AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 1, 2004
================================================================================

                       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, 2003

                                       OR

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

               For the transition period from ________ to ________

                         COMMISSION FILE NUMBER 0-28878

                                   TEFRON LTD.
             (Exact name of Registrant as specified in its charter)

                                     ISRAEL
                 (Jurisdiction of incorporation or organization)

                    28 CHIDA STREET, BNEI-BRAK 51371, ISRAEL
                    (Address of principal executive offices)

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

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

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

             12,412,166 ORDINARY SHARES, NIS 1.0 PAR VALUE PER SHARE

               4,500 DEFERRED SHARES, NIS 1.0 PAR VALUE PER SHARE

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 which financial statement item the registrant has elected
to follow.
                             ITEM 17 |_| ITEM 18 |X|

Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.

                                 NOT APPLICABLE
================================================================================


<PAGE>


                                TABLE OF CONTENTS
<TABLE>
<CAPTION>

                                                                           Page
<S>          <C>                                                             <C>
PART I     .............................................................     2

  ITEM 1.    IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS......     2
  ITEM 2.    OFFER STATISTICS AND EXPECTED TIMETABLE....................     2
  ITEM 3.    KEY INFORMATION............................................     3
     A.      Selected Financial Data....................................     3
     B.      Capitalization and Indebtedness............................     4
     C.      Reasons for the Offer and Use of Proceeds..................     4
     D.      Risk Factors...............................................     4
  ITEM 4.    INFORMATION ON THE COMPANY.................................    14
     A.      History and Development of the Company.....................    14
     B.      Business Overview..........................................    16
     C.      Organizational Structure...................................    26
     D.      Property, Plants and Equipment.............................    27
  ITEM 5.    OPERATING AND FINANCIAL REVIEW AND PROSPECTS...............    29
  ITEM 6.    DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.................    40
     A.      Directors and Senior Management............................    40
     B.      Compensation...............................................    43
     C.      Board Practices............................................    46
     D.      Employees..................................................    48
     E.      Share Ownership............................................    49
  ITEM 7.    MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS..........    53
     A.      Major Shareholders.........................................    53
     B.      Related Party Transactions.................................    54
     C       Interests of Experts and Counsel...........................    57
  ITEM 8.    FINANCIAL INFORMATION......................................    57
  ITEM 9.    THE OFFER AND LISTING......................................    57
  ITEM 10.   ADDITIONAL INFORMATION.....................................    59
     A.      Share Capital..............................................    59
     B.      Memorandum and Articles of Association.....................    59
     C.      Material Contracts.........................................    61
     D.      Exchange Controls..........................................    71
     E.      Taxation...................................................    71
     F.      Dividends and Payment Agents...............................    73
     G.      Statements by Experts......................................    73
     H.      Documents on Display.......................................    73
     I.      Subsidiary Information.....................................    73
  ITEM 11.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.    74
  ITEM 12.   DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.....    74

PART II ................................................................    75

  ITEM 13.   DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES............    75
</TABLE>


                                       i
<PAGE>


  ITEM 14.   MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY
              HOLDERS AND USE OF PROCEEDS ..............................    75
  ITEM 15.   CONTROLS AND PROCEDURES....................................    75
  ITEM 16.   [RESERVED].................................................    75
  ITEM 16A.  AUDIT COMMITTEE FINANCIAL EXPERT...........................    75
  ITEM 16B.  CODE OF ETHICS.............................................    75
  ITEM 16C.  ACCOUNTANTS' FEES AND SERVICES.............................    75

PART III ...............................................................    77

  ITEM 17.   FINANCIAL STATEMENTS.......................................    77
  ITEM 18.   FINANCIAL STATEMENTS.......................................    77
  ITEM 19.   EXHIBITS...................................................    78


                                       ii
<PAGE>


                                  INTRODUCTION

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

            Our consolidated financial statements have been prepared in United
States dollars and in accordance with accounting principles generally accepted
in the United States, or US GAAP. See Note 2 of the Notes to our Consolidated
Financial Statements. All references in this Annual Report to "US 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
US dollars at NIS 4.379 to $1.00, the representative rate of exchange published
by the Bank of Israel, the Israeli central bank, for December 31, 2003. The
representative exchange rate between the NIS and the dollar as published by the
Bank of Israel for March 30, 2004 was NIS 4.516 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, Cacique and Abercrombie &
Fitch. 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.

                           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.

            In light of the many risks and uncertainties surrounding our
business and operations, you should keep in mind that we cannot guarantee that
the forward-looking statements described in this Annual Report will transpire.
In addition, you should note that our past financial and operation performance
is not necessarily indicative of future financial and operational performance.
We undertake no obligation to update any forward-looking statements, whether as
a result of new information, future events or otherwise.


                                       1
<PAGE>


                                     PART I

ITEM 1.   IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

       Not Applicable.

ITEM 2.   OFFER STATISTICS AND EXPECTED TIMETABLE

       Not Applicable.


                                       2
<PAGE>


ITEM 3.   KEY INFORMATION

3A.   SELECTED FINANCIAL DATA

            The following selected financial data as of December 31, 2002 and
2003 and for each of the three years ended December 31, 2001, 2002 and 2003 have
been derived from, and should be read in conjunction with, our consolidated
financial statements and notes thereto appearing elsewhere in this Annual
Report. The selected financial data as of December 31, 1999, 2000 and 2001 and
for each of the years ended December 31, 1999 and December 31, 2000 have been
derived from our audited financial statements not included in this Annual
Report. Operating results of Alba-Waldensian, Inc., referred to in this Annual
Report as Alba, subsequent to the date of its acquisition on December 13, 1999
and through December 31, 1999 are not material to us and accordingly are not
included in the consolidated financial statements for the year ended December
31, 1999. Operating results of Alba are included in our consolidated financial
statements since January 1, 2000.

<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                 1999       2000(1)        2001        2002         2003
                                               ---------   ---------    ---------    ---------    ---------
                                                          (In thousands, except per share data)
<S>                                            <C>         <C>          <C>          <C>          <C>
STATEMENT OF INCOME DATA:
Sales ......................................   $ 128,826   $ 223,602    $ 188,949    $ 190,305    $ 163,086
Cost of sales ..............................     112,408     199,482      169,173      151,385      138,090
Restructuring costs ........................          --          --           --        1,550           --
                                               ---------   ---------    ---------    ---------    ---------
Gross profit ...............................      16,418      24,120       19,776       37,370       24,996
Selling, general and administrative expenses       5,300      20,574       20,140       18,358       20,323
Restructuring costs ........................          --          --           --        3,793           --
                                               ---------   ---------    ---------    ---------    ---------
Operating income  (loss) ...................      11,118       3,546         (364)      15,219        4,673
Financing expenses (income),
      net ..................................         794      10,292        9,396        5,457        5,628
Other expenses, net ........................          --          --          843        2,293         (228)
                                               ---------   ---------    ---------    ---------    ---------
Income (loss) before taxes on income .......      10,324      (6,746)     (10,603)       7,469         (727)
Income tax expense (benefit) ...............       2,322      (2,216)        (837)       4,979          (92)
                                               ---------   ---------    ---------    ---------    ---------
 Income (loss) after income
      taxes ...............................        8,002      (4,530)      (9,766)       2,490         (635)
Equity in losses of affiliate
      company .............................           --          --         (240)        (392)        (183)
Minority interest in earnings of a
      subsidiary ...........................          --          --           --         (822)      (2,550)
Pre-acquisition loss of subsidiary since
      April 1, 2003 ........................          --          --           --           --          (85)
                                               ---------   ---------    ---------    ---------    ---------
Net income (loss) from ordinary activities .       8,002      (4,530)     (10,006)       1,276       (3,453)

Cumulative effect of change in accounting
      principle ............................          --          --           --      (18,774)          --
                                               ---------   ---------    ---------    ---------    ---------
Net income (loss) ..........................       8,002      (4,530)     (10,006)     (17,498)      (3,453)
Basic earnings (loss) per
      Ordinary Share .......................        0.64       (0.36)       (0.81)        0.10        (0.28)
                                               =========   =========    =========    =========    =========
Loss per share from cumulative effect of
      change in accounting principle .......          --          --           --        (1.51)          --
                                               =========   =========    =========    =========    =========
Earning (loss) per share basic and diluted .        0.64       (0.36)       (0.81)       (1.41)       (0.28)
                                               =========   =========    =========    =========    =========
Ordinary Shares ............................      12,433      12,412       12,412       12,412       12,412
                                               =========   =========    =========    =========    =========
</TABLE>


                                       3
<PAGE>


<TABLE>
<CAPTION>
                                                AT DECEMBER 31,
                            -----------------------------------------------------------
                               1999       2000(1)      2001         2002         2003
                            ---------   ---------   ---------    ---------    ---------
                                               (in thousands)
<S>                         <C>         <C>         <C>          <C>          <C>
Cash and cash equivalents   $  15,759   $   4,419   $   5,078    $   6,742    $   6,877
Working capital (deficit)      30,542      14,404      (6,958)      (6,167)     (14,524)
Total assets ............     246,491     258,275     227,733      196,411      202,721
Total debt(2) ...........     115,587     143,918     131,609       98,890      100,254
Shareholders' equity ....      71,975      67,475      57,588       40,108       36,655
</TABLE>

_______________________

(1)   Consolidated with the financial statements of Alba-Waldensian Inc. since
      January 1, 2000.
(2)   Total debt consists of total bank debt, other loans received and capital
      lease obligations.

3B    CAPITALIZATION AND INDEBTEDNESS

      Not applicable.

3C    REASONS FOR THE OFFER AND USE OF PROCEEDS

      Not applicable.

3D    RISK FACTORS

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

            Our sales to Victoria's Secret accounted for approximately 43% of
our total sales in 2001, 49.8% of our total sales in 2002 and 38.2% of our total
sales in 2003. Our sales to Target, Warnaco/Calvin Klein, Banana Republic and
The Gap, and Cardinal Healthcare accounted in the aggregate for approximately
28.6% of our total sales in 2001, 26.3% of our total sales in 2002 and 31.4 % of
our total sales in 2003. See the table in "Item 4. Information on the Company -
4B. Business Overview - Customers." We do not have long-term purchase contracts
with our customers, and our sales arrangements with our customers do not have
minimum purchase requirements. We cannot assure that Victoria's Secret, Target,
Warnaco/Calvin Klein, Banana Republic and The Gap, and Cardinal Healthcare or
any other customer will continue to buy our products in the same volumes or on
the same terms as they did in the past. Their failure to do so may have a
material adverse effect on us. In addition, we cannot assure that we will be
able to attract new customers. A material decrease in the quantity of sales made
to our principal customers, a material adverse change in the terms of such sales
or a material adverse change in the financial conditions of our principal
customers could have a material adverse effect on us. See "Item 4. Information
on the Company - 4B. Business Overview - Customers."

            In 2003, sales to Victoria's Secret totaled $62.2 million, or 38.2%
of our sales that year, a decrease from the 2002 sales to Victoria's Secret of
$94.7 million, or 49.8% of our sales for that year. Furthermore, controlling or
related entities of Victoria's Secret are involved in business activities that
are in direct competition to our businesses. We cannot assure that Victoria's
Secret will continue to buy our products in the same volumes or on the same
terms as in earlier years.


                                       4
<PAGE>


      OUR PRINCIPAL CUSTOMERS ARE IN THE RETAIL INDUSTRY, WHICH IS SUBJECT TO
      SUBSTANTIAL CYCLICAL VARIATIONS. OUR REVENUES WILL DECLINE SIGNIFICANTLY
      IF OUR PRINCIPAL CUSTOMERS DO NOT CONTINUE TO BUY OUR PRODUCTS IN LARGE
      VOLUMES DUE TO AN ECONOMIC DOWNTURN.

            Our customers are in the retail industry, which is subject to
substantial cyclical variations and is affected strongly by any downturn in the
general economy. A downturn in the general economy, a change in consumer
purchasing habits or any other events or uncertainties that discourage consumers
from spending, could have a significant effect on our customers' sales and
profitability. Such downturns, changes, events or uncertainties could result in
our customers having larger inventories of our products than expected. These
events could result in decreased purchase orders from us in the future, which
would have a material adverse effect on our sales and profitability. For
example, the difficult global economic environment and the continuing soft
retail market conditions in the world and specifically in the U.S. both before
and especially after the events of September 11, 2001 were reflected in
disappointing retail sales in the year 2001 compared to the same period in the
year 2000, and consequently decreased our order backlog and production levels. A
prolonged economic downturn could harm our financial condition.

      OUR EXPANSION INTO NEW PRODUCT LINES WITH MORE COMPLICATED PRODUCTS, AND
      OUR MANUFACTURE OF PRODUCTS IN SHORTER PRODUCTION RUNS ADVERSELY AFFECTED
      OUR OPERATING EFFICIENCY DURING 2003 AND MAY HAVE CONTINUED ADVERSE
      EFFECTS ON OUR FUTURE OPERATING EFFICIENCY.

            During 2003, we invested significant efforts to develop and expand
new product lines, including active-wear products, to diversify our product line
and our client base. The manufacturing of new, more complicated products has
adversely affected our operating efficiency, and may continue to do so.

            In addition, in the past, we relied on selling our products in
relatively long production runs to achieve the manufacturing and logistical
efficiencies that enable us to maintain sales and profitability at relatively
high levels and to price our products competitively. During 2003, due to our
expansion into new product lines and due to changing market conditions, we began
manufacturing our products in shorter production runs, which also affected our
operating efficiency, and may continue to do so.

            Although we believe that our efficiency will improve as we continue
to manufacture our new product lines, we cannot assure that we will be able to
return to our previous efficiency levels in the future.

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

            During 2003, we invested significant efforts to develop and expand
our new product lines, in particular active-wear products, to diversify our
product line and our client base. Active-wear products that we manufacture are
made in bigger sizes than intimate apparel, both because our active-wear
products are intended for both men and women, and because our active-wear
products involve the manufacture of more tops, we have purchased and may need to
purchase additional knitting machines and other equipment adapted to manufacture
our new products lines. In addition, the manufacture of active-wear products at
times requires equipment with new technologies. The additional capital
expenditures that may be incurred in connection with these purchases may
adversely affect our future cash flow.

      SINCE MOST OF OUR REVENUES ARE GENERATED IN U.S. DOLLARS AND A LARGE PART
      OF OUR EXPENSES ARE IN ISRAELI CURRENCY, WE ARE SUBJECT TO FLUCTUATIONS IN
      INFLATION AND CURRENCY RATES.


                                       5
<PAGE>


            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. This appreciation
would cause an increase in our NIS expenses as recorded in our U.S. dollar
denominated financial reports, even though the expenses denominated in NIS will
remain unchanged. A portion of our NIS denominated expenses is linked to changes
in the Israeli cost of living index, a portion is linked to increases in NIS
payments under collective bargaining agreements and a portion is unlinked.

            In addition, an increase in our expenses in NIS will not always be
compensated for fully by a devaluation of NIS vis-a-vis the U.S. dollar. In 2001
and 2002, the rate of devaluation of the NIS vis-a-vis the dollar exceeded the
inflation rate in Israel. During 2001 and 2002, the rate of inflation was 1.4%
and 6.5%, respectively, while NIS devalued against the U.S. dollar by 9.3% and
7.3% in 2001 and 2002. During 2003, the rate of inflation was (1.9)%, while NIS
appreciated against the U.S. dollar by 7.6%. However, to the extent in the
future that the rate of inflation in Israel exceeds the rate of devaluation of
the NIS in relation to the dollar or if the timing of such devaluation lags
behind inflation in Israel, we may be adversely affected. See "Item 5. Operating
and Financial Review and Prospects - Impact of Inflation and Currency
Fluctuations."

      WE REQUIRE A SIGNIFICANT AMOUNT OF CASH TO PAY OUR DEBT. IF WE FAIL TO
      GENERATE SUFFICIENT CASH FLOW FROM OPERATIONS, WE MAY NEED TO RENEGOTIATE
      OR REFINANCE OUR DEBT, OBTAIN ADDITIONAL FINANCING OR POSTPONE CAPITAL
      EXPENDITURES.

            We depend mainly on our cash generated by operating activities to
make payments on our debts. In 2003, the cash generated by operating activities
was approximately $2.9 million. We cannot assure that we will generate
sufficient cash flow from operations to make the scheduled payments on our debt.
We have repayment obligations on our long-term debt of approximately $11.7
million in 2004, $25.2 million in 2005, $20.1 million in 2006 and $11.5 million
in 2007. These amounts do not include any repayment obligations under our
short-term debt in the amount of approximately $31.8 million as of December 31,
2003. 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.

            In February and March, 2004, we announced that we had entered into
agreements with Norfet, Limited Partnership and with a group of investors
represented by Mr. Zvi Limon who agreed to invest an aggregate of $20 million in
cash in Tefron in exchange for the issuance of ordinary shares in Tefron. We
expect to use the majority of the proceeds from such investments to repay
existing bank debt. In March 2004, we also announced that we had entered into an
equity credit line facility agreement under which we have an option to call
funds of up to the lesser of $15 million or 19.9% of our outstanding share
capital over the next three years, but in no event will the investor be
obligated to own more than 4.99% of our ordinary shares at any one time, and
subject to certain other limitations. All of these agreements are subject to the
satisfaction of closing conditions, and there is no guarantee that the
investments contemplated by these agreements will be completed.

            Bank Hapoalim and Israel Discount Bank have agreed to extend the
repayment schedule of the long term debt due to them commencing with the
payments due for 2005, such that each year from 2005 until 2012 we would be
obligated to pay approximately $7 million. These agreements from the banks are
contingent on our paying them the proceeds of the $15 million investment from
Norfet, Limted Partnership and are also subject to negotiation of final
documentation. See "Item 5. Operating and Financial Review and Prospects -
Liquidity and Capital Resources".

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


                                       6
<PAGE>


            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, the
lenders could declare all amounts borrowed and all amounts due to them under the
agreements due and payable. If we are unable to repay the debt, the lenders
could foreclose on our assets that are subject to liens and sell our assets to
satisfy the debt. See "Item 5. Operating and Financial Review and Prospects" and
"Item 10. Additional Information -10C. Material Contracts - Credit Agreement."

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

            We have a significant amount of bank debt mainly as a result of our
acquisition of Alba in December 1999 and the investments made in our Hi-Tex
Division. As of December 31, 2003, we had approximately $65.8 million of long
term loans outstanding (including current maturities of $9.8 million). We also
had approximately $2.7 million in long term capital lease obligations and other
loans (including current maturities of $1.9 million) and approximately $31.8
million in short term bank credit.

            Our substantial debt obligations could have important consequences.
For example, they could:

            o   require us to use a substantial portion of our operating cash
                flow to pay interest, which reduces funds available to grow and
                expand our business, invest in machinery and equipment and for
                other purposes;

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

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

            o   limit our ability to pursue business opportunities; and

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

            Because a significant portion of our loans bear interest at floating
rates, an increase in interest rates could adversely affect our financial
results. A ten percent interest rate change on our floating interest rate
long-term loans outstanding at December 31, 2003, would have an annual impact of
approximately $0.5 million on our interest cost. See "Item 5. Operating and
Financial Review and Prospectus - Liquidity and Capital Resources" and "Item 11.
Quantitative and Qualitative Disclosures about Market Risk."

      DUE TO RESTRICTIONS IN OUR LOAN AGREEMENTS, WE MAY NOT BE ABLE TO OPERATE
      OUR BUSINESS AS WE DESIRE.

            Our loan agreements contain a number of conditions and limitations
on the way in which we can operate our business, including limitations on our
ability to raise debt, sell or acquire assets and pay dividends. Our loan
agreements also contain various covenants which require that we maintain certain
financial ratios related to shareholder's equity and operating results that are
customary for companies comparable in size. These limitations and covenants may
force us to pursue less than optimal business strategies or forgo business
arrangements which could have been financially advantageous to us or our
shareholders.


                                       7
<PAGE>


            Due to our incurrence in 2002 of expenses totaling approximately
$26.4 million (mainly resulting from a non-cash goodwill adjustment of $18.8
million in compliance with SFAS 142; a capital loss of approximately $1.8
million associated with the sale of 52% of the Health Products Division of Alba;
and restructuring costs of Alba of approximately $5.3 million), and a net loss
for 2003 of approximately of $3.5 million, our shareholders equity as of
December 31, 2003 was $36.7 million and our ratio of shareholders'equity to
total assets was 18.1%. These figures were below the minimum level of
approximately $67 million for shareholders' equity and the minimum percentage of
30% for our ratio of shareholders' equity to total assets required by the
covenants under our credit facility with Bank Hapoalim B.M. and Israel Discount
Bank of New York. Bank Hapoalim has agreed to amend the minimum shareholders'
equity requirement to $36.5 million and the ratio of shareholders' equity to
total assets to not less than 18% for the period from December 31, 2003 to March
31, 2004 (inclusive). Israeli Discount Bank has agreed to amend the minimum
shareholders' equity requirement to $36.5 million and the ratio of shareholders
equity to total assets to not less than 18% for the period from December 31,
2003 to March 31, 2004 (not including financial statements as of March 31,
2004).

            Bank Hapoalim and Israel Discount Bank have agreed to permanently
amend the our shareholders' equity requirement to not less than $40 million and
our ratio of shareholders' equity to total assets to not less than 20% provided
that we pay to the banks are contingent on our paying the banks the proceeds of
the $15 million investment from Norfet, Limited Partnership. See "Item 5.
Operating and Financial Review and Prospects - Liquidity and Capital Resources".

            Our failure to comply with the covenants and restrictions contained
in our loan agreements could lead to a default under the terms of these
agreements. If a default occurs and we are unable to renegotiate the terms of
the debt, the lenders could declare all amounts borrowed and all amounts due to
them under the agreements due and payable. If we are unable to repay the debt,
the lenders could foreclose on our assets that are subject to liens and sell our
assets to satisfy the debt. See "Item 10. Additional Information - 10C. Material
Contracts - Credit Agreement."

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

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

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

            o   varying levels of market acceptance of our products;

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

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

            o   operating efficiencies.

            When we establish a relationship with a new customer, initial sales
to such customer are often in larger quantities of goods (to build its initial
inventory) than may be required to replenish such inventory from time to time
afterwards. As a result, after a customer builds its initial inventory, our
sales to such customer may decrease. We cannot assure that our sales to any of
our customers will continue at the current rate. See "Item 5. Operating and
Financial Review and Prospects."

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

            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.


                                       8
<PAGE>


      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 and active-wear many of which have 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 adversely affect 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 existing and prospective competitors, especially those
from the Far East, have established, or may in the future establish,
relationships with our existing and potential customers, which could have a
material adverse effect on our ability to compete. In addition, we cannot assure
that our customers will not seek to manufacture our products through alternative
sources and thereby eliminate the need to purchase our products. See "Item 4.
Information on the Company - 4B. Business Overview - Competition."

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

            In addition, our competitors may be able to purchase seamless
knitting machines and other equipment similar to, but less expensive than, the
Santoni knitting machines we use to knit garments in our Hi-Tex manufacturing
process. By reducing their production cost, our competitors may lower their
selling prices. If we are forced to reduce our prices and we cannot reduce our
production costs, our financial performance may be adversely affected.
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 have a material adverse effect on our sales.

      WE ARE SUBJECT TO FLUCTUATING COSTS OF RAW MATERIALS.

            We use cotton yarn, lycra, spandex, various polymeric yarn and
elastic as primary materials for manufacturing our products. Our financial
performance depends, to a substantial extent, on the cost and availability of
these raw materials. The capacity, supply and demand for such raw materials are
subject to cyclical and other market factors and may fluctuate significantly. As
a result, our cost in securing raw materials is subject to substantial increases
and decreases over which we have no control except by seeking to time our
purchases of cotton and polymeric yarns, which are our principal raw material,
to take advantage of favorable market conditions. For example, during 2003, the
cost of cotton increased by 45-50% due to an increase in demand. 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
adversely affect our margin of profitability and may have a material adverse
effect on us.

      IF OUR ORDINARY SHARES ARE DELISTED FROM THE NEW YORK STOCK EXCHANGE, THE
      LIQUIDITY AND PRICE OF OUR ORDINARY SHARES AND OUR ABILITY TO ISSUE
      ADDITIONAL SECURITIES MAY BE NEGATIVELY AFFECTED.


                                       9
<PAGE>


            In order to maintain the listing of our ordinary shares on The New
York Stock Exchange, or NYSE, we are required to meet specified maintenance
standards. In December 2002, we were notified by the NYSE that we failed to
comply with the listing standards of minimum stockholders' equity of $50 million
and minimum market capitalization of $50 million over a consecutive 30 trading
day period. As a result, we submitted a business plan to the NYSE demonstrating
how we anticipate meeting these criteria within 18-months as required by the
NYSE rules. In February 2003, we were notified that we had been approved for
continued listing on the NYSE, subject to the successful implementation of the
business plan that we submitted to the Exchange. We cannot guarantee that we
will successfully implement our business plan. In March 2004, we were informed
by the NYSE that it intends to publish for public comment amended continued
listing criteria requiring a minimum stockholders' equity of $75 million and
minimum market capitalization of $75 million.

            In the event we fail to successfully implement our business plan and
meet the prior NYSE criteria within 18 months from the time we submitted the
plan, or we fail to meet any other current or revised listing criteria of the
NYSE, our ordinary shares may be delisted from trading on The New York Stock
Exchange. We cannot assure you that we will meet all NYSE criteria in the
future. Delisting of our ordinary shares would result in limited availability of
market price information and limited news coverage. In addition, delisting could
diminish investors' interest in our ordinary shares as well as materially
adversely affect the liquidity and price of our ordinary shares. Delisting may
also make it more difficult for us to issue additional securities or secure
additional financing.

      WE DEPEND ON OUR SUPPLIERS FOR MACHINERY; WE MAY EXPERIENCE DELAYS OR
      ADDITIONAL COSTS SATISFYING OUR PRODUCTION REQUIREMENTS.

            We purchase machinery and equipment, including the machinery used in
our Hi-Tex manufacturing process, from sole suppliers. If our suppliers are not
able to provide us with additional machinery or equipment as needed, we might
not be able to increase our production to meet any growing demand for our
products.

      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 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. Any replication of our manufacturing
process by a competitor would have a material adverse effect on us.

      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. Until the closing of the Norfet transaction described in "Item
10. Additional Information - 10C. Material Contracts - FIMI Agreements- Tefron
Agreement", Arie Wolfson, the Chairman of our Board of Directors, has direct
voting power over approximately 14.2% of the outstanding Ordinary Shares of
Tefron. Mr. Wolfson is also the Chairman and a significant shareholder of
Macpell Industries Ltd., an Israeli company that owns approximately 35.9% of the
outstanding Ordinary Shares of Tefron. Mr. Wolfson and Mr. Sigi Rabinowicz, a
Director of Tefron, and another Macpell shareholder collectively own a
controlling interest in Macpell, have entered into a shareholders' agreement
regarding corporate actions of Macpell, including the process by which Macpell
votes its Ordinary Shares of Tefron to elect our Directors. Under the
shareholders' agreement, they are entitled to cause Macpell to vote its Ordinary
Shares of Tefron for five Directors designated by them, out of a total of eight
Directors on the Board of Directors of Tefron. As a result, the corporate
actions of Tefron may be influenced significantly by Messrs. Wolfson and
Rabinowicz. See "Item 6. Directors, Senior Management and Employees" and "Item
7. Major Shareholders and Related Party Transactions - 7A. Major Shareholders"
and "- 7B. Related Party Transactions - Relationships and Transactions with
Macpell - Macpell Shareholders' Agreement."


                                       10
<PAGE>


            In connection with the proposed acquisition of Ordinary Shares by
Norfet, Limited Partnership from the Company and from Arwol Holdings Ltd., an
Israeli company wholly owned by Arie Wolfson, and from Macpell, each of Norfet,
Limited Partnership, Arwol and Macpell have agreed to vote all of the Company
ordinary shares owned or controlled by each of them for the election to the
Company's Board of Directors of: (i) three members and one external director
nominated by Norfet, Limited Partnership, (ii) three members and one external
director nominated by Arwol and Macpell, and (iii) the Company's chief executive
officer. See "Item 10. Additional Information- 10C. Material Contracts - FIMI
Agreements". This agreement is subject to satisfaction of closing conditions.

            We are party to a consulting and management services agreement with
Mr. Wolfson and a company controlled by him, pursuant to which the company
controlled by Mr. Wolfson has agreed to provide consultancy and management
services to Tefron. We also engage in transactions with Macpell and its
affiliates. We believe that the consulting and management agreement and these
transactions are beneficial to us and are conducted upon terms which are no less
favorable to us than those terms available to us from unaffiliated third
parties. We intend to continue to engage in transactions with Macpell and its
affiliates. We may be in direct or indirect competition with Macpell or its
affiliates in the future. Moreover, opportunities to develop, manufacture or
sell new products or market them to new customers may arise in the future and
Macpell or its affiliates might pursue such opportunities while excluding us
from, or competing with us for, such opportunities. See "Item 6. Directors,
Senior Management and Employees - 6A. Directors and Senior Management," "Item 7.
Major Shareholders and Related Party Transactions," and Note 22 of the Notes to
the Consolidated Financial Statements.

            Israeli companies law imposes procedures, including, for certain
material transactions, a requirement of shareholder approval, as a precondition
to entering into interested party transactions. These procedures may apply to
transactions between Macpell and us. However, we cannot assure that we will be
able to avoid the possible detrimental effects of any such conflicts of interest
by complying with the procedures mandated by Israeli law. See "Item 6.
Directors, Senior Management and Employees - 6A. Directors and Senior
Management," "- 6C. Board Practices," and "Item 7. Major Shareholders and
Related Party Transactions."

      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. Following our
exhaustion of our net operating loss carry forwards, we have been able to
benefit from a reduced tax rate of 25% on earnings derived from these
investments for which the benefit period has not expired. To maintain
eligibility for these programs and tax benefits, we must continue to meet
certain conditions, including making certain specified investments in fixed
assets and conducting our operations in specified "Approved Enterprise" zones.
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 in Israel from the date of receipt. We have
granted a security interest over all of our assets to secure our obligations to
fulfill these conditions.

            The Government of Israel has reduced the available amount of
investment grants from up to 38% of eligible capital expenditures in 1996 to up
to 24% of eligible capital expenditures (for projects not exceeding investments
of 140 million shekels that are submitted in any year) and up to 20% of eligible
capital expenditures (for projects exceeding investments of 140 million shekels
that are submitted in any year) since 1997. There can be no assurance that the
Israeli Government will not further reduce the availability of investment
grants. 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 have a material adverse effect
on us.


                                       11
<PAGE>


            In addition, if the percentage of our foreign investment exceeds
25%, our Approved Enterprises would qualify for reduced tax rates for three
years beyond the initial seven-year period. We cannot assure that we will obtain
approval for additional Approved Enterprises, or that the provisions of the Law
for the Encouragement of Capital Investments, 1959, as amended, will not change
or that the 25% foreign investment percentage will be reached for any subsequent
year. See "Item 4. Information on the Company - 4B. Business Overview - Israeli
Investment Grants and Tax Incentives."

            We also benefit from exemptions from customs duties and import
quotas due to our location in Israel, Jordan (Qualified Industrial Zone) and
Madagascar and the free trade agreements Israel maintains with the United
States, Canada, the European Union and the European Free Trade Association. If
there is a change in such benefits or if other countries enter into similar
agreements and obtain similar benefits or if any such agreements were
terminated, we may be adversely affected.

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

            Approximately 95% of our sales in 2003 were made to customers in the
United States, and we intend to continue to expand our sales to customers in the
United States and Europe. In addition, a substantial majority of our raw
materials are purchased outside of Israel. Our international sales and purchases
are affected by costs associated with shipping goods and risks inherent in doing
business in international markets, including:

            o   changes in regulatory requirements;

            o   export restrictions, tariffs and other trade barriers;

            o   currency fluctuations;

            o   longer payment cycles;

            o   difficulties in collecting accounts receivable; and

            o   political instability and seasonal reductions in business
                activities.

            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 have a material adverse effect on our business, financial condition and
results of operations. See "Item 4. Information on the Company - 4B. Business
Overview - Manufacturing and Production."

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

            In addition to our production facilities in Israel, we currently
have production facilities in Jordan and Madagascar and are in the process of
shifting additional sewing production to Jordan to take advantage of lower labor
costs. During the last quarter of 2003, disputes arose between us and the other
shareholders in our joint subsidiaries that manage our operations in Madagascar.
As a result, effectively, we lost our influence in those companies. We intend to
terminate our partnership with these other shareholders and are currently
exploring our options with respect to our continued operations in Madagascar.

            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 Africa in general. We cannot assure that the political, economic or
social situation in these countries or in the Middle East and Africa in general
will not have a material adverse effect on our operations, especially in light
of the potential for hostilities in the Middle East. The success of the
production facilities also will depend on the quality of the workmanship of
laborers, and our ability to maintain good relations with such laborers, in
these countries. We cannot guarantee that our operations in Madagascar or Jordan
will be cost-efficient or successful.


                                       12
<PAGE>


            Furthermore, Madagascar experiences wide climate variations and a
yearly hurricane season generally between the months of November to March. These
weather conditions could negatively affect our operations in Madagascar by,
among other things, requiring us to delay or halt production, hindering our
ability to transport raw materials to, and finished products from, the
Madagascar production facility or even requiring us to replace or perform costly
repairs to our equipment at the facility. We cannot assure that our operations
will not be materially affected by weather conditions or natural disasters in
any area where we maintain production facilities.

      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 military 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 problems 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. Since October 2000, there has been a substantial
deterioration in the relationship between Israel and the Palestinians which has
resulted in increased violence. The future effect of this deterioration and
violence on the Israeli economy and our operations is unclear. We cannot assure
that ongoing or revived hostilities or other factors related to Israel will not
have a material adverse effect on us or our business.

            Generally, all male adult citizens and permanent residents of Israel
under the age of 54, unless exempt, are obligated to perform up to 36 days of
annual military reserve duty. Additionally, all such residents are subject to
being called to active duty at any time under emergency circumstances. Some of
our officers and employees are currently obligated to perform annual reserve
duty. No assessment can be made as to the full impact of such requirements on
our workforce or business if conditions in Israel should change, and no
prediction can be made as to the effect of any expansion or reduction of such
military obligations on us. See "Item 4. Information on the Company - 4B.
Business Overview - Conditions in Israel."


                                       13
<PAGE>


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 28 Chida
Street, Bnei-Brak 51371, Israel and our telephone number is 972-3-579-8701. We
are subject to the provisions of the Israeli Companies Law, 5759-1999. Our agent
for service of process in the United States is CSC Corporation Service Company,
2711 Centerville Rd. Suite 400, Wilmington, DE 19808.

          Below is a summary of significant events in our development:

      1990        First bodysize cotton panty with applicated elastics

      1997        Formation of Hi-Tex Founded by Tefron Ltd. and
                  production of first seamless panty.

                  Initial public offering of our shares on the NYSE.

      1998        Acquisition of a dyeing and finishing facility to
                  achieve greater vertical integration of our business.

      1999        Acquisition of Alba, a manufacturer of seamless apparel
                  and healthcare products. The main purpose of the
                  acquisition of Alba was to acquire additional production
                  capacity, a presence in the United States, direct store
                  distribution capacity, a broader customer base and
                  incremental revenues.

      2001        Initial significant shifting of sewing production to
                  Jordan

      2001        Acquisition of a 50% stake in JBA Productions S.A., an
                  intimate apparel manufacturer located in Madagascar that
                  specializes in bras manufacturing. JBA enjoys most of
                  the free trade privileges that we do in Israel, such as
                  exemption from import quotas and customs duties in the
                  United States and Europe, and the labor costs of its
                  production facility are significantly lower.

      2001        Launch of a turn around program, including significant
                  cost reduction, downsizing and consolidation of
                  operations.

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

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

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


                                       14
<PAGE>


      FEB.-MARCH  Proposed equity investments with two groups of investors in
      2004        the aggregate amount of $20 million, and an equity credit line
                  facility providing Tefron with the option to call funds of up
                  to an additional amount equal to the lesser of $15 million or
                  19.9% of Tefron's ordinary share capital, subject to
                  limitations and the satisfaction of certain conditions.

ALBAHEALTH LLC

            FORMATION OF ENTITY. On September 6, 2002, Alba entered into a
contribution agreement with Encompass Group, L.L.C., an experienced manufacturer
and marketer of numerous health products, and General Electric Capital
Corporation, as a result of which Encompass and GE Capital acquired a portion of
Alba'sHealth Products Division which from then became operated through a newly
formed Delaware limited liability company, AlbaHealth LLC, referred to in this
Annual Report as AlbaHealth.

            Under the terms of the contribution agreement, Alba contributed to
Alba Health substantially all of the assets related to its Health Products
Division, together with the associated liabilities, including bank debt of US$28
million secured by such assets, in exchange for a 48.325% ownership interest in
AlbaHealth. Encompass contributed US$12 million in cash to the capital of
AlbaHealth in exchange for a 48.325% ownership interest, and GE Capital
contributed US $1 million in cash in exchange for a 3.35% ownership interest. In
addition, GE Capital provided AlbaHealth with a US$18.0 million credit facility.
For information concerning the AlbaHealth credit agreement, see "Item 10.
Additional Information - 10C. Material Contracts - AlbaHealth Credit Agreement."

            Under the terms of the Contribution Agreement, the parties agreed
that Alba will maintain a majority position on the board of managers of
AlbaHealth so long as it holds at least 40% of the interest of AlbaHealth. In
addition, the Contribution Agreement provides for certain limitations on the
ability of the parties to transfer their interests in AlbaHealth.

            We, together with Alba and Encompass, undertook that, until the
fifth year following the date on which we shall cease to hold interest in
AlbaHealth, we shall not, directly or indirectly, engage in any competitive
business in the territory of the US, Canada and Mexico.

