---

Gildan 2006 Annual Report  21

|MD&A                                                                                      | 
|----------------------------------------------------------------------------------------- | 
|Management's Discussion and
    Analysis of Financial Condition and Results of Operations
|                                                                                         

This Management's discussion and analysis (MD&A) comments
  on Gildan's operations, performance and financial condition as at and for the
  years ended October 1, 2006 and October 2, 2005, compared to the preceding
  years. For a complete understanding of our business environment, trends, risks
  and uncertainties and the effect of accounting estimates on our results of
  operations and financial condition, this MD&A should be read together with the
  audited Consolidated Financial Statements and the related notes. This MD&A is
  dated December 13, 2006. All amounts in this report are in U.S. dollars,
  unless otherwise noted. All financial information contained in this MD&A and in the
  Consolidated Financial Statements has been prepared in accordance with
  Canadian generally accepted accounting principles (GAAP), except for certain
  information discussed in the paragraph entitled "Non-GAAP Financial
  Measures" on page 24 of this MD&A. The audited
  Consolidated Financial Statements and this MD&A were reviewed by Gildan's
  Audit and Finance Committee and were approved by our Board of Directors. Additional information about Gildan, including our 2006
  Annual Information Form, is available on our website at www.gildan.com, on the
  SEDAR website at www.sedar.com, and on the EDGAR section of the U.S.
  Securities and Exchange Commission website (which includes the Annual Report
  on Form 40-F) at www.sec.gov. This document contains forward-looking statements, which are qualified by
  reference to, and should be read together with the "Forward-looking
  Statements" cautionary notice on page 43. In this MD&A, "Gildan", the "Company", or the words "we", "us", "our"
  refer, depending on the context, either to Gildan Activewear Inc. or to Gildan
  Activewear Inc. together with its subsidiaries and joint venture.


Our Business

Gildan is a vertically-integrated marketer and manufacturer
of activewear, underwear and socks. The Company operates in one business
segment, being high-volume, basic, frequently replenished, non-fashion apparel.
We are the leading supplier of activewear for the wholesale imprinted sportswear
market in the U.S. and Canada, and also a leading supplier for this market in
Europe. In 2005, as part of our growth strategy, we began to implement a major
new initiative to sell our products into the mass-market retail channel in North
America. In conjunction with these plans, in fiscal 2006, we expanded our
product-line to include underwear and athletic socks.

Effective July 6, 2006, Gildan completed the acquisition of
Kentucky Derby Hosiery Co., Inc. (Kentucky Derby), a U.S. hosiery manufacturer
with corporate headquarters in Hopkinsville, Kentucky. This acquisition is
intended to enhance and accelerate Gildan's strategy to enter the North American
mass-market retail channel. Gildan intends to use Kentucky Derby's experience
and distribution with mass-market retailers to enhance its platform to develop Gildan as a consumer brand in basic athletic socks, underwear and activewear,
while continuing to focus on serving the needs of our customers in the wholesale
distribution channel and continuing to support Kentucky Derby's private label
programs and brand licenses.

Our Products

We specialize in large-scale marketing and manufacturing of
basic, non-fashion apparel products for customers requiring an efficient supply
chain and consistent product quality for high-volume automatic replenishment
programs. Our product offering focuses on core basic activewear styles sold in
various fabrics, weights and colours. In fiscal 2006, we also introduced a
variety of styles of men's and boys' underwear and athletic socks into our
product-line. Typically, our product offering is characterized by low fashion
risk, since products are basic and produced in a limited range of sizes, colours
and styles. Our products for the wholesale channel for screenprinters are
produced and sold without logos and designs.

We sell activewear, namely T-shirts, sport shirts and fleece,
in large quantities to wholesale distributors as undecorated "blanks", which are
subsequently decorated by screenprinters with designs and logos. Consumers
ultimately purchase the Company's products, with the Gildan label, in venues
such as sports, entertainment and corporate events, and travel and tourism
destinations. Other end-uses include work uniforms and similar applications to
convey individual, group and team identity.

In the retail channel, we have complemented our activewear
product-line by introducing in 2006 a variety of styles of men's and boys'
underwear and athletic socks.

Our Manufacturing and Distribution Facilities

To support our sales in the various markets, we have built
and are continuing to build modern manufacturing facilities located in Central
America and the Caribbean Basin. We also operate manufacturing facilities in
North America. We established our largest manufacturing hub in Central America
in Rio Nance, Honduras with our first offshore integrated knitting, bleaching,
dyeing, finishing and cutting facility, which became operational in 2002. During
2005, we purchased additional land adjacent to our Rio Nance facility for the
purpose of constructing two new integrated world-scale facilities, one for the
production of fleece, and one for the production of athletic socks. During 2006,
we completed the construction of the sock manufacturing facility, and began the
construction of the fleece textile facility. We expect to ramp up our sock
facility to full capacity by the second half of fiscal 2008 and begin production
at our fleece facility in the second half of fiscal 2007.

---

22  Gildan 2006 Annual
    Report

|MD&A                                                                                      | 
|----------------------------------------------------------------------------------------- | 
|Management's Discussion and
    Analysis of Financial Condition and Results of Operations

Following the success of our first Rio Nance facility and the
need to add capacity to support our projected continuing sales growth in
activewear and underwear, Gildan established a manufacturing hub in Bella Vista,
Dominican Republic. The Dominican Republic facility began production in fiscal
2005 and is currently running at a comparable scale of production to our mature
textile facility in Honduras. We will continue to maximize production levels and
cost efficiencies at the Dominican Republic facility during fiscal 2007.

During the course of this fiscal year, consistent with our
ongoing strategy to enhance our overall cost structure by maximizing large-scale
production of basic T-shirts at our textile manufacturing operations in Honduras
and the Dominican Republic, we announced the restructuring of our Canadian
manufacturing operations, to take effect in December 2006. This included the
closure of our textile manufacturing facility in Valleyfield, Quebec, and the
reduction in the operations of our knitting facility in Montreal, Quebec, as
well as our cutting facility in Bombay, New York. Also, in fiscal 2006, we
announced the closure and downsizing of sock manufacturing capacity located in
North Carolina and Virginia, which will be undertaken during the first half of
fiscal 2007. We continue to significantly increase our overall capacity through
major new expansions in both our Central American and Caribbean Basin
manufacturing hubs, and will continue on an ongoing basis to evaluate the role
and global competitiveness of our Canadian textile and U.S. sock manufacturing
facilities within our overall capacity planning to support our growth strategy.

Our sewing facilities are primarily located in Central
America, Mexico and the Caribbean Basin. We also utilize third-party contractors
to complement our vertically-integrated production.

CanAm Yarns, LLC (CanAm), our joint-venture company with
Frontier Spinning Mills, Inc. (Frontier), operates yarn-spinning facilities in
Georgia and North Carolina. CanAm's yarn-spinning operations, together with
supply agreements currently in place with Frontier and other third-party yarn
providers, serve to meet our yarn requirements.

We distribute our products in the U.S. primarily out of our
company-owned distribution centre in Eden, North Carolina, and use third-party
warehouses in Canada, Mexico, Europe and Australia to service our customers in
these markets.

In addition, during the year, as part of our overall plan to
integrate the operations of Kentucky Derby and to support future capacity
requirements for our retail initiative, we announced plans to invest
approximately $7 million in a new 400,000 square foot retail distribution centre
in Martinsville, Virginia and to relocate and consolidate Kentucky Derby's
existing distribution centres, at multiple sites in Virginia and North Carolina,
to this single location. This new distribution centre will be fully dedicated to
supporting our retail distribution plans. The relocation and consolidation of
Kentucky Derby's distribution centres will result in improved operating
efficiencies and lower transportation costs, as well as faster customer response
times. The installation of equipment in this facility, together with the
associated warehouse management system, is expected to be completed during the
second quarter of fiscal 2007. Our existing distribution centre in Eden, North
Carolina will remain fully dedicated to providing the capacity required for Gildan's anticipated further growth in the wholesale distribution channel.

Our corporate head office is located in Montreal, Canada and we employ over
15,000 full-time employees worldwide.

Market Overview

Our target market for activewear, underwear and socks is
characterized by low fashion risk compared to many other apparel markets, since
products are basic and produced in a limited range of sizes, colours and styles,
and since logos and designs for the screenprint market are not imprinted or
embroidered by manufacturers.

The apparel market for our products is highly competitive.
Competition is generally based upon price, with reliable quality and service
also being key requirements for success. Our primary competitors in North
America are the major U.S.-based manufacturers of basic branded activewear for
the wholesale and retail channels, such as Fruit of the Loom, Inc., Hanesbrands
Inc., the Jerzees division of Russell Corporation, which was recently acquired
by Berkshire Hathaway Inc. which owns Fruit of the Loom, Inc., Delta Apparel,
Inc., and Anvil Knitwear, Inc. The competition in the European wholesale
imprinted active-wear market is similar to that in North America, as we compete
primarily with the European divisions of the larger U.S.-based manufacturers. In
Europe, we also have large competitors which do not have integrated
manufacturing operations and source products from contractors in Asia.

Due to wholesaler and retailer consolidation, the customer
base to which we sell and are targeting to sell our products is composed of a
relatively small number of significant customers.

While the majority of our sales is currently derived from the
sale of activewear through the wholesale distribution channel, in 2006 we
continued to expand our entry into the retail channel, concentrating on regional
retailers that we can service well with the production capacity that we have
available. As we ramp up our major capacity expansion projects in the Caribbean
Basin and Central America, we will increasingly be in a position to service
major mass-market retailers. We believe that providing a superior value
proposition predicated on reliable product quality and comfort, combined with
efficient customer service and competitive pricing, the same factors that
contribute to our success in the wholesale channel, will allow us to be
successful in penetrating the retail channel.

---

Gildan 2006 Annual Report  23

|MD&A                                                                                      | 
|----------------------------------------------------------------------------------------- | 
|Management's Discussion and
    Analysis of Financial Condition and Results of Operations

We believe that growth for our activewear products has been driven by several
market trends such as the following:

- continued use of activewear for event merchandising (such
  as concerts, festivals, etc.);
- continued evolution of the entertainment/sports licensing
  and merchandising businesses;
- the growing use of activewear for uniform applications;
- the growing use of activewear for corporate promotions;
- continued increase in use of activewear products for travel
  and tourism;
- an increased emphasis on physical fitness; and
- a greater use and acceptance of casual dress in the
  workplace.

In addition, reductions in manufacturing costs, combined with
quality enhancements in activewear apparel, such as pre-shrunk fabrics, improved
fabric weight, blends and construction have provided consumers with superior
products at lower prices.

Strategy and Financial Objectives

We believe that our success in developing our
vertically-integrated manufacturing hubs has allowed us to provide our customers
with low prices, consistent product quality and a reliable supply chain, and has
been the main reason that we have been able to rapidly increase our market
presence and establish our market leadership in the imprinted sportswear market.
These are the same factors that management believes will allow Gildan to be
successful in building a consumer brand in the retail channel.

We believe that our vertically-integrated manufacturing
operations allow us to provide a combination of competitive prices and premium
quality products and to deliver superior value to our customers. We are able to
price our products competitively because of our success in reducing operating
costs. We accomplish this by:

- investing in modern, automated equipment and facilities;
- increasing our capacity through the development of
  integrated regional hubs in Central America and the Caribbean Basin, where we
  benefit from strategic locations and favourable international trade
  agreements; and
- focusing on producing a narrow range of basic, high-volume
  product-lines, which allows us to maximize production efficiencies.

We intend to continue to expand capacity through the
acquisition of modern, automated equipment for all aspects of our manufacturing
process to maximize productivity and achieve high efficiency rates.

