<PAGE>


                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                    FORM 10-Q

 X      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
---     SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 29, 2001
                               -----------------

                                       OR

         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
---      SECURITIES EXCHANGE ACT OF 1934

For the transition period from                    to
                               ------------------    -------------------

Commission File Number 0-20080
                       -------

                              GALEY & LORD, INC.
            ------------------------------------------------------
            (Exact name of registrant as specified in its charter)

             DELAWARE                            56-1593207
  -------------------------------        ---------------------------
  (State or other jurisdiction of              (IRS Employer
   incorporation or organization)            (Identification No.)

980 Avenue of the Americas
New York, New York                                 10018
----------------------------------------     --------------------------
(Address of principal executive offices)         Zip Code

                                  212/465-3000
 -------------------------------------------------------------------------------
               Registrant's telephone number, including area code

                                 Not Applicable
--------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report.

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X   No   .
                                      ---    ---

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.

Common Stock, $.01 Par Value - 11,996,965 shares as of February 15, 2002.

                                                        Exhibit Index at page 38


                                       1

<PAGE>

INDEX

                               GALEY & LORD, INC.

                                                                          Page
                                                                          ----

PART I.  FINANCIAL INFORMATION
------------------------------

Item 1.  Financial Statements (Unaudited)

         Consolidated Balance Sheets --                                     3
         December 29, 2001, December 30, 2000
         and September 29, 2001

         Consolidated Statements of Operations --                           4
         Three months ended December 29, 2001 and
         December 30, 2000

         Consolidated Statements of Cash Flows --                           5
         Three months ended December 29, 2001 and
         December 30, 2000

         Notes to Consolidated Financial Statements --                   6-22
         December 29, 2001

Item 2.  Management's Discussion and Analysis of                        23-33
         Financial Condition and Results of
         Operations

Item 3.  Quantitative and Qualitative Disclosures About                 34-35
         Market Risk

PART II.  OTHER INFORMATION
---------------------------

Item 1.  Legal Proceedings                                                 36

Item 2.  Changes in Securities and Use of Proceeds                         36

Item 3.  Defaults upon Senior Securities                                   36

Item 4.  Submission of Matters to a Vote of Security                       36
         Holders

Item 5   Other Information                                                 36

Item 6.  Exhibits and Reports on Form 8 - K                                36

SIGNATURES                                                                 37
----------

EXHIBIT INDEX                                                              38
-------------


                                       2

<PAGE>

PART I. FINANCIAL INFORMATION
-----------------------------
ITEM 1. FINANCIAL STATEMENTS

                               GALEY & LORD, INC.

                           CONSOLIDATED BALANCE SHEETS
                             (Amounts in thousands)

<TABLE>
<CAPTION>
                                                                         December 29,         December 30,         September 29,
                                                                             2001                 2000                 2001
ASSETS                                                                    (Unaudited)         (Unaudited)                *
------                                                                    -----------         -----------           -----------
<S>                                                                   <C>                  <C>                   <C>
Current assets:
  Cash and cash equivalents                                           $        6,497       $       11,913        $        9,157
  Trade accounts receivable                                                  106,451              165,632               145,366
  Sundry notes and accounts receivable                                         4,533                6,718                 4,802
  Inventories                                                                190,109              173,450               166,820
  Income taxes receivable                                                      2,509                1,563                 2,945
  Deferred income taxes                                                            -               13,402                     -
  Prepaid expenses and other current assets                                    4,127                3,979                 4,371
                                                                      --------------       --------------        --------------

         Total current assets                                                314,226              376,657               333,461

Property, plant and equipment, at cost                                       437,755              480,379               455,909
Less accumulated depreciation and
  Amortization                                                              (185,394)            (181,165)             (191,471)
                                                                      --------------       --------------        --------------
                                                                             252,361              299,214               264,438
Investments in and advances to associated
  Companies                                                                   41,310               34,317                38,897
Deferred charges, net                                                         11,222               12,917                12,039
Other non-current assets                                                       1,425                1,794                 1,506
Intangibles, net                                                             113,840              148,188               114,374
                                                                      --------------       --------------        --------------
                                                                      $      734,384       $      873,087        $      764,715
                                                                      ==============       ==============        ==============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
Current liabilities:
  Current portion of long-term debt                                   $        4,657       $        2,914        $        4,670
  Trade accounts payable                                                      40,370               58,962                53,503
  Accrued salaries and employee benefits                                      19,081               24,789                22,759
  Accrued liabilities                                                         36,048               38,731                35,529
  Income taxes payable                                                         6,254                4,258                 5,600
                                                                      --------------       --------------        --------------

          Total current liabilities                                          106,410              129,654               122,061

Long-term debt                                                               632,532              630,018               634,821
Other long-term liabilities                                                   13,055               20,023                17,814
Deferred income taxes                                                          3,118               32,952                 3,003

Stockholders' equity (deficit):
  Common stock                                                                   124                  124                   124
  Contributed capital in excess of par value                                  41,149               39,979                40,878
  Retained earnings (Accumulated deficit)                                    (42,842)              32,607               (37,609)
  Treasury stock, at cost                                                     (2,247)              (2,247)               (2,247)
  Accumulated other comprehensive income (loss)
                                                                             (16,915)             (10,023)              (14,130)
                                                                      --------------       --------------        --------------
          Total stockholders' equity (deficit)                               (20,731)              60,440               (12,984)
                                                                      --------------       --------------        --------------
                                                                      $      734,384       $      873,087        $      764,715
                                                                      ==============       ==============        ==============
*Condensed from audited financial statements.
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       3

<PAGE>

                               GALEY & LORD, INC.
                CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
                  (Amounts in thousands except per share data)

<TABLE>
<CAPTION>
                                                                                                 Three Months Ended
                                                                                     --------------------------------------
                                                                                         December 29,          December 30,
                                                                                            2001                  2000
                                                                                     -----------------      ----------------
<S>                                                                                    <C>                   <C>
Net sales                                                                              $      136,446        $      221,685
Cost of sales                                                                                 124,880               199,901
                                                                                       --------------        --------------
Gross profit                                                                                   11,566                21,784
Selling, general and administrative expenses                                                    8,688                 8,920
Amortization of intangibles                                                                       816                 1,188
Impairment of fixed assets                                                                        192                     -
Plant closing costs                                                                            (1,338)                 (445)
Net gain on benefit plan curtailments                                                          (3,375)               (2,327)
                                                                                       --------------        --------------
Operating income                                                                                6,583                14,448

Interest expense                                                                               13,200                16,431

Income from associated companies                                                               (2,326)               (1,864)
                                                                                       --------------        --------------
Income (loss) before income taxes                                                              (4,291)                 (119)
Income tax expense (benefit):
   Current                                                                                        827                 2,459
   Deferred                                                                                       115                (2,648)
                                                                                       --------------        --------------
Net income (loss)                                                                      $       (5,233)       $           70
                                                                                       ==============        ==============

Net income (loss) per common share:
Basic:
    Average common shares outstanding                                                          11,997                11,961
     Net income (loss) per common share - Basic                                        $         (.44)       $          .01
                                                                                       ==============        ==============
Diluted:
    Average common shares outstanding                                                          11,997                11,984
    Net income (loss) per common share - Diluted                                       $         (.44)       $          .01
                                                                                       ==============        ==============
</TABLE>

          See accompanying notes to consolidated financial statements.


                                       4

<PAGE>

                               GALEY & LORD, INC.

                CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
                             (Amounts in thousands)
<TABLE>
<CAPTION>
                                                                                                    Three Months Ended
                                                                                         ----------------------------------
                                                                                            December 29,      December 30,
                                                                                                2001              2000
                                                                                         ----------------     -------------
<S>                                                                                         <C>                  <C>
Cash flows from operating activities:
  Net income (loss)                                                                         $  (5,233)           $      70
  Adjustments to reconcile net income (loss) to net cash
    provided by (used in) operating activities:
     Depreciation of property, plant and equipment                                              7,495                8,174
     Amortization of intangible assets                                                            816                1,188
     Amortization of deferred charges                                                             852                  731
     Deferred income taxes                                                                        115               (2,648)
     Non-cash compensation                                                                        271                  306
     (Gain)/loss on disposals of property, plant
       and equipment                                                                               26                   17
     Undistributed income from associated companies                                            (2,326)              (1,864)
     Impairment of fixed assets                                                                   192                    -
     Net gain on benefit plan curtailments                                                     (3,375)              (2,327)
     Other                                                                                         23                   32
  Changes in assets and liabilities:
     (Increase)/decrease in accounts receivable - net                                          38,036               32,996
     (Increase)/decrease in sundry notes & accounts
       receivable                                                                                 122                1,452
     (Increase)/decrease in inventories                                                       (24,131)              (5,461)
     (Increase)/decrease in prepaid expenses and other
       current assets                                                                             156                   70
     (Increase)/decrease in other non-current assets                                               74                  (42)
     (Decrease)/increase in accounts payable - trade                                          (12,669)              (2,097)
     (Decrease)/increase in accrued liabilities                                                 1,516               (1,200)
     (Decrease)/increase in income taxes payable                                                1,130                2,106
     (Decrease)/increase in other long-term liabilities                                          (141)              (2,360)
     (Decrease)/increase in plant closing costs                                                (5,067)              (4,491)
                                                                                            ---------            ---------

Net cash provided by (used in) operating activities                                            (2,118)              24,652

Cash flows from investing activities:
  Property, plant and equipment expenditures                                                   (2,271)              (4,072)
  Proceeds from sale of property, plant and equipment                                           4,218                  240
  Distributions received from associated companies                                                  -                1,142
  Investment in affiliates                                                                          -               (1,110)
  Other                                                                                          (282)                 (47)
                                                                                            ---------            ---------

Net cash provided by (used in) investing activities                                              1,665              (3,847)

Cash flows from financing activities:
  Increase/(decrease) in revolving line of credit                                                 193               (3,200)
  Principal payments on long-term debt                                                         (2,287)             (16,221)
  Issuance of long-term debt                                                                        -                  596
                                                                                            ---------            ---------

Net cash provided by (used in) financing activities                                            (2,094)             (18,825)

Effect of exchange rate changes on cash and cash equivalents                                     (113)                 292
                                                                                            ---------            ---------

Net increase/(decrease) in cash and cash equivalents                                           (2,660)               2,272

Cash and cash equivalents at beginning of period                                                9,157                9,641
                                                                                            ---------            ---------

Cash and cash equivalents at end of period                                                  $   6,497            $  11,913
                                                                                            =========            =========
</TABLE>
          See accompanying notes to consolidated financial statements.

