<PAGE>

      As filed with the Securities and Exchange Commission on June 28, 2006

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

                       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, 2005
                                             -----------------

                         Commission file number 0-30020
                                                -------


                           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:

                                      None
                              ---------------------
                              (Title of each class)


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

                               Ordinary Shares (1)
                               -------------------
                                (Title of Class)


                         American Depositary Shares (2)
                         ------------------------------
                                (Title of Class)

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

(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 for which there is a reporting obligation pursuant to
                           Section 15(d) of the Act:

                                      None
                                ----------------
                                (Title of class)


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

         As of December 31, 2005 the Registrant had 19,947,849 ordinary shares
outstanding (including 1,206,802 ordinary shares owned by the Registrant and
45,882 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
<PAGE>

period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.

                               Yes [X]     No [ ]

         Indicate by check mark 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>
<CAPTION>

                                TABLE OF CONTENTS
                                                                                                   Page
                                                                                                   ----
<S>          <C>                                                                                 <C>
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 .....................................................      12
Item 4A        Unresolved Staff Comments ......................................................      22
Item 5         Operating and Financial Review and Prospects ...................................      23
Item 6         Directors, Senior Management and Employees .....................................      41
Item 7         Major Shareholders and Related Party Transactions ..............................      51
Item 8         Financial Information ..........................................................      53
Item 9         The Offer and Listing ..........................................................      53
Item 10        Additional Information .........................................................      55
Item 11        Quantitative and Qualitative Disclosures About Market Risk .....................      65
Item 12        Description of Securities Other Than Equity Securities .........................      65
Item 13        Defaults, Dividend Arrearages and Delinquencies ................................      65
Item 14        Material Modifications to the Rights of Security Holders and Use of Proceeds ...      66
Item 15        Controls and Procedures ........................................................      66
Item 16        Audit Committee; Financial Expert; Code of Ethics; Audit Fees ..................      66
Item 17        Financial Statements ...........................................................      68
Item 18        Financial Statements ...........................................................      68
Item 19        Exhibits .......................................................................      69
</TABLE>

                                      - 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 19,947,849 ordinary shares outstanding as of June 26,
2006, 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 18,695,165 ordinary shares outstanding as of
June 12 , 2006, which excludes 1,206,802 ordinary shares held by Delta Galil,
and 45,882 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

3A. 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,
                                       --------------------------------------------------------------
                                          2001         2002         2003         2004         2005
                                       ----------   ----------   ----------   ----------   ----------
                                                   ($ in thousands, except per share data)
<S>                                    <C>          <C>          <C>          <C>          <C>
Statement of Income Data:
Net revenues ......................    $  558,763   $  567,298   $  580,130   $  654,269   $  684,481
Cost of revenues ..................       453,036      454,238      463,863      533,036      582,799
                                       ----------   ----------   ----------   ----------   ----------
Gross profit ......................       105,727      113,060      116,267      121,233      101,682
Selling, marketing, general
administrative expenses ...........        80,562       84,135       82,089       98,646      107,008
Amortization of intangible
assets ............................                                                               779
Gain (loss) on sale of assets .....          (553)         (92)       3,645          922          (77)
Impairment of fixed assets ........                                                             7,415
Restructuring expenses ............           900        1,065        1,007        1,100        9,102
Goodwill impairment
(2001-amortization) ...............         1,505                                               5,505
Operating income (loss) ...........        22,207       27,768       36,816       22,409      (28,204)
Financial expenses - net ..........         4,751        5,456        5,637        6,231       10,218
Other income - net ................           463          960          252          958          300
                                       ----------   ----------   ----------   ----------   ----------
Income (loss) before taxes on
income ............................        17,919       23,272       31,431       17,136      (38,122)
Income tax benefit (expense) ......        (5,876)      (5,779)      (7,340)      (2,846)       2,302
                                       ----------   ----------   ----------   ----------   ----------
Income (loss) after taxes on
income ............................        12,043       17,493       24,091       14,290      (35,820)
Share in profits (losses) of
associated companies - net ........           110          158         (300)        (237)         (27)
Minority interests - net ..........          (729)      (1,025)        (439)      (1,368)        (500)
                                       ----------   ----------   ----------   ----------   ----------
Net income (loss) .................    $   11,424   $   16,626   $   23,352   $   12,685   $  (36,347)
                                       ==========   ==========   ==========   ==========   ==========
EPS
Basic .............................    $     0.60   $     0.88   $     1.28   $     0.69   $    (1.94)
                                       ==========   ==========   ==========   ==========   ==========
Diluted ...........................    $     0.60   $     0.88   $     1.24   $     0.67   $    (1.94)
                                       ==========   ==========   ==========   ==========   ==========
Weighted average number of
shares used in
    computation(1)
    Basic .........................        19,175       18,914       18,313       18,478       18,695
    Diluted .......................        19,199       18,927       18,763       18,834       18,695

Cash dividend per ordinary
shares (2) ........................    $     0.30   $     0.37   $     0.52   $     0.45          -,-
</TABLE>


(1)  See note 12g 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, 2003, 2004 and 2005.
(2)  Until 2001, dividends were declared and paid in NIS and such amounts have
     been translated into U.S. dollars here as a convenience. Beginning in 2002,
     dividends, if any, are declared and paid in dollars or in NIS, based on the
     applicable exchange rate.

                                      - 6 -
<PAGE>
<TABLE>
<CAPTION>

                                                     Year ended December 31,
                                  --------------------------------------------------------------
                                     2001         2002         2003         2004         2005
                                  ----------   ----------   ----------   ----------   ----------
                                                        ($ in thousands)
<S>                               <C>          <C>          <C>          <C>          <C>
Balance Sheet Data:
Cash and cash equivalents ....    $   12,762   $   14,491   $   17,699   $   22,150   $   14,595
Working capital (1) ..........        74,020       67,945       56,612      127,382       80,949
Total assets .................       424,965      441,058      450,884      534,497      476,573
Shareholders' equity .........       198,189      197,829      212,334      221,081      184,314
Amount of Share Capital ......        21,792       21,792       21,830       21,840       21,840
</TABLE>

(1)  Working capital is computed as a result of the total current assets less
     the current liabilities.

3B.      Capitalization and Indebtedness -

Not applicable.

3C.      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 will no longer
be subject to quota restrictions. This will allow retailers, apparel firms and
others to

                                      - 7 -
<PAGE>

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.

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 2005, 24% of Delta Galil's revenues were from sales to Marks and Spencer,
Delta Galil's largest customer. Sales to Wal-Mart reached 22% of revenues and
sales to Target reached 10% of revenues. Delta Galil's contracts with its
customers, including Wal-Mart and Marks & Spencer, 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 Wal-Mart,
Marks & Spencer 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 2005, Delta Galil produced goods in
Jordan, Egypt, Turkey, Honduras, Eastern Europe and the Far East that accounted
for approximately 81% of Delta Galil's 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 33% of our
2005 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 2005, Delta Galil
derived 25% of its revenues from customers in Pounds Sterling, 8% in NIS, and 8%
in Euros. More than 10% of Delta Galil's expenses in 2005 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

                                      - 8 -
<PAGE>

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 Disclosure - About Market Risk".

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 working towards integration of 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
28.5% of the outstanding ordinary shares of Delta Galil. Mr. Dov Lautman the CEO
and 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

                                      - 9 -
<PAGE>

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.

Dov Lautman, Delta Galil's Chairman and CEO, founder and principal shareholder,
has significantly contributed to its success. If Dov Lautman were to leave,
Delta Galil could be adversely affected.

         Dov Lautman, the Chairman and CEO of the Board of Directors, a founder
and principal shareholder 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

                                     - 10 -
<PAGE>

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 totaling $1.1 million in 2003 and 2004 under these programs. Delta Galil
did not receive any grants in 2005. The grant levels have been reduced in the
past by the Israeli government and there can be no assurance that the Israeli
government 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 those 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 those 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.

                                     - 11 -
<PAGE>

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

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), Levi's Signature(R) (socks, ladies intimate apparel and men's'
underwear in Europe) and in addition 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 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
                             ----------------------------------------
                                2003           2004           2005
                             ----------     ----------     ----------
Israel ..................    $    5,909     $    6,602     $    3,424
China ...................                                       3,665
Egypt ...................         3,927          3,253          3,100
North America ...........           525            851          2,233
United Kingdom ..........           754            314            209
Eastern Europe ..........         3,246          1,112            109
Jordan ..................           396            914             38
Others ..................           168            438            256
                             ----------     ----------     ----------
                             $   14,925     $   13,484     $   13,034
                             ==========     ==========     ==========


                                     - 12 -
<PAGE>

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 uses a nano-technology
         process along with special treatment to increase the absorption
         capacity of the fabric, simultaneously transferring moisture to the
         surface 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.

o        Effective management of manufacturing and logistics. Delta Galil
         maintains an advanced infrastructure of computerized acquisition,
         production, inventory control, dispatching, shipping and billing
         functions. These systems have enabled Delta Galil to effectively manage
         its geographically dispersed operations. As a result, Delta Galil is
         able to shift labor-intensive production functions to lower labor cost
         countries while maintaining the high levels of quality and timely
         delivery standards that its customers require.

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 Puma(R), Polo(R), Levi's(R) and Carrefour(R)
         (Europe), Ann Taylor(R) 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 2003, Delta Galil acquired Auburn
         Hosiery Mills and in 2004 Delta acquired Burlen Corporation. Delta
         Galil may pursue additional strategic acquisitions of businesses that
         would complement its product lines and customer relationships.

                                     - 13 -
<PAGE>

o        Branding. The market positioning of brands is becoming more and 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, Levi's(R) Signature, for
         socks, men's and ladies underwear for the European market; 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.

Recent Acquisitions


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 additional amounts which could be paid to the
selling shareholders was increased to $18 million but would be subject to
achieving adjusted targets over a period of six years, from 2006 to 2011. In
March 2006, a payment of $1.3 million was made to the selling shareholders as an
advance on these additional amounts.


Acquisition of Auburn

         In November 2003, Delta Galil acquired, the socks business of Kellwood
Company. Operating under the name Auburn Hosiery Mills, the business includes
operations in both the United States and Europe.

         Auburn manufactures, markets and sells branded sport socks under
exclusive licenses to brand names of Wilson(R) and Converse(R) in the United
States and Europe and Coca-Cola(R) in Europe. Auburn sources in the United
States, Mexico and the Far East and sells in North America and Europe. Wal-Mart
is Auburn's main customer in the United States.

         This acquisition is a favorable addition to Delta's socks business by
adding well-known brand names to the existing lines, penetrating into the US
mass market in the socks category and increasing Delta's marketing capabilities
in the United States and Europe.

         In 2003, Delta paid $10.8 million in cash to Kellwood and recorded
liabilities in respect of restructuring costs in the amount of $6.2 million.
During 2004 Delta Galil finalized the restructuring plan and actual liabilities
in respect of restructuring costs were $1.9 million less than originally
anticipated. As a result, goodwill, which was originally estimated at $1.4
million, was reduced to zero, and the value of the property, plant and equipment
was reduced by $0.5 million.

                                     - 14 -
<PAGE>

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 2003, 2004 and 2005.
<TABLE>
<CAPTION>

                                                                                             % of Revenues
                                                                                        Year ended December 31,
                                                                                    ------------------------------
Product Category          Key Products            Key Customers/Brands                2003       2004       2005
----------------          ------------            --------------------              --------   --------   --------
<S>                       <C>                     <C>                                <C>        <C>         <C>
Ladies' Intimate          Fashion and basic       Marks & Spencer                     61%        54%         61%
Apparel                   panties and bras        Wal-Mart
                          Women's nightwear       Target
                          Girl's nightwear        JC Penney
                                                  Victoria's Secret

Socks                     Men's, women's and      Marks & Spencer                     16%        23%         20%
                          children's leisure,     Nike
                          dress and sport socks   Wal-Mart
                                                  Hema

Men's Underwear           Briefs                  Calvin Klein                        10%        13%         11%
                          Boxer shorts            Hema
                          Mini-briefs             Hugo Boss
                          Undershirts             Marks & Spencer
                          Men's nightwear

Babywear                  Fashion and classic     Marks & Spencer                      7%         4%         3%
                          items, focusing on
                          newborns

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

Others                    Fabrics, elastic                                             3%         2%         2%
                          tapes  and other
                          operations
                                                                                    --------   --------   --------
                                                                                      100%       100%       100%
                                                                                    ========   ========   ========
</TABLE>

o    Ladies' Intimate Apparel: Delta Galil's intimate apparel items include both
     fashion and basic underwear, as well as bras. Delta Galil has introduced
     machinery to produce seam-free panties, tops and control underwear. Delta
     Galil has been shifting its product mix to increase its focus on these
     products. The increase in this category as a percentage of total revenues
     in 2005 is mainly due to the acquisition of Burlen, which all of the
     revenues of which are made in this category.

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 2005
     is mainly due to erosion in selling prices, especially to Marks & Spencer,
     and the decrease in sales in North America due to our decision to cease our
     activity in Canada.

                                     - 15 -
<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.

o    Babywear: Babywear includes fashion and classic daywear and sleepsuits in a
     wide variety of styles and fabrics, with a focus on newborns. Delta Galil
     products in this category are sold at medium to high retail prices.

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 that are sold at medium to high retail prices.

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 has 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 $401.1 million (which represented 59% of total sales) in
2005. Our five largest customers in North America, Wal-Mart(R), Target(R),
Victoria's Secret(R), JC Penney(R) and Calvin Klein(R), represented
approximately 78% of our 2005 sales in North America. The increase in 2005 sales
in North American is due to the acquisition of Burlen which sells all of its
products in North America. Excluding Burlen, sales in North America decreased by
11% compared to 2004.

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
over 14 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 $161 million in 2005,
representing 24% of Delta Galil's revenues in 2005. In 2005 sales to Marks &
Spencer decreased by 15% compared to 2004 mainly due to erosion in selling
prices in all categories, which was partly offset by an increase of 5% in units.

Israeli Market

         Delta Galil believes that it is among the market leaders in Israel for
men's underwear, ladies' intimate apparel and socks, with $49.0 million of sales
in 2005. These sales include products Delta Galil manufactures, as well as goods
it imports into Israel or purchases from other Israeli suppliers. Of Delta

                                     - 16 -
<PAGE>

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, 2005 Delta Plus had 83 stores.

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 580-600 tons
                  of fabric per month depending on the type of fabric produced.
                  During 2005, Delta Galil produced approximately 390 tons of
                  fabric per month, approximately 96% 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 7 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.

                                     - 17 -
<PAGE>

         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-Free Manufacturing

         Applying technology utilized in the manufacture of hosiery, Delta Galil
produces one-piece seam-free panties and bras. Seam-free 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.

         The seam-free 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-free 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-free technology. Sales of seam-free
products decreased from $40.2 million in 2000 to $24.0 million in 2005. In 2005
sales increased by 6%, compared to $22.5 million in 2004. As of December 31,
2005, Delta Galil owned 275 seam-free knitting machines.

Outsourcing of Products

         Subcontractors manufactured goods in Egypt (babywear and underwear),
Turkey (socks), Romania (bras and underwear), Bulgaria (socks), Thailand, Hong
Kong, Vietnam, India, Bangladesh, Dominican Republic and China (all ladies
intimate apparel), which in 2005 accounted for approximately 62% 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.

                                     - 18 -
<PAGE>

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 $7
million in 2005 and intends to spend a similar amount in 2006 to enhance its
system's capabilities in order to support the growing demand for Delta Galil's
products.

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.

         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. The unrest
in and around the areas administrated by the Palestinian Authority 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
the United States, 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. 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 EU, US and Egypt, Delta Galil's products manufactured in Egypt can
enter the EU countries and into the US duty free as well. Delta Galil is in a
period of major changes in the global business environment, following the
partial elimination of quotas as part of the WTO agreement which resulted in
strong pressure to lower prices.

                                     - 19 -
<PAGE>

4.C  Delta Galil's Organizational Structure

         Delta Galil is an Israeli corporation that commenced operations in
1975. It currently has thirty-five (35) 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%           Manufacturing and
                                                                              marketing of ladies and
                                                                              girls intimate apparel.

Burlen Corp.                        Georgia, USA               100%           Manufacturing and
                                                                              marketing ladies intimate
                                                                              apparel.

Auburn Hosiery Mills Inc.           Kentucky, USA              100%           Manufacturing and
                                                                              marketing 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         Egypt                      100%           Manufactures men's and
Zone S.A.E.                                                                   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,     Israel                     90%            Manufactures elastic tapes
Ltd.                                                                          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.

4.D  Property, Plant and Equipment

         Delta Galil has manufacturing facilities in Israel, Jordan, Egypt,
Bulgaria, Thailand, India and China. Delta Galil has also sub-contracts to
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 2005, 86% of Delta
Galil's revenues were generated from the sale of products produced in low labor
cost countries, up from 49% in 2000. In 2005, goods produced in Israel
represented 10% of Delta Galil's revenues, down from 35% in 2000.

                                     - 20 -
<PAGE>

         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                  2003       2004       2005
-------             -----------------------------   -----------------------        --------   --------   --------
<S>                 <C>                             <C>                             <C>        <C>        <C>
Far East            Purchase of finished products   Ladies intimate apparel           30%        26%        38%
                                                    Leisurewear
                    Cutting                         Men's underwear

Egypt               Knitting(2)                     Ladies' intimate apparel          20%        18%        17%
                    Dyeing(1)                       Men's underwear
                    Cutting                         Babywear
                    Sewing(2)                       Leisurewear
                    Purchase of finished products

Israel              Design & Development            Ladies' intimate apparel          14%        12%        10%
                    Knitting(2)                     Men's underwear
                    Dyeing                          Socks
                    Cutting & sewing(2)             Knitted fabric
                    Production of fabrics &         Elastic bands
                    elastics
                    Distribution center
                    Purchase of finished products

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

Jordan              Sewing(2)(3)(4)                 Ladies' intimate apparel           9%        13%        10%
                                                    Men's underwear

Turkey              Purchase of finished products   Ladies intimate apparel,           7%         6%         6%
                                                    Socks

Eastern Europe      Knitting(1)                                                        6%         9%         5%
                    Sewing(2)                       Socks
                    Purchase of finished products

North America       Design & Development            Ladies' intimate apparel           4%         6%         4%
                    Cutting                         Socks
                    Dyeing
                    Purchase of finished products
                                                                                   --------   --------   --------
                                                                                     100%       100%       100%
                                                                                   ========   ========   ========
</TABLE>

-----------------------
(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.
(5)  The increase in sales of products produced in the Far East in 2005 as
     compared to previous years is due to the acquisition of Burlen whose
     approximately 70% of it's revenues are produced in the Far East region.


         In Israel, Delta Galil owns six facilities, including its principal
production facility in Carmiel, and leases nine facilities. The leases,
including all extension options, for six facilities expire on various dates
between 2007 and 2010. Two leases expires in 2006. Delta Galil is confident that
it can renew one lease on terms no less favorable than the existing lease and
one lease will not be renewed due to the restructuring plan in North America. 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.

                                     - 21 -
<PAGE>

         Delta Galil leases manufacturing facilities in Pennsylvania, as well as
facilities in New Jersey, Hong Kong, China and India. These leases expire
between 2006 and 2014. Delta Galil is confident that it can renew these leases
on terms no less favorable than existing leases. Delta Galil also owns a
facility in Rockingham, North Carolina, and other manufacturing 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.

         On December 31, 2005 Delta Galil's unused real estate assets which are
held for sale include real-estate in Israel (approximately 50 acres of
undeveloped beach front property in Nahariya), Ireland, Scotland, Hungary and
the United States, were classified as current assets at their net book value of
$7.4 million.

         During the second quarter of 2006 Delta Galil sold its assets in
Ireland and is currently in advanced negotiations to sell part of its assets in
the United States and in Scotland.

         The following table shows Delta Galil's main owned and leased
properties and facilities as of June 12, 2006:
<TABLE>
<CAPTION>

        Plant location                         Square feet                     Main function
--------------------------------------     ---------------------    --------------------------------------
<S>                                              <C>                <C>
Carmiel, Israel                                  641,000            Textile manufacturing
Nahariya, Israel                                 257,000            Free beach front property
Rosh Ha'ain, Israel                               75,000            Offices and warehouse
Delta Plus retail chain, Israel                   88,000            Retail
Yodfat, Israel                                    42,000            Warehouse
Daliat El Carmel, Israel                          35,500            Elastic tape manufacturing
Tel Aviv, Israel                                  10,750            Main office
London, U.K.                                      25,000            Offices
Northampton, U.K.                                125,000            Warehouse
Jordan                                           362,000            Sewing and warehouse
Egypt                                            415,000            Knitting, cutting, sewing, warehouse
                                                                    and offices
New Jersey, U.S.                                  57,800            Warehouse and offices
New York, U.S.                                    18,500            Offices
Pennsylvania, U.S.                               380,000            Warehouse, logistic center and offices
Kentucky, U.S.                                   250,000            Warehousing & offices
Georgia, U.S.                                    495,000            Logistic center, warehouse and offices
Hong Kong                                         12,000            Offices and warehouse
Canada                                            92,000            Warehousing
Hungary*                                         129,000            Logistic center
Bulgaria                                          95,000            Socks manufacturing
Thailand                                          30,000            Cutting and sewing
Guangzhou, China**                               212,000            Cutting and sewing
India                                             49,000            Socks manufacturing
</TABLE>

*    Operation ceased during the first quarter of 2005.
**   Operation started in the third quarter of 2005.

ITEM 4A: UNRESOLVED STAFF COMMENTS.

Not applicable.

                                     - 22 -
<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 to
better understand our results of operations discussed below:

Non-GAAP Information

         The following discussion contains non-GAAP financial information
relating to the revenues of Delta Galil and Delta Galil USA excluding revenues
attributable to Burlen Corp., which was acquired in the fourth quarter of 2004.
Delta Galil's management believes that providing these measures gives investors
a more complete description of the revenue performance of Delta Galil and of the
Delta Galil USA segment in particular. Without this information, an investor
could conclude that revenue growth from existing operations accounted for the
increase in revenues, when, in fact, a portion of such growth was due to the
Burlen acquisition. Delta Galil's management uses this non-GAAP measure in
evaluating the performance of its US operations.