            PUT OPTION AGREEMENT. The parties to the Contribution Agreement are
also parties to a put option agreement. Pursuant to the provisions of the Put
Agreement, for a period of three years commencing on September 2004 (or, with
respect to GE Capital, commencing on such earlier date as the credit agreement
terminates), each of Alba and GE Capital has an option to require AlbaHealth to
purchase all, but not less than all, of such party's ownership interest in
AlbaHealth. The consideration to be paid to Alba for its interests in AlbaHealth
is calculated in accordance with a formula which taking into account certain
factors, such as AlbaHealth's fair value and its net sales, but in any event
such consideration shall not be less than Alba's pro-rata share of the fair
value of AlbaHealth. The consideration to be paid to GE Capital for its
interests in AlbaHealth shall be equal to its pro-rata share of the fair value
of AlbaHealth. Pursuant to the Put Agreement, the fair value of AlbaHealth shall
be determined based on a formula which takes into account the difference between
the sum of cash and cash equivalents of AlbaHealth and six times the EBITDA of
AlbaHealth for the preceding year, and the total debt of AlbaHealth at such
time. AlbaHealth's obligation to pay the exercising party its put consideration
is subject to the compliance by AlbaHealth of certain conditions as set forth in
the Put Agreement.

            Under the terms of a Share Purchase Agreement with Norfet, Limited
Partnership, we agreed to provide Norfet, Limited Partnership with a letter of
undertaking from Alba to exercise its put option in respect of AlbaHealth
immediately following September 2004 as soon as AlbaHealth's EBITDA for four
consecutive quarters equals or exceeds $8 million, subject to certain
conditions. See "Item 10. Additional Information- 10C. Material Contracts - FIMI
Agreements - Tefron Agreement".


                                       15
<PAGE>


            MANAGEMENT FEES. Under the terms of the agreement, Alba provided
certain management services to AlbaHealth in return for an annual fee of
approximately $800,000 for the first year ending on September 6, 2003, which
amount is to be increased at a rate of 4% per annum for each additional year of
the term. As of the March 31, 2004, this agreement remains in effect.

SHIFT OF U.S. CONSUMER DIVISION MANUFACTURING TO ISRAEL

            In the second quarter of 2003, we completed the shift of
manufacturing for Alba's Consumer Division, located in Valdese, NC, to our
Hi-Tex Division's manufacturing facility in Israel. At our facility in Valdese,
NC, we distribute to certain of our customers products that are manufactured by
our Hi-Tex Division in Israel. This shift resulted in a decrease of labor costs
and other production costs, although it has also, together with other factors,
adversely affected the operating efficiency of our Hi-Tex Division manufacturing
facility in Israel for longer than expected.

CAPITAL EXPENDITURES

            Our capital expenditures for fixed assets (net of grants from the
Government of the State of Israel) were $2.3 million, $1.3 million and $0.7
million for the years ended December 31, 2003, 2002, and 2001, respectively. The
2003 expenditures were primarily made in Israel to purchase new knitting
machines and other equipment. See Consolidated Statements of Cash Flows in the
Consolidated Financial Statements.

            Our current capital expenditures include investments in equipment,
machinery and leasehold improvements in our facilities in Israel and Jordan. See
Note 7 of the Notes to the Consolidated Financial Statements. We expect to incur
capital expenses to acquire new knitting machines with wider diameters to
manufacture our new active-wear products and to shift more of the sewing
production of our Cut & Sew Division from Israel to Jordan to take advantage of
lower labor costs.

            As of the date of this Annual Report, we estimate that our capital
expenditures for 2004 (net of grants from the Government of the State of Israel)
will be approximately $9 million. We expect to finance these investments
primarily from cash generated from operations and from the contemplated equity
investments described under "Item 10. Additional Information - 10C. Material
Contracts". However, the actual amount of our capital expenditures will depend
on a variety of factors, including general economic conditions, changes in
demand for our products, increase in the sales growth of our new products, the
risks and uncertainties involved in doing business in Jordan and our ability to
generate sufficient cash from operations. See "Item 3. Key Information - 3D.
Risk Factors."

4B.   BUSINESS OVERVIEW

OVERVIEW

            We manufacture intimate apparel, active-wear and swimwear sold
throughout the world by such name-brand marketers as Victoria's Secret, Target,
Warnaco/Calvin Klein The Gap, Banana Republic, Nike, Mervin's and as well as
other well known American retailers and designer labels. Through the utilization
of manufacturing technologies and techniques developed or refined by us, we are
able to mass-produce quality garments featuring unique designs tailored to our
customers' individual specifications at competitive prices. Our product line
includes knitted briefs, bras, tank tops, boxers, leggings, crop, T-shirts,
nightwear, bodysuits, swim wear, beach wear and active-wear. Our Healthcare
Division manufactures and sells a range of textile healthcare products. These
products include: anti-embolism stockings and compression therapy systems, an
intermittent pneumatic compression device; sterile wound dressings; and
XX-Span(R) dressing retainers, an extensible net tubing designed to hold
dressings in place without the use of adhesive tape.


                                       16
<PAGE>


            We seek to apply our manufacturing technologies and techniques to
meet the fashion and merchandising needs of our customers. We redesigned and
streamlined the production process for intimate apparel, which has historically
been labor-intensive, to increase substantially the automation and control of
our sewing and cutting operations, thereby achieving higher levels of product
quality and consistency while reducing labor costs. With product innovation made
possible by our manufacturing capabilities, we redirect 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.

            We are known for the technological innovation of our Hi-Tex and
cut-and-sew manufacturing process. Our Hi-Tex manufacturing process was
implemented as part of our strategy to streamline our manufacturing process and
improve the design and quality of our products. The Hi-Tex manufacturing process
includes 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.

            We seek to develop strong relationships with large name-brand
marketers of intimate apparel and active-wear and to become their principal
supplier for those products we manufacture. We believe that customers are
attracted by our manufacturing capabilities, which allow for consistently
high-quality merchandise at competitive prices as well as for the capacity to
accommodate rapid sales growth. We believe that our collaboration with our
customers in the design and development of our products strengthens our
relationships with our customers and improves the quality of our products. We
began our relationship with Victoria's Secret in 1991, with Banana Republic and
The Gap in 1993 and with Warnaco/Calvin Klein in 1994. In 2000, we began our
relationship with Target, which was an existing customer of Alba. In 2003, these
customers accounted for approximately 58.7% of our total sales.

            We enjoy several strategic advantages by reason of our location in
Israel, Jordan and Madagascar. Israel is one of the few countries in the world
that has free trade agreements with the United States, Canada, the European
Union, or EU, and the European Free Trade Association, or 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 Jordan and Madagascar we benefit from exemptions from
customs duties and import quotas. We also currently benefit from substantial
investment grants and tax incentives provided by the Government of Israel and
from the availability in Israel of both skilled engineers and relatively
inexpensive unskilled workers. See "- Israeli Investment Grants and Tax
Incentives" and "- Conditions in Israel -Trade Agreements."

PRODUCTS

            In close collaboration with our customers, we design and manufacture
intimate apparel, active-wear and swimwear. Through our efficient, low-cost
production capability, we produce garments made of cotton and man-made 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
and is made of high-quality fabric. Our principal products include Our product
line includes knitted briefs, bras, tank tops, boxers, leggings, crop, T-shirts,
nightwear, bodysuits, swim wear, beach wear and active-wear.

            AlbaHealth manufactures and sells healthcare products. These
products include: anti-embolism stockings and compression therapy systems, an
intermittent pneumatic compression device, both of which are designed to improve
circulation and reduce the incidence of deep vein thrombosis; sterile wound
dressings, such as pre-saturated gauze, petrolatum and xeroform gauze,
non-adhering dressings and gauze strips; and XX-Span(R) dressing retainers, an
extensible net tubing designed to hold dressings in place without the use of
adhesive tape. All dressing products are used in wound care therapy. Other
healthcare products include slip-resistant patient treads, which are knitted
soft patient footwear with slip-resistant sole to help prevent patient falls
while keeping feet warm even while in bed, oversized socks and knitted cuffs. In
2003, footwear products represented approximately 47.19% of the sales of the
AlbaHealth.


                                       17
<PAGE>


            The principal market for our products is the United States. For a
breakdown of our sales by geographic area and operating segments, see Note 21 of
the Notes to the Consolidated Financial Statements.

MANUFACTURING AND PRODUCTION

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

            We manufacture products only to fill firm orders and therefore
maintain limited inventory of finished goods. Customers typically send projected
product requirements to us between six and twelve months in advance of the
delivery requirements and place firm orders between three and six months prior
to the desired delivery date. This lead time allows us to coordinate raw
material procurement with its usage and to adjust production levels in order to
meet demand.

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

MANUFACTURING PROCESS

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

    o   PRODUCT DESIGN - Traditionally, manufacturers produce several samples of
        a garment from which apparel marketers can select. In contrast, our
        sophisticated technology enables us to collaborate with our customers
        earlier in the design process to develop customized garments. In
        addition, we work independently to develop new products, to increase
        sales to existing customers and to exploit market opportunities and
        increase penetration where it 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 lycra/spandex and elastic. We purchase
        our raw materials from several international and domestic suppliers and
        historically have not experienced any difficulty in obtaining raw
        materials to meet production requirements. Raw materials are generally
        purchased against actual orders. From time to time, when market
        conditions are favorable, we have entered into contracts with various
        suppliers of basic cotton for delivery over a period of three to six
        months.


                                       18
<PAGE>


    o   KNITTING (ONLY CUT & SEW) - Our Cut & Sew Division knitting facility
        located adjacent to our principal manufacturing facility in Segev,
        Israel, currently supplies substantially all of our fabric needs in
        Israel. This facility utilizes advanced and automated technology to knit
        tubular fabric, including bodysize fabrics. Bodysize fabrics, which are
        required for bodysize garments, enable maximum use of fabric and
        minimize waste during cutting. We operate 134 automatic knitting
        machines, which have capacity to produce approximately 350 tons of
        fabric per month (depending on the type of fabric). During 2003, we
        produced approximately 90 tons of fabric per month.

    o   DYEING AND FINISHING - Our Cut & Sew Division's dyeing and finishing
        facility can satisfy a significant portion of its dyeing and finishing
        needs in-house. The remainder is outsourced to dyeing and finishing
        subcontractors in Israel. Our Hi-Tex Division subcontracts all of its
        dyeing and finishing needs. We have established testing procedures which
        examine all fabric upon return to us to ensure the color consistency,
        stability and durability of our dyed fabric.

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

    o   SEWING (ONLY CUT & SEW) - Cut fabrics are sewn to complete the garment,
        including the addition of accessories such as elastic waist and leg
        bands as well as labels. Working with computerized equipment and
        robotics, our employees sew garments with far greater precision than if
        sewn entirely by hand. To accommodate short-term increased capacity
        requirements, we have the ability to utilize subcontractors to perform a
        portion of the sewing process. Our Cut & Sew Division operate one sewing
        facility in Israel and one in Jordan and also subcontracts sewing in
        Israel and in Jordan.

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

HI-TEX MANUFACTURING PROCESS

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

            The Hi-Tex manufacturing process is currently being used to produce
knit-to-size intimate apparel, active-wear and outerwear. We operate our Hi-Tex
knitting process in our principal production facilities in Segev, Israel. We
operate our Hi-Tex sewing process in three sewing facilities in Israel and also
subcontracts sewing in Israel and in Jordan. See "Item 4. Information on the
Company - 4D. Property, Plants and Equipment." At December 31, 2003, we had a
total of 675 fully equipped Santoni Knitting machines at the Hi-Tex facilities
in Israel. We also have 202 fully equipped Santoni Knitting machines at Alba in
Valdese, North Carolina, which are currently not operated but may be transferred
to other manufacturing facilities at our discretion. We completed the shifting
of our manufacturing from our Consumer Division of Alba, located in the United
States, to Hi-Tex in Israel in the second quarter of 2003.


                                       19
<PAGE>


            We believe that the Hi-Tex manufacturing process represents an
innovative combination of cutting-edge technology and technical expertise and
has further strengthened our reputation within the industry as a leader in
automated manufacture and design. In addition, with both the Hi-Tex
manufacturing process and the traditional cut-and-sew process, we are able to
produce garments made from man-made fibers in addition to its 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.

            Alba's health products, now produced by AlbaHealth, are manufactured
at its Rockwood, Tennessee plant and by subcontractors in the United States,
Mexico and Sri Lanka.

SALES AND MARKETING

            Our marketing strategy focuses on selling quality knitted products
to large U.S. marketers of intimate apparel, active-wear and swimwear.

            We are actively involved in pursuing new customer relationships and
stimulating the continued growth of existing customer orders and product lines.
We believe that responsiveness, dependability and personal attention are
important to our customers. In order to ensure such service, we work with
customers to develop new products and fabrics and coordinates with them to
ensure the availability of our capacity to meet such customers' anticipated
demand.

            We market our products directly to major retail organizations, which
sell them under their own labels and to several companies that market nationally
advertised brands. Products of the AlbaHealth for use in hospitals are marketed
to major distributors by AlbaHealth's sales representatives. These products are
sold both under private label and AlbaHealth's own Life Span(R) Label. We have
sales offices which are located in New York City and in Israel.

            We see the active-wear market as an added opportunity to materialize
our innovative production and design capabilities. We opened an office in
Portland, Oregon for the purpose of advancing our active-wear sales,
strengthening the communication with our active-wear customers and the
improvement of our services. In addition, we dedicated a separate development
and sales team in Israel for the active-wear customers.

INTELLECTUAL PROPERTY

            Only a part of the adaptations, configurations, technologies or
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 of our products, such as the "millenium
bra", the "bonded bra" and the "ultrasonic bra", whose fabric is joined without
sewing.

            Alba holds several patents relating to our products and AlbaHealth
holds several patents relating to healthcare products, including patents for
processes which make it possible to knit bras and various functional features in
bras and panties on seamless knitting equipment. AlbaHealth also holds a patent
for a device used to warm wet dressings as well as a patent for a process
covering the manufacture of dressings.

            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.


                                       20
<PAGE>


SEASONALITY

            Although our operations are affected by the substantial cyclical
variations of our principal customers' businesses, downturns in the general
economy, a change in consumer purchasing habits and other events, we have not
identified a clear seasonal pattern to our business.

CUSTOMERS

            Our customers represent some of the leading marketers of intimate
apparel and active-wear in the world. More than 58.6% of our sales in 2003 were
derived from the worldwide sale of our products to our four largest customers,
Victoria's Secret, Target, Warnaco/Calvin Klein and The Gap /Banana Republic. In
2003, we strengthened our business relationship with our active-wear customers,
such as Nike, Patagonia and Adidas.

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

<TABLE>
<CAPTION>

                                                          SALES
                              ---------------------------------------------------------
                                                  YEAR ENDED DECEMBER 31,
                              ---------------------------------------------------------
CUSTOMER                             2001                2002                 2003
                              ----------------     ----------------     ---------------
                                                  (Dollars in millions)
<S>                           <C>        <C>       <C>        <C>       <C>       <C>
Victoria's Secret (1) .....   $ 81.2     43.0%     $ 94.7     49.8%     $ 62.2    38.2%

Cardinal Heathcare (2) ....   $ 15.8      8.4%     $ 16.7      8.8%     $ 17.8    11.0%

Target                        $ 13.1      6.9%     $ 10.0      5.3%     $ 14.8     9.1%

Warnaco/Calvin Klein (3) ..   $  7.2      3.8%     $  7.5      3.9%     $  9.4     5.8%

Gap/Banana Republic .......   $ 18.0      9.5%     $ 15.8      8.3%     $  9.2     5.6%

Owens & Minor (2) .........   $  7.7      4.1%     $  8.4       4.4%    $  9.0     5.5%
                              ------    -----      ------     -----     ------   -----

Others ....................   $ 45.9     24.3%     $ 37.2      19.5%    $ 40.7    24.8%
                              ------    -----      ------     -----     ------   -----

Total .....................   $188.9    100.0%     $190.3     100.0%    $163.1   100.0%
</TABLE>

______________________________________

(1) Includes sales to Mast on behalf of Victoria's Secret, Victoria's Secret
    Catalog, Cacique and Abercrombie & Fitch.
(2) Customers of AlbaHealth, our 48% subsidiary.
(3) Includes sales to American Phill Textile Inc.

            We established our relationship with our largest customer,
Victoria's Secret, in 1991. Currently, we manufacture underwear, nightwear,
loungewear, bodysuits and bras for Victoria's Secret. We continue to seek to
expand and strengthen our relationship with Victoria's Secret by providing the
retailer with a continuing line of new products. However, we cannot assure that
Victoria's Secret will continue to buy our products in the same volumes or on
the same terms as they did in the past. 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."


                                       21
<PAGE>


            We began our relationship with Target in 2000, which was an existing
customer of Alba. Currently, we supply them with underwear for men and women,
and active-wear products.

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

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

            We also gained as a customer Allegiance Healthcare Corporation,
subsequently acquired by Cardinal Heathcare, through our acquisition of Alba at
the end of the year 1999. Cardinal acquires a range of medical products from
AlbaHealth.

            When we establish a relationship with a new customer in the normal
course of business, our initial sales to that customer are typically in larger
quantities of goods (to build the customer's initial inventory) than may be
required to replenish such inventory from time to time thereafter. After a
customer builds its initial inventory, the rate of growth of our sales to such
customer may decrease. In addition, the volume of products ordered by customers
are subject to the cyclical variations in their business. 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," "Our
principal customers are in the retail industry, which is subject to substantial
cyclical variations" and "Our annual and quarterly results may vary which may
cause the market price of our Ordinary Shares to decline. "Consequently, there
can be no assurance that sales to current customers will continue at the current
rate.

BACKLOG

            Our backlog of orders during 2003 ranged from $24.4 million to $68.4
million, as compared to a range of $44.7 million to $64.1 million during 2002.
This backlog is comprised of firm orders that represent the average production
volume for the subsequent three to six months. Backlog data and any comparison
thereof as of different dates may not necessarily represent an indication of
future sales.

ISRAELI INVESTMENT GRANTS AND TAX INCENTIVES

            The Israeli government has established investment and tax incentive
programs for enterprises that invest and do business in Israel. Israeli
government support is provided primarily to industrial and tourism companies
that help fulfill certain economic objectives of the Israeli government, such as
creating employment in selected locations in Israel, competing in international
markets, utilizing innovative technologies, producing value-added products and
generating income in foreign currency. To date, we have enjoyed Israeli
government grants with respect to such programs for significant amounts of its
capital expenditures. Such grants were available from 1997 to 2001 for an amount
equal to 24% of the eligible annual capital expenditures (for projects not
exceeding investments of NIS140 million in any year), and for an amount equal to
20% of the eligible annual capital expenditures (for projects exceeding
investments of NIS140 million). Following the exhaustion of our net operating
loss carryforwards in 1997, we began to benefit from certain tax incentives as a
result of the Approved Enterprise status of certain of its facilities. Approved
Enterprises related to investment programs from January 1997 onwards in
designated areas which include the location of our primary plants are exempt
from tax for the first two years of the Benefit Period commencing in the first
year in which the taxable income is generated.


                                       22
<PAGE>


LAW FOR THE ENCOURAGEMENT OF CAPITAL INVESTMENTS, 1959

            The Law for Encouragement of Capital Investments, 1959, or the
Investment Law, provides that a capital investment in eligible facilities may,
upon application to the Investment Center, be designated as an "Approved
Enterprise." Each certificate of approval for an Approved Enterprise relates to
a specific investment program delineated both by its financial scope, including
its capital sources, and by its physical characteristics, e.g., the equipment to
be purchased and utilized pursuant to the program. The tax benefits derived from
any such certificate of approval relate only to taxable income attributable to
the specific Approved Enterprise.

            Each application to the Investment Center is reviewed separately,
and a decision as to whether or not to approve such application is based, among
other things, on the then prevailing criteria set forth in the Investment Law,
on the specific objectives of the applicant company set forth in such
application and on certain financial criteria of the applicant company.
Accordingly, there can be no assurance that any such application will be
approved.

            Taxable income of a company derived from an Approved Enterprise
designated as such after July 30, 1978 is subject to corporate tax at the
maximum rate of 25% (rather than the generally applicable corporate tax rate of
36%) for the "Benefit Period," a period of seven years commencing with the year
in which the Approved Enterprise first generated taxable income (limited to 12
years from commencement of production or 14 years from the date of approval,
whichever is earlier) and, under certain circumstances (as further detailed
below), extending to a maximum of ten years from the commencement of the Benefit
Period. In the event that a company is operating under more than one approval or
that its capital investments are only partly approved, referred to as a "Mixed
Enterprise", its effective corporate tax rate is the result of a weighted
combination of the various applicable rates.

            We currently have plants which have been granted Approved Enterprise
status in conformity with the Investment Law. In accordance with this law, the
income from the Approved Enterprises during the Benefit Period will be subject
to a reduced tax rate of 25%. A company with foreign investment in excess of 25%
at the time an approval is granted is entitled to a Benefit Period of ten years
from such approval and, if the proportion of foreign investment is between 49%
and 74%, to a tax rate of 20%. The proportion of foreign investment is measured
annually based on the lowest level of foreign investment during the year. Our
effective tax rate for income derived from Approved Enterprises during 2003,
based on its percentage of foreign investment in 2003, was 28%. In addition,
pursuant to the Investment Law, Approved Enterprise status granted to investment
programs from January 1997 onwards in designated areas, which includes 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.

            The Benefit Period for our first Approved Enterprises has ended and
as such, income attributable to these enterprises are taxed at a rate of 36%,
the normal Israeli corporate tax rate. Shareholders are subject to a 15% Israeli
tax (withheld at source) on dividends distributed out of income of Approved
Enterprises and a 25% Israeli tax (unless treaties for the prevention of double
taxation state otherwise) on dividends distributed from other sources of income.
The Benefit Period for our remaining Approved Enterprises began in 1997, when
our taxable income first exceeded our net operating loss carryforwards.

            The Investment Law also provides that an Approved Enterprise is
entitled to accelerated depreciation on its property and equipment that are
included in an approved investment program. We have not utilized this benefit as
we have received preferable depreciation rights pursuant to other taxation laws.

            Grants and certain other incentives received by a company in
accordance with the Investment Law remain subject to final ratification by the
Investment Center, such ratification being conditional upon fulfillment of all
terms of the approved program.

            The benefits available to an Approved Enterprise are conditional
upon the fulfillment of certain conditions stipulated in the Investment Law and
its regulations and the criteria set forth in the specific certificate approval,
as described above. In the event that these conditions are violated, in whole or
in part, we would be required to refund the amount of tax benefits, with the
addition of the Israeli consumer price index, or CPI, linkage adjustment and
interest. We have granted a security interest over all of our assets to secure
our obligation to fulfill these conditions. We believe that our Approved
Enterprises operate in substantial compliance with all such conditions and
criteria.


                                       23
<PAGE>


LAW FOR THE ENCOURAGEMENT OF INDUSTRY (TAXES), 1969

            We currently qualify as an "Industrial Company" within the
definition of the Law for the Encouragement of Industry (Taxes), 1969, or the
Industry Encouragement Law. According to the Industry Encouragement Law, an
Industrial Company is a company resident in Israel, at least 90% of the income
of which, in any tax year, determined in Israeli currency (exclusive of income
from defense loans, capital gains, interest and dividends), is derived from an
"Industrial Enterprise" owned by it. An Industrial Enterprise is defined as an
enterprise whose major activity in a given tax year is industrial production
activity.

            The following tax benefits are available to Industrial Companies:

            (a)   deduction of purchases of know-how and patents over an
eight-year period for tax purposes;

            (b)   an election under certain conditions to file a consolidated
tax return with certain Israeli industrial subsidiaries; and

            (c)   accelerated depreciation rate on equipment and buildings.

            Eligibility for the benefits under the Industry Encouragement Law is
not subject to receipt of prior approval from a governmental authority. No
assurance can be given that we will continue to qualify as an Industrial Company
or that the benefits described above will be available in the future.

COMPETITION

            The intimate apparel and active-wear markets are highly competitive.
Our products compete with products of other manufacturers in Israel, Europe, the
United States, South and Central America and Asia. Competition in our markets is
generally based on price, quality and customer service. We believe that our
automated manufacturing process and relatively low labor costs in Jordan,
coupled with our ability to sell our products in the United States free of
custom duties and import quotas, give us a competitive advantage over other
manufacturers producing comparable-quality products. Although certain European
and Asian producers share some of our manufacturing technology, we believe such
producers are at a disadvantage due to the relative high operating costs in
Western Europe, and the existence of import quotas and custom duties for
products exported from Asia to the United States. We also believe that we have a
competitive advantage over manufacturers located in Asia and South America,
where the cost of labor is low, due to the quality of our products. The large
supply of inexpensive labor in Asia and South America has led Asian and South
American firms to focus on producing low-cost, mass-market garments. We believe
such textile manufacturers have not made the capital investments in automated
machinery necessary to produce consistently high-quality garments, and therefore
have not targeted the high-quality intimate apparel market.

            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 market. See "Item 3. Key Information - 3D.
Risk Factors - Our markets are highly competitive and some of our competitors
have numerous advantages over us; we may not be able to compete successfully."

            In addition, we benefit from Israel's status as one of the few
countries in the world that currently has free trade agreements with the United
States, Canada, the EU and the EFTA which permit us to sell its products in the
United States, Canada and the member countries of the EU and the EFTA free of
customs duties and imports quotas. Finally, government incentives that reduce
the cost to us of our equipment may not be available in other countries. We are
also able to sell our products manufactured at our facilities in Jordan and
Madagascar free from customs duties and import quotas to the United States and
Europe under certain conditions.


                                       24
<PAGE>


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, military 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 problems for Israel. However, 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 written agreements will be entered into between
Israel and its neighboring countries, whether a final resolution of the area's
problems will be achieved, the nature of any such resolution or whether civil
unrest will resume and to what extent such unrest would have an adverse impact
on Israel's economic development or on our operations in the future.

            There is substantial uncertainty about how or whether any peace
process will develop or what effect it may have upon us. Since October 2000,
there has been a substantial deterioration in the relationship between Israel
and the Palestinians which has resulted in increased violence. The future effect
of this deterioration and violence on the Israeli economy and our operations is
unclear. 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.

            Despite the limited progress towards peace between Israel, its Arab
neighbors and the Palestinians, 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 the expansion of 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 if conditions should change, 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.


                                       25
<PAGE>


TRADE AGREEMENTS

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

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

            In January 1995, the GATT members entered into an agreement with
respect to Textile and Clothing (ATC). According to this agreement, all
non-tariff barriers were gradually decreased since the date of the agreement
until their full omission on January 1, 2005. Lately, in expectation of this
change, the United States has decided to extend the period of barriers relating
to products exported from China.

U.S. GOVERNMENT REGULATION

            Alba is subject to various United States regulations relating to the
maintenance of safe working conditions and manufacturing practices. In addition,
certain of the products manufactured by AlbaHealth are subject to the
requirements of the Food and Drug Administration with respect to environmentally
controlled facilities. Management believes that it is currently in compliance
with all such regulations.

4C.   ORGANIZATIONAL STRUCTURE

            Our significant subsidiaries consist of the following wholly-owned
subsidiaries: (i) Hi-Tex Founded by Tefron Ltd., a company incorporated under
the laws of the State of Israel, (ii) New-Net Industries Ltd., a company
incorporated under the laws of the State of Israel, (iii) Newpal Ltd., a company
incorporated under the laws of the State of Israel, (iv) Alba which holds
48.325% interest in AlbaHealth, a Delaware limited liability company, (v)
El-Masira Textile Company Ltd. a company incorporated under the laws of Jordan,
(vi) Tefron Holdings Netherlands B.V. which holds a 49.9% interest in JBA
Production S.A., a company incorporated under the laws of Madegascar, and also
holds 50.1% interest in Tefrani S.A., a company incorporated under the laws of
Mauritius, and (vii) Macro Clothing Ltd, a company formed under the laws of
Israel.


                                       26
<PAGE>


4D.   PROPERTY, PLANTS AND EQUIPMENT

ISRAEL

            As of December 31, 2003, we maintained manufacturing and
administrative facilities at the following sites in Israel and Jordan:

<TABLE>
<CAPTION>
                                        Approx.
                                        Square    Number of   Lease
Facility in israel                      footage   employees   expiration (1)   Function
--------------------------------------  --------  ----------  ---------------  ---------------------------
<S>                                     <C>       <C>         <C>              <C>
Bnei Brak (2).......................     5,000    18          2004             Management offices
Segev: Central Factory -
  Tefron (3)(4) ....................    83,000    516         2006             Cutting, sewing, packaging,
                                                                               storage and administrative
                                                                               functions

Inoah...............................    13,000    281         2006             Sewing and packaging
Segev: Central Factory -
  Hi-Tex 1 (3)(4)  .................   143,000    184         2011             Knitting, sewing, packaging,
                                                                               storage and administrative
                                                                               functions

Segev: Central Factory -
  Hi-Tex 2 (3) (4)..................   180,000    585         2012             Knitting, sewing, packaging
                                                                               and storage
Holon - Macro Center................     6,200    56          2004             Sewing and administrative
                                                                               functions
Yarka ..............................    23,000    357         2012             Sewing and packaging
Segev:  Central Factory - New -Net..    37,000    67          2005             Knitting
Dyeing Factory......................    39,000    43          2004             Dyeing and finishing
Segev:  Delivery Warehouse(3)(4)  ..    65,000    9           2012             Warehouse for finished products

FACILITY IN JORDAN
Irbid...............................    19,000    351         2004             Sewing and packaging factory
</TABLE>

(1) Including any renewal options.
(2) We lease 5,800 sq. ft. and sublease 1,000 sq. ft. to an affiliated party,
    Macpell, through the year 2004.
(3) We lease this property from a subsidiary of Macpell.
(4) Not including an additional option for 15 years lease exercisable every
    three years on a 90 days' prior advance notice.

            Our Hi-Tex 1, Hi-Tex 2, Central Factory and Delivery Warehouse
facilities in Segev are leased from a subsidiary of Macpell. See "Item 7. Major
Shareholders and Related Party Transactions - 7B. Related Party Transactions -
Relationships and Transactions with Macpell - Lease Arrangement."

            In March 2004, we entered into an agreement to lease 7,889 square
feet in Petach Tikva until 2008 for our management offices, which will replace
our existing management offices in Bnei Brak during the third quarter of 2004.

            For a description of our plans regarding our facilities, see "- 4A.
History and Development of the Company - Capital Expenditures."

            We believe that our existing facilities in Israel and Jordan are
well-maintained, in good operating condition and provide adequate space for our
current level of operations as well as for a significant increase in sales
volume. We further believe that our facilities and operations are in substantial
compliance with current Israeli governmental regulations regarding safety,
health and environmental pollution. We have not generally experienced difficulty
in complying with these regulations and such compliance has not had a material
adverse effect on our capital expenditures, earnings or competitive position.


                                       27
<PAGE>


UNITED STATES

            As of December 31, 2003, Alba maintained manufacturing and
administrative facilities at the following sites in the United States:

<TABLE>
<CAPTION>

                              APPROX.          NUMBER OF
FACILITY IN UNITED STATES     SQUARE FOOTAGE   EMPLOYEES   FUNCTION
----------------------------  ---------------  ----------  ---------------------
<S>                              <C>               <C>     <C>
Valdese, NC - Alba..........     157,000           14      Warehouse (Consumer
                                                           Products)
Rockwood, TN (AlbaHealth)...     245,940          326      Knitting, Yarn
                                                           Processing &
                                                           Finishing (Health
                                                           Products)
Valdese, NC - Offices.......      52,000           23      Corporate
                                                           headquarters
New York City - Offices.....       3,200            3      Sales Offices and
                                                           Showroom
Portland, OR- Offices ......       2,029            3      Sales Offices and
                                                           Showroom
</TABLE>


            We also own two facilities in Valdese, NC (of approximately 178,300
and 81,000 square footage), which are currently unused. We are exploring
opportunities to sell or lease these facilities.

            All plants are of brick and steel construction, and most areas have
been air-conditioned. Alba leases its New York City office under a lease that
expires in April 2005. Alba also leases its office in Portland, Oregon that
expires in February 2006. The remainder of Alba's physical properties are held
in fee simple. Alba's physical properties are subject to a lien pursuant to a
credit agreement entered into in connection with the acquisition of Alba. See
"Item 10. Additional Information - 10C. Material Contracts - Credit Agreement."
We believe our existing facilities in the United States are well-maintained, in
good operating condition and provide adequate space for Alba's current level of
operations as well as for a significant increase in sales volume.

            We further believe that Alba 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 effect upon Alba's
earnings or the competitive position of Alba. We believe that continued
compliance will not require material expenditures.


                                       28
<PAGE>


ITEM 5.   OPERATING AND FINANCIAL REVIEW AND PROSPECTS

GENERAL

      OUR BUSINESS; DEVELOPMENTS

            We manufacture intimate apparel, active-wear and swim-wear sold
throughout the world by name-brand marketers as well as well known American
retailers and designer labels. Through the utilization of manufacturing
technologies and techniques developed or refined by us, we are able to
mass-produce quality garments featuring unique designs tailored to our
customers' individual specifications at competitive prices. Our product line
includes knitted briefs, bras, tank tops, boxers, leggings, crop, T-shirts,
nightwear, bodysuits, swim wear, beach wear and active-wear.

            We have three divisions: Cut & Sew, Seamless (also called Hi-Tex)
and Healthcare. Our Cut & Sew Division, which manufactures intimate apparel,
active-wear and swim-wear products, generated approximately 32% of our revenues
during 2003. Our Seamless Division, which manufactures intimate apparel and
active-wear products, generated approximately 45% of our revenues during 2003.
Our Healthcare Division generated approximately 23% of our revenues during 2003.

            We are known for the technological innovation of our Hi-Tex and
Cut-and-Sew manufacturing processes. Our cut and sew manufacturing process
involves a vertically integrated production process and automated production
techniques using our automatic knitting machines. 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 manufacturing for our Cut & Sew Division is
mainly in Israel and Jordan.

            Our Hi-Tex manufacturing process also 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 mainly in
Israel, where we operated approximately 675 fully equipped Santoni knitting
machines as of December 31, 2003.

            Our Healthcare Division manufactures a range of textile healthcare
products, which are manufactured in the United States, Mexico and Sri Lanka.

            In the end of 2002 and in 2003, we implemented strategic steps in
order to focus on our core business of apparel, consolidate our seamless
manufacturing facilities and expand our sale of new products, including
active-wear products. In September 2002, we sold approximately 52% of our
interest in Alba's Healthcare Division. In the fourth quarter of 2002, we
commenced the shifting of manufacturing of Alba's Seamless Division to our
Hi-Tex Division's manufacturing facility in Israel, which was completed in the
second quarter of 2003. In addition, during 2003, we invested significant
efforts to develop and expand our sales of new products, including active-wear
products, to diversify our product line and our client base.

                  The shifting of manufacturing to Israel, together with the
manufacturing in that facility of new, more complicated active-wear products in
shorter production runs, adversely affected the operational efficiency of our
Hi-Tex Division manufacturing facility in Israel for a longer period of time
than expected. This also entailed extra productions costs and selling expenses
for air shipments. The lower operational efficiencies compared to 2002, the
extra costs, coupled with lower sales to our major customer and the
strengthening of the NIS compared to the USD, were the main reasons for the
decrease in our operating income in 2003 compared to 2002.


                                       29
<PAGE>


      CURRENCY; REVENUES; RAW MATERIALS

            The currency of the primary economic environment in which our
business is conducted is the United States dollar. Consequently, we use the
dollar as our functional currency. Transactions and balances denominated in
dollars are presented at their dollar amounts. Transactions and balances in
other currencies are converted into dollars in accordance with the principles
set forth in Statement No. 52 of the Financial Accounting Standards Board and
resulting gains and losses are included in the statement of income. The
financial information below reflects our operations on a consolidated basis.

            Substantially all of our revenues are derived from the sale of our
products, primarily in the United States. We recognize revenues from the sale of
our products upon shipment. Our payment terms vary based on customer and length
of relationship. We do not have any long-term supply obligations.

            We purchase our raw materials from several international and
domestic suppliers and historically have not experienced any difficulty in
obtaining raw materials to meet production requirements. Raw materials are
generally purchased against actual orders, although we have a policy of
maintaining a minimum level of those raw materials that are in repeated demand.
From time to time, when market conditions are favorable, we have entered into
contracts with various suppliers of basic cotton for delivery over a period of
three to six months.

OPERATING RESULTS

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


<TABLE>
<CAPTION>

                                                       YEAR ENDED DECEMBER 31,
                                                    ---------------------------
                                                      2001      2002     2003
                                                    --------  -------  --------
<S>                                                   <C>       <C>      <C>
Sales..............................................   100.0%    100.0%   100.0%
Cost of sales......................................    89.5      80.4     84.7
                                                    -------   -------  -------
Gross profit ......................................    10.5      19.6     15.3
Selling, general and administrative
 expenses..........................................    10.7      11.6     12.5
                                                    -------   -------  -------
Operating income before financing
 expenses..........................................    (0.2)      8.0      2.8
Financing income (expense), net....................    (5.0)     (2.9)    (3.4)
Other income (expenses)............................    (0.4)     (1.2)     0.2
                                                    -------   -------  -------
Income (loss) before income taxes..................    (5.6)      3.9     (0.4)
Income tax expense (benefit).......................    (0.4)      2.6       (0)
                                                    -------   -------  -------
Income (loss) after income taxes...................    (5.2)      1.3     (0.4)
Equity in losses of affiliated company.............    (0.1)     (0.2)   (0.11)
Minority interests.................................      --      (0.4)    (1.6)
                                                    -------   -------  -------
Net income  (loss) from ordinary activities........    (5.3)      0.7    (2.11)
                                                    =======   =======  =======
Cumulative effect of change in accounting principle      --      (9.9)      --
Net income (loss)..................................    (5.3)%    (9.2)%  (2.11)%
                                                    =======   =======  =======
</TABLE>


                                       30
<PAGE>


      YEAR ENDED DECEMBER 31, 2003 COMPARED WITH YEAR ENDED DECEMBER 31, 2002

            SALES

            Sales for the year ended December 31, 2003 were $163.1 million,
14.3% below the sales of $190.3 million for the year ended December 31, 2002.
This decrease in sales was due primarily to a decrease in sales to our major
customer resulting mainly from an acceleration of orders to the fourth quarter
of 2002 from the first quarter of 2003 in expectation of the war in Iraq;
transfer of orders from Israel to manufacturers in other countries in
expectation of the war in Iraq and other factors; decreased prices in particular
projects due to increased competition; and decreased demand for some our
products in the stores of our major customer. Our sales of intimate apparel
(other than to our major customer) decreased from $51.5 million in 2002 to $46.8
million in 2003, while our sales of active-wear and swimwear products increased
from $6.5 million in 2002 to $15.8 million in 2003.