We are implementing a five-year plan to approximately triple
our unit sales volumes and continue to achieve significant manufacturing
efficiencies. Our growth strategy comprises the following four initiatives:

1. Continue to increase market share in the U.S. wholesale imprinted sportswear
market in all product categories

During fiscal 2006, we further
increased our leading market share position in the U.S. wholesale distributor
network in the T-shirt and sport shirts categories as reported in the S.T.A.R.S.
Report produced by ACNielsen Market Decisions. In addition, we gained
significant share in the fleece category, reaching the number two market share
position. We believe we will continue to increase market share in this channel
due to our competitive strengths and the addition of low cost production
capacity.

2. Leverage our successful business model to enter the mass-market retail channel
and develop Gildan as a consumer brand

We plan to continue to sell the same
basic undecorated activewear apparel products into the retail channel, as well
as our new complementary products, underwear and athletic socks, which also
leverage our existing core competencies, successful business model and
competitive strengths. Our goal is to continue to provide a value proposition,
which combines quality, service and competitive pricing. We intend to follow the
same pricing strategy as in the wholesale market, by using our cost efficiencies
to lower selling prices. Our main competitors in the retail channel for basic
family apparel products are essentially the same as in the wholesale channel.

During 2006, we expanded our presence
in the retail channel, particularly with U.S. regional retailers. Following our
recent acquisition of Kentucky Derby, we intend to use Kentucky Derby's
experience and distribution with mass-market retailers to build Gildan as a
consumer brand in athletic socks, underwear and activewear in the mass-market
retail channel.

3. Increase penetration in Europe and other international markets

We expect to pursue further market
penetration within our existing served wholesale markets in Europe, Mexico and
Australia, in addition to pursuing further international market expansion
opportunities. During fiscal 2006, we began to sell Gildan products in Mexico.

4. Support unit sales growth and maintain pricing competitiveness through continued
significant investments in low-cost production capacity

To support our projected continuing
sales growth, in fiscal 2006 we ramped up our new Dominican Republic facility to
close to full capacity. In addition, we completed the construction of our sock
facility in Honduras, which we expect to ramp up to full capacity by the second
half of fiscal 2008. We also began construction of a world-scale integrated
facility for theproduction of fleece,
which is expected to begin production in the second half of fiscal 2007. Our
land and infrastructure in Central America and the Caribbean Basin can
accommodate major capacity expansion on the same sites. We currently expect to
invest approximately $400 million during the next five years in capital
expenditures to support our projected sales growth. All of the organic capacity
expansions that we plan to undertake over the next five years are expected to be
financed by internally generated funds.

---

24  Gildan 2006 Annual
    Report

|MD&A                                                                                      | 
|----------------------------------------------------------------------------------------- | 
|Management's Discussion and
    Analysis of Financial Condition and Results of Operations

We are subject to a variety of business risks that may affect
our ability to maintain our current market share and profitability, as well as
our ability to achieve our long-term strategic objectives. These risks are
described in the "Risks and Uncertainties" section of this MD&A beginning on
page 37. As well, the nature of the Company's growth strategy involves risks
related to certain assumptions underlying unit sales growth, production capacity
growth and cost reductions, among others. Notably, our planned growth in market
share depends to a significant extent on the successful start-up and ramp-up of
new offshore facilities. There can be no assurances that we will achieve our
planned market share growth, retail market penetration or capacity increases.

Operating Results

Selected Annual Information

|                                                                     | 2006  | 2005  | 2004 
|-------------------------------------------------------------------- | ----- | ----- | -----
|                                                                     |       |       |      
|Sales                                                                | 773.2 | 653.9 | 533.4
|Cost
    of sales                                                    | 521.1 | 450.6 | 378.7
|Gross profit                                                         | 252.1 | 203.3 | 154.7
|Selling, general and
    administrative expenses                     | 84.4  | 73.8  | 58.3 
|Restructuring and other charges                                      | 20.4  | 11.8  | 4.6  
|                                                                     | 147.3 | 117.7 | 91.8 
|Depreciation and amortization                                        | 32.4  | 25.6  | 22.3 
|Interest, net                                                        | 3.1   | 4.6   | 6.2  
|Non-controlling interest in
    income of consolidated joint venture | 0.2   | 0.1   |     
|Earnings before income taxes                                         | 111.6 | 87.4  | 63.3 
|Income taxes                                                         | 4.8   | 1.4   | 3.1  
|Net
    earnings                                                     | 106.8 | 86.0  | 60.2 
|                                                                     |       |       |      
|Basic EPS(1)                                                         | 1.78  | 1.44  | 1.02 
|Diluted EPS(1)                                                       | 1.76  | 1.43  | 1.01 
|                                                                     |       |       |      
|Total assets                                                         | 723.3 | 597.5 | 488.8
|Total long-term liabilities(2)                                       | 47.1  | 64.1  | 66.0 

Certain minor rounding variances exist between the financial statements and
this summary.

(1) All earnings per share data reflect the effect of the stock split as
described on page 33.
(2) Includes long-term debt, future income taxes and non-controlling interest in
consolidated joint venture.

Operating Results for the year ended October 1, 2006, compared
to the year ended October 2, 2005

Non-GAAP Financial Measures

We use non-GAAP measures to assess our
operating performance. Securities regulations require that companies caution
readers that earnings and other measures adjusted to a basis other than GAAP do
not have standardized meanings and are unlikely to be comparable to similar
measures used by other companies. Accordingly, they should not be considered in
isolation. We use non-GAAP measures such as adjusted net earnings, adjusted
diluted EPS, EBITDA, free cash flow, total indebtedness and net debt to measure
our performance from one period to the next without the variation caused by
certain adjustments that could potentially distort the analysis of trends in our
operating performance, and because we believe such measures provide meaningful
information on the Company's financial condition and operating results.

We refer the reader to page 41 for the
definition and complete reconciliation of all non-GAAP financial measures used
and presented by the Company to the most directly comparable GAAP financial
measures.

Business Acquisition

Effective July 6, 2006, we acquired 100% of
the common shares of Kentucky Derby, a U.S. hosiery manufacturer with corporate
headquarters in Hopkinsville, Kentucky. The total purchase price of $20.4
million, including transaction costs, was paid in cash except for approximately
$0.5 million, which was settled through the issuance of common shares of Gildan.
We accounted for this acquisition using the purchase method and the results of
Kentucky Derby have been consolidated with those of Gildan from the date of
acquisition. Please refer to Note 3 to the Consolidated Financial Statements for
a summary of the estimated fair value of the assets acquired and liabilities
assumed at the date of acquisition.

Sales

Sales for fiscal 2006 reached $773.2 million,
up 18.2% from $653.9 million in fiscal 2005. The increase in sales was due
mainly to a 14.5% increase in unit sales volumes for our activewear products,
combined with the impact of a higher-valued product-mix, partially offset by an
approximate 2.5% decline in activewear unit selling prices compared to last
year. In addition, sales in the fourth quarter of this fiscal year included
$30.0 million from the acquisition of Kentucky Derby, which was effective July
6, 2006. Excluding the acquisition of Kentucky Derby, sales were up 13.7%.

Market growth and share data presented for the
U.S. wholesale distributor channel is based on the S.T.A.R.S. Report produced by
ACNielsen Market Decisions. The S.T.A.R.S. data for the nine months ended
September 30, 2006, includes information provided by the largest wholesale
distributor, which has renewed its participation in the report. In order to
calculate year-over-year growth rates, S.T.A.R.S. has adjusted comparative data
for the nine months ended September 30, 2005.

---

Gildan 2006 Annual Report  25

|MD&A                                                                                      | 
|----------------------------------------------------------------------------------------- | 
|Management's Discussion and
    Analysis of Financial Condition and Results of Operations

The table below summarizes the S.T.A.R.S. data for the nine months ended
September 30, 2006:

|             | Nine months
    ended | Nine months ended 
|------------ | --------------------- | ------------------
|             | September 30,         | September 30, 2006
|             | 2006 vs 2005          |                   
|             | Unit Growth           | Gildan Market     
|             | Industry              | Gildan            
|             |                       |                   
|All Products | 2.1%                  | 16.6%             
|T-shirts     | 2.4%                  | 16.9%             
|Sport shirts | (3.2%)                | 1.9%              
|Fleece       | 1.4%                  | 23.7%             

The increase in our unit sales volumes was due to continuing
market share penetration, primarily in the T-shirt and fleece categories, and
2.1% growth in overall industry unit shipments in the nine months ended
September 30, 2006. In the T-shirt category, we grew unit volumes by 16.9% for
the nine months ended September 30, 2006, and increased our leading share in
this category to 43.7%. We maintained our position as the leading brand in sport
shirts with a 32.2% market share, where our volume grew by 1.9%, compared with
an overall decline of 3.2% for the industry. In the fleece category, our volume
growth significantly exceeded that of the industry. We grew our share to 30.8%
and reached the number two market share position.

|Sales                     
|--------------------------
|(in millions of dozens)(1)



(1) activewear and underwear

We maintained a leading market share position in Canada and
continued to expand our international business. In Europe, our unit sales
increased 9.3% over fiscal 2005, and, in the fourth quarter, we added three
major new distributors in the U.K. During fiscal 2006, we introduced our
products in the wholesale distributor market in Mexico and continued to expand
our distributor network in this market.

|U.S. Industry Growth     
|-------------------------
|(based on unit sales (%))



Gross Profit

Gross profit is the result of our sales less cost of sales.
Gross margin reflects gross profit as a percentage of sales. Our cost of sales
includes all raw material costs, manufacturing conversion costs, sourcing costs
and transportation costs incurred until the receipt of finished goods at our
distribution facilities, but excludes depreciation expense. Cost of sales also
includes costs relating to purchasing, receiving and inspection activities,
manufacturing administration, third-party manufacturing services, insurance,
internal transfers of finished goods, and customs and duties. Our gross margins
may not be comparable to other companies, since some entities include
depreciation expense and distribution costs in cost of sales, whereas we include
them in depreciation and amortization and selling, general and administrative
expenses, respectively.

|Gross Margins
|-------------
|(%)          



(1) Before the impact of the change in functional currency on cost of sales.
See page 41.

---

26  Gildan 2006 Annual
    Report

|MD&A                                                                                      | 
|----------------------------------------------------------------------------------------- | 
|Management's Discussion and
    Analysis of Financial Condition and Results of Operations

Gross profit for fiscal 2006 was $252.1 million, or 32.6% of
sales, compared to $203.3 million, or 31.1% of sales during fiscal 2005. The
gross margin improvement in fiscal 2006 was due primarily to manufacturing
efficiencies, lower cotton costs, and a favourable product-mix. In addition, the
margin improvement reflected the impact of the reversal of a prior year reserve
of $1.1 million for litigation related to cotton purchase contracts in fiscal
2001, which was resolved in Gildan's favour in the second quarter of this fiscal
year. The positive variances in gross margin for the year were partly offset by
the impacts of lower net selling prices, higher energy and transportation costs,
and from the mix impact of the higher proportion of the lower margin sock sales
following our recent acquisition of Kentucky Derby.

We continued to reduce our overall manufacturing costs by
increasing the scale of production at our Dominican Republic textile facility,
which ramped up to close to full capacity by the end of fiscal 2006.

