AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 21, 2005
--------------------------------------------------------------------------------


                       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, 2004

                                       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)

        PARK AZORIM, DERECH EM HAMOSHAVOT 94, PETACH TIKVA 49527, ISRAEL
                    (Address of principal executive offices)

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

<TABLE>
<CAPTION>
<S>                                         <C>
Title of each class                         Name of each exchange on which registered
------------------------------------------- -----------------------------------------
ORDINARY SHARES,                            NEW YORK STOCK EXCHANGE
NIS 1.0 PAR VALUE PER SHARE
</TABLE>

 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:

             17,934,558 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]

<PAGE>


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

                                       ii
<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                                                            2
         A.         Selected Financial Data                                                    3
         B.         Capitalization and Indebtedness                                            3
         C.         Reasons for the Offer and Use of Proceeds                                  3
         D.         Risk Factors                                                               3
     ITEM 4.        INFORMATION ON THE COMPANY                                                13
         A.         History and Development of the Company                                    13
         B.         Business Overview                                                         15
         C.         Organizational Structure                                                  25
         D.         Property, Plants and Equipment                                            25
     ITEM 5.        OPERATING AND FINANCIAL REVIEW AND PROSPECTS                              27
     ITEM 6.        DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES                                37
         A.         Directors and Senior Management                                           37
         B.         Compensation                                                              40
         C.         Board Practices                                                           42
         D.         Employees                                                                 45
         E.         Share Ownership                                                           46
     ITEM 7.        MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS                         49
         A.         Major Shareholders                                                        49
         B.         Related Party Transactions                                                51
         C.         Interests of Experts and Counsel                                          53
     ITEM 8.        FINANCIAL INFORMATION                                                     53
     ITEM 9.        THE OFFER AND LISTING                                                     54
     ITEM 10.       ADDITIONAL INFORMATION                                                    55
         A.         Share Capital                                                             55
         B.         Memorandum and Articles of Association                                    55
         C.         Material Contracts                                                        58
         D.         Exchange Controls                                                         66
         E.         Taxation                                                                  67
         F.         Dividends and Payment Agents                                              68
         G.         Statements by Experts                                                     68
         H.         Documents on Display                                                      68
         I.         Subsidiary Information                                                    68
     ITEM 11.       QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                69
     ITEM 12.       DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                    69
</TABLE>

                                      iii
<PAGE>

<TABLE>
<CAPTION>
<S>                 <C>                                                                       <C>
PART II                                                                                       70

     ITEM 13.       DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES                           70
     ITEM 14.       MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
                    PROCEEDS                                                                  70
     ITEM 15.       CONTROLS AND PROCEDURES                                                   70
     ITEM 16.       [RESERVED]                                                                70
     ITEM 16A.      AUDIT COMMITTEE FINANCIAL EXPERT                                          70
     ITEM 16B.      CODE OF ETHICS                                                            70
     ITEM 16C.      ACCOUNTANTS' FEES AND SERVICES                                            70
     ITEM 16D.      EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT
                    COMMITTEES                                                                72
     ITEM 16E.      PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
                    URCHASERS                                                                 72

PART III                                                                                      73

     ITEM 17.       FINANCIAL STATEMENTS                                                      73
     ITEM 18.       FINANCIAL STATEMENTS                                                      73
     ITEM 19.       EXHIBITS                                                                  74
</TABLE>

                                       iv
<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 4.308 to $1.00, the representative rate of exchange published by the Bank of
Israel, the Israeli central bank, for December 31, 2004. The representative
exchange rate between the NIS and the dollar as published by the Bank of Israel
for April 6, 2005 was NIS 4.362 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. All references in the Annual
Report to "Nike" are to Nike, Inc.

                           FORWARD-LOOKING STATEMENTS

     This Annual Report contains forward-looking statements within the meaning
of the U.S. Securities Act of 1933, as amended, the U.S. Securities Exchange Act
of 1934, as amended, and the safe harbor provisions of the United States Private
Securities Litigation Reform Act of 1995. These forward-looking statements
involve risks and uncertainties and relate to our future plans, objectives,
expectations and intentions. The use of words such as "may," "will," "expect,"
"anticipate," "intend," "plan," "estimate," "believe," "continue" or other
similar expressions often identify forward-looking statements but are not the
only way we identify these statements. These forward-looking statements reflect
our current expectations and assumptions as to future events that may not prove
to be accurate. Our actual results are subject to a number of risks and
uncertainties and could differ materially from those discussed in these
statements. Factors that could contribute to these differences include, but are
not limited to, those discussed under "Item 3. Key Information," "Item 4.
Information on the Company" and "Item 5. Operating and Financial Review and
Prospects" and elsewhere in this Annual Report.

     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.

ITEM 3. KEY INFORMATION

3A.  SELECTED FINANCIAL DATA

     The following selected financial data as of December 31, 2003 and 2004 and
for each of the three years ended December 31, 2002, 2003 and 2004 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, 2000, 2001 and 2002 and for each of
the years ended December 31, 2000 and December 31, 2001 have been derived from
our audited financial statements not included in this Annual Report.

<TABLE>
<CAPTION>
                                                                              YEAR ENDED DECEMBER 31,
                                                   2000               2001              2002              2003              2004
                                                 ---------         ---------         ---------         ---------         ---------
                                                                       (In thousands, except per share data)
<S>                                              <C>               <C>               <C>               <C>               <C>
STATEMENT OF INCOME DATA:
Sales, net                                       $ 223,602         $ 188,949         $ 190,305         $ 163,086         $ 182,819
Cost of sales                                      199,186           169,173           151,385           139,422           159,937
Restructuring costs                                     --                --             1,550                --                --
                                                 ---------         ---------         ---------         ---------         ---------
Gross profit                                        24,416            19,776            37,370            23,664            22,882
Selling, general and administrative
     expenses                                       20,574            20,140            18,358            20,323            22,387
Restructuring costs                                     --                --             3,793                --                --
                                                 ---------         ---------         ---------         ---------         ---------
Operating income  (loss)                             3,842              (364)           15,219             3,341               495
Financing expenses, net                             10,292             9,396             5,457             5,628              5212
Other expenses (income), net                            --               843             2,293              (228)               --
                                                 ---------         ---------         ---------         ---------         ---------
Income (loss) before taxes on income                (6,450)          (10,603)            7,469            (2,059)           (4,717)
Taxes on income (tax benefit)                       (2,142)             (837)            4,979              (424)              203
                                                 ---------         ---------         ---------         ---------         ---------
 Income (loss) after income
       Taxes                                        (4,308)           (9,766)            2,490            (1,635)           (4,920)
Equity in losses of an affiliate
     company                                            --              (240)           (1,172)             (183)               --
Minority interest in earnings of a
     subsidiary                                         --                --              (822)           (2,550)           (1,945)
Pre-acquisition loss of subsidiary
     since April 1, 2003                                --                --                --               (85)               --
                                                 ---------         ---------         ---------         ---------         ---------
Income (loss) before cumulative effect of
     change in accounting principles                (4,308)          (10,006)              496            (4,453)           (6,865)
Cumulative effect of change in
     accounting principle                               --                --           (17,994)               --                --
                                                 ---------         ---------         ---------         ---------         ---------
Net  loss                                           (4,308)          (10,006)          (17,498)           (4,453)           (6,865)
Basic and diluted net earnings (loss)
     per share
Earnings (loss) per share before
     cumulative effect of change in
     accounting principles                           (0.35)            (0.81)             0.04             (0.36)            (0.44)
                                                 =========         =========         =========         =========         =========
Loss per share from cumulative effect
     of change in accounting principle                  --                --             (1.45)               --                --

                                                 =========         =========         =========         =========         =========
Loss per share basic and diluted                     (0.35)            (0.81)            (1.41)          (0. 36)             (0.44)
                                                 =========         =========         =========         =========         =========
Ordinary Shares                                     12,412            12,412            12,410            12,412            15,604
                                                 =========         =========         =========         =========         =========
</TABLE>


                                       2
<PAGE>

<TABLE>
<CAPTION>
                                                                   AT DECEMBER 31,
                                    --------------------------------------------------------------------------
                                    2000             2001              2002             2003              2004
                                    ----             ----              ----             ----              ----
                                                                                                      (in thousands)
<S>                              <C>              <C>               <C>               <C>               <C>
Cash and cash equivalents        $   4,419        $   5,078         $   6,742         $   5,747         $   3,558

Working capital (deficit)        $  14,404        $  (6,958)        $  (6,167)        $ (14,524)        $  (8,441)

Total assets                     $ 258,571        $ 229,065         $ 197,743         $ 201,591         $ 191,531

Total debt(1)                    $ 143,918        $ 131,609         $  98,890         $  99,124         $  78,507

Shareholders' equity             $  67,697        $  58,588         $  41,108         $  36,655         $  46,744
</TABLE>


----------
     (1) 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 49.8% of our
total sales in 2002, 38.2% of our total sales in 2003 and 38.5% of our total
sales in 2004. Our sales to Target, Nike, Banana Republic and The Gap, and
Cardinal Healthcare accounted in the aggregate for approximately 25.1% of our
total sales in 2002, 28.8% of our total sales in 2003 and 35.7% of our total
sales in 2004. 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, Nike,
Banana Republic and The Gap, and Cardinal Healthcare or any other customer will
continue to buy our products at all or in the same volumes or on the same terms
as they have in the past. Their failure to do so may significantly reduce our
sales. In addition, we cannot assure that we will be able to attract new
customers. A material decrease in the quantity of sales made to our principal
customers, a material adverse change in the terms of such sales or a material
adverse change in the financial conditions of our principal customers could
significantly reduce our sales. See "Item 4. Information on the Company - 4B.
Business Overview - Customers."

                                       3
<PAGE>

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

     Our customers are in the clothing retail industry, which is subject to
substantial cyclical variations and is affected strongly by any downturn 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 significantly reduce our sales and profitability. For example, the
difficult global economic environment and the continuing soft retail market
conditions in the world and specifically in the U.S. both before and especially
after the events of September 11, 2001 were reflected in disappointing clothing
retail sales in the year 2001 compared to the same period in the year 2000, and
consequently decreased our order backlog and production levels. A prolonged
economic downturn could harm our financial condition.

     OUR EXPANSION INTO NEW PRODUCT LINES WITH MORE COMPLICATED PRODUCTS AND
     DIFFERENT RAW MATERIALS REDUCED OUR OPERATING EFFICIENCY DURING 2003 AND
     2004 AND OUR OPERATING EFFICIENCY MAY NOT IMPROVE IN THE FUTURE.

     During 2003 and 2004, we invested significant efforts to develop and expand
new product lines, including active-wear products and swimwear, to diversify our
product line and our client base. The manufacturing of new, more complicated
products with different raw materials has reduced 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 REDUCE OUR FUTURE CASH FLOW.

     During 2003 and 2004, 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 reduce
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.

     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.


                                       4
<PAGE>


     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 2002
and 2004, the rate of devaluation of the NIS vis-a-vis the dollar exceeded the
inflation rate in Israel. During 2002 and 2004, the rate of inflation was 6.5%
and 1.2%, respectively, while NIS devalued against the U.S. dollar by 7.3% and
-1.6% in 2002 and 2004. 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, it could reduce our profitability. 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 2004, the cash generated by operating activities was
approximately $6.9 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 $9.3 million in
2005, $9.4 million in 2006 and $8.9 million in 2007. These amounts do not
include any repayment obligations under our short-term debt in the amount of
approximately $21.4 million as of December 31, 2004. Our ability to meet our
debt obligations will depend on whether we can successfully implement our
strategy, as well as on economic, financial, competitive and technical factors.
Some of the factors are beyond our control, such as economic conditions in the
markets where we operate or intend to operate, changes in our customers' demand
for our products, and pressure from existing and new competitors.

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

     o    our financial condition at the time;

     o    restrictions in agreements governing our debt; and

     o    other factors, including market conditions.

     If our lenders decline to renegotiate the terms of our debt, 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 considerable 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, 2004, we had approximately $57.2 million of long
term loans outstanding (including current maturities of $9.2 million) and
approximately $21.4 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
          repay the principal and interest on our loans, which would reduce
          funds available to grow and expand our business, invest in machinery
          and equipment and for other purposes;

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


                                       5
<PAGE>

     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 reduce our profitability. A ten percent
interest rate change on our floating interest rate long-term loans outstanding
at December 31, 2004, would have an annual impact of approximately $0.4 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. 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. For
instance, during 2004, our 48% subsidiary, AlbaHealth LLC, failed to comply with
certain financial covenants contained in its credit facility with GE Capital,
including a minimum EBITDA requirement. However, GE Capital has agreed to waive
certain financial covenant defaults that occurred during 2004 and to amend
certain of the financial covenant provisions of the AlbaHealth credit facility.

     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.


                                       6
<PAGE>

     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.

     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.

     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 a lower cost-base than Tefron, longer operating
histories, larger customer bases; greater geographical proximity to customers
and significantly greater financial and marketing resources than we do.
Increased competition, direct or indirect, could reduce our revenues and
profitability through pricing pressure, loss of market share and other factors.
We cannot assure that we will be able to compete successfully against existing
or new competitors, as the market for our products evolves and the level of
competition increases. Moreover, our competitors, especially those from the Far
East, have established relationships with our customers, which has caused an
erosion of prices of some of our Cut & Sew products; current or future
relationships between our existing and prospective competitors, especially from
the Far East, with existing or potential customers, could materially affect our
ability to compete. In addition, we cannot assure that our customers will not
seek to manufacture our products through alternative sources and thereby
eliminate the need to purchase our products. See "Item 4. Information on the
Company - 4B. Business Overview - Competition."

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

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

     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, in 2004 the cost of
synthetic fibers increased due to rising energy costs. We cannot assure that we
will be able to pass on to customers the increased costs associated with the
procurement of raw materials. Moreover, there has in the past been, and there
may in the future be, a time lag between the incurrence of such increased costs
and the transfer of such increases to customers. To the extent that increases in
the cost of raw materials cannot be passed on to customers or there is a delay
in passing on the increased costs to customers, we are likely to experience an
increase in the cost of raw materials which may materially reduced our margin of
profitability


                                       7
<PAGE>

     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 SIGNIFICANTLY REDUCED.

     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 addition, the NYSE has proposed amending its continued listing
criteria requiring a minimum stockholders' equity of $75 million and minimum
market capitalization of $75 million.

     In the event we fail to meet any 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 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 significantly
reduce the liquidity and price of our ordinary shares. Delisting may also make
it more difficult for us to issue additional securities or secure additional
financing.

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

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

     We depend on subcontractors who render to us services that are an integral
part of our manufacturing process, and in particular sewing services. If such
subcontractors do not render the required services, we may experience delays or
additional costs to satisfy our production requirements.

     We depend on a subcontractor who performs a major part of the dyeing and
finishing of our Hi-Tex manufacturing process, which is an essential part of our
manufacturing process. If that subcontractor breaches its commitments toward us
or is not other wise able to supply the required services, we would have
difficulty meeting our customer orders until we find an alternative solution.

     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. In addition, our subcontractors have
access to proprietary information, including regarding our manufacturing
processes, and from time to time we also lend machinery and equipment to
subcontractors, and there is a chance that subcontractors may breach their
confidentiality undertakings toward us. Any replication of our manufacturing
process by an existing or future competitor would significantly reduce our
sales.


                                       8
<PAGE>

     WE FACE POTENTIAL COMPETITION BY OUR FORMER EMPLOYEES.

     Our trade secrets are well known to some of our employees. In the event one
or more of our current or former employees exploit our trade secrets in
violation of their non-competition and confidentiality obligations, we may be
adversely affected in the competitive market and in our relationships with are
customers and suppliers.

     WE FACE POTENTIAL CONFLICTS OF INTEREST CAUSED BY INVESTOR INFLUENCE.

     Our principal shareholders have a great deal of influence over the
constitution of our Board of Directors and over matters submitted to a vote of
the shareholders. As of April 6, 2005, Arie Wolfson, the Chairman of our Board
of Directors, had direct voting power over approximately 5.41% of the
outstanding ordinary shares of Tefron, not including options to acquire 150,000
ordinary shares of Tefron that have already vested. Mr. Wolfson is also the
Chairman and a significant shareholder of Macpell Industries Ltd., an Israeli
company that owned approximately 21% of the outstanding ordinary shares of
Tefron as of April 6, 2005. Mr. Wolfson and our former president, Mr. Sigi
Rabinowicz, 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. As a result, the corporate actions of
Tefron may be influenced significantly by Mr. Wolfson.

     As of April 6, 2005, Norfet, Limited Partnership had voting power over
approximately 31.6% of the outstanding ordinary shares of Tefron. In addition,
as of April 6, 2005, Meir Shamir, one of our directors, owned approximately 40%
in Mitvah-Shamir, which at such date was an approximately 35.5% holder in
Norfet. As a result, the cooperate actions of Tefron may be significantly
influenced by Mr. Shamir.

     In connection with the acquisition of Tefron 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, Arwol
and Macpell agreed to vote all of the Tefron ordinary shares owned or controlled
by each of them for the election to the Company's nine-member Board of Directors
of: (i) two members plus one independent director and one external director
nominated by Norfet, Limited Partnership, (ii) two members plus one independent
director and one external director nominated by Arwol and Macpell, and (iii) the
Company's chief executive officer.

     We are party to a consulting and management services agreement with Mr.
Wolfson and a company controlled by him, as well as with Norfet pursuant to
which the company controlled by Mr. Wolfson and Norfet have agreed to provide
consultancy and management services to Tefron. We also engage in transactions
with Macpell and its affiliates. 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. See "Item 6. Directors, Senior
Management and Employees - 6A. Directors and Senior Management," "Item 7. Major
Shareholders and Related Party Transactions," and Note 16 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 and between Norfet and us. However, we
cannot assure that we will be able to avoid the possible detrimental effects of
any such conflicts of interest by complying with the procedures mandated by
Israeli law. See "Item 6. Directors, Senior Management and Employees - 6A.
Directors and Senior Management," "- 6C. Board Practices," and "Item 7. Major
Shareholders and Related Party Transactions."


                                       9
<PAGE>


     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 significantly reduce our
profitability.

     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 locations in Israel and Jordan (Qualified Industrial Zone) 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, our profitability may be
reduced.

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

     Approximately 92% of our sales in 2004 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;


                                       10
<PAGE>


     o    difficulties in collecting accounts receivable;

     o    political instability and seasonal reductions in business activities;
          and

     o    Strikes and general economic problems.

     Any of these risks could have a material adverse effect on our ability to
deliver or receive goods on a competitive and timely basis and on our results of
operations. We cannot assure that we will not encounter significant difficulties
in connection with the sale or procurement of goods in international markets in
the future or that one or more of these factors will not significantly reduce
our sales and profitability. 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, we have relationships with manufacturers in
China and we are in the process of shifting additional sewing production out of
Israel to take advantage of lower labor costs. Due to commercial disputes that
arose between us and the other shareholders of our joint subsidiaries that
managed operations in Madagascar, we no longer have production facilities 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 China or Jordan will be
cost-efficient or successful.

     WE ARE SUBJECT TO VARIOUS RISKS RELATING TO OPERATIONS IN ISRAEL

     We are incorporated under the laws of, and our main offices and
manufacturing facilities are located in, the State of Israel. We are directly
influenced by the political, economic and security conditions in Israel. Since
the establishment of the State of Israel in 1948, a number of armed conflicts
have taken place between Israel and its Arab neighbors and a state of hostility,
varying in degree and intensity, has led to security and economic 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.