            COST OF SALES

            Cost of sales consists primarily of materials, certain salaries and
related expenses, subcontracting expenses and other overhead expenses related to
our manufacturing operations. Cost of sales decreased by 8.8% to $138.1 million
in 2003 as compared to $151.4 million in 2002 primarily due to the decrease in
sales, although the decrease in cost of sales was offset by an increase in cost
of sales due to operating inefficiencies and extra costs resulting from the
consolidation of manufacturing facilities and the expansion of sales of
active-wear products. As a percentage of sales, cost of sales increased to 84.7%
in 2003 as compared to 79.6% in 2002 primarily due to our decreased sales, the
operating inefficiencies referred to above and the strengthening of the NIS
compared to the USD. Although we believe that our efficiency will improve as we
continue to manufacture our new product lines, we cannot assure that we will be
able to return to our previous efficiency levels in the future.

            SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

            Selling, general and administrative expenses consist primarily of
costs relating to salaries to employees engaged in sales, marketing,
distribution, administration and management activities, freight and other
administrative costs. Selling, general and administrative expenses increased by
10.7% to $20.3 million in 2003 as compared to $18.4 million in 2002. As a
percentage of sales, selling, general and administrative expenses increased to
12.5% in 2003 as compared to 9.6% in 2002. This increase was due to air freight
charges of approximately $2 million due to delays in supplying orders to
customers resulting from the operating inefficiencies referred to above. We
believe that our air freight charges in 2004 will be less than 2003 due to
improvements in our operating efficiencies, although we cannot assure that
substantially all such air freight charges will be eliminated.

            FINANCING EXPENSES, NET

            Financing expenses slightly increased to $5.6 million in 2003 as
compared to $5.5 million in 2002. Financing expenses were relatively unchanged
from 2002 because the principal amount of bank debt, capital lease and other
loans remained at approximately at the same level as in 2002, and there was no
material change in the interest rate paid by us on this debt from 2002 to 2003.
We believe that following the closing of the contemplated equity financings
described in "Item 10. Additional Information - 10C. Material Contracts" our
financing expenses will be reduced by approximately $800,000 annually.


                                       31
<PAGE>


            INCOME TAXES

            Tax expenses for 2003 were $0.1 million as compared to $5.0 million
for 2002, as a result of $0.7 million pretax loss this period compared to pretax
income of $7.5 million for the same period last year. Commencing from 2002, we
ceased to record tax benefits with respect to losses in Alba. In 2003, we
reduced our deferred taxes in Alba by $1 million as a result of an adjustment of
our expected utilization of deferred taxes in light of expected future earnings.
Although we currently estimate that we will be able to utilize the remaining
balance of the deferred taxes in Alba, we cannot assure that we will be able to
do so.

      YEAR ENDED DECEMBER 31, 2002 COMPARED WITH YEAR ENDED DECEMBER 31, 2001

            SALES

            Sales for the year ended December 31, 2002 were $190.3 million,
slightly higher than the $188.9 million reported for the year ended December 31,
2001.

            COST OF SALES

            Cost of sales consists primarily of materials, certain salaries and
related expenses, subcontracting expenses and other overhead expenses related to
our manufacturing operations. Although sales slightly increased, cost of sales
decreased by 10.5 % to $151.4 million in 2002 as compared to $169.2 million in
2001. As a percentage of sales, cost of sales decreased to 79.6% in 2002 as
compared to 89.5% in 2001. This decrease was primarily due to improvement in
material consumption and efficiency, continuing shifting of sewing operations to
lower labor cost facilities in Jordan and reduction of other manufacturing and
operating costs.

            SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

            Selling, general and administrative expenses consist primarily of
costs relating to salaries to employees engaged in sales, marketing,
distribution, administration and management activities, freight and other
administrative costs. Selling, general and administrative expenses decreased by
8.8% to $18.4 million in 2002 as compared to $20.1 million in 2001. As a
percentage of sales, selling, general and administrative expenses decreased to
9.6% in 2002 as compared to 10.7% in 2001. This decrease was primarily due to
the implementation of cost saving procedures, on-time delivery and, due to the
adoption of the SFAS 142 that resulted in no goodwill amortization during this
period.

            RESTRUCTURING COST

            On December 4, 2002, we announced our intention to shift
manufacturing of the Hi-Tex products from the Alba Consumer Division located in
Valdese, North Carolina to our facility in Israel during the first quarter of
2003. Marketing and distribution will remain in the U.S. In connection with this
shift and in accordance with EITF Issue 94-3, "Liability Recognition of Certain
Employee Termination Benefits and Other Cost to Exit an Activity", we recorded
in the fourth quarter of 2002 restructuring charges of $5.3 million (of which
$1.5 million were recorded in cost of sales and $3.8 million in Selling, General
and Administrative Expenses).

            OTHER EXPENSES, NET

            We incurred a capital loss of $2.3 million for 2002, most of which
is attributable to costs and accounting fees associated with the sale of 52% of
Alba's Health Products Division.


                                       32
<PAGE>


            FINANCING EXPENSES, NET

            Financing expenses decreased to $5.5 million in 2002 as compared to
$9.4 million in 2001. This decrease is primarily attributable to a significant
decrease in bank debt, capital lease and other loans from $131.6 million as of
December 31, 2001 to $98.9 million as of December 31, 2002, and a decline in the
average rate of the LIBOR interest from an average rate of 4.5% in 2001 to an
average rate of 1.75% in 2002.

            INCOME TAXES

            Tax expenses for 2002 were $5.0 million as compared to $0.8 million
for 2001, as a result of $7.5 million pretax income this period compared to
pretax loss of $10.6 million for the same period last year. Commencing from
2002, we ceased to record tax benefits with respect to losses in Alba. As a
result, in 2002 no tax benefit was recorded with respect to the $8.8 million
loss before taxes in Alba (mostly derived from the restructuring costs). In
addition, in 2002 Alba recorded $0.4 million tax expenses which relate to
previous years.

            EXTRAORDINARY EXPENSE

            To comply with the new Statement of Financial Accounting Standards,
Goodwill and Other Intangible Assets (SFAS) 142, we recorded a goodwill
impairment loss of $18.8 million in 2002 that was reported as cumulative effect
of change in accounting principle as of January 1, 2002. As of January 1, 2002,
we had unamortized goodwill in the amount of $49.5 million. In connection with
SFAS No. 142's traditional goodwill impairment evaluation, we performed an
assessment of whether there is an indication that the goodwill is impaired as of
January 1, 2002. To accomplish this, we identified our reporting units and
determined, through an independent expert, the carrying value of each reporting
unit by assigning assets and liabilities, including existing goodwill and
intangible assets, to those reporting units as of January 1, 2002. As a result,
the goodwill identified with one of the business units, which has a carrying
amount of $18.8 million, has been impaired.

LIQUIDITY AND CAPITAL RESOURCES

      2003 SOURCES AND USES OF CASH

     During 2003, we generated approximately $2.9 million in cash from operating
activities. This cash flow, together with short term borrowings of approximately
$15.6 million, enabled us to repay $15.6 million of bank loans and capital
leases in 2003, pay a dividend of $1.2 million to minority shareholders in one
of our subsidiaries and finance our $1.8 million investment in fixed assets, net
of government grants and proceeds from the sale of fixed assets. During 2003,
we received government grants in the approximate amount of $1.9 million and
received proceeds from the sale of fixed assets of $0.5 million, which were used
to finance part of our $4.1 million investments in fixed assets. At December 31,
2003, we had cash and cash equivalents of $6.9 million, as compared to $6.7
million a year earlier.

            During 2003, our cash flow decreased in comparison to 2002 mainly
due to a decrease in our operating income, an increase in our accounts
receivable due to a change in the mix of our customers, an increase in our
inventory and due to payments for expenses recorded in 2002 related to the shift
of manufacturing for Alba's Consumer Division to Israel.


                                       33
<PAGE>


      CONTRACTUAL AND OTHER COMMITMENTS

            We have various commitments primarily related to long-term debt,
capital lease obligations and short term debt. The following tables provides
details regarding our contractual cash obligations and other commercial
commitments subsequent to December 31, 2003:


<TABLE>
<CAPTION>

     CONTRACTUAL
     OBLIGATIONS             TOTAL     2004     2005     2006     2007 +
     ----------------------- --------- -------- -------- -------- -------
<S>                          <C>       <C>      <C>      <C>      <C>
     Long-Term Bank Debt     $65.8     $ 9.8    $24.4    $20.1    $11.5
     Capital Lease           $ 1.7     $ 1.4    $ 0.3       --        -
     Obligations
     Other Long-Term         $ 1.0     $ 0.5    $ 0.5       --        -
     Obligations
     TOTAL CONTRACTUAL       $68.5     $11.7    $25.2    $20.1    $11.5
     CASH OBLIGATIONS
</TABLE>


<TABLE>
<CAPTION>

     Other Commercial                  Total amounts
     commitments                       committed         2004
     --------------------------------- --------------    -----
<S>                                    <C>               <C>
     Lines of Credit                   $29.1             $29.1
     Short Term Bank Debt              $2.7              $2.7
     Guarantees/Letters of Credit      $3.8              $3.8
     TOTAL COMMERCIAL COMMITMENTS      $35.6             $35.6
</TABLE>


1 These credit line facilities are not limited in time. These amounts currently
  mature on December 31, 2004.

      LOAN FACILITIES

            At December 31, 2003, outstanding borrowings from banks and other
financial institutions totaled approximately $98.6 million, comprised of
approximately $66.8 million of long term-debt, including current maturities of
$10.3 million, and approximately $31.8 million of short-term debt. The bank
loans bear interest at LIBOR plus 1.25% to 4.5%, and are scheduled to mature
during the next six years.

            Long-term loans include a term loan facility with Bank Hapoalim B.M.
and Israel Discount Bank of New York entered into in connection with the
acquisition of Alba, in the outstanding amount of $25.6 million payable in 5
semi-annual installments (the last four in installments of approximately $6
million each) commencing January 17, 2005. The term loan facility and a related
revolving credit facility are secured by a floating lien on all the personal
property of Alba and its subsidiaries, pledges of all non-margin stock of Alba
owned by our U.S. subsidiary, Tefron U.S. Holdings Corp., and all subsidiary
stock then owned by Alba, and guaranties made by us, Tefron U.S. Holdings Corp.
The bank loan agreements contain various covenants which require, among others,
that we maintain certain financial ratios related to shareholders' equity and
operating results. In addition, the terms prohibit Alba from incurring certain
additional indebtedness, limit certain investments, advances or loans and
restrict substantial asset sales, cash dividends and other payments to
shareholders of Alba. These covenants and restrictions could hinder us in its
operations and growth.


                                       34
<PAGE>


            Our shareholders equity as of December 31, 2003 was $36.7 million
and our ratio of shareholders'equity to total assets was 18.1%. These figures
were below the minimum level of approximately $67 million for shareholders'
equity and the minimum percentage of 30% for our ratio of shareholders' equity
to total assets required by the covenants under our credit facility with Bank
Hapoalim B.M. and Israel Discount Bank of New York. Bank Hapoalim has agreed to
amend the minimum shareholders' equity requirement to $36.5 million and the
ratio of shareholders' equity to total assets to not less than 18% for the
period from December 31, 2003 to March 31, 2004 (inclusive). Israeli Discount
Bank has agreed to amend the minimum shareholders' equity requirement to $36.5
million and the ratio of shareholders equity to total assets to not less than
18% for the period from December 31, 2003 to March 31, 2004 (not including
financial statements as of March 31, 2004).

            Subject to their receipt of $15 million from the proceeds of the
contemplated equity investments described below under "Contemplated Equity
Financings", Bank Hapoalim and Israel Discount Bank have agreed to permanently
amend our shareholders' equity requirement to not less than $40 million and our
ratio of shareholders' equity to total assets to not less than 20% and, subject
to receipt of such amounts, have also agreed to extend the repayment schedule of
the long term debt due to them commencing with the payments due for 2005. Under
the agreement, the aggregate amount of $56 million currently due to be paid
during the years 2005-2007 would be spread over the period from 2005-2012, such
that during each such year from 2005 until 2012 we would be obligated to pay
approximately $7 million. In addition to their receipt of the proceeds from the
equity financings, this agreement by the banks is subject to negotiation of
final documentation with us.

            On September 9, 2002, we formed a new entity, AlbaHealth, with
Encompass Group, LLC, a Delaware limited liability company and General Electric
Capital Corporation, a Delaware corporation, to operate Alba's health products
business. In connection with the transaction, Alba contributed substantially all
of the assets of its Health Products Division (together with associated
liabilities, including certain existing bank indebtedness) to the capital of
AlbaHealth in exchange for a 48.325% ownership interest in AlbaHealth. Encompass
and GE Capital contributed cash to the capital of AlbaHealth in the amount of
$12 million and $1 million, respectively, in exchange for a 48.325% and 3.35%
ownership interest in AlbaHealth. Following the transaction, we repaid $28
million of the term loan facility with Bank Hapoalim B.M. and Israel Discount
Bank of New York. In addition we are no longer guaranteeing a debt of $17.8
million of AlbaHealth. See "Item 10. Additional Information - 10C. Material
Contracts - AlbaHealth Credit Agreement."

            Our short-term debt in the amount of approximately $31.8 million
consists of a $3 million term loan due during 2004 and one-year revolving credit
facilities in the aggregate amount of approximately $28.8 million with various
expiration dates during 2004. We expect that the one-year revolving credit
facilities will be renewed beyond their respective expiration dates. However,
the lenders under such revolving credit facilities are under no obligation to
renew such facilities. In the event that these facilities are not renewed, we
may be unable to repay outstanding amounts, and the lenders may, as a result,
declare all amounts borrowed to be due and payable. A default under the
revolving credit facilities may also trigger a default under the long-term loan
facilities described above.

      CONTEMPLATED EQUITY FINANCINGS

            On February 17, 2004, we announced that we had entered into an
agreement with Norfet, Limited Partnership ("Norfet"), controlled by FIMI
Opportunity Fund and certain other co-investors. Under this agreement, the
investor agreed to invest $15 million in cash in Tefron for approximately 3.53
million ordinary shares at a base price of $4.25 per share, subject to the
fulfillment of certain terms precedents. In addition, on March 3, 2004, we
announced that we has entered into an additional agreement with a group of
investors represented by Mr. Zvi Limon, under which the investors agreed to
invest $5 million in cash in Tefron for approximately 1.07 million ordinary
shares at a base price of $4.65 per share, subject to the closing of the FIMI
agreement. See "Item 10. Additional Information - C. Material Agreements - FIMI
Agreements". We expect that we will apply $15 million of the aggregate amount of
$20 million from these contemplated investments to repay short-term debt.


                                       35
<PAGE>


            Also, on March 9, 2004, we announced that we had entered into an
equity line credit facility with Brittany Capital Management Ltd. ("Brittany"),
an entity advised by Southridge Capital Management LLC. Under the agreement, we
have an option to call funds of up to the lesser of $15 million or 19.9% of our
outstanding share capital over the next three years. Under the financing
facility, we will be entitled to issue shares to Brittany from time to time, at
our own election, subject to certain minimum and maximum limitations, but in no
event will Brittany be obligated to own more than 4.99% of our ordinary shares
at any one time. The price to be paid by Brittany will be at a discount of 6% to
the market price of our ordinary shares (as calculated under the agreement)
during a period prior to the issuance of the shares. Before drawing on the
equity line, we must satisfy certain closing conditions, including the
effectiveness of a registration statement that we must file relating to the
shares to be issued to Brittany. See "Item 10. Additional Information - C.
Material Agreements - Equity Line Credit Facility ". We expect that we will
apply any proceeds from the equity line credit facility for investments in
equipment and for working capital.

      OUTLOOK

            We currently believe that our cash flow from ongoing operations, our
available bank credit and proceeds from equity financings will be sufficient to
finance all of our ongoing costs and our planed investment in our business
through 2004. However, we may not generate sufficient cash from operations to
finance our ongoing costs and service our high level of debt. See "Item 3. Key
Information - 3D. Risk Factors," in particular "- We depend on a small number of
principal customers who have in the past bought our products in large volumes,"
"Our principal customers are in the retail industry, which is subject to
substantial cyclical variations" and "- Our markets are highly competitive and
some of our competitors have numerous advantages over us; we may not be able to
compete successfully." In the event sufficient cash from operations are not
generated, we may need to renegotiate the terms of the debt, refinance the debt,
obtain additional financing, postpone capital expenditures or sell assets. If
the lenders decline to renegotiate the terms of the debt, the lenders could
declare all amounts borrowed to be due and payable. If we are unable to repay
the debt, the lenders could foreclose on our assets that are subject to liens
and sell the assets to satisfy the debt. See "Item 3. Key Information - 3D. Risk
Factors - Our debt obligations may hinder our growth and put us at a competitive
disadvantage," "We require a significant amount of cash to pay our debt " and
"Due to restrictions in our loan agreements, we may not be able to operate our
business as we desire." See "Item 10. Additional Information - 10C. Material
Contracts - Credit Agreement."

SIGNIFICANT ACCOUNTING POLICIES

            We prepare our consolidated financial statements in conformity with
accounting principles generally accepted in the U.S. As such, we are required to
make certain estimates, judgments and assumptions that we believe are reasonable
based upon the information available. These estimates and assumptions affect the
reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of the periods presented. To fully
understand and evaluate our reported financial results, we believe it is
important to understand the following accounting policies:

      INVENTORY

            We manufacture products against orders from our customers and in
most cases, purchase raw materials against these orders. We hold basic levels of
inventory for raw materials that are in repeated demand. From time to time, we
estimate the excess inventory of products and raw materials which are not
designated for existing orders as well as inventory that is not of saleable
quality, estimate their market value and reduce their carrying value
accordingly. Misjudgment in planning the basic levels of inventory or in the
assessment of the market value of the excess raw materials and products may
require us to record an inventory mark down.

      PROPERTY, PLANT AND EQUIPMENT

            Our property, plant and equipment are reviewed for impairment in
accordance with Statement of Financial Accounting Standard No. 144 "Accounting
for the Impairment or Disposal of Long-Lived Assets", whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to the future undiscounted cash
flows expected to be generated by the assets. If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds the fair value of the assets. Assets
to be disposed of are reported at the lower of the carrying amount or fair value
less costs to sell.


                                       36
<PAGE>


      GOODWILL

            Goodwill represents excess of the costs over the net assets of
businesses acquired. Goodwill that arose from acquisitions prior to July 1, 2001
was amortized until December 31, 2001 on a straight-line basis over forty years.
Under Statement of Financial Accounting Standard No. 142, goodwill acquired in a
business combination for which date is on or after July 1, 2001 shall not be
amortized.

            SFAS No.142 requires goodwill to be tested for impairment on
adoption and at least annually thereafter or between annual tests in certain
circumstances, and written down when impaired, rather than being amortized as
previous accounting standards required. Goodwill attributable to each of the
reporting units is tested for impairment by comparing the fair value of each
reporting unit with its carrying value.

            The carrying value of goodwill recorded in our financial statement
is related to the AlbaHealth reporting unit. In preparation of the financial
statements for the year 2003, we completed our most recent review performed by
an independent expert of this reporting unit, which determined that its fair
value is greater than its carrying value, and therefore no impairment was
required in the recorded goodwill for this period. The review process uses the
income method and is based on a discounted future cash flow approach that uses
estimates for cash flow, growth of sales, profits and cost of capital, among
others, for the AlbaHealth reporting unit. We may incur charges for the
impairment of goodwill in the future if AlbaHealth fails to meet our assumed
cash flow, growth of sales and profits, or if interest rates increase
significantly.

      INCOME TAXES

            The Company and its subsidiaries account for income taxes in
accordance with Statement of Financial Accounting Standards No.109, "Accounting
for Income Taxes" ("SFAS No.109"). This Statement prescribes the use of the
liability method whereby deferred tax assets and liability account balances are
determined based on differences between financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse. The Company
and its subsidiaries provide a valuation allowance, if necessary, to reduce
deferred tax assets to their estimated realizable value.

            We must assess the likelihood that we will be able to recover our
deferred tax assets. We review the balance of deferred taxes in relation to our
anticipated profits and if we estimate that it is not likely that our
anticipated profits will materialize, we record a valuation allowance against
the deferred tax assets accordingly. A future decrease in our profits or
anticipated profits may result in an additional adjustment to the carrying
amount of our deferred taxes.

            In addition, the calculation of our tax liabilities involves dealing
with uncertainties in the application of complex tax regulations, particularly
under the Law for Encouragement of Capital Investments, 1959, or the Investments
Law. We estimate our tax liabilities under the various investment programs under
the Investments Law based on a complex mix of factors, including our estimates
of our future growth of revenues, the particular investment program under which
revenue will be generated and the location where such revenues will be
generated. We may need to record a charge for tax if our estimates are
inaccurate.

RESEARCH AND DEVELOPMENT

            Our research and development department continually strives to
improve technologies and products and develop new lines of products. We estimate
that we invested approximately $2.0 million to $2.5 million in 2000, $2.5
million to $3 million in 2001, $3.5 million to $4.0 million in 2002, and $4
million to $4.5 million in 2003 on research and development, including Alba.


                                       37
<PAGE>


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. This appreciation
would cause an increase in our NIS expenses as recorded in our U.S. dollar
denominated financial reports even though the expenses denominated in NIS will
remain unchanged. A portion of our NIS denominated expenses is linked to changes
in the Israeli cost of living index, a portion is linked to increases in NIS
payments under collective bargaining agreements and a portion is unlinked.

            The dollar cost of our operations in Israel is influenced by the
extent to which any increase in the rate of inflation in Israel is (or is not)
offset, or is offset on a lagging basis, by the devaluation of the NIS in
relation to the dollar. Unless inflation in Israel is offset by a devaluation of
the NIS, such inflation will have a negative effect on our profitability because
we receive most of our payments in dollars or dollar-linked NIS, 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 2001 and 2002, the rate of devaluation of the NIS vis-a-vis the
dollar exceeded the inflation rate in Israel. During 2001 and 2002, the rate of
inflation was 1.4% and 6.5%, respectively, while NIS devalued against the U.S.
dollar by 9.3% and 7.3% in 2001 and 2002. During 2003, the rate of inflation was
(1.9)%, while NIS appreciated against the U.S. dollar by 7.6%. However, to the
extent in the future that the rate of inflation in Israel exceeds the rate of
devaluation of the NIS in relation to the dollar or if the timing of such
devaluation lags behind inflation in Israel, we may be adversely affected.

            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 a devaluation
would also have the effect of reducing the dollar amount of any of our expenses
or liabilities which are denominated in NIS (unless such expenses or payables
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 and expenses. During 2003, we incurred expenses of approximately
$1.5 million due to the appreciation of the NIS in relation to the dollar. This
appreciation may continue in 2004.

            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 movements in
foreign exchange rates. . We do not engage in any speculative or profit
motivated hedging activities. See "Item 3. Key Information - 3D. Risk Factors.
Since most of our revenues are generated in US dollars and a large part of our
expenses are in Israeli currency, we are subject to fluctuations in inflation
and currency rates."

EFFECTIVE CORPORATE TAX RATE

            The taxable income of Israeli corporations is generally subject to
corporate tax at the statutory rate of 36%, which has been in effect since 1996.
However, most of our manufacturing facilities in Israel have been granted
Approved Enterprise status under the Investment Law, and consequently income
derived from such facilities is eligible, subject to compliance with certain
requirements, for certain tax benefits beginning when such facilities first
generate taxable income. We have derived most of our income from our Approved
Enterprise facilities. Subject to compliance with applicable requirements,
income derived from our Approved Enterprise facilities will be subject to
corporate tax at a rate of 25% for the earlier between: (i) ten years beginning
in the year that we had taxable income, (ii) twelve years from commencement of
production, or (iii) fourteen years from the date of approval.


                                       38
<PAGE>


            In addition, should the percentage of foreign investment exceed 25%,
Approved Enterprises would qualify for reduced tax rates for an additional three
years beyond the initial seven-year period. The benefit period under each of our
Approved Enterprises will in any event expire 14 years following the date of the
approval of such Approved Enterprise by the Investment Center or 12 years after
production commences, whichever is earlier. In the event that the percentage of
foreign investment is between 49% and 74%, we would be subject to a corporate
tax rate of 20% on income derived from our Approved Enterprises. The proportion
of foreign investment is measured annually based on the lowest level of foreign
investment during the year. In addition, pursuant to the Investment Law,
Approved Enterprises related to investment programs from January 1997 onwards in
designated areas which include the location of our primary plants are exempt
from tax for the first two years of the Benefit Period commencing in the first
year in which taxable income is generated.

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

GOVERNMENT PROGRAMS

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

EXCHANGE RATES

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

<TABLE>
<CAPTION>

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

<C>                               <C>          <C>       <C>        <C>
1997......................        3.45         3.59      3.24       3.54
1998......................        3.80         4.37      3.54       4.16
1999......................        4.14         4.29      4.01       4.15
2000......................        4.08         4.20      3.97       4.04
2001......................        4.21         4.42      4.04       4.42
2002......................        4.74         4.99      4.42       4.74
2003......................        4.54         4.92      4.28       4.38
</TABLE>


                                       39
<PAGE>


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:

<TABLE>
<CAPTION>

Name                         Age     Position
----                         ---     --------
<S>                           <C>    <C>
Arie Wolfson............      42     Chairman of the Board
Sigi Rabinowicz.........      55     President and Director
Yosef Shiran............      42     Chief Executive Officer and Director
Micha Korman............      49     Director
Meir Shamir.............      52     Director
Yarom Oren..............      34     Director
Shirith Kasher..........      36     Director
Ofer Tsimchi............      44     External Director until July 15, 2004
Zvi Greengold...........      52     External Director until July 15, 2004
Arie Arieli.............      52     External Director
Yacov Elinav............      59     External Director from July 15, 2004
Dan Mesika..............      40     Chief Executive Officer of Alba and of
                                     AlbaHealth
Gil Rozen...............      43     Chief Financial Officer
Eran Shachar............      35     Vice President of Sales and Marketing
Yossi Zilber............      40     Chief Operating Officer
Talya Hanan.............      43     Vice President - Global Innovation
Itamar Harchol..........      45     Chief Technology Officer
Tchiya R. Fortus .......      45     Company Secretary and Legal Counsel
Margalit Shahar.........      37     Manager of Human Resources
</TABLE>


            ARIE WOLFSON joined Tefron in 1987 and has served as Chairman of the
Board of Directors since August 2002. He also served as Chairman of the Board of
Directors from 1997 to 2000, and as President from 1993 to 2000. Mr. Wolfson
served as Chief Financial Officer from 1988 to 1990 and Assistant to the Chief
Executive Officer from 1990 to 1993. Mr. Wolfson has also served as Chairman of
Macpell Industries Ltd., a principal shareholder in Tefron, since 1998 and
served as Chief Executive Officer of Macpell from 1998 until March 2003. Mr.
Wolfson is a graduate of High Talmudical Colleges in the United States and in
Israel.

            SIGI RABINOWICZ joined Tefron in 1977 and has served as President
since January 2001. He was also Chairman of the Board from January 2001 until
August 2002. Mr. Rabinowicz served as Chief Executive Officer from 1990 to 2000.
Mr. Rabinowicz has also served as a Director of Macpell since 1998. Mr.
Rabinowicz has over 25 years of experience in the textile industry in Israel and
abroad. Prior to joining the Company, Mr. Rabinowicz was general Manager of
Kortex Hosiery Mills in Australia, which was subsequently acquired by Sara Lee
Corporation. Mr. Rabinowicz is a graduate of High Talmudical Colleges in
Australia and in Israel.

            YOSEF SHIRAN has served as Chief Executive Officer and a Director of
Tefron since January 2001. Prior to joining Tefron, Mr. Shiran was the general
manager of Technoplast Industries, an injection molding and extrusion company,
from 1995 to 2000. Mr. Shiran has over 14 years of management experience. Mr.
Shiran holds a B.Sc. degree in Industrial Engineering from Ben-Gurion University
and a masters degree in Business Administration from Bar Ilan University.

            MICHA KORMAN has served as a director of the Company since October
2002. Mr. Korman leads the recovery and rehabilitation process for companies.
Mr. Korman held various senior management positions in the Company from 1991
until 2003. From October 2000, he served as the Executive Vice President of the
Company. Prior to that, Mr. Korman was Chief Financial Officer of the Company
from 1991 to September 2000. Prior to joining the Company, Mr. Korman held
various senior financial and management positions with companies in the hi-tech,
beverage and food and communication industries. Mr. Korman holds a Bachelors
degree in Economics and Business Administration from Bar-Ilan University.


                                       40
<PAGE>


            MEIR SHAMIR was elected as a director of the Company on March 31,
2004 and has been the Chairman of Mivtach Shamir Ltd., an investment company
traded on the Tel-Aviv Stock Exchange, since 1992. Mr. Shamir also serves as a
director of each of the following companies: Lipman Electronic Engineering Ltd,
a manufacturer of electronic clearance systems; Wizcom Technologies Ltd. which
is engaged in the field of electronics and is traded on the Deutsche Borse A.G.;
Digal Investments and Holdings Ltd, a real estate holding company traded on the
Tel-Aviv Stock Exchange; and Technoplus Ventures Ltd, a venture capital firm
traded on the Tel Aviv Stock Exchange.

            YAROM OREN was elected as a director of the Company on March 31,
2004 and is Senior Partner at First Israel Mezzanine Investors Ltd. and FIMI
2001 Ltd. Mr. Oren also serves as a director of Caesarea Creation Ltd., a
textile manufacturer, Tadir Gan Precision Products Ltd., a die casting
manufacturer, and Mez Op Holdings Ltd. a holding company wholly owned by FIMI.
Yarom Oren holds a B.SC in Industrial Engineering from Tel Aviv University and
an MBA from WBS England.

            SHIRITH KASHER was elected as a director of the Company on March 31,
2004 and has been a General Counsel and Secretary of Israel Phoenix Insurance
Company Ltd. since 2001 and General Counsel of Atara Investment Company Ltd. and
Atara Technology Ventures Limited (both from the Phoenix Group) since 2002. From
1997 to 2000, Ms. Kasher worked at S. Horowitz & Co., first as an Articled Clerk
and then as an Advocate. Ms. Kasher is currently a director at Mehadrin Ltd. Ms.
Kasher holds a B.Sc., an M.Sc. from the Human Genetics department of the Sackler
Medical School, and an LLB, all from Tel Aviv University and is admitted to
practice law in Israel.

            OFER TSIMCHI has served as an External Director of Tefron since July
2001. Mr. Tsimchi currently provides business development and marketing
consulting services to a foreign investment entity in the bio-technological
field. Mr. Tsimchi served as the Chief Executive Officer of Insider Financial
Services Online Ltd until April 2001. From 1997 to 2000, Mr. Tsimchi served as
the Chief Executive Officer of Inbar Reinforced Polyester Ltd., and from 1993 to
1997, as Manager of Sales and Marketing. From 1990 to 1993, Mr. Tsimchi served
as the Secretary of Kibbutz Hemdia. Mr. Tsimchi holds a bachelor's degree in
Economics and Agriculture, and is pursuing a master's degree in Business
Administration, both from the Hebrew University in Jerusalem, Israel. Mr.
Tsimichi's term as External Director ends on July 15, 2004.

            ZVI GREENGOLD has served as an External Director of Tefron since
July 2001. Mr. Greengold served as the Managing Director of Caribbean Petroleum,
Corp., a company that manufactures and markets fuel products in Puerto Rico,
from 2000 to April 2001. Mr. Greengold served as the General Manager of the
Israeli Oil Refineries Ltd. from 1999 to 2000. From 1996 to 1998, Mr. Greengold
served as the Managing Director of Electro-Chemicals Ltd., a company that
manufactures Polyvinyl Chloride and unorganic chemicals and whose shares are
traded on both the Tel Aviv Stock Exchange and the American Stock Exchange.
During 1986 to 1996, Mr. Greengold held various positions at Electro-Chemicals
Ltd., including Chief Financial Officer, Vice President of Organization and
Logistics, Vice President of Finance and Organization and Vice Managing
Director. Mr. Greengold holds a bachelor's degree in Economics and
Administration from the Rupin College in Israel. Mr. Greengold's term as
External Director ends on July 15, 2004

            ARIE ARIELI has served as an External Director of Tefron since July
2000. Since 1988, Mr. Arieli has been the legal counsel for the Israel Phoenix
Insurance Company. Mr. Arieli has served as Director of the Public for Offer
Commercial Centers Ltd. between 1993 and 1998 and is currently serving as an
External Director for Amit Profitable Company for the Management of Pensions and
Compensation Ltd. and for Master-Bit, the Israeli Students Insurance Agency Ltd.

            Upon expiration of the terms of Ofer Tsimichi and Zvi Greengold as
External Directors, they will be replaced by Yacov Elinav, who was elected by
the shareholders of the Company as an external director commencing on July 15,
2004. Mr. Elinav will serve as an External Director together with Mr. Arie
Arieli. Below is certain information about Mr. Elinav based on information
supplied by him.


                                       41
<PAGE>


            YACOV ELINAV has been a member of the Board of Management of Bank
Hapoalim B.M. between 1991 and July 2003. Mr. Elinav also serves as Chairman of
the Board of Diur B.P. Ltd. and is a director of Amot Investment Ltd., Mivnei
Ta'asia Ltd., Middle East Tube Ltd. and other entities and is an external
director of Office Textile Ltd. Mr. Elinav formerly served as a director of
other prominent Israeli companies.

            DAN MESIKA has served as Chief Executive Officer of Alba since
October 2001 and of AlbaHealth since September 2002. From June 2001 to October
2001, Mr. Mesika served as Tefron's representative at Alba. Since 1999, Mr.
Mesika has served as the manager of a division of Rotem Amfert Negev Ltd., a
subsidiary of Israel Chemical Corporation. Between 1999 to 2001, Mr. Mesika has
served as a Manager of Puriphos Division. From 1994 to 1998, he served as a
manger of a phosphorus acid production plant at Rotem Amfert Negev. From 1993 to
1994, Mr. Mesika was the General Manager of Or-Taas Fences, a company in the
metal industry, and, from 1991 to 1993, was employed as a consultant in the
research division of Rotem Amfert Negev. Mr. Mesika received his B.Sc. degree in
Chemical Engineering and M.Sc. degree in Industrial and Management Engineering
from Ben-Gurion University.

            GIL ROZEN joined Tefron in December 2001 as Chief Financial Officer.
Prior to joining Tefron, Mr. Rozen held several management positions including
that of chief financial officer (from 1996 to November 2001) of Technoplast
Industries Ltd., (TNP.L), an Israeli industrial company traded on the Tel Aviv
and the London Stock Exchanges. Prior to that he served as chief financial
officer of a private industrial company. He was also an economic consultant to
various industrial companies. Mr. Rozen holds a B.A. in Economics and
Accountancy from Bar Ilan University.

            ERAN SHACHAR joined Tefron in January 2004 as VP Marketing and
Sales. Prior to joining Tefron, between 1999 and 2003, he managed Nokia Networks
operations in Israel and prior to that, between 1996 and 1998, managed the
Housewear Business Unit in Keter Plastics Ltd. From 1993 until 1996, Mr. Shachar
managed the cheese devision in the Strauss- Danone Israel Group. Mr. Shachar
holds a BA and a Masters degree in Business Administration from Bar Ilan
University.

            YOSSI ZILBER joined Tefron as Chief Operating Officer in March 2004.
Prior to joining Tefron, from 1998 until the end of 2002, Mr. Zilber was the
manager of Amgat which is a subsidiary of Amraz Plastics Ltd, an injection
molding and extrusion company. Between 1996 and 1997, Mr. Zilber served as the
plant manager of the salad factory of the Strauss- Danone Israel Group, and
prior to that was a logistics manager in Teva Pharmaceuticals Ltd. Mr. Zilber
holds a B.Sc. degree in Industrial Engineering from Tel - Aviv University.

            TALYA HANAN joined Tefron in 1989 and has served as Vice President
of Global Innovation and Active Wear Marketing since January 2001. Prior to
that, she served as Vice President - Marketing and Development from 1999 to
2000, and as General Manager of Hi-Tex from 1997 to 1999. Prior to 1997, Ms.
Hanan served in various operational positions in Tefron, including Manager -
Quality Assurance, Manager - Research & Development, Manager - Pre-production
and New York Sales Correspondent. Ms. Hanan holds a degree of Industrial and
Management Engineering from the Shenkar School of Textile.

            ITAMAR HARCHOL joined Tefron in March, 2003 as Chief Technology
Officer. Prior to joining Tefron, from the beginning of 2001 to February 2003,
Mr. Harchol served as the Engineering Manager of Tamuz, a manufacturer of
electronic packaging, between 1998 and 2001 he was Products Manager for the
automotive industry in Ortal Dye Casting and prior to that, between 1994 and
1997, he served as the Engineering Manager of Inbar Polyester which is a plastic
manufacturer of composite materials products. Mr. Harchol holds a degree of
mechanical engineering from the Nazareth College.