         The following table shows Delta Galil's revenues excluding Burlen, and
Burlen's revenues in 2005 and 2004, in $ million:

<TABLE>
<CAPTION>


                                                                                        2004          2005
                                                                                    ----------     ----------
<S>                                                                                <C>            <C>
Delta Galil revenues, excluding Burlen .........................................    $    650.7     $    577.1
Burlen revenues ................................................................           3.6*         107.4
                                                                                    ----------     ----------
Total revenues as presented in the financial statements ........................    $    654.3     $    684.5
                                                                                    ==========     ==========
</TABLE>

*    Reflect revenues from the last three weeks of 2004, following the
     acquisition of Burlen. Delta Galil's 2004 revenues, on a proforma basis
     including Burlen, would have been $763.4 Million.

Revenues

         Delta Galil's revenues in 2005 increased by 5% and amounted to $684.5
million compared to $654.3 million in 2004. Burlen's sales in 2005 amounted to
$107.4 million compared to $3.6 million in 2004. Excluding Burlen which was
acquired in the fourth quarter of 2004, sales decreased by 11% compared to 2004.

         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, 2003, 2004 and 2005:

<TABLE>
<CAPTION>

                                                        Year ended December 31,
                        -------------------------------------------------------------------------------------
                                   2003                          2004                          2005
                        -------------------------     -------------------------     -------------------------
                             $              %              $              %              $             %
                        ----------     ----------     ----------     ----------     ----------     ----------
<S>                          <C>             <C>           <C>             <C>           <C>             <C>
North America ......         300.7           51.8          334.8           51.2          401.1           58.6
Europe .............         236.6           40.8          267.5           40.9          230.3           33.6
Israel .............          42.8            7.4           52.0            7.9           53.1            7.8
                        ----------     ----------     ----------     ----------     ----------     ----------
Total ..............         580.1          100.0          654.3          100.0          684.5          100.0
                        ==========     ==========     ==========     ==========     ==========     ==========
</TABLE>

                                     - 23 -
<PAGE>

         In 2005, sales to North America increased by 19.8% to $401.1 million
representing 58.6% of total sales. The increase in sales to North America is
attributed to the acquisition of Burlen in December 2004. Excluding Burlen,
sales to North America decreased by 11% compared to 2004, mainly due to a
decrease in sales to Wal-Mart in the ladies' category, a decrease in sales to
Calvin Klein in the men's category and a decrease in sales to Victoria's Secret
due to erosion in selling prices. Delta Galil's sales to Marks & Spencer,
decreased by 14.7% to $161.3 million in 2005, compared to $189.0 million in
2004. The decrease in sales to Marks & Spencer is attributed to erosion in
selling prices in all categories, which was partly offset by an increase of 5%
in units. Sales to Marks & Spencer have decreased in the ladies' category,
especially with respect to the sale of panties, and in the children's category,
due to increased competition and the loss of market share of Marks & Spencer
itself in the U.K.. Delta Galil's sales to the European market, excluding Marks
& Spencer, decreased by 19.0% to $52.4 million in 2005 compared to $64.7 million
in 2004, mainly due to erosion in selling prices and to low sales volume to
certain customers due to increased competition. Delta Galil's sales to the
Israeli market increased by 2.1% to $53.1 million in 2005 compared to $52.0
million in 2004.

         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. This 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.

         Recently, 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 most likely to
occur in the more basic, mass-market products, in which design is less of a
factor. [While this trend has to date not had a material impact on our sales] if
this trend continues and grows, it could have an adverse effect on Delta Galil's
sales in those categories.


         The following table shows Delta Galil's revenues by product categories,
stated as a percentage of total revenues, for the years ended December 31, 2003,
2004 and 2005:

                                                   Year ended December 31
                                           ------------------------------------
                                               2003        2004         2005
                                           ----------   ----------   ----------
Ladies' Intimate Apparel ............         61.1%        53.6%        61.1%
Socks ...............................         16.4         23.0         20.2
Men's Underwear .....................         10.1         12.9         11.1
Babywear ............................          6.8          4.4          2.5
Leisurewear .........................          3.0          3.7          3.1
Fabrics and Others ..................          2.6          2.4          2.0
                                           ----------   ----------   ----------
Total ...............................          100%         100%         100%
                                           ==========   ==========   ==========

         The increase in revenues in the Ladies Intimate Apparel in 2005
compared to 2004 is attributed to the acquisition of Burlen. The decrease in
revenues in the Socks category in 2005 compared to 2004 is attributed to the
decrease in sales in North America due to our decision to close the Canadian
activity and also due to erosion in selling prices especially to Marks and
Spencer. The increase in revenues in the socks category in 2004 compared to 2003
is due to the acquisition of Auburn. The decrease in revenues in the Babywear
category in 2005 compared to 2004 is due to lower sales volume due to increased
competition and the reduction in the market share of Marks & Spencer in the U.K.
in this category.

                                     - 24 -
<PAGE>

Reorganization Plan

         Following the changes in the business environment, such as the
elimination of some of the quotas due to the WTO agreement and the erosion in
selling prices, which totaled approximately $40.0 million on an annual basis,
Delta Galil decided to implement a reorganization plan designed to cut costs,
increase efficiency and return to profitability.

         The reorganization plan 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
                  will result in 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 cut maintenance and other overhead
                  costs. This action resulted in a total cost of $1.1 million.

         In 2005, Delta Galil recorded total restructuring expenses of $9.1
million of which approximately $6.5 million are in cash, primarily for severance
payments of which $2.6 million were already paid by December 31, 2005. The
remaining approximately $2.6 million are a non-cash impairment of assets
following the closure and reduction of activities in production sites.

         These measures continue the efficiency efforts Delta Galil commenced in
the fourth quarter of 2004, which included the closure of its logistics center
in Hungary.

Impairment of Fixed assets and Goodwill

         During 2005, as a result of the reorganization plan, following the
change in operations in various divisions and the erosion in profitability,
Delta Galil tested the carrying amount of its long-lived assets and, as a
result, recorded a total impairment of $9.8 million, of which $2.4 million is
included among 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-free facilities in Israel, and leasehold
improvements in real-estate which would be abandoned in connection with Delta
Galil's decision to unite most of its premises in Carmiel, Israel.

         Delta Galil has selected September 30 of each year as the date on which
it performs its annual goodwill impairment test. Financial results of the U.S.
Upper Market and sock segments, as determined under the test, indicated a
decrease in the assets' fair value. As a result of this test in 2005, Delta
Galil recorded an impairment of $5.5 million with respect to goodwill.

Acquisition of Burlen

         In December 2004, Delta 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.

         As consideration for all of the share capital of Burlen Corp., 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 deal costs
related to the transaction, which were paid in 2005.

                                     - 25 -
<PAGE>

         During 2005, the company paid an additional $1.3 million to the
selling shareholders with respect to cost 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 may be 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 3 years, from 2005 to 2007. In February 2006, an amendment to
the stock purchase agreement was signed which specifies that the additional
amounts that would be paid to the selling shareholders would be increased to $18
million but would depend on achieving adjusted targets over a period of six
years, from 2006 to 2011. The purpose of the amendment to the stock purchase
agreement was to reflect in it the changes in sales volume, 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. Payment of $1.3 million was made
against future consideration on March 15, 2006.

         Other intangible assets acquired, which amounted to $ 14.8 million,
represents customer relationship and is amortized over a period of 20 years.

         Aggregate amortization expense for the years ended December 31, 2005
and 2004 was $779 thousand, and $0 respectively. Estimated amortization expenses
over the years 2006 to 2010, is $739 thousand per year, and $10.3 million in the
aggregate for the years 2011 to 2024.

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

Acquisition of a manufacturing plant in Thailand

         In December 2004, Delta Galil acquired a manufacturing sewing and
cutting facility in Thailand for a total consideration of $2.4 million. Of this
amount $0.9 million was paid for the shares and $0.8 million to pay off debt to
the former shareholders. In addition, Delta assumed bank debt of $0.7 million.
Delta Galil accounted for this acquisition as an acquisition of a business. The
excess of the cost of the acquisition over the fair value of the net assets on
the acquisition date, which was approximately $1.0 million, was allocated to
goodwill and is included as part of Europe segment.

Acquisition of Auburn Hosiery Mills

         On November 13, 2003 Delta Galil completed the acquisition of the
outstanding shares of Auburn Hosiery Mills. Auburn manufactures, markets and
sells branded sport socks under exclusive licenses to brand names both in the
United States and Europe. Most of Auburn's revenues in the United States are
made to Wal-Mart.

         As consideration for all of the share capital of Auburn Hosiery, Delta
Galil paid $10.8 million to Kellwood and recorded liabilities in respect of
restructuring costs in the amount of $6.2 million. The total purchase price
amounted to approximately $17.0 million. During 2004, Delta Galil finalized the
restructuring plan, and actual liabilities in respect of restructuring costs,
were $1.9 million less than originally anticipated which resulted in a decrease
in the excess of cost of the acquisition over the fair value of the net assets
on the acquisition date. The decrease was allocated $1.4 million to the goodwill
which off set the entire goodwill initially recognized and $0.5 million to
property, plant and equipment.

Logistic center in Hungary

         In November 2002, Delta Galil, through a wholly owned subsidiary,
purchased the operations of Komar Textile Trading, a logistic center, which
included real estate, movables and receivables from subcontractors in Hungary.
The acquisition price was $5.6 million, and the excess of the cost of the
acquisition over the fair value of net assets amounted to $0.8 million. During
the fourth quarter of 2004, Delta Galil decided to close the logistic center,
and accrued $1.5 million for restructuring expenses. During the first half of
2005 the logistic center was closed.

                                     - 26 -
<PAGE>

Sale of Interests in Arad Towels and Standard Textile (Europe) Ltd

         On December 31, 1998, Delta Galil sold its 40.7% interest in Arad
Towels Ltd. to Standard Textile (Europe) Ltd. ("STE") for $12.4 million in cash
and a 15% interest in STE. The capital gain on this transaction totaled $ 5.2
million, of which $3.1 million was applied to income in 1998 and the balance of
$2.1 million was applied to income in 1999.

         On August 6, 2000 Delta Galil entered into an agreement with S.T.I.
Industries and Technologies Ltd., S.T.I.A. Holdings Ltd. and STE , for the sale
of its 15% holdings in STE for $9 million. The transaction was carried out in
four installments, subject to adjustments as stipulated in the agreement. The
first installment, 25% of the shares held by Delta Galil, was transferred to the
buyers upon the signing of the agreement, for $2.25 million. The second
installment was transferred on January 15, 2002, for consideration of $2.48
million, the third installment was transferred on January 15, 2003 for
consideration of $2.57 million and the fourth and final installment was
transferred on January 15, 2004 for consideration of $2.64 million. Delta Galil
recognized a capital gain of $0.9 million in 2003 and a capital gain of $1.0
million in 2004 for this transaction.

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:
<TABLE>
<CAPTION>

                                                                                Year ended December 31
                                                                        ------------------------------------
                                                                           2003         2004         2005
                                                                        ----------   ----------   ----------
<S>                                                                       <C>          <C>          <C>
Net revenues ....................................................         100.0%       100.0%       100.0%
Cost of revenues ................................................         (80.0)       (81.5)       (85.1)
                                                                        ----------   ----------   ----------
Gross profit ....................................................          20.0         18.5         14.9
Selling, marketing, general and administrative expenses .........         (14.1)       (15.1)       (15.6)
Restructuring expenses ..........................................          (0.2)        (0.1)        (1.3)
Impairment of fixed assets ......................................                                    (1.1)
Goodwill impairment .............................................                                    (1.0)
Amortization of intangible asset ................................                                       *
Gain (loss) on sales of fixed assets and subsidiary shares ......           0.6          0.1            *
Operating income (loss) .........................................           6.3          3.4         (4.1)
Financial expenses - net ........................................          (0.9)        (1.0)        (1.5)
Other income- net ...............................................             *          0.2            *
                                                                        ----------   ----------   ----------
Income (loss) before taxes on income ............................           5.4          2.6         (5.6)
Income tax benefit (expense) ....................................          (1.2)        (0.4)         0.4
                                                                        ----------   ----------   ----------
Income (loss) after taxes on income (tax benefit) ...............           4.2          2.2         (5.2)
Share in losses of associated companies - net ...................          (0.1)        (0.1)           *
Minority interests- net .........................................          (0.1)        (0.2)        (0.1)
                                                                        ----------   ----------   ----------
Net income (loss) ...............................................           4.0%         1.9%        (5.3)%
                                                                        ==========   ==========   ==========
</TABLE>

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

*    Less than 0.1%.

Segment Results

         We have six principal segments: Delta USA, U.S. Upper Market, Europe,
Socks, Delta Marketing Israel and China. Delta USA, U.S. Upper Market and Europe
segments are engaged mainly in manufacturing and marketing of men's underwear
and 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. The facility in
China, which started operations in the third quarter of 2005, is engaged with
manufacturing of ladies intimate apparel to various customers in the U.S. and
the European markets through Delta's various divisions.

                                     - 27 -
<PAGE>

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

                                                       Revenues by segment
                                            ----------------------------------------
                                                          ($ million)
                                            ----------------------------------------
                                               2003           2004           2005
                                            ----------     ----------     ----------
<S>                                               <C>           <C>             <C>
         Delta USA(1) .................     $    213.2     $    186.3     $    267.9
         U.S. Upper Market ............           88.3          111.9           97.5
         Europe .......................          177.4          193.8          163.5
         Socks-U.S. & Europe(2) .......           89.4          144.2          130.9
         Delta Marketing Israel .......           37.6           46.5           49.0
         China ........................                                          0.7
         Inter segment revenues .......          (25.8)         (28.4)         (25.0)
                                            ----------     ----------     ----------

         Total ........................     $    580.1     $    654.3     $    684.5
                                            ==========     ==========     ==========
</TABLE>

(1)  Including $107.4 million and $3.6 million of Burlen revenues, which was
     acquired in December 2004, in the years ended December 31, 2005 and 2004,
     respectively.

(2)  Including $57.1 million, $52.8 million and $7.0 million of Auburn revenues,
     both in the United States and in Europe, which was acquired in November
     2003, in the years ended December 31 2005, 2004 and in the last six weeks
     of 2003.

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.

Sales by Segment in 2004 vs. 2003

         The decrease in sales by Delta USA in 2004 compared to 2003is
attributed mainly to a decrease in sales to Wal-Mart and Target. The increase in
sales by the U.S. Upper Market segment resulted primarily from an increase in
sales to Calvin Klein and JC Penney. The increase in sales by the European
segment is attributed to the strengthening of the pound sterling and the euro
against the U.S. dollar as well as sales to new customers. The increase in sales
by the Socks segment is attributed to the acquisition of European operation of
Auburn. The increase in sales by the Israeli market segment is attributed mainly
to different mix of products and to the opening of new stores.

                                     - 28 -
<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                                                    Impairment   Impairment
                                            (loss) by                                                         of fixed       of
                                             segment                         Restructuring expenses            assets     Goodwill
                               ------------------------------------   ------------------------------------   ----------   ----------
                                     Including Restructuring
                                   expenses and impairment of
                                              assets
                               ------------------------------------
                                  2003         2004         2005         2003         2004         2005         2005         2005
                               ----------   ----------   ----------   ----------   ----------   ----------   ----------   ----------
<S>                            <C>          <C>          <C>          <C>          <C>          <C>          <C>          <C>
Delta USA ..................   $     24.8   $      5.9   $      5.6                                    1.1          1.5
U.S. Upper  Market .........         (8.9)        (0.6)       (21.7)                                   1.8          5.9          2.1
Europe .....................          4.4          4.9         (8.8)         1.0          1.1          2.1
Socks- U.S. & Europe .......          9.0          9.1         (5.0)                                   4.1                       3.4
Delta Marketing Israel .....          2.4          4.8          5.0
China ......................                                   (2.3)
Adjustments and Capital
Gains(1) ...................          5.1         (1.7)        (1.0)
                               ----------   ----------   ----------   ----------   ----------   ----------   ----------   ----------
Total ......................   $     36.8   $     22.4   $    (28.2)  $      1.0   $      1.1   $      9.1   $      7.4   $      5.5
                               ==========   ==========   ==========   ==========   ==========   ==========   ==========   ==========
</TABLE>

(1)  Adjustments include cancellation of inter-segment unrealized profits and,
     in 2004 and 2003, also include results of hedging transactions . In 2003
     adjustments include mainly capital gain from the sale of the real estate in
     London.

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.

         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 $5.9 million, mainly with respect to machinery and equipment in the
fabric and seam-free facilities in Israel in connection with the restructuring
plan initiated by Delta Galil, which also resulted in additional $1.8 million of
expenses related mainly to workforce reduction in those facilities 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 the 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.

                                     - 29 -
<PAGE>

         During the third quarter of 2005, Delta Galil started operations in
China. The plant includes 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 is attributed to the low initial
production volume and also includes start-up costs.

Operating Income (loss) by Segment in 2004 vs. 2003

         The decrease in the operating income of Delta USA in 2004 compared to
2003 was due primarily to a decrease in sales and to losses from operations with
certain customers. The decrease in the operating loss in the U.S. Upper Market
segment in 2004 compared to 2003 is primarily due to an increase in sales
volumes which also contributed to increase the production level in the fabric
facility and the sewing facilities. The erosion in the operating margin in the
Socks segment is attributed to the acquisition of Auburn, which contributed to a
net increase of approximately $45.0 million of sales, which had no substantial
operating income. The increase in operating income in Delta Marketing Israel is
attributed to the improvement of procurement sources and to increased sales
volumes.

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.

         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 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 decrease 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.

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 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.

                                     - 30 -
<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 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 assets include customer relations,
derived from the acquisition of Burlen, and is amortized over a period of 20
years.

Capital gain (loss) from realization of fixed 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.

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 Carmiel, 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 margin derived from the erosion
in selling prices and due to 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".

                                     - 31 -
<PAGE>

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 $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 losses.

         Delta Galil's share in losses of associated companies 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.

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 margin , impairment of fixed assets
and goodwill and due to higher financial expenses and low tax benefit.

Year ended December 31, 2004 compared with Year Ended December 31, 2003 -
Consolidated Revenues.

         Total revenues in 2004 increased by 12.8% and amounted to $654.3
million compared to $580.1 million in 2003. Excluding sales of Burlen, which was
acquired in the fourth quarter of 2004, and Auburn, which was acquired in the
fourth quarter of 2003, sales from continuing operations increased by 4.5%,
reaching $598.7 million in 2004 compared to $573.0 million in 2003. The increase
in revenues from continuing operations is due mainly to the strengthening of the
pound sterling and the Euro against the US dollar and to the increase in sales
in the Israeli market.

Cost of revenues.

         Cost of revenues in 2004 increased by 14.9% and amounted to $533.0
million (81.5% of revenues) compared to $463.9 million (80.0% of revenues) in
2003. Most of the increase in the cost of revenues is attributed to an increase
in sales volume.

Gross profit.

         Gross profit in 2004 increased by 4.3% over 2003 and totaled $121.2
million (18.5% of revenues), compared to $116.3 million (20.0% of revenues) in
2003.

Selling and marketing expenses.

         Selling and marketing expenses increased by 24.2 % to $ 81.2 million
(12.4% of revenues) in 2004 compared to $65.4 million (11.3% of revenues) in
2003. The increase in selling and marketing expenses is attributed mainly to the
acquisition of Auburn, to a $2.5 million increase in salaries and related
expenses due to the strengthening of the pound sterling and the NIS versus the
dollar, to a $1.4 million increase in lease expenses mainly due to the
strengthening of the pound sterling versus the dollar and to the increased
activity in the Israeli market.

                                     - 32 -
<PAGE>

General and administrative expenses.

         General and administrative expenses increased from $16.7 million in
2003 to $17.4 million in 2004. The increase in general and administrative
expenses is attributed mainly to the acquisition of Auburn.

Capital gain (loss) from realization of fixed assets.

         In 2004 Delta Galil recorded capital gain of $0.9 million mainly from
the sale of real estate in Ireland. In 2003 Delta Galil recorded a $3.9 million
capital gain from the sale of real estate in London, which was offset by $0.3
million of capital loss from realization of other fixed assets.

Restructuring expenses.

         Restructuring expenses in 2004 included to the closure of a logistic
center in Hungary while in 2003 they included the closure of sewing plants in
Scotland and in Israel.

Operating income.

         Operating income in 2004 decreased by 39.1% compared to 2003 and
totaled $22.4 million (3.4% of revenues) compared to $36.8 million (6.3% of
revenues) in 2003. The decrease in the operating profit is primarily due to
losses from operations with certain of Delta USA's customers, and to losses
incurred from the operation and the closure of the logistic center in Hungary.

Financial expenses - net.

         Financial expenses increased by 10.5% to $6.2 million in 2004 from $5.6
million in 2003 mainly due to increased bank loans due to the acquisition of
Auburn and to the increase in the average interest rate. Financial expenses were
composed mainly of interest and exchange differences.

Other income- net.

         Other income in 2004 increased by $0.7 million compared to 2003. 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.", while in 2003 a similar capital gain of
$0.9 million was offset by the write-off of other investments.

Taxes on income.

         Income taxes for 2004 were provided for at an effective tax rate of
16.6% compared to 23.4% in 2003. The decrease in the effective tax rate in 2004
compared to 2003 is mainly due to a decrease in pre-tax earnings of subsidiaries
that are subject to higher tax rates.

Share in losses of associated companies.

         Delta Galil's share in losses of associated companies includes its
investment in Edomit Ltd., which is accounted for by the equity method. In 2004
this share amounted to a loss of $0.2 million compared to a loss of $0.3 million
in 2003.