                                       11
<PAGE>


     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."

     During 2004, a general strike at Israel's ports caused a shortage of raw
materials and resulted in a loss of sales to the Company of approximately $2.5
million. This shortage also resulted in a decrease in production volume and an
increase in operating costs, which affected our ability to achieve greater
operating efficiencies. Although Israel's Ministry of Finance, the Histadrut
(General Federation of Labor in Israel), and the Israel Ports Authority signed
an agreement in February 2005 which is intended to ensure five (5) years without
labor strikes, a further strike or labor disruption at Israel's ports may occur
and have an adverse effect on us or our business.


                                       12
<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 Park Azorim, Derech Em
Hamoshavot 94, Petach Tikva 49527, Israel and our telephone number is
972-3-923-0215. We are subject to the provisions of the Israeli Companies Law,
1999. Our agent for service of process in the United States is CSC Corporation
Service Company, 2711 Centerville Rd. Suite 400, Wilmington, DE 19808.

     Below is a summary of significant events in our development:

<TABLE>
<CAPTION>
<S>                           <C>
     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                     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.
</TABLE>


                                       13
<PAGE>

<TABLE>
<CAPTION>
<S>                           <C>
     FEB.-APRIL 2004          Closing  of equity  investments  with two  groups of  investors  in the  aggregate
                              amount of $20 million.

     OCTOBER 2004             Launch of a new business  division,  Sports  Innovation  Division ("SID"), which is
                              devoted to our growing US customers base in the sport active wear market.
</TABLE>


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 under which 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. See "Item 10. Additional Information -
10C. Material Contracts - Alba Health Put Option Agreement."

     MANAGEMENT FEES. Under the terms of the agreement, Alba provided certain
management services to AlbaHealth in return for an annual fee of approximately
$832,000 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, 2005, this agreement remains in effect.

CAPITAL EXPENDITURES

     Our capital expenditures for fixed assets (net of grants from the
Government of the State of Israel) were $7.8 million, $ 2.1 million, and $1.3
million for the years ended December 31, 2004, 2003, and 2002, respectively. The
2004 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.


                                       14
<PAGE>


     Our current capital expenditures include investments in equipment,
machinery and leasehold improvements in our facilities in Israel and Jordan. See
Note 6 of the Notes to the Consolidated Financial Statements. We expect to incur
capital expenses to acquire new dying and finishing equipment for Hi-Tex and to
shift more of the sewing production of our Cut & Sew division and Hi-Tex
division out of Israel to Jordan, to the Far East and to other locations to take
advantage of lower labor costs.

     As of the date of this Annual Report, we estimate that our capital
expenditures for 2005 (net of grants from the Government of the State of Israel)
will be approximately $5 million. We expect to finance these investments
primarily from cash generated from operations. 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, Nike, The
Gap, Banana Republic, and 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.
Our product line includes knitted briefs, bras, tank tops, boxers, leggings,
crop, T-shirts, day-wear, nightwear, bodysuits, swim wear, beach wear,
active-wear and accessories. 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.

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

     We are known for the technological innovation of our Hi-Tex manufacturing
process. Our Hi-Tex manufacturing process was implemented as part of our
strategy to streamline our 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 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, with Warnaco/Calvin
Klein in 1994 and with Nike in 2000. In 2000, we began our relationship with
Target, which was an existing customer of Alba. In 2004, these customers
accounted for approximately 69.8% of our total sales. We enjoy several strategic
advantages by reason of our location in Israel and Jordan. Israel is one of the
few countries in the world that has free trade agreements with the United
States, Canada, the 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 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."


                                       15
<PAGE>


PRODUCTS

     In close collaboration with our customers, we design and manufacture
intimate apparel, active-wear and swimwear. Through our efficient capability, we
produce garments made of cotton and synthetic fibers for large- volume marketers
who, in recent years, have increased retail consumer interest for quality
intimate apparel and active-wear at affordable prices. We believe that our
advanced technology and manufacturing processes enable us to deliver intimate
apparel and active-wear that is comfortable to wear, fits well, fashionable,
made of high-quality fabric and difficult to imitate. Our product line includes
knitted briefs, bras, tank tops, boxers, leggings, crop, T-shirts, daywear,
nightwear, bodysuits, swim wear, beach wear, active-wear, and accessories.

     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
2004, footwear products represented approximately 49.3% of the sales of the
AlbaHealth.

     The principal market for our products is the United States. For a breakdown
of our sales by geographic area and operating segments, see Note 15 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 products in different
style, color and yarn combinations. We manufacture cotton knit products using
our advanced proprietary manufacturing techniques and also produce fine products
from synthetic fibers, including micro-fibers, using our cut-and-sew
manufacturing process and our highly automated Hi-Tex manufacturing process.


                                       16
<PAGE>


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.

     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 2004, we
          produced approximately 110 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
          operates a sewing facility in Jordan and also subcontracts sewing in
          Israel, China and 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.


                                       17
<PAGE>


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, 2004, we had a
total of 735 fully equipped Santoni Knitting machines at the Hi-Tex facilities
in Israel. We also have 155 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.

     We believe that the Hi-Tex manufacturing process represents an innovative
combination of cutting-edge technology and technical expertise and has further
strengthened our reputation within the industry as a leader in automated
manufacture and design. In addition, with both the Hi-Tex manufacturing process
and the traditional cut-and-sew process, we are able to produce garments made
from synthetic fibers in addition to 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 market our
products directly to major retailers, which sell them under their own labels and
to several companies that market nationally advertised brands. We have sales
offices which are located in Portland, Oregon and in Israel.


                                       18
<PAGE>


     We see the active-wear market as an added opportunity to materialize our
innovative production and design capabilities. Our office in Portland, Oregon
serves to advance our active-wear sales, to strengthen the communication with
our active-wear customers, and to improve our services. In addition, we have
dedicated a separate development and sales team in Israel for the active-wear
customers.

     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 label.

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 "millennium 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.

SEASONALITY

     Although our operations are affected by the substantial cyclical variations
of our principal customers' businesses, downturns in the general economy, a
change in consumer purchasing habits and other events, we have not identified a
clear seasonal pattern to our general business, other than with respect to our
swimwear products. In the swimwear segment, most of our sales are consummated
between December and May.

CUSTOMERS

     Our customers represent some of the leading marketers of intimate apparel
and active-wear in the world. More than 65% of our sales in 2004 were derived
from the worldwide sale of our products to our four largest apparel customers,
Victoria's Secret, Target, Nike, and Gap/Banana Republic. In 2004, we
strengthened our business relationship with our active-wear customers, such as
Nike, Patagonia, Puma , Adidas and others.

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

<TABLE>
<CAPTION>
CUSTOMER                              2002                       2003                    2004
                               --------------------     ---------------------      ---------------------
                                                        (Dollars in millions)
<S>                            <C>           <C>         <C>           <C>         <C>           <C>
Victoria's Secret (1)          $94.7         49.8%       $62.2         38.2%       $70.4         38.5%

Target                         $10.0          5.3%       $14.8          9.1%       $24.4         13.40%

Cardinal Healthcare (2)        $16.7          8.8%       $17.8         10.9%       $16.9          9.2%
</TABLE>


                                       19
<PAGE>

<TABLE>
<CAPTION>
CUSTOMER                           2002                         2003                       2004
                           --------------------        ---------------------       ---------------------
                                                       (Dollars in millions)
<S>                        <C>            <C>          <C>            <C>          <C>            <C>
Nike                       $  5.2           2.7%       $  5.3           3.2%       $ 12.4           6.8%

Gap/Banana Republic        $ 15.8           8.3%       $  9.2           5.6%       $ 11.5           6.3%

Others                     $ 47.9          25.2%       $ 53.9          33.0%       $ 47.3          25.8%

Total                      $190.3         100.0%       $163.1         100.0%       $182.8         100.0%
</TABLE>

(1)  Includes sales to Mast on behalf of Victoria's Secret, Victoria's Secret
     Catalog, Cacique and Abercrombie & Fitch.

(2)  Customer of AlbaHealth, our 48% subsidiary.

     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. For instance, we have been asked by
Victoria's Secret to reduce the prices of Victoria's Secret's Logo program. See
"Item 3. Key Information - 3D. Risk Factors - We depend on a small number of
principal customers who have in the past bought our products in large volumes.
We cannot assure that these customers or any other customer will continue to buy
our products in the same volumes or on the same terms."

     We began our 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 working relationship with Nike in 2000. Currently, we supply
them with active wear for men and women.

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

     We also gained as a customer Allegiance Healthcare Corporation,
subsequently acquired by Cardinal Healthcare, 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 the
customer may decrease. 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. Our principal customers
are in the retail industry, which is subject to substantial cyclical variations.
Our annual and quarterly results may vary which may cause our profits and/or the
market price of our Ordinary Shares to decline. Consequently, there can be no
assurance that sales to current customers will continue at the current rate.


                                       20
<PAGE>


BACKLOG

     Our backlog of orders during 2004 ranged from $48.6 million to $85.8
million, as compared to a range of $24.4 million to $68.4 million during 2003.
This backlog is comprised of firm orders that represent the average production
volume mainly for the subsequent three to six months. Backlog data and any
comparison thereof as of different dates may not necessarily indicate future
sales.

ISRAELI INVESTMENT GRANTS AND TAX INCENTIVES

     The Israeli government has established investment and tax incentive
programs for enterprises that invest and do business in Israel. Israeli
government support is provided primarily to industrial and tourism companies
that help fulfill certain economic objectives of the Israeli government, such as
creating employment in selected locations in Israel, competing in international
markets, utilizing innovative technologies, producing value-added products and
generating income in foreign currency. To date, we have enjoyed Israeli
government grants with respect to such programs for significant amounts of our
capital expenditures. Such grants were available from 1997 to 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 carry forwards 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.

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 regular corporate tax rate of 35%) 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 accounting purposes for income derived from Approved
Enterprises during 2004, based on its percentage of foreign investment in 2004,
was 25%. Due to accumulated losses and other factors, we did not pay tax on this
income during 2004.


                                       21
<PAGE>


     The Benefit Period for our first Approved Enterprises has ended and as
such, income attributable to these enterprises are taxed at a rate of 35%, the
regular Israeli corporate tax rate. (expected to be progressively reduced to 34%
in 2005, 32% in 2006 and 30% in 2007 and thereafter). 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 carry forwards.

     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. However, the shifting of the sewing operations from Israel to Jordan
may require an adjustment to the terms of the certificate approval; otherwise,
our operations may not be in compliance with the approval's terms.

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.


                                       22
<PAGE>


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.

     Although we have invested in Santoni knitting machines to manufacture our
seamless products, a competitor of the Santoni brand could manufacture similar
machines at lower prices, thereby increasing the competition we would face in
the intimate apparel and active-wear markets. 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 free from customs
duties and import quotas to the United States and Europe under certain
conditions. We may also elect to manufacture products in Egypt and sell them
free from customs duties and import quotas to the United States under certain
conditions.

CONDITIONS IN ISRAEL

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

POLITICAL CONDITIONS IN ISRAEL

     Since the establishment of the State of Israel in 1948, a number of armed
conflicts have taken place between Israel and its Arab neighbors and a state of
hostility, varying from time to time in intensity and degree, has led to
security and economic 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.


                                       23
<PAGE>


     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.

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. In 2004, in expectation of this change, the United
States decided to extend the period of barriers relating to products exported
from China.

     Israel is a party to Qualified Industrial Zones agreements - since 1998
with Jordan and the United States, and since December 2004, with Egypt and the
United States. These agreements enable us to execute part of our manufacturing
process in defined zones in Jordan or in Egypt, under the terms of these
agreements, and enjoy exemption from U.S. custom duties and quotas once exported
to the United States.

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.


                                       24
<PAGE>


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) Alba Waldensian, Inc., which name was
changed to Tefron USA, Inc and 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, and (vi) Macro Clothing Ltd, a company
formed under the laws of Israel.

4D.  PROPERTY, PLANTS AND EQUIPMENT

ISRAEL

     As of December 31, 2004, 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>
Petach Tikva                                 7700             13          2008         Management offices
Segev:  Central Factory -
  Tefron (2) (3)                           83,000            232          2006         Knitting cutting, sewing,
                                                                                       packaging, storage and
                                                                                       administrative functions
Inoah                                      13,000            263          2006         Sewing and packaging
Segev:  Central Factory -
  Hi-Tex 1 (2) (3)                        143,000            550          2011         Knitting, sewing, packaging,
                                                                                       storage and administrative
                                                                                       functions
Segev:  Central Factory -
  Hi-Tex 2 (2) (3)                        180,000            525          2012         Knitting, sewing, packaging
                                                                                       and storage
Holon - Macro Center                        12000             66          2009         Sewing and administrative
                                                                                       functions
Yarka                                      23,000            340          2012         Sewing and packaging
Segev:  Central Factory - New -Net..       37,000             43          2005         Knitting
Dyeing Factory                             39,000             40          2009         Dyeing and finishing
Segev:  Delivery Warehouse (2) (3)..       65,000             10          2012         Warehouse for finished
                                                                                       products
FACILITY IN JORDAN
Irbid                                       30000            440          2006(4)      Sewing and packaging factory
</TABLE>


(1)  Including any renewal options.
(2)  We lease this property from a subsidiary of Macpell.
(3)  Not including an additional option for 15 years lease exercisable every
     three years on a 90 days' prior advance notice.
(4)  The agreement is renewable, at our option, every year.

     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."

     For a description of our plans regarding our facilities, see Note 6 of the
Notes to the Consolidated Financial Statements.


                                       25
<PAGE>


     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.

UNITED STATES

     As of December 31, 2004, 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          260         Knitting, Yarn Processing &
                                                              Finishing (Health Products)
Valdese, NC - Offices             52,000           23         Corporate headquarters
New York City - Offices            3,200            1         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. See Note 6(3) of the Notes to
the Consolidated Financial Statements.

     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. From April 2005, we are leasing for seven years 2000 square feet
at 150 West 30th Street New York, NY. 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.


                                       26
<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. Our product line includes knitted briefs, bras, tank tops,
boxers, leggings, crop, T-shirts, daywear, nightwear, bodysuits, swim-wear,
beach wear, active-wear, and accessories.

     We have three divisions: Seamless (also called Hi-Tex), Cut & Sew and
Healthcare. Our Seamless Division, which manufactures intimate apparel and
active-wear products, generated approximately 46% of our revenues during 2004.
Our Cut & Sew Division, which manufactures intimate apparel, active-wear and
swim-wear products, generated approximately 36% of our revenues during 2004. Our
Healthcare Division generated approximately 18% of our revenues during 2004.

     Our Hi-Tex manufacturing process involves a vertically integrated
production process, from the design of the product to the knitting, dyeing and
sewing of the product. However, our Hi-Tex manufacturing process utilizes
state-of-the-art technology that eliminates a significant number of stages of
the manufacturing process while enabling our Hi-Tex Division to produce a
substantially wider range of fabrics, styles and product lines at a consistently
high level of comfort, quality and durability. The Hi-Tex manufacturing process
was developed in-house through the adaptation and configuration of machinery and
equipment purchased from third parties. Although developed for our exclusive
use, most of these adaptations and configurations are not patented. The
manufacturing for our Hi-Tex Division takes mainly in Israel, where we operated
approximately 735 fully equipped Santoni knitting machines as of December 31,
2004.

     Our Cut & Sew manufacturing process also involves a vertically integrated
production process. We are involved in all steps in the process, from the design
of the product to the knitting, dyeing, cutting and sewing of the product. The
knitting, dyeing and cutting processes for our Cut & Sew Division takes place in
Israel and most of the sewing in Jordan.

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

     2004 DEVELOPMENTS

     In 2004, we continued our strategy, begun at the end of 2002, to transform
from an intimate apparel company with one anchor customer to a diversified
active wear, swim wear and intimate apparel company with a more diversified
customer base. This process has taken longer than we initially anticipated and
has reduced operating efficiency in our Seamless division due to our manufacture
of new, more complicated products with different raw materials. These operating
inefficiencies had a significant negative effect on our operating results in
2003 and 2004. Although we have seen an improvement in our operating efficiency
beginning towards the end of 2004, we cannot assure that we will be able to
return to our previous efficiency levels in the future.

     Our expansion into active-wear and swim-wear has provided us with an
opportunity to increase our sales to a more diverse customer base, including
Nike, Puma, Adidas and others, and we are working to capitalize on this
opportunity in both our Seamless and our Cut & Sew Divisions through our
offering of a more diverse selection of products.

     The cost structure of our Cut & Sew manufacturing process, which takes
place principally in Israel and in Jordan, is higher than the cost structure of
our competitors in the Far East. The competition from the Far East, mainly for
the sale of intimate apparel products, has caused an erosion of our prices. We
have established a branch office in Hong Kong in an effort to locate manufacture
sources in the Far East, and we are exploring options for transfer of
manufacture operations also to other locations where labor cost are relatively
low.

     In addition, the strengthening of the NIS compared to the USD in 2003 and
2004 also adversely affected our operating income in 2003 and 2004.

                                       27
<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,
                                                   2002           2003           2004
                                                  -----          -----          -----

<S>                                               <C>            <C>            <C>
Sales                                             100.0%         100.0%         100.0%
Cost of sales                                      80.4           85.5           87.5
                                                  -----          -----          -----
Gross profit                                       19.6           14.5           12.5
Selling, general and administrative
 expenses                                          11.6           12.5           12.2
                                                  -----          -----          -----
Operating income before financing
 expenses                                           8.0            2.0            0.3
Financing income, net                              (2.9)          (3.5)          (2.9)
Other income (expenses)                            (1.2)           0.2             --
                                                  -----          -----          -----
Income (loss) before income taxes                   3.9           (1.3)          (2.6)
Income tax expense (benefit)                        2.6           (0.3)           0.1
                                                  -----          -----          -----
Income (loss) after income taxes                    1.3           (1.0)          (2.7)
Equity in losses of affiliated company             (0.6)          (0.1)            --
Minority interests                                 (0.4)          (1.6)          (1.1)
                                                                                -----
Net income (loss) from ordinary activities          0.3           (2.7)          (3.8)
                                                  =====          =====          =====
Cumulative effect of change in accounting
principle                                          (9.5)            --             --
Net Loss                                           (9.2)%         (2.7%)         (3.8%)
                                                  -----          -----          -----
</TABLE>


                                       28
<PAGE>


SALES

     CONSOLIDATED. Sales for the year ended December 31, 2004 were $182.8
million, 12.1% increase compared to sales of $163.1 million for the year ended
December 31, 2003. Our sales of intimate apparel increased 8.5% from $109.0
million in 2003 to $118.2 million in 2004, our sales of active-wear products
increased 66.6% from $12.1 million in 2003 to $20.1 million in 2004 and our
sales of Swim-wear increased 175.4% from $3.7 million in 2003 to $10.3 million
in 2004. Below is a table that describes our 2003 and 2004 sales of intimate
apparel, active-wear and swimwear products:


<TABLE>
<CAPTION>
                                                              SALES
                        ----------------------------------------------------------------------------------
                                        2003                                         2004
                        ------------------------------------          ------------------------------------
                                                      (Dollars in thousands)
                         CUT &                                        CUT &
                          SEW          SEAMLESS        TOTAL           SEW           SEAMLESS       TOTAL
<S>                      <C>            <C>           <C>             <C>            <C>           <C>
Intimate Apparel         48,044         60,954        108,998         47,351         70,889        118,240
Active-wear               1,638         10,433         12,071          7,646         12,459         20,105
Swimwear                  3,731             --          3,731         10,275             --         10,275
Total                    53,413         71,387        124,800         65,272         83,348        148,620
Alba Health                  --             --         38,286             --             --         34,199
                             --             --        163,086             --             --        182,819
</TABLE>


          SEAMLESS. Sales for the year ended December 31, 2004 for this segment
     were $83.8 million, 15% increase compared to sales of $72.9 million for the
     year ended December 31, 2003. This increase in sales was due to a greater
     demand for intimate apparel products and the increase of sales of our more
     diverse selection of active wear products to a more diverse customer base.