                                       5

<PAGE>

                               GALEY & LORD, INC.

                   Notes to Consolidated Financial Statements
                               December 29, 2001
                                  (Unaudited)

NOTE A - Basis of Presentation

The consolidated financial statements include the accounts of Galey & Lord, Inc.
(the "Company") and its wholly-owned subsidiaries. Investments in affiliates in
which the Company owns 20 to 50 percent of the voting stock are accounted for
using the equity method. Intercompany items have been eliminated in
consolidation.

The accompanying unaudited consolidated financial statements reflect all
adjustments which are, in the opinion of management, necessary to present fairly
the financial position of the Company as of December 29, 2001 and the results of
operations and cash flows for the periods ended December 29, 2001 and December
30, 2000. Such adjustments consisted only of normal recurring items. Interim
results are not necessarily indicative of results for a full year. These
financial statements should be read in conjunction with the financial statements
and footnotes included in the Company's Annual Report on Form 10-K and Form
10-K/A for the fiscal year ended September 29, 2001.

NOTE B - Inventories

The components of inventory at December 29, 2001, December 30, 2000 and
September 29, 2001 consisted of the following (in thousands):

<TABLE>
<CAPTION>

                                                                    December 29,           December 30,            September 29,
                                                                       2001                    2000                    2001
                                                                 -----------------       -----------------     -----------------
<S>                                                              <C>                     <C>                   <C>
Raw materials                                                    $          4,779        $          4,611      $           4,760
Stock in process                                                           17,018                  30,180                 19,015
Produced goods                                                            163,252                 134,828                140,742
Dyes, chemicals and supplies                                               11,568                  12,198                 11,152
                                                                 ----------------        ----------------      -----------------
                                                                          196,617                 181,817                175,669
Adjust to LIFO cost                                                         4,211                     424                    757
Lower-of-cost-or-market reserves                                          (10,719)                 (8,791)                (9,606)
                                                                 ----------------        ----------------      -----------------
                                                                 $        190,109        $        173,450      $         166,820
                                                                 ================        ================      =================
</TABLE>

On September 30, 2001, the Company changed its method of accounting for
inventories to last-in, first-out (LIFO) for its Swift Denim business which was
acquired on January 28, 1998. The Company believes that utilizing LIFO for Swift
will result in a better matching of costs with revenues and provide consistency
in accounting for inventory among the Company's North American operations. The
Company also believes the utilization of LIFO is consistent with industry
practice. Approximately $1.0 million of lower-of-cost-or-market (LCM) reserves
were reversed during the quarter due to the change from FIFO to LIFO. In
implementing the change in inventory method for Swift, the opening fiscal 2002
inventory value under LIFO is the same as the year ending FIFO inventory value
at September 29, 2001. The cumulative effect of implementing LIFO on prior
periods and the pro forma effects of retroactive application is not
determinable.


                                       6

<PAGE>
                               GALEY & LORD, INC.

                   Notes to Consolidated Financial Statements
                               December 29, 2001

                                  (Unaudited)

NOTE C - Long-Term Debt

On July 13, 1999, the Company amended its credit agreement, dated as of January
29, 1998, as amended, with First Union National Bank ("FUNB"), as agent and
lender and its syndicate of lenders. The amendment became effective as of July
3, 1999 (the "July 1999 Amendment"). In August 2001, the Company amended the
Senior Credit Facility (the "August 2001 Amendment") which, among other things,
replaced the Adjusted Leverage Ratio covenant (as defined in the August 2001
Amendment) with a minimum EBITDA covenant (as defined in the August 2001
Amendment) until the Company's December quarter 2002, waived compliance by the
Company with the Adjusted Fixed Charge Coverage Ratio (as defined in the August
2001 Amendment) until the Company's December quarter 2002 and modified the
Company's covenant related to capital expenditures. The August 2001 Amendment
also excludes, for covenant purposes, charges related to closure of facilities
announced on July 26, 2001. The August 2001 Amendment also increased the
interest rate spread on all borrowings under the Company's revolving line of
credit and term loans by 100 basis points for the remainder of the term of its
Senior Credit Facility.

Under the July 1999 Amendment, for the period beginning July 4, 1999 through
February 15, 2001, the revolving line of credit borrowings bear interest at a
per annum rate, at the Company's option, of either (i) (a) the greater of the
prime rate or the federal funds rate plus .50% plus (b) a margin of 1.75% or
(ii) LIBOR plus a margin of 3.00%. Term Loan B and Term Loan C bear interest at
a per annum rate, at the Company's option, of (A) with respect to Term Loan B
either (i)(a) the greater of the prime rate or federal funds rate plus .50%,
plus (b) a margin of 2.25% or (ii) LIBOR plus a margin of 3.50% or (B) with
respect to Term Loan C, either (i)(a) the greater of the prime rate or federal
funds rate plus .50%, plus (b) a margin of 2.0% or (ii) LIBOR plus a margin of
3.75%. In addition, the Company repaid $25 million principal amount of its term
loan balance using available borrowings under its revolving line of credit and
reduced the maximum amount of borrowings under the revolving line of credit by
$25 million to $200 million. The repayment of the Term Loan B and Term Loan C
principal balances ratably reduced the remaining quarterly principal payments.

Under the Senior Credit Facility, as amended on December 22, 1998, July 3, 1999
and August 9, 2001, the revolving line of credit borrowings bear interest at a
per annum rate, at the Company's option, of either (i) (a) the greater of the
prime rate or the federal funds rate plus .50% plus (b) a margin of 1.0%, 1.25%,
1.50%, 1.75%, 2.00% or 2.25%, based on the Company achieving certain leverage
ratios (as defined in the Senior Credit Facility) or (ii) LIBOR plus a margin of
2.25%, 2.50%, 2.75%, 3.00%, 3.25% or 3.50%, based on the Company achieving
certain leverage ratios. Term Loan B and Term Loan C bear interest at a per
annum rate, at

NOTE C - Long-Term Debt (Continued)



                                       7

<PAGE>

                               GALEY & LORD, INC.

                   Notes to Consolidated Financial Statements
                               December 29, 2001

                                  (Unaudited)



the Company's option, of (A) with respect to Term Loan B either (i) (a) the
greater of the prime rate or federal funds rate plus .50%, plus (b) a margin of
2.00%, 2.25%, 2.50% or 2.75%, based on the Company achieving certain leverage
ratios or (ii) LIBOR plus a margin of 3.25%, 3.50%, 3.75% or 4.00%, based on the
Company achieving certain leverage ratios and (B) with respect to Term Loan C,
either (i) (a) the greater of the prime rate or federal funds rate plus .50%,
plus (b) a margin of 2.25%, 2.50%, 2.75% or 3.00%, based on the Company
achieving certain leverage ratios, or (ii) LIBOR plus a margin of 3.50%, 3.75%,
4.00% or 4.25%, based on the Company's achieving certain leverage ratios.

Under the Senior Credit Facility, the Company is required to make mandatory
prepayments of principal annually in an amount equal to 50% of Excess Cash Flow
(as defined in the Senior Credit Facility), and also in the event of certain
dispositions of assets or debt or equity issuances (all subject to certain
exceptions) in an amount equal to 100% of the net proceeds received by the
Company therefrom. Based on fiscal 2001 results, the Company was not required to
make an Excess Cash Flow payment with respect to fiscal 2001.

As a result of the February 2001 funding of the Company's Canadian Loan
Agreement (as defined below), the Company repaid $12.7 million principal amount
of its U.S. term loan balance and reduced the maximum amount of borrowings under
its U.S. revolving line of credit by $12.3 million to $187.7 million. The
repayment of the Term Loan B and Term Loan C principal balances ratably reduced
the remaining quarterly principal payments. The reduction in the U.S. revolving
line of credit facility resulted in a write-off of $0.1 million of deferred debt
charges which is included in selling, general and administrative expenses in the
March quarter 2001.

In February 2001, the Company's wholly owned Canadian subsidiary, Drummondville
Services Inc. ("Drummondville"), entered into a Loan Agreement (the "Canadian
Loan Agreement") with Congress Financial Corporation (Canada), as lender. The
Canadian Loan Agreement provides for (i) a revolving line of credit under which
Drummondville may borrow up to an amount equal to the lesser of U.S. $16.0
million or a borrowing base (comprised of eligible accounts receivable and
eligible inventory of Drummondville, as defined in the Canadian Loan Agreement),
and (ii) a term loan in the principal amount of U.S. $9.0 million, which was
originally borrowed and denominated in Canadian dollars.

Under the Canadian Loan Agreement, the revolving line of credit expires in
February 2004 and the principal amount of the term loan is repayable

NOTE C - Long-Term Debt (Continued)


                                       8

<PAGE>
                               GALEY & LORD, INC.

                   Notes to Consolidated Financial Statements
                               December 29, 2001

                                  (Unaudited)


in equal monthly installments of $229,500 CDN with the unpaid balance repayable
in February 2004; provided, however, that the revolving line of credit and the
maturity of the term loan may be extended at the option of Drummondville for up
to two additional one year periods subject to and in accordance with the terms
of the Canadian Loan Agreement. Under the Canadian Loan Agreement, the interest
rate on Drummondville's borrowings initially is fixed through the second quarter
of fiscal year 2001 (March quarter 2001) at a per annum rate, at Drummondville's
option, of either LIBOR plus 2.75% or the U.S. prime rate plus .75% (for
borrowings in U.S. dollars) or the Canadian prime rate plus 1.5% (for borrowings
in Canadian dollars). Thereafter, borrowings will bear interest at a per annum
rate, at Drummondville's option, of either (i) the U.S. prime rate plus 0%,
 .25%, .50%, .75%, or 1.0% (for borrowings in U.S. dollars), (ii) the Canadian
prime rate plus .75%, 1.0%, 1.25%, 1.50%, or 1.75% (for borrowings in Canadian
dollars), or (iii) LIBOR plus 2.00%, 2.25%, 2.50%, 2.75% or 3.00% (for
borrowings in U.S. dollars ), all based on Drummondville maintaining certain
quarterly excess borrowing availability levels under the revolving line of
credit or Drummondville achieving certain fixed charge coverage ratio levels (as
set forth in the Canadian Loan Agreement).

