastern Europe     4,470      5,243     11,370
          China              2,387      4,761
          Thailand           3,452      2,923      2,108
          United Kingdom     1,683      2,076      3,831
          India              1,131
          Ireland                         129      1,184
          Other                382        427      2,592
                           -------   --------   --------
                           $99,263   $109,131   $128,341
                           =======   ========   ========

          C. SALES BY PRODUCT CATEGORY INFORMATION:

                                           YEAR ENDED DECEMBER 31
                                       ------------------------------
                                         2006       2005       2004
                                       --------   --------   --------
                                                IN THOUSANDS
                                       ------------------------------
          1) Net revenues
             Ladies intimate apparel   $408,807   $417,942   $350,688
             Socks                      136,134    138,499    150,482
             Men's underwear            104,256     75,722     84,400
             Leisurewear                 25,267     20,899     24,207
             Babywear                    23,367     17,193     28,788
             Fabrics and Other            8,868     14,226     15,704
                                       --------   --------   --------
                                       $706,699   $684,481   $654,269
                                       ========   ========   ========


                                     F - 59

<PAGE>

                           DELTA GALIL INDUSTRIES LTD.
                            (An Israeli corporation)
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 14 - SEGMENT INFORMATION (continued):

          D. REVENUES FROM PRINCIPAL CUSTOMERS:

<TABLE>
<CAPTION>
                                                          YEAR ENDED DECEMBER 31
                                                      ------------------------------
                                                        2006       2005       2004
                                                      --------   --------   --------
                                                                 IN THOUSANDS
                                                      ------------------------------
<S>                                                   <C>        <C>        <C>
          Customer 1 (Europe and Socks segments)      $155,827   $161,348   $188,947
                                                      ========   ========   ========
          Customer 2 (Delta USA and Socks segments)   $151,474   $150,556   $ 86,177
                                                      ========   ========   ========
          Customer 3 (Delta USA segment)              $ 57,977   $ 67,064   $ 70,157
                                                      ========   ========   ========
</TABLE>

NOTE 15 - SUBSEQUENT EVENTS:

          Options

     a.   On March 2007 the Company granted 122,000 options to 8 employees at an
          exercise price of $6.95.

          Of the total options granted, 120,000 are vest and exercisable as
          follows: First third vest on the second anniversary of the date of
          grant and are exercisable for three years thereafter, second third
          vest on the third anniversary of the date of grant and are exercisable
          for three years thereafter and the final third vest on the fourth
          anniversary of the date of grant and are exercisable for three years
          thereafter.

          The remaining 2,000 options are vest and exercisable as follows: First
          quarter vest on the first anniversary of the date of grant and are
          exercisable for three years from the second anniversary of the date of
          grant, second quarter vest on the second anniversary of the date of
          grant and are exercisable for three years thereafter, third quarter
          vest on the third anniversary of the date of grant and are exercisable
          for three years thereafter and the final third vest on the fourth
          anniversary of the date of grant and are exercisable for three years
          thereafter.

          The fair value of the options granted, based on the Black-Scholes
          Option-Pricing Model, is approximately $0.2 million and will be
          included in the financial statement over the vesting period.

     b.   Restructuring Plan For 2007

          On March 28, 2007, the Company approved a restructuring plan, which
          includes the planned closure of certain manufacturing facilities in
          Israel, and the downsizing of operations that may involve certain
          changes to the Company's operational structure, development and design
          functions, and marketing, sales and finance operations. The Company
          estimates the costs associated with this restructuring plan to range
          between $10 million to $12 million. The implementation of the
          restructuring plan is expected to take place commencing in the second
          quarter of 2007.



                                      F-60


<PAGE>

 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON FINANCIAL STATEMENT
                                    SCHEDULE

To the shareholders of

DELTA GALIL INDUSTRIES LTD.

Our audits of the consolidated financial statements, referred to in our report
dated March 30, 2007 appearing in the 2006 Annual Report on form 20-F of Delta
Galil Industries Ltd. also included an audit of Financial Statement Schedule
II-Valuation and Qualifying Accounts - included as an exhibit in Item 19 of this
Form 20-F. In our opinion, the financial statement schedule presents fairly, in
all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements

Tel-Aviv, Israel                                     Kesselman & Kesselman
   March 30, 2007                             Certified Public Accountant (Isr.)
                                              A member of PricewaterhouseCoopers
                                                     International Limited

<PAGE>

                           DELTA GALIL INDUSTRIES LTD.
                            (An Israeli corporation)

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
THREE YEARS ENDED DECEMBER 31, 2006
(U.S. $ IN THOUSAND)