          CUT & SEW. Sales for the year ended December 31, 2004 for this segment
     were $65.3 million, 22.2% increase compared to sales of $53.4 million for
     the year ended December 31, 2003. This increase in sales was due primarily
     to an increase in sales of our more diverse selection of swimwear and
     active-wear products to a more diverse customer base.

          HEALTHCARE. Sales for the year ended December 31, 2004 for this
     segment were $34.2 million, a 10.7% decrease compared to the sales of $38.3
     million for the year ended December 31, 2003. This decrease was mainly due
     price erosion caused by competition from producers in the Far East.

     COST OF SALES

     Cost of sales consists primarily of materials, various salaries and related
expenses, subcontracting expenses and other overhead expenses related to our
manufacturing operations. Cost of sales increased by 14.7% to $159.9 million in
2004 as compared to $139.4 million in 2003 primarily due to the increase in
sales. As a percentage of sales, cost of sales increased to 87.5% in 2004 as
compared to 85.5% in 2003 primarily due to the operating inefficiencies referred
to above and the reevaluation 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.


                                       29
<PAGE>


     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 10.2% to $22.4
million in 2004 as compared to $20.3 million in 2003. This increase is primarily
due to an increase in sales, an increase in air freight charges of due to delays
in supplying orders to customers resulting from the operating inefficiencies
referred to above, an expense resulting from the grant of options to the
company's CEO and an impairment of property and equipment held for sale in North
Carolina. As a percentage of sales, selling, general and administrative expenses
decreased from 12.5% in 2003 to 12.2% in 2004.

     OPERATING INCOME

     CONSOLIDATED. Operating income for the year ended December 31, 2004 was
$495,000 (0.3% of sales), compared to operating income of $3.3 million (2.0% of
sales) for the year ended December 31, 2003. This decrease in operating income
was due to the increase in cost of sales and selling, general and administrative
expenses discussed above.

          SEAMLESS. Operating loss for the year ended December 31, 2004 for this
     segment was $8.2 million (9.8% of sales), compared to operating loss of
     $4.1 million (5.6% of sales) for the year ended December 31, 2003. This
     increase in operating loss was due primarily to operating inefficiencies
     and increase in freight charges due to delays in supplying orders to
     customers.

          CUT & SEW. Operating income for the year ended December 31, 2004 for
     this segment was $3.5 million (5.4% of sales), compared to operating income
     of $0.7 million (as restated) (1.4% of sales) for the year ended December
     31, 2003. The increase in operating income resulted primarily from a
     significant increase in sales and gross profit of our swimwear products and
     increase in sales of active wear products. This increase was offset by
     price erosion of an intimate apparel project to a major customer due to
     competition.

          HEALTHCARE. Operating income for the year ended December 31, 2004 for
     this segment was $5.2 million, 22.1% decrease from the operating income of
     $6.7 million for the year ended December 31, 2003. This decrease was mainly
     due price erosion caused by competition from producers in the Far East.

     FINANCING EXPENSES, NET

     Financing expenses decreased slightly to $5.2 million in 2004 as compared
to $5.6 million in 2003. This decrease was mainly due to decrease in interest
expenses caused by reduction of $20 million in the amount of bank debt, capital
lease and other loans from proceeds of issuance of shares in April 2004. This
decrease was partly offset by an increase in bank charges due to our increased
use of letters of credit, mainly with new customers.

     INCOME TAXES

     Tax expense for 2004 was $0.2 million as compared to tax benefit of $0.4
million for 2003. In 2004, we reduced our deferred taxes in Alba by $0.6 million
as a result of an adjustment of our expected utilization of deferred taxes in
light of expected future earnings and recorded additional expenses of $0.4
million due to tax assessment by the Israeli tax authorities regarding tax
returns for the years 1997-2000. 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.


                                       30
<PAGE>


LIQUIDITY AND CAPITAL RESOURCES

     2004 SOURCES AND USES OF CASH

     During 2004, we generated approximately $6.9 million in cash from operating
activities. This cash flow, together with the net proceeds to the Company of
$19.7 million derived from the investment in the Company by Norfet and Leber,
enabled us to repay a net amount of $9.3 million of short term bank loans and
$11.3 million of long term bank loans and finance our $9.1 million investment in
fixed assets. During 2004, we received government grants in the approximate
amount of $1.2 million and received proceeds from the sale of fixed assets of
$0.4 million. At December 31, 2004, we had cash and cash equivalents of $3.6
million, as compared to $5.7 million in a previous year. We currently anticipate
lower capital expenditures for 2005 than the actual capital expenditures of
2004. The main capital investment in fix assets are expected to be made in favor
of increasing the dyeing capacity of our Hi-Tex Division.

     Cash provided by operating activities is net income (loss) adjusted for
certain non-cash items and changes in assets and liabilities. For 2004, cash
provided by operating activities was $6.9 million, compared to $2.9 million in
2003, while our net loss increased in 2004 to $6.9 million from $4.5 million in
2003. During 2004, the majority of our increase in cash flow as compared to 2003
was mainly due to a decrease in our trade receivables as compared to increase in
2003, an increase in our inventories which was lower than the increase in 2003
and higher depreciation and amortization expenses than in 2003. Our increase in
inventories was lower in 2004 mainly due to decrease in the average credit
period granted to customers. Our depreciation and amortization expenses were
higher in 2004 due to increase in depreciation expenses due to purchase of fixed
assets during 2003-2004, amortization of options compensation related to options
granted to CEO and write-off of investment in JBA.

     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, 2004:

<TABLE>
<CAPTION>
   CONTRACTUAL OBLIGATIONS(1)(2)  TOTAL      2005             2006 - 2007      2008 - 2009        2010 +
     --------------------------   -----      ----             -----------      -----------        ------
<S>                               <C>        <C>              <C>              <C>                <C>
     Long-Term Bank Debt          $56.9      $8.9             $18.3            $11.9              $17.8

     Capital Lease Obligations    $ 0.2      $0.2                --               --                 --

     Other Long-Term Obligations  $ 0.1      $0.1                --               --                 --

     TOTAL CONTRACTUAL CASH       $57.2      $9.2             $18.3            $11.9              $17.8
     OBLIGATIONS

</TABLE>


<TABLE>
<CAPTION>
    OTHER COMMERCIAL COMMITMENTS      TOTAL AMOUNTS AVAILABLE            2005(3)
    ----------------------------      -----------------------            -------
<S>                                         <C>                          <C>
    Lines of Credit                         $19                          $18.8

    Short Term Bank Debt                    $ 3.5                        $ 0

    Guarantees/Letters of Credit            $ 2.5                        $ 2.5

    TOTAL COMMERCIAL COMMITMENTS            $25.0                        $21.3
</TABLE>

These credit line facilities are not limited in time.


                                       31
<PAGE>


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

     (2) This table does not include payments of interest on our long-term debt,
due to its variable nature. Interest on our long-term bank debt ranges from
three-month LIBOR plus 1.5% to three-month LIBOR plus 2%. As of April 6, 2005,
three-month LIBOR was 3.125%.

     (3) These credit lines facilities are revolving every year.

     LOAN FACILITIES

     At December 31, 2004, outstanding borrowings from banks and other financial
institutions totaled approximately $78.3 million, comprised of approximately
$56.9 million of long term-debt, including current maturities of $9 million, and
approximately $21.4 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 eight
years.

     Long-term loans include a term loan facility of our wholly owned
subsidiary, Alba (now called Tefron USA Inc.) 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 32 quarterly
installments commencing March 15, 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, Hi-Tex Founded by Tefron
Ltd. and by Tefron U.S. Holdings Corp.

     Long-term loans also include a long-term loan facility between us and
Hi-Tex Founded by Tefron Ltd., with Bank Hapoalim B.M. and Israel Discount Bank
Ltd. in the outstanding amount of $22 million also payable in 32 quarterly
installments commencing March 15, 2005. The term loan facility and a related
revolving credit facility are secured by a floating lien on all the personal
property of Tefron and Hi-Tex.

     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 us and 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 us and of Alba. These covenants and restrictions could hinder
us in its operations and growth.

     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 long term loan facility with Bank Hapoalim B.M. and Israel
Discount Bank of New York.

     In connection with the formation of AlbaHealth, AlbaHealth entered into a
credit agreement, with GE Capital, which contains a term loan facility in the
outstanding principal amount of $9 million and is payable in quarterly
installments, ending on September 6, 2007. In addition, the AlbaHealth Credit
Agreement provides for a 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 Hapoalim
B.M. and Israel Discount Bank of New York and for working capital purposes. The
credit agreement contains various restrictive covenants as well as covenants
which require that we maintain certain financial ratios. See "Item 10.
Additional Information - 10C. Material Contracts - AlbaHealth Credit Agreement"
for more information regarding this credit facility. During 2004, AlbaHealth
failed to comply with certain financial covenants contained in the credit
agreement, including a minimum EBITDA requirement, and GE Capital has agreed to
waive certain financial covenant defaults that occurred during 2004 and to amend
certain of the financial covenants.


                                       32
<PAGE>


     Our short-term debt in the amount of approximately $21.4 million consists
of one-year revolving credit facilities with various expiration dates during
2005. 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.


     EQUITY FINANCINGS

     On April 22, 2004, we issued to Norfet, Limited Partnership ("Norfet"),
controlled by FIMI Opportunity Fund and certain other co-investors,
approximately 3.53 million ordinary shares at a base price of $4.25 per share
and to a group of investors represented by Mr. Zvi Limon ("Leber") approximately
1.07 million ordinary shares at a base price of $4.65 per share. See "Item 10.
Additional Information - C. Material Agreements - FIMI Agreements". We applied
most of the aggregate amount of $19.7 million from these investments to repay
short-term debt. On April 5, 2005 we issued, with no further consideration,
additional shares to Norfet and Leber according to a share purchase price
adjustment mechanisms included in the investments agreements with these
investors. 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 ".

     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 2005. 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," "Our expansion into new product lines with
more complicated products and new raw materials reduced our operating efficiency
during 2003 and 2004 and our future operating efficiency may continue at the
same level as 2004 without improvement" 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 is 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


                                       33
<PAGE>


DESIGN AND DEVELOPMENT OF PRODUCTS

     Our design and development of products department continually strives to
improve technologies and products and develop new lines of products. We estimate
that we invested approximately $3.5 million to $4.0 million in 2002, $4 million
to $4.5 million in 2003 and $4.4 million to $4.9 million in 2004 on design and
development of products, including Alba.

IMPACT OF INFLATION AND CURRENCY FLUCTUATIONS

     Because most of our revenues in the foreseeable future are expected to
continue to be generated in U.S. dollars and a significant portion of our
expenses are expected to continue to be incurred in NIS, we are exposed to the
risk of appreciation of the NIS vis-a-vis the U.S. dollar. Part of our expenses
are executed in Euro, and therefore we are also exposed to the risk of
appreciation of the Euro vis-a-vis the U.S dollar. This appreciation would cause
an increase in our NIS or Euro expenses as recorded in our U.S. dollar
denominated financial reports even though the expenses denominated in NIS or
Euro 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 2002 and 2004, the rate of devaluation of the NIS vis-a-vis the dollar
exceeded the inflation rate in Israel. During 2002 and 2004, the rate of
inflation was 6.5% and 1.2%, respectively, while NIS devalued against the U.S.
dollar by 7.3% and -1.6% in 2002 and 2004. 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 2004, we incurred expenses of approximately
$0.3 million due to the appreciation of the NIS in relation to the dollar and
approximately $0.2 million due to the appreciation of the Euro in relation to
the dollar. This appreciation may continue in 2005.

     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."


                                       34
<PAGE>


EFFECTIVE CORPORATE TAX RATE

     The taxable income of Israeli corporations was generally subject to
corporate tax at the statutory rate of 35% in 2004 (compared to a rate of 36%
until 2003). The rate in 2005 is 34% and it is scheduled to be reduced to 32% in
2006 and 30% for 2007 and thereafter. However, most of our manufacturing
facilities in Israel have been granted Approved Enterprise status under the
Investment Law, and consequently income derived from such facilities is
eligible, subject to compliance with certain requirements, for certain tax
benefits beginning when such facilities first generate taxable income. We have
derived most of our income from our Approved Enterprise facilities. Subject to
compliance with applicable requirements, income derived from our Approved
Enterprise facilities will be subject to corporate tax at a rate of 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.

     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 our capital expenditures. The
Government of Israel has reduced the investment grants available to us from 38%
of eligible annual capital expenditures in 1996 to 24% of eligible annual
capital expenditures (for projects not exceeding investments of 140 million NIS
in any year) since 1997. Commencing in 2001, such investment grants were reduced
by the Government of Israel to 20% of eligible annual capital expenditures.
There can be no assurance that the Israeli government will not further reduce
such investment grants. The termination or reduction of certain programs
(particularly benefits available to us as a result of the Approved Enterprise
status of certain of our facilities) would increase the costs of acquiring
machinery and equipment for 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."


                                       35
<PAGE>


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>
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
2004                        4.48               4.63               4.30               4.30
</TABLE>


     TREND INFORMATION. We have seen an improvement in the operating efficiency
in our Seamless Division in the beginning of 2005, although we cannot assure
that we will be able to return to our previous efficiency levels in the future.
In addition, our first quarter of 2005 has seen an increase in sales of
active-wear and swim-wear products and we expect that the active-wear sales in
2005 will comprise a significantly bigger part of our total sales than in 2004.
For more information, see " - General - 2004 Developments."

     We have also seen a reduction of the price of our Cut & Sew products, as
well as our sales of these products, that may continue in the future.

     OFF-BALANCE SHEET ARRANGEMENTS. As of December 31, 2004, we did not have
any significant off-balance sheet arrangements.


                                       36
<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 as of April 6, 2005:

<TABLE>
<CAPTION>
NAME                        AGE       POSITION
----                        ---       --------
<S>                         <C>       <C>
Arie Wolfson                43        Chairman of the Board
Yosef Shiran                43        Chief Executive Officer and Director
Micha Korman                50        Director
Meir Shamir                 53        Director
Yarom Oren                  35        Director
Shirith Kasher              37        Director
Arie Arieli                 53        External Director
Yacov Elinav                60        External Director
Gil Rozen                   44        Chief Financial Officer (until May 31, 2005)
Asaf Alperovitz             34        Chief Financial Officer (from June 1, 2005)
Osnat Kaplan                39        Vice President of Sales and Marketing
Talya Hanan                 44        Vice President - Global Innovation
Itamar Harchol              46        Chief Technology Officer
Margalit Shahar             38        Manager of Human Resources
Amit Eshet                  43        H-Ttex Division Manager and Purchasing Manager
David Gerbi                 55        Hi-Tex Division Manager
Ilan Gilboa                 38        Cut & Sew Division Manager
Zvi Avigad                  45        Logistics Manager
Ronny Grundland             51        Swimwear Marketing Manager
Michal Baumwald Oron        32        Company Secretary and Legal Counsel
</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.

     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 Bachelor's
degree in Economics and Business Administration from Bar-Ilan University.

     MEIR SHAMIR was elected as a director of the Company on March 31, 2004 and
has been the Chairman of Mivtach Shamir Holdings Ltd., an investment company
traded on the Tel-Aviv Stock Exchange, since 1992. Mr. Shamir also serves as a
director of each of the following companies, as well as of other private
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;.


                                       37
<PAGE>

     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, Formula Systems (1985) Ltd. a global information technology (IT)
solutions and services company traded on Nasdaq and TASE, Ginegar Plastic
Products Ltd., a plastic cover films manufacturer, and Mez Op Holdings Ltd. a
holding company controlled 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 is the CEO of Shefa Yamim Finance Ltd. From 2001 to March 31,2005, Ms.
Kasher was the General Counsel and Secretary of The Israel Phoenix Assurance
Company Ltd. and the General Counsel of Atara Investment Company Ltd. and Atara
Technology Ventures Limited (both from the Phoenix Group) . From 1997 to 2000,
Ms. Kasher worked at S. Horowitz & Co., first as an Articled Clerk and then as
an Advocate. Ms. Kasher holds a B.Sc., 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.

     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.

     YACOV ELINAV has served as an External Director of Tefron since 2004.
Between 1991 and July 2003, Mr. Elinav was a member of the Board of Management
of Bank Hapoalim B.M. Mr. Elinav also serves as 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.

     GIL ROZEN joined Tefron in December 2001 as Chief Financial Officer. Gil
Rozen will resign his position on May 31, 2005 following his decision to conduct
private business. 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.

     ASAF ALPEROVITZ will join Tefron in June 2005 as Chief Financial Officer.
Mr. Alperovitz has held several management positions, including that of Chief
Financial Officer of Corigin Ltd., a software development company of
approximately 40 employees, from 2003 until 2005. Prior to that, Mr. Alperovitz
worked as the Head of Israeli Desk and as High-Technology Senior Manager for
Ernst & Young in both Israel and California. Mr. Alperovitz holds a Bachelor's
degree in Accounting and Economics and a Master in Business Administration from
Tel-Aviv University and is a Certified Public Accountant.

     OSNAT KAPLAN joined Tefron in the end of 1999 and has served as Vice
President of Sales and Marketing since October 2004. Prior to that, she served
as a Customer Manager and afterwards - as a Business Development Director Mass
Market. Prior to joining the company Ms. Kaplan held various senior marketing
positions in The Geographic Company- Neot Hakikar and in Straus Nestle. Ms.
Kaplan holds a Bachelor's degree in International Business and Languages form
the Hebrew University and Master of Communication and Business Administration
from Bar-Ilan University.


                                       38
<PAGE>


     TALYA HANAN joined Tefron in 1989 and has served as Vice President of
Global Innovation and Far-East Sourcing since February 2005 . Prior to that, she
served as Vice President of Global Innovation & Active Wear Marketing from 2001
to 2004. A s Marketing and Development Director 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 serves as a lecturer of Shenkar School of Textile in a
course for sports-wear collection design in the Textile course of study. Ms.
Hanan holds a degree of Industrial and Management Engineering from the Shenkar
School of Textile and a Bachelor's degree from the Open University.

     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.

     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 Bachelor's and a masters degree in Social Work from the Haifa
University.

     AMIT ESHET joined Tefron in February 2001 and has served as Hi-Tex division
manager since July 2004 and as Purchasing manager since March 2005. Prior to
that, he served as manager quality assurance of Hi-Tex division. Mr. Eshet
served as manager in several industrial corporations. Mr. Eshet holds a B.Sc
degree in Industrial Engineering from the Technion in Haifa.

     DAVID GERBI joined Tefron as Hi-Tex Managing director in February 2005.
David has a vast experience in management positions in the textile industry.
Mr., Gerby served from 1977 to 1985 as the textile division production manager
in Nilit Ltd, from 1985 to 1997 as the manager of the socks factory of Delta and
as the manager of the fabric division of Delta, managed a private textile
factory of him between 1997 to 1999 and established plants and outsourcing for
Sara Lee in Turkey between 2003-2005. Mr. Gerby holds a degree in practical
engineer from Ort and a Bachelor's degree in sociology and state studies form
Haifa University.