Selling, General and Administrative Expenses

Our selling, general and administrative (SG&A) expenses
include costs incurred subsequent to the receipt of finished goods at our
distribution facilities, excluding depreciation expense and costs of
inter-warehouse transfers of finished goods. The principal components of our SG&A
expenses include warehousing and handling costs, the cost of shipping goods to
customers, selling and administrative personnel costs, advertising and marketing
expenses, leased facilities and equipment, professional fees, and other general
and administrative expenses.

|SG&A                     
|-------------------------
|(percentage of sales (%))



SG&A expenses were $84.4 million, or 10.9% of sales during
fiscal 2006, compared to $73.8 million, or 11.3% of sales during fiscal 2005.
The increase in SG&A expenses compared to last year stemmed primarily from
higher volume-driven distribution costs, professional fees for the compliance
with the requirements of Section 404 of the U.S. Sarbanes Oxley Act of 2002,
and the impact of the stronger Canadian dollar, combined with the cost of
ongoing organizational development to support our

Restructuring and Other Charges

The following table summarizes the components of
restructuring and other charges for the years ended October 1, 2006, October 2,
2005 and October 3, 2004:

|(in $ millions)                                  |      |      |     
|------------------------------------------------ | ---- | ---- | ----
|                                                 | 2006 | 2005 | 2004
|                                                 |      |      |     
|Canadian textile manufacturing
    restructuring | 18.9 |     |    
|Restructuring of yarn-spinning
    facilities    |     | 10.7 |    
|Charge to comply with
    employment contract    | 1.5  | 1.1  | 4.6 
|                                                 | 20.4 | 11.8 | 4.6 

Canadian Textile Manufacturing Restructuring

In September 2006, we announced a restructuring of our
Canadian manufacturing operations to take effect in December 2006, involving the
closure of our textile manufacturing facility in Valleyfield, Quebec and the
downsizing of our knitting facility in Montreal, Quebec. We recorded a charge of
$18.9 million relating to this restructuring and our concurrent re-assessment of
the recoverability of the carrying values of our remaining Canadian textile
manufacturing and related assets. Under our business model, there are
essentially no tax recoveries with respect to this charge. The components of
this charge include employee severance of $2.1million with respect to the
Valleyfield and Montreal textile facilities, an asset impairment loss of $15.1
million relating to all of the Canadian textile and related manufacturing fixed
assets, and other costs of $1.7 million. The Company was required to recognize
asset impairment charges to reduce the carrying value of the fixed assets to
fair value, because the carrying value of the assets exceeded the future cash
flows which they were projected to generate during the balance of their
estimated economic lives. As at October 1, 2006, all amounts accrued for
severance and other costs remained unpaid and are included in "Accounts payable
and accrued liabilities".

Restructuring of Yarn-Spinning Facilities

During fiscal 2005, we closed our two Canadian yarn-spinning
facilities, and relocated a major portion of our yarn-spinning equipment to a
North Carolina spinning facility operated by CanAm. We recorded a charge of
$10.7 million during fiscal 2005 for the costs associated with this closure. The
components of the charge included a writedown to fair value of the fixed assets
not transferred to CanAm of $6.8 million, employee severance of $3.7 million,
and other costs of $0.2 million.

---

Gildan 2006 Annual Report  27

|MD&A                                                                                      | 
|----------------------------------------------------------------------------------------- | 
|Management's Discussion and
    Analysis of Financial Condition and Results of Operations

The fixed assets not transferred to CanAm were classified as
held for sale at their estimated fair values. Proceeds from assets held for sale
of $4.1 million and $5.0 million were received, respectively in fiscal 2005 and
in fiscal 2006. Severance costs were paid in full in fiscal 2005.

Charge to Comply With Employment Contract

During fiscal 2004, we expensed $4.6 million representing
management's best estimate of the cost of financial obligations pursuant to an
employment contract with the former Chairman and Co-Chief Executive Officer of
the Company. The employment contract includes variable components related to the
Company's financial and operating performance to fiscal 2009. This resulted in
charges of $1.5 million in fiscal 2006 and $1.1 million in fiscal 2005.

Depreciation and Interest Expenses

Depreciation and amortization expense increased to $32.4
million in fiscal 2006, compared to $25.6 million in fiscal 2005. The increase
in depreciation expense in fiscal 2006 was due to a higher capital asset base
resulting from continued capital spending to support capacity expansion, in
particular the Dominican Republic facility.

Net interest expense amounted to $3.1 million during fiscal
2006, down from $4.6 million in fiscal 2005. The decrease in net interest
expense resulted from higher investment income and the reduction in overall
debt, following the scheduled principal repayments made on the Company's Senior
Notes. The increase in investment income was due to higher average cash balances
during the year combined with higher interest rate returns compared to last
year.

Income Taxes

Income tax expense for the year ended October 1, 2006, was
$4.8 million, up $3.4 million from $1.4 million in fiscal 2005. The income tax
expense for fiscal 2006 and fiscal 2005 included an income tax recovery of $0.4
million and $3.9 million, respectively, related to restructuring and other
charges, as discussed on page 26. Excluding the impact of restructuring and
other charges in both years, the income tax provision for the year ended October
1, 2006 was $5.2 million, resulting in an effective income tax rate of 3.9%,
compared to an income tax provision of $5.3 million in fiscal 2005, reflecting
an effective income tax rate of 5.3%. The decline in the effective income tax
rate was mainly due to a higher proportion of our total sales being derived from
our international operations and sourced from our offshore textile facilities.

Net Earnings

Net earnings for fiscal 2006 were $106.8 million and diluted
earnings per share (EPS) were $1.76, up respectively 24.2% and 23.1% compared to
net earnings of $86.0 million, or $1.43 per share in fiscal 2005. Net earnings
for fiscal 2006 included restructuring and other charges of $20.0 million after
tax, or $0.33 per share. Net earnings for fiscal 2005 includedrestructuring and other charges of $7.9 million after tax, or $0.13 per share.
Excluding the impact of these restructuring and other charges, adjusted net
earnings of $126.8 million, or $2.09 per share on a diluted basis in fiscal
2006, increased 35.0% and 34.0%, respectively, compared to adjusted net earnings
of $93.9 million, or $1.56 per share in fiscal 2005. The increase in adjusted
net earnings and adjusted diluted EPS resulted mainly from the continued strong
growth in unit sales volumes and higher gross margins, which more than offset
increases in SG&A and depreciation expenses.

| | 
| | 

(1) Adjusted net earnings and adjusted diluted EPS are before
impact of restructuring and other charges and impact of change to U.S. dollar as
functional currency. See page 24.
(2) Adjusted net earnings and adjusted diluted EPS are before impact of
restructuring and other charges. See page 24.

---

28  Gildan 2006 Annual
    Report

|MD&A                                                                                      | 
|----------------------------------------------------------------------------------------- | 
|Management's Discussion and
    Analysis of Financial Condition and Results of Operations

Operating Results for the year ended October 2, 2005, compared to the year
ended October 3, 2004

Change in Functional and Reporting Currency in Fiscal 2004

Effective October 6, 2003, we adopted the U.S. dollar as our
functional currency since a significant portion of our revenues, expenses,
assets and liabilities are denominated in U.S. dollars and our sales and
manufacturing operations are increasingly international in scope. Effective the
same date, the U.S. dollar was adopted as our reporting currency. This resulted
in a translated value for opening inventories and fixed assets that was
approximately $23 million higher than the amount that would have resulted from
the application of exchange rates prevailing at the dates these assets were
manufactured or acquired. This upward revaluation of inventories and fixed
assets was reflected directly in opening shareholders' equity as part of the
$26.2 million positive balance of cumulative translation adjustments. These
increases result in a corresponding offsetting negative impact on earnings as
inventories were consumed and fixed assets are depreciated. During fiscal 2004,
an additional $3.3 million was reflected in cost of sales as opening inventories
were consumed.

Sales

Sales for fiscal 2005 reached $653.9 million, up 22.6% from
$533.4 million in fiscal 2004. The increase in sales was due mainly to an 18.2%
increase in unit sales over the prior year, combined with a higher-valued
product-mix.

During fiscal 2005, Gildan continued to expand its European
business and maintained a leading market share position in Canada. The Company
also introduced its products in Australia during fiscal 2004, with immediate
success in achieving market penetration.

Gross Profit

Gross profit for fiscal 2005 was $203.3 million, or 31.1% of
sales, compared to $154.7 million, or 29.0% of sales during fiscal 2004. Gross
profit in fiscal 2004, excluding the adjustment due to the change in functional
currency, was $158.0 million, or 29.6% of sales. The increase in gross margin
percentage was the result of a higher valued product-mix, higher average selling
prices, lower raw material costs and ongoing manufacturing efficiencies offset
by higher transportation and energy costs and start up inefficiencies for the
new Dominican Republic textile facility.

We continued to reduce our overall manufacturing costs by
increasing the output from our Honduran textile operations. Our Dominican
Republic textile facility commenced operations in the third quarter of fiscal
2005 and continued to ramp up capacity in fiscal 2006.

Selling, General and Administrative Expenses

SG&A expenses were $73.8 million or 11.3% of sales during
fiscal 2005, compared to $58.3 million or 10.9% of sales during fiscal 2004. The
increase in SG&A expenses in fiscal 2005 was mainly due to higher volume-related
selling and distribution costs combined with additional costs for the
implementation of a new warehouse management system, the stronger Canadian
dollar, the overall strengthening of our management and administrative
infrastructure to support our growth strategy, and higher performance-related
compensation costs.

Depreciation and Interest Expenses

Depreciation and amortization expense was $25.6 million in
fiscal 2005, compared to $22.3 million in fiscal 2004. The increase in
depreciation expense in fiscal 2005 was the result of our continued investment
in capital expenditures to add capacity for long-term sales growth.

Net interest expense was $4.6 million during fiscal 2005,
down from $6.2 million in fiscal 2004. The decrease in net interest expense was
the result of the reduction in overall debt following the scheduled principal
repayments made on our Senior Notes, offset slightly by the impact of an
increase in the long-term debt of our joint venture in fiscal 2005.

Income Taxes

Income tax expense for fiscal 2005 included an income tax
recovery of $3.9 million from restructuring and other charges. Excluding the
impact of restructuring and other charges, the income tax provision for fiscal
2005 was $5.3 million, resulting in an effective income tax rate of 5.3%. The
income tax expense for fiscal 2004 included an income tax recovery of $1.4
million arising from restructuring and other charges. Excluding this tax
recovery, the effective income tax rate for fiscal 2004 was 6.3%. The decline in
the effective income tax rate was the result of a higher proportion of
international sales compared to prior years, which are taxed at relatively lower
rates.

Net Earnings

Net earnings for fiscal 2005 were $86.0 million or $1.43 per
share on a diluted basis, compared to $60.2 million, or diluted EPS of $1.01 in
fiscal 2004, up respectively 42.9% and 41.6%. Before restructuring and other
charges, adjusted net earnings for fiscal 2005 were $93.9 million or $1.56 per
share. These results were up 40.8% and 39.3%, respectively from net earnings of
$66.7 million or $1.12 per share in fiscal 2004, after adjusting 2004 earnings
to remove the $3.3 million after-tax impact of the functional currency change on
cost of sales as a result of revaluing opening inventories, and the after-tax
impact of restructuring and other charges. The increase in net earnings on this
basis was primarily due to the 22.6% increase in sales revenue together with
higher gross margins, partially offset by higher SG&A and depreciation expenses.

---

Gildan 2006 Annual Report  29

|MD&A                                                                                      | 
|----------------------------------------------------------------------------------------- | 
|Management's Discussion and
    Analysis of Financial Condition and Results of Operations

Summary of Quarterly Results

The table below sets forth certain summarized unaudited
quarterly financial data for the eight most recently completed quarters. This
quarterly information is unaudited but has been prepared on the same basis as
the annual audited Consolidated Financial Statements. The operating results for
any quarter are not necessarily indicative of the results to be expected for any
period.

The activewear business is seasonal and we have historically
experienced quarterly fluctuations in operating results. Typically, demand for
our T-shirts is highest in the third quarter of each fiscal year, when
distributors purchase inventory for the peak summer selling season, and lowest
in the first quarter of each fiscal year. The seasonality of specific
product-lines is consistent with that experienced by other companies in the
activewear industry. While we began selling socks in the fourth quarter of
fiscal 2006, demand for our sock products is typically highest in the first and
fourth quarters of each fiscal year, stimulated largely by the need to support
requirements for the back-to-school period and peak retail selling during the
Christmas holiday season. Management anticipates that the seasonality we have
historically experienced will continue in the future, although it is expected to
be somewhat mitigated by our product diversification. As a result of the
historical seasonal sales trends, we produce and store finished goods inventory
in the first half of the fiscal year in order to meet the expected demand for
delivery in the second half of the fiscal year.