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 starting April 2003, also 10% of Delta Elastic Tapes,
amounted to $1.4 million in 2004 compared to $0.4 million in 2003.

Net Income.

         Net income in 2004 decreased by 45.7% and totaled $12.7 million (1.9%
of sales) compared to $23.4 million (4.0% of sales) in 2003 due to the decrease
in the operating profit.

                                     - 33 -
<PAGE>

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, 2005, 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 3C. - 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, 2005 amounted to
$193 million. Depreciation and amortization expenses with respect to Delta
Galil's fixed assets on an annual basis are approximately $14.5 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
5f 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

                                     - 34 -
<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, 2005
amounted to $147.1 million. This amount is net of an allowance for specific
obsolete and slow-moving inventories in the amount of $27.9 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. See also note 1h of the
consolidated financial statements.

         As of December 31, 2005 the goodwill included in Delta Galil's balance
sheet amounted to $53.7 million, of which $51.9 million relate to the Delta USA
segment and the remainder, $1.8 million relate to the Europe 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.

New Accounting Standards under US GAAP

FAS 123 (revised 2004) Share-based Payment

         In December 2004, the Financial Accounting Standards Board, or FASB,
issued the revised Statement of Financial Accounting Standards, FAS, No. 123,
Share-Based Payment (FAS 123R), which addresses the accounting for share-based
payment transactions in which a company obtains employee services in exchange
for (a) equity instruments of the company or (b) liabilities that are based on
the fair value of the company's equity instruments or that may be settled by the
issuance of such equity instruments. In March 2005, the SEC issued Staff
Accounting Bulletin No. 107 (SAB 107) regarding the SEC's interpretation of FAS
123R.

         FAS 123R eliminates the ability to account for employee share-based
payment transactions using APB Opinion No. 25 - "Accounting for Stock Issued to
Employees", and requires instead that such transactions be accounted for using
the grant-date fair value based method. This Statement will be effective for
public companies at the beginning of their next fiscal year that begins after
June 15, 2005 (first quarter of 2006 for the Company). Early adoption of FAS
123R is encouraged. This Statement applies to all awards granted or modified
after the Statement's effective date. In addition, compensation cost for the
unvested portion of previously granted awards that remain outstanding on the
Statement's effective date shall be recognized on or after the effective date,
as the related services are rendered, based on the awards' grant-date fair value
as previously calculated for the pro-forma disclosure under FAS 123.

         Delta Galil estimates that there will not be any cumulative effect of
adopting FAS 123R, as of its adoption date by the company (1 January 2006),
based on the awards outstanding as of December 31, 2005. This estimate does not
include the impact of additional awards, which may be granted, or forfeitures,
which may occur subsequent to December 31, 2005 and prior to the adoption of FAS
123R.

         Delta Galil expects that upon the adoption of FAS 123R, as of January
1, 2006, Delta Galil will apply the modified prospective application transition
method, as permitted by the Statement. Under such transition method, upon the
adoption of FAS 123R, Delta Galil `s financial statements for periods prior to
the effective date of the Statement will not be restated.

                                     - 35 -
<PAGE>

         Compensation expense for outstanding awards for which the requisite
service had not been rendered as of the effective date will be recognized over
the remaining service period using the compensation cost calculated for
pro-forma disclosure purposes under FAS 123.

Taking into account the transition method adopted by the Company, the Company
expects that the effect of applying this statement on the Company's results of
operations in 2006 as it relates to existing option plans would not be
materially different from the FAS 123 pro forma effect previously reported. The
balance of unamortized compensation before taxation of options at December 31,
2005 is immaterial. As to options granted after the balance sheet date, see
note 16.

FAS 151 Inventory Costs - an amendment of ARB 43, Chapter 4

         In November 2004, the FASB issued FAS No. 151, "Inventory Costs - an
Amendment of ARB 43, Chapter 4, known as FAS 151.

         This Statement amends the guidance in ARB No. 43, Chapter 4, "Inventory
Pricing", to clarify the accounting for abnormal amounts of idle facility
expense, freight, handling costs, and wasted material. This Statement requires
that those items be recognized as current-period charges. In addition, this
Statement requires that allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production facilities. This
Statement will be effective for inventory costs incurred during fiscal years
beginning after June 15, 2005 (January 1, 2006 for the company). Earlier
application of FAS 151 is permitted. The provisions of this Statement shall be
applied prospectively. Delta Galil does not except this statement to have a
material effect on the company's financial statements, its results of operations
or cash flows.

FAS 154 Accounting Changes and Error Corrections - a replacement of Accounting
Principles Board Opinion, or APB, No. 20 and FASB Statement No. 3.

         In June 2005, the Financial Accounting Standards Board issued FAS No.
154, "Accounting Changes and Error Corrections - a replacement of APB Opinion
No. 20 and FASB Statement No. 3". This Statement generally requires
retrospective application to prior periods' financial statements of changes in
accounting principle. Previously, Opinion No. 20 required that most voluntary
changes in accounting principle were recognized by including the cumulative
effect of changing to the new accounting principle in net income of the period
of the change. FAS 154 applies to all voluntary changes in accounting principle.
It also applies to changes required by an accounting pronouncement in the
unusual instance that the pronouncement does not include specific transition
provisions. When a pronouncement includes specific transition provisions, those
provisions should be followed. This Statement shall be effective for accounting
changes and corrections of errors made in fiscal years beginning after December
15, 2005 (January 1, 2006 for the company). Delta Galil does not expect the
adoption of this statement will have a material impact on Delta Galil`s results
of operations, financial position or cash flows.

FAS 155 Accounting for certain hybrid financial instruments, an amendment of
FASB statements no. 133 and 140.

         In February 2006, the FASB issued FAS 155, accounting for certain
Hybrid Financial Instruments, an amendment of FASB statements No.133 and 140.
This statement permits fair value measurement for any hybrid financial
instrument that contains an embedded derivative that otherwise would require
bifurcation. This statement 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. 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. Management is currently evaluating the
impact of this statement, if any, on Delta Galil's financial statements or its
results of operations.

FAS 156 Accounting for servicing of financial Assets - an amendment of FASB
statement no.140

         In March 2006 the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Reporting No. 156 ("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,
and is effective for financial periods beginning after September 15, 2006. Delta
Galil does not currently engage in transfers of financial fixed assets and
accordingly does not anticipate that the adoption of this statement will have a
material impact on its financial statements. . Since the Company does not
currently engage in transfers of financial fixed

                                     - 36 -
<PAGE>
assets, the company does not anticipate that the adoption of this statement will
have a material impact on its financial statements.


EITF 04-13

         In September 15, 2005 the Emerging Issues Task Force of the FASB
reached a consensus on Issue 04-13, "Accounting for Purchases and Sales of
Inventory with the Same Counterparty", known as EITF 04-13. EITF 04-13 describes
the circumstances under which two or more inventory transactions with the same
counterparty should be viewed as a single nonmonetary transaction, and describes
the circumstances under which nonmonetary exchanges of inventory within the same
line of business should be recognized at fair value. EITF 04-13 will be
effective for transactions completed in reporting periods beginning after March
15, 2006. Delta Galil is currently evaluating the applicability of EITF 04-13 to
its inventory transactions.

5B.      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.

                                     - 37 -
<PAGE>

         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
                                                                --------------------------------------
                                                                   2003          2004          2005
                                                                ----------    ----------    ----------
<S>                                                             <C>           <C>           <C>
  Net cash flow provided by operating activities ............   $     42.9    $     23.0    $     11.6
  Net cash flow used in investing activities ................        (18.4)        (68.9)        (14.4)
  Net cash flow provided by (used in) financing
  activities* ...............................................        (21.3)         50.2          (4.7)
  Translation differences on cash equivalents of foreign
  currency consolidated subsidiary ..........................           --           0.1          (0.1)
                                                                ----------    ----------    ----------
  Increase (decrease) in cash and cash equivalents ..........   $      3.2    $      4.4    $     (7.6)
                                                                ==========    ==========    ==========
</TABLE>

* Including payment of dividends to shareholders of $9.5 million and $8.3
million in 2003 and 2004, respectively.

         In 2003, 2004 and 2005 Delta Galil generated excess cash flow from
operations of $42.9 million, $23.0 million and $11.6 million respectively. The
decrease in net cash flow provided by operating activities from $23.0 million in
2004 to $11.6 million in 2005 is mainly attributed to the loss in 2005 compared
to the net profit in 2004. The decrease in the net cash flow used in investing
activities is mainly attributed to the acquisition of Burlen in the fourth
quarter of 2004. Net cash flow used in financing activities in 2005 amounted to
$4.7 million while in 2004 the net cash flow provided by financing activities
amounted to $58.5 million. The decrease in cash flow provided by financing
activities in 2005 is attributed mainly to the increased bank debt in connection
with the acquisition of Burlen in December 2004.

         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.

Debt

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

<TABLE>
<CAPTION>
                                                           Year ended December 31
                                                   ------------------------------------
                                                      2003         2004         2005
                                                   ----------   ----------   ----------
<S>                                                <C>          <C>          <C>
Short-term:
       Bank loans ..............................   $     94.5   $     55.6   $     80.6
       Current maturities of long-term loans ...         10.4         27.9         29.5
                                                   ----------   ----------   ----------
           Total Short-term ....................        104.9         83.5        110.1
                                                   ----------   ----------   ----------
Long-term:
           Total Long-term bank loans ..........         13.6         98.4         68.8
                                                   ----------   ----------   ----------
           Total Debt ..........................   $    118.5   $    181.9   $    178.9
                                                   ==========   ==========   ==========
</TABLE>

         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 5.8% on
average for the year ended December 31, 2005 and are secured by liens on Delta
Galil's assets. Delta Galil's bank loans are issued under secured bank lines of
credit of up to $298.8 million of which, as of December 31, 2005, Delta Galil
had $102.3 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. 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 December 2009. Delta Galil and each of its subsidiaries have
granted each other guarantees of each other's indebtedness.

                                     - 38 -
<PAGE>

         Delta Galil USA Inc. is a party to a credit agreement with Bank Leumi
USA and Bank Hapoalim, which provides for an aggregate of $91 million in loans,
of which $31 million are long-term loans and $60 million of which is revolving
short-term credit which expires on January 31, 2007. The loans bear interest at
a variable rate that is linked to the LIBOR. As of March 31, 2006, the interest
rate on the term loan was 6.55% and on the short-term credit was 6.3%. The
principal of the term loans is payable in equal quarterly installments of
approximately $1.94 million each until December 1, 2009. As of December 31, 2005
the unutilized credit line was $24 million. This credit agreement includes
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 (or,
collectively, debt) to EBITDA. The covenants are as follows:

       1.     The ratio of Delta Galil USA's EBITDA to fixed charges, each 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 ended March 31, 2007 and for each twelve month
              period ending at 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 ending June 30, 2006, and 4.0 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 month period ending at the end of each subsequent
              quarter until maturity.

Delta Galil USA and the banks amended the credit agreement in January 2006 and
in May 2006. The material changes contained in the amendments as reflected above
are the following:

     o   A prepayment of $25 million of the principal amount of the term loan;

     o   A reduction in the quarterly payment on the term loan from $3.5 million
         to $1.9 million; an extension of the expiration of the revolving loan
         facility from January 15, 2006 to January 31, 2007;

     o   A deposit of $4 million with Bank Leumi USA and a pledge of that
         deposit to Bank Leumi;

     o   An extension of the explanation of the revolving loan facility to
         January 31, 2007.

     o   An increase of 0.25% in the interest.

         Delta Galil USA did not satisfy the covenant relating to the ratio of
EBITDA to fixed charges for the year ended December 31, 2005. The amendment of
January 2006 provided for a waiver of all of the financial covenants for the
period ending December 31, 2005. Management believes that Delta Galil USA will
satisfy the covenants as currently in effect.

Working Capital and Capital Expenditures

         Working capital at December 31, 2005 was $80.9 million, compared to
$127.4 million at December 31, 2004. The decrease in the working capital is
attributed to the increase in short-term loans on account of 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.

5C.     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 increased to approximately $29 million in 2005, as
compared to

                                     - 39 -
<PAGE>

$25 million in 2004 and $23 million in 2003. The increase in 2005 versus 2004 is
mainly due to the acquisition of Burlen.


5D.      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.


5E.      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".

5F.      Contractual Obligations

         Set forth below are our contractual obligations and other commercial
commitments as of December 31, 2005:

<TABLE>
<CAPTION>
                                               Payments Due by Period
                                               ----------------------

                                              Less than 1               More than 5
Contractual Obligations            Total         year      2- 4 years      years
                                 ----------   ----------   ----------   ----------

                                                  (U.S. $ in millions)
<S>                                   <C>           <C>          <C>          <C>
Long-Term Debt (1) ...........        109.7         34.5         75.2          -,-
Capital Lease Obligations ....          1.0          0.1          0.3          0.6
Operating Leases .............         45.7          8.9         19.0         17.8
Letter of credits and bank
guarantees ...................         35.0         30.0          4.8          0.2
                                 ----------   ----------   ----------   ----------
Total Contractual Cash
Obligations ..................        191.4         73.5         99.3         18.6
                                 ==========   ==========   ==========   ==========
</TABLE>

(1) Includes expected interest expenses on long-term debt, based on interest
rates in effect as of December 31, 2005. In May 2006, 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 $25 million of the
principal amount of its term loan. As a result, Long-Term Debt as of May 30,
2006, would be as follows: $81.4 (Total); $26.9 (less than one year); $54.5 (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.

                                     - 40 -
<PAGE>

ITEM 6:         DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

6A.      Directors and Senior Management

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

<TABLE>
<CAPTION>
     Name                        Age         Position
     ----                        ---         --------
<S>                         <C>         <C>
     Dov Lautman                 69          Chairman of the Board of Directors and Chief Executive
                                             Officer
     Isaac Dabah(3)              48          Director and Vice Chairman of the Board of Directors
     Yossi Hajaj                 38          Senior Vice President & Chief Financial Officer
     Aviram Lahav(4)             47          Senior Vice President & CEO of US Upper Market Division
     Michael Fitzgerald          63          Senior Vice President & Business Development USA
     Imad Telhami                47          Senior Vice President & CEO of European Division
     Esti Maoz                   58          Senior Vice President & Global Development and Marketing
     Eytan Stiassnie             50          Senior Vice President & CEO of Socks Division
     Moshe Grencel               53          Senior Vice President - Supply Chain Management
     David Kostman(5)            41          Senior Vice President & CEO of Delta Galil USA
     Israel Baum(3)              67          Director
     Gideon Chitayat(3)          66          Director
     Aharon Dovrat               75          Director
     Harvey M. Krueger           77          Director
     Noam Lautman                37          Director
     Giora Morag(1) (2)          61          Director
     Amnon Neubach(1) (2)        61          Director
     Dan Propper                 65          Director
     Arnon Tiberg                62          Director
     Amior Vinocourt(2)          78          Director
</TABLE>

(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.

(4)  Mr. Lahav has been appointed Chief Executive Officer of Delta Galil,
     effective November 1, 2006.

(5)  Mr. Kostman has resigned effective July 2006, as CEO of Delta Galil USA.

         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 since February 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.

         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.

         Aviram Lahav has been appointed CEO of Delta Galil, effective November
1,2006. MR. Lahav has been Senior Vice President since 1997. He served as CEO of
Delta Galil's Innerwear USA operations from

                                     - 41 -
<PAGE>

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).

         Michael Fitzgerald Recently appointed Corporate Senior Vice President
of Business Development responsible for creating growth opportunities across all
divisions doing business in the USA. He served as CEO of Delta Galil USA from
1999 until April 1 2005 , and was named Senior Vice President of Delta Galil in
2002. Mr. Fitzgerald was formerly Chief Executive Officer of Wundies Industries
from 1989 until the company was acquired by Delta Galil in 1999.Mr. Fitzgerald
started with Wundies in 1974 as manager of the ladies underwear division. He
became Vice President of Marketing in 1983. Between 1966 and 1974 Mr. Fitzgerald
held various marketing posts at the Buick Division of General Motors, Allied
Chemical Fibers Division, and the Coated Fabric Division of Occidental
Petroleum. Mr. Fitzgerald holds a Bachelor of Arts Degree from Fordham
University and an MBA from the Bernard Baruch College of the City University of
New York.

         Imad 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 been with Delta Galil since its inception in 1975, and
has served as Senior Vice President, Global Development and Marketing since
November 2002. 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.

         Eytan Stiassnie has been Vice President and C.E.O. of Delta Galil's
Sock Division since January 2002 and was named Senior Vice President of Delta
Galil Industries in May 2004. He joined Delta Galil in 1989, serving as the
manager of information technology for the Sock Division until 1993, when he
became the production manager of the Sock Division, a position he held until
1997. From 1997 until 2001 he was operations manager of the Sock Division, and
during 2001 he served as vice president of logistics in the Sock Division. Mr.
Stiassnie holds a B. Sc. in Industrial Engineering, specializing in Information
Technology, from the Technion, Israel Institute of Technology.

         Moshe Grencel joined Delta Galil in 2004 as a Senior Vice President
Supply Chain Management. From 2001 to 2004 he served as an Executive VP for
Global Operations and Supply Chain of Lumenis Ltd. a medical device company.
From 1998 until 2000 he served as a General Manager of Elscint Industrial
Solutions. In the sixteen years before that he held several managerial positions
in Elscint Ltd. Mr. Grencel holds a B.Sc in industrial and management
engineering from the Technion, Israel Institute of Technology.

         David Kostman has served as Senior Vice President and Chief Executive
Officer of Delta Galil USA since April 2005. From 2002 to 2004 he served as
Chief Operating Officer of Delta Galil USA. From 2000 to 2002 he served as Chief
Operating Officer of Verticalnet, Inc. (Nasdaq: VERT). Prior to that he was a
Managing Director at Lehman Brothers' Investment Banking Division in New York
where he worked from 1994 to 2000. Mr. Kostman worked at NM Rothschild's
Investment Banking Division in London from 1992-1994. Mr. Kostman is a Director
of NICE Systems Ltd. (Nasdaq: NICE) and of Utopy, Inc. He holds an MBA from
Insead, Fontainebleau (France) and an LL.B. from Tel Aviv University Law School.

         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.

                                     - 42 -
<PAGE>

         Gideon Chitayat, has served as a director since November, 2005. He is
the chairman of General Management and Business Strategy Consultant (GMBS) Ltd.
and served as its President and Chief Executive Officer from 1985 until 2004.
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
Bank Hapoalim and Teva-Israel, a subsidiary of Teva Pharmaceutical Industries
Ltd. 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 Automatic Data Processing Inc., 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 and Beth Israel Medical Center (NY) and Continuum Health Partners.

         Noam Lautman has been a Director of Delta Galil since October 2001. Mr.
Lautman serves as a Director of Nasvax Ltd. (TASE: NSVX) and Collplant Ltd. Mr.
Lautman served as Director for New Ventures and Strategic Business Planning at
Teva Pharmaceutical Industries Ltd from 2002 to 2006. Mr. Lautman previously
served in various managerial positions in several Israeli companies operating in
the high-tech field. 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.

         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. 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. 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 Weizmann Institute and the Technion, Israel Institute of Technology, and
Chairman of the Boards of Directors of various industrial companies.

                                     - 43 -
<PAGE>

         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., Strauss-Elite Holding Ltd., Kali Insurance Agency Ltd.,
and The First International Bank of Israel Ltd. Mr. Tiberg is also a member of
the Executive Council of the Association of Publicly Traded Companies (of The
Tel Aviv Stock Exchange).

         Amior Vinocourt has served as a Director of Delta Galil since December
1996. Mr. Vinocourt was a Director of Industrial Building Corporation Ltd., of
Ofis Textile Ltd. and Alliance Tyre (1992) Ltd. Until 1995, Mr. Vinocourt was a
Director of Neshua Underwriting and Issuing Ltd. and, from 1994 to 1997 a
Director of Bank Hapoalim Ltd. Mr. Vinocourt is a Chartered Accountant (F.C.A.)
(England) and a Certified Public Accountant (Isr). From 1972 to 1993 Mr.
Vinocourt was managing Director of Industrial Finance Corp. Ltd. and the
Investment Company for Industrial Development in Israel Ltd.

6B. 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 $8,300 for
their services on the board of directors or on any committee thereof. In
addition, a sum of approximately $300 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 2005, Delta
Galil's expenses for directors' compensation amounted to a total of
approximately $91,000.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, 2005.

<TABLE>
<CAPTION>
                                             Salaries, Directors' Fees,         Pension, Retirement and
                                              Commissions and Bonuses               Similar Benefits
                                              -----------------------               ----------------
<S>                                                 <C>                               <C>
All directors and executive officers
(consisting of
22 persons).........................                $3.9 million                      $0.3 million
</TABLE>

         As of June 26, 2006, 1,133,514 options to purchase Delta Galil's
ordinary shares were outstanding to certain executive officers and key employees
(consisting of 8 persons who were granted options). See "Stock Option Plans"
below and note 10 of the notes to Delta Galil's consolidated financial
statements included in Item 18 of this annual report.

6C.      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.

         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. Under the Companies Law, only one of such "experts"
is required to be an external director, as described below.

                                     - 44 -
<PAGE>

         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 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, all in the main business sector of the company or in a
         relevant area for the board position; or

                  (iii) the director has at least five years' experience in one
         or more of the following (or a combined five years' experience in at
         least two or more of these: (a) senior management position in a
         corporation of significant business scope; (b) senior public office or
         senior position in the public sector; or (c) senior position in the
         main business sector of the company.

         The above qualifications do not apply to external directors appointed
prior to January 19, 2006, such as our external directors. 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 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, 2006 and December 16, 2006,
respectively.

         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

                                     - 45 -
<PAGE>

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 Vinocourt,
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.

6D.      Employees

         As of December 31, 2005, Delta Galil employed approximately 13,325
employees of these, approximately 10,900 were engaged in production, and the
remainder performed administrative, marketing, logistics and other functions.