     ILAN GILBOA joined Tefron as manager of Tefron's cut & sew division in
March 2003. Prior to joining Tefron Mr. Gilboa served from 1996 to February 2003
in Kulicke & Soffa Israel, a leading supplier of semiconductor assembly and test
inerconnect equipment, materials and technologies, first as a manager of
industrial engineering and last as vice president of operations and as such, was
responsible for the construction of K&S's new industrial facility in China. Mr.
Gilboa holds a B.Sc and M.Sc degree in industrial engineering from the Technion
in Haifa.

     ZVI AVIGAD joined Tefron at the beginning of 2001 and has served as
logistics manager since October 2004. Prior to that Mr. Avigad held various
positions in the company, including operational manager and manager of the
Hi-Tex division. Mr. Avigad held various senior management positions in several
industrial corporations since 1991. Mr. Avigad holds a B.Sc degree in industrial
Engineering and masters degree in business administration (MBA) from the
Technion in Haifa.

     RONNY GRUNDLAND joined Tefron in May 2003, following the acquisition of
Macro Clothing Ltd, and has serve since then as a Swimwear Marketing Manager.
Prior to that Mr. Grundland served since 1995 until 2003 as the general manager
of Macro, since 1993 until 1995 he served as general manger of Macpell
Industries, Ltd. jointly with another and as its marketing manager, since 1990
until 1992 Mr. Grundland served as an organizational advisor to textile
companies in Israel and Europe, and since 1980 until 1989 he served as a
production and operational manager in Gotex, Ltd. Mr. Grundland holds a B.Sc
degree in industrial Engineering form the Technion- the technologic institution
to Israel.


                                       39
<PAGE>


     MICHAL BAUMWALD ORON joined Tefron in 2003 and has served as the company
secretary and legal counsel since August 2004. Prior to joining Tefron, Ms. Oron
served as a lawyer and as legal counsel in a law firm, in private practice and
in the IDF. Ms. Oron holds an LLB from Tel-Aviv University and an LLM from
Bar-Ilan University and was admitted to practice law in Israel in 1996.

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 Tefron'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) is Mr. Wolfson. Since the resignation of Mr. Sigi Rabinowicz,
Macpell has not appointed an additional director. "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, 2004 was approximately $2.2 million, of which $100,000 was paid to Directors
in their capacities as Directors. This amount includes $150,000 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 and a $118,000 in management
fees paid to Norfet as described in "Item 4. Information on the Company - 4A.
History and Development of the Company".

     In 2004, we granted options for 730,000 Ordinary Shares under the Share
Option Plan, of which 720,000 were granted to Directors and senior managers.
Such options have an average exercise price of $4.264 per share and expire in
2014. Options for 115,768 Ordinary Shares under the Share Option Plan expired or
were cancelled during 2004.

     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
$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 made until 2002 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, subject to relevant
tax laws, 150,000 are already exercisable and 75,000 options will be exercisable
on August 6, 2005.


                                       40
<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".

     FORMER PRESIDENT

     Under the terms of our employment agreement with Mr. Sigi Rabinowicz, our
former president, we paid or provided 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. Effective January 10, 2005,
Mr. Rabinowicz resigned as President and as a member of the Board of Directors.
According to the retirement agreement we executed with Mr. Rabinowicz, he will
be entitled to the monthly compensation, employee benefits and a vehicle until
Sept. 30, 2005. The options granted to Mr. Rabinowicz will be effective and
exercisable until January 2, 2007. The agreement also includes non-competition
and confidentiality clauses.

     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 $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 $ 4.25 per share. These
options were issued upon the closing of the transactions with Norfet, Limited
Partnership described in "Item 10. Additional Information - C. Material
Agreements - FIMI Agreements". These options were issued in accordance with our
1997 Share Option Plan and are exercisable, subject to relevant tax laws, as
follows:


                                       41
<PAGE>


     a.   162,500 Options vested 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.

     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 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, 1999 which
requires that we have at least two External Directors. Under a recent amendment
to the Companies Law, at least one of the external directors is required to have
Financial Expertise and the other External Directors are required to have
Professional Expertise. These requirements are subject to regulations to be
promulgated in which the terms Financial Expertise and Professional Expertise
would be defined. This recent amendment does not apply to External Directors who
were appointed before March 17, 2005 (such as our External Directors).


                                       42
<PAGE>


     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 Arie Arieli and Yacov Elinav.

     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. Our independent
directors, who are all members of the audit committee, are Shirith Kasher, Micha
Korman, Arie Arieli and Yacov Elinav. 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.

     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.


                                       43
<PAGE>


     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.

     QUALIFICATIONS OF OTHER DIRECTORS

     Under a recent amendment to the Companies Law, the Board is required to
determine the minimal number of board member that would be required to have
Financial Expertise. This requirement is subject to regulations to be
promulgated in which the term Financial Expertise would be defined.

     DUTIES OF DIRECTORS

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

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

     COMMITTEES

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


                                       44
<PAGE>


6D.  EMPLOYEES

     At December 31, 2004, we employed 2,082 employees in Israel of whom 469
were salaried employees and 1,613 were hourly wage employees. At December 31,
2004, we employed 301 employees in the United States through our subsidiary,
Alba, of whom 259 were salaried employees and 42 were hourly wage employees. At
December 31, 2004, El-masira employed 440 employees in Jordan all of them were
salaried 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 whom 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.

     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.

     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 employer contributes 5.9% of wages, and the employee
contributes the rest. A majority of our permanent employees in Israel are
covered by general and/or individual life and pension insurance policies
providing customary benefits to employees, including retirement and severance
benefits. The employers generally contribute up to 15.8% (depending on the
employee) of base wages to such plans and the permanent employees contribute up
to 5.5% of their base wages.

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


                                       45
<PAGE>

6E.  SHARE OWNERSHIP

     As of April 6, 2005, 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 17,932,558 Ordinary Shares outstanding
as of, April 6, 2005. 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, April 6, 2005. 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.


<TABLE>
<CAPTION>

                                                                NUMBER OF        % OF ORDINARY SHARES
NAME                                                         ORDINARY SHARES          OUTSTANDING**
------------------------------------------------------       ---------------          -------------
<S>                                                           <C>                        <C>
Arie Wolfson                                                   4,898,492(1)              27.3%
Yos Shiran                                                       540,208(2)                 3%
Talya Hanan                                                            *                    *
Micha Korman                                                           *                    *
Gil Rozen                                                              *                    *
Meir Shamir                                                    5,663,085(3)              31.6%
Yacov Elinav                                                           *                    *
Arie Arieli                                                            *                    *
Itamar Harchol                                                         *                    *
Ilan Gilboa                                                            *
Zvi Avigad                                                             *
Margalit Shahar                                                        *                    *
Amit Eshet                                                             *

Directors and senior managers as a group (13 persons)         11,415,682(4)              63.7%
</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.

(1) Includes (a) 3,777,110 Ordinary Shares held by Macpell, (b) 971,282 Ordinary
Shares held by Arwol Holdings Ltd., (c) 150,000 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 3,777,110 Ordinary Shares held by Macpell and the 971,282
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.


                                       46
<PAGE>


(2) Consists of 540,208 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).

(3) Consists of 5,663,085 Ordinary Shares held by Norfet, which Mr. Shamir may
be deemed to beneficially own due to his 40% interest in Mivtah-Shamir, which
held an approximately 35.5% interest in Norfet as of April 6, 2005.

(4) Consists of 5,663,085 Ordinary Shares held by Norfet, which Meir Shamir may
be deemed to beneficially own under U.S securities laws due to his 40% interest
in Mivtah-Shamir, which held an approximately 35.5% interest in Norfet as of
April 6, 2005. Also include 3,777,110 Ordinary Shares held by Macpell of which
Arie Wolfson may be deemed to be beneficial owner under U.S. securities laws due
to his 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 971,282 Ordinary Shares held 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 1,004,205
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 April 6, 2005 options to purchase 2,369,555 of such Ordinary Shares had
been granted to our senior managers, directors and employees, of which 1,532,156
options had been granted to our senior managers and directors as a group. 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.

     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.


                                       47
<PAGE>


     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 12 of the Notes to the Consolidated Financial Statements.

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

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

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

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


                                       48
<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 30, 2005. The information in this table is based on
17,932,558 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, April 6, 2005. 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.



<TABLE>
<CAPTION>
NAME                                          NUMBER OF SHARES OWNED          PERCENT OF ORDINARY SHARES *
------------------------------------          ----------------------          ----------------------------
<S>                                               <C>                                  <C>
Norfet, Limited Partnership                       5,663,085 (1)                        31.6%
c/o Fimi 2001 Ltd.
"Rubinstein House"
37 Begin Rd.
Tel Aviv, Israel

Macpell Industries Ltd.                           3,777,110 (2)                        21.1%
28 Chida Street
Bnei Brak, Israel  51371

Discount Investment Corporation Ltd               1,916,866 (3)                         7.1%
Azrieli Center 3, Triangular Building
Tel Aviv, Israel 67023

Arie Wolfson                                      4,898,492 (4)                        27.3%

Sigi Rabinowicz                                   4,071,451 (5)                        22.7%

Leber Partners, L.P.                              1,276,882                             7.1%
Zvi Limon
95 Avenue Kleber Paris, France 75116
</TABLE>

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

(1)  Norfet L.P is an Israeli partnership. As of April 6, 2005, 51.963% of
     Norfet was held by FIMI Israel, Opportunity Fund, Limited Partnership, and
     34.449% was held by Mivtach Shamir Holdings Ltd.. Pursuant to Rule 13d-5 of
     the U.S Exchange Act, Norfet may also be deemed to beneficially own the
     shares held by Macpell and Arwol due to the shareholders agreement between
     Arwol, Macpell and Norfet. See "Item 10. Additional Information - 10C.
     Material Contracts - FIMI Agreements." In addition, pursuant to Rule 13d-5,
     Mr. Meir Shamir, a director in our company, may be deemed to beneficially
     own the shares held by Norfet due to his 40% interest in Mivtah-Shamir.


                                       49
<PAGE>


(2)  Macpell is an Israeli corporation. As of April 6, 2005, 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, held 25.0% of Macpell; and Condo Overseas
     Inc., a Panamanian company wholly-owned by Avi Ruimi, held 25.8% of
     Macpell, representing 78.7% 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 April
     6, 2005 was 15,561,284 (included 398,651 shares held by New Net Holdings
     Ltd, a wholly owned subsidiary of Macpell) .Pursuant to Rule 13d-5 of the
     U.S Exchange Act, Macpell may also be deemed to beneficially own the shares
     held by Norfet due to the shareholders agreement between Arwol, Macpell and
     Norfet. See "Item 10. Additional Information - 10C. Material Contracts -
     FIMI Agreements."

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

     IDBH is controlled by a group comprised of: (i) Ganden Investments I.D.B.
     Ltd. ("Ganden Investments"), a wholly owned Israeli subsidiary of Ganden
     Holdings Ltd. ("Ganden Holdings"), a private Israeli company controlled by
     Nochi Dankner and his sister, Shelly Bergman, which holds 31.02% of the
     equity of and voting power in IDBH; (ii) Manor Investments-IDB Ltd. ("Manor
     Investments"), a majority owned Israeli subsidiary of Manor Holdings B.A.
     Ltd. ("Manor Holdings"), 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. ("Livnat Investments"), a
     wholly owned Israeli subsidiary of Avraham Livnat Ltd. ("Livnat Ltd."), a
     private Israeli company controlled by Avraham Livnat, which holds 10.34% of
     the equity of and voting power in IDBH. Ganden Investments, Manor
     Investments and Livnat Investments, 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 to the shares of IDBH owned by Ganden Investments, Manor
     Holdings and Livnat Holdings, as at April 6, 2005: (i) Ganden Holdings
     itself owned directly approximately 3.16% 6.44% of the outstanding shares
     of IDBH, (ii) Shelly Bergman owned, through a private Israeli corporation
     which is wholly owned by her, approximately 6.54% 7.23% of the outstanding
     shares of IDBH, (iii) Manor Holdings itself owned directly approximately
     0.04% 0.03% of the outstanding shares of IDBH and (iv) Livnat Ltd. itself
     owned directly approximately 0.04% of the outstanding shares of IDBH. These
     additional holdings of shares of IDBH are not subject to the Shareholders
     Agreement referred to above.

     Nochi Dankner is Chairman of IDBH, IDB Development and DIC. Shelly Bergman,
     Isaac Manor (the husband of Ruth Manor), Dori Manor (a son of Isaac and
     Ruth Manor) and Zvi Livnat (a son of Avraham Livnat) are directors of each
     of IDBH, IDB Development and DIC. Shai Livnat (a son of Avraham Livnat) is
     a director of IDB Development.

(4)  Includes (a) 3,777,110 Ordinary Shares held by Macpell, (b) 971,282
     Ordinary Shares held by Arwol, (c) 150,000 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 3,777,110 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.

(5)  Consists of (i) 3,777,110 Ordinary Shares held by Macpell, and (ii)
     exercisable options to purchase 294,341 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 3,777,110
     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.


                                       50
<PAGE>


     At April 6, 2005, there were 18 holders of Ordinary Shares of record
registered with a United States mailing address, including banks, brokers and
nominees. These holders of record represented approximately 39% 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.

     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 3,777,110 Ordinary Shares, approximately 21% 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 April 6, 2005, 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,
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.


                                       51
<PAGE>


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/NORFET

     Pursuant to a Share Purchase Agreement, dated February 17, 2004, Tefron
issued to Norfet, Limited Partnership ("Norfet") 3,529,412 Tefron ordinary
shares for a base price of $4.25 per share and a base aggregate consideration of
$15 million. Norfet also acquired an additional 1,365,000 Tefron ordinary shares
in the aggregate from Arwol and Macpell pursuant to a separate agreement.
Following the closing of these agreements, Norfet held 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.

     Due to purchase price adjustment provisions in the Purchase Agreements,
Tefron issued to Norfet an additional 661,765 ordinary shares, and Arwol
transferred 106,908 additional ordinary shares to Norfet.

     Under the Share Purchase Agreement, we also agreed to pay Norfet a
management fee of approximately $172,000 plus VAT per annum until our first
annual meeting in 2005, and $120,000 plus VAT thereafter.

AGREEMENTS AMONG NORFET, MACPELL AND ARWOL

     Under an agreement among Norfet, Macpell and Arwol, the parties agreed to
vote all of Tefron ordinary shares owned or controlled by each of them for the
election 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 Norfet
(one of whom shall be a woman), (ii) three members (of whom at least one will
qualify as an independent director and a financial expert under the NYSE
rules)and, subject to applicable law, one external director, that shall be
nominated by Arwol and Macpell, and (iii) Tefron's chief executive officer.

     The Company, Norfet, Arwol and Macpell are also party to a Registration
Rights Agreement, which replaced the previous Registration Rights Agreement
among the Company, Arwol and Macpell .

     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 have
initiated discussions with Macpell in an effort to reduce our annual payments
under these lease agreements. We cannot assure that we will be successful in
this effort to reduce our annual payments.


                                       52
<PAGE>


     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 2002, our sales to this affiliate
were approximately $1 million, in 2003 approximately $1.2 million and in 2004
approximately $ 0.8 million. We believe these prices to be no less favorable
than those were available to us from unaffiliated third parties. See Note 16 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.
Macro manufactures, markets and sells of swimsuits and beachwear.

7C.  INTERESTS OF EXPERTS AND COUNSEL.

     Not Applicable.

ITEM 8. FINANCIAL INFORMATION

CONSOLIDATED FINANCIAL STATEMENTS

     See Item 18.

LEGAL PROCEEDINGS

     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.

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.

                                       53
<PAGE>


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
2004                                                       $ 6.30     $ 3.50
</TABLE>


     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>

                                      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                                              $ 6.30     $ 4.31
Second quarter                                             $ 6.00     $ 4.74
Third quarter                                              $ 4.70     $ 3.92
Fourth quarter                                             $ 4.45     $ 3.92
</TABLE>

<TABLE>
<CAPTION>
                                      2005
                                      ----
<S>                                                        <C>        <C>
First quarter                                              $ 5.35     $ 3.84
</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>
                                      2004
                                      ----
<S>                                                        <C>        <C>
October                                                    $ 4.45     $ 3.90
November                                                   $ 4.10     $ 3.50
December                                                   $ 3.86     $ 3.68
</TABLE>

<TABLE>
<CAPTION>
                                      2005
                                      ----
<S>                                                        <C>        <C>
January                                                    $ 5.05     $ 3.84
February                                                   $ 5.35     $ 4.59
March                                                      $ 5.25     $ 4.88
</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 April 6, 2005, we had repurchased and hold in our treasury 997,400
Ordinary Shares.

     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."


                                       54
<PAGE>


9B.  PLAN OF DISTRIBUTION

     Not Applicable.

9C.  MARKETS

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

9D.  SELLING SHAREHOLDERS

     Not Applicable.

9E.  DILUTION

     Not Applicable.

9F.  EXPENSES OF THE ISSUE

     Not Applicable.

ITEM 10. ADDITIONAL INFORMATION

10A. SHARE CAPITAL

     Not applicable.

10B. MEMORANDUM AND ARTICLES OF ASSOCIATION

     SECURITIES REGISTERS

     Our transfer agent and register is American Stock Transfer & Trust Company
and its address is 59 Maiden Lane, New York, New York 10038. Section 2 of our
Memorandum of Association provides that our principal objects, among other
things, are to engage in any business connected with manufacturing, processing,
supplying and marketing undergarments, textiles and ready-made clothes. Article
2A of our Articles of Association provides that we may, at any time, carry on
business in any field or type of business permitted to us, whether explicit or
implied, according to our Memorandum of Association.

     BOARD OF DIRECTORS

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

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


                                       55
<PAGE>


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

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

     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.


                                       56
<PAGE>


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

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

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

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

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

     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.


                                       57
<PAGE>


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.

     ALBAHEALTH OPTION AGREEMENT

     In connection with the formation of AlbaHealth LLC (described in "Item 4.
Information on the Company - 4A. History and Development of the Company"), our
subsidiary, Alba, became party to a Put Option Agreement. Pursuant to the
provisions of the Put Option 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 and the date of exercise of the put option. 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 Option 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 Option Agreement. Pursuant to an amendment to the Put Option Agreement,
dated December 13, 2004, in the event the Alba Party delivers a "Put Notice"
between July 1, 2005 and December 31, 2005, then for purposes of determining the
fair value of AlbaHealth, AlbaHealth's EBITDA will be deemed to be not less than
US$6,434,000 ("Minimum EBITDA") and not more than the Minimum EBITDA plus 50% of
the amount by which the actual EBITDA (as defined in the Put Option Agreement)
exceeds the Minimum EBITDA.

     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 " - FIMI Agreements - Tefron Agreement" below.

     FIMI AGREEMENTS

     We entered into a Share Purchase Agreement (the "Tefron Agreement"), dated
February 17, 2004, 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 issued to the Investor 3,529,412 Tefron ordinary shares for
a base price of $4.25 per share and a base aggregate consideration of $15
million. Due to purchase price adjustment provisions in the Tefron Agreement,
Tefron issued to Norfet an additional 661,765 ordinary shares in April 2005.

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


                                       58
<PAGE>

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

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

     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 was equal to or less than $16 million, then the share price per
share was to be reduced retroactively by $0.75 (to $3.50), and if the Company's
EBITDA for 2004 is higher than $16 million but lower than $23 million, then the
share price reduction was to be calculated in accordance with the following
formula:

     Price Per Share = 4.25 - 0.75*[x]

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

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

     Tefron's EBDITA for 2004 was $11.809 million. and pursuant to an amendment
to the Tefron Agreement signed on March 31, 2005 Tefron issued to Norfet an
additional 661,765 ordinary shares, instead of the adjustment mechanism provided
for in the Tefron Agreement.