Fourth Quarter Results

Sales in the fourth quarter amounted to $235.2 million, up
30.2% from $180.7 million in the fourth quarter of last year. The increase in
sales revenues was due to $30.0 million of sock sales resulting from the
acquisition of Kentucky Derby, which was effective from July 6, 2006, a 13.7%
increase in unit sales volumes for activewear and the impact of a higher-valued
activewear product-mix, partially offset by a close to 3% reduction in unit
selling prices for active-wear compared to last year. The growth in activewear
unit sales was due to continuing market share penetration in all product
categories in the U.S. distributor channel.

Gross margins in the fourth quarter of fiscal 2006 were
30.6%, versus 32.3% in the fourth quarter of 2005. The decrease in gross margins
was entirely attributable to the impact of lower margins from the sale of socks,
which do not yet reflect the anticipated cost synergies from the planned
rationalization of

Selling, general and administrative expenses in the fourth
quarter were $23.6 million, or 10.1% of sales, compared to $20.1 million, or
11.1% of sales, in the fourth quarter of last year. The increase in SG&A
expenses was due to the impact of the acquisition of Kentucky Derby, higher
volume-related distribution costs and professional fees for compliance with
Section 404 of the U.S.

The income tax rate for the fourth quarter of fiscal 2006 was
6.3% compared to an income tax rate of 4.1% in the fourth quarter of fiscal
2005. Excluding the impact of restructuring and other charges in both years, the
effective income tax rate for the fourth quarter of fiscal 2006 was 4.0%
compared to an effective income tax rate of 3.4% for fiscal 2005.

We achieved net earnings of $16.8 million and diluted EPS of
$0.28, after recording restructuring and other charges in the quarter totaling
$20.0 million after tax, or $0.33 per share. The restructuring and other charges
comprised $0.31 per share for the restructuring of the Company's Canadian
manufacturing facilities, which was announced on September 27, 2006, and $0.02
per share to reflect the variable component of Gildan's contractual obligations
towards its former Chairman and Co-Chief Executive Officer. Before reflecting
the restructuring and other charges, net earnings and diluted EPS for the fourth
quarter of fiscal 2006 amounted to $36.8 million or $0.61 per share, up
respectively 25.6% and 27.1% from net earnings of $29.3 million and diluted EPS
of $0.48 in the fourth quarter of fiscal 2005. Excluding the impact of the
Kentucky Derby acquisition in the quarter, which was $0.01 per share dilutive to
EPS, the increase in net earnings and EPS before the restructuring and other
charges was primarily due to continuing strong growth in unit sales volumes,
favourable manufacturing efficiencies, a higher-valued product-mix for
activewear, and lower SG&A expenses, partially offset by lower selling prices
and higher depreciation expense.

|                                          | 2006  | 2005 
|----------------------------------------- | ----- | -----
|(in $ millions, except per share amounts) | Q4    | Q3   
|                                          |       |      
|Sales                                     | 235.2 | 233.9
|Net earnings                              | 16.8  | 42.8 
|Net earnings per share                    |       |      
|Basic EPS                                 | 0.28  | 0.71 
|Diluted EPS                               | 0.28  | 0.71 

---

30  Gildan 2006 Annual
    Report

|MD&A                                                                                      | 
|----------------------------------------------------------------------------------------- | 
|Management's Discussion and
    Analysis of Financial Condition and Results of Operations

During the fourth quarter of fiscal 2006, we generated cash
flow of $33.6 million from operating activities, after using $17.0 million to
finance seasonal accounts receivable and $9.0 million to meet seasonal and
replenishment inventory requirements for the sock business and to support
transitional outsourcing programs. We also used cash of $26.2 million for
capital expenditures, mainly for our major capacity expansion projects in
Honduras and the Dominican Republic, and $19.9 million for the acquisition of
Kentucky Derby. In addition, we repaid $21.3 million of the total amount of
$27.4 million of Kentucky Derby's debt assumed at the date of the acquisition.

Financial Condition

On October 1, 2006, accounts receivable were $165.9 million
compared to $108.6 million at the end of fiscal 2005. The increase was due to a
13.7% increase in activewear sales in the fourth quarter over the prior year,
the inclusion of $16.2 million accounts receivable from the acquisition of
Kentucky Derby, and an increase in days sales outstanding on our trade
receivables. The increase in days sales outstanding resulted mainly from the
increased success of our long-sleeve and fleece programs which are traditionally
sold with extended payment terms in the summer months, in line with industry
practice. Days sales outstanding are expected to return to more normal levels by
the first quarter of fiscal 2007.

Inventories were $200.7 million representing an increase of
$65.8 million from $134.9 million at the end of fiscal 2005. Inventories at the
end of fiscal 2006 included $39.3 million from the acquisition of Kentucky Derby
in the fourth quarter of fiscal 2006. The remaining increase in inventory over
fiscal 2005 was primarily attributable to the 13.7% increase in activewear sales
compared to last year and a higher level of finished goods inventories required
to meet our anticipated sales demand in fiscal 2007. Additionally,
year-over-year inventory requirements have increased due to the broadening of
our product-line to support greater penetration in fleece, more T-shirt styles
and the introduction of underwear, combined with increased geographical coverage
requiring more inventory to be allocated to regional warehouses.

Fixed assets, which are net of accumulated depreciation,
including asset impairment losses, amounted to $302.7 million at the end of
fiscal 2006, up $42.1 million from last year. This increase was primarily due to
net capital expenditures of $80.2 million, mainly for capacity expansion
projects in the Dominican Republic and Honduras, partially offset by
depreciation and asset impairment losses of $46.2 million.

At the end of fiscal 2006, intangible assets of $9.5 million
represented the unamortized value of customer contracts and customer
relationships related to the acquisition of Kentucky Derby in the fourth quarter
of fiscal 2006.

Total assets were $723.3 million on October 1, 2006, compared
to $597.5 million at the end of the previous year. Working capital was $261.0
million compared to $214.9 million on October2, 2005. The current ratio at the
end of fiscal 2006 was 2.8 compared to 2.9 at the end of fiscal 2005.

| | 
| | 

---

Gildan 2006 Annual Report  31

|MD&A                                                                                      | 
|----------------------------------------------------------------------------------------- | 
|Management's Discussion and
    Analysis of Financial Condition and Results of Operations

Liquidity and Capital Resources

Cash Flows

Cash flows from operating activities in fiscal 2006 were
$94.7 million, compared to $93.2 million for the previous year, reflecting
higher operating earnings, partly offset by higher inventory and accounts
receivable requirements. Excluding the acquired inventory of Kentucky Derby,
inventories for the year increased $35.4 million compared to an increase of
$17.8 million in fiscal 2005. Excluding the acquired accounts receivable of
Kentucky Derby, accounts receivable for the year increased by $41.1 million,
compared to an increase of $22.7 million a year ago.

Cash flows used in investing activities were $96.1 million in
fiscal 2006, compared to cash outflows of $83.8 million in fiscal 2005. The
increase in cash used in investing activities was mainly due to the acquisition
of Kentucky Derby in the fourth quarter of fiscal 2006 for cash consideration of
$19.9 million, partly offset by lower net capital expenditures in fiscal 2006
compared to last year. Net capital expenditures for fiscal 2006 were $80.2
million, down $5.9 million from fiscal 2005. The major capital investment
projects for fiscal 2006 included the new textile facility in the Dominican
Republic, as well as the sock manufacturing facility and the textile facility
for the production of fleece in Honduras. While capital expenditures in fiscal
2006 for the textile facilities in the Dominican Republic and Honduras were up
from fiscal 2005, total capital expenditures were higher in fiscal 2005 due to
investments for the expansion of our U.S. distribution centre and the expansion
of our yarn-spinning joint venture with Frontier.

Free cash flow1amounted to $18.5 million in
fiscal 2006, compared to free cash flow of $9.4 million in fiscal 2005, mainly
as a result of higher operating earnings and lower capital expenditures, partly
offset by higher working capital requirements.

Cash flows used in financing activities in fiscal 2006
amounted to $39.4 million, compared to $0.5 million in fiscal 2005, primarily as
a result of a higher net repayment of total indebtedness2in fiscal
2006, higher proceeds from the issuance of shares in fiscal 2005, and a cash
contribution of $2.5 million received in fiscal 2005 from our joint venture
partner. During fiscal 2006, we repaid $23.9 million of long-term debt
consisting of the $17.5 million third scheduled principal repayment on our
Senior Notes, which was made on June 10, 2006, and a $4.0 million repayment of
Kentucky Derby long-term debt, following our acquisition of Kentucky Derby in
the fourth quarter of fiscal 2006. In addition, we repaid $17.3 million of
Kentucky Derby bank indebtedness. The balance of the debt repayment in fiscal
2006

We ended fiscal 2006 with cash and cash equivalents of $29.0
million compared to $69.8 million at the end of fiscal 2005. At the end of both
fiscal 2005 and fiscal 2006, our revolving bank facility was unutilized. Bank
indebtedness included in our Consolidated Financial Statements at the end of
fiscal 2006 is attributable to our joint venture. Total indebtedness at
October1, 2006 amounted to $37.3 million compared to $51.1 million at October 2,
2005. The decline in total indebtedness is mainly due to the third scheduled
principal repayment of $17.5 million on our Senior Notes, which was made on June
10, 2006, partly offset by the assumption of long-term debt related to the
acquisition of Kentucky Derby.

Liquidity and Capital Resources

In recent years, we have funded our operations and capital
requirements with cash generated from operations. A revolving credit facility
has been periodically utilized to finance seasonal peak working capital
requirements. Our primary use of funds on an ongoing basis is related to capital
expenditures for new manufacturing facilities, inventory financing, accounts
receivable funding, and scheduled payments of principal and interest on our
Senior Notes.

As a result of the seasonal nature of the apparel business,
working capital requirements are variable throughout the year. Our need for
working capital typically grows throughout the first two quarters as inventories
are built up for the peak selling period in the third quarter.

Anticipated sales growth in 2007 is expected to result in
increased working capital requirements, mainly to finance trade accounts
receivable and inventory. For fiscal 2007, we expect to incur approximately $110
million in capital expenditures. We believe our cash flow from operating
activities together with our unused credit facilities will provide us with
sufficient liquidity and capital resources in fiscal 2007 to fund our
anticipated working capital requirements, capital expenditures and the June 2007
final principal repayment on our Senior Notes.

In order to maximize flexibility to finance our ongoing
growth and expansion and to be able to take advantage of additional new
opportunities, we do not currently pay a dividend. Periodically, the merits of
introducing a dividend are re-evaluated by our Board of Directors.

1

2

---

32  Gildan 2006 Annual
    Report

|MD&A                                                                                      | 
|----------------------------------------------------------------------------------------- | 
|Management's Discussion and
    Analysis of Financial Condition and Results of Operations

Off-Balance Sheet Arrangements

We have no commitments that are not reflected in our balance
sheets except for operating leases and other purchase obligations, which are
included in the table of contractual obligations below. As disclosed in Note 13
to our Consolidated Financial Statements, we have issued corporate guarantees
and standby letters of credit arising from various servicing agreements
amounting to $37.4 million at October 1, 2006.

Derivative Financial Instruments

From time to time, we use forward foreign
exchange contracts, primarily in Canadian dollars, British pounds and Euros, to
hedge cash flows related to sales and operating expenses denominated in foreign
currencies (non-U.S. dollar).

A forward foreign exchange contract represents an obligation
to buy or sell foreign currency with a counterparty. Credit risk existsin the event of failure by a counterparty to meet its obligations. We reduce
this risk by dealing only with highly rated counter-parties, normally major
European and North American financial institutions. Our exposure to foreign
currency fluctuations is described in more detail in the "Risks and
Uncertainties" section of this MD&A.

We do not use derivative financial instruments
for speculative purposes. Forward foreign exchange contracts are entered into
with maturities not exceeding twenty-four months.

