---

|44 Gildan 2006
    Annual Report
|---------------------------------
|Consolidated                     
|Financial Statements             

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The accompanying consolidated financial statements have been
prepared by management and approved by the Board of Directors of the Company.
The consolidated financial statements were prepared in accordance with
accounting principles generally accepted in Canada and, where appropriate,
reflect management's best estimates and judgements. Where alternative accounting
methods exist, management has chosen those methods deemed most appropriate in
the circumstances. Management is responsible for the accuracy, integrity and
objectivity of the consolidated financial statements within reasonable limits of
materiality, and for the consistency of financial data included in the text of
the Annual Report with that contained in the consolidated financial statements.

To assist management in the discharge of these
responsibilities, the Company maintains a system of internal controls over
financial reporting as described in "Management's Annual Report of Internal
Control Over Financial Reporting" on page 36 of this Annual Report.

The Company's Audit and Finance Committee is appointed by the
Board of Directors annually and is comprised exclusively of outside, independent
directors. The Audit and Finance Committee meets with management as well as with
the independent auditors and internal auditors to satisfy itself that management
is properly discharging its financial reporting responsibilities and to review
the consolidated financial statements and the independent auditors' report. The
Audit and Finance Committee reports its findings to the Board of Directors for
consideration in approving the consolidated financial statements for
presentation to the shareholders. The Audit and Finance Committee considers, for
review by the Board of Directors and approval by the shareholders, the
engagement or reappointment of the independent auditors. KPMG LLP have direct
access to the Audit and Finance Committee of the Board of Directors.

The consolidated financial statements have been independently
audited by KPMG LLP, Chartered Accountants, on behalf of the shareholders, in
accordance with Canadian generally accepted auditing standards and, with respect
to the consolidated financial statements for the year ended October 1, 2006, in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Their report outlines the nature of their audit and expresses
their opinion on the consolidated financial statements of the Company. In
addition, our auditors have issued an attestation report on management's
assessment of the Company's internal controls over financial reporting as of
October 1, 2006.

|(Signed: Glenn J.
    Chamandy)           | (Signed: Laurence G.
    Sellyn)              
|----------------------------------------- | ----------------------------------------------
|                                          |                                               
|Glenn J. Chamandy                         | Laurence G. Sellyn                            
|President and Chief
    Executive Officer | Executive
    Vice-President,                 
|                                          | Chief Financial and
    Administrative Officer
|December 6, 2006                          |                                               

---

46  Gildan 2006 Annual
    ReportREPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Shareholders and Board of Directors of Gildan
Activewear Inc.
We have audited the accompanying consolidated balance sheets
of Gildan Activewear Inc. and subsidiaries as of October 1, 2006 and October 2,
2005 and the related consolidated statements of earnings, retained earnings and
cash flows for the years ended October 1, 2006, October 2, 2005 and October 3,
2004. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with Canadian generally
accepted auditing standards. With respect to the consolidated financial
statements for the year ended October 1, 2006, we also conducted our audit in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of Gildan Activewear Inc. and subsidiaries as of October 1, 2006 and
October 2, 2005, and the results of their operations and their cash flows for
the years ended October 1, 2006, October 2, 2005 and October 3, 2004, in
conformity with Canadian generally accepted accounting principles.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the effectiveness of
Gildan Activewear Inc. and subsidiaries' internal control over financial
reporting as of October 1, 2006, based on criteria established in Internal
Control  Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission(COSO), and our report dated
December 6, 2006 expressed an unqualified opinion on management's assessment of,
and the effective operation of, internal control over financial reporting.(Signed: KPMG LLP)Chartered Accountants

Montreal, Canada 
December 6, 2006

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To the Shareholders and Board of Directors of Gildan Activewear Inc.

We have audited management's assessment, included in the
accompanying Management's Annual Report on Internal Control over Financial
Reporting appearing in Gildan Activewear Inc.'s (the "Company") Annual Report
for the year ended October 1, 2006, that the Company maintained effective
internal control over financial reporting as of October 1, 2006, based on
criteria established in Internal Control  Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission(COSO). As
described in Management's Annual Report on Internal Control over Financial
Reporting, management excluded the acquisition of Kentucky Derby Hosiery Co.,
Inc. and subsidiaries ("Kentucky Derby"), which occurred in July 2006, from the
scope of their assessment of internal controls over financial reporting.
Kentucky Derby is a wholly-owned subsidiary of the Company whose total assets
and total sales represented less than 11% of consolidated total assets and less
than 4% of consolidated sales, respectively, of the Company as of and for the
year ended October 1, 2006. Accordingly, our audit of internal control over
financial reporting also excluded an evaluation of the internal control over
financial reporting of Kentucky Derby. The Company's management is responsible
for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express an opinion on management's assessment and on
the effectiveness of the Company's internal control over financial reporting
based on our audit.

We conducted our audit in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in
all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.

A company's internal control over financial reporting is a
process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with Canadian and U.S. generally accepted accounting
principles. A company's 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 the assets of the company; (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
receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could have a
material effect on the financial statements.

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

In our opinion, management's assessment that Gildan
Activewear Inc. and subsidiaries maintained effective internal control over
financial reporting as of October 1, 2006 is fairly stated, in all material
respects, based on criteria established in Internal Control  Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission(COSO). Also, in our opinion, Gildan Activewear Inc. and
subsidiaries maintained, in all material respects, effective internal control
over financial reporting as of October 1, 2006, based on criteria established in
Internal Control 
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission(COSO).

We also have audited, in accordance with Canadian generally
accepted auditing standards, the consolidated balance sheets of Gildan
Activewear Inc. and subsidiaries as of October 1, 2006 and October 2, 2005, and
the related consolidated statements of earnings, retained earnings and cash
flows for the years ended October 1, 2006, October 2, 2005 and October 3, 2004.
With respect to the consolidated financial statements for the year ended October
1, 2006, we have also conducted our audit in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Our report dated
December 6, 2006 expressed an unqualified opinion on those consolidated
financial statements.



(Signed: KPMG LLP)Chartered Accountants

Montreal, Canada 
December 6, 2006

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|
|
|

|                               
|-------------------------------
|CONSOLIDATED
    BALANCE SHEETS

| | October 1, 2006
    and October 2, 2005                          |   |         |   |        
| | ---------------------------------------------------------------- | - | ------- | - | -------
| | (In thousands
    of US dollars)                                 |   |         |   |        
| |                                                                  |   |         |   |        
| |                                                                  |   |         |   |        
| |                                                                  |   | 2006    |   | 2005   
| |                                                                  |   |         |   |        
| | Assets                                                           |   |         |   |        
| | Current assets:                                                  |   |         |   |        
| | Cash and cash
    equivalents                                    | $ | 29,007  | $ | 69,802 
| | Accounts
    receivable                                          |   | 165,870 |   | 108,646
| | Inventories                                                      |   | 200,653 |   | 134,861
| | Prepaid expenses
    and deposits                                |   | 5,757   |   | 4,394  
| | Future income
    taxes (note 14)                                |   | 5,298   |   | 10,135 
| |                                                                  |   | 406,585 |   | 327,838
| |                                                                  |   |         |   |        
| | Fixed assets (note
    4)                                        |   | 302,677 |   | 260,615
| | Intangible assets
    (note 5)                                   |   | 9,513   |   |       
| | Other assets (note
    6)                                        |   | 4,501   |   | 4,036  
| | Assets held for
    sale (note 16 (b))                           |   |        |   | 5,027  
| |                                                                  | $ | 723,276 | $ | 597,516
| |                                                                  |   |         |   |        
| | Liabilities and
    Shareholders' Equity                         |   |         |   |        
| | Current
    liabilities:                                         |   |         |   |        
| | Bank indebtedness
    (note 7)                                   | $ | 3,500   | $ | 3,980  
| | Accounts payable
    and accrued liabilities                     |   | 117,984 |   | 86,843 
| | Income taxes
    payable                                         |   | 2,269   |   | 2,206  
| | Current portion of
    long-term debt (note 8)                   |   | 21,820  |   | 19,859 
| |                                                                  |   | 145,573 |   | 112,888
| |                                                                  |   |         |   |        
| | Long-term debt
    (note 8)                                      |   | 12,041  |   | 27,288 
| | Future income
    taxes (note 14)                                |   | 29,443  |   | 31,386 
| | Non-controlling
    interest in consolidated joint venture       |   | 5,654   |   | 5,394  
| |                                                                  |   |         |   |        
| | Shareholders'
    equity (note 9):                               |   |         |   |        
| | Share capital                                                    |   | 86,584  |   | 84,177 
| | Contributed
    surplus                                          |   | 2,365   |   | 1,596  
| | Cumulative
    translation adjustment                            |   | 26,248  |   | 26,248 
| | Retained earnings                                                |   | 415,368 |   | 308,539
| |                                                                  |   | 530,565 |   | 420,560
| |                                                                  |   |         |   |        
| | Commitments and
    contingent liabilities (note 12)             |   |         |   |        
| |                                                                  | $ | 723,276 | $ | 597,516
| |                                                                  |   |         |   |        
| | See accompanying
    notes to consolidated financial statements. |   |         |   |        
| |                                                                  |   |         |   |        
| | On behalf of the Board:                                          |   |         |   |        

| |                             |                                
| | --------------------------- | -------------------------------
| |                             |                                
| |                             |                                
| | (Signed: Glenn J. Chamandy) | (Signed: Pierre
    Robitaille)
| | Glenn J. Chamandy           | Pierre
    Robitaille          
| | Director                    | Director                       
| |                             |                                
| |                             |                                