     Under the terms of the Tefron Agreement, the issue price per share will be
increased in the event that, during the three-year period following the closing
of the Tefron Agreement and the Macpell Agreement, the Investor sells at least
20% of the total number of shares purchased 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.

     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 Option Agreement dated September 6, 2003, as amended
on December 13, 2004 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.


                                       59
<PAGE>


     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.

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

     The Registration Rights Agreement is 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.

     In connection with the execution of the Share Purchase Agreement with Leber
Partners, L.P., we entered into a Registration Rights Agreement with Leber
Partners, the Investor, Arwol and Macpell which replaced, and is 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.


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

     Price per share = 5.538 - 0.75*[x]

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

     Tefron's EBITDA for 2004 was $11.809 million, and due to purchase price
adjustment, Arwol transferred 106,908 additional ordinary shares to Norfet in
April 2005, and Macpell elected to pay Norfet cash in lieu of transferring
additional shares to Norfet.

     AGREEMENTS OF THE PARTIES.

     COMPOSITION OF THE BOARD OF DIRECTORS. Arwol, Macpell and the Investor
agreed to vote all of Tefron ordinary shares owned or controlled by each of them
for the election to Tefron's Board of Directors of: (i) three members (of whom
at least one will qualify as an "independent director" under the NYSE rules)
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.

     CHAIRMAN OF THE BOARD OF TEFRON. Arwol, Macpell and the Investor confirm in
the Macpell Agreement that Arie Wolfson 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.


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

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

     MANAGEMENT FEE. Arwol, Macpell and the Investor agreed in the Macpell
Agreement to vote all of Tefron ordinary shares owned or controlled by them in
order to cause Tefron (i) to pay the Investor (or any of its affiliates) the
Management Fees (described above under "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 also entered into a Share Purchase Agreement, dated March 3, 2004 with
Leber Partners, L.P., which is a group of investors represented by Mr. Zvi
Limon. The investors invested $5 million in cash in Tefron for approximately
1.07 million ordinary shares of Tefron at a base price of $4.65 per share.
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.

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<PAGE>

     ISSUE PRICE ADJUSTMENT. The purchase price of $4.65 per share was 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 was to 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]

     Tefron EBDITA for 2004 was $11.809 million. Pursuant to an amendment to the
Purchase Agreement signed on March 3, 2004, Tefron issued to Leber an additional
201,613 ordinary shares, instead of the adjustment mechanism provided for in the
Purchase Agreement.

     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.

     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 replaced, and is on substantially the same terms
as, the Registration Rights Agreement that we agreed to execute in connection
with the Tefron Agreement, other than as provided below. In addition to the
rights to be granted to all of the shareholders that are to be party to the
Registration Rights Agreement, Leber Partners would have the right to request a
registration (even though we would not be eligible to use a short form
registration) of all, but not less than all, of the ordinary shares then held by
Leber Partners, but in any event not less than 500,000 ordinary shares. 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.


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     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.


OUR CREDIT AGREEMENTS

     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.

     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.

     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;


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          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.

     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.

     Pursuant to the amendment of our Credit Agreement, the repayment schedule
of the loans will be spread over the period from 2005-2012, such that during
each such year from 2005 until 2012 we will be obligated to pay approximately $6
million.

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 up to 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:


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          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.

     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.
During 2004, AlbaHealth failed to comply with certain financial covenants
contained in the credit agreement, including a minimum EBITDA requirement, and
pursuant to the First Amendment and Waiver to Credit Agreement, GE Capital
agreed to waive certain financial covenant defaults that occurred during 2004
and to amend certain of the financial covenants.

     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.


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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.


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     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.

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.


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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, 2004, our liabilities denominated in foreign currencies in the
amount of $20.7 million represented 14.3% of our total liabilities of $144.8
million. At December 31, 2004, our assets denominated in foreign currencies in
the amount of $8.5million represented 4.4% of our total assets of $191.5
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, 2004, $78.5
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 $0.4
million.

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

     Not applicable.


                                       69
<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, 2004 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.

ITEM 16. [RESERVED]

16A. AUDIT COMMITTEE FINANCIAL EXPERT

     The Board of Directors has determined that Yacov Einav 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, 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, and
McGladrey & Pullen, LLP, have served as our independent registered public
accounting firms for each of the fiscal years in the two-year period ended
December 31, 2004, 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
2004 and 2003.


                                       70
<PAGE>

<TABLE>
<CAPTION>

                              US$ 2004        US$ 2003
                              --------        --------
<S>                           <C>             <C>
Audit Fees (1)                $126,677        $106,577

Audit-related Fees (2)        $ 92,000        $101,168

Tax Fees (3)                  $ 63,971        $123,528

All Other Fees (4)            $ 24,426        $  1,275

TOTAL                         $307,074        $332,548

</TABLE>

     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, programs 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 2004, 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.


                                       71
<PAGE>


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

     None.

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

     None.


                                       72
<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
Report of Registered Public Accounting Firm                      F-2
Consolidated Balance Sheets                                      F-3 - F-4
Consolidated Statement of Operations                             F-5
Consolidated Statement of Changes in Shareholders' Equity        F-6
Consolidated Statement of Cash Flows                             F-7 - F-8
Notes to the Consolidated Financial Statements                   F-9 - F-33
Report of Independent  Auditors for subsidiary of Tefron,
Alba Health LLC, for 2004 Financial Statements                   F-34

</TABLE>


                                       73
<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 March 2, 2004, from Israel Discount Bank Ltd. to the Company
     regarding shareholders' equity requirements under the Credit Agreement
     (incorporated by reference to Exhibit 2.8 to the Company's Annual Report on
     Form 20-F for the fiscal year ended December 31, 2003).

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

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

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

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

2.7  Sixth Amendment to Credit Agreement, dated December 15, 2004, among
     Alba-Waldensian, Inc. and Bank Hapoalim, as Agent and Lender, together with
     Term B Notes.

2.8  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).

2.9  First Amendment and Waiver to Credit Agreement, dated March 31, 2005, among
     AlbaHealth LLC and General Electric Capital Corporation, as Agent and
     Lender.


                                       74
<PAGE>


2.10 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).

2.11 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).

2.12 Loan Agreement, dated as of December 21, 2004, between Israel Discount Bank
     and Hi-Tex Founded by Tefron Ltd.

2.13 Loan Agreement, dated as of December 31, 2004, between Bank Hapoalim and
     Hi-Tex Founded by Tefron Ltd.

2.14 Loan Agreement, dated as of December 25, 2004, between Israel Discount Bank
     and the Company.

2.15 Loan Agreement, dated as of December 31, 2004, between Bank Hapoalim and
     the Company.

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 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).

3.2  Agreement, dated February 17, 2004, by and among Arwol Holdings Ltd.,
     Macpell Industries Ltd. and Norfet, Limited Partnership (incorporated by
     reference to Exhibit 3.4 to the Company's Annual Report on Form 20-F for
     the fiscal year ended December 31, 2003).

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)


                                       75
<PAGE>


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,
     Entrepreneurship, and Financing (incorporated by reference to Exhibit 4.4
     to the Company's Annual Report on Form 20-F for the fiscal year ended
     December 31, 2003).

4.5. 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, as amended as of
     December 13, 2004, 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  Amendment No. 1 to Put Option Agreement, dated as of December 13, 2004, by
     and among AlbaHealth, LLC, Alba-Waldensian, Inc., Encompass Group, L.L.C.
     and General Electric Capital Corporation.

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

4.11 Amendment to Purchase Agreement, dated March 31, 2005, by and between the
     Company and Norfet Limited Partnership.

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

4.13 Amendment to Agreement, dated March 31, 2005, by and between the Company
     and Leber Partners, L.P.


                                       76
<PAGE>


4.14 Private Equity Credit Agreement, dated as of March 9, 2004, by and between
     the Company and Brittany Capital Management Limited (incorporated by
     reference to Exhibit 4.11 to the Company's Annual Report on Form 20-F for
     the fiscal year ended December 31, 2003).

4.15 Registration Rights Agreement, dated as of March 9, 2004, by and between
     the Company and Brittany Capital Management Limited (incorporated by
     reference to Exhibit 4.12 to the Company's Annual Report on Form 20-F for
     the fiscal year ended December 31, 2003).

8.1  List of subsidiaries of the Company.

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

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

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

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

14.(a).2 Consent of McGladrey & Pullen, LLP.



                                       77
<PAGE>


                        TEFRON LTD. AND ITS SUBSIDIARIES


                        CONSOLIDATED FINANCIAL STATEMENTS


                             AS OF DECEMBER 31, 2004


                            U.S. DOLLARS IN THOUSANDS




                                      INDEX


<TABLE>
<CAPTION>
                                                                   PAGE
                                                               --------------
<S>                                                                <C>     <C>
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM            F - 2

CONSOLIDATED BALANCE SHEETS                                    F - 3 - F - 4

CONSOLIDATED STATEMENTS OF OPERATIONS                              F - 5

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY         F - 6

CONSOLIDATED STATEMENTS OF CASH FLOWS                          F - 7 - F - 8

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                     F - 9 - F - 33

REPORT OF INDEPENDENT AUDITORS FOR SUBSIDIARY OF TEFRON,
ALBA HEALTH LLC, FOR 2004 FINANCIALS STATEMENTS                    F - 34
</TABLE>

<PAGE>


[ERNST & TOUNG LOGO]
                   [X] KOST FORER GABBAY & KASIERER     [X] Phone: 972-3-6232525
                       3 Aminadav St.                       Fax:   972-3-5622555
                       Tel-Aviv 67067, Israel

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

                             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, 2003 and 2004, 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,
2004. 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 of Alba Health LLC ("Alba
Health") a subsidiary, whose statements constitute 23.4% and 23.9% of total
consolidated assets as of December 31, 2003 and 2004, respectively and whose
revenues constitute 6.5%, 23.5% and 18.7% of total consolidated revenues for the
period from September 6, 2002 to December 31, 2002 and for the two years ended
December 31, 2003 and 2004, respectively. Those statements were audited by other
auditors whose reports have been furnished to us, and our opinion, insofar as it
relates to amounts included for Alba Health, is based solely on the reports of
the other auditors.

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

     In our opinion, based on our audits 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, 2003 and 2004, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2004, in conformity with U.S generally accepted accounting
principles.


Tel-Aviv, Israel                                 KOST FORER GABBAY & KASIERER
March 16, 2005                                 A Member of Ernst & Young Global


                                     F - 2
<PAGE>


                                                TEFRON LTD. AND ITS SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS


<TABLE>
<CAPTION>
                                                                                   DECEMBER 31,
                                                                               ---------------------
                                                                       NOTE       2003         2004
                                                                       ---     --------     --------
<S>                                                                    <C>     <C>          <C>
    ASSETS

CURRENT ASSETS:
  Cash and cash equivalents                                                    $  5,747     $  3,558
  Trade receivables (net of allowances for doubtful accounts and
    product returns of $ 779 and $ 252 as of December 31, 2003 and
    2004, respectively)                                                          24,917       21,402
  Other accounts receivable and prepaid expenses                        4         6,166        5,696
  Inventories                                                           5        31,676       33,137
                                                                               --------     --------

TOTAL current assets                                                             68,506       63,793
                                                                               --------     --------

LONG-TERM ASSETS:
  Deferred taxes                                                       14g        3,428        2,486
  Investment in affiliated company                                      7           296            -
  Severance pay fund                                                                217           95
  Other                                                                             806          483
                                                                               --------     --------

TOTAL long-term assets                                                            4,747        3,064
                                                                               --------     --------

PROPERTY, PLANT AND EQUIPMENT, NET                                      6        97,473       93,931
                                                                               --------     --------

GOODWILL                                                                3        30,865       30,743
                                                                               --------     --------

TOTAL assets                                                                   $201,591     $191,531
                                                                               ========     ========
</TABLE>


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


                                     F - 3
<PAGE>

                                                TEFRON LTD. AND ITS SUBSIDIARIES

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


<TABLE>
<CAPTION>
                                                                                       DECEMBER 31,
                                                                                  ---------      ---------
                                                                          NOTE       2003           2004
                                                                          ---     ---------      ---------
<S>                                                                       <C>     <C>            <C>
    LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
  Short-term bank credit                                                   8      $  30,631      $  21,355
  Current maturities of long-term debt:
    Loans from banks and others                                            10        10,328          9,039
    Capital leases                                                         10         1,367            206
  Trade payables                                                                     29,558         28,991
  Conditional obligation with respect to issuance of shares                12             -          3,454
  Other accounts payable and accrued expenses                              9         11,146          9,189
                                                                                  ---------      ---------

TOTAL current liabilities                                                            83,030         72,234
                                                                                  ---------      ---------

LONG-TERM LIABILITIES:
  Loans from banks and others (net of current maturities)                  10        56,471         47,907
  Capital leases (net of current maturities)                               10           327              -
  Deferred taxes                                                          14g         7,570          5,611
  Accrued severance pay                                                               2,486          2,744
                                                                                  ---------      ---------

TOTAL long-term liabilities                                                          66,854         56,262
                                                                                  ---------      ---------

LIENS, CONTINGENCIES AND COMMITMENTS                                       11

MINORITY INTEREST                                                                    15,052         16,291
                                                                                  ---------      ---------

SHAREHOLDERS' EQUITY:                                                      12
  Share capital -
    Ordinary shares of NIS 1 par value -
      Authorized: 50,000,000 shares; Issued: 13,409,566 and
    18,014,247 shares as of December 31, 2003 and 2004,
    respectively;
    Outstanding:, 12,412,166  and 17,016,847 shares as of
     December 31, 2003 and 2004, respectively                                         5,575          6,582
    Deferred shares of NIS 1 par value - Authorized, issued and
     outstanding: 4,500 shares as of December 31, 2003 and 2004                           1              1
  Additional paid-in capital                                                         62,810         79,243
  Deferred stock-based compensation                                                     ---           (486)
  Treasury shares at cost (997,400 Ordinary shares as of December 31,
    2003 and 2004)                                                                   (7,408)        (7,408)
  Accumulated Deficit                                                               (24,323)       (31,188)
                                                                                  ---------      ---------

TOTAL shareholders' equity                                                           36,655         46,744
                                                                                  ---------      ---------

TOTAL liabilities and shareholders' equity                                        $ 201,591      $ 191,531
                                                                                  =========      =========
</TABLE>


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


                                     F - 4
<PAGE>

                                                TEFRON LTD. AND ITS SUBSIDIARIES

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


<TABLE>
<CAPTION>
                                                                              YEAR ENDED DECEMBER 31,
                                                                  ------------------------------------------------
                                                          NOTE          2002              2003              2004
                                                          ---     ------------      ------------      ------------
<S>                                                       <C>     <C>               <C>               <C>
Sales, net                                                        $    190,305      $    163,086      $    182,819
Cost of sales                                             13a          151,385           139,422           159,937
Restructuring costs                                        1d            1,550                 -                 -
                                                                  ------------      ------------      ------------

Gross profit                                                            37,370            23,664            22,882
Selling, general and administrative expenses                            18,358            20,323            22,387
Restructuring costs                                        1d            3,793                 -                 -
                                                                  ------------      ------------      ------------

Operating income                                                        15,219             3,341               495
Financial expenses, net                                   13b            5,457             5,628             5,212
Other income (expenses), net                              13c           (2,293)              228                 -
                                                                  ------------      ------------      ------------

Income (loss) before taxes on income                                     7,469            (2,059)           (4,717)
Taxes on income                                           14d            4,979              (424)              203
Equity in losses of affiliated companies                   7            (1,172)             (183)                -
Minority interest in earnings of a subsidiary                             (822)           (2,550)           (1,945)
Pre-acquisition earnings of subsidiary since April 1,
  2003 through May 5, 2003                                 1b                -               (85)                -
                                                                  ------------      ------------      ------------

Income (loss) before cumulative effect of change in
  accounting principles                                                    496            (4,453)           (6,865)
Cumulative effect of change in accounting principles       3           (17,994)                -                 -
                                                                  ------------      ------------      ------------

Net loss                                                          $    (17,498)     $     (4,453)     $     (6,865)
                                                                  ============      ============      ============

Basic and diluted net loss per share:

Earnings (loss) per share before cumulative effect of
  change in accounting principles                                 $       0.04      $      (0.36)     $      (0.44)

Loss per share from cumulative effect of change in
  accounting principles                                           $      (1.45)     $          -      $          -
                                                                  ------------      ------------      ------------

Basic and diluted net loss per share                              $      (1.41)     $      (0.36)     $      (0.44)
                                                                  ============      ============      ============

Weighted average number of shares used for computing
  basic and diluted net loss per share                              12,409,929        12,412,166        15,603,904
                                                                  ============      ============      ============
</TABLE>

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


                                     F - 5
<PAGE>


                                                TEFRON LTD. AND ITS SUBSIDIARIES

STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE DATA


<TABLE>
<CAPTION>
                                        ORDINARY SHARES           DEFERRED SHARES       ADDITIONAL
                                    -----------------------   -----------------------     PAID-IN
                                      NUMBER       AMOUNT       NUMBER       AMOUNT       CAPITAL
                                    ----------   ----------   ----------   ----------   ----------
<S>                                 <C>          <C>               <C>     <C>          <C>
Balance as of January 1, 2002       12,412,166   $    5,575        4,500   $        1   $   62,810

Foreign currency translation
  adjustments                                -            -            -            -            -
Amortization of deferred stock
  compensation                               -            -            -            -            -
Net loss                                     -            -            -            -            -
                                    ----------   ----------   ----------   ----------   ----------

Balance as of December 31, 2002     12,412,166        5,575        4,500            1       62,810

Net loss                                     -            -            -            -            -
                                    ----------   ----------   ----------   ----------   ----------

Balance as of December 31, 2003     12,412,166        5,575        4,500            1       62,810

Issuance of shares (net of
  issuance expenses in the amount
  of $ 296)                          4,604,681        1,007            -            -       15,393
Deferred stock based compensation            -            -            -            -        1,040
Amortization of deferred stock
  based compensation                         -            -            -            -            -
Net loss                                     -            -            -            -            -
                                    ----------   ----------   ----------   ----------   ----------



Balance as of December 31, 2004     17,016,847   $    6,582        4,500   $        1   $   79,243
                                    ==========   ==========   ==========   ==========   ==========
</TABLE>


<TABLE>
<CAPTION>
                                     DEFERRED       OTHER
                                      STOCK      COMPREHENSIVE  ACCUMULATED    TREASURY
                                   COMPENSATION     INCOME       DEFICIT        SHARES        TOTAL
                                    ----------    ----------    ----------    ----------    ----------
<S>                                 <C>           <C>           <C>           <C>           <C>
Balance as of January 1, 2002       $      (68)   $       50    $   (2,372)   $   (7,408)   $   58,588

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              -             -       (19,870)       (7,408)       41,108

Net loss                                     -             -        (4,453)            -        (4,453)
                                    ----------    ----------    ----------    ----------    ----------

Balance as of December 31, 2003              -             -       (24,323)       (7,408)       36,655

Issuance of shares (net of
  issuance expenses in the amount
  of $ 296)                                  -             -             -             -        16,400
Deferred stock based compensation       (1,040)            -             -             -             -
Amortization of deferred stock
  based compensation                       554             -             -             -           554
Net loss                                     -             -        (6,865)            -        (6,865)
                                    ----------    ----------    ----------    ----------    ----------