            TCHIYA R. FORTUS joined Tefron in 1998 as Company Secretary and
Legal Counsel. Prior to joining Tefron, Ms. Fortus served as a lawyer in
Discount Investment Corporation Ltd. from 1989 to 1997, and earlier served as
Legal Counsel and Company Secretary with companies in the construction and
medical imaging industries. Ms. Fortus was admitted to the Israel Bar in 1983
and holds a bachelors and masters degree in Law and a masters degree in Business
Administration, all from Tel-Aviv University.


                                       42
<PAGE>

            MARGALIT SHAHAR joined Tefron in May 2002 as Manager of Human
Resources. Between 1998 and 2001 Ms. Shahar served Spandex Elastic Fibers Ltd, a
start up that developed elastic fibers, as manager of human resources, and
before that, held the same position for PCB Electronics Ltd. for a period of
three years. Ms. Shahar holds a bachelors and a masters degree in Social Work
from the Haifa University.

MACPELL SHAREHOLDERS' AGREEMENT

            The Macpell Shareholders Agreement relates, among other things, to
the election of Directors of Tefron. The agreement provides, among other things,
that subject to the agreement of the shareholders in Tefron, the distribution of
the directors on Terfon's Board of Directors will reflect the direct and
indirect holdings in Tefron (including through Macpell) of the parties to the
agreement. The current designees of Macpell and its major shareholders (Arwol,
Ruimi and Riza) are Messrs. Wolfson and Rabinowicz. See "Item 7 - Major
Shareholders and Related Party Transactions - 7B. - Related Party Transaction -
Macpell Shareholders' Agreement." See "Item 10. Additional Information - C.
Material Agreements - FIMI Agreements - Macpell Agreement" for a description of
the agreement between Arwol, Macpell and Norfet, Limited Partnership regarding
the election of members to Tefron's Board of Directors.

6B.   COMPENSATION

            The aggregate direct remuneration paid to all Directors and senior
management as a group for services in all capacities for the year ended December
31, 2003 was approximately $1.7 million, of which $71,000 was paid to Directors
in their capacities as Directors. This amount includes $136,000 which was 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
its 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.

            In 2003, we granted options for 152,284 Ordinary Shares under the
Share Option Plan, of which 142,964 were granted to Directors and senior
managers. Such options have an average exercise price of $3.50 per share and
expire in 2013. Options for 98,835 Ordinary Shares under the Share Option Plan
expired during 2003.

      EMPLOYMENT AGREEMENTS

            CHAIRMAN OF THE BOARD

            Under the terms of our consulting and management services agreement
with Mr. Arie Wolfson, our Chairman of the Board of Directors, and with a
company controlled by him, (the "Consulting Agreement") we pay to the company
controlled by Mr. Wolfson: (1) compensation for consulting services in the
amount of US$15,000 per month, plus 41% cost (equivalent to the cost we would
have paid for a similar senior management wage), (2) reimbursement of vehicle
expenses, (3) reimbursement of out-of-pocket expenses, and (4) reimbursement of
other standard expenses customarily provided to persons serving in such capacity
in Israel. These payments replace payments previously made to Macpell in the
amount of $20,000 per month. In addition, the consulting and management services
agreement includes non competition clauses.

            In  addition,  we have  granted to Mr.  Wolfson  options to purchase
225,000  Ordinary  Shares at an exercise price per share of $3.50.  Such options
will be  issued  in  accordance  with our  1997  Share  Option  Plan and will be
exercisable, subject to relevant tax laws, as follows:

            a. 75,000 options will be exercisable on August 6, 2003;

            b. 75,000 options will be exercisable on August 6, 2004; and

            c. 75,000 options will be exercisable on August 6, 2005.


                                       43
<PAGE>


            In the event the agreement is terminated, Mr. Wolfson will be
entitled to exercise the options he would otherwise be entitled to exercise as
of such date for a period ending 36 months after such termination.

            Pursuant to the terms of the agreement between Norfet, Limited
Partnership and the Company, on March 31, 2004, the general meeting of
shareholders of the Company approved an amendment to the Consulting Agreement
which provides that as of the date on which Mr. Wolfson ceases to act as
chairman of the board of directors of the Company, and for so long as Mr.
Wolfson continues to provide consulting services to the Company, the annual
amounts payable pursuant to the Consulting Agreement will be reduced from
$253,800 to $120,000 per annum, each plus VAT. See "Item 10. Additional
Information - 10C. Material Contracts - FIMI Agreements".

            PRESIDENT

            Under the terms of our employment agreement with Mr. Sigi
Rabinowicz, our President, we pay or provide to Mr. Rabinowicz: (1) monthly
compensation in the amount of US $20,000, (2) reimbursement of other standard
expenses, (3) benefits such as the provision of an vehicle, vacation,
educational fund, sick leave, and management and disability insurance
contributions, and (4) a bonus to be determined by our audit committee once a
year, that is to be not less than 1.5% and no higher than 2.5% of our net
profits, as calculated in the employment agreement. If the audit committee
determines that the bonus should be greater than 1.5% of net profits, such
determination shall be subject to the approvals of our Board of Directors and
our shareholders at a general meeting of the shareholders, unless such approvals
are not otherwise required under applicable law. Mr. Rabinowicz's employment
agreement includes non competition clauses. In addition, we granted to Mr.
Rabinowicz options to purchase 291,512 Ordinary Shares with an exercise price
per share of $3.50. This grant follows the cancellation of 291,512 options
previously granted to Mr. Rabinowicz with an exercise price per share of US
$17.00. These options will be subject to the terms and conditions of our 1997
Share Option Plan. One-third of the options will vest on each of August 6, 2003,
2004 and 2005, subject to any relevant tax laws.

            In the event the agreement is terminated after February 6, 2004, Mr.
Rabinowicz will be entitled to exercise the options he would otherwise be
entitled to exercise as of such date for a period ending 36 months after such
termination.

            In the case we distribute a cash dividend distribution of more than
US$1.00 per share, the exercise price of the options which at that time are not
exercisable will be amended to reflect the x-dividend price of the share. The
calculation of the ex-dividend price of the share will not take into
consideration the portion of the cash dividend up to US$1.00.

            In the event we terminate the employment agreement because of a
"change of control," Mr. Rabinowicz will be entitled to exercise one-half of his
options that are not exercisable at the time of termination. Mr. Rabinowicz will
be entitled to exercise these options within 30 days of the termination notice.
A "change of control" is defined as (i) the sale by DIC of all of its Tefron
shares, (ii) the sale by Arwol of all of its Tefron shares or (iii) the sale by
Macpell, DIC, Arwol or Tabriz Anstalt Limited NV, individually or in the
aggregate, of more than 17% of our outstanding share capital, as a result of
which none of the foregoing, individually or in the aggregate, is a controlling
shareholder of the company. A sale to another shareholder or to an affiliate of
either of Wolfson, Rabinowicz or Ruimi or their respective family relatives,
will not be considered a "change of control."

            In 1999, we granted to Mr. Rabinowicz additional options to purchase
100,000 of our Ordinary Shares at an exercise price of $9.50 per share, which
expire in 2009.


                                       44
<PAGE>


            CHIEF EXECUTIVE OFFICER

            Under the terms of our management services agreement with Mr. Yosef
Shiran, our Chief Executive Officer, and with an entity controlled by him (the
"Management Agreement"), we pay to the entity controlled by Mr. Shiran: (1)
compensation for management services in the amount of US$26,663 plus NIS 2,065
per month, plus VAT as applicable by law, (2) reimbursement of any and all
reasonable direct expenses including telephone, cellular phone and vehicle
expenses and (3) annual grant that will not be higher than 2.5% of Tefron's Net
Profit, as defined in the Management Agreement, and not lower than 1.5% of such
Net Profit. In any case that the Audit Committee shall determine that the annual
grant should be higher than 1.5% of the Net Profit, its decision will be subject
to approvals of both the Board of Directors and the General Meeting of the
Shareholders of Tefron, unless such approvals will no longer be required under
applicable law. In March 2004, the Tefron shareholders approved that, upon the
closing of the transactions with Norfet, Limited Partnership described in "Item
10. Additional Information - C. Material Agreements - FIMI Agreements", the
Management Agreement will be amended and accordingly, from that date onwards the
annual grant will be 2% of the Company's Net Profits, as defined under the
Management Agreement.

            In addition, in 2001, we granted to Mr. Shiran options to purchase
300,000 Ordinary Shares at an exercise price per share of $3.56. Mr. Shiran was
entitled to exercise 1/6 of the options (for 50,000 ordinary shares) at the end
of the first three months of employment. At the end of each three months,
starting at the end of the first half-year of his employment and ending at the
end of the first 27 months of his employment, he is entitled to exercise 1/12 of
the options (for 25,000 ordinary shares, and a total of 200,000 ordinary shares
during such time period). At the end of the first thirty months of employment,
he is entitled to exercise an additional 1/6 of the options (for 50,000 ordinary
shares). These options are subject to the terms and conditions of our 1997 Share
Option Plan. In 2002 we granted to Mr. Shiran options to purchase 15,000
Ordinary Shares with an exercise price per share of $3.59. These options are
subject to the terms and conditions of our 1997 Share Option Plan. One-third of
the options vested on August 5, 2003, and one-third of the options will vest on
each of August 5, 2004 and 2005, subject to any relevant tax laws. In March
2004, the Tefron shareholders approved the grant to Mr. Shiran of options to
purchase 650,000 Ordinary Shares at an exercise price of US$ 4.25 per share.
These options will be issued upon the closing of the transactions with Norfet,
Limited Partnership described in "Item 10. Additional Information - C. Material
Agreements - FIMI Agreements". These options will be issued in accordance with
our 1997 Share Option Plan and will be exercisable, subject to relevant tax
laws, as follows:

            a.     162,500 Options would vest as of January 1, 2005 and
                   thereafter

            b.     at the end of each month, starting as of the end of January
                   2005 and ending at the end of December 2007, 1/48 (rounded
                   up to the closest whole number which is approximately
                   13,542) of the Options granted would vest.

In the event the Management Agreement is terminated by us without "cause" or by
Mr. Shiran, Mr. Shiran will be entitled to exercise the options he would
otherwise be entitled to exercise as of such date for a period ending 36 months
after such termination. Notwithstanding the foregoing, in the event we terminate
the Management Agreement because of "Change in Control", Mr. Shiran will be
entitled to exercise all of the 650,000 options not exercisable at the time of
termination. In such a case, Mr. Shiran will be entitled to exercise these
options within 30 days of the termination date. For the purpose of this grant,
"Change of Control" means: if none of (i) FIMI Opportunity Fund, L.P. (and its
affiliates and investors, including FIMI Israel Opportunity Fund, Limited
Partnership) ("FIMI"); (ii) Arwol Holdings Ltd. ("Arwol"); and (iii) Macpell
Industries Ltd., will be party to the shareholder agreement dated March 17, 2004
between such parties (described in "Item 10. Additional Information - C.
Material Contracts - FIMI Agreements - Macpell Agreement"), or will otherwise
effectively have Control of the Company. For that purpose, the term "Control"
shall have the meaning given to that term (in Hebrew: "Shlita") on Section 1 of
the Securities Law, 1968.


                                       45
<PAGE>


      DEFERRED SHARES

            In 1996, we issued 2,250 Ordinary B Shares each to Sigi Rabinowicz
and Arie Wolfson in consideration for NIS 2,250 and services rendered to us in
their capacities as executive officers. Pursuant to our Articles of Association,
the Ordinary B Shares automatically converted into Deferred Shares upon
consummation of the initial public offering. The Deferred Shares are
non-transferable and entitle their holders, upon the liquidation of the company,
to the par value of the shares but to no voting, dividend or any other rights.

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 officer will serve until his or her
removal by the Board of Directors or resignation from office.

      INDEPENDENT/EXTERNAL DIRECTORS

      ISRAELI COMPANIES LAW REQUIREMENTS

            We are subject to the provisions of the Israeli Companies Law,
5759-1999 which requires that we have at least two External 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 voted at the meeting, 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 Ofer Tsimchi, Zvi Greengold and Arie Arieli. The shareholders of
the Company have elected Yacov Elinav to serve as an external director
commencing on July 15, 2004 upon expiration of the terms of Ofer Timschi and Zvi
Greengold as External Directors.

      NEW YORK STOCK EXCHANGE REQUIREMENTS

            Our Ordinary Shares are listed on the New York Stock Exchange, and
we are subject to the rules of the NYSE applicable to listed companies. Under
the current NYSE rules, we are required to have an audit committee consisting of
at least three directors, all of who must be independent. The independence
standard under the NYSE rules generally excludes (1) any person who is an
employee of a company or its affiliates or any person who is an immediate family
member of an executive officer of a company or its affiliates, until the lapse
of three years from the termination of such employment, (2) any person who is a
partner, controlling shareholder or executive officer of an organization that
has a business relationship with the company or who has a direct business
relationship with a company, unless the board of directors of the company
determines that the business relationship does not interfere with such person's
independent judgment, or unless three years have lapsed from the termination of
such relationship or his status as a partner, controlling shareholder or
executive officer, and (3) any person who is employed as an executive of another
corporation where any of the company's executives serves on that corporation's
compensation committee.


                                       46
<PAGE>


      AUDIT COMMITTEE

            NYSE REQUIREMENTS. Under NYSE rules, we are required to have an
audit committee consisting of at least three directors, all of whom are
financially literate and independent and one of whom has accounting or related
financial management expertise. The responsibilities of the audit committee
under NYSE rules include evaluating the independence of a company's outside
auditors. Pursuant to the Sarbanes-Oxley Act of 2002, the Securities and
Exchange Commission (the "SEC") has issued new rules that, among other things,
require the New York Stock Exchange to impose independence requirements on each
member of the audit committee. The New York Stock Exchange has adopted rules
that comply with the SEC's requirements and which are applicable to us by July
31, 2005.

            The adopted requirements implement two basic criteria for
determining independence: (i) audit committee members would be barred from
accepting any consulting, advisory or other compensatory fee from the issuer or
an affiliate of the issuer, other than in the member's capacity as a member of
the board of directors and any board committee, and (ii) audit committee members
of an issuer that is not an investment company may not be an "affiliated person"
of the issuer or any subsidiary of the issuer apart from his or her capacity as
a member of the board and any board committee.

            The SEC has defined "affiliate" for non-investment companies as "a
person that directly, or indirectly through one or more intermediaries,
controls, or is controlled by, or is under common control with, the person
specified. "The term "control" is intended to be consistent with the other
definitions of this term under the Securities Exchange Act of 1934, as "the
possession, direct or indirect, of the power to direct or cause the direction of
the management and policies of a person, whether through the ownership of voting
securities, by contract, or otherwise."

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

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

      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.


                                       47
<PAGE>


            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 managing director 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 audit committee and the board
of directors. Arrangements regarding the compensation of directors or
controlling shareholders also require the approval of the shareholders.

      COMMITTEES

            Our Board of Directors has established an Audit Committee,
Compensation Committee and Contributions Committee. The Companies Law restricts
the delegation of powers from the Board of Directors to its committees in
certain manners. The Audit Committee exercises the powers of the Board of
Directors with respect to our accounting, reporting and financial control
practices, including exercising the responsibility, where appropriate, for
reviewing potential conflicts of interest situations. The members of the Audit
Committee are Messrs. Greengold, Arieli, and Tsimchi. The Compensation Committee
administers our executive compensation and share option plans. The members of
the Compensation Committee are Mr. Wolfson (Chairman of the Board), one of the
external directors (Messrs. Greengold, Arieli, or Tsimchi) and Mr. Shiran (CEO).
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.
Rabinowicz (President), Shiran and Arieli (external director). See "Item 10.
Additional Information -10B. Memorandum and Articles of Association - Board of
Directors."

6D.   EMPLOYEES

            At December 31, 2003, we employed 2,126 employees in Israel of whom
692 were salaried employees and 1,434 were hourly wage employees. At December
31, 2003, we employed 363 employees in the United States through our subsidiary,
Alba, of whom 48 were salaried employees and 315 were hourly wage employees. At
December 31, 2003, El-masira employed 341 employees in Jordan all of them were
salaried employees

            At December 31, 2002, we employed 2, 011 employees in Israel of whom
582 were salaried employees and 1,429 were hourly wage employees. At December
31, 2002, we employed 644 employees in the United States through our subsidiary,
Alba, of whom 79 were salaried employees and 565 were hourly wage employees. At
December 31, 2002, El-masira employed 349 employees in Jordan, all of whom were
salaried employees.

            At December 31, 2001, we employed 2,074 employees in Israel of whom
608 were salaried employees and 1,466 were hourly wage employees. At December
31, 2001, we employed 654 employees in the United States through our subsidiary,
Alba, of whom 80 were salaried employees and 574 were hourly wage employees. At
December 31, 2001, El-masira employed 342 employees in Jordan, all of whom were
salaried employees.

            To increase the motivation of the workforce, many factory employees
are eligible for bonuses based upon the number of units such employees produce
in any given day. We believe that relations with our employees are good.

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


                                       48
<PAGE>


            Israeli law generally requires the payment by employers of severance
pay upon the retirement or death of an employee or upon termination of
employment by the employer or, in certain circumstances, by the employee. We
currently fund our ongoing severance obligations by making monthly payments to
pension funds, employee accounts in a provident fund and insurance policies. In
addition, according to the National Insurance Law, Israeli employees and
employers are required to pay specified amounts to the National Insurance
Institute, which is similar to the U.S. Social Security Administration. Since
January 1, 1995, such amounts also include payments for national health
insurance payable by employees. The payments to the National Insurance Institute
are determined progressively in accordance with the wages and range from 10.4%
to 16.3% of wages, of which the employee contributes approximately 66% and the
employer contributes approximately 34%. A majority of our permanent employees in
Israel are covered by general and/or individual life and pension insurance
policies providing customary benefits to employees, including retirement and
severance benefits. The employers generally contribute up to 15.8% (depending on
the employee) of base wages to such plans and the permanent employees contribute
5.0% of their base wages.

            None of Alba's employees are covered by a collective bargaining
agreement.

6E.   SHARE OWNERSHIP

            As of March 29, 2004, 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 12,412,166 Ordinary Shares outstanding
as of March 29, 2004. The number of Ordinary Shares beneficially owned by a
person includes Ordinary Shares subject to options held by that person that were
currently exercisable at, or exercisable within 60 days of, March 29, 2004. 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.

            Following closing of the equity investments described in "Item 10.
Additional Information- 10C. Material Contracts," the number of Ordinary Shares
beneficially held by Arie Wolfson and Sigi Rabinowicz and their percentage
ownership will be reduced.

<TABLE>
<CAPTION>

                                                        % of Ordinary
                                 Number of              Shares
Name                             Ordinary Shares        Outstanding**
----------------------------     ---------------        --------------
<S>                              <C>                    <C>
Arie Wolfson................     6,286,700 (1)          50.3
Sigi Rabinowicz.............     4,648,081 (2)          36.9
Yos Shiran..................       305,000 (3)           2.4
Talya Hanan.................     *                      *
Tchiya R. Fortus............     *                      *
Micha Korman................     *                      *
Gil Rozen...................     *                      *
Dan Mesika..................     *                      *
Ofer Tsimchi................     *                      *
Zvi Greengold...............     *                      *
Arie Arieli.................     *                      *
Itamar Harchol..............     *                      *
Margalit Shahar.............     *                      *
All Directors and senior
managers as a group
(13 persons) ...............     7,065,239 (4)          53.3%
</TABLE>


_________________________
*     Less than 1% of the outstanding Ordinary Shares.
**    Does not take into account 997,400 Ordinary Shares held by a wholly owned
      subsidiary of the Company.


                                       49
<PAGE>


(1) Includes (a) 4,450,910 Ordinary Shares held by Macpell, (b) 1,760,690
Ordinary Shares held by Arwol Holdings Ltd., (c) 75,000 Ordinary Shares subject
to options exercisable at $3.50 per share (which expire in 2012), and (d) 100
Ordinary Shares held by Mr. Wolfson Pursuant to Rule 13d-5 of the U.S.
Securities Exchange Act of 1934, as amended, Mr. Wolfson may be deemed to
beneficially own the 4,450,910 Ordinary Shares held by Macpell and the 1,760,690
Ordinary Shares held by Arwol. See "-6A. Directors and Senior Management -
Macpell Shareholders' Agreement" and "Item 7. Major Shareholders and Related
Party Transactions - 7B. Related Party Transactions - Relationships and
Transactions with Macpell - Macpell Shareholders' Agreement." The table above
does not include 2,250 Deferred Shares (representing 50% of the outstanding
Deferred Shares) held by Mr. Wolfson. The Deferred Shares are non-transferable
and entitle their holders, upon our liquidation, to the par value of the shares
but to no voting, dividend or any other rights.

(2) Consists of (a) 4,450,910 Ordinary Shares held by Macpell, and (b) 197,171
Ordinary Shares subject to options exercisable at prices that are between $3.50
and $9.50 per share (which expire between 2009 and 2012). See "- 6A. Directors
and Senior Management - Macpell Shareholders' Agreement," "-6B. Compensation -
Employment Agreements" and "Item 7. Major Shareholders and Related Party
Transactions -7B. Related Party Transactions - Relationships and Transactions
with Macpell - Macpell Shareholders' Agreement." Pursuant to Rule 13d-5 of the
U.S. Securities Exchange Act of 1934, as amended, Mr. Rabinowicz may be deemed
to beneficially own the 4,450,910 Ordinary Shares held by Macpell. The table
above does not include 2,250 Deferred Shares (representing 50% of the
outstanding Deferred Shares) held by Mr. Rabinowicz. The Deferred Shares are
non-transferable and entitle their holders, upon the liquidation of the Company,
to the par value of the shares but to no voting, dividend or any other rights.

(3) Consists of 305,000 Ordinary Shares subject to options exercisable at prices
that are between $3.50 and at $3.56 per share (which expire between 2011 and
2012).

 (4) Includes the 4,450,910 Ordinary Shares held by Macpell of which Arie
Wolfson and Sigi Rabinowicz may be deemed beneficial owners under U.S.
securities laws due to their beneficial interests in Macpell and the Macpell
Shareholders' Agreement. See "Item 7. Majority Shareholders and Related Party
Transactions - 7B. Related Party Transactions - Relationships and Transactions
with Macpell - Macpell Shareholders' Agreement." Also includes 1,760,690
Ordinary Shares purchased by Arwol of which Arie Wolfson may be deemed
beneficial owner under U.S. securities laws. Further includes options
(exercisable within 60 days) to purchase 974,148 Ordinary Shares. The exercise
price of these options ranges from $3.50 to $9.50 per share. The expiration of
these options ranges from 2007 to 2013.


SHARE OPTION PLAN

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

      GENERAL

            The Share Option Plan authorizes the issuance of options to purchase
2,266,049 Ordinary Shares. At a shareholders meeting held on March 31, 2004, the
shareholders voted to increase the number of shares reserved for issuance under
the Share Option Plan by 446,274 Ordinary Shares to 2,712,323 Ordinary Shares.
As of March 31, 2004 options to purchase 1,897,323 of such Ordinary Shares had
been granted to our senior managers, directors and employees, of which 1,313,168
options had been granted to our senior managers and directors as a group. On
March 31, 2004, the Tefron shareholders also approved the grant to Mr. Shiran of
options to purchase 650,000 Ordinary Shares to be issued upon the closing of the
transactions with Norfet, Limited Partnership described in "Item 10. Additional
Information - C. Material Agreements - FIMI Agreements". 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.


                                       50
<PAGE>


      ADMINISTRATION

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

      VESTING PERIODS

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

      AMENDMENT AND TERMINATION OF THE SHARE OPTION PLAN

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

      ACCOUNTING TREATMENT

            For a discussion of the accounting treatment of the Share Option
Plan, see Note 15 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 50% 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.


                                       51
<PAGE>


            On February 27, 2003, in order to enable us to grant options after
January 1, 2003, we filed an amendment to the Share Option Plan with the tax
authorities and informed them of our election of the capital gains track (the
third alternative above). In addition, under the amendment to the Share Option
Plan, we may also issue options under the provisions of the tax track without a
trustee under the first alternative. The capital gains track will apply to all
trustee-track options to be granted by us until December 31, 2004. After this
period has ended, we may change our election.

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


                                       52
<PAGE>


ITEM 7.     MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

7A.   MAJOR SHAREHOLDERS

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

            The following table sets forth the number of our Ordinary Shares
owned by any person known to us to be the beneficial owner of 5% or more of our
Ordinary Shares as of March 29, 2004. The information in this table is based on
12,412,166 Ordinary Shares outstanding as of such date. The number of Ordinary
Shares beneficially owned by a person includes Ordinary Shares subject to
options held by that person that were currently exercisable at, or exercisable
within 60 days of, March 29, 2004. 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.

            Following closing of the equity investments described in "Item 10.
Additional Information - 10C. Material Contracts," the number of Ordinary Shares
beneficially owned by Macpell Industries Ltd., Arie Wolfson, Sigi Rabinowicz and
Avi Riumi will be reduced, as will their percentage ownership and that of
Discount Investment Corporation Ltd.

<TABLE>
<CAPTION>
NAME                                         NUMBER OF SHARES OWNED     PERCENT OF ORDINARY SHARES *
------------------------------------------   ----------------------     ----------------------------
<S>                                                <C>                            <C>
Macpell Industries Ltd. (1)...............         4,450,910                      35.9%
28 Chida Street
Bnei Brak, Israel  51371

Discount Investment Corporation Ltd.......         1,916,866 (2)                  15.4%
Azrieli Center 3, Triangular Building
Tel Aviv, Israel 67023

Arie Wolfson..............................         6,286,700 (3)                  50.3%

Sigi Rabinowicz...........................         4,648,081 (4)                  36.9%

Avi Ruimi.................................         4,469,710 (5)                  36.0%
</TABLE>

_______________________________

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

(1)   Macpell is an Israeli corporation. As of March 29, 2004, Arwol Holdings
      Ltd., an Israeli company wholly-owned by Arie Wolfson, our Chairman of
      the Board, held 27.8% of Macpell; Riza Holdings Ltd., an Israeli company
      wholly-owned by Sigi Rabinowicz, our President and a director, held 25.0%
      of Macpell; and Condo Overseas Inc., a Panamanian company wholly-owned by
      Avi Ruimi, held 25.8% of Macpell, representing 78.6% of Macpell's shares
      in the aggregate. See "- 7B. Related Party Transactions - Relationships
      and Transactions with Macpell." The aggregate number of Macpell's shares
      outstanding as of March 29, 2004 was 15,561,284.

(2)   Consists of 958,433 shares held by Discount Investment Corporation Ltd.,
      or DIC, and 958,433 shares held by PEC Israel Economic Corporation, or
      PEC, a wholly owned subsidiary of DIC. DIC is controlled by IDB
      Development Corporation Ltd., or IDBD. IDBD is controlled by IDB Holding
      Corporation Ltd., or IDBH. DIC, IDBD and IDBH are public companies traded
      on the Tel Aviv Stock Exchange.


                                       53
<PAGE>


      Since May 19, 2003, approximately 51.7% of the outstanding share capital
      of IDBH is owned by a group comprised of: (i) Ganden Investments I.D.B.
      Ltd., or Ganden, a private Israeli company controlled by Nochi Dankner
      and his sister, Shelly Dankner-Bergman, which holds 31.02% of the equity
      of and voting power in IDBH; (ii) Manor Investments-IDB Ltd., or Manor, a
      private Israeli company controlled by Ruth Manor, which holds 10.34% of
      the equity of and voting power in IDBH; and (iii) Avraham Livnat
      Investments (2002) Ltd., or Livnat, a private Israeli company controlled
      by Avraham Livnat, which holds 10.34% of the equity of and voting power
      in IDBH. Ganden, Manor and Livnat, owning in the aggregate approximately
      51.7% of the equity of and voting power in IDBH, entered into a
      Shareholders Agreement relating, among other things, to their joint
      control of IDBH, the term of which is until May 19, 2023. In addition,
      Shelly Dankner-Bergman holds approximately 4.75% of the equity of and
      voting power in IDBH.

(3)   Includes (a) 4,450,910 Ordinary Shares held by Macpell, (b) 1,760,690
      Ordinary Shares held by Arwol, (c) 75,000 Ordinary Shares subject to
      options exercisable at $3.50 per share (which expire in 2012) and (d) 100
      Ordinary Shares held by Mr. Wolfson. Pursuant to Rule 13d-5 of the
      Securities Exchange Act of 1934, as amended, Mr. Wolfson may be deemed to
      beneficially own the 4,450,910 Ordinary Shares held by Macpell due to his
      beneficial interest in Macpell and the Macpell Shareholders' Agreement.
      Does not include 2,250 Deferred Shares held by Mr. Wolfson. The Deferred
      Shares are non-transferable and entitle their holders, upon the
      liquidation of the Company, to the par value of the shares but to no
      voting, dividend or any other rights.

(4)   Consists of (i) 4,450,910 Ordinary Shares held by Macpell, and (ii)
      exercisable options to purchase 197,171 Ordinary Shares at prices that are
      between $3.50 and $9.50 per share (which expire between 2009 and 2012).
      Pursuant to Rule 13d-5 of the U.S. Securities Exchange Act of 1934, as
      amended, Mr. Rabinowicz may be deemed to beneficially own the 4,450,910
      Ordinary Shares held by Macpell due to his beneficial interest in Macpell
      and the Macpell Shareholders' Agreement. Does not include 2,250 Deferred
      Shares held by Mr. Rabinowicz. The Deferred Shares are non-transferable
      and entitle their holders, upon the liquidation of the Company, to the par
      value of the shares but to no voting, dividend or any other rights.

(5)   Includes (a) 4,450,910 Ordinary Shares held by Macpell and (b) 18,800
      Ordinary Shares held by Mr. Riumi. Pursuant to Rule 13d-5 of the U.S.
      Securities Exchange Act of 1934, as amended, Mr. Ruimi may be deemed to
      beneficially own the 4,450,910 Ordinary Shares held by Macpell due to his
      beneficial interest in Macpell and the Macpell Shareholders' Agreement.


            Pursuant to an agreement dated November 28, 2000, and amended on
February 21, 2001, Arie Wolfson, through Arwol, purchased all of Tabriz's
Ordinary Shares in Tefron, totaling 1,760,690 Ordinary Shares. Tabriz is a
Belgian company wholly-owned by IWC, a Panamanian company owned by trusts
established by Ivor Wolfson for the benefit of himself and his family, including
his son, Arie Wolfson.

            At March 29, 2004, there were 24 holders of Ordinary Shares of
record registered with a United States mailing address, including banks, brokers
and nominees. These holders of record represented approximately 48.6% of the
total outstanding Ordinary Shares. Because these holders of record include
banks, brokers and nominees, the beneficial owners of these Ordinary Shares may
include persons who reside outside the United States. See "Item 7. Major
Shareholders and Related Party Transactions - 7A. Major Shareholders." There are
no holders of Deferred Shares in the United States.

7B.   RELATED PARTY TRANSACTIONS

RELATIONSHIPS AND TRANSACTIONS WITH MACPELL

            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.


                                       54
<PAGE>


            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.

            Macpell owns 4,450,910 Ordinary Shares, approximately 35.9% of
Tefron's outstanding Ordinary Shares. Macpell is mainly a holding company that
owns various companies, including Tefron and a partnership that mainly trades in
various clothing and apparel products. Macpell was also engaged in the
construction of industrial buildings mainly intended for the use of the Macpell
group.

            As of March 29, 2004, Arwol Holdings Ltd., an Israeli company
wholly-owned by Arie Wolfson, Chairman of the Board of Directors of Tefron, held
27.8% of Macpell; Riza Holdings Ltd., an Israeli company wholly-owned by Sigi
Rabinowicz, President of Tefron, held 25.0% of Macpell; and Condo Overseas Inc.,
a Panamanian company wholly-owned by Avi Ruimi, a former Director of Tefron,
held 25.8% of Macpell, representing 78.6% of Macpell's shares in the aggregate.
The ordinary shares of Macpell are listed and traded on the Tel Aviv Stock
Exchange.

MACPELL SHAREHOLDERS' AGREEMENT

            Arwol Holdings Ltd., Riza Holdings Ltd. and Condo Overseas Inc. are
parties to the Macpell Shareholders' Agreement. The agreement provides, among
other things, that subject to the agreement of the shareholders in Tefron, the
distribution of the directors on Tefron's Board will reflect the direct and
indirect holdings in Tefron (including through Macpell) of the parties to the
agreement. Pursuant to the Macpell Shareholders' Agreement, the Tefron Ordinary
Shares of Macpell held by the parties thereto will be voted at each meeting of
Macpell's shareholders by the trustee in accordance with the resolution of the
shareholders party to the agreement, each shareholder having one vote for each
Macpell share held by such shareholder.

            The Macpell Shareholders' Agreement contains a right of first
refusal in the event that either party wishes to sell its shares in Macpell, and
a tag-along right if either party finds a buyer outside of the Macpell
Shareholders' Agreement who is willing to purchase the Macpell shares. It also
provides that the parties to the Macpell Shareholders' Agreement shall retain
their ownership of at least 50% of the Macpell shares they own as of the date
the agreement was executed. The Macpell Shareholders' Agreement provides that
the vote of the holders of 75% of the Macpell shares is required for Macpell to
(i) enter another line of business, (ii) merge, consolidate or dispose of any of
its substantial assets, (iii) purchase, lease or acquire another substantial
company, (iv) wind-up Macpell, (v) make decisions regarding the allotment of
Macpell shares and (vi) declare dividends. The Macpell Shareholders' Agreement
specifically permits the sale of Macpell shares by Arwol Holdings Ltd. to Sigi
Rabinowicz or a company controlled by Sigi Rabinowicz, provided that the
transferee agrees to be bound by the terms and conditions of the Macpell
Shareholders' Agreement.

AGREEMENT WITH ARIE WOLFSON

            We are party to a consulting and management services agreement with
Mr. Arie Wolfson, our Chairman of the Board of Directors and an indirect holder
of 27.8% of Macpell, and with a company controlled by him. See "Item 6.
Directors, Senior Management and Employees - 6B. Compensation".

AGREEMENTS WITH FIMI

            Tefron has entered into a Share Purchase Agreement with Norfet,
Limited Partnership ("Norfet"), pursuant to which Tefron agreed to issue to
Norfet 3,529,412 Tefron ordinary shares for a base price of $4.25 per share and
a base aggregate consideration of $15 million. As a condition to the closing of
this agreement, Norfet will also acquire an additional 1,365,000 Tefron ordinary
shares in the aggregate from Arwol and Macpell pursuant to an Agreement by and
among Macpell, Arwol and the Norfet. It is contemplated that immediately
following the closing of these agreements, Norfet will hold 4,894,412, or
approximately 30.7% of the outstanding share capital of Tefron, without taking
into account Tefron ordinary shares currently held by a wholly owned subsidiary
of Tefron.


                                       55
<PAGE>


            The Company, the Investor, Arwol and Macpell will execute at the
closing of the agreements a Registration Rights Agreement substantially the same
as that approved by the shareholders of the Company at a shareholders meeting
held on July 30, 2003 and entered into by the Company, Arwol and Macpell in
November 2003. The new Registration Rights Agreement, which replaces the
existing Registration Rights Agreement, also grants the parties the right to
demand a Form F-3 "shelf registration".

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

LEASE ARRANGEMENT

            On August 12, 1997, we entered into an agreement to lease until 2011
approximately 143,000 square feet of industrial space in a facility (the Hi-Tex
1 facility) adjacent to its current facilities in Segev from a wholly-owned
subsidiary of Macpell for a current monthly rent of approximately $65,000. The
first rental payment was made upon entrance into the facility on October 1,
1999. On December 21, 1998, we entered into an agreement to lease until 2012
approximately 180,000 square feet of industrial space in a second facility (the
Hi-Tex 2 facility) adjacent to our existing facilities in Segev from a
wholly-owned subsidiary of Macpell for a monthly rent of approximately $87,000.
The first rental payment was made upon entrance into the facility on March 1,
2000. We conduct our Hi-Tex manufacturing operations in these facilities. In
Segev, we also lease from Macpell's subsidiary an 83,000 square foot facility
under a lease that expires in 2006 for a monthly rent of approximately $43,000
and a 65,000 square foot warehouse under a lease that expires in 2012 for a
monthly rent of approximately $26,000. The rent payable under these leases is
50% linked to the Israeli and U.S. consumer product index and 50% to the
exchange rate between the NIS and the dollar. These agreements provide for a 5%
increase in monthly rent every 3-5 years. According to the terms of the lease
agreements, we pay the property insurance premiums on these facilities. We
believe that the terms of the leases are no less favorable than those available
to us from unaffiliated third parties.

            All of these facilities are subject to a long-term lease agreement
between Macpell's subsidiary and the Israel Land Authority. Under the terms of
such lease agreement, Macpell's affiliate was granted a 49-year lease over such
property.

PRODUCTS PURCHASES FROM TEFRON

            An affiliate of Macpell purchases from us various products and sells
them in the local Israeli market and abroad. In 2000 our sales to this affiliate
were approximately $1.1 million, in 2001 approximately $700,000, in 2002
approximately $1 million and in 2003 approximately $1.2 million. We believe
these prices to be no less favorable than those available to us from
unaffiliated third parties. See Note 22 of the Notes to the Consolidated
Financial Statements.