         Following the change in the business environment and the erosion in
selling prices Delta Galil decided to implement a Re-organization plan which
included a dismissal of approximately 2,100 employees, mainly in the United
States and in Israel. See ""Item 5 - Operating and Financial Review and
Prospects - Overview.".

         The following table shows the geographical distribution of Delta
Galil's employees, as of December 31, 2005:

         Country                             Number of Employees
         -------                             -------------------
         Egypt                                        5,363
         Israel                                       2,357
         Jordan                                       2,311
         Far East                                     2,195
         United States                                  815
         United Kingdom                                 186
         Other                                           98
                                                     ------
         Total                                       13,325
                                                     ======

         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.

                                     - 46 -
<PAGE>

         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%. 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.

         In addition, approximately 100 employees of Delta Galil's U.S.
subsidiary are subject to a collective bargaining agreement.

6E.  Share Ownership

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

Stock Option Plans

         Delta Galil has five stock option plans. The total shares that may be
issued upon exercise of all outstanding options represent approximately 11% of
the outstanding share capital of Delta Galil excluding 1,206,802 ordinary shares
held by the company and 45,882 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 June 12, 2006.

1998 Stock Option Plan

         In May 1998, Delta Galil adopted an option plan to retain and attract
qualified persons as employees and officers and to motivate such persons by
providing them with an equity participation. The stock option plan is designed
to afford the participants tax benefits under Section 102 of the Israeli Income
Tax Ordinance. Options issued under the stock option plan 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.
Shares issued upon exercise of options will be held by the trustee until the
option holder pays applicable taxes. Unexercised options are not entitled to a
vote while held by the trustee.

         Options granted under the stock option plan vest over a period of three
years in four equal tranches, the first of which vested in August 1998. The
options are subject to restrictions on transfer, sale or hypothecation. Options
may only be exercised commencing on the date that is two years after the date
such options vested and they expire five years after vesting. Restrictions on
disposition of options lapse according to the terms of the stock option plan
under which those options are granted.

         As of December 31, 2005, Delta Galil had outstanding under this plan
options to purchase up to 37,130 ordinary shares at an exercise price of $8.297
per ordinary share, converted to NIS on the date of the exercise. The exercise
price is equal to 90% of the Tel Aviv Stock Exchange closing price on the last
day of trading prior to the board of directors' approval of the plan. All of
these options were granted to executive officers of Delta Galil and its
subsidiaries.

Executive Option Plan

         In addition, Delta Galil has granted to Arnon Tiberg, Delta Galil's
President and Chief Executive Officer until January 31, 2006, options to acquire
100,000 ordinary shares. The options were approved by the board of directors and
the audit committee in September 1998, and at a shareholders' meeting on October
14, 1998. The option's exercise price is $7.90 per share converted to NIS on the
date of the exercise. The exercise price is equal to 90% of the Tel Aviv Stock
Exchange closing price on the last day of trading prior

                                     - 47 -
<PAGE>

to the board of directors' approval of the plan. As of December 31, 2005 all of
the said options are fully vested. As of December 31, 2005, Delta Galil had
outstanding under this plan options to purchase up to 25,000 ordinary shares.

2000 Stock Option Plan

         In June 2000, Delta Galil adopted a new stock option plan. Under the
new plan, options to purchase 809,000 ordinary shares, including an additional
100,000 options to Arnon Tiberg, Delta Galil's President and Chief Executive
Officer till January, 2006, will be granted to 70 employees. As of June 10,
2006, 119,375 options that were granted to 20 employees were forfeited, upon the
termination of their employment and 194,750 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 21, 2005 all of these options were fully vested. As of December
31, 2005, Delta Galil had outstanding under this plan options to purchase up to
494,875 ordinary shares for purchase.

2002 Stock Option Plan

         In October 2002 Delta Galil adopted a fourth stock option plan, under
which options to 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 an additional 100,000 options to Arnon Tiberg, Delta
Galil's President and Chief Executive Officer till January, 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. The options vest in four equal batches. The first,
second, third and fourth batches will vest in November 2003, 2004, 2005 and 2006
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. 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, 2005, Delta Galil had outstanding under this
plan options to purchase up to 865,000 ordinary shares. As of June 10, 2006
options to purchase an additional 100,000 shares remain available for grant
under the plan. As of June 10, 2006, 144,500 options that were granted to twenty
six employees were forfeited upon the termination of their employment.

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.

         A total of 1,295,018 options were granted and 104,982 options remain
available for future issuances under the plans. 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 on 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. Of the 1,295,018 options granted, 766,014 were
granted to senior employees. The plan for Israeli employees, which will be
treated under the capital gains track under Section 102 of the Israeli Income
Tax Ordinance, is subject to the approval of the Israeli Tax Authority.
Treatment of the options granted under the plan for U.S. employees as incentive
stock options,

                                     - 48 -
<PAGE>

which have certain tax benefits for those receiving the options, is subject to
shareholder approval at the Company's next shareholders meeting.

         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, are 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. The fair value of the
option granted, based on the Black and Scholes model, is approximately $1.9
million and will be included in the financial statements over the vesting
period.

         As of June 26, 2006, 2,852,023 options to purchase Delta Galil's
ordinary shares were outstanding to certain executive officers and key
employees.

                                     - 49 -
<PAGE>

         The following table summarizes information regarding options
outstanding at December 31, 2005:


<TABLE>
<CAPTION>
                              Number of shares issuable upon exercise of options
-----------------------------------------------------------------------------------------------------------

                                            Outstanding                          Vested         Exercisable
                         ------------------------------------------------     ------------     ------------

                                       Balance at        Weighted average      Balance at       Balance at
                         Exercise       December            remaining         December 31,     December 31,
Date of plan              prices        31, 2005         contractual life         2005             2005
------------             --------       --------         ----------------     ------------     ------------
                                                              Years
                                                              -----
<S>                       <C>           <C>                     <C>            <C>              <C>
August 1998               $ 8.30           37,130               0.7               37,130           37,130

November 1998             $ 7.90           25,000               0.9               25,000           25,000

June 2000                 $21.07          494,875               1.5              494,875          494,875

October 2002              $ 9.00          865,000               2.6              666,000          666,000

October 2002              $10.76           30,000               3.1               15,000           15,000

October 2002              $15.35           80,000               4.1               20,000             --,-

October 2002              $12.74           30,000               4.3                7,500             --,-
                                        ---------                              ---------        ---------

                                        1,562,005                              1,265,505        1,238,005
                                        =========                              =========        =========
</TABLE>

                                     - 50 -
<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 June 12, 2006, 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 beneficially owns 1% or more of Delta Galil's
outstanding ordinary shares.

<TABLE>
<CAPTION>
                                                          Number of                   Percent of
                                                          Ordinary Shares             Ordinary Shares
         Name                                             Beneficially Owned          Outstanding(1)
         ----                                             ------------------          -----------
<S>                                                            <C>                          <C>
         GMM Capital, LLC(2)                                    5,323,793                    28.5%
         Dov Lautman(3)                                         4,644,993                    24.8%
         Menorah Holdings Ltd. (4)                                996,061                     5.3%
         Arnon Tiberg-Director(5)                                 672,588                     3.6%
         Amior Vinocourt-Director (6)                              63,501                     0.3%
         Aharon Dovrat-Director                                    30,050                    0.16%
         Harvey Krueger-Director                                    5,000                    0.03%
                                                          ------------------         ------------
         Officers and directors as a group (aggregate)         11,735,986                   62.78%
                                                          ==================         ============
</TABLE>

(1)  Based on 18,695,165 ordinary shares outstanding, excluding 1,206,802
     ordinary shares held by the Company and excluding 45,882 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 175,000 ordinary shares, as
     follows: Options to acquire 25,000 ordinary shares have an exercise price
     of $7.90 per share converted to NIS on the date of the exercise, are fully
     vested, and are exercisable until November 2006. Options to acquire an
     additional 75,000 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 2006, 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.
     These options vest in equal tranches over four years commencing in November
     2003, and expire three years after vesting. Of these 100,000 shares, 75,000
     that have vested and are included above.

(6)  Held through Vinocourt Achzakot Ltd., a company controlled by Mr.
     Vinocourt.

                                     - 51 -
<PAGE>

         Shareholders Agreements

         Dov Lautman, the Chief Executive Officer of the company and 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. 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 June 10, 2006, GMM Capital owned 28.5% and the Lautman Group
owned 24.8% of the outstanding ordinary shares of Delta Galil.

         As of June 10 2006, Delta Galil had 23 shareholders of record resident
in the United States, accounting for 29.3% of the outstanding ordinary shares.
One U.S. shareholder, GMM Capital, holds 28.5% of the outstanding ordinary
shares.

7B.  Related Party Transactions

         See "Item 10: Additional Information--Approval of Related Party
Transactions under Israeli Law."

                                     - 52 -
<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:

                 2002               2003             2004              2005
                 ----               ----             ----              ----

                $0.37              $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.

                                     - 53 -
<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 2001. 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.

<TABLE>
<CAPTION>
                                                                                               ADS
                                                      Ordinary Shares                      Equivalents
                                        -------------------------------------------        -----------

                                         High                     Low                    High          Low
                                        -----                    -----                  -----        -----
                                         NIS           $          NIS           $         $            $
                                        -----        -----       -----        -----     -----        -----
<S>                                     <C>          <C>         <C>           <C>      <C>           <C>
Year Ending December 31, 2001:          59.18        14.38       33.33         7.64     14.63         7.58
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:
         First Quarter.........         74.40        16.81       66.60        14.72     15.72        14.31
         Second Quarter........         72.60        16.14       66.60        14.72     16.15        13.91
         Third Quarter.........         72.82        16.25       52.75        11.63     15.48        11.76
         Fourth Quarter........         55.10        12.34       40.20         9.19     12.65         9.35
Year Ending December 31, 2005:
    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
Most Recent Six Months

    December 2005                       30.70         6.70       28.00         6.10      6.65         5.96
    January 2006                        32.55         7.07       27.95         6.04      6.79         6.16
    February 2006                       30.48         6.54       28.80         6.12      6.50         6.05
    March 2006                          34.86         7.48       29.49         6.27      7.47         6.45
    April 2006                          32.27         7.02       30.05         6.52      7.31         6.55
    May 2006                            37.75         8.53       31.80         7.04      8.41         7.06
</TABLE>

         As of June 25, 2006, the last reported price of the ordinary shares on
the TASE was NIS 33.91 ($7.59) and the last reported price per ADS on Nasdaq was
$7.66. 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

Not applicable

9D.      Selling Shareholders

Not applicable

9E.      Dilution

Not applicable

9F.      Expense of the Issue

Not applicable

                                     - 54 -
<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 objects 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

                                     - 55 -
<PAGE>

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.

      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 there in 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;

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.

                                     - 56 -
<PAGE>

         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 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 at least thirty percent (30%) of the
current number of directors.

                                     - 57 -
<PAGE>

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,
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

                                     - 58 -
<PAGE>

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, Delta Galil entered into two amendments to 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 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 2005 is 34%. This rate is currently
scheduled to decrease to 31% in 2006, 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

                                     - 59 -
<PAGE>

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 2005 of 34% (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 are
exempt from income tax in the first two years.

         Delta Galil first derived income from some of the abovementioned
Approved Enterprises in 1999. In1999, 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 - 2005, 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 2003 and in 2004 and none in 2005. 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.

         Delta Galil is a "Foreign Investors Company" ("FIC"), as defined by the
Investment Law, and is entitled to 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. Benefits under the Investment Law
are granted to enterprises seeking approval not later than January 1, 2005.
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.

                                     - 60 -
<PAGE>

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.

         The tax basis of shares acquired prior to January 1, 2003, with respect
of which the shareholders had been exempt 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.

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.

                                     - 61 -
<PAGE>

         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 25%,
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, 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.

                                     - 62 -
<PAGE>

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.

         On the ordinary shares or ADSs during taxable years beginning before
January 1, 2007 to a U.S. Holder will generally be treated as foreign source
income and categorized as "passive income" or, in the case of certain U.S.
Holders, "financial services income" for U.S. foreign tax credit purposes.

         For taxable years beginning on or after January 1, 2007, dividends will
generally constitute "passive category income" or, in the case of certain U.S.
Holders, "general category income." 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. U.S. Holders who
do 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.

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.

                                     - 63 -
<PAGE>

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, 2005 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
at a current rate of 28%. 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

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 450 Fifth Street,
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

                                     - 64 -
<PAGE>

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 2005, Delta Galil
derived 25% of its revenues from customers in Pound Sterling, 8% of its revenue
were in NIS, and 8% were in Euros. More than 10% of Delta Galil's expenses were
in NIS in 2005.

         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, 2005, Delta Galil had not entered into hedging
transactions.

         During the second quarter of 2006 Delta Galil carried out sales of the
Pound Sterling in the amount of $30 million to hedge part of its exposure to the
above described exchange rate fluctuation.

         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 $1.1 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 an 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 $1.8 million per year, based
on amounts outstanding at December 31, 2005. 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 13 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

                                     - 65 -
<PAGE>

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 13a-15(e) of the Securities Exchange Act 1934, as
amended) as of December 31, 2005 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 16:          AUDIT COMMITTEE; FINANCIAL EXPERT; CODE OF ETHICS; AUDIT FEES


ITEM 16A:         AUDIT COMMITTEE; FINANCIAL EXPERT

         The Board of Directors and the Audit Committee have determined that
Amior Vinocourt is an independent director under the definition of independence
under the rules of the Nasdaq National Market, and that Mr. Vinocourt is the
financial expert serving on the Audit Committee of Delta Galil.

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.

                                     - 66 -
<PAGE>

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, 2004 and 2005 :

                                           2004              2005
                                         --------          --------
Audit fees                               $383,000          $520,000
Tax fees                                   67,000           116,000
Other fees                                     --            90,000
                                         --------          --------
Total                                    $450,000          $726,000
                                         ========          ========

         The increase in the fees paid to PwC in 2005 compared to 2004 is due to
an audit fee for Burlen and in connection with an evaluation of our internal
controls as required by Section 404 of the Sarbanes-Oxley Act.

         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

                                     - 67 -
<PAGE>

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

         Below is a list of purchases of Delta Galil's ordinary shares by Isaac
Dabah, our largest shareholder, through GMM Capital LLC and GMM Trust during
calendar year 2005. Delta Galil itself did not purchase any of its securities
during calendar year 2005.

<TABLE>
<CAPTION>
                                                                 Total Number of        Maximum Number
                                                               Shares Purchased as    of Shares that May
                            Total Number                         Part of Publicly      Yet Be Purchased
                             of Shares        Average Price     Announced Plans or     Under Plans or
      Period                 Purchased        Paid Per Share        Programs              Programs
----------------------      ------------      --------------   -------------------    ------------------
<S>                            <C>                      <C>       <C>                   <C>
January 2005
February 2005
March 2005                        34,871                9.23
April 2005                        32,061                9.29
May 2005                         427,119                8.88
June 2005
July 2005
August 2005                    4,592,930                6.58
September 2005                    72,617                6.99
October 2005
November 2005                     30,197                6.49
December 2005                     15,758                6.45
                            ------------      --------------   -------------------    ------------------
TOTAL 2005                     5,205,553                6.81
                            ------------      --------------   -------------------    ------------------

         In addition, Mr. Dabah and the GMM entities made the following
purchases of Delta Galil shares in 2006:

<CAPTION>
                                                                 Total Number of        Maximum Number
                                                               Shares Purchased as    of Shares that May
                            Total Number                         Part of Publicly      Yet Be Purchased
                             of Shares        Average Price     Announced Plans or     Under Plans or
      Period                 Purchased        Paid Per Share        Programs              Programs
----------------------      ------------      --------------   -------------------    ------------------
<S>                          <C>                   <C>          <C>                   <C>
January 2006                         870                6.09
February 2006
March 2006                        34,940                6.71
April 2006                        46,937                6.94
May 2006                          35,493                7.16
                            ------------      --------------   -------------------    ------------------
TOTAL 2006                       118,240                6.93
                            ------------      --------------   -------------------    ------------------
TOTAL BALANCE                  5,323,793                6.81
                            ============      ==============   ===================    ==================
</TABLE>


                                    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-58 hereof.

                                     - 68 -
<PAGE>

ITEM 19:          EXHIBITS

<TABLE>
<CAPTION>
      (a)  Index to Consolidated Financial Statements                                                            PAGE
           ------------------------------------------                                                            ----
<S>                                                                                                             <C>
        Report of Independent Registered Public Accounting Firm...............................................   F-2
        Consolidated Statements of Income for the Years Ended December 31, 2003, 2004 and 2005................   F-3
        Consolidated Balance Sheets at December 31, 2004 and 2005.............................................   F-4
        Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31,
          2003, 2004 and 2005.................................................................................   F-6
        Consolidated Statements of Cash Flows for the Years Ended December 31, 2003, 2004 and 2005............   F-7
        Notes to Consolidated Financial Statements............................................................   F-10
        Schedule II
</TABLE>

      (b)  Exhibits
           --------

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   Option Plan to 13 employees of Delta Galil and/or its subsidiaries*

4.6   Option Plan to Arnon Tiberg*

4.7   Option Plan to 70 employees of Delta Galil and/or its subsidiaries***

4.8   Delta Galil Industries Ltd. 2002 Share Option Plan*****

4.9   Form of Indemnification Undertaking******

4.10  2006 Incentive Plan

4.11  Delta Galil Industries Ltd. 2006 Option Plan

8.1   List of significant subsidiaries

12.1  Section 302 Certification of Dov Lautman

12.2  Section 302 Certification of Yossi Hajaj

13.1  Section 906 Certification of Dov Lautman

13.2  Section 906 Certification of Yossi Hajaj

14.1  Consent of PricewaterhouseCoopers LLP

14.2  Consent of Baker Tilly

14.3  Consents of Allied for Accounting and Auditing, Member Firm of Ernst &
      Young Global

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

      * 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

                                     - 69 -
<PAGE>

      *** 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 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.
      +Portions of this exhibit have been omitted and will be filed separately
      with the secretary of the Securities and Exchange Commission pursuant to a
      confidential treatment request.

                                     - 70 -
<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: June 28, 2006

                                     - 71 -
<PAGE>

                           DELTA GALIL INDUSTRIES LTD.
                            (An Israeli corporation)
                        CONSOLIDATED FINANCIAL STATEMENTS
                      FOR THE YEAR ENDED DECEMBER 31, 2005

<PAGE>

                           DELTA GALIL INDUSTRIES LTD.
                            (An Israeli corporation)
                        CONSOLIDATED FINANCIAL STATEMENTS
                      FOR THE YEAR ENDED DECEMBER 31, 2005

                                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-58

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

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

<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, 2005 and 2004 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, 2005. 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 did not audit the financial statements of
certain subsidiaries, whose assets included in consolidation constitute 12% of
total consolidated assets as of December 31, 2004, and whose revenues included
in consolidation constitute less than 1% and 2% of total consolidated revenues
for the years ended December 31, 2004 and 2003, respectively. Those financial
statements were audited by other auditors, whose reports thereon have been
furnished to us, and our opinion expressed here in, insofar as it relates to
amounts included for those subsidiaries, is based solely on the reports of the
other auditors.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by 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 auditors provide a reasonable basis
for our opinion.

In our opinion, based on our audits and the reports of the other auditors, the
consolidated financial statements referred to above, present fairly, in all
material respects, the consolidated financial position of the Company and its
subsidiaries as of December 31, 2005 and 2004, and the consolidated results of
their operations, and cash flows for each of the three years in the period ended
December 31, 2005, in conformity with accounting principles generally accepted
in the United States of America.