Balance as of December 31, 2004     $     (486)   $        -    $  (31,188)   $   (7,408)   $   46,744
                                    ==========    ==========    ==========    ==========    ==========
</TABLE>


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


                                     F - 6
<PAGE>


                                                TEFRON LTD. AND ITS SUBSIDIARIES

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

<TABLE>
<CAPTION>
                                                                            YEAR ENDED DECEMBER 31,
                                                                       --------------------------------
                                                                         2002        2003        2004
                                                                       --------    --------    --------
<S>                                                                    <C>         <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss                                                             $(17,498)   $ (4,453)   $ (6,865)
  Adjustments to reconcile net loss to net cash provided by
    operating activities:
    Depreciation, amortization and impairment of property, plant and
      equipment                                                           9,722       9,005      10,760
    Restructuring charges                                                 4,172           -           -
    Amortization of deferred stock compensation                               -           -         554
    Loss related to conditional obligation                                    -           -         150
    Cumulative effect of change in accounting principles                 17,994           -           -
    Accrued severance pay, net                                            1,285        (692)        380
    Deferred income taxes, net                                            4,571        (621)       (853)
    Realization of pre-acquisition acquired operating losses                  -           -         489
    Equity in losses of affiliated companies                              1,172         183           -
    Loss (gain) on disposal of property, plant and equipment, net             8        (199)         28
    Minority interest in earnings of a subsidiary                           822       2,550       1,945
    Loss from issuance of shares in subsidiary to third party             2,082           -           -
    Pre-acquisition earnings of a subsidiary                                  -          85           -
  Changes in operating assets and liabilities:
    Decrease (increase) in trade receivables, net                         2,019      (3,006)      3,515
    Decrease (increase) in other accounts receivable and prepaid
      expenses                                                             (343)       (469)         65
    Increase in inventories                                              (2,634)     (4,482)     (1,461)
    Increase (decrease) in trade payables                                 4,227       3,911        (567)
    Increase (decrease) in other accounts payable and accrued
      expenses                                                           (1,753)      1,064      (1,231)
                                                                       --------    --------    --------

Net cash provided by operating activities                                25,846       2,876       6,909
                                                                       --------    --------    --------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of property, plant and equipment                              (2,977)     (3,948)     (8,950)
  Investment grants received                                              1,659       1,868       1,156
  Investment in affiliated companies                                       (279)       (125)          -
  Proceeds from sale of property, plant and equipment                       218         499         422
  Acquisition of Macro Clothing (b)                                           -         300        (106)
                                                                       --------    --------    --------

Net cash used in investing activities                                    (1,379)     (1,406)     (7,478)
                                                                       --------    --------    --------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Receipt of long-term bank loans                                        25,772       8,500           -
  Repayment of long-term bank loans and other loans                     (53,980)    (22,614)     (9,854)
  Payments under capital lease                                           (1,831)     (1,691)     (1,488)
  Short-term bank credit, net                                            (3,908)     14,506      (9,276)
  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)       (706)
  Proceeds from issuance of shares and conditional obligation, net            -           -      19,704
                                                                       --------    --------    --------

Net cash used in financing activities                                   (22,803)     (2,465)     (1,620)
                                                                       --------    --------    --------

Increase (decrease) in cash and cash equivalents                          1,664        (995)     (2,189)
Cash and cash equivalents at the beginning of the year                    5,078       6,742       5,747
                                                                       --------    --------    --------

Cash and cash equivalents at the end of the year                       $  6,742    $  5,747    $  3,558
                                                                       ========    ========    ========
</TABLE>

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,
                                                                  -----------------------------
                                                                    2002       2003       2004
                                                                  -------    -------    -------
<S>                                                               <C>        <C>        <C>
(a) CASH PAID DURING THE YEAR FOR:

       Interest                                                   $ 5,962    $ 3,538    $ 2,809
                                                                  =======    =======    =======

       Income taxes, net of refunds received                      $   (37)   $    60    $   272
                                                                  =======    =======    =======

(b) ACQUISITION OF MACRO CLOTHING:

       Working capital deficiency, net                            $     -    $   692    $     -
       Property and equipment, net                                      -       (369)         -
       Goodwill                                                         -       (122)      (367)
       Accrued severance pay, net                                       -         99          -
                                                                  -------    -------    -------

                                                                        -        300       (367)
                                                                  -------    -------    -------

       Accrued payments                                                 -          -        261
                                                                  -------    -------    -------

                                                                  $     -    $   300    $  (106)
                                                                  =======    =======    =======
(c) SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
       ACTIVITY:

       Purchase of property, plant and equipment by credit, net
       of investment grants receivables                           $  (740)   $(2,346)   $  (490)
                                                                  =======    =======    =======
</TABLE>

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


                                     F - 8
<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, swimwear and active
          wear, which are manufactured using two different techniques (seamless
          and cut and sew) and products for the health care industry (see also
          Note 15). The Company's principal market is the United States.

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

     b.   Acquisition of Macro Clothing Ltd. ("Macro"):

          In April 2003, the Company agreed to acquire 100% of the outstanding
          Ordinary shares of Macro from Macpell Industries Ltd. ("Macpell"). The
          closing date of the agreement was May 5, 2003. Macro manufactures,
          markets and sells swimsuits and beachwear. The purchase has
          diversified the Company's line of products. Pursuant to the terms of
          the agreement, the Company assumed certain guarantees to the bank
          granted by Macpell in favor of Macro in the aggregate amount of
          approximately $ 530 and Macpell paid the Company $ 300 to assume the
          aforementioned guarantees. As a result, the Company recorded goodwill
          in the amount of $ 122. In addition, Macpell assigned to the Company
          its rights to a loan granted to Macro in the amount of approximately $
          522. Under the terms of the acquisition agreement, contingent cash
          payments of $ 367 were accrued or paid in 2004 since certain financial
          performance criteria were met. As a result, the Company recorded an
          additional consideration which increased the purchase price. Since the
          realized pre-acquisition tax carryforward losses exceeded the total
          purchase price, including the total contingent consideration, the
          additional consideration and the initial goodwill allocated in 2003
          were recorded as income tax expenses.

          The acquisition has been treated using the purchase method of
          accounting in accordance with SFAS No. 141 "Business Combination". The
          purchase price has been allocated to the assets acquired and to the
          assumed liabilities based on their estimated fair value at the date of
          acquisition. The excess of the purchase price over the estimated fair
          value of the net assets acquired has been recorded as goodwill.

          The operating results of Macro were consolidated for reasons of
          convenience effective April 1, 2003. The operating results for the
          period prior to the acquisition (from April 1, 2003 through May 5,
          2003), amounting to an income of $ 85, were deducted from the
          Company's consolidated results of operations. Pro forma information
          was not provided due to immateriality.


                                     F - 9
<PAGE>


                                                TEFRON LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS


NOTE 1:- GENERAL (CONT.)

     c.   On September 6, 2002, the Health Products Division of Alba Waldensian,
          Inc. ("Alba"), a wholly-owned subsidiary of Tefron U.S. Holdings Corp.
          which is a wholly-owned subsidiary of the Company, 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 the formation of
          AlbaHealth, Alba contributed substantially all of the assets of its
          health products division (together with associated liabilities,
          including certain existing bank indebtedness collateralized by such
          assets) to AlbaHealth in exchange for a 48.325% ownership interest in
          AlbaHealth. Both Encompass and GE Capital contributed cash to
          AlbaHealth in the amount of $ 12,000 and $ 1,000, in exchange for a
          48.325% and 3.35% ownership interest in AlbaHealth, respectively. For
          a period of three years commencing September 6, 2004, Alba and GE
          Capital each have an option to sell all, but not less than all, of
          their interest in AlbaHealth to Alba Health, in exchange for its fair
          value, which will be determined based on a formula set forth in the
          agreement.

          The Company has control over the financial and operating policies of
          AlbaHealth through its rights to appoint the majority of AlbaHealth's
          directors. Therefore, the Company consolidates AlbaHealth's financial
          statements.

     d.   On December 4, 2002, the Company announced that in the first quarter
          of 2003 the manufacturing of products from Alba located in Valdese,
          North Carolina ("Alba Consumer") to its facility in Israel. Marketing
          and distribution will remain in the U.S. The Company completed the
          restructuring plan during 2003.

          In connection with the aforementioned and in accordance with EITF
          Issue 94-3, "Liability Recognition of Certain Employee Termination
          Benefits and Other Costs to Exit an Activity" and SAB-100,
          "Restructuring and Impairment Charges", the Company recorded in the
          fourth quarter of 2002 restructuring charges of $ 5,343.

          The major components of the fiscal 2002 restructuring charges were as
          follows:

<TABLE>
<CAPTION>
                                         YEAR ENDED
                                        DECEMBER 31,
                                            2002
                                           ------
<S>                                        <C>
Write-down of long-lived assets            $2,621
Inventory mark-down                         1,550
Employee termination and severance costs    1,172
                                           ------

                                           $5,343
                                           ======
</TABLE>

          The cash and the non-cash elements of the expenses of the
          restructuring plan amounted to approximately $ 1,200 and $ 4,100,
          respectively. As a result of the restructuring, 250 positions were
          eliminated in Alba. The liability in respect of the employee
          termination and severance costs as of December 31, 2002, 2003 and 2004
          amounted to $ 1,172, $ 214 and none, respectively. The change in the
          aforementioned liability during 2003 resulted from payment of
          severance pay to the terminated employees.


                                     F - 10
<PAGE>


                                                TEFRON LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS


NOTE 1:- GENERAL (CONT.)

     e.   During 2002, 2003 and 2004, 63.9%, 58.2% and 60.7% respectively, were
          derived from the three largest customers all located in the United
          States. 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 of purchases made by the major customers or
          a material adverse change in the terms of such purchases could have a
          material adverse effect on the Company's results of operations.


NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES

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

     a.   Use of estimates:

          The preparation of financial statements in conformity with accounting
          principles generally accepted in the United States of America 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.   Financial statements in U.S. dollars:

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

          Accordingly, monetary accounts maintained in currencies other than the
          dollar are remeasured into U.S. dollars in accordance with Statement
          No. 52 of the Financial Accounting Standards Board ("FASB") "Foreign
          Currency Translation". All transactions gains and losses from the
          remeasurement of monetary balance sheet items are reflected in the
          statements of operations as financial income or expenses as
          appropriate.

     c.   Principles of consolidation:

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

     d.   Cash equivalents:

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


                                     F - 11
<PAGE>


                                                TEFRON LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS


NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

     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,
          discontinued products, and items with a market price that is lower
          than cost. Cost is determined as follows:

          Raw materials, accessories and packaging materials - using the "moving
          average cost" method.

          Work-in-progress and finished products - using standard costs which
          are adjusted to actual costs.

     f.   Property, plant and equipment, net:

          Property, plant and equipment are stated at cost, net of accumulated
          depreciation and investment grants. Investment grants are recorded at
          the time the Company is entitled to such grants. Depreciation is
          calculated by the straight-line method over the estimated useful lives
          of the assets at the following annual rates:

<TABLE>
<CAPTION>
                                                                       %
                                                                     -------
<S>                                                                  <C>
          Buildings                                                   2.5
          Machinery and equipment                                      7
          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 reasonably assured renewal options, or the useful lives of
          the assets, whichever is shorter. The Company's long-lived assets and
          certain identifiable intangibles are reviewed for impairment in
          accordance with SFAS No. 144 "Accounting for the Impairment or
          Disposal of Long-Lived Assets" whenever events or changes in
          circumstances indicate that the carrying amount of an asset may not be
          recoverable. Recoverability of assets to be held and used is measured
          by a comparison of the carrying amount of an asset to the future
          undiscounted cash flows expected to be generated by the assets. If
          such assets are considered to be impaired, the impairment to be
          recognized is measured by the amount by which the carrying amount of
          the assets exceeds the fair value of the assets. Assets to be disposed
          of are reported at the lower of the carrying amount or fair value less
          costs to sell. The Company recorded impairment losses of $ 771 for the
          year ended December 31, 2004.

     g.   Goodwill:

          Goodwill is measured as the excess of the cost of an acquired company
          over the sum of the amounts assigned to tangible and identifiable
          intangible assets acquired less liabilities assumed. Goodwill is not
          amortized, but rather reviewed for impairment at least annually in
          accordance with the provisions of SFAS No. 142.


                                     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.)

          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 o each of the reporting units is tested for impairment by
          comparing the fair value of each reporting unit with its carrying
          value. The Company performed annual impairment test during 2003 and
          2004 and no impairment losses have been identified.

     h.   Investments in affiliated companies:

          Affiliated companies are companies in which the Company is able to
          exercise significant influence over their operating and financial
          policies. The investments in affiliated companies are accounted for by
          the equity method. The excess of the purchase price over the fair
          value of net assets acquired has been attributed to goodwill. Income
          from intercompany sales, not realized outside the Group, is
          eliminated.

          The Company's investments in these companies is reviewed for
          impairment whenever events or changes in circumstances indicate that
          the carrying amount of the investments may not be recoverable, in
          accordance with Accounting Principle Board Opinion No. 18, "The Equity
          Method of Accounting for Investments in Common Stock" ("APB No. 18").
          During 2004, based on management's most recent analyses, impairment
          losses have been recorded in the amount of $ 296 which reduced the
          investments to zero.

     i.   Severance pay:

          The Company's liability for severance pay in Israel is calculated
          pursuant to Israel's Severance Pay Law based on the most recent salary
          of the employees multiplied by the number of years of employment as of
          the balance sheet date. Employees are entitled to one month's salary
          for each year of employment or a portion thereof. The Company's
          liability for all of its Israeli employees, is fully provided by
          monthly deposits with insurance policies, pension and severance pay
          funds and by an accrual. The value of the severance pay funds 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 Israel's Severance Pay Law or labor agreements.
          The value of the deposited funds is based on the cash surrendered
          value of these funds. Severance pay expenses amounted to $ 1,285, $
          357 and $ 1,035 for the years ended December 31, 2002, 2003 and 2004,
          respectively (in 2002, includes $ 1,172, which was recorded as
          restructuring charges).

     j.   Revenue recognition:

          Revenues from sales are recognized in accordance with Staff Accounting
          Bulletin No. 104 "Revenue Recognition in Financial Statements", ("SAB
          No. 104"), when delivery has occurred, persuasive evidence of an
          agreement exists, the vendor's fee is fixed or determinable, no
          further obligation exists and collectibility is probable.

          The Company's subsidiary maintains a provision for product returns, in
          accordance with Statement of Financial Accounting Standard No. 48,
          "Revenue Recognition When A Right Of Return Exists". The provision for
          products returns amounted to $ 634, $ 550 and $ 122 for the years
          ended December 31, 2002, 2003 and 2004, respectively.


                                     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.)

     k.   Income taxes:

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

     l.   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.

          In 2002, the FASB issued FAS 148 "Accounting for Stock-Based
          Compensation - Transition and Disclosure, an Amendment of FASB
          Statement No. 123" ("SFAS 148"). SFAS 148 provides alternative methods
          of transition for a voluntary change to the fair value based method of
          accounting for stock-based employee compensation. The Company
          continues to apply the provisions of APB 25 in accounting for share
          based compensation. 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 increased
          to the following pro forma amounts:


                                     F - 14
<PAGE>


                                                TEFRON LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA


NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

<TABLE>
<CAPTION>
                                                     YEAR ENDED DECEMBER 31,
                                               ----------------------------------
                                                  2002         2003        2004
                                               ---------    --------    ---------
<S>                                            <C>          <C>         <C>
Net loss as reported                           $ (17,498)   $ (4,453)   $  (6,865)
Add: Stock-based compensation expense
  included in the determination of net loss
  as reported                                         68           -          554
Deduct: Stock-based compensation expense
  determined under fair value method for all
  awards                                            (923)       (911)      (1,359)
                                               ---------    --------    ---------

Pro forma net loss                             $ (18,353)   $ (5,364)   $  (7,670)
                                               =========    ========    =========

Basic and diluted net loss per share:
Income (loss) before cumulative effect of
  change in accounting principles pro forma    $    0.04    $  (0.43)   $   (0.49)
                                               =========    ========    =========
Income (loss) before cumulative effect of
  change in accounting principles pro forma    $   (0.02)   $  (0.43)   $   (0.49)
                                               =========    ========    =========
Net loss as reported                           $   (1.41)   $  (0.36)   $   (0.44)
                                               =========    ========    =========
Net loss pro forma                             $   (1.47)   $  (0.43)   $   (0.49)
                                               =========    ========    =========
</TABLE>

          The fair value for these options was estimated at the date of grant
          using a Black-Scholes option-pricing model with the following
          weighted-average assumptions:

<TABLE>
<CAPTION>
                          2002    2003    2004
                          ----    ----    ----
<S>                       <C>     <C>     <C>
Risk-free interest rate    2%      1.5%    2%
Expected dividend yield    0%      0%      0%
Expected volatility       94.5%   94.2%   36%
Expected lives             2       2       3
</TABLE>

     m.   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
          approximates their fair values due to the short-term maturities of
          such instruments. Values of long-term loans approximate their fair
          values due to the variable interest rates on these loans.

          The fair values of capital lease obligations 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 obligations approximates their fair value since such
          obligations bear interest at a rate which approximates market rate.


                                     F - 15
<PAGE>


                                                TEFRON LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

     n.   Loss per share:

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

          In all reported periods, no diluted loss per share was presented
          because the effect of all outstanding options was anti-dilutive
          (1,755,874, 1,817,323 and 2,422,805 outstanding options as of December
          31, 2002, 2003 and 2004, respectively).

     o.   Concentrations of credit risk:

          Financial instruments that potentially subject the Company and its
          subsidiaries to concentrations of credit risk consist principally of
          cash and cash equivalents and trade receivables. Cash and cash
          equivalents are invested mainly in U.S. dollars with major banks in
          Israel. Accordingly, the Company's management believes that minimal
          credit risk exists with respect to cash and cash equivalents. Trade
          receivables are derived from sales to major customers located
          primarily in the U.S. The allowance for doubtful accounts comprises
          specific accounts the collectibility of which, based upon management's
          estimate, is doubtful. The doubtful account expenses for the years
          ended December 31, 2002, 2003 and 2004, were $ 274, $ 27 and $ 16,
          respectively.

          As of the balance sheet date there are no significant
          off-balance-sheet concentrations of credit risk such as foreign
          exchange contracts, option contracts or other foreign hedging
          arrangements.

     p.   Impact of recently issued accounting standards:

          In November 2004, the FASB issued Statement of Financial Accounting
          Standard No. 151, "Inventory Costs, an Amendment of ARB No. 43,
          Chapter 4." ("SAFS 151"). SFAS 151 amends Accounting Research Bulletin
          ("ARB") No. 43, Chapter 4, to clarify that abnormal amounts of idle
          facility expense, freight handling costs and wasted materials
          (spoilage) should be recognized as current-period charges. In
          addition, SFAS 151 requires that the allocation of fixed production
          overheads to the costs of conversion be based on the normal capacity
          of the production facilities. SAFS 151 is effective for inventory
          costs incurred during fiscal years beginning after June 15, 2005. The
          Company does not expect that the adoption of SFAS 151 will have a
          material effect on its financial position or results of operations.


                                     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.)

