`AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 13, 2010
--------------------------------------------------------------------------------

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 20-F

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

                                       OR

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

     For the fiscal year ended December 31, 2009

                                       OR

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

     For the transition period from ________ to ________

                                       OR

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

     DATE OF EVENT REQUIRING THIS SHELL COMPANY REPORT ________

                         COMMISSION FILE NUMBER 0-28878`

|
|

`TEFRON LTD.
             (Exact name of Registrant as specified in its charter)
                                     ISRAEL
                 (Jurisdiction of incorporation or organization)

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

                                   Eran Rotem
                             Chief Financial Officer
                   Industrial Center Teradyon, P.O. Box 1365,
                              Misgav 20179, Israel
                               Tel: 972-4-990-0881
--------------------------------------------------------------------------------
          (Name, Telephone, E-mail and/or Facsimile number and Address of
                          Registrant's Contact Person)

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

Title of each class                    Name of each exchange on which registered
--------------------------------------------------------------------------------
ORDINARY SHARES,                       OVER-THE-COUNTER BULLETIN BOARD
NIS 10.0 PAR VALUE PER SHARE

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

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

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

             2,120,298 ORDINARY SHARES, NIS 10.0 PAR VALUE PER SHARE

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

                             YES [_]  NO [X]

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

                             YES [_]  NO [X]

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

                             YES [X]  NO [_]

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

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

Indicate by check mark which basis of accounting the registrant has used to
prepare the financial statements included in this filing:

U.S. GAAP [_]

INTERNATIONAL FINANCING REPORTING STANDARDS AS ISSUED BY THE INTERNATIONAL
ACCOUNTING STANDARDS BOARD |X|

OTHER [_]

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

                         ITEM 17 [_]  ITEM 18 [_]

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

                              YES [_]  NO [X]

                                       ii`

`TABLE OF CONTENTS

                                                                            Page

PART I                                                                         3

     ITEM 1.      IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS        3
     ITEM 2.      OFFER STATISTICS AND EXPECTED TIMETABLE                      3
     ITEM 3.      KEY INFORMATION                                              3
         3A.      Selected Financial Data                                      3
         3B.      Capitalization and Indebtedness                              5
         3C.      Reasons for the Offer and Use of Proceeds                    5
         3D.      Risk Factors                                                 5
     ITEM 4.      INFORMATION ON THE COMPANY                                  18
         4A.      History and Development of the Company                      19
         4D.      Property, Plants and Equipment                              33
     ITEM 4A.     UNRESOLVED STAFF COMMENTS                                   35
     ITEM 5.      OPERATING AND FINANCIAL REVIEW AND PROSPECTS                35
     ITEM 6.      DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES                  49
         6A.      Directors and Senior Management                             49
         6B.      Compensation                                                52
         6C.      Board Practices                                             55
         6D.      Employees                                                   58
         6E.      Share Ownership                                             59
     ITEM 7.      MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS           62
         7A.      Major Shareholders                                          62
         7B.      Related Party Transactions                                  64
         7C.      Interests of Experts and Counsel                            65
     ITEM 8.      FINANCIAL INFORMATION                                       65
     ITEM 9       THE OFFER AND LISTING                                       66
     ITEM 10.     ADDITIONAL INFORMATION                                      69
         10A.     Share Capital                                               69
         10B.     Memorandum and Articles of Association                      69
         10C.     Material Contracts                                          71
         10D.     Exchange Controls                                           78
         10E.     Taxation                                                    78
         10F.     Dividends and Payment Agents                                82
         10G.     Statements by Experts                                       82
         10H.     Documents on Display                                        82
         10I.     Subsidiary Information                                      83
     ITEM 11.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
                  RISK                                                        83
     ITEM 12.     DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES      84
     ITEM 13.     DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES             84
     ITEM 14.     MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS
                  AND USE OF PROCEEDS                                         84
     ITEM 15T.    CONTROLS AND PROCEDURES                                     85

                                      iii`

`ITEM 16.     [RESERVED]                                                  86
         16A.     AUDIT COMMITTEE FINANCIAL EXPERT                            86
         16B.     CODE OF ETHICS                                              86
         16C.     ACCOUNTANTS' FEES AND SERVICES                              86
         16D.     EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES  87
         16E.     PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND
                  AFFILIATED PURCHASERS                                       87
         16F.     CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT               87
         16G.     CORPORATE GOVERNANCE                                        87
     ITEM 17.     FINANCIAL STATEMENTS                                        87
     ITEM 18.     FINANCIAL STATEMENTS                                        87

                                       iv`

`INTRODUCTION

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

     All share and per share information in this Annual Report has been adjusted
to give retroactive effect to a ten-for-one reverse split of our ordinary shares
that became effective on January 22, 2009.

     Our 2009 consolidated financial statements have been prepared in United
States dollars and in accordance with International Financial Reporting
Standards, or IFRS, as issued by the International Accounting Standards Board,
or IASB. See Note 2 of the Notes to our Consolidated Financial Statements. Until
and including our financial statements for the year ended December 31, 2007, we
prepared our consolidated financial statements in accordance with Generally
Accepted Accounting Principles in the United States ("U.S. GAAP"). All
references in this Annual Report to "U.S. dollars," "dollars" or "$" are to
United States dollars and all references in this Annual Report to "NIS" or
"shekels" are to New Israeli Shekels. Unless otherwise indicated, and when no
date is specified, NIS amounts have been translated into U.S. dollars at NIS
3.775 to $1.00, the representative rate of exchange published by the Bank of
Israel, the Israeli central bank, for December 31, 2009. The representative
exchange rate between the NIS and the dollar as published by the Bank of Israel
for June 30, 2010 was NIS 3.8750 to $1.00.

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

                           FORWARD-LOOKING STATEMENTS

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

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

     o    the liquidity challenges that we face;

     o    our dependence on a small number of principal customers and on their
          continued purchase of our products in the same volumes or on the same
          terms and their ability to meet their payment obligations to us;

                                       1`

`o    the effect of the worldwide recession on our target markets and the
          cyclical nature of the clothing retail industry and the ongoing
          changes in fashion preferences;

     o    our failure to generate sufficient cash from our operations to pay our
          debt and our failure to meet our financial covenants in our bank loan
          agreements;

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

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

     o    fluctuations in inflation and currency exchange rates;

     o    cost increase in the purchase of finished products or production
          services;

     o    the limitations and restrictions imposed by our substantial debt
          obligations;

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

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

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

     o    our dependence on subcontractors in connection with our manufacturing
          process, in particular the sewing, dyeing and finishing process;

     o    the fluctuating costs of raw materials; and

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

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

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


                                       2`

`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

PRESENTATION OF FINANCIAL AND SHARE INFORMATION

     We prepared our consolidated financial statements in accordance with
International Financial Reporting Standards ("IFRS") as issued by the
International Accounting Standards Board ("IASB"). Until and including our
financial statements for the year ended December 31, 2007, we prepared our
consolidated financial statements in accordance with U.S. GAAP.

     The following selected financial data as of December 31, 2007, 2008 and
2009 and for each of the three years ended December 31, 2007, 2008 and 2009 have
been derived from, and should be read in conjunction with, our audited
consolidated financial statements and notes thereto prepared in accordance with
IFRS and do not include consolidated financial data in accordance with U.S. GAAP
appearing elsewhere in this Annual Report. The selected financial data as of
December 31, 2005 and 2006 and for each of the two years ended December 31, 2005
and 2006 have been derived from our audited financial statements not included in
this Annual Report. Our audited financial statements for the years ended
December 31, 2005 and 2006 were prepared in accordance with U.S. GAAP. All share
and per share information has been adjusted to give retroactive effect to a
ten-for-one reverse split of our ordinary shares that became effective on
January 22, 2009.

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

                                                                        FOR THE YEAR ENDED DECEMBER 31
                                                               -----------------------------------------------
                                                                    2007             2008           2009
                                                               ---------------- --------------- --------------
                                                                          U.S. dollars in thousands
                                                                           (except per share data)
                                                               -----------------------------------------------
STATEMENT OF INCOME DATA:
IN ACCORDANCE WITH IFRS

Sales                                                            $   158,614      $   173,829      $   115,538
Cost of sales, net                                                   139,145          167,557          119,339
                                                                 -----------      -----------      -----------

Gross profit (loss)                                                   19,469            6,272           (3,801)
Selling and marketing expenses                                        12,443           16,959           13,842
General and administrative expenses                                    5,190            6,406            3,779
Other expenses (income)                                                    -            2,135             (496)
                                                                 -----------      -----------      -----------

Operating income (loss)                                                1,836          (19,228)         (20,926)
Loss from early repayment of subordinated
     note receivable                                                       -                -            1,285
Financial income                                                      (1,401)            (319)          (1,747)
                                                                 -----------      -----------      -----------
Financial expenses                                                     2,690            3,347            2,259
                                                                 -----------      -----------      -----------

Income (loss) before taxes on income                                     547          (22,256)         (22,723)
Tax benefit                                                               35            4,677            5,330
                                                                 -----------      -----------      -----------
Net income (loss)                                                $       582      $   (17,579)     $   (17,393)
                                                                 ===========      ===========      ===========
Basic and diluted net earnings (losses)
per share                                                                0.2             (8.3)            (8.2)
                                                                 ===========      ===========      ===========

Weighted average number of shares used for
     computing basic earnings (losses) per
     share                                                         2,118,816        2,120,298        2,120.298
                                                                 ===========      ===========      ===========
Weighted average number of shares used for
     computing diluted earnings (losses)
     per share                                                     2,118,816        2,120,298        2,120,298
                                                                 ===========      ===========      ===========

                                       3`

`FOR THE YEAR ENDED DECEMBER 31
                                         ------------------------------------------
                                                             2005          2006
                                         -------------  ------------- -------------
                                                  U.S. dollars in thousands
                                                   (except per share data)
                                         ------------------------------------------
STATEMENT OF INCOME DATA:
IN ACCORDANCE WITH U.S. GAAP

Sales                                                  $   171,336      $   188,104
Cost of sales                                              141,621          145,144
                                                       -----------      -----------

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

Operating income                                            16,136           25,883
Financing expenses, net                                      3,189            1,912
                                                       -----------      -----------

Income before taxes on income                               12,947           23,971
Tax expenses                                                 4,297            5,711
                                                       -----------      -----------
Income from continuing operations                            8,650           18,260
Income (loss) from discontinued operations                  (5,357)             120
                                                       -----------      -----------
Net income                                             $     3,293      $    18,380
                                                       ===========      ===========
Basic and diluted net earnings per share
     from continuing operations:
Basic net earnings per share                                   4.9              9.0
                                                       -----------      -----------
Diluted net earnings per share                                 4.7              8.8
                                                       -----------      -----------
Basic and diluted net earnings (losses)
     per share from discontinued
     operations:
Basic net earnings (losses) per share                         (3.0)             0.1
                                                       -----------      -----------
Diluted net earnings (losses) per share                       (2.9)             0.1
                                                       -----------      -----------
Basic and diluted net earnings per share:
Basic net earnings per share                                   1.9              9.1
                                                       ===========      ===========
Diluted net earnings per share                                 1.8              8.9
                                                       ===========      ===========
Weighted average number of shares used for
     computing basic earnings per share                  1,771,927        2,021,072
                                                       ===========      ===========
Weighted average number of shares used for
     computing diluted earnings per share                1,854,262        2,075,457
                                                       ===========      ===========

                                       4`

`AS OF DECEMBER 31,
                                  -----------------------------------
                                   2007          2008 *          2009
                                  ------        -------         -----
                                      (US Dollars in thousands)

BALANCE SHEET DATA
IN ACCORDANCE WITH IFRS

Cash and cash equivalents      $   2,384     $   1,566     $   1,904
Working capital  (deficit)        38,578         4,930        (6,647)
Total assets                     160,740       131,732        99,197
Total debt(1)                     19,322        24,809        25,847
Total equity                      89,380        63,745        46,995

Share Capital                      7,518         7,518         7,518

Additional paid in capital       106,864       107,104       107,522

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

                                   AS OF DECEMBER 31,
                               ----------------------------
                                          2005        2006*
                               ------   -------     -------
                                 (US Dollars in thousands)

BALANCE SHEET DATA
IN ACCORDANCE WITH US GAAP

Cash and cash equivalents             $  7,652     $  3,966

Working capital                          7,296       35,270
Total assets                           186,514      164,656
Total debt(1)                           56,621       25,270
Shareholders' equity                    54,685       82,230

Share Capital                            6,810        7,411

Additional paid-in capital              83,069      101,684

     (1)  Total debt consists of total short-term bank credit and long-term
          loans from banks.

     * In 2006, dividends declared per share amounted to $4.851 (after giving
     effect to the ten-for-one reverse split). In 2008, dividends declared per
     share amounted to $3.77 (after giving effect to the ten-for-one reverse
     split). No dividends were declared in the years 2005, 2007 and 2009.

3B.   CAPITALIZATION AND INDEBTEDNESS

      Not Applicable.

3C.   REASONS FOR THE OFFER AND USE OF PROCEEDS

      Not Applicable.

3D.   RISK FACTORS

                      RISK FACTORS RELATING TO OUR BUSINESS

                                       5`

`WE FACE SIGNIFICANT LIQUIDITY CHALLENGES. IF OUR BANK LENDERS CANCEL OUR CREDIT
LINES, IT WILL JEOPARDIZE THE CONTINUATION OF OUR ACTIVITIES. IN ADDITION, WE
MAY NEED TO RAISE ADDITIONAL CAPITAL IN THE NEAR FUTURE, AND IF IT IS NOT
AVAILABLE TO US, WE MAY NEED TO ELIMINATE SOME ASPECTS OF OUR OPERATIONS.

     We face significant liquidity challenges. Current economic conditions have,
among other things, led to a limitation in the amount of credit available to us,
and in recent months we have been contending with limited credit after our bank
lenders reduced part of the credit lines at our disposal. We have implemented
efficiency measures in an effort to balance our expenses with our available
sources of capital. Although we raised $4 million in March 2010 through a
combination of a rights offering and a private placement, we may still need to
raise additional funds in the near future in order to satisfy our working
capital and capital expenditure requirements. Current economic conditions,
including weakness and uncertainty in the capital and credit markets, are likely
to limit our ability to access sources of funds.

     Although we are considering raising new capital from various resources, we
may not be able to obtain additional funds on a timely basis, on acceptable
terms or at all. Continued weakness and uncertainty in the capital and credit
markets may limit our access to additional funds required to operate our
business. This could force us to delay raising capital or bear an unattractive
cost of capital, resulting in decreased profitability and significantly reducing
our financial flexibility. In addition, if we cannot raise needed funds on
acceptable terms, we may be required to delay, scale back or eliminate some
aspects of our operations and we may not be able to:

     o    develop new products;

     o    maintain or enhance our existing products;

     o    remain current with evolving industry standards;

     o    maintain or expand our sales and marketing programs;

     o    take advantage of future opportunities; or

     o    respond to competitive pressures or unanticipated requirements.

In addition, if we do not have a sufficient amount of cash, we may be unable to
continue our operations.

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

     Our sales to Victoria's Secret accounted for approximately 39.1% of our
total sales in 2007, 32.7% of our total sales in 2008 and 32.7% of our total
sales in 2009. Our sales to Nike accounted for approximately 23.6% of our total
sales in 2007, 23.2% of our total sales in 2008 and 5.8% of our total sales in
2009. Our sales to our largest three customers (other than Victoria's Secret and
Nike) during 2009 (Calvin Klein, The Gap, and lululemon athletica) accounted in
the aggregate for approximately 16.2% of our total sales during that period.

     We do not have long-term purchase contracts with our customers, and our
sales arrangements with our customers do not have minimum purchase requirements.
We cannot assure that our customers will continue to buy our products at all or
in the same volumes or on the same terms as they have in the past. During 2009,
we experienced a significant decrease in our sales, including in our sales to
our then two major customers, Nike and Victoria's Secret. During 2010, our sales
to Nike have continued to decrease and such sales were not substantial in 2010.

     Failures of our customers, and particularly our major customers, to
continue to buy our products in the same volumes and on the same terms as in the
past may significantly reduce our sales and our earnings. In addition, we cannot
assure that we will be able to attract new customers.


                                       6`

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

OUR PRINCIPAL CUSTOMERS ARE IN THE CLOTHING RETAIL INDUSTRY, WHICH IS SUBJECT TO
SUBSTANTIAL CYCLICAL VARIATIONS. CURRENT ECONOMIC CONDITIONS IN OUR TARGET
MARKETS ARE EXPECTED TO ADVERSELY AFFECT OUR SALES. OUR REVENUES WILL DECLINE
SIGNIFICANTLY IF OUR PRINCIPAL CUSTOMERS DO NOT CONTINUE TO BUY OUR PRODUCTS IN
LARGE VOLUMES OR IF ANY OF OUR PRINCIPAL CUSTOMERS FAILS TO SATISFY ITS PAYMENT
OBLIGATIONS TO US DUE TO AN ECONOMIC DOWNTURN OR FOR ANY OTHER REASON.

     Our customers are in the clothing retail industry, which is subject to
substantial cyclical variations and is affected strongly by any downturn or
slowdown in the general economy. The global economic recession, and the
recession in the U.S. economy in particular, could have the effect of causing a
significant reduction in consumption in our target markets, which could have a
significant effect on our customers' sales and profitability. Consequently, our
customers may have larger inventories of our products than expected, and they
may reduce the size of their orders, change the payment terms, limit their
purchases to a lower price range and try to change their purchase terms. These
events could result in decreased purchase orders from us, which would
significantly reduce our sales and profitability and result in losses

     A worsening of the economic recession, together with the credit shortage in
our target markets, may lead to the postponement of payments by our customers
and thus restrict our cash flow. Economic difficulties in our target markets can
also jeopardize the businesses of our customers, and may limit our ability to
collect payment from such customers after we have already delivered their
orders. In addition, the current economic instability and uncertainty could
affect the willingness of our customers to make capital spending and investment
in our products, or their ability to obtain financing to purchase our products,
any of which may have an adverse effect on our revenues. Our results of
operations, financial condition, and cash flows could be materially adversely
affected by a prolonged economic downturn.

     A significant part of our sales is made to a limited number of customers.
Our largest customer accounted for 39.2% of our sales in 2007, 32.7% of our
sales in 2008 and 32.7% of our sales in 2009, and our then six largest customers
accounted for approximately 83.5% of our sales in 2007, 76.5% of our sales in
2008 and 59.0% of our sales in 2009. We generally do not require and do not
receive collateral or guarantees from those customers for the orders we supply
them. We maintain an allowance for doubtful debts based upon factors surrounding
the credit risk of specific customers, historical trends and other information
which our management believes adequately covers all anticipated losses in
respect of trade receivables. There can be no assurance that this allowance will
be adequate. In the event that any of our major customers fails to satisfy its
payment obligations to us for any reason, this could significantly reduce our
sales and our earnings and have a material adverse effect on our operating
results.

     The economic situation has increased the level of risk that our partners -
customers, subcontractors, (including an important contractor in the area of
dyeing) and suppliers - will become insolvent. If our suppliers and
subcontractors encounter financial difficulties, we may be forced to find
alternative suppliers and subcontractors with little advance warning. As a
result, we may be unable to supply our products to our customers in a timely
manner or be unable to deliver such products to our customers altogether.

WE REQUIRE A SIGNIFICANT AMOUNT OF CASH TO SATISFY OUR DEBT OBLIGATIONS. IF WE
FAIL TO GENERATE SUFFICIENT CASH FLOW FROM OPERATIONS, WE MAY NEED TO
RENEGOTIATE OR REFINANCE OUR DEBT, OBTAIN ADDITIONAL FINANCING, POSTPONE CAPITAL
EXPENDITURES OR SELL ASSETS. IF WE ARE NOT SUCCESSFUL IN ACCOMPLISHING ANY OF
THE FORGOING, THE LENDERS MAY DECLARE ALL AMOUNTS OWED TO THEM DUE AND PAYABLE.

     We depend mainly on our cash generated by operating activities to make
payments on our debt. The cash generated by operating activities was
approximately $3.0 million in 2007. In 2008, we had a negative cash flow of $7.7
million, and in 2009, we had a negative cash flow of $1.5 million. In 2008 and
in 2009, we were unable to meet our financial covenant obligations on our loan
from our bank lenders, and we expect that we will be unable to meet our EBITDA
financial covenant in the fourth quarter of 2010. All the banks with which we
have loan agreements have agreed to waive these financial covenant defaults for
2008 and 2009 and for our expected financial covenant default for 2010. For
2010, we and our bank lenders have agreed to the following financial covenants:
(i) that our EBITDA for the year 2010 will not drop below $2.1 million, (ii)
that our shareholders equity will not drop below $35 million, (iii) that we will
not pay dividends or any management fees and/or any other payment to our
shareholders until the loans provided by our bank lenders have been repaid in
full, and (iv) that our cash, inventory and receivables will not, at any time,
drop below $33 million, nor will our receivables drop below $9 million. We
cannot guarantee that we will be able to meet these financial requirements for
2010.

                                       7`

`We cannot assure that we will generate sufficient cash flow from operations
to make the scheduled payments on our debt in the future. Under the March, 2,
2010 agreement with our bank lenders described in "Item 10. Additional
Information - C. Material Contracts - Agreement with Our Bank Lenders" below, we
currently have a balance of $20.0 million in long term loans, of which $15.0
million is due from 2016 until 2019 and $5.0 million is due from 2013 until
2016. The repayment obligations on our long-term debt of approximately $15
million is $1.25 million per year from 2016 until 2018 and $11.25 million in
2019, and repayment obligations on our long-term debt of approximately $5
million is $1.25 million per year from 2013 until 2016. In addition, as of March
31, 2010, we had repayment obligations under our short-term bank credit and
revolving credit facilities in the amount of approximately $2.9 million. Our
ability to meet our debt obligations will depend on whether we can successfully
implement our strategy, as well as on economic, financial, competitive and
technical factors. Some of the factors are beyond our control, such as economic
conditions in the markets where we operate or intend to operate, changes in our
customers' demand for our products, and pressure from existing and new
competitors.

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

     o    our financial condition at the time;

     o    restrictions in agreements governing our debt; and

     o    other factors, including market conditions.

     If our lenders decline to renegotiate the terms of our debt in these
circumstances, the lenders could declare all amounts borrowed and all amounts
due to them under the agreements due and payable. If we are unable to repay the
debt in these circumstances, the lenders could foreclose on our assets that are
subject to liens and sell our assets to satisfy the debt.

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

     We compete directly with a number of manufacturers of intimate apparel,
active-wear and swimwear, many of which have a lower cost-base than Tefron,
longer operating histories, larger customer bases, greater geographical
proximity to customers and significantly greater financial and marketing
resources than we do. Increased competition, direct or indirect, could reduce
our revenues and profitability through pricing pressure, loss of market share
and other factors. We cannot assure that we will be able to compete successfully
against existing or new competitors, as the market for our products evolves and
the level of competition increases. Moreover, our competitors, especially those
from the Far East, have established relationships with our customers, which has
caused an erosion of prices of some of the products of our Cut & Sew Division,
and we expect this will have a negative effect on our sales of Cut & Sew
products. For example, in 2008, our largest intimate apparel customer
transferred its sourcing of an old Cut & Sew cotton program to India. Current or
future relationships between our existing and prospective competitors,
especially from the Far East, and existing or potential customers could
materially affect our ability to compete.

                                       8`

`Our customers operate in an intensely competitive retail environment. In
the event that any of our customers' sales decline for any reason, whether or
not related to us or to our products, our sales to such customers could be
materially reduced.

     In addition, our competitors may be able to purchase Seamless knitting
machines and other equipment similar to, but less expensive than, the Santoni
knitting machines we use to knit garments in our Hi-Tex manufacturing process.
By reducing their production costs, our competitors may lower their selling
prices. If we are forced to reduce our prices and we cannot reduce our
production costs, it will cause a reduction in our profitability. Furthermore,
if there is a weak retail market or a downturn in the general economy,
competitors may be pressured to sell their inventory at substantially depressed
prices. A surplus of intimate apparel at significantly reduced prices in the
marketplace would significantly reduce our sales.

THE CANCELLATION OF IMPORT QUOTAS ON TEXTILE GOODS IS CAUSING A DECREASE IN THE
SALE PRICE OF SOME OF OUR PRODUCTS.

     Beginning January 1, 2005, the member countries in the World Trade
Organization removed a portion of the quotas on textile products. As a result,
some of the textile products manufactured in a country that is a member of the
World Trade Organization are no longer subject to quota limitations.

     These changes allow retailers, clothing companies and others to import
unlimited quantities of textile products from member countries, including those
member countries where manufacturing costs are low. As a result, textile and
clothing prices worldwide, including our products, are facing pressures for
price reductions, and price reductions are likely to continue. Should such price
reductions accelerate beyond our ability to cut costs, our business and results
of operations may be adversely impacted.

     The United States and the European Union adopted a policy with regard to
products imported from China until the end of 2008 that limited the total number
of items imported from China. Beginning on January 1, 2009, no quotas apply to
imports from China to the United States and to the European Union, and this can
have an impact on our activities that are related to the categories and
quantities upon which the limitations were imposed. In particular we expect that
the cancelation of the quotas will increase competition and reduce prices of
products imported from China, which will likely cause a decrease in our
profitability. In addition, the cancellation of the import quotas on imports
from China to the United States eliminates a substantial competitive advantage
that we had as a company that exports from Israel, which does not have quotas on
imports to the United States.

OUR EXPANSION INTO NEW PRODUCT LINES WITH COMPLICATED PRODUCTS AND DIFFERENT RAW
MATERIALS, AND FACING SHORTER PRODUCTION RUNS, REDUCED OUR OPERATING EFFICIENCY
DURING THE LAST FEW YEARS, AND WE MAY ALSO FACE OPERATING EFFICIENCY
DIFFICULTIES IN THE FUTURE.

     In recent years, we have invested significant efforts to develop and expand
new product lines, including active-wear products and swimwear, in order to
diversify our product line and our client base. Our efforts to fulfill our
costumers' needs, including by providing innovative products, and the
requirements of our customers to manufacture new, complicated products with
different raw materials in shorter production runs, and sometimes to supply
orders in small amounts and short time frames, led to a reduction in our
operating efficiency in 2007, 2008 and 2009. Our continued efforts to develop
and present new product lines and to make the required adjustments to changes in
market trends may result in additional reductions in operating efficiency and
profits in the future. As a result of our reductions in operating efficiency, we
may also be unable to guarantee the quality of our products or meet our
customers' delivery deadline requirements, which may increase our costs due to
the additional freight charges and charge backs that we may be required to pay.
In addition, our reduction in operating efficiency may adversely affect our
reputation and our relationships with our customers and lead to a diversion of
orders and projects from us to our competitors.

                                       9`

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

     Exchange rate fluctuations between the U.S. dollar and the NIS and between
the Euro and the U.S. dollar, and inflation in Israel, may negatively affect our
earnings. A substantial majority (approximately 87.8% in 2009) of our revenues
is denominated in U.S. dollars and a portion of our revenues (approximately 6.0%
in 2009) are denominated in Euros. However, a significant portion of the
expenses associated with our Israeli operations, including personnel and
facilities-related expenses and expenses related to the purchase of raw
materials, are incurred in NIS. A significant portion of our expenses are also
incurred in countries in the Far East, mainly China and India; these expenses
are denominated in U.S. dollars but may be adjusted in accordance with the
exchange rate of the local currency to the U.S. dollar. Consequently, we are
exposed to the risk of appreciation of the NIS vis-a-vis the U.S. dollar. The
appreciation of the NIS vis-a-vis the U.S. dollar would cause, and in 2007 and
2008 did cause, an increase in our expenses as recorded in our U.S. dollar
denominated financial reports even though the expenses denominated in local
currencies will remain unchanged. Although during 2009 the U.S. dollar
appreciated vis-a-vis the NIS, and as a result of this appreciation and hedging
transactions performed by the Company during 2009 our personnel and
facilities-related expenses and expenses related to the purchase of raw
materials decreased by approximately $3.6 million, the NIS may appreciate
vis-a-vis the U.S. dollar again in the future.

     We are also exposed to the risk of the devaluation of the Euro vis-a-vis
the U.S. dollar, which would cause, and in 2009 did cause, a decline in our
sales in Europe in dollar terms. Due to the devaluation of the Euro vis-a-vis
the dollar in 2009 compared to 2008, our sales declined in dollar terms by
approximately $350,000. This amount does not take into account hedging
transactions performed by the Company during 2009, which diminished the adverse
effect of the devaluation of the Euro in relation to the dollar. These hedging
transactions do not protect us if the devaluation in the Euro vis-a-vis the
dollar continues after the end of the forward contracts.

     In addition, inflation in Israel and all other off-shore locations in which
we operate will have the effect of increasing the dollar cost of our operations,
unless it is offset on a timely basis by a devaluation of the NIS relative to
the U.S. dollar. We cannot predict any future trends in the rate of inflation in
Israel or the rate of devaluation of the NIS against the U.S. dollar. In
addition, fluctuations in currency exchange rates in countries other than Israel
where we operate and do business may also negatively affect our earnings.

COST INCREASES IN THE PURCHASE OF FINISHED PRODUCTS OR PRODUCTION SERVICES COULD
AFFECT OUR PROFITABILITY.

     We purchase and manufacture some of the products that we sell via
subcontractors located in the Far East and in Jordan. The cost of these products
may increase due to an increase in wages costs, production-related costs, the
strengthening of the local currencies against the U.S. dollar and customer
demands or for other reasons not within our control. Our profitability would be
adversely affected as a result of an increase in the price of products that we
purchase from our subcontractors.

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

     As of December 31, 2009, we had approximately $11.6 million of long term
loans outstanding (including current maturities of $4.1 million) and
approximately $14.2 million in short-term bank credit. Our debt obligations
could have important consequences. For example, they could:

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

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

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

     o    limit our ability to pursue business opportunities; and

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

                                       10`

`Because our loans bear interest at floating rates, an increase in interest
rates could reduce our profitability. For example, a one percent change on our
floating interest rate long-term loans outstanding at December 31, 2009, would
have an annual impact of approximately $43,000 on our interest cost.

OUR FAILURE TO COMPLY WITH THE COVENANTS AND RESTRICTIONS CONTAINED IN OUR LOAN
AGREEMENTS COULD LEAD TO OUR LENDERS DECLARING IMMEDIATELY DUE AND PAYABLE ALL
AMOUNTS DUE TO THEM UNDER THE AGREEMENTS. IN SUCH EVENT, WE WOULD HAVE A REAL
DIFFICULTY IN OBTAINING FINANCING FROM OTHER SOURCES, WHICH WOULD JEOPARDIZE THE
CONTINUATION OF OUR ACTIVITIES. IN ADDITION, DUE TO RESTRICTIONS IN OUR LOAN
AGREEMENTS, WE MAY NOT BE ABLE TO OPERATE OUR BUSINESS AS WE DESIRE.

     We owe a significant amount to our bank lenders, including credit lines
that our bank lenders make available to us, and we are currently unable to
obtain financing from alternative sources. Our loan agreements contain various
covenants which require that we maintain certain financial ratios related to
shareholders' equity and operating results. Our failure to comply with the
covenants and restrictions contained in our loan agreements could lead to a
default under the terms of these agreements. For instance, during the fourth
quarter of 2008 and 2009, we failed to comply with a minimum EBITDA requirement
contained in our bank loan agreements, and we expect that we will be unable to
meet our EBITDA financial covenant in the fourth quarter of 2010. All the banks
with which we have loan agreements have agreed to waive such financial covenant
defaults for 2008, 2009 and for our expected financial covenant default for
2010. For 2010, our bank lenders have agreed to the following financials
covenants: (i) that our EBITDA for the year 2010 will not drop below negative
$2.1 million, (ii) that our shareholders equity will not drop below $35 million,
(iii) that we will not pay dividends or any management fees and/or any other
payment to our shareholders until the loans provided by our bank lenders have
been repaid in full, and (iv) that our cash, inventory and receivables will not,
at any time, drop below $33 million, nor will our receivables drop below $9
million. We cannot assure that we will not default on that or other financial
covenants contained in our bank loan agreements again in the future, or in the
event of any such defaults, that our bank lenders will agree to waive such
defaults again in the future.

     If a default occurs and we do not receive a waiver and we are unable to
renegotiate the terms of our debt, the lenders could declare all amounts
borrowed and all amounts due to them under the agreements due and payable, in
which event we would have a real difficulty in obtaining financing from other
sources, which would jeopardize the continuation of our activities, and we would
have difficulty continuing to operate as a going concern.

     In addition, our loan agreements contain a number of conditions and
limitations on the way in which we can operate our business, including
limitations on our ability to raise debt, sell or acquire assets and pay
dividends. These conditions and limitations, as well as the covenants requiring
that we maintain financial ratios referred to above, may force us to pursue less
than optimal business strategies or forgo business arrangements which could have
been financially advantageous to us and our shareholders.

IF THE MARKET SHARE OF OUR CUSTOMERS DECLINES, OUR SALES AND EARNINGS MAY
DECLINE.

     Our sales can be adversely affected in the event that our customers do not
successfully compete in the markets in which they operate. In the event that the
sales of one of our major customers decline for any reason, irrespective of
whether it is related to us or to our products, our sales to such customer may
also decline, which could reduce our overall sales and our earnings.

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

     Approximately 84% of our sales in 2007, 79% of our sales in 2008 and 84.8%
of our sales in 2009 were made to customers in North America, and approximately
11% of our sales in 2007, 16% of our sales in 2008 and 9.7% of our sales in 2009
were made to customers in Europe. We also had sales in Israel constituting
approximately 2% of our sales in 2007 and 2008 and approximately 4.6% of our
sales in 2009. In addition, a substantial majority of our raw materials are
purchased outside of Israel. Furthermore, a substantial majority of our sewing
operation is performed in Jordan, and a substantial majority of our Cut & Sew
operations for swimwear and intimate apparel is performed in China, India and
Cambodia. For these purposes, products of ours are situated in these countries,
and equipment and machinery of ours are situated in Jordan. Our international
sales and purchases are affected by costs associated with shipping goods and
risks inherent in doing business in international markets, including:

                                       11`

`o    changes in regulatory requirements or tax laws;

     o    export restrictions, tariffs and other trade barriers;

     o    quotas imposed by international agreements between the United States
          and certain foreign countries;

     o    currency fluctuations;

     o    longer payment cycles;

     o    difficulties in collecting accounts receivable;

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

     o    strikes and general economic problems.

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

     In addition, we may enter into joint ventures with third parties or
establish operations outside of Israel that will subject us to additional
operating risks. These risks may include diversion of management time and
resources and the loss of management control over such operations and may
subject us to the laws of such jurisdiction.

     In addition to our production facilities in Israel, we currently have
production facilities in Jordan, we have relationships with manufacturers,
suppliers and subcontractors in India, China and Cambodia, and we are shifting
additional production activities, mainly cutting and sewing, finishing and
accompanied operations and logistics operations, out of Israel to benefit from
lower labor costs. In addition to the risks referred to above, terrorist attacks
against foreigners, in general, and Jews, in particular, in the countries where
we have production facilities or relationships with manufacturers can disrupt
the normal course of business of our business partners or can harm our business
partners and/or our relationships with them and as a result impair our
manufacturing capacity.

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

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

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

                                       12`

`WE ARE SUBJECT TO FLUCTUATING COSTS OF RAW MATERIALS.

     We use cotton yarn, spandex, various polymeric yarn and elastic as primary
materials for manufacturing our products. Our financial performance depends, to
a substantial extent, on the cost and availability of these raw materials, and
especially the fluctuating costs of cotton and petroleum. The capacity, supply
and demand for such raw materials are subject to cyclical and other market
factors and may fluctuate significantly. As a result, our cost in securing raw
materials is subject to substantial increases and decreases over which we have
no control except by seeking to time our purchases of cotton and polymeric
yarns, which are our principal raw materials, to take advantage of favorable
market conditions. For example, in 2007, the cost of synthetic fibers increased
due to rising energy costs, and there may be a similar increase in the future.
In addition, in 2008 and in 2009, cotton price levels were very high due to high
demand and shortage of commodity. We cannot assure that we will be able to pass
on to customers the increased costs associated with the procurement of raw
materials. Moreover, there has in the past been, and there may in the future be,
a time lag between the incurrence of such increased costs and the transfer of
such increases to customers. To the extent that increases in the cost of raw
materials cannot be passed on to customers or there is a delay in passing on the
increased costs to customers, we are likely to experience an increase in the
cost of raw materials which may materially reduce our margin of profitability.

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

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

DIRECT PURCHASES BETWEEN RETAILERS AND MANUFACTURERS IN THE FAR EAST COULD
ADVERSELY AFFECT OUR SALES.

     In recent times, a number of large retailers are attempting to bypass
design companies by developing private undergarment brands and contracting
directly with manufacturing plants, to have them manufacture products for them.
We believe that this phenomenon will encompass basic products intended for the
mass market, where the design element is less important. Our sales can be
adversely impacted if this phenomenon spreads further.

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

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

UNEXPECTED EXPENSES RELATED TO THE DELIVERY OF PRODUCTS MAY REDUCE OUR
PROFITABILITY.

     As part of our business, we supply our products through various delivery
companies. Delivery of our products involved the incurrence of unexpected
expenses, such as product theft, delays and loss of products. Our profitability
may be adversely affected by these additional expenses to the extent that they
are not covered by our various insurance policies.

                                       13`

`WE MAY NOT BE ABLE TO PROTECT OUR INTELLECTUAL PROPERTY.

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

AN INCREASE IN THE MINIMUM WAGE IN ISRAEL, JORDAN OR OTHER COUNTRIES IN WHICH WE
CONDUCT BUSINESS MAY ADVERSELY AFFECT OUR OPERATING RESULTS.

     Many of our employees and the employees of our manufacturers and
subcontractors earn the minimum wage payable under law. Under Israeli law, the
minimum wage, which is increased from time to time as a result of various
economic parameters and updating of employee-union agreements, equals
approximately 47.5% of the average wage for an employee in Israel, unless
otherwise determined by government regulations. Pursuant to existing
legislation, the minimum monthly wage was increased on July 1, 2008 in Israel,
to NIS 3,850, and on May 23, 2010, a governmental committee of ministers in
Israel approved a proposal to amend the Israeli Minimum Wage Law, 1987, to
gradually increase the minimum wage in Israel to NIS 4,600 over a period of 15
months. The Israeli parliament, or the Knesset, has not yet approved such
amendment of the Minimum Wage Law and it is unknown if and when such amendment
will be approved. In October 2008, the Jordanian Labor Ministry raised the
minimum wage from JD110 to JD150 a month for 200,000 laborers, a decision that
excluded QIZ firms, who in turn pledged to raise their Jordanian workers'
salaries voluntarily. We have operations that are located both in the QIZ areas
and outside such areas. An increase in the minimum wage would increase our labor
costs or the labor costs of our manufacturers and subcontractors, and unless we
can obtain alternative labor in lower cost markets, this increase could
adversely affect our operating results.

WE FACE POTENTIAL CONFLICTS OF INTEREST CAUSED BY INVESTOR INFLUENCE.

     Our principal shareholders have a great deal of influence over the
constitution of our Board of Directors and over matters submitted to a vote of
the shareholders. As of June 15, 2010, Norfet, Limited Partnership and related
parties had voting power over approximately 24.0% of the outstanding ordinary
shares of Tefron (excluding 99,740 ordinary shares held by our wholly-owned
subsidiary). In addition, as of June 15, 2010, and based on available public
information, Meir Shamir, one of our directors, owned approximately 40.02% in
Mivtach-Shamir, which at such date was an approximately 42.29% holder in Norfet.
As a result, the corporate actions of Tefron may be significantly influenced by
Mr. Shamir. Furthermore, as of June 15, 2010, Ishay Davidi, another director,
served as CEO of FIMI 2001 Ltd., which controls the general partner of Norfet,
one of the Norfet limited partners (which is managed by FIMI 2001 Ltd.) as well
as the other Norfet limited partners by virtue of an irrevocable power of
attorney. As a result, the corporate actions of Tefron may be significantly
influenced by Mr. Davidi.

     We are party to consulting and management services agreements with Norfet,
pursuant to which Norfet agreed to provide consultancy and management services
to Tefron.

     Israeli law imposes procedures, including, for certain material
transactions, a requirement of shareholder approval, as a precondition to
entering into interested party transactions. These procedures may apply to
transactions between Norfet and us. However, we cannot assure that we will be
able to avoid the possible detrimental effects of any such conflicts of interest
by complying with the procedures mandated by Israeli law.

                                       14`

`WE MAY FAIL TO MAINTAIN EFFECTIVE INTERNAL CONTROL OVER FINANCIAL REPORTING IN
ACCORDANCE WITH SECTION 404 OF THE SARBANES-OXLEY ACT OF 2002. IF WE FAIL TO
MAINTAIN EFFECTIVE INTERNAL CONTROL OVER FINANCIAL REPORTING, WE MAY NOT BE ABLE
TO REPORT OUR FINANCIAL RESULTS ACCURATELY, AND THIS COULD SUBJECT US TO COSTLY
LITIGATION, DIVERT OUR MANAGEMENT'S TIME AND ATTENTION, REQUIRE US INCUR
SIGNIFICANT COSTS AND EXPENSES AND LEAD TO A LOSS OF SHAREHOLDER CONFIDENCE IN
OUR FINANCIAL REPORTING. ANY OF THESE COULD SIGNIFICANTLY IMPACT OUR BUSINESS.

     The Sarbanes-Oxley Act of 2002 imposes certain duties on us and our
executives and directors. Our efforts to comply with the requirements of Section
404, which began in connection with our Annual Report on Form 20-F for the
fiscal year ended December 31, 2006, have resulted in increased general and
administrative expense and a diversion of management time and attention, and we
expect these efforts to require the continued commitment of resources. We have
documented and tested our internal control systems and procedures in order for
us to comply with the requirements of Section 404. While our assessment of our
internal control over financial reporting resulted in our conclusion that as of
December 31, 2009, our internal control over financial reporting was effective,
we cannot predict the outcome of our testing in future periods. In 2009, we
determined that a deficiency in our internal control over financial reporting in
the first quarter of 2009 did not enable us to identify a failure to record
purchasing expenses in connection with one sale made by our subsidiary, Macro
Clothing Ltd. This required us to restate our financial statements for the first
quarter of 2009. If we fail to maintain the adequacy of our internal controls,
we may not be able to conclude on an ongoing basis that we have effective
internal controls over financial reporting.

     The restatement of our financial results may lead to costly litigation
claims against us or an investigation or sanctions by regulatory authorities.
The defense of any litigation or investigation which may arise in connection
with any restatement may divert management's time and attention, and we may be
required to pay damages if any claims are not resolved in our favor. Any
litigation or investigation, even if resolved in our favor, may cause us to
incur significant legal and other expenses. Any restatement could also reduce
investor confidence in our financial results. As a result, our business and
market price could be impacted.

                  RISK FACTORS RELATING TO OUR ORDINARY SHARES

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

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

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

     o    varying levels of market acceptance of our products;

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

     o    fluctuations in the exchange rate between the NIS, the U.S. dollar and
          the Euro;

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

     o    operating efficiencies.

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

                                       15`

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

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

THE DELISTING OF OUR ORDINARY SHARES FROM NYSE MAY MAKE IT MORE DIFFICULT FOR
YOU DISPOSE OF YOUR SHARES OR FOR US TO SECURE ADDITIONAL FINANCING.

     On December 22, 2008, our ordinary shares were delisted from the New York
Stock Exchange, ("NYSE") and, effective as of January 16, 2009, they are quoted
on the Over-The-Counter Bulletin Board ("OTCBB"), an electronic quotation medium
regulated by the Financial Industry Regulatory Authority. Securities traded on
the OTCBB typically have low trading volumes. In addition, delisting of our
shares could diminish interest in our Ordinary Shares, and it may be more
difficult to dispose of or to obtain accurate quotations as to the market value
of our Ordinary Shares. Delisting may also make it more difficult for us to
issue additional securities or secure additional financing. Our shares continue
to be traded on the TASE.

DELISTING OF THE COMPANY'S SHARES FROM THE TEL AVIV STOCK EXCHANGE.

     In order to preserve the registration of our shares for trading on the
TASE, we must comply with certain conditions. We cannot ensure that we can
comply with those conditions in the future. If we fail to comply with those
conditions, our shares could be delisted from trading on the Tel Aviv Stock
Exchange, their liquidity could be impaired, their price in the U.S. and in
Israel may be reduced, the extent of information published by us to our
shareholders could be reduced, the possibility of obtaining a market price for
the shares will be reduced and our ability to raise capital could be reduced.

DIFFICULT CONDITIONS IN THE GLOBAL CAPITAL AND CREDIT MARKETS AND THE ECONOMY
GENERALLY MAY MATERIALLY ADVERSELY AFFECT OUR SHARE PRICE.

     Market fluctuations and volatility, as well as general economic, market and
political conditions, could reduce our share price. Continued weakness or
uncertainty in the global capital and credit markets and difficult conditions in
the economy generally may continue to adversely affect our share price. As of
June 15, 2010, the last reported sale price of our ordinary shares on the OTCBB
was $1.5 per ordinary share, and as of June 15, 2009, the last reported sale
price of our ordinary shares on the OTCBB was $3.9 per ordinary share.


                RISK FACTORS RELATING TO OUR OPERATIONS IN ISRAEL

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

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

                                       16`

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

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

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

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

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

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

                                       17`

`THE DETERIORATION OF RELATIONS BETWEEN ISRAEL AND ITS NEIGHBORS CAN ADVERSELY
AFFECT OUR BUSINESS.

     Security conditions prevailing in Israel and in the region can influence
our business. A deterioration in relations between Israel and its neighbors,
where some of our manufacturing facilities are located, can disrupt production
processes and the purchase of our products by our customers and negatively
affect our financial results.

     Most of our sewing activities are concentrated in Jordan, and during 2009,
approximately 56.3% of our sales derived from the sale of products manufactured
in Jordan. Our activities in Jordan are predicated to a large extent on
relations between Jordan and the State of Israel. In the past, hostility existed
between Israel and Jordan. Likewise beginning with December 2008, the
hostilities between Israel and the Palestinians increased, and future
hostilities can damage our activity in Jordan. A deterioration in Israel's
relations with Jordan can adversely affect our production and our ability to
meet delivery on customer orders.

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

     We are incorporated under the laws of, and our main offices and
manufacturing facilities are located in, the State of Israel. We are directly
influenced by the political, economic and security conditions in Israel. Since
the establishment of the State of Israel in 1948, a number of armed conflicts
have taken place between Israel and its Arab neighbors and a state of hostility,
varying in degree and intensity, has led to security and economic concerns for
Israel. Any major hostilities involving Israel, the interruption or curtailment
of trade between Israel and its trading partners or a significant downturn in
the economic or financial condition of Israel could have a material adverse
effect on our operations.

     In July 2006, a conflict with Hezbollah escalated significantly on Israel's
northern border, during which our normal activity routine was disrupted,
affecting our sales and increasing our costs. In the last few years, the
establishment of a Hamas government in Gaza has created additional unrest and
uncertainty in the region and has increased hostilities between Israel and the
Palestinians. In December 2008 and January 2009, there was an armed conflict
between Israel and Hamas, following the firing of missiles into southern Israel,
as a result of which security warnings were issued regarding the presence of
Israelis in Jordan. The majority of our sewing activity is located in Jordan and
if we are unable to carry out such activity in Jordan our production
capabilities will be harmed and we may not be able to meet the orders of our
customers for our products. Any armed conflicts, terrorist activities or
political instability in the region would likely negatively affect business
conditions and could significantly harm our results of operations.

     The future of Israel's relations with its Arab neighbors and the
Palestinians is uncertain. We cannot assure that ongoing or revived hostilities
or other factors related to Israel will not have a material adverse effect on us
or our business.

     Generally, all male adult citizens and permanent residents of Israel under
the age of 45, unless exempt, are obligated to perform up to 36 days of annual
military reserve duty. Additionally, all such residents are subject to being
called to active duty at any time under emergency circumstances. Some of our
officers and employees are currently obligated to perform annual reserve duty.
No assessment can be made as to the full impact of such requirements on our
workforce or business, and no prediction can be made as to the effect of any
expansion or reduction of such military obligations on our business.

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

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

                                       18`

`ITEM 4.  INFORMATION ON THE COMPANY

4A. HISTORY AND DEVELOPMENT OF THE COMPANY

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

          Below is a summary of significant events in our development:

         1990       First body size cotton panty with elastics adjustable to
                    body size.

         1997       Formation of Hi-Tex Founded by Tefron Ltd. ("Hi-Tex") and
                    production of first Seamless products.

                    Initial public offering of our Ordinary Shares on the NYSE.