<TABLE>
<CAPTION>
                                                 ADDITION -   DEDUCTION-   DEDUCTION-
                                    BALANCE AT   CHARGED TO   CHARGED TO   CHARGED TO   BALANCE AT
                                     BEGINNING    COSTS AND    ACCOUNTS      COST &       END OF
                                     OF YEAR      EXPENSES    RECEIVABLE    EXPENSES       YEAR
                                    ----------   ----------   ----------   ----------   ----------
<S>                                   <C>          <C>          <C>         <C>           <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
   Year ended December 31, 2006       $   453      $   211                  $   (112)     $   552
                                      =======      =======                  ========      =======
   Year ended December 31, 2005       $   127      $   340                  $    (14)     $   453
                                      =======      =======                  ========      =======
   Year ended December 31, 2004       $ 1,038      $    26      $(827)      $   (110)     $   127
                                      =======      =======      =====       ========      =======
ALLOWANCE FOR SALES RETURN:
   Year ended December 31, 2006       $   174      $   572                  $   (174)     $   572
                                      =======      =======                  ========      =======
   Year ended December 31, 2005       $    81      $   174                  $    (81)     $   174
                                      =======      =======                  ========      =======
   Year ended December 31, 2004       $    80      $    81                  $    (80)     $    81
                                      =======      =======                  ========      =======
ALLOWANCE FOR OBSOLETE AND SLOW
   MOVING INVENTORY:
   Year ended December 31, 2006       $27,879      $26,732                  $(27,879)     $26,732
                                      =======      =======                  ========      =======
   Year ended December 31, 2005       $26,292      $27,879                  $(26,292)     $27,879
                                      =======      =======                  ========      =======
   Year ended December 31, 2004       $25,926      $26,292                  $(25,926)     $26,292
                                      =======      =======                  ========      =======
VALUATION ALLOWANCE IN RESPECT OF
   DEFERRED INCOME TAXES:
   Year ended December 31, 2006       $ 8,932      $ 3,322                                $12,254
                                      =======      =======                                =======
   Year ended December 31, 2005           -,-      $ 8,932                                $ 8,932
                                      =======      =======                                =======
   Year ended December 31, 2004           -,-                                                 -,-
                                      =======                                             =======
</TABLE>
<PAGE>

                                    SIGNATURE

          The registrant 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.

                                        DELTA GALIL INDUSTRIES LTD.


                                        By: /s/ Yossi Hajaj
                                            ------------------------------------
                                            Name: Yossi Hajaj
                                            Title: Chief Financial Officer

Date: March 30, 2007


                                      -62-

<PAGE>

                                  EXHIBIT INDEX

1.1    Memorandum of Association, as amended**

1.2    Articles of Association**

2.1    Form of Deposit Agreement and ADR*

4.1    Stock Purchase Agreement dated as of December 8, 2004 by and among Steven
       Klein, Kristina Nettesheim, and Gary Beggs, as selling shareholders and
       Delta Galil Industries Ltd. and Delta Galil USA Inc. as Purchaser
       relating to the acquisition of Burlen Corp ^****

4.2    Second Amended and Restated Credit and Security Agreement dated as of
       December 9, 2004 by and among Delta Galil USA Inc., as Borrower; Bank
       Leumi USA and Bank Hapoalim B.M., as Lenders and Bank Leumi USA, as
       Agent****

4.3    Amendment No.1 to Burlen Stock Purchase Agreement ^*******

4.4    Amendment No.1, dated January 12, 2006, and Amendment No. 2, dated May 9,
       2006, to the Second Amended and Restated Credit and Security Agreement
       *******

4.5    Amendment No. 3, dated July 31, 2006, to the Second Amended and Restated
       Credit and Security Agreement.

4.6    Amendment No. 4, dated January 26, 2007, to the Second Amended and
       Restated Credit and Security Agreement.

4.7    Option Plan to 13 employees of Delta Galil and/or its subsidiaries*

4.8    Option Plan to Arnon Tiberg* (Delta's Former CEO)

4.9    Option Plan to 70 employees of Delta Galil and/or its subsidiaries***

4.10   Delta Galil Industries Ltd. 2002 Share Option Plan*****

4.11   Form of Indemnification Undertaking******

4.12   2006 Incentive Plan*******

4.13   Delta Galil Industries Ltd. 2006 Option Plan *******

8.1    List of significant subsidiaries *******

12.1   Section 302 Certification of Aviram Lahav.

12.2   Section 302 Certification of Yossi Hajaj.

13.1   Section 906 Certification of Aviram Lahav.

13.2   Section 906 Certification of Yossi Hajaj.

14.1   Consent of Resselman & Kesselman, a memeber of PricewaterhouseCoopers,
       International Limited

----------
*       Previously filed as an exhibit to Delta Galil's Registration Statement
        on Form F-1 (Registration No. 333-10062) filed with the Securities and
        Exchange Commission on February 26, 1999 and incorporated herein by
        reference.

**      Previously filed as an exhibit to Delta Galil's Annual Report on Form
        20-F (File No .0-30020) filed with the Securities and Exchange
        Commission on June 8, 2001 and incorporated herein by reference.

***     Previously filed as an exhibit to Delta Galil's Registration Statement
        on Form S-8 (Registration No. 333-12608) filed with the Securities and
        Exchange Commission on September 26, 2000 and incorporated herein by
        reference.

****    Previously filed as an exhibit to Delta Galil's Annual Report on Form
        20-F (File No. 0-30020) filed


                                      -63-

<PAGE>

        with the Securities and Exchange Commission on June 27, 2005 and
        incorporated herein by reference.

*****   Previously filed as an exhibit to Delta Galil's Registration Statement
        on Form S-8 (Registration No. 353-102247) filed with the Securities and
        Exchange Commission on December 30, 2002 and incorporated herein by
        reference.

******  Previously filed as an exhibit to Delta Galil's Annual Report on Form
        20-F (File No. 0-30020) filed with the Securities and Exchange
        Commission on June 26, 2003 and incorporated herein by reference.

******* Previously filled as an exhibit to Delta Galil's Annual Report on Form
        F-20 (file No. 0-50020) filed with the Securities and Exchange
        Commission on June 28, 2006 and incorporated herein by reference.

     ^  Portions of this exhibit have been omitted and filed separately with the
        secretary of the Securities and Exchange Commission pursuant to a
        confidential treatment request.


                                      -64-