MACRO SHARE PURCHASE AGREEMENT

            On March 2, 2003, we entered into a share purchase agreement with
Macpell, and with Mr. Ron Grundland, pursuant to which we agreed to acquire 100%
of the outstanding ordinary shares of Macro Clothing Ltd., upon the satisfaction
of certain conditions, in consideration for the assumption by Tefron of certain
guarantees granted by the sellers in favor of Macro in the aggregate amount of
approximately $530,000, subject to adjustments. Pursuant to the terms of the
agreement, Macpell agreed to pay to us the amount of $300,000 to assume
Macpell's guarantees to the bank. In addition, Macpell agreed to assign to us
its rights to a loan to Macro in the amount of approximately NIS 2.4 million.
The consummation of the transactions is subject to the approval of Macpell
shareholders. Macro manufactures, markets and sells of swimsuits and beachwear.


                                       56
<PAGE>


7C.   INTERESTS OF EXPERTS AND COUNSEL.

      Not Applicable.

ITEM 8.     FINANCIAL INFORMATION

CONSOLIDATED FINANCIAL STATEMENTS

      See Item 18.

OTHER FINANCIAL INFORMATION

            In 2003, the amount of our sales of products exported from Israel
was approximately $115.8 million, which represents 97.7% of our total sales from
Israel. Alba's sales in 2003 were $60.9 million.

LEGAL PROCEEDINGS

            Except as described below, there are no material pending legal
proceedings, other than ordinary routine litigation incidental to the business,
to which we or any of our subsidiaries or which any of its properties are
subject.

            On March 5, 2003, a lawsuit was filed by a former employee of
Tefron, in the Tel Aviv District Labor Court, alleging for compensation relating
to the termination of his employment with Tefron in 2002, in an aggregate amount
of NIS 5 million. We intend to defend against all allegations included in the
complaint. We do not expect this lawsuit to have a material adverse effect on
our business or financial condition.

DIVIDEND POLICY

            Although we have no established dividend policy, in the past we have
distributed dividends to our shareholders from our accumulated earnings. We have
not declared or paid any dividends for the last three fiscal years.

ITEM 9      THE OFFER AND LISTING

9A.   OFFER AND LISTING DETAILS

            Since the initial public offering of our Ordinary Shares on
September 24, 1997, our Ordinary Shares have been traded on the New York Stock
Exchange, or NYSE, under the symbol "TFR." Prior to the offering, there was no
market for our Ordinary Shares. There is no non-United States trading market for
our Ordinary Shares.

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

<TABLE>
<CAPTION>

                                      High       Low
                                      ----       ----
<C>                                   <C>        <C>
1999 ..............................   13.87      6.50
2000 ..............................   20.25      3.31
2001 ..............................    5.44      1.21
2002 ..............................    4.70      1.15
2003 ..............................    4.80      3.10
</TABLE>


                                       57
<PAGE>


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

<TABLE>
<CAPTION>

                            2002
                            ----
<S>                                            <C>      <C>
First quarter ...............................  2.00     1.15
Second quarter ..............................  4.20     1.25
Third quarter ...............................  4.70     2.90
Fourth quarter ..............................  4.05     3.00
</TABLE>
<TABLE>
<CAPTION>

                            2003
                            ----
<S>                                            <C>      <C>
First quarter ...............................  3.69     3.26
Second quarter ..............................  4.80     3.42
Third quarter ...............................  4.14     3.10
Fourth quarter ..............................  4.42     3.32
</TABLE>
<TABLE>
<CAPTION>

                            2004
                            ----
<S>                                             <C>     <C>
First quarter (until March 29, 2004) ........   6.3     4.31
</TABLE>

            As reported on the NYSE, the monthly high and low sales prices for
our Ordinary Shares for the last six months were as follows:
<TABLE>
<CAPTION>

                            2003
                            ----
<S>                                             <C>     <C>
October .....................................   3.75    3.32
November ....................................   4.14    3.50
December ....................................   4.42    3.65
</TABLE>
<TABLE>
<CAPTION>

                            2004
                            ----
<S>                                             <C>     <C>
January .....................................   4.80    4.31
February ....................................   5.47    4.60
March (until March 29, 2004) ................   6.30    5.80
</TABLE>



            On September 8, 1998, we announced our intention to repurchase
through a stock repurchase program up to one million of our outstanding Ordinary
Shares. As of March 29, 2004, we had repurchased and hold in our treasury
997,400 Ordinary Shares.

            In February 2003, we were notified that we had been approved for
continued listing on the NYSE, subject to the successful implementation of the
business plan that we submitted to the NYSE. In March 2004, we were informed by
the NYSE that it intends to publish for public comments amended continued
listing criteria requiring a minimum stockholders' equity of $75 million and
minimum market capitalization of $75 million. See "Item 3D. Risk Factors- If our
ordinary shares are delisted from The New York Stock Exchange, the liquidity and
price of our ordinary shares and our ability to issue additional securities may
be negatively affected."

9B.   PLAN OF DISTRIBUTION

            Not Applicable.

9C.   MARKETS

            Our Ordinary Shares are traded on the New York Stock Exchange.

9D.   SELLING SHAREHOLDERS

            Not Applicable.


                                       58
<PAGE>


9E.   DILUTION

            Not Applicable.

9F.   EXPENSES OF THE ISSUE

            Not Applicable.

ITEM 10.    ADDITIONAL INFORMATION

10A.  SHARE CAPITAL

            Not applicable.

10B.  MEMORANDUM AND ARTICLES OF ASSOCIATION

      SECURITIES REGISTERS

            Our transfer agent and register is American Stock Transfer & Trust
Company and its address is 40 Wall Street, New York, New York 10005. 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 and by the board of
directors itself. Those transactions that require such approval pursuant to a
company's articles of association must be approved by its board of directors. In
certain circumstances, audit committee and shareholder approval also is
required. 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. Pursuant to the Companies
Law, the audit committee is to be comprised of at least three members appointed
by the board of directors, which members must include all of the external
directors, but excluding the chairman of the board of directors, a general
manager, the chief executive officer, a controlling shareholder and any director
employed by the company or who provides services to the company on a regular
basis.

            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.


                                       59
<PAGE>


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

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

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

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

DESCRIPTION OF SECURITIES

            We are authorized to issue 49,995,500 Ordinary Shares, par value NIS
1.0 per share, and 4,500 Ordinary B Shares, par value NIS 1.0 per share. Upon
consummation of the initial public offering of the Ordinary Shares, the Ordinary
B Shares were converted into Deferred Shares, all of which are issued and
outstanding and held of record by two holders.

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

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

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


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

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

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

            An ordinary resolution (such as a resolution for the election of
directors, the declaration of dividends or the appointment of auditors) requires
approval by the holders of a majority of the voting rights represented at the
meeting, in person or by proxy, and voting thereon. A special or extraordinary
resolution (such as a resolution amending our Memorandum of Association or
Articles of Association or approving any change in capitalization, merger,
consolidation, winding-up, authorization of a class of shares with special
rights 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.

            DEFERRED SHARES. Pursuant to our Articles of Association, our
Ordinary B Shares automatically converted into Deferred Shares upon consummation
of our initial public offering. Subsequent to the conversion, there were 4,500
Deferred Shares outstanding. The Deferred Shares are non-transferable and
entitle their holders, upon our liquidation, to the par value of the shares but
to no voting, dividend or any other rights.


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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.

FIMI AGREEMENTS

            We have entered into a Share Purchase Agreement (the "Tefron
Agreement") with Norfet, Limited Partnership (the "Investor"), which is wholly
owned by (i) N.D.M.S. Ltd., a company wholly owned by FIMI Opportunity Fund,
L.P., (ii) FIMI Israel Opportunity Fund, Limited Partnership and (iii) Migdal
Insurance Company and Shamir Insurers Investment Company, among others, pursuant
to which we agreed to issue to the Investor 3,529,412 Tefron ordinary shares for
a base price of $4.25 per share and a base aggregate consideration of $15
million.

            As a condition to the closing of the transactions under the Tefron
Agreement, the Investor will also acquire an additional 1,365,000 Tefron
ordinary shares in the aggregate from Arwol and Macpell pursuant to an Agreement
(the "Macpell Agreement") by and among Macpell, Arwol and the Investor. It is
contemplated that immediately following the closing of the Tefron Agreement and
the Macpell Agreement, the Investor will hold 4,894,412, or approximately 30.7%
of the outstanding share capital of Tefron, without taking into account the
Equity Shares.

            Tefron, the Investor, Arwol and Macpell will execute at the closing
of the Tefron Agreement and the Macpell Agreement a Registration Rights
Agreement substantially the same as that approved by the shareholders of Tefron
at a shareholders meeting held on July 30, 2003 and entered into by Tefron,
Arwol and Macpell in November 2003. The new Registration Rights Agreement, which
replaces the existing Registration Rights Agreement, also grants the parties the
right to demand a Form F-3 "shelf registration" under certain conditions.

            Below is a description of the principal terms of these transactions.
The Tefron Agreement, the Registration Rights Agreement, and all transactions
contemplated by such agreements to which Tefron is a party are collectively
referred to as the "FIMI Transactions".

      TEFRON AGREEMENT

            ISSUE PRICE ADJUSTMENT. Under the terms of the Tefron Agreement, in
the event Tefron's earnings before income tax, depreciation and amortization
("EBITDA") for 2004 (excluding (i) the EBITDA of Alba Health LLC ("AlbaHealth")
to the extent that it exceeds zero and (ii) any increase in EBITDA of Alba
Waldensian, Inc. as a result of the exercise of the put option by AlbaHealth
described below) as set forth in Tefron's audited consolidated financial
statements for the year ending on December 31, 2004 is less than $23 million,
then the price per share of $4.25 will be adjusted as follows: (i) if Tefron's
EBITDA for 2004 is equal to or less than $16 million, then the share price per
share will be reduced retroactively by $0.75 (to $3.50), and if the Company's
EBITDA for 2004 is higher than $16 million but lower than $23 million, then the
share price reduction will be calculated in accordance with the following
formula:

            Price Per Share = 4.25 - 0.75*[x]

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

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

            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 from Tefron and Macpell and
Arwol for cash or publicly traded securities (excluding publicly traded
securities in connection with a merger or reorganization of Tefron), at an
average price of at least $9.22 per share (after adjustments for dividends,
share combinations and splits). The amount of the increase will be equal to the
difference between the average sale price and the threshold of $9.22, provided
that in any event, an upwards adjustment will be no more than $0.75 per such
sold 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.


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            The adjustment mechanism described in the immediately preceding
paragraph will also apply in respect of the four-year period following the
closing of the Tefron Agreement and the Macpell Agreement, but in such event,
the investor average sale price must exceed $11.60 per shares (rather than $9.22
per share) for adjustment to apply.

            ALBA PUT OPTION. The Tefron Agreement provides that Tefron is
required to provide the Investor with a letter of undertaking from Alba, a
wholly owned subsidiary of Tefron, to exercise its put option in respect of
AlbaHealth, granted pursuant to a Put Agreement dated September 6, 2003,
immediately following September 2004 as soon as AlbaHealth's EBITDA for four
consecutive quarters equals or exceeds $8 million. However, Alba will not be
required to exercise the put option for so long as (i) Tefron's total
consolidated debt is equal to or is lower than $50 million (of which no more
than $30 million may be long term debt) and (ii) neither Alba nor Tefron or its
subsidiaries is in default under any financial covenant in loan agreement(s) to
which it is a party.

            LIMITS ON EQUITY LINE OF CREDIT. Tefron undertook not to exercise
any right to issue shares to a third party investor (or its affiliates) under an
equity line of credit without the consent of the Investor, unless such issuance
is at a price of no less than $4.6 per share or if the issuance is required in
order for Tefron to satisfy covenants relating to shareholders equity under
company loan agreements or if the issuance is required for Tefron to satisfy
certain NYSE listing requirements. Notwithstanding the foregoing, Tefron may not
issue to such third party investor (or its affiliates) an aggregate sum of more
than 12% of Tefron's issued capital without the consent of the Investor.

            LIMITS ON EQUITY INVESTMENT PRIOR TO CLOSING. Tefron may enter into
an agreement with a third party investor(s) (the identity of which must be
approved in advance by the Investor), which agreement will provide for the
purchase by such investor(s) of Tefron ordinary shares at a price per share of
at least $4.65, and an aggregate purchase price of up to $7,000,000. The closing
of any such contemplated equity investment may not take place prior to the
closing of the Tefron Agreement.

            CONDITIONS TO CLOSING. Performance of the Tefron Agreement is
subject to the satisfaction of the following conditions, among others:

                (a) approval of the Tefron Agreement at the general meeting of
                shareholders of Tefron;

                (b) that Macpell and Arwol jointly hold more than 50% of
                Tefron's ordinary shares immediately prior to closing;

                (c) concurrent closing of the sale of Tefron shares under the
                Macpell Agreement;

                (d) approval by the general meeting of shareholders of Tefron of
                the payment of an annual management fee to the Investor in the
                sum of (i) $172,000 plus VAT per annum until Tefron's first
                annual general shareholders meeting in 2005 and (ii) $120,000
                plus VAT per annum as of such meeting, in each case in
                consideration for non-exclusive strategic guidance and
                consulting services to be provided on an as needed basis, as
                determined by Tefron and the Investor from time to time;

                (e) the approval by the general meeting of shareholders of
                Tefron of an amendment to the consulting agreement between
                Tefron and New York Delight Ltd., wholly owned by Arie Wolfson,
                which will provide that as of the date on which Mr. Wolfson
                ceases to act as chairman of the board of directors of Tefron,
                and for so long as Mr. Wolfson continues to provide consulting
                services to Tefron, the annual amounts payable pursuant to the
                consulting agreement will be reduced from $253,800 to $120,000
                per annum, each plus VAT;


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                (f) the board of directors of Tefron shall have resolved to
                cease all payments (including share option grants) to any of its
                directors (with the exception of the independent directors) on
                account of their service as directors of Tefron, excluding, for
                the avoidance of doubt, payment to New York Delight Ltd., a
                company beneficially owned by Mr. Wolfson, or any other party
                designated by Mr. Wolfson for services provided by Mr. Wolfson
                as chairman of the board, pursuant to the consulting agreement
                described in clause (e) above);

                (g) Tefron shall have executed new financial arrangements with
                its bank lenders, under certain minimum terms;

                (h) the average closing price per share on the NYSE over the
                consecutive 30 trading days immediately prior to the date of
                closing does not fall below $3.14. Should the price fall below
                that threshold, the investor will be entitled to postpone the
                date of completion (but in such a case, Tefron shall be entitled
                to give notice of rescission of the agreement) for up to 60 days
                after such date, and if, during such 60 day period, the average
                closing price per share over any 30 consecutive trading days
                increases above such threshold, completion of the agreement will
                be required; and

                (i) the investor will have received bank financing in the amount
                and on terms no less favorable than that set forth in draft loan
                documents received.

            If any of the above conditions is not fulfilled within 120 days of
the date of the Tefron Agreement, the agreement will expire without any party
having any rights or claims.

            APPROVAL OF RELATED AMENDMENTS. For so long as the provisions of the
Macpell Agreement described below under "- Macpell Agreement - Agreements of the
Parties" are in effect, any change in any agreement or arrangement between
Tefron and Arwol, Macpell or Wolfson in effect at the time of closing or the
adoption of any new agreement or arrangement between Tefron and such parties
will require investor's prior approval. Similarly, any amendment to the
management fee arrangement with investor or the adoption of any new agreement or
arrangement between Tefron and the investor will require approval of Macpell and
Arwol.

            INCREASE IN SHARES AVAILABLE FOR ISSUANCE UNDER TEFRON LTD. 1997
SHARE OPTION PLAN. As a result of the transactions contemplated by the Tefron
Agreement, the shareholders of Tefron were asked to increase the plan by 446,274
ordinary shares, which was approved by the shareholders of Tefron on March 31,
2004.

      REGISTRATION RIGHTS AGREEMENT

            The Investor will enter into a Registration Rights Agreement with
Tefron, Arwol and Macpell on the date of closing with respect to the ordinary
shares that the Investor acquires pursuant to the Tefron Agreement and the
Macpell Agreement replacing the existing Registration Rights Agreement. The
Registration Rights Agreement will be substantially the same as the Registration
Rights Agreement approved by the shareholders of Tefron and entered into by
Company, Arwol and Macpell in November 2003, other than (i) the insertion of a
new provision granting to the Investor, Arwol and Macpell the right, once every
18 months, to request a registration on Form F-3 (short form registration
statement) when the aggregate net proceeds from the sale of such holders'
securities is at least $3,000,000, in which event Tefron would be obligated keep
such registration statement effective so as to permit sale of ordinary shares
pursuant to the Registration Statement for a period of two years, subject to
certain limitations, and (ii) the amendment of an existing provision granting to
the Investor, Arwol and Macpell the right to request a registration even though
Tefron is not eligible to use Form F-3 (short form registration statement), in
which event Tefron would be obligated keep such registration statement effective
so as to permit sale of ordinary shares pursuant to the Registration Statement
for a period of 120 days, subject to certain limitations.


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            In connection with the execution of the Share Purchase Agreement
with Leber Partners, L.P., we agreed to enter into a Registration Rights
Agreement with Leber Partners, the Investor, Arwol and Macpell which would
replace, and be on substantially the same terms as, the Registration Rights
Agreement that we agreed to execute in connection with the Tefron Agreement. See
"- Leber Partners, L.P. - Registration Rights Agreement."

      MACPELL AGREEMENT

            At the same time as the Investor proposed to Tefron to enter into
the Tefron Agreement, the Investor proposed to Arwol to purchase from it an
additional amount of approximately 1.365 million Ordinary Shares at the base
price of $5.538 per share, and concomitantly, and as a condition to the said
purchase, to enter into a shareholders agreement. Arwol offered Macpell to join
it and take part in the sale transaction. Under the terms of the Macpell
Agreement among the Investor, Arwol and Macpell, it was agreed that the base
price for purchase of the shares, would be $5.538 per share and the aggregate
purchase price would be $7,559,370.

            PURCHASE PRICE ADJUSTMENT. The purchase price of $5.538 per share
under the Macpell Agreement is subject to adjustment downwards or upwards on
substantially the same terms as the adjustment of the issue price under the
Tefron Agreement, as described above; provided that if Tefron's EBITDA for 2004
is between $16 million and $23 million, then the share price reduction will be
calculated in accordance with the following formula:

            Price per share = 5.538 - 0.75*[x]

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

            CONDITIONS TO CLOSING. Performance of the Macpell Agreement is
subject to the satisfaction of the following conditions, among others:

            (a) the approval by the general meeting of shareholders of Tefron of
            the election to Tefron's seven-member board of directors (not
            including external directors), of three members designated by the
            investor, described below; and

            (b) the closing of the sale of the shares under the Tefron Agreement
            shall have taken place.

            TERMINATION. The Macpell Agreement will become null and void if,
            among others:

            (a) the closing of the sale of the shares under the Tefron Agreement
            does not take place within 120 days (or such longer period agreed by
            the parties) of February 17, 2004; or

            (b) if Macpell is required to convene a general meeting of its
            shareholders for approving the transactions contemplated by the
            Macpell Agreement and such general meeting does not approve such
            transactions.

            AGREEMENTS OF THE PARTIES.

               COMPOSITION OF THE BOARD OF DIRECTORS. Arwol, Macpell and the
Investor agreed to vote all of Tefron ordinary shares owned or controlled by
each of them for the election to Tefron's Board of Directors of: (i) three
members (of whom at least one will qualify as an "independent director" under
the NYSE rules) and, subject to applicable law - one external director, that
shall be nominated by the Investor (one of whom shall be a woman), (ii) three
members (of whom at least one will qualify as an independent director and a
financial expert under the NYSE rules)and, subject to applicable law, one
external director, that shall be nominated by Arwol and Macpell, and (iii)
Tefron's chief executive officer.


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            CHAIRMAN OF THE BOARD OF TEFRON. Arwol, Macpell and the Investor
confirm in the Macpell Agreement that ArieWolfson has agreed to remain as
Chairman of the Board until Tefron's first Annual General Meeting of
Shareholders in calendar year 2005 (to be convened by no later than July 31,
2005). Subject to the provisions of applicable law, on or before such
shareholders meeting, Arwol, Macpell and the Investor will endeavor to agree on
the identity of the Chairman as of and following such shareholders meeting;
PROVIDED, HOWEVER, that in the event they are unable to agree on the identity of
the Chairman, each of the Investor, on the one hand, and Macpell and Arwol, on
the other hand, will be entitled to designate the Chairman for an 18 month
period, provided that the Investor will be the first to exercise such right
commencing from Tefron's first Annual General Meeting of Shareholders in the
year 2005.

            EXECUTIVE COMMITTEE. Arwol, Macpell and the Investor agreed to
appoint an Executive Committee for advisory purposes, comprising of Messrs. Arie
Wolfson and Ishay Davidi (or, an alternate member appointed by Arwol and Macpell
(if Arie Wolfson cannot fulfill his duties) or an alternative member appointed
by the Investor (if Ishay Davidi cannot fulfill his duties). Decisions of the
Executive Committee do not bind Tefron in any way.

            RIGHTS OF FIRST OFFER; TAG-ALONG. The Macpell Agreement contains
provisions which require that if Arwol, Macpell or the Investor wishes to
transfer ordinary shares of Tefron to a third party, it must first make an offer
to transfer the shares the other parties, subject to certain exceptions. The
agreement also gives the right to the offerees to sell certain of their Company
ordinary shares to the proposed purchaser of the ordinary shares rather than
accepting the offer from the transferor.

            DRAG ALONG RIGHTS. The Macpell Agreement contains provisions which
provide that if any of Arwol, Macpell or the Investor secures a bona fide offer
from any third party offeror to purchase all of the Ordinary Shares then held by
such party, in cash or publicly traded securities, at a price per share
(adjusted for allocation of dividend, bonus shares, splits etc.) of not less
than $10 (provided that such price per share shall not be lower than 80% of the
average of the closing prices of Tefron's shares on the NYSE over the
consecutive 60 trading days immediately preceding such sale), and the offeror
conditions its offer on the acquisition of all the shares held by the other two
parties to the Macpell Agreement at such time, such other two parties will be
required under certain conditions to sell all of the shares of Tefron then held
by them to such offeror, at the same price and upon the same terms and
conditions as those to which the sale by the initiator is subject.

            DISCUSSIONS PRIOR TO MEETINGS. Arwol, Macpell and the Investor
agreed in the Macpell Agreement to meet regularly and in any event prior to each
General Meeting of shareholders of Tefron and to review, discuss and attempt to
reach a unified position with respect to principal issues on the agenda of each
such meeting. The parties clarified that this should not be interpreted as
forcing any party to act or vote according to any position stated at such prior
meeting.

            DIVIDEND DISTRIBUTION. The parties agreed to formulate a mutually
agreeable dividend distribution policy for Tefron, which policy shall provide
for the distribution of an annual amount, net after taxes (including withholding
tax), of at least $2 million with respect to calendar year 2004, and at least
$4.5 million, effective as of calendar year 2005, and they will utilize their
best efforts to cause Tefron to adopt such policy, subject to: (a) the
provisions of applicable law (including NYSE requirements); (b) any undertaking
and commitment made or to be made towards banks and other creditors; (c) the
decision of Tefron's Board of Directors, taking into account Tefron's financial
needs, investments and all other relevant aspects.


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            MANAGEMENT FEE. Arwol, Macpell and the Investor agreed in the
Macpell Agreement to vote all of Tefron ordinary shares owned or controlled by
them in order to cause Tefron (i) to pay the Investor (or any of its affiliates)
the Management Fees (described above under "the Tefron Agreement"), and (ii) as
of the date on which Arie Wolfson no longer serves as the Chairman of Tefron's
Board of Directors, to pay Arie Wolfson or his designees for their services to
Tefron, an aggregate annual amount of $120,000.

            PURCHASE OF SHARES FROM DISCOUNT INVESTMENT COMPANY ("DIC"). Any
party to the agreement wishing to purchase Company ordinary shares from DIC will
be required to offer to the other parties the right to participate in such
purchase, at the same price per share and upon the same terms and conditions.

            TERM OF AGREEMENTS OF THE PARTIES. All agreements of Arwol, Macpell
and the Investor described above under"Agreements of the Parties" above will
remain in effect until the fifth anniversary of the closing of the transactions
under the Macpell Agreement. The Investor will cease to have any rights under
these agreements as of the first date on which it holds less than 10% of
Tefron's issued share capital (on a non-diluted basis), and will cease to have
any obligation under these agreements as of the first date on which the Investor
holds less than 5% of Tefron's issued share capital (on a non-diluted basis).
Each of Arwol and Macpell will cease to have any rights under "Agreements of the
Parties" above as of the first date in which they hold (in the aggregate) less
than 10% of Tefron's issued share capital (on a non-diluted basis), and each of
Arwol and Macpell will cease to have any obligation under these agreements as of
the first date on which such party holds less than 5% of Tefron's issued share
capital (on a non-diluted basis).

LEBER PARTNERS L.P.

      SHARE PURCHASE AGREEMENT

            We have also entered into a Share Purchase Agreement with Leber
Partners, L.P., which is a group of investors represented by Mr. Zvi Limon.
Subject to the closing of the Tefron Agreement and the Macpell Agreement within
120 days of March 3, 2004, the investors agreed under this agreement to invest
$5 million in cash in Tefron for approximately 1.07 million ordinary shares of
Tefron at a base price of $4.65 per share. We have an option to issue to the
investors, within 90 days from the closing of this transaction, additional
shares at the same price and on the same terms for an additional investment of
up to $2 million for up to 430,107 additional ordinary shares. According to the
agreement, the base price per share will be subject to adjustments and may be
increased or reduced by up to $0.75 per share.

            ISSUE PRICE ADJUSTMENT. The purchase price of $4.65 per share is
subject to adjustment downwards or upwards on substantially the same terms as
the adjustment of the issue price under the Tefron Agreement and the Macpell
Agreement, as described above; provided that if Tefron's EBITDA for 2004 is
between $16 million and $23 million, then the share price reduction will be
calculated in accordance with the following formula:

            Price per share = 4.65 - 0.75*[x]

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

            Under the terms of the share purchase agreement, the issue price per
share will be increased in the event that, during the three-year period
following the closing of the agreement, the investors sell for cash or publicly
traded securities (excluding publicly traded securities in connection with a
merger or reorganization of Tefron) at least 20% of the total number of shares
they purchased from Tefron at an average price of at least $9.22 per share
(after adjustments for dividends, share combinations and splits). The amount of
the increase will be equal to the difference between the average sale price and
the threshold of $9.22, provided that in any event, an upwards adjustment will
be no more than $0.75 per such sold share. The amount of any increase is to be
paid to Tefron on the third anniversary of the closing.


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            The adjustment mechanism described in the immediately preceding
paragraph will also apply in respect of the four-year period following the
closing, but in such event, the average sale price must exceed $11.60 per shares
(rather than $9.22 per share) for adjustment to apply.

      REGISTRATION RIGHTS AGREEMENT

            In connection with the execution of the Share Purchase Agreement
with Leber Partners, we agreed to enter into a Registration Rights Agreement
with Leber Partners, the Investor under the Tefron Agreement, Arwol and Macpell.
This Registration Rights Agreement would replace, and be on substantially the
same terms as, the Registration Rights Agreement that we agreed to execute in
connection with the Tefron Agreement, other than as provided below. In addition
to the rights to be granted to all of the shareholders that are to be party to
the Registration Rights Agreement, Leber Partners would have the right to
request a registration (even though we would not be eligible to use a short form
registration) of all, but not less than all, of the ordinary shares then held by
Leber Partners, but in any event not less than 500,000 ordinary shares. This
would be below the threshold required for the other shareholders (which would be
a request from holders of at least 25% of the aggregate number of ordinary
shares subject to the agreement at such time to register a minimum of five
percent (5%) of the share capital of Tefron then outstanding but not less than
500,000 Ordinary Shares).

EQUITY LINE CREDIT FACILITY

            On March 9, 2004, we entered into an equity line credit facility
with Brittany Capital Management Ltd. ("Brittany"), an entity advised by
Southridge Capital Management LLC . Under the agreement, we have an option to
call funds of up to the lesser of $15 million or 19.9% of our outstanding share
capital over the next three years. Under the financing facility, we will be
entitled to issue shares to Brittany from time to time, at our own election,
subject to certain minimum and maximum limitations, but in no event will
Brittany be obligated to own more than 4.99% of our ordinary shares at any one
time. The price to be paid by Brittany will be at a discount of 6% to the market
price of our ordinary shares (as calculated under the agreement) during a period
prior to the issuance of the shares. The "market price" under the agreement is
calculated to be the average of the lowest closing prices for any four trading
days (not necessarily consecutive) during the ten trading day period immediately
following the date on which we deliver a written notice to Brittany setting
forth the dollar amount with respect to which we will require Brittany to
purchase our Ordinary Shares.

            Before drawing on the equity line, we must satisfy certain closing
conditions, including the effectiveness of a registration statement that we must
file relating to the shares to be issued to Brittany. In addition, under our
agreement with Norfet, Limited Partnership described above under "- FIMI
Agreements - Tefron Agreement", we require the consent of Norfet for the
issuance of shares under an equity line of credit if such issuance is at a price
of less than $4.6 per share unless the issuance is required in order for us to
satisfy covenants relating to shareholders equity under company loan agreements
or to satisfy certain NYSE listing requirements. Notwithstanding the foregoing,
the issuance under the equity line of an aggregate sum of more than 12% of our
issued capital will also require the consent of Norfet.

            We expect that we will apply any proceeds from the equity line
credit facility for investments in equipment and for working capital.

ALBA CREDIT AGREEMENT

      To finance the acquisition of Alba, AWS, our wholly-owned subsidiary
which merged with and into Alba following our tender offer for Alba, entered
into a credit agreement, dated as of December 13, 1999, with Bank Hapoalim B.M.
and the Israel Discount Bank of New York, as subsequently amended. The Credit
Agreement provided for a tender offer credit facility of up to $70.5 million.


                                       68
<PAGE>


      The Credit Agreement also provides for a seven-year term loan
facility of up to $65.5 million, which was drawn down as a single borrowing at
the time of the merger and amortizes in 11 consecutive semi-annual installments
commencing on January 15, 2002. In addition, the Credit Agreement further
provides a one-year revolving loan facility of up to $5.0 million. The proceeds
from the term loan facility and the revolving loan facility were used to repay
the tender offer credit facility, which was used initially to finance the
acquisition of Alba and to refinance certain indebtedness of Alba.

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

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

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

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

      INTEREST RATE. The tender offer credit facility, term loan facility and
revolving loan facility bear interest at 1.375% over LIBOR.

      PREPAYMENT/REPAYMENT. The amounts outstanding under the loan facilities
may be prepaid at any time, subject to certain limitations. The amounts
outstanding under the credit facility must be repaid in amounts equal to:

            o  one half of the net cash proceeds from issuance or sale of any
               capital stock of Alba or its subsidiaries to a third party;

            o  the net cash proceeds from certain incurrence of debt by Alba or
               its subsidiaries for borrowed money;

            o  net cash proceeds from certain asset sales by Alba or its
               subsidiaries; and

            o  net cash proceeds from property insurance policies in excess of
               the estimated cost to replace the insured property.

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

            o  incurring additional indebtedness, other than certain permitted
               indebtedness;

            o  creating liens other than certain permitted encumbrances;

            o  creating or assuming any guarantee obligations other than certain
               permitted guarantee obligations;

            o  merging, consolidating, amalgamating or entering into any other
               form of business combination with a third party, or liquidating
               or dissolving;

            o  selling assets, subject to certain exceptions which include sale
               of assets in the ordinary course of business or in amounts not
               exceeding $250,000 in any twelve-month period;

            o  declaring or setting aside funds for payment of dividends;

            o  making capital expenditures, subject to certain exceptions such
               as capital expenditures in the ordinary course of business;

            o  making investments, loans or advances other than as specified;

            o  entering into transactions with affiliates unless certain
               requirements are satisfied.


                                       69
<PAGE>

      The Credit Agreement requires that we maintain certain financial ratios
related to shareholders' equity and operating results. The Credit Agreement also
contains customary events of defaults, including the failure to pay interest or
principal, material breach of any representation or warranty or breach of any
covenant, cross-defaults, bankruptcy, a judgment in excess of $100,000 or a
change in control event relating to Tefron or Alba or its subsidiaries.

ALBAHEALTH CREDIT AGREEMENT

      In connection with the formation of AlbaHealth, AlbaHealth entered into a
credit agreement, dated September 6, 2002, with GE Capital, pursuant to which GE
Capital provided AlbaHealth credit facility of up to $18 million. The AlbaHealth
Credit Agreement provides for a term loan facility of up to $15 million, which
was drawn down as a single borrowing upon the consummation of such agreement.
The term loan facility amortizes in 20 consecutive quarterly installments,
commencing on January 1, 2003 and ending on September 6, 2007, each in the
amount of $750,000. In addition, the AlbaHealth Credit Agreement provides for a
five-year revolving loan facility of up to $3.0 million. The proceeds from the
term loan facility and the revolving loan facility were and are to be used,
among other purposes, to repay amounts due to the bank lenders under the portion
of the Alba Credit Agreement that was assigned by Alba to AlbaHealth and for
working capital purposes.

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

            o  a lien on all of its existing and after-acquired personal and
               real property of AlbaHealth, and

            o  a first priority security interest over all of the interests in
               AlbaHealth held by its members, including Alba, and any
               additional indebtedness arising in the future by AlbaHealth or
               any of its subsidiaries in favor of such members.

      INTEREST RATE. Interest on the revolving credit facility and the term loan
facility shall be paid, at the election of AlbaHealth, at one of the following
rates:

            o  a floating rate equal to the higher of (i) a base rate quoted by
               75% of the largest banks in the U.S. and (ii) the federal funds
               rate plus 50 basis points, in each case plus a margin per annum
               initially equal to 3.00%, subject to reduction upto 2.50%
               depending on a leverage ratio measured by the ratio of funded
               debt to annualized EBITDA; or

            o  the LIBOR rate plus a margin per annum initially equal to 4.50%,
               subject to reduction up to 4.00% depending on the leverage ratio.

      PREPAYMENT/REPAYMENT. The amounts outstanding under the revolving credit
facility and the term loan facility may be voluntary prepaid by AlbaHealth at
any time, subject to certain limitations and payments of fees. In addition, the
amounts outstanding under the credit facility must be repaid in amounts equal
to:

            o  50% of the excess cash flow (as defined in the agreement) for the
               preceding year, after the delivery of the annual reports of
               AlbaHealth with respect to each year, or, if the leverage ratio
               for such preceding year is less then 100%, 25% of the excess cash
               flow for such preceding year;

            o  75% of the net cash proceeds from issuance of interests in of
               AlbaHealth;

            o  net cash proceeds from the sale of any interests AlbaHealth holds
               in any of its subsidiaries; and

            o  net cash proceeds from certain asset disposals by AlbaHealth.


                                       70
<PAGE>


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

            o  incurring additional indebtedness, other than certain permitted
               indebtedness;

            o  creating any lien on or with respect to its accounts, properties
               or assets except for permitted encumbrances;

            o  creating or assuming any guarantee obligations other than certain
               permitted guarantee obligations;

            o  merging, consolidating, amalgamating or entering into any other
               form of business combination with a third party, or liquidating
               or dissolving;

            o  selling assets, subject to certain exceptions;

            o  declaring or setting aside funds for payment of dividends or
               other similar restricted payments except for permitted payments
               and distribution;

            o  making investments, loans or advances other than as specified;

            o  entering into transactions with affiliates which are not are not
               in the ordinary course of business unless certain requirements
               are satisfied; and

            o  changing its business or altering its capital structure other
               than as specified.

      FINANCIAL COVENANTS. The AlbaHealth credit agreement requires AlbaHealth
to comply with certain financial covenants, including with respect to (i)
maximum permitted capital expenditures for each; (ii) minimum annual fixed
charge coverage ratio; (iii) minimum annual EBITDA; and (iv) maximum leverage
ratio.

      EVENTS OF DEFAULT. The AlbaHealth Credit Agreement contains customary
events of default, including the failure to pay amounts thereunder, breach of
other obligations, any representation and warranty being incorrect or misleading
in any respect, cross-defaults, certain insolvency events or ceasing to carry on
business, change of control of AlbaHealth or any of its subsidiaries, breach of
the contribution agreement and other related agreements, and any default in the
observance or breach of any covenants.

10D.  EXCHANGE CONTROLS

      Nonresidents of Israel who purchase our Ordinary Shares with US 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.


                                       71
<PAGE>


10E.  TAXATION

      The following is a discussion of the material United States federal and
Israeli income tax consequences to Qualified Holders holding Ordinary Shares.
This discussion is based upon existing United States federal and Israeli income
tax law, including legislation, regulations, administrative rulings and court
decisions, as in effect on the date of this Annual Report, all of which are
subject to change, possibly with retroactive effect. For purposes of this
discussion, in general, a "Qualified Holder" means a beneficial owner of
Ordinary Shares that is a resident of the United States for purposes of the
United States-Israel income tax treaty, or the Income Tax Treaty, whose holding
of Ordinary Shares is not related in any way to properties or activities located
in Israel and who is not subject to any limitation on benefits restrictions
under the Income Tax Treaty. This discussion assumes that the Qualified Holder
holds Ordinary Shares as a capital asset. This discussion does not address all
aspects of United States federal and Israeli income taxation that may be
relevant to all Qualified Holders in light of their particular circumstances,
including for example Qualified Holders who hold or at any time have held 10
percent or more of our voting power, Qualified Holders whose stock was acquired
pursuant to the exercise of an employee stock option or otherwise as
compensation or Qualified Holders who are subject to special treatment under
United States federal income tax laws (for example, financial institutions,
insurance companies, tax-exempt organizations and broker-dealers). This
discussion also does not address any aspects of state, local or non-United
States (other than certain Israeli) tax law.