For fiscal 2006 and 2005, net earnings
included recognized gains relating to derivative financial instruments of $4.6
million and $5.8million, respectively, which primarily related to hedging
activities.

The following table summarizes our commitments to buy and sell
foreign currencies as at October 1, 2006 and October 2, 2005:

|(in thousands)                 |     | Notional |                  |                                | Notional U.S.
|------------------------------ | --- | -------- | ---------------- | ------------------------------ | -------------
|                               |     | amount   | Exchange rate    | Maturity                       | equivalent   
|                               |     |          |                  |                                |              
|2006                           |     |          |                  |                                |              
|Buy contracts:                 |     |          |                  |                                |              
|Foreign exchange
    contracts |    | 9,756    | 1.2056 to 1.2696 | October 2006 to June 2007      | $11,934      
|                               | CA$ | 6,250    | 0.8961           | October 2006                   | 5,600        
|2005                           |     |          |                  |                                |              
|Buy contracts:                 |     |          |                  |                                |              
|Foreign exchange contracts     |    | 2,150    | 1.2039           | October 2005                   | $ 2,588      
|                               | CA$ | 21,400   | 0.7997 to 0.8216 | October 2005 to August 2006    | 17,348       
|Sell contracts:                |     |          |                  |                                |              
|Foreign exchange contracts     |    | 9,276    | 1.3450 to 1.3721 | October 2005 to September 2006 | $12,620      
|                               | £   | 4,490    | 1.8707 to 1.8909 | October 2005 to September 2006 | 8,439        
|                               | CA$ | 2,800    | 0.8610           | October 2005                   | 2,410        

Contractual Obligations

In the normal course of business, we enter into contractual
obligations that will require us to disburse cash over future periods. The
following table sets forth our contractual obligations for the following items
as at October 1, 2006:

|Payments due by period        |       |           |        |        |        
|----------------------------- | ----- | --------- | ------ | ------ | -------
|                              |       | Less than | 1 to 3 | 4 to 5 | After  
|(in $ millions)               | Total | 1 year    | years  | years  | 5 years
|                              |       |           |        |        |        
|Long-term debt                | 33.9  | 21.8      | 6.5    | 4.1    | 1.5    
|Fixed interest payments       | 1.3   | 1.3       |       |       |       
|Operating leases              | 34.7  | 10.0      | 9.4    | 6.3    | 9.0    
|Purchase obligations          | 128.4 | 128.4     |       |       |       
|Other obligations             | 17.5  | 17.5      |       |       |       
|Total Contractual Obligations | 215.8 | 179.0     | 15.9   | 10.4   | 10.5   

We expect that cash flow from our operating earnings,
together with our year-end cash balances and unutilized bank facilities, will be
sufficient to meet foreseeable cash needs for fiscal 2007.

---

Gildan 2006 Annual Report  33MD&AManagement's Discussion and
    Analysis of Financial Condition and Results of OperationsContingent Liability

In November 2002, one of our Mexican subsidiaries ("Gildan
Mexico") received a tax assessment from a regional taxation office relating to
duties for the 2000 fiscal year for approximately $6.0 million. The substance of
the assessment was that the Mexican tax authorities adopted the position that
Canadian-made textiles shipped to Gildan Mexico for sewing processing had not
subsequently been exported from Mexico. Gildan Mexico appealed the assessment
and was successful in obtaining a judgement in its favour. Notwithstanding the
judgement, the regional Mexican taxation office issued a new assessment in March
2005, and increased the assessed amount to approximately $7.1 million, primarily
comprised of interest and late payment penalties. Shortly after receiving the
second assessment, Gildan Mexico again filed an appeal. In July 2006, Gildan
Mexico received notification that its appeal of the second assessment for fiscal
2000 was unsuccessful. We have received legal opinions that the tax assessment
is without merit under Mexican law governing re-export from maquiladora
operations. Additionally, Gildan Mexico, a maquiladora operation, has provided
documentation to establish that the textiles imported into Mexico for sewing
were subsequently exported to the United States and Canada. We are pursuing all
available avenues to resolve this matter in our favour. At the present time, the
Mexican authorities are not attempting to enforce payment of this tax
assessment. We expect to be successful in our efforts to clarify and resolve
this matter and, accordingly, no provision has been made in the accounts for
this potential liability.
Outstanding Share Data

Our common shares are listed on the New York Stock Exchange and the Toronto
Stock Exchange (GIL).
As of November 30, 2006, there were 60,138,612 common shares
issued and outstanding along with 501,343 stock options and 453,872 dilutive
restricted share units outstanding. Each stock option entitles the holder to
purchase one common share at the end of the vesting period at a pre-determined
option price. Each restricted share unit entitles the holder to receive one
common share from treasury at the end of the vesting period, without any
monetary consideration being paid to the Company. However, the vesting of 50% of
the restricted share grant is dependent upon the financial performance of the
Company relative to a benchmark group of Canadian publicly-listed companies.
The Board of Directors has approved the renewal of the
Company's normal course issuer bid, subject to obtaining final approval from the
Toronto Stock Exchange, in order to repurchase a maximum of 1,000,000 common
shares in the open market commencing December 22, 2006 and ending December 21,
2007. This represents less than 2.0% of the total common shares issued and
outstanding. No shares had been repurchased under the previous bid.
Stock Split
On May 4, 2005, the Board of Directors of the Company
declared a two-for-one stock split, effected in the form of a stock dividend,
applicable to all of our issued and outstanding common shares and payable to
shareholders of record on May 20, 2005. All earnings per share data in this MD&A
are stated after the stock split.Outlook
Recap of Fiscal 2006 GuidanceOur original diluted EPS guidance for the 2006 fiscal year
was approximately $1.85. This guidance was based on anticipated sales growth of
approximately 20% and an assumed reduction in average selling prices of
approximately 1.5%. This represented diluted EPS growth of 29.4% over fiscal
2005 reported EPS, and 18.6% growth over adjusted diluted EPS of $1.56 excluding
restructuring and other charges from the prior year EPS.
On February 1, 2006, when we reported our results for our
first fiscal quarter, we increased our guidance for fiscal 2006 diluted EPS to
approximately $1.90, due to more favourable than anticipated results in the
first fiscal quarter. The increase in adjusted diluted EPS was primarily
attributable to more favourable selling price realizations in the first quarter
of the fiscal year.
On May 4, 2006, when we reported our second quarter results,
we further increased our adjusted diluted EPS guidance for fiscal 2006 to $1.96
as a result of more favourable results in the second quarter of the year. The
projected diluted EPS for the second half of fiscal 2006 reflected our revised
assumption of a 2% reduction in pricing compared with the second half of last
year and lower unit sales volumes than previously projected. However, these
factors were expected to be offset by the benefit of more favourable product mix
and by increased manufacturing efficiencies.
On June 20, 2006, in conjunction with the announcement of the
acquisition of Kentucky Derby, we increased our full year guidance to diluted
EPS of $2.00 due to more favourable product mix.
On August 3, 2006, when we announced our third quarter
results, we further increased our full year diluted EPS guidance to reflect more
favourable than anticipated third quarter results and the assumed continuation
in the fourth quarter of more favourable manufacturing efficiencies and
product-mix, partially offset by the projected continuation of more unfavourable
industry pricing. The revised diluted EPS guidance of $2.07 included a $0.02
charge to comply with the employment contract of the former Chairman and
Co-Chief Executive Officer of the Company. Before this charge, adjusted diluted
EPS for fiscal 2006 was projected at $2.09.

---

34  Gildan 2006 Annual
    Report

|MD&A                                                                                      | 
|----------------------------------------------------------------------------------------- | 
|Management's Discussion and
    Analysis of Financial Condition and Results of Operations

On September 27, 2006, prior to participating at an investor
conference, we announced the restructuring of our Canadian manufacturing
facilities and reconfirmed our annual diluted EPS guidance before restructuring
and other charges. Adjusted diluted EPS guidance of $2.09 reflected projected
EPS for fiscal 2006 before the anticipated charge of $0.28 for the announced
restructuring of our Canadian manufacturing facilities and the $0.02 charge to
comply with the employment contract of the former Chairman and Co-Chief
Executive Officer of the Company.

Our actual diluted EPS for fiscal 2006 was $1.76, or $2.09
excluding the impact of restructuring and other charges, in line with our
guidance for the year.

Outlook 2007

We are projecting diluted EPS of approximately $2.55 for
fiscal 2007. Our fiscal 2007 guidance continues to include approximately $0.06
per share of accelerated depreciation to reflect the change in the estimated
economic lives of our remaining Canadian textile and related manufacturing
assets. Prior to this additional depreciation charge, adjusted diluted EPS for
fiscal 2007 is projected to be approximately $2.61, up from $2.56 per share
originally projected on September 27, 2006. The projected $0.05 per share impact
of the acquisition of Kentucky Derby was not included in the original guidance.

Our guidance for fiscal 2007 assumes that the acquisition of
Kentucky Derby has a negligible impact on EPS until the fourth quarter of the
fiscal year. By the end of fiscal 2007, the annualized impact of cost reductions
from the integration of Kentucky Derby into Gildan is expected to be in excess
of $0.15 per share. We continue to project that we will achieve annual cost
reduction synergies of $0.30 per share, once the integration process is
completed during fiscal 2008 and we have achieved a globally competitive cost
structure for our sock manufacturing operations.

Our guidance for fiscal 2007 assumes growth in sales of
approximately 26% compared to fiscal 2006, to approximately $970 million. Unit
sales growth is projected at over 55%, including approximately 25 million dozens
of socks. Our guidance is also based on an assumed year-over-year reduction in
activewear selling prices of approximately 2.5% in fiscal 2007 as we continue to
drive further market share penetration and enter the mass-market retail channel.

Diluted EPS for the first quarter of fiscal 2007, before the
additional depreciation charge, are projected to be the same as in the first
quarter of fiscal 2006, at $0.27. Higher unit sales volume growth in the first
quarter is projected to be offset by lower gross margins and higher SG&A
expenses. In particular, the first quarter is impacted by significant
year-over-year increases in cotton costs, compared with a low point in cotton
prices in the first quarter of last year. Also, the positive impact of unit
volume growth is lower than in other quarters, as the first quarter is
seasonally the lowest sales volume quarter of the fiscal year.

After the first quarter, in addition to the more significant
impact of sales volume growth, gross margins for activewear are expected to
increase, both relative to the first quarter as well as to the corresponding
quarters in fiscal 2006. In the second half of fiscal 2007, cotton costs are
expected to be comparable to the second half of fiscal 2006. Also, throughout
fiscal 2007 we expect to realize significant manufacturing efficiencies from the
continuing ramp-up of the Dominican Republic textile facility and the
rationalization of our Canadian textile manufacturing announced on September 27,
2006, which are expected to more than offset the projected 2.5% reduction in
selling prices. In addition, gross margins for the sock business are expected to
increase in successive quarters as the Company progresses with the integration
of Kentucky Derby.

We are projecting capital expenditures of approximately $110
million in fiscal 2007, which we expect to fully finance out of our
internally-generated cash flow from operating activities.

We hereby refer to the Forward-Looking Statements cautionary notice on page
43.

Critical Accounting Estimates

Our significant accounting policies are described in Note 2
to our audited Consolidated Financial Statements. The preparation of financial
statements in conformity with Canadian GAAP requires estimates and assumptions
that affect our results of operations and financial position. By their nature,
these judgements are subject to an inherent degree of uncertainty and are based
upon historical experience, trends in the industry and information available
from outside sources. On an ongoing basis, management reviews its estimates and
actual results could differ from those estimates.

Management believes that the following accounting estimates
are most significant to assist in understanding and evaluating our financial
results.

Sales Promotional Programs

At the time of sale, estimates are made for customer price
discounts and rebates based upon existing programs. Accruals required for new
programs, which relate to prior sales, are recorded at the time the new program
is introduced. Sales are recorded net of these program costs and a provision for
estimated sales returns, which is based on historical experience and other known
factors, and exclude sales taxes. If actual price discounts, rebates or returns
differ from estimates, significant adjustments to net sales could be required in
future periods.

