##### Table of Contents

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549



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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 June 28, 2003



OR



| ̈ |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
|- |  | --------------------------------------------------------

| |  | SECURITIES EXCHANGE ACT OF 1934
| |  | -------------------------------



For the transition period from  to



Commission File Number 0-20080



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GALEY & LORD, INC.

(Exact name of registrant as specified in its charter)



|DELAWARE                                                       |  | 56-1593207                        
|-------------------------------------------------------------- |  | ----------------------------------
|(State or other jurisdiction of incorporation or organization) |  | (IRS Employer (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)



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



Indicate by check mark whether the
registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes ̈No  x.



Common Stock, $.01 Par Value  11,996,965 shares outstanding as of August 8, 2003.



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##### Table of Contents

INDEX



GALEY & LORD, INC.



|                              |  |                                                                                                          |  | Page 
|----------------------------- |  | -------------------------------------------------------------------------------------------------------- |  | -----
|PART I. FINANCIAL INFORMATION |  |                                                                                                         
|                              |  |                                                                                                         
|Item 1.                       |  | Financial Statements (Unaudited)                                                                         |  |      
|                              |  |                                                                                                         
|                              |  | Consolidated Balance SheetsJune 28, 2003, June 29, 2002 and September 28, 2002                          |  | 3    
|                              |  |                                                                                                         
|                              |  | Consolidated Statements of OperationsThree months and nine months ended June 28, 2003 and June 29, 2002 |  | 4    
|                              |  |                                                                                                         
|                              |  | Consolidated Statements of Cash FlowsNine months ended June 28, 2003 and June 29, 2002                  |  | 5    
|                              |  |                                                                                                         
|                              |  | Notes to Consolidated Financial StatementsJune 28, 2003                                                 |  | 6-33 
|                              |  |                                                                                                         
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                    |  | 34-55
|                              |  |                                                                                                         
|Item 3.                       |  | Quantitative and Qualitative Disclosures About Market Risk                                               |  | 56-57
|                              |  |                                                                                                         
|Item 4.                       |  | Controls and Procedures                                                                                  |  | 58   
|                              | 
|PART II. OTHER INFORMATION    |  |                                                                                                         
|                              |  |                                                                                                         
|Item 1.                       |  | Legal Proceedings                                                                                        |  | 59   
|                              |  |                                                                                                         
|Item 2.                       |  | Changes in Securities and Use of Proceeds                                                                |  | 59   
|                              |  |                                                                                                         
|Item 3.                       |  | Defaults Upon Senior Securities                                                                          |  | 59   
|                              |  |                                                                                                         
|Item 4.                       |  | Submission of Matters to a Vote of Security Holders                                                      |  | 59   
|                              |  |                                                                                                         
|Item 5.                       |  | Other Information                                                                                        |  | 59   
|                              |  |                                                                                                         
|Item 6.                       |  | Exhibits and Reports on Form 8  K                                                                       |  | 59   
|                              | 
|EXHIBIT INDEX                 |  | 60                                                                                                      
|                              | 
|SIGNATURES                    |  | 61                                                                                                      



2



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##### Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS



GALEY & LORD, INC.

(DEBTORS-IN-POSSESSION)

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands)



|                                                    |  | June 28, 2003 (Unaudited) |          |   | June 29, 2002 (Unaudited) |   |          | September 28, 2002 * | 
|--------------------------------------------------- |  | ------------------------- | -------- | - | ------------------------- | - | -------- | -------------------- | 
|ASSETS                                              |  |                           |          |   |                           |   |          |                      | 
|Current assets:                                     |  |                           |          |   |                           |   |          |                      | 
|Cash and cash equivalents                           |  | $                         | 10,206   |   |                           | $ | 25,489   |                      | 
|Trade accounts receivable                           |  |                           | 127,868  |   |                           |   | 156,454  |                      | 
|Sundry notes and accounts receivable                |  |                           | 7,231    |   |                           |   | 6,506    |                      | 
|Inventories                                         |  |                           | 176,645  |   |                           |   | 154,336  |                      | 
|Income taxes receivable                             |  |                           | 3,056    |   |                           |   | 2,855    |                      | 
|Prepaid expenses and other current assets           |  |                           | 6,506    |   |                           |   | 6,072    |                      | 
|                                                    |  |                           |          |   |                           |   |          |                      | 
|Total current assets                                |  |                           | 331,512  |   |                           |   | 351,712  |                      | 
|                                                    |  |                           |         
|Property, plant and equipment, at cost              |  |                           | 457,031  |   |                           |   | 432,071  |                      | 
|Less accumulated depreciation and amortization      |  |                           | (215,743 | ) |                           |   | (187,596 | )                    | 
|                                                    |  |                           |          |   |                           |   |          |                      | 
|                                                    |  |                           | 241,288  |   |                           |   | 244,475  |                      | 
|                                                    |  |                           |         
|Investments in and advances to associated companies |  |                           | 37,873   |   |                           |   | 38,042   |                      | 
|Deferred charges, net                               |  |                           | 1,637    |   |                           |   | 5,848    |                      | 
|Other non-current assets                            |  |                           | 1,243    |   |                           |   | 1,710    |                      | 
|Intangibles, net                                    |  |                           | 20,627   |   |                           |   | 112,192  |                      | 
|                                                    |  |                           |          |   |                           |   |          |                      | 
|                                                    |  | $                         | 634,180  |   |                           | $ | 753,979  |                      | 
|                                                    |  |                           |          |   |                           |   |          |                      | 
|LIABILITIES AND STOCKHOLDERS DEFICIT               |  |                           |          |   |                           |   |          |                      | 
|Liabilities not subject to compromise:              |  |                           |          |   |                           |   |          |                      | 
|Current liabilities:                                |  |                           |          |   |                           |   |          |                      | 
|Long-term debtcurrent                              |  | $                         | 304,850  |   |                           | $ | 313,026  |                      | 
|Trade accounts payable                              |  |                           | 35,717   |   |                           |   | 34,859   |                      | 
|Accrued salaries and employee benefits              |  |                           | 40,481   |   |                           |   | 23,813   |                      | 
|Accrued liabilities                                 |  |                           | 31,037   |   |                           |   | 33,615   |                      | 
|Income taxes payable                                |  |                           | 5,069    |   |                           |   | 4,676    |                      | 
|                                                    |  |                           |          |   |                           |   |          |                      | 
|Total current liabilities                           |  |                           | 417,154  |   |                           |   | 409,989  |                      | 
|Long-term liabilities:                              |  |                           |          |   |                           |   |          |                      | 
|Long-term debt                                      |  |                           | 15,937   |   |                           |   | 32,350   |                      | 
|Other long-term liabilities                         |  |                           | 12,802   |   |                           |   | 13,410   |                      | 
|                                                    |  |                           |          |   |                           |   |          |                      | 
|Total long-term liabilities                         |  |                           | 28,739   |   |                           |   | 45,760   |                      | 
|                                                    |  |                           |         
|Deferred income taxes                               |  |                           | 3,511    |   |                           |   | 3,298    |                      | 
|                                                    |  |                           |          |   |                           |   |          |                      | 
|Total liabilities not subject to compromise         |  |                           | 449,404  |   |                           |   | 459,047  |                      | 
|                                                    |  |                           |         
|Liabilities subject to compromise                   |  |                           | 327,415  |   |                           |   | 326,507  |                      | 
|                                                    |  |                           |         
|Stockholders deficit:                              |  |                           |          |   |                           |   |          |                      | 
|Common stock                                        |  |                           | 124      |   |                           |   | 124      |                      | 
|Contributed capital in excess of par value          |  |                           | 41,960   |   |                           |   | 41,686   |                      | 
|Accumulated deficit                                 |  |                           | (177,260 | ) |                           |   | (61,362  | )                    | 
|Treasury stock, at cost                             |  |                           | (2,247   | ) |                           |   | (2,247   | )                    | 
|Accumulated other comprehensive loss                |  |                           | (5,216   | ) |                           |   | (9,776   | )                    | 
|                                                    |  |                           |          |   |                           |   |          |                      | 
|Total stockholders deficit                         |  |                           | (142,639 | ) |                           |   | (31,575  | )                    | 
|                                                    |  |                           |          |   |                           |   |          |                      | 
|                                                    |  | $                         | 634,180  |   |                           | $ | 753,979  |                      | 
|                                                    |  |                           |          |   |                           |   |          |                      | 

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|* |  | Condensed from audited financial statements.
|- |  | --------------------------------------------



See accompanying notes to consolidated financial statements.



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##### Table of Contents

GALEY & LORD, INC.

(DEBTORS-IN-POSSESION)

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(Amounts in thousands except per
share data)



|                                                                                                                                                                                                                        |  | Three Months Ended |         |   | Nine Months Ended |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ------- | - | ----------------- | -
|                                                                                                                                                                                                                        |  | June 28, 2003      |         |   | June 29, 2002     |  
|Net sales                                                                                                                                                                                                               |  | $                  | 150,087 |   |                   | $
|Cost of sales                                                                                                                                                                                                           |  |                    | 148,038 |   |                   |  
|                                                                                                                                                                                                                        |  |                    |         |   |                   |  
|Gross profit                                                                                                                                                                                                            |  |                    | 2,049   |   |                   |  
|Selling, general and administrative expenses                                                                                                                                                                            |  |                    | 6,632   |   |                   |  
|Impairment of intangible asset                                                                                                                                                                                          |  |                    | 5,500   |   |                   |  
|Amortization of intangibles                                                                                                                                                                                             |  |                    |        |   |                   |  
|Plant closing costs                                                                                                                                                                                                     |  |                    |        |   |                   |  
|Net gain on benefit plan curtailments                                                                                                                                                                                   |  |                    |        |   |                   |  
|                                                                                                                                                                                                                        |  |                    |         |   |                   |  
|Operating income (loss)                                                                                                                                                                                                 |  |                    | (10,083 | ) |                   |  
|Interest expense (contractual interest of $12,278 and $37,018 for the three and nine months ended June 28, 2003, respectively, and
$13,066 and $38,984 for the three and nine months ended June 29, 2002, respectively) |  |                    | 5,434   |   |                   |  
|Equity in income from associated companies                                                                                                                                                                              |  |                    | (1,460  | ) |                   |  
|                                                                                                                                                                                                                        |  |                    |         |   |                   |  
|Income (loss) before reorganization items and income taxes                                                                                                                                                              |  |                    | (14,057 | ) |                   |  
|Reorganization items                                                                                                                                                                                                    |  |                    | 708     |   |                   |  
|Income tax expense (benefit):                                                                                                                                                                                           |  |                    |         |   |                   |  
|Current                                                                                                                                                                                                                 |  |                    | 1,694   |   |                   |  
|Deferred                                                                                                                                                                                                                |  |                    | (30     | ) |                   |  
|                                                                                                                                                                                                                        |  |                    |         |   |                   |  
|Loss before cumulative effect of accounting change                                                                                                                                                                      |  |                    | (16,429 | ) |                   |  
|Cumulative effect of accounting change (net of applicable income taxes of $0)                                                                                                                                           |  |                    |        |   |                   |  
|                                                                                                                                                                                                                        |  |                    |         |   |                   |  
|Net loss                                                                                                                                                                                                                |  | $                  | (16,429 | ) |                   | $
|                                                                                                                                                                                                                        |  |                    |         |   |                   |  
|Net loss per common share:                                                                                                                                                                                              |  |                    |         |   |                   |  
|                                                                                                                                                                                                                        |  |                    |         |  
|Basic and Diluted:                                                                                                                                                                                                      |  |                    |         |   |                   |  
|                                                                                                                                                                                                                        |  |                    |         |  
|Net loss before cumulative effect of accounting change                                                                                                                                                                  |  | $                  | (1.37   | ) |                   | $
|Cumulative effect of accounting change                                                                                                                                                                                  |  |                    |        |   |                   |  
|                                                                                                                                                                                                                        |  |                    |         |   |                   |  
|Net loss per common shareBasic and Diluted                                                                                                                                                                             |  | $                  | (1.37   | ) |                   | $
|                                                                                                                                                                                                                        |  |                    |         |   |                   |  



See accompanying notes
to consolidated financial statements.



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##### Table of Contents

GALEY & LORD, INC.