         1999       Acquisition of Alba Waldensian, Inc. (Tefron USA), a
                    manufacturer of seamless apparel and healthcare products.

         2001       Initial significant shifting of sewing production to Jordan.

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

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

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

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

         2005       Listing of our Ordinary Shares for trading on the Tel-Aviv
                    Stock Exchange ("TASE") (in addition to the listing on the
                    NYSE).

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

                    Disposition of our ownership interest in AlbaHealth for
                    consideration of approximately $13 million, consisting of
                    approximately $10 million paid in cash and a $3 million by
                    an unsecured subordinated promissory note. Pursuant to an
                    agreement with AlbaHealth in September 2009, AlbaHealth paid
                    us $1.715 million as early repayment on the unsecured
                    subordinated promissory note and settled all overdue
                    interest payments. We recorded a loss from this early
                    repayment in the amount of $1.285 million in our financial
                    statements for the period ended September 30, 2009.


                                       19`

`SEPTEMBER 2008  Acquisition of operations of Excelsior Inc., a private
                         company operating in the USA that specializes in design
                         and distribution of swimwear in the USA.

         DECEMBER 2008   Delisting of our Ordinary Shares from the NYSE due to
                         failure to meet certain quantitative listing standards.

         JANUARY 2009    Quotation of our Ordinary Shares on the Over the
                         Counter Bulletin Board.

                         Ten-for-one reverse stock split and increase in share
                         capital.


         FEBRUARY 2009   Implementation of an efficiency plan to, among other
                         things, streamline our production facilities and reduce
                         wastage.

         MARCH 2010      Implementation of a turnaround plan to return the Company to
                         profitability.

                         Signing of agreement with our bank lenders, among other
                         things, re-organizing our credit arrangements with our
                         bank lenders.

                         Closing of a rights offering which raised approximately
                         $2.9 million and subsequent private placement to
                         Mivtach Shamir Holdings, Ltd. and Ta-Top Limited
                         Partnership, which raised approximately $1.1 million.

               2010 TURNAROUND PLAN

          During the first quarter of 2010, we began to implement a turnaround
     plan with a view to returning the Company to profitability. The Company's
     program primarily addresses the following areas:

o    Working to improve our ability to meet deadlines for supplying customers'
     orders, by focusing on the processes for planning, management focus on
     customer targets, addressing basic problems in the quality of products and
     addressing operative bottlenecks.

o    Continued reduction in the level of production waste, including identifying
     the basic problems in the fields of knitting, fixation, dyeing and sewing,
     improving quality control in the early stages of production, measuring and
     managing waste on the production floor level, and in the various work
     stations and improving optimization of planning quantities to reduce
     logistic waste.

o    Taking efficiency steps on the Company's production floor by improving
     levels of efficiency and output mainly in the stages of knitting and
     sewing, including by changing work processes, training employees and
     increasing control over the production process.

o    Reducing purchasing costs, mainly in the purchasing of raw materials and
     auxiliary materials, through locating additional alternative suppliers to
     increase competition between the suppliers, and through the development of
     products with cheaper alternative raw materials.

o    Taking saving and efficiency measures in general and administrative
     expenses. In this context, the Company signed agreements with its landlord,
     RIET 1 Ltd., regarding the property on which the Company's plant is
     located, as described below in " - 4D. Property, Plants and Equipment -
     Israel." The total amount saved as a result of the agreement with RIET 1
     Ltd., is more than $1 million per year.

                                       20`

`o    Examining and improving the costing process and the mix of products and
     customers in order to prevent erosion in selling prices, and eliminating
     small customers and production of products with low profitability.

o    Taking steps to expand our customer base and to increase our sales to
     existing customers, by offering new product collections and improving our
     operating efficiency in order that we can offer a better cost structure.

o    Recruiting key personnel in the fields of textile and clothing to expand
     the Company's know-how basis. In this context, the Company hired Mr. Amit
     Meridor as the Company's CEO, Mr. Arnon Tiberg as the Company's Chairman of
     the Board of Directors, and rehired Mr. Ilan Gilboa as the Company's EVP
     Operations and Customer Support.

o    Reorganization of the Company's debt structure with the banks, as described
     in "Item 10. Additional Information - C. Material Contracts - Agreement
     with Our Bank Lenders."

     Our 2010 turnaround plan follows our decision in February 2009 to implement
an overall efficiency plan in view of our financial results and due to the
liquidity challenges that we faced due to the worsening global economic
environment, our ongoing operating difficulties and the reduction by our bank
lenders of the credit available to us beginning in the fourth quarter of 2008.

     In the context of our efficiency plan in 2009, we decided to streamline all
our production facilities, improve the utilization of knitting capacity and
reduce knitting costs, make changes in the development processes, assimilate an
advanced system of quality assurance, reduce wastage, and we progressively
ceased working with several smaller sewing factories, all of which were operated
by subcontractors, and began working with one large sewing factory, also
operated by a subcontractor. No obligations have arisen from this transition to
one sewing factory, as all of these sewing factories are operated by
subcontractors. In addition, as part of the efficiency plan, we reduced our
headcount by approximately 15%. This resulted in severance pay obligations, paid
during 2009 to those employees that were dismissed, in the amount of
approximately $275,000. As of the end of the second quarter of 2009, we have
completed the implementation of the 2009 efficiency plan, which led to a
significant reduction in our costs during 2009.

     In addition, at the end of 2008, we closed our dyeing factory in Israel,
which provided only a small part of the dyeing activity for our products. We
have transferred all of our dyeing activity to subcontractors with whom we have
longstanding business relationships.

     In order to streamline our management, operations and our arrangements with
customers and suppliers, during January 2009 we transferred all of our Cut & Sew
sportswear and underwear activity to our subsidiary, Hi-Tex, while maintaining
our swimwear activity in our subsidiary, Macro.

     There are no long term material obligations that have arisen from the
efficiency plan.

     RIGHTS OFFERING AND PRIVATE PLACEMENT TO NORFET

     On December 2, 2009, we received non-written notices from our bank lenders
in which the banks stated their decision to terminate our utilization of our
credit line. Following negotiations with our bank lenders, in March 2010, we
signed an agreement with our bank lenders, which among other things, provides
for a re-organization of our credit lines with the banks. Under the agreement,
we committed to complete a rights offering and/or private placement in which not
less than $4 million is invested in Tefron's equity.

     Following Norfet's notice to us that it would not be able to participate in
the rights offering due to regulatory limitations, we decided to raise capital
by means of a transaction that combined both a rights offering to all of our
shareholders and a private placement to Norfet (or whoever acts on its behalf).
Norfet committed to us that it (or whoever acts on its behalf) would invest in
Tefron the difference between $4 million and the amount previously raised in the
rights offering.

     Accordingly, following a shareholder meeting approving the private
placement to Norfet, we held a rights offering pursuant to which we issued to
our shareholders approximately 754,384 ordinary shares at a price per share of
$3.8, resulting in gross proceeds of approximately $2.9 million. In addition, we
issued 149,124 ordinary shares, at a price per share of $3.8, to each of Mivtach
Shamir Holdings Ltd. (one of the partners in Norfet) and Ta-Top Limited
Partnership (a partnership under the control of FIMI 2001 Ltd.) in a private
placement, resulting in gross proceeds of approximately $1.1 million. The
combined gross proceeds that we received from the rights offering and the
private placement was $4 million.


                                       21`

`CAPITAL EXPENDITURES

     Our capital expenditures for fixed and intangible assets were $0.7 million,
$3.4 million and $6.4 million for the years ended December 31, 2009, 2008 and
2007, respectively. The 2009 expenditures were primarily made in Israel to
invest in leasehold improvements and other equipment. See Consolidated
Statements of Cash Flows in the Consolidated Financial Statements.

     Our current capital expenditures include investments in equipment,
machinery and leasehold improvements in our facilities in Israel and Jordan. See
also Note 7 of the Notes to the Consolidated Financial Statements.

     As of the date of this Annual Report, we estimate that our capital
expenditures for 2010 will be approximately between $0.5 million to $1.0
million. We expect to finance these investments primarily from cash generated
from operations and from proceeds from the rights offering and private placement
which were completed during March 2010. However, the actual amount of our
capital expenditures will depend on a variety of factors, including the scope of
our sales, general economic conditions, changes in demand for our products,
increase in the sales growth of our new products, the risks and uncertainties
involved in doing business in Jordan and our ability to generate sufficient cash
from operations. See "Item 3. Key Information - 3D. Risk Factors."

4B. BUSINESS OVERVIEW

OVERVIEW

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

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

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

                                       22`

`Our subsidiary, Macro Clothing Ltd., or Macro, is known for its ability to
combine expertise in design and fashion with its ability to manufacture high
quality swimwear products in large quantities to leading customers mainly in the
U.S. and Europe.

     We believe that our collaboration with our customers in the design and
development of our products strengthens our relationships with our customers and
improves the quality of our products. We began our relationship with Victoria's
Secret in 1991, The GAP in 1993, Calvin Klein in 1994, and lululemon athletica
in 2006. Our four largest customers in 2009 accounted for approximately 49.8% of
our total sales in 2009, and our four largest customers in 2008 accounted for
approximately 69.2% of our total sales in 2008. However, as a result of the
global economic recession and our operating difficulties, during 2009, we
experienced a significant decrease in our sales, and specifically to our then
two main customers, Nike and Victoria's Secret. We have been making an effort to
try to maintain our relationships with these customers. See "Item 4. Information
on the Company - 4B. Business Overview - Customers."

     We enjoy several strategic advantages by reason of our location in Israel
and Jordan. Israel is one of the few countries in the world that has free trade
agreements with the United States, Canada, the EU, and the EFTA. These
agreements permit us to sell our products in the United States, Canada and the
member countries of the EU and the EFTA free of customs duties and import
quotas. Due to our locations in Israel and Jordan we benefit from exemptions
from customs duties and import quotas. We also currently benefit from tax
incentives provided by the Government of Israel and from the availability in
Israel of both skilled engineers and unskilled workers. See "- Israeli Tax
Incentives" and "- Conditions in Israel -Trade Agreements."

PRODUCTS

     In close collaboration with our customers, we design and manufacture
intimate apparel, active-wear and swimwear. Through our efficient capability, we
produce garments made of cotton and synthetic fibers for large-volume marketers
who, in recent years, have increased retail consumer interest for quality
intimate apparel and active-wear at affordable prices.

     We believe that our advanced technology and manufacturing processes enable
us to deliver intimate apparel and active-wear that is comfortable to wear, fits
well, fashionable, made of high-quality fabric and difficult to imitate. Our
advanced design skills enable us to provide our costumer with leading-fashion
swimwear. Our product line includes knitted briefs, bras, tank tops, boxers,
leggings, crop tops, T-shirts, daywear, nightwear, bodysuits, swimwear,
beach-wear, active-wear, shape wear and accessories.

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

MANUFACTURING AND PRODUCTION

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

                                       23`

`We manufacture products principally to fill firm orders and, therefore,
maintain limited inventory of finished goods. Customers typically send projected
product requirements to us between three and six months in advance of the
delivery requirements and place firm orders between three and six months prior
to the desired delivery date. This lead time allows us to coordinate raw
material procurement with its usage and to adjust production levels in order to
meet demand. Our contractual engagements with our customers in the purchase
orders are made on a basis of the development of a project, a series of products
or a product, at the customer's request or at our initiative.

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

     A significant portion of the manufacturing process for our swimwear
products is outsourced to subcontractors, mostly in China and Cambodia, that
manufacture the products based on our development, design and specifications. We
continue to examine the financial feasibility of using subcontractors in various
countries, and during 2009 we manufactured some of our swimwear in Morocco in an
effort to identify preferable production locations, including in terms of
production expenses.

     In many cases, these subcontractors manufacture the complete garment that
is delivered to our customers. Our quality assurance and quality control
personnel work with our subcontractors to maximize product quality standards. We
are moving as much of our non knowledge intensive manufacturing activity as
possible out of Israel to destinations where production costs, including labor
costs, are lower. Thus, we are gradually expanding our manufacturing sources in
the Far-East for our Cut & Sew products, supervised by our personnel, including
with regard to product quality standards.

MANUFACTURING PROCESS

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

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

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

o    KNITTING (ONLY CUT & SEW) - The knitting needs of our Cut & Sew Division
     are provided by subcontractors in Israel that currently supply
     substantially all of our fabric needs in Israel. Our subcontractors utilize
     advanced and automated technology to knit tubular fabric, including
     bodysize fabrics. Bodysize fabrics, which are required for bodysize
     garments, enable maximum use of fabric and minimize waste during cutting.


                                       24`

`o    DYEING AND FINISHING - At the end of 2008, we closed our dyeing factory in
     Israel, which conducted only a small part of the dyeing activity for our
     products. We have transferred all of our dyeing activity in our Cut & Sew
     Division to a subcontractor located in Israel. All of the dyeing and
     finishing needs of our Hi-Tex Division are provided by a different
     subcontractor in Israel. Most of the dyeing machines used by the
     subcontractor for the purpose of providing dyeing services are owned by us.
     In addition, the subcontractor applies unique technologies and production
     methods for us, which have been developed by us, by the subcontractor for
     itself, or by us and the subcontractor jointly for us. We are dependent on
     this subcontractor for our dyeing and finishing needs at our Hi-Tex
     Division.

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

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

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

     In 2009, 74.8%of our revenues generated from Cut & Sew products were due to
sales of goods manufactured by subcontractors. Other than sewing at our plant in
Jordan, all our activity in this field is carried out by subcontractors in
Israel, Jordan, and the Far East. Sometimes subcontractors supply the finished
product, and sometimes they provide only production services, while we supply
them with part of the product for work and the required raw materials. Most of
the subcontractors in Israel and Jordan use our machinery to provide the
production services to us.

HI-TEX MANUFACTURING PROCESS

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


                                       25`

`The Hi-Tex manufacturing process is currently being used to produce
knit-to-size intimate apparel, active-wear and outerwear. We operate our Hi-Tex
knitting process in our principal production facilities in Misgav, Israel. We
operate our Hi-Tex sewing process in one sewing facility in Israel and also
subcontract sewing in Israel and in Jordan. See "Item 4. Information on the
Company - 4D. Property, Plants and Equipment."

     At December 31, 2009, we had a total of 729 fully equipped Santoni Knitting
machines at the Hi-Tex facilities in Israel.

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

SALES AND MARKETING

     Our marketing strategy focuses on selling quality products to large U.S.
and European marketers of intimate apparel, active-wear and swimwear. In
addition, we have decided to expand our marketing activity in Europe, and to
market to customers in the local market and open outlet shops in Israel, as part
of our strategy of increasing our ability to make use of surplus finished
products and raw materials. Thus, the principal market for our lingerie,
underwear and sportswear products is the American market.

     We market our products directly to major retailers, which sell them under
their own labels and to several companies that market nationally advertised
brands. We have sales offices which are located in Portland, Oregon, New York,
New York, London, England and Israel.

     We believe that some of our products in the Seamless area of activity give
the consumer added value, yielding potential for higher profit margins, both for
us and for our customers, and provide us with a marketing advantage. By means of
our technology, we believe that we have the ability to supply leading products
with unique features, which cannot easily be produced by any of our competitors.

     In addition we see the active-wear market as an added opportunity to
promote our innovative production and design capabilities.

INTELLECTUAL PROPERTY

     We hold a number of patents, patent requests, and inventions and secret
developments that are not protected formally, including inventions and
developments in the field of production, mechanization and products. We protect
our intellectual property mainly through entering into confidentiality
agreements with our employees, our suppliers, our sub-contractors and our
customers that are exposed to confidential information. Only a part of the
adaptations, configurations, technologies and techniques used in our
manufacturing process is patented. See "Item 3. Key Information - 3D. Risk
Factors - We may not be able to protect our intellectual property." However, we
have obtained patents for certain aspects of our manufacturing process and for
certain products, such as the "millennium bra," the "bonded bra" and the
"ultrasonic bra", whose fabric is joined without sewing.

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

     We do not believe that the patents we currently hold constitute a
significant aspect of our operations.

                                       26`

`SEASONALITY

     We have not identified a clear seasonal pattern to our general business,
other than with respect to our swimwear products. In the swimwear division, most
of our sales are consummated between December and May.

CUSTOMERS

     Our customers represent some of the leading marketers of intimate apparel,
active-wear and swimwear in the world. In the Cut & Sew market for men's,
women's and children's underwear and sportswear our main customers are the large
retail chains in the U.S. and companies that have some of the leading brands in
the U.S. In the Cut & Sew market for swimwear and beachwear our main customers
are retail chains and companies with the leading brands in the U.S., Europe and
Israel. Approximately49.8% of our sales in 2009 were derived from the worldwide
sale of our products to our then four largest apparel customers, Victoria's
Secret, Nike, Calvin Klein and lululemon athletica. In 2009, in the active-wear
area we strengthened our business relationship with lululemon athletica,
maintained our business relationships with other active-wear customers, such as
Patagonia and Reebok, and began working with other active-wear customers. In the
swimwear area, we strengthened our business relationship with Wal-Mart, while we
maintained our business relationships with other swimwear customers and
developed business relationships with new customers in the USA and Europe.

     The global recession and the decline in the level of consumption impact the
extent of demand for our products and are liable also to impact the type of
products that customers prefer to buy. Beginning in the second quarter of 2009,
we experienced a significant decrease in our sales. Among other things, we
experienced a significant decrease in our sales to our then two main customers,
Nike and Victoria's Secret. We are taking steps to expand our customer base and
to increase our sales to existing customers, so as to compensate for the decline
in sales of existing customers; however, we estimate that an increase in our
sales to existing customers and sales to new customers will only partially
compensate for the decline in our sales.

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

CUSTOMER                          2007               2008                    2009
                        ---------------------  ---------------------  ---------------------
                                             (Dollars in millions)

Victoria's Secret (1)   $   62.1      39.1%     $   56.9      32.7%     $   37.8      32.7%

Calvin Klein            $    2.4       1.5%     $    3.9       2.3%     $    7.2       6.2%

Nike                    $   37.4      23.6%     $   40.3      23.2%     $    6.7       5.8%

lululemon athletica     $    1.9       1.2%     $    3.4       2.0%     $    5.8       5.0%

Others                  $   54.8      34.6%     $   69.3      39.8%     $     58      50.3%

Total                   $  158.6       100%     $  173.8       100%     $  115.5       100%

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

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

                                       27`

`We established our relationship with our largest customer, Victoria's
Secret, in 1991. Currently, we manufacture underwear, nightwear, loungewear,
bodysuits, active-wear and bras for Victoria's Secret. As described above,
during the second quarter of 2009 we experienced a significant decrease in our
sales to Victoria's Secret. In addition, during the past few years we have been
asked by Victoria's Secret to reduce the prices of Victoria's Secret's Logo
program. See "Item 3. Key Information - 3D. Risk Factors - We depend on a small
number of principal customers who have in the past bought our products in large
volumes. We cannot assure that these customers or any other customer will
continue to buy our products in the same volumes or on the same terms".

     We began our working relationship with Calvin Klein in 1994. Currently, we
supply Calvin Klein with underwear for men and women, T-shirts and camisoles.

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

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

     We continue to seek to expand and strengthen our relationship with
Victoria's Secret, Lululemon and other brand names by providing the retailers
with a continuing line of new products. However, we cannot assure that these
brands will continue to buy our products in the same volumes or on the same
terms as they did in the past.

     The supply times for goods to customers are determined by the purchase
order and vary from order to order.

     The volume of products ordered by customers is subject to the cyclical
variations in their business. See "Item 3. Key Information - 3D. Risk Factors -
Our principal customers are in the clothing retail industry, which is subject to
substantial cyclical variations. Current economic conditions in our target
markets are expected to adversely affect our sales. Our revenues will decline
significantly if our principal customers do not continue to buy our products in
large volumes or if any of our principal customers fails to satisfy its payment
obligations to us due to an economic downturn or for any other reason."

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

ISRAELI INCENTIVES

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

     LAW FOR THE ENCOURAGEMENT OF CAPITAL INVESTMENTS, 1959

     The Company's production and development facilities have been granted
"Approved Enterprise" status pursuant to the Law for the Encouragement of
Capital Investments, 1959 (the "Investment Law"). According to the Law, revenues
from the approved enterprises, during the seven years from the first year the
approved enterprise earns taxable income, provided that 14 years have not passed
since the approval was granted or 12 years have not passed since the enterprise
began operating, whichever is earlier ("benefit period"), will be taxed at
reduced tax rate of between 10% and 25% (in accordance with the rate of foreign
investments in the company). A company, in which foreign investments exceed 25%,
is entitled to a 10-year benefit period. Approval letters dated January 1997 or
later are entitled to a tax exemption in the first two years of the benefit
period. Nevertheless, if a dividend is distributed out of income derived from
the Approved Enterprise during the tax exemption period, the distributing
company will be subject to a corporate tax on the amount determined by the
distributed amount grossed up with the effective corporate tax rate which would
have been applied had the distributing company not enjoyed the exemption (as
mentioned above).


                                       28`

`Shareholders are taxed at a 15% tax rate (withheld) on dividends
distributed from revenues from the approved operations, and at a 25% tax rate on
dividends distributed from revenues from other sources, unless otherwise
stipulated by tax treaties.

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

     TEFRON -Tefron has nine approved investments under the grants track. The
benefit period of 6 approved investments of the Company has ended, and as such
income derived from these investments is taxable at the regular corporate tax
rate in Israel. The ratio of the revenue derived from these investments is
calculated according to growth in Company sales over and above sales before the
beginning of these investments. The benefit period of 3 approved investments of
the Company has yet to be ended.

     HI-TEX - Hi-Tex has three approved investments under the grants track. The
benefit period of them has yet to be ended.

     In addition, the Company's fourth plan is in accordance with Amendment 60
of the Law ("the Amendment"), under the alternative track. Under the alternative
track, the benefit period start date is from the year in which taxable revenue
is first generated by the approved enterprise, provided that less than 12 years
have elapsed since the start of the elective year. Under this track, the Company
is tax exempt in the first ten years of the benefit period.

     The basic condition for receiving the benefits under this track is that the
enterprise is "a competitive enterprise".

     Another condition for receiving the benefits under the alternative track is
a minimum qualifying investment. This condition requires an investment in the
acquisition of productive assets such as machinery and equipment, which must be
carried out within three years. The minimum qualifying investment required for
plant expansion is the higher of NIS 300 thousand and an amount equivalent to
the "qualifying percentage" of the value of the productive assets. Productive
assets that are used by the plant but not owned by it will also be viewed as
productive assets.

     The qualifying percentage of the value of the productive assets is as
     follows:

                The value of productive            The new proportion that the
              assets before the expansion         required investment bears to
                   (NIS in millions)             the value of productive assets
          ----------------------------------  ----------------------------------

              Up to NIS 140                                  12%
              NIS 140 - NIS 500                               7%
              More than NIS 500                               5%

     The income qualifying for tax benefits under the alternative track is the
taxable income of a company that has met certain conditions as determined by the
Law ("a beneficiary enterprise"), and which is derived from an industrial
enterprise or a hotel. The Law specifies the types of qualifying income that is
entitled to tax benefits under the alternative track both in respect of an
industrial enterprise and of a hotel, whereby income from an industrial
enterprise includes, among others, revenues from the production and development
of software products and revenues from industrial research and development
activities performed for a foreign resident (and approved by the Head of the
Administration of Industrial Research and Development).

                                       29`

`Hi-Tex has elected 2007 as its year of election. Furthermore, on June 30,
2008 an application for a pre-ruling was filed with the Income Tax Professional
Department, requesting beneficiary enterprise status and determination of 2007
as the year of election ("the application for a pre-ruling"). To date, response
from the Tax Authorities has yet to be received.

     As mentioned in Note 1c above, in January 2009 the Group placed all of the
active wear and intimate apparel operations under Hi-Tex founded by Tefron Ltd.
To this end, Tefron transferred most of its assets to Hi-Tex against allotment
of additional Hi-Tex shares, pursuant to Section 104 of the Israeli Income Tax
Ordinance. Therefore, Tefron applied to the Investment Center to indorse its
approval to Hi-Tex. To date, response has yet to be received. In addition,
Hi-Tex updated the application for a pre-ruling accordingly.

     MACRO - Macro has elected 2005 as the year of election under the
alternative track, pursuant to the amendment to the Law. The Company informed
the income tax assessor on its election in its letter from December 27, 2006.

     LAW FOR THE ENCOURAGEMENT OF INDUSTRY (TAXES), 1969

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

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

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

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

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

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


                                       30`

`COMPETITION

     The intimate apparel, active-wear and swimwear markets are highly
competitive. The competition in the fields in which we operate is focused on
four main parameters: the price of the product, its quality, the level of
customer service, and also, in the sportswear and swimwear market as well as in
the Seamless market, innovative design and adapting to the dictates of fashion
and consumer taste.

     Our products compete with products of other manufacturers in Israel,
Europe, the United States, South and Central America and Asia. Most competition
with other manufacturers in the clothing industry focuses on reducing production
costs, reducing supply lead times, design, product quality, and efficiency of
supply to the customer. Since production costs depend to a large extent on labor
costs, in recent years most production in the industry has been moved to
countries where the labor costs are low. Some of our competitors have a lower
cost base, longer operating experience, broader customer base and other
advantages over us which allow them to compete with us.

     In addition, our competing manufacturers from the Far East have established
relationships with our customers which erode the prices of some of our Cut & Sew
products and reduce our sales of these products. As a result, the products that
involve labor intensive manufacturing processes that are not based on our
special technologies, are almost all manufactured through subcontractors in the
Far East and in Jordan.We are examining the possibility of transferring more of
our production activity to countries where labor costs are low. We cannot be
certain that our customers will not ask for production of our products by means
of third parties, including direct contacts with subcontractors who are
currently working through us. For our Seamless products that are more technology
dependent, we endeavor to maintain our competitive position based on innovation
and development.

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

     We benefit from Israel's status as one of the few countries in the world
that currently has free trade agreements with the United States, Canada, the EU
and the EFTA which permit us to sell our products in the United States, Canada
and the member countries of the EU and the EFTA free of customs duties and
imports quotas. Further, government incentives that reduce the cost of our
equipment may not be available to us in other countries. We are also able to
sell our products manufactured at our facilities in Jordan to the United States
and Europe free from customs duties and import quotas under certain conditions.
These favorable terms enable us to maintain the core of our knowledge-based
operation in Israel, while competing on the basis of price. We are also able to
sell from Egypt to the United States and Europe free from customs duty and
import quotas.

CONDITIONS IN ISRAEL

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

POLITICAL CONDITIONS IN ISRAEL

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

                                       31`

`There is substantial uncertainty about how or whether any peace process
will develop or what effect it may have upon us. During the summer of 2006,
Israel was engaged in an armed conflict with Hezbollah, a Lebanese Islamist
Shiite militia group, which involved thousands of missile strikes and disrupted
most day-to-day civilian activity in northern Israel. Further, the establishment
of a Hamas government in Gaza and the subsequent armed conflict with Hamas in
the Gaza Strip, in which Israel was engaged during the winter of 2008-2009, has
created additional unrest and uncertainty in the region. Ongoing violence
between Israel and its Arab neighbors and Palestinians may have a material
adverse effect on our business, financial condition or results of operations.

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

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

ECONOMIC CONDITIONS IN ISRAEL

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

TRADE AGREEMENTS

     Israel is a member of the United Nations, the International Monetary Fund,
the International Bank for Reconstruction and Development, the International
Finance Corporation and since 2010, the organization for Economic Co-operation
and Development, also known as OECD. Israel is a signatory to the General
Agreement on Tariffs and Trade, or GATT, which provides for the reciprocal
lowering of trade barriers among its members. In addition, Israel has been
granted preferences under the Generalized System of Preferences from the United
States, Australia, Canada and Japan. These preferences allow Israel to export
the products covered by such program either duty-free or at reduced tariffs.
Israel became associated with the European Economic Community (now known as the
European Union) in a Free Trade Agreement concluded in 1975, which confers
certain advantages with respect to Israeli exports to most European countries
and obligates Israel to lower its tariffs with respect to imports from those
countries over a number of years.

     Israel is a party to Qualified Industrial Zones agreements - since 1998
with Jordan and the United States, and since December 2004, with Egypt and the
United States. These agreements, as well as the free trade agreement between the
European Union, the United States and Egypt, enable us to execute part of our
manufacturing process in defined zones in Jordan or in Egypt (including by
producing parts of the product in Israel), and enjoy exemption from U.S. custom
duties and quotas once exported to the United States and to countries of the
European Union.

                                       32`

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

     As of January 1, 2005, the member states of the World Trade Organization
removed some of the tariffs on textile products. As a result of this, some of
the textile products manufactured in a member state of the World Trade
Organization are no longer subject to the tariff limitations. These changes
enable retailers, clothing companies and others to import unlimited amounts of
textile products from member states as stated, where the cost of production is
low. As a result of this, the prices of textiles and clothing throughout the
world, including our products, must cope with downward pressure on prices, and
these prices may continue to decline. Since such a reduction in prices will be
more rapid than our ability to reduce costs, it is possible that the Company's
business and operating results will be negatively influenced.

     In 2006, some of the tariffs on textile products produced in China were put
back in place by the member states of the World Trade Organization. As of
January 1, 2009, the safeguard restricting policy, that had been applied by the
United States and the European Union until that time in relation to products in
certain categories imported from China was cancelled. The cancellation of this
policy may influence our competitive ability.

U.S. GOVERNMENT REGULATION

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

4C. ORGANIZATIONAL STRUCTURE

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

4D. PROPERTY, PLANTS AND EQUIPMENT

ISRAEL

                                       33`

`As of December 31, 2009, we maintained manufacturing and administrative
facilities at the following sites in Israel and Jordan:

                                          APPROX.
                                          SQUARE        NUMBER OF         LEASE
FACILITY IN ISRAEL                       FOOTAGE        EMPLOYEES      EXPIRATION     FUNCTION
-----------------------------------      -------        ---------      ----------     --------

Petach Tikva                              1,900             2             2011        Management
                                                                                      offices, partly
                                                                                      sublease

Misgav:  Central Factory -
  Tefron ("Tefron Building") (1)          83,000           91             2010        Development,
                                                                                      packaging,
                                                                                      storage and
                                                                                      administrative
                                                                                      functions
                                                                                      Development,

Misgav:  Central Factory -
  Hi-Tex  ("Hi-Tex Building 1") (1)       143,000          85             2019        Knitting, sewing,
                                                                                      packaging,
                                                                                      storage and
                                                                                      administrative
                                                                                      functions

Misgav:  Central Factory -
  Hi-Tex ("Hi-Tex Building 2") (1)        178,000          601            2019        Knitting,
                                                                                      packaging and
                                                                                      storage

Holon - Macro Center                      11,200           77             2010        Design,
                                                                                      development and
                                                                                      administrative
                                                                                      functions
FACILITY IN JORDAN
Irbid                                     229,000          657           2009(2)      Pressing, Sewing
                                                                                      and packaging
                                                                                      factory and
                                                                                      logistic and some
                                                                                      other
                                                                                      manufacturing
                                                                                      processes

(1)  In March 2010, following negotiations, the Company signed an agreement
     pursuant to which the Company will vacate the Tefron Building and will
     continue renting Hi-Tex Buildings 1 and 2. Pursuant to the agreement, the
     rental period of the Tefron Building will terminate on March 31, 2010.
     Moreover, the Company and RIET 1 will sign, within 60 days of the date from
     the date of signing of the agreement, new leases with respect to the other
     two buildings housing plants of the Company , for the period from January
     1, 2010 until December 31, 2019, without the possibility of reducing the
     rental period and in return for a monthly rent of approximately NIS 522,000
     plus VAT, linked to changes in the CPI. The total amount saved as a result
     of the aforementioned move, including rent, taxes, and structural
     maintenance costs, is more than $1 million per year.


(2) The lease agreement is renewable annually at our option.

     For a description of our plans regarding our facilities, see Note 7 of the
Notes to the Consolidated Financial Statements.

     We believe that our existing facilities in Israel and Jordan are
well-maintained, in good operating condition and provide adequate space for our
current level of operations as well as for a significant increase in sales
volume.

                                       34`

`UNITED STATES, ENGLAND AND CHINA

     As of December 31, 2009, Tefron USA, Tefron UK and Macro HK maintained a
warehouse and distribution logistical center and administrative facilities at
the following sites in the United States and China:

FACILITY IN UNITED STATES,            APPROX.         NUMBER OF
ENGLAND AND CHINA                  SQUARE FOOTAGE     PERSONNEL       FUNCTION
-------------------------          --------------     ---------       --------

Valdese, NC - Warehouse                163,610             31         Warehouse and distribution
                                                                      Logistical center and
                                                                      stitching headquarters USA

Valdese, NC                             52,644               -        Subleased

New York City - Offices                  1,500                1       Sales Offices and Showroom

Portland, OR- Offices                    2,450                4       Sales Offices and Showroom

Los Angeles, CA - Offices                9,200               11       Sales Offices and Showroom

Dong Guan, China - Office                6,000               19       Sourcing and development

Dong Guan, China - Office                4,500               22       Sewing samples

     Both plants in Valdese, North Carolina are of brick and steel construction,
and most areas have been air-conditioned. Since April 2005, we are leasing for a
period of seven years 1,500 square feet at 150 West 30th Street New York, New
York. Since October 2006, we are leasing for a period of five years 2,450 square
feet at 4145 SW Watson Way, Beaverton, Oregon. Since February 2009, we are
leasing for a period of one and a half years 9,200 square feet at 6440 E. 26th
Street, Los Angeles, California. Since May 2007, we are leasing for a period of
five years 10,500 square feet at FuMingzhong Rd., Town of Dalang, Dong Guan,
China. The remainder of Tefron USA's physical properties are held in fee simple.
We believe our existing facilities in the United States are well-maintained, in
good operating condition and provide adequate space for Tefron USA's current
level of operations as well as for a significant increase in sales volume.

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

     The Company's significant real estate properties are in Israel, Jordan and
the United States. These properties are under ongoing maintenance and in good
operating condition. The Company leases additional real estates properties
around the world, which are not significant to the Company and the Company does
not believe that it will have any difficulties in continuing to lease these
properties, or alternatively, in finding alternative properties to lease.

ITEM 4A. UNRESOLVED STAFF COMMENTS

Not Applicable.

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

GENERAL

     OUR BUSINESS; DEVELOPMENTS

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

                                       35`

`We have two segments: Seamless (also called Hi-Tex) and Cut & Sew. Our
Seamless Division, which manufactures intimate apparel and active-wear products,
generated approximately 53.9% of our revenues during 2009. Our Cut & Sew
Division, which manufactures intimate apparel, active-wear and swimwear
products, generated approximately 46.1% of our revenues during 2009.

     Our Hi-Tex manufacturing process, which is conducted through our
subsidiary, Hi-Tex, involves a vertically integrated production process, from
the design of the product to the knitting, dyeing and sewing of the product.
However, our Hi-Tex manufacturing process utilizes state-of-the-art technology
that eliminates a significant number of stages of the manufacturing process
while enabling our Hi-Tex Division to produce a substantially wider range of
fabrics, styles and product lines at a consistently high level of comfort,
quality and durability. The Hi-Tex manufacturing process was developed in-house
through the adaptation and configuration of machinery and equipment purchased
from third parties. Although developed for our exclusive use, most of these
adaptations and configurations are not patented. The manufacturing for our
Hi-Tex Division takes place mainly in Israel, where we had 765 fully equipped
Santoni knitting machines as of December 31, 2009, of which 36 machines are
leased to a third party that operates them in North Carolina, USA.

     Our Cut & Sew manufacturing process also involves a vertically integrated
production process. We are involved in all steps in the process, from the design
of the product to the knitting, dyeing, cutting and sewing of the product. The
knitting, dyeing and cutting processes for our intimate apparel and active-wear
products of our Cut & Sew Division take place in Israel and most of the sewing
for these products takes place in Jordan. Our swimwear products are produced by
subcontractors mainly in the Far East. We continue to examine the financial
feasibility of using subcontractors in various countries in an effort to
identify preferable production locations, including in terms of production
expenses.

     2009 DEVELOPMENTS

     During 2009, we continued to face liquidity challenges due to the worsening
global economic environment, our ongoing operating difficulties and the
reduction by our bank lenders of the credit available to us beginning in the
fourth quarter of 2008. Our profits in 2009 were adversely impacted by a number
of factors, including a decline of approximately $58 million in our sales in
2009 from 2008, and in particular the decline of our sales to our main
customers, and the manufacturing challenges at our Hi-Tex Division that
continued to increase our costs and decrease our operating efficiency.

     We are taking steps to expand our customer base and to increase our sales
to existing customers, so as to compensate for the decline in sales to our
existing customers during 2009; however, we estimate that an increase in our
sales to existing customers and sales to new customers will only partially
compensate for the decline in our sales to our two main customers.

     In our Hi-Tex Division, during 2009, we contended and are still contending
with the need to address operating difficulties and the efficiency of
manufacturing procedures. As a result, we experienced an increase in our
production costs and in the levels of waste from our products. During 2009 we
implemented an overall efficiency plan to overcome these operating and
efficiency difficulties.

     To further improve our operating efficiencies and in view of the global
economic environment, during the first quarter of 2010, we began to implement a
turnaround plan with a view to returning the Company to profitability, as
described in "Item 4. Information on the company - A.History and Development of
the Company - 2010 Turnaround Plan".

                                       36`

`CURRENCY; REVENUES; RAW MATERIALS

     The currency of the primary economic environment in which our business is
conducted is the U.S. dollar. Consequently, we use the dollar as our functional
currency. Transactions and balances denominated in dollars are presented at
their dollar amounts. Transactions and balances in other currencies are
converted into dollars and resulting gains and losses are included in the
statement of income. The financial information below reflects our operations on
a consolidated basis.

     Substantially all of our revenues are derived from the sale of our
products, primarily in the United States. We recognize revenues from the sale of
our products upon delivery when all other revenue recognition criteria are met.
Our payment terms vary based on customer and length of relationship. Our payment
terms for our significant customers are between 30 and 60 days from the date of
supply and the issuance of an invoice. We do not have any long-term supply
obligations.

     We purchase our raw materials from several international and domestic
suppliers and historically have not experienced any difficulty in obtaining raw
materials to meet production requirements. During 2008 and 2009, there was a
relative rise in the prices of raw materials, mainly due to a decline in the
dollar rate against most other currencies in the world, and a rise in the prices
of inputs worldwide. Raw materials are generally purchased against actual orders
or customers' firm commitments, although we have a policy of maintaining a
minimum level of those raw materials that are in repeated demand.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

     We prepare our consolidated financial statements in conformity with
International Financial Reporting Standards ("IFRS") as issued by the
International Accounting Standards Board ("IASB"). As such, we are required to
make certain estimates, judgments and assumptions that we believe are reasonable
based upon the information available at the time they are made. These estimates,
judgments and assumptions affect the reported amounts of assets and liabilities
as of the date of the financial statements, as well as the reported amounts of
expenses during the periods presented.

     We base our estimates upon past experience, and where applicable, various
factors, external sources and on other assumptions that we believe are
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions and could have a material
impact on our reported results.

     We believe that the accounting policies discussed below are critical to our
financial results and to the understanding of our past and future performance,
as these policies relate to the more significant areas involving management's
estimates and assumptions. We consider an accounting estimate to be critical if:
(1) it requires us to make assumptions because information was not available at
the time or it included matters that were highly uncertain at the time we were
making our estimate and (2) changes in the estimate or different estimates that
we could have selected may have had a material impact on our financial condition
or results of operations.

     Our management believes the significant accounting policies which affect
management's more significant estimates, judgments, and assumptions used in the
preparation of the Company's consolidated financial statements and which are the
most critical to aid in fully understanding and evaluating the Company's
reported financial results include the following:

     o    Revenue recognition;

     o    Inventories;

     o    Impairment of fixed assets;

     o    Deferred tax assets;

     o    Legal claims; and

     o    Allowance for doubtful debts.

                                       37`

`REVENUE RECOGNITION

     Revenues from sales are recognized in accordance with International
Accounting Standard 18, "Revenue" ("IAS No. 18"), when the revenues can be
measured reliably, it is probable that the economic benefits associated with the
transaction will flow to the Company and the costs incurred or to be incurred in
respect of the transaction can be measured reliably. Revenues are measured at
the fair value of the consideration received, minus surcharges and quantity
discounts.

     INVENTORIES

     The Company reviews in each period the state and age of inventories and
records a provision for slow-moving inventories accordingly. In order to assess
the ability to use these inventories in the future, the Company relies on
technical data and on assumptions with regard to anticipated order backlog.

     IMPAIRMENT OF FIXED ASSETS

     Our property, plant and equipment are reviewed for impairment in accordance
with International Accounting Standard 36, "Impairment of assets" ("IAS No.
36"). Whenever events or changes in circumstances indicate that their carrying
values may not be recoverable through the present value of anticipated cash
flows from the continued use of the asset, including those expected at the time
of its future retirement and disposal, we reduce, if necessary, the carrying
values of the assets to their estimated fair values.

     The provision for impairment of fixed assets recorded up to the recoverable
amount of said asset, provided that this amount is lower than the asset cost on
Company financial statements. The recoverable amount is the higher of fair value
net of selling cost, and net value in use based on discounted cash flow. In
order to determine the recoverable amount of fixed assets, the Company has
engaged a qualified independent valuator. A reversal provision of impairment of
plant, property and equipment in 2009 amounted to $496 thousand according to an
asset valuation assessment, compared to a provision of $2.1 million in 2008.

     DEFERRED TAX ASSETS

     Deferred tax assets are recognized for unused carry forward tax losses and
temporary differences to the extent that it is probable that taxable profit will
be available against which the losses can be utilized. Significant management
judgment is required to determine the amount of deferred tax assets that can be
recognized, based upon the likely timing and level of future taxable profits
together with future tax planning strategies.

     LEGAL CLAIMS

     In estimating the chances of the legal claims filed against the Company and
its investees, the companies relied on the opinion of their legal counsels. The
estimates of these counsels are based on their best professional judgment,
taking into account the stage of proceedings and historical legal experience in
the different issues. Since the outcome of the claims will be determined in
courts, the results could differ from these.

     ALLOWANCE FOR DOUBTFUL DEBTS

     Company's management regularly reviews accounts receivable and assesses
their collectability by taking into account variables such as past experience,
age of the receivable balance and current economic conditions of the party owing
the receivable balance. Accordingly, the Company makes a provision for debts
whose collection is doubtful. We believe that our allowance for doubtful
accounts is adequate to cover estimated losses in customer accounts receivable
balances under current conditions. However, changes to the allowance for
doubtful accounts may be necessary in the event that the financial condition of
our customers improves or deteriorates.

                                       38`

`RESULTS OF OPERATIONS

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

                                                  YEAR ENDED DECEMBER 31,
                                             2009         2008          2007
                                            -----        -----         -----

Sales                                        100%          100%         100%
Cost of sales                               103.3          96.4         87.7
                                            -----         -----        -----
Gross profit (loss)                          (3.3)          3.6         12.3
Selling and marketing expenses               11.9           9.7          7.8
General and administrative expenses           3.3           3.7          3.3
Other expenses (income)                      (0.4)          1.3            -
                                             -----        -----        -----
Operating income (loss)                     (18.1)        (11.1)         1.2
Loss from early repayment of                 (1.1)          -
subordinated note receivable
Financial expenses, net                      (0.5)         (1.7)         0.8
                                             -----        -----        -----
Income (loss)before taxes on
income                                       (19.7)       (12.8)         0.4
Tax benefit                                    4.6          2.7            -
                                             -----        -----        -----
Net income (loss)                            (15.1)       (10.1)         0.4
                                             =====        =====        =====

YEAR ENDED DECEMBER 31, 2009 COMPARED TO YEAR ENDED DECEMBER 31, 2008

     SALES

     CONSOLIDATED. Sales for the year ended December 31, 2009 were $115.5
million, a 33.5% decrease compared to sales of $173.8 million for the year ended
December 31, 2008. Our sales of intimate apparel decreased 31.5% from $93.7
million in 2008 to $64.1 million in 2009, our sales of active-wear products
decreased 54.4% from $47.2 million in 2008 to $21.5 million in 2009 and our
sales of swimwear decreased 9.4% from $33.0 million in 2008 to $29.9 million in
2009. Below is a table that describes our 2009 and 2008 sales of intimate
apparel, active-wear and swimwear products:

                                                              SALES
                       ------------------------------------------------------------------------------------
                                         2009                                       2008
                       ------------------------------------------  ----------------------------------------
                                                     (Dollars in thousands)
                      CUT & SEW        SEAMLESS        TOTAL        CUT & SEW       SEAMLESS        TOTAL
                       --------       --------       --------       --------       --------       --------

Intimate Apparel       $ 19,152       $ 44,991       $ 64,143       $ 35,969       $ 57,714       $ 93,683
Active-wear               4,218         17,315         21,533         18,638         28,551         47,189
Swimwear                 29,862             --         29,862         32,957             --         32,957
                       --------       --------       --------       --------       --------       --------
TOTAL                    53,232         62,306        115,538         87,564         86,265        173,829

     SEAMLESS. Sales for the year ended December 31, 2009 for this segment were
$62.3 million, a 27.8% decrease compared to sales of $86.3 million for the year
ended December 31, 2008.

     CUT & SEW. Sales for the year ended December 31, 2009 for this segment were
$53.2 million, a 39.2% decrease compared to sales of $87.6 million for the year
ended December 31, 2008.

                                       39`

`COST OF SALES

     Cost of sales consists primarily of materials, various salaries and related
expenses, subcontracting expenses and other overhead expenses related to our
manufacturing operations. Cost of sales decreased by 28.8% to $119.3 million in
2009 as compared to $167.6 million in 2008 due to the decrease in production
volume as a result from the decrease in sales. As a percentage of sales, cost of
sales increased to 103.3% in 2009 as compared to 96.4% in 2008. This increase
was primarily due to a significant decrease in sales, which was not matched by
any corresponding decrease in the fixed costs.

     SELLING AND MARKETING EXPENSES

     Selling and marketing expenses consist primarily of costs relating to
salaries to employees engaged in sales, marketing and distribution and to
freight costs. Selling and marketing expenses decreased by 18.4% to $13.8
million in 2009 as compared to $17.0 million in 2008. This decrease was
primarily due to a decrease in sales volume during 2009 and the efficiency plan
that the company adopted. The main effect of the program on selling and
marketing expenses was a decrease in manpower and a reduction of 5%-15% in
salary expenses. As a percentage of sales, selling and marketing expenses
increased to 11.9% in 2009 as compared to 9.8% in 2008. This increase was
primarily due to costs of maintaining additional sales offices that we opened in
Germany and Los Angeles during 2009. The cost of maintaining these offices
during 2009 was $1.3 million. In addition, from the fourth quarter of 2008 the
company has amortization expenses of costs relating to the purchase of
operations in the United States. During 2009, the company recorded an
amortization of these costs of $468,000 compared to $186,000 in 2008.

     GENERAL AND ADMINISTRATIVE EXPENSES

     General and administrative expenses consist primarily of costs relating to
administration and management activities and other administrative costs. General
and administrative expenses decreased by 41.0% to $3.8 million in 2009 as
compared to $6.4 million in 2008. This decrease was primarily due to a decrease
in salary expenses, as result of the efficiency plan, and a decrease in the
provision for doubtful debts, which we recorded during 2009 as compared with
2008. As a percentage of sales, general and administrative expenses decreased
from 3.7% in 2008 to 3.3% in 2009.

     OTHER EXPENSES - IMPAIRMENT OF PLANT, PROPERTY AND EQUIPMENT

A reversal impairment of Plant, Property and Equipment in 2009 amounted to $496
thousand and was due to provision for impairment of plant, property and
equipment according to an asset valuation assessment which was prepared in
accordance with IAS 36. In 2008, an impairment of $2.1 million was recorded.

     OPERATING LOSS

     CONSOLIDATED. Operating loss for the year ended December 31, 2009 was $20.9
million (18.1% of sales), compared to operating loss of $19.2 million (11.1% of
sales) for the year ended December 31, 2008. This increase in operating loss was
due to the factors explained above.

     SEAMLESS. Operating loss for the year ended December 31, 2009 for this
segment was $13.2 million, compared to operating loss of $15.8 million for the
year ended December 31, 2008.

     CUT & SEW. Operating loss for the year ended December 31, 2009 for this
segment was $7.7 million, compared to operating loss of $3.4 million for the
year ended December 31, 2008.

     FINANCIAL EXPENSES, NET

     Financial expenses, net decreased by 83.1% to $0.5 million in 2009 as
compared to $3.0 million in 2008. This decrease was mainly due to (i) an
appreciation of the Dollar vis-a-vis the New Israel Shekel, (ii) a significant
decrease in the three-month Dollar LIBOR interest rate on long-term loans, net,
from 1.43% on December 31, 2008 to 0.25% on December 31, 2009 and (iii) an
offset of financing expenses as a result of the increase in short-term credits
from $9.3 million on December 31, 2008, to $14.2 million on December 31, 2009.
During 2009, interest expenses were $276,000 on long-term loans as compared with
interest expenses of $765,000 during 2008..