                                              /s/ Kesselman & Kesselman
Tel-Aviv, Israel                                  Kesselman & Kesselman
    June 28, 2006                           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 (losses) per share)

<TABLE>
<CAPTION>
                                                                      YEAR ENDED DECEMBER 31
                                                               ------------------------------------
                                                                  2005         2004         2003
                                                               ----------   ----------   ----------
<S>                                                            <C>          <C>          <C>
Net revenues                                                   $  684,481   $  654,269   $  580,130
Cost of revenues                                                  582,799      533,036      463,863
                                                               ----------   ----------   ----------
Gross profit                                                      101,682      121,233      116,267
Selling, marketing, general and administrative expenses           107,008       98,646       82,089
Amortization of intangible asset                                      779
Gain (loss) on sale of fixed assets                                   (77)         922        3,645
Impairment of fixed assets                                          7,415
Restructuring expenses                                              9,102        1,100        1,007
Goodwill impairment                                                 5,505
                                                               ----------   ----------   ----------
Operating income (loss)                                           (28,204)      22,409       36,816
Financial expenses - net                                           10,218        6,231        5,637
Other income - net                                                    300          958          252
                                                               ----------   ----------   ----------
Income (loss) before taxes on income                              (38,122)      17,136       31,431
Income tax benefit (expense)                                        2,302       (2,846)      (7,340)
                                                               ----------   ----------   ----------
                                                                  (35,820)      14,290       24,091
Share in losses of associated companies                               (27)        (237)        (300)
Minority interests, net                                              (500)      (1,368)        (439)
                                                               ----------   ----------   ----------
Net income (loss)                                              $  (36,347)  $   12,685   $   23,352
                                                               ==========   ==========   ==========
Earnings (loss) per share:
  Basic                                                        $    (1.94)  $     0.69   $     1.28
                                                               ==========   ==========   ==========
  Diluted                                                      $    (1.94)  $     0.67   $     1.24
                                                               ==========   ==========   ==========
Weighted average number of shares
    (in thousands):
  Basic                                                            18,695       18,478       18,313
                                                               ==========   ==========   ==========
  Diluted                                                          18,695       18,834       18,763
                                                               ==========   ==========   ==========
</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)

<TABLE>
<CAPTION>
                                                                     DECEMBER 31
                                                               -----------------------
                                                                  2005         2004
                                                               ----------   ----------
<S>                                                            <C>          <C>
                            A s s e t s
Current assets:
  Cash and cash equivalents                                    $   14,595   $   22,150
  Accounts receivable:
     Trade                                                        104,424      105,129
     Other                                                         13,244       10,627
  Inventories                                                     147,142      183,767
  Assets held for sale                                              7,420
  Deferred income taxes                                             4,726        3,675
                                                               ----------   ----------
         T o t a l  current assets                                291,551      325,348
                                                               ----------   ----------
Investments and long-term receivables:
  Associated company                                                               455
  Funds in respect of employee rights upon retirement               7,021        6,852
  Long-term receivables, net of current maturities                    148          226
  Deferred income taxes                                               267
                                                               ----------   ----------
                                                                    7,436        7,533
                                                               ----------   ----------
Property, plant and equipment,
  net of accumulated depreciation and amortization                109,131      128,341
                                                               ----------   ----------
Goodwill                                                           53,689       57,920
                                                               ----------   ----------
Intangible assets                                                  14,499       14,778
                                                               ----------   ----------
Deferred charges, net of accumulated amortization                     267          577
                                                               ----------   ----------
           T o t a l  assets                                   $  476,573   $  534,497
                                                               ==========   ==========
</TABLE>

           /s/ D. Lautman                         /s/ G. Morag
      -----------------------------        -----------------------------
               D. Lautman                             G. Morag
       Chairman of the Board & CEO                    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)

<TABLE>
<CAPTION>
                                                                     DECEMBER 31
                                                               -----------------------
                                                                  2005         2004
                                                               ----------   ----------
<S>                                                            <C>          <C>

                  Liabilities and shareholders' equity
Current liabilities:
  Short-term bank credit                                       $   80,560   $   55,603
  Current maturities of long-term bank loans and
     other liability                                               29,623       27,942
  Accounts payable and accruals:
     Trade                                                         61,255       80,338
     Other                                                         39,164       34,083
                                                               ----------   ----------
         T o t a l  current liabilities                           210,602      197,966
                                                               ----------   ----------
Long-term liabilities:
  Bank loans and other liability, net of current maturities        69,677       99,437
  Liability for employee rights upon retirement                     7,850        7,408
  Deferred income taxes                                             1,267        4,894
                                                               ----------   ----------
         T o t a l  long-term liabilities                          78,794      111,739
                                                               ----------   ----------
Commitments and contingent liabilities, see note 9
         T o t a l  liabilities                                   289,396      309,705
                                                               ----------   ----------
Minority interests                                                  2,863        3,711
                                                               ----------   ----------
Shareholders' equity:
  Ordinary shares of NIS 1 par value
     December 31, 2005 and 2004:
     Authorized - 26,000,000 shares;
     Issued - 19,947,849 shares;
     Issued and paid - 19,901,967 shares                           21,840       21,840
  Additional paid-in capital                                      100,749      100,749
  Retained earnings                                                72,633      108,980
  Accumulated other comprehensive loss                             (1,208)        (788)
  Treasury shares, at cost (1,206,802 shares,
     in December 31, 2005 and 2004)                                (9,700)      (9,700)
                                                               ----------   ----------
         T o t a l  shareholders' equity                          184,314      221,081
                                                               ----------   ----------
         T o t a l  liabilities and shareholders' equity       $  476,573   $  534,497
                                                               ==========   ==========
</TABLE>

    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
                                                                  -----------------------   ADDITIONAL
                                                                  NUMBER OF                  PAID-IN      RETAINED
                                                                    SHARES     PAR VALUE     CAPITAL      EARNINGS
                                                                  ----------   ----------   ----------   ----------




<S>                                                                   <C>      <C>          <C>          <C>
BALANCE AT JANUARY 1, 2003                                            19,680   $   21,792   $   98,030   $   90,748
CHANGES DURING 2003:
  Net income                                                                                                 23,352
  Losses in respect of derivative instruments designated as
     a cash-flow hedge (net of related taxes of $474,000)
  Differences from translation of foreign currency
     financial statements
  Additional minimum pension liability adjustment (net
     of related taxes of $25,000)

  Total comprehensive income
  Exercise of employee stock options                                     181           38        1,387
  Tax benefit in respect of employee stock options exercised                                       318
  Cash dividend ($0.52 per share)                                                                            (9,493)
                                                                  ----------   ----------   ----------   ----------
BALANCE AT DECEMBER 31, 2003                                          19,861   $   21,830   $   99,735   $  104,607
CHANGES DURING 2004:
  Net income                                                                                                 12,685
  Gains in respect of derivative instruments designated as
     a cash-flow hedge (net of related taxes of $798,000)
  Differences from translation of foreign currency financial
     statements
  Additional minimum pension liability adjustment (net of
     related taxes of $30,000)

  Total comprehensive income
  Exercise of employee stock options                                      41           10          321
  Tax benefit in respect of employee stock options exercised                                        79
  Reissuance of treasury shares on acquisition of Burlen
     (see note 2a)                                                                                 614
  Cash dividend ($0.45 per share)                                                                            (8,312)
                                                                  ----------   ----------   ----------   ----------
BALANCE AT DECEMBER 31, 2004                                          19,902   $   21,840   $  100,749   $  108,980
CHANGES DURING 2005:
  Net Loss                                                                                                  (36,347)
  Differences from translation of foreign currency financial
     statements
  Additional minimum pension liability adjustment (net of
     related taxes of $65,000)

  Total comprehensive loss
                                                                  ----------   ----------   ----------   ----------
BALANCE AT DECEMBER 31, 2005                                          19,902   $   21,840   $  100,749   $   72,633
                                                                  ==========   ==========   ==========   ==========

<CAPTION>
                                                                               ACCUMULATED
                                                                                  OTHER                   TREASURY
                                                                              COMPREHENSIVE                SHARES,
                                                                              INCOME (LOSS)                AT COST      TOTAL
                                                                  ------------------------------------   ----------   ----------
                                                                   CURRENCY     MINIMUM
                                                                  TRANSLATION   PENSION     UNREALIZED
                                                                  ADJUSTMENTS   LIABILITY      LOSS
                                                                  ----------   ----------   ----------
<S>                                                               <C>          <C>         <C>           <C>          <C>
BALANCE AT JANUARY 1, 2003                                                     $     (825)  $     (581)  $  (11,335)  $  197,829
CHANGES DURING 2003:
  Net income                                                                                                              23,352
  Losses in respect of derivative instruments designated as
     a cash-flow hedge (net of related taxes of $474,000)                                       (1,134)                   (1,134)
  Differences from translation of foreign currency
     financial statements                                                                                                      *
  Additional minimum pension liability adjustment (net
     of related taxes of $25,000)                                                      37                                     37
                                                                                                                      ----------
  Total comprehensive income                                                                                              22,255
  Exercise of employee stock options                                                                                       1,425
  Tax benefit in respect of employee stock options exercised                                                                 318
  Cash dividend ($0.52 per share)                                                                                         (9,493)
                                                                  ----------   ----------   ----------   ----------   ----------
BALANCE AT DECEMBER 31, 2003                                                   $     (788)  $   (1,715)  $  (11,335)  $  212,334
CHANGES DURING 2004:
  Net income                                                                                                              12,685
  Gains 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                                                                                         331
  Tax benefit in respect of employee stock options exercised                                                                  79
  Reissuance of treasury shares on acquisition of Burlen
     (see note 2a)                                                                                            1,635        2,249
  Cash dividend ($0.45 per share)                                                                                         (8,312)
                                                                  ----------   ----------   ----------   ----------   ----------
BALANCE AT DECEMBER 31, 2004                                      $       45   $     (833)         -,-   $   (9,700)  $  221,081
CHANGES DURING 2005:
  Net Loss                                                                                                               (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                                      $     (276)  $     (932)         -,-   $   (9,700)  $  184,314
                                                                  ==========   ==========   ==========   ==========   ==========
</TABLE>

                               * Less than $1,000.

    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
                                                                              --------------------------------------
                                                                                 2005          2004          2003
                                                                              ----------    ----------    ----------
<S>                                                                           <C>           <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss)                                                           $  (36,347)   $   12,685    $   23,352
  Adjustments to reconcile net income (loss) to net cash provided
     by operating activities:
     Income and expenses not involving cash flows:
       Minority interests in profits of subsidiaries - net                           500         1,368           439
       Share in losses  of associated companies, net                                  27           237           300
       Depreciation and amortization                                              15,811        15,185        14,530
       Impairment of fixed assets                                                  9,753
       Goodwill impairment                                                         5,505
       Write-down of other investments                                                                           634
       Deferred income taxes - net                                                (4,872)         (279)       (3,555)
       Restructuring expenses                                                      4,132         1,310           194
       Changes in accrued liability for employee rights upon
           retirement                                                                (16)        1,023           409
       Loss (gain) on amounts funded in respect of employee
          rights upon retirement                                                     120          (416)          214
       Capital loss (gain) on sale of fixed assets
           and subsidiary shares                                                      77          (922)       (3,645)
       Capital gain from realization of other investments                           (300)         (958)         (885)
       Erosion of long-term receivables                                                2            (6)          (30)
       Exchange differences (erosion) of principal of long-term
          bank loans - net                                                                        (180)        1,043
     Changes in operating assets and liabilities:
       Decrease (increase) in accounts receivable                                 (2,130)        1,798        15,095
       Increase (decrease) in accounts payable and accruals                      (17,127)       12,204        (5,061)
       Decrease (increase) in inventories                                         36,469       (20,078)         (173)
                                                                              ----------    ----------    ----------
  Net cash provided by operating activities - forward                         $   11,604    $   22,971    $   42,861
                                                                              ==========    ==========    ==========
</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
                                                                              --------------------------------------
                                                                                 2005          2004          2003
                                                                              ----------    ----------    ----------
<S>                                                                           <C>           <C>           <C>
Brought forward                                                               $   11,604    $   22,971    $   42,861
                                                                              ----------    ----------    ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Acquisition of subsidiaries (1)                                                 (1,000)      (56,039)      (10,101)
  Additional payment allocated to goodwill                                        (1,274)       (6,700)       (2,003)
  Purchase of property, plant and equipment                                      (13,034)      (13,484)      (14,925)
  Investment grants relating to property, plant and equipment                                    1,074         1,099
  Other investments                                                                                (58)
  Amounts carried to intangible assets                                              (500)
  Proceeds from sale of property, plant and equipment                              1,071         4,318         6,091
  Proceeds from realization of other investments                                     300         2,640         2,567
  Proceeds from sale of subsidiary shares                                                                        250
  Loans granted to employees                                                         (85)         (260)         (350)
  Collection of associated company's loan                                            526
  Dividend from associated company                                                    20
  Collection of employees loans                                                      223           313           345
  Loans granted to associated company                                                (80)          (26)         (221)
  Amounts funded in respect of employee rights upon
     Retirement                                                                     (627)         (667)       (1,214)
  Amounts paid in respect of employee rights upon
     Retirement                                                                       13                          57
                                                                              ----------    ----------    ----------
  Net cash used in investing activities                                          (14,447)      (68,889)      (18,405)
                                                                              ----------    ----------    ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Long-term bank loans and other long-term liabilities                                         119,000
  Repayment of long-term loans and other long-term liabilities                   (28,079)      (10,430)      (10,335)
  Dividend to the Company's shareholders                                                        (8,312)       (9,493)
  Dividend to minority shareholders in a subsidiary                               (1,366)         (863)         (778)
  Short-term bank credit - net                                                    24,957       (48,890)       (2,067)
  Amounts carried to deferred charges                                               (156)         (597)
  Proceeds from exercise of options                                                                331         1,425
                                                                              ----------    ----------    ----------
  Net cash provided by (used in) financing activities                             (4,644)       50,239       (21,248)
                                                                              ----------    ----------    ----------
  TRANSLATION DIFFERENCES ON CASH AND
      CASH EQUIVALENTS OF FOREIGN CURRENCY
      CONSOLIDATED SUBSIDIARY                                                        (68)          130             *
  NET INCREASE (DECREASE) IN CASH AND CASH
      EQUIVALENTS                                                                 (7,555)        4,451         3,208
  CASH AND CASH EQUIVALENTS AT BEGINNING
      OF YEAR                                                                     22,150        17,699        14,491
                                                                              ----------    ----------    ----------
  CASH AND CASH EQUIVALENTS AT END OF YEAR                                    $   14,595    $   22,150    $   17,699
                                                                              ==========    ==========    ==========
</TABLE>

                               * Less than $1,000

(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
                                                                              --------------------------------------
                                                                                 2005          2004          2003
                                                                              ----------    ----------    ----------
<S>                                                                           <C>           <C>           <C>
    SUPPLEMENTARY DISCLOSURE OF CASH FLOW
       INFORMATION - CASH PAID DURING THE
       YEAR FOR:
       Interest                                                               $    8,527    $    4,133    $    3,660
                                                                              ==========    ==========    ==========
       Income taxes                                                           $    2,268    $    3,169    $    9,478
                                                                              ==========    ==========    ==========
(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    $    2,091
       Long-lived assets                                                                         9,636         6,642
       Intangible asset                                                                         14,778
       Goodwill arising on acquisition                                                           4,930         1,368
                                                                                            ----------    ----------
                                                                                                59,288        10,101
    Reissuance of treasury shares                                                               (2,249)
    Amount payable                                                                 1,000        (1,000)
                                                                              ----------    ----------    ----------
    Cash paid - net                                                           $    1,000    $   56,039    $   10,101
                                                                              ==========    ==========    ==========
</TABLE>

Supplementary information on investing activities not involving cash flows:

In 2005, 2004 and 2003, the net changes in outstanding balances of trade
payables in respect of the purchase of property, plant and equipment were an
increase (decrease) of $0.6 million, $0.1 million and $(1.1) 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 six reportable operating
                    segments - Delta USA, U.S. Upper market, Europe, Socks,
                    Delta marketing Israel and China. As to the Group's segments
                    and principal markets see note 15.

                    A significant portion of the Group's revenues is derived
                    from three principal customers. See note 12a and 15c.

               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.

                                     F - 10
<PAGE>

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

NOTE 1 -  SIGNIFICANT ACCOUNTING POLICIES (continued):

                    The functional currencies of a subsidiary which was acquired
                    in 2003 (see also note 2c) and an associated company are
                    their local currencies (EURO and NIS, respectively). The
                    financial statements of these subsidiaries are 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 income (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 statement 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.

          c.   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.

          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 of materials (on the "moving average" basis), labor
               and an appropriate portion of indirect manufacturing costs.

          e.   Investments in an associated company

               An "associated company" is a company over which significant
               influence is exercised, but which is not a consolidated
               subsidiary. An associated company is accounted for by the equity
               method.

                                     F - 11
<PAGE>

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

NOTE 1 -  SIGNIFICANT ACCOUNTING POLICIES (continued):

          f.   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 $ 33.2 million and $ 34.5 million at December 31, 2005
               and 2004, 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%)

               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.

          g.   Intangible Assets

               The company's intangible assets relate to the acquisition of
               subsidiary and represent customer relationships that are
               amortized over a period of 20 years, commencing 2005, see note
               2a.

               Also included among intangible assets is a certain exclusive
               license acquired by the company in the amount of $500 thousands.

               The company estimates that the useful life of this license is 3
               years. The license will be amortized over this period by the
               straight - line method.

                                     F - 12
<PAGE>

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

NOTE 1 -  SIGNIFICANT ACCOUNTING POLICIES (continued):

          h.   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.

          i.   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.

               Amortization of deferred charges included among "financial
               expenses- net" were $ 466 thousand, $ 353 thousand and $ 250
               thousand, for the years ended December 31, 2005, 2004 and 2003,
               respectively.

          j.   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 certain intangible assets, 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. As for impairment charge of
               fixed assets recognized in 2005 see note 5f and note 12e. For
               assets held for sale, impairment losses are recorded when the
               carrying amount of the asset exceeds fair value less cost to
               sell.

          k.   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.

                                     F - 13
<PAGE>

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

NOTE 1 -  SIGNIFICANT ACCOUNTING POLICIES (continued):

               As stated in note 11a, 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.

          l.   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.

          m.   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.

          n.   Concentration of credit risks - allowance for doubtful accounts

               The Group's cash and cash equivalents as of December 31, 2005 and
               2004 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 sales is to 3 principal customers
               (see also note 15c). The balance receivables from these principal
               customers as of December 31, 2005 and 2004 were $ 41,070
               thousands and $ 47,982 thousands, respectively (see also note
               12a). 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.

                                     F - 14
<PAGE>

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

NOTE 1 -  SIGNIFICANT ACCOUNTING POLICIES (continued):

               The net bad debt income for the years ended December 31, 2005,
               2004 and 2003 aggregated $ 143 thousand, $ 950 thousand and $ 309
               thousand, respectively. These net bad debt income include income
               that were credited directly to cost and expenses and were not
               reflected in the allowance of doubtful accounts in the amounts of
               $469 thousands, $866 thousands and $216 thousands for the years
               ended December 31, 2005, 2004 and 2003, respectively.

          o.   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, 2005, 2004 and 2003 were approximately $ 18 million,
               $ 20 million and $ 17 million, respectively.

          p.   Advertising costs

               These costs are expensed as incurred. Advertising costs for the
               years ended December 31, 2005, 2004 and 2003 were $ 2.5 million,
               $ 2.1 million and $ 1.9 million, respectively.

          q.   Stock based compensation

               Stock options granted to employees are accounted for under the
               recognition and measurement principles of APB No. 25, "Accounting
               for Stock Issued to Employees", and related interpretations.
               Under APB 25, compensation cost for employee stock option plans
               is measured using the intrinsic value based method of accounting.

               Accordingly, the difference, if any, between the quoted market
               price of the ordinary shares on the date of grant of the options
               and the exercise price of such options is amortized by the
               accelerated amortization method, against income (loss), over the
               expected service period (up to four years).

               FAS 123, "Accounting for Stock-Based Compensation", established a
               fair value based method of accounting for employee stock options
               or similar equity instruments, and encourages adoption of such
               method for stock compensation plans. However, it also allows
               companies to continue to account for those plans using the
               accounting treatment prescribed by APB 25. The Company has
               elected to continue accounting for employee stock option plans
               under APB 25, and has accordingly complied with the disclosure
               requirements set forth in FAS 123, as amended by FAS 148, for
               companies electing to apply APB 25 (see also note 1u(1)).

                                     F - 15
<PAGE>

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

NOTE 1 -  SIGNIFICANT ACCOUNTING POLICIES (continued):

               The following table illustrates the Proforma effect on net income
               (loss) and earnings (loss) per share assuming the Company has
               applied the fair value recognition provisions of FAS 123 to its
               stock-based employee compensation:

<TABLE>
<CAPTION>
                                                                         YEAR ENDED DECEMBER 31
                                                                  ------------------------------------
                                                                     2005         2004         2003
                                                                  ----------   ----------   ----------
                                                                             $ in thousands
                                                                        (except per share data)
                                                                  ------------------------------------
               <S>                                                <C>          <C>          <C>
               Net income (loss), as reported                     $  (36,347)  $   12,685   $   23,352
               Add - stock-based employee compensation
               expense included in reported net income (loss)
                   net of related tax effect                             NIL          NIL          NIL
               Less - stock-based employee compensation
                expense determined under fair value method,
                    net of related tax effect                           (331)        (690)      (1,384)
                                                                  ----------   ----------   ----------
               Pro forma net income (loss)                        $  (36,678)  $   11,995   $   21,968
                                                                  ==========   ==========   ==========
               Earnings (loss) per share:
                   Basic - as reported                            $    (1.94)  $     0.69   $     1.28
                   Basic - pro forma                              $    (1.96)  $     0.65   $     1.20
                   Diluted - as reported                          $    (1.94)  $     0.67   $     1.24
                   Diluted - pro forma                            $    (1.96)  $     0.64   $     1.17
</TABLE>

               The fair value of options granted during 2005, 2004 and 2003 was
               $0, $452 and $72 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:

                                                2004            2003
                                            ------------    ------------
               Dividend yield                        3.5%              5%
                                            ============    ============
               Expected volatility                 28.00%          27.33%
                                            ============    ============
               Risk-free interest rate                 4%              1%
                                            ============    ============
               Expected life - in years             4.25            4.25
                                            ============    ============

          r.   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 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 is anti-dilutive.

                                     F - 16
<PAGE>

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

NOTE 1 -  SIGNIFICANT ACCOUNTING POLICIES (continued):

          s.   Derivatives

               The Company enters into forward exchange contracts to hedge the
               cash flows resulting from sales of products, salaries and wages,
               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 "Gains or losses in respect of
               derivative instruments designated as a cash-flow hedge, net of
               related tax" 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 in
               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.

          t.   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, net of related taxes, differences from translation of
               foreign currency financial statements of a subsidiary and an
               associated company and additional minimum pension liability
               adjustments, net of related taxes.

          u.   Recently issued accounting pronouncements:

               1)   FAS 123 (revised 2004) Share-based Payment

                    In December 2004, the Financial Accounting Standards Board
                    ("FASB") issued the revised Statement of Financial
                    Accounting Standards ("FAS") No. 123, Share-Based Payment
                    (FAS 123R), which addresses the accounting for share-based
                    payment transactions in which the company obtains employee
                    services in exchange for (a) equity instruments of the
                    company or (b) liabilities that are based on the fair value
                    of the company's equity instruments or that may be settled
                    by the issuance of such equity instruments .In March 2005,
                    the SEC issued Staff Accounting Bulletin No. 107 (SAB 107)
                    regarding the SEC's interpretation of FAS 123R.

                                     F - 17
<PAGE>

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

NOTE 1 -  SIGNIFICANT ACCOUNTING POLICIES (continued):

                    FAS 123R eliminates the ability to account for employee
                    share-based payment transactions using APB Opinion No. 25 -
                    "Accounting for Stock Issued to Employees", and requires
                    instead that such transactions be accounted for using the
                    grant-date fair value based method. This Statement will be
                    effective for public companies at the beginning of their
                    next fiscal year that begins after June 15, 2005 (first
                    quarter of 2006 for the Company). Early adoption of FAS 123R
                    is encouraged. This Statement applies to all awards granted
                    or modified after the Statement's effective date. In
                    addition, compensation cost for the unvested portion of
                    previously granted awards that remain outstanding on the
                    Statement's effective date shall be recognized on or after
                    the effective date, as the related services are rendered,
                    based on the awards' grant-date fair value as previously
                    calculated for the pro-forma disclosure under FAS 123.