      EACH QUALIFIED HOLDER IS STRONGLY URGED TO CONSULT HIS OR HER TAX ADVISOR
AS TO THE UNITED STATES FEDERAL AND ISRAELI INCOME TAX CONSEQUENCES OF HOLDING
ORDINARY SHARES, INCLUDING THE PARTICULAR FACTS AND CIRCUMSTANCES THAT MAY BE
UNIQUE TO SUCH QUALIFIED HOLDER, AND AS TO ANY OTHER TAX CONSEQUENCES OF HOLDING
ORDINARY SHARES.

      CAPITAL GAINS

      Israeli law imposes a capital gains tax on the sale of capital assets.
Under current Israeli law, capital gains resulting from sales of our Ordinary
Shares are generally taxed at a rate of 15%. However, while final clarifying
regulations have not yet been issued, a Qualified Holder will be exempted from
Israeli capital gains tax on the sale of our Ordinary Shares, as long as those
Ordinary Shares are traded in a recognize exchange. In addition, under the
Income Tax Treaty, a Qualified Holder who hold in the aggregate less then 10% of
our Ordinary Shares (subject to certain conditions), will be exempt from Israeli
capital gains tax.

      Upon a sale or other disposition of Ordinary Shares, a Qualified Holder
will recognize capital gain or loss for United States federal income tax
purposes equal to the difference between the amount realized and the Qualified
Holder's adjusted tax basis in the Ordinary Shares. In the case of an individual
Qualified Holder of Ordinary Shares, any such capital gain will be subject to a
maximum United States federal income tax rate of 20%, if the individual
Qualified Holder's holding period in the Ordinary Shares is more than 12 months.

      DIVIDENDS

      On distributions of dividends other than bonus shares (stock dividends),
for individuals, Israeli income tax at the rate of 25% (15% for dividends
generated directly or indirectly by an Approved Enterprise) is withheld at
source, unless a different rate is provided in a treaty between Israel and the
shareholder's country of residence. The Income Tax Treaty provides no relief in
this regard. There is no tax on distribution of dividends to an Israeli
corporate shareholder.

      Qualified Holders are generally subject to United States federal income
tax on dividends paid by Israeli corporations. Subject to applicable limitations
of United States federal income tax law, Qualified Holders may be able to claim
a foreign tax credit for certain Israeli income taxes paid.

      UNITED STATES INFORMATION REPORTING AND BACKUP WITHHOLDING

      Dividends on Ordinary Shares, and payments of the proceeds of a sale of
Ordinary Shares paid within the United States or through certain U.S.-related
financial intermediaries, are subject to information reporting and may be
subject to backup withholding at a 31% rate unless the Qualified Holder (1) is a
corporation or other exempt recipient or (2) provides a taxpayer identification
number and certifies that no loss of exemption from backup withholding has
occurred.


                                       72
<PAGE>


10F.  DIVIDENDS AND PAYMENT AGENTS

      Not applicable.

10G.  STATEMENTS BY EXPERTS.

      Not applicable.

10H.  DOCUMENTS ON DISPLAY

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

      As a foreign private issuer, we are exempt from the rules under the
Securities Exchange Act of 1934, as amended, prescribing the furnishing and
content of proxy statements to shareholders. 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.


                                       73
<PAGE>


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, 2003, our liabilities denominated in foreign currencies in the
amount of $14.6 million represented 9% of our total liabilities of $166.1
million. At December 31, 2003, our assets denominated in foreign currencies in
the amount of $7.5 million represented 4% of our total assets of $202.7 million.
We may from time to time utilize derivative financial instruments to manage risk
exposure to movements in foreign exchange rates. Accordingly, in 2002, a forward
exchange contract was designated as hedging instrument. We do not engage in any
speculative or profit motivated forward or derivatives activities. See "Item 3.
Key Information - 3D. Risk Factors" and "Item 5. Operating and Financial Review
and Prospects - Impact of Inflation and Currency Fluctuations."

      INTEREST RATE RISK

      Of our dollar-denominated financial liabilities at December 31, 2003,
$100.2 million were loans denominated in or linked to the dollar bearing
interest at LIBOR. As a result, our interest expenses are sensitive to changes
in LIBOR.

      Our dollar-denominated or dollar-linked financial liabilities bear
interest at 1.25% to 4.5% over LIBOR. A hypothetical ten percent shift in
interest rates would result in a decrease (or increase) in net income of
approximately $0.5 million.

ITEM 12.  DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

      Not applicable.


                                       74
<PAGE>


                                     PART II

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

           None.

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


14A. TO E. Not applicable

      ITEM 15. CONTROLS AND PROCEDURES

      (a) Disclosure Controls and Procedures. Our Chief Executive Officer and
our Chief Financial Officer, after evaluating the effectiveness of our
disclosure controls and procedures (as defined in US Exchange Act Rule
13a-15(e)) as of the end of the period covered by this Form 20-F, have concluded
that, as of such date, our disclosure controls and procedures were effective.

      (b) Internal Control Over Financial Reporting. There were no changes in
our internal control over financial reporting that occurred during the year
ended December 31, 2003 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 Zvi Greengold is an "audit
committee financial expert" as defined in Item 16A of Form 20-F.

16B.  CODE OF ETHICS

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

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

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

16C.  ACCOUNTANTS' FEES AND SERVICES

      Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global, has served
as our independent public accountants for each of the fiscal years in the
two-year period ended December 31, 2003, for which audited financial statements
appear in this Annual Report on Form 20-F.

      The following table presents the aggregate fees for professional services
and other services rendered by Kost, Forer Gabbay & Kasierer in Israel and by
Ernst & Young and by McGladrey & Pullen, LLP in the United States to Tefron in
2003 and 2002.

<TABLE>
<CAPTION>

                               US$ 2003      US$ 2002
                               --------      --------
<S>                             <C>           <C>
Audit Fees (1)                  $166,577      $181,361
Audit-related Fees (2)            41,168         7,021
Tax Fees (3)                     123,528        62,172
All Other Fees (4)                 1,275             0
TOTAL                            332,548       250,554
</TABLE>


                                       75
<PAGE>


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

      Audit-related Fees consist of fees billed for assurance and related
services that are reasonably related to the performance of the audit or review
of our financial statements or that are traditionally performed by the external
auditor, and include consultations concerning financial accounting and reporting
standards; internal control reviews of new systems, programmes and projects;
review of security controls and operational effectiveness of systems; review of
plans and control for shared service centers, due diligence related to
acquisitions; accounting assistance and audits in connection with proposed or
completed acquisitions; and employee benefit plan audits.

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

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

AUDIT COMMITTEE PRE-APPROVAL POLICIES AND PROCEDURES

Below is a summary of the current 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 2003, 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.


                                       76
<PAGE>


                                    PART III

ITEM 17.  FINANCIAL STATEMENTS

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

ITEM 18. FINANCIAL STATEMENTS

      Our Consolidated Financial Statements beginning on pages F-1 through F-35,
as set forth in the following index, are hereby incorporated herein by
reference. These Consolidated Financial Statements are filed as part of this
Annual Report.

 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>

                                                                    PAGE
                                                                    ----
<S>                                                                   <C>
 Index to Consolidated Financial Statements.......................  F-1
 Reports of Independent Auditors..................................  F-2 - F-3
 Consolidated Balance Sheets......................................  F-4 - F-5
 Consolidated Statement of Operations.............................  F-6
 Consolidated Statement of Changes in Shareholders' Equity........  F-7
 Consolidated Statement of Cash Flow..............................  F-8 - F-9
 Notes to the Consolidated Financial Statements...................  F-10- F-40
 Report of Independent Auditors for 2002 Financial Statements.....  F-41
 Reports of Independent  Auditors for subsidiary of Tefron,  Alba
 Health LLC, for 2002 and 2003 Financial Statements...............  F-42- F-43
</TABLE>


                                       77
<PAGE>


ITEM 19. EXHIBITS

1.1.     Memorandum  of  Association  of the Company  (incorporated  by
         reference  to Exhibit 3.1 to the  Company's  Registration Statement on
         Form F-1 (No. 333-7538) filed on August 29, 1997).

1.2.     Restated Articles of Association of the Company (incorporated by
         reference to Exhibit 1.2 to the Company's Annual Report on Form 20-F
         for the fiscal year ended December 31, 2002).

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 February 28, 2001, from Bank Hapoalim to the Company
         regarding Commitments dated December 19, 1999 (incorporated by
         reference to Exhibit 2.2 to the Company's Annual Report on Form 20-F
         for the fiscal year ended December 31, 2000).

2.3.     Letter Agreement, dated as of March 3, 2001, between Israeli Discount
         Bank Ltd., Israeli Discount Bank of New York and the Company
         (incorporated by reference to Exhibit 2.3 to the Company's Annual
         Report on Form 20-F for the fiscal year ended December 31, 2000).

2.4.     Letter, dated November 12, 2001, from the Company to Bank Hapoalim
         regarding Commitments dated December 14, 1999 (incorporated by
         reference to Exhibit 2.4 to the Company's Annual Report on Form 20-F
         for the fiscal year ended December 31, 2001).

2.5.     Letter, dated November 13, 2001, from the Company to the Israeli
         Discount Bank Ltd. regarding Commitments dated December 14, 1999
         (incorporated by reference to Exhibit 2.5 to the Company's Annual
         Report on Form 20-F for the fiscal year ended December 31, 2001).

2.6      Letter, dated July 30, 2002, from Bank Hapoalim to the Company
         regarding shareholders equity requirements under the Credit Agreement
         (incorporated by reference to Exhibit 2.6 to the Company's Annual
         Report on Form 20-F for the fiscal year ended December 31, 2002).

2.7      Letter, dated August 12, 2002, from Israel Discount Bank Ltd. to the
         Company regarding shareholders equity requirements under the Credit
         Agreement (incorporated by reference to Exhibit 2.7 to the Company's
         Annual Report on Form 20-F for the fiscal year ended December 31,
         2002).

2.8      Letter, dated March 2, 2004, from Israel Discount Bank Ltd. to the
         Company regarding shareholders' equity requirements under the Credit
         Agreement.

2.9      Letter, dated March 2, 2004, from Bank Hapoalim to the Company
         regarding shareholders' equity requirements under the Credit Agreement.

2.10     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.

2.11     Letter, dated February 15, 2004, from Bank Hapoalim to the Company
         regarding revised repayment schedule under the Credit Agreement.


                                       78
<PAGE>


2.12     Letter, dated March 31, 2004, from Bank Hapoalim to the Company
         regarding revised shareholders' equity requirements under the Credit
         Agreement.

2.13     Credit Agreement, dated September 6, 2002, among AlbaHealth LLC, as
         borrower, the other borrower signatory thereto, the lenders signatory,
         thereto from time to time, and General Electric Capital Corporation, as
         Agent and a Lender. (incorporated by reference to Exhibit 2.8 to the
         Company's Annual Report form 20-F for the fiscal year ended December
         31, 2002).

2.14     Security Agreement, dated as of September 6, 2002, among the Grantor
         signatory thereto, from time to time, and General Electric Capital
         Corporation, as Agent for the benefit of itself and the lenders from
         time to time party to the Credit Agreement (referred to in Exhibit
         2.13).

2.15     Borrower Stockholders Pledge Agreement, dated as of September 6, 2002,
         by and among the pledgors signatory thereto, from time to time, and
         General Electric Capital Corporation, as Agent for the benefit of
         itself and the lenders from time to time party to the Credit Agreement
         (referred to in Exhibit 2.13).

2.16     The total amount of long-term debt securities of the Company authorized
         under any instrument, other than as exhibited hereto, does not exceed
         10% of the total assets of the Company on a consolidated basis. The
         Company hereby agrees to furnish to the SEC, upon request, a copy of
         any instrument defining the rights of holders of long-term debt of the
         Company or of its subsidiaries for which consolidated or unconsolidated
         financial statements are required to be filed.

3.1      Shareholders Agreement, dated as of September 17, 1997, between Macpell
         Industries Ltd., Discount Investment Company Ltd., PEC Israel Economic
         Corporation, Tabriz Anstalt Ltd. and Oranim (Securities) Ltd.
         (incorporated by reference to Exhibit A to the General Statement of
         Beneficial Ownership of the Company on Schedule 13D filed by Arwol
         Holdings Ltd., Arie Wolfson, Sigi Rabinowicz, Riza Holdings Ltd. and
         Macpell Industries Ltd. on February 17, 2000).

3.2.     Shareholders Agreement, dated as of December 28, 1999, between Arwol
         Holdings Ltd. and Avi Ruimi (incorporated by reference to Exhibit D to
         the General Statement of Beneficial Ownership of the Company on
         Schedule 13D filed by Arwol Holdings Ltd., Arie Wolfson, Sigi
         Rabinowicz, Riza Holdings Ltd. and Macpell Industries Ltd. on February
         17, 2000).

3.3.     Purchase Agreement, dated as of December 30, 1999, by and among Arwol
         Holdings Ltd. and Riza Holdings Ltd. (incorporated by reference to
         Exhibit 99.E to the General Statement of Beneficial Ownership of the
         Company on Schedule 13D filed by Arwol Holdings Ltd., Arie Wolfson,
         Sigi Rabinowicz, Riza Holdings Ltd. and Macpell Industries Ltd. on
         February 17, 2000).

3.4      Agreement, dated February 17, 2004, by and among Arwol Holdings Ltd.,
         Macpell Industries Ltd. and Norfet, Limited Partnership.

4.1.     Agreement and Plan of Merger, dated as of November 8, 1999, by and
         among Tefron U.S. Holdings Corp., AWS Acquisition Corp. and
         Alba-Waldensian, Inc. (incorporated by reference to Exhibit (c)(1) to
         Schedule 14D-1 in respect of Alba-Waldensian, Inc. filed by the Company
         on November 12, 1999)

4.2.     Employment Agreement, dated as of August 5, 2002, between the Company
         and Sigi Rabinowicz (incorporated by reference to Exhibit 4.2 to the
         Company's Annual Report on Form 20-F for the fiscal year ended December
         31, 2002).


                                       79
<PAGE>


4.3.     Consulting and Management Services Agreement, dated as of August 5,
         2002, between the Company, New York Delights Ltd., and Arie Wolfson
         (incorporated by reference to Exhibit 4.3 to the Company's Annual
         Report on Form 20 F for the fiscal year ended December 31, 2002).

4.4.     Management and Services Agreement, effective as of July 30, 2003,
         between the Company, Yosef Shiran and Shiran & Partners - Consulting,
         Entreprenuership, and Financing..

4.5.     Lease Agreement dated as of August 12, 1997, between the Company and
         New Net Assets (1994) Ltd. and an Assignment Agreement dated as of
         December 25, 1998 between the Company and Hi-Tex Founded by Tefron Ltd.
         The Company and/or its subsidiary, Hi-Tex Founded by Tefron Ltd., have
         entered in to similar lease agreements with New Net Assets (1994) Ltd.
         (incorporated by reference to Exhibit 4.5 to the Company's Annual
         Report on Form 20-F for the fiscal year ended December 31, 2001).

4.6      Contribution Agreement, dated as of September 6, 2002, between
         AlbaHealth, LLC, Alba-Waldensian, Inc., Encompass Group, L.L.C. and
         General Electric Capital Corporation (incorporated by reference to
         Exhibit 4.6 to the Company's Annual Report on Form 20 F for the fiscal
         year ended December 31, 2002).

4.7      The Limited Liability Company Agreement of AlbaHealth LLC, dated as of
         September 6, 2002, by and among AlbaHealth, LLC, Alba-Waldensian, Inc.,
         Encompass Group, L.L.C. and General Electric Capital Corporation
         (incorporated by reference to Exhibit - to the Company's Annual Report
         on Form 20 F for the fiscal year ended December 31, 2002).

4.8      Put Option Agreement, dated as of September 6, 2002, by and among
         AlbaHealth, LLC, Alba-Waldensian, Inc., Encompass Group, L.L.C. and
         General Electric Capital Corporation (incorporated by reference to
         Exhibit 4.8 to the Company's Annual Report on Form 20 F for the fiscal
         year ended December 31, 2002).

4.9      Share Purchase Agreement dated February 17, 2004, by and between the
         Company and Norfet Limited Partnership, including related Registration
         Rights Agreement attached as a schedule.

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.

4.11     Private Equity Credit Agreement, dated as of March 9, 2004, by and
         between the Company and Brittany Capital Management Limited.

4.12     Registration Rights Agreement, dated as of March 9, 2004, by and
         between the Company and Brittany Capital Management Limited.

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


                                       80
<PAGE>


14.(a).1 Consent of Kost, Forer Gabbay & Kasierer.

14.(a).2 Consent of McGladrey & Pullen, LLP with respect to 2002 report.

14.(a).3 Consent of McGladrey & Pullen, LLP with respect to 2003 report.

14.(a).4 Notice Regarding Lack of Consent of Arthur Andersen LLP.

                                       81
<PAGE>


                                   TEFRON LTD.

                        CONSOLIDATED FINANCIAL STATEMENTS

                             AS OF DECEMBER 31, 2003

                            U.S. DOLLARS IN THOUSANDS


                                      INDEX
                                      -----
<TABLE>
<CAPTION>

                                                                 PAGE
                                                                 ----

<S>                                                             <C>
 REPORTS OF INDEPENDENT AUDITORS                                 2 - 3

 CONSOLIDATED BALANCE SHEETS                                     4 - 5

 CONSOLIDATED STATEMENTS OF OPERATIONS                             6

 STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY                     7

 CONSOLIDATED STATEMENTS OF CASH FLOWS                           8 - 9

 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS                 10 - 40

 REPORT OF INDEPENDENT AUDITORS FOR 2002 FINANCIAL STATEMENTS     41

 REPORTS OF INDEPENDENT  AUDITORS FOR SUBSIDIARY OF TEFRON, ALBA
 HEALTH LLC, FOR 2002 AND 2003 FINANCIAL STATEMENTS             42 - 43

</TABLE>



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


<PAGE>


[ERNST & YOUNG LOGO APPERS HERE]

                         REPORT OF INDEPENDENT AUDITORS

                             TO 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, 2003 and 2002, and
the related consolidated statements of operations, changes in shareholders'
equity and cash flows for each of the two years in the period ended December 31,
2003. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. The financial statements as of December 31, 2001
and for the year then ended, were audited by other auditors who have ceased
operations as a foreign associated firm of the Securities and Exchange
Commission Practice Section of the American Institute of Certified Public
Accountants and whose report dated March 25, 2002, expressed an unqualified
opinion on those statements.

      We did not audit the financial statements of Alba Health LLC ("Alba
Health") a subsidiary, which statements reflect total assets constituting 23.4%
and 24% as of December 31, 2003 and 2002, respectively, and total revenues
constituting 23.5% and 6.5% for the two years ended December 31, 2003 and 2002,
respectively. Those statements were audited by other auditors whose report has
been furnished to us, and our opinion, insofar as it relates to the amounts
include for Alba Health, is based solely on the report of the other auditors.

      We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall financial
statement presentation. We believe that our audit and the report of other
auditors provides a reasonable basis for our opinion.

      In our opinion, based on our audits and the reports of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of the Company and its
subsidiaries as of December 31, 2003 and 2002, and the results of its operations
and its cash flows for each of the two years in the period ended December 31,
2003, in conformity with accounting principles generally accepted in the United
States.

                                         /s/ Kost Forer Gabbay & Kasierer

Tel-Aviv, Israel                           KOST FORER GABBAY & KASIERER
March 14, 2004                           A Member of Ernst & Young Global


                                      F - 2
<PAGE>


  THIS IS A COPY OF THE PREVIOUSLY ISSUED INDEPENDENT PUBLIC ACCOUNTANTS REPORT
                               OF ARTHUR ANDERSEN.
              THE REPORT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN.

                                                                        ANDERSEN
                                                              LUBOSHITZ KASIERER



                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To the Shareholders of
TEFRON LTD.



We have audited the accompanying consolidated balance sheets of TEFRON LTD. (an
Israeli corporation) as of December 31, 2000 and 2001, and the related
consolidated statements of operations, changes in shareholders' equity and cash
flows for each of the three years in the period ended December 31, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States and in Israel, including those prescribed under the
Auditors' Regulations (Auditor's Mode of Performance), 1973. Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of TEFRON
LTD. as of December 31, 2000 and 2001, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States.

                                                          /s/ LUBOSHITZ KASIERER

                                                          Luboshitz Kasierer
                                                          Arthur Andersen


Tel-Aviv, Israel.
March 25, 2002



                                      F - 3
<PAGE>




                                                TEFRON LTD. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

<TABLE>
<CAPTION>
                                                                           DECEMBER 31,
                                                                        -------------------
                                                                 NOTE     2002       2003
                                                                        --------   --------
<S>                                                              <C>    <C>        <C>
    ASSETS

CURRENT ASSETS:
   Cash and cash equivalents                                            $  6,742   $  6,877
   Trade receivables (net of allowance for doubtful debts)          4     21,421     24,917
   Inventories                                                      6     26,206     31,676
   Other accounts receivable and prepaid expenses                   5      5,459      6,166
                                                                        --------   --------

Total current assets                                                      59,828     69,636
                                                                        --------   --------

SEVERANCE PAY FUNDS                                                13        433        217
                                                                        --------   --------
PROPERTY, PLANT AND EQUIPMENT:
   Cost                                                             7    150,632    157,734
   Less - accumulated depreciation                                        52,133     60,261
                                                                        --------   --------

Property, plant and equipment, net                                        98,499     97,473
                                                                        --------   --------
OTHER ASSETS:
   Goodwill                                                         3     30,743     30,865
   Deferred taxes                                                  20      3,961      3,428
   Investment in affiliated companies                               8        354        296
   Advance to supplier of equipment                                14d     1,374          -
   Other                                                                   1,219        806
                                                                        --------   --------

Total other assets                                                        37,651     35,395
                                                                        --------   --------

Total assets                                                            $196,411   $202,721
                                                                        ========   ========
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements


                                      F - 4
<PAGE>


                                                TEFRON LTD. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE DATA

<TABLE>
<CAPTION>
                                                                               DECEMBER 31,
                                                                         ----------------------
                                                                 NOTE        2002        2003
                                                                 ----    -----------   --------
<S>                                                              <C>       <C>         <C>
     LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
   Short-term bank credit                                           9    $    14,767   $ 31,761
   Current maturities of long-term debt:
     Banks and other loans                                         12      *) 16,290     10,328
     Capital leases                                                12      *)  1,455      1,367
   Trade payables                                                  10      *) 24,078     29,558
   Other accounts payable and accrued expenses                     11      *)  9,405     11,146
                                                                         -----------   --------

Total current liabilities                                                     65,995     84,160
                                                                         -----------   --------
LONG-TERM LIABILITIES:
   Banks and other loans                                           12         64,623     56,471
   Capital leases                                                  12          1,755        327
   Deferred taxes                                                  20          8,117      7,570
   Accrued severance pay                                           13          2,123      2,486
                                                                         -----------   --------

Total long-term liabilities                                                   76,618     66,854
                                                                         -----------   --------

MINORITY INTEREST                                                   1b        13,690     15,052
                                                                         -----------   --------

Total liabilities                                                            156,303    166,066
                                                                         -----------   --------

LIENS, CONTINGENCIES AND COMMITMENTS                               14

SHAREHOLDERS' EQUITY:                                              15
   Share capital
     Ordinary shares of NIS 1 par value:
     Authorized - 50,000,000 shares
     Issued - 13,409,566 shares                                                5,575      5,575
     Deferred shares of NIS 1 par value:
     Authorized, issued and outstanding - 4,500 shares                             1          1
   Additional paid-in capital                                                 62,810     62,810
   Accumulated deficit                                                       (20,870)   (24,323)
   Deferred stock compensation                                                     -          -
   Accumulated other comprehensive income                                          -          -
                                                                         -----------   --------
                                                                              47,516     44,063
Less - 997,400 Ordinary shares in treasury, at cost                           (7,408)    (7,408)
                                                                         -----------   --------

Total shareholders' equity                                                    40,108     36,655
                                                                         -----------   --------

Total liabilities and shareholders' equity                               $   196,411   $202,721
                                                                         ===========   ========
</TABLE>

*) Reclassified.

The accompanying notes are an integral part of the consolidated financial
statements

<TABLE>
<CAPTION>

       March 14, 2004                /s/ Arie Wolfson                   /s/ Yos Shiran
------------------------------   ------------------------   -------------------------------------
<S>                                    <C>                   <C>
   Date of approval of the             Arie Wolfson                       Yos Shiran
    financial statements                 Chairman            Chief Executive Officer and Director
</TABLE>


                                      F - 5
<PAGE>


                                                TEFRON LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA

<TABLE>
<CAPTION>
                                                                            YEAR ENDED DECEMBER 31,
                                                                     -------------------------------------
                                                            NOTE        2001        2002          2003
                                                           ------    ---------    ---------    -----------
<S>                                                        <C>       <C>          <C>          <C>
Sales                                                          16    $ 188,949    $ 190,305    $   163,086
Cost of sales                                                  17      169,173      151,385        138,090
Restructuring costs                                             1c           -        1,550              -
                                                                     ---------    ---------    -----------

Gross profit                                                            19,776       37,370         24,996
Selling, general and administrative expenses                            20,140       18,358         20,323
Restructuring costs                                             1c           -        3,793              -
                                                                     ---------    ---------    -----------

Operating income (loss)                                                   (364)      15,219          4,673
Financial expenses, net                                        18        9,396        5,457          5,628
Other expenses (income), net                                   19          843        2,293           (228)
                                                                     ---------    ---------    -----------

Income (loss) before taxes on income (benefit)                         (10,603)       7,469           (727)
Taxes on income (benefit)                                      20         (837)       4,979            (92)
                                                                     ---------    ---------    -----------

Income (loss) after income taxes                                        (9,766)       2,490           (635)
Equity in losses of affiliated companies                        8         (240)        (392)          (183)
Minority interest in earnings of a subsidiary                                -         (822)        (2,550)
Pre-acquisition loss of subsidiary since April 1, 2003          1d           -            -            (85)
                                                                     ---------    ---------    -----------

Net income (loss) from ordinary activities                             (10,006)       1,276         (3,453)
Cumulative effect of change in accounting principle             3            -      (18,774)             -
                                                                     ---------    ---------    -----------

Net loss                                                             $ (10,006)   $ (17,498)   $    (3,453)
                                                                     =========    =========    ===========

Income (loss) per share from ordinary activities                     $   (0.81)   $    0.10    $     (0.28)
                                                                     =========    =========    ===========

Loss per share from cumulative effect of change in
  accounting principles                                              $       -    $   (1.51)   $         -
                                                                     =========    =========    ===========

Basic and diluted net loss per share                                 $   (0.81)   $   (1.41)   $     (0.28)
                                                                     =========    =========    ===========
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements


                                      F - 6
<PAGE>


                                                TEFRON LTD. AND ITS SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE DATA

<TABLE>
<CAPTION>
                                                                           RETAINED                ACCUMULATED
                                                                ADDITIONAL EARNINGS                  OTHER
                                               ORDINARY SHARES   PAID-IN  (ACCUMULATED DEFERRED   COMPREHENSIVE TREASURY
                                             ------------------
                                              NUMBER *)  AMOUNT  CAPITAL   DEFICIT)   COMPENSATION   INCOME      SHARES     TOTAL
                                             ----------  ------  -------  ----------  ------------ ----------   -------   --------
<S>                                          <C>         <C>     <C>      <C>         <C>          <C>          <C>       <C>
Balance as of January 1, 2001                12,412,166  $5,576  $62,810  $    6,634  $      (137) $        -   $(7,408)  $ 67,475

Foreign currency translation adjustments              -       -        -           -            -          50         -         50
Amortization of deferred stock compensation           -       -        -           -           69           -         -         69
Net loss                                              -       -        -     (10,006)           -           -         -    (10,006)
                                             ----------  ------  -------  ----------  -----------  ----------   -------   --------
Balance as of December 31, 2001              12,412,166   5,576   62,810      (3,372)         (68)         50    (7,408)    57,588

Foreign currency translation adjustments              -       -        -           -            -         (50)        -        (50)
Amortization of deferred stock compensation           -       -        -           -           68           -         -         68
Net loss                                              -       -        -     (17,498)           -           -         -    (17,498)
                                             ----------  ------  -------  ----------  -----------  ----------   -------   --------

Balance as of December 31, 2002              12,412,166   5,576   62,810     (20,870)           -           -    (7,408)    40,108

Net loss                                              -       -        -      (3,453)           -           -         -     (3,453)
                                             ----------  ------  -------  ----------  -----------  ----------   -------   --------
Balance as of December 31, 2003              12,412,166  $5,576  $62,810  $  (24,323) $         -  $        -   $(7,408)  $ 36,655
                                             ==========  ======  =======  ==========  ===========  ==========   =======   ========
</TABLE>

*) Net of 997,400 Ordinary shares in treasury.

The accompanying notes are an integral part of the consolidated financial
statements


                                      F - 7
<PAGE>


                                                TEFRON LTD. AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

<TABLE>
<CAPTION>
                                                                               YEAR ENDED DECEMBER 31,
                                                                        ------------------------------------
                                                                          2001          2002         2003
                                                                        ----------   ----------   ----------
<S>                                                                     <C>          <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES
   Net loss                                                             $  (10,006)  $  (17,498)  $   (3,453)
   Adjustments to reconcile net loss to net cash provided by operating
     activities (a)                                                         25,203       43,344        6,329
                                                                        ----------   ----------   ----------

Net cash provided by operating activities                                   15,197       25,846        2,876
                                                                        ----------   ----------   ----------

CASH FLOWS FROM INVESTING ACTIVITIES
   Investment in property, plant and equipment                              (6,475)      (2,977)      (4,123)
   Investment grants received                                                5,732        1,659        1,868
   Investment in affiliated companies                                       (1,487)        (279)        (125)
   Proceeds from sale of property, plant and equipment                           -          218          499
   Payment for acquisition of subsidiary (b)                                     -            -          300
                                                                        ----------   ----------   ----------

   Net cash used in investing activities                                    (2,230)      (1,379)      (1,581)
                                                                        ----------   ----------   ----------

CASH FLOWS FROM FINANCING ACTIVITIES
   Receipt of long-term bank loans                                               -       25,772        8,500
   Repayment of long-term bank loans and other loans                        (8,110)     (50,320)     (22,614)
   Payment under capital lease                                              (3,146)      (5,821)      (1,691)
   Receipt under capital lease                                                   -          330          175
   Increase (decrease) in short-term bank credit, net                       (1,052)      (3,908)      15,636
   Payment under issuance of shares to minority shareholders                     -       (1,214)           -
   Proceeds from issuance of shares to minority shareholders                     -    *) 12,358            -
   Dividend paid to minority interest in subsidiary                              -            -       (1,166)
                                                                        ----------   ----------   ----------

   Net cash used in financing activities                                   (12,308)     (22,803)      (1,160)
                                                                        ----------   ----------   ----------

Increase in cash and cash equivalents                                          659        1,664          135
Cash and cash equivalents at the beginning of the year                       4,419        5,078        6,742
                                                                        ----------   ----------   ----------

Cash and cash equivalents at the end of the year                        $    5,078   $    6,742   $    6,877
                                                                        ==========   ==========   ==========
</TABLE>

*)  Net of issuance cost in the amount of $ 642.

The accompanying notes are an integral part of the consolidated financial
statements.


                                      F - 8
<PAGE>


                                                TEFRON LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

<TABLE>
<CAPTION>
                                                                                  YEAR ENDED DECEMBER 31,
                                                                             ---------------------------------
                                                                               2001        2002        2003
                                                                             ---------   ---------   ---------
<S>                                                                          <C>         <C>         <C>
(a) ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH PROVIDED BY OPERATING
      ACTIVITIES
      Depreciation and amortization                                          $  10,944   $   9,722   $   7,673
      Increase (decrease) in accrued severance pay, net                            458       1,285        (692)
      Decrease (increase) deferred income taxes                                   (837)      4,571        (289)
      Equity in losses of affiliated companies                                     240         392         183
      Loss (gain) on disposal of property and equipment, net                       915           8        (199)
      Minority interest in earnings of a subsidiary                                  -         822       2,550
      Loss from issuance of shares to third party                                    -       2,082           -
      Pre-acquisition loss of a subsidiary                                           -           -          85

      Decrease (increase) in trade receivables, net                              3,964       2,019      (3,006)
      Decrease (increase)  in  other  accounts  receivable  and  prepaid
        expenses                                                                 5,655        (343)       (469)
      Decrease (increase) in inventories                                         7,875      (2,634)     (4,482)
      Increase (decrease) in trade payables                                     (1,200)      4,227       3,911
      Increase (decrease) in other accounts payable and accrued expenses        (2,811)     (1,753)      1,064
      Goodwill write-off                                                             -      18,774           -
      Restructuring cost:
        Write down of long-lived assets                                              -       2,622           -
        Inventory mark down                                                          -       1,550           -
                                                                             ---------   ---------   ---------

                                                                             $  25,203   $  43,344   $   6,329
                                                                             =========   =========   =========
(b) PAYMENT FOR ACQUISITION OF SUBSIDIARY
      Working capital, net                                                   $       -   $       -   $    (692)
      Property and equipment, net                                                    -           -         369
      Goodwill                                                                       -           -         122
      Accrued severance pay, net                                                     -           -         (99)
                                                                             ---------   ---------   ---------

                                                                             $       -   $       -   $    (300)
                                                                             =========   =========   =========

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
  FINANCING ACTIVITIES:                                                      $       -   $     410   $   2,744
                                                                             =========   =========   =========

 CASH PAID DURING THE YEAR IN RESPECT OF:

   Interest paid                                                             $  10,813   $   5,962   $   3,538
                                                                             =========   =========   =========

   Income taxes, net of refunds received                                     $       -   $     (37)  $      60
                                                                             =========   =========   =========
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.


                                      F - 9
<PAGE>


                                                TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 1:-  GENERAL

          a.  Tefron Ltd, a company organized under the laws of the State of
              Israel ("the Company"), and its subsidiaries are engaged in the
              design, manufacture and sale of knitted intimate apparel,
              beachwear and activewear, which are manufactured using two
              different techniques (seamless and cut and sew) and products for
              the health care industry (see also Note 21). The Company's
              principal market is the United States.

              The Company's significant subsidiaries are Hi-Tex Founded by
              Tefron Ltd. ("Hi-Tex"), which commenced operations in 1997,
              Alba-Waldensian, Inc. ("Alba"), which was purchased in December
              1999, New-Net Industries Ltd. ("New-Net") New-Pal Ltd.
              ("New-Pal"), which commenced operations in April 1999, and Macro
              Clothing Ltd. ("Macro") which was purchased in April, 2003.

          b.  Acquisition of Macro Clothing Ltd.:

              On March 26, 2003, The Company entered into a share purchase
              agreement, which was approved on April 24, 2003 by Macpell
              Industries Ltd. ("Macpell"), and by Mr. Ron Grundland, pursuant to
              which the Company agreed to acquire 100% of the outstanding
              Ordinary Shares of Macro Clothing Ltd., ("Macro") upon the
              satisfaction of certain conditions, in consideration of the
              assumption by the Company of certain guarantees granted by the
              sellers in favor of Macro in the aggregate amount of approximately
              $ 530, subject to adjustments. Pursuant to the terms of the
              agreement, Macpell agreed to pay the Company the amount of $ 317
              to assume Macpell's guarantees to the bank. In addition, Macpell
              agreed to assign to the Company its rights to a loan granted to
              Macro in the amount of approximately $ 522. The closing day of the
              agreement was May 5, 2003. Macro manufactures, markets and sells
              swimsuits and beachwear. The purchase will diversify the Company's
              line of products.

              The acquisition was accounted for as a purchase. The excess of the
              purchase price over the estimated fair value of net assets
              acquired totals $ 122.

              The operating results of Macro were consolidated for convenience
              reasons effective April 1, 2003. The operating results for the
              period prior to the acquisition (from April 1, 2003 through May 5,
              2003) in the amount of $ 85 thousand, were deducted in the
              statements of operations.

          c.  Acquisition of R.M.D. Robotics Ltd. ("RMD"):

              RMD was incorporated on May 16, 1999, in order to develop
              technology products for the textile industry. RMD shareholders
              were: the Company - 25.05%, Macpell - 25.05%, and Mr. Meir Azulai
              - 49.9%.

              In accordance with the establishment agreement, the Company has
              the power to govern the financial and operating policies of RMD
              and as a result, its financial statements were consolidated with
              those of the Company.


                                     F - 10
<PAGE>


                                                TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 1:-  GENERAL (CONT.)

              On March 13, 2003, the Company acquired Mr. Azulai's outstanding
              shares in a consideration of $ 1. On October 9, 2003, the Company
              acquired Macpell's outstanding shares in a consideration of $ 200.
              As a result, the Company holds 100% of RMD's outstanding shares.

          d.  On September 6, 2002, the Health Products Division of Alba
              Waldensian, Inc. ("Alba") a wholly-owned subsidiary of Tefron U.S.
              Holdings Corp., a wholly-owned subsidiary of the Company, has
              formed a new entity with Encompass Group, LLC, a Delaware limited
              liability company ("Encompass") and General Electric Capital
              Corporation, a Delaware corporation ("GE Capital"), to operate
              Alba's health products business through AlbaHealth, LLC, a newly
              formed Delaware limited liability company ("AlbaHealth").

              In Connection with AlbaHealth, Alba contributed substantially all
              of the assets of its Health products division (together with
              associated liabilities, including certain existing bank
              indebtedness secured by such assets) to the capital of AlbaHealth
              in exchange for a 48.325% ownership interest in AlbaHealth. Each
              of Encompass and GE Capital contributed cash to the capital of
              AlbaHealth in the amount of $ 12 thousand and $ 1 thousand, in
              exchange for a 48.325% and 3.35% ownership interest in AlbaHealth,
              respectively. As result of Alba contribution, the Company recorded
              $ 12,082 as an expense.

              For a period of three years commencing on September 6, 2004 Alba
              is permitted to sell all, but not less than all, of its Common
              Units to Alba Health, in exchange for basically its fair value.