Drummondville's obligations under the Canadian Loan Agreement are secured by all
of the assets of Drummondville. The Canadian Loan Agreement contains certain
covenants, including without limitation, those limiting Drummondville's ability
to incur indebtedness (other than incurring or paying certain intercompany
indebtedness), incur liens, sell or acquire assets or businesses, pay dividends,
make loans or advances or make certain investments. In addition, the Canadian
Loan Agreement requires Drummondville to maintain a certain level of tangible
net worth (as defined in the Canadian Loan Agreement).

The Company was in full compliance with all of its lenders' covenants as of
December 29, 2001. However, due to the poor retail environment, the Company
expects to report a loss for the March 2002 quarter. Accordingly, the Company
anticipates that it may not be in compliance with certain of the financial
covenants in the Senior Credit Facility as of March 30, 2002. If the Company
violates the financial or other covenants contained in its Senior Credit
Facility or in the indenture governing the outstanding Notes, the Company will
be in default under the Senior Credit Facility and/or the indenture. If a
default occurs and is not waived by the lenders, the lenders could seek remedies
against the Company, including: (1) penalty rates of interest; (2) immediate
repayment of the debt; and/or (3) the foreclosure on any assets securing the
debt.



                                       9

<PAGE>
                               GALEY & LORD, INC.

                   Notes to Consolidated Financial Statements
                               December 29, 2001
                                  (Unaudited)



NOTE D - Net Income (Loss) Per Common Share

The following table sets forth the computation of basic and diluted earnings per
share (in thousands):
<TABLE>
<CAPTION>

                                                                                    Three Months Ended
                                                                           ---------------------------------
                                                                           December 29,        December 30,
                                                                               2001                2000
                                                                           -------------       -------------
<S>                                                                        <C>                 <C>
Numerator:
     Net income (loss)                                                     $      (5,233)      $          70
                                                                           =============       =============

Denominator:
     Denominator for basic earnings per share                                     11,997              11,961
     Effect of dilutive securities:
        Stock options                                                                  -                  23
                                                                           -------------       -------------
     Diluted potential common shares denominator for diluted
        earnings per share - adjusted weighted average shares and
        assumed exercises                                                         11,997              11,984
                                                                           =============       =============
</TABLE>

Incremental shares for diluted earnings per share represent the dilutive effect
of options outstanding during the quarter. Options to purchase 161,149 shares
and 867,499 shares of common stock were outstanding during the three months
ended December 29, 2001 and December 30, 2000, respectively, but were not
included in the computation of diluted earnings per share because the options'
exercise price was greater than the average market price of the common shares.
Options to purchase 798,150 shares and 105,000 shares of common stock were
outstanding during the three months ended December 29, 2001 and December 30,
2000, respectively, but were not included in the computation of diluted earnings
per share pursuant to the contingent share provisions of Financial Accounting
Standards Board Statement No. 128, "Earnings Per Share". Vesting of these
options is contingent upon the market price of common shares reaching certain
target prices, which were greater than the average market price of the common
shares.

NOTE E - Benefit Plans

The Company and its U.S. subsidiaries sponsor noncontributory defined benefit
pension plans covering substantially all domestic employees. The plans provide
retirement benefits for all qualified salaried employees and qualified non-union
wage employees based generally on years of service and average compensation.
Retirement benefits for qualified union wage employees are based generally on a
flat dollar amount for each year of service. The Company's funding policy is to
contribute annually the amount recommended by the plan's actuary. Plan assets,
which consist of common stocks, bonds and cash equivalents, are maintained in
trust accounts.


                                       10

<PAGE>

                               GALEY & LORD, INC.

                   Notes to Consolidated Financial Statements
                               December 29, 2001

                                  (Unaudited)

NOTE E - Benefit Plans (Continued)

On September 20, 2001, the Company froze the accrual of future retirement
benefits under its U.S. defined benefit plans effective December 31, 2001. The
resulting curtailment gain was offset by unamortized actuarial losses.

The Company provides health care and life insurance benefits to certain retired
employees and their dependents. The plans are unfunded and approved claims are
paid by the Company. The Company's cost is partially offset by retiree premium
contributions. Effective December 31, 2001, the Company curtailed benefits to
employees who were not retired as of December 31, 2001 and, accordingly, a net
benefit curtailment gain of $3.4 million was recognized in the first quarter of
fiscal 2002.

NOTE F - Stockholders' Equity (Deficit)

Comprehensive income represents the change in stockholders' equity (deficit)
during the period from non-owner sources. Currently, changes from non-owner
sources consist of net loss, foreign currency translation adjustments and loss
on derivative instruments. Total comprehensive income (loss) for the three
months ended December 29, 2001 and December 30, 2000 was $(8.0) million and $4.5
million, respectively.

Activity in Stockholders' Equity (Deficit) is as follows (in thousands):
<TABLE>
<CAPTION>

                                                                                                       Accumulated
                          Current Year                                                                    Other
                          Comprehensive      Common     Contributed     Retained         Treasury     Comprehensive
                          Income (Loss)       Stock       Capital       Earnings           Stock      Income(Loss)      Total
                          -------------       -----       -------       --------           -----      ------------      -----
<S>                        <C>             <C>         <C>              <C>           <C>           <C>             <C>
Balance at
  September 29, 2001                       $   124     $    40,878      $(37,609)     $   (2,247)   $   (14,130)    $   (12,984)
Compensation earned
  Related to stock
  Options                                        -             271             -               -              -             271
Comprehensive
  Income(loss):
  Net income (loss) for
  three months ended
  December 29, 2001        $   (5,233)           -               -        (5,233)              -              -          (5,233)
  Foreign currency
  Translation
  adjustment                   (2,754)           -               -             -               -         (2,754)         (2,754)
  Gain (loss) on
  derivative
  instruments                     (31)           -               -             -               -            (31)            (31)
                           ----------    ---------    ------------      ----------    -----------   -----------    ------------
  Total comprehensive
  Income (loss)            $   (8,018)
                           ==========
Balance at
  December 29, 2001                        $   124     $    41,149    $  (42,842)    $    (2,247)   $   (16,915)    $   (20,731)
                                           =======     ===========    ==========     ===========   ============     ===========
</TABLE>

Included in Accumulated Other Comprehensive Income (Loss) at December 29, 2001
was a $16.9 million loss related to foreign currency translation adjustment and
a $7,000 loss related to derivative instruments.


                                       11

<PAGE>

                               GALEY & LORD, INC.

                   Notes to Consolidated Financial Statements
                               December 29, 2001
                                  (Unaudited)



NOTE G - Income Taxes

The components of income tax expense (benefit) are as follows (in thousands):
<TABLE>
<CAPTION>

                                                                                   Three Months Ended
                                                                          ---------------------------------------
                                                                             December 29,          December 30,
                                                                                 2001                  2000
                                                                          -----------------     -----------------
<S>                                                                       <C>                   <C>
Current tax provision:
     Federal                                                              $               -     $               5
     State                                                                               13                    19
     Foreign                                                                            814                 2,435
                                                                          -----------------     -----------------
Total current tax provision                                                             827                 2,459

Deferred tax provision:
     Federal                                                                              -                (2,519)
     State                                                                                -                  (297)
     Foreign                                                                            115                   168
                                                                          -----------------     -----------------
Total deferred tax provision                                                            115                (2,648)
                                                                          -----------------     -----------------
Total provision for income taxes                                          $             942     $            (189)
                                                                          =================     =================
</TABLE>

The Company's overall tax rate differed from the statutory rate principally due
to the nonrecognition of the U.S. tax benefits on the domestic net operating
losses. The result is an overall tax expense rate which is higher than the
statutory rate.

At December 29, 2001, the Company had outstanding net operating loss
carryforwards ("NOLs") for U.S. federal tax purposes of approximately
$117.2 million and state tax purposes of approximately $97.5 million. The
federal NOLs will expire in years 2019-2021, and the state NOLs will expire in
years 2002-2017. In accordance with the Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," a valuation allowance of
$16.6 million related to domestic operating income losses has been established
since it is more likely than not that some portion of the deferred tax assets
will not be realized. This review, along with the timing of the reversal of the
Company's temporary differences and the expiration dates of the NOLs, were
considered in reaching this conclusion.


                                       12

<PAGE>

                               GALEY & LORD, INC.

                   Notes to Consolidated Financial Statements
                               December 29, 2001

                                  (Unaudited)



NOTE H - Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives

In the fourth quarter of fiscal 2001, the Company announced additional actions
(the "Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives") taken as a
result of the very difficult business environment which the Company continued to
operate in throughout fiscal 2001. The Company's goal in taking these actions
was future loss avoidance, cost reduction, production capacity rationalization
and increased cash flow. The principal manufacturing initiatives included
discontinuation of G&L Service Company, the Company's garment making operations
in Mexico, and the consolidation of its greige fabrics operations. The
discontinuation of G&L Service Company included the closure of the Dimmit
facilities in Piedras Negras, Mexico, the Alta Loma facilities in Monclova,
Mexico and the Eagle Pass Warehouse in Eagle Pass, Texas. The consolidation of
its greige fabrics operations included the closure of its Asheboro, North
Carolina weaving facility and Caroleen, North Carolina spinning facility. In
addition to the principal manufacturing initiatives above, the Company also
provided for the reduction of approximately 5% of its salaried overhead
employees.

In the fourth quarter of fiscal 2001, the Company recorded $63.4 million before
taxes of plant closing and impairment charges and $4.9 million before taxes of
losses related to completing garment customer orders all related to the Fiscal
2001 Cost Reduction and Loss Avoidance Initiatives. The components of the plant
closing and impairment charges included $30.4 million for goodwill impairments,
$20.3 million for fixed asset impairments, $7.5 million for severance expense
and $5.2 million for the write-off of leases and other exit costs. In the
December quarter 2001, the Company recorded a change in estimate that increased
the fixed asset impairment charge by $0.2 million and decreased the plant
closing costs by $1.3 million.