                                       40`

`INCOME TAXES

     The tax benefit in 2009 was $5.3 million as compared to a tax benefit of
$4.7 thousand for 2008. The main reason for this increase in tax benefit was the
increase in loss carry forwards and the recognition of a deferred tax asset
receivable thereon.

YEAR ENDED DECEMBER 31, 2008 COMPARED TO YEAR ENDED DECEMBER 31, 2007

     SALES

     CONSOLIDATED. Sales for the year ended December 31, 2008 were $173.8
million, a 9.6% increase compared to sales of $158.7 million for the year ended
December 31, 2007. Our sales of intimate apparel increased 4.2% from $89.9
million in 2007 to $93.7 million in 2008, our sales of active-wear products
increased 12.2% from $42.0 million in 2007 to $47.2 million in 2008 and our
sales of swimwear increased 23.5% from $26.7 million in 2007 to $33.0 million in
2008. Below is a table that describes our 2007 and 2008 sales of intimate
apparel, active-wear and swimwear products:

                                                              SALES
                       ------------------------------------------------------------------------------------
                                         2008                                       2007
                       ------------------------------------------ -----------------------------------------
                                                     (Dollars in thousands)
                        CUT & SEW      SEAMLESS       TOTAL          CUT & SEW      SEAMLESS        TOTAL
                       --------       --------       --------       --------       --------       --------
Intimate Apparel       $ 35,969       $ 57,714       $ 93,683       $ 37,114       $ 52,763       $ 89,877
Active-wear              18,638         28,551         47,189         13,216         28,831         42,047
Swimwear                 32,957             --         32,957         26,690             --         26,690
                       --------       --------       --------       --------       --------       --------
TOTAL                    87,564         86,265        173,829         77,020         81,594        158,614

     SEAMLESS. Sales for the year ended December 31, 2008 for this segment were
$86.3 million, a 5.7% increase compared to sales of $81.6 million for the year
ended December 31, 2007. This increase in sales was due to an increase of 9.3%
of our sales of intimate apparel products from $52.8 million in 2007 to $57.7
million in 2008 due to initial sales to new customers such as Maidenform, which
were partially offset by a decrease of 1.0% in our sales of active wear from
$28.8 million in 2007 to $28.6 million in 2008.

     CUT & SEW. Sales for the year ended December 31, 2008 for this segment were
$87.6 million, a 13.7% increase compared to sales of $77.0 million for the year
ended December 31, 2007. This increase in sales was mainly due to an increase of
41.0% in our sales of active wear from $13.2 million in 2007 to $18.6 million in
2008, which was due to our sales to Nike for their 'new generation' of the Pro
Core category, as well as an increase of 23.6% in our sales of swimwear from
$26.7 million in 2007 to $33.0 million in 2008, which was due to a postponement
of orders by some of our customers from the fourth quarter of 2007 to the first
quarter of 2008. This increase in sales was partially offset by a decrease of
3.1% in our sales of intimate apparel from $37.1 million in 2007 to $36.0
million in 2008.

                                       41`

`COST OF SALES

     Cost of sales consists primarily of materials, various salaries and related
expenses, subcontracting expenses and other overhead expenses related to our
manufacturing operations. Cost of sales increased by 20.4% to $167.6 million in
2008 as compared to $139.1 million in 2007 due to an increase in our sales
volume. As a percentage of sales, cost of sales increased to 96.4% in 2008 as
compared to 87.7% in 2007. This increase was primarily due to (i) the
devaluation of the US Dollar versus the NIS; (ii) the higher proportion of Cut &
Sew products in our active-wear sales mix which have a lower profitability than
those of the Seamless products; (iii) the continuing manufacturing challenges in
our Hi-Tex Division, which we have not yet been able to overcome; and (iv) an
inventory write-off in the amount of $4.5 million in 2008, compared to an
inventory write-off in the amount of $1.3 million in 2007.

     SELLING AND MARKETING EXPENSES

     Selling and marketing expenses consist primarily of costs relating to
salaries to employees engaged in sales, marketing and distribution and to
freight costs. Selling and marketing expenses increased by 36.3% to $17.0
million in 2008 as compared to $12.4 million in 2007. This increase was
primarily due to an increase in air freight costs resulting from late shipments.
As a percentage of sales, selling and marketing expenses increased from 7.8% in
2007 to 9.7% in 2008 due to the reasons noted above.

     GENERAL AND ADMINISTRATIVE EXPENSES

     General and administrative expenses consist primarily of costs relating to
administration and management activities and other administrative costs. General
and administrative expenses increased by 23.4% to $6.4 million in 2008 as
compared to $5.2 million in 2007. This increase was primarily due to the
expenses derived from the acquisition of the operations of Excelsior and an
increase of $0.8 million in allowance for doubtful debts. As a percentage of
sales, selling and marketing, general and administrative expenses increased from
3.3% in 2007 to 3.7% in 2008 due to the reasons noted above.

     OTHER EXPENSES- IMPAIRMENT OF PROPERTY, PLANT AND EQUIPMENT

     Impairment of Property, Plant and Equipment in 2008 amounted to $2.1
million and was due to provision for impairment of plant, property and equipment
according to an asset valuation assessment which was prepared in accordance with
IAS 36. In 2007, no impairment was recorded.

     OPERATING LOSS

     CONSOLIDATED. Operating loss for the year ended December 31, 2008 was $19.2
million (11.1% of sales), compared to operating income of $1.8 million (1.2% of
sales) for the year ended December 31, 2007. This operating loss was due to the
decrease in gross profit, for the reasons discussed above.

     SEAMLESS. Operating loss for the year ended December 31, 2008 for this
segment was $15.8 million, compared to operating loss of $0.4 million for the
year ended December 31, 2007. This increase in operating loss was due to the
continuing manufacturing challenges in our Hi-Tex Division, the $2.1 million
impairment of fixed assets, charge backs and the devaluation of the US dollar
versus the NIS, as discussed above.

     CUT & SEW. Operating loss for the year ended December 31, 2008 for this
segment was $3.4 million, compared to operating income of $2.3 million (2.9% of
sales) for the year ended December 31, 2007. The transition from operating
income to an operating loss resulted mainly from the continuous pricing pressure
regarding older collections of our intimate apparel product line, a significant
inventory write-off and devaluation of the US dollar versus the NIS, as
discussed above.

                                       42`

`FINANCIAL EXPENSES, NET

     Financial expenses, net increased by 134.1% to $3.0 million in 2008 as
compared to $1.3 million in 2007. This increase was mainly due to (i) the
significant devaluation of the US Dollar versus the NIS, which increased the US
dollar value of our NIS denominated liabilities, (ii) an increase in our net
bank debt and (iii) a write-down of $0.6 million in the carrying value of our
portfolio of auction rate securities.

     INCOME TAXES

     The tax benefit in 2008 was $4.7 million as compared to a tax benefit of
$35.0 thousand for 2007. The main reason for this increase in tax benefit was
primarily due to transition from pre-tax income of $0.6 million in 2007 to
pre-tax loss of $22.3 million in 2008.

LIQUIDITY AND CAPITAL RESOURCES

     2009 SOURCES AND USES OF CASH

     During 2009, cash flow used in operating activities amounted to $1.5
million, compared to $7.7 million in 2008. In addition, we received:

     o    Proceeds of $4.9 million from short-term bank credit, and

     o    Proceeds of $1.7 million from an early repayment of subordinated note.

     This cash flow was used to repay a net amount of $3.9 million in bank debt,
invest $0.7 million, net, in property, plant and equipment and intangible
assets, and, together with other cash flow activities, increase our cash and
cash equivalents by $0.3 million from $1.6 million at December 31, 2008 to $1.9
million at December 31, 2009. This cash balance will be sufficient for the next
12 months.

     Cash provided by operating activities is net income (loss) adjusted for
certain non-cash items and changes in assets and liabilities. For 2009, cash
used in operating activities was $1.5 million, compared to $7.7 million in 2008.
The decrease in cash used in operating activities in 2009 as compared to 2008
was mainly due to decrease in our working capital.

CONTRACTUAL AND OTHER COMMITMENTS

     We have various commitments primarily related to long-term debt. The
following tables provide details regarding our contractual cash obligations and
other commercial commitments subsequent to December 31, 2009 (US dollars in
millions).

CONTRACTUAL OBLIGATIONS(1) (2)      TOTAL      2010      2011      2012      2013      2014      2015      2016+
--------------------------------    -----      ----      ----      ----      ----      ----      ----      ----
Long-Term Bank Debt (3)             $11.6      $4.2      $4.2       3.2        -         -         -         -
--------------------------------    -----      ----      ----      ----      ----      ----      ----      ----
Operating Lease Obligations (4)     $17.7      $2.1      $2.0      $1.9      $1.7      $1.7      $1.7      $6.6
-------------------------------     -----      ----      ----      ----      ----      ----      ----      ----
Employee Benefit Liabilities,
net (5)                              $0.7      $0.7        -         -         -         -         -         -
--------------------------------    -----      ----      ----      ----      ----      ----      ----      ----
Accounts payable - institutions      $2.1      $0.3      $1.8       --        --        --        --        --
--------------------------------    -----      ----      ----      ----      ----      ----      ----      ----
Other Long-Term Obligations (6)       --        --        --        --        --        --        --        --
--------------------------------    -----      ----      ----      ----      ----      ----      ----      ----
TOTAL CONTRACTUAL CASH
OBLIGATIONS                         $28.0
--------------------------------    -----      ----      ----      ----      ----      ----      ----      ----

                                       43`

`TOTAL AMOUNTS AVAILABLE AS OF     TOTAL CREDIT LINES AS OF DECEMBER
 OTHER COMMERCIAL COMMITMENTS            DECEMBER 31, 2009                 31, 2009 (6)
---------------------------------------- --------------------------------- -----------------------------------

Lines of Credit                                                      $13.7                               $14.2
---------------------------------------- --------------------------------- -----------------------------------
Guarantees/Letters of Credit                                          $2.5                                $2.9
---------------------------------------- --------------------------------- -----------------------------------
TOTAL COMMERCIAL COMMITMENTS                                         $16.2                               $17.1
---------------------------------------- --------------------------------- -----------------------------------

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

     (2) This table does not include payments of interest on our long-term bank
debt, due to its variable nature. Interest on our long-term bank debt is
three-month LIBOR plus 1.0%. As of June 15, 2010, the three-month LIBOR was
0.54%.

     (3) See also "Loan Facilities" below.

     (4) Minimum lease payments are presented in accordance with the agreement
signed with RIET 1 in March 21, 2010, as described in Note 24d to the financial
statements as of December 31, 2009.

     (5) Employee Benefit Liabilities, net relate to accrued severance
obligations to our Israeli employees as required under Israeli labor law.

     (6) This table does not include deferred tax liabilities, net, of $1.7
million. We are unable to predict when these obligations will mature.

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

     LOAN FACILITIES

     The Company's bank credit facilities change from time to time depending on
the Company's need for financing and on its arrangements with its bank lenders.
As of December 31, 2009, the Company's credit facilities were approximately
$28.7 million, of which approximately $25.1 million was being utilized for loans
and credit.

     On March 2, 2010, we signed an agreement with our bank lenders, which,
among other things, included a re-organization of our and our subsidiaries'
credit lines with the banks.

     The agreement with the bank lenders provides for a re-organization of our
current credit lines with the banks as follows: (1) one loan in the amount of
$15 million is payable in three equal installments of $1.25 million, each at the
end of the seventh, eighth and ninth years from the date on which this loan was
provided, with the balance of $11.25 million to be paid at the end of the tenth
year, (2) one loan in the amount of $5 million is payable in four equal annual
installments of $1.25 million each, beginning on the last day of the third year
from the date on which such loan was provided and (3) short term credit lines in
a total amount of $8.95 million. For more information regarding the agreement
with our bank lenders, see "Item 10. Additional Information - C. Material
Contracts - Agreement with Our Bank Lenders" below.

     The loan facilities are secured by a floating lien on all of the Company's
assets.

     The bank loan agreements contain various covenants which require, among
other things, that we maintain certain financial ratios related to shareholders'
equity and operating results. In addition, the terms prohibit us from incurring
certain additional indebtedness, limit certain investments, advances or loans
and restrict substantial asset sales, cash dividends and other payments to our
shareholders. These covenants and restrictions could hinder us in our operations
and growth, and our failure to comply with the covenants and restrictions could
lead to a default under the terms of these agreements.

                                       44`

`As of December 31, 2008 and 2009, there was one financial covenant in the
long-term loan agreements with our bank lenders that we did not meet, and we
expect that we will be unable to meet our EBITDA financial covenant in the
fourth quarter of 2010. As such, we have classified these loans and presented
them as of December 31, 2008 and 2009 as part of the current liabilities in
accordance with the instructions of IAS 1. The aforementioned classification was
made despite of the Company's new agreement with the banks as of March 2, 2010,
and despite the waivers granted to the Company due to its failure to comply with
one financial covenant in 2009 and 2008 and for our expected failure to comply
with one financial covenant in 2010. The new agreement with the bank contains
new financial covenants, as described in "Item 10. Additional Information - C.
Material Contracts - Agreement with Our Bank Lenders" below.

     EQUITY FINANCINGS

     All share and per share information in this Annual Report has been adjusted
to give retroactive effect to a ten-for-one reverse split of our ordinary shares
that became effective on January 22, 2009.

     In March 2010, we completed a rights offering pursuant to which we issued
to our shareholders approximately 754,384 ordinary shares at a price per share
of $3.8, resulting in gross proceeds of approximately $2.9 million. As part of
the rights offering in Israel, we published a shelf prospectus that allows us to
issue securities in Israel during the next two years.

     In addition, on March 28, 2010, we issued 149,124 ordinary shares, at a
price per share of $3.8, to each of Mivtach Shamir Holdings Ltd. (one of the
partners in Norfet) and Ta-Top Limited Partnership (a partnership under the
control of FIMI 2001, Ltd.) in a private placement, resulting in gross proceeds
of approximately $1.1 million. See "Item 10. Additional Information - 10C.
Material Contracts - Private Placement to Norfet's Shareholders."

     On January 10, 2006, we completed a public auction of our Ordinary Shares
and Option Certificates (Series 1) in Israel. A total of 100,000 units,
consisting of 1.8 Ordinary Shares and 0.6 Option Certificates each, were issued
in the offering at a price of NIS 7,016.4 (approximately $1,514.8) per unit.
Each Option Certificate was exercisable into one Share until January 9, 2007 at
an exercise price of $94.9 per Ordinary Share denominated in NIS (subject to
adjustment for dividend distributions). Of the total number of Option
Certificates issued, 57,274 were exercised and 2,725 expired. Our total net
proceeds from the offering were approximately $13.8 million for shares plus
approximately $5.7 million generated from the exercise of the Option
Certificates. The Ordinary Shares and the shares issued upon the exercise of the
Option Certificates are listed for trading on the Tel Aviv Stock Exchange.

     On April 22, 2004, we issued to Norfet, controlled by FIMI Opportunity Fund
and certain other co-investors, approximately 353,000 Ordinary Shares at a base
price of $42.5 per share and to a group of investors represented by Mr. Zvi
Limon, or Leber, approximately 107,000 of our Ordinary Shares at a base price of
$46.5 per share. See "Item 10. Additional Information - C. Material Agreements -
Norfet Agreements." We applied most of the aggregate amount of $19.7 million
from these investments to repay short-term debt. On April 5, 2005, we issued,
with no further consideration, additional shares to Norfet and Leber according
to share purchase price adjustment mechanisms included in the investments
agreements with these investors.

     OUTLOOK

     We currently believe that our cash flow from ongoing operations and our
available cash on hand and bank credit will be sufficient to finance all of our
ongoing costs and our planned investments in our business through at least the
end of 2010. However, it is possible that a worsening of the economic
environment will require us to obtain other sources of financing. Our continued
loss in the past quarters has, among other things, led the bank lenders to limit
the amount of credit available to us, and in recent months we have been
contending with limited credit lines. Although we raised $4 million dollars from
our shareholders at the end of March 2010, we may need to raise additional funds
in the near future in order to satisfy our working capital and capital
expenditure requirements.

                                       45`

`During the first quarter of 2010, we began to implement a turnaround plan
with a view to returning the Company to profitability, see "Item 4. Information
on the Company - A. History and Development of the Company - 2010 Turnaround
Plan".

DESIGN AND DEVELOPMENT OF PRODUCTS

     Our design and development of products department continually strives to
improve technologies and products and develop new lines of products. We invested
approximately $7.1 million in 2007, $8.1 million in 2008 and $8.2 million in
2009 on design and development of products.

IMPACT OF INFLATION AND CURRENCY FLUCTUATIONS

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

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

     In 2005, the rate of devaluation of the NIS vis-a-vis the U.S. dollar
exceeded the inflation rate in Israel. During 2005, the rate of inflation was
2.4%, while the NIS devalued against the U.S dollar by 6.9%. During 2006, 2007,
2008 and 2009, the rate of inflation was (0.1)%, 3.4%, 3.8% and 3.9%
respectively, while the NIS appreciated versus the U.S dollar by 8.2%, 9.0%,
1.1% and 0.7%, respectively, and this negatively affected our profitability.

     The average exchange rate of the U.S. dollar vis-a-vis the NIS during 2009
increased by 9.6% compared with 2008. During 2009, we recorded salary expenses
and raw material purchase costs incurred in NIS of $42 million. The appreciation
of the average exchange rate of the U.S. dollar vis-a-vis the NIS, and hedging
transactions entered into by the company, reduced these expenses during 2009 by
$3.6 million.

     Although during 2009 the average U.S. dollar appreciated vis-a-vis the NIS,
the NIS may appreciate vis-a-vis the U.S. dollar again in the future.

     A devaluation of the NIS in relation to the dollar would have the effect of
decreasing the dollar value of any assets or receivables denominated in NIS
(unless such receivables are linked to the dollar). Such devaluation would also
have the effect of reducing the dollar amount of any of our payables or
liabilities which are denominated in NIS (unless such payables or liabilities
are linked to the dollar). Conversely, any increase in the value of the NIS in
relation to the dollar will have the effect of increasing the dollar value of
any of our unlinked NIS assets and the dollar amounts of any of our unlinked NIS
liabilities.

                                       46`

`In addition, inflation in Israel and all other off-shore locations in which
we operate will have the effect of increasing the dollar cost of our operations,
unless it is offset on a timely basis by a devaluation of the NIS relative to
the U.S. dollar. We cannot predict any future trends in the rate of inflation in
Israel.

     Because exchange rates between the NIS and the dollar fluctuate
continuously (albeit with a historically declining trend in the value of the
NIS), exchange rate fluctuations and especially larger periodic devaluations
will have an impact on our profitability and on period-to-period comparisons of
our results. This impact is recorded in our consolidated financial statements in
accordance with applicable accounting principles. We may from time to time
utilize derivative financial instruments to manage risk exposure to fluctuations
in foreign exchange rates. We do not engage in any speculative or profit
motivated hedging activities. See "Item 3. Key Information - 3D. Risk Factors.
Our business may be impacted by inflation and U.S. dollar, NIS and Euro exchange
rate fluctuations as well as the exchange rates of the other currencies in
countries in which we operate."

EFFECTIVE CORPORATE TAX RATE

     The taxable income of Israeli corporations was generally subject to
corporate tax at the statutory rate of 26% in 2009. This rate was reduced to 25%
in 2010 and is scheduled to be reduced to 18% in 2010 by 2016. However, most of
our manufacturing facilities in Israel have been granted Approved Enterprise
status under the Investment Law, and consequently income derived from such
facilities is eligible, subject to compliance with certain requirements, for
certain tax benefits beginning when such facilities first generate taxable
income. We have derived most of our income from our Approved Enterprise
facilities. Subject to compliance with applicable requirements, income derived
from our Approved Enterprise facilities will be subject to corporate tax at a
rate of 10%- 25% (based on the percentage of foreign investment in the Company)
for a seven-year period beginning in the first year we had taxable income. In
addition, Approved Enterprises related to investment programs from January 1997
onwards in designated areas, which include the location of our primary plants,
are exempt from tax for the first two years of the Benefit Period commencing in
the first year in which taxable income is generated. Should the percentage of
foreign investment in the Company exceed 25%, Approved Enterprises would qualify
for reduced tax rates for an additional three years beyond the initial
seven-year period.

     The Benefit Period under each of our Approved Enterprises will in any event
expire 14 years following the date of the approval of such Approved Enterprise
by the Investment Center or 12 years after production commences, whichever is
earlier. In the event that the percentage of foreign investment is between 49%
and 74%, we would be subject to a corporate tax rate of 20% on income derived
from our Approved Enterprises. The proportion of foreign investment is measured
annually based on the lowest level of foreign investment during the year.

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

EXCHANGE RATES

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

                                       47`

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

2005                                          4.49         4.74         4.30         4.60
2006                                          4.46         4.73         4.18         4.23
2007                                          4.11         4.34         3.83         3.85
2008                                          3.59         4.02         3.23         3.80
2009                                          3.93         4.26         3.69         3.78

     The following table sets forth certain information concerning the
representative rate of exchange between the NIS and the US dollar, as published
for the months December 2009 through June 15, 2010.

MONTH                                     AVERAGE RATE     HIGH        LOW       PERIOD END
-----------------------                      ----          ----       ----          ----
                                                             (NIS PER $1.00)
                                            -------------------------------------------------
December 2009                                3.79         3.82         3.77         3.78
January 2010                                 3.71         3.77         3.67         3.72
February 2010                                3.75         3.8          3.7          3.8
March 2010                                   3.74         3.79         3.71         3.71
April 2010                                   3.71         3.75         3.68         3.72
May 2010                                     3.79         3.87         3.73         3.83
June 2010                                    3.85         3.89         3.81         3.88

     On July 12, 2010, the representative rate of exchange between the NIS and
the U.S. dollar was NIS 3.87 per $1.00, as published by the Bank of Israel.
Changes in the exchange rate between the NIS and the U.S. dollar could
materially affect our financial results.

     TREND INFORMATION.

     From the second quarter of 2009 and until the end of the first quarter of
2010, we experienced sales stability of approximately $21-$25 million per
quarter. We are taking steps to expand our customer base and to increase our
sales to existing customers, so as to compensate for the decline in sales to our
existing customers. For more information, see "See "Item 5. Operating and
Financial Review and Prospects - 5.B. Liquidity and Capital Resources -
Outlook".

     OFF-BALANCE SHEET ARRANGEMENTS. We have no off-balance sheet arrangements
that have or are reasonably likely to have a current or future effect on our
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that are material to investors, except
for foreign exchange hedging contracts. See "Item 11. Quantitative and
Qualitative Disclosures About Market Risk - Foreign Currency Risk."

                                       48`

`ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

6A. DIRECTORS AND SENIOR MANAGEMENT

     The following table sets forth certain information concerning our current
directors, senior management and key employees as of July 5, 2010.

Name                 Age      Position
------------         ---      --------
Arnon Tiberg         66       Chairman  of the Board of  Directors  (commencing  July 5,2010)
Yacov Gelbard        63       Chairman of the Board of Directors (until July 5, 2010)
Amit Meridor         49       Chief Executive Officer (commencing January 21, 2010)
Ishay Davidi         48       Director
Meir Shamir          59       Director
Avi Zigelman         53       Director
Shirith Kasher       42       Director
Zvi Limon            51       Director
Eli Admoni           70       External Director
Yacov Elinav         65       External Director  (until July 14, 2010)
Eran Rotem           42       Chief Financial Officer
David Piller         49       Swimwear Division Manager
Orna Goldner-Marom   53       Company Secretary and Legal Counsel
Alon Shadmi          48       Development Manager
Meir Kupershmidt     54       Hi-Tex Division Manager (resigned as of July 1, 2010)
Ilan Gilboa          42       EVP Operations and Customer  Support (commencing June 20,2010)

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

     Arnon Tiberg began serving as the Company's active Chairman of the Board of
Directors on July 5, 2010. Mr. Tiberg brings to Tefron many years of direct
experience in the textile industry and he has close relationships with Tefron's
major customer base. Mr. Tiberg served as President and CEO of Delta Galil
Industries from 1997 to 2006 where he executed a successful turnaround program
for the company and lead Delta's global expansion and NASDAQ listing. Mr. Tiberg
has also served as a member of the Board of Directors at NILIT, an Israeli nylon
fiber manufacturer, since 1987, and is a director in the following companies:
RANSYS SYSTEMS Ltd., Kali Group Pension & Financial Management, The First
International Bank of Israel Ltd. and IBI Ltd Investment Company. Mr. Tiberg is
also chairman of the board of directors at Hameshakem and M.C.A. Among other
senior managerial positions, Mr. Tiberg was Managing Director of Mediterranean
Car Agency and CEO of the Manufacturers' Association of Israel. In 2000, Mr.
Tiberg was awarded the Manufacturers' Association 'Industry Award' which
recognizes exceptional activities or achievements in manufacturing industries.
Mr. Tiberg holds a B.A. in Economics from the Hebrew University, Jerusalem and
an M.A. in Economics from Tel Aviv University.

     YACOV GELBARD served as the Company's active Chairman of the Board of
Directors since December 27, 2007 until July 5, 2010. Mr. Gelbard served as
President and CEO of Bezeq the Israeli Communications Company Ltd. from 2005 to
2007, as President and CEO of Pelephone Communications Ltd. from 2001 to 2005,
as Chairman of the "Hamashbir Fashion Warehouse" Ltd in 2001, as President and
CEO of XXL (Electronic Commerce) Ltd. from 1999 to 2001, as President and CEO of
Blue Square - Israel Ltd. from 1993 to 1999, and as VP of Finance of Blue Square
- Israel Ltd. from 1983 to 1993. Mr. Gelbard holds a B.A. in Economics and
Accounting from Tel Aviv University, and he is a Certified Public Accountant.

     AMIT MERIDOR began serving as the Chief Executive Officer of the Company on
January 21, 2010. From 2008 through 2009, Mr. Meridor served as CEO of CMT
Medical where he successfully executed a turnaround plan for the company and
facilitated the merger of CMT Medical with a large European electronics and
systems company. Between 2005 and 2008, Mr. Meridor served as VP for business
development, sales and marketing at an esthetic device manufacturer, Syneron
Medical. Between 2000 and 2005, Mr. Meridor served as manager of the textile
division of NILIT Fibers Ltd., an Israeli manufacturer of high-quality yarn and
fibers recognized for its high standards of manufacturing and innovation. Mr.
Meridor holds a B.SC in Industrial Engineering from the Technion - Israel
Institute of Technology and an MBA from Tel Aviv University, Israel.

                                       49`

`ISHAY DAVIDI has served as a director of the Company since June 2005 and
served as Chairman of the Board of Directors from November 2005 through December
2007. Mr. Davidi is the Founder, CEO and a director of each of FIMI IV 2007 Ltd,
FIMI Opportunity 2005 Ltd and FIMI 2001 Ltd, the managing general partners of
the partnerships constituting the FIMI Private Equity Funds. Mr. Davidi also
serves as a director at Retalix Ltd., Scope Metals Group Ltd., MDT Micro Diamond
Technologies Ltd, Ophir Optronic Ltd., Orian S.M. Ltd., Merhav-Ceramic and
Building Materials Center Ltd. , Bagir Group Ltd., Inrom Industries Ltd., and
Fite G.P. Ltd. Mr. Davidi holds a B.Sc in Industrial and Management Engineering
from Tel Aviv University and an M.B.A. from Bar Ilan University.

     MEIR SHAMIR was elected as a director of the Company on March 31, 2004 and
has been the CEO of Mivtach Shamir Holdings Ltd., an investment company traded
on the TASE, since 1993. From 1993 until December 2008 he also served as
Chairman of Mivtach Shamir Holdings Ltd. Mr. Shamir also serves as a director of
AAMS Investments Ltd., HLHP (1997) Ltd., Meir Shamir Management (1997), Meir
Shamir Holdings Ltd., Mivtach Shamir Assets Ltd. and of several companies
controlled by Mivtach Shamir Holdings Ltd. He also serves as a director of our
subsidiaries, Hi-Tex, Macro Clothing Ltd. and Tefron USA Inc. Mr. Shamir holds
an undergraduate degree in Economics and Business Administration from Bar Ilan
University.

     AVI ZIGELMAN was elected as a director of the Company on June 28, 2005.
Since 2004 Mr. Zigelman has been a financial consultant and serves as a member
of the board of directors of various entities. Mr. Zigelman currently serves as
a director in the following companies: Mizrahi Tefahot Bank Ltd., Ophir Optronic
Ltd., Gindi Investments 1 Ltd., Clal Biotechnology Industries Ltd., Simha Urieli
and Sons Engineering and Contracting Company Ltd., Sialo Technology Israel Ltd.,
Pangea Real Estates Ltd., and Afcon Electro-mechanics Ltd. Since 2000, Mr.
Zigelman has been a member of the Professional Committee of the Israeli
Accounting Standard Board. Between 1996 and 2003, Mr. Zigelman served as a
Partner Head of Professional Practice Department of the KPMG Somekh Chaikin
accounting firm. Mr. Zigelman holds an M.A. in Business Economics,
specialization in Finance, with honors, B.A in Accounting and Economics,
Economics with honors, and post degree Accounting Studies, with honors, all from
Tel-Aviv University. Mr. Zigelman is a Certified Public Accountant.

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

     ZVI LIMON has served as a director of the Company since May 2008 and has
been a General Partner of Rimon Funds, a public equities investment fund
focusing on Israeli companies since 2006. Since 1999, Mr. Limon has also served
as a General Partner and Venture Partner of Magna VC (previously Magnum
Communication) Fund, an Israeli venture capital fund focusing on communication
technology companies. Mr. Limon also serves on the board of directors of CEVA
Inc. and DSPG Inc. From 1990 to 2000, Mr. Limon was the Chairman of Limon
Holdings Ltd., the advisor to an international technology fund focusing on
private and public equity investments. Mr. Limon holds a B.A. in Economics and
Business Administration from Bar Ilan University and an M.B.A. from INSEAD.

                                       50`

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

     YACOV ELINAV has served as an External Director of Tefron since July 2004
and until July 14, 2010. Between 1991 and July 2003, Mr. Elinav served as a
Deputy CEO of Bank Hapoalim B.M. Since August 2004, Mr. Elinav has served as a
director of DS Securities & Investment Ltd. Mr. Elinav also serves as chairman
of the board of directors of DS Pension Fund Ltd. and as a director of the
following companies: Elinav Counseling and Services Corporations, Shlomo
Holdings Ltd., The Middle East Pipes Ltd., Golden Pages Ltd., DS Securities and
Investments Ltd., DS Institutional Investors Ltd., Yuvalim Pension Funds
Management Ltd., Sapiens Ltd., BGI Investments Ltd., Polar Communications Ltd.,
Global Box Ltd., Frutarom Industries Ltd., Ayalon Highways Ltd., Delek Real
Estate Ltd. and the Industrial Development Bank Ltd. Mr. Elinav holds a B.A. in
Economics from the Hebrew University, Jerusalem.

     ERAN ROTEM began serving as the Chief Financial Officer of the Company on
August 17, 2008. Mr. Rotem also serves as a director of Hi-Tex, Macro, Tefron
USA, Tefron US Holdings Corp., Tefron Holdings (98) Ltd., New Net Industries,
New Pal, R.M.D. Robotics and Tefron UK Limited. Between 2002 and 2008, Mr. Rotem
served as Chief Financial Officer of Healthcare Technologies Ltd., a company
which was traded on the NASDAQ Capital Market, and of the Gamida For Life Group.
Between 1995 and 2002, Mr. Rotem served as a senior manager in Ernst & Young
Israel. Mr. Rotem has broad financial and managerial experience. Mr. Rotem holds
a BA in Accounting and Business Administration from the Tel Aviv College of
Management and he is a Certified Public Accountant.

     DAVID PILLER began serving as Manager of Tefron's Swimwear Division in July
2009. Prior to joining Tefron, from 2008 until 2009, Mr. Piller served as vice
president procurement and sales of The New HaMashbir Le'Zarchan Ltd. From 2001
until 2008, Mr. Piller served as vice president marketing and sales of Kitan
Textile Industries Ltd., from 1998 until 2001 he served as a national sales
manager of Neviot Nature of Galilee, and from 1986 until 1998 Mr. Piller served
in various positions in Oppenheimer Jerusalem Sweets Ltd., and most recently as
vice president marketing and sales. Mr. Piller holds a B.A. degree in Economics
and Business Administration from the University of Nice (France).

     ORNA GOLDNER - MAROM joined Tefron on June 14, 2009 and has served since
then as the company secretary and general counsel. From January 2009 until June
2009 Ms. Marom served as a lawyer in Avitan, Perach Law firm. Between 2005 and
2008, Ms. Marom served as a lawyer in Baratz, Horn & Co. Law firm, and as
company secretary and general counsel of OrganiTech Ltd., a company which was
traded on the NASDAQ. Between 1996 and 2004, Ms. Marom served as legal counsel
in Iscar Ltd. Ms. Marom holds an LLB from Tel-Aviv University, Israel, was
admitted to the Israeli Bar Association in 1983 and is a Certified Public
Notary.

     ALON SHADMI joined Tefron in 2003 and serves as Development Manager. From
2007 until 2009 Alon served as our VP, Marketing. Prior to joining Tefron, Mr.
Shadmi served as Site Manager of Amdocs Inc. from 2001 to 2003, as VP operations
in Ginegar Plastic Products Ltd. from 1996 to 2001, and in managerial positions
in Seker Planning and Management from 1993 to 1996 and in Gadot Petrochemical
Industries from 1991 to 1993. Mr. Shadmi holds an M.B.A. (Marketing) from the
Technion Institute, Haifa since 1997 and B.Sc. Industrial and Management
Engineering with honors from the Technion Institute, Haifa since 1991.

     MEIR KUPERSHMIDT served as our Hi-Tex Division Manager since December, 30,
2008 until his resignation on July 1, 2010. Prior to joining Tefron, Mr.
Kupershmidt served as VP operations at Gottex Ltd. from 2007 to 2008 and as VP
operations at Kitan Textile Industries Ltd. from 1999 to 2007. Mr. Kupershmidt
holds a B.A in business administration from University of Derby.

                                       51`

`ILAN GILBOA joined Tefron as EVP, Operations and Customer Support, in June
2010. From 2009 to 2010, Mr. Gilboa served as a VP for Global Operations of
N-trig Company, a computer device company, where he was responsible for the
establishment and functioning of a wide supply chain for the company's worldwide
operations. From 2003 to 2009, Mr. Gilboa served as manager of our Hi-Tex and
Cut & Sew divisions. From 1996 to February 2003 Mr. Gilboa served in several
positions at Kulicke & Soffa Israel, a leading supplier of semiconductor
assembly and test interconnect equipment, materials and technologies, first as a
manager of industrial engineering and last as vice president of operations and
as such, was responsible for the construction of Kulicke & Soffa's new
industrial facility in China. Mr. Gilboa holds a B.Sc and M.Sc degree in
industrial engineering from the Technion in Haifa.

6B. COMPENSATION

     The aggregate direct remuneration paid to all Directors and senior
management as a group for services in all capacities for the year ended December
31, 2009 was approximately $2.0 million, of which $217,000 was paid to Directors
in their capacities as Directors. Negligible amounts were set aside or accrued
for vacation and recuperation pay for all Directors and senior management as a
group. No amounts were set aside or accrued to provide pension, retirement or
similar benefits. The amount does not include any amounts expended by us for
automobiles made available to our officers, expenses (including business travel
and professional and business association dues and expenses) reimbursed to
officers and other fringe benefits commonly reimbursed or paid by companies in
Israel. We have no service contracts with any of our directors that provide for
benefits upon termination of their status as directors.

     In connection with the Company's efficiency program, the Directors of the
Company (other than External Directors) sent an instruction to the Company to
reduce their directors' compensation during 2009 and 2010 by 15% and in December
2009, Mr. Yacov Elinav, an External Director, sent an instruction to the Company
to reduce his directors' compensation during 2010 by 15%. The directors'
compensation of Mr. Eli Admoni, the Company's other External Director, was not
reduced. In addition, within the framework of the Company's agreement with its
banks lenders, the Company agreed not to distribute any dividends or pay
management fees and/or any other payment to its shareholders until the loans
have been repaid in full. See "Item 10. Additional Information - C. Material
Contracts - Agreement with Our Bank Lenders." Norfet, a major shareholder of the
Company which receives management fees from the Company, consented to the
inclusion of this provision in the Company's agreement with its bank lenders.
Accordingly, Norfet has effectively waived the management fees owed to it, as of
the date on which the loans were granted to the Company and until the date on
which all the loans are repaid in full. In addition, on April 7, 2010, Norfet
notified us that it waives the $190,000 unpaid management fees that were then
due to Norfet.

     EMPLOYMENT AGREEMENTS

     CHAIRMAN OF THE BOARD OF DIRECTORS

     Mr. Tiberg began serving as Chairman of the Company's Board of Directors on
July 5, 2010. Mr. Tiberg is to provide management services to the Company
pursuant to a Services Agreement between the Company and A. Tiberg Counselors
Ltd., a private company wholly owned by Mr. Tiberg and his wife Mrs. D. Tiberg
(the "AGREEMENT"). The Agreement has been approved by the Company's Audit
Committee and Board of Directors and will be effective retroactively as of July
5, 2010, upon approval by the Company's shareholders. The material terms of the
Agreement are described below.

     MONTHLY FEE; EXPENSES. The Company will pay A. Tiberg Counselors Ltd. a
monthly fee of US $11,000, at their NIS value on the date of payment, plus VAT
(the "Compensation"). The Compensation includes payment for transportation
expenses in Israel. A. Tiberg Counselors Ltd. will be entitled to a
reimbursement of all expenses incurred in connection with Mr. Tiberg's position,
whether in Israel or abroad, including but not limited to board and lodging,
hospitality and similar items, according to the Company's policy.

                                       52`

`OPTIONS. According to the Agreement, the Company is to grant Mr. Tiberg
options to purchase 47,605 Ordinary Shares (the: "Options"). The Options are to
vest over a period of three (3) years commencing July 5, 2010 - one-third upon
the completion of 12 months, one-third upon completion of 24 months and
one-third upon completion of 36 months, assuming, in each case that the
Agreement is in full force and effect at the end of the prescribed vesting
periods. The exercise price of the Options will be agreed upon by the parties no
later than by the end of the year 2010, at which point the grant of the Options
will be brought to the approval of the Company's Audit Committee, Board of
Directors and shareholders.

     INSURANCE AND INDEMNIFICATION. Mr. Tiberg will be included in the Company's
Directors' and Officers' liability insurance policy in connection with the
services rendered under the Agreement.

     CONFIDENTIALITY; NON-COMPETE. The Agreement includes a commitment to
non-disclosure and non-compete of any information related to the Company.

     TERM/TERMINATION. The term of the agreement is for an unlimited period
beginning on July 5, 2010, subject to shareholder approval. Each party may
terminate the Agreement immediately upon written notice.

          FORMER CHAIRMAN OF THE BOARD OF DIRECTORS

     Mr. Gelbard began rendering his services to the Company on December 27,
2007 as Active Chairman of the Company's Board of Directors until July 5, 2010.
Mr. Gelbard provided management services to the Company as an independent
contractor pursuant to a Services Agreement between the Company and Mr. Gelbard
(the "AGREEMENT"), the material terms of which are described below.

     THE SERVICES. Under the Agreement, Mr. Gelbard was to be an active partner
and to assist in the formulation and execution of the long term and short term
policies of the Company, including the advancement of the business of the
Company. Mr. Gelbard was to contribute of his experience and capabilities, as
much as would be required, for the providence of the Services to the Company and
its subsidiaries. The Agreement did not include a fixed hour requirement and the
amount of hours actually dedicated by Mr. Gelbard to the position was not
monitored by the Company.

     MONTHLY FEE; EXPENSES. The Company paid Mr. Gelbard a monthly fee of NIS
60,000 (the "MONTHLY FEE"), subject to increases at the end of each fiscal
quarter in accordance with increases in the Israeli consumer price index since
December 15, 2007 (the "INCREASED MONTHLY FEE"), in each case plus VAT. This
compensation was to constitute the total compensation due to Mr. Gelbard under
the Agreement and included the consideration for any social and fringe benefits
to which Mr. Gelbard was entitled. Mr. Gelbard was entitled to a reimbursement
of all expenses incurred in connection with his position, whether in Israel or
abroad, including but not limited to car expenses, board and lodging,
hospitality and similar items, according to the Company's policy. Following the
15% reduction of the salary of the Company's officers beginning in December
2008, the monthly fee paid by the Company to Mr. Gelbard (linked to the Israeli
Consumer Prices Index published on October 15, 2009) was NIS 55,043.

     OPTIONS. In July, 2008 Mr. Gelbard was granted options to purchase 30,000
Ordinary Shares (the: "Options"). The exercise price of the Options is $20.7.
The Options are to vest over a period of three (3) years - one-third upon the
completion of 12 months, one-third upon completion of 24 months and one-third
upon completion of 36 months, assuming, in each case that the Agreement is in
full force and effect at the end of the prescribed vesting periods. The Options
are subject to the terms of the Company's share option plan.

     Mr. Gelbard is able to exercise any vested Options starting from the elapse
of the applicable holding period set in section 102 to the Israeli Tax Ordinance
and until five years from the relevant day, subject to the applicable law.
Should Mr. Gelbard terminate the Agreement, he would be entitled to exercise the
vested Options until the earlier of two years from termination of the Agreement
or five years from the relevant day, whether or not the Agreement is in effect
at the time of exercise. However, in the event of the distribution of a dividend
on the Company's Ordinary Shares, then an amount equal to the dividend per share
will be deducted from the exercise price of each Option that Mr. Gelbard is not
able to exercise as of the date of record date for such dividend, whether
because such options had not yet vested or because the applicable holding period
for such options under section 102 of the Israeli Tax Ordinance had not yet
elapsed. The Agreement also provides that the adjustment described above shall
apply MUTATIS MUTANDIS to distribution of bonus shares by the Company.

                                       53`

`INSURANCE AND INDEMNIFICATION. Mr. Gelbard was included in the Company's
Directors' and Officers' liability insurance policy in connection with the
services rendered under the Agreement. The Company also provided Mr. Gelbard
with an indemnification letter in the form previously approved by the Company's
shareholders.

     CONFIDENTIALITY; NON-COMPETE. Mr. Gelbard committed to non-disclosure of
any information related to the Company obtained by him while providing his
services, which commitment survives termination of the Agreement. Mr. Gelbard
also agreed not to compete with the Company and with any of the Company's
projects and/or activities during the period of the Agreement and for a period
of six months following termination thereof.

     OTHER SERVICES. Mr. Gelbard was permitted to engage in other activities as
long as they did not interfere with his obligations to the Company or cause a
conflict of interest. In the event Mr. Gelbard was interested in serving as
chairman of the board of directors of a company other than Tefron (during the
period covered by his agreement with the Company), he was required to submit a
written notice to the Company within a reasonable period of time prior to his
appointment.

     TERM/TERMINATION. The term of the agreement was initially for 12 months
commencing December 27, 2007 (the "INITIAL PERIOD"). To the extent the parties
do not provide a termination notice, and to the extent the Agreement is not
terminated for cause, the Agreement will then be extended automatically for an
additional unlimited term (the "EXTENDED PERIOD"). During the Extended Period,
each party may terminate the Agreement upon ninety (90) days prior written
notice (such 90-day period, the "NOTICE PERIOD"). The Company has a right to
terminate the Agreement immediately for cause, which includes among others, a
material breach by Mr. Gelbard of his confidentiality undertaking and/or duty of
loyalty to the Company and/or a breach by Mr. Gelbard of a fundamental term of
the Agreement that can be cured, but which is not cured within 14 days of demand
to do so.

     CHIEF EXECUTIVE OFFICER

     Mr. Amit Meridor was appointed Chief Executive Officer of the Company
effective as of January 21, 2010. Under the terms of his employment agreement,
Mr. Meridor is entitled to a monthly gross salary of NIS 80,000 subject to
annual increases in accordance with increases in the Israeli consumer price
index since January 1, 2010, as well as an annual bonus up to six monthly
salaries, subject to the achievement of objectives to be defined by the Board of
Directors based on Company performance during the year and Mr. Meridor's
contribution to such performance. As of June 15, 2010, the Company's board of
directors had yet to determine such targets. Mr. Meridor is eligible for social
benefits as set forth in the agreement, and for reimbursement of various
expenses.

     The agreement is for an unspecified term, and each of the parties may
terminate the employment agreement by providing 90 days' advance written notice
to the other party. Should the Company terminate employment of Mr. Meridor not
for cause, or Mr. Meridor terminates the agreement for cause, Mr. Meridor would
also be entitled to an adjustment period of 270 days during which he would be
entitled to receive all benefits conferred on him under the agreement.

     In accordance with the employment agreement, the Company allotted to Mr.
Meridor options exercisable for 100,000 Company ordinary shares, under the
Company Share Option Plan, at an exercise price of $3.8 per share. The options
vest in three equal installments - on January 17, 2011, January 17, 2012 and
January 17, 2013.

                                       54`

`Mr. Meridor committed to non-disclosure for an unlimited duration and to a
non-competition provision with the Company for a 12-month period after
termination of his employment.

     FORMER CHIEF EXECUTIVE OFFICER

     Mr. Adi Livneh resigned from his position as the Company's CEO, effective
as of December 31, 2009. The termination arrangement with Mr. Livneh includes a
severance payment in the aggregate amount of approximately $31,000 and a waiver
by Mr. Livneh of social benefits, vacation payment and reimbursement of other
expenses due to him in the aggregate amount of approximately $46,000.

     Under the terms of our management services agreement with Mr. Adi Livneh,
Mr. Livneh was entitled to a monthly gross salary of NIS 90,000 subject to
increases in accordance with increases in the Israeli consumer price index
beginning on September 15, 2008 as well as to an annual bonus, subject to the
achievement of objectives that were to be defined by the Board of Directors, of
up to six annual salaries, or of 2% of the Company's annual net income after
deduction of carry-forward loss starting in 2009, whichever is higher. Mr.
Livneh did not receive a bonus during his period of employment with the Company.
In addition, Mr. Livneh was eligible for social benefits as set forth in the
agreement, and for reimbursement of various expenses

     In accordance with the employment agreement, the Company allotted to Mr.
Livneh options exercisable for 30,000 Company ordinary shares, in accordance
with the Company Share Option Plan, at an exercise price of $40 per share. The
options were to vest in three equal installments, the first on September 1, 2009
and the second and third vesting on September 1, 2010 and 2011, respectively.
The fair value of the aforementioned options was calculated using the Black &
Scholes option pricing model. As of the date of Mr. Livneh's resignation, 10,000
options were vested, and their exercise period expires on March 31, 2010.

     Mr. Livneh committed to non-disclosure for an unlimited duration, to grant
to the Company ownership of inventions and creations achieved during his
employment by the Company and to a non-competition provision with the Company
for a 12-month period after termination of his employment.

     6C.Board Practices

     Each Director, other than the External Directors, is generally elected by a
vote at the Annual General Meeting of shareholders and serves for a term of one
year or until the following Annual General Meeting. Each External Director is
elected to serve for a period of three years from the date of the Annual General
Meeting. Each office holder will serve until his or her removal by the Board of
Directors or resignation from office.

     Pursuant to a recent amendment to the Israeli Companies Law, 1999, one may
not be elected and may not serve as a director of a public company if (s)he does
not have the required qualifications and the ability to dedicate an appropriate
amount of time for the performance of his/her duties as a director in the
company, taking into consideration, among other things, the special needs and
size of the company. In addition, a public company may convene an annual general
meeting of shareholders to elect a director, and may elect such director, only
if prior to such shareholders meeting, the nominee declares, among other things,
that (s)he possess all of the required qualifications to serve as a director
(and lists such qualifications in such declaration) and that (s)he has the
ability to dedicate an appropriate amount of time for the performance of his/her
duties as a director of the company. The above requirements do not apply to
directors appointed prior to September 29, 2008.

                                       55`

`Under the Israeli Companies Law, each Israeli public company is required to
determine the minimum number of directors with "Accounting and Financial
Expertise" that such company believes is appropriate in light of the particulars
of such company and its activities. A director with "Accounting and Financial
Expertise" is a person that, due to education, experience and qualifications, is
highly skilled and has an understanding of business-accounting issues and
financial statements in a manner that enables him/her to understand in depth the
company's financial statements and stimulate discussion regarding the manner of
presentation of the financial data. On March 8, 2006, the Board determined that
at least two members of the board would be required to have Accounting and
Financial Expertise. The Board believes it complies with such requirement.