(DEBTORS-IN-POSSESSION)

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Amounts in thousands)



|                                                                                          |  | Nine Months Ended |         
|----------------------------------------------------------------------------------------- |  | ----------------- | --------
|                                                                                          |  | June 28, 2003     |         
|Cash flows from operating activities:                                                     |  |                   |         
|Net loss                                                                                  |  | $                 | (110,287
|Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |  |                   |         
|Cumulative effect of accounting change (net of applicable income taxes)                   |  |                   | 87,408  
|Depreciation of property, plant and equipment                                             |  |                   | 22,414  
|Impairment of intangible asset                                                            |  |                   | 5,500   
|Amortization of intangible assets                                                         |  |                   | 7       
|Amortization of deferred charges                                                          |  |                   | 2,997   
|Deferred income taxes                                                                     |  |                   | (98     
|Non-cash compensation                                                                     |  |                   | 6       
|Loss on disposals of property, plant and equipment                                        |  |                   | 206     
|Undistributed income from associated companies                                            |  |                   | (6,307  
|Impairment of fixed assets                                                                |  |                   |        
|Net gain on benefit plan curtailments                                                     |  |                   |        
|Non-cash reorganization write-offs                                                        |  |                   |        
|Other                                                                                     |  |                   | (44     
|Changes in assets and liabilities:                                                        |  |                   |         
|(Increase)/decrease in accounts receivablenet                                            |  |                   | 16,499  
|(Increase)/decrease in sundry notes & accounts receivable                                 |  |                   | (1,768  
|(Increase)/decrease in inventories                                                        |  |                   | (27,428 
|(Increase)/decrease in prepaid expenses and other current assets                          |  |                   | (247    
|(Increase)/decrease in other non-current assets                                           |  |                   | 186     
|(Decrease)/increase in accounts payabletrade                                             |  |                   | (875    
|(Decrease)/increase in accrued liabilities                                                |  |                   | 1,362   
|(Decrease)/increase in income taxes payable                                               |  |                   | 621     
|(Decrease)/increase in other long-term liabilities                                        |  |                   | (83     
|(Decrease)/increase in plant closing costs                                                |  |                   | (644    
|                                                                                          |  |                   |         
|Net cash provided by (used in) operating activities                                       |  |                   | (10,575 
|                                                                                          |  |                  
|Cash flows from investing activities:                                                     |  |                   |         
|Property, plant and equipment expenditures                                                |  |                   | (11,113 
|Proceeds from sale of property, plant and equipment                                       |  |                   | 58      
|Distributions received from associated companies                                          |  |                   | 7,336   
|Other                                                                                     |  |                   |        
|                                                                                          |  |                   |         
|Net cash provided by (used in) investing activities                                       |  |                   | (3,719  
|                                                                                          |  |                  
|Cash flows from financing activities:                                                     |  |                   |         
|Advances/(payments) on revolving lines of credit, net                                     |  |                   | (407    
|Principal payments on long-term debt                                                      |  |                   | (17,194 
|Borrowings under existing debt agreements                                                 |  |                   | 2,359   
|Payment of bank fees and loan costs                                                       |  |                   | (250    
|                                                                                          |  |                   |         
|Net cash provided by (used in) financing activities                                       |  |                   | (15,492 
|Effect of exchange rate changes on cash and cash equivalents                              |  |                   | 617     
|                                                                                          |  |                   |         
|Net increase/(decrease) in cash and cash equivalents                                      |  |                   | (29,169 
|Cash and cash equivalents at beginning of period                                          |  |                   | 39,375  
|                                                                                          |  |                   |         
|Cash and cash equivalents at end of period                                                |  | $                 | 10,206  
|                                                                                          |  |                   |         



See accompanying notes
to consolidated financial statements.



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##### Table of Contents

GALEY & LORD, INC.

(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements

June 28, 2003

(Unaudited)



NOTE ABankruptcy Filing



On February 19, 2002 (the Filing Date), Galey & Lord, Inc. (the Company) and each of its domestic subsidiaries (together with the Company, the
Debtors) filed voluntary petitions for reorganization (the Chapter 11 Filings or the Filings) under Chapter 11 of Title 11, United States Code (the Bankruptcy Code) in the United States Bankruptcy
Court for the Southern District of New York (Case Nos. 02-40445 through 02-40456 (ALG)). The Chapter 11 Filings pending for the Debtors are being jointly administered for procedural purposes only. The Debtors direct and indirect foreign
subsidiaries and foreign joint venture entities did not file petitions under Chapter 11 and are not the subject of any bankruptcy proceedings.



During the pendency of the Filings, the Debtors remain in possession of their properties and assets and management continues to operate the businesses of the Debtors as
debtors-in-possession pursuant to Sections 1107(a) and 1108 of the Bankruptcy Code. As debtors-in-possession, the Debtors are authorized to operate their businesses, but may not engage in transactions outside of the ordinary course of business
without the approval of the Bankruptcy Court, after notice and the opportunity for a hearing.



On the Filing Date, the Debtors filed a motion seeking authority for the Company to enter into a credit facility of up to $100 million in debtor-in-possession (DIP) financing with First Union National Bank
(the Agent) and Wachovia Securities, Inc. On February 21, 2002, the Bankruptcy Court entered an interim order approving the credit facility and authorizing immediate access of up to $30 million. On March 19, 2002, the Bankruptcy Court
entered a final order approving the entire $100 million DIP financing. Effective September 24, 2002, the Company exercised its right, as permitted under the DIP Financing Agreement (as defined below), to permanently reduce such maximum amount of
revolving credit borrowings from $100 million to $75 million. Effective July 25, 2003, the Company further exercised its right, as permitted under the DIP Financing Agreement, to permanently reduce such maximum amount of revolving credit borrowings
from $75 million to $50 million.



Under the terms of the final DIP financing
agreement (the DIP Financing Agreement), the Company, as borrower, may make revolving credit borrowings (including up to $15 million for post-petition letters of credit which was reduced to $10 million by the Financing Extension, as
defined below) in an amount not exceeding the lesser of $100 million (effective September 24, 2002, such amount was permanently reduced to $75 million and effective July 25, 2003, it was permanently reduced to $50 million) or the Borrowing Base (as
defined in the DIP Financing Agreement). The DIP Financing Agreement will terminate and the borrowings thereunder will be due and payable upon the earliest of (i) August 19, 2003, (ii) the date of the substantial consummation of a plan of
reorganization that is confirmed pursuant to an order by the Bankruptcy Court or (iii) the acceleration of the revolving credit loans made by any of the banks who are a party to the DIP Financing Agreement and the termination of the total commitment
under the DIP Financing Agreement pursuant to the DIP Financing Agreement. Amounts borrowed under the DIP Financing Agreement bear interest at the rate per annum at the Companys option, of either (i) (a) the higher of the prime rate or the
federal funds rate plus .50% plus (b) a margin of 2.00% or (ii) LIBOR plus a margin of 3.25%. There is an unused commitment fee of either (A) at such time as First Union National Bank is no longer the sole bank, at the rate of (i) .75% per annum on
the average daily unused total commitment at all times during which the average total commitment usage is less than 25% of the total commitment and (ii) .50% per annum on the average daily unused total commitment at all times during which the
average total commitment usage is more than or equal to 25% of the total commitment; or (B) at all times that First Union National Bank is the sole bank, at a rate of .50% per annum on the average daily unused total commitment. There are letter of
credit fees payable to the Agent equal to LIBOR plus 3.25% on the daily



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##### Table of Contents

GALEY & LORD, INC.

(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements

June 28, 2003

(Unaudited)



NOTE ABankruptcy Filing (Continued)



average letters of credit outstanding and to a fronting bank, its customary fees plus .25% for each letter of credit issued by such fronting bank.



Borrowings under the DIP Financing Agreement are guaranteed by each of the
Debtor subsidiaries. In general, such borrowings constitute allowed super-priority administrative expense claims and are secured by (i) a perfected first priority lien pursuant to Section 364(c)(2) of the Bankruptcy Code, upon all property of the
Company and the Debtor subsidiaries that was not subject to a valid, perfected and non-avoidable lien on the Filing Date, (ii) a perfected junior lien, pursuant to Section 364(c)(3) of the Bankruptcy Code upon all property of the Company and the
Debtor subsidiaries already subject to valid, perfected, non-avoidable liens, and (iii) a perfected first priority senior priming lien, pursuant to Section 364(d)(1) of the Bankruptcy Code, upon all property of the Company and the Debtor
subsidiaries already subject to a lien that presently secures the Companys and the Debtor subsidiaries pre-petition indebtedness under the existing pre-petition credit agreement, whether created prior to or after the Filing Date (subject
to certain specific existing or subsequently perfected liens). This security interest is subject to certain explicit exceptions.



The DIP Financing Agreement contains covenants restricting the Company and the Debtor subsidiaries from consolidating or merging with and into another person, disposing
of assets, incurring additional indebtedness and guarantees, creating liens and encumbrances on properties, modifying its or their business, making capital expenditures in excess of $22.5 million through the maturity date or $15.2 million during any
12 month period, declaring and paying dividends, making investments, loans or advances, and creating super-priority claims. There are certain limitations on affiliate transactions and on costs and expenses incurred in connection with the closing of
production facilities. The DIP Financing Agreement also requires the Company and the Debtor subsidiaries to achieve certain levels of EBITDA (as defined) as specified therein. At June 28, 2003, the Company was in compliance with the covenants of the
DIP Financing Agreement.



The DIP Financing Agreement also provides for the
mandatory prepayment of all or a portion of outstanding borrowings upon repatriation of funds from foreign subsidiaries or the sale of assets, or in the event outstanding loans exceed the Borrowing Base.



In July 2003, the DIP Financing Agreement was amended, among other things, to extend the
maturity date from August 19, 2003 to October 3, 2003 (the Financing Extension). The Company has filed a motion seeking, among other things, Bankruptcy Court approval of the Financing Extension. On August 7, 2003, the Bankruptcy Court
approved the Financing Extension on an interim basis and is scheduled to consider approval of the Financing Extension on a permanent basis on September 17, 2003. There can be no assurance that the DIP Financing Agreement will be approved on a final
basis. In the event that the Financing Extension is not approved, it will expire by its terms on September 19, 2003.



The Financing Extension allows the Company to have a maximum aggregate principal amount of loans and letters of credit outstanding of $25 million and reduces the maximum
aggregate amount available for letters of credit from $15 million to $10 million. As part of the Financing Extension, among other things:



| | i. |  | Upon the sale of the capital stock of the entities which constitute Klopman International and certain intellectual property rights thereof no less than $24.4
million will be repatriated to the Company and the
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

GALEY & LORD, INC.

(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements

June 28, 2003

(Unaudited)



NOTE ABankruptcy Filing (Continued)



Company will apply such repatriated funds in accordance with the DIP Financing Agreement, as amended.



| | ii. |  | Provide a draft plan of reorganization and disclosure statement by September 15, 2003 to the lenders and the lenders agent.
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------



The DIP Financing Agreement was also modified to provide for cash collateral for letters of
credit from the proceeds of foreign repatriations, after the repayment of any outstanding loans under the DIP Financing Agreement.



The Company intends to seek an additional extension of the DIP Financing Agreement that will include the establishment of future EBITDA covenants through the extension
period. There can be no assurance that the Company will obtain such extension. The Company has no current commitments or arrangements for additional debtor-in-possession financing and, if the DIP Financing Agreement is not extended, there can be no
assurance that replacement debtor-in-possession financing will be available on acceptable terms (or that any such financing will be approved by the Bankruptcy Court), or at all.



The Bankruptcy Court has approved payment of certain of the Debtors pre-petition obligations, including, among other things, employee
wages, salaries, and benefits, and certain critical vendor and other business-related payments necessary to maintain the operation of their businesses. The Debtors have retained, with Bankruptcy Court approval, legal and financial professionals to
advise the Debtors in the bankruptcy proceedings and the restructuring of their businesses, and certain other ordinary course professionals. From time to time the Debtors may seek Bankruptcy Court approval for the retention of additional
professionals.



By orders dated June 6, 2002, and July 24, 2002, the Bankruptcy
Court authorized the implementation of various employee programs for the Debtors. These programs include:



Stay Bonus and Emergence PlansThese plans provide for payments totaling $5.2 million for 62 employees including executive officers. Payments
under the Stay Bonus Plan are in four equal payments beginning in August 2002 and ending the later of June 2003 or upon emergence. The Emergence Plan provides for a single payment upon emergence.



Enhanced Severance ProgramPursuant to this program, certain
employees, including executive officers, are entitled to enhanced severance payments under certain terms and conditions.



Discretionary Transition Payment PlanThis plan allows the Debtors to offer incentives to certain employees during a transition period at the
end of which such employees would be terminated, in the event such incentives become necessary (the Debtors have no current plans to significantly reduce headcount).



Discretionary Retention PoolThis plan provides the Chief Executive Officer discretionary authority to offer
incentives to employees (including new employees) not otherwise participating in other portions of the program.



8



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##### Table of Contents

GALEY & LORD, INC.

(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements

June 28, 2003

(Unaudited)



NOTE ABankruptcy Filing (Continued)



Performance Incentive PlanThe Debtors filed a motion for approval of a proposed
performance incentive plan, pursuant to which certain employees, including executive officers, would be entitled to an additional bonus in the event certain personal and/or company performance goals were achieved. The Debtors voluntarily withdrew
that motion without prejudice to their right to seek the relief requested therein at a later date.



The Debtors have also received authority to conduct certain other transactions that might be considered outside the ordinary course of business. The Debtors have sought and received authority to pay
certain pre-petition personal and property taxes, to sell certain identified assets, to enter into certain financing agreements, and to retain a real estate professional to market and sell certain unused properties.



The Debtors must, subject to Bankruptcy Court approval and certain other limitations, assume,
assume and assign, or reject each of their executory contracts and unexpired leases. In this context, assumption means, among other things, re-affirming their obligations under the relevant lease or contract and curing all monetary
defaults thereunder. In this context, rejection means breaching the relevant contract or lease as of the Filing Date, being relieved of on-going obligations to perform under the contract or lease, and being liable for damages, if any,
for the breach thereof. Such damages, if any, are deemed to have accrued prior to the Filing Date by operation of the Bankruptcy Code. The Bankruptcy Court has entered three orders collectively approving the rejection of one executory contract and
several unexpired leases. In addition, under the Bankruptcy Code, the Debtors must assume, assume and assign, or reject all unexpired leases of non-residential real property for which a Debtor is lessee within 60 days from the Filing Date. By orders
dated April 29, 2002, August 16, 2002, December 11, 2002, and April 17, 2003, the Bankruptcy Court extended this deadline up through and including August 14, 2003. The Debtors are in the process of reviewing their remaining executory contracts to
determine which, if any, they will reject. At this time the Debtors cannot reasonably estimate the ultimate liability, if any, that may result from rejecting and/or assuming executory contracts or unexpired leases, and no provisions have yet been
made for these items.