              In light of the fact that the Company has the power to govern the
              financial and operating policies of AlbaHealth (through the right
              to appoint the majority of AlbaHealth's directors), the Company
              consolidates AlbaHealth financial statements in its financial
              statements.

          e.  The percentage of sales to a principal customer in the United
              States was 74.8%, 81.8% and 74.8% in the years 2001, 2002 and
              2003, respectively. The Company's arrangements with its customers
              do not contain minimum purchase requirements and there can be no
              assurance that the principal customers will continue to purchase
              the Company's products in the same volumes or on the same terms as
              they have done in the past. A material decrease in the quantity of
              purchases made by the principal customers or a material adverse
              change in the terms of such purchases could have a material
              adverse effect on the Company's results of operations.


                                     F - 11
<PAGE>


                                                TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 2:-  SIGNIFICANT ACCOUNTING POLICIES

          The consolidated financial statements have been prepared in conformity
          with generally accepted accounting principles in the United States
          ("US GAAP"). The significant accounting policies followed in the
          preparation of the financial statements, applied on a consistent
          basis, are:

          a.  The preparation of financial statements in conformity with
              generally accepted accounting principles requires management to
              make estimates and assumptions that affect the amounts reported in
              the financial statements and accompanying notes. Actual results
              could differ from those estimates.

          b.  The accompanying consolidated financial statements have been
              prepared in U.S. dollars, as the currency of the primary economic
              environment in which the operations of the Company and its
              subsidiaries are conducted is the U.S. dollar. The majority of
              sales is made in U.S. dollars, as a significant portion of
              purchases of materials and property, plant and equipment. Thus,
              the functional and the reporting currency of the Company is the
              U.S. dollar.

              Transactions and balances originally denominated in U.S. dollars
              are presented at their original amounts. Transactions and balances
              in other currencies are remeasured into U.S dollars in accordance
              with principles set forth in Statement of Financial Accounting
              Standards ("SFAS") No. 52 of the Financial Accounting Standards
              Board of the United States ("FASB").

              The representative exchange rate at December 31, 2003 was U.S. $
              1. = 4.379 new Israeli shekels ("NIS"), (December 31, 2001 and
              2002 - NIS 4.416 and NIS 4.737, respectively).

          c.  Principles of consolidation:

              The consolidated financial statements include the accounts of the
              Company and those of its wholly-owned subsidiaries and AlbaHealth
              (See note 1d). Intercompany balances and transactions have been
              eliminated in consolidation.

          d.  Cash and cash equivalents:

              Cash equivalents are short-term highly liquid investments that are
              readily convertible to cash with original maturities of three
              months or less.

          e.  Inventories:

              Inventories are stated at the lower of cost or market value.
              Inventory write-offs are provided to cover risks arising from
              slow-moving items, technological obsolesce, discontinued products,
              and for market price lower than cost.


                                     F - 12
<PAGE>


                                                TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 2:-  SIGNIFICANT ACCOUNTING POLICIES (CONT.)

              Cost is determined as follows:

              Raw materials, accessories -  "First-in, first-out" method. and
              packaging materials

              Work - in - progress and   -  The Company uses the standard
              finished products             costing method for work in progress
                                            and  finished products evaluation.
                                            The Company uses two standards as
                                            follows:

                                            a. Raw materials standard price -
                                               represent the raw material
                                               cost by meter.

                                            b. Labor standard price - represent
                                               the labor cost per minute  work.

                                               The two standards prices above
                                               are determined based on the
                                               Company's past experience and
                                               are burdened onto the finished
                                               products and the work in
                                               progress in accordance with the
                                               stage of completion.

          f.  Property, plant and equipment, net:

              Property, plant and equipment are stated at cost, net of
              accumulated depreciation and investment grants. Depreciation is
              calculated by the straight-line method over the estimated useful
              lives of the assets at the following annual rates:
<TABLE>
<CAPTION>

                                                                         %
                                                                      --------
<S>                                                                    <C>
              Buildings                                                 2.5
              Machinery and equipment                                  5 - 20
              Installations and leasehold improvements                 5 - 10
              Motor vehicles                                             15
              Furniture and office equipment                           6 - 25
</TABLE>

              Leasehold improvements are amortized over the term of the lease,
              including renewal options, or the useful lives of the assets,
              whichever is shorter.


                                     F - 13
<PAGE>


                                                TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 2:-  SIGNIFICANT ACCOUNTING POLICIES (CONT.)

              The Company's property, plant and equipment are reviewed for
              impairment in accordance with Statement of Financial Accounting
              Standard No.144, "Accounting for the Impairment or Disposal of
              Long-Lived Assets" ("SFAS No.144"), whenever events or changes in
              circumstances indicate that the carrying amount of an asset may
              not be recoverable. Recoverability of assets to be held and used
              is measured by a comparison of the carrying amount of an asset to
              the future undiscounted cash flows expected to be generated by the
              assets. If such assets are considered to be impaired, the
              impairment to be recognized is measured by the amount by which the
              carrying amount of the assets exceeds the fair value of the
              assets. Assets to be disposed of are reported at the lower of the
              carrying amount or fair value less costs to sell.

          g.  Goodwill:

              Goodwill represents excess of the purchase price over the fair
              value of the net assets of businesses acquired. Goodwill that
              arose from acquisitions prior July 1, 2001, was amortized until
              December 31, 2001, on a straight-line basis over 40 years. Under
              Statement of Financial Accounting Standard No.142, "Goodwill and
              Other Intangible Assets" ("SFAS No. 142"), goodwill acquired in a
              business combination for which date is on or after July 1, 2001,
              shall not be amortized.

              SFAS No.142 requires goodwill to be tested for impairment on
              adoption and at least annually thereafter or between annual tests
              in certain circumstances, and written down when impaired, rather
              than being amortized as previous accounting standards required.
              Goodwill attributable to each of the reporting units is tested for
              impairment by comparing the fair value of each reporting unit with
              its carrying value.

              The fair value of goodwill was evaluated in the transitional
              implementation, relying on an independent expert. The valuation is
              updated annually.

          h.  Investments in affiliated companies:

              Affiliated companies are companies held to the extent of 20% or
              more (which are not subsidiaries), or companies held less than
              20%, which the Company can exercise significant influence over
              operating and financial policy of the affiliate. The investment in
              affiliated companies is accounted for by the equity method.
              Profits on intercompany sales, not realized outside the Group,
              were eliminated.

              The excess of the purchase price over the fair value of net assets
              acquired has been attributed to goodwill.

              The Company's investments in affiliated companies are reviewed for
              impairment whenever events or changes in circumstances indicate
              that the carrying amount of an investment may not be recoverable.
              As of December 31, 2003, based on managements' most recent
              analyses, no impairment losses have been identified (see Note 3
              and 8).


                                     F - 14
<PAGE>


                                                TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 2:-  SIGNIFICANT ACCOUNTING POLICIES (CONT.)

          i.  Severance pay:

              The Company's liability for severance pay is calculated pursuant
              to Israeli severance pay law based on the most recent salary of
              the employees multiplied by the number of years of employment, as
              of the balance sheet date. Employees are entitled to one month's
              salary for each year of employment or a portion thereof. The
              Company's liability for all of its employees, is fully provided by
              monthly deposits with insurance policies and by an accrual. The
              value of these policies is recorded as an asset in the Company's
              balance sheet. The deposited funds include profits accumulated up
              to the balance sheet date. The deposited funds may be withdrawn
              only upon the fulfillment of the obligation pursuant to Israeli
              severance pay law or labor agreements. The value of the deposited
              funds is based on the cash surrendered value of these policies.

          j.  Stock-based compensation:

              The Company has elected to follow Accounting Principles Board
              Opinion No.25 "Accounting for Stock Issued to Employees" ("APB
              25") and FASB Interpretation No.44 "Accounting for Certain
              Transactions Involving Stock Compensation" ("FIN 44") in
              accounting for its employee stock option plans. Under APB 25, when
              the exercise price of the Company's share options is higher than
              or equal to the market price of the underlying shares on the date
              of grant, no compensation expense is recognized. The pro forma
              disclosures required by Statement of Financial Accounting Standard
              No.123 "Accounting for Stock-Based Compensation" ("SFAS No.123"),
              are provided in Note 15.

          k.  Revenue recognition:

              Revenues from sales are recognized in accordance with Staff
              Accounting Bulletin No. 101 "Revenue Recognition in Financial
              Statements", ("SAB No. 101"), when delivery has occurred,
              persuasive evidence of an agreement exists, the vendor's fee is
              fixed or determinable, no further obligation exists and
              collectability is probable.

          l.  Allowance for doubtful accounts:

              The allowance for doubtful accounts is computed for specific
              accounts the collectibility of which is doubtful based upon
              management's estimate.


                                     F - 15

<PAGE>


                                                TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 2:-  SIGNIFICANT ACCOUNTING POLICIES (CONT.)

          m.  Income taxes:

              The Company and its subsidiaries account for income taxes in
              accordance with Statement of Financial Accounting Standards
              No.109, "Accounting for Income Taxes" ("SFAS No.109"). This
              Statement prescribes the use of the liability method whereby
              deferred tax assets and liability account balances are determined
              based on differences between financial reporting and tax bases of
              assets and liabilities and are measured using the enacted tax
              rates and laws that will be in effect when the differences are
              expected to reverse. The Company and its subsidiaries provide a
              valuation allowance, if necessary, to reduce deferred tax assets
              to their estimated realizable value.

          n.  Fair value of financial instruments:

              The fair value of financial instruments approximates their
              carrying value.

              The following methods and assumptions were used by the Company in
              estimating the fair value of financial instruments:

              The carrying amount reported in the balance sheet for cash and
              cash equivalents, trade receivables, short-term credit and trade
              payables approximate their fair values due to the short-term
              maturities of such instruments.

              Values of long-term loans approximate fair values due to the
              variable interest rates on these loans.

              Capital lease are estimated by discounting the future cash flows
              using current interest rates for leases of similar terms and
              maturities. The carrying amount of the capital lease approximates
              their fair value.

          o.  Derivative financial instruments:

              Effective January 1, 2001, the Company adopted Statement of
              Financial Accounting Standards ("SFAS") No. 133 "Accounting for
              Derivative Instruments and Hedging Activities".

              The Company's derivative financial instruments consist of foreign
              currency forward exchange and option contracts. These contracts
              are utilized by the Company, from time to time, to manage risk
              exposure to movements in foreign exchange rates. In the year 2002,
              a forward exchange contract is designated as hedging instrument,
              which met the conditions for special hedge accounting. This
              contract was recognized as asset or liability on the balance sheet
              at its fair value, which is the estimated amount at which it could
              be settled based on market prices or dealer quotes. Changes in
              fair value, are recognized in earnings at the same period with the
              hedged item.


                                     F - 16
<PAGE>


                                                TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 2:-  SIGNIFICANT ACCOUNTING POLICIES (CONT.)

          p.  Loss per share:

              Basic net loss per share is computed based on the weighted average
              number of shares of Ordinary Shares outstanding during each year.
              Diluted net loss per share is computed based on the weighted
              average number of shares of Ordinary Shares outstanding during
              each year, plus dilutive potential shares of Ordinary Shares
              considered outstanding during the year, in accordance with
              Statement of Financial Standard No.128, "Earnings Per Share"
              ("SFAS No.128").

              In the year 2003, no diluted loss per share was presented because
              the effect of the 1,809,323 outstanding options is antidilutive
              (1,138,474 and 1,755,874 outstanding options had the same effect
              in the years 2001 and 2002, respectively).

          q.  Impact of recently issued accounting standards:

              In April 2002, the FASB issued Statement of Financial Accounting
              Standard No. 145, "Rescission of FASB Statements No. 4, 44, and
              64, Amendment of FASB Statement No. 13, and Technical Corrections"
              ("SFAS No. 145"), which rescinds SFAS No. 4, "Reporting Gains and
              Losses from Extinguishment of Debt" and an amendment of that
              Statement, and SFAS No. 64, "Extinguishments of Debt Made to
              Satisfy Sinking-Fund Requirements." SFAS No. 145 also rescinds
              SFAS No. 44, "Accounting for Intangible Assets for Motor
              Carriers." SFAS No. 145 amends SFAS No. 13, "Accounting for
              Leases," to eliminate an inconsistency between the required
              accounting for sale-leaseback transactions and the required
              accounting for certain lease modifications that have economic
              effects that are similar to sale-leaseback transactions. SFAS No.
              145 also amends other existing authoritative pronouncements to
              make various technical corrections, clarify meanings, or describe
              their applicability under changed conditions. SFAS No. 145 is
              effective for fiscal years beginning after May 15, 2002. The
              adoption of SFAS No. 145 has not had a material impact on the
              results of operations or financial position.

              In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
              Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS
              146 requires that a liability for a cost associated with an exit
              or disposal activity be recognized and measured, initially at fair
              value, only when the liability is incurred; therefore, nullifying
              Emerging Issues Task Force Issue No. 94-3, "Liability Recognition
              for Certain Employee Termination benefits and Other Costs to Exit
              an Activity (including Certain Costs Incurred in a Restructuring)"
              ("EITF 94-3") that required a liability for an exit cost to be
              recognized at the date of an entity's commitment to an exit plan.
              The adoption of SFAS 146 is expected to result in delayed
              recognition for certain types of costs as compared to the
              provisions of EITF 94-3, especially for facility closure costs.
              The provisions of SFAS 146 are effective for exit or disposal
              activities that are initiated after December 31, 2002. The
              adoption of SFAS No. 146 has not had a material impact on the
              results of operations or financial position.


                                     F - 17
<PAGE>


                                                TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 2:-  SIGNIFICANT ACCOUNTING POLICIES (CONT.)

              In April 2003, the FASB issued SFAS No. 149 ("SFAS 149"),
              "Amendment of Statement 133 on Derivative Instruments and Hedging
              Activities." SFAS 149 amends and clarifies (1) the accounting
              guidance on derivative instruments (including certain derivative
              instruments embedded in other contracts) and (2) hedging
              activities that fall within the scope of FASB Statement No. 133
              ("SFAS 133"), "Accounting for Derivative Instruments and Hedging
              Activities." SFAS 149 amends SFAS 133 to reflect decisions made
              (1) as part of the Derivatives Implementation Group ("DIG")
              process that effectively required amendments to SFAS 133, (2) in
              connection with other projects dealing with financial instruments,
              and (3) regarding implementation issues related to the application
              of the definition of a derivative. SFAS 149 is effective (1) for
              contracts entered into or modified after June 30, 2003, with
              certain exceptions, and (2) for hedging relationships designated
              after June 30, 2003. The guidance is to be applied prospectively.

              Generally, SFAS 149 improves financial reporting by (1) requiring
              that contracts with comparable characteristics be accounted for
              similarly and (2) clarifying when a derivative contains a
              financing component that warrants special reporting in the
              statement of cash flows. SFAS 149 is not expected to have a
              material impact on the Company's financial statements.

              In November 2002, the FASB issued FASB Interpretation No. 45,
              "Guarantor's Accounting and Disclosure Requirements for
              Guarantees, Including Indirect Guarantees of Indebtedness of
              Others, an interpretation of FASB Statements No. 5, 57, and 107
              and Rescission of FASB Interpretation No. 34" ("FIN No. 45"). FIN
              No. 45 elaborates on the disclosures to be made by a guarantor in
              its interim and annual financial statements about its obligations
              under certain guarantees that it has issued. It also clarifies
              that a guarantor is required to recognize, at the inception of a
              guarantee, a liability for the fair value of the obligation
              undertaken in issuing the guarantee. FIN No. 45 does not prescribe
              a specific approach for subsequently measuring the guarantor's
              recognized liability over the term of the related guarantee. It
              also incorporates, without change, the guidance in FASB
              Interpretation No. 34, "Disclosure of Indirect Guarantees of
              Indebtedness of Others," which is being superseded. The disclosure
              provisions of FIN No. 45 are effective for financial statements of
              interim or annual periods that end after December 15, 2002, and
              the provisions for initial recognition and measurement are
              effective on a prospective basis for guarantees that are issued or
              modified after December 31, 2002, irrespective of a guarantor's
              year-end. The adoption of FIN No. 45 didn't have a material impact
              on the results of operations or financial position.


                                     F - 18
<PAGE>


                                                TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 2:-  SIGNIFICANT ACCOUNTING POLICIES (CONT.)

              In January 2003, the FASB issued Interpretation No. 46,
              "Consolidation of Variable Interest Entities" ("FIN 46"). The
              objective of FIN 46 is to improve financial reporting by companies
              involved with variable interest entities. A variable interest
              entity is a corporation, partnership, trust, or any other legal
              structure used for business purposes that either (a) does not have
              equity investors with voting rights or (b) has equity investors
              that do not provide sufficient financial resources for the entity
              to support its activities. FIN 46 requires a variable interest
              entity to be consolidated by a company if that company is subject
              to a majority of the risk of loss from the variable interest
              entity's activities or entitled to receive a majority of the
              entity's residual returns or both. FIN 46 also requires
              disclosures about variable interest entities that the company is
              not required to consolidate but in which it has a significant
              variable interest. The consolidation requirements of FIN 46 apply
              immediately to variable interest entities created after January
              31, 2003. The consolidation requirements apply to older entities
              in the first fiscal year or interim period ending after March 15,
              2004. Certain of the disclosure requirements apply in all
              financial statements issued after January 31, 2003, regardless of
              when the variable interest entity was established. As of December
              31, 2003, the Company does not expect the adoption of FIN 46 to
              have a material impact on its consolidated financial statements.

              In December 2003, the SEC issued Staff Accounting Bulletin ("SAB")
              No. 104, "Revenue Recognition," ("SAB No. 104") which revises or
              rescinds certain sections of SAB No. 101, "Revenue Recognition,"
              in order to make this interpretive guidance consistent with
              current authoritative accounting and auditing guidance and SEC
              rules and regulations. The changes noted in SAB No. 104 did not
              have a material effect on the Company's consolidated results of
              operations, consolidated financial position or consolidated cash
              flows.

NOTE 3:-  GOODWILL

          On December 13, 1999, AWS Acquisition Corp. ("AWS"), a wholly owned
          subsidiary of Tefron U.S. Holdings Corp. ("Holdings"), a wholly-owned
          subsidiary of the Company, completed its tender offer for 100% of the
          outstanding Common stock of a U.S. company, Alba- Waldensian Inc.
          ("Alba"), that manufactures seamless apparel and specialty knitted
          health care products. AWS and Holdings were formed in connection with
          the purchase of Alba's stock and, immediately following the purchase,
          AWS was merged into Alba, as the surviving corporation. The
          acquisition, which was accounted for as a purchase, included the
          purchase of outstanding shares of Common stock of Alba at $ 18.50 per
          share, which, in addition to acquisition costs of $ 3,273 resulted in
          a total purchase price of $ 63,418.

          In June 2001, the Company signed an agreement according to which it
          acquired, through a wholly-owned subsidiary, 49.9% of JBA Production
          S.A. ("JBA"), a company operating in Madagascar and engaged in the
          manufacturing of bras, in consideration for approximately $ 1.3
          thousand.


                                     F - 19
<PAGE>


                                                TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 3:-  GOODWILL (CONT.)

          On January 1, 2002, the Company adopted SFAS 142.

          The Company, relying on an independent expert, compared the fair value
          of each reporting unit's carrying amount. As a result, one reporting
          unit carrying amount exceeded its fair value and the goodwill
          identified with the reporting unit, which has a carrying amount of $
          17,994, has been impaired under the provisions of SFAS No. 142. The
          goodwill identified with JBA in the amount of $ 780 has been impaired
          under APB Opinion No. 18, the equity method of accounting for
          investment in Common stock. The transitional impairment loss was
          recognized as the cumulative effect of a change in accounting
          principle as of January 1, 2002, in the Company's statement of
          operations.

          The revaluation of goodwill for the year 2003 did not change the
          carrying value of goodwill for the year ended December 31, 2003.

          The following transitional information is presented to reflect net
          income (loss) and earnings (loss) per share for all prior periods
          adjusted to exclude amortization of goodwill:

<TABLE>
<CAPTION>
                                                                                  YEAR ENDED DECEMBER 31,
                                                                           ------------------------------------
                                                                              2001         2002         2003
                                                                           ----------   ----------   ----------
          <S>                                                              <C>          <C>          <C>
          Reported net income (loss) from ordinary activities              $  (10,006)  $    1,276   $   (3,453)
          Add - goodwill amortization                                           1,282            -            -
                                                                           ----------   ----------   ----------

          Adjusted net income (loss) from ordinary activities                  (8,724)       1,276       (3,453)

          Cumulative effect of change in accounting principle                       -      (18,774)           -
                                                                           ----------   ----------   ----------

          Adjusted net loss                                                $   (8,724)  $  (17,498)  $   (3,453)
                                                                           ==========   ==========   ==========

          Basic and dilutive earnings (loss) per share:

          Reported net earnings (loss) per share from ordinary
             activities:                                                   $    (0.81)  $     0.10   $    (0.28)
          Add - goodwill amortization                                            0.10            -            -
                                                                           ----------   ----------   ----------

          Adjusted net earnings (loss) per share from ordinary activities       (0.71)        0.10        (0.28)

          Net loss per share from cumulative effect of change in
             accounting principle                                                   -        (1.51)           -
                                                                           ----------   ----------   ----------

          Adjusted net loss per share                                      $    (0.71)  $    (1.41)  $    (0.28)
                                                                           ==========   ==========   ==========
</TABLE>


                                     F - 20
<PAGE>


                                                TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 4:-  TRADE RECEIVABLES, NET
<TABLE>
<CAPTION>

                                                          December 31
                                                     --------------------
                                                       2002        2003
                                                     ---------  ---------
<S>                                                  <C>        <C>
          Foreign
          Major customers                               15,539     14,147
          Other customers                                5,293      9,727
                                                     ---------  ---------
          Foreign                                       20,832     23,874
                                                     ---------  ---------

          Domestic (Israel) -
             Related party (Macpell)                       395        718
             Others                                        194        325
                                                     ---------  ---------
                                                           589      1,043
                                                     ---------  ---------
          Total *)                                   $  21,421  $  24,917
                                                     =========  =========
          *) Net of allowance for doubtful accounts  $     474  $     229
                                                     =========  =========
</TABLE>

NOTE 5:-  OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES
<TABLE>
<CAPTION>

                                                           December 31
                                                        ------------------
                                                          2002      2003
                                                        --------  --------
<S>                                                     <C>       <C>
          Government authorities:
             VAT, customs and other levies recoverable  $    987  $  2,071
             Investment grant receivable                   2,021     1,897
             Income tax advances, net of accruals            276        92
          Deferred income taxes (see Note 20)                314       589
          Advances to suppliers                              188       303
          Prepaid expenses                                   776       703
          Other                                              897       511
                                                        --------  --------
                                                        $  5,459  $  6,166
                                                        ========  ========

NOTE 6:-  INVENTORIES

          Raw materials, accessories and packaging
           materials                                    $  9,042  $ 11,128
          Work - in - progress                             8,644    11,214
          Finished products                                8,520     9,334
                                                        --------  --------
                                                        $ 26,206  $ 31,676
                                                        ========  ========
</TABLE>


                                     F - 21
<PAGE>


                                                TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 7:-  PROPERTY, PLANT AND EQUIPMENT, NET

          Composition of assets grouped by major classifications, are as
          follows:
<TABLE>
<CAPTION>

                                                           DECEMBER 31
                                                      ---------------------
                                                        2002         2003
                                                      ---------   ---------
<S>                                                   <C>         <C>
           Cost:
             Buildings                                $   7,724   $   7,767
             Machinery and equipment (3) (2)            164,952     172,865
             Installation and leasehold improvements      4,490       5,138
             Motor vehicles                                 784         557
             Furniture and office equipment               2,969       3,563
             Investment grants                          (30,287)    (32,156)
                                                      ---------   ---------

                                                        150,632     157,734
                                                      ---------   ---------

           Accumulated depreciation:
             Buildings                                      584         725
             Machinery and equipment                     59,243      71,097
             Installation and leasehold improvements      3,808       1,830
             Motor vehicles                                 475         402
             Furniture and office equipment               1,499       1,853
             Investment grants                          (13,476)    (15,646)
                                                      ---------   ---------

                                                         52,133      60,261
                                                      ---------   ---------

          Depreciated cost                            $  98,499   $  97,473
                                                      =========   =========
</TABLE>

          (1) Depreciation expense for the years ended December 31, 2001, 2002
              and 2003 is $ 9,592, $ 9,722 and $ 7,260, respectively.

          (2) Included in machinery and equipment are assets under capital lease
              with a cost of $ 8,464 and $ 6,079 as of December 31, 2002 and
              2003, respectively. The capital lease is included in accordance
              with No.13. Statement of Financial Accounting Standards No. 13,
              "According to Leases" ("SFAS No. 13").

          (3) Including advance to machinery and equipment supplier in the
              amount of $ 1,166, which was exercised at the beginning of 2004 -
              see Note 14d.

          (4) As for collateral, see Note 14.


                                     F - 22
<PAGE>


                                                TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 8:-  INVESTMENT IN AFFILIATED COMPANIES

          In June 2001, the Company acquired, through a wholly-owned subsidiary,
          49.9% of JBA Production S.A. ("JBA"), a company operating in
          Madagascar and engaged in the manufacturing of bras, in consideration
          of approximately $ 1.3 thousand.

          In the framework of JBA acquisition, the Company invested
          approximately $ 200 for a 50.1% ownership of a new marketing company,
          Tefrani SA, which is designated to be engaged in the marketing most of
          JBA's products.

          The investment in Tefrani was accounted for by the equity method since
          its operations are immaterial.

          During the last quarter of 2003, disputes arose between the Company
          and the other shareholders in Tefrani SA and JBA. As a result,
          effectively, it lost its influence in those companies.

          The Company's management intends to terminate its partnership with the
          other shareholders.

          In light of the aforementioned, the investment in Tefrani SA and JBA
          is presented since September 30, 2003, on a cost basis. The balance of
          the investment reflects the cash balances that, in management's
          opinion, with the liquidation of operations, there is a high degree of
          certainty that these balances will be paid.

          a.  Investment in JBA:
<TABLE>
<CAPTION>

                                                             December 31,
                                                          -----------------
                                                           2002       2003
                                                          -------   -------

<S>                                                       <C>           <C>
              Equity, net (1)                             $   194        11
              Long-term loans (2)                             279       382
                                                          -------   -------

              Total investments in JBA                    $   473       393
                                                          =======   =======

              (1) Net equity is as follows:
                    Net equity as of the purchase date    $   507       507
                    Accumulated net losses                   (313)     (496)
                                                          -------   -------

                                                          $   194        11
                                                          =======   =======
</TABLE>

              (2)  The Company granted to JBA a loan linked to the U.S. dollar
                   and bearing no interest. A maturity date has not yet been
                   determined.

          b.  Investment in Tefrani SA:
<TABLE>
<CAPTION>

                                                     December 31
                                                  -----------------
                                                   2002       2003
                                                  -------   -------

<S>                                               <C>           <C>
              Net equity as of the purchase date  $   200       200
              Accumulated net losses                 (319)     (297)
                                                  -------   -------

              Equity, net                         $  (119)      (97)
                                                  =======   =======
</TABLE>


                                     F - 23
<PAGE>


                                                TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 9:-  SHORT-TERM BANK CREDIT

<TABLE>
<CAPTION>
                                                         INTEREST RATE %
                                                    ------------------------
                                                          DECEMBER 31,          DECEMBER 31,
                                                    -----------  -----------  ----------------
                                                       2002          2003      2002      2003
                                                    -----------  -----------  -------  -------
<S>                                                  <C>         <C>          <C>      <C>
          Short-term loans and overdrafts in
            U.S. dollar (1)                          2.75 - 3.5  2.75 - 4.25  $12,018  $30,291

          Loans and overdrafts in Israeli currency      10.4      9.6 - 10.4    2,749    1,470
                                                                              -------  -------

                                                                              $14,767  $31,761
                                                                              =======  =======
</TABLE>

          (1)  As of December 31, 2003, the Company fully utilized its unused
               short-term credit facilities.

          (2)  Collateral - see Note 14.

NOTE 10:- TRADE PAYABLES
<TABLE>
<CAPTION>

                                                         DECEMBER 31
                                                     ---------------------
                                                        2002        2003
                                                     ---------   ---------

<S>                                                  <C>         <C>
          Foreign                                    $  11,034   $  12,869
          Domestic (Israel)                             13,044      16,689
                                                     ---------   ---------

                                                     $  24,078   $  29,558
                                                     =========   =========

NOTE 11:- OTHER ACCOUNTS PAYABLE AND ACCRUED
          EXPENSES

          Employees and payroll accruals             $   5,286   $   5,298
          Accrued expenses                               2,254       2,984
          Equipment suppliers                              693       2,864
          Severance costs related to restructuring       1,172           -
                                                     ---------   ---------

                                                     $   9,405   $  11,146
                                                     =========   =========
</TABLE>


                                     F - 24
<PAGE>


                                                TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 12:- LONG-TERM LOANS

          a.  Composition
<TABLE>
<CAPTION>
                                           ANNUAL INTEREST RATE %
                                           ----------------------
                                                DECEMBER 31              DECEMBER 31
                                           ----------------------   ---------------------
                                              2002        2003        2002         2003
                                           ---------   ----------   ---------   ---------
              <S>                         <C>           <C>         <C>         <C>
              Loans in U.S. dollars:
                Banks                     2.75 - 6.4    2.375-6.4   $  78,874   $  65,763
                Capital lease obligation      7-9           7-9         3,210       1,694
                Other                         7-9           7-9         2,039       1,036
                                                                    ---------   ---------

                                                                       84,123      68,493
                                                                    ---------   ---------
              Less current maturities:
                Banks and other loans                                  16,290      10,328
                Capital lease obligation                                1,455       1,367
                                                                    ---------   ---------

                                                                       17,745      11,695
                                                                    ---------   ---------

                                                                    $  66,378   $  56,798
                                                                    =========   =========
</TABLE>

          b.  The loans mature as follows:
<TABLE>
<CAPTION>

                                       December 31,
                                        ---------

<S>           <C>                       <C>
              2004 (current maturity)   $  11,695
              2005                         25,235
              2006                         20,109
              2007                         11,454
                                        ---------

                                        $  68,493
                                        =========
</TABLE>


          c.  The bank loan agreements contain various covenants, which require
              among others, that the Company maintain certain financial ratios
              related to shareholders' equity and operating results. In
              addition, the terms limit capital expenditure. As of December 31,
              2003, the Company was not in compliance with these financial
              ratios. However, the Company received a waiver from the banks from
              the financial ratios with which it was not in compliance for this
              period.

              In addition, the banks have agreed to new financing arrangements
              with the Company that will become effective upon the closing of
              the Share Purchase Agreement with the Investor controlled by FIMI
              (see in Note 23). Such new financing arrangements contain
              different financial covenants and ratios, than those in the
              Company's current bank loan agreements.

          d.  As for collateral, see Note 14.


                                     F - 25
<PAGE>


                                                TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 13:- SEVERANCE PAY FUNDS

          Under Israeli law, the Company and its subsidiaries in Israel are
          required to make severance payments to terminated employees. The
          calculation is based on the employee's latest salary and the period of
          employment. For certain employees, including officers, the obligation
          for severance pay is covered by payment of premiums to insurance
          companies under approved plans and by regular payments to pension
          funds. For commitments, which, are not covered by such payments, an
          amount of $ 2,486 (2002 - $ 2,123) has been accrued.

          Severance pay expenses amounted to $ 1,471, $ 1,285 and $ 357 for the
          years ended December 31, 2001, 2002 and 2003, respectively (in 2002,
          including $ 1,172 restructuring charges).

NOTE 14:- LIENS, CONTINGENCIES AND COMMITMENTS

          a.  All bank debt is collateralized by a floating charge (a continuing
              charge on the Company's present and future assets but permitting
              the Company to dispose of such assets in the ordinary course of
              business) on all of the assets of the Company and its
              subsidiaries.

          b.  In accordance with the provisions of the Law for the Encouragement
              of Capital Investments, (1959), the Company and its subsidiaries
              in Israel received grants from the State of Israel in respect of
              investments in their plants (see Note 20). The conditions in the
              letters of approval extending the grants from the State of Israel
              primarily include the requirements that the investments be made
              according to the approved plan and that at least 30% of the
              investments be financed by paid-up share capital. Non-fulfillment
              of these conditions would require the refund of the grants linked
              to the Consumer Price Index from date of receipt plus interest. To
              guarantee fulfillment of the conditions for receipt of the grants,
              the Company and its subsidiaries have registered floating charges
              on all of their assets for the benefit of the State of Israel. In
              the opinion of management, as of December 31, 2003, the Company
              and its subsidiaries are meeting the required conditions.

          c.  The facilities of the Company and most of its Israeli subsidiaries
              are located in buildings leased for various periods (excluding
              renewal options) ending between 2004 and 2012.

              The significant leases are with a related party, a company
              controlled by the principal shareholders, ending between 2008 and
              2024 (including renewal options) at an annual rental of $ 2,475.
              Half of the basic rental payments is linked to the Israeli CPI and
              half is linked to the U.S. cost of living index.

              The remaining lease payments are in, or linked to, the U.S.
              dollar.


                                     F - 26
<PAGE>


                                                TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE DATA

NOTE 14:-- LIENS, CONTINGENCIES AND COMMITMENTS (CONT.)

              The aggregate minimum rental, commitments under non-cancelable
              leases, based on the above agreements as of December 31, 2003, are
              as follows:
<TABLE>
<CAPTION>

<S>                                            <C>
              2004                             $   3,032
              2005                             $   2,800
              2006                             $   2,241
              2007                             $   2,154
              2008                             $   2,154
              2009 and thereafter              $   6,765
</TABLE>

              Rental expense for the years 2001, 2002 and 2003, amounted to $
              3,165, $ 3,348 and $ 3,121, respectively.

          d.  Advance to supplier of fixed assets:

              The Company has committed to purchase machinery in the amount of
              approximately $ 4,660. At December 31, 2001, an amount of $ 1,329
              has been paid as a 30% advance on this commitment. The advance is
              linked to the Euro (2003 - 0.79, 2002 - 0.95). The advance was
              fully realized at the beginning of 2004 when the Company ordered
              30 machines and machinery parts in an amount of (euro) 2 thousand.
              As a result, the advance has classified to property, plant and
              equipment (see also Note 7).

          e.  Legal proceeding:

              Except as described below, there are no material pending legal
              proceedings, other than ordinary routine litigation incidental to
              the business, to which the Company or any of its subsidiaries are
              subject.

              On March 5, 2003, a lawsuit was filed by a former employee of the
              Company, in the Tel-Aviv District labor Court, alleging for
              compensation relating to the termination of his employment with
              the Company in 2002, in an aggregate amount of $ 1,150. The
              Company does not except this lawsuit to have a material adverse
              effect on its business or financial condition.

NOTE 15:- SHAREHOLDERS' EQUITY

          a.  Composition:
<TABLE>
<CAPTION>


                                                        DECEMBER 31
                                                       2002 AND 2003
                                                    ------------------
                                                      NUMBER OF SHARES
                                                    ------------------
<S>                                                     <C>
              Ordinary shares of NIS 1 par value:
                 Authorized                             50,000,000
                 Issued and paid-up                     13,409,566
                 Treasury stock *)                         997,400
                 Outstanding                            12,412,166
</TABLE>


              *)  Relates to the Company's stock held by a wholly-owned
                  subsidiary.

              The Company's shares are traded on the New York Stock Exchange.
              (See also Note 23).


                                     F - 27
<PAGE>


                                                TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE DATA

NOTE 15:- SHAREHOLDERS' EQUITY (CONT.)

          b.  Stock options:

              In September 1997, the Company's Board of Directors adopted a
              Share Option Plan in which 1,166,049 Ordinary shares are reserved
              for issuance to directors, officers and employees of the Company.
              At general meetings of shareholders in August 1999 and July 2001,
              it was resolved to increase the number of shares reserved for
              issuance under the Share Option Plan by 600,000 and 500,000
              Ordinary Shares, respectively. The options vest over a period of
              three years and expire on the tenth anniversary from the grant
              date or at termination of employment.

              Most options have been issued in accordance with Section 102 of
              the Income Tax Ordinance in Israel. This provided certain tax
              benefits to employee participants and restricted the disposal of
              the shares under the plan for a period of two years from the grant
              date.

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

<TABLE>
<CAPTION>
                                                            WEIGHTED    WEIGHTED
                                                            AVERAGE  AVERAGE FAIR
                                              NUMBER OF     EXERCISE   VALUE ON
                                               SHARES        PRICE    GRANT DATE
                                              ----------    -------   ----------
              <S>                              <C>          <C>       <C>
              Outstanding January 1, 2001
               (513,201 exercisable)           1,081,533

               Granted                           619,500    $  3.53   $    1.61
               Forfeited                        (562,559)   $ 13.23   $    3.12
                                              ----------

              Outstanding December 31, 2001
               (397,086 exercisable)           1,138,474

               Granted                           838,553    $  3.52   $    1.70
               Forfeited                        (221,153)   $ 10.31   $     4.5
                                              ----------

              Outstanding December 31, 2002
               (641,804 exercisable)           1,755,874

               Granted                           160,284    $   3.5   $    1.67
               Forfeited                         (98,835)   $ 10.11   $    3.08
                                              ----------

              Outstanding December 31, 2003
               (1,031,679 exercisable)         1,817,323    $  4.54   $    2.07
                                              ==========
</TABLE>


                                     F - 28
<PAGE>


                                                TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE DATA

NOTE 15:- SHAREHOLDERS' EQUITY (CONT.)