---

Gildan 2006 Annual Report  35

|MD&A                                                                                      | 
|----------------------------------------------------------------------------------------- | 
|Management's Discussion and
    Analysis of Financial Condition and Results of Operations

Trade Accounts Receivable

Trade accounts receivable consist of amounts due from our
normal business activities. We maintain an allowance for doubtful accounts to
provide for credit losses. Our extension of credit and our determination of the
allowance for doubtful accounts involve judgement and is based on an evaluation
of each customer's financial condition and payment history. We regularly monitor
our credit risk exposure to our customers and take steps to mitigate the risk of
loss.

If the financial condition of our customers were to
deteriorate causing an impairment of their ability to make payments, additional
provisions for bad debts may be required in future periods. On the other hand,
if our ultimate recovery on the accounts we have reserved or written off exceeds
our estimates, we may decrease our reserves.

Fixed Assets

Our fixed assets are stated at cost less accumulated
depreciation, including asset impairment losses. Depreciation is calculated
using the straight-line method over the estimated useful lives of the assets.

On a regular basis, we review the estimated useful lives of
our fixed assets. Assessing the reasonableness of the estimated useful lives of
fixed assets requires judgement and is based on currently available information.
We also review our fixed assets for potential impairment whenever events and
changes in circumstances indicate that the carrying amounts of such assets may
not be recoverable. Impairment losses are recognized when the estimated
undiscounted future cash flows expected to result from the use of an asset and
its eventual disposition are less than its carrying amount. The amount of
impairment loss recognized is measured as the amount by which the carrying value
for an asset exceeds the fair value of the asset, with fair value being
determined based upon discounted cash flows or appraised values, depending on
the nature of the asset. In estimating future cash flows, the Company uses its
best estimates based on internal plans, which incorporate management's
judgements as to the remaining service potential of the fixed assets. Changes in
circumstances, such as technological advances and changes to our business
strategy can result in actual useful lives and future cash flows differing
significantly from our estimates. Revisions to the estimated useful lives of
fixed assets or future cash flows constitute a change in accounting estimate and
are applied prospectively.

Cotton and Yarn Procurements

We contract to buy cotton and yarn with future delivery dates
at fixed prices in order to reduce the effects of fluctuations in the prices of
cotton used in the manufacture of our products. These contracts are not used for
trading purposes. We commit to fixed prices on a percentage of our cotton and
yarn requirements up to eighteen months in the future. If market prices for
cotton and yarn fall significantly below the committed future purchase prices,
we estimate the costs of cotton and yarn that are not recoverable in future
sales of finished goods, and record a charge to earnings.

Income Taxes

We utilize the asset and liability method for accounting for
income taxes which requires the establishment of future tax assets and
liabilities, measured at substantively enacted tax rates, for all temporary
differences caused when the tax bases of assets and liabilities differ from
those reported in our audited Consolidated Financial Statements.

Our future income tax assets are recognized only to the
extent that, in management's opinion, it is more likely than not that the future
income tax assets will be realized. If the realization is not considered to be
more likely than not, a valuation allowance is provided. Management's opinion is
based on certain estimates or assumptions. In addition, income tax rules and
regulations in the countries in which the Company operates and income tax
treaties between these countries are subject to interpretation, and require
estimates and assumptions in determining the Company's consolidated income tax
provision that may be challenged by the taxation authorities. If these estimates
or assumptions change in the future, we may be required to reduce or increase
the value of the future income tax assets and liabilities resulting in a
significant income tax expense or recovery in future periods. We evaluate our
future income tax assets and liabilities on a quarterly basis.

Recent Accounting Pronouncements

Comprehensive Income / Financial Instruments / Hedges

During 2005, the Canadian Institute of Chartered Accountants
(CICA) released new accounting standards for the recognition, measurement and
disclosure of financial instruments, hedges and comprehensive income, as
follows:

- 1530, Comprehensive Income;
- 3855, Financial Instruments  Recognition and Measurement; and
- 3865, Hedges

Under these new standards, all financial assets should be
measured at fair value with the exception of loans, receivables and investments
that are intended to be held to maturity and certain equity investments, which
should be measured at cost. Similarly, all financial liabilities should be
measured at fair value when they are held for trading or when they are
derivatives.

Gains and losses on financial instruments measured at fair
value will be recognized in the income statement in the periods they arise with
the exception of gains and losses arising from:

- financial assets held for sale, for which unrealized changes in fair value
  are initially reported in other comprehensive income and subsequently
  reclassified to net income when the financial assets are sold or become
  impaired; and

---

36  Gildan 2006 Annual
    Report

|MD&A                                                                                      | 
|----------------------------------------------------------------------------------------- | 
|Management's Discussion and
    Analysis of Financial Condition and Results of Operations

- certain financial instruments that qualify as hedging items under the
  application of hedge accounting, for which unrealized changes in fair value
  are initially reported in other comprehensive income and subsequently
  reclassified to net income when the offsetting loss or gain on the hedged item
  affects net income.

Other comprehensive income comprises revenues, expenses,
gains and losses that are excluded from net income under generally accepted
accounting principles, but are added to or deducted from net income in computing
and reporting comprehensive income. Unrealized gains and losses on qualifying
hedging instruments, translation of self-sustaining foreign operations, and
unrealized gains or losses on financial instruments held for sale will be
included in other comprehensive income and reclassified to net income when
realized. Comprehensive income and its components will be a new financial
statement required under the new standards.

These new standards will be effective for our 2007 fiscal
year. We do not expect the adoption of these standards to have any material
impact on our results of operations or financial position.

Equity

The CICA has issued Handbook Section 3251, Equity, which
establishes standards for the presentation of equity and changes in equity
during the reporting period. The main feature of this Section is a requirement
for an enterprise to present separately each of the changes in equity during the
period, including comprehensive income, as well as components of equity at the
end of the period. This new standard is effective for interim and annual
financial statements relative to fiscal years beginning on or after October 1,
2006 and therefore will be effective for our 2007 fiscal year. We do not expect
the adoption of this standard to have any material impact on our results of
operations or financial position.

Related Party Transactions

We have transactions with Frontier which manages the
operations of CanAm. These transactions are in the normal course of operations
and are measured at the exchange amount, which is the amount of consideration
established and agreed to by the related parties. Total purchases of yarn from
Frontier were $100.4 million in fiscal 2006 (2005  $106.8 million), along with
$0.8 million relating to management fees (2005  $0.6 million). As at October 1,
2006, we had an outstanding payable to Frontier of $18.9 million (2005  $15.6
million).

During fiscal 2005, Frontier contributed $2.5 million in cash to CanAm.

Disclosure Controls

Our disclosure controls and procedures are designed to ensure
that information required to be disclosed in our reports filed with securities
regulatory authorities is recorded, processed, summarized, and reported within
prescribed time periods and is accumulated and communicated to our management,
including our Chief Executive Officer and our Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure.

An evaluation was carried out under the supervision of, and
with the participation of, our management, including our Chief Executive Officer
and our Chief Financial Officer, of the effectiveness of our disclosure controls
and procedures as of October 1, 2006. Based on that evaluation, our Chief
Executive Officer and our Chief Financial Officer concluded that our disclosure
controls and procedures were effective as of the end of such period.

Internal Control Over Financial Reporting

Management's Annual Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and
maintaining adequate internal control over financial reporting, as such term is
defined in Rules 13a-15(f) and 15d-15(f) under the U.S.Securities Exchange
Act of 1934.

Our internal control over financial reporting includes those
policies and procedures that: (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of our assets; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that our receipts
and expenditures are being made only in accordance with authorizations of our
management and directors; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition
of our assets that could have a material effect on the financial statements.

Under the supervision and with the participation of our Chief
Executive Officer and our Chief Financial Officer, management conducted an
evaluation of the effectiveness of our internal control over financial
reporting, as of October 1, 2006, based on the framework set forth in Internal Control-Integrated Frameworkissued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Based on its evaluation under
this framework, management concluded that our internal control over financial
reporting was effective as of that date.

---

Gildan 2006 Annual Report  37

|MD&A                                                                                      | 
|----------------------------------------------------------------------------------------- | 
|Management's Discussion and
    Analysis of Financial Condition and Results of Operations

Management's assessment of the effectiveness of our internal
control over financial reporting as of October 1, 2006 excluded Kentucky Derby,
which we acquired on July 6, 2006. Kentucky Derby is a wholly-owned subsidiary
of ours whose total assets and total net sales represented less than 11% of our
consolidated total assets and less than 4% of our consolidated net sales,
respectively, as of and for the year ended October 1, 2006. Companies are
allowed to exclude acquisitions from their assessment of internal control over
financial reporting during the first year of an acquisition while integrating
the acquired company under guidelines established by the Securities and Exchange
Commission.

Attestation Report of Registered Public Accounting Firm

KPMG LLP, an independent registered public accounting firm,
which audited and reported on our financial statements in this Annual Report,
has issued an attestation report on management's assessment of our internal
control over financial reporting as of October 1, 2006.

Changes in Internal Controls Over Financial Reporting

During fiscal 2006, we made improvements to our internal
controls over financial reporting in preparation for our first annual management
report on internal controls over financial reporting.

The design of any system of controls and procedures is based
in part upon certain assumptions about the likelihood of certain events. There
can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions, regardless of how remote.

Risks and Uncertainties

The Company is subject to a variety of business risks. The
risks described below are risks that could materially affect our business,
financial condition and results of operations, but are not necessarily the only
ones facing the Company. Additional risks that are not currently known to us or
that we currently deem immaterial, could also materially and adversely affect
our business.

Our ability to implement our strategies and plans

While we believe we can leverage our existing core
competencies and successful business model in the mass-market retail channel, we
cannot assure you that our strategy to develop our vertically-integrated
manufacturing hubs, which has allowed us to provide our customers with low
prices, consistent product quality and a reliable supply chain, and has been the
main reason that we have been able to rapidly increase our market presence and
establish our market leadership in the imprinted sportswear market, will be
successful in the retail channel.

In addition to our recent acquisition of Kentucky Derby, we
may invest in business acquisitions that we assess to be complementary to our
business or that could contribute to the acceleration of our growth strategy,
and from which we would expect to realize

economic benefits through the integration of such
acquisitions into our operations. There can be no assurance that we would be
successful in completing and integrating such acquisitions into our own
operations or that we would realize the anticipated benefits from such
acquisitions.

Our industry is competitive

The apparel market for our products is highly competitive.
Competition is generally based upon price, with reliable quality and service
also being key requirements for success. Our primary competitors in North
America are the major U.S.-based manufacturers of basic branded activewear for
the wholesale and retail channels, such as Fruit of the Loom, Inc., Hanesbrands
Inc., the Jerzees division of Russell Corporation, which was recently acquired
by Berkshire Hathaway Inc. which owns Fruit of the Loom, Inc., Delta Apparel,
Inc., and Anvil Knitwear, Inc. The competition in the European wholesale
imprinted activewear market is similar to that in North America, as we compete
primarily with the European divisions of the larger U.S.-based manufacturers. In
Europe, we also have large competitors that do not have integrated manufacturing
operations and source products from contractors in Asia. In addition, we face
the threat of increasing global competition.

Our ability to remain competitive in the areas of quality,
price, service, marketing, product development, manufacturing and distribution
will, in large part, determine our future success. We cannot assure you that we
will be able to continue to compete successfully.

Our industry is subject to pricing pressures

Prices in our industry have been declining over the past
several years primarily as a result of passing cost reductions through into
lower selling prices. Such cost reductions result from factors which include the
relocation of manufacturing operations to lower-cost labour environments
offshore, the addition of new capacity using state-of-the-art manufacturing
technology, and lower raw material costs.