The Bankruptcy Court established October 1, 2002 as the
bar date as of which all claimants were required to submit and characterize claims against the Debtors. The Debtors are currently in the process of reviewing the claims that were filed against the Company. The ultimate amount of the
claims allowed by the Court against the Company could be significantly different than the amount of the liabilities recorded by the Company.



The consummation of a plan or plans of reorganization (a Plan) is the principal objective of the Chapter 11 Filings. A Plan would, among other things, set
forth the means for satisfying claims against and interests in the Company and its Debtor subsidiaries, including setting forth the potential distributions on account of such claims and interests, if any. The Plan could also involve the sale of the
Debtors assets and/or stock. It is also possible that a sale of the Debtors assets and/or stock could be accomplished outside a plan of reorganization. Pursuant to the Bankruptcy Code, the Debtors had the exclusive right for 120 days
from the Filing Date (through and including June 18, 2002) to file a Plan, and for 180 days from the Filing Date (through and including August 17, 2002) to solicit and receive the votes necessary to confirm a Plan. As of the date hereof, the
Bankruptcy Court had entered six orders collectively extending the Debtors exclusive right to file a Plan through and including September 9, 2003, and extending the Debtors exclusive right to solicit acceptances of



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##### Table of Contents

GALEY & LORD, INC.

(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements

June 28, 2003

(Unaudited)



NOTE ABankruptcy Filing (Continued)



such Plan through and including November 3, 2003. Both of these exclusivity periods may be further extended by the Bankruptcy Court for cause. If the Debtors
fail to file a Plan during the exclusive filing period or if the Debtors fail to obtain the requisite acceptance of such Plan during the exclusive solicitation period, any party-in-interest, including a creditor, an equity holder, a committee of
creditors or equity holders, or an indenture trustee, may file its own Plan for the Debtors. Confirmation of a Plan is subject to certain statutory findings by the Bankruptcy Court. Subject to certain exceptions as set forth in the Bankruptcy Code,
confirmation of a Plan requires, among other things, a vote on the Plan by certain classes of creditors and equity holders whose rights or interests are impaired under the Plan. If any impaired class of creditors or equity holders does not vote to
accept the Plan, but all of the other requirements of the Bankruptcy Code are met, the proponent of the Plan may seek confirmation of the Plan pursuant to the cram down provisions of the Bankruptcy Code. Under these provisions, the
Bankruptcy Court may still confirm a Plan notwithstanding the non-acceptance of the Plan by an impaired class, if, among other things, no claim or interest receives or retains any property under the Plan until each holder of a claim senior to such
claim or interest has been paid in full. As a result of the amount of pre-petition indebtedness and the availability of the cram down provisions, the holders of the Companys capital stock may receive no value for their interests
under any Plan. Because of such possibility, the value of the Companys outstanding capital stock and unsecured instruments are highly speculative. In addition, there can be no assurance that a Plan will be proposed by the Debtors or confirmed
by the Bankruptcy Court, or that any such Plan will be consummated.



On or
about April 4, 2003, the Official Committee of General Unsecured Creditors (the Committee) filed a motion (the Examiner Motion) seeking the appointment of an examiner in the Debtors cases pursuant to Sections
1104(c)(1), 1104(c)(2) and 105(a) of the Bankruptcy Code and Bankruptcy Rules 2007.1 and 9014, and seeking an injunction prohibiting the Debtors from filing a Plan for at least 90 days from the appointment of such examiner. Both the Debtors
and the agent for the Debtors pre-petition secured lenders filed objections to this motion, objecting to the relief requested therein and the purported factual predicate therefore. The Committee has withdrawn the Examiner Motion.



On or around June 26, 2003, the Company filed a motion for authority to enter into an
engagement agreement (the Engagement Agreement) with Alvarez & Marsal, Inc. (A&M). A&M will supplement existing management with professionals led by Mr. Peter A. Briggs, a managing director at A&M. Mr. Briggs
will serve as chief restructuring officer (CRO) and report to Arthur C. Wiener, Chairman and Chief Executive Officer of the Company. Mr. Joseph A. Biondi and certain additional officers (together, the Additional Officers)
will assist the CRO. On or about June 27, 2003, the Bankruptcy Court entered an order authorizing the Company, on an interim basis and as amended thereby, to enter into the Engagement Agreement, and to retain the CRO and Additional Officers. On or
about July 18, 2003, the Bankruptcy Court entered a final order approving the retention of A&M and the CRO and Additional Officers.



It is not possible to predict the length of time the Company will operate under the protection of Chapter 11 and the supervision of the Bankruptcy Court, the outcome of
the bankruptcy proceedings in general, or the effect of the proceedings on the business of the Company or on the interest of the various creditors and stakeholders. Since the Filing Date, the Debtors have conducted business in the ordinary course.
Management is in the process of evaluating their operations as part of the development of a Plan.



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##### Table of Contents

GALEY & LORD, INC.

(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements

June 28, 2003

(Unaudited)



NOTE ABankruptcy Filing (Continued)



During the pendency of the Chapter 11 Filings, the Debtors may, with Bankruptcy Court approval, sell assets and
settle liabilities, including for amounts other than those reflected in the financial statements. The administrative and reorganization expenses resulting from the Chapter 11 Filings will unfavorably affect the Debtors results of operations.
In addition, under the priority scheme established by the Bankruptcy Code, most, if not all, post-petition liabilities must be satisfied before most other creditors or interest holders, including stockholders, can receive any distribution on account
of such claim or interest.



The accompanying consolidated financial statements
are presented in accordance with American Institute of Certified Public Accountants Statement of Position 90-7, Financial Reporting by Entities in Reorganization under the Bankruptcy Code (SOP 90-7), assuming that the
Company will continue as a going concern. The Company is currently operating under the jurisdiction of Chapter 11 of the Bankruptcy Code and the Bankruptcy Court, and continuation of the Company as a going concern is contingent upon, among other
things, its ability to formulate a Plan which will gain approval of the requisite parties under the Bankruptcy Code and confirmation by the Bankruptcy Court, its ability to extend the term and maturity of the DIP Financing Agreement beyond August
19, 2003 or find alternative debtor-in-possession financing, its ability to comply with the DIP Financing Agreement or any alternative financing arrangement, and its ability to return to profitability, generate sufficient cash flows from operations,
and obtain financing sources to meet future obligations. These matters raise substantial doubt about the Companys ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of these uncertainties.



In the Chapter 11 Filings, substantially all unsecured liabilities as of the Filing Date are subject to compromise or other treatment under
a Plan which must be confirmed by the Bankruptcy Court after submission to any required vote by affected parties. Generally, all actions to enforce or otherwise effect repayment of pre-petition liabilities, as well as all pending litigation against
the Debtors, are stayed while the Debtors continue their business operations as debtors-in-possession. The ultimate amount of and settlement terms for liabilities subject to compromise are subject to an approved Plan and accordingly are not
presently determinable. The principal categories of obligations classified as liabilities subject to compromise under the Chapter 11 Filings as of June 28, 2003 are identified below (in thousands):



|91/8% Senior Subordinated Notes |  | $ | 300,000
|------------------------------- |  | - | -------
|Interest accrued on above debt  |  |   | 12,775 
|Accounts payable                |  |   | 11,400 
|Liability for rejected leases   |  |   | 2,165  
|Other accrued expenses          |  |   | 1,075  
|                                |  |   |        
|                                |  | $ | 327,415
|                                |  |   |        



Pursuant to SOP 90-7, professional
fees associated with the Chapter 11 Filings are expensed as incurred and reported as reorganization items. Interest expense is reported only to the extent that it will be paid during the Chapter 11 Filings or that it is probable that it will be an
allowed claim. The Company recognized a charge of $0.7 million and $7.8 million associated with the Chapter 11 Filings for the three and nine months ended June 28, 2003, respectively. Of these charges, $2.3 million and $6.2 million for the three and
nine months ended June 28, 2003, respectively, were for fees payable to professionals retained to assist with the Chapter 11 Filings and $(1.6) million and $1.6 million for the three months and nine months ended June 28, 2003,



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##### Table of Contents

GALEY & LORD, INC.

(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements

June 28, 2003

(Unaudited)



NOTE ABankruptcy Filing (Continued)



respectively, were related to incentive and retention programs. During the June quarter 2003, the Company reversed a $2.6 million accrual related to an
incentive program. The Company recognized a charge of $4.4 million and $14.3 million associated with the Chapter 11 Filings for the three and nine months ended June 29, 2002, respectively. Of these charges, $2.9 million and $5.1 million for the
three and nine months ended June 29, 2002, respectively, were for fees payable to professionals retained to assist with the Chapter 11 Filings. In addition, $1.5 million for both the three and nine months ended June 29, 2002 was related to incentive
and retention programs and approximately $7.7 million, incurred in the March quarter 2002, was related to the non-cash write-off of the unamortized discount on the 91/8% Senior Subordinated Notes and the non-cash write-off of related deferred financing fees.



NOTE BImpairment of Goodwill and Other Intangible Assets



Effective as of the beginning of the Companys fiscal 2003, the Company adopted Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets (FAS 142). This new standard eliminates the amortization of goodwill and intangible assets with indefinite useful lives (collectively, the Intangible Assets). Instead these
assets must be tested at least annually for impairment. In the year of adoption, FAS 142 also requires the Company to perform an initial assessment of its reporting units to determine whether there is any indication that the Intangible Assets
carrying value may be impaired. This transitional assessment is made by comparing the fair value of each reporting unit, as determined in accordance with the new standard, to its carrying value. To the extent the fair value of any reporting unit is
less than its carrying value, which would indicate that potential impairment of Intangible Assets exists, a second transitional test is required to determine the amount of impairment.



For purposes of Intangible Assets impairment testing, FAS 142 requires that goodwill be assigned to one or more reporting units. The Company
assigned goodwill to the Swift Denim and Galey & Lord Apparel reporting units. In addition to goodwill, Swift Denim also owns several trademarks whose useful lives are considered to be indefinite.



The Company, with the assistance of an outside consultant, completed the initial transitional
assessment of its reporting units in the first quarter of fiscal 2003 and determined that potential impairment of Intangible Assets existed in both reporting units. During the second quarter of fiscal 2003, the Company completed its assessment and,
accordingly, the entire goodwill balance of $65.2 million ($0.8 million and $64.4 million at the Galey & Lord Apparel and Swift Denim reporting units, respectively) was impaired and $22.2 million of the recorded trademark (Swift Denim reporting
unit) was impaired.



In accordance with FAS 142, these adjustments were
recorded as a cumulative effect of an accounting change retroactive to the beginning of fiscal 2003 and prior period amounts were not restated. The effect of the change on the first quarter of fiscal 2003 is as follows:



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##### Table of Contents

GALEY & LORD, INC.

(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements

June 28, 2003

(Unaudited)



NOTE BImpairment of Goodwill and Other
Intangible Assets (Continued)



|                                                                              |  | Three Months Ended December 28, 2002 |        
|----------------------------------------------------------------------------- |  | ------------------------------------ | -------
|Net loss as reported                                                          |  | $                                    | (304   
|Cumulative effect of accounting change (net of applicable income taxes of $0) |  |                                      | (87,408
|                                                                              |  |                                      |        
|Net loss as restated                                                          |  | $                                    | (87,712
|                                                                              |  |                                      |        
|Net loss per share as reported                                                |  | $                                    | (0.03  
|Cumulative effect of accounting change per share                              |  |                                      | (7.28  
|                                                                              |  |                                      |        
|Adjusted net loss per share                                                   |  | $                                    | (7.31  
|                                                                              |  |                                      |        



The following table adjusts the
reported net loss for the three and nine months ended June 29, 2002 and the loss per share amounts to exclude the amortization of Intangible Assets (in thousands, except per share data):



|                                  |  | Three MonthsEnded June 29, 2002 |        |   | Nine MonthsEnded June 29, 2002 |  
|--------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | -
|Reported net loss                 |  | $                               | (2,650 | ) |                                | $
|Amortization of Intangible Assets |  |                                 | 979    |   |                                |  
|                                  |  |                                 |        |   |                                |  
|Adjusted net loss                 |  | $                               | (1,671 | ) |                                | $
|                                  |  |                                 |        |   |                                |  
|Reported loss per share           |  | $                               | (0.22  | ) |                                | $
|Amortization of Intangible Assets |  |                                 | 0.08   |   |                                |  
|                                  |  |                                 |        |   |                                |  
|Adjusted net loss per share       |  | $                               | (0.14  | ) |                                | $
|                                  |  |                                 |        |   |                                |  



FAS 142 requires that an intangible
asset not subject to amortization be tested for impairment annually, or more frequently if events or changes in circumstances indicate the asset might be impaired. If the carrying amount of an intangible asset exceeds its fair value, an impairment
loss shall be recognized in an amount equal to that excess and the adjusted carrying amount of the intangible assets shall be its new accounting basis. The Company determined that impairment indicators existed with respect to Swift Denim in the June
quarter 2003 due to the further softening in the retail environment in which Swift Denim operates. Accordingly, the fair value of the Swift Denim trademark was tested for impairment based on the expected value of future cash flows and, based on such
testing, a non-cash impairment loss of $5.5 million was recorded on the Swift Denim trademark in the June quarter 2003.



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##### Table of Contents

GALEY & LORD, INC.