     EXTERNAL DIRECTORS

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

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

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

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

     In addition to the above requirements, which apply to an independent
director as well, an independent director is additionally required not to serve
as a Director of the Company during nine sequential years, and a recess for no
more than two years shall not be deemed to interrupt the continuity of his or
her service for this matter.

     The above qualifications do not apply to independent directors appointed
prior to September 29, 2008, and external directors appointed prior to January
19, 2006. However, an external director may not be appointed to an additional
term unless: (i) such director has "Accounting and Financial Expertise"; or (ii)
he or she has "Professional Expertise", and on the date of appointment for
another term there is another external director who has "Accounting and
Financial Expertise" and the number of "Accounting and Financial Experts" on the
board of directors is at least equal to the minimum number determined
appropriate by the board of directors.

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

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

                                       56`

`DUTIES OF DIRECTORS

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

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

     AUDIT COMMITTEE

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

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

     We have adopted an audit committee charter, which sets forth the powers and
responsibilities of our Audit Committee. According to our audit committee
charter, the role of the Audit Committee is to assist the Board of Directors in
fulfilling its responsibility for oversight of the quality and integrity of the
accounting, auditing, and reporting practices of the Company. Our audit
committee also oversees the appointment, compensation, and oversight of the
public accounting firm engaged to prepare or issue an audit report on our
financial statements and also recommends to the Board of Directors the nominee
for Internal Auditor and approves his annual audit program. Its responsibilities
also include approving all audit and non-audit services to be provided by the
external auditor, reviewing the firm's non-audit services and related fees, and
reviewing legal and regulatory matters that may have a material impact on the
financial statements, related Company compliance policies, and programs and
reports received from regulators. The members of the Audit Committee are Ms.
Kasher and Messrs. Admoni and Elinav.

     OTHER BOARD COMMITTEES

     Our Board of Directors has also established a Compensation Committee,
Balance Sheet Committee and Contributions Committee. The Companies Law restricts
the delegation of powers from the Board of Directors to its committees in
certain manners. The members of the Compensation Committee are Messrs. Davidi
and Admoni. The Balance Sheet Committee performs a close review of the financial
statements of the Company and its members are Ms. Kasher and Messrs. Zigelman,
Admoni and Elinav. The Articles of Association provide that we may contribute
reasonable sums for worthy causes, even if the contribution is not in the frame
of our business considerations. The Board of Directors has delegated this power
to the Contributions Committee. The members of the Contributions Committee are
Messrs. Davidi and Elinav. See "Item 10. Additional Information -10B. Memorandum
and Articles of Association - Board of Directors."

                                       57`

`6D. EMPLOYEES

     At December 31, 2009, we employed 1,038 employees in Israel of whom 678
were salaried employees and 360 were hourly wage employees. At December 31,
2009, we employed 47 employees in the United States through our subsidiary,
Tefron USA, of whom 16 were salaried employees and 31 were hourly wage
employees. At December 31, 2009, El-masira employed 657 employees in Jordan all
of whom were hourly wage employees, and our subsidiary, Tefron UK, had one
employee in the U.K. and one subcontractor and Macro had 41 employees in China
and Hong Kong.

     At December 31, 2008, we employed 1,149 employees in Israel of whom 545
were salaried employees and 604 were hourly wage employees. At December 31,
2008, we employed 22 employees in the United States through our subsidiary,
Tefron USA, of whom 15 were salaried employees and 7 were hourly wage employees.
At December 31, 2008, El-masira employed 1,018 employees in Jordan all of whom
were salaried employees, and our subsidiary, Tefron UK, had one employee in the
U.K. and one subcontractor and Macro had 45 employees in China and Hong Kong.

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

     To increase the motivation of the workforce, many factory employees are
eligible for bonuses based upon their performance level, discipline and quality
manufacturing. We believe that relations with our employees are good.

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

     Israeli law generally requires the payment by employers of severance pay
upon the retirement or death of an employee or upon termination of employment by
the employer or, in certain circumstances, by the employee. We currently fund,
according to the applicable law, most of our ongoing severance obligations by
making monthly payments to pension funds, employee accounts in a provident fund
and insurance policies In addition, according to the National Insurance Law,
Israeli employees and employers are required to pay specified amounts to the
National Insurance Institute, which is similar to the U.S. Social Security
Administration. Since January 1, 1995, such amounts also include payments for
national health insurance payable by employees. A majority of our permanent
employees in Israel are covered by general and/or individual life and pension
insurance policies providing customary benefits to employees, including
retirement and severance benefits.

                                       58`

`SALARY REDUCTION

     As a result of the economic crisis and our financial results we have
decided to reduce the salary of our employees as of December 3, 2008. The rate
of reduction in salary varies between 5% and 15%, in accordance with the
employee's level of salary, such that the higher the employee's original salary
was, the higher the rate of reduction, and in the event that an employee's gross
monthly salary is less than NIS 5,000, no such reduction applies. Pursuant to
the notice delivered to the employees, the reduction in salary will remain in
effect until December 31, 2010. Pursuant to the decision of the Company, an
employee who chooses to resign at any time during the period in which such
employee is paid a reduced salary shall be entitled to receive severance pay as
if he had been fired by the company.

6E. SHARE OWNERSHIP

     As of July 1, 2010, the following directors and senior managers
beneficially held the number of Ordinary Shares set forth in the table below.
The information in this table is based on 3,173,642 (excluding 99,740 shares
held by our wholly owned subsidiary) Ordinary Shares outstanding as of July 1,
2010. The number of Ordinary Shares beneficially owned by a person includes
Ordinary Shares subject to options held by that person that were currently
exercisable at, or exercisable within 60 days of, July 1, 2010. The Ordinary
Shares issuable under these options are treated as if they were outstanding for
purposes of computing the percentage ownership of the person holding these
options but are not treated as if they were outstanding for the purposes of
computing the percentage ownership outstanding for any other person. Except as
disclosed below, to our knowledge, none of the directors, officers or key
executives listed in the Directors and Senior Management table appearing in Item
6 above beneficially owns any Ordinary Shares.

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

Arnon Tiberg                                                             -                    -
Yacov Gelbard                                                       81,540                2.56%
Ishay Davidi                                                       612,399(1)             19.3%
Meir Shamir                                                        610,432(2)            19.24%
Avi Zigelman                                                             -                    -
Shirith Kasher                                                           -                    -
Yacov Elinav                                                             -                    -
Eli Admoni                                                               -                    -
Zvi Limon                                                          173,038(3)             5.45%
Amit Meridor                                                             -                    -
Eran Rotem                                                               *                    *
Amit Tal                                                                 *                    *
Orna Goldner-Marom                                                       -                    -
Alon Shadmi                                                              *                    *
Meir Kupershmidt                                                         -                    -

Directors and senior managers as a group (14 persons)            1,200,450(4)            34.36%

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

*    Less than 1% of the outstanding Ordinary Shares.

**   Does not take into account 99,740 Ordinary Shares held by a wholly owned
     subsidiary of the Company.

                                       59`

`(1) Consists of (i) 461,308 Ordinary Shares held by Norfet, which Mr. Davidi may
be deemed to beneficially own under U.S. securities laws since he serves as CEO
of FIMI 2001 Ltd., which controls the general partner of Norfet, one of the
Norfet limited partners (which is managed by FIMI 2001 Ltd.) as well as the
other Norfet limited partners by virtue of an irrevocable power of attorney;
(ii) 1,967 Ordinary Shares held by FIMI, which Mr. Ishay Davidi may be deemed to
beneficially own in accordance with the above mentioned; and (ii) 149,124
Ordinary Shares held by Ta-Top Limited Partnership, which Mr. Ishay Davidi may
be deemed to beneficially own since he serves as CEO of FIMI 2001 Ltd, which
controls FIMI Israel Opportunity Fund L.P. and FIMI Opportunity Fund L.P., which
hold the partnership interests in Ta-Top Limited Partnership.

(2) Consists of (i) 461,308 Ordinary Shares held by Norfet, which Mr. Shamir may
be deemed to beneficially own due to his 34.15% interest in Mivtah-Shamir, which
held an approximately 42.29% interest in Norfet as of June 15, 2010; and (ii)
149,124 Ordinary Shares held by Mivtach-Shamir, which Mr. Shamir may be deemed
to beneficially own in accordance with the above mentioned.

(3) Consists of (i) 173,038 Ordinary Shares held by Rimon Investment Master
Fund, LP ("Rimon"), which Mr. Zvi Limon may be deemed to beneficially own under
the U.S. securities laws since he serves as a partner in the management company
of Rimon.

(4) Consists of (i) 461,308 Ordinary Shares held by Norfet, which Mr. Ishay
Davidi may be deemed to beneficially own under U.S. securities laws since he
serves as CEO of FIMI 2001 Ltd., which controls the general partner and one of
the limited partners of Norfet and which Mr. Meir Shamir may be deemed to
beneficially own under U.S. securities laws due to his 34.15% interest in
Mivtah-Shamir, which held an approximately 42.29% interest in Norfet as of June
1, 2010; (ii) 1,967 Ordinary Shares held by FIMI which Mr. Ishay Davidi may be
deemed to beneficially own under U.S. securities laws since he serves as CEO of
FIMI 2001 Ltd., which controls the general partner and one of the limited
partners of Norfet; (iii) 149,124 Ordinary Shares held by Ta-Top Limited
Partnership, which Mr. Ishay Davidi may be deemed to beneficially own since he
serves as CEO of FIMI 2001 Ltd, which controls FIMI Israel Opportunity Fund L.P.
and FIMI Opportunity Fund L.P., which hold the partnership interests in Ta-Top
Limited Partnership; (iv) 149,124 Ordinary Shares held by Mivtach-Shamir, which
Mr. Shamir may be deemed to beneficially own in accordance with the above
mentioned; (v) 173,038 Ordinary Shares held by Rimon which Mr. Zvi Limon may be
deemed to beneficially own under U.S. securities laws since he serves as a
partner in the management company of Rimon; (vi) 81,540 Ordinary Shares held by
Mr. Yacov Gelbard; and (vii) 120 Ordinary Shares held by one executive; and
(viii) options to purchase 320,229 Ordinary Shares. The exercise prices of these
options range from $3.8 to $15 per share. These options will expire between 2010
and 2020.

SHARE OPTION PLAN

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

     GENERAL

     The Share Option Plan authorizes the issuance of options to purchase
621,232 Ordinary Shares. As of June 15, 2010, options to purchase 284,229
Ordinary Shares had been granted to our senior managers, directors and
employees, of which 271,000 options had been granted to our senior managers and
directors as a group. These numbers do not include options that were cancelled
or expired. Upon the occurrence of any Ordinary Share split, reverse Ordinary
Share split, recapitalization or rights offerings or other substantially similar
corporate transaction or event, we shall make such equitable changes or
adjustments necessary to the number of shares subject to each outstanding option
in order to prevent dilution or enlargement of the optionees' rights. Options
granted to our employees shall be issued to a trustee nominated by the Board of
Directors, which trustee shall hold the options, and any Ordinary Shares issued
upon exercise thereof, for the benefit of the optionees for two years from the
date of the grant. In 2008, the exercise prices of the options that were
outstanding but had neither vested nor were exercisable in light of Section 102
of the Israeli Income Tax Ordinance [New Version] 1961 at the time of the
distributions of our dividends were reduced in an amount equal to the dividends
paid per share in such distributions.


                                       60`

`ADMINISTRATION

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

     VESTING PERIODS

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

     AMENDMENT AND TERMINATION OF THE SHARE OPTION PLAN

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

     ACCOUNTING TREATMENT

     For a discussion of the accounting treatment of the Share Option Plan, see
Note 20 of the Notes to the Consolidated Financial Statements.

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

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

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


                                       61`

`On February 27, 2003, in order to enable us to grant options after January
1, 2003, we filed an amendment to the Share Option Plan with the tax authorities
and informed them of our election of the capital gains track (the third
alternative above). In addition, under the amendment to the Share Option Plan,
we may also issue options under the provisions of the tax track without a
trustee under the first alternative.

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

     In 2008, the term of the Share Option Plan was extended for another ten
years.

ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

7A.  MAJOR SHAREHOLDERS

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

     The following table sets forth the number of our Ordinary Shares owned by
any person known to us to be the beneficial owner of 5% or more of our Ordinary
Shares as of June 15, 2010. The information in this table is based on 3,173,642
Ordinary Shares outstanding as of such date (excluding 99,740 shares held by our
wholly owned subsidiary). The number of Ordinary Shares beneficially owned by a
person includes Ordinary Shares subject to options held by that person that were
currently exercisable at, or exercisable within 60 days of, June 15, 2010. The
Ordinary Shares issuable under these options are treated as if they were
outstanding for purposes of computing the percentage ownership of the person
holding these options but are not treated as if they were outstanding for the
purposes of computing the percentage ownership outstanding for any other person.
None of the holders of the Ordinary Shares listed in this table have voting
rights different from other holders of the Ordinary Shares.

NAME                                        NUMBER OF SHARES OWNED       PERCENT OF ORDINARY SHARES*
----                                        ----------------------       ---------------------------

Norfet, Limited Partnership                                461,308(1)                         14.54%
c/o Fimi 2001 Ltd.
"Rubinstein House"
37 Begin Rd.
Tel Aviv, Israel

FIMI 2001 Ltd.                                             612,399(1)(2)                      19.30%

Mivtach Shamir Holdings, Ltd.                              610,432(1)(3)                      19.24%

Analyst I.M.S. Investment Management Services Ltd.         221,777(4)                          6.95%
Alrov Tower
46 Rothschild Blvd.
Tel Aviv 66883

*    Does not take into account 99,740 Ordinary Shares held by a wholly-owned
     subsidiary of the Company.


                                       62`

`(1)  Norfet L.P is an Israeli partnership. As of June 15, 2010, 7.76% of
          Norfet was held by FIMI Opportunity Fund, LP, approximately 40.15% of
          Norfet was held by FIMI Israel Opportunity Fund, Limited Partnership,
          approximately 42.29% was held by Mivtach Shamir Holdings Ltd.,
          approximately 6.06% was held by Yashir Provident Funds Ltd.

          Pursuant to Rule 13d-5, (i) Mr. Ishay Davidi, a director of the
          Company, may be deemed to beneficially own the shares held by Norfet
          due to his position as CEO of FIMI 2001 Ltd., which is the managing
          general partner of each of FIMI Israel Opportunity Fund, Limited
          Partnership and FIMI Opportunity Fund, L.P. and (ii) Mr. Meir Shamir,
          a director of the Company, may be deemed to beneficially own the
          shares held by Norfet due to his 34.15% interest in Mivtach Shamir
          Holdings, Ltd. ("Mivtach-Shamir").

          In addition, each of FIMI 2001 Ltd. and Mivtach-Shamir may be deemed
          to beneficially own the shares held by Norfet due to the fact that, to
          the best of the Company's knowledge, FIMI 2001 Ltd. and Mivtach-Shamir
          share joint control of N.D.M.S. Ltd., which is the general partner of
          Norfet and holds the sole management, operation and control of Norfet
          pursuant to a limited partnership agreement between N.D.M.S. Ltd. and
          the limited partners of Norfet.

     (2)  As described in footnote (1) above, FIMI 2001 Ltd. may be deemed to
          beneficially own all of the 461,308 Ordinary Shares held directly by
          Norfet. FIMI 2001 Ltd. may also be deemed to beneficially own (i)
          149,124 shares held by Ta-Top, Limited Partnership, due to FIMI 2001
          Ltd.'s position as the managing general partner of FIMI Delaware,
          which is the sole shareholder of TA-TEK Ltd., the general partner of
          Ta-Top, Limited Partnership and (ii) 1,967 shares held directly by
          FIMI Opportunity Fund Limited Partnership and FIMI Israel Opportunity
          Fund Limited Partnership, due to FIMI 2001 Ltd.'s position as general
          partner of these partnerships. Mr. Ishay Davidi, a director of the
          Company, may be deemed to beneficially own the shares held by FIMI
          2001 Ltd. due to his position as CEO of FIMI 2001.

     (3)  Mivtach Shamir Holdings, Ltd. is an Israeli public company traded on
          the Tel Aviv Stock Exchange. Mivtach-Shamir's largest shareholder is
          Mr. Meir Shamir, who, as of June 15, 2010, held 34.15% of
          Mivtach-Shamir. Mivtach-Shamir directly owns 149,124 Ordinary Shares.
          In addition, as described in footnote (1) above, Mivtach-Shamir may be
          deemed to beneficially own all of the 461,308 Ordinary Shares held
          directly by Norfet. Mr. Meir Shamir, a director of the Company, may be
          deemed to beneficially own the shares held by Mivtach-Shamir due to
          his 34.15% interest in Mivtach-Shamir.

     (4)  Analyst I.M.S. Investment Management Services Ltd. is an Israeli
          public company traded on the Tel Aviv Stock Exchange ("Analyst"). As
          of June 15, 2010, 33.04% of Analyst was held by Mr. Ehud Shiloni,
          33.04% was held by Mr. Shmuel Lev and 6.1% was held by D.S. Apex
          Holdings Ltd. Analyst's holdings consist of (i) 213,645 Ordinary
          Shares held by Analyst I.M.S. Investment Management Services (1986)
          Ltd. and (ii) 8,132 Ordinary Shares held by Analyst Provident Funds
          Ltd. As of June 15, 2010, Analyst held 99% of Analyst I.M.S.
          Investment Management Services (1986) Ltd. and 99% of Analyst
          Provident Funds Ltd.

     The percentage ownership in the Ordinary Shares of Norfet, FIMI 2001 Ltd.
and Mivtach-Shamir as a group is approximately 24% as of June 15, 2010. All of
the Ordinary Shares held by Norfet are pledged in favor of two Israeli bank
institutions.

     At June 15, 2010, there were 82 holders of Ordinary Shares of record
registered with a United States mailing address, including banks, brokers and
nominees. These holders of record represented approximately 46.76% of the total
outstanding Ordinary Shares (excluding 99,740 shares held by our wholly owned
subsidiary). Because these holders of record include banks, brokers and
nominees, the beneficial owners of these Ordinary Shares may include persons who
reside outside the United States.


                                       63`

`7B.  RELATED PARTY TRANSACTIONS

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

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

RELATIONSHIPS AND TRANSACTIONS WITH NORFET AND ITS SHAREHOLDERS

     As of June 15, 2010, Norfet owned 461,308 Ordinary Shares, which
represented approximately 14.54% of Tefron's outstanding Ordinary Shares
(excluding 99,740 shares held by Tefron's wholly owned subsidiary).
Substantially all of Norfet is owned by (i) N.D.M.S. Ltd., a company wholly
owned by FIMI Opportunity Fund L.P., (ii) FIMI Israel Opportunity Fund, Limited
Partnership and (iii) Mivtach Shamir Holdings Ltd. and (iv) Yashir Provident
Funds Ltd..

     Pursuant to a Share Purchase Agreement, dated February 17, 2004, we issued
to Norfet in April 2004, 352,941 Ordinary Shares for a base price of $42.5 per
share and a base aggregate consideration of $15 million. Norfet also acquired an
additional 136,500 of our Ordinary Shares in the aggregate from Arwol and
Macpell pursuant to a separate agreement. Immediately following the closing of
these agreements, Norfet held 489,441, or approximately 28.8% of our outstanding
share capital, without taking into account our Ordinary Shares held by our
wholly-owned subsidiary. In April 2005, due to a purchase price adjustment
agreed to with Norfet instead of the purchase price adjustment mechanism agreed
to in the Share Purchase Agreement, we issued to Norfet an additional 66,176
Ordinary Shares, and Arwol transferred 10,690 additional Ordinary Shares to
Norfet.

     Under the Share Purchase Agreement, we also agreed to pay Norfet a
management fee of approximately $172,000 plus VAT per annum until our first
annual meeting in 2005 (which took place on June 28, 2005), and $120,000 plus
VAT thereafter. On March 2, 2010 we signed an agreement with our bank lenders
which, among other things, establishes new financial covenants and undertakings
for 2010, including our undertaking not to distribute any dividends or pay
management fees and/or any other payment to our shareholders until the loans
provided by our bank lenders have been repaid in full. See "Item 10. Additional
Information - 10C. Material Contracts - Agreement with Our Bank Lenders."
Norfet, our major shareholder, consented to the inclusion of this provision in
the agreement with our bank lenders, and accordingly, Norfet has effectively
waived the management fees owed to it from the date on which the loans were
granted to the Company and until the date on which all the loans are repaid in
full. In addition, on April 7, 2010, Norfet notified us that it waives the
$190,000 unpaid management fees that were then due to Norfet.

     The Company, Norfet, Arwol and Macpell, together with Leber Partners L.P.,
are also party to a Registration Rights Agreement, dated April 22, 2004, which
replaced the previous Registration Rights Agreements to which the Company and
certain of these shareholders had been a party. On November 29, 2005, the
Securities and Exchange Commission declared effective a Registration Statement
on Form F-3 covering the resale of Ordinary Shares held by the shareholders
party to this agreement.

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

     On March 31, 2009, our board of directors approved an agreement with Orian
S.M. Ltd. (formerly known as Orian Agish Ltd.) ("Orian") for freight and
delivery services. FIMI Israel Opportunity Fund Limited Partnership and FIMI
Opportunity Fund L.P. are interested parties in Orian. Our Director, Yishai
Davidi, serves as senior partner of FIMI Israel Opportunity Fund, Limited
Partnership and FIMI Opportunity Fund, L.P. Mr. Davidi also serves as CEO of
FIMI 2001 Ltd., which controls the general partner of Norfet, one of the Norfet
limited partners (which is managed by FIMI 2001 Ltd.) as well as the other
Norfet limited partners by virtue of an irrevocable power of attorney. As of
June 15, 2010, Norfet and related parties held 24% of our shares. The agreement
with Orian will be reviewed quarterly by the Company's Audit Committee and the
Board of Directors.


                                       64`

`On March 28, 2010, we issued 149,124 ordinary shares, at a price per share
of $3.8, to each of Mivtach Shamir Holdings Ltd. (one of the partners in Norfet)
and Ta-Top Limited Partnership (a partnership under the control of FIMI 2001,
Ltd.) in a private placement, resulting in aggregate gross proceeds of
approximately $1.1 million. The private placement was part of a transaction to
raise capital in connection with an agreement with our bank lenders, which
combined both a rights offering to all of our shareholders and a private
placement to Norfet (or whoever acts on its behalf) in which Norfet (or whoever
acts on its behalf) agreed to invest in Tefron the difference between $4 million
and the amount raised in the rights offering. See "Item 10. Additional
Information - 10C. Material Contracts - Private Placement to Norfet."

7C.  INTERESTS OF EXPERTS AND COUNSEL.

     Not Applicable.

ITEM 8. FINANCIAL INFORMATION

CONSOLIDATED FINANCIAL STATEMENTS

     See Item 18.

LEGAL PROCEEDINGS

     CLAIMS RELATING TO A FORMER EMPLOYEE'S IMPRISONMENT IN EGYPT

     On November 15, 2006, a former employee of the Company filed law suits
against the Company and three of its former or current directors, with the
Israeli District Court and the Israeli Labor Law Court, seeking damages in the
amount of approximately $2 million plus non-specified bodily damages, due to
damages allegedly incurred by him as a result of his imprisonment in Egypt. The
Company believes that these law suits are without merit. As of June 15, 2010,
the claim is at the evidence stage and the next court hearing has been set for
December 2010.

     CLAIMS RELATING TO TERMINATION OF EMPLOYMENT OF FORMER GENERAL MANAGER OF
MACRO

     On September 3, 2009, Mr. Ron Grundland, the former general manager of the
Company's wholly owned subsidiary, Macro, and the Peles Institute for Automatic
Balances Ltd., a corporation wholly owned by Mr. Ron Grundland and his wife,
Smadar Grundland, through which Mr. Ron Grundland provided management services
to Macro (the "Management Company"), filed a lawsuit against the Company and
Macro for pecuniary losses of NIS 1,663,000 allegedly resulting from the
unilateral termination by Mr. Grundland of a management services agreement
between Macro and the Management Company on July 7, 2009. The parties have filed
their arguments and as of the date of this Annual Report, the parties are in
negotiations for a settlement.

     In connection with the abovementioned claim, on December 10, 2009, the
court issued a temporary order for attachment against the Company and Macro in
an amount of up to NIS 1,663,000 (the amount of the claim), following an
application, ex parte, filed by Mr. Grundland and the Management Company for
temporary attachment of funds and rights due to Macro and the Company from four
customers. On January 13, 2010, the parties reached a settlement pursuant to
which the temporary order of attachment was cancelled and, in exchange, the
Company deposited deferred checks with Mr. Grundland's legal counsel to
guarantee payment of the verdict and legal expenses in the event that the final
verdict is in favor of Mr. Grundland.


                                       65`

`ARBITRATION PROCEEDINGS RELATING TO ALLEGED UNLAWFUL TERMINATION OF AN
EMPLOYEE

     On June 4, 2009, we signed an arbitration agreement with a former employee,
Mr. Reuven Hason, in connection with his claims regarding the circumstances of
his termination. An arbitrator was appointed to arbitrate the claims. On
September 1, 2009, Mr. Hason filed a claim against the Company for unlawful
termination in an amount of approximately NIS 751,000, plus additional amounts
for pain and suffering and salary payments due to him. The parties agreed not to
hold evidential hearings in connection with the arbitration and instead to hold
mediation meetings to examine the possibility of reaching a settlement. As of
June 15, 2010, the mediation process is still ongoing.

     APPOINTMENT OF SPECIAL COMMITTEE TO ADDRESS ALLEGATIONS OF FORMER DIRECTOR

     On May 28, 2009 the Company appointed a special committee to investigate
certain allegations made by Mr. Micha Korman, a former director of the Company,
concerning management's projections for the budget for the year 2009 and the
communication between management and the Company's board of directors. On
September 15, 2009 the company announced the findings of the special committee.
The special committee concluded that management's assessments as presented to
the Board of Directors were reasonable and were based on reasonable data.
Nevertheless, the special committee recommended that, in the future, when
presenting the annual budget to the board of directors for approval, management
should present the range of projections that management considered in preparing
the budget and address the differences between such projections. In addition,
the special committee recommended that the Company's Board of Directors
establish a policy for conveying information from management to the members of
the Board of Directors (which would address, among other things, the manner in
which the information is transferred, the timing for transfer of information and
the type of information to be transferred), including updating members of the
Board of Directors on an ongoing basis of any material changes that occurred in
the condition of the Company.

     DIVIDEND POLICY

     Although we have no established dividend policy, in the past we have
distributed dividends to our shareholders from our accumulated earnings. In
2006, we twice declared and paid dividends of approximately $5 million each, in
2007, we did not declare any dividends and in May 2008, we declared and paid a
dividend of $8 million. In 2009 we did not declare any dividends and as of
December 31, 2009, we had no accumulated earnings for distribution. We may
distribute dividends in the future if our Board of Directors so determines and
there are sufficient accumulated earnings in accordance with applicable law. On
March 2, 2010 we signed an agreement with our bank lenders which, among other
things, establishes new financial covenants and undertakings for 2010, including
our undertaking not to distribute any dividends or pay management fees and/or
any other payment to our shareholders until the loans provided by our bank
lenders have been repaid in full. See Item 10. Additional Information - C.
Material Contracts - Agreement with Our Bank Lenders.

ITEM 9 THE OFFER AND LISTING

9A.  OFFER AND LISTING DETAILS

     From the initial public offering of our Ordinary Shares on September 24,
1997 through December 18, 2008, our Ordinary Shares were traded on the NYSE
under the symbol "TFR". Since January 16, 2009, our ordinary shares have been
quoted on the OTCBB. The symbol of our ordinary shares on the OTCBB is "TFRFF".

     All share price information has been adjusted to give retroactive effect to
a ten-for-one reverse split of our ordinary shares that became effective on
January 22, 2009.


                                       66`

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

                                HIGH          LOW
                              ---------    ---------

2005                          $    87.5    $    38.4
2006                          $   130.5    $    83.0
2007                          $   109.5    $    40.5
2008                          $    56.5    $     2.5
2009                          $    6.35    $     2.2

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

                   2008          HIGH         LOW
                   ----       ---------    ---------
First quarter                 $    56.5    $    29.4
Second quarter                $    39.4    $    21.4
Third quarter                 $    23.3    $    17.1
Fourth quarter                $    19.9    $     2.5
                   2009
                   ----
First quarter                 $     4.0    $     2.2
Second quarter                $     4.4    $     3.2
Third quarter                 $     6.1    $     3.5
Fourth quarter                $    6.35    $     2.7
                   2010
                   ----
First quarter                 $     4.6    $     3.5
Second quarter                $     4.0    $     1.5

     As reported on the NYSE and on the OTC, the monthly high and low sales
prices for our Ordinary Shares for the lastix months were as follows:

                   2010
                   ----
January                       $     4.6    $     3.5
February                      $     4.4    $     3.9
March                         $     4.3    $     3.8
April                         $     4.0    $     3.8
May                           $     3.4    $     2.0
June                          $     2.0    $     1.5
July (through July 12, 2010)  $     1.8    $     1.5

     Our Ordinary Shares have been traded on the TASE since September 28, 2005
under the symbol "TFRN".


                                       67`

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

                                HIGH          LOW
                              ---------    ---------

2007                          NIS 463.3    NIS 165.6
2008                          NIS 205.0    NIS  12.0
2009                          NIS  12.1    NIS  25.5

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

                    2008        HIGH          LOW
                    ----      ---------    ---------
First quarter                 NIS 205.0    NIS 104.1
Second quarter                NIS 148.5    NIS  81.4
Third quarter                 NIS  87.9    NIS  60.3
Fourth quarter                NIS  60.3    NIS  12.0
                    2009
                    ----
First quarter                 NIS  16.3    NIS  12.1
Second quarter                NIS  19.8    NIS  13.4
Third quarter                 NIS  25.5    NIS  13.4
Fourth quarter                NIS  21.9    NIS  10.5
                    2010
                    ----
First quarter                 NIS 16.27    NIS 12.91
Second quarter                NIS 15.09    NIS   5.6

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

                    2010
                    ----
January                       NIS  15.2     NIS 12.9
February                      NIS  15.3     NIS 14.2
March                         NIS  16.3     NIS 14.3
April                         NIS  15.1     NIS 13.5
May                           NIS  13.6     NIS  6.5
June                          NIS   6.8     NIS  5.6
July (through July 12, 2010)  NIS   7.2     NIS  5.2

     On September 8, 1998, we announced our intention to repurchase through a
stock repurchase program up to one million of our outstanding Ordinary Shares.
As of July 12, 2010, we had repurchased and hold in our treasury 99,740 Ordinary
Shares.

9B.  PLAN OF DISTRIBUTION

     Not Applicable.

9C.  MARKETS

     Our Ordinary Shares are quoted on the OTCBB and are traded on the TASE.

9D.  SELLING SHAREHOLDERS

     Not Applicable.

9E.  DILUTION

     Not Applicable.


                                       68`

`9F.  EXPENSES OF THE ISSUE

     Not Applicable.

ITEM 10. ADDITIONAL INFORMATION

10A. SHARE CAPITAL

     Not Applicable.

10B. MEMORANDUM AND ARTICLES OF ASSOCIATION

     SECURITIES REGISTERS

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

     BOARD OF DIRECTORS

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

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

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


                                       69`

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

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

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

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

DESCRIPTION OF SECURITIES

     We are authorized to have 6,999,550 Ordinary Shares issued, par value NIS
10 per share.

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

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

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

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


                                       70`

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

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

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

10C. MATERIAL CONTRACTS.

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

     AGREEMENT WITH OUR BANK LENDERS

     On March 2, 2010, we and our subsidiaries, Hi-Tex and Macro (collectively,
the "Companies") signed an agreement with our bank lenders, Bank Leumi L'Israel
Ltd. - 51.3% (b) Bank HaPoalim Ltd. - 23.8%; (c) Israel Discount Bank Ltd. (the
"Agreement"), which among other things, provides for a re-organization of our
and our subsidiaries' credit lines with the banks. Pursuant to the agreement,
during March 2010, we raised an aggregate $4 million through the combination of
a rights offering to our shareholders and a private placement to Ta-Top, Limited
Partnership and Mivtach-Shamir Holdings, Ltd. For information on the private
placement, see " - Private Placement to Norfet's Shareholders".

     LOAN A

     Subject to the signing of documents in the standard form at each bank, the
banks shall provide the Companies with a loan ("Loan A"), in an aggregate
principal amount of $15 million.

     INTEREST - Loan A will bear annual interest at a rate to be agreed upon by
us and our subsidiaries and each of the banks. The interest rate on Loan A is
LIBOR plus 2.85%. The interest on the unpaid balance of the Loan A shall be paid
by the Companies in 40 (forty) consecutive quarterly installments, beginning on
the last day of the third month from the date on which Loan A was provided.

     PRINCIPAL - Loan A is for a period of 120 months, and is repayable in three
equal installments in the amount of $1.25 million each, at the end of each of
the seventh, eighth and ninth years after the date on which Loan A was provided.
The balance of the Loan A principal, in the amount of $11.25 million shall be
repaid at the end of the tenth year after the date the date on which Loan A was
provided (the "Final Principal Payment of Loan A").


                                       71`

`Early Repayment of Loan A - the Companies will make early repayment of the
unpaid balance of Loan A, in whole or in part, in the event of (i) a capital
raising, in which case approximately 50% of the net consideration from the
capital raising would be used for early repayment, (ii) the sale of assets not
in the ordinary course of business, in which event the whole net consideration
from the sale would be used for early repayment, or (iii) cash flow surplus of
the Companies (EBITDA (as defined in the Agreement) minus interest costs and
certain expenses) in a calendar year exceeds $8 million, 50% of the surplus
exceeding $8 million would be used for early repayment.

     LOAN B

     Subject to the signing of documents in the standard form at any bank, the
banks will provide the Companies with an additional loan in an aggregate
principal amount of $5 million.

     INTEREST - Loan B will bear annual interest at a rate to be agreed upon by
us and our subsidiaries and each of the banks. The interest rate on Loan B is
LIBOR plus 2.15%. The interest on the unpaid balance of the Loan B will be paid
by the Companies in 24 (twenty four) consecutive quarterly installments,
beginning on the last day of the third month from the date on which Loan B was
provided.

     PRINCIPAL - Loan B is for a period of 72 months, and is repayable in four
equal installments in the amount of $1.25 million each, at the end of each of
the third, fourth, fifth and sixth years after the date on which Loan B was
provided.

     Loan A and Loan B shall be used solely and exclusively to repay portions of
the Companies' existing debts to each of the banks, divided among the banks
according to the Determining Ratio.

     NEW SHORT-TERM CREDIT LINES (IN ADDITION TO LOANS A AND B)

     Subject to the signing of documents in the standard form at any bank, in
place of the Company's existing credit lines (which will be cancelled) the banks
will make available to the Companies new short-term credit lines (in addition to
Loans A and B) for the Companies' working capital, in an aggregate amount of
$8.95 million (the "New Credit Lines"). The New Credit Lines will be provided
for a period not exceeding one year from the date on which the Agreement was
signed. All the terms of repayment of the New Credit Lines, including the rates
and types of interest on utilized credit in the framework of the New Credit
Lines and the date and method of payment of interest for the utilized credit in
the framework of the New Credit Lines, will be determined between the Companies
and any of the banks separately. The interest on the New Credit Lines is prime
+2.5% for NIS credit, and LIBOR +1.75% for dollar credit.

     INVESTMENT IN TEFRON'S EQUITY

     The Company undertook to complete a rights offering and/or private
placement in which at least $4 million (minus related expenses actually paid to
third parties in an amount not to exceed 6% of the amount raised by the Company
("Permitted Expenses")) was invested in the Company's equity by March 31, 2010
(the "Investment").

     Accordingly, in March 2010, the Company completed a rights offering to its
shareholders and a private placement to Ta-Top, Limited Partnership and Mivtach
Shamir Holdings Ltd., in which the Company raised an aggregate amount of $4
million in proceeds, before deducting Permitted Expenses.

     ADDITIONAL CREDIT LINES

     Subject to the completion of the Investment, the banks will provide the
Companies, at their request, an additional $1.8 million short term credit line
(the "Additional Credit Line"). The Additional Credit Line will be provided for
a period not exceeding one year from the date on which such credit was provided.
All the terms of repayment of the Additional Credit Line, including the rates
and types of interest on utilized credit in the framework of the Additional
Credit Line and the date and method of payment of interest for the utilized
credit in the framework of the Additional Credit Line, will be determined
between the Companies and any of the banks separately.


                                       72`

`In addition, without derogating from the above, it was agreed, at the
request of the Companies, that the banks will provide the Companies with part of
the Additional Credit Line in an amount of up to $1.2 million prior to
completion of the Investment, if FIMI 2001 Ltd. and Mivtach-Shamir (the
"Guarantors"), indirect interested parties in Norfet, would sign letters of
continuing guarantee in favor of the banks for a total amount of $1.2 million,
to secure all the debts and liabilities of the Companies to the banks (the
"Letters of Guarantee"). During March 2010, FIMI 2001 Ltd. and Mivtach-Shamir
signed the Letters of Guarantee, and the banks provided the Companies with a
part of the Additional Credit Line in an amount of $1.2 million. The Letters of
Guarantee expired on March 28, 2010 following the completion of the rights
offering and private placement.

     SECURITIES

     To secure payment of all the credit described above, the banks will use all
of the securities which were created in the past and/or which will be created in
the future in favor of the banks, which include, among other things, a first
fixed lien for an unlimited amount on the share capital and the goodwill of the
Companies, and a first floating lien for an unlimited amount on the Companies'
plants and other assets.

     ADDITIONAL UNDERTAKINGS

     In addition to the securities and commitments in the Agreement, the
Companies undertook, among other things, (a) not to purchase, not to give
financing to, and not to undertake to purchase or give financing for the
purchase of shares of any of the Companies without the prior written consent of
the banks; (b) not to pass any resolutions regarding voluntary liquidation,
change in corporate structure or reorganization, merger, settlement or
arrangement without receiving the prior written consent of the banks; (c) not to
distribute any dividends or pay management fees and/or any other payment to our
shareholders until Loan A and Loan B have been repaid in full; (d) to allot to
the banks for no consideration 100,000 non negotiable and non transferable
warrants, exercisable into 100,000 Ordinary Shares, for an exercise price of
$4.5 per share, during a period of 48 months from the date on which the
Agreement was signed. The Company undertook to allot the warrants not later than
April 15, 2010. As of June 15, 2010, the Company has not yet allotted the
warrants to the banks.

     Financial covenants - the banks provided waivers for the Company's failure
to meet its financial covenants in 2009 only. In addition, the Company undertook
to meet at all times during 2010 all of the following financial covenants and
undertakings:

          (1) the EBITDA of the Company will be positive according to the
     Company's 2010 consolidated financial statements (this financial covenant
     was amended by agreement with the bank lenders on July 11, 2010, requiring
     EBITDA of at least negative $2.1 million);

          (2) according to the quarterly and annually consolidated financial
     statements, (i) the Company's shareholders' equity will not be less than
     $35 million, (ii) the Company's total amount of cash balances, inventories
     and receivables will not be less than $33 million, and (iii) the balance of
     the Company's receivables will not be less than $9 million; and

          (3) the salary of the CEO and Chairman of the Board of Directors of
     the Companies will not exceed the salaries on the date of the Agreement
     plus linkage differences to the consumer price index.

     By November 30, 2010, the Companies and the banks will mutually agree as to
additional financial covenants and undertakings, including regarding
restrictions on salaries of officers in the Companies, which the Companies must
meet beginning on January 1, 2011. Should such agreement not be reached by
November 30, 2011, the Companies must meet the financial covenants in effect
prior to the date on which the Agreement was signed.


                                       73`

`PRIVATE PLACEMENT TO NORFET'S SHAREHOLDERS

     On March 28, 2010, we issued 149,124 Ordinary Shares, at a price per share
of $3.8, to each of Mivtach Shamir Holdings Ltd. (one of the partners in Norfet)
and Ta-Top Limited Partnership (a partnership under the control of FIMI 2001,
Ltd.) in a private placement, resulting in aggregate gross proceeds of
approximately $1.1 million. The private placement was part of a transaction to
raise capital in connection with an agreement with our bank lenders, which
combined both a rights offering to all of our shareholders and a private
placement to Norfet (or whoever acts on its behalf), in which Norfet (or whoever
acts on its behalf) agreed to invest in Tefron the difference between $4 million
and the amount raised in the rights offering. For information on the agreement
with our bank lenders, see " - Agreement with Our Bank Lenders" above.

     DISPOSITION OF INTEREST IN ALBAHEALTH LLC

     MEMBERSHIP INTEREST REDEMPTION AGREEMENT

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

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

     UNSECURED SUBORDINATED PROMISSORY NOTE

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

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

     This Promissory Note was amended and restated, as described below.


                                       74`

`SUBORDINATION AGREEMENT

     Pursuant to a Subordination Agreement we entered into with SunTrust bank,
as administrative agent for the lenders under AlbaHealth's Senior Credit
Facility, we subordinated our claims against AlbaHealth under the Unsecured
Subordinated Promissory Note to the full payment by AlbaHealth to the lenders
under its senior credit agreement; provided so long as no Default or Event of
Default under the senior credit agreement has occurred, we may receive (i)
regularly scheduled payments of interest under the Unsecured Subordinated
Promissory Note and (ii) any payments of principal and interest from AlbaHealth
after August 31, 2009. During 2007, AlbaHealth breached certain non-payment
covenants under its Senior Credit Facility, but the lender under the Facility
delivered a waiver with respect to these breaches.

     AMENDED AND RESTATED UNSECURED SUBORDINATED PROMISSORY NOTE; NEW
SUBORDINATION AGREEMENT

     During 2008, AlbaHealth did not meet its financial obligations under its
Senior Credit Facility, and pursuant to the terms of the Senior Credit Facility,
the lender under the Senior Credit Facility demanded full payment of the loan
and prevented AlbaHealth from making payments to us under our Unsecured
Subordinated Promissory Note. In light of this, on December 31, 2008, AlbaHealth
entered into a new credit facility ("Alternative Credit Facility") with Branch
Banking and Trust Company (the "Senior Lender") in order to refinance the Senior
Credit Facility. Simultaneously, we entered into an Amended and Restated
Unsecured Subordinated Promissory Note (the "Amended Note") with AlbaHealth and
a Subordination Agreement with the Senior Lender, subordinating our claims
against AlbaHealth under the Amended Note to the full payment by AlbaHealth to
the Senior Lender under the Alternative Credit Facility; provided that so long
as no Event of Default under the Alternative Credit Facility has occurred and is
continuing, we may receive (i) regularly scheduled payments of interest under
the Amended Note and (ii) regularly scheduled payments of principal and interest
under the Amended Note after August 31, 2009.

     Pursuant to the Amended Note, accrued and unpaid interest for the period
April 1, 2008 through September 30, 2009 was paid beginning July 2009 and until
October 2009. Beginning on October 1, 2009 (i) accrued interest was due and
payable in consecutive quarterly installments until the Amended Note would be
paid in full; and (ii) the principal balance under the Amended Note was due and
payable in ten consecutive quarterly installments of $300,000 until the Amended
Note would be paid in full, with the final payment due on January 1, 2012. Prior
to July 1, 2009, interest accrued on the outstanding balance at LIBOR plus 5%;
on and after July 1, 2009, interest is to accrued on the outstanding balance at
LIBOR plus 3%.

     On September 24, 2009, we signed an agreement with AlbaHealth for the early
repayment by AlbaHealth of the Amended Note. Pursuant to the agreement,
AlbaHealth paid us $1,715,000 in settlement of AlbaHealth's payment obligations
under the Amended Note, including accrued and unpaid interest due to us. As a
result of the early repayment, we recorded a $1,285,000 capital loss in our
financial statements for the year ended December 31, 2009. The total
consideration that we received for the redemption of our membership interest in
AlbaHealth was approximately $11.75 million.

NORFET AGREEMENTS

     All share and per share information in this Annual Report has been adjusted
to give retroactive effect to a ten-for-one reverse split of our ordinary shares
that became effective on January 22, 2009.

     We entered into a Share Purchase Agreement, or the Tefron Agreement, dated
February 17, 2004, with Norfet, Limited Partnership, or the Investor,
substantially all of the interests of which are owned by (i) N.D.M.S. Ltd., a
company wholly owned by FIMI Opportunity Fund, L.P., (ii) FIMI Israel
Opportunity Fund, Limited Partnership, (iii) Migdal Insurance Company, and (iv)
Shamir Insurers Investment Company and (v) the provident funds of First
International Bank of Israel, pursuant to which we issued to the Investor
352,941 Tefron Ordinary Shares for a base price of $42.5 per share and a base
aggregate consideration of $15.0 million. Due to purchase price adjustment
provisions in the Tefron Agreement, Tefron issued to Norfet an additional 66,176
Ordinary Shares in April 2005.


                                       75`

`Under the Tefron Agreement, we recorded annual management fees to Norfet in
the amount of $120,000. Beginning December 1, 2008, the management fees were
reduced by 15% until the end of 2009. However, we have not actually paid Norfet
any management fees since April 2008, and such unpaid fees amounted to $190,000,
as of December 31, 2009. On March 2, 2010 we signed an agreement with our bank
lenders which, among other things, included our undertaking not to distribute
any dividends or pay management fees and/or any other payment to our
shareholders until the loans provided by our bank lenders have been repaid in
full. Norfet, our major shareholder, consented to the inclusion of this
provision in the agreement with our bank lenders, and accordingly, Norfet has
effectively waived the management fees owed to it, as of the date on which the
loans were granted to the Company and until the date on which all the loans are
repaid in full. For information regarding the terms of the loans, see "Agreement
with Our Bank Lenders" above. On April 7, 2010 Norfet notified us that it waives
the $190,000 unpaid management fees that were then due to Norfet.

     In connection with the Tefron Agreement, the Investor also acquired an
additional 136,500 Tefron Ordinary Shares in the aggregate from Arwol and
Macpell pursuant to an Agreement, or the Macpell Agreement, by and among
Macpell, Arwol and the Investor. Following the closing of the Tefron Agreement
and the Macpell Agreement, the Investor held 489,441, or approximately 30.7% of
the outstanding share capital of Tefron, without taking into account the Equity
Shares. Due to purchase price adjustment provisions in the Macpell Agreement,
Arwol transferred 10,690 additional Ordinary Shares to Norfet in April 2005.

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

     The Tefron Agreement, the Registration Rights Agreement, and all
transactions contemplated by such agreements to which Tefron is a party are
collectively referred to as the "Norfet Agreements".

     Below is a description of the principal terms of Tefron Agreement and
Registration Rights Agreement.

     TEFRON AGREEMENT

     ISSUE PRICE ADJUSTMENT. Under the terms of the Tefron Agreement, in the
event Tefron's earnings before income tax, depreciation and amortization, or
EBITDA, for 2004 (excluding (i) the EBITDA of AlbaHealth to the extent that it
exceeds zero and (ii) any increase in EBITDA of Alba Waldensian, Inc. as a
result of the exercise of the put option by AlbaHealth described below) as set
forth in Tefron's audited consolidated financial statements for the year ending
on December 31, 2004 is less than $23 million, then the price per share of $42.5
will be adjusted as follows: (i) if Tefron's EBITDA for 2004 was equal to or
less than $16 million, then the share price per share was to be reduced
retroactively by $7.5 (to $35.0), and if the Company's EBITDA for 2004 is higher
than $16 million but lower than $23 million, then the share price reduction was
to be calculated in accordance with the following formula:

          Price Per Share = 42.5 - 7.5*[x]

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

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

     Tefron's EBITDA for 2004 was $11.809 million and pursuant to an amendment
to the Tefron Agreement signed on March 31, 2005 Tefron issued to Norfet an
additional 66,176 Ordinary Shares, instead of the adjustment mechanism provided
for in the Tefron Agreement.


                                       76`

`Under the terms of the Tefron Agreement, the issue price per share will be
increased in the event that, during the three-year period following the closing
of the Tefron Agreement and the Macpell Agreement, the Investor sells at least
20% of the total number of shares purchased on April 22, 2004 from Tefron and
Macpell and Arwol for cash or publicly traded securities (excluding publicly
traded securities in connection with a merger or reorganization of Tefron), at
an average price of at least $92.2 per share (after adjustments for dividends,
share combinations and splits). The amount of the increase will be equal to the
difference between the average sale price and the threshold of $92.2 (as so
adjusted), provided that in any event, an upwards adjustment will be no more
than $7.5 per each share. The amount of any increase is to be paid by the
Investor to Tefron on the third anniversary of the closing of the Tefron
Agreement and the Macpell Agreement. After thoroughly reviewing the facts
related to the sale of shares by Norfet during the three years following the
closing of the Tefron Agreement, we concluded that we are not entitled to an
adjustment payment from Norfet under the terms described above.