In the future, our financial performance may be negatively
affected if we are forced to reduce our prices and we cannot reduce our
production costs, or if our production costs increase and we cannot increase our
prices.

Our success depends on our ability to anticipate evolving consumer
preferences and trends

While we currently focus on basic, non-fashion products, the
apparel industry, particularly within the retail channel, is subject to evolving
consumer preferences and trends. Our success may be impacted by changes in
consumer preferences which do not fit with Gildan's core competency of
large-scale marketing and manufacturingof basic, non-fashion apparel products
for customers requiring an efficient supply chain and consistent product quality
for high-volume automatic replenishment programs. This could have a material
adverse effect on our business, results of operations and financial condition.

---

38  Gildan 2006 Annual
    Report

|MD&A                                                                                      | 
|----------------------------------------------------------------------------------------- | 
|Management's Discussion and
    Analysis of Financial Condition and Results of Operations

Our operations are subject to environmental regulation

We are subject to various environmental and occupational
health and safety laws and regulations in our operations in Canada, the United
States and offshore. Future events, such as:

- a change in existing laws and regulations;
- the enactment of new laws and regulations;
- a release of hazardous substances on or from our properties
  or any associated offsite disposal location; or
- the discovery of contamination from current or prior
  activities at any of our properties

may give rise to compliance or environmental remediation costs that could
have a material adverse effect on our business.

We rely on a relatively small number of significant customers

We sell our products to approximately 180 customers. In
fiscal 2006, our largest customer accounted for 28.2% (2005 28.2%) of sales,
and our top ten customers accounted for 66.0% (2005  63.8%) of total sales. We
expect that these customers will continue to represent a significant portion of
our sales in the future, together with a relatively small number of large
mass-market retailers. If any of our significant customers substantially reduce
their purchases or cease to buy from us and we cannot replace that business with
sales to other customers on similar terms, our business would be materially
adversely affected.

Our customers do not commit to purchase minimum quantities

Our contracts with our customers do not require them to
purchase a minimum quantity of our products. If any of our customers experiences
a significant business downturn or fails to remain committed to our products,
they may reduce or discontinue purchases from us. Although we have maintained
long-term relationships with many of our wholesale distributor customers, we
cannot assure you that historic levels of business from any of our customers
will continue or increase in the future.

We are exposed to concentrations of credit risk

The Company's financial instruments that are exposed to
concentrations of credit risk consist primarily of cash equivalents and trade
receivables. The Company invests available cash in short-term deposits with
major North American and European financial institutions.

The Company's extension of credit involves considerable
judgement and is based on an evaluation of each customer's financial condition
and payment history. Adverse changes in our customers' financial position could
cause us to limit or discontinue business with that customer, require us to
assume more credit risk relating to that customer's future purchases or limit
our ability to collect accounts receivable relating to previous purchases by
that customer, all of which could have a material adverse effect on our
business, results of operations and financial condition. The Company regularly
monitors its credit risk exposure to its customers and takes steps to mitigate
the risk of loss. As at October 1, 2006, the Company's top ten customers
accounted

We are subject to international trade regulation that is becoming
increasingly liberalized

The textile and apparel industries of developed countries
(including Canada, the United States and Europe) have historically received a
relatively higher degree of trade protection than other industries.

Since January 2005, quotas on imports of textiles and apparel
from member countries of the World Trade Organization (WTO) have been
eliminated, except that China will continue to be subject to quotas on its
textile and apparel exports until the end of 2008. Additionally, the developed
countries have implemented regional trade agreements and programs, such as the
North American Free Trade Agreement (NAFTA), the Caribbean Basin Trade
Partnership Act (CBTPA) and the Central America Free Trade Agreement (CAFTA),
which allow qualifying textiles and apparel from participating countries
duty-free access to developed countries' markets. One of the newest programs, CAFTA, was adopted to strengthen and develop economic relations among its
parties. We have situated our manufacturing facilities in strategic locations to
take advantage of these trade liberalization measures, which enable us to be
competitive in our markets.

CAFTA allows the United States to impose safeguards in the
form of full or partial restoration of normal duties if increased imports cause
or threaten serious damage to domestic industry. There can be no assurance that
CAFTA safeguards or other developments in trade regulation would not adversely
impact our business.

The Company is subject to customs audits in the various
countries in which it operates. The Company believes that its customs compliance
programs are effective, although we cannot predict the likelihood or outcome of
any governmental audit.

We currently pay income tax at a comparatively low effective rate, which
could change in the future

The Company's sales structure results in the income generated
from its international sales being subject to relatively low income tax rates.
The structure is supported by current domestic laws in the countries in which
the Company operates, as well as through the application of income tax treaties
between various countries in which the Company operates. The Company conducts
annual transfer pricing studies to substantiate the transactions between the
various related parties within the Company.

---

Gildan 2006 Annual Report  39

|MD&A                                                                                      | 
|----------------------------------------------------------------------------------------- | 
|Management's Discussion and
    Analysis of Financial Condition and Results of Operations

The Company is subject to government audits in the various
countries in which it operates. The final result of any audits undertaken by
taxation authorities may vary compared to the estimates and assumptions used by
management in determining the Company's consolidated tax provision. Depending on
the ultimate outcome of any such audit, there may be a material impact on the
Company's consolidated tax provision.

The Company operates under free trade and export processing
zones in various countries in Central America and the Caribbean Basin. Under the
free trade zone rules, the Company is not subject to income tax in these
countries. Any changes to the free trade zone rules or the free trade zone
status of any one of the countries in which we operate may impact the effective
tax rate of the Company.

Any unanticipated changes to either current domestic laws in
the countries in which the Company operates, or any changes to the income tax
treaties the Company currently relies on, could also impact the effective tax
rate of the Company.

The price of the raw materials we buy is prone to significant fluctuations
and volatility

Cotton is the primary raw material used in the manufacture of
our products. We also purchase chemicals, dyestuffs and trims through a variety
of suppliers. The Company purchases cotton through its yarn-spinning joint
venture, and also purchases processed cotton yarn from outside vendors, at
prices that vary depending on the actual price of cotton. The price of cotton
fluctuates and is affected by weather, consumer demand, speculation on the
commodities market, the relative valuations and fluctuations of the currencies
of producer versus consumer countries and other factors that are generally
unpredictable and beyond our control. In addition, fluctuations in crude oil or
petroleum prices may also influence the prices of related items used in our
business, such as chemicals, dyestuffs and trims. The Company enters into
futures contracts and makes other arrangements to establish firm prices for
cotton and cotton yarn for which it will ultimately take delivery in order to
mitigate the effect of price fluctuations. For future deliveries with a fixed
price, the Company will not be able to benefit from price decreases but will be
protected against price increases. Conversely, in the event that we have not
entered into sufficient cotton futures contracts or made other arrangements to
lock in the price of cotton yarn in advance of delivery, we will not be
protected against price increases, but will be in a position to benefit from any
price decreases.

Without taking into account the impact of futures contracts,
a change of $0.01 per pound in cotton prices would affect the Company's annual
raw material costs by approximately $3.2 million, at estimated production levels
for fiscal 2007. The ultimate effect of this change on the Company's earnings
cannot be quantified, as the relationship between movements in cotton prices and
movements in industry selling prices cannot be predicted with any certainty.

Our operations are subject to political, social and economic risks

The majority of our products are now manufactured and sewn in
Central America, the Caribbean Basin and Mexico. The Company is currently adding
significant new capacity and making further capital investments in Central
America and the Caribbean Basin. Some of these countries have experienced
political, social and economic instability, and we cannot be certain of their
future stability.

Additional events that could disrupt our supply chain,
interrupt production in our offshore facilities or increase our cost of sales
include:

- political instability, labour unrest, war or terrorism;
- disruptions in shipping and freight forwarding services;
- increases in oil prices and energy costs, which would
  increase transportation costs;
- interruptions in the availability of basic services and
  infrastructure, including power and water shortages; and
- fire or natural disasters, such as hurricanes, floods and
  earthquakes.

Such conditions or events could have material adverse effects on our
business, results of operations and financial condition.

Our industry is subject to fluctuations in sales demand

Demand for our products may vary from year to year. We must
appropriately balance our inventory with our ability to meet market demand.
Based on discussions with our customers and internally generated projections
reflecting our analysis of factors impacting industry demand at the beginning of
each fiscal year, we produce and store finished goods inventory to meet the
expected demand for delivery. If, after producing and storing inventory in
anticipation of deliveries, demand is significantly less than expected, we may
have to hold inventory for extended periods of time, or sell excess inventory at
reduced prices. In either case, our profits would be reduced. Excess inventory
could also result in slower production, lower plant and equipment utilization
and lower fixed operating cost absorption, all of which would have a negative
impact on our business, results of operations or financial condition.

Our business operations significantly rely on our information systems

We depend on information systems to manage our inventory,
process transactions, respond to customer inquiries, purchase, sell and ship
goods on a timely basis and maintain cost-effective operations. There can be no
assurance that we will not experience operational problems with our information
systems as a result of system failures, viruses, or other causes. Any material
disruption or slowdown of our systems could cause operational delays that could
have a material adverse effect on our business, results of operation and
financial condition.

---

40  Gildan 2006 Annual
    Report

|MD&A                                                                                      | 
|----------------------------------------------------------------------------------------- | 
|Management's Discussion and
    Analysis of Financial Condition and Results of Operations

Foreign currency risk

Effective fiscal 2004, the functional and reporting currency
of the Company was changed from the Canadian dollar to the U.S. dollar. This
change was made as the majority of the Company's sales revenues are denominated
in U.S. dollars, while its manufacturing operations are increasingly diversified
outside Canada. However, as the Company operates as an international business,
its financial results continue to be exposed to the effects of changes in
foreign currency (non-U.S. dollar) exchange rates. The Company's exposure
relates primarily to changes in the U.S. dollar/Canadian dollar, U.S.
dollar/Honduras lempira, U.S. dollar/British pound and U.S. dollar/Euro exchange
rates. Significant fluctuations in these exchange rates could materially impact
our future results of operations.

Our operations could be affected by changes in our relationship with our
employees or changes to domestic and foreign employment regulations

We employ over 15,000 employees worldwide. As a result,
changes in domestic and foreign laws governing our relationships with our
employees, including wage and hour laws and regulations, fair labour standards,
overtime pay, unemployment tax rates, workers' compensation rates and payroll
taxes, would likely have a direct impact on our operating costs. The majority of
our employees are employed outside of Canada and the United States. A
significant increase in wage rates in the countries we operate could have a
material impact on our operating costs.

The Company has been able to operate in a productive manner
in all of its manufacturing facilities without experiencing labour disruptions,
such as strikes or work stoppages. If labour relations were to change or
deteriorate, this could adversely affect the productivity and cost structure of
the Company's manufacturing operations.

We may suffer negative publicity if we, or our third-party contractors
violate labour laws or engage in practices that are viewed as unethical

We are committed to ensuring that all of our manufacturing
facilities comply with our strict internal code of conduct, local and
international laws, and the codes to which we subscribe, including those of
Worldwide Responsible Apparel Production (WRAP) and the Fair Labour Association
(FLA). While the majority of our manufacturing operations are conducted through
company-owned facilities, we also utilize third-party contractors to complement
our vertically-integrated production. We have engaged Verité, a globally
respected training and auditing organization, to carry out a comprehensive
program of training and auditing at all of our Company-owned and contractor
facilities. In addition, we have recruited an internationally respected Director
of Corporate Social Responsibility to develop the Company's compliance programs.
However, if one of our own manufacturing operations or one of our third-party
contractors violates or is accused of violating local or international labour
laws or other applicable regulations, or engages in labour or other practices
that would be viewed, in any market in which our products are sold, as
unethical, we could suffer negative publicity which could tarnish our reputation
or result in a loss of sales that could have a material adverse effect on our
business, results of operations and financial condition.