(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements

June 28, 2003

(Unaudited)



NOTE CBasis of Presentation



The consolidated financial statements include the accounts of 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 Company follows the accounting provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, which
requires that the Company recognize expense for the fair value of stock-based compensation awarded during the year.



Certain prior period amounts have been reclassified to conform to current year presentation.



The accompanying unaudited consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary to
present fairly the consolidated financial position of the Company as of June 28, 2003 and the consolidated results of operations and cash flows for the periods ended June 28, 2003 and June 29, 2002. Such adjustments consisted only of normal
recurring items with the exception of the cumulative effect of an accounting change as outlined in Note BAdoption of New Accounting Standard. 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 for the fiscal year ended September 28, 2002.



NOTE DInventories



The components of inventory at June 28, 2003, June 29, 2002, and September 28, 2002 consisted of the following (in thousands):



|                                 |  | June 28, 2003 |         |   | June 29, 2002 |   |         | September 28, 2002 | 
|-------------------------------- |  | ------------- | ------- | - | ------------- | - | ------- | ------------------ | 
|Raw materials                    |  | $             | 7,342   |   |               | $ | 4,979   |                    | 
|Stock in process                 |  |               | 17,577  |   |               |   | 18,127  |                    | 
|Produced goods                   |  |               | 153,043 |   |               |   | 122,696 |                    | 
|Dyes, chemicals and supplies     |  |               | 11,570  |   |               |   | 12,817  |                    | 
|                                 |  |               |         |   |               |   |         |                    | 
|                                 |  |               | 189,532 |   |               |   | 158,619 |                    | 
|Adjust to LIFO cost              |  |               | (6,334  | ) |               |   | 9,143   |                    | 
|Lower-of-cost-or-market reserves |  |               | (6,553  | ) |               |   | (13,426 | )                  | 
|                                 |  |               |         |   |               |   |         |                    | 
|                                 |  | $             | 176,645 |   |               | $ | 154,336 |                    | 
|                                 |  |               |         |   |               |   |         |                    | 



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 the Swift Denim business 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 $0.4 million and
$2.7 million of lower-of-cost-or-market (LCM) reserves were reversed in the three and nine months ended June 29, 2002 due to the change from FIFO to LIFO. In implementing the change in inventory method for Swift Denim, 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.



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##### Table of Contents

GALEY & LORD, INC.

(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements

June 28, 2003

(Unaudited)



NOTE ELong-Term Debt



Long-term debt consists of the following (in thousands):



|                                                   |  | June 28,2003 |         | June 29,2002 |   | September 28,2002
|-------------------------------------------------- |  | ------------ | ------- | ------------ | - | -----------------
|Long-term debt not subject to compromise:          |  |              |         |              |   |                  
|Long-term debtcurrent                             |  |              |         |              |   |                  
|Debtor-in-Possession Financing                     |  | $            |        |              | $ |                 
|Senior Credit Facility:                            |  |              |         |              |   |                  
|Revolving Credit Note                              |  |              | 116,941 |              |   | 119,874          
|Term Loan B                                        |  |              | 105,860 |              |   | 108,785          
|Term Loan C                                        |  |              | 75,096  |              |   | 77,169           
|Other borrowings with various rates and maturities |  |              | 6,953   |              |   | 7,198            
|                                                   |  |              |         |              |   |                  
|                                                   |  |              | 304,850 |              |   | 313,026          
|                                                   |  |              |         |              |   |                  
|Long-term debt                                     |  |              |         |              |   |                  
|Canadian Loan:                                     |  |              |         |              |   |                  
|Revolving Credit Note                              |  |              | 2,611   |              |   | 6,880            
|Term Loan                                          |  |              | 2,937   |              |   | 4,987            
|Italian Credit Agreements                          |  |              | 10,208  |              |   | 19,818           
|Other borrowings with various rates and maturities |  |              | 181     |              |   | 665              
|                                                   |  |              |         |              |   |                  
|                                                   |  |              | 15,937  |              |   | 32,350           
|                                                   |  |              |         |              |   |                  
|Total long-term debt not subject to compromise     |  |              | 320,787 |              |   | 345,376          
|                                                   |  |              |         |              |   |                  
|Long-term debt subject to compromise:              |  |              |         |              |   |                  
|91/8% Senior Subordinated Notes                    |  |              | 300,000 |              |   | 300,000          
|                                                   |  |              |         |              |   |                  
|                                                   |  | $            | 620,787 |              | $ | 645,376          
|                                                   |  |              |         |              |   |                  



Debtor-in-Possession Agreement



As discussed in Note A above, the Company and the Debtor subsidiaries
entered into the DIP Financing Agreement pursuant to which the Company, as borrower, may make revolving credit borrowings (including up to $15 million for post-petition letters of credit, which was reduced to $10 million by the Financing Extension)
in an amount not exceeding the lesser of $100 million or the Borrowing Base (as defined in the DIP Financing Agreement). Effective September 24, 2002, the Company exercised its right, as permitted under the DIP Financing Agreement, to permanently
reduce such maximum amount of revolving credit borrowings from $100 million to $75 million. Effective July 25, 2003, the Company further exercised its right, as permitted under the DIP Financing Agreement, to permanently reduce such maximum amount
of revolving credit borrowings from $75 million to $50 million. See Note A above for a description of the DIP Financing Agreement and Financing Extension.



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##### Table of Contents

GALEY & LORD, INC.

(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements

June 28, 2003

(Unaudited)



NOTE ELong-Term Debt (Continued)



Pre-Petition Senior Credit Facility



On July 13, 1999, the Company amended its credit agreement, dated as of January 29, 1998 (the Senior Credit Facility), as amended, with First Union
National Bank, 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. On January 24, 2002, the Company amended its Senior Credit Facility to provide for an overadvance of $10 million, none of which
was drawn prior to the overadvance expiration on February 23, 2002.



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.



As a result of the February 2001 funding of the Companys Canadian Loan Agreement (as defined below), the Company repaid $12.7 million in principal on 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 second quarter of fiscal 2001.



During the second quarter of fiscal 2002, Klopman International used existing
cash balances and borrowings under its credit agreements to complete a capital reduction of $20.2 million with its European parent holding company (which is a wholly-owned subsidiary of the Company). In April 2002, $19.5 million was transferred from
the Companys European holding company to the Company in the United States. The Company then utilized the cash to repay its $7.4 million outstanding balance under its DIP Financing Agreement as well as repay $5.0 million, $4.2 million, and $2.9
million of the Companys pre-petition revolving line of credit, Term Loan B, and Term Loan C borrowings, respectively, under the pre-petition Senior Credit Facility.



As a result of the Chapter 11 Filings, the Company and each of the Debtor subsidiaries are currently in default of the Senior Credit
Facility. See Note ABankruptcy Filing.



Pre-Petition 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



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##### Table of Contents

GALEY & LORD, INC.

(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements

June 28, 2003

(Unaudited)



NOTE ELong-Term Debt (Continued)



the Securities Act of 1933. Net proceeds from the offerings 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. Interest on the Notes is payable on March 1 and September 1 of each year.



On August 18, 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 of restricted subsidiaries or merge or consolidate the Company or its restricted subsidiaries.



As a result of the Chapter 11 Filings, the Company and the Debtor subsidiaries are currently in default under the Notes and the Indenture. As of the Filing Date, the Company discontinued its interest accrual on the
Notes and wrote off $7.7 million of deferred debt fees and the remaining discount on the Notes. See Note ABankruptcy Filing.



Italian Loan Agreements



The Companys wholly-owned Italian subsidiary, Klopman International S.r.l. (Klopman), had net borrowings of approximately $8.8 million outstanding under
various unsecured bank line-of-credit agreements as of June 28, 2003. The average interest rate on these borrowings was 3.00% and 3.40% per annum for the three and nine months ended June 28, 2003, respectively, and the various line-of-credit
agreements renew automatically. The amount of outstanding credit allowed is subject to periodic review by the issuing banks. As of June 28, 2003, total unused credit under these agreements was approximately $44.8 million.



In addition, Klopman has an Italian government term loan of approximately $1.6 million. The
term loan requires principal and interest payments through March 2011. The interest rate on such term loan is 4.11% per annum.



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##### Table of Contents

GALEY & LORD, INC.

(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements

June 28, 2003

(Unaudited)



NOTE ELong-Term Debt (Continued)



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,
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 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.
Effective July 24, 2002, the term loan was converted to U.S. dollars repayable in equal monthly installments of U.S. $150,000 with the unpaid balance repayable in February 2004. 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 1.50% (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 1.00% (for borrowings in U.S. dollars), (ii) the Canadian prime rate plus .75%, 1.00%, 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). At June 28, 2003, the Company was in compliance with the covenants of the Canadian Loan Agreement.



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##### Table of Contents

GALEY & LORD, INC.

(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements

June 28, 2003

(Unaudited)



NOTE FNet Income (Loss) Per Common Share



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



|                                                                                                                                  |  | Three Months Ended |         |   | Nine Months Ended |  
|--------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ------- | - | ----------------- | -
|                                                                                                                                  |  | June 28, 2003      |         |   | June 29, 2002     |  
|Numerator:                                                                                                                        |  |                    |         |   |                   |  
|Loss before cumulative effect of accounting change                                                                                |  | $                  | (16,429 | ) |                   | $
|Cumulative effect of accounting change (net of applicable income taxes of $0)                                                     |  |                    |        |   |                   |  
|                                                                                                                                  |  |                    |         |   |                   |  
|Net loss                                                                                                                          |  | $                  | (16,429 | ) |                   | $
|                                                                                                                                  |  |                    |         |   |                   |  
|Denominator:                                                                                                                      |  |                    |         |   |                   |  
|Denominator for basic earnings per share                                                                                          |  |                    | 11,997  |   |                   |  
|Effect of dilutive securities:                                                                                                    |  |                    |         |   |                   |  
|stock options                                                                                                                     |  |                    |        |   |                   |  
|                                                                                                                                  |  |                    |         |   |                   |  
|Diluted potential common shares denominator for diluted earnings per shareadjusted weighted average shares and assumed
exercises |  |                    | 11,997  |   |                   |  
|                                                                                                                                  |  |                    |         |   |                   |  



Options to purchase 132,950 shares and
161,149 shares of the Companys common stock were outstanding during the three months and nine months ended June 28, 2003 and June 29, 2002, 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 777,699 and 798,150 shares of the Companys common stock were outstanding during the three months and nine months ended June 28,
2003 and June 29, 2002, 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.



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##### Table of Contents

GALEY & LORD, INC.

(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements

June 28, 2003

(Unaudited)



NOTE G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.



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.



Statement of Financial Accounting Standards No. 87, Employers Accounting for Pensions (FAS 87), requires
companies with any plans that have an unfunded accumulated benefit obligation to recognize an additional minimum pension liability and an intangible pension asset equal to the unrecognized prior service cost and, if the additional liability required
to be recognized exceeds the unrecognized service cost, the excess shall be reported in accumulated other comprehensive loss as a separate component of equity. In accordance with FAS 87, the consolidated balance sheet at June 28, 2003 includes an
intangible pension asset of $2.4 million, an additional minimum pension liability of $11.7 million and accumulated other comprehensive loss of $9.3 million.



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 curtailment gain of
$3.4 million was recognized in the first quarter of fiscal 2002.



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##### Table of Contents

GALEY & LORD, INC.

(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements

June 28, 2003

(Unaudited)



NOTE HStockholders Equity (Deficit)



Comprehensive income (loss) represents the change in stockholders deficit during the period from non-owner sources. Currently, changes
from non-owner sources consist of net loss, foreign currency translation adjustments, derivative instrument reclassifications and minimum pension liability. Total comprehensive income/(loss) for the three and nine months ended June 28, 2003 was
$(9.2) million and $(94.8) million, respectively, and for the three and nine months ended June 29, 2002 was $5.4 million and $(19.4) million, respectively.



Activity in Stockholders Equity (Deficit) is as follows (in thousands):



|                                             |  | Current YearComprehensiveIncome (Loss) |          |   | Common Stock |   | Contributed Capital |  | Accumulated Deficit |        |  | Treasury Stock |          |   | AccumulatedOtherComprehensiveIncome (Loss) |   |        | Total | 
|-------------------------------------------- |  | -------------------------------------- | -------- | - | ------------ | - | ------------------- |  | ------------------- | ------ |  | -------------- | -------- | - | ------------------------------------------ | - | ------ | ----- | 
|Balance at September 28, 2002                |  |                                        |          |   |              | $ | 124                 |  | $                   | 41,954 |  | $              | (66,973  | ) |                                            | $ | (2,247 | )     | 
|Compensation earned related to stock options |  |                                        |          |   |              |   |                    |  |                     | 6      |  |                |         |   |                                            |   |       |       | 
|Comprehensive income (loss):                 |  |                                        |          |   |              |   |                     |  |                     |        |  |                |          |   |                                            |   |        |       | 
|Net loss for nine months ended June 28, 2003 |  | $                                      | (110,287 | ) |              |   |                    |  |                     |       |  |                | (110,287 | ) |                                            |   |       |       | 
|Foreign currency translation adjustment      |  |                                        | 15,759   |   |              |   |                    |  |                     |       |  |                |         |   |                                            |   |       |       | 
|Derivative instrument reclassifications      |  |                                        | (261     | ) |              |   |                    |  |                     |       |  |                |         |   |                                            |   |       |       | 
|                                             |  |                                        |          |   |              |   |                     |  |                     |        |  |                |          |   |                                            |   |        |       | 
|Total comprehensive income (loss)            |  | $                                      | (94,789  | ) |              |   |                     |  |                     |        |  |                |          |   |                                            |   |        |       | 
|                                             |  |                                        |          |   |              |   |                     |  |                     |        |  |                |          |   |                                            |   |        |       | 
|Balance at June 28, 2003                     |  |                                        |          |   |              | $ | 124                 |  | $                   | 41,960 |  | $              | (177,260 | ) |                                            | $ | (2,247 | )     | 
|                                             |  |                                        |          |   |              |   |                     |  |                     |        |  |                |          |   |                                            |   |        |       | 



Accumulated Other Comprehensive Income
(Loss) at June 28, 2003 represents a $4.1 million gain related to foreign currency translation adjustment and a $9.3 million loss related to a minimum pension liability.