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|CONSOLIDATED
    
    STATEMENTS OF EARNINGS | 
|-------------------------------------------- | 

|Years ended October 1, 2006,
    October 2, 2005 and October 3, 2004 |   |         |   |         |   |        
|-------------------------------------------------------------------- | - | ------- | - | ------- | - | -------
|(In thousands of US dollars, except
    per share amounts)           |   |         |   |         |   |        
|                                                                     |   |         |   |         |   |        
|                                                                     |   |         |   |         |   |        
|                                                                     |   |         |   |         |   |        
|                                                                     |   | 2006    |   | 2005    |   | 2004   
|                                                                     |   |         |   |         |   |        
|Sales                                                                | $ | 773,190 | $ | 653,851 | $ | 533,368
|Cost of sales                                                        |   | 521,095 |   | 450,570 |   | 378,696
|Gross
    profit                                                     |   | 252,095 |   | 203,281 |   | 154,672
|                                                                     |   |         |   |         |   |        
|Selling,
    general and administrative expenses                     |   | 84,388  |   | 73,846  |   | 58,284 
|Restructuring and other charges (note
    16)                        |   | 20,386  |   | 11,776  |   | 4,614  
|Earnings
    before the undernoted items                             |   | 147,321 |   | 117,659 |   | 91,774 
|                                                                     |   |         |   |         |   |        
|Depreciation and amortization                                        |   | 32,383  |   | 25,615  |   | 22,275 
|Interest,
    net                                                    |   | 3,067   |   | 4,615   |   | 6,170  
|Non-controlling interest in income of
    consolidated joint venture |   | 260     |   | 34      |   |       
|                                                                     |   | 35,710  |   | 30,264  |   | 28,445 
|                                                                     |   |         |   |         |   |        
|Earnings
    before income taxes                                     |   | 111,611 |   | 87,395  |   | 63,329 
|Income taxes (note 14)                                               |   | 4,782   |   | 1,352   |   | 3,078  
|                                                                     |   |         |   |         |   |        
|Net earnings                                                         | $ | 106,829 | $ | 86,043  | $ | 60,251 
|                                                                     |   |         |   |         |   |        
|Earnings
    per share (note 15):                                    |   |         |   |         |   |        
|Basic                                                                | $ | 1.78    | $ | 1.44    | $ | 1.02   
|Diluted                                                              |   | 1.76    |   | 1.43    |   | 1.01   
|                                                                     |   |         |   |         |   |        
|See
    accompanying notes to consolidated financial statements.     |   |         |   |         |   |        
|                                                                     |   |         |   |         |   |        



|CONSOLIDATED
    
    STATEMENTS OF RETAINED EARNINGS | 
|----------------------------------------------------- | 

|Years ended October 1, 2006,
    October 2, 2005 and October 3, 2004 |   |         |   |         |   |        
|-------------------------------------------------------------------- | - | ------- | - | ------- | - | -------
|(In thousands of US dollars, except
    per share amounts)           |   |         |   |         |   |        
|                                                                     |   |         |   |         |   |        
|                                                                     |   |         |   |         |   |        
|                                                                     |   | 2006    |   | 2005    |   | 2004   
|                                                                     |   |         |   |         |   |        
|Retained
    earnings, beginning of year                             | $ | 308,539 | $ | 222,496 | $ | 162,245
|Net earnings                                                         |   | 106,829 |   | 86,043  |   | 60,251 
|Retained earnings, end of year                                       | $ | 415,368 | $ | 308,539 | $ | 222,496
|                                                                     |   |         |   |         |   |        
|See
    accompanying notes to consolidated financial statements.     |   |         |   |         |   |        

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|CONSOLIDATED
    
    STATEMENTS OF CASH FLOWS | 
|---------------------------------------------- | 

| | Years ended October
    1, 2006, October 2, 2005 and October 3, 2004     |   |          |   |          |   |         
| | ------------------------------------------------------------------------ | - | -------- | - | -------- | - | --------
| | (In thousands of US
    dollars)                                         |   |          |   |          |   |         
| |                                                                          |   |          |   |          |   |         
| |                                                                          |   |          |   |          |   |         
| |                                                                          |   |          |   |          |   |         
| |                                                                          |   | 2006     |   | 2005     |   | 2004    
| |                                                                          |   |          |   |          |   |         
| | Cash flows from
    (used in) operating activities:                      |   |          |   |          |   |         
| | Net earnings                                                             | $ | 106,829  | $ | 86,043   | $ | 60,251  
| | Adjustments for:                                                         |   |          |   |          |   |         
| | Depreciation and amortization                                            |   | 32,383   |   | 25,615   |   | 22,275  
| | Impairment loss (note 16 (a))                                            |   | 15,149   |   |         |   |        
| | Loss on disposal and writedown of fixed assets                           |   | 1,197    |   | 7,373    |   | 1,949   
| | Stock-based compensation costs                                           |   | 908      |   | 1,050    |   | 477     
| | Future income taxes                                                      |   | 1,764    |   | 176      |   | 2,947   
| | Non-controlling interest                                                 |   | 260      |   | 34       |   |        
| | Unrealized foreign exchange loss                                         |   | 843      |   | 2,552    |   | 586     
| | Changes in non-cash
    working capital balances:                        |   |          |   |          |   |         
| | Accounts receivable                                                      |   | (41,058) |   | (22,694) |   | (20,236)
| | Inventories                                                              |   | (35,435) |   | (17,790) |   | (13,112)
| | Prepaid expenses and deposits                                            |   | 95       |   | (1,082)  |   | 440     
| | Accounts payable and accrued liabilities                                 |   | 11,046   |   | 11,979   |   | 5,416   
| | Income taxes payable                                                     |   | 740      |   | (6)      |   | (2,073) 
| |                                                                          |   | 94,721   |   | 93,250   |   | 58,920  
| |                                                                          |   |          |   |          |   |         
| | Cash flows from
    (used in) financing activities:                      |   |          |   |          |   |         
| | Repayment of long-term
    debt                                          |   | (23,866) |   | (24,739) |   | (19,981)
| | Increase in long-term
    debt                                           |   | 691      |   | 12,086   |   | 4,125   
| | (Decrease) increase in
    bank indebtedness                             |   | (17,830) |   | 3,980    |   |        
| | Repayment of capital
    leases                                          |   | (186)    |   | (157)    |   | (1,158) 
| | Proceeds from the
    issuance of shares                                 |   | 1,808    |   | 5,872    |   | 2,664   
| | Contribution by non-controlling
    interest                             |   |         |   | 2,500    |   |        
| |                                                                          |   | (39,383) |   | (458)    |   | (14,350)
| |                                                                          |   |          |   |          |   |         
| | Cash flows from
    (used in) investing activities:                      |   |          |   |          |   |         
| | Purchase of fixed
    assets                                             |   | (80,183) |   | (86,124) |   | (53,684)
| | Acquisition of
    Kentucky Derby Hosiery Co., Inc. (note 3)             |   | (19,911) |   |         |   |        
| | Proceeds from the sale
    of assets held for sale                       |   | 5,027    |   | 4,087    |   |        
| | Increase in other assets                                                 |   | (986)    |   | (1,811)  |   | (136)   
| |                                                                          |   | (96,053) |   | (83,848) |   | (53,820)
| |                                                                          |   |          |   |          |   |         
| | Effect of exchange
    rate changes on cash and                          |   |          |   |          |   |         
| | cash equivalents denominated in foreign
    currencies                   |   | (80)     |   | 187      |   | 581     
| |                                                                          |   |          |   |          |   |         
| | Net (decrease)
    increase in cash and cash equivalents during the year |   | (40,795) |   | 9,131    |   | (8,669) 
| |                                                                          |   |          |   |          |   |         
| | Cash and cash equivalents,
    beginning of year                         |   | 69,802   |   | 60,671   |   | 69,340  
| | Cash and cash equivalents, end of
    year                               | $ | 29,007   | $ | 69,802   | $ | 60,671  
| |                                                                          |   |          |   |          |   |         
| | Supplemental disclosure of cash flow information (note 17 (c))           |   |          |   |         
| | See
    accompanying notes to consolidated financial statements.         |   |          |   |         