                    The company estimates that there will not be any cumulative
                    effect of adopting FAS 123R, as of its adoption date by the
                    company (January 1, 2006), based on the awards outstanding
                    as of December 31, 2005. This estimate does not include the
                    impact of additional awards, which may be granted, or
                    forfeitures, which may occur subsequent to December 31, 2005
                    and prior to the adoption of FAS 123R.

                    The Company expects that upon the adoption of FAS 123R, as
                    of January 1, 2006, the Company will apply the modified
                    prospective application transition method, as permitted by
                    the Statement. Under such transition method, upon the
                    adoption of FAS 123R, the Company's financial statements for
                    periods prior to the effective date of the Statement will
                    not be restated.

                    Compensation expense for outstanding awards for which the
                    requisite service had not been rendered as of the effective
                    date will be recognized over the remaining service period
                    using the compensation cost calculated for pro-forma
                    disclosure purposes under FAS 123.

                    Taking into account the transition method adopted by the
                    Company, the Company expects that the effect of applying
                    this statement on the Company's results of operations in
                    2006 as it relates to existing option plans would not be
                    materially different from the FAS 123 pro forma effect
                    previously reported. The balance of unamortized compensation
                    before taxation of options at December 31, 2005 is
                    immaterial. As to options granted after the balance sheet
                    date, see note 16.

               2)   FAS 151 Inventory Costs - an amendment of ARB 43, Chapter 4

                    In November 2004, the FASB issued FAS No. 151, "Inventory
                    Costs - an Amendment of ARB 43, Chapter 4" ("FAS 151").

                    This Statement amends the guidance in ARB No. 43, Chapter 4,
                    "Inventory Pricing", to clarify the accounting for abnormal
                    amounts of idle facility expense, freight, handling costs,
                    and wasted material.

                                     F - 18
<PAGE>

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

NOTE 1 -  SIGNIFICANT ACCOUNTING POLICIES (continued):

                    This Statement requires that those items be recognized as
                    current-period charges. In addition, this Statement requires
                    that allocation of fixed production overheads to the costs
                    of conversion be based on the normal capacity of the
                    production facilities. This Statement will be effective for
                    inventory costs incurred during fiscal years beginning after
                    June 15, 2005 (January 1, 2006 for the company). Earlier
                    application of FAS 151 is permitted. The provisions of this
                    Statement shall be applied prospectively. The company does
                    not except this statement to have a material effect on the
                    company's financial statements, its results of operations or
                    cash flows.

               3)   FAS 154 Accounting Changes and Error Corrections - a
                    replacement of Accounting Principles Board Opinion ("APB")
                    No. 20 and FASB Statement No. 3.

                    In June 2005, the Financial Accounting Standards Board
                    issued FAS No. 154, "Accounting Changes and Error
                    Corrections - a replacement of APB Opinion No. 20 and FASB
                    Statement No. 3". This Statement generally requires
                    retrospective application to prior periods' financial
                    statements of changes in accounting principle. Previously,
                    Opinion No. 20 required that most voluntary changes in
                    accounting principle were recognized by including the
                    cumulative effect of changing to the new accounting
                    principle in net income of the period of the change. FAS 154
                    applies to all voluntary changes in accounting principle. It
                    also applies to changes required by an accounting
                    pronouncement in the unusual instance that the pronouncement
                    does not include specific transition provisions. When a
                    pronouncement includes specific transition provisions, those
                    provisions should be followed. This Statement shall be
                    applied to accounting changes and corrections of errors made
                    in fiscal years beginning after December 15, 2005
                    (January 1, 2006 for the company).

               4)   FAS 155 - Accounting for Certain Hybrid Financial
                    Instruments, an amendment of FASB Statement No. 133 and 140.

                    In February 2006, the FASB issued FAS 155, accounting for
                    certain Hybrid Financial Instruments, an amendment of FASB
                    statements No.133 and 140. This statement permits fair value
                    measurement for any hybrid financial instrument that
                    contains an embedded derivative that otherwise would require
                    bifurcation. This statement 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. 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. Management is currently evaluating the impact of this
                    statement, if any, on the Company's financial statements or
                    its results of operations.

                                     F - 19
<PAGE>

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

NOTE 1 -  SIGNIFICANT ACCOUNTING POLICIES (continued):

               5)   FAS 156 - Accounting for servicing of Financial Assets - an
                    amendment of FASB Statement No. 140

                    In March 2006 the Financial Accounting Standards Board (the
                    "FASB") issued Statement of Financial Reporting No. 156
                    ("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, and is effective for financial
                    periods beginning after September 15, 2006. The Company is
                    currently evaluating the impact of FAS 156 on its financial
                    statements. Since the Company does not currently engage in
                    transfers of financial fixed assets , the company does not
                    anticipate that the adoption of this statement will have a
                    material impact on its financial statements.

               6)   EITF 04-13 - On September 15, 2005, the Emerging Issues Task
                    Force ("EITF") of the Financial Accounting Standards Board
                    ("FASB") reached a consensus on Issue 04-3, "Accounting for
                    Purchases and Sales of Inventory with the Same
                    Counterparty." EITF 04-13 describes the circumstances under
                    which two or more inventory transactions with the same
                    counterparty should be viewed as a single no monetary
                    transaction, and describes the circumstances under which no
                    monetary exchanges of inventory within the same line of
                    business should be recognized at fair value. EITF 04-13 will
                    be effective for transactions completed in reporting periods
                    beginning after March 15, 2006. The Company is currently
                    evaluating the applicability of EITF 04-13 to the Company's
                    inventory transactions.

          v.   Reclassifications

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

                                     F - 20
<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 of $ 1.0 million were paid in 2005. During
               2005, the company paid an additional $1.3 million 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 6.

               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, from 2006-2011. 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. Payment
               of $1.3 million was made against future consideration on March
               15, 2006. The aggregate additional consideration, will be
               recorded as additional goodwill.

               Another intangible asset acquired, which amounted to $ 14.8
               million, represents customer relationships and is amortized over
               a period of 20 years. Aggregate amortization expense for the
               years ended December 31, 2005, 2004 was $779 thousands and $0,
               respectively.

               Estimated amortization expenses over the years 2006-2010, is $739
               thousand per year, and $10.3 million in aggregate for the years
               2011-2024.

                                     F - 21
<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
                                                            ==========

               As to proforma results, see note d below.

                                     F - 22
<PAGE>

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

NOTE 2 -  ACQUISITIONS AND OTHER TRANSACTIONS (continued):

          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".

               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
                                                            ==========

                                     F - 23
<PAGE>

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

NOTE 2 -  ACQUISITIONS AND OTHER TRANSACTIONS (continued):

          c.   Acquisition of Auburn Hosiery Mills ("Auburn") - in 2003

               In November 2003, the Company acquired, through wholly owned
               subsidiaries, from Kellwood Inc. ("the seller") all of the shares
               of its two privately held U.S. and Irish companies, which are
               engaged in the operations of design, development, manufacturing,
               sourcing, marketing, distribution and sale of socks.

               The acquisition price amounted to $10.8 million in cash.

               The following table summarizes the estimated fair values of the
               assets acquired and liabilities assumed at the date of
               acquisition. The excess of cost of acquisition over the fair
               value of net assets on acquisition date of approximately $ 1.4
               million - was initially allocated to goodwill.

               At November 13, 2003 (in thousands)
               Cash and cash equivalents                    $      699
               Account receivable - Trade                        5,754
               Account receivable - Other                          700
               Inventories                                       9,448
               Property, plant, and equipment                    6,642
               Goodwill                                         *1,368
                                                            ----------
                         Total assets acquired              $   24,611
                                                            ==========
               Short-term bank credit                       $      213
               Accounts payable                                  7,435
               Accrued expenses - restructuring costs           *6,163
                                                            ----------
                         Net assets acquired                $   10,800
                                                            ==========

              *In 2003 the Company recorded liabilities in respect of
               restructuring costs in an amount of $6.2 million, which includes
               approximately $2.2 million for severance pay and related costs
               and $ 4.0 million for costs associated with the shut down of
               certain acquired facilities. An amount of $4.8 million was paid
               during 2004, $2.0 million related to repayment of government
               grants, $2.3 million related to employees, $0.1 million related
               to property, plant and equipment and $0.4 million related to
               manufacturing and others.

                                     F - 24
<PAGE>

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

NOTE 2 -  ACQUISITIONS AND OTHER TRANSACTIONS (continued):

               During 2004 the Company finalized the restructuring plan and
               liabilities in respect of restructuring costs, which resulted in
               a decrease of $1.9 million on the excess of cost of the
               acquisitions over the fair value of net assets on acquisition
               date. The decrease was allocated $1.4 million to goodwill (which
               off set the entire goodwill initially recognized) and $0.5
               million to property, plant and equipment.

          d.   Hereafter are certain unaudited pro forma combined income data
               assuming that the acquisition of Burlen had occurred on January
               1, 2004 and 2003, respectively, and the acquisition of Auburn had
               occurred on January 1, 2003. The unaudited pro forma financial
               information is not necessarily indicative of the combined results
               that would have been attained had the acquisitions of Burlen and
               Auburn occurred as of January 1, 2004 and 2003, respectively, nor
               is it necessarily indicative of future results.

                                                 YEAR ENDED DECEMBER 31
                                               ---------------------------
                                                   2004           2003
                                               ---------------------------
                                                       In thousands
                                               (Except earnings per share)
                                               ---------------------------
                                                       (Unaudited)
                                               ---------------------------
               Net Revenues                    $    763,375   $    721,172
                                               ============   ============
               Net Income                      $     19,853   $     24,664
                                               ============   ============
               Earning per share - Basic       $       1.06   $       1.33
                                               ============   ============
               Earning per share - Diluted     $       1.04   $       1.30
                                               ============   ============

                                     F - 25
<PAGE>

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

NOTE 3 -  OTHER INVESTMENT AND  INVESTMENT IN AN ASSOCIATED COMPANY

          a.   Sale of investment in Standard Textile Europe Ltd. ("STE") -
               other investment

               On August 4, 2000, a subsidiary signed an agreement for the sale
               of its investment in STE, which was an associated company (till
               January 2003), for $ 9 million, which bears interest of LIBOR
               plus 1.5% per year.

               The transaction was carried out in four equal batches, in the
               years 2004, 2003, 2002 and 2000. The capital gains recorded in
               the years 2004 and 2003 were $958 thousand, $885 thousand
               respectively, and were classified to "Other Income - net".

          b.   Edomit Ltd. ("Edomit") - an associated company

               The Company holds 50% of the shares in Edomit. The Company's
               investment in Edomit is accounted for by the equity method.

               The carrying amount of the investment in Edomit as of December
               31, 2005 and 2004 is a liability of $55 thousand and an asset of
               $ 455 thousand, respectively.

               During the year 2005 Edomit repaid the loan received from the
               company. The Company also received dividend from Edomit in the
               amount of $20 thousand and an additional dividend, in the amount
               of $16 thousand, which was declared by Edomit in 2005, will be
               received during 2006. As of December 31, 2005 and 2004 the
               carrying amount included a loan in the amount of $0 thousand and
               $446 thousand, respectively. The loan is linked to the Israeli
               CPI and bears no interest.

NOTE 4 -  LONG-TERM RECEIVABLES

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

          These balances mature in the following years after balance sheet
          dates:

                                                 DECEMBER 31
                                             -------------------
                                               2005       2004
                                             --------   --------
                                                In thousands
                                             -------------------
          First year - current maturities    $    107   $    193
                                             --------   --------
          Second year                             127        204
          Third year                                9         14
          Fourth year                               8          5
          Fifth year                                4          3
                                             --------   --------
                                             $    148   $    226
                                             --------   --------
                                             $    255   $    419
                                             ========   ========
                                     F - 26
<PAGE>

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

NOTE 5 -  PROPERTY, PLANT AND EQUIPMENT:

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

<TABLE>
<CAPTION>
                                                                    DECEMBER 31
                                                              -----------------------
                                                                 2005         2004
                                                              ----------   ----------
                                                                   In thousands
                                                              -----------------------
          <S>                                                 <C>          <C>
          Land and buildings, see b. below*                   $   32,205   $   41,627
          Machinery and equipment                                131,351      133,058
          Vehicles, office furniture and equipment
              and leasehold improvements                          54,318       48,623
                                                              ----------   ----------
                                                                 217,874      223,308
          Less - accumulated depreciation and amortization      (108,743)     (94,967)
                                                              ----------   ----------
                                                              $  109,131   $  128,341
                                                              ==========   ==========

          * Including building leased under capital lease -
            (see note 1f):
            Cost                                              $    1,414   $    1,414
            Less - accumulated depreciation                          501          409
                                                              ----------   ----------
                                                              $      913   $    1,005
                                                              ==========   ==========
</TABLE>

          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 $ 14.6 , $14.8 and $ 14.3 million in the years
               ended December 31, 2005, 2004 and 2003 (excluding impairment of
               assets and impairment of assets relating to restructuring, see
               note 12e).

          d.   As to pledges on assets, see notes 8d and 11a.

          e.   On December 31, 2005 assets most of which were vacated
               following the reorganization plan and the discontinuation of
               activities there, are held for sale and include real-estate in
               Israel, Ireland, Scotland, Hungary and the US. These assets were
               classified to current assets at their net book value of $7.4
               million. During the second quarter of 2006 the company sold its
               assets in Ireland and is currently in advanced negotiation to
               sell part of it's assets in the US and in Scotland. The company
               estimates that the rest of the assets will be realized during
               2006. See also note 15b, for segmental data.

                                     F - 27
<PAGE>

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

NOTE  5 - 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-free 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. See also note 15, for segmental
               data.

NOTE  6 - 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.

          Changes in the carrying amount of goodwill for the two years ended
December 31 2005, are as follows:

<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 - 28
<PAGE>

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

NOTE  6 - GOODWILL (continued):

<TABLE>
<CAPTION>
                                                        YEAR ENDED DECEMBER 31, 2004
                                          -------------------------------------------------------
                                                                In thousands
                                          -------------------------------------------------------
                                           DELTA      US UPPER
                                            USA        MARKET      EUROPE     SOCKS      TOTAL
                                          --------    --------    --------   --------   --------
          <S>                             <C>         <C>         <C>        <C>        <C>
          Goodwill at beginning of year   $ 46,732    $  2,119    $    753   $  4,754   $ 54,358
          Changes during the year:
            Goodwill arising from
               acquisition of
               subsidiaries, see notes 2a
               and 2b                        3,873                   1,057                 4,930
            Adjustment to purchase
               price, see note 2c                                              (1,368)    (1,368)
                                          --------    --------    --------   --------   --------
          Goodwill at end of year         $ 50,605    $  2,119    $  1,810   $  3,386   $ 57,920
                                          ========    ========    ========   ========   ========
</TABLE>

NOTE  7 - EMPLOYEE RIGHTS UPON RETIREMENT:

          a.   Employees related obligations are composed as follows:

                                                            DECEMBER 31
                                                       -----------------------
                                                          2005         2004
                                                       ----------   ----------
                                                             In thousands
                                                       -----------------------
                    Accrued severance pay              $    6,360   $    6,076
                    Obligation in respect of defined
                        benefit plans                       1,490        1,332
                                                       ----------   ----------
                                                       $    7,850   $    7,408
                                                       ==========   ==========

               As of December 31, 2005 and 2004, the Group had deposits of $ 5.8
               million and $ 5.7 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 marketed to market at each balance sheet date, with gains and
               losses recorded in the statement of operations. 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, 2005, 2004 and 2003 were $ 6.2 million, $ 7.5
               million and $ 7.0 million respectively (in 2005, 2004 and 2003,
               excluding $ 5,893 thousand, $ 190 thousand and $ 850 thousand,
               respectively, relating to the termination of employment, which
               were charged to restructuring expenses, see note 12e).

               The profit (loss) from deposits in respect of severance pay were
               $ (120) thousand, $ 416 thousand and $ (214) thousand in the
               years ended December 31, 2005, 2004 and 2003, 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 - 29
<PAGE>

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

NOTE  7 - 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, 2005, 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 $308 thousand and $233 thousand for the
                    years ended December 31, 2005 and 2004, respectively.

                                     F - 30
<PAGE>

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

NOTE  7 - EMPLOYEE RIGHTS UPON RETIREMENT (continued):

          c.   Certain details relating to defined benefit plans:

<TABLE>
<CAPTION>
                                                                      2005          2004
                                                                   ----------    ----------
                                                                         In thousands
                                                                   ------------------------
               <S>                                                 <C>         <C>
               Change in benefit obligation:
                  Benefit obligation at beginning of year          $    3,140    $    3,145
                  Interest cost                                           178           179
                  Actuarial loss                                          204            20
                  Benefit paid                                           (192)         (204)
                                                                   ----------    ----------
                  Benefit obligation at end of year                $    3,330    $    3,140
                                                                   ----------    ----------
               Change in plan assets:
                  Fair value of plan assets at beginning of year   $    2,999    $    2,888
                  Actual return on plan assets                            188            90
                  Employer contribution                                   125           225
                  Benefit paid, including plan expenses                  (223)         (204)
                                                                   ----------    ----------
                  Fair value of plan assets at end of year         $    3,089    $    2,999
                                                                   ----------    ----------
               Reconciliation of funded status:
                  Funded status (carryforward obligations)         $     (241)   $     (141)
                  Unrecognized net actuarial loss                       1,490         1,332
                  Adjustment to recognize minimum liability            (1,490)       (1,332)
                                                                   ----------    ----------
                  Accrued pension cost                             $     (241)   $     (141)
                                                                   ==========    ==========
</TABLE>

          The estimated future benefit payments in each of the five years
          subsequent to 2005 are as follows (in thousands):

                          2006                       $      191
                          2007                              191
                          2008                              199
                          2009                              213
                          2010                              217
                          2011-2015                       1,137
                                                     ----------
                                                     $    2,148
                                                     ==========

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

<TABLE>
<CAPTION>
                                                              2005     2004     2003
                                                             -----    -----    -----
                  <S>                                         <C>      <C>      <C>
                  Weighted average assumptions at end of
                  year:
                       Discount rate                          5.41%    5.75%    6.00%
                       Expected return on plan assets         6.00%    6.25%    6.25%
                       Rate of compensation increase          N/A      N/A      N/A
</TABLE>

                                     F - 31
<PAGE>

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

NOTE  7 - EMPLOYEE RIGHTS UPON RETIREMENT (continued):

          Additional information

          Increase in minimum liability included other comprehensive income, net
          of tax, $99 thousand and $45 thousand in year 2005 and 2004
          respectively.

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

                                            2005        2004
                                         ---------   ---------
          Projected benefit obligation   $   3,330   $   3,139
          Fair value of plan assets          3,089       2,999

          Contributions totaling $125 thousand and $225 thousand were made in
          the year ended December 31, 2005 and 2004, respectively. For the year
          ended December 31, 2006, the Company anticipates satisfying any
          minimum funding requirements by making contributions of $191 thousand.

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

<TABLE>
<CAPTION>
                                                          YEAR ENDED DECEMBER 31
                                                    ---------------------------------
                                                       2005       2004        2003
                                                    ---------   ---------   ---------
                                                              In thousands
                                                    ---------------------------------
                    <S>                             <C>         <C>         <C>
                    Interest cost                   $     178   $     179   $     183
                    Actual return on plan assets         (182)       (122)        (85)
                    Recognized net actuarial cost          72          10          13
                                                    ---------   ---------   ---------
                                                    $      68   $      67   $     111
                                                    =========   =========   =========
</TABLE>

          At December 31, 2005 and 2004, 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.

          d.   Cash flows information regarding the company's liability for
               employee rights upon retirement:

               1.   The Company expects to contribute in 2006, $610 thousand to
                    insurance companies and $225 thousand to contribution plans.

                                     F - 32
<PAGE>

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

NOTE  7 - EMPLOYEE RIGHTS UPON RETIREMENT (continued):

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

                                                  SEVERANCE PAY
                                                    BENEFITS
                                                  -------------
                                                  In thousands
                                                  -------------
                          2006                    $         49
                          2007                    $        267
                          2008                    $        249
                          2009                    $        580
                          2010                    $        147
                          Years 2011-2015         $      1,591

                    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 - 33
<PAGE>

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

NOTE  8 - LONG-TERM LIABILITIES - BANK LOANS AND OTHER LIABILITY:

          a.   Composition:

<TABLE>
<CAPTION>
                                                                     WEIGHTED
                                                                     AVERAGE
                                                                     INTEREST
                                                                       RATE
                                                                   ------------        DECEMBER 31
                                                                   DECEMBER 31,    -------------------
                                                                       2005          2005       2004
                                                                   ------------    --------   --------
                                                                         %            In thousands
                                                                   ------------    -------------------
               <S>                                                     <C>         <C>        <C>
               Bank loans - in dollars or linked thereto*              5.8%        $ 98,337   $126,131
               Bank loans - in other currencies                                                    216
               Other liability - obligation under capital lease,
                    see note 1f and c below - in dollars               8.6%             963      1,032
                                                                                   --------   --------
                                                                                     99,300    127,379
               L e s s - current maturities                                          29,623     27,942
                                                                                   --------   --------
                                                                                   $ 69,677   $ 99,437
                                                                                   ========   ========
</TABLE>

               *    In January 2006 the company repaid $25 million as part
                    of the new credit agreement. See e3 below.

          b.   Total liabilities (net of current maturities) mature in the
               following years after balance sheet dates:

                                                           DECEMBER 31
                                                      -------------------
                                                        2005       2004
                                                      --------   --------
                                                          In thousands
                                                      -------------------
                      Second year                     $ 23,229   $ 29,703
                      Third year                        23,236     23,270
                      Fourth year                       22,587     23,230
                      Fifth year                           100     22,584
                      Sixth year and thereafter            525        650
                                                      --------   --------
                                                      $ 69,677   $ 99,437
                                                      ========   ========

                                     F - 34
<PAGE>

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

NOTE  8 - 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, 2005:

                                                                In thousands
                                                                ------------
                    First year - current maturities                      158
                    Second year                                          158
                    Third year                                           158
                    Fourth year                                          158
                    Fifth year                                           158
                    Sixth year and thereafter                            632
                                                                ------------
                                                                       1,422
                    L e s s - amount representing interest               459
                                                                ------------
                                                                         963
                                                                ============

          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 its subsidiaries.

          e.   Delta Galil USA Inc., a subsidiary of the Company is a party to a
               credit agreement, which was amended, as of 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. The credit agreement provides for $ 130
               million in loans, of which $ 70 million are long term loans. The
               loan bears interest at a variable rate that is linked to the
               Libor. As of December 31, 2005, the interest rate on the long
               term loan was 5.9% and on the short-term credit was 5.65%. The
               principal of the long term loans is payable in 20 equal quarterly
               installments of approximately $3.5 million each until December 1,
               2009. As of December 31, 2005 the unutilized credit line was $ 24
               million.