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##### Table of Contents

GALEY & LORD, INC.

(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements

June 28, 2003

(Unaudited)



NOTE IIncome Taxes



The components of income tax expense (benefit) are as follows (in thousands):



|                                 |  | Three Months Ended |       | Nine Months Ended |              
|-------------------------------- |  | ------------------ | ----- | ----------------- | -------------
|                                 |  | June 28, 2003      |       |                   | June 29, 2002
|Current tax provision:           |  |                    |       |                   |              
|Federal                          |  | $                  |      |                   |              
|State                            |  |                    |      |                   |              
|Foreign                          |  |                    | 1,694 |                   |              
|                                 |  |                    |       |                   |              
|Total current tax provision      |  |                    | 1,694 |                   |              
|                                 |  |                    |       |                  
|Deferred tax provision:          |  |                    |       |                   |              
|Federal                          |  |                    |      |                   |              
|State                            |  |                    |      |                   |              
|Foreign                          |  |                    | (30   | )                 |              
|                                 |  |                    |       |                   |              
|Total deferred tax provision     |  |                    | (30   | )                 |              
|                                 |  |                    |       |                   |              
|Total provision for income taxes |  | $                  | 1,664 |                   |              
|                                 |  |                    |       |                   |              



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 loss carryforwards, tax rate differences on foreign transactions, differing treatment of certain items for tax purposes and
changes in the valuation allowance. The result is an overall tax expense rate which is higher than the statutory rate.



At June 28, 2003, the Company had outstanding net operating loss carryforwards (NOLs) for U.S. federal tax purposes and for state tax purposes of
approximately $166 million and approximately $202 million, respectively. The federal NOLs will expire in years 2018-2022, and the state NOLs will expire in years 2003-2022. In accordance with the Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes, a valuation allowance of $51.2 million related to domestic and international net operating losses has been established since it is more likely than not that some portion of the deferred tax assets will not be
realized.



Included in the valuation allowance is a $(3.5) million adjustment
that reflects the reversal of certain transactions recorded net of tax in accumulated other comprehensive income (loss). An offsetting deferred tax asset of $3.5 million has been set up to track these amounts until such time as the transactions are
closed and recognized for tax purposes.



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##### Table of Contents

GALEY & LORD, INC.

(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements

June 28, 2003

(Unaudited)



NOTE J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 the Companys 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.



Approximately 3,300 Mexican employees and 500 U.S. employees were terminated as a result of the Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives. All production
at the affected facilities ceased in early September 2001 by which time substantially all the affected employees were terminated.



During fiscal 2002, the Company recorded a change in estimate that decreased the plant closing costs by $1.4 million, primarily related to leases, as well as, additional
fixed asset impairment charges of $0.9 million. In the first quarter of fiscal 2003, the Company recorded an additional change in estimate that decreased the plant closing costs by $0.2 million, also primarily related to leases.



The Company sold its Asheboro, North Carolina facility and related equipment as well as all
the G&L Service Company equipment in fiscal 2002. 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 an additional 12
months or longer to complete.



The table below summarizes the activity related
to the Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives plant closing accruals for the nine months ended June 28, 2003 (in thousands):



|                             |  | Accrual Balanceat September 28, 2002 |       | CashPayments |   |     | Change inEstimate |  |   | AccrualBalance atJune 28, 2003
|---------------------------- |  | ------------------------------------ | ----- | ------------ | - | --- | ----------------- |  | - | ------------------------------
|Severance benefits           |  | $                                    | 442   |              | $ | (11 | )                 |  | $ |                              
|Lease cancellation and other |  |                                      | 1,171 |              |   | (5  | )                 |  |   | (240                          
|                             |  |                                      |       |              |   |     |                   |  |   |                               
|                             |  | $                                    | 1,613 |              | $ | (16 | )                 |  | $ | (240                          
|                             |  |                                      |       |              |   |     |                   |  |   |                               



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##### Table of Contents

GALEY & LORD, INC.

(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements

June 28, 2003

(Unaudited)



NOTE JFiscal 2001 Cost Reduction and Loss
Avoidance Initiatives (Continued)



Of the lease cancellation and other accrual balance related to the Fiscal 2001 Cost Reduction and Loss Avoidance
Initiatives outstanding at June 28, 2003, $0.9 million is included in liabilities subject to compromise. See Note ABankruptcy Filing.



The Company incurred run-out expenses totaling $12,000 and $0.3 million for the three and nine months ended June 28, 2003, respectively. These expenses, which include
equipment relocation, plant carrying costs and other costs, are included primarily in cost of sales in the consolidated statement of operations.



NOTE K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 included 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.



All production at the affected facilities ceased during the December quarter of fiscal 2000 and substantially all of the 1,370 employees
have been terminated. Severance payments were made in either a lump sum or over a maximum period of up to eighteen months.



During fiscal 2001, the Company recorded a change in estimate for severance benefits that reduced the plant closing charge by $0.6 million. During the first quarter of
fiscal 2003, the Company recorded an additional change in estimate that reduced the plant closing costs by $0.2 million.



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. During
fiscal 2002, the Company recorded an additional fixed asset impairment charge of $0.9 million related to the Erwin facility. The Company expects that the sale of the remaining real estate related to the Fiscal 2000 Strategic Initiatives could take
an additional 12 months or longer to complete.



The table below summarizes the
activity related to the plant closing accruals for the nine months ended June 28, 2003 (in thousands):



|                             |  | Accrual Balanceat September 28, 2002 |       | Cash Payments |   |      | Usage of Reserve |  |   | Change inEstimate |   |  | AccrualBalance atJune 28, 2003
|---------------------------- |  | ------------------------------------ | ----- | ------------- | - | ---- | ---------------- |  | - | ----------------- | - |  | ------------------------------
|Severance benefits           |  | $                                    | 226   |               | $ | (168 | )                |  | $ |                  |   |  | $                             
|Lease cancellation and other |  |                                      | 1,930 |               |   |     |                  |  |   | (75               | ) |  |                               
|                             |  |                                      |       |               |   |      |                  |  |   |                   |   |  |                               
|                             |  | $                                    | 2,156 |               | $ | (168 | )                |  | $ | (75               | ) |  | $                             
|                             |  |                                      |       |               |   |      |                  |  |   |                   |   |  |                               



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##### Table of Contents

GALEY & LORD, INC.

(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements

June 28, 2003

(Unaudited)



NOTE KFiscal 2000 Strategic Initiatives
(Continued)



Of the lease cancellation and other accrual balance related to the Fiscal 2000 Strategic Initiatives outstanding at
June 28, 2003, $1.3 million is included in liabilities subject to compromise. See Note ABankruptcy Filing.



The Company incurred run-out expenses totaling $0.3 million and $1.0 million for the three and nine months ended June 28, 2003, respectively. These expenses, which
include equipment relocation, plant carrying costs and other costs, are included primarily in cost of sales in the consolidated statement of operations.



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.



NOTE
LSegment Information



The Companys operations are classified
into three business segments: Galey & Lord Apparel, Swift Denim and Klopman International. 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.



Through fiscal 2002, the Company reported Home Fashion Fabrics as a separate business
segment. 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. During fiscal 2002, the Company realigned its Home Fashion Fabrics management under the control of the Galey & Lord Apparel business unit. Accordingly, Home Fashion Fabrics operating results are not presented as
a separate operating segment effective in fiscal 2003. Prior year financial information has been restated to reflect Home Fashion Fabrics results included with Galey & Lord Apparels results for comparative purposes.



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 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.



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##### Table of Contents

GALEY & LORD, INC.

(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements

June 28, 2003

(Unaudited)



NOTE LSegment Information
(Continued)



Information about the Companys operations in its different industry segments for the three and nine months
ended June 28, 2003 and June 29, 2002 is as follows (in thousands):



|                                                                    |  | Three Months Ended |         |   | Nine Months Ended |  
|------------------------------------------------------------------- |  | ------------------ | ------- | - | ----------------- | -
|                                                                    |  | June 28, 2003      |         |   | June 29, 2002     |  
|Net Sales to External Customers                                     |  |                    |         |   |                   |  
|Galey & Lord Apparel                                                |  | $                  | 63,263  |   |                   | $
|Swift Denim                                                         |  |                    | 49,431  |   |                   |  
|Klopman International                                               |  |                    | 37,393  |   |                   |  
|                                                                    |  |                    |         |   |                   |  
|Consolidated                                                        |  | $                  | 150,087 |   |                   | $
|                                                                    |  |                    |         |   |                   |  
|Operating Income (Loss)                                             |  |                    |         |   |                   |  
|Galey & Lord Apparel                                                |  | $                  | (932    | ) |                   | $
|Swift Denim                                                         |  |                    | (10,867 | ) |                   |  
|Klopman International                                               |  |                    | 1,873   |   |                   |  
|Corporate                                                           |  |                    | (157    | ) |                   |  
|                                                                    |  |                    |         |   |                   |  
|                                                                    |  |                    | (10,083 | ) |                   |  
|Interest expense                                                    |  |                    | 5,434   |   |                   |  
|Income from associated companies(1)                                 |  |                    | (1,460  | ) |                   |  
|Reorganization items(2)                                             |  |                    | 708     |   |                   |  
|                                                                    |  |                    |         |   |                   |  
|Loss before income taxes and cumulative effect of accounting change |  | $                  | (14,765 | ) |                   | $
|                                                                    |  |                    |         |   |                   |  



|                        |  |              
|----------------------- |  | -------------
|                        |  | June 28, 2003
|Assets(3)               |  |              
|Galey & Lord Apparel(4) |  | $            
|Swift Denim(5)          |  |              
|Klopman International   |  |              
|Corporate               |  |              
|                        |  |              
|                        |  | $            
|                        |  |              

---

|(1) |  | Net of amortization of $0, $163, $0, and $489, respectively. The Company adopted Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (FAS 142), on September 29, 2002 (the beginning of the Companys fiscal 2003). Upon adoption of FAS 142, the Company ceased amortizing the
remaining investment over its equity in the underlying net assets of its joint venture interests.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Reorganization items for the three months and nine months ended June 28,
2003 include $2.3 million and $6.2 million, respectively, of professional fees associated with the Chapter 11 Filings and $(1.6) million and $1.6 million, respectively, of expenses related to incentive and retention programs. The Company reversed a
$2.6 million accrual related to an incentive program during the June quarter 2003. Reorganization items for the three months ended June 29, 2002 include $2.9 million of professional fees associated with the Chapter 11 Filings and $1.5 million of
expenses related to incentive and retention programs. Reorganization items for the nine months ended June 29, 2002 include $7.7 million for the non-cash write-off of the unamortized discount
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

GALEY & LORD, INC.

(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements

June 28, 2003

(Unaudited)



on the 91/8% Senior
Subordinated Notes and the non-cash write-off of the related deferred financing fees, $5.1 million of professional fees associated with the Chapter 11 Filings and $1.5 million of expenses related to incentive and retention programs.

|(3) |  | Excludes intercompany balances and investments in subsidiaries which are eliminated in
consolidation.
|--- |  | -----------------------------------------------------------------------------------------------------

|(4) |  | Upon adoption of FAS 142, Galey & Lord Apparel recorded a goodwill impairment write-off
of $0.8 million. This was reported as a cumulative effect of an accounting change, retroactive to the first day of fiscal 2003.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) |  | Upon adoption of FAS 142, Swift Denim recorded a goodwill impairment write-off of $64.4
million and an other intangible assets impairment write-down of $22.2 million. This was reported as a cumulative effect of an accounting change, retroactive to the first day of fiscal 2003. Swift Denim recognized an additional impairment loss of
$5.5 million on its trademark in the June quarter 2003 which was recorded as a component of operating income (loss) from continuing operations.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

GALEY & LORD, INC.

(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements

June 28, 2003

(Unaudited)



NOTE M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.



|                                            |  | June 28, 2003  |         
|------------------------------------------- |  | -------------- | --------
|                                            |  | (in thousands) |         
|Financial Position                          |  | Parent         |         
|Current assets:                             |  |                |         
|Trade accounts receivable                   |  | $              |        
|Inventories                                 |  |                |        
|Other current assets                        |  |                | 2,188   
|                                            |  |                |         
|Total current assets                        |  |                | 2,188   
|Property, plant and equipment, net          |  |                |        
|Intangibles                                 |  |                |        
|Other assets                                |  |                | (119,647
|                                            |  |                |         
|                                            |  | $              | (117,459
|                                            |  |                |         
|Liabilities not subject to compromise:      |  |                |         
|Current liabilities:                        |  |                |         
|Long-term debtcurrent                      |  | $              | 297,897 
|Trade accounts payable                      |  |                | 64      
|Accrued liabilities                         |  |                | 17,329  
|Other current liabilities                   |  |                |        
|                                            |  |                |         
|Total current liabilities                   |  |                | 315,290 
|Long-term debt                              |  |                |        
|Other non-current liabilities               |  |                | (57     
|                                            |  |                |         
|Total liabilities not subject to compromise |  |                | 315,233 
|Net intercompany balance                    |  |                | (602,958
|Liabilities subject to compromise           |  |                | 312,905 
|Stockholders equity (deficit)              |  |                | (142,639
|                                            |  |                |         
|                                            |  | $              | (117,459
|                                            |  |                |         



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##### Table of Contents

GALEY & LORD, INC.