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|NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS |                                                                     
|---------------------------------------------- | --------------------------------------------------------------------
|                                               | Years ended October
    1, 2006, October 2, 2005 and October 3, 2004
|                                               | (In thousands of US
    dollars)                                    

Gildan Activewear Inc. (the "Company") is incorporated under
the Canada Business Corporations Act. Its principal business activity is the
manufacture and sale of activewear, socks and underwear. The Company's fiscal
year ends on the first Sunday following September 28. All references to 2006,
2005 and 2004 represent the fiscal years ended October 1, 2006, October 2, 2005
and October 3, 2004, respectively.

1

Effective the beginning of the Company's 2005 fiscal year,
the Company adopted, on a prospective basis, the recommendations of the Canadian
Institute of Chartered Accountants ("CICA") Accounting Guideline 15  Consolidation of Variable Interest Entities("AcG-15") ("VIEs"). A VIE is
any type of legal structure not controlled by voting equity, but rather by/or
through contractual or other financial arrangements. This guideline requires the
Company to identify VIEs in which it has an interest, determine whether it is
the primary beneficiary of such entities and, if so, to consolidate the VIE. A
primary beneficiary is an enterprise that will absorb a majority of the VIE's
expected losses, receive a majority of its expected residual return, or both.
The Company determined that its joint venture (CanAm Yarns, LLC) ("CanAm") with
Frontier Spinning Mills, Inc. met the criteria for being a VIE and that the
Company is the primary beneficiary of the entity.

The application of the guideline in fiscal 2005 resulted in
an increase to total assets of $7,929, total liabilities of $5,069 and
non-controlling interest of $2,860. The Company's net earnings were not affected
by this change as the investment in the joint venture was previously accounted
for using the proportionate consolidation method.

2 Significant Accounting Policies

The consolidated financial statements are expressed in US
dollars and have been prepared in accordance with accounting principles
generally accepted in Canada. The principal accounting policies of the Company
are summarized as follows:

(a)     
Basis of presentationThe accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries and a joint venture for which the Company is
considered the primary beneficiary. All significant intercompany balances and
transactions have been eliminated on consolidation.

(b)     
Cash and cash equivalentsThe Company considers all liquid investments with maturities of three months
or less when acquired to be cash equivalents.

(c)     
InventoriesInventories are stated at the lower of cost and market value. Cost is
established based on the first-in, first-out method. Market value is defined as
replacement cost for raw materials and net realizable value for work in process
and finished goods.

(d)     
Fixed assetsFixed assets are recorded at cost. Depreciation is calculated on a
straight-line basis at the following annual rates:

| | Asset                      | Rate         
| | -------------------------- | -------------
| | Buildings and improvements | 2 1/2% to 20%
| | Equipment                  | 6 2/3% to 25%

Construction in progress includes
expenditures incurred to-date, including deposits for equipment and plant
expansions which are still in progress or are not yet in service as at the
balance sheet date. Accordingly, depreciation on these assets will commence when
the assets are put into service.

(e)     
Intangible assetsIntangible assets, which represent customer contracts and customer
relationships included in the acquisition of Kentucky Derby Hosiery Co., Inc.
are being amortized on a straight-line basis over a period of fifteen years.

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|NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS |                                                                     
|---------------------------------------------- | --------------------------------------------------------------------
|                                               | Years ended October
    1, 2006, October 2, 2005 and October 3, 2004
|                                               | (In thousands of US
    dollars)                                    

2

(f)     
Impairment of long-lived assets

(g)     
Deferred charges

(h)     
Use of estimates

(i)     
Foreign currency translation

(j)     
Revenue recognition

(k)     
Cotton and yarn procurements

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|NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS |                                                                     
|---------------------------------------------- | --------------------------------------------------------------------
|                                               | Years ended October
    1, 2006, October 2, 2005 and October 3, 2004
|                                               | (In thousands of US
    dollars)                                    



2 Significant Accounting Policies
(Continued)

(l)     
Financial instruments and hedging relationships

(m)    
Income taxesThe Company utilizes 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 the financial statements. Future income tax assets are
evaluated and if realization is not considered to be more likely than not, a
valuation allowance is provided.

(n)    
Stock-based compensation and other stock-based paymentsEffective the commencement of its 2004 fiscal year, the Company follows the
fair value-based method to account for all transactions whereby services are
received in exchange for stock-based compensation and other stock-based
payments. Under the fair value-based method, compensation cost is measured at
the fair value at the date of grant and is expensed over the award's vesting
period.
In fiscal 2006, the Company changed its accounting policy to estimate
forfeitures of stock options and restricted share units when determining
stock-based compensation. In prior years, the Company accounted for forfeitures
as they occurred. This change in accounting policy had no significant impact on
the financial position of the Company or on the results of its operations.
For employee share purchase plans, the Company's contribution, on the employee's
behalf, is recognized as a compensation expense with an offset to share capital,
and consideration paid by employees on purchase of stock is also recorded as an
increase to share capital.

(o)     
Employee future benefitsThe Company offers group defined contribution plans to eligible employees
whereby the Company matches employees' contributions up to a fixed percentage of
the employee's salary. Contributions by the Company to trustee-managed
investment portfolios or employee associations are expensed as incurred.

(p)    
Earnings per shareBasic earnings per share are computed by dividing net earnings by the
weighted average number of common shares outstanding for the year. Diluted
earnings per share are computed in the same manner, except the weighted average
number of common shares outstanding for the period is increased to include
additional shares from the assumed exercise of options, if dilutive, and the
issuance of restricted share units. The number of additional shares is
calculated by assuming that outstanding options are exercised, and that the
proceeds from such exercises, as well as the amount of unrecognized stock-based
compensation are used to repurchase common shares at the average share price for
the period.

---



|
|
|
|

|NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS |                                                                     
|---------------------------------------------- | --------------------------------------------------------------------
|                                               | Years ended October
    1, 2006, October 2, 2005 and October 3, 2004
|                                               | (In thousands of US
    dollars)                                    



2 Significant Accounting Policies
(Continued)

(q)    
Environmental expendituresEnvironmental expenditures that relate to current operations are expensed or
capitalized as appropriate. Expenditures that relate to an existing condition
caused by past operations and which are not expected to contribute to current or
future operations are expensed. Liabilities are recorded when environmental
assessments and/or remedial efforts are likely, and when the costs, based on a
specific plan of action in terms of the technology to be used and the extent of
the corrective action required, can be reasonably estimated.

(r)    
GuaranteesIn the normal course of business, the Company enters into various agreements
that may contain guarantees. A liability is recorded when the Company considers
probable that a payment relating to the guarantee has to be made to the other
party.

(s)    
Business acquisitionsThe Company accounts for business acquisitions using the purchase method.
Accordingly, the purchase price of a business acquisition is allocated to its
identifiable net assets including identifiable intangible assets, on the basis
of estimated fair values as at the date of purchase, with any excess being
assigned to goodwill. When the amounts assigned to identifiable net assets
exceed the cost of the purchase, resulting in negative goodwill, the excess is
applied, to the extent possible, to certain noncurrent assets, with the balance
recorded as an extraordinary gain.