              The following table summarizes information about options
              outstanding and exercisable at December 31, 2003:

<TABLE>
<CAPTION>
                                                                           OPTIONS EXERCISABLE
                                                                           --------------------
                                    OPTIONS         WEIGHTED AVERAGE            OPTIONS
                                OUTSTANDING AS OF      REMAINING            OUTSTANDING AS OF
                                   DECEMBER 31,       CONTRACTUAL              DECEMBER 31,
              EXERCISE PRICES         2003            LIFE (YEARS)               2003
              ---------------    ---------------     --------------         ----------------
              <S>                        <C>              <C>                      <C>
              $    15.00                  59,000               6.46                   59,000
              $     9.50                 100,000               5.37                  100,000
              $     8.13                 128,000               5.32                  128,000
              $     3.89                  40,000               8.59                   13,333
              $     3.59                  15,000                8.6                    5,000
              $     3.56                 300,000               7.01                  300,000
              $     3.50                 214,000               7.78                  142,667
              $     3.50                  50,000               7.92                   33,333
              $     3.50                 751,039               8.50                  250,346
              $     3.50                 160,284               9.37                        -
                                 ---------------                            ----------------

                                                          1,817,323                1,031,679
                                                     ==============         ================
</TABLE>

              Under SFAS No. 123, "Accounting for Stock-Based Compensation"
              ("SFAS No.123"), pro forma information regarding net loss and loss
              per share is required for grants issued after December 1994, and
              has been determined as if the Company had accounted for its
              employee share options under the fair value method of SFAS No.
              123. The fair value for these options were estimated at the grant
              date using a Black-Scholes option pricing model with the following
              weighted-average assumptions for 2001, 2002 and 2003: risk-free
              interest rates of 1.75%, 2% and 1.5 %, respectively, dividend
              yields of 0% for each year, volatility factors of the expected
              market price of the Company's Ordinary shares of 123%, 94.5% and
              94.2%, respectively, and a weighted-average expected life of the
              options of approximately 2 years (for all years presented).


                                     F - 29
<PAGE>


                                                TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE DATA

NOTE 15:- SHAREHOLDERS' EQUITY (CONT.)

              Had compensation cost been determined under the alternative fair
              value accounting method provided for under SFAS No. 123, the
              Company's loss and loss per share would have been reduced to the
              following pro forma amounts:

<TABLE>
<CAPTION>
                                                                                       YEAR ENDED DECEMBER 31,
                                                                               ----------------------------------------
                                                                                   2001          2002         2003
                                                                               ------------  ------------  ------------
              <S>                                                <C>           <C>           <C>           <C>
              Net loss                                           As reported   $    (10,006) $    (17,498) $     (3,295)
                                                                               ============  ============  ============
                                                                 Pro forma
                                                                 net loss      $    (11,266) $    (18,333) $     (4,206)
                                                                               ============  ============  ============
              Basic and diluted earnings (loss) per share:
                 From ordinary activities                        As reported   $      (0.81) $       0.10  $      (0.27)
                                                                 Pro forma     $      (0.91) $       0.07  $      (0.34)

                 Net loss per share                              As reported   $      (0.81) $      (1.41) $      (0.27)
                                                                 Pro forma     $      (0.91) $      (1.47) $      (0.34)
</TABLE>

NOTE 16:- SALES

          Sales to major customers:

<TABLE>
<CAPTION>
                                                       YEAR ENDED DECEMBER 31,
                                                   ---------------------------------
                                                      2001      2002         2003
                                                   --------   ---------    ---------
                                                                 %
                                                   ---------------------------------
              <S>                                      <C>         <C>          <C>
              A                                        43.0        49.8         38.2
              B                                         8.4         8.8         11.0
              C                                         6.9         5.3          9.1
              D                                         3.8         3.9          5.8
              E                                         9.5         8.3          5.6
              F                                         4.1         4.4          5.5
                                                   --------   ---------    ---------
                                                       75.7        80.5         75.2
                                                   ========   =========    =========

NOTE 17:- COST OF SALES

              Materials                            $ 69,911   $  70,274    $  64,322
              Salaries and related expenses          49,691      42,327       39,878
              Subcontracting                         12,811      13,750       10,673
              Other production costs                 21,340      18,855       19,141
              Depreciation                            9,224       9,060        6,716
                                                   --------   ---------    ---------

              Total manufacturing costs             162,977     154,266      140,730

              Decrease (increase) in inventories      6,196      (2,881)      (2,640)
                                                   --------   ---------    ---------

                                                   $169,173   $ 151,385    $ 138,090
                                                   ========   =========    =========
</TABLE>

              Shipping expenses to clients, in the amount of $ 3,130 (2002 -
              2,046), were recorded as selling expenses.


                                     F - 30
<PAGE>


                                                TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE DATA

NOTE 18:- FINANCIAL EXPENSES, NET
<TABLE>
<CAPTION>

                                                    YEAR ENDED DECEMBER 31,
                                              --------------------------------
                                                2001        2002        2003
                                              --------    --------    --------
<S>                                           <C>         <C>         <C>
          Expenses:
             Interest on long-term loans      $  8,306    $  3,942    $  3,708
             Interest on short-term loans          855         727         653
             Exchange rate differences, net        (28)        480         682
             Bank expenses and other, net          354         335         515
                                              --------    --------    --------

                                                 9,487       5,484       5,558
          Interest income on bank deposits         (91)        (27)          -
                                              --------    --------    --------

                                              $  9,396    $  5,457    $  5,558
                                              ========    ========    ========


NOTE 19:- OTHER EXPENSES (INCOME), NET

          Issuance of shares to
           minority shareholders              $      -    $  2,082    $      -
          Other losses (gains)                     843         211        (228)
                                              --------    --------    --------

                                              $    843    $  2,293    $   (228)
                                              ========    ========    ========


NOTE 20:- TAXES ON INCOME

          a.  Composition:

              Current taxes                   $      -    $      -    $    197
              Deferred taxes                      (837)      4,571        (289)
              Taxes in respect of prior
                years (foreign)                      -         408           -
                                              ---------   --------    --------

                                              $   (837)   $  4,979    $    (92)
                                              =========   ========    ========
</TABLE>

          b   Tax laws applicable:

              The Company and most of its significance subsidiaries in Israel
              are subject to Income Tax Regulations (Rules Relating to the
              Maintenance of Books of Account by Foreign Investment Companies
              and Certain Partnerships and the Determination of their Taxable
              Income) 1986, and accordingly, maintain books for tax purposes in
              U.S. dollars. The Company and its subsidiaries in Israel are
              "industrial companies" in conformity with the Law for the
              Encouragement of Industry (Taxes) 1969. The principal benefits to
              which the companies are entitled under this Law are accelerated
              rates of depreciation, consolidated tax returns and a deduction
              for tax purposes, over a three year period, of costs incurred in
              registering shares for trading.


                                     F - 31
<PAGE>


                                                TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE DATA

NOTE 20:- TAXES ON INCOME

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

              Seven expansion programs of the Company have been granted an
              "Approved Enterprise" status, under the Law. For these expansion
              programs, the Company has elected alternative benefits, waiving
              grants in return for tax exemptions. Pursuant thereto, the income
              of the Company derived from the following "Approved Enterprise"
              expansion programs is tax-exempt for the periods stated below and
              will be eligible for reduced tax rates thereafter (such reduced
              tax rates are dependent on the level of non-Israeli investments in
              the Company), as described below.

              1.  Income derived from the first to the fifth programs, which
                  commenced in 1997 and are to be expired in 2003 to 2006, were
                  tax-exempt for the two-year period ended December 31, 1999,
                  and were subject to a reduced tax rate of 25% for the
                  following years.

              2.  Income derived from the sixth program, which commenced in 1998
                  and is to be expired in 2007, was tax-exempt for the two-year
                  period ended December 31, 2000 and were subject to reduced tax
                  rate of 25% for the following years.

              3.  The seventh program is not yet commenced.

              The entitlement to the above benefits is conditional upon the
              Company fulfilling the conditions stipulated by the above law,
              regulations published thereunder and the instruments of approval
              for the specific investments in "approved enterprises". In the
              event of failure to comply with these conditions, the benefits may
              be canceled and the Company may be required to refund the amount
              of the benefits, in whole or in part, including interest. As of
              December 31, 2003, management believes that the Company is meeting
              all of the aforementioned conditions.

              The period of tax benefits, detailed above, is subject to limits
              of the earlier of 12 years from the commencement of production, or
              14 years from receiving the approval.

              Since the Company is operating under more than one approval and
              since part of its taxable income is not entitled to tax benefits
              under the abovementioned law and is taxed at the regular tax rate
              of 36%, its effective tax rate is the result of a weighted
              combination of the various applicable rate and tax exemptions, and
              the computation is made for income derived from each program on
              the basis of formulas specified in the law and in the approvals.

              Income from sources other than the "Approved Enterprise" during
              the benefit period will be subject to tax at the regular corporate
              tax rate of 36%.

              By virtue of this law, the Company is entitled to claim
              accelerated depreciation on equipment used by the "Approved
              Enterprise" during five tax years.


                                     F - 32
<PAGE>


                                                TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE DATA

NOTE 20:- TAXES ON INCOME (CONT.)

              Shareholders are subject to tax at a rate of 15% on dividends
              distributed out of income of approved enterprises and 25% on
              dividends distributed from other sources of income, unless tax
              treaties state otherwise.

          d.  Effective tax:

              A reconciliation between the theoretical tax expense, assuming all
              income is taxed at the statutory tax rate applicable to income of
              the Company and the actual tax expense as reported in the
              statement of operations, is as follows:

<TABLE>
<CAPTION>
                                                                                   YEAR ENDED DECEMBER 31,
                                                                             ----------------------------------
                                                                               2001         2002         2003
                                                                             --------     --------     --------
              <S>                                                            <C>          <C>          <C>
              Income (loss) before taxes, as reported in the consolidated
                 statements of operations                                    $(10,603)    $  7,469     $   (727)
                                                                             ========     ========     ========

              Statutory tax rate                                                   36%          36%          36%
                                                                             ========     ========     ========

              Theoretical tax expense (benefit) on the above amount at the
                 Israeli statutory tax rate                                  $ (3,817)    $  2,689     $   (256)
              Decrease in taxes resulting from "Approved Enterprise"
                 benefits                                                         504       (1,303)          51
              Deferred taxes on losses for which valuation allowance was
                 provided                                                       2,715        2,633          533
              Exempt income                                                       (15)           -            -
              Non-deductible expenses                                               -           45           40
              Taxes in respect of prior years                                       -          408         (469)
              Other                                                              (224)         507            9
                                                                             --------     --------     --------

              Actual tax expenses (benefit)                                  $   (837)    $  4,979     $    (92)
                                                                             ========     ========     ========
</TABLE>


                                     F - 33
<PAGE>


                                                TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE DATA

NOTE 20:- TAXES ON INCOME (CONT.)

          e.  Deferred taxes:

              Deferred income taxes reflect the net tax effect of temporary
              differences between the carrying amounts of assets and liabilities
              for financial reporting purposes and the amounts used for income
              tax purposes. Significant components of the Company's deferred tax
              liabilities and assets are as follows:

<TABLE>
<CAPTION>
                                                                                DECEMBER 31
                                                                            ----------------------
                                                                               2002         2003
                                                                            ---------    ---------
              <S>                                                           <C>          <C>
              Liability in respect of:
              Depreciation                                                  $ (17,731)   $ (17,569)
              Temporary differences in recognition of income and expenses       5,601        4,427
              Net operating loss carryforwards                                 17,177       19,011
                                                                            ---------    ---------

              Net deferred tax assets before valuation allowance                5,047        5,869
              Valuation allowance (1)                                          (8,889)      (9,422)
                                                                            ---------    ---------

              Net deferred tax                                              $  (3,842)   $  (3,553)
                                                                            =========    =========

              Presented in balance sheet:
                Long-term liability                                         $  (8,117)   $  (7,570)
                Long-term assets                                                3,961        3,428
                Other receivables                                                 314          589
                                                                            ---------    ---------

                Net deferred tax                                            $  (3,842)   $  (3,553)
                                                                            =========    =========

                Domestic                                                    $  (7,803)   $  (6,553)
                Foreign                                                         3,961        3,000
                                                                            ---------    ---------

                Net deferred tax                                            $  (3,842)   $  (3,553)
                                                                            =========    =========
</TABLE>

              (1) The net change in the total valuation allowance for the years
                  ended December 31, 2001, 2002 and 2003 is $ 6,196, $ 2,633 and
                  $ 533, respectively.

              (2) The deferred taxes are computed based on enacted tax rates
                  estimated to apply at time of reversal (average rate of 22%
                  for Israeli companies and 37% for a subsidiary located in the
                  U.S.).

          f.  Final tax assessments:

              The Company and New-Net have received final tax assessments
              through December 31, 1996 and 1999, respectively. Other
              subsidiaries have not received a tax assessment since inception.

              The Company is negotiating with Israel's Tax Authorities with
              respect to final tax assessment for the years 1997-1999. The
              Company cannot predict the impact of these negotiations on the
              results of operations.


                                     F - 34
<PAGE>


                                                TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 21:- SEGMENT REPORTING

          a.  General information:

              FABS Statement No. 131 "Disclosures about Segment of an Enterprise
              and Related Information" requires companies to provide certain
              information about their operating segments.

              The Company has three production lines: Knitted apparel ("Cut and
              Sew") Seamless apparel ("Seamless") and health care products.
              Unlike the Cut and Sew process, the Seamless process includes the
              utilization of a single machine, that transforms yarn directly
              into a nearly complete garment.

              The company has three reportable segments:

              -   Intimate apparel and activewear manufactured using the
                  Seamless process ("Seamless").
              -   Intimate apparel and activewear manufactured using Cut and Sew
                  process located in Israel ("Cut and Sew").
              -   Health production, located in Tennessee, U.S. (Healthcare).

              The accounting policies of the reportable segments are the same as
              those described in Note 2, "Summary of significant accounting
              policies". Selling, general and administrative expenses are
              allocated according to the management's assessment.

              Management evaluates performance based upon operating income
              (loss) before interest and income taxes.


                                     F - 35
<PAGE>


                                                TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 21:- SEGMENT REPORTING (CONT.)

          b.  Reportable segments:
<TABLE>
<CAPTION>
                                                             YEAR ENDED DECEMBER 31, 2003
                                             ----------------------------------------------------------------
                                             CUT & SEW                  HEALTHCARE
                                             - ISRAEL      SEAMLESS        USA       ADJUSTMENTS  CONSOLIDATED
                                             ----------   ----------    ----------   ----------    ----------
          <S>                                <C>          <C>           <C>          <C>           <C>
          Sales to unaffiliated customers    $   51,944   $   72,856    $   38,286   $        -    $  163,086
          Inter-segmental sales                   1,469            -             -       (1,469)            -
                                             ----------   ----------    ----------   ----------    ----------

          Total sales                        $   53,413   $   72,856    $   38,286   $   (1,469)   $  163,086
                                             ==========   ==========    ==========   ==========    ==========

          Operating income (loss)            $    1,026   $   (3,046)   $    6,693   $        -    $    4,673
                                             ==========   ==========    ==========   ==========    ==========
          Financial expenses, net                                                                       5,628
          Other income, net                                                                               228
                                                                                                   ----------

          Loss before tax on income                                                                $      727
                                                                                                   ==========

          Depreciation and amortization      $    1,809   $    5,442    $      422   $        -    $    7,673
                                             ==========   ==========    ==========   ==========    ==========

          Identifiable and total assets at
             December 31, 2003               $   39,628   $  101,202    $   44,329   $        -    $  185,222
                                             ==========   ==========    ==========   ==========

          Corporate assets                                                                             17,499
                                                                                                   ----------

          Total assets                                                                             $  202,721
                                                                                                   ==========
</TABLE>

<TABLE>
<CAPTION>
                                                            YEAR ENDED DECEMBER 31, 2002
                                             -----------------------------------------------------------------
                                             CUT & SEW                  HEALTHCARE
                                              - ISRAEL     SEAMLESS        USA      ADJUSTMENTS   CONSOLIDATED
                                             ----------   ----------    ----------   ----------    ----------
          <S>                                <C>          <C>           <C>          <C>           <C>

          Sales to unaffiliated customers    $   66,199   $   86,524    $   37,582   $        -    $  190,305
          Inter-segmental sales                       -        1,308             -       (1,308)            -
                                             ----------   ----------    ----------   ----------    ----------

          Total sales                        $   66,199   $   87,832    $   37,582   $   (1,308)   $  190,305
                                             ==========   ==========    ==========   ==========    ==========

          Operating income (loss)            $   10,611   $   (2,760)   $    7,368   $        -    $   15,219
                                             ==========   ==========    ==========   ==========

          Financial expenses, net                                                                       5,457
          Other expenses, net                                                                           2,293
                                                                                                   ----------

          Income before tax on income                                                              $    7,469
                                                                                                   ==========

          Depreciation and amortization      $    2,989   $    6,321    $      412   $        -    $    9,722
                                             ==========   ==========    ==========   ==========    ==========

          Identifiable and total assets at
             December 31, 2002               $   34,975   $   97,299    $   44,904   $        -    $  177,178
                                             ==========   ==========    ==========   ==========

          Corporate assets                                                                             19,233
                                                                                                   ----------

          Total assets                                                                             $  196,411
                                                                                                   ==========
</TABLE>


                                     F - 36
<PAGE>


                                                TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 21:- SEGMENT REPORTING (CONT.)

<TABLE>
<CAPTION>
                                                             YEAR ENDED DECEMBER 31, 2001
                                             -----------------------------------------------------------------
                                             CUT & SEW                   HEALTHCARE
                                             - ISRAEL       SEAMLESS        USA      ADJUSTMENTS   CONSOLIDATED
                                             ----------    ----------    ----------   ----------    ----------
          <S>                                <C>           <C>           <C>          <C>           <C>

          Sales to unaffiliated              $   54,785    $   95,740    $   38,424   $        -    $  188,949
          Inter-segmental sales                       -         1,634             -       (1,634)            -
                                             ----------    ----------    ----------   ----------    ----------
          Total sales                        $   54,785    $   97,374    $   38,424   $   (1,634)   $  188,949
                                             ==========    ==========    ==========   ==========    ==========

          Operating income (loss)            $    2,385    $   (9,570)   $    6,872   $      (51)   $     (364)
                                             ==========    ==========    ==========   ==========

          Financial expenses, net                                                                        9,396
          Other expenses, net                                                                              843
                                                                                                    ----------

          Loss before tax benefit                                                                   $  (10,603)
                                                                                                    ==========

          Depreciation and amortization      $    2,970    $    7,026    $      948   $        -    $   10,944
                                             ==========    ==========    ==========   ==========    ==========

          Identifiable and total assets at
             December 31, 2001               $   39,393    $  131,049    $   37,818   $     (221)   $  208,039
                                             ==========    ==========    ==========   ==========

          Corporate assets                                                                              19,694
                                                                                                    ----------

          Total assets                                                                              $  227,733
                                                                                                    ==========
</TABLE>


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

<TABLE>
<CAPTION>

                                       Year Ended December 31,
                                 ------------------------------------
                                    2001         2002         2003
                                 ----------   ----------   ----------

<S>                              <C>          <C>          <C>
              North America      $  177,539   $  186,348   $  154,696
              Europe                  6,326        1,809        4,350
              Israel                  2,000        1,709        2,782
              Other                   3,084          439        1,258
                                 ----------   ----------   ----------

                                 $  188,949   $  190,305   $  163,086
                                 ==========   ==========   ==========
</TABLE>


                                     F - 37
<PAGE>


                                                TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 21:- SEGMENT REPORTING (CONT.)

          d.  The company's long-live assets by geographic area are as follows:

<TABLE>
<CAPTION>

                                            December 31,
                                       -----------------------
                                          2002        2003
                                       ----------   ----------

<S>                                    <C>          <C>
              Israel                   $   77,083   $   76,882
              Foreign countries            54,752       51,096
                                       ----------   ----------

                                       $  131,835   $  127,978
                                       ==========   ==========
</TABLE>


NOTE 22:- RELATED PARTIES

          a.  Transactions with related parties:

<TABLE>
<CAPTION>
                                                                  Year Ended December 31,
                                                             -------------------------------
                                                                2001      2002        2003
                                                             ---------  ---------  ---------
              <S>                                            <C>        <C>        <C>
              Sales to related parties                       $     694  $   1,019  $   1,155
              Cost of sales (1)                              $  (2,517) $  (2,475) $  (2,667)
              Selling, general and administrative expenses   $    (550) $    (362) $    (703)
</TABLE>

              (1)  Including primarily rental payments.

          b.  During 2003, the Company acquired machinery from a related company
              in the amount of $ 200.


                                     F - 38
<PAGE>


                                                TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 23:- SUBSEQUENT EVENTS

          a.  On February 17, 2004, the Company entered into a Share Purchase
              Agreement ("SPA") with a partnership (the "Investor") controlled
              by FIMI Opportunity Fund ("FIMI") and certain other co-investors
              including Mivtach Shamir Holding Corporation Ltd. Under the SPA,
              the Investor will, subject to the fulfillment of certain
              prerequisites, invest in the Company $ 15 million in cash for
              approximately 3.53 million Ordinary shares of the Company at a
              base price of $ 4.25 per share.

              In addition to the SPA, the Investor entered into an agreement
              ("Additional Purchase Agreement") with the major shareholders of
              the Company, Macpell Industries Ltd. ("Macpell") and its
              controlling shareholder Arwol Holdings Ltd. ("Arwol"), to purchase
              from them additional 1,365,000 Ordinary shares of the Company, at
              a base price of $ 5.538 per share at an aggregate purchase price
              of about $ 7.56 million. The Additional Purchase Agreement
              includes shareholders' agreement between the Investor, Macpell and
              Arwol. Subsequent to the consummation of all transactions
              contained in the SPA and in the Additional Purchase Agreement, the
              Investor will join the controlling group of Macpell and Arwol. The
              controlling group will hold approximately 60% of the issued share
              capital of the Company of which the Investor will be holding about
              half.

              According to the SPA, the base price per share for the Company and
              for Macpell and Arwol will be subject to adjustments and may be
              increased or reduced by up to $ 0.75 per share. In the event that
              a reduction is required, the Company will have the discretion to
              issue additional shares to the Investor or to refund a
              proportionate amount that was paid by the Investor to The Company.
              Similar discretion is provided to Macpell and Arwol under the
              Additional Purchase Agreement.

              The Investor has also entered into a Registration Rights Agreement
              with the Company, identical to that entered into by the Company,
              Arwol and Macpell in November 2003, with a change to permit a
              demand for a Form F-3 "shelf registration", which will be added to
              the existing Registration Rights Agreements.

              The execution of the agreement is subject, among other things, to
              the approval of the SPA by the shareholders of the Company and new
              financing arrangements between the Company and its financing
              banks, and the Investor and its financing banks. The Investor may
              terminate the agreements in the event that the average closing
              price of the Company's shares on NYSE over 30 consecutive trading
              days immediately preceding the closing date shall be less than US
              $ 3.14.

              Under the Agreement, the parties agree that annual management fees
              shall be paid to FIMI in consideration for management services on
              a non-exclusive basis, which shall be $ 172 per annum for the
              period until the Company's general meeting in 2005, and up to $
              120 per annum for the subsequent period. It was further agreed
              that as of the date on which Mr. Wolfson shall cease to serve as
              Chairman of the Company's Board of Directors, the existing
              consulting agreement between the Company and a company acting on
              behalf of Mr. Wolfson shall be amended so that the consideration
              to which he shall be entitled for the consulting services he will
              continue to provide to the Company although not as the Chairmen of
              its Board of Directors) shall be reduced from approximately $ 254
              to $ 120 per annum.


                                     F - 39
<PAGE>


                                                TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 23:- SUBSEQUENT EVENTS (CONT.)

          b.  The Company announced on March 3, 2004 that it has entered into an
              additional Share Purchase Agreement with a group of Investors
              represented by Mr. Zvi Limon. Under this agreement, the investors
              will, subject to the closing of the Share Purchase Agreement made
              on February 17, 2004, between the company and FIMI, invest in
              Tefron $ 5 million in cash for approximately 1.07 million ordinary
              shares of the Company at a base price of $ 4.65 per share. The
              Company has an option to issue the investor, within 90 days from
              the closing of this transaction, additional shares at the same
              price and terms in the total additional investment of up to $ 2
              million.

              According to the agreement, the base price per share will be
              subject to adjustments and may be increased or reduced by up to $
              0.75 per share. The investor has also entered into a Registration
              Rights Agreement with the Company.

              The execution of the agreement is subject, among other things to
              the execution of the SPA agreement aforementioned.

          c.  On March 9, 2004 the Company announced that it had entered into a
              Private Equity Credit Agreement with funds advised by Southridge
              Capital Management LLC ("Southridge"). Under the agreement, the
              Company has an option to call funds from an equity credit line
              facility provided by Southridge of up to the lesser of $ 15 or
              19.9% of The Company's outstanding share capital over the next
              three years. Under the financing facility, the Company will be
              entitled to issue shares to Southridge from time to time, at its
              own election, subject to certain minimum and maximum limitations,
              but in no event will Southridge be obligated to own more than
              4.99% of the Company's Ordinary shares at any one time. The price
              to be paid by Southridge will be at a discount of 6% to the market
              price of the Company's Ordinary shares (as calculated under the
              agreement) during a period prior to the issuance of the shares.
              Before drawing on the equity line, the Company must satisfy
              certain closing conditions, including the effectiveness of a
              registration statement to be filed by the Company, relating to the
              shares to be issued to Southridge.

          d.  On March 2004, the Company granted 650,000 options to Yosef Shiran
              (the Company's CEO.). The exercise price was set at $ 4.25, and
              the vesting periods are spread over 10 years from the date of the
              grant. The granting is subject to the shareholder committee
              approval.


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

                                     F - 40
<PAGE>
                         REPORT OF INDEPENDENT AUDITORS


                             TO THE SHAREHOLDERS OF

                                   TEFRON LTD.


     We have audited the accompanying consolidated balance sheets of Tefron Ltd.
("the Company") and its subsidiaries as of December 31, 2002, and the related
consolidated statements of operations, changes in shareholders' equity and cash
flows for the year ended December 31, 2002. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

     We did not audit the financial statements as of December 31, 2002 and for
the year then ended, of Alba Health LLC ("Alba Health") a subsidiary, which
statements reflect total assets constituting 24% as of December 31, 2002 and
total revenues constituting 6.5% for the year ended December 31, 2002. Those
statements were audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to the amounts include for Alba Health,
is based solely on the report of the other auditors.

     The financial statements of Tefron Ltd. as of December 31, 2001 and for the
years ended December 31, 2001 and 2000 were audited by other auditors who have
ceased operations as a foreign associated firm of the Securities and Exchange
Commission Practice Section of the American Institute of Certified Public
Accountants and whose report dated March 25, 2002 expressed an unqualified
opinion on those statements.

     We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall financial
statement presentation. We believe that our audit and the report of other
auditors provide a reasonable basis for our opinion.

     In our opinion, based on our audit and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of the Company and its
subsidiaries as of December 31, 2002, and the results of their operations and
cash flows for the year ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States.



Tel-Aviv, Israel                                  KOST FORER GABBAY & KASIERER
February 27, 2003                                (Formerly KOST FORER & GABBAY)
                                                A Member of Ernst & Young Global


                                      F-41
<PAGE>



                          INDEPENDENT AUDITOR'S REPORT


To the Board of Directors
AlbaHealth, LLC
Valdese, North Carolina

We have audited the accompanying balance sheet of AlbaHealth, LLC as of December
31, 2002, and the related statements of income, members' equity, and cash flows
for the period from September 6, 2002 (date of inception) to December 31, 2002.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.

We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of AlbaHealth, LLC as of December
31, 2002, and the results of its operations and its cash flows for the period
from September 6, 2002 (date of inception) to December 31, 2002, in conformity
with accounting principles generally accepted in the United States of America.

As discussed in note 1 of the financial statements, on September 6, 2002 (Date
of inception) The Company adopted Financial Accounting Standards Board Statement
No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS.


/s/ McGladrey & Pullen, LLP


Charlotte, North Carolina
February 6, 2003



                                      F- 42

<PAGE>

INDEPENDENT AUDITOR'S REPORT


To the Board of Directors
AlbaHealth, LLC
Valdese, North Carolina

We have audited the accompanying balance sheet of AlbaHealth, LLC (the
"Company") as of December 31, 2003, and the related statements of income,
members' equity, and cash flows for the year ended December 31, 2003. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of AlbaHealth, LLC as of December
31, 2003, and the results of its operations and its cash flows for the year
ended December 31, 2003, in conformity with accounting principles generally
accepted in the United States of America.


/s/ McGladrey & Pullen, LLP


Charlotte, North Carolina
January 30, 2004


                                      F- 43


<PAGE>


                                   SIGNATURES

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


                                   TEFRON LTD.

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


                                    By:   /s/ Gil Rozen
                                        ----------------------------------------
                                    Name:    Gil Rozen
                                    Title:   Chief Financial Officer

April 1, 2004


<PAGE>


                                  EXHIBIT INDEX

1.1.     Memorandum of Association of the Company (incorporated by reference to
         Exhibit 3.1 to the Company's Registration Statement on Form F-1 (No.
         333-7538) filed on August 29, 1997).

1.2.     Restated Articles of Association of the Company (incorporated by
         reference to Exhibit 1.2 to the Company's Annual Report on Form 20-F
         for the fiscal year ended December 31, 2002).

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 February 28, 2001, from Bank Hapoalim to the Company
         regarding Commitments dated December 19, 1999 (incorporated by
         reference to Exhibit 2.2 to the Company's Annual Report on Form 20-F
         for the fiscal year ended December 31, 2000).

2.6.     Letter Agreement, dated as of March 3, 2001, between Israeli Discount
         Bank Ltd., Israeli Discount Bank of New York and the Company
         (incorporated by reference to Exhibit 2.3 to the Company's Annual
         Report on Form 20-F for the fiscal year ended December 31, 2000).

2.7.     Letter, dated November 12, 2001, from the Company to Bank Hapoalim
         regarding Commitments dated December 14, 1999 (incorporated by
         reference to Exhibit 2.4 to the Company's Annual Report on Form 20-F
         for the fiscal year ended December 31, 2001).

2.8.     Letter, dated November 13, 2001, from the Company to the Israeli
         Discount Bank Ltd. regarding Commitments dated December 14, 1999
         (incorporated by reference to Exhibit 2.5 to the Company's Annual
         Report on Form 20-F for the fiscal year ended December 31, 2001).

2.6      Letter, dated July 30, 2002, from Bank Hapoalim to the Company
         regarding shareholders equity requirements under the Credit Agreement
         (incorporated by reference to Exhibit 2.6 to the Company's Annual
         Report on Form 20-F for the fiscal year ended December 31, 2002).

2.7      Letter, dated August 12, 2002, from Israel Discount Bank Ltd. to the
         Company regarding shareholders equity requirements under the Credit
         Agreement (incorporated by reference to Exhibit 2.7 to the Company's
         Annual Report on Form 20-F for the fiscal year ended December 31,
         2002).


<PAGE>


2.8      Letter, dated March 2, 2004, from Israel Discount Bank Ltd. to the
         Company regarding shareholders' equity requirements under the Credit
         Agreement.

2.9      Letter, dated March 2, 2004, from Bank Hapoalim to the Company
         regarding shareholders' equity requirements under the Credit Agreement.

2.10     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.

2.11     Letter, dated February 15, 2004, from Bank Hapoalim to the Company
         regarding revised repayment schedule under the Credit Agreement.

2.12     Letter, dated March 31, 2004, from Bank Hapoalim to the Company
         regarding revised shareholders' equity requirements under the Credit
         Agreement.

2.13     Credit Agreement, dated September 6, 2002, among AlbaHealth LLC, as
         borrower, the other borrower signatory thereto, the lenders signatory,
         thereto from time to time, and General Electric Capital Corporation, as
         Agent and a Lender. (incorporated by reference to Exhibit 2.8 to the
         Company's Annual Report form 20-F for the fiscal year ended December
         31, 2002).

2.14     Security Agreement, dated as of September 6, 2002, among the Grantor
         signatory thereto, from time to time, and General Electric Capital
         Corporation, as Agent for the benefit of itself and the lenders from
         time to time party to the Credit Agreement (referred to in Exhibit
         2.13).

2.15     Borrower Stockholders Pledge Agreement, dated as of September 6, 2002,
         by and among the pledgors signatory thereto, from time to time, and
         General Electric Capital Corporation, as Agent for the benefit of
         itself and the lenders from time to time party to the Credit Agreement
         (referred to in Exhibit 2.13).

2.16     The total amount of long-term debt securities of the Company authorized
         under any instrument, other than as exhibited hereto, does not exceed
         10% of the total assets of the Company on a consolidated basis. The
         Company hereby agrees to furnish to the SEC, upon request, a copy of
         any instrument defining the rights of holders of long-term debt of the
         Company or of its subsidiaries for which consolidated or unconsolidated
         financial statements are required to be filed.


<PAGE>


3.1      Shareholders Agreement, dated as of September 17, 1997, between Macpell
         Industries Ltd., Discount Investment Company Ltd., PEC Israel Economic
         Corporation, Tabriz Anstalt Ltd. and Oranim (Securities) Ltd.
         (incorporated by reference to Exhibit A to the General Statement of
         Beneficial Ownership of the Company on Schedule 13D filed by Arwol
         Holdings Ltd., Arie Wolfson, Sigi Rabinowicz, Riza Holdings Ltd. and
         Macpell Industries Ltd. on February 17, 2000).

3.2.     Shareholders Agreement, dated as of December 28, 1999, between Arwol
         Holdings Ltd. and Avi Ruimi (incorporated by reference to Exhibit D to
         the General Statement of Beneficial Ownership of the Company on
         Schedule 13D filed by Arwol Holdings Ltd., Arie Wolfson, Sigi
         Rabinowicz, Riza Holdings Ltd. and Macpell Industries Ltd. on February
         17, 2000).

3.3.     Purchase Agreement, dated as of December 30, 1999, by and among Arwol
         Holdings Ltd. and Riza Holdings Ltd. (incorporated by reference to
         Exhibit 99.E to the General Statement of Beneficial Ownership of the
         Company on Schedule 13D filed by Arwol Holdings Ltd., Arie Wolfson,
         Sigi Rabinowicz, Riza Holdings Ltd. and Macpell Industries Ltd. on
         February 17, 2000).

3.4      Agreement, dated February 17, 2004, by and among Arwol Holdings Ltd.,
         Macpell Industries Ltd. and Norfet, Limited Partnership.

4.1.     Agreement and Plan of Merger, dated as of November 8, 1999, by and
         among Tefron U.S. Holdings Corp., AWS Acquisition Corp. and
         Alba-Waldensian, Inc. (incorporated by reference to Exhibit (c)(1) to
         Schedule 14D-1 in respect of Alba-Waldensian, Inc. filed by the Company
         on November 12, 1999)

4.2.     Employment Agreement, dated as of August 5, 2002, between the Company
         and Sigi Rabinowicz (incorporated by reference to Exhibit 4.2 to the
         Company's Annual Report on Form 20-F for the fiscal year ended December
         31, 2002).

4.3.     Consulting and Management Services Agreement, dated as of August 5,
         2002, between the Company, New York Delights Ltd., and Arie Wolfson
         (incorporated by reference to Exhibit 4.3 to the Company's Annual
         Report on Form 20 F for the fiscal year ended December 31, 2002).

4.4      Management and Services Agreement, effective as of July 30, 2003,
         between the Company, Yosef Shiran and Shiran & Partners - Consulting,
         Entreprenuership, and Financing..

4.5      Lease Agreement dated as of August 12, 1997, between the Company and
         New Net Assets (1994) Ltd. and an Assignment Agreement dated as of
         December 25, 1998 between the Company and Hi-Tex Founded by Tefron Ltd.
         The Company and/or its subsidiary, Hi-Tex Founded by Tefron Ltd., have
         entered in to similar lease agreements with New Net Assets (1994) Ltd.
         (incorporated by reference to Exhibit 4.5 to the Company's Annual
         Report on Form 20-F for the fiscal year ended December 31, 2001).


<PAGE>


4.6      Contribution Agreement, dated as of September 6, 2002, between
         AlbaHealth, LLC, Alba-Waldensian, Inc., Encompass Group, L.L.C. and
         General Electric Capital Corporation (incorporated by reference to
         Exhibit 4.6 to the Company's Annual Report on Form 20 F for the fiscal
         year ended December 31, 2002).

4.7      The Limited Liability Company Agreement of AlbaHealth LLC, dated as of
         September 6, 2002, by and among AlbaHealth, LLC, Alba-Waldensian, Inc.,
         Encompass Group, L.L.C. and General Electric Capital Corporation
         (incorporated by reference to Exhibit - to the Company's Annual Report
         on Form 20 F for the fiscal year ended December 31, 2002).

4.8      Put Option Agreement, dated as of September 6, 2002, by and among
         AlbaHealth, LLC, Alba-Waldensian, Inc., Encompass Group, L.L.C. and
         General Electric Capital Corporation (incorporated by reference to
         Exhibit 4.8 to the Company's Annual Report on Form 20 F for the fiscal
         year ended December 31, 2002).

4.9      Share Purchase Agreement dated February 17, 2004, by and between the
         Company and Norfet Limited Partnership, including related Registration
         Rights Agreement attached as a schedule.

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.

4.11     Private Equity Credit Agreement, dated as of March 9, 2004, by and
         between the Company and Brittany Capital Management Limited.

4.12     Registration Rights Agreement, dated as of March 9, 2004, by and
         between the Company and Brittany Capital Management Limited.

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.

14(a) 2  Consent of McGladrey & Pullen, LLP with respect to 2002 report.

14(a) 3  Consent of McGladrey & Pullen, LLP with respect to 2003 report.

14(a).4  Notice Regarding Lack of Consent of Arthur Andersen LLP.