Approximately 3,300 Mexican employees and 500 U.S. employees were terminated as
a result of the initiatives. All production at the affected facilities ceased in
early September 2001 by which time substantially all the affected employees were
terminated. During the first quarter of fiscal 2001, the Company sold its
Asheboro, North Carolina facility and related equipment as well as a portion of
the G&L Service Company equipment. The Company expects that the sale of the
remainder of the real estate and equipment in connection with the Fiscal 2001
Cost Reduction and Loss Avoidance Initiatives could take 12 months or longer to
complete.


                                       13

<PAGE>

                               GALEY & LORD, INC.

                   Notes to Consolidated Financial Statements
                               December 29, 2001

                                  (Unaudited)




NOTE H - Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives (Continued)

The table below summarizes the activity related to the Fiscal 2001 Cost
Reduction and Loss Avoidance Initiatives plant closing accruals for the year
ended September 29, 2001 (in thousands):
<TABLE>
<CAPTION>

                                              Accrual                                                                Accrual
                                             Balance at                                                            Balance at
                                            September 29,              Cash                  Change in            December 29,
                                               2001                  Payments                Estimate                  2001
                                          ---------------          ---------------        --------------         ----------------

<S>                                       <C>                      <C>                    <C>                    <C>
Severance benefits                        $          1,992         $         (674)        $            -         $          1,318
Lease cancellation
and other                                            5,027                 (2,098)                (1,338)                   1,591
                                          ----------------         --------------         --------------         ----------------
                                          $          7,019         $       (2,772)        $       (1,338)        $          2,909
                                          ================         ==============         ==============         ================
</TABLE>


The Company incurred run-out expenses totaling $2.2 million in the December
quarter of fiscal 2002. These expenses, which include efficiency losses,
equipment relocation, losses on inventories of discontinued styles, plant
carrying costs and other costs, are included primarily in cost of sales in the
consolidated statement of operations.

In August 2001, the Company amended its Senior Credit Facility (as defined
herein) to, among other things, exclude from covenant calculations the charges
related to the Fiscal 2001 Strategic Initiatives discussed above. See Note C -
Long-term Debt.

NOTE I - Fiscal 2000 Strategic Initiatives

During the fourth quarter of fiscal 2000, the Company announced a series of
strategic initiatives (the "Fiscal 2000 Strategic Initiatives") aimed at
increasing the Company's competitiveness and profitability by reducing costs.
The initiatives include completing a joint venture in Mexico, closing two of the
Company's plants, consolidating some operations, outsourcing certain yarn
production and eliminating excess employees in certain operations. The cost of
these initiatives was reflected in a plant closing and impairment charge
totaling $63.6 million before taxes in the fourth quarter of fiscal 2000. The
original components of the plant closing and impairment charge included $49.3
million for fixed asset write-offs, $10.8 million for severance expense and $3.5
million for the write-off of leases and other exit costs. During fiscal 2001,
the Company recorded a change in estimate for severance benefits that


                                       14

<PAGE>

                               GALEY & LORD, INC.

                   Notes to Consolidated Financial Statements
                               December 29, 2001
                                  (Unaudited)



NOTE I - Fiscal 2000 Strategic Initiatives (Continued)

reduced the plant closing charge by $0.6 million.  All production at the
affected facilities ceased during the December quarter of fiscal 2000. Of the
1,370 employees to be terminated as a result of the Fiscal 2000 Strategic
Initiatives, substantially all have been terminated as of September 29, 2001.
Severance payments have been made in either a lump sum or over a maximum period
of up to eighteen months. During fiscal 2001, the Company sold a portion of the
Erwin facility as well as substantially all of the equipment at the Erwin
facility and the Brighton facility. The Company expects that the sale of the
remaining real estate and equipment related to the Fiscal 2000 Strategic
Initiatives could take 12 months or longer to complete.

The table below summarizes the activity related to the plant closing accruals
for the three months ended December 29, 2001 (in thousands):
<TABLE>
<CAPTION>

                                         Accrual Balance at                          Accrual Balance at
                                           September 29,              Cash               December 29,
                                               2001                 Payments                 2001
                                       ----------------------      ---------------    ------------------
<S>                                     <C>                        <C>                 <C>
Severance benefits                     $          1,817           $         (685)     $           1,132
Lease cancellation
  and other                                       2,402                     (272)                 2,130
                                       ----------------           --------------      -----------------
                                       $          4,219           $         (957)     $           3,262
                                       ================           ==============      =================
</TABLE>

As a result of the employees terminated due to the Fiscal 2000 Strategic
Initiatives, the Company recognized a net curtailment gain of $2.4 million in
fiscal 2001 related to its defined benefit pension and post-retirement medical
plans.




                                       15

<PAGE>

                               GALEY & LORD, INC.

                   Notes to Consolidated Financial Statements
                               December 29, 2001
                                  (Unaudited)



NOTE J - Segment Information

The Company's operations are classified into four business segments: Galey &
Lord Apparel, Swift Denim, Klopman International and Home Fashion Fabrics. The
Company is principally organized around differences in products; however, one
segment exists primarily due to geographic location. The business segments are
managed separately and distribute products through different marketing channels.
Galey & Lord Apparel manufactures and sells woven cotton and cotton blended
apparel fabrics. Swift Denim manufactures and markets a wide variety of denim
products for apparel and non-apparel uses. Klopman International manufactures
principally workwear and careerwear fabrics as well as woven sportswear apparel
fabrics primarily for consumption in Europe. Home Fashion Fabrics sells dyed and
printed fabrics to the home furnishing trade for use in bedspreads, comforters,
curtains and accessories as well as greige fabrics (undyed and unfinished) which
it sends to independent contractors for dyeing and finishing.

The Company evaluates performance and allocates resources based on operating
income; therefore, certain expenses, principally net interest expense and income
taxes, are excluded from the chief operating decision makers' assessment of
segment performance. Accordingly, such expenses have not been allocated to
segment results. The corporate segment's operating income (loss) represents
principally the administrative expenses from the Company's various holding
companies. Additionally, the corporate segment assets consist primarily of
corporate cash, deferred bank charges and investments in and advances to
associated companies.

Information about the Company's operations in its different industry segments
for the three months ended December 29, 2001 and December 30, 2000 is as follows
(in thousands):

                                                     Three Months Ended
                                             ---------------------------------
                                               December 29,     December 30,
                                                   2001               2000
                                             ---------------    --------------
   Net Sales to External Customers
       Galey & Lord Apparel                  $       58,972    $      107,556
       Swift Denim                                   43,961            78,604
       Klopman International                         29,744            31,824
       Home Fashion Fabrics                           3,769             3,701
                                             --------------    --------------
       Consolidated                          $      136,446    $      221,685
                                             ==============    ==============



                                       16

<PAGE>
                               GALEY & LORD, INC.

                   Notes to Consolidated Financial Statements
                               December 29, 2001
                                  (Unaudited)



NOTE J - Segment Information (Continued)
<TABLE>
<CAPTION>

                                                                                  Three Months Ended
                                                                       ------------------------------------
                                                                          December 29,        December 30,
                                                                              2001                2000
                                                                       ---------------        -------------
<S>                                                                     <C>                  <C>
   Operating Income (Loss)(1)(2)
       Galey & Lord Apparel                                             $       (2,016)      $        6,381
       Swift Denim                                                              10,497                7,433
       Klopman International                                                       690                2,003
       Home Fashion Fabrics                                                     (1,081)              (1,109)
       Corporate                                                                (1,507)                (260)
                                                                        --------------       --------------
                                                                                 6,583               14,448
   Interest expense                                                             13,200               16,431
   Income from associated companies(3)                                          (2,326)              (1,864)
                                                                        --------------       --------------
   Income (loss) before income taxes                                    $       (4,291)      $         (119)
                                                                        ==============       ==============

   Assets(4)
       Galey & Lord Apparel                                             $      239,187       $      286,414
       Swift Denim                                                             325,122              357,004
       Klopman International                                                   105,157              116,209
       Home Fashion Fabrics                                                      8,299               54,620
       Corporate                                                                56,619               58,840
                                                                        --------------       --------------
                                                                        $      734,384       $      873,087
                                                                        ==============       ==============
</TABLE>

(1) December quarter 2001 operating income (loss) includes run-out charges and
    plant closing and impairment costs related to the Fiscal 2001 Cost Reduction
    and Loss Avoidance Initiatives of $0.3 million for Galey & Lord Apparel and
    $0.7 million for Home Fashion Fabrics.

(2) December quarter 2000 operating income (loss) includes run-out charges and
    plant closing costs related to the Fiscal 2000 Strategic Initiatives of $1.6
    million for Galey & Lord Apparel and $0.3 million for Swift Denim.

(3) Net of amortization of $163 and $163, respectively.

(4) Excludes intercompany balances and investments in subsidiaries which are
    eliminated in consolidation.



                                       17

<PAGE>

                               GALEY & LORD, INC.