3

Effective July 6, 2006, the Company acquired 100% of the
common shares of Kentucky Derby Hosiery Co., Inc. ("Kentucky Derby"), a U.S.
hosiery manufacturer with corporate headquarters in Hopkinsville, Kentucky. The
total purchase price of $20,371, including transaction costs, was paid in cash,
except for $460 which was settled through the issuance of common shares of the
Company. The acquisition is intended to enhance and accelerate the Company's
strategy to enter the North American mass-market retail channel as a supplier of
athletic socks, underwear and activewear.

The Company accounted for this acquisition using the purchase
method and the results of Kentucky Derby have been consolidated with those of
the Company from the date of acquisition.

The following table summarizes the estimated fair value of
the assets acquired and liabilities assumed at the date of acquisition:

|Assets
    acquired                           |   |       
|--------------------------------------------- | - | ------
|Accounts receivable                           | $ | 15,081
|Income taxes receivable                       |   | 775   
|Inventory                                     |   | 30,357
|Prepaid expenses                              |   | 1,458 
|Fixed assets                                  |   | 6,993 
|Customer contracts and customer relationships |   | 9,866 
|                                              |   | 64,530
|Liabilities assumed                           |   |       
|Bank indebtedness                             |   | 17,350
|Accounts payable and accrued liabilities      |   | 16,734
|Long-term debt                                |   | 10,075
|                                              |   | 44,159
|                                              |   |       
|Net assets acquired                           | $ | 20,371
|                                              |   |       
|Consideration                                 |   |       
|Cash                                          | $ | 19,000
|10,000 common shares                          |   | 460   
|Transaction costs                             |   | 911   
|                                              | $ | 20,371

---



|
|
|
|

|NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS |                                                                     
|---------------------------------------------- | --------------------------------------------------------------------
|                                               | Years ended October
    1, 2006, October 2, 2005 and October 3, 2004
|                                               | (In thousands of US
    dollars)                                    



3

Immediately following the acquisition, the Company repaid the
entire amount of bank indebtedness and $3,987 of long-term debt.

The value of the shares issued as consideration for the
business acquisition was $46.00 per share, which was determined using the
Company's average closing share price on the New York Stock Exchange over a
reasonable period before and after the date the terms of the business
consideration were agreed to and announced.

Included in the purchase price allocation is an accrual of
$1,500 for estimated costs, which includes severance and other employee related
costs, for the restructuring and integration of the operations of Kentucky
Derby. The restructuring and integration process is expected to be completed
during the next fiscal year. As at October 1, 2006, the entire amount is
included in "Accounts payable and accrued liabilities".

4 Fixed Assets

|                               |      |              |              |         |          | 2006   
|------------------------------ | ---- | ------------ | ------------ | ------- | -------- | -------
|                               |      | Accumulated  | Net book    
|                               | Cost | depreciation | value       
|                               |      |              |             
|Land                           | $    | 21,669       | $            |        | $        | 21,669 
|Buildings and
    improvements |      | 109,949      |              | 19,442  |          | 90,507 
|Equipment                      |      | 268,420      |              | 107,530 |          | 160,890
|Construction in progress       |      | 29,611       |              |        |          | 29,611 
|                               | $    | 429,649      | $            | 126,972 | $        | 302,677
|                               |      |              |              |         |          |        
|                               |      |              |              |         |          | 2005   
|                               |      |              | Accumulated  |         | Net book
|                               |      | Cost         | depreciation |         | value   
|                               |      |              |              |         |          |        
|Land                           | $    | 19,032       | $            |        | $        | 19,032 
|Buildings and
    improvements |      | 95,207       |              | 10,691  |          | 84,516 
|Equipment                      |      | 227,046      |              | 73,619  |          | 153,427
|Construction in progress       |      | 3,640        |              |        |          | 3,640  
|                               | $    | 344,925      | $            | 84,310  | $        | 260,615

For fiscal 2006, accumulated
depreciation includes an asset impairment loss of $15,149, described in note 16
(a).

5 Intangible Assets

|                                                                                |   | 2006  |   | 2005 
|------------------------------------------------------------------------------- | - | ----- | - | -----
|                                                                                |   |       |   |      
|Customer contracts and
    customer relationships (note 3)                      | $ | 9,866 | $ |     
|Less accumulated amortization                                                   |   | (353) |   |     
|                                                                                | $ | 9,513 | $ |     
|                                                                                |   |       |   |      
|                                                                                |   |       |   |      
|6 Other Assets                                                                  |   |       |   |      
|                                                                                |   | 2006  |   | 2005 
|                                                                                |   |       |   |      
|Deferred charges, net
    of accumulated amortization of $6,544 (2005  $5,716) | $ | 2,333 | $ | 1,482
|Long-term receivable                                                            |   | 758   |   | 1,133
|Deposits                                                                        |   | 581   |   | 662  
|Prepaid equipment
    rental                                                    |   | 441   |   | 446  
|Other                                                                           |   | 388   |   | 313  
|                                                                                | $ | 4,501 | $ | 4,036

---



|
|
|
|

|NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS |                                                                     
|---------------------------------------------- | --------------------------------------------------------------------
|                                               | Years ended October
    1, 2006, October 2, 2005 and October 3, 2004
|                                               | (In thousands of US
    dollars)                                    



7 Bank Indebtedness

The Company's joint venture, CanAm, has a revolving line of
credit in the amount of $4,000. As at October 1, 2006, the joint venture had
utilized $3,500 (2005  $3,980) of its line of credit. The borrowings are due on
demand and bear interest at 30-day LIBOR plus 2.25% (7.58% at October 1, 2006;
6.13% at October 2, 2005). The line of credit is secured by a first ranking
security interest on the assets of the joint venture.

8 Long-Term Debt

|                                                                                         |   | 2006   |   | 2005  
|---------------------------------------------------------------------------------------- | - | ------ | - | ------
|                                                                                         |   |        |   |       
|Secured                                                                                  |   |        |   |       
|Senior notes (a)                                                                         | $ | 17,500 | $ | 35,000
|Term loan, repayable in monthly instalments,
    bearing interest at 30-day LIBOR plus   |   |        |   |       
|2.75% (8.07% at October 1, 2006; 6.63% at October
    2, 2005),                          |   |        |   |       
|maturing in September 2012; secured by assets (b)                                        |   | 9,657  |   | 10,658
|Term loan, repayable in monthly instalments,
    bearing interest at a fixed rate of 6%, |   |        |   |       
|maturing in December 2008; secured by equipment
    (b)                                  |   | 734    |   | 1,041 
|Municipal bonds, repayable in annual instalments,
    bearing interest at variable rates |   |        |   |       
|(3.85% at October 1, 2006), maturing in January
    2010; secured                        |   |        |   |       
|by building and equipment (c)                                                            |   | 2,860  |   |      
|Notes payable to bank due in monthly instalments,
    bearing interest at fixed rates    |   |        |   |       
|ranging from 4.39% to 5.38%, maturing from
    December 2006 to June 2009;               |   |        |   |       
|secured by equipment (c)                                                                 |   | 2,128  |   |      
|Note payable to bank due in monthly instalments,
    bearing interest at a fixed         |   |        |   |       
|rate of 4.84%, maturing in October 2009; secured
    by equipment (c)                    |   | 647    |   |      
|Note payable to bank due in monthly instalments,
    bearing interest                    |   |        |   |       
|at NY Prime plus 0.25% (8.50% at October 1,
    2006),                                   |   |        |   |       
|maturing in July 2011; secured by a building (c)                                         |   | 195    |   |      
|Obligations under capital leases, bearing
    interest at 3.83%                          |   |       |   | 186   
|                                                                                         |   | 33,721 |   | 46,885
|Current portion of secured debt                                                          |   | 21,712 |   | 19,737
|                                                                                         | $ | 12,009 | $ | 27,148
|                                                                                         |   |        |   |       
|Unsecured                                                                                |   |        |   |       
|Term loans, bearing interest at rates up to 5%
    per annum,                            |   |        |   |       
|maturing at various dates through 2008                                                   | $ | 140    | $ | 262   
|                                                                                         |   |        |   |       
|Current portion of unsecured debt                                                        |   | 108    |   | 122   
|                                                                                         | $ | 32     | $ | 140   
|Total secured and unsecured long-term
    debt                                           | $ | 12,041 | $ | 27,288

(a)   
The notes bear interest at 9.51% on $13,750 and 9.88% on $3,750, and are secured
by tangible and intangible property of the Company. The combined effective
interest rate on the senior notes for fiscal 2006 and 2005 was 9.59%. The notes
mature in June 2007.