     The adjustment mechanism described in the immediately preceding paragraph
will also apply in respect of the four-year period following the closing of the
Tefron Agreement and the Macpell Agreement, but in such event, the Investor
average sale price must exceed $116.0 per share (rather than $92.2 per share)
for the adjustment to apply.

     REGISTRATION RIGHTS AGREEMENT

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

     The Registration Rights Agreement was substantially the same as the
Registration Rights Agreement approved by the shareholders of Tefron and entered
into by Company, Arwol and Macpell in November 2003, other than (i) the
insertion of a new provision granting to the Investor, Arwol and Macpell the
right, once every 18 months, to request a registration on Form F-3 (short form
registration statement) when the aggregate net proceeds from the sale of such
holders' securities is at least $3.0 million, in which event Tefron would be
obligated keep such registration statement effective so as to permit sale of
Ordinary Shares pursuant to the Registration Statement for a period of two
years, subject to certain limitations, and (ii) the amendment of an existing
provision granting to the Investor, Arwol and Macpell the right to request a
registration even though Tefron is not eligible to use Form F-3 (short form
registration statement), in which event Tefron would be obligated to keep such
registration statement effective so as to permit sale of Ordinary Shares
pursuant to the Registration Statement for a period of 120 days, subject to
certain limitations.

     In connection with the execution of the Share Purchase Agreement, in March
2004, with Leber Partners, L.P., which purchased approximately 107,000 Ordinary
Shares of Tefron, we agreed to enter into a Registration Rights Agreement with
Leber Partners, the Investor under the Tefron Agreement, Arwol and Macpell. This
Registration Rights Agreement replaced, and is on substantially the same terms
as, the Registration Rights Agreement that we agreed to execute in connection
with the Tefron Agreement, other than as provided below. In addition to the
rights to be granted to all of the shareholders that are to be party to the
Registration Rights Agreement, Leber Partners would have the right to request a
registration (even though we would not be eligible to use a short form
registration) of all, but not less than all, of the Ordinary Shares then held by
Leber Partners, but in any event not less than 500,000 Ordinary Shares. The
other shareholders have the right to request registration if holders of at least
25% of the aggregate number of Ordinary Shares subject to the agreement at such
time request to register a minimum of 5% of the share capital of Tefron then
outstanding, but not less than 50,000 Ordinary Shares. Leber Partners also has
the right to request a registration of all, but not less than all, of the
Ordinary Shares then held by it, but in any event not less than 50,000 Ordinary
Shares. If Macpell, Arwol and Norfet (collectively, the "Principal Holders")
intend to distribute the Ordinary Shares by means of an underwriting, the
underwriter will be selected by the Company and be reasonably acceptable to
Principal Holders holding a majority of the Ordinary Shares to be registered.
Under certain conditions, the Company may defer registering such Ordinary Shares
for a period not exceeding 180 days. In addition, the Company would have no
obligation to register these shares pursuant to requests once it has effected
three effective registrations pursuant to requests of Principal Holders.


                                       77`

`The Principal Holders also have the right, once every 18 months, to request
a registration on Form F-3 (short form registration statement) when the
aggregate net proceeds from the sale of such holders' securities are at least
$3.0 million. In addition, the Principal Holders also have certain rights to
register their Ordinary Shares for sale at the time the Company registers for
its own account any of its securities in connection with a public offering for
cash (called "piggyback registration").

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

     Leber Partners, the Investor, Arwol and Macpell exercised their rights
under the Registration Rights Agreement, and asked for the registration of all
their shares by the Company. Accordingly, on November 29, 2005, the Securities
and Exchange Commission declared effective a Registration Statement on Form F-3
covering the resale of Ordinary Shares held by Leber Partners, the Investor,
Arwol and Macpell.

10D. EXCHANGE CONTROLS

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

10E. TAXATION

TAXATION OF SHAREHOLDERS

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

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


                                       78`

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

     o a citizen or resident of the United States;

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

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

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

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

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

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

     1. CAPITAL GAINS

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

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


                                       79`

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

     The real capital gain derived by a corporation generally will be subject to
tax at the corporate tax rate of 25% in 2010, and at the reduced capital gains
tax rate of 25% in 2009. Real capital gain derived from the sale of securities
(as defined in Section 6 of the Inflationary Adjustment Law) by a corporation
that had been subject on August 10, 2005 to the provisions of Section 6 of the
Inflationary Adjustment Law, will be taxed at the corporate tax rate (26% in
2009 and 25% in 2010). The capital gain accrued by individuals on the sale of an
asset purchased on or after January 1, 2003 will be taxed at the rate of 20%.
However, if the individual shareholder is a "Significant Shareholder" (i.e., a
person who holds, directly or indirectly, alone or together with another, 10% or
more of one of the Israeli resident company's means of control) at the time of
sale or at any time during the preceding 12 month period, such gain will be
taxed at the rate of 25%. In addition, until certain regulations will be
enacted, the capital gain derived by an individual claiming deduction of
financing expenses in respect of such gain will be taxed at the rate of 25%.

     The capital gain accrued on the sale of an asset purchased prior to January
1, 2003 will be generally subject to tax at a blended rate. The marginal tax
rate for individuals (up to 46% in 2009 and up to 45% in 2010) and the regular
corporate tax rate for corporations (26% in 2009 and 25% in 2010) will be
applied to the portion of the gain amount which bears the same ratio to the
total gain realized as the ratio which the holding period commencing at the
acquisition date and terminating on January 1, 2003 bears to the total holding
period. The remainder of the gain realized will be subject to capital gains tax
at the rates applicable to an asset purchased after January 1, 2003 (see
aforementioned).

     Individual and corporate shareholders dealing in securities in Israel are
taxed at the tax rates applicable to business income (tax rate of up to 26% in
2009 and 25% in 2010 for a corporation and a marginal tax rate of up to 45% in
2009 and up to 39% in 2016 for an individual). Notwithstanding the foregoing, if
the shareholder is a non-Israeli resident, then such taxation is subject to the
provision of any applicable double tax treaty. Moreover, capital gain derived
from the sale of the shares of an Israeli resident company publicly traded on a
recognized stock exchange by a non-Israeli shareholder may be exempt under the
Israeli Income Tax Ordinance from Israeli taxation provided the following
cumulative conditions are met: (i) the securities were purchased upon or after
the registration of the securities on the stock exchange (ii) the seller does
not have a permanent establishment in Israel to which the derived capital gain
is attributed, and (iii) if the seller is a corporation, less than 25% of its
means of control are held, directly or indirectly, by Israeli resident
shareholders. In addition, the sale of the shares may be exempt from Israeli
capital gain tax under the provisions of an applicable double tax treaty. Thus,
the U.S.-Israel Double Tax Treaty exempts U.S. resident from Israeli capital
gain tax in connection with such sale, provided (i) the U.S. resident owned
directly or indirectly, less than 10% of an Israeli resident company's voting
power at any time within the 12-month period preceding such sale; and (ii) the
seller, being an individual, is present in Israel for a period or periods of
less than 183 days at the taxable year; and (iii) the capital gain generated
from the sale of the shares is not attributed to a permanent establishment
maintained by the U.S. resident in Israel.

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

     Upon the sale of traded securities, a detailed return, including a
computation of the tax due, should be filed and an advanced payment should be
paid on January 31 and June 30 of every tax year in respect of sales of
securities made within the previous six months. However, if all tax due was
withheld at source according to applicable provisions of the Israeli Income Tax
Ordinance and regulations promulgated thereunder, the aforementioned return
should not be filed and no advance payment should be paid. Capital gain is also
reportable on the annual income tax return.


                                       80`

`2. DISTRIBUTIONS

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

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

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

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

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


                                       81`

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

     3. PASSIVE FOREIGN INVESTMENT COMPANY ("PFIC") RULES

     Based on current projections concerning the composition of Tefron's income
and assets, Tefron does not believe that it will be treated as a PFIC for its
current or future taxable years. However, because this conclusion is based on
our current projections and expectations as to future business activity, Tefron
can provide no assurance that it will not be treated as a PFIC in respect of its
current or any future taxable years. We urge you to consult your own tax
advisors regarding possible application of the PFIC rules to your ownership and
disposition of Ordinary Shares.

     4. U.S. BACKUP WITHHOLDING AND INFORMATION REPORTING

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

     U.S. backup withholding is not an additional tax. Any amounts withheld
under the backup withholding rules will be allowed as a credit against the U.S.
Holder's U.S. federal income tax liability and may entitle such U.S. Holder to a
refund, by timely filing the appropriate claim for refund with the Internal
Revenue Service and furnishing any required information.

10F. DIVIDENDS AND PAYMENT AGENTS

     Not Applicable.

10G. STATEMENTS BY EXPERTS

     Not Applicable.

10H. DOCUMENTS ON DISPLAY

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


                                       82`

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

10I. SUBSIDIARY INFORMATION

     Not Applicable.

ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

FOREIGN CURRENCY RISK

     Our operating expenses are influenced by changes in the exchange rates
between the dollar and foreign currencies, especially the NIS. Our operational
expenses increase when the dollar is devalued against such currencies. At
December 31, 2009, our liabilities denominated in foreign currencies in the
amount of $19.9 million represented 38.1% of our total liabilities of $52.2
million. At December 31, 2009, our assets denominated in foreign currencies in
the amount of $6.2 million represented 6.2% of our total assets of $99.2
million. In 2009, the average amount of our net liabilities denominated in NIS
was approximately $14.7 million. Based on such amount, a depreciation of the
dollar in relation to NIS in the amount of 10% would cause us to incur annual
expenses in the amount of approximately $1.5 million. Due to the devaluation of
the NIS vis-a-vis the dollar in 2009, we generated gross income of approximately
$3.6 million Dollar and due to the appreciation of the NIS vis-a-vis the dollar
in 2008, we incurred gross expenses of approximately $0.2 million in 2008. This
amount does not take into account hedging transactions performed by the Company
during 2008 and 2009, which diminished the adverse effect of the appreciation of
the NIS in relation to the dollar. Although during 2009 the U.S. dollar
appreciated vis-a-vis the NIS, the NIS may appreciate vis-a-vis the U.S. dollar
again in the future.

     Additionally, a portion of our sales is denominated in Euros. The dollar
value of these sales decreases when the Euro depreciates against the dollar. We
may from time to time utilize derivative financial instruments to manage risk
exposure to fluctuations in foreign exchange rates. Accordingly, in 2009 and
2008, forward exchange contracts were designated as hedging instrument. We do
not engage in any speculative or profit motivated forward or derivatives
activities. See "Item 3. Key Information - 3D. Risk Factors" and "Item 5.
Operating and Financial Review and Prospects - Impact of Inflation and Currency
Fluctuations".

     Most of our sales are denominated in U.S. dollars, and we incur most of our
expenses in U.S. dollars and in NIS. According to the salient economic factors
indicated in IAS 21, "The Effects of Changes in Foreign Exchange Rates," our
cash flow, sale price, sales market, expense, financing and intercompany
transactions and arrangement indicators are predominately denominated in U.S.
dollars. In addition, the U.S. dollar is the primary currency of the economic
environment in which we operate, and thus the U.S. dollar is our functional and
reporting currency.

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

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


                                       83`

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

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

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

     Under the agreement with our bank lenders described in "Item 10. Additional
Information - C. Material Contracts - Agreement with Our Bank Lenders" above,
and the memorandum of understanding that we signed with our bank lenders on
January 6, 2010, we closed all our open positions for forward transactions.
However, we may use our existing credit lines in order to carry out forward
transactions. As of June 15, 2010, opening any hedging positions is subject to
approval of our bank lenders.

INTEREST RATE RISK

     Of our dollar-denominated financial liabilities at December 31, 2009, $25.5
million were loans denominated in dollar bearing interest at LIBOR. As a result,
our interest expenses are sensitive to changes in LIBOR.

     Our dollar-denominated financial liabilities bear interest at 1.0% to 2.85%
over LIBOR. A hypothetical one percent shift in interest rates would result in a
decrease (or increase) in net income of approximately $43,000. In March 2010, we
signed an agreement with our bank lenders, which, among other things,
reorganized our bank credit arrangements, as described in "Item 10. Additional
Information - C. Material Contracts - Agreement with Our Bank Lenders" above.
Under the agreement with our bank lenders, we received credit lines of up to
$30.75 million. The restructuring of debt vis-a-vis the banks includes a split
of the debt into a loan of $5 million for a period of six years, and a loan of
$15 million for a period of ten years. Additionally the annual interest rate on
the long term loans was increased to three-month LIBOR plus 2.15% to 2.85%.

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

     Not Applicable.

                                     PART II

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

     None.

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

14A.TO E. Not Applicable.


                                       84`

`ITEM 15T. CONTROLS AND PROCEDURES

     (a) DISCLOSURE CONTROLS AND PROCEDURES. As of the end of the period covered
by this report, we performed an evaluation of the effectiveness of our
disclosure controls and procedures that are designed to ensure that the
information required to be disclosed in the reports that it files or submits
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by an
issuer in the reports that it files or submits under the Securities Act of 1933,
as amended, is accumulated and communicated to our management, including our
principal executive and principal financial officers, or persons performing
similar functions, as appropriate to allow timely decisions regarding required
disclosure. There can be no assurance that our disclosure controls and
procedures will detect or uncover all failures of persons within Tefron to
disclose information otherwise required to be set forth in our reports.
Nevertheless, our disclosure controls and procedures are designed to provide
reasonable assurance of achieving the desired control objectives. Based on our
evaluation, our management, including our Chief Executive Officer and Chief
Financial Officer, have concluded that our disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15(d) - 15(e) of the Securities Exchange Act
of 1934, as amended) as of the end of the period covered by this report are
effective.

     (b) MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL
REPORTING. Our management, under the supervision of our Chief Executive Officer
and Chief Financial Officer, is responsible for establishing and maintaining
adequate internal control over our financial reporting, as defined in Rules
13a-15(f) and 15d-15(f) of the Exchange Act of 1934, as amended. The Company's
internal control over financial reporting is designed to provide reasonable
assurance to the Company's management and Board of Directors regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles. Internal control over financial reporting includes policies and
procedures that:

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

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

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

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

     Due to its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. In addition, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.

     Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
conducted an evaluation of the effectiveness of our internal control over
financial reporting as of December 31, 2009 based on the framework for Internal
Control-Integrated Framework set forth by The Committee of Sponsoring
Organizations of the Treadway Commission. Based on our assessment, our
management concluded that the Company's internal control over financial
reporting were effective as of December 31, 2009.

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


                                       85`

`(c) CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING. There were no
changes in our internal control over financial reporting that occurred during
the year ended December 31, 2009 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.

ITEM 16.  [RESERVED]

16A. AUDIT COMMITTEE FINANCIAL EXPERT

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

16B. CODE OF ETHICS

     We have adopted a code of ethics that applies to our Chief Executive
Officer, Chief Financial Officer, Corporate Controller Managers and employees in
the course of their work for the Company and its subsidiaries. This code of
ethics is posted on our website, WWW.TEFRON.COM , and may be found as follows:

     1.   From our main web page, first click on the "Investor Relations" can be
          found on the right side of the bar menu.

     2.   Next, click on "company information", can be found on the left side of
          the sub bar menu.

     3.   Next, click on "code of business ethics".

16C. ACCOUNTANTS' FEES AND SERVICES

     The following table presents the aggregate fees for professional services
and other services rendered by Kost, Forer Gabbay & Kasierer in Israel, a member
of Ernst & Young Global to Tefron in 2009 and 2008.

                                US$ 2009        US$ 2008
                                --------        --------

Audit Fees                      $300,000        $234,000
Audit-related Fees              $ 32,000        $ 15,000
Tax Fees                        $ 15,000        $ 15,000
All Other Fees                         -               -
TOTAL                           $347,000        $264,000

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

     Audit-related Fees consist of fees billed for assurance and related
services that are reasonably related to the performance of the audit or review
of our financial statements or that are traditionally performed by the external
auditor, and include consultations concerning financial accounting and reporting
standards.


                                       86`

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

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

AUDIT COMMITTEE PRE-APPROVAL POLICIES AND PROCEDURES

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

     During 2009, none of Audit-Related Fees, Tax Fees or Other Fees provided to
us by Kost, Forer Gabbay & Kasierer in Israel or by Ernst & Young or McGladrey &
Pullen, LLP in the United States were approved by the Audit Committee pursuant
to the de minimis exception to the pre-approval requirement provided by
paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.

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

     None.

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

     None.

16F. CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT.

     Not applicable.

16G. CORPORATE GOVERNANCE.

     Not applicable.

                                    PART III

ITEM 17. FINANCIAL STATEMENTS

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


                                       87`

`ITEM 18. FINANCIAL STATEMENTS

     Our Consolidated Financial Statements beginning on pages F-1 through F-70
as set forth in the following index, are hereby incorporated herein by
reference. These Consolidated Financial Statements are filed as part of this
Annual Report.

     INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
     ------------------------------------------

                                                                         PAGE
                                                                         ----

     Index to Consolidated Financial Statements                          F-1
     Reports of Independent Registered Public Accounting Firm            F-2
     Consolidated Balance Sheets                                         F-3
     Consolidated Statements of income                                   F-4
     Consolidated Statements of Comprehensive income                     F-5
     Consolidated Statements of changes in Equity                        F-6
     Consolidated Statements of Cash Flows                               F-7-F-8
     Notes to the Consolidated Financial Statements                      F-9-F-69
     Appendix to Consolidated Financial statements-List of Subsidiaries  F-70


                                       88`

`ITEM 19. EXHIBITS

1.1. Amended and Restated Memorandum of Association of the Company (incorporated
     by reference to Exhibit 1.1 to the Company's Annual Report on Form 20-F for
     the fiscal year ended December 31, 2008).

1.2. Amended and Restated Articles of Association of the Company (incorporated
     by reference to Annex A to the Registrant's Report on Form 6-K, dated
     January 20, 2009).

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

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

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

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

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

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

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

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

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

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


                                       89`

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

2.12 Letter, dated March 24, 2009, from Bank Hapoalim to the Company regarding
     covenant waiver (incorporated by reference to Exhibit 2.12 to the Company's
     Annual Report on Form 20-F for the fiscal year ended December 31, 2008).

2.13 Letter, dated March 25, 2009, from Israel Discount Bank to the Company
     regarding covenant waiver (incorporated by reference to Exhibit 2.13 to the
     Company's Annual Report on Form 20-F for the fiscal year ended December 31,
     2008).

2.14 Letter, dated March 31, 2009, from Bank Leumi to the Company regarding
     covenant waiver (incorporated by reference to Exhibit 2.14 to the Company's
     Annual Report on Form 20-F for the fiscal year ended December 31, 2008).

4.1  Membership Interest Redemption Agreement, dated April 26, 2006, by and
     between AlbaHealth, LLC and Tefron USA, Inc. (incorporated by reference to
     Exhibit 4.6 to the Company's Annual Report on Form 20-F for the fiscal year
     ended December 31, 2006).

4.5  Subordination Agreement, dated April 26, 2006, by Tefron USA, Inc. in favor
     of Suntrust Bank, in its capacity as administrative agent for the lenders
     from time to time party to the Senior Credit Agreement (incorporated by
     reference to Exhibit 4.7 to the Company's Annual Report on Form 20-F for
     the fiscal year ended December 31, 2006).

4.6  Subordination Agreement, dated December 31, 2008, by Tefron USA, Inc. in
     favor of Branch Banking and Trust Company (incorporated by reference to
     Exhibit 4.6 to the Company's Annual Report on Form 20-F for the fiscal year
     ended December 31, 2008).

4.7  Amended and Restated Unsecured Subordinated Promissory Note in the
     principal amount of US $3 million, dated December 31, 2008, by AlbaHealth
     LLC. in favor of Tefron USA, Inc. (incorporated by reference to Exhibit 4.7
     to the Company's Annual Report on Form 20-F for the fiscal year ended
     December 31, 2008).

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

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

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

4.11 Agreement, dated March 2, 2010, among Tefron Ltd., Hi-Tex Founded by Tefron
     Ltd., Macro Clothing Ltd., Bank Leumi L'Israel Ltd., Bank HaPoalim Ltd. and
     Israel Discount Bank Ltd. (incorporated by reference to Exhibit 10.1 to the
     Company's Amendment No. 4 to its Registration Statement on Form F-1 (No.
     333-161466) filed on March 10, 2010).

4.12 Letter, dated July 11, 2010, from Bank Hapoalim to the Company regarding
     covenant waiver.


                                       90`

`4.13 Letter, dated July 11, 2010, from Israel Discount Bank to the Company
     regarding covenant waiver.

4.14 Letter, dated July 11, 2010, from Bank Leumi to the Company regarding
     covenant waiver.

4.15 Subscription Agreement, dated March 2010, between Tefron Ltd. and TA-TOP,
     Limited Partnership and Mivtach Shamir Holdings Ltd.

8.1  List of subsidiaries of the Company.

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

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

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

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


                                       91`

`TEFRON LTD. AND ITS SUBSIDIARIES

                        CONSOLIDATED FINANCIAL STATEMENTS
                             AS OF DECEMBER 31, 2009

                            U.S. dollars in thousands`

`TEFRON LTD. AND ITS SUBSIDIARIES

            CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009
                            U.S. DOLLARS IN THOUSANDS

                                      INDEX

                                                                        PAGE

Report of Independent Registered Public Accounting Firm                  F-2

Consolidated Balance Sheets                                              F-3

Consolidated Statements of Income                                        F-4

Consolidated Statements of Comprehensive Income                          F-5

Consolidated Statements of Changes in Equity                             F-6

Consolidated Statements of Cash Flows                                 F-7 - F-8

Notes to Consolidated Financial Statements                            F-9 - F-69

Appendix to Consolidated Financial Statements -
List of subsidiaries                                                     F-70


                                     F - 1`

| |                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------
| | Kost Forer Gabbay & Kasierer2 Pal-Yam Ave.
Haifa 33095, Israel
Tel: 972 (4)8654000
Fax: 972(3) 5633439
www.ey.com.il

`REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
                  TO BOARD OF DIRECTORS AND THE SHAREHOLDERS OF
                                   TEFRON LTD.

     We have audited the accompanying consolidated balance sheets of Tefron Ltd.
and its subsidiaries ("the Company") as of December 31, 2009 and 2008 and the
related consolidated statements of income, comprehensive income, changes in
equity, and cash flows for each of the years ended December 31, 2009, 2008 and
2007. These financial statements are the responsibility of the Company's board
of directors and management. Our responsibility is to express an opinion on
these financial statements based on our audits.

     We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. 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
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

     In our opinion, the 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, 2009 and 2008, and the results of their
operations and cash flows for each of the years ended
December 31, 2009, 2008 and 2007, in conformity with International Financial
Reporting Standards ("IFRS") as issued by the International Accounting Standards
Board ("IASB").

                                             /s/ Kost Forer Gabay & Kasierer
                                             -----------------------------------
                                                Kost Forer Gabay & Kasierer
                                           A member firm of Ernst & Young Global

Haifa,
July 13, 2010


                                     F - 2`

`Tefron Ltd.

Consolidated Balance Sheets
--------------------------------------------------------------------------------

                                                                                          AS OF DECEMBER 31,
                                                                                    ------------------------------
                                                                                       2009               2008
                                                                                    ------------      ------------
 ASSETS                                                                NOTE               $ IN THOUSANDS
                                                                     --------       ------------------------------

 CURRENT ASSETS

 Cash and cash equivalents                                                          $      1,904      $      1,566
 Short-term investments                                                                      737               847
 Trade receivables, net                                                  4                14,597            23,446
 Other current assets                                                    5                 2,892             4,558
 Inventories                                                             6                19,778            32,125
                                                                                    ------------      ------------
                                                                                          39,908            62,542
                                                                                    ------------      ------------

 NON-CURRENT ASSETS

 Subordinated note receivable                                            9                     -             2,700
 Deferred taxes, net                                                    16                 1,409                 -
 Property, plant and equipment, net                                      7                56,920            64,469
 Goodwill and other intangible assets, net                               8                   960             2,021
                                                                                    ------------      ------------

                                                                                          59,289            69,190
                                                                                    ------------      ------------
                                                                                    $     99,197      $    131,732
                                                                                    ============      ============
 LIABILITIES AND EQUITY

 CURRENT LIABILITIES

 Short-term loans (including current portion of long term - loans)    10,13         $     25,847      $     24,809
 Trade payables                                                         11                15,042            25,167
 Other current liabilities                                              12                 5,666             7,636
                                                                                    ------------      ------------
                                                                                          46,555            57,612
                                                                                    ------------      ------------

 NON-CURRENT LIABILITIES

 Employee benefits, net                                                 15                   729             2,169
 Deferred taxes, net                                                    16                 3,080             6,897
 Other non-current liabilities                                          12                 1,838             1,309
                                                                                    ------------      ------------
                                                                                           5,647            10,375
                                                                                    ------------      ------------

 EQUITY ATTRIBUTABLE TO OWNERS OF THE
   PARENT                                                               18

 Share capital                                                                             7,518             7,518
 Additional paid-in capital                                                              107,522           107,104
 Accumulated deficit                                                                     (60,666)          (43,739)
 Treasury shares                                                                          (7,408)           (7,408)
 Other capital reserves                                                                       29                23
                                                                                    ------------      ------------

                                                                                          46,995            63,498
 Employee stock options in a subsidiary                                                        -               247
                                                                                    ------------      ------------

 TOTAL                                                                                    46,995            63,745
                                                                                    ------------      ------------

                                                                                    $     99,197      $    131,732
                                                                                    ============      ============

THE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART THEREOF.


                                     F - 3`

`Tefron Ltd.

Consolidated Statements of Income
--------------------------------------------------------------------------------

                                                                                    YEAR ENDED DECEMBER 31,
                                                                          ------------------------------------------
                                                                             2009            2008            2007
                                                                          ----------      ----------      ----------
                                                                                        $ IN THOUSANDS
                                                               NOTE               (EXCEPT FOR PER SHARE DATA)
                                                             --------     ------------------------------------------

 Sales                                                                    $  115,538      $  173,829      $  158,614
 Cost of sales, net                                            20a           119,339         167,557         139,145
                                                                          ----------      ----------      ----------

 Gross profit (loss)                                                          (3,801)          6,272          19,469

 Selling and marketing expenses                                20b            13,842          16,959          12,443
 General and administrative expenses                           20c             3,779           6,406           5,190
 Other expenses (income)                                       20d              (496)          2,135               -
                                                                          ----------      ----------      ----------

 Operating income (loss)                                                     (20,926)        (19,228)          1,836

Loss from early repayment of subordinated note
  receivable                                                                   1,285               -               -
 Financial income                                              20e            (1,747)           (319)         (1,401)
 Financial expenses                                            20e             2,259           3,347           2,690
                                                                          ----------      ----------      ----------

 Income (loss) before income taxes                                           (22,723)        (22,256)            547
 Tax benefit                                                   16              5,330           4,677              35
                                                                          ----------      ----------      ----------

 Net income (loss)                                                        $  (17,393)     $  (17,579)     $      582
                                                                          ==========      ==========      ==========

 NET EARNINGS (LOSS) PER SHARE ATTRIBUTABLE TO OWNERS OF
 THE PARENT                                                    21

 Basic and diluted (loss) earnings per share                              $     (8.2)     $     (8.3)     $      0.2
                                                                          ==========      ==========      ==========

THE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART THEREOF.


                                     F - 4`

`Tefron Ltd.

Consolidated Statements of Comprehensive Income
--------------------------------------------------------------------------------

                                                                            YEAR ENDED DECEMBER 31,
                                                                  ------------------------------------------
                                                                     2009            2008            2007
                                                                  ----------      ----------      ----------
                                                                                $ IN THOUSANDS
                                                                  ------------------------------------------

Net income (loss)                                                 $  (17,393)     $  (17,579)     $      582
                                                                  ----------      ----------      ----------

Other comprehensive income (loss) (net of tax effect) *):

Realized gain on cash flow hedges, net                                   (23)           (445)            (52)
Realized loss (gain) on available-for-sale securities                      -              77              (3)
Unrealized gain from cash flow hedges, net                               115              23             445
Unrealized loss on available for sale securities                         (86)              -             (77)
Actuarial gain (loss) on defined-benefit plans, net                      466            (198)              -
                                                                  ----------      ----------      ----------

Other comprehensive income (loss)                                        472            (543)            313
                                                                  ----------      ----------      ----------

TOTAL COMPREHENSIVE INCOME (LOSS)                                    (16,921)        (18,122)            895
                                                                  ==========      ==========      ==========

Total comprehensive income (loss) attributed to owners of the
  parent                                                          $  (16,921)     $  (18,122)     $      895
                                                                  ==========      ==========      ==========

*) See note 16e.

THE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART THEREOF.


                                     F - 5`

`Tefron Ltd.

Consolidated Statements of changes in Equity
--------------------------------------------------------------------------------

                                                 ATTRIBUTE TO EQUITY HOLDERS OF THE PARENT
                                -----------------------------------------------------------------------------------------
                                                                                      CAPITAL
                                                                                     RESERVE FOR     CAPITAL
                                                                                      AVAILABLE      RESERVE                     SHARE
                                             ADDITIONAL    RETAINED                   FOR SALE      FOR CASH                  OPTIONS IN
                                  SHARE       PAID IN     EARNINGS      TREASURY      FINANCIAL       FLOW                    CONSOLIDATED      TOTAL
                                 CAPITAL      CAPITAL     (DEFICIT)      SHARES        ASSETS        HEDGES        TOTAL        COMPANY        EQUITY
                                --------     --------     --------      --------      --------      --------      --------      --------      --------
                                                                                   $ IN THOUSANDS
                                ----------------------------------------------------------------------------------------------------------------------

 Balance as of January 1,
   2007                         $  7,411     $102,100     $(18,544)     $ (7,408)     $      3      $     52      $ 83,614      $      -      $ 83,614

 Total comprehensive income
   (loss)                              -            -          582             -           (80)          393           895             -           895

 Share-based payment to
   employees                           -          489            -             -                           -           489             -           489
 Exercise of stock options
   related to employees and
   directors                           5           87            -             -                           -            92             -            92
Exercise of tradable
options issued at the
secondary offering                   102        4,188            -             -                           -         4,290             -         4,290
                                --------     --------     --------      --------      --------      --------      --------      --------      --------

 Balance as of December 31,
   2007                         $  7,518     $106,864     $(17,962)     $ (7,408)     $    (77)     $    445      $ 89,380      $      -      $ 89,380
                                --------     --------     --------      --------      --------      --------      --------      --------      --------

 Balance as of January 1,
   2008                         $  7,518     $106,864     $(17,962)     $ (7,408)     $    (77)     $    445      $ 89,380      $      -      $ 89,380

 Total comprehensive income
   (loss)                              -            -      (17,777)            -            77          (422)      (18,122)            -       (18,122)

 Share-based payments to
   employees                           -          240            -             -             -             -           240             -           240
 Share-based payment in
   consolidated company                -            -            -             -             -             -             -           247           247
 Dividend                              -            -       (8,000)            -             -             -        (8,000)                     (8,000)
                                --------     --------     --------      --------      --------      --------      --------      --------      --------

 Balance as of December 31,
   2008                         $  7,518     $107,104     $(43,739)     $ (7,408)            -      $     23      $ 63,498      $    247      $ 63,745
                                --------     --------     --------      --------      --------      --------      --------      --------      --------

 Balance as of January 1,
   2009                         $  7,518     $107,104     $(43,739)     $ (7,408)            -      $     23      $ 63,498      $    247      $ 63,745

 Total comprehensive income
   (loss)                              -            -      (16,927)            -           (86)           92       (16,921)            -       (16,921)

 Share-based payments to
   employees                           -          171            -             -             -             -           171             -           171
 Cancelation of stock
   options in consolidated
   company                             -          247            -             -             -             -           247          (247)            -
                                --------     --------     --------      --------      --------      --------      --------      --------      --------

 Balance as of December 31,
   2009                         $  7,518     $107,522     $(60,666)     $ (7,408)     $    (86)     $    115      $ 46,995      $      -      $ 46,995
                                ========     ========     ========      ========      ========      ========      ========      ========      ========

THE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART THEREOF.


                                     F - 6`

`Tefron Ltd.

Consolidated Statements of Cash Flows
--------------------------------------------------------------------------------

                                                                                          YEAR ENDED DECEMBER 31,
                                                                              ------------------------------------------------
                                                                                  2009              2008               2007
                                                                              ------------      ------------      ------------
                                                                                               $ IN THOUSANDS
                                                                              ------------------------------------------------

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income(loss)                                                              $    (17,393)     $    (17,579)     $        582
                                                                              ------------      ------------      ------------
Adjustments to reconcile net (loss) income to net cash (used in) provided
by operating activities:

       Adjustments to reconcile net (loss) income to net cash provided
         by (used in) operating activities

             Adjustments to the profit or loss items:

     Depreciation and amortization                                                   9,256      $      8,925             8,568
     Impairment (reversal of impairment) of property, plant and equipment
       and intangible assets                                                          (496)            2,135                 -
     Inventories write-off                                                           2,808             4,523             1,260
     Extinguishment of contingent consideration (b)                                   (399)                -                 -
     Impairment of available-for-sale securities                                         -               553                 -
     Share-based payments                                                              171               487               489
     Loss (gain) on sale of property, plant and equipment                              (17)              188              (651)
     Gain on sale of available-for-sale securities                                       -               (22)             (134)
     Deferred taxes, net                                                            (5,364)           (5,558)               64
     Change in employee benefits, net                                                 (850)              420                72
     Loss on early repayment of subordinated note receivable                         1,285                 -                 -
     Accrued interest and amortization of available-for-sale securities                  -              (263)             (189)
     Accrued interest on deposits                                                        -               (75)             (613)
     Taxes on income                                                                 1,427              (468)              450
     Finance expenses                                                                  723             1,363               447
                                                                              ------------      ------------      ------------

                                                                                     8,544            12,208             9,763
                                                                              ------------      ------------      ------------

     Changes in asset and liability items:

     Decrease in trade receivables                                                   8,849             5,587             1,622
     Decrease (increase) in other accounts receivable and
        prepared expenses                                                            1,497               488              (920)
     Decrease (increase) in inventories                                              9,730            (3,051)           (4,925)
     Decrease in trade payables                                                    (10,125)           (4,553)           (1,423)
     Increase (decrease) in other current liabilities                                 (428)               77            (2,562)
                                                                              ------------      ------------      ------------

                                                                                     9,523            (1,452)           (8,208)
                                                                              ------------      ------------      ------------

     Cash paid and received during the year for:

     Interest paid                                                                    (878)           (1,528)           (1,751)
     Interest received                                                                 155               165             1,304
     Taxes paid                                                                     (1,427)                -              (450)
     Taxes received                                                                      -               468                 -
                                                                              ------------      ------------      ------------

                                                                              $     (2,150)     $       (895)     $       (897)
                                                                              ------------      ------------      ------------

     Net cash provided by (used in) operating activities:                     $     (1,476)     $     (7,718)     $      3,034
                                                                              ============      ============      ============

THE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART THEREOF.


                                     F - 7`

`Tefron Ltd.

Consolidated Statements of Cash Flows
--------------------------------------------------------------------------------

                                                                                      YEAR ENDED DECEMBER 31,
                                                                          ------------------------------------------------
                                                                              2009              2008              2007
                                                                          ------------      ------------      ------------
                                                                                          $ IN THOUSANDS
                                                                          ------------------------------------------------

 CASH FLOWS FROM INVESTING ACTIVITIES:

 Purchase of property, plant and equipment                                $       (611)     $     (3,151)     $     (6,089)
 Proceeds from sale of property, plant and equipment                                18                35               943
 Purchase of intangible assets                                                     (75)             (224)             (288)
 Contingent consideration paid                                                    (271)                -                 -
 Proceeds from early repayment loss from subordinated note receivable            1,715                 -                 -
 Acquisition of business (a)                                                         -              (300)                -
 Proceeds from sale of available-for-sale securities                                 -             5,914            17,240
 Purchase of available-for-sale securities                                           -                 -           (18,973)
 Proceeds from maturity of short - term investments                                  -             7,139             4,668
                                                                          ------------      ------------      ------------

 Net cash provided by (used in) investing activities                               776             9,413            (2,499)
                                                                          ------------      ------------      ------------

 CASH FLOWS FROM FINANCING ACTIVITIES:

 Short-term credit from banks, net                                               4,923             9,323                 -
 Repayment of long-term loans                                                   (3,885)           (9,836)           (5,948)
 Proceeds from long-term loans                                                       -             6,000                 -
 Proceeds from exercise of options                                                   -                 -             4,382
 Dividends paid to shareholders                                                      -            (8,000)             (551)
                                                                          ------------      ------------      ------------

 Net cash provided by (used in) financing activities                             1,038            (2,513)           (2,117)
                                                                          ------------      ------------      ------------

 INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                  338              (818)           (1,582)

 CASH AND CASH EQUIVALENT AT THE BEGINNING OF THE YEAR                           1,566             2,384             3,966
                                                                          ------------      ------------      ------------

 CASH AND CASH EQUIVALENT AT THE END OF THE YEAR                          $      1,904      $      1,566      $      2,384
                                                                          ============      ============      ============

 (a) ACQUISITION OF BUSINESS (NOTE 3)

     Assets and liabilities of as of acquisition date:

     Order backlog                                                                   -      $        264                 -
     Customer relationships                                                          -             1,029                 -
     Goodwill                                                                        -               344                 -
     Deferred tax liability                                                          -              (323)                -
                                                                          ------------      ------------      ------------
     Total                                                                           -             1,314                 -
     Contingent consideration                                                        -            (1,014)                -
                                                                          ------------      ------------      ------------
                                                                                     -      $        300                 -
                                                                          ============      ============      ============

(b) SUPPLEMENT DISCLOSURE OF NON-CASH INVESTING ACTIVITIES

    Purchase of other assets for contingent consideration                            -      $      1,014                 -
                                                                          ============      ============      ============
    Extinguishment of contingent consideration against goodwill           $        344                 -                 -
                                                                          ============      ============      ============

THE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART THEREOF.


                                     F - 8`

`Tefron Ltd.

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Note 1: GENERAL

     a.   Tefron Ltd. ("the Company") is a company organized under the laws of
          the state of Israel. The Company designs, develops, manufactures and
          sells intimate apparel, swimwear and active wear using two different
          methods (the "Seamless" technique and the "Cut & Sew" technique). The
          Company's principal markets are the United States and Europe.

     b.   The Company's shares are traded on the Tel Aviv Stock Exchange as well
          as on the OTC Bulletin Board in the USA ("OTC"). The OTC is an
          electronic quoting system that offers online quotes, prices and
          trading volume of securities traded "over the counter," and not on one
          of the United States stock exchanges.

          The Company's headquarters are located at Misgav Industrial Zone.

     b.   DEFINITIONS

          In these financial statements:

          The Company        Tefron Ltd.

          The Group          Tefron Ltd. and its subsidiaries, as detailed in
                             the enclosed list.

          Subsidiaries       Companies in which the Company has a controlling
                             interest (as defined in IAS 27) and whose
                             financial statements are consolidated with the
                             Company's financial statements.

          Related parties    As defined in IAS 24.

     c.   In 2009, for more efficient management of the Company, its operations
          and its relations with customers and suppliers, the Group placed all
          of the active wear and intimate apparel operations under Hi-Tex
          Founded by Tefron Ltd. (hereinafter: "Hi-Tex"), whereas the swimwear
          operations were kept under Macro Clothing Ltd. To this end, Tefron
          transferred most of its assets to Hi-Tex against allotment of
          additional Hi-Tex shares, pursuant to Section 104 of the Israeli
          Income Tax Ordinance.

     d.   During February 2009, the Company decided on implementing a
          comprehensive efficiency plan. Among other, the Company decided to
          streamline all its production facilities, including by combining
          several production sites operating in Jordan into fewer, larger
          production facilities, improving the utilization of knitting capacity
          and reducing knitting costs, making changes in the development
          processes (in order to meet the production demands at the development
          stage), assimilating an advanced system of quality assurance, with
          precise feedback for the production process, reducing gaps of time
          between the various production stages for the purpose of reducing lead
          time for customers, reducing wastage and reducing our workforce by
          about 15% .

     e.   During the first quarter of 2010, the Company began implementing a
          turnaround plan which .Up to date, operational improvements are
          occurring on the production floor such as reducing lead time to
          customers, reduction in the level of production waste, reducing costs
          such as salaries, rent and transportation.


                                     F - 9`

`Tefron Ltd.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Note 1: GENERAL (CONT.)

     f.   The Company incurred a loss of $ 17,393 thousand in the year ended
          December 31, 2009. Furthermore, in 2009 the Group generated negative
          cash flow from current operations amounting to $1,476 thousand. The
          Company has a negative working capital amounting to $6,647 thousand.

          Due to the crisis in the global economy, the decrease in demands and a
          continuation of accumulation of significant losses, the Company is
          required for additional financing sources. The Company's management
          plans for setting additional funding sources required for the
          financing of working capital for the next year, and for financing its
          strategic plan are: capital raising from shareholders through rights
          offering and private placement.

          In March 2010 the Company had raised through the rights offering to
          shareholders and private placement to Norfet, or anyone on its behalf,
          a total of $4 million gross, see note 24 c. In addition, on March 2,
          2010, the Company signed an agreement with the banks regarding the
          credit lines and liabilities as stated in note 24 b. In addition, the
          Company examines non-bank financing options such as beginning working
          with factoring companies that allow early payment from customers.
          There is no certainty that the Company will be successful in finding
          the stated financing resources.

          If and insofar, for any reason whatsoever, the Company will not meet
          the financial covenants and the banks will demand that the bank credit
          will be payable immediately, then it will be very difficult to raise
          financing from other sources.

     g.   The Company estimates that it will not meet the EBITDA covenant for
          the year 2010 that was agreed upon between the Company and its three
          bank lenders. On July 11 the Company was granted a waiver from the
          banks for its expected inability to meet the EBITDA covenant, based on
          the Company's forecast for improvement of its EBITDA ratio in 2010
          compared to 2009 in accordance with the development to data in
          connection with the implementation of the turnaround plan. According
          to the waiver, the new EBITDA covenant is not more than a negative
          EBITDA of $2.1 million.

     h.   On July 5, 2010 Mr. Jacov Gelbard terminated his position as the
          chairman of the board of directors of the Company. On July 5, 2010 Mr.
          Arnon Tiberg was appointed to the chairman of the board of directors.


                                     F - 10`

`Tefron Ltd.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Note 2: SIGNIFICANT ACCOUNTING POLICIES

     a.   BASIS OF PREPARATION OF THE FINANCIAL STATEMENTS

          The Group's financial statements have been prepared on a historical
          cost basis, except for derivatives, financial assets available for
          sale and employee benefits that have been measured at fair value.

          THE PREPARATION FORMAT OF THE FINANCIAL STATEMENTS

          These financial statements have been prepared in accordance with
          International Financial Reporting Standards ("IFRS"), as issued by the
          International Accounting Standards Board (IASB). These Standards
          comprise:

          1.   International Financial Reporting Standards (IFRS).

          2.   International Accounting Standards (IAS).

          3.   Interpretations issued by the (IFRIC) and by the (SIC).

          CONSISTENT ACCOUNTING POLICIES

          The accounting policies adopted in the financial statements are
          consistent with those of all periods presented in the financial
          statements.

          CHANGES IN ACCOUNTING POLICIES IN VIEW OF THE ADOPTION OF NEW
          STANDARDS:

          IAS 1 (REVISED) - PRESENTATION OF FINANCIAL STATEMENTS

          Effective January 1, 2009, the Group applies an amendment to IAS 1,
          "Presentation of Financial Statements". the amended IAS 1 introduces
          the `statement of comprehensive income' and requires that all changes
          in equity arising from transactions with owners in their capacity as
          owners to be presented separately from non-owner changes in equity.
          (i.e., The statement of changes in equity includes only details of
          transactions with owners, with all non-owner changes presented in
          equity as a single line carried forward from the statement of
          comprehensive income).


                                     F - 11`

`Tefron Ltd.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Note 2: SIGNIFICANT ACCOUNTING POLICIES (Cont.)

     a.   BASIS OF PREPARATION OF THE FINANCIAL STATEMENTS (Cont.)

          CHANGES IN ACCOUNTING POLICIES IN VIEW OF THE ADOPTION OF NEW
          STANDARDS (Cont.)

          IAS 1 (REVISED) - PRESENTATION OF FINANCIAL STATEMENTS (Cont.)

          In addition, IAS 1 permits presentation of income and expenses in one
          statement (a combined statement of income and other comprehensive
          income), or in two linked statements - a statement of income followed
          by a statement of other comprehensive income. The Company chose to
          present items of income and expense and items of other comprehensive
          income in two statements - a statement of income and thereafter a
          statement of comprehensive income. In addition, the Company presents a
          statement of changes in equity in place of disclosure as part of the
          notes to the financial statements, immediately following the statement
          of comprehensive income.

          The amendment was adopted from January 1, 2009. The initial adoption
          of the Standard did not have any material effect on the consolidated
          financial statements.

          IFRS 2 - SHARE-BASED PAYMENT:

          Effective January 1, 2009, The Group adopted an amendment to IFRS 2,
          "Share-based-payment). The amendment defines a `vesting condition' as
          a condition that includes an explicit or implicit requirement to
          provide service. Therefore, any condition that does not have such a
          requirement is a non-vesting condition. The amendment requires
          `non-vesting' conditions to be treated in a similar fashion to market
          conditions and, hence, factored into account in determining the fair
          value of the equity instruments granted. Where an award does not vest
          as the result of a failure to meet a non-vesting condition, the
          accounting treatment depends on whether the failure to meet the
          condition is within or outside the control of either the entity or the
          counterparty. A failure to satisfy a non-vesting condition that is
          within the control of either the entity or the counterparty is
          accounted for as a cancellation. However, failure to satisfy a
          non-vesting condition that is beyond the control of either party does
          not give rise to a cancellation.

          The amendment was adopted from January 1, 2009. The initial adoption
          of the Standard did not have any material effect on the consolidated
          financial statements.

          IAS 38 (REVISED) - INTANGIBLE ASSETS:

          Pursuant to an amendment to IAS 38, expenses incurred for advertising,
          marketing or promotional activities will be recognized as an expense
          when the company has the right of access to the advertising goods or
          when the company receives those services. For these purposes, the
          activities also include production of catalogs and promotional
          pamphlets.

          The amendment was adopted from January 1, 2009. The initial adoption
          of the Standard did not have any material effect on the consolidated
          financial statements.

          IFRS 7 FINANCIAL INSTRUMENTS: DISCLOSURES:

          The amendment to IFRS 7 requires additional disclosures about fair
          value measurement and liquidity risk. According to the amendment,
          additional disclosures should be made, among others, as to the source
          of inputs used to value financial instruments measured at fair value,
          using a three-level hierarchy. The level within which a financial
          instrument is categorized is based on the lowest level of input to the
          instrument's valuation that is significant to the fair value
          measurement in its entirety. The levels are for disclosure purposes
          only and the measurement itself continues in terms of the hierarchy in
          IAS 39.


                                     F - 12`

`Tefron Ltd.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Note 2: SIGNIFICANT ACCOUNTING POLICIES (Cont.)

     a.   BASIS OF PREPARATION OF THE FINANCIAL STATEMENTS (Cont.)

          In addition, a reconciliation between the opening and closing balance
          for Level 3 fair value measurements is required (source of inputs that
          is not based on market data), as well as disclosure of significant
          transfers between levels in the fair value hierarchy.

          The amendment was adopted as a prospective change from the financial
          statements for the year beginning January 1, 2009 (there is no need to
          provide comparative information).

     b.   SIGNIFICANT ACCOUNTING JUDGMENTS, ESTIMATES AND ASSUMPTIONS USED IN
          THE PREPARATION OF THE FINANCIAL STATEMENTS:

          JUDGMENTS

          In the process of applying the Group's accounting policies, management
          has made the following judgments which have the most significant
          effect on the amounts recognized in the financial statements:

          ESTIMATES AND ASSUMPTIONS

          The preparation of the consolidated financial statements requires
          management to make judgments, estimates and assumptions that affect
          the reported amounts of assets, liabilities, revenues and expenses.
          However, uncertainty about these assumptions and estimates could
          result in outcomes that require a material adjustment to the carrying
          amount of the asset or liability affected in future periods. The basis
          of the estimates and assumptions is reviewed regularly. The changes in
          accounting estimates are reported in the period of the change in
          estimate.