(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements

June 28, 2003

(Unaudited)



NOTE MSupplemental Condensed
Consolidating Financial Information (Continued)



|                                            |  | June 29, 2002  |         
|------------------------------------------- |  | -------------- | --------
|                                            |  | (in thousands) |         
|                                            |  |                |         
|Financial Position                          |  | Parent         |         
|Current assets:                             |  |                |         
|Trade accounts receivable                   |  | $              |        
|Inventories                                 |  |                |        
|Other current assets                        |  |                | 2,114   
|                                            |  |                |         
|Total current assets                        |  |                | 2,114   
|Property, plant and equipment, net          |  |                |        
|Intangibles                                 |  |                |        
|Other assets                                |  |                | 17,902  
|                                            |  |                |         
|                                            |  | $              | 20,016  
|                                            |  |                |         
|Liabilities not subject compromise:         |  |                |         
|Current liabilities:                        |  |                |         
|Long-term debtcurrent                      |  | $              | 305,828 
|Trade accounts payable                      |  |                |        
|Accrued liabilities                         |  |                | 18,741  
|Other current liabilities                   |  |                |        
|                                            |  |                |         
|Total current liabilities                   |  |                | 324,569 
|Long-term debt                              |  |                |        
|Other non-current liabilities               |  |                | (1,363  
|                                            |  |                |         
|Total liabilities not subject to compromise |  |                | 323,206 
|Net intercompany balance                    |  |                | (584,390
|Liabilities subject to compromise           |  |                | 312,775 
|Stockholders equity (deficit)              |  |                | (31,575 
|                                            |  |                |         
|                                            |  | $              | 20,016  
|                                            |  |                |         



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##### Table of Contents

GALEY & LORD, INC.

(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements

June 28, 2003

(Unaudited)



NOTE MSupplemental Condensed
Consolidating Financial Information (Continued)



|                                                                        |  | Three Months Ended June 28, 2003 |       
|----------------------------------------------------------------------- |  | -------------------------------- | ------
|                                                                        |  | (in thousands)                   |       
|Results of Operations                                                   |  | Parent                           |       
|Net sales                                                               |  | $                                |      
|                                                                        |  |                                  |       
|Gross profit                                                            |  |                                  |      
|                                                                        |  |                                  |       
|Operating income (loss)                                                 |  |                                  | (9    
|                                                                        |  |                                  |       
|Reorganization items                                                    |  |                                  | 708   
|                                                                        |  |                                  |       
|Interest expense, income taxes, and other, net                          |  |                                  | (8,270
|                                                                        |  |                                  |       
|Cumulative effect of accounting change (net of applicable income taxes) |  |                                  |      
|                                                                        |  |                                  |       
|Net income (loss)                                                       |  | $                                | 7,553 



|                                                                        |  | Nine Months Ended June 28, 2003 |        
|----------------------------------------------------------------------- |  | ------------------------------- | -------
|                                                                        |  | (in thousands)                  |        
|Results of Operations                                                   |  | Parent                          |        
|Net sales                                                               |  | $                               |       
|                                                                        |  |                                 |        
|Gross profit                                                            |  |                                 |       
|                                                                        |  |                                 |        
|Operating income (loss)                                                 |  |                                 | (123   
|                                                                        |  |                                 |        
|Reorganization items                                                    |  |                                 | 7,773  
|                                                                        |  |                                 |        
|Interest expense, income taxes and other, net                           |  |                                 | (25,472
|                                                                        |  |                                 |        
|Cumulative effect of accounting change (net of applicable income taxes) |  |                                 |       
|                                                                        |  |                                 |        
|Net income (loss)                                                       |  | $                               | 17,576 



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##### Table of Contents

GALEY & LORD, INC.

(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements

June 28, 2003

(Unaudited)



NOTE MSupplemental Condensed
Consolidating Financial Information (Continued)



|                                              |  | Three Months Ended June 29, 2002 |       
|--------------------------------------------- |  | -------------------------------- | ------
|                                              |  | (in thousands)                   |       
|Results of Operations                         |  | Parent                           |       
|Net sales                                     |  | $                                |      
|                                              |  |                                  |       
|Gross profit                                  |  |                                  |      
|                                              |  |                                  |       
|Operating income (loss)                       |  |                                  | (253  
|                                              |  |                                  |       
|Reorganization items                          |  |                                  | 4,442 
|                                              |  |                                  |       
|Interest expense, income taxes and other, net |  |                                  | (8,134
|                                              |  |                                  |       
|Net income (loss)                             |  | $                                | 3,439 



|                                              |  | Nine Months Ended June 29, 2002 |        
|--------------------------------------------- |  | ------------------------------- | -------
|                                              |  | (in thousands)                  |        
|Results of Operations                         |  | Parent                          |        
|Net sales                                     |  | $                               |       
|                                              |  |                                 |        
|Gross profit                                  |  |                                 |       
|                                              |  |                                 |        
|Operating income (loss)                       |  |                                 | (1,851 
|                                              |  |                                 |        
|Reorganization items                          |  |                                 | 14,323 
|                                              |  |                                 |        
|Interest expense, income taxes and other, net |  |                                 | (21,421
|                                              |  |                                 |        
|Net income (loss)                             |  | $                               | 5,247  



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GALEY & LORD, INC.

(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements

June 28, 2003

(Unaudited)



NOTE MSupplemental Condensed
Consolidating Financial Information (Continued)



|                                                            |  | Nine Months Ended June 28, 2003 |        
|----------------------------------------------------------- |  | ------------------------------- | -------
|                                                            |  | (in thousands)                  |        
|Cash Flows                                                  |  | Parent                          |        
|Cash provided by (used in) operating activities             |  | $                               | 17,703 
|                                                            |  |                                 |        
|Cash provided by (used in) investing activities             |  |                                 |       
|                                                            |  |                                 |        
|Cash provided by (used in) financing activities             |  |                                 | (17,687
|                                                            |  |                                 |        
|Effect of exchange rate change on cash and cash equivalents |  |                                 |       
|                                                            |  |                                 |        
|Net change in cash And cash equivalents                     |  |                                 | 16     
|                                                            |  |                                 |        
|Cash and cash equivalents at beginning of period            |  |                                 | 15     
|                                                            |  |                                 |        
|Cash and cash equivalents at end of period                  |  | $                               | 31     
|                                                            |  |                                 |        





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GALEY & LORD, INC.

(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements

June 28, 2003

(Unaudited)



NOTE MSupplemental Condensed
Consolidating Financial Information (Continued)



|                                                            |  | Nine Months Ended June 29, 2002 |        
|----------------------------------------------------------- |  | ------------------------------- | -------
|                                                            |  | (in thousands)                  |        
|Cash Flows                                                  |  | Parent                          |        
|Cash provided by (used in) operating activities             |  | $                               | 21,596 
|                                                            |  |                                 |        
|Cash provided by (used in) investing activities             |  |                                 | (651   
|                                                            |  |                                 |        
|Cash provided by (used in) financing activities             |  |                                 | (20,935
|                                                            |  |                                 |        
|Effect of exchange rate change on cash and cash equivalents |  |                                 |       
|                                                            |  |                                 |        
|Net change in cash And cash equivalents                     |  |                                 | 10     
|                                                            |  |                                 |        
|Cash and cash equivalents at beginning of period            |  |                                 | 5      
|                                                            |  |                                 |        
|Cash and cash equivalents at end of period                  |  | $                               | 15     
|                                                            |  |                                 |        



NOTE NSubsequent Event



In July 2003, the Company, Dominion Textile International B.V., an
indirect wholly owned subsidiary of the Company (Dominion), and Textile S.A., an entity created by the investment banking group, BS Electra (the Purchaser), entered into a Purchase Agreement (the Purchase
Agreement), pursuant to which the Company, through Dominion, has agreed to sell to the Purchaser (the Sale Transaction) all of Klopman International (pursuant to a sale of all of the capital stock of each subsidiary which together
constitute Klopman International), for a net purchase price of approximately 22.45 million euros (before deduction for fees, costs and expenses). The consummation of the Sale Transaction is subject to a number of conditions, many of which are beyond
the control of the Company, including, among other things, Bankruptcy Court approval, regulatory approval and satisfactory completion of environmental due diligence and appropriate environmental surveys. Consequently, there can be no assurance that
such conditions will be satisfied or that the Sale Transaction will be consummated.



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



Bankruptcy Filing



On February 19, 2002 (the Filing Date), Galey & Lord, Inc. (the Company) and each of its domestic subsidiaries (together with the Company, the Debtors) filed voluntary petitions
for reorganization (the Chapter 11 Filings or the Filings) under Chapter 11 of Title 11, United States Code (the Bankruptcy Code) in the United States Bankruptcy Court for the Southern District of New York (Case
Nos. 02-40445 through 02-40456 (ALG)). The Chapter 11 Filings pending for the Debtors are being jointly administered for procedural purposes only. The Debtors direct and indirect foreign subsidiaries and foreign joint venture entities did not
file petitions under Chapter 11 and are not the subject of any bankruptcy proceedings.



During the pendency of the Filings, the Debtors remain in possession of their properties and assets and management continues to operate the businesses of the Debtors as debtors-in-possession pursuant to Sections 1107(a) and 1108 of the
Bankruptcy Code. As debtors-in-possession, the Debtors are authorized to operate their businesses, but may not engage in transactions outside of the ordinary course of business without the approval of the Bankruptcy Court, after notice and the
opportunity for a hearing.



On the Filing Date, the Debtors filed a motion
seeking authority for the Company to enter into a credit facility of up to $100 million in debtor-in-possession (DIP) financing with First Union National Bank (the Agent) and Wachovia Securities, Inc. On February 21, 2002,
the Bankruptcy Court entered an interim order approving the credit facility and authorizing immediate access of up to $30 million. On March 19, 2002, the Bankruptcy Court entered a final order approving the entire $100 million DIP financing.
Effective September 24, 2002, the Company exercised its right, as permitted under the DIP Financing Agreement, to permanently reduce such maximum amount of revolving credit borrowings from $100 million to $75 million. Effective July 25, 2003, the
Company further exercised its right, as permitted under the DIP Financing Agreement, to permanently reduce such maximum amount of revolving credit borrowings from $75 million to $50 million. In July 2003, the DIP Financing Agreement was amended,
among other things, to extend the maturity date from August 19, 2003 to October 3, 2003. For a description of the DIP Financing Agreement and the recent amendment, see Liquidity and Capital Resources.



The Bankruptcy Court has approved payment of certain of the Debtors pre-petition
obligations, including, among other things, employee wages, salaries, and benefits, and certain critical vendor and other business-related payments necessary to maintain the operation of their businesses. The Debtors have retained, with Bankruptcy
Court approval, legal and financial professionals to advise the Debtors in the bankruptcy proceedings and the restructuring of their businesses, and certain other ordinary course professionals. From time to time the Debtors may seek
Bankruptcy Court approval for the retention of additional professionals.



By
orders dated June 6, 2002, and July 24, 2002, the Bankruptcy Court authorized the implementation of various employee programs for the Debtors. These programs include:



Stay Bonus and Emergence PlansThese plans provide for payments



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totaling $5.2 million for 62 employees including executive officers. Payments under the Stay Bonus Plan are in four equal payments beginning in August 2002
and ending the later of June 2003 or upon emergence. The Emergence Plan provides for a single payment upon emergence.



Enhanced Severance ProgramPursuant to this program, certain employees, including executive officers, are entitled to enhanced
severance payments under certain terms and conditions.



Discretionary Transition Payment PlanThis plan allows the Debtors to offer incentives to certain employees during a transition period at the end of which such employees would be terminated, in the event such incentives become
necessary (the Debtors have no current plans to significantly reduce headcount).



Discretionary Retention PoolThis plan provides the Chief Executive Officer discretionary authority to offer incentives to employees (including new employees) not otherwise participating in other portions
of the program.



Performance Incentive PlanThe
Debtors filed a motion for approval of a proposed performance incentive plan, pursuant to which certain employees, including executive officers, would be entitled to an additional bonus in the event certain personal and/or company performance goals
were achieved. The Debtors voluntarily withdrew that motion without prejudice to their right to seek the relief requested therein at a later date.



The Debtors have also received authority to conduct certain other transactions that might be considered outside the ordinary course of business. The Debtors
have sought and received authority to pay certain pre-petition personal and property taxes, to sell certain identified assets, to enter into certain financing agreements, and to retain a real estate professional to market and sell certain unused
properties.