          In December 2004, the FASB issued Statement of Financial Accounting
          Standard No. 153, "Exchanges of Nonmonetary Assets, an Amendment of
          APB Opinion No. 29" ("SFAS 153"). The guidance in APB Opinion No. 29,
          "Accounting for Nonmonetary Transactions" ("APB 29"), is based on the
          principle that exchanges of nonmonetary assets should be measured
          based on the fair value of the assets exchanged. APB 29 includes
          certain exceptions to that principle. SFAS 153 amends APB 29 to
          eliminate the exception for nonmonetary exchanges of similar
          productive assets and replaces it with a general exception for
          exchanges of nonmonetary assets that do not have commercial substance.
          A nonmonetary exchange has a commercial substance if the future cash
          flows of the entity are expected to change significantly as a result
          of the exchange. SFAS 153 is effective for nonmonetary assets
          exchanges occurring in fiscal periods beginning after June 15, 2005.
          The Company does not expect that the adoption of SFAS 153 will have a
          material effect on its financial position or results of operations.

          On December 16, 2004, the Financial Accounting Standards Board (FASB)
          issued Statement No. 123 (revised 2004), "Share-Based Payment"
          ("Statement 123(R)"), which is a revision of FASB Statement No. 123,
          "Accounting for Stock-Based Compensation" ("Statement 123").
          Generally, the approach in Statement 123(R) is similar to the approach
          described in Statement 123. However, Statements 123 permitted, but not
          required, share-based payments to employees to be recognized based on
          their fair values while Statement 123(R) requires all share-based
          payments to employees to be recognized based on their fair values.
          Statement 123(R) also revises, clarifies and expands guidance in
          several areas, including measuring fair value, classifying an award as
          equity or as a liability and attributing compensation cost to
          reporting periods. The new standard will be effective for the Company
          in the first interim period beginning after June 15, 2005. The Company
          expects that the adoption of Statement 123(R) will have a significant
          effect on its results of operations.

     q.   Reclassification:

          Certain prior year amounts were reclassified to conform to current
          year financial statement presentation.


NOTE 3:- GOODWILL

     Goodwill attributed to operating segments for the years ended December 31,
     2003 and 2004 is as follows:

<TABLE>
<CAPTION>

                                                  MACRO         HEALTHCARE-
                                                 CLOTHING           USA           TOTAL
                                                 --------        --------       --------
<S>                                              <C>             <C>            <C>
Balance as of January 1, 2003                    $      -        $ 30,743       $ 30,743

Acquisition of Macro Clothing                         122               -            122
                                                 --------        --------       --------

Balance as of December 31, 2003                       122          30,743         30,865

Realization of pre-acquired operating loss           (122)              -           (122)
                                                 --------        --------       --------

Balance as of December 31, 2004                  $      -        $ 30,743       $ 30,743
                                                 ========        ========       ========
</TABLE>


                                     F - 17
<PAGE>

                                                TEFRON LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA

NOTE 3:- GOODWILL (CONT.)

     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")
     which 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 that, in addition to acquisition costs
     of $ 3,273, resulted in a total purchase price of $ 63,418. The goodwill
     deriving from the acquisition amounted to $ 51,302.

     On January 1, 2002, the Company adopted SFAS 142. Accordingly, the Company,
     based on a valuation by an independent expert, compared the fair value of
     each reporting unit to its carrying amount. Based on the aforementioned
     valuation, the healthcare reporting unit's carrying amount exceeded its
     fair value and, as a result, the goodwill identified with that reporting
     unit, which had a carrying amount of $ 17,994, was written off under the
     provisions of SFAS No. 142. The transitional impairment loss was recognized
     as a cumulative effect of a change in accounting principle as of January 1,
     2002, in the Company's statement of operations. See Note 15 for a
     description of the Company's segments.


NOTE 4:- OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES


<TABLE>
<CAPTION>
                                                                            DECEMBER 31,
                                                                        ---------------------
                                                                          2003          2004
                                                                        -------       -------
<S>                                                                     <C>           <C>
               Government authorities:
                 VAT, customs and other levies recoverable              $ 2,071       $ 1,509
                 Investment grant receivable                              1,897         1,400
                 Income tax advances, net of accruals                        92           175
               Deferred income taxes (see Note 14)                          589           425
               Advances to suppliers                                        303           491
               Prepaid expenses                                             703           738
               Other                                                        511           958
                                                                        -------       -------

                                                                        $ 6,166       $ 5,696
                                                                        =======       =======

NOTE 5:- INVENTORIES

               Raw materials, accessories and packaging materials       $11,128       $11,469
               Work-in progress                                          11,214        11,807
               Finished products                                          9,334         9,861
                                                                        -------       -------

                                                                        $31,676       $33,137
                                                                        =======       =======
</TABLE>


     In the years ended December 31, 2002, 2003 and 2004, the Company recorded
     inventory write-downs in the amount of $ 1,756 (out of which $ 1,550 was
     recorded as restructuring costs), $ 582 and $ 969, respectively. These
     write-downs were recorded as cost of sales.


                                     F - 18
<PAGE>

                                                TEFRON LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS


NOTE 6:- PROPERTY, PLANT AND EQUIPMENT, NET

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

<TABLE>
<CAPTION>
                                                       DECEMBER 31,
                                                --------------------------
                                                   2003            2004
                                                ---------        ---------
<S>                                             <C>              <C>
Cost:
  Buildings                                     $   7,767        $   6,933
  Machinery and equipment (2)                     172,865          178,546
  Installation and leasehold improvements           5,138            5,175
  Motor vehicles                                      557              611
  Furniture and office equipment                    3,562            3,786
  Investment grants                               (32,155)         (32,957)
                                                ---------        ---------

                                                  157,734          162,094
                                                ---------        ---------
Accumulated depreciation:
  Buildings                                           725              767
  Machinery and equipment                          71,097           79,694
  Installation and leasehold improvements           1,830            1,942
  Motor vehicles                                      402              488
  Furniture and office equipment                    1,853            2,504
  Investment grants                               (15,646)         (17,232)
                                                ---------        ---------

                                                   60,261           68,163
                                                ---------        ---------

Depreciated cost                                $  97,473        $  93,931
                                                =========        =========
</TABLE>

     (1)  Depreciation expenses for the years ended December 31, 2002, 2003 and
          2004 were $ 9,722, $ 8,592 and $ 9,348, respectively.

     (2)  December 31, 2003 - represents an advance payment to a machinery and
          equipment supplier in the amount of $ 1,166, which was exercised at
          the beginning of 2004.

     (3)  During 2004, the Company had decided to dispose of five idle buildings
          of the seamless segment. The buildings were classified as held for
          sale and are presented in other accounts receivables, in accordance
          with Statement of Financial Accounting Standard No. 144 "Accounting
          for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144").
          Accordingly, these buildings were measured at the lower of their
          carrying amount or fair value less costs to sell. In respect of the
          above, the Company recorded a loss in the amount of $ 771, resulting
          from the adjustment of the carrying amount of the buildings to their
          fair value less costs to sell. In November 2004, three of the
          buildings was sold for consideration of $ 160. The impaired building
          was classified as held for sale and is presented in other accounts
          receivable in the amount of $ 255.

          As for liens, see Note 11.


                                     F - 19
<PAGE>

                                                TEFRON LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 7:- INVESTMENT IN AFFILIATED COMPANY

          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 manufacture of bras, in consideration of
          approximately $ 1,300. As part of the JBA acquisition, the Company
          invested approximately $ 200 for 50.1% ownership interest of a new
          marketing company, Tefrani SA, which was designated to be engaged in
          the marketing of most of JBA's products. The investment in Tefrani was
          accounted for by the equity method because its operations are
          immaterial.

          During 2002, the Company recorded an impairment loss amounting to $
          780 in respect of its investment in JBA.

          In 2004, due to disputes that arose between the Company and the other
          shareholders in Tefrani SA and JBA, the operations have been ceased
          and the Company decided to record impairment loss in the amount of $
          296 which reduced the investment in JBA to zero.

NOTE 8:- SHORT-TERM BANK CREDIT

<TABLE>
<CAPTION>
                                       WEIGHTED AVERAGE
                                        INTEREST RATE
                                      ------------------
                                          DECEMBER 31,             DECEMBER 31,
                                      ------------------        ------------------
                                       2003       2004            2003       2004
                                      -------    -------        -------    -------
                                               %
                                      ------------------
<S>                                   <C>            <C>        <C>              <C>
Loans and bank credit in NIS          9.0            6.7        $29,161              994
                                                                -------          -------

                                                                $30,631          $21,355
                                                                =======          =======
</TABLE>

          As for collateral - see Note 11.

NOTE 9:- OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES

<TABLE>
<CAPTION>
<S>                                                             <C>              <C>
Employees and payroll accruals                                  $ 5,298          $ 4,820
Accrued expenses                                                  2,984            2,492
Equipment suppliers                                               2,864            1,877
                                                                -------          -------

                                                                $11,146          $ 9,189
                                                                =======          =======
</TABLE>


                                     F - 20
<PAGE>

                                                TEFRON LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 10:- LONG-TERM LOANS

     a.   Composition:


<TABLE>
<CAPTION>
                                                                  WEIGHTED AVERAGE
                                                                    INTEREST RATE
                                                             ---------------------------
                                                                     DECEMBER 31,                        DECEMBER 31,
                                                             ---------------------------    ------------------------------------
                                                                 2003           2004              2003                2004
                                                             ------------   ------------    ----------------    ----------------
                                                                          %
                                                             ---------------------------
<S>                                                          <C>                <C>                   <C>              <C>
                 Loans in U.S. dollars:
                   Banks (variable interest
                     LIBOR plus 1.5%-4.5%)                   2.375-6.4          3.7-6.78              $65,763          $56,830
                   Capital lease obligation                      7-9              7-9                   1,694              206
                   Other                                         7-9              7-9                   1,036              116
                                                                                                      -------          -------

                                                                                                       68,493           57,152
                                                                                                      -------          -------
                 Less - current maturities:
                   Loans from banks and others                                                         10,328            9,039

                   Capital lease obligation                                                             1,367              206
                                                                                                      -------          -------

                                                                                                       11,695            9,245
                                                                                                      -------          -------

                                                                                                      $56,798          $47,907
                                                                                                      =======          =======
</TABLE>

     b.   The loans as of December 31, 2004 mature as follows:

<TABLE>
<CAPTION>
<S>                                                                             <C>
                 December 31,

                 2005 (current maturities)                                      $ 9,245
                 2006                                                             9,369
                 2007                                                             8,923
                 2008                                                             5,923
                 2009 and thereafter                                             23,692
                                                                                -------

                                                                                $57,152
                                                                                =======
</TABLE>


     c.   Upon the closing of the Share Purchase Agreement with the investor
          controlled by FIMI (see Note 12), the Company entered into new
          financing arrangements with its bank creditors. The new financing
          arrangements contain different financial covenants and ratios from
          those in the Company's previous bank loan agreements. As of December
          31, 2004, the Company met those covenant criteria.

     d.   As for collateral, see Note 11.


                                     F - 21
<PAGE>

                                                TEFRON LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 11:- 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 14). The conditions in the letters of approval
          extending the grants from the State of Israel primarily include the
          requirements that the investments be made according to the approved
          plan and that at least 30% of the investments be financed by
          outstanding share capital. Non-fulfillment of these conditions would
          require the refund of the grants linked to the Consumer Price Index in
          Israel from the date of receipt plus interest. To guarantee
          fulfillment of the conditions for receipt of the grants, the Company
          and its subsidiaries have recorded floating charges on all of their
          assets in favor of the State of Israel.

     c.   The facilities of the Company and most of its Israeli subsidiaries are
          located in buildings leased for various periods ending between 2005
          and 2012. The Company has renewal options for additional periods.

          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 $ 2,823. 50% of the basic
          rental payments is linked to Israel's CPI and 50% is linked to the
          U.S. cost of living index. The remaining lease payments are in, or
          linked to, the U.S. dollar.

          The aggregate minimum rental, commitments under non-cancelable leases,
          based on the above agreements as of December 31, 2004, is as follows:

<TABLE>
<CAPTION>
<S>                          <C>
2005                         $3,585
2006                         $2,645
2007                         $2,518
2008                         $2,370
2009                         $2,370
2010 and thereafter          $5,081
</TABLE>

          Rental expenses for 2002, 2003 and 2004, amounted to $ 3,348, $ 3,121
          and $ 3,163, respectively.

     d.   Legal proceedings:

          There are no material pending legal proceedings, other than
          litigations in the ordinary course incidental to the business to which
          the Company or any of its subsidiaries are subject.


                                     F - 22
<PAGE>


                                                TEFRON LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 12:- SHAREHOLDERS' EQUITY

     a.   On April 22, 2004, the transactions pursuant to the Share Purchase
          Agreement with a partnership controlled by FIMI Opportunity Fund
          ("Fimi") and pursuant to the Share Purchase Agreement with Leber
          Partners, L.P., a limited partnership ("the Investor") were closed.
          Under the agreements, the Company issued 3.53 million and 1.07 million
          Ordinary shares of the Company to Fimi and the Investor, respectively,
          at a price per share of $ 4.25 and $ 4.65 ("the PPS"), respectively,
          for a total cash consideration of $ 15 million and $ 5 million,
          respectively. The proceeds received may be adjusted, as described
          below.

          According to the agreements, in the event that the Company's earnings
          before income tax, depreciation and amortization ("EBITDA"), excluding
          (i) the EBITDA of Alba Health LLC to the extent it exceeds zero, and
          (ii) any increase in the EBITDA of Alba Waldensian, Inc., as a result
          of the exercise of the Put Option for fiscal year 2004 ("the 2004
          EBITDA"), is less than $ 23 million, then the PPS shall be adjusted as
          follows: (i) if the Company's 2004 EBITDA is equal to or lower than $
          16 million, then the PPS will be retroactively reduced by $ 0.75, and
          (ii) if the Company's 2004 EBITDA is higher than $ 16 million but
          lower than $ 23 million, the PPS will be retroactively reduced at an
          amount of less than $ 0.75, which will be calculated according to the
          formula set forth in the agreement (Adjusted PPS). If the Company's
          2004 EBITDA is higher than $ 23 million, no adjustment will be made.

          In the event that the adjusted PPS is not equal to the PPS, the
          Company, at its sole discretion, shall either (i) deliver Fimi and the
          Investor, within fourteen business days following the release of the
          2004 financial statements, a number of additional ordinary shares that
          is equal to the difference between the number of purchased shares
          issued to Fimi and the Investor at the Closing date and the number of
          ordinary shares that would have been issued to Fimi and the Investor
          at the Closing date had the original PPS been equal to the adjusted
          PPS, or (ii) pay Fimi and the Investor, within ten business days
          following the release of the 2004 financial statements, a cash amount
          equal to the difference between the price per share and the adjusted
          PPS per each share purchased by Fimi and the Investor.

          The agreements include two instruments: shares and a conditional
          obligation that is freestanding of the shares and can be settled in
          shares at the Company's discretion. Therefore the conditional
          obligation is a liability and not equity since the value of the payout
          is based on the performance condition and not based on the shares. As
          a result, the conditional obligation should be measured at fair value
          on transaction date and on each balance sheet date. The difference
          between the initial values assigned to the liability component and the
          final payout was charged to statements of operations.

          The conditional obligation was recorded at the inception of the
          agreement and as of December 31, 2004 in an amount of $ 3,304 and
          3,454, respectively. The difference of $ 150 was recorded as financial
          expenses.

                                     F - 23
<PAGE>

                                                TEFRON LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 12:- SHAREHOLDERS' EQUITY (CONT.)

     b.   Equity credit line:

          On March 9, 2004, the Company 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 $ 15,000 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 time. The price to
          be paid by Southridge will be at a discount of 6% on 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. As of
          December 31, 2004, no funds were called.

     c.   Stock options:

          In September 1997, the Company's Board of Directors adopted a Share
          Option Plan in which 1,166,049 Ordinary shares were reserved for
          issuance to directors, officers and employees of the Company. At
          general meetings of shareholders in August 1999 ,July 2001 and March
          2004, it was resolved to increase the number of shares reserved for
          issuance under the Share Option Plan by 600,000, 500,000 and 446,274
          Ordinary shares, respectively. The options vest over a period of three
          years and expire after 10 years from the grant date or upon
          termination of employment.

          On April 22, 2004, upon the completion of the Purchase Agreement
          described in a. above, the Company granted, the Company's CEO, 650,000
          options ("the Options"), which may be exercised to purchase up to
          650,000 Ordinary shares of the Company, at an exercise price of $ 4.25
          per share. The Options vest over four years commencing January 1, 2004
          and expire 10 years from the date of the grant. The market price of
          the Company's shares on the date of grant was $ 5.85. Accordingly, The
          Company recorded a compensation expense of $ 554. This expense was
          included as part of general and administrative expenses.

          Except for these options, all other options are granted with an
          exercise price equal to the market value at the date of grant. The
          weighted average fair values of the options granted during 2002, 2003
          and 2004 were $ 1.65, $ 1.67 and $ 2, respectively.

          As of December 31, 2004, 289,518 options were available for future
          grants under the aforementioned plan.



                                     F - 24
<PAGE>

                                                TEFRON LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 12:- SHAREHOLDERS' EQUITY (CONT.)