          The key assumptions made in the financial statements concerning
          uncertainties at the balance sheet date and the critical estimates
          computed by the Group that may cause a material adjustment to the
          carrying amounts of assets and liabilities within the next financial
          year are discussed below:

          -    LEGAL CLAIMS

               In estimating the provision for legal claims filed against the
               Company and its subsidiaries, the Company has relied on the
               opinion of its legal counsels. The opinion of the Company's legal
               counsels is based on their professional judgment, taking into
               account the stage of proceedings and experience with respect to
               that claim. Since the outcome of any legal claims will generally
               be determined in the court, actual results could differ from
               these estimates.

          -    DEFERRED TAX ASSETS

               Deferred tax assets are recognized for carry forward tax losses
               and deductible temporary differences to the extent that it is
               probable that taxable profit will be available against which the
               losses can be utilized. Significant management judgment is
               required to determine the amount of deferred tax assets that can
               be recognized, based upon the likely timing and level of future
               taxable profits together with future tax planning strategies. For
               further information, see Note 16.

          -    PENSION AND OTHER POST-EMPLOYMENT BENEFITS

               The liability in respect of defined post-employment benefit plans
               is determined using actuarial valuations. The actuarial valuation
               involves making assumptions about discount rates, expected rates
               of return on assets, future salary increases and mortality rates.
               Due to the long-term nature of these plans, such estimates are
               subject to significant uncertainty. For further information, see
               Note 15.


                                     F - 13`

`Tefron Ltd.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Note 2: SIGNIFICANT ACCOUNTING POLICIES (Cont.)

     c.   SIGNIFICANT ACCOUNTING JUDGMENTS, ESTIMATES AND ASSUMPTIONS USED IN
          THE PREPARATION OF THE FINANCIAL STATEMENTS (CONT.):

          -    ALLOWANCE FOR DOUBTFUL ACCOUNTS

               Company's management regularly reviews trade receivables and
               assesses their collectability. Accordingly, the Company makes a
               provision for trade receivables whose collection is doubtful.

          -    INVENTORIES

               The Company reviews in each period the state and age of
               inventories and records a provision for slow-moving inventories
               accordingly. In assessing whether the inventory is obsolete or
               slow moving, the Company relies on empirical data and on
               assumptions with regard to anticipated order backlog.

          -    FAIR VALUE OF FINANCIAL INSTRUMENTS NOT TRADED IN AN ACTIVE
               MARKET

               Where the fair value of financial assets and financial
               liabilities cannot be derived from active markets, they are
               determined using valuation techniques including the discounted
               cash flows model. The inputs to these models are taken from
               observable markets where possible, but where this is not
               feasible, a degree of judgment is required in establishing fair
               values. The fair value of available-for-sale securities that are
               not traded in an active market was determined by a qualified
               independent valuator and the valuation technique included
               considerations of inputs such as liquidity risk, credit risk and
               volatility. Changes in assumptions about these factors could
               affect the reported fair value of the available-for-sale
               securities. The available-for-sale securities were classified as
               level 3 in accordance with IFRS 7 hierarchy.

          -    IMPAIRMENT OF PROPERTY, PLANT AND EQUIPMENT

               An impairment of property, plant and equipment is recorded if the
               recoverable amount is less than the asset's carrying amount. The
               recoverable amount is the higher of fair value less costs to
               sell, and value in use based on discounted cash flow. In order to
               determine the recoverable amount of its fixed assets, the Company
               has engaged a qualified independent valuator.

     c.   CONSOLIDATED FINANCIAL STATEMENTS:

          The consolidated financial statements include the statements of
          companies that are controlled by the Company (wholly-owned
          subsidiaries: Hi-Tex founded by Tefron, Ltd. (hereinafter: "Hi-Tex"),
          Macro Clothing Ltd. (hereinafter: "Macro"), Tefron USA Inc.
          (hereinafter: "Tefron USA"), Tefron UK Ltd. (hereinafter: "Tefron UK")
          and El Masira Textile Co. (hereinafter: "El Masira"). Control exists
          when the Company has the power, directly or indirectly, to govern the
          financial and operating policies of an entity. The existence and
          effect of potential voting rights that are currently exercisable or
          convertible, including potential voting rights held by another entity,
          are considered when assessing whether an entity has control over
          another entity. Consolidation commences on the date on which control
          is obtained and ceases upon loss of control.

          All intra-group balances, transactions and gains and losses resulting
          from intra-group transactions are eliminated in full in the
          consolidated financial statements.

          The financial statements of the subsidiaries are prepared for the same
          reporting period as the parent company, using consistent accounting
          policies.


                                     F - 14`

`Tefron Ltd.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Note 2: SIGNIFICANT ACCOUNTING POLICIES (Cont.)

     d.   FUNCTIONAL AND FOREIGN CURRENCIES

          1.   FUNCTIONAL AND PRESENTATION CURRENCIES

               The financial statements are presented in USD, which is the
               Company's functional currency.

               The functional currency is the currency that best reflects the
               economic environment in which the Company operates and conducts
               its transactions. Each entity in the Group determines its
               functional currency which is used to measure its financial
               position and operating results.

          2.   FOREIGN CURRENCY TRANSACTIONS

               Transactions denominated in a foreign currency (i.e., a currency
               other than the functional currency) are recorded initially at the
               exchange rate at the date of the transaction. After initial
               recognition, monetary assets and liabilities are translated at
               each balance sheet date into the functional currency, at the
               exchange rate at that date. Exchange rate differences are
               recognized in the statement of income. Non-monetary assets and
               liabilities that are measured in term of historical cost are
               translated into the function currency of the exchange rate on the
               date of the initial transaction. Non-monetary assets and
               liabilities that are measured at fair value are translated into
               the functional currency at the exchange rate on the date when the
               fair value is determined.

     e.   CASH EQUIVALENTS

          Cash equivalents are considered as highly liquid investments,
          including unrestricted short-term bank deposits with an original
          maturity of three months or less from the date of acquisition or with
          a maturity of more than three months, however, they are repayable on
          demand without penalty and form part of the Group's cash management,
          and are not restricted by liens.

     f.   ALLOWANCE FOR DOUBTFUL ACCOUNTS

          The allowance for doubtful accounts is determined in respect of
          specific trade receivables whose collection, in the opinion of the
          Company's management, is doubtful. Impaired trade receivables are
          derecognized when they are assessed as uncollectible.

     g.   INVENTORIES

          Inventories are measured at the lower of cost and net realizable
          value. The cost of inventories comprises costs of purchase and costs
          incurred in bringing the inventories to their present location and
          condition. Net realizable value is the estimated selling price in the
          ordinary course of business less the estimated costs of completion and
          the estimated costs necessary to make the sale.

          The cost of inventories is assigned as follows:

          Raw materials      -   Based on weighted average cost.

          Work in progress   -   Based on weighted average cost including
                                 material,  labor and other direct and indirect
                                 manufacturing costs.

          Finished goods     -   Based on weighted average cost including
                                 material, labor and other direct and indirect
                                 manufacturing costs.


                                     F - 15`

`Tefron Ltd.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Note 2: SIGNIFICANT ACCOUNTING POLICIES (Cont.)

     g.   INVENTORIES (Cont.)

          The Company periodically evaluates the condition and age of
          inventories and records a provision for slow-moving inventories.

          The allocation of fixed production overheads to the costs of inventory
          is based on the normal capacity of the production facilities. The
          amount of fixed overhead allocated to the costs of inventory is not
          increased as a consequence of low production. All unallocated
          overheads are recognized as an expense in the period in which they are
          incurred. Furthermore, cost of inventories does not include abnormal
          amounts of materials, labor or other costs resulting from
          inefficiency.

     h.   FINANCIAL INSTRUMENTS

          FINANCIAL ASSETS:

          Financial assets within the scope of IAS 39 are initially recognized
          at fair value plus directly attributable transaction costs, except for
          investments at fair value through profit or loss in which case
          transaction costs are expensed as incurred.

          After initial recognition, the subsequent accounting and measurement
          of financial assets depends on their classification as follows:

          o    Financial assets at fair value through profit or loss.

          o    Loans and receivables.

          o    Available-for-sale financial assets.

          The Company has classified its financial assets as follows:

          1.   AVAILABLE-FOR- SALE FINANCIAL ASSETS (SHORT TERM INVESTMENTS)

               The Group has available-for-sale financial assets that are
               financial assets (non-derivative) that are designated as
               available-for-sale or are not classified in any of the three
               preceding categories. After initial recognition,
               available-for-sale financial assets are measured at fair value.
               Gains or losses from fair value adjustments, except exchange
               differences that relate to monetary debt instruments that are
               carried to the statement of income in financial expenses or
               income, are recognized directly in equity as unrealized gains,
               net. When the investment is disposed of or in case of impairment,
               the accumulated gain or loss is recognized in the statement of
               income. Interest income on investments in debt instruments is
               recognized in the statement of income using the effective
               interest method.

          2.   LOANS AND RECEIVABLES

               Loans and receivables are non-derivative financial assets with
               fixed or determinable payments that are not quoted in an active
               market. After initial measurement, such financial assets are
               subsequently measured at amortized cost using the effective
               interest rate method, less impairment.


                                     F - 16`

`Tefron Ltd.
Notes to Consolidated Financial Statements
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Note 2: SIGNIFICANT ACCOUNTING POLICIES (Cont.)

     h.   FINANCIAL INSTRUMENTS (Cont.)

          3.   FAIR VALUE

               The fair value of investments that are traded in an active market
               is determined by reference to the market prices at the balance
               sheet date. For investments where there is no active market, fair
               value is determined using valuation techniques. Such techniques
               include using recent arm's length market transactions; reference
               to the current market value of another instrument which is
               substantially the same; discounted cash flow or other valuation
               models. The valuation took into consideration interest and credit
               components that are derived from the risk.

          FINANCIAL LIABILITIES

          FINANCIAL LIABILITIES MEASURED AT AMORTIZED COST:

          Interest-bearing loans and borrowings are initially recognized at fair
          value less directly attributable transaction costs. After initial
          recognition, borrowings are measured at amortized cost. Gains and
          losses are recognized in the statement of income when the loan is
          derecognized as well as through the systematic amortization process.

          TREASURY SHARES

          Company shares held by the Company's subsidiary are presented at cost
          and deducted from equity. No gain or loss is recognized in the income
          statement on the purchase, sale, issue or cancellation of the
          Company's own equity instruments. Any difference between the carrying
          amount and the consideration is recognized in a capital reserve.

          DERECOGNITION OF FINANCIAL INSTRUMENTS

          FINANCIAL ASSETS

          A financial asset is derecognized when the contractual rights to the
          cash flows from the financial asset expire.

          FINANCIAL LIABILITIES

          A financial liability is derecognized when it is extinguished, i.e.
          when the obligation is discharged, cancelled or expires. A financial
          liability is extinguished when the debtor (the Group):

          o    discharges the liability by paying in cash, other financial
               assets, goods or services; or

          o    is legally released from the liability.

          Where an existing financial liability is exchanged with another
          liability from the same lender on substantially different terms, or
          the terms of an existing liability are substantially modified, such an
          exchange or modification is accounted for as an extinguishment of the
          original liability and the recognition of a new liability. The
          difference between the carrying amount of the above liabilities is
          recognized in the statement of income. If the exchange or modification
          is immaterial, it is accounted for as a change in the terms of the
          original liability and no gain or loss is recognized from the
          exchange.

          IMPAIRMENT OF FINANCIAL ASSETS:

          The Group assesses at each balance sheet date whether there is any
          objective evidence that the following financial asset or group of
          financial assets is impaired.


                                     F - 17`

`Tefron Ltd.
Notes to Consolidated Financial Statements
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Note 2: SIGNIFICANT ACCOUNTING POLICIES (Cont.)

     h.   IMPAIRMENT OF FINANCIAL ASSETS (Cont.)

          AVAILABLE-FOR-SALE FINANCIAL ASSETS

          For debt instruments classified as available-for-sale financial
          assets, objective evidence of impairment may arise as a result of one
          or more events that have a negative impact on the estimated future
          cash flows of the asset since the recognition of the asset. Evidence
          of impairment may include indications that the debtor is experiencing
          financial difficulties, including liquidity difficulty and default in
          interest or principal payments. Where there is evidence of impairment,
          the cumulative loss - measured as the difference between the
          acquisition cost (less principal payments, amortizations using the
          effective interest method and previous impairment losses) and the fair
          value is reclassified from equity and recognized as an impairment
          charge in the statement of income. In a subsequent period, the amount
          of the impairment loss is reversed if the increase in fair value can
          be related objectively to an event occurring after the impairment was
          recognized and that leads to a change in the original considerations
          that led to the conclusion that the investment is impaired. The amount
          of the reversal, as above, is credited to the statement of income up
          to the amount of any previous impairment.

          FINANCIAL ASSETS CARRIED AT AMORTIZED COST

          For financial assets carried at amortized cost the Group first
          assesses individually whether objective evidence of impairment exists
          individually for financial assets that are individually significant,
          or collectively for financial assets that are not individually
          significant.

          If there is objective evidence that an impairment loss has incurred,
          the amount of the loss is measured as the difference between the
          asset's carrying amount and the present value of estimated future cash
          flows (excluding future expected credit losses that have not yet been
          incurred). If a loan has a variable interest rate, the discount rate
          for measuring any impairment loss is the current effective interest
          rate. The carrying amount of the asset is reduced through the use of
          an allowance account and the amount of the loss is recognized in the
          income statement. Interest income continues to be accrued on the
          reduced carrying amount and is accrued using the rate of interest used
          to discount the future cash flows for the purpose of measuring the
          impairment loss. The interest income is recorded as part of finance
          income in the income statement. Loans together with the associated
          allowance are written off when there is no realistic prospect of
          future recovery and all collateral has been realized or has been
          transferred to the Group.

     i.   DERIVATIVE FINANCIAL INSTRUMENTS HELD FOR HEDGING

          From time to time, the Group enters into contracts with derivative
          financial instruments such as forward currency contracts (forward) and
          Put and Call options in respect of foreign currency. Such derivative
          financial instruments are initially recognized at fair value and
          attributable transactions costs are recognized in the statement of
          income when incurred. After initial recognition, the financial
          derivatives are measured at fair value. Derivatives are carried in the
          balance sheet as assets when the fair value is positive and as
          liabilities when the fair value is negative.

          The Group holds derivative financial instruments in order to hedge
          foreign currency related risks. The fair value of forward currency
          contracts and Put and Call options is calculated by reference to
          current forward exchange rates for contracts with similar maturity
          profiles.

          For the purpose of hedge accounting, hedges are classified as cash
          flow hedges when hedging exposure to variability in cash flows that is
          either attributable to a particular risk associated with a recognized
          asset or liability or a forecast transaction or the foreign currency
          risk in an unrecognized firm commitment


                                     F - 18`

`Tefron Ltd.
Notes to Consolidated Financial Statements
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Note 2: SIGNIFICANT ACCOUNTING POLICIES (Cont.)

     i.   DERIVATIVE FINANCIAL INSTRUMENTS HELD FOR HEDGING (cont.)

          At the inception of a hedge relationship, the Group formally
          designates and documents the hedge relationship to which the Group
          wishes to apply hedge accounting and the risk management objective and
          strategy for undertaking the hedge. The documentation includes
          identification of the hedging instrument, the hedged item or
          transaction, the nature of the risk being hedged and how the entity
          will assess the hedging instrument's effectiveness in offsetting the
          exposure to changes in the hedged item's fair value or cash flows
          attributable to the hedged risk. The hedge effectiveness is assessed
          at each balance sheet date.

          Hedges which meet the criteria for hedge accounting are accounted for
          as follows:

          CASH FLOW HEDGES:

          The effective portion of the gain or loss on the hedging instrument is
          recognized directly in equity, while any ineffective portion is
          recognized immediately in the statement of income.

          Amounts recognized as other comprehensive income (loss) are
          reclassified to the statement of income when the hedged transaction
          affects profit or loss, such as when the hedged income or expense is
          recognized or when a forecast sale occurs.

          If the forecast transaction or firm commitment is no longer expected
          to occur, amounts previously recognized in equity are transferred to
          the statement of income. If the hedging instrument expires or is sold,
          terminated or exercised, or if its designation as a hedge is revoked,
          amounts previously recognized in equity remain in equity until the
          forecast transaction or firm commitment occurs.

     j.   LEASES:

          The tests for classifying leases as finance or operating leases depend
          on the substance of the agreements and are made at the inception of
          the lease in accordance with the principles below as set out in IAS
          17.

          THE GROUP AS LESSEE:

          OPERATING LEASES:

          Lease agreements are classified as an operating lease if they do not
          transfer substantially all the risks and benefits incidental to
          ownership of the leased asset. Lease payments are recognized as an
          expense in the statement of income on a straight-line basis over the
          lease term.

          THE GROUP AS LESSOR:

          OPERATING LEASES:

          Lease agreements where the Group does not actually transfer
          substantially all the risks and benefits incidental to ownership of
          the leased asset are classified as operating leases. Lease income is
          recognized as revenue in the statement of income on a straight-line
          basis over the lease term.

     k.   BUSINESS COMBINATIONS AND GOODWILL

          Business combinations are accounted for by applying purchase method
          pursuant to IFRS 3. Identifiable assets acquired and liabilities
          assumed are measured at fair value on the acquisition date. The cost
          of the acquisition is measured at the fair value of the assets given,
          the equity instruments issued and the liabilities incurred on the
          acquisition date plus direct acquisition costs.


                                     F - 19`

`Tefron Ltd.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Note 2: SIGNIFICANT ACCOUNTING POLICIES (Cont.)

     k.   BUSINESS COMBINATIONS AND GOODWILL (Cont.)

          Goodwill acquired in a business combination is initially measured as
          the excess of the cost of the acquisition over the Group's interest in
          the fair value of the net identifiable assets of the acquiree. After
          initial recognition, goodwill is measured at cost less any accumulated
          impairment losses. Goodwill is not systematically amortized. For the
          purpose of impairment testing, the goodwill is allocated to a
          subsidiary. As for impairment testing of goodwill, see n below.

          Contingent consideration is recognized if, and only if, the Group had
          a present obligation, the economic outflow was more likely than not
          and a reliable estimate was determinable. Subsequent adjustments to
          the contingent consideration affects goodwill.

     l.   PROPERTY, PLANT AND EQUIPMENT

          Items of property, plant and equipment are measured at cost plus
          direct acquisition costs less any accumulated depreciation, less
          accumulated impairment losses and less related investment grants and
          excluding day-to-day servicing expenses. Cost includes spare parts and
          auxiliary equipment that can be used only in connection with the
          machinery and equipment.

          Deprecation is calculated at equal annual rates based on the straight
          line method over the useful life of the asset as follows:

                                                      %             MAINLY %
                                               --------------   ---------------

          Buildings                                 2.5               2.5
          Machinery and equipment                    7                 7
          Motor vehicles                             15                15
          Office furniture and equipment            6-25          Furniture - 6,
                                                                  computers - 25
          Leasehold improvements                    (*)               (*)

          (*) Leasehold improvements are depreciated using the straight line
          method over the lease term (including any optional extension term
          available to the Company which it intends to exercise), or over the
          expected useful life of the assets, whichever is shorter.

          The useful life, depreciation method and residual value of an asset
          are reviewed at least each year end and the changes are accounted for
          as a prospective change in accounting estimate. As for testing the
          impairment of fixed assets, see n below.

          An asset is derecognized on disposal or when no further economic
          benefits are expected from its use. The gain or loss arising from the
          derecognition of the asset (determined as the difference between the
          net disposal proceeds and the carrying amount in the financial
          statements) is included in the statement of income when the asset is
          derecognized. See note 7.

     m.   INTANGIBLE ASSETS

          Separately acquired intangible assets are measured on initial
          recognition at cost with the addition of costs directly attributable
          to the acquisition. The Cost of intangible asset acquired in a
          business combination is its fair value at the acquisition date. After
          initial recognition, intangible assets are carried at cost less any
          accumulated amortization and any accumulated impairment losses.


                                     F - 20`

`Tefron Ltd.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Note 2: SIGNIFICANT ACCOUNTING POLICIES (Cont.)

     m.   INTANGIBLE ASSETS (Cont.)

          According to management's assessment, intangible assets have a finite
          useful life. The assets are amortized over their useful life using the
          straight-line method and reviewed for impairment whenever there is an
          indication that the asset may be impaired. The amortization period and
          the amortization method for an intangible asset with a finite useful
          life are reviewed at least at each financial year end. Changes in the
          expected useful life or the expected pattern of consumption of future
          economic benefits embodied in the asset are accounted for as
          prospective changes in accounting estimates. The amortization charge
          on intangible assets with finite useful lives is recognized in the
          statements of income.

          The useful life of intangible assets is as follows:

                                                                 YEARS
                                                       -------------------------
          Computer software                                        4
          Customer relationships (*)                               7
          Order backlog                                Period of delivery orders

          Gains or losses arising from the derecognition of an intangible asset
          are determined as the difference between the net disposal proceeds and
          the carrying amount of the asset and are recognized in the statement
          of income.

          (*)In accordance with Accounting Standard IAS38 and IFRS3, customer
          relationships are part of intangible assets due to the fact that they
          arise from contractual legal rights and maintain the principle of
          detection. Deprecation of customer relationship is done in accordance
          with the abandonment of existing customers over the years.

          COMPUTER SOFTWARE:

          The Group's assets include computer systems comprising hardware and
          software. Software forming an integral part of the hardware to the
          extent that the hardware cannot function without the programs
          installed on it, is classified as fixed assets. In contrast, software
          that adds functionality to the hardware is classified as an intangible
          asset.

     n.   IMPAIRMENT OF NON-FINANCIAL ASSETS

          The Group assesses at each reporting date whether there is an
          indication that an asset may be impaired. If any indication exists, or
          when annual impairment testing for an asset is required, the Group
          estimates the asset's recoverable amount. An asset's recoverable
          amount is the higher of the asset's (or cash generating unit) fair
          value less costs to sell and its value in use and is determined for an
          individual asset, unless the asset does not generate cash inflows that
          are largely independent of those from other assets or groups of asset,
          in which case the recoverable amount is determined for the
          cash-generating unit to which the asset belongs.

          Where the carrying amount of an asset or cash generating unit exceeds
          its recoverable amount, the asset is considered impaired and is
          written down to its recoverable amount.

          In measuring value in use, the estimated future cash flows are
          discounted using a pre-tax discount rate that reflects the risks
          specific to the asset or the cash generating unit.


                                     F - 21`

`Tefron Ltd.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Note 2: SIGNIFICANT ACCOUNTING POLICIES (Cont.)

     n.   IMPAIRMENT OF NON-FINANCIAL ASSETS (cont.)

          Impairment losses are recognized in the statement of income.

          For assets excluding goodwill, an assessment is made at each reporting
          date as to whether there is any indication that previously recognized
          impairment losses may no longer exist or may have decreased. If such
          indication exist, the Group estimates the asset's or cash-generating
          unit's recoverable amount. A previously recognized impairment loss is
          reversed only if there has been a change in the assumptions used to
          determine the asset's recoverable amount since the last impairment
          loss was recognized. The reversal is limited so that the carrying
          amount of the asset does not exceed its recoverable amount, nor exceed
          the carrying amount that would have been determined, net of
          depreciation, had no impairment loss been recognized for the asset in
          prior years. Such reversal is recognized in the income statement. See
          note 7.

          The following criteria are applied in assessing impairment of the
          goodwill:

          Goodwill:

          The Group reviews goodwill for impairment once a year (on December 31)
          or more frequently if events or changes in circumstances indicate that
          the goodwill's carrying amount may be impaired.

          Impairment is determined for goodwill by comparing the recoverable
          amount of the cash-generating unit(s) to which the goodwill relates to
          the carrying amount of the cash generating unit(s), including
          goodwill. If the recoverable amount of the cash-generating unit(s) is
          less than the carrying amount of the cash-generating unit(s), an
          impairment loss is recognized. Impairment losses recognized for
          goodwill cannot be reversed in future periods.

          For the purpose of impairment testing, goodwill acquired in a business
          combination is allocated, at the acquisition date, to each of the
          Group's cash generating units that is expected to benefit from the
          synergies of the combination.

     o.   GOVERNMENT GRANTS

          Government grants from the Office of the Chief Scientist in Israel for
          supporting research and development activities do not contain a
          liability to pay royalties to the State, therefore, reduced from the
          cost of sales.

          Government grants are recognized when there is reasonable assurance
          that the grant will be received and the Company will comply with the
          attached conditions. The Company's government grants, which have been
          received in prior years in order to purchase fixed assets, have been
          recorded as a reduction in the carrying amount of the fixed asset.

     p.   TAXES ON INCOME

          Taxes on income in the statement of income comprise current and
          deferred taxes. The tax results in respect of current or deferred
          taxes are recognized in the statement of income except to the extent
          that the tax arises from items which are recognized directly in the
          statement of comprehensive income. In such cases, the tax effect is
          also recognized in the relevant item in statement of comprehensive
          income.


                                     F - 22`

`Tefron Ltd.
Notes to Consolidated Financial Statements
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Note 2: SIGNIFICANT ACCOUNTING POLICIES (Cont.)

     p.   TAXES ON INCOME (Cont.)

          DEFERRED TAXES:

          Deferred income taxes are computed using the liability method on
          temporary differences between the carrying amounts in the financial
          statements and the amounts attributed for tax purposes, except for a
          limited number of exceptions. Deferred taxes are carried directly to
          equity if the tax relates to items that are taken to equity.

          Deferred tax balances are measured at the tax rates that are expected
          to apply to the period when the taxes are taken to the statement of
          income or to equity, based on tax laws that have been enacted or
          substantively enacted by the balance sheet date. The amount for
          deferred taxes in the statement of income represents the changes in
          said balances during the reported period, excluding in respect of
          changes attributable to items carried directly to equity.

          Deferred tax assets are reviewed at each balance sheet date and
          reduced to the extent that it is not probable that they will be
          utilized. Simultaneously, temporary differences (such as carryforward
          losses) for which deferred tax assets have not been recognized are
          reassessed and deferred tax assets are recognized to the extent that
          their recoverability has become probable. Any resulting reduction or
          reversal is recognized in the item taxes on income.

          Taxes that would apply in the event of the sale of investments in
          investees have not been taken into account in computing the deferred
          taxes, as long as it is probable that the sale of the investments in
          investees is not expected in the foreseeable future. Equally, deferred
          taxes that would apply in the event of distribution of earnings by
          investees as dividends have not been taken into account in computing
          the deferred taxes, since the distribution of dividends does not
          involve an additional tax liability or since it is the Company's
          policy not to initiate distribution of dividends that triggers an
          additional tax liability.

          Deferred tax assets and deferred tax liabilities are presented in the
          balance sheet as non-current assets and non-current liabilities,
          respectively. Deferred taxes are offset if there is a legally
          enforceable right to set off a current tax asset against a current tax
          liability and the deferred taxes relate to the same taxpayer and the
          same taxation authority.

     q.   SHARE-BASED PAYMENT TRANSACTIONS

          The Company's employees and directors are entitled to remuneration in
          the form of share-based payment transactions whereby employees and
          directors render service as consideration for equity instruments
          ("equity-settled transactions").

          EQUITY-SETTLED TRANSACTIONS:

          The cost of equity-settled transactions with employees is measured at
          the fair value of the equity instruments granted at the grant date.
          The fair value is determined using an accepted pricing model (see Note
          19).

          The cost of equity-settled transactions is recognized in the statement
          of income, together with a corresponding increase in equity (in
          additional paid in capital), during the period which the service
          conditions are to be satisfied, ending on the date on which the
          relevant employees and directors become fully entitled to the award
          ("the vesting period"). The cumulative expense recognized for
          equity-settled transactions at each reporting date until the vesting
          date reflects the extent to which the vesting period has expired and
          the Group's best estimate of the number of equity instruments that
          will ultimately vest. The charge or credit to the statement of income
          represents the movement in cumulative expense recognized at the
          beginning and end of that reported period.


                                     F - 23`

`Tefron Ltd.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Note 2: SIGNIFICANT ACCOUNTING POLICIES (Cont.)

     q.   SHARE-BASED PAYMENT TRANSACTIONS (cont.)

          No expense is recognized for awards that do not ultimately vest.

          Where the terms of an equity-settled transaction award are modified,
          the minimum expense recognized is the expense as if the terms had not
          been modified, if the original terms of the award are met. An
          additional expense is recognized for any modification that increases
          the total fair value of the share-based payment arrangement or is
          otherwise beneficial to the employee, as measured at the modification
          date.

     r.   PENSIONS AND OTHER POST EMPLOYEE BENEFITS

          The Group has several employee benefit plans:

          1.   SHORT-TERM EMPLOYEE BENEFITS:

               Short-term employee benefits include salaries, paid annual leave,
               paid sick leave, recreation and social security contributions and
               are recognized as expenses as the services are rendered.

          2.   POST-EMPLOYMENT BENEFITS

               The plans are normally financed by deposits in insurance
               companies and classified as defined contribution plans or as
               defined benefit plans.

               The Group has defined contribution plans pursuant to Section 14
               of the Israeli Severance Pay Law, under which the amount of the
               post-employment benefits received by the employee is limited to
               the amount of contributions paid by the group, together with
               investment returns arising from the contributions. As the Group
               is not legally or constructively liable to make additional
               payments even if sufficient amounts are not accumulated in the
               fund to pay all the benefits due to an employee relating to his
               current or past services, in consequence, actuarial risk and
               investment risk fall on the employee.

               Obligations in respect to contributions to defined contribution
               pension plans are recognized as an expense in the periods during
               which services are rendered by employees.

               The Group also operates a defined benefit plan in respect of
               severance pay pursuant to the Israeli Severance Pay Law.
               According to the Law, employees are entitled to severance pay
               upon dismissal or retirement. The cost of providing benefits
               under this plan is determined using the projected unit credit
               method. The actuarial assumptions comprise future salary
               increases and rates of employee turnover based on the estimated
               timing of payment. The amounts are presented based on discounted
               expected future cash flows using a discount rate on Government
               bonds with maturity that matches the estimated term of the
               benefit payments.

               The Company makes current deposits in respect of its liabilities
               to pay compensation to certain of its employees in pension funds
               and insurance companies ("the plan assets").

               Plan assets comprise assets held by a long-term employee benefit
               fund or qualifying insurance policies. Plan assets are not
               available to the Group's own creditors and can not be returned
               directly to the Group.

               Actuarial gains and losses are recognized directly in other
               comprehensive income (loss) in the period in which they occur.


                                     F - 24`

`Tefron Ltd.
Notes to Consolidated Financial Statements
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Note 2: SIGNIFICANT ACCOUNTING POLICIES (Cont.)

     r.   PENSIONS AND OTHER POST EMPLOYEE BENEFITS (cont.)

          The net liability for employee benefits includes the present value of
          the defined benefit obligation less past service costs and actuarial
          gains and losses not yet recognized and less the fair value of plan
          assets out of which the obligations are to be settled.

     s.   REVENUE RECOGNITION

          Revenues are recognized when the amount of revenues can be measured
          reliably, it is probable that the economic benefits associated with
          the transaction will flow to the Group and the costs incurred or to be
          incurred can be measured reliably. Revenues are measured at the fair
          value of the consideration received excluding any trade discounts or
          volume rebates.

          The following specific recognition criteria must also be met before
          revenue is recognized:

          REVENUES FROM SALE OF GOODS

          Revenue from the sale of goods is recognized when all the significant
          risks and rewards of ownership of the goods have passed to the buyer
          and the seller no longer retains managerial involvement to the degree
          associated with ownership over the goods sold, usually on delivery of
          the goods.

     t.   COST OF SALES

          Cost of sales includes expenses for storage and transportation of
          inventories to the end point of sale. Cost of sales also includes
          losses from write-downs of inventories and provisions for slow-moving
          inventories.

     u.   OPERATING SEGMENTS

          According to IFRS 8, the Company adopted the "management approach" in
          reporting on the financial performance of the operating segments.

          An operating segment is a component of the Group that meets the
          following three criteria:

          1.   Is engaged in business activities from which it may earn revenues
               and incur expenses, including revenues and expenses relating to
               intragroup transactions;

          2.   Whose operating results are regularly reviewed by the Group's
               chief operating decision maker (the CEO of the Company) to make
               decisions about resources to be allocated to the segment and
               assess its performance; and

          3.   For which separate financial information is available.

     v.   EARNINGS (LOSS) PER SHARE

          Earnings (loss) per share are calculated by dividing the net income
          (loss) attributable to equity holders of the parent by the weighted
          average number of ordinary shares outstanding during the period. Basic
          earnings (loss) per share only include shares that were actually
          outstanding during the period. Potential ordinary shares (employee
          options) are included in the computation of diluted earnings (loss)
          per share only when their conversion decreases earnings per share or
          increases loss per share. Furthermore, potential ordinary shares that
          are converted or exercised during the period are included in diluted
          earnings (loss) per share only until the conversion or exercise date
          and from that date in basic earnings (loss) per share.


                                     F - 25`

`Tefron Ltd.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Note 2: SIGNIFICANT ACCOUNTING POLICIES (Cont.)

     w.   PROVISIONS

          In accordance with IAS 37, a provision is recognized when the Group
          has a present obligation (legal or constructive) as a result of a past
          event and it is probable that an outflow of resources embodying
          economic benefits will be required to settle the obligation and a
          reliable estimate can be made of the amount of the obligation. Where
          the Group expects some or all of a provision to be reimbursed, for
          example under an insurance contract, the reimbursement is recognized
          as a separate asset but only when the reimbursement is virtually
          certain. The expense relating to any provision is presented in the
          income statement net of any reimbursement.

          If the effect of the time of money is material, provisions are
          measured based on discounted cash flows, using a pre-tax interest rate
          that reflects, where appropriate, those risks specific to the
          liability. Where discounting is used, the increase in the provision
          due to the passage of time is recognized as a finance cost.

     x.   STANDARDS ISSUED BUT NOT YET EFFECTIVE

          1.   IFRS 3 (REVISED) - BUSINESS COMBINATIONS AND IAS 27 (REVISED) -
               CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS

               IFRS 3 (Revised) and IAS 27 (Revised) (herein "the Standards")
               will be effective for annual periods beginning on January 1,
               2010,

               The principal changes expected to take place following the
               adoption of the Standards are:

               -    The definition of a business was broadened so that it also
                    contains activities and assets that are not managed as a
                    business as long as they are capable of being managed as a
                    business from a perspective of market participant.

               -    Contingent consideration in a business combination will be
                    initially classified as a liability or as equity. For
                    contingent consideration initially classified as a
                    liability, subsequent changes in the liability generally
                    will be recognized through profit or loss.

               -    Transaction costs directly attributable to the business
                    combination will be expensed as incurred.

               -    Subsequent recognition of a deferred tax asset for acquired
                    temporary differences which did not meet the recognition
                    criteria at acquisition date will be recorded in profit of
                    loss and not as adjustment to goodwill.

               -    A minority interest transaction without the loss of control,
                    whether a sale or a purchase, will be accounted for as an
                    equity transaction.

               -    A subsidiary's losses, although resulting in the
                    subsidiary's deficiency, will be allocated between the
                    parent company and minority interests, even if the minority
                    has not guaranteed or has no contractual obligation of
                    sustaining the subsidiary or carrying out another
                    investment.

               -    Upon the loss of control of a subsidiary, the remaining
                    investment in the subsidiary, if any, will be revalued to
                    its fair value through profit and loss. This fair value will
                    represent a new cost basis for the purpose of subsequent
                    treatment.

               The Company believes that the effect of the Standards on its
               financial condition, results of operations and cash flows is not
               expected to be material.


                                     F - 26`

`Tefron Ltd.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Note 2: SIGNIFICANT ACCOUNTING POLICIES (Cont.)

     x.   STANDARDS ISSUED BUT NOT YET EFFECTIVE (cont.)

          2.   IFRS 9 - FINANCIAL INSTRUMENTS:

               In November 2009, the IASB issued IFRS 9, "Financial
               Instruments", which represents the first phase of a project to
               replace IAS 39, "Financial Instruments: Recognition and
               Measurement". IFRS 9 focuses mainly on the classification and
               measurement of financial assets and it applies to all financial
               assets within the scope of IAS 39.

               According to IFRS 9, upon initial recognition, all the financial
               assets (including hybrid contracts with financial asset hosts)
               will be measured at fair value. In subsequent periods, debt
               instruments can be measured at amortized cost if both of the
               following conditions are met:

               -    the asset is held within a business model whose objective is
                    to hold assets in order to collect the contractual cash
                    flows.

               -    the contractual terms of the financial asset give rise on
                    specified dates to cash flows that are solely payments of
                    principal and interest on the principal amount outstanding.

               Subsequent measurement of all other debt instruments and
               financial assets will be at fair value.

               Financial assets that are equity instruments will be measured in
               subsequent periods at fair value and the changes will be
               recognized in the statement of income or in other comprehensive
               income (loss), in accordance with the election of the accounting
               policy on an instrument-by-instrument basis. Nevertheless, if the
               equity instruments are held for trading, they must be measured at
               fair value through profit or loss. This election is final and
               irrevocable. When an entity changes its business model for
               managing financial assets it shall reclassify all affected
               financial assets. In all other circumstances, reclassification of
               financial instruments is not permitted.

               The Standard will be effective starting January 1, 2013. Earlier
               application is permitted. Early adoption will be made with a
               retrospective restatement of comparative figures, subject to the
               reliefs set out in the Standard.

               The Company is evaluating the possible effect of the adoption of
               the new Standard on the consolidated financial statements but is
               presently unable to assess such effect, if any.

          3.   IAS 1 - PRESENTATION OF FINANCIAL STATEMENTS:

               The amendment to IAS 1 deals with current or non-current
               classification of the liability component of a convertible
               instrument. Pursuant to the amendment, terms of a liability that
               can, at the option of the counterparty, be settled by the issue
               of the entity's equity instruments do not affect its
               classification as current or non-current. The amendment will be
               prospectively adopted starting from the financial statements for
               periods beginning on January 1, 2010. Earlier application is
               permitted.

               The Company believes that the effect of the amendment on the
               financial statements is not expected to be material.

          4.   IAS 32 - FINANCIAL INSTRUMENTS: PRESENTATION - CLASSIFICATION OF
               RIGHTS ISSUES:

               The amendment to IAS 32 determines that rights, options or share
               options to acquire a fixed number of the entity's equity
               instruments for a fixed amount of any currency are classified as
               equity instruments if the entity offers the rights, options or
               share options pro rata to all of its existing owners of the same
               class of its non-derivative equity instruments.


                                     F - 27`

`Tefron Ltd.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Note 2: SIGNIFICANT ACCOUNTING POLICIES (Cont.)

          5.   IAS 36 - IMPAIRMENT OF ASSETS:

               The amendment to IAS 36 defines the required accounting unit to
               which goodwill will be allocated for impairment testing of
               goodwill. Pursuant to the amendment, the largest unit permitted
               for impairment testing of goodwill acquired in a business
               combination is an operating segment as defined in IFRS 8,
               "Operating Segments" before the aggregation for reporting
               purposes. The amendment will be prospectively adopted starting
               from the financial statements for periods beginning on January 1,
               2010. Earlier application is permitted.

               The Company believes that the effect of the amendment on the
               financial statements is not expected to be material.

Note 3: -  BUSINESS COMBINATIONS

     ACQUISITION OF EXCELSIOR INC.

     On September 17, 2008, a Company's subsidiary acquired the entire business
     activity of Excelsior Inc. ("Excelsior"), a private company operating in
     the USA that specializes in the design and distribution of swimwear in the
     USA. The transaction was accounted for as business combination under IFRS
     3.

     The total cost of this business combination amounted to $1,314 thousand,
     which included a cash payment of $300 thousand and contingent consideration
     payable of $1,014 thousand. The contingent consideration payable is an
     estimate of 10% of future sales of Excelsior in each of the two years
     following the acquisition.

     The Company has allocated the acquisition cost to the fair value of assets
     acquired and liabilities assumed. Any changes in the contingent
     consideration payable will be recorded as an adjustment to goodwill.

     The financial statements include the operating results of Excelsior from
     the date of acquisition and were immaterial to the results of the Group in
     2008.

     The fair value of the assets acquired and liabilities assume of Excelsior
     as of the date of acquisition is as follows:

                                                         FAIR VALUE
                                                        ------------
                                                       $ IN THOUSANDS
                                                        ------------

 Customer relationships                                 $      1,029
 Order backlog                                                   264
 Deferred tax liability                                         (323)
                                                        ------------

 Net assets                                                      970
 Goodwill                                                        344
                                                        ------------

Total Purchase cost                                     $      1,314
                                                        ============

Acquisition cost:

                                                       $ IN THOUSANDS
                                                        ------------

Cash paid                                               $        300
contingent consideration                                       1,014
                                                        ------------

Total                                                   $      1,314
                                                        ============


                                     F - 28`

`Tefron Ltd.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Note 3: -  BUSINESS COMBINATIONS (cont.)

     Acquisition cost:

                                                       $ IN THOUSANDS
                                                        ------------

CASH OUTFLOW/INFLOW ON THE ACQUISITION

Cash and cash equivalents acquired with the Company
at the acquisition date                                 $          -
Cash paid                                                        300
                                                        ------------

Net cash flow                                           $        300
                                                        ============

     The goodwill created on the acquisition is allocated to the forecasted
     benefits derived from the synergy of activities combining of the Company
     and the purchased company. See goodwill update against contingent
     consideration.

     On November 23, 2009, the subsidiary and Excelsior signed an amendment to
     the selling agreement according to which, the period for royalties payments
     will be due immediately upon transfer of a final payment to excelsior in
     the amount of $200 thousand. On that date, the contingent consideration was
     extinguished partly against the balance of the goodwill, with an additional
     amount of $399 recognized in Selling and Marketing expenses.

Note 4:- TRADE RECEIVABLES, NET

                                                    AS OF DECEMBER 31,
                                                -------------------------
                                                   2009           2008
                                                ----------     ----------
                                                     $ IN THOUSANDS
                                                -------------------------

Trade Receivables (1)                           $   14,523     $   23,068
Notes Receivable                                        74            378
                                                ----------     ----------

                                                $   14,597     $   23,446
                                                ==========     ==========

(1) Net of  allowance for doubtful accounts     $      990     $      986
                                                ==========     ==========

     Impaired trade receivables are accounted for through recording an allowance
     for doubtful accounts.

     The movement in the allowance for doubtful accounts is as follows:

                                           $ IN THOUSANDS
                                             ----------

 BALANCE AS OF JANUARY 1, 2008               $      172
 Charge for the year                                865
 Derecognition of doubtful debts                    (51)
                                             ----------

 BALANCE AS OF DECEMBER 31, 2008             $      986

 Charge for the year                                 33
 Reversal of collected doubtful accounts            (29)
                                             ----------

 BALANCE AS OF DECEMBER 31, 2009             $      990
                                             ==========


                                     F - 29`

`Tefron Ltd.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Note 4 :- TRADE RECEIVABLES, NET (cont.)

     At December 31, 2009, the aging analysis of the trade receivables is as
     follows:

                                  PAST DUE TRADE RECEIVABLES BUT NOT IMPAIRED WITH AGEING OF
                 NEITHER PAST DUE -------------------------------------------------------
                   (NOR IMPAIRED)  UNDER 30   30 - 60     60 - 90    90 - 120    OVER 120
                      AGEING        DAYS       DAYS        DAYS        DAYS        DAYS        TOTAL
                      -------     -------     -------     -------     -------     -------     -------
                                                      $ IN THOUSANDS
                      -------------------------------------------------------------------------------

DECEMBER 31, 2009      14,199         101         259           -           -          38      14,597
                      =======     =======     =======     =======     =======     =======     =======

DECEMBER 31, 2008     $18,954     $ 1,778     $   800     $   416     $   642     $   856     $23,446
                      =======     =======     =======     =======     =======     =======     =======

Note 5: OTHER CURRENT ASSETS

                                                          AS OF DECEMBER 31,
                                                     -----------------------------
                                                         2009             2008
                                                     ------------     ------------
                                                            $ IN THOUSANDS
                                                     -----------------------------

Prepaid expenses                                     $        358     $        545
Advances to suppliers                                         995              974
Government authorities                                      1,063            1,001
Accrued income                                                123              543
Current maturity of subordinated note receivable                -              300
Derivatives                                                   195              196
Other                                                         158              999
                                                     ------------     ------------

                                                     $      2,892     $      4,558
                                                     ============     ============

Note 6: INVENTORIES

                                                           AS OF DECEMBER 31,
                                                     -----------------------------
                                                         2009             2008
                                                     ------------     ------------
                                                            $ IN THOUSANDS
                                                     -----------------------------

Raw Materials                                        $      7,148     $     12,343
Work in process                                             7,650           11,323
Finished goods                                              4,980            8,459
                                                     ------------     ------------

                                                     $     19,778     $     32,125
                                                     ============     ============

     The amount of inventories write-off recognized in cost of sales is $ 2,808
     thousand (2008 - $4,523 thousand).


                                     F - 30`

`Tefron Ltd.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Note 7: -PROPERTY, PLANT AND EQUIPMENT

     a.   Composition and movement:

          2009

                                                                                 OFFICE
                                                    MACHINERY                   FURNITURE
                                      LAND AND         AND           MOTOR         AND          LEASEHOLD
                                     BUILDINGS      EQUIPMENT       VEHICLES     EQUIPMENT    IMPROVEMENTS       TOTAL
                                     ---------      ---------      ---------     ---------      ---------      ---------
                                                                      $ IN THOUSANDS
                                     -----------------------------------------------------------------------------------

 COST

 Balance as of January 1, 2009       $   5,918      $ 148,211      $     422     $   8,389      $   6,284      $ 169,224
 Additions during the year                   9            174              -            95            333            611
 Disposals during the year
   (through sale)                            -            (19)             -             -              -            (19)
  Disposals (fully depreciated
   assets)                                   -              -              -        (2,230)          (148)        (2,378)
                                     ---------      ---------      ---------     ---------      ---------      ---------

 Balance as of December 31,
 2009                                $   5,927      $ 148,366      $     422     $   6,254      $   6,469      $ 167,438
                                     ---------      ---------      ---------     ---------      ---------      ---------

 ACCUMULATED DEPRECIATION AND
 IMPAIRMENT

 Balance as of January 1, 2009       $   1,542      $  92,036      $     412     $   6,544      $   2,277      $ 102,811
 Additions during the year                 207          7,911              6           386            393          8,903
 Disposals during the year
   (through sale)                            -            (18)             -             -              -            (18)
  Disposals (fully depreciated
   assets)                                   -              -              -        (2,230)          (148)        (2,378)
                                     ---------      ---------      ---------     ---------      ---------      ---------

 Balance as of December 31,
 2009                                $   1,749      $  99,929      $     418     $   4,700      $   2,522      $ 109,318
                                     ---------      ---------      ---------     ---------      ---------      ---------

IMPAIRMENT
Balance as of January 1, 2009        $     372      $   1,344              -     $     419              -      $   2,135
Impairment charge (Reversal
  of impairment loss), net                  82           (738)             -            63              -           (593)
Reduction during the year                  (17)          (276)             -           (49)             -           (342)
                                     ---------      ---------      ---------     ---------      ---------      ---------
Balance as of December 31, 2009      $     437      $     330              -     $     433              -      $   1,200
                                     ---------      ---------      ---------     ---------      ---------      ---------

 NET BOOK VALUE, AS OF
 DECEMBER 31, 2009                   $   3,741      $  48,107      $       4     $   1,121      $   3,947      $  56,920
                                     =========      =========      =========     =========      =========      =========


                                     F - 31`

`Tefron Ltd.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Note 7: -PROPERTY, PLANT AND EQUIPMENT (Cont.)

     a.   Composition and movement: (Cont.)