(b)    These term
loans have been entered into by CanAm, the Company's joint venture with Frontier
Spinning Mills, Inc.
The fixed assets of CanAm serve as collateral for the long-term borrowings of
CanAm. In addition, the Company has provided a guarantee of $3,500 on the term
debt and revolving credit facility with the bank. Other creditors of CanAm do
not have any recourse to the general credit of the Company.

(c)     As a
result of the acquisition of Kentucky Derby, described in note 3, the Company
assumed the obligations entered into by Kentucky Derby.

---



|
|
|
|

|NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS |                                                                     
|---------------------------------------------- | --------------------------------------------------------------------
|                                               | Years ended October
    1, 2006, October 2, 2005 and October 3, 2004
|                                               | (In thousands of US
    dollars)                                    



8 Long-Term Debt (Continued)

The Company has a revolving term credit facility for a
maximum of $200,000 which matures in July 2009. The facility is secured by a
first ranking moveable hypothec and security interest on the majority of the
Company's accounts receivable, inventories, intangible assets, equipment and
tangible moveable assets. There were no amounts drawn under this facility at
October 1, 2006 or October 2, 2005.

Under various financing arrangements with its bankers and other long-term
lenders, the Company is required to meet certain covenants. The Company was in
compliance with all of these covenants as at October 1, 2006 and October 2,
2005.

Principal payments due on long-term debt are as follows:

|Fiscal year |   |       
|----------- | - | ------
|            |   |       
|2007        | $ | 21,820
|2008        |   | 3,581 
|2009        |   | 2,901 
|2010        |   | 2,408 
|2011        |   | 1,664 
|Thereafter  |   | 1,487 
|            | $ | 33,861

9 Shareholders' Equity

Changes in share capital were as
follows:

|                                                                 |            |   | 2006   |              |   | 2005    
|---------------------------------------------------------------- | ---------- | - | ------ | ------------ | - | --------
|                                                                 |            |   | Book   |              |   | Book    
|                                                                 | Shares     |   | value  | Shares       |   | value   
|                                                                 |            |   |        |              |   |         
|Authorized without
    limit as to number and without par value: |            |   |        |              |   |         
|First preferred shares, issuable in series,
    non-voting       |            |   |        |              |   |         
|Second preferred shares, issuable in series,
    non-voting      |            |   |        |              |   |         
|Common shares                                                    |            |   |        |              |   |         
|Issued and
    outstanding:                                      |            |   |        |              |   |         
|Common shares:                                                   |            |   |        |              |   |         
|Total outstanding, beginning of year                             | 59,954,530 | $ | 84,177 |             | $ |        
|Conversion of Class A shares                                     |            |   |        |              |   |         
|into common shares (a)                                           |           |   |       | 59,397,412   |   | 78,170  
|Shares issued pursuant to business acquisition
    (note 3)      | 10,000     |   | 460    |             |   |        
|Shares issued under employee share purchase plan                 | 8,321      |   | 360    | 9,916        |   | 200     
|Shares issued pursuant to exercise of stock
    options          | 140,983    |   | 1,587  | 547,202      |   | 5,807   
|Total outstanding, end of year                                   | 60,113,834 |   | 86,584 | 59,954,530   |   | 84,177  
|Class A subordinate voting shares:                               |            |   |        |              |   |         
|Total outstanding, beginning of year                             |           |   |       | 59,397,412   |   | 78,170  
|Conversion of Class A shares into                                |            |   |        |              |   |         
|common shares (a)                                                |           |   |       | (59,397,412) |   | (78,170)
|Total outstanding, end of year                                   |           |   |       |             |   |        
|                                                                 | 60,113,834 | $ | 86,584 | 59,954,530   | $ | 84,177  

The amounts credited to share capital
from the exercise of stock options include a cash consideration of $1,448 (2005
 $5,672) as well as an ascribed value from contributed surplus of $139 (2005 
$135).

---



|
|
|
|

|NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS |                                                                     
|---------------------------------------------- | --------------------------------------------------------------------
|                                               | Years ended October
    1, 2006, October 2, 2005 and October 3, 2004
|                                               | (In thousands of US
    dollars)                                    



9 Shareholders' Equity (Continued)

(a)    
The Articles of the Company were amended by Certificate of Amendment dated
February 2, 2005 to create an unlimited number of a new class of common shares,
convert each of the issued and outstanding Class A subordinate voting shares
into one of the common shares created and cancel the Class A subordinate voting
shares as well as the rights, privileges, restrictions and conditions attached
thereto.

(b)    
On December 1, 2005, the Board of Directors approved the renewal of the stock
repurchase program authorizing the Company to purchase up to a maximum of
1,000,000 of the Company's common shares in the open market commencing December
22, 2005 and ending December 21, 2006. As at October 1, 2006, no shares had been
repurchased under this plan.

(c)    
On December 1, 2004, the Board of Directors adopted a shareholder rights plan,
which became effective that same day. At the annual and special meeting of the
shareholders on February 2, 2005, the shareholders approved a resolution
confirming the ratification of the shareholder rights plan. The objectives of
the shareholder rights plan are to provide the Board of Directors and the
shareholders with additional time to assess any unsolicited take-over bid for
the Company and, where appropriate, pursue other alternatives for maximizing
shareholder value.

(d)     
Changes in contributed surplus were as follows:

| |                                                                                  |   |      
| | -------------------------------------------------------------------------------- | - | -----
| | Balance, October 3,
    2004                                                     | $ | 681  
| | Stock-based
    compensation related to stock options and restricted share units |   | 1,050
| | Ascribed value credited to share
    capital from exercise of stock options      |   | (135)
| | Balance, October 2, 2005                                                         |   | 1,596
| | Stock-based
    compensation related to stock options and restricted share units |   | 908  
| | Ascribed value credited to share
    capital from exercise of stock options      |   | (139)
| | Balance, October 1, 2006                                                         | $ | 2,365

(e)     
Cumulative translation adjustment:
At the commencement of fiscal 2004, the Company adopted the US dollar as its
functional and reporting currency. The change in the functional currency for the
prior periods resulted in a currency translation adjustment of $26,248 which is
reflected in the cumulative translation adjustment.

10 Stock-Based Compensation

(a)     
Employee share purchase plans:
The Company has employee share purchase plans which allow eligible employees to
authorize payroll deductions of up to 10% of their salary to purchase, from
treasury, common shares of the Company at a price of 90% of the then current
stock price as defined in the plans. Employees purchasing shares under the plans
must hold the shares for a minimum of one year. The Company has reserved
1,400,000 common shares for issuance under the plans. As at October 1, 2006, a
total of 61,077 (2005  52,756) shares were issued under these plans.

(b)    
Stock options and restricted share units:
The Company's Long Term Incentive Plan (the "LTIP") includes stock options and
restricted share units. The LTIP allows the Board of Directors to grant stock
options and dilutive restricted share units ("Treasury RSUs") to officers and
other key employees of the Company and its subsidiaries. On February 2, 2006,
the shareholders of the Company approved an amendment to the LTIP to fix at
3,000,158 the number of common shares that are issuable pursuant to the exercise
of stock options and the vesting of Treasury RSUs. As at October 1, 2006,
2,062,187 common shares remained authorized for future issuance under this plan.
The exercise price payable for each common share covered by a stock option is
determined by the Board of Directors at the date of the grant, but may not be
less than the closing price of the common shares of the Company on the trading
day immediately preceding the effective date of the grant. Stock options vest
equally over a two to four-year period from the date of grant, and expire no
more than ten years after the date of the grant.