               The credit agreement includes 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 2006 and in May 2006. The material changes contained in
               the amendments are 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 - 35
<PAGE>

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

NOTE  8 - 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 4.0 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.

               Delta Galil USA did not satisfy the covenant relating to the
               ratio of EBITDA to fixed charges, as in effect prior to the
               amendment in the agreement, for the year ended December 31, 2005.
               The amendment of January 2006 provided for a waiver of all of the
               financial covenants for the period ending December 31,
               2005.Management believes that Delta Galil USA will satisfy the
               covenants as currently in effect.

                                     F - 36
<PAGE>

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

NOTE  9 - COMMITMENTS AND CONTINGENT LIABILITIES:

          a.   Commitments

               The Company and its subsidiaries lease 34 facilities under
               operating leases. The leases (including extension options) for 20
               facilities expire on various dates between 2007 and 2029 and the
               remaining leases expired in 2006. The Company intends to renew
               some of these leases. The minimum future annual lease payment
               over each of the years 2006 to 2010 will amount to $9.2, $7.8,
               $6.5, $5.8 and $3.0 million, respectively. In the period from
               2011 to the end of the lease periods, the cumulative lease
               payments will amount to $ 16.4 million. The lease expenses for
               each of the years 2005, 2004 and 2003 were $ 9.3 million, $ 8.6
               million and $ 7.3 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 4% to
               16% of sales.

          c.   Contingent liabilities - Guarantees

               The Company and 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 10 - 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, 2005, the closing price per ADS on Nasdaq
                    was $5.98; the shares were quoted on the TASE on that date
                    at NIS 28.24 ($6.15).

               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)   In December 2002, the Company repurchased 565,000 of the
                    Company's shares for an amount of $ 6,215 thousands
                    (representing $ 11.0 per share).

               4)   On September 28, 2001, the Company's Board of Directors
                    approved the repurchase of Company shares for an amount of
                    up to $3.0 million. During 2002 and 2001 the Company
                    purchased 282,483 and 96,017 shares, respectively, in the
                    open market at an average price of $7.58 and $9.0 per share
                    in a total amount of $2,141 thousands and $860 thousands,
                    respectively.

               5)   As of December 31, 2005 and 2004, 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,
                    is 45,882.

               6)   The shares held by the Company have no voting rights and are
                    not entitled to receive dividends.

                                     F - 37
<PAGE>

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

NOTE 10 - SHAREHOLDERS' EQUITY (continued):

          b.   Stock options plans for employees and the Company's CEO:

               1)   On May 10, 1998, the Company's Board of Directors approved
                    an employee stock option plan for the grant, without
                    consideration, of 304,696 options, exercisable in purchase
                    of 319,931 ordinary shares of NIS 1 par value of the
                    Company, to thirteen senior employees of the Company and/or
                    its subsidiaries. All of the above options were granted in
                    June 1998. The exercise price of each option is $ 8.297,
                    based on the quoted price of the Company's shares on the
                    last day of trade prior to the Board of Directors'
                    resolution ($ 9.22), less 10%. The options vested in four
                    equal batches.

                    As of December 31, 2005, all the options are fully vested.
                    The options are exercisable over three years period,
                    commencing on the date that is two years after the date such
                    option vested. Any option not exercised within the said five
                    years will expire. The options expire over the years
                    2003-2006.

               2)   On September 10, 1998, the Company's Board of Directors
                    approved a plan for the grant, at no consideration, of
                    100,000 options to its CEO at that time, which are
                    exercisable in purchase of 100,000 shares of NIS 1 par value
                    of the Company. All of said options were granted in
                    September 1998. The exercise price of each option is $ 7.90,
                    based on the quoted price of the Company's share on the last
                    day of trade prior to the Board of Directors' resolution ($
                    8.77), less 10%. The options vested in four equal batches.
                    As of December 31, 2005, all the options are fully vested.
                    The exercise terms under the CEO's plan are identical to
                    those of the employees plan.

               3)   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 CEO), exercisable to 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: the first, second,
                    third and fourth batch vested in August 2001, 2002, 2003 and
                    2004, respectively. The options are exercisable over a three
                    years period, commencing one year after the vesting date of
                    each batch.

                    As of December 31, 2005, all the options are fully vested.
                    Any option not exercised within the said three years will
                    expire. The options expire over the years 2005-2008.

               4)   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 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 CEO) at an exercise price of $ 9. The options
                    vest in four equal batches. The first, second, third and
                    fourth batches will vest in November 2003, 2004, 2005 and
                    2006, 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.

                                     F - 38
<PAGE>

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

NOTE 10 - SHAREHOLDERS' EQUITY (continued):

                    In May 2003 the Company granted 30,000 options to three
                    employees of the Group at an exercise price of $10.76. The
                    first and the second batch vested in May 2004 and 2005,
                    respectively and the third and fourth batches will vest in
                    May 2004, 2005, 2006 and 2007 respectively. 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, 2005 95,000 options remain available for
                    grant under the plan.

               5)   The grant of options 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.

               6)   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.

               7)   Following is a summary of the status of the Company's stock
                    option plans:

<TABLE>
<CAPTION>
                                                                           YEAR ENDED DECEMBER 31
                                            -----------------------------------------------------------------------
                                                    2005                     2004                     2003
                                            ---------------------    ---------------------    ---------------------
                                                         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    1,832,071    $  13.84    1,830,702    $  13.50    2,038,562    $  13.07
Changes during the year:
   Granted - at market price                        -           -      110,000    $  14.65       30,000    $  10.76
   Exercised                                                           (41,756)   $   7.91     (180,109)   $   7.91
   Forfeited                                  (23,000)   $   9.00      (66,875)   $   9.34      (57,751)   $  11.35
   Expired                                   (247,066)   $  18.30
                                            ---------                ---------                ---------
Options outstanding at end of year          1,562,005    $  13.21    1,832,071    $  13.84    1,830,702    $  13.50
                                            =========                =========                =========
Options exercisable at end of year          1,238,005    $  13.79    1,106,821    $  14.69      528,952    $  17.15
                                            =========                =========                =========
</TABLE>

     *    Represents the number of shares arising upon exercise of options,
          based on the conversion ratio.

                                     F - 39
<PAGE>

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

NOTE 10 - SHAREHOLDERS' EQUITY (continued):

               8)   The following table summarizes information regarding options
                    outstanding at December 31, 2005:

                      NUMBER OF SHARES ISSUABLE UPON EXERCISE OF OPTIONS
               -----------------------------------------------------------------
                           OUTSTANDING                   VESTED     EXERCISABLE
               -------------------------------------  ------------  ------------
                                          WEIGHTED
                                          AVERAGE
                           BALANCE AT     REMAINING    BALANCE AT    BALANCE AT
               EXERCISE   DECEMBER 31,   CONTRACTUAL  DECEMBER 31,  DECEMBER 31,
                PRICES        2005          LIFE         2005          2005
               --------   ------------   -----------  ------------  ------------
                                            YEARS
                                         -----------
                  $8.30         37,130       0.7            37,130        37,130
                  $7.90         25,000       0.9            25,000        25,000
                 $21.07        494,875       1.5           494,875       494,875
                  $9.00        865,000       2.6           666,000       666,000
                 $10.76         30,000       3.1            15,000        15,000
                 $15.35         80,000       4.1            20,000             -
                 $12.74         30,000       4.3             7,500             -
                          ============                ============  ============
                             1,562,005                   1,265,505     1,238,005
                          ============                ============  ============

               9)   As to a new option plan, see note 16.

          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.

NOTE 11 - TAXES ON INCOME:

          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 5.

                                     F - 40
<PAGE>

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

NOTE 11 - TAXES ON INCOME (continued):

                    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. Through December 31, 2003, the
                    corporate tax rate was 36%. In July 2004, Amendment No. 140
                    to the Income Tax Ordinance was enacted. One of the
                    provisions of this amendment is that the corporate tax rate
                    is to be gradually reduced from 36% to 30%. 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 2004 and thereafter
                    are as follows: 2004 - 35%, 2005 - 34%, 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.

                    Pursuant to another amendment to the Income Tax Ordinance,
                    which became effective in 2003, capital gains are taxed at a
                    reduced rate of 25% from January 1, 2003, instead of the
                    regular corporate tax rate at which such gains were taxed
                    until the aforementioned date. The aforesaid amendment
                    stipulates that with regard to the sale of assets acquired
                    prior to January 1, 2003, the reduced tax rate will be
                    applicable only for the gain allocated to capital gains
                    earned after the implementation of the amendment, which will
                    be calculated, as prescribed by said amendment.

                                     F - 41
<PAGE>

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

NOTE 11 - 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 (derived from the Israeli companies) as
               of December 31, 2005 and 2004, aggregate to $ 51 million and $ 36
               million, respectively.

               Carryforward tax losses in Israel may be utilized indefinitely.

          d.   Deferred income taxes:

               1)   The deferred income taxes are composed as follows:
<TABLE>
<CAPTION>
                                                                             DECEMBER 31
                                                                       -----------------------
                                                                          2005         2004
                                                                       ----------   ----------
                                                                            In thousands
                                                                       -----------------------
                         <S>                                           <C>          <C>
                         Property, plant and equipment                 $    8,198   $   13,832
                         Inventories                                       (1,824)        (841)
                         Provisions for employee related obligations       (1,377)      (1,457)
                         Other                                               (116)         653
                         In respect of carry forward tax losses
                          (see c. above)                                  (17,539)     (10,968)
                         Valuation Allowance                                8,932
                                                                       ----------   ----------
                           Total                                       $   (3,726)  $    1,219
                                                                       ==========   ==========
</TABLE>

                                     F - 42
<PAGE>

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

NOTE 11 - TAXES ON INCOME (continued):

               2)   Deferred income taxes are presented in the balance sheets
                    as follows:

                                                             DECEMBER 31
                                                       -----------------------
                                                          2005         2004
                                                       ----------   ----------

                                                       -----------------------
                         Among current assets          $   (4,726)  $   (3,675)
                         Among non-current assets            (267)
                         Among long term liabilities        1,267        4,894
                                                       ----------   ----------
                                                       $   (3,726)  $    1,219
                                                       ==========   ==========

          e.   Income (loss) before taxes on income is composed as follows:

<TABLE>
<CAPTION>
                                                             YEAR ENDED DECEMBER 31
                                                      ------------------------------------
                                                         2005         2004         2003
                                                      ----------   ----------   ----------
                                                                  In thousands
                                                      ------------------------------------
                   <S>                                <C>          <C>          <C>
                   The Company and its Israeli
                    subsidiaries                      $  (26,757)  $    3,190   $   (4,832)
                   Non-Israeli subsidiaries              (11,365)      13,946       36,263
                                                      ----------   ----------   ----------
                                                      $  (38,122)  $   17,136   $   31,431
                                                      ==========   ==========   ==========
</TABLE>

          f.   Income tax (benefit) expense included in the statements of
               operations:

<TABLE>
<CAPTION>
                                                             YEAR ENDED DECEMBER 31
                                                   ------------------------------------------
                                                       2005           2004           2003
                                                   ------------   ------------   ------------
                                                                  In thousands
                                                   ------------------------------------------
                         <S>                       <C>            <C>            <C>
                         Current:
                           Israeli                 $      1,422   $      1,636   $        746
                           Non-Israeli                    2,911          1,941         10,292
                                                   ------------   ------------   ------------
                                                          4,333          3,577         11,038
                                                   ------------   ------------   ------------
                         Deferred:
                           Israeli                 $     (2,970)  $       (498)  $     (4,075)
                           Non-Israeli                   (1,902)           219            520
                                                   ------------   ------------   ------------
                                                         (4,872)          (279)        (3,555)
                                                   ------------   ------------   ------------
                         For previous years:
                           Israeli                 $       (173)  $       (516)  $        (30)
                           Non-Israeli                   (1,590)            64           (113)
                                                   ------------   ------------   ------------
                                                         (1,763)          (452)          (143)
                                                   ------------   ------------   ------------
                                                   $     (2,302)  $      2,846   $      7,340
                                                   ============   ============   ============
</TABLE>

                                     F - 43
<PAGE>

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

NOTE 11 - 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 (36% in 2003, 35% in
               2004 and 34% in 2005) and the actual tax expense (benefit):

<TABLE>
<CAPTION>
                                                                                           YEAR ENDED DECEMBER 31
                                                                                    ------------------------------------
                                                                                       2005         2004         2003
                                                                                    ----------   ----------   ----------
                                                                                                In thousands
                                                                                    ------------------------------------
               <S>                                                                  <C>          <C>          <C>
               Income (loss) before taxes, as reported in
                 the consolidated statements of operations                          $  (38,122)  $   17,136   $   31,431
                                                                                    ==========   ==========   ==========
               Theoretical tax expense (benefit)                                    $  (12,961)  $    5,997   $   11,315
               Additional tax expenses arising from reduced tax
                 rate on losses from an approved enterprise                                              73          380
               Increase (decrease) in tax arising from different tax
                 rate applicable to non-Israeli subsidiaries                             1,926       (2,575)      (2,834)
                                                                                    ----------   ----------   ----------
                                                                                       (11,035)       3,495        8,861
               Increase (decrease) in taxes resulting from permanent differences:
                 Disallowable deductions                                                 2,455          110           36
                 Previous years                                                         (1,763)        (452)        (143)
                 Difference between the basis of measurement
                  of income reported for tax purposes and
                  the basis of measurement of income for
                  financial reporting purposes - net                                       453         (807)         151
                 Valuation allowance                                                     8,932
                 Change in the tax rates on which tax expense was computed               1,154
                 Sundry - net                                                           (2,498)         500       (1,565)
                                                                                    ----------   ----------   ----------
               Taxes on income - in the consolidated statements
                 of operations                                                      $   (2,302)  $    2,846   $    7,340
                                                                                    ==========   ==========   ==========
</TABLE>

          h.   Tax assessments

               Tax assessments for the Company and most of its Israeli
               subsidiaries are considered final through the tax year 2000.

                                     F - 44
<PAGE>

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

NOTE 12 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION:

          Balance sheets:

<TABLE>
<CAPTION>
                                                                       DECEMBER 31
                                                               ---------------------------
                                                                   2005           2004
                                                               ------------   ------------
                                                                      In thousands
                                                               ---------------------------
          <S>                                                  <C>            <C>
          a.  Accounts receivable:
              1) Trade:
                 Outside Israel                                $     91,126   $     90,682
                 In Israel                                           13,298         14,447
                                                               ------------   ------------
                                                               $    104,424   $    105,129
                                                               ============   ============
                 Principal customers (see note 1n and 15c):
                     Customer 1                                $      8,556   $      2,656
                                                               ============   ============
                     Customer 2                                $     21,361   $     29,871
                                                               ============   ============
                     Customer 3                                $     11,153   $     15,455
                                                               ============   ============

              2) Other:
                 Investment grant receivable                                  $        646
                 Government departments                        $      2,935          1,501
                 Prepaid expenses                                     2,365          1,822
                 Deposits                                             1,009            858
                 Income receivable                                      103          1,184
                 Employees                                              311            380
                 Receivables from subcontractors                      4,159          2,987
                 Sundry                                               2,362          1,249
                                                               ------------   ------------
                                                               $     13,244   $     10,627
                                                               ============   ============
</TABLE>

                                     F - 45
<PAGE>

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

NOTE 12 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (continued):

<TABLE>
<CAPTION>
                                                                     DECEMBER 31
                                                             ---------------------------
                                                                 2005           2004
                                                             ------------   ------------
                                                                     In thousands
                                                             ---------------------------
          <S>                                                <C>            <C>
          b.   Inventories:
                 Finished products                           $    108,984   $    137,813
                 Products in process                               16,247         21,829
                 Raw materials and supplies                        11,519         12,797
                 Packaging and maintenance materials               10,392         11,328
                                                             ------------   ------------
                                                             $    147,142   $    183,767
                                                             ============   ============
</TABLE>

          c.   Short-term bank credit

               The weighted average interest rate of short-term bank credit as
               of December 31, 2005 and 2004 is 5.1% and 3.5%, respectively. A
               subsidiary is a party to a credit agreement, which was amended,
               as of December 9 2004 and during 2006, 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 $ 60 million in short term
               credit (see note 8e).

               Unutilized short-term credit lines of the Group (under the USA
               credit agreement and other credit agreements) as of December 31,
               2005 and 2004 aggregated to $ 109 million and $ 163 million,
               respectively.

<TABLE>
<CAPTION>
                                                                         DECEMBER 31
                                                                 ---------------------------
                                                                     2005           2004
                                                                 ------------   ------------
                                                                        In thousands
                                                                 ---------------------------
          <S>                                                    <C>            <C>
          d.   Accounts payable and accruals - other:
                 Employees and employee institutions             $      7,458   $      7,745
                 Provision for vacation and recreation pay              3,179          4,297
                 Government department                                  4,084          2,731
                 Accrued expenses                                      20,109         18,300
                 Accrued expenses - restructuring expenses              3,250
                 Other                                                  1,084          1,010
                                                                 ------------   ------------
                                                                 $     39,164   $     34,083
                                                                 ============   ============
</TABLE>

                                     F - 46
<PAGE>

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

NOTE 12 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (continued):

          Statements of operations:

          e.   Restructuring expenses:

               1)   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 and 2003 the company implemented restructuring plan
                    in the European segment totaling approximately $1.1 million
                    and $1.0 million respectively.

               2)   The primary components of the restructuring expenses are:

<TABLE>
<CAPTION>
                                                                              YEAR ENDED DECEMBER 31
                                                                    ------------------------------------------
                                                                        2005           2004           2003
                                                                    ------------   ------------   ------------
                                                                                   In thousands
                                                                    ------------------------------------------
                         <S>                                        <C>            <C>            <C>
                         Costs relating to workforce reduction      $      5,894   $        190   $        850
                         Impairment of fixed assets                        2,370             50            157
                         Receivables write-off                               180            860
                         Costs relating to other expenses                    658
                                                                    ------------   ------------   ------------
                                                                    $      9,102   $      1,100   $      1,007
                                                                    ============   ============   ============
</TABLE>

          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.

                                     F - 47
<PAGE>

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

NOTE 12 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (continued):

          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.

          The 2003 program

          During 2003, the Company initiated a restructuring program designed to
          reduce its cost structure (the "2003 program"). The 2003 Program
          included the closure of sewing plants in Scotland and in Israel. The
          2003 Program resulted in total restructuring charges to the Company of
          $1.0 million, which were recorded in the first quarter of 2003.

          The implementation of the 2003 Program in Scotland, which represented
          $0.9 million of the total charges of $1.0 million, consisted of the
          dismissal of approximately 100 persons who had previously been
          employed by the Company's European subsidiary.

          The implementation of the 2003 Program in Israel which represented
          $0.1 million of the total charges of $1.0 million consisted of the
          dismissal of approximately 70 employees in Israel, who had previously
          been employed by the Company's. 2003 Program was concluded by the end
          of the first quarter of 2003.

     3)   The following table summarizes the transactions in the restructuring
          accrued expenses for the 3 years ended December 31, 2005, in thousand:

<TABLE>
<CAPTION>
                                                       YEAR ENDED DECEMBER 31, 2005
                                    -------------------------------------------------------------------
                                    BALANCE AT                                               BALANCE AT
                                     DECEMBER                                                 DECEMBER
                                     31, 2004      EXPENSES      DEDUCTION       PAYMENT      31, 2005
                                    ----------    ----------    ----------     ----------    ----------
<S>                                        <C>    <C>           <C>            <C>           <C>
Cost relating to:
  Workforce reduction                             $    5,894*                  $   (2,486)   $    3,408*
  Assets impairment                                    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
                                    --------------------------------------------------------------------------------
                                    BALANCE AT                                                            BALANCE AT
                                     DECEMBER                                                              DECEMBER
                                     31, 2003      EXPENSES      REVERSAL        PAYMENT      DEDUCTION    31, 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)
   Assets impairment                                      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)    $   (4,990)   $     (910)         -,-
                                    ==========    ==========    ==========     ==========    ==========   ==========
</TABLE>

                                     F - 48
<PAGE>

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

NOTE 12 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (continued):

<TABLE>
<CAPTION>
                                                             YEAR ENDED DECEMBER 31, 2003
                                    --------------------------------------------------------------------------------
                                    BALANCE AT                                               ACQUISITION   BALANCE AT
                                     DECEMBER                                                    OF         DECEMBER
                                     31, 2002      EXPENSES      PAYMENT        DEDUCTION    SUBSIDIARY     31, 2003
                                    ----------    ----------    ----------     ----------    ----------    ----------
<S>                                        <C>    <C>           <C>            <C>           <C>           <C>
Cost relating to:
   Workforce reduction                            $      850    $     (850)
   Workforce reduction -relating
     to acquisition of subsidiary                                                                 2,063         2,063
   Assets impairment                                     157                         (157)
   Other expenses                                                                                 4,100         4,100
                                    ----------    ----------    ----------     ----------    ----------    ----------
                                           -,-    $    1,007    $     (850)    $     (157)   $    6,163    $    6,163
                                    ==========    ==========    ==========     ==========    ==========    ==========
</TABLE>

*    Including $670 thousand for long term workforce reduction accruals. The
     rest of the accrual would be paid during 2006 parallel to the execution of
     the plan.