                   Notes to Consolidated Financial Statements
                               December 29, 2001
                                  (Unaudited)

NOTE K - Supplemental Condensed Consolidating Financial Information

The following summarizes condensed consolidating financial information for the
Company, segregating Galey & Lord, Inc. (the "Parent") and guarantor
subsidiaries from non-guarantor subsidiaries. The guarantor subsidiaries are
wholly-owned subsidiaries of the Company and guarantees are full, unconditional
and joint and several. Separate financial statements of each of the guarantor
subsidiaries are not presented because management believes that these financial
statements would not be material to investors.
<TABLE>
<CAPTION>

                                                                         December 29, 2001
                                   -------------------------------------------------------------------------------------------------
                                                                            (in thousands)

                                                                               Non-
                                                        Guarantor            Guarantor
                                       Parent         Subsidiaries         Subsidiaries      Eliminations         Consolidated
                                       ------         ------------         ------------      ------------         ------------
<S>                                 <C>              <C>                 <C>                 <C>                   <C>
Financial Position
Current assets:
   Trade accounts
     receivable                     $         -      $       72,185      $       34,266      $                -    $        106,451
   Inventories                                -             148,173              41,936                       -             190,109
   Other current
     assets                                 837               3,912              12,917                       -              17,666
                                   ------------      --------------      --------------      ------------------    ----------------
       Total current
        assets                              837             224,270              89,119                       -             314,226

Property, plant and
  Equipment, net                              -             174,059              78,302                       -             252,361

Intangibles                                   -             113,840                   -                       -             113,840

Other assets                             34,764               5,644              39,014                 (25,465)             53,957
                                   ------------      --------------      --------------      ------------------    ----------------
                                    $    35,601      $      517,813      $      206,435      $          (25,465)   $        734,384
                                    ===========      ==============      ==============      ==================    ================

Current liabilities:
   Trade accounts
     payable                        $         -      $       24,166      $       16,204        $              -    $         40,370
   Accrued
     liabilities                         22,529              21,273              11,343                     (16)             55,129
   Other current
     liabilities                          2,083               1,701               7,127                       -              10,911
                                   ------------      --------------      --------------      ------------------    ----------------
      Total current
         liabilities                     24,612              47,140              34,674                     (16)            106,410

Net intercompany
  balance                              (577,362)            598,312             (20,950)                      -                   -
Long-term debt                          611,874               5,693              14,965                       -             632,532
Other non-current
  liabilities                            (2,792)              7,586              11,379                       -              16,173

Stockholders' equity
  (deficit)                             (20,731)           (140,918)            166,367                 (25,449)            (20,731)
                                   -------------     --------------      --------------      ------------------    ----------------


                                    $    35,601      $      517,813      $      206,435      $          (25,465)   $        734,384
                                    ===========      ==============      ==============      ==================    ================
</TABLE>


                                       18

<PAGE>

                               GALEY & LORD, INC.

                   Notes to Consolidated Financial Statements
                               December 29, 2001
                                  (Unaudited)




NOTE K - Supplemental Condensed Consolidating Financial Information (Continued)
<TABLE>
<CAPTION>

                                                                         December 30, 2000
                                   ------------------------------------------------------------------------------------------
                                                                            (in thousands)

                                                                               Non-
                                                        Guarantor            Guarantor
                                       Parent         Subsidiaries         Subsidiaries      Eliminations        Consolidated
                                       ------         ------------         ------------      ------------        ------------
<S>                              <C>                    <C>                <C>                <C>                <C>
Financial Position
------------------
Current assets:
   Trade accounts
     receivable                  $         -            $ 123,570          $  42,06$                -            $ 165,632
   Inventories                             -              134,832             38,618                -              173,450
   Other current
     assets                              3,673             17,456             16,446                -               37,575
                                     ---------          ---------          ---------          ---------          ---------
       Total current
        assets                           3,673            275,858             97,126                -              376,657

Property, plant and
  equipment, net                           -              209,028             90,186                -              299,214

Intangibles                                -              148,188                -                  -              148,188

Other assets                           205,799              7,517             33,226           (197,514)            49,028
                                     ---------          ---------          ---------          ---------          ---------
                                     $ 209,472          $ 640,591          $ 220,538          $(197,514)         $ 873,087
                                     =========          =========          =========          =========          =========

Current liabilities:
   Trade accounts
     payable                         $      40          $  36,322          $  22,600 $              -            $  58,962
   Accrued
     liabilities                        27,011             21,072             15,450                (13)            63,520
   Other current
     liabilities                         5,692             (2,638)             4,118                -                7,172
                                     ---------          ---------          ---------          ---------          ---------
       Total current
         liabilities                    32,743             54,756             42,168                (13)           129,654

Net intercompany
balance                               (506,087)           582,350            (76,263)               -                  -
Long-term debt                         621,413              6,421              2,184                -              630,018
Other non-current
  liabilities                              963             42,577             10,487             (1,052)            52,975

Stockholders' equity
    (deficit)                           60,440            (45,513)           241,962           (196,449)            60,440
                                     ---------          ---------          ---------          ---------          ---------
                                     $ 209,472          $ 640,591          $ 220,538          $(197,514)         $ 873,087
                                     =========          =========          =========          =========          =========
</TABLE>

                                       19

<PAGE>

                               GALEY & LORD, INC.

                   Notes to Consolidated Financial Statements
                               December 29, 2001

                                  (Unaudited)



NOTE K - Supplemental Condensed Consolidating Financial Information (Continued)
<TABLE>
<CAPTION>

                                                                    Three Months Ended December 29, 2001
                                          ----------------------------------------------------------------------------------
                                                                                 (in thousands)

                                                                                   Non-
                                                            Guarantor            Guarantor
                                           Parent         Subsidiaries         Subsidiaries      Eliminations   Consolidated
                                           ------         ------------         ------------      ------------   ------------

Results of Operations
---------------------

<S>                                      <C>                 <C>               <C>               <C>               <C>
Net sales                                $       -           $  95,698         $  41,987         $  (1,239)        $ 136,446

Gross profit                                     -               7,308             4,258               -              11,566

Operating income (loss)                       (1,314)            4,760             3,137               -               6,583

Interest expense,
  income taxes and
    other, net                                (5,373)           17,890              (701)              -              11,816

Net income (loss)                          $   4,059         $ (13,130)        $   3,838         $     -           $  (5,233)
</TABLE>


<TABLE>
<CAPTION>


                                                                    Three Months Ended December 30, 2000
                                          ----------------------------------------------------------------------------------
                                                                                 (in thousands)

                                                                                Non-
                                                            Guarantor         Guarantor
                                           Parent         Subsidiaries      Subsidiaries   Eliminations     Consolidated
                                           ------         ------------      ------------   ------------     ------------

Results of Operations
---------------------

<S>                                   <C>                <C>               <C>              <C>               <C>
Net sales                             $        -         $ 170,829         $  63,781        $ (12,925)        $ 221,685

Gross profit                                   -            12,320             9,464                -            21,784

Operating income (loss)                     (269)            7,714             7,003                -            14,448

Interest expense,
  income taxes and
    other, net                                37            14,193             1,008             (860)           14,378

Net income (loss)                      $    (306)        $  (6,479)        $   5,995        $     860         $      70

</TABLE>




                                       20

<PAGE>

                               GALEY & LORD, INC.

                   Notes to Consolidated Financial Statements
                               December 29, 2001

                                  (Unaudited)



NOTE K - Supplemental Condensed Consolidating Financial Information (Continued)
<TABLE>
<CAPTION>

                                                                Three Months Ended December 29, 2001
                                     ----------------------------------------------------------------------------------------------
                                                                             (in thousands)

                                                                                Non-
                                                         Guarantor            Guarantor
                                       Parent          Subsidiaries         Subsidiaries         Eliminations         Consolidated
                                       ------          ------------         ------------         ------------         ------------
<S>                                 <C>               <C>                  <C>                 <C>                   <C>
Cash Flows
----------

Cash provided by
  (used in) operating
  activities                        $    1,434        $      (6,659)       $       3,119       $        (12)         $      (2,118)

Cash provided by
  (used in) investing
  activities                                 -                2,192                7,766             (8,293)                 1,665

Cash provided by
  (used in) financing
  activities                            (1,434)               1,463              (10,427)             8,304                 (2,094)

Effect of exchange
  rate change on cash
  and cash equivalents                       -                    -                 (113)                 -                   (113)
                                   -----------      ---------------      ---------------      -------------        ---------------

Net change in cash
  and cash equivalents                       -               (3,004)                 345                 (1)                (2,660)

Cash and cash
  equivalents at
  beginning of period                        5                4,623                4,529                  -                  9,157
                                   -----------      ---------------      ---------------      -------------        ---------------

Cash and cash
  equivalents at end
  of period                        $         5      $         1,619      $         4,874      $          (1)       $         6,497
                                   ===========      ===============      ===============      =============        ===============
</TABLE>




                                                                       21

<PAGE>

                               GALEY & LORD, INC.

                   Notes to Consolidated Financial Statements
                               December 29, 2001
                                  (Unaudited)



NOTE K - Supplemental Condensed Consolidating Financial Information (Continued)
<TABLE>
<CAPTION>

                                                                 Three Months Ended December 30, 2000
                                      ---------------------------------------------------------------------------------------------
                                                                              (in thousands)

                                                                                 Non-
                                                          Guarantor            Guarantor
                                        Parent          Subsidiaries         Subsidiaries         Eliminations         Consolidated
                                        ------          ------------         ------------         ------------         ------------

Cash Flows
----------
<S>                                  <C>               <C>                  <C>                 <C>                   <C>
Cash provided by
  (used in) operating
  activities                         $    6,117        $      17,276        $       1,768       $       (509)         $      24,652

Cash provided by
  (used in) investing
  activities                              2,731               (2,900)              (4,340)               662                 (3,847)

Cash provided by
  (used in) financing
  activities                             (8,848)             (12,459)               2,635               (153)               (18,825)

Effect of exchange
  rate change on cash
  and cash equivalents                        -                    -                  292                  -                    292
                                    -----------      ---------------      ---------------      -------------        ---------------

Net change in cash
  and cash equivalents                        -                1,917                  355                  -                  2,272

Cash and cash
  equivalents at
  beginning of period                        10                4,194                5,437                  -                  9,641
                                    -----------      ---------------      ---------------      -------------        ---------------

Cash and cash
  equivalents at end
  of period                         $        10      $         6,111      $         5,792      $           -        $        11,913
                                    ===========      ===============      ===============      =============        ===============
</TABLE>



                                                                       22

<PAGE>

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

Results of Operations

The Company's operations are primarily classified into four operating segments:
(1) Galey & Lord Apparel, (2) Swift Denim, (3) Klopman International and (4)
Home Fashion Fabrics. Results for the three months ended December 29, 2001 and
December 30, 2000 for each segment are shown below:

<TABLE>
<CAPTION>
                                                                                         Three Months Ended
                                                                             --------------------------------------
                                                                               December 29,           December 30,
                                                                                    2001                   2000
                                                                             ------------------      --------------
                                                                                       (Amounts in thousands)
<S>                                                                         <C>                     <C>
Net Sales per Segment
      Galey & Lord Apparel                                                  $       58,972          $      107,556
      Swift Denim                                                                   43,961                  78,604
      Klopman International                                                         29,744                  31,824
      Home Fashion Fabrics                                                           3,769                   3,701
                                                                            --------------          --------------
      Total                                                                 $      136,446          $      221,685
                                                                            ==============          ==============
Operating Income (Loss) per Segment As
Reported
      Galey & Lord Apparel                                                  $       (2,016)         $        6,381
      Swift Denim                                                                   10,497                   7,433
      Klopman International                                                            690                   2,003
      Home Fashion Fabrics                                                          (1,081)                 (1,109)
      Corporate                                                                     (1,507)                   (260)
                                                                            --------------          --------------
                                                                            $        6,583          $       14,448
                                                                            ==============          ==============
Operating Income (Loss) per Segment Excluding
Strategic Initiatives
      Galey & Lord Apparel                                                  $       (1,708)         $        7,997
      Swift Denim                                                                   10,497                   7,767
      Klopman International                                                            690                   2,003
      Home Fashion Fabrics                                                            (360)                 (1,109)
      Corporate                                                                     (1,507)                   (260)
                                                                            --------------          --------------
                                                                            $        7,612          $       16,398
                                                                            ==============          ==============
</TABLE>

December Quarter 2001 Compared to December Quarter 2000

Net Sales

Net sales for the December quarter 2001 (first quarter of fiscal 2002) were
$136.4 million as compared to $221.7 million for the December quarter 2000
(first quarter of fiscal 2001).