---



|
|
|
|

|NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS |                                                                     
|---------------------------------------------- | --------------------------------------------------------------------
|                                               | Years ended October
    1, 2006, October 2, 2005 and October 3, 2004
|                                               | (In thousands of US
    dollars)                                    



10 Stock-Based Compensation
(Continued)

Changes in outstanding stock options
were as follows:

|                                         |  |  |  |  | Weighted average
|---------------------------------------- |  |  |  |  | ----------------
|                                         |  |  |  |  | Number          
|                                         |  |  |  |  |                 
|                                         |  |  |  |  |                 
|Options outstanding,
    October 3, 2004 |  |  |  |  | 1,142,646       
|Exercised                                |  |  |  |  | (547,202)       
|Forfeited                                |  |  |  |  | (26,666)        
|Options outstanding,
    October 2, 2005 |  |  |  |  | 568,778         
|Exercised                                |  |  |  |  | (140,983)       
|Options outstanding, October 1, 2006     |  |  |  |  | 427,795         

The following table summarizes
information about stock options outstanding and exercisable at October 1, 2006:

|                      |                       |          | Options outstanding | Options exercisable  
|--------------------- | --------------------- | -------- | ------------------- | ---------------------
|                      |                       |          |                     | Weighted             
|                      |                       | Weighted | average             |                      
|Range of              |                       |          | average             | remaining            
|exercise              |                       |          | exercise            | contractual          
|prices                | Number                |          | price               | life (yrs)           
|(in Canadian dollars) | (in Canadian dollars) |          |                     | (in Canadian dollars)
|                      |                       |          |                     |                      
|                      |                       |          |                     |                      
|$ 2.57 
    4.88     | 49,056                | $        | 3.78                | 2.17                 
|$ 9.85 
    10.79    | 50,830                |          | 10.46               | 5.12                 
|$ 12.13 
    13.75   | 208,856               |          | 12.68               | 4.07                 
|$ 17.00  20.45       | 119,053               |          | 17.35               | 4.54                 
|                      | 427,795               | $        | 12.70               |                      

A Treasury RSU represents the right of an individual to
receive one common share on the vesting date without any monetary consideration
being paid to the Company. With the exception of a special, one-time award,
which vests at the end of an eight-year period, all other Treasury RSUs awarded
to-date vest at the end of a five-year vesting period. The Treasury RSUs are
subject to vesting conditions, with 50% of each award vesting at the end of
their vesting period on the basis of time and the remaining 50% of each award
vesting based on the achievement of specified Company performance objectives.
Compensation expense relating to the Treasury RSUs is recognized in the
financial statements over the vesting period based on the fair value of the
Treasury RSUs on the date of the grant and estimates relating to forfeitures and
the probability of performance objectives being met. The fair value of the
Treasury RSUs granted is equal to the market price of the common shares of the
Company at the time of grant.

|Changes in outstanding
    Treasury RSUs were as follows: |          | Weighted average     
|--------------------------------------------------------- | -------- | ---------------------
|                                                          |          |                      
|                                                          | Number   |                      
|                                                          |          | (in Canadian dollars)
|                                                          |          |                      
|                                                          |          |                      
|RSUs outstanding,
    October 3, 2004                     | 224,000  | $                    
|Granted                                                   | 162,000  |                      
|Forfeited                                                 | (30,000) |                      
|RSUs outstanding,
    October 2, 2005                     | 356,000  |                      
|Granted                                                   | 120,500  |                      
|Forfeited                                                 | (60,000) |                      
|RSUs outstanding, October 1, 2006                         | 416,500  | $                    

---



|
|
|
|

|NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS |                                                                     
|---------------------------------------------- | --------------------------------------------------------------------
|                                               | Years ended October
    1, 2006, October 2, 2005 and October 3, 2004
|                                               | (In thousands of US
    dollars)                                    



10 Stock-Based Compensation (Continued)

As of October 1, 2006, none of the awarded and outstanding
Treasury RSUs were vested. The compensation expense recorded for fiscal 2006, in
respect of the LTIP, was $908 (2005  $919). The counterpart has been recorded
as contributed surplus. When the shares are issued to the employees, the amounts
previously credited to contributed surplus are credited to share capital.

11 Deferred Share Unit Plan

The Company has a deferred share unit plan for independent
members of the Company's Board of Directors who must receive 50% of their annual
retainers in the form of deferred share units ("DSUs"). The value of these DSUs
is the market price of the Company's common shares at the time of payment of the
retainers or fees. DSUs granted under the plan will be redeemable and the value
thereof payable in cash only after the director ceases to act as a director of
the Company. As at October 1, 2006, there were 1,991 (2005  2,666) DSUs
outstanding at a value of $96 (2005  $102). This amount is included in
"Accounts payable and accrued liabilities". The DSU obligation will continue to
be adjusted each quarter based on the market value of the Company's common
shares. The Company includes the cost of the DSU plan in "Selling, general and
administrative expenses".

Changes in outstanding DSUs were as follows:

|                                      |        
|------------------------------------- | -------
|DSUs outstanding,
    October 3, 2004 |       
|Granted                               | 2,666  
|DSUs outstanding, October 2, 2005     | 2,666  
|Granted                               | 1,497  
|Settled                               | (2,172)
|DSUs outstanding, October 1, 2006     | 1,991  

12 Commitments and Contingent
Liabilities

(a)     The minimum
annual lease payments under operating leases for premises, equipment and
aircraft are approximately as follows:

|Fiscal year |   |       
|----------- | - | ------
|            |   |       
|2007        | $ | 9,980 
|2008        |   | 5,175 
|2009        |   | 4,180 
|2010        |   | 3,439 
|2011        |   | 2,959 
|Thereafter  |   | 8,996 
|            | $ | 34,729

(b)    
As at October 1, 2006, there were contractual obligations outstanding of
approximately $46,882 for the acquisition of fixed assets (2005  $16,971).

(c)    
The Company is a party to claims and litigation arising in the normal course of
operations. The Company does not expect the resolution of these matters to have
a materially adverse effect on the financial position or results of operations
of the Company.

(d)    
In November 2002, one of the Company's Mexican subsidiaries ("Gildan Mexico")
received a tax assessment from a regional taxation office relating to duties for
the 2000 fiscal year for approximately $6,000. 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 $7,100, primarily comprising
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. The Company has received legal opinions that the tax
assessment is without merit under Mexican law governing re-export from
maquiladora operations.

---



|
|
|
|

|NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS |                                                                     
|---------------------------------------------- | --------------------------------------------------------------------
|                                               | Years ended October
    1, 2006, October 2, 2005 and October 3, 2004
|                                               | (In thousands of US
    dollars)                                    



12 Commitments and Contingent Liabilities (Continued)

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. The Company
is pursuing all available avenues to resolve this matter in its favour. At the
present time, the Mexican authorities are not attempting to enforce payment of
this tax assessment. The Company expects to be successful in its efforts to
clarify and resolve this matter and, accordingly, no provision has been made in
the accounts for this potential liability.

13 Guarantees

As at October 1, 2006, significant guarantees that have been
provided to third parties are the following:

The Company, and some of its subsidiaries, have granted
irrevocable standby letters of credit and surety bonds, issued by highly rated
financial institutions, to third parties to indemnify them in the event the
Company does not perform its contractual obligations. As at October 1, 2006, the
maximum potential liability under these guarantees was $43,100, of which $5,700
was for surety bonds and $37,400 was for corporate guarantees and standby
letters of credit. The standby letters of credit mature at various dates during
fiscal 2007, the surety bonds are automatically renewed on an annual basis and
the corporate guarantees mature at various dates up to fiscal 2010.

As at October 1, 2006, the Company has recorded no liability
with respect to these guarantees, as the Company does not expect to make any
payments for the aforementioned items. Management believes that the fair value
of the non-contingent obligations requiring performance under the guarantees in
the event that specified triggering events or conditions occur approximates the
cost of obtaining the standby letters of credit and surety bonds.

14 Income Taxes

The income tax provision differs from the amount computed by
applying the combined Canadian federal and provincial tax rates to earnings
before income taxes. The reasons for the difference and the related tax effects
are as follows:

|                                                                      |   | 2006     |   | 2005     |   | 2004    
|--------------------------------------------------------------------- | - | -------- | - | -------- | - | --------
|                                                                      |   |          |   |          |   |         
|Combined
    basic Canadian federal and provincial income taxes       | $ | 35,459   | $ | 27,075   | $ | 20,012  
|Increase
    (decrease) in income taxes resulting from:               |   |          |   |          |   |         
|Effect of different tax rates on earnings of
    foreign subsidiaries |   | (33,664) |   | (29,016) |   | (19,935)
|Effect of non-deductible expenses and other                           |   | 2,987    |   | 3,293    |   | 3,001   
|                                                                      | $ | 4,782    | $ | 1,352    | $ | 3,078   

For fiscal 2005, the effect of different tax rates on
earnings of foreign subsidiaries was greater than the amount computed by
applying the combined Canadian tax rates to consolidated earnings before income
taxes. This occurred due to a combination of losses incurred in the Canadian
parent company that generated a recovery of income taxes at statutory Canadian
rates, and earnings in the Company's subsidiaries that generated income tax
expense at relatively low tax rates.