**   The amount of $500 thousands was charged to other comprehensive loss
     related to differences from translations of foreign currency financial
     statements.

***  As to the reversal, see note 2c.


          f.   Financial expenses - net:

<TABLE>
<CAPTION>
                                                                      YEARS ENDED DECEMBER 31
                                                               ------------------------------------
                                                                  2005         2004         2003
                                                               ----------   ----------   ----------
                                                                           In thousands
                                                               ------------------------------------
                    <S>                                        <C>          <C>          <C>
                    Interest expenses                          $    9,891   $    4,923   $    3,824
                    Interest income                                  (245)         (42)         (58)
                    Exchange differences and other - net              572          763        1,259
                    Losses from derivatives instruments               -,-          587          612
                                                               ----------   ----------   ----------
                                                               $   10,218   $    6,231   $    5,637
                                                               ==========   ==========   ==========
</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>
                                                                        2005       2004       2003
                                                                      --------   --------   --------
                                                                               In thousands
                                                                      ------------------------------
                    <S>                                                 <C>        <C>        <C>
                    Weighted average number of
                      shares used in the computation of
                      basic earnings (loss) per share                   18,695     18,478     18,313
                    Add:
                      Net additional shares from the anticipated
                          exercise of stock options                          0        356        450
                                                                      --------   --------   --------
                    Weighted average number of
                      shares used in the computation of
                      diluted earnings per share                        18,695     18,834     18,763
                                                                      ========   ========   ========
                    Options which were not included in the
                      computation of diluted earnings (loss) per
                      share due to anti dilutive effect                  1,560        798        700
                                                                      ========   ========   ========
</TABLE>

                                     F - 49
<PAGE>

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

NOTE 13 - 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. Until 2004, derivative
               financial instruments ("derivatives") were utilized by the Group
               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

               Until 2004, the Company entered into most 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 and from salaries, wages and
               related expenses, would be affected by changes in exchange rates.
               The term of most of these contracts is less than one year.

               These transactions were mainly for the exchange of pounds
               sterling, Euro and NIS into 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, salaries,
               wages and related expenses transactions 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 period from January 1,
               2003 through December 31, 2004:

                                                           2004         2003
                                                        ----------   ----------
                                                             $ In thousands
                                                        -----------------------
                    Balance at beginning of year        $   (1,715)  $     (583)
                    Changes in effective portion of
                     derivatives designated as cash
                     flow hedges                               691       (2,905)
                    Reclassification into earnings
                     from other comprehensive income         1,822        1,299
                    Net of tax effect                         (798)         474
                                                        ----------   ----------
                    Balance at end of year                     -;-   $   (1,715)
                                                        ==========   ==========

               Hedge loss related to the portion of cash flow hedging
               instruments excluded from assessment of effectiveness had impact
               on earnings for 2004 and 2003 of $ 0.6 million and $ 0.7 million
               loss respectively. Cash flow hedges were not discontinued during
               the years ended December 31, 2004 and 2003.

               As of December 31, 2005 and 2004 the Company has no derivatives
               instruments outstanding.

                                     F - 50
<PAGE>

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

NOTE 13 - 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 (items included in working
               capital, long-term receivables - in insignificant amounts - and
               long-term liabilities); the Group also has derivatives.

               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, or are in immaterial amounts.

NOTE 14 - RELATED PARTIES - TRANSACTIONS AND BALANCES:

          a.   Transactions with related parties:

                                                     YEAR ENDED DECEMBER 31
                                                   ---------------------------
                                                    2005      2004      2003
                                                   -------   -------   -------
                                                           In thousands
                                                   ---------------------------
                    Net revenues                   $   409   $ 1,303   $ 2,433
                                                   =======   =======   =======
                    Purchases and other expenses   $     7   $    21   $   249
                                                   =======   =======   =======


               The above transactions were made with one of the 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 10b.

          b.   Related parties balances:

                                                                DECEMBER 31
                                                             -----------------
                                                              2005       2004
                                                             -------   -------
                                                               In thousands
                                                             -----------------
                    Current receivables - presented in
                     the balance sheets among "accounts
                     receivable - trade"                           -   $   126
                                                             =======   =======
                    Current liabilities - presented under
                     "accounts payable and accruals"               -   $    20
                                                             =======   =======

                                     F - 51
<PAGE>

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

NOTE 15 - SEGMENT INFORMATION :

          a.   Information on operating segments:

               Operating segments:

               1)   General:

                    The Company conducts its worldwide operations in six
                    operating segments as follows:

                    Delta USA, U.S upper market and Europe- these segments are
                    engaged in manufacturing and marketing of intimate apparel
                    to various customers in the U.S and European markets. Socks-
                    the segment is engaged in manufacturing and marketing of
                    socks to various customers in the U.S and European markets.

                    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.

                    China - this segment, which started its operation during
                    2005, is engaged in manufacturing of intimate apparel to
                    other segments.

                    The company's reportable segments are based on the 6
                    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 6 operating segments
                    have not been aggregated for segment reporting purposes.

                    In 2005 the Company changed its internal organization by
                    transferring Socks marketing operations in Israel to the
                    managerial responsibility of Delta Marketing Israel. In
                    addition, US upper market and the textile divisions were
                    merged. Numbers included below have been reclassified
                    accordingly.

                    Starting 2006, following a management decision, the
                    Seem-free and the elastic tape operation would be conducted
                    independently and will be presented as a separate segment.
                    Up until 2005, the Seem-free and the elastic tape operation
                    financial data is include in the US Upper market segment.

               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.

                                     F - 52
<PAGE>

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

NOTE 15 - SEGMENT INFORMATION (continued):

               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 profits (losses) of
               associated companies 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 - 53
<PAGE>

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

NOTE 15 - SEGMENT INFORMATION (continued):

               b)   Financial data relating to reportable operating segments:

<TABLE>
<CAPTION>
                                                     US UPPER
                                     DELTA USA         MARKET          EUROPE          SOCKS
                                    -----------     -----------     -----------     -----------
                                                       (U.S. $ In thousands)
                                    -----------------------------------------------------------
<S>                                 <C>             <C>             <C>             <C>
Year ended December 31, 2005:
Net revenues:
  To unaffiliated customers         $   267,887     $    77,551     $   163,245     $   126,760
  Intersegment                                      $    19,959     $       214     $     4,126
                                    -----------     -----------     -----------     -----------
Total net revenues                  $   267.887     $    97,510     $   163,459     $   130,886
                                    ===========     ===========     ===========     ===========
Operating income (loss)          (1)$     5,625  (2)$   (21,749) (3)$    (8,827) (4)$    (4,990)
                                    ===========     ===========     ===========     ===========
Assets (at end of year)             $   194,515     $    70,997     $   101,789     $    50,085
                                    ===========     ===========     ===========     ===========
Assets held for sale                $       990                     $     4,723     $       941
                                    ===========     ===========     ===========     ===========
Depreciation and amortization       $     3,168     $     4,959     $     4,416     $     2,220
                                    ===========     ===========     ===========     ===========

<CAPTION>
                                      DELTA
                                    MARKETING
                                      ISRAEL           CHINA        ADJUSTMENTS        TOTAL
                                    -----------     -----------     -----------     -----------
                                                       (U.S.$ In thousands)
                                    -----------------------------------------------------------
<S>                                 <C>             <C>             <C>             <C>
Year ended December 31, 2005:
Net revenues:
  To unaffiliated customers         $    49,038                                     $   684,481
  Intersegment                                      $       718     $   (25,017)
                                    -----------     -----------     -----------     -----------
Total net revenues                  $    49,038     $       718     $   (25,017)    $   684,481
                                    ===========     -----------     ===========     ===========
Operating income (loss)             $     5,010     $    (2,313) (5)$      (960)    $   (28,204)
                                    ===========     ===========     ===========     ===========
Assets (at end of year)             $    24,847     $     4,760  (6)$    22,160     $   469,153
                                    ===========     ===========     ===========     ===========
Assets held for sale                                             (6)$       766     $     7,420
                                    ===========     ===========     ===========     ===========
Depreciation and amortization       $       442     $        72     $       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 $1.8 million, impairment
     of goodwill in the amount of $2.1 million and impairment of fixed assets in
     the amount of $5.9 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 general corporate expenses not assignable to segments.
(6)  Includes general corporate assets not assignable to segments.

                                     F - 54
<PAGE>

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

NOTE 15 - SEGMENT INFORMATION (continued):

               b)   Financial data relating to reportable operating segments
                    (continued):

<TABLE>
<CAPTION>
                                                                                            DELTA
                                                US UPPER                                  MARKETING
                                   DELTA USA     MARKET         EUROPE        SOCKS         ISRAEL       ADJUSTMENTS     TOTAL
                                  ----------   ----------     ----------   -----------   -----------     -----------   ----------
                                                                      (U.S. $ In thousands)
                                  -----------------------------------------------------------------------------------------------
<S>                               <C>          <C>            <C>          <C>           <C>             <C>           <C>
Year ended December 31, 2004:
  Net revenues:
    To unaffiliated customers     $  186,280   $   90,540     $  193,638   $   138,749   $    46,460  (1)$    (1,398)  $  654,269
    Intersegment                               $   21,312     $      165   $     5,435                   $   (26,912)         -`-
                                  ----------   ----------     ----------   -----------   -----------     -----------   ----------
  Total net revenues              $  186,280   $  111,852     $  193,803   $   144,184   $    46,460     $   (28,310)  $  654,269
                                  ==========   ==========     ==========   ===========   ===========     -----------   ==========
  Operating income (loss)         $    5,911   $     (568) (4)$    4,906   $     9,137   $     4,753  (2)$    (1,730)  $   22,409
                                  ==========   ==========     ==========   ===========   ===========     ===========   ==========
  Assets (at end of year)         $  225,744   $   98,055     $  100,264   $    56,271   $    23,866  (3)$    30,297   $  534,497
                                  ==========   ==========     ==========   ===========   ===========     ===========   ==========
  Depreciation and amortization   $    1,438   $    6,097     $    4,326   $     2,463   $       450     $       411   $   15,185
                                  ==========   ==========     ==========   ===========   ===========     ===========   ==========
</TABLE>

(1)  Includes results of hedge transactions.
(2)  Includes mainly the effect of hedge transactions in an amount of $1,700
     thousands.
(3)  Includes general corporate assets not assignable to segments.
(4)  Includes restructuring expenses in the amount of $1,500 thousands relating
     to the closure of a logistic center in Hungary.

                                     F - 55
<PAGE>

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

NOTE 15 - SEGMENT INFORMATION (continued):

<TABLE>
<CAPTION>
                                                                                            DELTA
                                                US UPPER                                  MARKETING
                                   DELTA USA     MARKET         EUROPE        SOCKS         ISRAEL       ADJUSTMENTS     TOTAL
                                  ----------   ----------     ----------   -----------   -----------     -----------   ----------
                                                                      (U.S. $ In thousands)
                                  -----------------------------------------------------------------------------------------------
<S>                               <C>          <C>            <C>          <C>           <C>             <C>           <C>
Year ended December 31, 2003:
  Net revenues:
    To unaffiliated customers     $  213,241   $   66,665     $  176,827   $    86,393   $    37,561  (1)$      (557)  $   580,130
    Intersegment                                   21,603            563         3,022                       (25,188)         - ;-
                                  ----------   ----------     ----------   -----------   -----------     -----------   ----------
  Total net revenues              $  213,241   $   88,268     $  177,390   $    89,415   $    37,561     $   (25,745)  $   580,130
                                  ==========   ==========     ==========   ===========   ===========     ===========   ===========
  Operating income (loss)         $   24,780   $   (8,871) (4)$    4,453   $     8,997   $     2,415  (2)$     5,042   $    36,816
                                  ==========   ==========     ==========   ===========   ===========     ===========   ===========
  Assets (at end of year)         $  137,762       84,185     $  109,377   $    69,877   $    19,774  (3)$    29,909   $   450,884
                                  ==========   ==========     ==========   ===========   ===========     ===========   ===========
  Depreciation and amortization   $    1,561   $    5,560     $    4,368   $     2,148   $       398     $       495   $    14,530
                                  ==========   ==========     ==========   ===========   ===========     ===========   ===========
</TABLE>

(1)  Includes results of hedge transactions.
(2)  Including mainly capital gain in an amount of $ 4,050 thousands, the effect
     of losses of hedge transactions in an amount of $ 1,300 thousands and gain
     of $600 thousands which represents the minority share in the operating
     profits of certain subsidiary - included in the US Upper market - which is
     partly consolidated for segment purposes and fully consolidated in the
     consolidated financial statements.
(3)  Includes general corporate assets not assignable to segments.
(4)  Includes restructuring expenses in the amount of $ 1,007 thousands relating
     to the closure of sewing facilities in Scotland and in Israel.

                                     F - 56
<PAGE>

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

NOTE 15 - SEGMENT INFORMATION (continued):

          b.   Geographical information:

<TABLE>
<CAPTION>
                                                                  YEAR ENDED DECEMBER 31
                                                         ------------------------------------
                                                            2005         2004        2003
                                                         ----------   ----------   ----------
                                                                      In thousands
                                                         ------------------------------------
                  <S>                                    <C>          <C>          <C>
                  1)  Revenues
                         attributed to geographic area
                         (based on the location of the
                         customers):
                         North America                   $  401,050   $  334,833   $  300,708
                         United Kingdom                     177,950      202,831      187,885
                         Europe (other than U.K.)            52,360       64,605       48,766
                         Israel                              53,121       52,000       42,771
                                                         ----------   ----------   ----------
                                                         $  684,481   $  654,269   $  580,130
                                                         ==========   ==========   ==========
</TABLE>

                  2)  The net balance of the Company's long-lived assets, by
                      geographic location, are as follows:

<TABLE>
<CAPTION>
                                                                     DECEMBER 31
                                                         ------------------------------------
                                                            2005         2004        2003
                                                         ----------   ----------   ----------
                                                                     In thousands
                                                         ------------------------------------
                         <S>                             <C>          <C>          <C>
                         Israel                          $   45,508   $   57,685   $   60,108
                         Egypt                               26,270       24,464       22,218
                         United States                       13,582       15,637        8,369
                         Jordan                               8,212        9,470        9,666
                         Eastern Europe                       5,243       11,370       11,719
                         China                                4,761
                         Thailand                             2,923        2,108
                         United Kingdom                       2,076        3,831        4,429
                         Ireland                                129        1,184        5,450
                         Other                                  427        2,592        2,918
                                                         ----------   ----------   ----------
                                                         $  109,131   $  128,341   $  124,877
                                                         ==========   ==========   ==========
</TABLE>

          c.   Revenues from principal customers:

<TABLE>
<CAPTION>
                                                                YEAR ENDED DECEMBER 31
                                                         ------------------------------------
                                                            2005         2004         2003
                                                         ----------   ----------   ----------
                                                                     In thousands
                                                         ------------------------------------
          <S>                                            <C>          <C>          <C>
          Customer 1 (Europe and Socks segments)         $  161,348   $  188,947   $  179,120
                                                         ==========   ==========   ==========
          Customer 2 (Delta USA and Socks segments)      $  150,556   $   86,177   $   82,472
                                                         ==========   ==========   ==========
          Customer 3 (Delta USA segment)                 $   67,064   $   70,157   $   86,829
                                                         ==========   ==========   ==========
</TABLE>

                                     F - 57
<PAGE>

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

NOTE 16 - SUBSEQUENCES EVENTS

          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 the company's pursuant to terms of
          the relevant option plan.

          A total of 1,295,018 options were granted and 104,982 options remain
          available for future issuances under the plans. The exercise price of
          845,016 options granted in May 2006 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 exercise price of 425,000
          options granted in June 2006 is $7.26 equal to the closing price of
          the ordinary share 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. Of the
          1,295,018 options granted, 766,014 were granted to executive officers.

          The plan for Israeli employees, which will be treated under the
          capital gains track under Section 102 of the Israeli Income Tax
          Ordinance, is subject to the approval of the Israeli Tax Authority.
          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, is subject to shareholder approval at the
          Company's next shareholders meeting.

          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 executive officers, are 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.

          The fair value of the option granted, based on the B&S model, is
          approximately $1.9 million and will be included in the financial
          statement over the vesting period.

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

                                     F - 58
<PAGE>

                         Report of Independent Auditors

The Board of Directors of Delta Textile Egypt - Free Zone (S.A.E.)

We have audited the balance sheets of Delta Textile Egypt - Free Zone (S.A.E.)
as of 31 December 2004 and 2003, and the related statements of income,
shareholders' equity, and cash flows for each of the three years in the period
ended 31 December 2004 (not presented separately herein). These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Delta Textile Egypt - Free Zone
(S.A.E.) at 31 December 2004 and 2003, and the results of its operations and its
cash flows for each of the three years in the period ended 31 December 2004, in
conformity with the Egyptian Accounting Standards and the related applicable
Egyptian laws and regulations which differ in certain respects from United
States generally accepted accounting principles (see Note 14 of Notes to the
Financial Statements).


                                        Allied for Accounting and Auditing-
                                        Member Firm of Ernst & Young Global


Cairo, Egypt
30 March 2006

<PAGE>

                         Report of Independent Auditors

The Board of Directors of Delta Egypt Sourcing (Limited Liability Company)

We have audited the balance sheets of Delta Egypt Sourcing (Limited Liability
Company) as of 31 December 2004 and 2003, and the related statements of income
and changes in Quota holders' Equity and cash flows for each of the three years
in the period ended 31 December 2004 (not presented separately herein). These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Delta Egypt Sourcing (Limited
Liability Company) at 31 December 2004 and 2003, and the results of its
operations and cash flows for each of the three years in the period ended
December 31, 2004, in conformity with the Egyptian Accounting Standards and the
related applicable Egyptian laws and regulations which differ in certain
respects from United States generally accepted accounting principles (see Note
12 of Notes to the Financial Statements).



                                        Allied for Accounting and Auditing-
                                        Member Firm of Ernst & Young Global


Cairo, Egypt
30 March 2006

<PAGE>

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM TO THE MEMBERS OF DELTA
TEXTILES (LONDON) LIMITED

We have audited the balance sheets of Delta Textiles (London) Limited and its
subsidiaries ("the Company") as at 31 December 2004 and 31 December 2003 and the
related statements of income, changes in shareholder equity and cash flows for
each of the three years in the period ended 31 December 2004. 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 generally accepted auditing standards
in the United Kingdom and 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 from 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
the significant estimates made by the Company's Board of Directors and
management, as well as evaluating the overall annual accounts presentation. We
believe that our audit provides a reasonable basis for our opinion.

In our opinion, the aforementioned financial statements present fairly, in all
material respects, the financial position of the Company as at 31 December 2004
and 31 December 2003 and the result of its operations, changes in its
shareholders' equity and cash flows for each of the three years in the period
ended 31 December 2004, in conformity with generally accepted accounting
principles in the United Kingdom. In addition they present fairly, in all
material respects, the financial position of the Company as at 31 December 2004
and 31 December 2003 and the results of its operations for each of the three
years in the period ended 31 December 2004, in conformity with generally
accepted accounting principles in the United States of America.


BAKER TILLY

Registered Auditor
Chartered Accountants
2 Bloomsbury Street
London WC1B 3ST
United Kingdom

10 April 2006

<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 June 28, 2006 appearing in the 2005 Annual Report on form 20F 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


                                              /s/ Kesselman & Kesselman
Tel-Aviv, Israel                                  Kesselman & Kesselman
June 28, 2006                               Certified Public Accountants (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, 2005
(U.S. $ In thousand)

<TABLE>
<CAPTION>
                                                                ADDITION -     DEDUCTION-      DEDUCTION-
                                                 BALANCE AT     CHARGED TO     CHARGED TO      CHARGED TO      BALANCE AT
                                                BEGINNING OF    COSTS AND       ACCOUNTS         COST &          END OF
                                                    YEAR         EXPENSES      RECEIVABLE       EXPENSES         YEAR
                                                ------------   ------------   ------------    ------------    ------------
<S>                                             <C>            <C>            <C>             <C>             <C>
Allowance for doubtful accounts:
  Year ended December 31, 2005                  $        127   $        340              -    $        (14)   $        453
                                                ============   ============   ============    ============    ============
  Year ended December 31, 2004                  $      1,038   $         26   $       (827)   $       (110)   $        127
                                                ============   ============   ============    ============    ============
  Year ended December 31, 2003                  $      1,131   $         72              -    $       (165)   $      1,038
                                                ============   ============   ============    ============    ============
Allowance for sales return:
  Year ended December 31, 2005                  $         81   $        174                   $        (81)   $        174
                                                ============   ============                   ============    ============
  Year ended December 31, 2004                  $         80   $         81                   $        (80)   $         81
                                                ============   ============                   ============    ============
  Year ended December 31, 2003                  $         74   $         80                   $        (74)   $         80
                                                ============   ============                   ============    ============
Allowance for obsolete and slow moving
inventory:
  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
                                                ============   ============                   ============    ============
  Year ended December 31, 2003                  $     23,018   $     25,926                   $    (23,018)   $     25,926
                                                ============   ============                   ============    ============
Valuation Allowance in respect of deferred
income taxes:
  Year ended December 31, 2005                           -,-   $      8,932                            -,-    $      8,932
                                                ============   ============                   ============    ============
  Year ended December 31, 2004                           -,-            -,-                            -,-             -,-
                                                ============   ============                   ============    ============
  Year ended December 31, 2003                           -,-            -,-                            -,-             -,-
                                                ============   ============                   ============    ============
</TABLE>