Galey & Lord Apparel Galey & Lord Apparel's net sales for the December quarter
2001 were $59.0 million, a $48.6 million decrease as compared to the December
quarter 2000 net sales of $107.6 million. The decrease in net sales was
primarily attributable to a 31% decrease in fabric sales volume. Approximately
$19 million of the decrease was due to the discontinuation in September 2001 of
the Company's garment making operations announced as part of the Fiscal 2001
Cost Reduction and Loss Avoidance Initiatives. The remainder of the decrease was
due


                                       23

<PAGE>

to the continuing difficult domestic retail environment and a reduction in
average selling prices. Overall, average selling prices, inclusive of product
mix changes, declined approximately 9.1%.

Swift Denim Swift Denim's net sales for the December quarter 2001 were $44.0
million as compared to $78.6 million in the December quarter 2000. The $34.6
million decrease was primarily attributable to a 43% decrease in volume and a
1.4% decline in selling prices. Approximately $8.8 million of the volume
decrease is due to the reduction in manufacturing capacity resulting from the
closure of the Erwin, North Carolina Facility in December 2000. The remainder
of the decrease is due to the decline in demand at retail.

Klopman International Klopman International's net sales for the December quarter
2001 were $29.7 million, a $2.1 million decline as compared to the December
quarter 2000 net sales of $31.8 million. The decline was primarily attributable
to a 5.7% decline in selling prices, a 2.7% decrease in sales volume and $0.4
million of foreign currency transaction exchange losses on sales not denominated
in Euros. These decreases were partially offset by a 3.2% increase in net sales
due to exchange rate changes used in translation.

Home Fashion Fabrics Net sales for Home Fashion Fabrics for the December quarter
2001 were $3.8 million compared to $3.7 million for the December quarter 2000.
The $0.1 million increase in net sales primarily resulted from changes in
product mix offset by lower selling prices and volume.

Operating Income

Operating income for the December quarter 2001 was $6.6 million as compared to
$14.4 million for the December quarter 2000. Excluding the charges related to
the Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives, the December
quarter 2001 operating income would have been $7.6 million. Excluding the
charges related to the Fiscal 2000 Strategic Initiatives, the December quarter
2000 operating income would have been $16.4 million.

Galey & Lord Apparel Galey & Lord Apparel's operating loss was $2.0 million for
the December quarter 2001 as compared to an operating income of $6.4 million for
the December quarter 2000. Excluding the run-out costs associated with the
Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives, Galey & Lord
Apparel's operating loss for the December quarter 2001 would have been $1.7
million as compared to an operating income of $8.0 million for the December
quarter 2000 excluding the Fiscal 2000 Strategic Initiatives. The decrease is
principally a result of reduced sales and manufacturing volume due to a
continuing decline in the market and foreign price competition, lower selling
prices and change in product mix.


                                       24

<PAGE>

Swift Denim December quarter 2001 operating income for Swift Denim was $10.5
million, a $3.1 million increase as compared to the December quarter 2000
operating income of $7.4 million. Excluding the run-out costs related to the
Fiscal 2000 Strategic Initiatives, operating income for the December quarter
2000 would have been $7.8 million. The increase in Swift Denim's operating
income principally reflects positive changes in product mix, lower utility
costs, reduction of lower-of-cost-or-market (LCM) reserves due to the change in
method of accounting for inventories to the last-in, first-out (LIFO) inventory
method and lower fixed manufacturing costs due to the closure of the Erwin
facility in December 2000. These improvements were partially offset by the
impact of lower sales volume and selling prices. Swift also recognized a benefit
curtailment gain of $3.4 million in the current quarter related to the
curtailment of postretirement benefits for employees not retired as of December
31, 2001 compared to a gain of $2.4 million recognized in December 2000 quarter
related to benefit curtailment at the Erwin facility.

Klopman International Klopman International's operating income in the December
quarter 2001 decreased $1.3 million to $0.7 million as compared to the December
quarter 2000 operating income of $2.0 million. The decrease principally reflects
the impact of lower selling prices and volume partially offset by lower cost of
raw materials and greige fabric as well as a cost reduction program implemented
in the first quarter of fiscal 2002 impacting manufacturing overhead and
selling, general and administrative expenses. In addition, Klopman
International's results were negatively impacted by $0.4 million of foreign
currency transaction exchange losses on sales not denominated in Euros.

Home Fashion Fabrics Home Fashion Fabrics reported an operating loss of $1.1
million for both the December quarter 2001 and December quarter 2000. Excluding
the costs associated with the Fiscal 2001 Cost Reduction and Loss Avoidance
Initiatives, Home Fashion Fabrics' operating loss would have been $0.4 million.
The decrease in operating loss is principally a result of the Fiscal 2001 Cost
Reduction and Loss Avoidance Initiatives.

Corporate The corporate segment reported an operating loss for the December
quarter 2001 of $1.5 million as compared to an operating loss for the December
quarter 2000 of $0.3 million. The increase in the operating loss is primarily
due to financial consultant expenses incurred in the first quarter of fiscal
2002. The corporate segment's operating income (loss) typically represents the
administrative expenses from the Company's various holding companies.


                                       25

<PAGE>

Income from Associated Companies

Income from associated companies was $2.3 million in the December quarter 2001
as compared to $1.9 million in the December quarter 2000. The income represents
amounts from several joint venture interests that manufacture and sell denim
products.

Interest Expense

Interest expense was $13.2 million for the December quarter 2001 compared to
$16.4 million for the December quarter 2000. The decrease in interest expense
was primarily due to lower prime and LIBOR base rates in the December quarter
2001 as compared to the December quarter 2000. The average interest rate paid by
the Company on its bank debt in the December quarter 2001 was 7.6% per annum as
compared to 9.6% per annum in the December quarter 2000.

Income Taxes

The Company's overall tax rate for the December quarter 2001 differed from the
statutory rate principally due to the nonrecognition of the U.S. tax benefits on
the domestic net operating losses. The result is an overall tax expense rate
which is higher than the statutory rate.

Net Income (Loss) and Net Income (Loss) Per Share

Net loss for the December quarter 2001 was $5.2 million or $.44 per common
share, compared to a net loss for the December quarter 2000 of $0.1 million or
$.01 per common share. Excluding the Fiscal 2001 Cost Reduction and Loss
Avoidance Initiatives, the Company's net loss for the December quarter 2001
would have been $4.2 million or $.35 per common share. Excluding the Fiscal 2000
Strategic Initiatives, the Company's net income for the December quarter 2000
would have been $1.3 million or $.11 per share.

Order Backlog

The Company's order backlog at December 29, 2001 was $85.9 million, a 55%
decrease from the December 30, 2000 backlog of $190.3 million. The decline in
order backlog is due to lower demand as a result of the difficult domestic
retail environment, as well as decreased visibility due to shortened lead times.
Over the past several years, many apparel manufacturers, including many of the
Company's customers, have modified their purchasing procedures and have
shortened lead times from order to delivery. Accordingly, the Company believes
that order backlogs may not be as meaningful as they have in the past with
regard to the Company's future sales.


                                       26

<PAGE>

Liquidity and Capital Resources

The Company and its subsidiaries had cash and cash equivalents totaling $6.5
million and $11.9 million at December 29, 2001 and December 30, 2000,
respectively. As of December 29, 2001, the Company had a total of $7.2 million
of revolving credit borrowing availability under its Senior Credit Facility (as
discussed below) and a total of U.S. $2.8 million of revolving credit borrowing
availability under the Canadian Loan Agreement (as defined below).

During the December quarter 2001, the Company primarily utilized its available
cash and revolving credit borrowings under its Senior Credit Facility to fund
the Company's operating and investing requirements.

In October 2001, the Company retained Houlihan Lokey Howard & Zukin Capital
("Houlihan"). Houlihan is assisting the Company in evaluating its strategic
alternatives regarding the potential restructuring of its outstanding debt. On
January 24, 2002, the Company amended its Senior Credit Facility to provide for
an overadvance of $10 million, none of which has been drawn as of February 15,
2002. The overadvance amendment will expire on February 23, 2002 unless
otherwise extended. The Company is in discussion with it senior lenders and its
subordinated note holders regarding the Company's financial structure.

Senior Credit Facility

On January 29, 1998 the Company entered into a new credit agreement (as amended,
the "Senior Credit Facility") with First Union National Bank ("FUNB"), as agent
and lender, and, as of March 27, 1998, with a syndicate of lenders. The Senior
Credit Facility provides for (i) a revolving line of credit under which the
Company may borrow up to an amount (including letters of credit up to an
aggregate of $30.0 million) equal to the lesser of $225.0 million or a borrowing
base (comprised of eligible accounts receivable and eligible inventory, as
defined in the Senior Credit Facility), (ii) a term loan in the principal amount
of $155.0 million ("Term Loan B") and (iii) a term loan in the principal amount
of $110.0 million ("Term Loan C"). In July 1999, the Company amended its Senior
Credit Facility (the "July 1999 Amendment") pursuant to which the Company, among
other things, repaid $25 million principal amount of its term loan balance using
available borrowings under its revolving line of credit and reduced the maximum
amount of borrowings under the revolving line of credit by $25 million to $200
million. The repayment of the Term Loan B and Term Loan C principal balances
ratably reduced the remaining quarterly principal payments.