We depend on key management

Our success depends upon the continued contributions of our
key management, some of whom have unique talents and experience and would be
difficult to replace. The loss or interruption of the services of a key
executive could have a material adverse effect on our business during the
transitional period that would be required for a successor to assume the
responsibilities of the key management position. Our future success will also
depend on our ability to attract and retain key managers, sales people and
others. We may not be able to attract or retain these employees, which could
adversely affect our business.

---

Gildan 2006 Annual Report  41

|MD&A                                                                                      | 
|----------------------------------------------------------------------------------------- | 
|Management's Discussion and
    Analysis of Financial Condition and Results of Operations

Reconciliation and Definition of Non-GAAP Measures

We use non-GAAP measures to assess our operating performance
and financial condition. The terms and definitions of the non-GAAP measures used
in this report and a reconciliation of each non-GAAP measure to the most
directly comparable GAAP measure are provided below. The non-GAAP measures are
presented on a consistent basis for all periods presented in this MD&A. These
non-GAAP measures do not have any standardized meanings prescribed by Canadian
GAAP and are therefore unlikely to be comparable to similar measures presented
by other companies. Accordingly, they should not be considered in isolation.

Adjusted Net Earnings and Adjusted Diluted EPS

To measure our performance from one period to the next,
without the variations caused by the impacts of restructuring and other charges
as discussed on page 26, and the change in functional currency, as discussed on
page 28, management uses adjusted net earnings and adjusted diluted earnings per
share, which is calculated as net earnings and earnings per share excluding
these items. We exclude these items because they affect the comparability of our
financial results and could potentially distort the analysis of trends in our
business performance. Excluding these items does not imply they are necessarily
non-recurring.

(in $ millions, except per share amounts)

|2006                                                                 | Audited | Adjusted 
|-------------------------------------------------------------------- | ------- | ---------
|                                                                     |         |          
|Sales                                                                | 773.2   |          
|Cost of sales                                                        | 521.1   |          
|Gross profit                                                         | 252.1   |          
|                                                                     |         |          
|Selling, general and
    administrative expenses                     | 84.4    |          
|Restructuring and other charges                                      | 20.4    | (20.4)(1)
|                                                                     | 147.3   | 20.4     
|Depreciation and amortization                                        | 32.4    |          
|Interest, net                                                        | 3.1     |          
|Non-controlling interest in
    income of consolidated joint venture | 0.2     |          
|Earnings before income taxes                                         | 111.6   | 20.4     
|Income taxes                                                         | 4.8     | 0.4 (1)  
|Net earnings                                                         | 106.8   | 20.0     
|                                                                     |         |          
|Basic EPS                                                            | 1.78    | 0.33     
|Diluted EPS                                                          | 1.76    | 0.33     

Certain minor rounding variances exist between the financial statements and
this summary.

(in $ millions, except per share amounts)

|2005                                                                                          | Audited |           | Adjusted
|--------------------------------------------------------------------------------------------- | ------- | --------- | --------
|                                                                                              |         |           |         
|Sales                                                                                         | 653.9   |           | 653.9   
|Cost of sales                                                                                 | 450.6   |           | 450.6   
|Gross profit                                                                                  | 203.3   |           | 203.3   
|Selling, general and
    administrative expenses                                              | 73.8    |           | 73.8    
|Restructuring and other charges                                                               | 11.8    | (11.8)(1) |        
|                                                                                              | 117.7   | 11.8      | 129.5   
|Depreciation and amortization                                                                 | 25.6    |           | 25.6    
|Interest, net                                                                                 | 4.6     |           | 4.6     
|Non-controlling
    interest in income of consolidated joint venture                          | 0.1     |           | 0.1     
|Earnings before income taxes                                                                  | 87.4    | 11.8      | 99.2    
|Income taxes                                                                                  | 1.4     | 3.9(1)    | 5.3     
|Net earnings                                                                                  | 86.0    | 7.9       | 93.9    
|                                                                                              |         |           |         
|Basic EPS                                                                                     | 1.44    | 0.13      | 1.57    
|Diluted EPS                                                                                   | 1.43    | 0.13      | 1.56    
|                                                                                              |         |           |         
|Certain minor
    rounding variances exist between the financial statements and this summary.
|                                                                                              |         |           |         
|                                                                                              |         |           |         
|(in $
    millions, except per share amounts)                                                 |         |          
|2004                                                                                          | Audited |           | Adjusted
|                                                                                              |         |           |         
|Sales                                                                                         | 533.4   |           | 533.4   
|Cost of sales                                                                                 | 378.7   | (3.3)(2)  | 375.4   
|Gross profit                                                                                  | 154.7   | 3.3       | 158.0   
|Selling, general and
    administrative expenses                                              | 58.3    |           | 58.3    
|Restructuring and other charges                                                               | 4.6     | (4.6)(1)  |        
|                                                                                              | 91.8    | 7.9       | 99.7    
|Depreciation and amortization                                                                 | 22.3    |           | 22.3    
|Interest, net                                                                                 | 6.2     |           | 6.2     
|Earnings before income taxes                                                                  | 63.3    | 7.9       | 71.2    
|Income taxes                                                                                  | 3.1     | 1.4(1)    | 4.5     
|Net earnings                                                                                  | 60.2    | 6.5       | 66.7    
|                                                                                              |         |           |         
|Basic EPS                                                                                     | 1.02    | 0.11      | 1.13    
|Diluted EPS                                                                                   | 1.01    | 0.11      | 1.12    

Certain minor rounding variances exist between the financial statements and
this summary.

(1) Adjustment to remove restructuring and other charges, and the income tax
effect thereon. See page 26. 
(2) Adjustment to remove the impact of the change in functional currency. See
page 28.

---

42  Gildan 2006 Annual
    Report

|MD&A                                                                                      | 
|----------------------------------------------------------------------------------------- | 
|Management's Discussion and
    Analysis of Financial Condition and Results of Operations

EBITDA

EBITDA is calculated as earnings before interest, taxes and
depreciation and amortization and excludes the impacts of restructuring and
other charges, as discussed on page 26 and the change in functional currency, as
discussed on page 28. We use EBITDA, among other measures, to assess the
operating performance of our business. We also believe this measure is commonly
used by investors and analysts to measure a company's ability to service debt
and to meet other payment obligations, or as a common valuation measurement. We
exclude depreciation and amortization expenses, which are non-cash in nature and
can vary significantly depending upon accounting methods or non-operating
factors such as historical cost. Excluding these items does not imply they are
necessarily non-recurring.

(in $ millions)

|                                                                     | 2006  | 2005  | 2004
|-------------------------------------------------------------------- | ----- | ----- | ----
|                                                                     |       |       |     
|Net earnings                                                         | 106.8 | 86.0  | 60.2
|Restructuring and other
    charges                                  | 20.4  | 11.8  | 4.6 
|Change in functional currency                                        |      |      | 3.3 
|Depreciation and amortization                                        | 32.4  | 25.6  | 22.3
|Interest, net                                                        | 3.1   | 4.6   | 6.2 
|Income taxes                                                         | 4.8   | 1.4   | 3.1 
|Non-controlling interest in
    income of consolidated joint venture | 0.2   | 0.1   |    
|EBITDA                                                               | 167.7 | 129.5 | 99.7

Certain minor rounding variances exist between the financial statements and
this summary.

Free Cash Flow

Free cash flow is defined as cash from operating activities
including net changes in non-cash working capital balances, less cash flow used
in investing activities excluding business acquisitions. We consider free cash
flow to be an important indicator of the financial strength and performance of
our business, because it shows how much cash is available after capital
expenditures to repay debt and to reinvest in our business. We believe this
measure is commonly used by investors and analysts when valuing a business and
its underlying assets.

(in $ millions)

|                                     | 2006   | 2005   | 2004  
|------------------------------------ | ------ | ------ | ------
|                                     |        |        |       
|Cash flows from operating activities | 94.7   | 93.2   | 58.9  
|Cash flows from investing activities | (96.1) | (83.8) | (53.8)
|Add back:                            |        |        |       
|Acquisition of Kentucky Derby        | 19.9   |       |      
|Free cash flow                       | 18.5   | 9.4    | 5.1   

Certain minor rounding variances exist between the financial statements and
this summary.

Total Indebtedness and Cash in Excess of Debt (Net Indebtedness)

We consider total indebtedness and net debt to be important indicators of the
financial leverage of the Company.

(in $ millions)

|                                          | 2006   | 2005   | 2004  
|----------------------------------------- | ------ | ------ | ------
|                                          |        |        |       
|Bank indebtedness                         | (3.5)  | (4.0)  | -     
|Current portion of long-term debt         | (21.8) | (19.8) | (18.6)
|Long-term debt                            | (12.0) | (27.3) | (38.0)
|Total indebtedness                        | (37.3) | (51.1) | (56.6)
|Cash and cash equivalents                 | 29.0   | 69.8   | 60.7  
|(Net indebtedness) cash in excess of debt | (8.3)  | 18.7   | 4.1   

Certain minor rounding variances exist between the financial statements and
this summary.

---

Gildan 2006 Annual Report  43

|MD&A                                                                                      | 
|----------------------------------------------------------------------------------------- | 
|Management's Discussion and
    Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

Certain statements included in this MD&A may constitute
"forward-looking statements" within the meaning of the U.S. Private
Securities Litigation Reform Act of 1995and Canadian securities legislation
and regulations, and are subject to important risks, uncertainties and
assumptions. This forward-looking information includes amongst others,
information with respect to our objectives and the strategies to achieve these
objectives, as well as information with respect to our beliefs, plans,
expectations, anticipations, estimates and intentions. Forward-looking
statements generally can be identified by the use of forward-looking terminology
such as "may", "will", "expect", "intend", "estimate", "anticipate", "plan",
"foresee", "believe" or "continue" or the negatives of these terms or variations
of them or similar terminology. We refer you to the Company's filings with the
Canadian securities regulatory authorities and the U.S. Securities and Exchange
Commission, as well as the "Risks and Uncertainties" section of this MD&A,
beginning on page 37, for a discussion of the various factors that may affect
the Company's future results. Material factors and assumptions that were applied
in drawing a conclusion or making a forecast or projection are also set out
throughout this document.

The results or events predicted in such forward-looking
information may differ materially from actual results or events. Material
factors, which could cause actual results or events to differ materially from a
conclusion, forecast or projection in such forward-looking information, include,
but are not limited to:

- general economic conditions such as currency exchange
  rates, commodity prices and other factors over which we have no control;
- the impact of economic and business conditions, industry
  trends and other external and political factors in the countries in which we
  operate;
- the intensity of competitive activity;
- changes in environmental, tax, trade and other laws and
  regulations;
- our ability to implement our strategies and plans;
- our ability to complete and successfully integrate
  acquisitions;
- changes in customer demand for our products and our ability
  to maintain customer relationships and grow our business;
- the seasonality of our business;
- our ability to attract and retain key personnel;
- changes in accounting policies; and
- disruption to manufacturing and distribution activities due
  to the impact of weather, natural disasters and other unforeseen adverse
  events.

This may cause the Company's actual performance and financial
results in future periods to differ materially from any estimates or projections
of future performance or results expressed or implied by such forward-looking
statements. Forward-looking statements do not take into account the effect that
transactions or non-recurring or other special items announced or occurring
after the statements are made have on the Company's business. For example, they
do not include the effect of business dispositions, acquisitions, other business
transactions, asset writedowns or other charges announced or occurring after
forward-looking statements are made. The financial impact of such transactions
and non-recurring and other special items can be complex and necessarily depends
on the facts particular to each of them.

We believe that the expectations represented by our
forward-looking statements are reasonable, yet there can be no assurance that
such expectations will prove to be correct. Furthermore, the forward-looking
statements contained in this report are made as of the date of this report, and
we do not undertake any obligation to update publicly or to revise any of the
included forward-looking statements, whether as a result of new information,
future events or otherwise unless required by applicable legislation or
regulation. The forward-looking statements contained in this report are
expressly qualified by this cautionary statement.

December 13, 2006

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