The components of income tax expense are as follows:

|                         |   | 2006  |   | 2005  |   | 2004 
|------------------------ | - | ----- | - | ----- | - | -----
|                         |   |       |   |       |   |      
|Current
    income taxes | $ | 3,018 | $ | 1,176 | $ | 131  
|Future income taxes      |   | 1,764 |   | 176   |   | 2,947
|                         | $ | 4,782 | $ | 1,352 | $ | 3,078

The Company has not recognized a future income tax liability
for the undistributed earnings of its subsidiaries in the current or prior years
because the Company currently does not expect to sell those investments, and for
those undistributed earnings that would become taxable, there is no intention to
repatriate the earnings.

---



|
|
|
|

|NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS |                                                                     
|---------------------------------------------- | --------------------------------------------------------------------
|                                               | Years ended October
    1, 2006, October 2, 2005 and October 3, 2004
|                                               | (In thousands of US
    dollars)                                    



14 Income Taxes (Continued)

Future income taxes reflect the net effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. In assessing
the realizability of future tax assets, management considers whether it is more
likely than not that some portion or all of the future income tax assets will be
realized.

Significant components of the Company's future tax position are as follows:

|                                                             |   | 2006     |   | 2005    
|------------------------------------------------------------ | - | -------- | - | --------
|                                                             |   |          |   |         
|Future income tax
    assets (liabilities):                  |   |          |   |         
|Non-capital losses and
    research and development expenses | $ | 5,495    | $ | 6,735   
|Reserves and accruals                                        |   | 5,561    |   | 2,200   
|Other                                                        |   | 949      |   | 1,200   
|                                                             |   | 12,005   |   | 10,135  
|Less valuation allowance                                     |   | (4,624)  |   |        
|                                                             |   | 7,381    |   | 10,135  
|Fixed assets and other                                       |   | (31,526) |   | (31,386)
|Net future income tax liability                              | $ | (24,145) | $ | (21,251)
|Presented as:                                                |   |          |   |         
|Current assets                                               | $ | 5,298    | $ | 10,135  
|Long-term liabilities                                        |   | (29,443) |   | (31,386)
|                                                             | $ | (24,145) | $ | (21,251)

The Company has unused tax losses expiring in 2026 and
deductible temporary differences in the amount of $16,661 arising from the
acquisition of Kentucky Derby. The Company recorded a valuation allowance due to
the uncertainty of realizing the benefits of these items.

15 Earnings Per Share

A reconciliation between basic and diluted earnings per share
is as follows:

|                                                                 |   | 2006       |   | 2005       |   | 2004      
|---------------------------------------------------------------- | - | ---------- | - | ---------- | - | ----------
|                                                                 |   |            |   |            |   |           
|Basic earnings per
    share:                                    |   |            |   |            |   |           
|Basic weighted average number of
    common shares outstanding   |   | 60,051,683 |   | 59,690,966 |   | 59,181,610
|Basic earnings per share                                         | $ | 1.78       | $ | 1.44       | $ | 1.02      
|Diluted earnings per
    share:                                  |   |            |   |            |   |           
|Basic weighted average
    number of common shares outstanding   |   | 60,051,683 |   | 59,690,966 |   | 59,181,610
|Plus impact of stock options and
    Treasury RSUs               |   | 574,201    |   | 443,910    |   | 489,568   
|Diluted weighted average number of
    common shares outstanding |   | 60,625,884 |   | 60,134,876 |   | 59,671,178
|Diluted earnings per share                                       | $ | 1.76       | $ | 1.43       | $ | 1.01      

All stock options and Treasury RSUs outstanding for fiscal
2006 and fiscal 2005 were dilutive.

Excluded from the above calculation for fiscal 2004 are
64,000 stock options ranging in price from CA$18.25 to CA$20.44 which were
deemed to be anti-dilutive because the exercise prices were greater than the
average market price of the common shares.

---



|
|
|
|

|NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS |                                                                     
|---------------------------------------------- | --------------------------------------------------------------------
|                                               | Years ended October
    1, 2006, October 2, 2005 and October 3, 2004
|                                               | (In thousands of US
    dollars)                                    



16 Restructuring and
Other Charges

The following table
summarizes the components of restructuring and other charges:

|                                                     |   | 2006   |   | 2005   |   | 2004 
|---------------------------------------------------- | - | ------ | - | ------ | - | -----
|                                                     |   |        |   |        |   |      
|Canadian textile
    manufacturing restructuring (a) | $ | 18,930 | $ |       | $ |     
|Restructuring of
    yarn-spinning facilities (b)    |   |       |   | 10,726 |   |     
|Charge to comply with employment
    contract (c)    |   | 1,456  |   | 1,050  |   | 4,614
|                                                     | $ | 20,386 | $ | 11,776 | $ | 4,614

(a)   In
September 2006, the Company announced a restructuring of its Canadian
manufacturing operations to take effect in December 2006, involving the closure
of its textile manufacturing facility in Valleyfield, Quebec and the downsizing
of its Montreal, Quebec knitting facility. The Company has recorded a charge of
$18,930 relating to this restructuring and the concurrent re-assessment of the
recoverability of the carrying values of its remaining Canadian textile
manufacturing and related assets. Under the Company's business model, there are
essentially no tax recoveries with respect to this charge. The components of
this charge include employee severance of $2,141 with respect to the Valleyfield
and Montreal textiles facilities, an asset impairment loss of $15,149 relating
to all of the Canadian textile and related manufacturing fixed assets, and other
costs of $1,640. 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".

(b)  
During fiscal 2005, the Company closed its two Canadian yarn-spinning
facilities, and relocated a major portion of its yarn-spinning equipment to a
North Carolina spinning facility operated by CanAm. The Company recorded a
charge of $10,726 before tax ($7,008 after tax) 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 $6,783, employee
severance of $3,688, and other costs of $255. 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 $4,087 and $5,027 were received,
respectively in fiscal 2005 and in fiscal 2006. Severance costs were paid in
full in fiscal 2005.

(c)   
During fiscal 2004, the Company expensed $4,614 ($3,184 after tax) 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. Most of the
payments under this contract are payable in Canadian dollars. Movements in the
accrual were as follows:

| |                                                                           |   |        
| | ------------------------------------------------------------------------- | - | -------
| | Balance, October 3, 2004                                                  | $ | 2,225  
| | Adjustments related to variable
    components of contractual obligations |   | 1,050  
| | Foreign exchange adjustment                                               |   | 153    
| | Payments                                                                  |   | (646)  
| | Balance, October 2, 2005                                                  |   | 2,782  
| | Adjustments related to variable
    components of contractual obligations |   | 1,456  
| | Foreign exchange adjustment                                               |   | 114    
| | Payments                                                                  |   | (1,064)
| | Balance, October 1, 2006                                                  | $ | 3,288  

---



|
|
|
|

|NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS |                                                                     
|---------------------------------------------- | --------------------------------------------------------------------
|                                               | Years ended October
    1, 2006, October 2, 2005 and October 3, 2004
|                                               | (In thousands of US
    dollars)                                    

17 Other information

(a)   The following items were included in the determination of the Company's
net earnings:

|                                                    |   | 2006   |   | 2005    |   | 2004  
|--------------------------------------------------- | - | ------ | - | ------- | - | ------
|                                                    |   |        |   |         |   |       
|Depreciation expense
    of fixed assets            | $ | 31,006 | $ | 24,677  | $ | 21,511
|Interest expense on
    long-term debt              |   | 4,253  |   | 4,805   |   | 6,226 
|Interest expense on
    short-term indebtedness     |   | 280    |   | 56      |   |      
|Foreign exchange gain
    (loss)                    |   | 1,578  |   | (1,113) |   | 47    
|Defined contribution
    plan expense               |   | 1,035  |   | 688     |   | 442   
|Amortization expense
    of deferred start-up costs |   | 770    |   | 502     |   | 377   
|Amortization of
    intangible assets               |   | 353    |   |        |   |      
|Amortization of
    deferred financing costs        |   | 254    |   | 436     |   | 387   
|Investment income                                   |   | 1,466  |   | 450     |   | 248   
|Research and development tax credits                |   | 1,290  |   | 761     |   | 360   

(b)   An amount
of approximately $1,035 (2005  $1,173; 2004  $500) is included as compensation
costs in "Selling, general and administrative expenses" for fiscal 2006 in
respect of the employee share purchase plans, RSUs, DSUs and certain stock
options.