In September 2000, the Company amended the Senior Credit Facility to exclude
charges related to the Company's Fiscal 2000 Strategic Initiatives from the
computation of the covenants. In March 2001, the Company further amended the
Senior Credit Facility to allow for a more tax efficient European corporate
structure. In August 2001, the


                                       27

<PAGE>

Company amended the Senior Credit Facility (the "August 2001 Amendment") which,
among other things, replaced the Adjusted Leverage Ratio covenant (as defined in
the August 2001 Amendment) with a minimum EBITDA covenant (as defined in the
August 2001 Amendment) until the Company's December quarter 2002, waived
compliance by the Company with the Adjusted Fixed Charge Coverage Ratio (as
defined in the August 2001 Amendment) until the Company's December quarter 2002
and modified the Company's covenant related to capital expenditures. The August
2001 Amendment also excludes, for covenant purposes, charges related to closure
of facilities announced on July 26, 2001. The August 2001 Amendment also
increased the interest rate spread on all borrowings under the Company's
revolving line of credit and term loans by 100 basis points for the remainder of
the term of its Senior Credit Facility.

Under the Senior Credit Facility (as amended by the July 1999 Amendment), for
the period beginning July 4, 1999 through February 15, 2001, the revolving line
of credit borrowings bear interest at a per annum rate, at the Company's option,
of either (i) (a) the greater of the prime rate or the federal funds rate plus
 .50% plus (b) a margin of 1.75% or (ii) LIBOR plus a margin of 3.00%. Term Loan
B and Term Loan C bear interest at a per annum rate, at the Company's option, of
(A) with respect to Term Loan B either (i)(a) the greater of the prime rate or
federal funds rate plus .50%, plus (b) a margin of 2.25% or (ii) LIBOR plus a
margin of 3.50% and (B) with respect to Term Loan C, either (i)(a) greater of
the prime rate or federal funds rate plus .50%, plus (b) a margin of 2.50% or
(ii) LIBOR plus a margin of 3.75%.

Under the Senior Credit Facility, the revolving line of credit expires on March
27, 2004 and the principal amount of (i) Term Loan B is repayable in quarterly
payments of $304,645 through March 27, 2004, three quarterly payments of
$28,636,594 and final amount of $24,303,053 on Term Loan B's maturity of April
2, 2005 and (ii) Term Loan C is repayable in quarterly payments of $216,111
through April 2, 2005, three quarterly payments of $20,098,295 and a final
amount of $17,024,140 on Term Loan C's maturity of April 1, 2006. Under the
Senior Credit Facility, as amended on December 22, 1998, July 3, 1999 and August
9, 2001, the revolving line of credit borrowings bear interest at a per annum
rate, at the Company's option, of either (i) (a) the greater of the prime rate
or the federal funds rate plus .50% plus (b) a margin of 1.0%, 1.25%, 1.50%,
1.75%, 2.00% or 2.25%, based on the Company achieving certain leverage ratios
(as defined in the Senior Credit Facility) or (ii) LIBOR plus a margin of 2.25%,
2.50%, 2.75%, 3.00%, 3.25% or 3.50%, based on the Company achieving certain
leverage ratios. Term Loan B and Term Loan C bear interest at a per annum rate,
at the Company's option, of (A) with respect to Term Loan B either (i) (a) the
greater of the prime rate or federal funds rate plus .50%, plus (b) a margin of
2.00%, 2.25%, 2.50% or 2.75%, based on the Company achieving certain leverage
ratios or (ii) LIBOR plus a margin of 3.25%, 3.50%, 3.75% or 4.00%, based on the
Company achieving


                                       28

<PAGE>

certain leverage ratios and (B) with respect to Term Loan C, either (i) (a) the
greater of the prime rate or federal funds rate plus .50%, plus (b) a margin of
2.25%, 2.50%, 2.75% or 3.00%, based on the Company achieving certain leverage
ratios, or (ii) LIBOR plus a margin of 3.50%, 3.75%, 4.00% or 4.25%, based on
the Company's achieving certain leverage ratios.

The Company's obligations under the Senior Credit Facility, as amended pursuant
to the July 1999 Amendment, are secured by substantially all of the assets of
the Company and each of its domestic subsidiaries (including a lien on all real
property owned in the United States), a pledge by the Company and each of its
domestic subsidiaries of all the outstanding capital stock of its respective
domestic subsidiaries and a pledge of 65% of the outstanding voting capital
stock, and 100% of the outstanding non-voting capital stock, of certain of its
respective foreign subsidiaries. In addition, payment of all obligations under
the Senior Credit Facility is guaranteed by each of the Company's domestic
subsidiaries. Under the Senior Credit Facility, the Company is required to make
mandatory prepayments of principal annually in an amount equal to 50% of Excess
Cash Flow (as defined in the Senior Credit Facility), and also in the event of
certain dispositions of assets or debt or equity issuances (all subject to
certain exceptions) in an amount equal to 100% of the net proceeds received by
the Company therefrom. Based on fiscal 2001 results, the Company is not required
to make Excess Cash Flow payment with respect to fiscal 2001.

As a result of the February 2001 funding of the Company's Canadian Loan
Agreement (as defined below), the Company repaid $12.7 million principal amount
of its U.S. term loan balance and reduced the maximum amount of borrowings under
its U.S. revolving line of credit by $12.3 million to $187.7 million. The
repayment of the Term Loan B and Term Loan C principal balances ratably reduced
the remaining quarterly principal payments. The reduction in the U.S. revolving
line of credit facility resulted in a write-off of $0.1 million of deferred debt
charges which is included in selling, general and administrative expenses in the
March quarter 2001.

The Senior Credit Facility contains certain covenants, including, without
limitation, those limiting the Company's and its subsidiaries' ability to incur
indebtedness, incur liens, sell or acquire assets or businesses, change the
nature of its business, make certain investments or pay dividends. In addition,
the Senior Credit Facility requires the Company to meet certain financial ratio
tests and limits the amount of capital expenditures which the Company and it's
subsidiaries may make in any fiscal year.

The Company was in full compliance with all of its lenders' covenants as of
December 29, 2001. However, due to the poor retail environment, the Company
expects to report a loss for the March 2002 quarter. Accordingly, the Company
anticipates that it may not be in compliance


                                       29

<PAGE>

with certain of the financial covenants in the Senior Credit Facility as of
March 30, 2002. If the Company violates the financial or other covenants
contained in its Senior Credit Facility or in the indenture governing the
outstanding Notes, the Company will be in default under the Senior Credit
Facility and/or the indenture. If a default occurs and is not waived by the
lenders, the lenders could seek remedies against the Company, including: (1)
penalty rates of interest; (2) immediate repayment of the debt; and/or (3) the
foreclosure on any assets securing the debt.

Senior Subordinated Debt

In February 1998, the Company closed its private offering of $300.0 million
aggregate principal amount of 9 1/8% Senior Subordinated Notes Due 2008 (the
"Notes"). In May 1998, the Notes were exchanged for freely transferable
identical Notes registered under the Securities Act of 1933. Net proceeds from
the offering of $289.3 million (net of initial purchaser's discount and offering
expenses), were used to repay (i) $275.0 million principal amount of bridge
financing borrowings incurred to partially finance the acquisition of the
apparel fabrics business of Dominion Textile, Inc. on January 29, 1998 and (ii)
a portion of the outstanding amount under a revolving line of credit provided
for under the Senior Credit Facility (as defined herein). Interest on the Notes
is payable on March 1 and September 1 of each year.

In August 2000, the Company and its noteholders amended the indenture, dated
February 24, 1998 (the "Indenture"), entered into in connection with the Notes
to amend the definition of "Permitted Investment" in the Indenture to allow the
Company and its Restricted Subsidiaries (as defined in the Indenture) to make
additional investments (as defined in the Indenture) totaling $15 million at any
time outstanding in one or more joint ventures which conduct manufacturing
operations primarily in Mexico. This amendment was completed to allow the
Company sufficient flexibility in structuring its investment in the Swift
Denim-Hidalgo joint venture.

The Notes are general unsecured obligations of the Company, subordinated in
right of payment to all existing and future senior indebtedness of the Company
and its subsidiaries and senior in right of payment to any subordinated
indebtedness of the Company. The Notes are unconditionally guaranteed, on an
unsecured senior subordinated basis, by Galey & Lord Industries, Inc., Swift
Denim Services, Inc., G&L Service Company North America, Inc., Swift Textiles,
Inc., Galey & Lord Properties, Inc., Swift Denim Properties, Inc. and other
future direct and indirect domestic subsidiaries of the Company.

The Notes are subject to certain covenants, including, without limitation, those
limiting the Company and its subsidiaries' ability to incur indebtedness, pay
dividends, incur liens, transfer or sell assets, enter into transactions with
affiliates, issue or sell stock


                                       30

<PAGE>

of restricted subsidiaries or merge or consolidate the Company or its restricted
subsidiaries.

Canadian Loan Agreement

In February 2001, the Company's wholly owned Canadian subsidiary, Drummondville
Services Inc. ("Drummondville"), entered into a Loan Agreement (the "Canadian
Loan Agreement") with Congress Financial Corporation (Canada), as lender. The
Canadian Loan Agreement provides for (i) a revolving line of credit under which
Drummondville may borrow up to an amount equal to the lesser of U.S. $16.0
million or a borrowing base (comprised of eligible accounts receivable and
eligible inventory of Drummondville, as defined in the Canadian Loan Agreement),
and (ii) a term loan in the principal amount of U.S. $9.0 million.