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

<TABLE>
<CAPTION>

                                                                     YEAR ENDED DECEMBER 31,
                              ------------------------------------------------------------------------------------------------------
                                         2002                                  2003                                   2004
                              -----------------------------        ----------------------------         ----------------------------
                                                  WEIGHTED                            WEIGHTED                             WEIGHTED
                                                  AVERAGE                             AVERAGE                              AVERAGE
                                NUMBER            EXERCISE           NUMBER           EXERCISE            NUMBER           EXERCISE
                              OF OPTIONS           PRICE           OF OPTIONS          PRICE            OF OPTIONS           PRICE
                              ----------         ----------        ----------        ----------         ----------         ---------
<S>                            <C>                 <C>              <C>                 <C>              <C>                 <C>
Options outstanding
   at beginning of
   year                        1,138,474           $ 7.04           1,755,874           $ 3.14           1,817,323           $4.54
Changes during the
   year:
   Granted                       838,553           $ 3.52             160,284           $ 3.5              730,000           $4.26
   Forfeited or
     canceled                   (221,153)          $10.31             (98,835)          $10.11            (124,518)          $4.23
                              ----------                           ----------                            ----------

Options outstanding
   at end of year              1,755,874           $ 3.14           1,817,323           $ 4.54           2,422,805           $4.48
                              ==========           ======          ==========           ======          ==========           =====

Options exercisable
   at the end of the
   year                          641,804           $ 7.65           1,031,679           $ 5.53           1,422,551           $4.83
                              ==========           ======          ==========           ======          ==========           =====
</TABLE>


               The following table summarizes information about options
               outstanding and exercisable at December 31, 2004:


<TABLE>
<CAPTION>
                                                                                                               WEIGHTED
                                               OPTIONS                        WEIGHTED         OPTIONS         AVERAGE
                                             OUTSTANDING       WEIGHTED       AVERAGE        EXERCISABLE      EXERCISE
                           RANGE OF             AS OF          AVERAGE       REMAINING          AS OF          PRICE OF
                           EXERCISE          DECEMBER 31,      EXERCISE     CONTRACTUAL      DECEMBER 31,      OPTIONS
                             PRICE               2004           PRICE       LIFE (YEARS)        2004         EXERCISABLE
                     --------------------- ----------------- -------------- -------------- ----------------- --------------
<S>                                         <C>                  <C>              <C>          <C>               <C>
                            $ 15.00            59,000            $  15.00         5.46            59,000         $  15.00
                         $8.13 - $ 9.5        223,500            $   8.74         4.34           223,500         $   8.74
                         $ 3.5 - $ 4.31     2,140,305            $   3.74         7.85         1,140,051         $   3.53
                                           ----------                                          ---------

                                            2,422,805            $   4.48         7.47         1,422,551         $   4.83
                                           ==========                                          =========
</TABLE>


                                     F - 25
<PAGE>

                                                TEFRON LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 13:- SUPPLEMENTARY INFORMATION TO STATEMENTS OF OPERATIONS

     a.   Cost of sales:

<TABLE>
<CAPTION>
                                                                          YEAR ENDED DECEMBER 31,
                                                            -------------------------------------------------
                                                               2002               2003                 2004
                                                            ---------           ---------           ---------
<S>                                                         <C>                 <C>                 <C>
        Materials                                           $  70,274           $  64,322           $  80,650
        Salaries and related expenses                          42,327              39,878              39,536
        Subcontracting                                         13,750              10,673              12,027
        Other production costs                                 18,855              19,141              20,140
        Depreciation                                            9,060               8,048               8,704
        Increase in work-in progress and finished
          products                                             (2,881)             (2,640)             (1,120)
                                                            ---------           ---------           ---------

                                                            $ 151,385           $ 139,422           $ 159,937
                                                            =========           =========           =========

     b.   Financial expenses (income):

        Finance expenses:
          Interest on long-term loans                       $   3,942           $   3,319           $   2,657
          Interest on short-term loans                            727               1,042                 977
          Exchange rate differences, net                          480                 682                 450
          Bank expenses and other, net                            335                 585                 978
          Loss related to conditional obligation                    -                   -                 150
                                                            ---------           ---------           ---------

                                                                5,484               5,628               5,212
        Interest income on bank deposits                          (27)                  -
                                                            ---------           ---------           ---------

                                                            $   5,457           $   5,628           $   5,212
                                                            =========           =========           =========

     c.   Other income (expenses):

        Loss on issuance of subsidiary's shares to
          third parties                                     $  (2,082)          $       -           $       -
        Other gains (losses)                                     (211)                228                   -
                                                            ---------           ---------           ---------

                                                            $  (2,293)          $     228           $       -
                                                            =========           =========           =========
</TABLE>

                                     F - 26
<PAGE>

                                                TEFRON LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 14:- TAXES ON INCOME

     a.   Reduction in corporate tax rate:

          On June 2004, the Israeli Parliament approved an amendment to the
          Income Tax Ordinance (No. 140 and Temporary Provision), which
          progressively reduces the regular corporate tax rate from 36% to 35%
          in 2004, to 34% in 2005 to 32% in 2006 and to a rate of 30% in 2007.

     b.   Applicable tax laws:

          The Company and its subsidiaries in Israel are "industrial companies"
          in conformity with the Law for the Encouragement of Industry (Taxes)
          1969. The principal benefits to which the companies are entitled under
          this Law are accelerated rates of depreciation, consolidated tax
          returns and a deduction for tax purposes, over a three year period, of
          costs incurred in issuance of shares.

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

          Certain production facilities in Israel have been granted the status
          of "Approved Enterprise" under the Law, for several investment
          programs ("the Programs").

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

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

          Tax-exempt income attributable to the "Approved Enterprise" cannot be
          distributed to shareholders without subjecting the Company to taxes
          except upon complete liquidation of the Company. If such retained
          tax-exempt income is distributed in a manner other than upon the
          complete liquidation of the Company, it would be taxed at the reduced
          corporate tax rate applicable to such profits (between 10%-25%).

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

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


                                     F - 27
<PAGE>

                                                TEFRON LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 14:- TAXES ON INCOME (CONT.)

     d.   Taxes on income included in the statements of operations:

<TABLE>
<CAPTION>
                                                    YEAR ENDED DECEMBER 31,
                                         -------------------------------------------
                                           2002             2003              2004
                                         -------           -------           -------
<S>                                      <C>               <C>               <C>
Current taxes                            $     -           $   197               692
Deferred taxes                             4,571              (621)             (853)
Taxes in respect of prior years              408                 -               364
                                         -------           -------           -------

                                         $ 4,979           $  (424)          $   203
                                         =======           =======           =======

Domestic                                 $ 4,571           $(1,582)          $  (476)

Foreign                                      408             1,158               679
                                         -------           -------           -------

                                         $ 4,979           $  (424)          $   203
                                         =======           =======           =======
</TABLE>

     e.   Effective tax:

          Reconciliation between the theoretical tax expense, assuming all
          income is taxed at the statutory tax rate applicable to income of the
          Company and the actual tax expense as reported in the statement of
          operations is as follows:

<TABLE>
<CAPTION>
                                                                    YEAR ENDED DECEMBER 31,
                                                         ---------------------------------------------
                                                          2002               2003               2004
                                                         -------            -------            -------
<S>                                                      <C>                <C>                <C>
Income (loss) before taxes, as reported in the
  consolidated statements of operations                  $ 7,469            $(2,059)           $(4,717)
                                                         =======            =======            =======

Statutory tax rate                                            36%                36%                35%
                                                         =======            =======            =======

Provision at the Israeli statutory tax rate              $ 2,689            $  (741)           $(1,651)
Increase (decrease) in taxes resulting from
  "Approved Enterprise" benefits                          (1,303)               198                676
Deferred taxes on losses and temporary
  differences for which valuation allowance was
  provided                                                 2,633                533                742
Nondeductible expenses                                        45                 40                 88
Change in tax rate used for computation of
  deferred taxes                                               -               (469)               (83)
Taxes in respect of prior years                              408                  -                366
Other                                                        507                 15                 65
                                                         -------            -------            -------

Actual tax expenses (benefit)                            $ 4,979            $  (424)           $   203
                                                         =======            =======            =======
</TABLE>


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

<TABLE>
<CAPTION>
<S>                                                      <C>                <C>                <C>
                                                         $17,038            $(2,049)           $(5,681)

Foreign                                                   (9,569)               (10)               964
                                                        --------           --------           --------

Total                                                    $ 7,469            $(2,059)           $(4,717)
                                                        ========           ========           ========
</TABLE>


                                     F - 28
<PAGE>

                                                TEFRON LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 14:- TAXES ON INCOME (CONT.)

     g.   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,
                                                                                  ---------------------------
                                                                                    2003               2004
                                                                                  --------           --------
<S>                                                                               <C>                <C>
                      Asset (liability) in respect of:
                        Property, plant and equipment                             $(17,569)          $(15,613)
                        Allowances and provisions                                    4,427              1,658
                        Net operating loss carryforward                             19,011             18,728
                                                                                  --------           --------

                      Net deferred tax assets before valuation allowance             5,869              4,773
                      Valuation allowance (1)                                       (9,422)            (7,473)
                                                                                  --------           --------

                      Net deferred tax liability                                  $ (3,553)          $ (2,700)
                                                                                  ========           ========
                      Presented in balance sheet:
                        Long-term liability                                       $ (7,570)          $ (5,611)
                        Long-term assets                                             3,428              2,486
                        Other receivables                                              589                425
                                                                                  --------           --------

                      Net deferred tax liability                                  $ (3,553)          $ (2,700)
                                                                                  ========           ========


                      Domestic                                                    $ (6,553)          $ (5,141)
                      Foreign                                                        3,000              2,441
                                                                                  --------           --------

                      Net deferred tax                                            $ (3,553)          $ (2,700)
                                                                                  ========           ========
</TABLE>

          (1)  The net change in the total valuation allowance for the years
               ended December 31, 2002, 2003 and 2004 is $ 2,693, $ 533 and $
               1,949, respectively.

          (2)  The deferred taxes are computed based on enacted tax rates
               expected to apply at the time of reversal (average rate of 22%
               for Israeli companies and 37% for a subsidiary located in the
               U.S.).

     h.   As of December 31, 2004, the Company's subsidiary in the U.S. had
          estimated aggregate available carryforward tax losses of approximately
          $ 35,000 to offset against future taxable profits, which expire
          between 2020 and 2023. A valuation allowance for an amount of $ 8,000
          was recorded due to the uncertainty of the tax asset's future
          realization.

          As of December 31, 2004 the Company and its Israeli subsidiaries had
          tax loss carryforward of approximately $ 17,000. Carryforward tax
          losses in Israel may be carryforward indefinitely and may be offset
          against future taxable income.


                                     F - 29
<PAGE>
                                                TEFRON LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 14:- TAXES ON INCOME (CONT.)

     i.   Final tax assessments:

          The Company is currently in the process of tax assessments with
          Israel's Tax Authorities for the tax years 1997 to 1999.


NOTE 15:- SEGMENT REPORTING

     a.   General information:

          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 active wear manufactured using the Seamless
               process.

          -    Intimate apparel and active wear manufactured using the Cut and
               Sew process located in Israel.

          -    Health production, located in the, U.S. (Healthcare).

          The accounting policies of the reportable segments are the same as
          those described in Note 2. Selling, general and administrative
          expenses are allocated according to management's assessment.
          Management evaluates performance based upon operating income (loss)
          before interest and income taxes.

          b.   Reportable segments:

<TABLE>
<CAPTION>
                                                                    YEAR ENDED DECEMBER 31, 2004
                                       -------------------------------------------------------------------------------------
                                        CUT & SEW                           HEALTHCARE
                                        - ISRAEL          SEAMLESS             USA              ADJUSTMENTS      CONSOLIDATED
                                       ----------        ----------         ----------          ----------         ---------
<S>                                    <C>               <C>                <C>                 <C>                <C>
Sales to unaffiliated
  customers                            $   64,867        $   83,753         $   34,199          $        -         $ 182,819
Inter-segmental sales                         405                 -                  -                (405)                -
                                       ----------        ----------         ----------          ----------         ---------

Total sales                            $   65,272        $   83,753         $   34,199          $     (405)        $ 182,819
                                       ==========        ==========         ==========          ==========         =========

Operating income (loss)                $    3,497        $   (8,217)        $    5,215          $        -         $     495
                                       ==========        ==========         ==========          ==========

Financial expenses, net                                                                                                5,212
                                                                                                                   ---------

Loss before income taxes                                                                                           $  (4,717)
                                                                                                                   =========

Depreciation and amortization          $    2,824        $    6,393         $    1,543          $        -         $  10,760
                                       ==========        ==========         ==========          ==========         =========
Identifiable and total assets
  at December 31, 2004                 $   36,990        $   98,235         $   44,243          $        -         $ 179,468
                                       ==========        ==========         ==========          ==========

Corporate assets                                                                                                      12,063
                                                                                                                   ---------

Total assets                                                                                                       $ 191,531
                                                                                                                   =========
</TABLE>


                                     F - 30
<PAGE>
                                                TEFRON LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 15:- SEGMENT REPORTING (CONT.)

<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)                $    704          $  (4,056)         $   6,693          $        -          $   3,341
                                       ========          =========          =========          ==========

Financial expenses, net                                                                                                5,628
Other income, net                                                                                                        228
                                                                                                                   ---------

Loss before income taxes                                                                                           $  (2,059)
                                                                                                                   =========

Depreciation and amortization          $  2,131          $   6,452          $     422          $        -          $   9,005
                                       ========          =========          =========          ==========          =========

Identifiable and total assets
  at December 31, 2003                 $ 39,628          $ 101,202          $  44,392          $        -          $ 185,222
                                       ========          =========          =========          ==========

Corporate assets                                                                                                      16,369
                                                                                                                   ---------

Total assets                                                                                                       $ 201,591
                                                                                                                   =========
</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 income taxes                                                                                     $  7,469
                                                                                                               ========

Depreciation and amortization          $  2,989          $  6,321          $    412          $      -          $  9,722
                                       ========          ========          ========          ========          ========

Identifiable and total assets
  at December 31, 2002                 $ 35,297          $ 98,309          $ 44,904          $      -          $178,510
                                       ========          ========          ========          ========

Corporate assets                                                                                                 19,233
                                                                                                               --------

Total assets                                                                                                   $197,743
                                                                                                               ========
</TABLE>


                                     F - 31
<PAGE>
                                                TEFRON LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 15:- SEGMENT REPORTING (CONT.)

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

<TABLE>
<CAPTION>
                                YEAR ENDED DECEMBER 31,
                       --------------------------------------------
                         2002              2003              2004
                       --------          --------          --------
<S>                    <C>               <C>               <C>
North America          $186,348          $154,696          $168,914
Europe                    1,809             4,350             8,044
Israel                    1,709             2,782             2,892
Other                       439             1,258             2,969
                       --------          --------          --------

                       $190,305          $163,086          $182,819
                       ========          ========          ========
</TABLE>

     d.   Sales to major customers:

<TABLE>
<CAPTION>

                 YEAR ENDED DECEMBER 31,
           ---------------------------------
           2002          2003          2004
           ----          ----          ----
                          %
           ---------------------------------
<S>        <C>           <C>           <C>
A          49.8          38.2          38.5
B           8.8          10.9           9.2
C           5.3           9.1          13.0
           ----          ----          ----

           63.9          58.2          60.7
           ====          ====          ====
</TABLE>

          As of December 31, 2003 and 2004, major customer's balances were $
          15,592 and $ 11,939, respectively.

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

<TABLE>
<CAPTION>
                                   DECEMBER 31,
                            ---------------------------
                              2003              2004
                            --------          --------
<S>                         <C>               <C>
 Israel                     $ 76,882          $ 79,785
 Foreign countries            51,096            45,378
                            --------          --------

                            $127,978          $125,163
                            ========          ========
</TABLE>

     f.   Revenues are generated by the following products:

<TABLE>
<CAPTION>
                                      YEAR ENDED DECEMBER 31,
                             ---------------------------------------------
                               2002              2003              2004
                             --------          --------          --------
<S>                          <C>               <C>               <C>
Intimate apparel             $146,260          $108,998          $118,240
Active wear                     6,463            12,071            20,105
Swimwear                            -             3,731            10,275
Healthcare products            37,582            38,286            34,199
                             --------          --------          --------

                             $190,305          $163,086          $182,819
                             ========          ========          ========
</TABLE>


                                     F - 32
<PAGE>


                                                TEFRON LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 16:- RELATED PARTIES

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

<TABLE>
<CAPTION>
                                                        YEAR ENDED DECEMBER 31,
                                             -------------------------------------------
                                               2002             2003              2004
                                             -------           -------           -------
<S>                                          <C>               <C>               <C>
Sales to related parties (1)                 $ 1,019           $ 1,155           $   796
                                             =======           =======           =======

Cost of sales (2)                            $(2,475)          $(2,667)          $(2,602)
                                             =======           =======           =======

Selling, general and administrative
  expenses (2)                               $  (362)          $  (703)          $  (684)
                                             =======           =======           =======

</TABLE>

          (1)  Related parties trade receivables in 2003 and 2004 were $ 718 and
               $ 372, respectively.

          (2)  Related parties trade payables in 2003 and 2004 were $ 196 and $
               52, respectively.

          (3)  Including primarily rental payments to a company controlled by
               shareholders.


     b.   During 2003, the Company acquired Macpell's interest in RMD, in
          consideration of $ 200.


NOTE 17:- SUBSEQUENT EVENTS

     a.   In February 2005, a fire damaged the Company's sewing plant in Jordan.
          The fire resulted in loss of inventories and raw materials of $ 1,400,
          and damage to plant and machinery of $ 630. The Company expects that
          its insurance policies will cover substantially all of the losses
          resulted from the fire less the deductible in the amount of $ 250. The
          Company is transferring production to other facilities. However,
          damage from the fire may delay shipment of some goods. The Company
          does not expect damage or loss from the fire to materially affect its
          overall sales or profitability.

     b.   As of December 31 2004, the Company's 2004 EBITDA is expected to be
          less then $ 16 million. As a result, the PPS will be retroactively
          reduced by $ 0.75 per share. The Company has not yet decided whether
          to issue anon additional 963,085 shares or to pay an amount of $ 3,454
          in cash.



                                     F - 33
<PAGE>


             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors
AlbaHealth, LLC
Valdese, North Carolina

     We have audited the accompanying balance sheets of AlbaHealth, LLC (the
"Company") as of December 31, 2004 and 2003, and the related statements of
income, members' equity, and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of AlbaHealth, LLC as of
December 31, 2004 and 2003, and the results of its operations and its cash flows
for the years then ended, in conformity with United States generally accepted
accounting principles.

/s/ McGladrey & Pullen, LLP

Charlotte, North Carolina

February 3, 2005, except as to the
first paragraph, last three sentences
of Note 4 and first paragraph, last
three sentences of Note 5 as to which
the date is March 31, 2005


                                     F - 34
<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
                                                        --------------------
                                                        Yosef Shiran
                                                        Chief Executive Officer


                                                        By: /S/ Gil Rozen
                                                        -----------------
                                                        Gil Rozen
                                                        Chief Financial Officer


April 21, 2005

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

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

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

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

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

2.7  Sixth Amendment to Credit Agreement, dated December 15, 2004, among
     Alba-Waldensian, Inc. and Bank Hapoalim, as Agent and Lender, together with
     Term B Notes.

2.8  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).

<PAGE>

2.9  First Amendment and Waiver to Credit Agreement, dated March 31, 2005, among
     AlbaHealth LLC and General Electric Capital Corporation, as Agent and
     Lender.

2.10 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).

2.11 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).

2.12 Loan Agreement, dated as of December 21, 2004, between Israel Discount Bank
     and Hi-Tex Founded by Tefron Ltd.

2.13 Loan Agreement, dated as of December 31, 2004, between Bank Hapoalim and
     Hi-Tex Founded by Tefron Ltd.

2.14 Loan Agreement, dated as of December 25, 2004, between Israel Discount Bank
     and the Company.

2.15 Loan Agreement, dated as of December 31, 2004, between Bank Hapoalim and
     the Company.

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 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).

<PAGE>

3.2  Agreement, dated February 17, 2004, by and among Arwol Holdings Ltd.,
     Macpell Industries Ltd. and Norfet, Limited Partnership (incorporated by
     reference to Exhibit 3.4 to the Company's Annual Report on Form 20-F for
     the fiscal year ended December 31, 2003).

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).

4.6. Management and Services Agreement, effective as of July 30, 2003, between
     the Company, Yosef Shiran and Shiran & Partners - Consulting,
     Entrepreneurship, and Financing (incorporated by reference to Exhibit 4.4
     to the Company's Annual Report on Form 20-F for the fiscal year ended
     December 31, 2003).

4.7. 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, as amended as of
     December 13, 2004, 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  Amendment No. 1 to Put Option Agreement, dated as of December 13, 2004, by
     and among AlbaHealth, LLC, Alba-Waldensian, Inc., Encompass Group, L.L.C.
     and General Electric Capital Corporation.

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


<PAGE>

4.11 Amendment to Purchase Agreement, dated March 31, 2005, by and between the
     Company and Norfet Limited Partnership.

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

4.13 Amendment to Agreement, dated March 31, 2005, by and between the Company
     and Leber Partners, L.P.

4.14 Private Equity Credit Agreement, dated as of March 9, 2004, by and between
     the Company and Brittany Capital Management Limited (incorporated by
     reference to Exhibit 4.11 to the Company's Annual Report on Form 20-F for
     the fiscal year ended December 31, 2003).

4.15 Registration Rights Agreement, dated as of March 9, 2004, by and between
     the Company and Brittany Capital Management Limited (incorporated by
     reference to Exhibit 4.12 to the Company's Annual Report on Form 20-F for
     the fiscal year ended December 31, 2003).

8.1  List of subsidiaries of the Company.

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

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

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

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

14.(a).2 Consent of McGladrey & Pullen, LLP.