(c)   Supplemental cash flow
disclosure:

|                                                                                   |   | 2006   |   | 2005   |   | 2004  
|---------------------------------------------------------------------------------- | - | ------ | - | ------ | - | ------
|                                                                                   |   |        |   |        |   |       
|Cash
    paid during the year for:                                                 |   |        |   |        |   |       
|Interest                                                                           | $ | 4,771  | $ | 4,516  | $ | 6,404 
|Income taxes                                                                       |   | 2,031  |   | 1,557  |   | 1,812 
|Non-cash transactions:                                                             |   |        |   |        |   |       
|Additions to fixed assets
    included in accounts payable and accrued liabilities |   | 2,979  |   | 740    |   | 3,473 
|Issuance of shares on
    acquisition of Kentucky Derby                            |   | 460    |   |       |   |      
|                                                                                   |   |        |   |        |   |       
|Cash
    and cash equivalents consist of:                                          |   |        |   |        |   |       
|Cash balances with banks                                                           | $ | 27,810 | $ | 38,802 | $ | 33,571
|Short-term investments,
    bearing interest at 4.90% (2005  3.67%; 2004  1.72%) |   | 1,197  |   | 31,000 |   | 27,100
|                                                                                   | $ | 29,007 | $ | 69,802 | $ | 60,671

18 Related Party Transactions

The Company has transactions with Frontier Spinning Mills,
Inc., 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.
The following is a summary of the related party transactions and balances owed:

|                       |   | 2006    |          | 2005   |        | 2004
|---------------------- | - | ------- | -------- | ------ | ------ | ----
|                       |   |         |          |        |        |     
|Transactions:          |   |         |          |        |        |     
|Yarn purchases         | $ | 100,432 | $106,820 | $      | 94,910
|Management fee expense |   | 750     |          | 562    |        |    
|Balances outstanding:  |   |         |          |        |        |     
|Accounts payable       | $ | 18,877  | $        | 15,631 |        |     

During fiscal 2005, Frontier Spinning Mills, Inc. contributed $2,500 in cash
to CanAm.

---



|
|
|
|

|NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS |                                                                     
|---------------------------------------------- | --------------------------------------------------------------------
|                                               | Years ended October
    1, 2006, October 2, 2005 and October 3, 2004
|                                               | (In thousands of US
    dollars)                                    

19 Financial Instruments

(a)     Foreign currency risk management:

A portion of the Company's sales
and operating expenses are denominated in currencies other than US dollars. The
Company uses the revenue stream in these non-US dollar currencies as a partial,
natural hedge against purchases of fixed assets and expenses denominated in
these non-US dollar currencies. From time to time, the Company also uses forward
foreign exchange contracts to hedge its foreign exchange exposure on cash flows
related to sales and operating expenses.

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

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

A
forward foreign exchange contract represents an obligation to buy or sell a
foreign currency with a counterparty. Credit risk exists in the event of failure
by a counterparty to meet its obligations. The Company reduces this risk by
dealing only with highly rated counterparties, normally major European and North
American financial institutions.

(b)    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 judgement and is based on an evaluation
of each customer's financial condition and payment history. 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 10 customers
accounted for 57.0% (2005  60.1%) of the trade receivable balance, of which one
customer represented 18.1% (2005  20.5%). The remaining trade receivable
balances are dispersed among a large number of debtors across many geographic
areas including the United States, Canada, Europe and Australasia.

An allowance for
doubtful accounts is maintained for credit losses consistent with the credit
risk, historical trends, general economic conditions and other information.

(c)    Fair value disclosure:

Fair value estimates
are made as of a specific point in time, using available information about the
financial instrument. These estimates are subjective in nature and often cannot
be determined with precision.

---



|
|
|
|

|NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS |                                                                     
|---------------------------------------------- | --------------------------------------------------------------------
|                                               | Years ended October
    1, 2006, October 2, 2005 and October 3, 2004
|                                               | (In thousands of US
    dollars)                                    



19 Financial Instruments (Continued)

The Company has determined that the carrying values of its short-term
financial assets and liabilities approximate their respective fair values as at
the balance sheet dates because of the short-term maturity of those instruments.

The fair value of long-term debt is $34,479 (2005  $49,532)
compared to a carrying value of $33,861 (2005  $47,147) as at October 1, 2006.
The fair value of the forward foreign exchange contracts is $502 (2005  $2,953)
as at October 1, 2006. The method of calculating fair values for the financial
instruments is described below.

The fair value of the Company's long-term debt bearing
interest at fixed rates was calculated using the present value of future
payments of principal and interest discounted at the current market rates of
interest available to the Company for the same or similar debt instruments with
the same remaining maturities. For long-term debt bearing interest at variable
rates, the fair value is considered to approximate the carrying value. The fair
value of the forward foreign exchange contracts was determined using quoted
market values.

(d)    
Interest rate risk:
The Company's exposure to interest rate fluctuations is with respect to debt
which bears interest at floating rates.

20 Segmented Information

The Company manufactures and sells activewear, socks and underwear. The
Company operates in one business segment, being high-volume, basic, frequently
replenished, non-fashion apparel.

(a)     Sales by major product group:

|                                                                                                                                                                                                                                                                                                                                    |                                         |   | 2006    |   | 2005    | 2004     
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------- | - | ------- | - | ------- | ---------
|                                                                                                                                                                                                                                                                                                                                    |                                         |   |         |   |         |          
|                                                                                                                                                                                                                                                                                                                                    | Activewear
    and underwear            | $ | 743,215 | $ | 653,851 | $ 533,368
|                                                                                                                                                                                                                                                                                                                                    | Socks                                   |   | 29,975  |   |        |         
|                                                                                                                                                                                                                                                                                                                                    |                                         | $ | 773,190 | $ | 653,851 | $ 533,368
|                                                                                                                                                                                                                                                                                                                                    |                                         |   |         |   |         |          
|(b)    
    Major customers and revenues by geographic areas:
    (i) The Company has one customer accounting for greater than 10% of total
    sales. This customer accounted for 28.2% of total sales (2005  28.2%; 2004
     25.0%).
    (ii) Sales were derived from customers located in the following geographic
    areas:
|                                                                                                                                                                                                                                                                                                                                    |                                         |   |         |   |         |          
|                                                                                                                                                                                                                                                                                                                                    |                                         |   | 2006    |   | 2005    | 2004     
|                                                                                                                                                                                                                                                                                                                                    |                                         |   |         |   |         |          
|                                                                                                                                                                                                                                                                                                                                    | United
    States                       | $ | 680,048 | $ | 567,084 | $ 452,060
|                                                                                                                                                                                                                                                                                                                                    | Canada                                  |   | 50,440  |   | 46,009  | 44,827   
|                                                                                                                                                                                                                                                                                                                                    | Europe and other                        |   | 42,702  |   | 40,758  | 36,481   
|                                                                                                                                                                                                                                                                                                                                    |                                         | $ | 773,190 | $ | 653,851 | $ 533,368
|                                                                                                                                                                                                                                                                                                                                    |                                         |   |         |   |         |          
|(c)     Fixed
    assets by geographic areas are as follows:                                                                                                                                                                                                                                                                       
|                                                                                                                                                                                                                                                                                                                                    |                                         |   |         |   |         |          
|                                                                                                                                                                                                                                                                                                                                    |                                         |   |         |   | 2006    | 2005     
|                                                                                                                                                                                                                                                                                                                                    |                                         |   |         |   |         |          
|                                                                                                                                                                                                                                                                                                                                    | Caribbean
    Basin and Central America |   |         | $ | 200,170 | $ 141,029
|                                                                                                                                                                                                                                                                                                                                    | United
    States                       |   |         |   | 68,591  | 67,260   
|                                                                                                                                                                                                                                                                                                                                    | Canada                                  |   |         |   | 31,407  | 47,711   
|                                                                                                                                                                                                                                                                                                                                    | Mexico                                  |   |         |   | 2,509   | 4,615    
|                                                                                                                                                                                                                                                                                                                                    |                                         |   |         | $ | 302,677 | $ 260,615

21 Comparative figures

Certain comparative figures have been reclassified in order to conform with
the current year's presentation.

---