The Debtors must, subject to Bankruptcy Court approval and certain
other limitations, assume, assume and assign, or reject each of their executory contracts and unexpired leases. In this context, assumption means, among other things, re-affirming their obligations under the relevant lease or contract
and curing all monetary defaults thereunder. In this context, rejection means breaching the relevant contract or lease as of the Filing Date, being relieved of on-going obligations to perform under the contract or lease, and being liable
for damages, if any, for the breach thereof. Such damages, if any, are deemed to have accrued prior to the Filing Date by operation of the Bankruptcy Code. The Bankruptcy Court has entered three orders collectively approving the rejection of one
executory contract and several unexpired leases. In addition, under the Bankruptcy Code, the Debtors must assume, assume and assign, or reject all unexpired leases of non-residential real property for which a Debtor is lessee within 60 days from the
Filing Date. By orders dated April 29, 2002, August 16, 2002, December 11, 2002, and April 17, 2003, the Bankruptcy Court extended this deadline up through and including August 14, 2003. The Debtors are in the process of reviewing their remaining
executory contracts to determine which, if any, they will reject. At this time the Debtors cannot reasonably estimate the ultimate liability, if any, that may result from rejecting and/or assuming executory contracts or unexpired leases, and no
provisions have yet been made for these items.



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The Bankruptcy Court established October 1, 2002 as the bar date as of which all claimants are required to
submit and characterize claims against the Debtors. The Debtors are currently in the process of reviewing the claims that were filed against the Company. The ultimate amount of the claims allowed by the Court against the Company could be
significantly different than the amount of the liabilities recorded by the Company.



The consummation of a plan or plans of reorganization (a Plan) is the principal objective of the Chapter 11 Filings. A Plan would, among other things, set forth the means for satisfying claims against and interests in the
Company and its Debtor subsidiaries, including setting forth the potential distributions on account of such claims and interests, if any. The Plan could also involve the sale of the Debtors assets and/or stock. It is also possible that a sale
of the Debtors assets and/or stock could be accomplished outside a plan of reorganization. Pursuant to the Bankruptcy Code, the Debtors had the exclusive right for 120 days from the Filing Date (through and including June 18, 2002) to file a
Plan, and for 180 days from the Filing Date (through and including August 17, 2002) to solicit and receive the votes necessary to confirm a Plan. As of the date hereof, the Bankruptcy Court had entered six orders collectively extending the
Debtors exclusive right to file a Plan through and including September 9, 2003, and extending the Debtors exclusive right to solicit acceptances of such plan through and including November 3, 2003. For a discussion of the DIP Financing
Agreement, see Liquidity and Capital Resources below. Both of these exclusivity periods may be further extended by the Bankruptcy Court for cause. If the Debtors fail to file a Plan during the exclusive filing period or if the
Debtors fail to obtain the requisite acceptance of such Plan during the exclusive solicitation period, any party-in-interest, including a creditor, an equity holder, a committee of creditors or equity holders, or an indenture trustee, may file its
own Plan for the Debtors. Confirmation of a Plan is subject to certain statutory findings by the Bankruptcy Court. Subject to certain exceptions as set forth in the Bankruptcy Code, confirmation of a Plan requires, among other things, a vote on the
Plan by certain classes of creditors and equity holders whose rights or interests are impaired under the Plan. If any impaired class of creditors or equity holders does not vote to accept the Plan, but all of the other requirements of the Bankruptcy
Code are met, the proponent of the Plan may seek confirmation of the Plan pursuant to the cram down provisions of the Bankruptcy Code. Under these provisions, the Bankruptcy Court may still confirm a Plan notwithstanding the
non-acceptance of the Plan by an impaired class, if, among other things, no claim or interest receives or retains any property under the Plan until each holder of a claim senior to such claim or interest has been paid in full. As a result of the
amount of pre-petition indebtedness and the availability of the cram down provisions, the holders of the Companys capital stock may receive no value for their interests under any Plan. Because of such possibility, the value of the
Companys outstanding capital stock and unsecured instruments are highly speculative. In addition, there can be no assurance that a Plan will be proposed by the Debtors or confirmed by the Bankruptcy Court, or that any such Plan will be
consummated.



On or about April 4, 2003, the Official Committee of General
Unsecured Creditor (the Committee) filed a motion (the Examiner Motion) seeking the appointment of an examiner in the Debtors cases pursuant to Sections 1104(c)(1), 1104(c)(2) and 105(a) of the Bankruptcy Code and
Bankruptcy Rules 2007.1 and 9014, and seeking an injunction prohibiting the Debtors from



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filing a Plan for at least 90 days from the appointment of such examiner. Both the Debtors and the agent for the Debtors pre-petition secured lenders
filed objections to this motion, objecting to the relief requested therein and the purported factual predicate therefore. The Committee has withdrawn the Examiner Motion.



On or around June 26, 2003, the Company filed a motion for authority to enter into an engagement agreement (the Engagement
Agreement) with Alvarez & Marsal, Inc. (A&M). A&M will supplement existing management with professionals led by Mr. Peter A. Briggs, a managing director at A&M. Mr. Briggs will serve as chief restructuring officer
(CRO) and report to Arthur C. Wiener, Chairman and Chief Executive Officer of the Company. Mr. Joseph A. Biondi and certain additional officers (together, the Additional Officers) will assist the CRO. On or about June 27,
2003, the Bankruptcy Court entered an order authorizing the Company, on an interim basis and as amended thereby, to enter into the Engagement Agreement, and to retain the CRO and Additional Officers. On or about July 18, 2003, the Bankruptcy Court
entered a final order approving the retention of A&M and the CRO and Additional Officers.



It is not possible to predict the length of time the Company will operate under the protection of Chapter 11 and the supervision of the Bankruptcy Court, the outcome of the bankruptcy proceedings in general, or the
effect of the proceedings on the business of the Company or on the interest of the various creditors and stakeholders. Since the Filing Date, the Debtors have conducted business in the ordinary course. Management is in the process of evaluating
their operations as part of the development of a Plan. During the pendency of the Chapter 11 Filings, the Debtors may, with Bankruptcy Court approval, sell assets and settle liabilities, including for amounts other than those reflected in the
financial statements. The administrative and reorganization expenses resulting from the Chapter 11 Filings will unfavorably affect the Debtors results of operations. In addition, under the priority scheme established by the Bankruptcy Code,
most, if not all, post-petition liabilities must be satisfied before most other creditors or interest holders, including stockholders, can receive any distribution on account of such claim or interest.



The Companys consolidated financial statements are presented in accordance with
American Institute of Certified Public Accountants Statement of Position 90-7, Financial Reporting by Entities in Reorganization under the Bankruptcy Code (SOP 90-7), assuming that the Company will continue as a going
concern. The Company is currently operating under the jurisdiction of Chapter 11 of the Bankruptcy Code and the Bankruptcy Court, and continuation of the Company as a going concern is contingent upon, among other things, its ability to formulate a
Plan which will gain approval of the requisite parties under the Bankruptcy Code and confirmation by the Bankruptcy Court, its ability to extend the term and maturity of the DIP Financing Agreement beyond August 19, 2003 or find alternative
debtor-in-possession financing, it ability to comply with the DIP Financing Agreement or any alternative financing arrangement, and its ability to return to profitability, generate sufficient cash flows from operations, and obtain financing sources
to meet future obligations. These matters raise substantial doubt about the Companys ability to continue as a going concern. The Companys consolidated financial statements do not include any adjustments relating to the recoverability and
classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of these uncertainties.



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In the Chapter 11 Filings, substantially all unsecured liabilities as of the Filing Date are subject to compromise or
other treatment under a Plan which must be confirmed by the Bankruptcy Court after submission to any required vote by affected parties. Generally, all actions to enforce or otherwise effect repayment of pre-petition liabilities, as well as all
pending litigation against the Debtors, are stayed while the Debtors continue their business operations as debtors-in-possession. The ultimate amount of and settlement terms for liabilities subject to compromise are subject to an approved Plan and
accordingly are not presently determinable.



The principal categories of
obligations classified as liabilities subject to compromise under the Chapter 11 Filings as of June 28, 2003 are identified below (in thousands):



|91/8% Senior Subordinated Notes |  | $ | 300,000
|------------------------------- |  | - | -------
|Interest accrued on above debt  |  |   | 12,775 
|Accounts payable                |  |   | 11,400 
|Liability for rejected leases   |  |   | 2,165  
|Other accrued expenses          |  |   | 1,075  
|                                |  |   |        
|                                |  | $ | 327,415
|                                |  |   |        



Pursuant to SOP 90-7, professional
fees associated with the Chapter 11 Filings are expensed as incurred and reported as reorganization items. Interest expense is reported only to the extent that it will be paid during the Chapter 11 Filings or that it is probable that it will be an
allowed claim. The Company recognized a charge of $0.7 million and $7.8 million associated with the Chapter 11 Filings for the three and nine months ended June 28, 2003, respectively. Of these charges, $2.3 million and $6.2 million for the three and
nine months ended June 28, 2003, respectively, were for fees payable to professionals retained to assist with the Chapter 11 Filings and $(1.6) million and $1.6 million for the three and nine months ended June 28, 2003, respectively, were related to
incentive and retention programs. The Company reversed a $2.6 million accrual related to an incentive program in the June quarter 2003. The Company recognized a charge of $4.4 million and $14.3 million associated with the Chapter 11 Filings for the
three and nine months ended June 29, 2002, respectively. Of these charges, $2.9 million and $5.1 million for the three and nine months ended June 29, 2002, respectively, were for fees payable to professionals retained to assist with the Chapter 11
Filings. In addition, $1.5 million for both the three and nine months ended June 29, 2002 was related to incentive and retention programs and approximately $7.7 million, incurred in the March quarter 2002, was related to the non-cash write-off of
the unamortized discount on the 91/8% Senior Subordinated Notes and the non-cash write-off of related deferred
financing fees.



Subsequent Event



In July 2003, the Company, Dominion Textile International B.V., an indirect wholly owned
subsidiary of the Company (Dominion), and Textile S.A., an entity created by the investment banking group, BS Electra (the Purchaser), entered into a Purchase Agreement (the Purchase Agreement), pursuant to which
the Company, through Dominion, has agreed to sell to the Purchaser (the Sale Transaction) all of Klopman International (pursuant to a sale of all of the capital stock of each subsidiary which together constitute Klopman International),
for a net purchase price of approximately 22.45 million euros (before deduction for fees, costs and expenses). The consummation of the Sale Transaction is subject to a number of conditions, many of which are



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beyond the control of the Company, including, among other things, Bankruptcy Court approval, regulatory approval and satisfactory completion of environmental
due diligence and appropriate environmental surveys. Consequently, there can be no assurance that such conditions will be satisfied or that the Sale Transaction will be consummated.



Results of Operations



The Companys operations are primarily classified into three operating segments: (1) Galey & Lord Apparel, (2) Swift Denim and (3) Klopman International.



Through fiscal 2002, the Company reported Home Fashion Fabrics as a separate
business segment. During fiscal 2002, the Company realigned its Home Fashion Fabrics management under the control of the Galey & Lord Apparel business unit. Accordingly, Home Fashion Fabrics operating results are not presented as a
separate operating segment effective in fiscal 2003. Prior year financial information has been restated to reflect Home Fashion Fabrics results included with Galey & Lord Apparels results for comparative purposes.



Results for the three and nine months ended June 28, 2003 and June 29, 2002 for each segment
are shown below:



|                                    |  | Three Months Ended     |         |   | Nine Months Ended      |  
|----------------------------------- |  | ---------------------- | ------- | - | ---------------------- | -
|                                    |  | June 28, 2003          |         |   | June 29, 2002          |  
|                                    |  | (Amounts in thousands) |         |   | (Amounts in thousands) |  
|Net Sales per Segment               |  |                        |         |   |                        |  
|Galey & Lord Apparel                |  | $                      | 63,263  |   |                        | $
|Swift Denim                         |  |                        | 49,431  |   |                        |  
|Klopman International               |  |                        | 37,393  |   |                        |  
|                                    |  |                        |         |   |                        |  
|Total                               |  | $                      | 150,087 |   |                        | $
|                                    |  |                        |         |   |                        |  
|Operating Income (Loss) per Segment |  |                        |         |   |                        |  
|Galey & Lord Apparel                |  | $                      | (932    | ) |                        | $
|Swift Denim                         |  |                        | (10,867 | ) |                        |  
|Klopman International               |  |                        | 1,873   |   |                        |  
|Corporate                           |  |                        | (157    | ) |                        |  
|                                    |  |                        |         |   |                        |  
|                                    |  | $                      | (10,083 | ) |                        | $
|                                    |  |                        |         |   |                        |  



June Quarter 2003 Compared to
June Quarter 2002



Net Sales



Net sales for the June quarter 2003 (third quarter of fiscal 2003) were $150.1 million as
compared to $196.6 million for the June quarter 2002 (third quarter of fiscal 2002). The sales decrease was primarily attributable to a decline in domestic customer demand for apparel products as retail sales were adversely impacted by the overall
economic conditions.



Galey & Lord ApparelGaley & Lord
Apparels net sales for the June quarter 2003 were $63.3 million, a $20.5 million decrease as compared to the June quarter 2002 net sales of $83.8 million. The decrease in net sales primarily resulted from a 27.8% decline in sales volume
partially offset by an improvement in sales mix.



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Swift Denim Swift Denims net sales for the June quarter 2003 were $49.4 million as compared to $80.6
million in the June quarter 2002. The $31.2 million decrease was primarily attributable to a 41.4% decrease in sales volume partially offset by a 4.9% improvement in sales mix.



Klopman International Klopman Internationals net sales for the June quarter 2003 were $37.4 million, a $5.2 million
increase as compared to the June quarter 2002 net sales of $32.2 million. The increase was primarily attributable to a 21.9% increase in net sales due to exchange rates used in translation offset slightly by decreased selling prices, foreign
currency exchange losses and unfavorable changes in sales mix.