          2008

                                                                              OFFICE
                                                 MACHINERY                   FURNITURE
                                   LAND AND         AND           MOTOR         AND          LEASEHOLD
                                   BUILDINGS     EQUIPMENT      VEHICLES      EQUIPMENT    IMPROVEMENTS       TOTAL
                                   ---------     ---------      ---------     ---------      ---------      ---------
                                                                    $ IN THOUSANDS
                                   ----------------------------------------------------------------------------------

 COST

 Balance as of January 1, 2008     $   5,281     $ 147,207      $     422     $   8,209      $   6,222      $ 167,341
 Additions during the year               637         1,030              -           188            484          2,339
 Disposals during the year
   (through sale)                          -           (26)             -            (8)          (422)          (456)
                                   ---------     ---------      ---------     ---------      ---------      ---------

 Balance as of December 31,
 2008                              $   5,918     $ 148,211      $     422     $   8,389      $   6,284      $ 169,224
                                   ---------     ---------      ---------     ---------      ---------      ---------

 ACCUMULATED DEPRECIATION AND
 IMPAIRMENT

 Balance as of January 1, 2008     $   1,349     $  84,275      $     399     $   6,232      $   2,299      $  94,554
 Additions during the year               193         7,781             13           312            189          8,488
 Disposals during the year
   (through sale)                          -           (20)             -             -           (211)          (231)
                                   ---------     ---------      ---------     ---------      ---------      ---------

 Balance as of December 31,
 2008                              $   1,542     $  92,036      $     412     $   6,544      $   2,277      $ 102,811
                                   ---------     ---------      ---------     ---------      ---------      ---------

IMPAIRMENT
Balance as of January 1, 2008              -             -              -             -              -              -
 Additions during the year               372         1,344              -           419              -          2,135
                                   ---------     ---------      ---------     ---------      ---------      ---------
 Balance as of December 31,
 2008                              $     372     $   1,344              -     $     419              -      $   2,135
                                   ---------     ---------      ---------     ---------      ---------      ---------

 NET BOOK VALUE, AS OF
 DECEMBER31, 2008                  $   4,004     $  55,022      $      10     $   1,426      $   4,007      $  64,469
                                   =========     =========      =========     =========      =========      =========

     d.   IMPAIRMENT OF PROPERTY, PLANT AND EQUIPMENT

          The Company engaged a qualified independent appraiser in order to
          determine the fair value of its cash generating units (including
          buildings, machinery and equipment, office furniture and equipment and
          leasehold improvements) for the purpose of assessing recoverability.
          As a result of the aforementioned valuation, the Company recorded in
          2009, an impairment reversal, net in the amount of $496 thousand: Due
          to cash generating unit Cut&Sew the Company recorded a loss from
          impairment in the amount of $237 thousand, due to cash generating unit
          Seamless the Company recorded an impairment reversal in the amount of
          $394 thousand, and due to cash generating unit regarding knitting
          machines that the Company leased in USA recorded an impairment
          reversal in the amount of $339 thousand. In 2008 the Company recorded
          an impairment loss amounting to $2,135 thousand, which was allocated
          to cash generating unit Seamless. This loss, and a reversal of part of
          it, as mentioned above, was calculated by matching fixed assets items
          to their recoverable amount. The recoverable amount is the fair value
          less costs to sell. A loss from impairment and a reversal of part of
          it, as mentioned above, were recorded in the statements of income in
          other expenses (income).

     d.   For liens, see Note 17.


                                     F - 32`

`Tefron Ltd.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Note 8: - GOODWILL AND INTANGIBLE ASSETS

                                                                      CUSTOMER
                                                                    RELATIONSHIPS
                                                        COMPUTER     AND ORDER
                                                        SOFTWARE       BACKLOG     GOODWILL       TOTAL
                                                        --------      --------     --------      --------
                                                                         $ IN THOUSANDS
                                                        -------------------------------------------------

 COST
 Balance as of January 1, 2008                          $  2,941      $      -     $      -      $  2,941
 Additions - purchased separately                            224             -            -           224
 Additions - Acquisition of Excelsior
 activity (Note 3)                                             -         1,293          344         1,637
                                                        --------      --------     --------      --------

 Balance as of December 31, 2008                        $  3,165      $  1,293     $    344      $  4,802
 Additions - purchased separately                             75             -            -            75
 Disposals (fully amortized)                              (1,561)            -            -        (1,561)
 Extinguishment of contingent consideration against
   goodwill                                                    -             -         (344)         (344)
                                                        --------      --------     --------      --------

 Balance as of December 31, 2009                        $  1,679      $  1,293     $      -      $  2,972
                                                        --------      --------     --------      --------

 ACCUMULATED AMORTIZATION
 Balance as of January 1, 2008                          $  2,344      $      -     $      -      $  2,344
 Amortization                                                251           186            -           437
                                                        --------      --------     --------      --------

 Balance as of December 31, 2008                        $  2,595      $    186     $      -      $  2,781
 Additions - purchased separately                            227           468            -           695
Disposal (fully amortized)                                (1,561)            -            -        (1,561)
                                                        --------      --------     --------      --------
 Balance as of December 31, 2009                        $  1,261      $    654     $      -      $  1,915
                                                        --------      --------     --------      --------

IMPAIRMENT
Balance as of January 1, 2009                                  -             -            -             -
 Additions during the year                                    97             -            -            97
                                                        --------      --------     --------      --------
 Balance as of December 31, 2009                        $     97      $      -     $      -      $      -


 NET BALANCE

 As of December 31, 2009                                $    321      $    639     $      -      $    960
                                                        ========      ========     ========      ========
 As of December 31, 2008                                $    570      $  1,107     $    344      $  2,021
                                                        ========      ========     ========      ========

     AMORTIZATION EXPENSE

     Amortization expense for intangible assets is classified in the statements
     of income as follows:

                                            FOR THE YEAR ENDED
                                               DECEMBER 31
                                   ----------------------------------
                                     2009         2008         2007
                                   --------     --------     --------
                                             $ IN THOUSANDS
                                   ----------------------------------

Cost of sales                      $    227     $    251     $    249
Selling and Marketing expenses          468          186            -
                                   --------     --------     --------
                                   $    695     $    437     $    249
                                   ========     ========     ========


                                     F - 33`

`Tefron Ltd.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Note 9: - SUBORDINATED NOTE RECEIVABLE

     In 2006, the Company exercised its option to sell its holdings in
     AlbaHealth ("Alba"). The sale was made for a total consideration of $13
     million, of which $10 million was paid to the Company in cash and $3
     million was payable to the Company on August 31, 2009 in accordance with an
     agreement for issuance of a subordinated note bearing market interest at
     LIBOR + 3%, subject to repayment of Alba's debt to a bank in the USA. The
     agreement was signed by Alba, Suntrust (Alba's major lender) and Tefron
     USA. In accordance with the agreement, Tefron USA is entitled to receive
     interest on the note for as long as Alba is in compliance with its credit
     commitments to Suntrust, as set forth in the agreement between Alba and
     Suntrust. In 2008, Alba failed to comply with one of the financial
     covenants. Therefore it was in breach of its credit commitment, and acted
     to replace its sources of financing.

     On December 31, 2008, Alba signed a new loan agreement with BB&T Bank.
     Suntrust and Tefron USA were also parties to this agreement, and have
     consented for the note to be paid in ten equal installments of $300
     thousand. Payments were made quarterly starting on October 1, 2009 and bear
     an interest of LIBOR + 3%.

     On September 24, 2009 the subordinated note, was early repaid, by mutual
     agreement between the parties. According to the agreement Alba paid Tefron
     $1,715 thousand and settled all the interest payments that were lagged. Due
     to the aforesaid early repayment, the Company recorded a $1,285 thousand
     capital loss.

Note 10: - SHORT - TERM LOANS

     a.   COMPOSITION:

                                               WEIGHTED                                              AS OF
                                                AVERAGE                                             DECEMBER
                                             INTEREST RATE        AS OF DECEMBER 31, 2009           31, 2008
                                              ----------     ----------------------------------     --------
                                              DECEMBER 31,
                                                 2009         IN NIS      IN U.S. $     TOTAL        TOTAL
                                              ----------     --------     --------     --------     --------
                                                   %                         $ IN THOUSANDS
                                              ----------     -----------------------------------------------

Short-term credit from banks                  LIBOR+2.75          299       13,947       14,246        9,323
Current maturities of long-term loans                               -        4,151        4,151        4,151
Long-term loans classified as current (b)     LIBOR + 1%            -        7,450        7,450       11,335
                                                             --------     --------     --------     --------

                                                                  299       25,548       25,847       24,809
                                                             ========     ========     ========     ========

     b.   In 2009 and 2008 the Company failed to comply with its debt covenants.
          As required by IAS 1, the Company classified its long-term loans as
          current in both 2008 and 2009. Notwithstanding the aforementioned, the
          Company received waivers from the banks subsequent to the year end in
          both years. See also note 24b, regarding a new agreement with the
          banks, signed on March 2, 2010.


                                     F - 34`

`Tefron Ltd.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Note 10: - SHORT - TERM LOANS (Cont.)

     c.   MATURITIES AFTER THE BALANCE SHEET DATE AS OF DECEMBER 31, 2009:

                                                YEAR 1       YEAR 2       YEAR 3       TOTAL
                                               --------     --------     --------     --------

 Short-term credit from banks                    14,246            -            -       14,246
 Current maturities of long-term loans            4,151            -            -        4,151
 Long-term loans classified as current (b)            -        4,151        3,299        7,450
                                               --------     --------     --------     --------

 Total                                           18,397        4,151        3,299       25,847
                                               ========     ========     ========     ========

     d.   For collaterals, see Note 17.

     e.   On March 2, 2010, the company signed a final agreement with the banks
          for the restructuring of the Company's current credit lines and
          long-term loans. As part of the restructuring, all of the existing
          debts were reorganized to current and non-current (with different
          maturities of up to 10 years), Whereas, loans in a cumulated amount of
          $20 million are to be repaid starting the third year from the date of
          receiving the loans.

Note 11: TRADE PAYABLES

                                    AS OF DECEMBER 31,
                              -----------------------------
                                  2009             2008
                              ------------     ------------
                                      $ IN THOUSANDS
                              -----------------------------

Trade Payables                $     14,826     $     22,953
Notes Payable                          216            2,214
                              ------------     ------------

                              $     15,042     $     25,167
                              ============     ============

Note 12: OTHER CURRENT LIABILITIES

                                    AS OF DECEMBER 31,
                              -----------------------------
                                  2009             2008
                              ------------     ------------
                                      $ IN THOUSANDS
                              -----------------------------

Payroll accruals              $      3,812     $      3,528
Accrued expenses                       533            1,177
Tax Authorities (*)                    293            2,111
Other current liabilities            1,028              820
                              ------------     ------------

                              $      5,666     $      7,636
                              ============     ============

     *)   In January 2009, the Company reached an agreement with the Israeli Tax
          Authorities with regard to payment of taxes in arrears by
          installments. Amounts due more than one year after the balance sheet
          date are presented under other non-current liabilities.


                                     F - 35`

`Tefron Ltd.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Note 13: LOANS FROM BANKS

     a.   COMPOSITION:

          AS OF DECEMBER 31, 2009

                       WEIGHTED                         BALANCE NET
                        AVERAGE                          OF CURRENT
                     INTEREST RATE        BALANCE        MATURITIES
                     -------------     ------------     ------------
                           %                  $ IN THOUSANDS
                     -------------     -----------------------------

Loans from banks     LIBOR + 1.2-2           11,601            7,450(1)
                                       ============     ============

          (1)  Classified to short term loans, see note 10.

     b.   FINANCIAL COVENANTS

          In accordance with the new agreement, signed on March 2, 2010 with the
          banks, the Company is required to be in compliance with financial
          covenants, including all the following financial ratios:

          1.   The Company's Earnings Before Interest, Taxes, Depreciation and
               Amortization ("EBITDA") will be positive according to the
               Company's 2010 consolidated financial statements (this financial
               covenant was amended by agreement with the bank lenders on July
               11, 2010, requiring EBITDA of not more than a negative EBITDA of
               $2.1 million);

          2.   The Company's shareholders' equity, according to the quarterly
               and annually consolidated financial statements will not be less
               than $35 million;

          3.   The total amount of the cash and cash equivalents, trade
               receivables, other current assets and inventory balances of the
               Company, pursuant to the consolidated financial statements (on a
               quarterly and annual basis) will not be less than $33 million;

          4.   The balance of the Company's trade receivables will not be less
               than $9 million, according to its consolidated financial
               statements (on a quarterly and annual basis).

          According to the agreement, unless the parties agree on new financial
          covenants for 2011 (including with regard to the salary limitations of
          the officers of the Group companies, on which the Group is required to
          comply effective from January 1, 2011) by November 30, 2010, the
          Company shall be required to comply with the financial covenants,
          which were in effect prior to the new agreement signed on March 2,
          2010,.

          Furthermore, the agreements contain restrictions that limit the Group
          ability to make certain investments or obtaining additional loans,
          material sale of assets, dividend distribution or other payments to
          shareholders.

          Failure to comply with the aforementioned covenants shall enable the
          banks to demand immediate repayment in full of all credit extended to
          the Company.

          Up to December 31, 2009, the terms of the then existing long-term bank
          loans required the Company to comply with financial covenants,
          including the following financial ratios:

               o    Shareholders' equity shall not be less than $40 million.

               o    Ratio of shareholders' equity to Total assets shall not be
                    less than 20%.

               o    Ratio of total liabilities to banks to EBITDA shall not
                    exceed 9.5.

          As of December 31, 2009 and 2008, the Company was in breach of the
          EBITDA covenant. Subsequent to the balance sheet date, the Company
          received waivers from all banks, as discussed in Note 10b.


                                     F - 36`

`Tefron Ltd.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Note 14: FINANCIAL INSTRUMENTS

     a.   The financial assets and financial liabilities in the balance sheet
          are classified by groups of financial instruments pursuant to IAS 39:

                                                                    DECEMBER 31,
                                                           -----------------------------
                                                               2009             2008
                                                           ------------     ------------
                                                                  $ IN THOUSANDS
                                                           -----------------------------

Financial assets:

Financial assets at fair value through profit or loss:

Derivatives                                                $        195     $        196
                                                           ============     ============
Available-for-sale financial assets                                 737              847
                                                           ============     ============
Loans and receivables - subordinated note receivable                  -            3,000
                                                           ============     ============

Financial liabilities:

Financial liabilities measured at amortized cost           $     25,847     $     24,809
                                                           ============     ============

     b.   FINANCIAL RISKS FACTORS

          The Group's activities expose it to various financial risks such as
          market risk (including foreign exchange risk and interest rate risk),
          credit risk and liquidity risk. The Group's comprehensive risk
          management plan focuses on activities that reduce to a minimum any
          possible adverse effects on the Group's financial performance. The
          Group utilizes derivatives in order to hedge certain exposures to
          risks.

          The Board establishes documented objectives for the overall risk
          management activities as well as specific policies with respect to
          certain exposures to risks such as currency risk, interest rate risk,
          credit risk, the use of derivative financial instruments and
          non-derivative financial instruments.

          1.   MARKET RISKS:

               a.   FOREIGN CURRENCY RISK:

                    Foreign currency risk is the risk that the fair value or
                    future cash flows of a financial instrument will fluctuate
                    because of changes in foreign exchange rates. The Group's
                    exposure to the risk of changes in foreign exchange rates
                    relates primarily to the Group's operating activities (when
                    revenue or expense are denominated in a different currency
                    from the Group's functional currency)

                    The Group operates in a large number of countries and is
                    exposed to foreign currency risk resulting from the exposure
                    to different currencies, mainly the New Israeli Shekel
                    ("NIS"). Foreign exchange risk arises from forward
                    commercial transactions and recognized assets and
                    liabilities denominated in a different currency from the
                    functional currency of the Company. The risk management unit
                    is responsible for managing the net position of each foreign
                    currency by entering into forward exchange contracts,
                    according to the Company's hedging policy.

                    Management's policy is to hedge forecasted payroll expenses
                    denominated in NIS, its payments to suppliers in NIS and its
                    sales in Euro. The hedging level is examined from time to
                    time, according to the market condition.


                                     F - 37`

`Tefron Ltd.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Note 14: FINANCIAL INSTRUMENTS (CONT.)

          1.   MARKET RISKS (cont.):

               b.   INTEREST RISK:

                    Interest rate risk is the risk that the fair value or future
                    cash flows of a financial instrument will fluctuate because
                    of changes in market interest rates. The Group's exposure to
                    the risk of changes in market interest rates relates
                    primarily to the Group's short and long-term debt
                    obligations with floating interest rates (the long-term
                    loans are linked to the LIBOR and PRIME base interest rate).

          2.   CREDIT RISK:

               Credit risk is the risk that a counterparty will not meet its
               obligations under a financial instrument or customer contract,
               leading to a financial loss.

               The Group has no significant concentrations of credit risk. The
               Group has a policy to ensure collection through sales of its
               products to wholesalers with an appropriate credit history.

               Credit risk may arise from the exposure of holding several
               financial instruments with a single entity or from entering into
               transactions with several groups of debtors with similar economic
               characteristics whose ability to discharge their obligations will
               likely be similarly affected by changes in economic or other
               conditions. Factors that have the potential of creating
               concentrations of risks consist of the nature of the debtors'
               activities, such as their business sector, the geographical area
               of their operations and the financial strength of groups of
               borrowers.

               The Company provides an allowance for doubtful accounts based on
               the factors that affect the credit risk of certain customers,
               past experience and other information.

               The Company maintains cash and cash equivalents and other
               financial instruments in various financial institutions in Israel
               and in other countries in which the Company works. The Company's
               policy is to diversify its investments among the various
               institutions.

               As of December 31, 2009, cash and cash equivalents totaled $
               1,904 thousand.

               The Company's revenues are mainly from customers in the United
               States and Europe. Outstanding customer receivables are regularly
               monitored by the Company, and allowances for doubtful accounts
               which, according to the Company's evaluation, adequately reflect
               the expected loss of debts whose collection is doubtful, were
               recorded in the financial statements

          3.   LIQUIDITY RISK:

               Liquidity risk is the risk that the Company will not be able to
               pay its financial liabilities at payment date.

               The Group's objective is to maintain a balance between continuity
               of funding and flexibility through the use of bank overdrafts,
               and bank loans.

               The Company's management is responsible for handling the Group's
               liquidity risk, The Company's management has a plan for managing
               financial risks and liquidity for the short, medium and long term
               according to the Company's needs. The Company manages the
               liquidity risk by performing updating financial forecasts.


                                     F - 38`

`Tefron Ltd.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Note 14: FINANCIAL INSTRUMENTS (CONT.)

               The table below presents the maturity dates of the Group's
               financial obligations based on contractual undiscounted payments:

               AS OF DECEMBER 31, 2009

                             LESS THAN         1 TO 2           2 TO 3
                              1 YEAR            YEARS            YEARS            TOTAL
                           ------------     ------------     ------------     ------------
                                                    $ IN THOUSANDS
                           ---------------------------------------------------------------

Loans from banks           $     18,397     $      4,151     $      3,299     $     25,847
Trade payables                   15,042                -                -           15,042
Other accounts payable            5,374                -                -            5,374
Other liabilities                   292            1,838                -            2,130
                           ------------     ------------     ------------     ------------
                           $     39,105     $      5,989     $      3,299     $     48,393
                           ============     ============     ============     ============

               AS OF DECEMBER 31, 2008

                             LESS THAN         1 TO 2          2 TO 3           3 TO 4
                              1 YEAR           YEARS            YEARS            YEARS            TOTAL
                           ------------     ------------     ------------     ------------     ------------
                                                            $ IN THOUSANDS
                           --------------------------------------------------------------------------------

Loans from banks           $     13,474     $      4,151     $      4,151     $      3,033     $     24,809
Trade payables                   25,167                -                -                -           25,167
Other accounts payable            5,525                -                -                -            5,525
Other liabilities                 2,111              915              394                -            3,420
                           ------------     ------------     ------------     ------------     ------------
                           $     46,277     $      5,066     $      4,545     $      3,033     $     58,921
                           ============     ============     ============     ============     ============

     c.   FAIR VALUE

          The carrying amount of cash and cash equivalents, trade receivables,
          other current assets, subordinated note receivable, short - term loans
          from banks and long-term loans, trade payables and other current
          liabilities approximate their fair value.

     d.   CLASSIFICATION OF FINANCIAL INSTRUMENTS BY FAIR VALUE HIERARCHY:

          The financial instruments presented in the balance sheet at fair value
          are grouped into classes with similar characteristics using the
          following fair value hierarchy which is determined based on the lowest
          significant source of input used in measuring fair value:

          Level 1   -    quoted prices (unadjusted) in active markets for
                         identical assets or liabilities.

          Level 2   -    inputs other than quoted prices included within Level 1
                         that are observable either directly or indirectly.

          Level 3   -    inputs that are not based on observable market data
                         (valuation techniques which use inputs that are not
                         based on observable market data).


                                     F - 39`

`Tefron Ltd.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Note 14: FINANCIAL INSTRUMENTS (CONT.)

     d.   Classification of financial instruments by fair value hierarchy
          (Cont.):

          FINANCIAL LIABILITIES MEASURED AT FAIR VALUE:

          December 31, 2009:

                                                            LEVEL 1        LEVEL 2        LEVEL 3
                                                          ----------     ----------     ----------
                                                                       $ IN THOUSANDS
                                                          ----------------------------------------

Financial liabilities at fair value through profit or
   loss:
Foreign exchange foreign contracts - hedged                        -            195              -

Available for sale financial assets:
Mortgage-backed securities                                         -              -            737
                                                          ----------     ----------     ----------

                                                                   -            195            737
                                                          ==========     ==========     ==========

          During 2009, there were no transfers between Level 1 and Level 2 fair
          value measurements, and no transfers into and out of Level 3 fair
          value measurements.

          Changes in financial assets classified as Level 3:

                                                             AVAILABLE-FOR-SALE
                                                                 FINANCIAL
                                                                   ASSETS
                                                              $ IN THOUSANDS
                                                                ----------

Balance as of January 1, 2009                                   $      847

Total recognized gains (losses):
   In other comprehensive income (loss)                               (110)
                                                                ----------
Balance as of December 31, 2009                                 $      737
                                                                ==========

Total gain (loss) for the year included in profit or loss
   relating to assets held at the end of the reporting year     $        -
                                                                ==========

     e.   DERIVATIVES AND CASH FLOW HEDGING

          The Group in Israel is exposed mainly to foreign currency risk.

          As of December 31, 2009 and 2008 the Group held forward contracts and
          Call and Put options in foreign currency for the purpose of hedging
          the following: its Israeli employees wages , its purchases of expected
          future raw materials from local suppliers, and expected sales in Euro
          to the Company's customers in Europe. all the above-mentioned
          transactions are considered highly probable.

          The cash flow hedges of expected future purchases in January through
          March 2010 were assessed to be highly effective, and as of December
          31, 2009, net unrealized gain amounting to $95 thousand, plus deferred
          tax liability amounting to $24 thousand, was included in the statement
          of comprehensive income.

          The cash flow hedges of expected future sales in January through April
          2010 were assessed to be highly effective, and as of December 31,
          2009, net unrealized gain amounting to $20 thousand, plus deferred tax
          liability amounting to $7 thousand, was included in statement of
          comprehensive income.


                                     F - 40`

`Tefron Ltd.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Note 14: FINANCIAL INSTRUMENTS (CONT.)

     e.   DERIVATIVES AND CASH FLOW HEDGING (Cont.)

          The cash flow hedges of expected future purchases in January through
          March 2009 were assessed to be highly effective, and as of December
          31, 2008, net unrealized gain amounting to $47 thousand, plus deferred
          tax liability amounting to $16 thousand, was included in statement of
          comprehensive income.

          The cash flow hedges of expected future wages payments in January 2009
          was assessed to be highly effective, and as of December 31, 2008, net
          unrealized loss amounting to $28 thousand, plus deferred tax asset
          amounting to $17 thousand, was included in statement of comprehensive
          income.

          The cash flow hedges of expected future sales in January through March
          of 2009 were assessed to be highly effective, and as of December 31,
          2008, net unrealized gain amounting to $4 thousand, plus deferred tax
          liability amounting to $1 thousand, was included in statement of
          comprehensive income.

          The following are details of the Group's financial derivatives:

                                     EXERCISE / EXPIRATION   PAR VALUE ($       FAIR VALUE
                                              DATE           IN THOUSANDS)    $ IN THOUSANDS
                                        ----------------     ------------      ------------

December 31, 2009

Forward transactions purchased, net     Jan. - May. 2010     $      6,692      $        195
                                                             ============      ============

December 31, 2008

Forward transactions purchased, net     Jan. - Jun. 2009     $     13,483      $        196
                                                             ============      ============

Options purchased:
Call options                            Jan. - Feb. 2009     $     (2,000)     $        (88)
                                                             ============      ============

Put options                             Jan. - Feb. 2009     $      2,000      $          1
                                                             ============      ============

     f.   SENSITIVITY TESTS RELATING TO CHANGES IN MARKET FACTORS

          Changes in interest rates for financial liabilities as of December 31
          would have increased (decreased) shareholders' equity and income or
          loss by the following amounts. This analysis assumes that all other
          variables are constant and ignores tax implications.

                                        SENSITIVITY TEST TO CHANGES IN
                                               INTEREST RATES
                                        ------------------------------
                                           GAIN (LOSS) FROM CHANGE
                                        ------------------------------
                                       1% INCREASE IN    1% DECREASE IN
                                          INTEREST          INTEREST
                                        ------------      ------------
                                                $ IN THOUSANDS
                                        ------------------------------

2009                                    $       (430)     $        430
                                        ============      ============

2008                                    $     (2,170)     $      2,170
                                        ============      ============


                                     F - 41`

`Tefron Ltd.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Note 14: FINANCIAL INSTRUMENTS (CONT.)

     f.   SENSITIVITY TESTS RELATING TO CHANGES IN MARKET FACTORS (Cont.)

          Changes in NIS exchange rates as of December 31 would have increased
          (decreased) shareholders' equity and income or loss by the following
          amounts. This analysis assumes that all other variables are constant
          and ignores tax implications.

                                       SENSITIVITY TEST TO FLUCTUATIONS
                                            IN NIS EXCHANGE RATE
                                        -------------=---------------
                                            GAIN (LOSS) FROM CHANGE
                                        -----------------------------
                                       1% INCREASE IN    1% DECREASE IN
                                        EXCHANGE RATE    EXCHANGE RATE
                                        ------------     ------------
                                               $ IN THOUSANDS
                                        -----------------------------

2009                                    $      1,420     $     (1,420)
                                        ============     ============

2008                                    $      1,700     $     (1,700)
                                        ============     ============

          Changes in NIS exchange rates as of December 31 would have increased
          (decreased) shareholders' equity and income or loss by the following
          amounts. This analysis assumes that all other variables are constant
          and ignores tax implications.

                                                             GAIN (LOSS) FROM CHANGE
                                                          ------------------------------
                                                         1% INCREASE IN    1% DECREASE IN
                                                          MARKET FACTOR     MARKET FACTOR
                                                          ------------      ------------
FOREIGN CURRENCY                                                  $ IN THOUSANDS
                                                          ------------------------------

US DOLLAR

2009 - In respect of forward transactions and options     $       (300)     $        300

2008 - In respect of forward transactions and options     $     (1,000)     $      1,000

EURO

2009 - In respect of forward transactions                 $       (290)     $        290

2008 - In respect of forward transactions                 $        (35)     $        350

          SENSITIVITY TESTS AND PRINCIPAL WORK ASSUMPTIONS:

          The selected changes in the relevant risk variables were determined
          based on management's estimate as to reasonable possible changes in
          these risk variables.

          The Company has performed sensitivity tests of principal market risk
          factors that are liable to affect its reported operating results or
          financial position. The sensitivity tests present the profit or loss
          and/or change in equity (before tax) in respect of each financial
          instrument for the relevant risk variable chosen for that instrument
          as of each reporting date. The test of risk factors was determined
          based on the materiality of the exposure of the operating results or
          financial condition of each risk with reference to the operating
          currency and assuming that all the other variables are constant.

          The sensitivity test for long-term loans with variable interest was
          performed solely on the variable component of interest.


                                     F - 42`

`Tefron Ltd.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Note 15: EMPLOYEE BENEFITS

     Employee benefits consist of short-term benefits and post-employment
     benefits.

     a.   POST-EMPLOYMENT BENEFITS

          According to the labor laws and Severance Pay Law in Israel, the
          Company is required to pay compensation to an employee upon dismissal
          or retirement or to make current contributions in defined contribution
          plans pursuant to Section 14 to the Severance Pay Law, as specified
          below. The Company's liability is accounted for as a post-employment
          benefit. The computation of the Company's employee benefit liability
          is made in accordance with a valid employment contract based on the
          employee's salary and employment term which establish the entitlement
          to receive the compensation.

          The post-employment employee benefits are normally financed by
          contributions classified as defined contribution plans or as defined
          benefit plans, as detailed below.

     b.   DEFINED CONTRIBUTION PLANS

          Section 14 of the Severance Pay Law, 1963 in Israel applies to part of
          the compensation payments, pursuant to which the fixed contributions
          paid by the Group into pension funds and/or policies of insurance
          companies release the Group from any additional liability to employees
          for whom such contributions were made. These contributions and
          contributions for compensation represent defined contribution plans.

                                                              FOR THE YEAR ENDED DECEMBER 31
                                                      ----------------------------------------------
                                                          2009             2008              2007
                                                      ------------     ------------     ------------
                                                                      $ IN THOUSANDS
                                                      ----------------------------------------------

Expenses in respect of defined contribution plans     $      1,072     $      1,170     $      1,139
                                                      ============     ============     ============

     c.   DEFINED BENEFIT PLANS

          The Group accounts for that part of the payment of compensation that
          is not covered by contributions in defined contribution plans, as
          above, as a defined benefit plan for which an employee benefit
          liability is recognized and for which the Group contributes amounts in
          central severance pay funds and in qualifying insurance policies.

          1.   EXPENSES CHARGED TO THE STATEMENTS OF INCOME:

                                                               FOR THE YEAR ENDED DECEMBER 31
                                                       ------------------------------------------------
                                                           2009              2008               2007
                                                       ------------      ------------      ------------
                                                                       $ IN THOUSANDS
                                                       ------------------------------------------------

Current service cost                                   $        147      $        382      $        319
Interest cost on benefit obligation                              95               143               126
Expected return on plan assets                                  (35)              (55)              (43)
Other                                                            40              (121)              (82)
                                                       ------------      ------------      ------------
Total expenses in respect of employee benefits         $        247      $        349      $        320
                                                       ============      ============      ============

Actual return on plan assets                           $         37      $         10      $         43
                                                       ============      ============      ============

Expenses presented in the statements of income are
as follows:

Cost of sales                                          $        199      $        100      $        194
Sales and Marketing expenses                                     44               115                42
General and administrative expenses                               4               134                84
                                                       ------------      ------------      ------------
                                                       $        247      $        349      $        320
                                                       ============      ============      ============


                                     F - 43`

`Tefron Ltd.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Note 15: EMPLOYEE BENEFITS (cont.)

     c.   DEFINED BENEFIT PLANS (Cont.)

          2.   PLAN ASSETS (LIABILITIES), NET

                                     AS OF DECEMBER 31,
                               ------------------------------
                                   2009              2008
                               ------------      ------------
                                       $ IN THOUSANDS
                               ------------------------------

Defined benefit obligation     $     (1,468)     $     (3,098)
Fair value of plan assets               739               929
                               ------------      ------------

Total liabilities, net         $       (729)     $     (2,169)
                               ============      ============

          3.   CHANGES IN PRESENT VALUE OF DEFINED BENEFIT OBLIGATION

                                   2009              2008
                               ------------      ------------
                                      $ IN THOUSANDS
                               ------------------------------

Balance as of January 1        $      3,098      $      2,425

Interest expenses                        95               143
Current service cost                    147               382
Benefits paid                          (770)             (574)
Net actuarial loss (gain)              (588)              222
Exchange rate differences              (514)              500
                               ------------      ------------

Balance as of December 31      $      1,468      $      3,098
                               ============      ============


                                     F - 44`

`Tefron Ltd.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Note 15: EMPLOYEE BENEFITS (cont.)

     c.   DEFINED BENEFIT PLANS (Cont.)

          4.   PLAN ASSETS

               a)   PLAN ASSETS

                    Plan assets include assets held by a long-term employee
                    benefit fund and by qualifying insurance policies.

               b)   MOVEMENT IN FAIR VALUE OF PLAN ASSETS

               c)

                                           2009               2008
                                       ------------      ------------
                                               $ IN THOUSANDS
                                       ------------------------------

Balance as of January 1                $        929      $        940

Expected return                                  35                55
Employer contributions to the plan               72               118
Benefits paid                                  (216)             (152)
Net actuarial loss                              (20)              (42)
Exchange rate differentials                     (61)               10
                                       ------------      ------------

Balance as of December 31              $        739      $        929
                                       ============      ============

          5.   PRINCIPAL ASSUMPTIONS USED IN DETERMINING THE DEFINED BENEFIT
               PLAN

                                               YEAR ENDED DECEMBER 31,
                                   ----------------------------------------------
                                       2009             2008              2007
                                   ------------     ------------     ------------
                                                          %
                                   ----------------------------------------------

Discount rate                               5.4          3.9-4.6          3.9-4.6
                                   ============     ============     ============

Expected return on plan assets          3.6-5.4            5-6.7            5-6.7
                                   ============     ============     ============

Expected salary increase rate                 0                0                0
                                   ============     ============     ============

          6.   The amounts for the current and previous years:

                                                            YEAR ENDED DECEMBER 31,
                                                ----------------------------------------------
                                                    2009             2008             2007
                                                ------------     ------------     ------------
                                                                $ IN THOUSANDS
                                                ----------------------------------------------

Present value of defined benefit obligation     $      1,468     $      3,098     $      2,424
                                                ============     ============     ============

Fair value of plan assets                       $        739     $        929     $        940
                                                ============     ============     ============

Surplus in the plan                             $        729     $      2,169     $      1,485
                                                ============     ============     ============


                                     F - 45`

`Tefron Ltd.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Note 16: INCOME TAXES

     a.   TAX LAWS APPLICABLE TO GROUP COMPANIES

          The Company is subject to provisions of Income Tax Regulations (Rules
          for Bookkeeping by Foreign Investment Companies and Certain
          Partnerships and Determination of Taxable Revenue), 1986. In
          accordance with the aforementioned regulations, the Company files its
          income tax returns in USD.

          TAX BENEFITS UNDER THE LAW FOR THE ENCOURAGEMENT OF CAPITAL
          INVESTMENT, 1959 ("THE LAW")

          The Company's enterprises received a status of "approved enterprise"
          under the law for the Encouragement of Capital Investment, 1959.
          According to the Law, revenues from the approved enterprises, during
          the seven years from the first year the approved enterprise earns
          taxable income, provided that 7 years have not passed since the
          approval was granted or 12 years have not passed since the enterprise
          began operating, whichever is earlier ("benefit period"), will be
          taxed at reduced tax rate of between 10% and 25% (in accordance with
          the rate of foreign investments in the company). A company, in which
          foreign investments exceed 25%, is entitled to a 10-year benefit
          period. Approval letters dated January 1997 or later are entitled to a
          tax exemption in the first two years of the benefit period.

          Shareholders are taxed at a 15% tax rate (withheld) on dividends
          distributed from revenues from the approved operations, and at a 25%
          tax rate on dividends distributed from revenues from other sources,
          unless otherwise stipulated by tax treaties.

          TEFRON -Tefron has 9 approved investments under the grants track. The
          benefit period of 6 approved investments of the Company has ended, and
          as such income derived from these investments is taxable at the
          regular corporate tax rate in Israel. The ratio of the revenue derived
          from these investments is calculated according to growth in Company
          sales over and above sales before the beginning of these investments.
          The benefit period of 3 approved investments of the Company has yet to
          be ended.

          TAX BENEFITS UNDER THE LAW FOR THE ENCOURAGEMENT OF CAPITAL
          INVESTMENT, 1959 ("THE LAW") (Cont.)

          HI-TEX - Hi-Tex has 3 approved investments under the grants track. The
          benefit period of them has yet to be ended.

          In addition, the Company's fourth plan is in accordance with Amendment
          60 of the Law ("the Amendment"), under the alternative track. Under
          the alternative track, the benefit period start date is from the year
          in which taxable revenue is first generated by the approved
          enterprise, provided that less than 12 years have elapsed since the
          start of the elective year. Under this track, the Company is tax
          exempt in the first ten years of the benefit period.

          The basic condition for receiving the benefits under this track is
          that the enterprise is "a competitive enterprise".

          Another condition for receiving the benefits under the alternative
          track is a minimum qualifying investment. This condition requires an
          investment in the acquisition of productive assets such as machinery
          and equipment, which must be carried out within three years. The
          minimum qualifying investment required for plant expansion is the
          higher of NIS 300 thousand and an amount equivalent to the "qualifying
          percentage" of the value of the productive assets. Productive assets
          that are used by the plant but not owned by it will also be viewed as
          productive assets.


                                     F - 46`

`Tefron Ltd.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Note 16:  INCOME TAXES (CONT.)

     a.   TAX LAWS APPLICABLE TO GROUP COMPANIES (CONT.)

          The qualifying percentage of the value of the productive assets is as
          follows:

             THE VALUE OF PRODUCTIVE           THE NEW PROPORTION THAT THE
           ASSETS BEFORE THE EXPANSION      REQUIRED INVESTMENT BEARS TO THE
                (NIS IN MILLIONS)              VALUE OF PRODUCTIVE ASSETS
          ------------------------------    ---------------------------------

                 Up to NIS 140                             12%
               NIS 140 - NIS 500                            7%
               More than NIS 500                            5%

          The income qualifying for tax benefits under the alternative track is
          the taxable income of a company that has met certain conditions as
          determined by the Law ("a beneficiary enterprise"), and which is
          derived from an industrial enterprise or a hotel. The Law specifies
          the types of qualifying income that is entitled to tax benefits under
          the alternative track both in respect of an industrial enterprise and
          of a hotel, whereby income from an industrial enterprise includes,
          among others, revenues from the production and development of software
          products and revenues from industrial research and development
          activities performed for a foreign resident (and approved by the Head
          of the Administration of Industrial Research and Development).

          The Hi-Tex enterprise has elected 2007 as its elective year.
          Furthermore, on June 30, 2008 an application for a pre-ruling was
          filed with the Income Tax Professional Department, requesting
          beneficiary enterprise status and determination of 2007 as the
          elective year ("the application for a pre-ruling"). To date, response
          from the Tax Authorities has yet to be received.


                                     F - 47`

`Tefron Ltd.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Note 16: INCOME TAXES (CONT.)

     a.   TAX LAWS APPLICABLE TO GROUP COMPANIES (CONT.)

          TAX BENEFITS UNDER THE LAW FOR THE ENCOURAGEMENT OF CAPITAL
          INVESTMENT, 1959 ("THE LAW") (Cont.)

          As mentioned in Note 1c above, in January 2009 the Group placed all of
          the active wear and intimate apparel operations under Hi-Tex founded
          by Tefron Ltd. To this end, Tefron transferred most of its assets to
          Hi-Tex against allotment of additional Hi-Tex shares, pursuant to
          Section 104 of the Israeli Income Tax Ordinance. Therefore, Tefron
          applied to the Investment Center to indorse its approval to Hi-Tex. To
          date, response has yet to be received. In addition, Hi-Tex updated the
          application for a pre-ruling accordingly.

          MACRO - Macro has elected 2005 as the elective year under the
          alternative track, pursuant to the amendment to the Law. The Company
          informed the income tax assessor on its election in its letter from
          December 27, 2006.

          THE LAW FOR ENCOURAGEMENT OF INDUSTRY (TAXES), 1969

          The Company and its subsidiaries in Israel are "industrial companies"
          in conformity with the Industry Promotion Act (Taxes), 1969. The
          principal benefits to which the companies are entitled under this Act
          are accelerated depreciation on property, plant and equipment, a
          consolidated tax return and allowed deduction for tax purposes, over a
          three year period, of costs incurred in listing shares for trading.

          CAPITAL GAINS/LOSSES

          Under provisions of the Israeli Income Tax Ordinance (Amendment 132),
          2003 (the "Reform Act"), a reduced tax rate of 25% applies to capital
          gains realized after January 1, 2003 instead of the normal tax rate.
          When selling assets acquired prior to the effective date of the
          "Reform Act", the reduced tax rate shall apply only to the part of the
          gain made after the "Reform Act" came into effect, to be calculated as
          set forth in the act. Furthermore, the "Reform Act" stipulates that
          carry-forward capital losses for tax purposes may be offset against
          capital gains with no time limits. The Reform Act also sets forth the
          option to offset capital losses from sale of assets outside Israel
          against capital gains in Israel.

     b.   TAX RATES APPLICABLE TO THE INCOME OF THE GROUP:

          In June 2004, an amendment to the Income Tax Ordinance (No. 140 and
          Temporary Provision), 2004 was passed by the "Knesset" (Israeli
          parliament) and on July 25, 2005, another law was passed, the
          amendment to the Income Tax Ordinance (No. 147) 2005, according to
          which, among others, the corporate tax rate is to be progressively
          reduced to the following tax rates: 2004 - 35%, 2005 - 34%, 2006 -
          31%, 2007 - 29%, 2008 - 27%, 2009 - 26%, 2010 and thereafter - 25%.

          In July 2009, the "Knesset" (Israeli Parliament) passed the Law for
          Economic Efficiency (Amended Legislation for Implementing the Economic
          Plan for 2009 and 2010), 2009, which prescribes, among others, an
          additional gradual reduction in the rates of the Israeli corporate tax
          and real capital gains tax starting 2011 to the following tax rates:
          2011 - 24%, 2012 - 23%, 2013 - 22%, 2014 - 21%, 2015 - 20%, 2016 and
          thereafter - 18%.

          The effect of the abovementioned change on the balances of deferred
          taxes has been a decrease in loss of approximately $ 888 thousand
          which was carried to taxes on income in 2009.

          The tax rate on a subsidiary in the United States is 34%.


                                     F - 48`

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Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Note 16: INCOME TAXES (CONT.)

     b.   TAX RATES APPLICABLE TO THE INCOME OF THE GROUP (cont.):

          El Masira is incorporated in the Free Trade Zone in Jordan, and is
          taxed according to tax laws applicable in Jordan. The statutory tax
          rate in the Free Trade Zone in Jordan, for the industry in which the
          Group is engaged, is 0%.

     c.   FINAL TAX ASSESSMENTS

          The Company and its subsidiaries operating in Israel have final tax
          assessments through 2004. Major subsidiaries operating outside Israel
          have final tax assessments through 2007.

          The Company is subject to provisions of Income Tax Law (Rules for
          bookkeeping by foreign investment companies and certain partnerships
          and determination of taxable income), 1986. In accordance with the
          aforementioned provisions, the Company files for taxes on income
          purposes in accordance with provisions concerning bookkeeping, in USD.

     d.   CARRYFORWARD LOSSES FOR TAX PURPOSES AND OTHER TEMPORARY DIFFERENCES

          Tefron, Hi-Tex and Macro have carryforward losses for tax purposes as
          of December 31, 2009 amounting to $ 37,881 thousand, which may be used
          over an unlimited period. In respect of said balances and other
          deductible temporary differences relating to employee benefits and
          provision for doubtful accounts, the Company recorded in its financial
          statements deferred tax assets amounting to $ 9,216 thousand (because
          of their expected utilization as a result of deferred tax liabilities
          in the amount of $10,887 thousand, mainly property, plant and
          equipment). Furthermore, a subsidiary in the USA has carryforward
          losses for tax purposes amounting to $ 13,006 thousand as of December
          31, 2009. The Company estimates that these losses cannot be utilized;
          hence, no deferred tax asset has been recognized.

     e.   DEFERRED TAXES

          Composition:

                                              BALANCE SHEETS                       STATEMENTS OF INCOME
                                        --------------------------      ------------------------------------------
                                                DECEMBER 31                   FOR THE YEAR ENDED DECEMBER 31
                                        --------------------------      ------------------------------------------
                                           2009            2008            2009            2008            2007
                                        ----------      ----------      ----------      ----------      ----------
                                                                     $ IN THOUSANDS
                                        --------------------------------------------------------------------------

DEFERRED TAX LIABILITIES

Property, plant and equipment           $  (10,649)     $  (13,169)     $    2,520      $     (274)     $      (96)
Cash flow hedging transactions                 (38)            (15)              -               -               -
Actuarial profit in respect of
defined benefit plan                           (42)              -               -                               -
Acquisition of Excelsior                      (158)           (277)            119              48               -
                                        ----------      ----------

                                           (10,887)        (13,461)
                                        ----------      ----------
DEFERRED TAX ASSETS
Carryforward tax losses for tax
  purposes                                   8,528           5,390           3,138           5,021             161
Allowance for doubtful accounts                230             241             (11)            216             (11)
Employee benefits                              431             867            (436)            242             (85)
Available for sale financial assets             27               -               -               -               -
Actuarial loss in respect of a
  defined  benefit plan                          -              66               -               -               -
                                        ----------      ----------

                                             9,216           6,564
                                        ----------      ----------      ----------      ----------      ----------
Deferred tax income (expenses)                                          $    5,330      $    5,253      $      (31)
                                                                        ==========      ==========      ==========


Deferred tax liabilities, net           $   (1,671)     $   (6,897)
                                        ==========      ==========


                                     F - 49`

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Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Note 16: INCOME TAXES (CONT.)

     e.   DEFERRED TAXES (cont.)

          Deferred taxes are presented in the balance sheet as follows:

                                      DECEMBER 31
                            ------------------------------
                                2009              2008
                            ------------      ------------
                                     $ IN THOUSANDS
                            ------------------------------

Non-current assets          $      1,409      $          -
Non-current liabilities           (3,080)           (6,897)
                            ------------      ------------
                            $     (1,671)     $     (6,897)
                            ============      ============

          The deferred taxes are computed at the average tax rate of 23.5%
          (2008-21.0%) based on the tax rates that are expected to apply upon
          realization.

          TAXES ON INCOME RELATED TO ITEMS CARRIED TO EQUITY:

                                                                                    DECEMBER 31
                                                                  ------------------------------------------------
                                                                      2009              2008              2007
                                                                  ------------      ------------      ------------
                                                                                  $ IN THOUSANDS
                                                                  ------------------------------------------------

Loss in respect of  investments available-for-sale securities     $        (27)     $          -      $          -
Actuarial gain (loss) in respect of defined benefit plan                   108               (66)                -
Gain in respect of cash flow hedging transactions                           38                 8               165
                                                                  ------------      ------------      ------------
                                                                  $        119      $        (58)     $        165
                                                                  ============      ============      ============

     f.   TAX INCOME (EXPENSE) INCLUDED IN STATEMENTS OF INCOME

                                                                                     DECEMBER 31
                                                                  ------------------------------------------------
                                                                      2009              2008              2007
                                                                  ------------      ------------      ------------
                                                                                  $ IN THOUSANDS
                                                                  ------------------------------------------------

Deferred taxes, see also (e) above                                $      5,330      $      5,253      $        (31)
Taxes in respect of previous years                                           -              (576)               66
                                                                  ------------      ------------      ------------

                                                                  $      5,330      $      4,677      $         35
                                                                  ============      ============      ============

          The Company does not intend to distribute dividends which would create
          a tax liability for its revenues from an "approved enterprise".


                                     F - 50`

`Tefron Ltd.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Note 16: INCOME TAXES (CONT.)

     g.   A RECONCILIATION between the tax expense, assuming that all the income
          and expenses, gains and losses in the statement of income were taxed
          at the statutory tax rate and the taxes on income recorded in the
          statement of income is as follows:


                                                                     YEAR ENDED DECEMBER 31
                                                            ------------------------------------------
                                                              2009             2008              2007
                                                            --------         --------         --------
                                                                         $ IN THOUSANDS
                                                            ------------------------------------------

(Loss) income before taxes                                  $(22,723)        $(22,256)        $    547
                                                            ========         ========         ========

Statutory tax rate                                                26%              27%              29%
                                                            ========         ========         ========

Tax (tax saving) computed at the statutory tax rate           (5,908)          (6,009)             159

Increase (decrease) in taxes on income resulting from
   the following factors:

Non-deductible expenses for tax purposes                         155              379              105
Increase in unrecognized tax losses in the year                  192              146                -
Update of deferred tax balances due to changes in tax
   rates                                                         500                -                -
Taxes in respect of previous years                                 -              576              (66)
Others                                                          (269)             231             (233)
                                                            --------         --------         --------

Taxes (benefit) expense                                     $ (5,330)        $ (4,677)        $    (35)
                                                            ========         ========         ========

Effective tax rate                                              23.5%            21.0%            (6.4)%
                                                            ========         ========         ========

Note 17: CONTINGENT LIABILITIES, CONTRACTS AND LIENS

     a.   CONTINGENCIES

          1.   According to the law for the Encouragement of Capital Investment,
               1959, the Company and its subsidiaries received grants according
               to their investments in enterprises. The receiving of the grants
               is conditioned in applying all of the conditions in the
               application for a pre-ruling and also that at least 30% of the
               investments will be financed by the outstanding share capital.
               Lack of applying the conditions in the application for a
               pre-ruling will oblige the return of the grants with an addition
               of interest and linkage differences from the grant date.

               In order to fulfill the conditions related to receiving the
               investment grants, the Company and its subsidiaries recorded
               floating liens on their entire assets, in favor of the state of
               Israel.


                                     F - 51`

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Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Note 17: CONTINGENT LIABILITIES, CONTRACTS AND LIENS (cont.)

     a.   CONTINGENCIES (cont.)

          2.   LEGAL PROCEEDINGS

               a.   On November 15, 2006, a former employee of the Company filed
                    claims with the District Court and with the Labor Court
                    against the Company, a serving Board member of the Company
                    and two former Board members of the Company. The plaintiff
                    was convicted and jailed in Egypt in November 1996 on
                    charges of spying, while in Egypt on Company business. The
                    plaintiff claims a direct link exists between his arrest in
                    Egypt and his employment by the Company in Egypt. The claim
                    filed with the District Court and with the Labor Court
                    amounts to $2,000 thousand.