Under the Canadian Loan Agreement, the revolving line of credit expires in
February 2004 and the principal amount of the term loan is repayable in equal
monthly installments of $229,500 CDN with the unpaid balance repayable in
February 2004; provided, however, that the revolving line of credit and the
maturity of the term loan may be extended at the option of Drummondville for up
to two additional one year periods subject to and in accordance with the terms
of the Canadian Loan Agreement. Under the Canadian Loan Agreement, the interest
rate on Drummondville's borrowings initially is fixed through the second quarter
of fiscal year 2001 (March quarter 2001) at a per annum rate, at Drummondville's
option, of either LIBOR plus 2.75% or the U.S. prime rate plus .75% (for
borrowings in U.S. dollars) or the Canadian prime rate plus 1.5% (for borrowings
in Canadian dollars). Thereafter, borrowings will bear interest at a per annum
rate, at Drummondville's option, of either (i) the U.S. prime rate plus 0%,
 .25%, .50%, .75%, or 1.0% (for borrowings in U.S. dollars), (ii) the Canadian
prime rate plus .75%, 1.0%, 1.25%, 1.50%, or 1.75% (for borrowings in Canadian
dollars), or (iii) LIBOR plus 2.00%, 2.25%, 2.50%, 2.75% or 3.00%, all based on
Drummondville maintaining certain quarterly excess borrowing availability levels
under the revolving line of credit or Drummondville achieving certain fixed
charge coverage ratio levels (as set forth in the Canadian Loan Agreement).

Drummondville's obligations under the Canadian Loan Agreement are secured by all
of the assets of Drummondville. The Canadian Loan Agreement contains certain
covenants, including without limitation, those limiting Drummondville's ability
to incur indebtedness (other than incurring or paying certain intercompany
indebtedness), incur liens, sell or acquire assets or businesses, pay dividends,
make loans or advances or make certain investments. In addition, the Canadian
Loan Agreement requires Drummondville to maintain a certain level of tangible
net worth (as defined in the Canadian Loan Agreement).


                                       31

<PAGE>

Tax Matters

At December 29, 2001, the Company had outstanding net operating loss
carryforwards ("NOLs") for U.S. federal tax purposes of approximately $117.2
million and state tax purposes of appproximately $97.5 million. The federal NOLs
will expire in years 2019-2021 if unused, and the state NOLs will expire in
years 2002-2017 if unused. In accordance with the Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," a valuation
allowance of $16.6 million related to domestic operating income losses has been
established since it is more likely than not that some portion of the deferred
tax asset will not be realized. This review, along with the timing of the
reversal of its temporary differences and the expiration dates of the NOLs, were
also considered in reaching this conclusion.

Other

The Company expects to spend approximately $12 million for capital expenditures
in fiscal 2002, of which $2.3 million was spent in the first three months of
fiscal 2002. The Company anticipates that approximately 15% of the forecasted
capital expenditures will be used to increase the Company's capacity while the
remaining 85% will be used to maintain existing capacity.

There can be no assurance that the Company's cash requirements, including
working capital and capital expenditure needs, will be met through funds
generated from operations, through revolving credit borrowings and overadvances
under the Company's Senior Credit Facility in the near term. In addition, from
time to time, the Company uses borrowings under secured and unsecured bank
loans, through capital leases or through operating leases for various equipment
purchases.

Euro Conversion

On January 1, 1999, eleven of the fifteen member countries of the European Union
(the "Participating Countries") established fixed conversion rates between their
existing sovereign currencies ("legacy currencies") and the Euro. Between
January 1, 1999 and December 31, 2001, the Euro was used solely for non-cash
transactions. During that time period, the Euro traded on currency exchanges and
was the basis of valuing legacy currencies which continued to be legal tender.
Beginning January 1, 2002, the participating countries began issuing new
Euro-denominated bills and coins for use in cash transactions, and no later than
July 1, 2002, will withdraw all bills and coins denominated in the legacy
currencies. The legacy currencies will then no longer be legal tender for any
transactions.

The Company's European operations export the majority of its sales to countries
that are Participating Countries. As the European pricing policy has
historically been based on local currencies, the Company believes that as a
result of the Euro conversion the uncertainty of


                                       32

<PAGE>

the effect of exchange rate fluctuations will be greatly reduced. In addition,
the Company's principal competitors are also located within the Participating
Countries. The Company believes that the conversion to the Euro will eliminate
much of the advantage or disadvantage coming from exchange rate fluctuation
resulting from transactions involving legacy currencies in Participating
Countries. Accordingly, competitiveness will be solely based on price, quality
and service. While the Company believes the increased competitiveness based on
these factors will provide the Company with a strategic advantage over smaller
local companies, it cannot assess the magnitude of this impact on its
operations.

As contemplated by the Company's Euro conversion plan, invoicing of products in
both local currencies and the Euro began January 1, 1999. The conversion of the
Company's financial reporting and information systems was completed during the
Company's 2001 fiscal year. The costs related to the conversion were not
material to the Company's operating results or liquidity.

Forward Looking Statements

This Form 10-Q contains statements which constitute forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Those statements
include statements regarding the intent and belief of current expectations of
the Company and its management team. Prospective investors are cautioned that
any such forward-looking statements are not guarantees of future performance and
involve risks and uncertainties, and that actual results may differ materially
from those projected in the forward-looking statements. Such risks and
uncertainties include, among other things, competitive and economic factors in
the textile, apparel and home furnishings markets, raw materials and other
costs, the level of the Company's indebtedness, interest rate fluctuations,
weather-related delays, general economic conditions, governmental legislation
and regulatory changes, the long-term implications of regional trade blocs and
the effect of quota phase-out and lowering of tariffs under the WTO trade
regulations and other risks and uncertainties that may be detailed herein, or in
the Company's Annual Report on Form 10-K for the fiscal year ended September 29,
2001.


                                       33

<PAGE>

Item 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Information relative to the Company's market risk sensitive instruments by major
category at September 29, 2001 is presented under Item 7a of the registrant's
Annual Report on Form 10-K for the fiscal year ended September 29, 2001.

Foreign Currency Exposures

The Company conducts its business in various foreign currencies and, as a
result, is exposed to movements in foreign currency exchange rates. To protect
against the volatility of forecasted foreign currency sales and purchases and
accounts receivable and payable denominated in foreign currencies, the Company
uses natural offsets and forward contracts. As of December 29, 2001, the result
of a uniform 10% change in the value of the U.S. dollar relative to currencies
of countries in which the Company manufactures or sells its products would not
be material.

Cotton Commodity Exposures

Purchase contracts are used to hedge against fluctuations in the price of raw
material cotton. Increases or decreases in the market price of cotton may effect
the fair value of cotton commodity purchase contracts. A 10% decline in market
price as of December 29, 2001 would have a negative impact of approximately $1.7
million.

Derivative Financial Instruments

The Company uses forward exchange contracts to reduce the effect of fluctuating
foreign currencies on sales, purchases, short-term assets and commitments. These
short-term assets and commitments principally related to accounts receivable and
trade payable positions and fixed asset purchase obligations. The Company does
not utilize derivative financial instruments for trading or other speculative
purposes. The Company actively evaluates the creditworthiness of the financial
institutions that are counterparties to derivative financial instruments, and it
does not expect any counterparties to fail to meet their obligations.

Cash Flow Hedging Strategy

The Company conducts its business in various foreign currencies and, as a
result, is exposed to movements in foreign currency exchange rates. To protect
against the volatility of forecasted foreign currency cash flows resulting from
sales or purchases denominated in other than the Company's functional currencies
over the next year, the Company has instituted a foreign currency hedging
program. The Company hedges portions of its forecasted sales and purchases
denominated in foreign currencies with forward contracts.


                                       34

<PAGE>

Item 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Derivative Financial Instruments (Continued)

Foreign currency forward contracts that hedge forecasted sales and purchases are
designated as cash flow hedges. The amount of gain or loss resulting from hedge
ineffectiveness for these contracts is attributable to the difference in the
spot exchange rates and forward contract rates. The net loss was not material
for the quarter ended December 29, 2001 and is included in cost of sales in the
consolidated statement of income.

At December 29, 2001, the Company expects to reclassify approximately $15,000 of
pre-tax losses ($7,000 after-tax) on derivative instruments from accumulated
other comprehensive income to earnings over the next twelve months. This
reclassification will be made when the forecasted transactions occur.

Fair Value Hedging Strategy

The Company also maintains foreign currency forward contracts to hedge
receivables and payables denominated in foreign currencies. These contracts are
designated as fair value hedges. The gain or loss resulting from hedge
ineffectiveness for these contracts is attributable to the difference in spot
exchange rates and forward contract rates. The net loss was not material for the
quarter ended December 29, 2001 and is included in cost of sales in the
consolidated statement of income.


                                       35

<PAGE>

PART II. OTHER INFORMATION

Item 1.  Legal Proceedings (not applicable)

Item 2.  Changes in Securities and Use of Proceeds (not applicable)

Item 3.  Defaults Upon Senior Securities (not applicable)

Item 4.  Submission of Matters to a Vote of Security Holders (not applicable)

Item 5.  Other Information (not applicable)

Item 6.  Exhibits and Reports on Form 8-K

         (a)      Exhibits - The exhibits to this Form 10-Q are listed in the
                  accompanying Exhibit Index

         (b)      Reports on Form 8-K - The Registrant filed a Form 8-K on
                  January 8, 2002 announcing the suspension of trading of the
                  Company's common stock on the NYSE and the commencement of
                  trading of the Company's common stock on the OTC Bulletin
                  Board.


                                       36

<PAGE>

SIGNATURES
----------

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

                                                Galey & Lord, Inc.
                                         ---------------------------------------
                                                     (Registrant)




                                         /s/ Leonard F. Ferro
                                         ---------------------------------------
                                         Leonard F. Ferro
                                         Vice President

February 15, 2002
-----------------
     Date


                                       37

<PAGE>

                                  EXHIBIT INDEX

Exhibit                                                         Sequential
Number            Description                                    Page No.
-------           -----------                                -----------------


10.73             Ninth Amendment and Consent to the Credit
                  Agreement dated January 24, 2002 among the
                  Company, G&L Industries, Inc., the other
                  Domestic Subsidiaries of the Company and
                  First Union National Bank, as agent and
                  lender, and the other lenders' party thereto.


10.74             Ernst & Young LLP Preferability Letter