                    Group management estimates, based on the opinion of legal
                    counsel, that the claim is without merit, hence no provision
                    was made for this claim. As of the report date, the claim is
                    in the evidence stage and the next court session was set for
                    July 2010.

               b.   Two legal claims were filed against the Company by two
                    former employees. The total amount of the claims amounted to
                    $600 thousand. The claims were lodged due to claims
                    regarding the termination of the working relations. At this
                    stage, the claims are in preliminary stages.

                    Group management estimates, based on the opinion of legal
                    counsel, that the provisions included in its financial
                    statements are sufficient to cover potential damage caused
                    to it, if any, from those claims. These provisions were
                    presented in the statements of income under "general and
                    administrative expenses".

     b.   CONTRACTS

          COMMITMENT TO MAKE RENT PAYMENTS

          The facilities of the Company and most of its subsidiaries are located
          in buildings leased for various terms ending between 2012 and 2019.

          The aggregate minimum rent commitments under non-cancelable leases as
          of December 31 are as follows:

                             2009 (*)       2008
                             -------       -------
                                $ IN THOUSANDS
                             ---------------------

Year 1                       $ 2,172       $ 3,231
Years 2                        1,970         3,034
Years 3                        1,875         2,939
Years 4 and thereafter        11,633         1,309
                             -------       -------
                             $17,650       $10,513
                             =======       =======

          (*)  Minimum lease payments for 2009 are presented in accordance with
               the agreement signed with "Reit 1" in March 21, 2010, specified
               in Note 24 d below.


                                     F - 52`

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Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Note 17: CONTINGENT LIABILITIES, CONTRACTS AND LIENS (Cont.)

     c.   LIENS

          1.   All liabilities to banks are secured by a floating lien on the
               Company's and the subsidiaries' existing and future assets, which
               permits the Company to dispose of assets in the normal course of
               business,.

          2.   To secure compliance with conditions of the "approved enterprise"
               status granted to the Company and its subsidiaries pursuant to
               the Capital Investment Promotion Act, 1959, the Company and its
               subsidiaries have pledged floating liens up to an unlimited
               amount on all their assets in favor of the State of Israel.

Note 18: SHAREHOLDERS' EQUITY

     a.   REVERSE SPLIT OF COMPANY SHARES

          On January 20, 2009, a special General Meeting approved a reverse
          split of Company share capital, such that 10 ordinary shares of NIS 1
          par value each would be converted into one ordinary share of NIS 10
          par value. The effective date for this reverse split was January 22,
          2009 at trading start on the Tel Aviv Stock Exchange. Earnings (loss)
          per share have been retrospectively adjusted in the Company's
          financial statements.

          Furthermore, the General Meeting of shareholders approved an increase
          in the Company's authorized share capital, from 49,995,500 shares of
          NIS 1 par value each to 69,995,500 shares of NIS 1 par value each, at
          values prior to the reverse split of share capital, or from 4,999,550
          shares of NIS 10 par value each to 6,999,550 shares of NIS 10 par
          value each in values subsequent to the reverse-split of share capital.
          The Company's Articles of Incorporation and Bylaws were amended
          accordingly.

     b.   SHARE CAPITAL COMPOSITION

                                                       DECEMBER 31, 2009
                                             -----------------------------------------
                                             AUTHORIZED       ISSUED        OUTSTANDING
                                             ---------       ---------       ---------
                                                         NUMBER OF SHARES
                                             -----------------------------------------

Ordinary shares, NIS 10 par value each       6,999,550       2,220,039       2,120,299
                                             =========       =========       =========

                                                        DECEMBER 31, 2008
                                             -----------------------------------------
                                            AUTHORIZED        ISSUED        OUTSTANDING
                                             ---------       ---------       ---------
                                                         NUMBER OF SHARES
                                             -----------------------------------------

Ordinary shares, NIS 10 par value each       4,999,550       2,220,039       2,120,299
                                             =========       =========       =========


                                     F - 53`

`Tefron Ltd.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Note 18: SHAREHOLDERS' EQUITY (Cont.)

     c.   RIGHTS CONFERRED BY SHARES

          ORDINARY SHARES

          1.   Voting rights at the General Meeting, right to dividends, rights
               upon liquidation of the Company and right to appoint Company
               Board members.

          2.   Traded on the Tel Aviv Stock Exchange.

          On December 22, 2008, Company shares were suspended from trading on
          the New York Stock Exchange (NYSE) for failure to meet quantitative
          listing conditions, which include a requirement of average market
          capitalization of no less than $25 million over a period of 30 trading
          days. Shortly afterwards, Company shares started being traded on the
          OTC.

     d.   TREASURY SHARES

          As of the balance sheet date, Tefron Holdings (98) Ltd., a
          wholly-owned subsidiary of the Company, holds 99,740 Company shares,
          which constitute 4.49% of Company shares and whose cost is $7,408
          thousand. The investment in these shares is recorded according to the
          "treasury shares" method in the equity.

          To secure a received loan, those shares are pledged to a bank.

     e.   OTHER CAPITAL RESERVES

          CAPITAL RESERVE FOR HEDGES

          The effective portion of the gain or loss (net of tax) on cash flow
          hedges is recognized directly in capital reserve for hedges.

          Net gain for cash flow hedges recognized in 2009 is $115 thousand
          (2008 - $23 thousand gain).

     f.   RIGHTS OFFERING, SHELF PROSPECTUS AND A PRIVATE PLACEMENT

          Regarding the rights offering, shelf prospectus and private placement
          occurred subsequent to the balance sheet date, see Note 24 c below.

     g.   DIVIDEND PAID

          On April 2, 2008, the Company declared a cash dividend to Company's
          shareholders as of April 14, 2008 ("the effective date"). The amount
          included in the statement of changes in shareholders' equity,
          amounting to $ 8,000 thousand, reflects a dividend of $ 0.377 per
          share outstanding on the dividend declaration date. The dividend was
          distributed on May 1, 2008.

     h.   CAPITAL MANAGEMENT IN THE COMPANY:

          The Company's capital management objectives are:

          1.   To preserve the Group's ability to ensure business continuity
               thereby creating a return for the shareholders, investors and
               other interested parties.

          2.   To ensure adequate return for the shareholders by pricing of
               products and services adjusted to the level of risk in the
               Group's business activity.


                                     F - 54`

`Tefron Ltd.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Note 18: SHAREHOLDERS' EQUITY (Cont.)

     h.   CAPITAL MANAGEMENT IN THE COMPANY (CONT.)

          The Company acts to achieve a capital return at a level that is
          customary in the industry and markets in which the Company operates.
          This return is subject to changes depending on market factors in the
          Company's industry and business environment. The Company is under
          minimal equity requirements of $35 million according to the financial
          covenants included in the agreements with the lending banks and is not
          required to attain a certain level of capital return. In 2009 and
          2008, the Company achieved a negative capital return.

          As for loans from the banks (see also Note 13), the Company was
          required to meet financial covenants, including the ratio of equity to
          total balance of 1:5. As of December 31, 2009, the Company meets the
          condition required.

          In accordance to the financing reorganization agreement with the
          banks, as detailed in Note 13b, the Company's equity, shall be no less
          than $35 million during 2010.

Note 19: SHARE-BASED PAYMENT

     a.   EXPENSE RECOGNIZED IN FINANCIAL STATEMENTS

          The total share based compensation expense related to all of the
          Company's share based compensation, recognized for years ended
          December 31, 2009, 2008 and 2007, was comprised as follows:

                                                   FOR THE YEAR ENDED DECEMBER 31
                                                     --------------------------
                                                     2009       2008       2007
                                                     ----       ----       ----
                                                          $ IN THOUSANDS
                                                     --------------------------

Compensation related to options granted              $171       $240       $489
   to employees  and directors
Compensation related to options granted
   to an employee in a subsidiary                       -        247          -
                                                     ----       ----       ----

Total expense arising from share-based payment
  transactions                                       $171       $487       $489
                                                     ====       ====       ====

          Share-based payment transactions granted by the Company to its
          employees are described below. In 2007 a change was made in the
          benefit plan for the Company's former CEO - see section b2a below.
          During 2009 and 2008, there were no modifications or cancellations in
          the said benefit plans to employees.

     b.   SHARE-BASED PAYMENT PLAN TO COMPANY'S EMPLOYEES AND EXECUTIVES

          1.   STOCK OPTION PLAN FOR COMPANY EMPLOYEES AND EXECUTIVES

               a.   In September 1997, the Company's Board of Directors adopted
                    a stock option plan in which options to acquire 116,605
                    ordinary shares would be granted to Board members,
                    executives, employees and consultants of the Company. At
                    shareholders meetings in August 1999, July 2001 and March
                    2004, it was resolved to increase the number of shares
                    issued under the stock option plan by 60,000, 50,000 and
                    44,627 ordinary shares, respectively. The exercise price for
                    options yet to be granted would be determined by the
                    Company's Board of Directors. Most of the options vest after
                    3 to 4 years, and are due to expire 10 years after their
                    grant date, or upon termination of employment. The term of
                    the option plan was originally 10 years, and was extended on
                    March 2008 for an additional 10 years, through March 1,
                    2018.


                                     F - 55`

`Tefron Ltd.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Note 19: SHARE-BASED PAYMENT (Cont.)

     b.   SHARE-BASED PAYMENT PLAN TO COMPANY EMPLOYEES AND EXECUTIVES (Cont.)

          1.   STOCK OPTION PLAN FOR COMPANY EMPLOYEES AND EXECUTIVES (cont.)

               b.   On November 15, 2009, the Company's Board of Directors
                    approved a grant of 54,000 options (not listed for trading),
                    to purchase 54,000 ordinary shares having a nominal value of
                    NIS 10 each to five senior officeholders in the Company, who
                    are not interested parties in theCompany and who shall not
                    become interested parties in the Company following the
                    grant. The allocation of the Options to the Offerees was
                    effected in accordance with the option plan for employees,
                    officeholders and advisers of the Company, which was adopted
                    by the Company's Board in September 1997, and amended in
                    January 2003.

                    Each Offeree's Options will vest over a three-year period.
                    The vesting period shall begin on the date on which the
                    Offeree's employment at the Company commenced (except with
                    regard to one Offeree in respect of whom the vesting period
                    shall begin on the date on which the Options were granted).
                    The exercise price for each option shall be the higher of:
                    (a) $5.06, which is the closing price of the Company's share
                    on the Stock Exchange trading day on which the Company's
                    Board's resolution concerning the grant was adopted; (b) the
                    average closing price of the Company's shares on the Stock
                    Exchange on ten trading days concluding on the day of the
                    Board's resolution concerning the grant.

                    The market price of the Company's shares on the grant date
                    was $5.06. The fair value of the aforementioned stock option
                    grant amounts to $73 thousand. Therefore, the Company
                    recorded expenses amounting to $6 thousand in 2009. This
                    expense was presented in the statements of income under
                    "selling and marketing expenses" and "general and
                    administrative expenses".

          2.   STOCK OPTIONS FOR COMPANY'S FORMER CEO'S

               a.   In April 2004, the Company granted its former CEO 65,000
                    options which may be exercised at an exercise price of $42.5
                    per share. The options vest in equal installments over a
                    four-year period starting in January 2004 and expire 10
                    years from the grant date. The market price of the Company's
                    shares on the grant date was $58.5. The Company recorded
                    compensation expense of $303 thousand and $142 thousand in
                    2005 and 2006, respectively. This expense was presented in
                    the statements of income under "general and administrative
                    expenses". The agreement includes adjustment of the option
                    exercise price in case of dividend distribution, by an
                    amount equal to the dividend per share. This adjustment
                    would apply to options which could not be exercised upon the
                    dividend distribution date, whether because of non-vesting
                    of the options or in case of compliance with Section 102 of
                    the Israeli Income Tax Ordinance. In the third quarter of
                    2007, the Company's Board of Directors approved an amendment
                    to the agreement, whereby the exercise price adjustment upon
                    dividend distribution would apply in all cases to all 65,000
                    options, through October 22, 2008, whether or not the
                    options have vested by that date for dividends distributed
                    through October 22, 2008. This approval is effective
                    retrospectively since October 2006. Consequent to the
                    amendment to the agreement, the Company recorded an
                    additional expense in its 2007 financial statements,
                    amounting to $262 thousand.

               b.   On December 18, 2008, the Company granted its former CEO
                    30,000 options which may be exercised at an exercise price
                    of $40.0 per share. The options vest in installments over
                    three years starting on September 1, 2009 and expire 10
                    years from the grant date or 24 months from termination of
                    employment, whichever is sooner. The market price of the
                    Company's shares on the grant date was $0.33. The fair value
                    of the aforementioned stock option grant amounts to $4
                    thousand. Therefore, the Company recorded expenses amounting
                    to $1 thousand in 2008. This expense was presented in the
                    statements of income under "general and administrative
                    expenses".


                                     F - 56`

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Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Note 19: SHARE-BASED PAYMENT (Cont.)

     b.   SHARE-BASED PAYMENT PLAN TO COMPANY EMPLOYEES AND EXECUTIVES (Cont.)

          3.   STOCK OPTIONS FOR THE CHAIRMAN OF THE BOARD OF DIRECTORS

               In July 2008, the Company granted the Chairman of the Board of
               Directors 30,000 options which may be exercised at an exercise
               price of $2.07 per share. The options vest in installments over a
               three-year period starting in July 2008 and expire 5 years from
               the grant date. The market price of the Company's shares on the
               grant date was $2.07. The fair value of the aforementioned stock
               option grant amounts to $270 thousand. Therefore, in 2008 and
               2009, the Company recorded expenses amounting to $72 thousand and
               126$ thousand, in accord. This expense was presented in the
               statements of income under "general and administrative expenses".

          4.   STOCK OPTIONS GRANTED TO AN EMPLOYEE OF A SUBSIDIARY

               On June 11, 2008, the Company granted to an employee of a
               subsidiary options to purchase 62,800 shares of the subsidiary at
               an exercise price of $11.94 per share. All of these options
               vested immediately and could be exercised as of the grant date.
               The options expire four years from the grant date. The Company
               recorded expense amounting to $247 thousand in the statements of
               income in 2008. This expense is presented under "general and
               administrative expenses. On May 28, 2009, the Company's Board of
               Directors approved a change in the employment agreement with a
               senior employee in a subsidiary. Pursuant to this agreement, all
               of the options to purchase the shares of the subsidiary, which
               were granted to the employee on December 27, 2007, were
               forfeited. In addition, the employee's salary conditions were
               updated. On July 7, 2009 this senior employee notified ceasing
               his connection with the Company. The Company assigned a
               substitute for his position since July 8, 2009.

     c.   MOVEMENT DURING THE YEAR

          The following table lists the number of share options, the weighted
          average exercise prices of share options and modification in employee
          option plans during the current year:

                                           AS OF DECEMBER 31, 2009      AS OF DECEMBER 31, 2008
                                           ------------------------     ------------------------
                                                          WEIGHTED                     WEIGHTED
                                                           AVERAGE                      AVERAGE
                                          NUMBER OF         STOCK       NUMBER OF      EXERCISE
                                        STOCK OPTIONS     OPTIONS($) EXERCISE PRICE     PRICE($)
                                           --------        --------     --------        --------

Outstanding at January 1                    195,857            46.1      139,703            50.3
Granted during the year                      54,000             5.3       60,000            30.4
Forfeited or expired during the year        (29,628)           57.5       (3,846)           45.0
Exercised during the year                         -               -            -               -
                                           --------        --------     --------        --------

Outstanding at December 31                  220,229            32.7      195,857            46.1
                                           ========        ========     ========        ========
Exercisable at December 31                  131,229            44.2      113,536            49.0
                                           ========        ========     ========        ========


                                     F - 57`

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Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Note 19: SHARE-BASED PAYMENT (Cont.)

     d.   The weighted average remaining contractual term of the stock options
          as of December 31, 2009 is approximately 3.4 years (2008 - 3.5 years).

     e.   The range of exercise prices of the stock options as of December 31,
          2009 was $ 5.3 - $15.0 (2008 -$ 2.1-$15.0).

     f.   MEASURING OF THE FAIR VALUE OF EQUITY-SETTLED SHARE OPTIONS

          The fair value of stock options granted is estimated at the date of
          grant using the Black-Scholes option pricing model taking into account
          the terms and conditions upon which the options were granted. The
          measurement was made at the grant date of equity-settled share options
          since the options were granted to employees.

          The following table lists the inputs used for the fair value
          measurement of equity-settled share options, according to
          Black-Scholes option pricing model, for the above plan:

                                                                   2009
                                                              ---------------

          Dividend yield (%)                                       0.0
          Expected volatility of the share prices (%)             53.2
          Risk-free interest rate (%)                              2.6
          Expected life of share options (years)                     6
          Weighted average share price ($)                         5.1

          Based on the above inputs, the fair value of the options was
          determined at $73 thousand at the grant date.

          The expected life of the share options is based on historical data and
          is not necessarily indicative of the exercise patterns of share
          options that may occur in the future.

          The expected volatility of the share prices reflects the assumption
          that the historical volatility of the share prices is reasonably
          indicative of expected future trends.


                                     F - 58`

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Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

NOTE 20: SUPPLEMENTARY INFORMATION TO STATEMENTS OF INCOME ITEMS

                                                                             FOR THE YEAR ENDED DECEMBER 31,
                                                                       ------------------------------------------
                                                                         2009              2008           2007
                                                                       ---------        ---------       ---------
                                                                                     $ IN THOUSANDS
                                                                       ------------------------------------------
a.   COST OF SALES, NET (*)

     Materials (**)                                                    $  64,649        $  93,705       $  75,694
     Payroll and benefits                                                 17,615           26,193          24,776
     Sub-contracted work                                                  10,733           18,432          16,254
     Depreciation                                                          8,260            8,284           7,944
     Other production expenses                                            13,681           20,256          18,866
                                                                       ---------        ---------       ---------

                                                                         114,938          166,870         143,534

     Decrease (increase) in work-in-progress and finished goods
       inventories                                                         4,401              687          (4,389)
                                                                       ---------        ---------       ---------

                                                                         119,339          167,557         139,145
                                                                       =========        =========       =========
     (*) Including development cost, net (less a governmental
     grant of $167 thousand in 2009)                                       8,242            8,058           7,053
                                                                       =========        =========       =========
     (**)  Including provision for inventories write off                   2,808            4,523           1,260
                                                                       =========        =========       =========

b.   SELLING AND MARKETING EXPENSES
     Payroll and benefits                                                  5,854            5,831           5,025
     Shipping, export and distribution                                     3,114            6,336           3,921
     Overseas office maintenance                                           1,911            1,095             880
     Others                                                                2,963            3,697           2,617
                                                                       ---------        ---------       ---------

                                                                          13,842           16,959          12,443
                                                                       =========        =========       =========

     Payroll and benefits                                                  2,021            3,264           2,450
     Office maintenance                                                      384              535             508
     Consulting                                                            1,054            1,109           1,528
     Allowance for doubtful accounts                                           4              814             (11)
     Others                                                                  316              684             715
                                                                       ---------        ---------       ---------

                                                                           3,779            6,406           5,190
                                                                       =========        =========       =========

d.   OTHER EXPENSES (INCOME) - LOSS (LOSS REVERSAL) DUE TO AN
       IMPAIRMENT OF PROPERTY, PLANT AND EQUIPMENT                          (496)           2,135               -
                                                                       =========        =========       =========

e.   FINANCIAL INCOME (EXPENSES)

      FINANCIAL INCOME
      Interest income from bank deposits                                     249              102           1,213
      Net change in fair value of financial assets
        available-for-sale                                                     -              200              31
      Net foreign exchange gain                                            1,388               17               -
      Realized gain from cash flow hedges  transferred from
        shareholders equity                                                  110                -             157
                                                                       ---------        ---------       ---------

                                                                           1,747              319           1,401
                                                                       =========        =========       =========
      FINANCIAL EXPENSES
      Financial expenses in respect of short-term credit                      62              402             183
      Interest expense on financial liabilities measured at
         amortized cost                                                      816            1,126           1,574
      Net loss from change in foreign exchange rates                           -                -             593
      Net change in fair value of financial assets available for
        sale                                                                   -              553               -
      Bank expenses, hedging-related expenses and other expenses           1,381            1,266             340
                                                                       ---------        ---------       ---------
                                                                       $   2,259        $   3,347       $   2,690
                                                                       =========        =========       =========


                                     F - 59`

`Tefron Ltd.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Note 21: EARNINGS (LOSS) PER SHARE

     a.   DETAILS OF NUMBER OF SHARES AND EARNINGS (LOSS) USED TO CALCULATE
          EARNINGS (LOSS) PER SHARE:

                                                              FOR THE YEAR ENDED DECEMBER 31,
                                   ----------------------------------------------------------------------------------------
                                            2009                           2008                             2007
                                   ---------------------        --------------------------        -------------------------
                                                 LOSS                             LOSS                              NET
                                   WEIGHTED    ATTRIBUTED       WEIGHTED       ATTRIBUTED TO      WEIGHTED         INCOME
                                    AVERAGE    TO EQUITY         AVERAGE         EQUITY           AVERAGE       ATTRIBUTED TO
                                   NUMBER OF   HOLDERS OF       NUMBER OF       HOLDERS OF       NUMBER OF      EQUITY HOLDERS
                                    SHARES     THE PARENT        SHARES         THE PARENT         SHARES       OF THE PARENT
                                   ---------   ---------        ---------        ---------        ---------       ---------
                                                 $ IN                              $ IN                             $ IN
                                   THOUSANDS   THOUSANDS        THOUSANDS        THOUSANDS        THOUSANDS       THOUSANDS
                                   ---------   ---------        ---------        ---------        ---------       ---------
Amounts used in calculation
of basic earnings (loss) per
share                                  2,120   $ (17,393)           2,120        $ (17,579)           2,119       $     582
                                   =========   =========        =========        =========        =========       =========

Impact of potentially
dilutive ordinary shares
Amounts used in calculation
of diluted earnings (loss)
per share                                  -           -                -                -               44               -
                                   ---------   ---------        ---------        ---------        ---------       ---------
                                       2,120   $(17,393)            2,120        $ (17,579)           2,163       $     582
                                   =========   =========        =========        =========        =========       =========

     b.   The calculation of basic and diluted earnings (loss) per share
          reflects the affect of the reverse-split, see Note 18a.

Note 22: OPERATING SEGMENTS

     a.   GENERAL

          Group companies are engaged in two business segments:

          Seamless apparel ("Seamless") - Design, development, manufacturing and
                                          sale of intimate apparel, swimwear and
                                          active wear using the "seamless"
                                          method.

          Knitted apparel ("Cut & Sew") - Design, development, manufacturing and
                                          sale of intimate apparel and active
                                          wear using the "cut & sew" method.
                                          Design and manufacturing are mostly
                                          carried out in Israel, in Jordan and
                                          in the far east, and finished goods
                                          are mostly sold in the USA and Europe.

          The Company's two business segments are carried out in a number of
          principle geographic areas in the world. In Israel, where the Company
          and its subsidiaries Hi-Tex and Macro are located, the design,
          development, manufacturing and sale activities of intimate apparel,
          active wear and swimwear are carried out. In the subsidiaries Tefron
          USA and Teforn UK marketing and selling activities are carried out.

          The Company reports the information by IFRS 8 based on information
          that is reviewed by the Chief operating decision maker ("CODM") to
          make decisions about resources to be allocated and assess its
          performance. The Chief operating decision maker is the Company's CEO.
          Accordingly, based on criteria set in IFRS 8, and the available
          financial information reviewed by the CEO, the Company determined that
          it operates in two sectors of activity reported.

          Group financing (including financial costs and incomes) and taxes on
          income are managed on a group basis and are not allocated to segments.


                                     F - 60`

`Tefron Ltd.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Note 22: OPERATING SEGMENTS (Cont.):

     b.   REPORTING ON OPERATING SEGMENTS:

                                               FOR THE YEAR ENDED DECEMBER 31, 2009
                                              --------------------------------------
                                              SEAMLESS       CUT & SEW       TOTAL
                                              ---------      ---------     ---------
                                                          $ IN THOUSANDS
                                              --------------------------------------
External revenues                             $  62,306      $  53,232     $ 115,538
                                              =========      =========     =========

Segment results                               $ (13,197)     $  (7,729)    $ (20,926)
                                              =========      =========     =========

Loss from early repayment of subordinated
        note receivable                                                    $  (1,285)

Financial expenses, net                                                    $    (512)

Tax benefit                                                                $   5,330

Total                                                                      $ (17,393)
                                                                           =========

Segment assets                                $  74,431      $  24,766     $  99,197
                                              =========      =========     =========

Segment liabilities                           $  35,169      $  17,033     $  52,202
                                              =========      =========     =========

Capital expenditure                           $     457      $     229     $     686
                                              =========      =========     =========

Depreciation and amortization                 $   6,419      $   2,837     $   9,256
                                              =========      =========     =========

                                      FOR THE YEAR ENDED DECEMBER 31, 2008
                                    ----------------------------------------
                                     SEAMLESS       CUT & SEW        TOTAL
                                    ---------       ---------      ---------
                                                 $ IN THOUSANDS
                                    ----------------------------------------

External revenues                   $  86,265       $  87,564      $ 173,829
                                    =========       =========      =========

Segment results                     $ (15,804)      $  (3,424)     $ (19,228)
                                    =========       =========      =========

Financial expenses, net                                            $  (3,028)

Tax benefit                                                            4,677

Total                                                              $ (17,579)
                                                                   =========

Segment assets                      $  99,012       $  32,720      $ 131,732
                                    =========       =========      =========

Segment liabilities                 $  40,721       $  27,266      $  67,987
                                    =========       =========      =========

Capital expenditure                 $   2,497       $     877      $   3,374
                                    =========       =========      =========

Depreciation and amortization       $   6,833       $   2,092      $   8,925
                                    =========       =========      =========


                                     F - 61`

`Tefron Ltd.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Note 22: OPERATING SEGMENTS (Cont.):

     b.   REPORTING ON OPERATING SEGMENTS (Cont.):

                                      FOR THE YEAR ENDED DECEMBER 31, 2007
                                    ---------------------------------------
                                    SEAMLESS      CUT & SEW        TOTAL
                                    ---------     ---------       ---------
                                              $ IN THOUSANDS
                                    ---------------------------------------

External revenues                   $  81,594     $  77,020       $ 158,614
                                    =========     =========       =========

Segment results                     $    (433)    $   2,269       $   1,836
                                    =========     =========       =========

Financial expenses, net                                           $  (1,289)

Tax benefit                                                       $      35

Net income                                                        $     582

Segment assets                      $ 109,557     $  51,183       $ 160,740
                                    =========     =========       =========


Segment liabilities                 $  44,856     $  26,504       $  71,360
                                    =========     =========       =========

Capital expenditure                 $   4,561     $   1,816       $   6,377
                                    =========     =========       =========

Depreciation and amortization       $   6,720     $   1,848       $   8,568
                                    =========     =========       =========

     c.   GEOGRAPHIC INFORMATION:

          1.   Sales by geography (based on customer location):

                        FOR THE YEAR ENDED DECEMBER 31
                    --------------------------------------
                      2009           2008           2007
                    --------       --------       --------
                               $ IN THOUSANDS
                    --------------------------------------

North America       $ 97,975       $137,992       $132,521
Europe                11,259         28,038         18,314
Israel                 5,335          3,851          4,374
Others                   969          3,948          3,405
                    --------       --------       --------
                    $115,538       $173,829       $158,614
                    ========       ========       ========

          2.   Carrying amount of assets and capital expenditures by geography
               (based on asset location):

                      BALANCE OF
                 NON-CURRENT ASSETS (*)            CAPITAL EXPENDITURES
                    --------------       ------------------------------------------
                  AS OF DECEMBER 31,           FOR THE YEAR ENDED DECEMBER 31
                    --------------       ------------------------------------------
                      2009          2008         2009           2008         2007
                    -------       -------       -------       -------       -------
                                            $ IN THOUSANDS
                    ---------------------------------------------------------------

Israel              $52,159       $60,521       $   640       $ 2,665       $ 4,730
North America         3,126         3,583            43            17           167
Others                2,595         2,386             3           692         1,480
                    -------       -------       -------       -------       -------
                    $57,880       $66,490       $   686       $ 3,374       $ 6,377
                    =======       =======       =======       =======       =======

               (*)  Excluding deferred taxes, net and subordinated note
                    receivable.


                                     F - 62`

`Tefron Ltd.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Note 22: OPERATING SEGMENTS (Cont.):

     d.   MAJOR CUSTOMERS

                                        FOR THE YEAR ENDED DECEMBER 31
                                    --------------------------------------
                                      2009           2008           2007
                                    --------       --------       --------
                                                $ IN THOUSANDS
                                    --------------------------------------

Revenues from major customers       $ 56,664       $111,711       $120,069
                                    --------       --------       --------

                      % FROM TOTAL REVENUES
                 -------------------------------

Customer A          32.7        32.7        39.1
Customer B           6.2         2.3         1.5
Customer C           5.8        23.2        23.6
Customer D           4.3         9.5        11.5
                 -------     -------     -------
                    49.0%       67.7%       75.7%
                 =======     =======     =======

Note 23: BALANCES AND TRANSACTIONS WITH INTERESTED PARTIES AND RELATED PARTIES

     a.   BALANCES WITH INTERESTED PARTIES AND RELATED PARTIES

          Composition:

          AS OF DECEMBER 31, 2009

                              LINKAGE TERMS     RELATED PARTIES    KEY EXECUTIVES
                                ----------      ---------------      ---------
                                                $ IN THOUSANDS
                                 -------------------------------------------

Trade payables                          -         $     1,612       $      -
Other current liabilities        Unlinked         $         -       $     28

          AS OF DECEMBER 31, 2008

                              LINKAGE TERMS     RELATED PARTIES    KEY EXECUTIVES
                                ----------      ---------------      ---------
                                                $ IN THOUSANDS
                                 -------------------------------------------

Trade payables                    Unlinked        $     1,239       $      8
Other current liabilities         Unlinked        $         -       $      8

     b.   BENEFITS TO INTERESTED PARTIES AND RELATED PARTIES

                                                                      FOR THE YEAR ENDED DECEMBER 31
                                                                         --------------------------
                                                                         2009       2008       2007
                                                                         ----       ----       ----
                                                                               $ IN THOUSANDS
                                                                         --------------------------


Payroll and benefits for employees by or on behalf of the Company        $491       $678       $348
                                                                         ====       ====       ====

Fees for Board members not employed by or on behalf of the Company       $120       $129       $ 91
                                                                         ====       ====       ====
Management fees for those not employed by or on behalf of the
  Company                                                                $102       $119       $190
                                                                         ====       ====       ====

NUMBER OF BENEFICIARIES OF PAYROLL AND BENEFITS
Related parties employed by or on behalf of the Company                     1          2          1
Board members not employed by the Company                                  10         10         10
                                                                         ----       ----       ----
                                                                           11         12         11
                                                                         ====       ====       ====


                                     F - 63`

`Tefron Ltd.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Note 23: BALANCES AND TRANSACTIONS WITH RELATED PARTIES (Cont.)

     c.   TRANSACTIONS WITH RELATED PARTIES

          FOR THE YEAR ENDED DECEMBER 31, 2009

                                              RELATED     PARTY OF      EXECUTIVE
                                              PARTIES     INTEREST      OFFICERS
                                              ------       -------       ------
                                                      $ IN THOUSANDS
                                              ---------------------------------

Cost of sales, net                            $ 1,429      $     -       $     -
General and administrative expenses           $     -      $   102       $   611

          FOR THE YEAR ENDED DECEMBER 31, 2008

                                              RELATED     PARTY OF      EXECUTIVE
                                              PARTIES     INTEREST      OFFICERS
                                              ------       -------       ------
                                                      $ IN THOUSANDS
                                              ---------------------------------

Cost of sales, net                            $ 2,999       $    -        $    -
General and administrative expenses           $     -       $  119        $  807

          FOR THE YEAR ENDED DECEMBER 31, 2007

                                              PARTY OF     EXECUTIVE
                                              INTEREST     OFFICERS
                                              -------       ------
                                                $ IN THOUSANDS
                                              --------------------

General and administrative expenses           $   190       $  439
                                              =======       ======

     d.   CONTRACTS

          In April 2005, the Company entered into an agreement with another
          company, a related party, whereby the Company pays an annual
          management fee amounting to $120 thousand.

Note 24: EVENTS SUBSEQUENT TO THE BALANCE SHEET DATE

     a.   EMPLOYMENT OF A NEW CEO

          On January 17, 2010, the Company's Board of Directors authorized the
          Company's engagement in an Employment Agreement with the entering
          Company's CEO, Mr. Amit Meridor, commencing from January 21, 2010. The
          CEO's (gross) monthly salary shall be NIS 80,000 and shall be linked
          to the increase in the consumer price index rate, benefits, car and
          other expenses refund.

          In addition, the CEO will be entitles to six monthly salaries,
          pursuant to the extent to which the CEO has complied with the targets
          determined for him by the Board based on the Company's achievements
          and the CEO's contribution to the Company's said achievements.


                                     F - 64`

`Tefron Ltd.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Note 24: EVENTS SUBSEQUENT TO THE BALANCE SHEET DATE (Cont.)

     a.   EMPLOYMENT TERMS OF COMPANY'S CEO (Cont.)

          In addition, on January 17, 2010, the Company's Board of Directors
          authorized, pursuant to the authorization of the Company's audit
          committee, an allocation of 100,000 options (not traded), exercisable
          into 100,000 ordinary Company shares par value 10 NIS each. The share
          allocation shall be effected pursuant to the Company's 1997 Share
          Option Plan, as amended in January 2003.

          The vesting period shall be 3 years beginning in the CEO's employment
          date.

     b.   FINAL AGREEMENT WITH THE LENDING BANKS REGARDING THE COMPANY'S CREDIT
          LINES

          On March 2, 2010 the Company signed a definitive agreement
          (hereinafter: "the definitive agreement") with the banks.

          The definitive agreement included a re-organization of the current
          credit lines of the Company. The following is a summary of the main
          points in the agreement:

          The loans and credit lines extended to the Company shall be re-divided
          as follows:

          1.   LOAN A

               The Banks shall loan the Company, an amount of to $ 15 million
               ("Loan A"), payable in three equal payments of $ 1.25 million,
               each at the end of the seventh, eighth and ninth years from the
               date on which Loan A was provided. The Loan A balance of $ 11.25
               million shall be payable at the end of the tenth year (the "Last
               Capital Payment").

               LOAN A SHALL BE PAYABLE, IN WHOLE OR IN PART, UNDER THE FOLLOWING
               CIRCUMSTANCES:

               a.   Future capital raising - In the case of future capital
                    raising - 50% of the net value obtained as a result of
                    capital raising, shall be used as Loan pre-payment, on
                    account of the last principal payment.

               b.   Sale of assets - In the case of sale of assets, not in the
                    ordinary course of business, the net consideration for a
                    sale of assets shall be used for Loan A pre-payment, on
                    account of the last principal payment.

               c.   Positive cash flow - In the case of positive cash flow,
                    according to its consolidated annual financial statements,
                    in a given calendar year, exceeds the amount of $ 8 million
                    (the " Surplus Cash Flow") - 50% of the Surplus Cash Flow
                    amount shall be used for the Loan A pre-payment, on account
                    of the last principal payment.

               d.   Positive cash flow" - The EBITDA of the Company, according
                    to its consolidated annual financial statements, in a given
                    calendar year, after deduction of interest costs,
                    investments and maintenance costs.

               The Company would not take ongoing investments, including regular
               business investments in a cumulative annual amount for all group
               companies, greater than $2,000 thousands.

          2.   LOAN B

               The Banks shall loan an amount of $ 5 million to the Company
               ("Loan B"), which would be payable in four equal capital payments
               of $ 1.25 million, each at the end of the third until the sixth
               years from the date on which Loan B was provided.


                                     F - 65`

`Tefron Ltd.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Note 24: EVENTS SUBSEQUENT TO THE BALANCE SHEET DATE (Cont.)

     c.   FINAL AGREEMENT WITH THE LENDING BANKS REGARDING THE COMPANY'S CREDIT
          LINES (Cont.)

          3.   SHORT-TERM CREDIT LINES (IN ADDITION TO THE LOANS)

               The Banks shall provide short-term credit lines, up to one year,
               in a total amount of $ 8.95 million (the "Credit Lines"), in the
               following conditions:

          4.   INJECTION OF CAPITAL

               The Company has undertaken to perform a rights offering and/or
               private placement of shares, within the framework of which the
               sum of no less than $3,400 thousand shall be invested in the
               Company's equity (after deduction of the issuance expenses) until
               March 31, 2010 (hereinafter: "the first capital injection").

               In March 28, 2010, the Company had raised through the rights
               offering to shareholders and private placement to Norfet, or
               anyone on its behalf, a total of $4 million.

          5.   OTHER CREDIT LINES

               Subject to the performance of the Capital Injections, in full and
               on the due date, the Banks shall make available to the Companies
               additional short-term credit frameworks in total amount of $1,800
               thousand (hereinafter: "the additional credit frameworks").

               In addition, without derogating from the above, it is agreed
               that, at the Company's request, the banks shall provide a part of
               the Additional Credit Lines in an amount of up to $1,200 thousand
               (hereinafter: the "partial new credit lines") even prior to the
               making of the First Capital Injection, subject to the signing by
               FIMI 2001 Ltd. and Mivtach Shamir Holdings Ltd.on (hereinafter,
               collectively: "the guarantors"), the indirect interested parties
               in Norfet letters of continuing guarantee in favor of the Banks
               in a total amount of up to $1,200 thousand to guarantee all of
               the debts and liabilities of the Company to the Banks. Those
               guarantees were provided to banks during March, 2010, and the new
               additional short term credit frameworks provided to the Company.
               These guarantees expired on March 28, 2010, following the
               completion of the rights offering and private placement.

          6.   OTHER LIABILITIES

               The Company has undertaken not to distribute dividends and not to
               pay management fees and/ or any other payment of any type
               whatsoever, to the shareholders, as long as Loan A and Loan B
               have not been repaid in full.

               CAPITAL BENEFIT

               The Company has undertaken to issue to the Banks, without a
               consideration, not later than at the expiration of 30 days from
               the date of the signing of the agreement, a total amount of
               100,000non-negotiable and non-transferable warrants, that may be
               exercised into ordinary shares of NIS 10 par value of the
               Company. The warrants may be exercised (in whole or in part)
               during a period of 48 months from the date of the signing of the
               Agreement, for an exercise price of $4.5 per share. The option
               warrants can be exercised (fully or partly) for a 48-month period
               from the date of signing the agreement. The Company has
               undertaken to perform the allocation of the warrants, as
               aforesaid, after receipt of all the approvals as required by law,
               not later than April 15, 2010.


                                     F - 66`

`Tefron Ltd.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Note 24: EVENTS SUBSEQUENT TO THE BALANCE SHEET DATE (Cont.)

     c.   FINAL AGREEMENT WITH THE LENDING BANKS REGARDING THE COMPANY'S CREDIT
          LINES (Cont.)

          FINANCIAL COVENANTS

          The Banks have granted their consent not to exercise their rights
          against the Company following its expected failure to comply with the
          financial covenants with which the Company undertook to comply in
          2009, pursuant to Tefron's financial statements as of December 31,
          2009, only.

          In addition, the Company has undertaken to comply, at all times, in
          2010, with all of the financial covenants and undertakings, as set
          forth below:

          1.   the Company's EBITDA, pursuant to the Company's consolidated
               financial statements for 2010 shall be positive (this financial
               covenant was amended by agreement with the bank lenders on July
               11, 2010, requiring EBITDA of not more than a negative EBITDA of
               $2.1 million); and also -

          2.   according to the quarterly and annually consolidated financial
               statements the Company's shareholders' equity will not be less
               than $35 million; and also -

          3.   The total amount of the cash balances, inventory and accounts
               receivable of the Company, pursuant to its consolidated financial
               statements (quarterly and annual) will not be less than $33
               million; and also -

          4.   The Company has undertaken that the amount of receivables shall
               be no less than $9 million, according to its consolidated
               financial statements (quarterly and annual).

          5.   the salary of the CEO and Chairman of the Board of Directors of
               the Company will not exceed the salaries on the date of the
               Agreement plus linkage differences to the consumer price index.

          By November 30, 2010, the Company and the Banks will mutually agree as
          to additional financial covenants and undertakings, including
          regarding restrictions on salaries of officers in the Company, which
          the Company must meet beginning on January 1, 2011. Should such
          agreement not be reached by November 30, 2011, the Company must meet
          the financial covenants in effect prior to the date on which the
          Agreement was signed.

          Prior to the signing on the definitive agreement, on December 2, 2009
          the Company's chairman on the Board of Directors and the CFO received
          verbal announcements from the three banks with whom the Company is
          related in financing agreements, according to which each of the banks
          decided to terminate the utilization of the Company's credit lines.

          To the best of the Company's knowledge, the banks' decision regarding
          terminating utilization of the Company's credit lines is the result of
          the banks' evaluation that the Company will continue to present losses
          during the coming periods. The banks' decision was sudden without
          prior notice, and despite the fact that for the purpose of the
          Company's financial statements as of December 31, 2008, March 31, 2009
          and June 30, 2009, the banks submitted to the Company a letter of
          waiver of their right for immediate repayment of the credit provided
          to the Company, with regards to the Company not meeting one of the
          financial covenants (the EBIDTA ratio) stipulated in the financing
          agreements between the Company and the banks.


                                     F - 67`

`Tefron Ltd.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Note 24: EVENTS SUBSEQUENT TO THE BALANCE SHEET DATE (Cont.)

     d.   RIGHTS OFFERING PROSPECTUS, SHELF PROSPECTUS, AND A PRIVATE PLACEMENT

          On February 26, 2010, the Company published a rights offering
          prospectus with the United States Securities and Exchange Commission,
          and a prospectus for a rights offering with the Israel Securities
          Authority and the Tel Aviv Stock Exchange. The prospectus included a
          rights issue of up to 1,578,975 ordinary shares, at a par value of NIS
          10 each of the Company, at a price of $3.8 per share. The share rights
          offer to shareholders of the Company was at a ratio of 1 unit for each
          1.406 shares.

          Since Norfet announced that it could not participate in the rights
          offering because of regulatory concerns, the Company chose to raise
          funds through both a rights offering and a private placement with
          Norfet and/or any of its representatives ("Norfet"), under which
          Norfet is committed to invest, against a private placement of shares,
          an amount that will complement the overall proceeds of the Company
          from the rights offering and private placement, up to $4 million.

          As part of the rights offering, the Company raised $2,867 thousand
          from its shareholders, against an issue of 754,384 ordinary shares of
          the Company. Under the private placement, the Company raised an
          additional $1,133 thousand, and in total raised $4 million (gross).

          In addition, the Company published a shelf prospectus for registration
          of:

          (A.) up to 3 million ordinary shares, of NIS 10 par value each of the
               Company.

          (B.) up to 10 series of convertible bonds, with each bond series at a
               par value of up to NIS 500 million available for repayment in one
               payment or a number of equal payments.

          (C.) up to 10 series of options, with each option series including not
               more than 3 million options available for conversion in a manner
               that each option will be available for conversion into 1 ordinary
               share, NIS 10 par value each of the Company, against a payment in
               cash of the exercise price linked to an indexation basis.

          (D.) up to 10 series of options, with each option series including not
               more than 200 million options available for conversion in a
               manner that each option will be available for conversion into NIS
               100 par value bonds of series A. through T of the Company,
               against a payment in cash of the exercise price linked to an
               indexation basis.

          (E.) up to 10 series of commercial paper (series 1 through 10), with
               each series of commercial paper at a par value of up to NIS 500
               million available for repayment in one or more payments.

     e.   LEASE AGREEMENT WITH REIT 1

          On March 21, 2010, the Company signed an agreement with Reit 1 Ltd.,
          (hereinafter: "Reit 1"), which holds rights in three industrial
          buildings in the Tradyon Industrial Area (hereinafter: "the
          buildings"), which houses the Company's plants and headquarters.
          According to the agreement, the Company will pay its entire debt to
          Reit 1, will vacate its headquarters and continue to rent the Hi-Tex
          Buildings 1 and 2 (hereinafter: "the agreement"). The details of the
          agreement are as follows:


                                     F - 68`

`Tefron Ltd.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Note 24: EVENTS SUBSEQUENT TO THE BALANCE SHEET DATE (Cont.)

          1.   The Company will settle its debt to Reit 1 in respect of rent for
               the buildings, which as of the end of the first quarter of 2010
               amounts to approximately NIS 3.4 million plus statutory Value
               Added Tax ("VAT"). Payment of the rental debt shall be effected
               in two equal installments, the first on the date of the signing
               of the Agreement, and the second on March 28, 2010. Upon payment
               of the aforementioned debt, the financial dispute between the
               parties will be settled.

          2.   The rental period of the building housing the Company's
               headquarters will terminate on March 31, 2010. The Company and
               Reit 1 will sign, within 60 days of the date from the date of
               signing of the Agreement, new leases with respect to the other
               two buildings housing plants of the Company, for the period from
               January 1, 2010 until December 31, 2019, without the possibility
               of reducing the rental period and in return for a monthly rent of
               approximately NIS 522 thousand plus VAT, linked to changes in the
               Israeli Consumer Price Index ("CPI"). In addition, the parties
               fixed a mechanism whereby the rent will be updated by NIS 0.50
               per sq. m. for each increase of $500 thousand in the EBITDA ratio
               over and above a cash flow surplus of $8,000 thousand, pursuant
               to the Company's agreement with the banks as mentioned above. The
               rental update is limited to an increase of up to NIS 4 per sq.
               m., linked to changes in the CPI.

          3.   In order to secure all of the Company's obligations under the
               Agreement, the Company has furnished to Reit 1 an autonomous bank
               guarantee in the amount of $500 thousand (hereinafter: "the
               guarantee"). The Company has undertaken to increase the amount of
               the guarantee by $450 thousand plus statutory VAT, in the manner
               of an increase of the guarantee by $150 thousand plus statutory
               VAT on January 1 of each of the years 2011, 2012 and 2013.

          4.   The total annual rent of the Company in the Teradyon Industrial
               Area shall amount to approximately NIS 6.3 million per year,
               compared to approximately NIS 9.8 million per year in respect of
               the buildings, prior to the agreement. The total amount saved as
               a result of the aforementioned move, including rent, taxes and
               structural maintenance costs, is more than NIS 4 million per
               year.

          5.   Prior to the signing of the agreement with Reit 1, on January 11,
               2010 the Company received a letter rom Reit 1's representative,
               in which Reit 1 claims that the Company did not transfer the
               rental fee for December 2009 and the first quarter of 2010, in
               the amount of $877 thousand. Reit 1 also claims that there is a
               debt for linkage differences in the amount of NIS 570 thousand.
               Reit 1 stated in its letter that if the said debt is not settled
               within five days from the letter date, Reit 1 will make
               procedures to protect its rights. The Company has attainments for
               the claims stated in Reit 1's letter,including the amount of the
               claimed debt. The agreement that was signed on March 21, resolves
               the aforementioned disputes.


                                     F - 69`

`Tefron Ltd.
Appendix to Consolidated Financial Statements - List of subsidiaries
--------------------------------------------------------------------------------

                              LIST OF SUBSIDIARIES

                                                      SHARES CONFERRING VOTING AND DIVIDEND RIGHTS
                                                               -------------------------
                                                           DECEMBER 31, 2009, 2008 AND 2007
                                                               -------------------------

COMPANY NAME

Subsidiaries:

Hi-Tex, founded by Tefron Ltd.                                 100%                 100%
Macro Clothing Ltd.                                            100%                 100%
Tefron USA Inc., wholly-owned by Tefron US Holdings            100%                 100%
Tefron UK Ltd., wholly-owned by Macro Clothing Ltd.            100%                 100%
El Masira Textile Co., wholly-owned by Tefron USA Inc.         100%                 100%
Tefron Holdings (98) Ltd.                                      100%                 100%
Tefron US Holdings Corp.                                       100%                 100%
Tefron Holding Netherlands B.V.                                100%                 100%
Tefron Macro HK Ltd., wholly-owned by Macro Clothing Ltd       100%                 100%


                                     F - 70`

`SIGNATURES

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

                                                  TEFRON LTD.

                                                  By: /s/ Amit Meridor
                                                  ------------------------------
                                                  Name:  Amit Meridor
                                                  Title: Chief Executive Officer

                                                  By: /s/ Eran Rotem
                                                  ------------------------------
                                                  Name:  Eran Rotem
                                                  Title: Chief Financial Officer

July 13, 2010

                                       92`