Operating
Income (Loss)



Operating loss for the June quarter 2003 was $10.1 million
as compared to operating income of $7.4 million for the June quarter 2002.



Galey & Lord Apparel Galey & Lord Apparels operating loss was $0.9 million for the June quarter 2003 as compared to $0.1 million operating income for the June quarter 2002. The decrease in Galey & Lord
Apparels operating income was primarily due to lower sales volume due to the weak retail environment, which resulted in capacity curtailments, and lower selling prices resulting from competition, as well as higher raw material and energy
costs. These declines were partially offset by improvements in sales mix.



Swift Denim Swift Denims operating loss was $10.9 million for the June quarter 2003 compared to operating income of $5.1 million for the June quarter 2002. In accordance with Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets (FAS 142), the Company determined that impairment indicators existed in the June quarter 2003 due to the further softening in the retail environment in which Swift Denim operates.
Accordingly, the fair value of the Swift Denim trademark was tested for impairment based on the expected value of future cash flows and, based on such testing, a non-cash impairment loss of $5.5 million was recorded in the June quarter 2003. The
remaining decrease in Swift Denims operating income was primarily due to lower sales volume, which resulted in a curtailment of capacity, price pressure due to competition and unfavorable variances due to manufacturing inefficiencies and
higher raw material and energy costs. In addition, in the June quarter 2003, Swift recorded a severance accrual of approximately $0.5 million in connection with a reduction of the workforce at its Columbus, Georgia plants.



Klopman InternationalKlopman Internationals operating income in the June
quarter 2003 decreased $0.6 million to $1.9 million as compared to the June quarter 2002 operating income of $2.5 million. The decrease was primarily due to lower selling prices and unfavorable changes in sales mix, partially offset by improvements
in sales volume and reduced agent commissions.



Corporate The
corporate segment reported an operating loss for both the June quarter 2003 and June quarter 2002 of $0.2 million. The corporate segments operating loss typically represents the administrative expenses from the Companys various holding
companies.



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Income from Associated Companies



Income from associated companies was $1.5 million in the June quarter 2003 as compared to $1.4 million in the June quarter 2002. The income
represents amounts from several joint venture interests that manufacture and sell denim products. The increase in income from associated companies was principally due to the favorable impact of foreign currency exchange rates used in translation and
the fact that upon adoption of FAS 142 at the beginning of fiscal 2003, the Company ceased amortizing the remaining investment over its equity in the underlying net assets of its joint venture interests whereas the June quarter 2002 results included
the amortization. These increases are offset by lower results of the joint ventures in the June quarter 2003 over the June quarter 2002.



Interest Expense



Interest expense was $5.4 million for the June quarter 2003 compared to $6.2 million for the June quarter 2002. The decrease in interest expense was primarily due to lower prime and LIBOR base rates and lower average
debt balances in the June quarter 2003 as compared to the June quarter 2002. Due to the discontinuation of the Subordinated Notes interest accrual as of the Filing Date, there is no interest expense related to the Subordinated Notes in either the
June quarter 2003 or the June quarter 2002. The average interest rate paid by the Company on its bank debt in the June quarter 2003 was 5.16% per annum as compared to 5.73% per annum in the June quarter 2002.



Income Taxes



The Companys overall tax rate for the June quarter 2003 differed from the statutory rate principally due to the nonrecognition of the
U.S. tax benefits on the domestic net operating loss carryforwards. The result is an overall tax expense rate which is higher than the statutory rate.



Net Loss and Net Loss Per Share



The Company reported a net loss for the June quarter 2003 of $16.4 million or $1.37 per common share compared to a net loss for the June quarter 2002 of $2.7 million or
$0.22 per common share. The net loss of $16.4 million for the June quarter 2003 included a $5.5 million impairment loss on intangible assets, $0.7 million of reorganization costs and $0.3 million of run-out costs related to the Fiscal 2001 Cost
Reduction and Loss Avoidance Initiatives and Fiscal 2000 Strategic Initiatives. The net loss of $2.7 million for the June quarter 2002 included $4.4 million of reorganization costs and $0.6 million of run-out costs and restructuring adjustments
related to the Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives and Fiscal 2000 Strategic Initiatives.



First Nine Months of Fiscal 2003 Compared to First Nine Months of Fiscal 2002



Net Sales



Net sales for the first nine months of fiscal 2003 were $440.0 million as compared to $501.0 million for the first nine months of fiscal 2002. The sales decrease was
primarily attributable to a decline in domestic customer demand for apparel products as retail sales were adversely impacted by the overall economic conditions.



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Galey & Lord ApparelGaley & Lord Apparels net sales for the first nine months of fiscal 2003
were $189.5 million, a $27.9 million decrease as compared to the first nine months of fiscal 2002 net sales of $217.4 million. The decrease in net sales was due to a 15.6% decrease in sales volume as well as lower selling prices. These decreases
were partially offset by an improvement in sales mix.



Swift
Denim Swift Denims net sales for the first nine months of fiscal 2003 were $149.9 million as compared to $190.1 million in the first nine months of fiscal 2002. The $40.2 million decrease was primarily attributable to a 11.3% decrease
in sales volume partially offset by a 5.0% improvement in sales mix.



Klopman International Klopman Internationals net sales for the first nine months of fiscal 2003 were $100.5 million, a $7.0 million increase as compared to the first nine months of fiscal 2002s net sales of $93.5
million. The increase was primarily attributable to an 18.7% increase in net sales due to exchange rates used in translation partially offset by an 8.1% decrease in sales volume and a 3.4% decrease due to a combination of lower selling prices and
foreign currency exchange losses.



Operating Income (Loss)



Operating loss for the first nine months of fiscal 2003 was $1.9 million as compared to
operating income of $15.6 million for the first nine months of fiscal 2002.



Galey & Lord Apparel Galey & Lord Apparels operating loss was $0.6 million for the first nine months of fiscal 2003 as compared to $5.2 million for the first nine months of fiscal 2002. The decrease in Galey
& Lord Apparels operating loss was due primarily to reduced lower-of-cost-or-market (LCM) adjustment for last-in, first-out (LIFO) inventories, reduced run-out and restructuring costs associated with the Fiscal 2001 Cost Reduction and Loss
Avoidance Initiatives and improvements in sales mix and manufacturing productivity. These improvements were partially offset by reduced apparel fabric sales due to the weak retail environment and lower selling prices due to price competition, as
well as higher raw material and energy costs.



Swift Denim Swift
Denims operating loss was $5.8 million for the first nine months of fiscal 2003 compared to operating income of $18.4 million for the first nine months of fiscal 2002. In accordance with FAS 142, the Company determined that impairment
indicators existed in the June quarter 2003 due to the further softening in the retail environment in which Swift Denim operates. Accordingly, the fair value of the Swift Denim trademark was tested for impairment based on the expected value of
future cash flows and, based on such testing, a non-cash impairment loss of $5.5 million was recorded in the June quarter 2003. In the first nine months of fiscal 2002, Swift Denim recorded $2.3 million of intangible asset amortization prior to the
adoption of FAS 142. The remaining decrease in Swift Denims operating income was principally due to lower sales volume, which resulted in a curtailment of capacity, price pressure due to competition and unfavorable variances due to
manufacturing inefficiencies and higher raw material, labor and energy costs. Also, in the June quarter 2003, Swift recorded a severance accrual of approximately $0.5 million in connection with a reduction of the workforce at its Columbus, Georgia
plants. In fiscal 2002, Swift recognized a reduction of LCM reserves of approximately $2.7 million due to the change



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in method of accounting for inventories to the LIFO inventory method effective September 30, 2001 and a benefit curtailment gain of $3.4 million related to
the curtailment of postretirement benefits for employees not retired as of December 31, 2001. These decreases are partially offset by improvements in sales mix and an improvement of approximately $0.9 million related to run-out expenses incurred in
connection with the Fiscal 2000 Strategic Initiatives.



Klopman
InternationalKlopman Internationals operating income in the first nine months of fiscal 2003 increased $0.5 million to $5.0 million as compared to the first nine months of fiscal 2002s operating income of $4.5 million. The
increase was principally due to improved manufacturing variances of $1.6 million, reduced agent commissions of $1.0 million, and reduced discount and allowances expenses of $0.7 million partially offset by lower sales volume and mix of $0.9 million
and lower selling prices of $1.8 million. Improvements due to exchange rates used in translation were offset by foreign currency exchange losses.



Corporate The corporate segment reported an operating loss for the first nine months of fiscal 2003 of $0.4 million as compared to an operating loss for the
first nine months of fiscal 2002 of $2.2 million. The corporate segments operating loss typically represents the administrative expenses from the Companys various holding companies, however, the first nine months of fiscal 2002 included
financial advisor fees of $1.1 million.



Income from Associated Companies



Income from associated companies was $6.3 million in the first nine
months of fiscal 2003 as compared to $5.6 million in the first nine months of fiscal 2002. The income represents amounts from several joint venture interests that manufacture and sell denim products. The increase in income from associated companies
was principally due to the favorable impact of foreign currency exchange rates used in translation, a net improvement in results of the Swift Denim Hidalgo joint venture in the first nine months of fiscal 2003 as compared to the first nine months of
fiscal 2002 and the fact that upon adoption of FAS 142 at the beginning of fiscal 2003, the Company ceased amortizing the remaining investment over its equity in the underlying net assets of its joint venture interests whereas the results of the
nine months ended June 29, 2002 included the amortization. These increases are offset by the Companys decreased ownership percentage in its European joint ventures.



Interest Expense



Interest expense was $16.5 million for the first nine months of fiscal 2003 compared to $28.8 million for the first nine months of fiscal 2002. The decrease in interest
expense was primarily due to the discontinuation of the Subordinated Notes interest accrual as of the Filing Date and lower prime and LIBOR base rates in the first nine months of fiscal 2003 as compared to the first nine months of fiscal 2002. The
average interest rate paid by the Company on its bank debt, excluding the Subordinated Notes, in the first nine months of fiscal 2003 was 5.39% per annum as compared to 5.91% per annum in the first nine months of fiscal 2002.



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Income Taxes



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 loss
carryforwards. The result is an overall tax expense rate which is higher than the statutory rate.



Cumulative Effect of an Accounting Change



The Company adopted Statement of FAS 142 retroactive to the beginning of fiscal 2003 and, accordingly, recorded goodwill impairment charges of $0.8 million at Galey & Lord Apparel and goodwill and trademark impairment charges of $86.6
million at Swift Denim.



Net Loss and Net Loss Per Share



The Company reported a net loss for the first nine months of fiscal 2003 of $110.3 million
or $9.19 per common share compared to a net loss for the first nine months of fiscal 2002 of $23.8 million or $1.98 per common share. The net loss of $110.3 million for the first nine months of fiscal 2003 included $87.4 million (net of applicable
income taxes), or $7.28 per common share, related to the cumulative effect of an accounting change, $7.8 million of reorganization costs, a $5.5 impairment loss on intangible assets and $1.0 million of run-out costs and restructuring adjustments
related to the Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives and Fiscal 2000 Strategic Initiatives. The net loss of $23.8 million for the first nine months of fiscal 2002 included $14.3 million of reorganization costs and $3.9 million of
run-out costs and restructuring adjustments related to the Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives and Fiscal 2000 Strategic Initiatives.



Order Backlog



The Companys order backlog at June 28, 2003 was $70.5 million, a 45.9% decrease from the June 29, 2002 backlog of $130.2 million. 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.



Liquidity and Capital Resources



As previously discussed, the Company and each of its domestic
subsidiaries filed voluntary petitions for reorganization under Chapter 11 of Title 11 of the Bankruptcy Code. The matters described under this caption Liquidity and Capital Resources, to the extent that they relate to future events or
expectations, may be significantly affected by the Chapter 11 Filings. Such proceedings will involve, or result in, various restrictions on the Debtors activities, limitations on financing, the need to obtain Bankruptcy Court approval for
various matters and uncertainty as to relationships with vendors, suppliers, customers and others with whom the Debtors may conduct or seek to conduct business.



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The Company and its subsidiaries had cash and cash equivalents totaling $10.2 million and $25.5 million at June 28, 2003
and June 29, 2002, respectively. As a result of the Chapter 11 Filings, the Companys ability to borrow under its Senior Credit Facility (as defined below) was frozen and replaced with the Companys DIP Financing Agreement (as defined
below). As of June 28, 2003, the Companys borrowing availability under its DIP Financing Agreement was $66.4 million. As of June 28, 2003, the Companys Canadian operations also had a total of U.S. $9.2 million of revolving credit
borrowing availability under the Canadian Loan Agreement (as defined below).



During the June quarter 2003, the Company primarily utilized its available cash and revolving credit borrowings under the Canadian Loan Facility to fund the Companys operating and investing requirements.



During the March quarter 2002, Klopman International used existing cash balances and
borrowings under its credit agreements to complete a capital reduction of $20.2 million with its European parent holding company (which is a wholly-owned subsidiary of the Company). In April 2002, $19.5 million was transferred from the
Companys European holding company to the Company in the United States. The Company then utilized the cash to repay its $7.4 million outstanding balance under its DIP Financing Agreement (as defined below) as well as repay $5.0 million, $4.2
million, and $2.9 million of the Companys pre-petition revolving line of credit, Term Loan B, and Term Loan C borrowings, respectively, under the pre-petition Senior Credit Facility (as defined below).



Debtor-in-Possession Financing Agreement



Under the terms of the final DIP financing agreement (the DIP Financing
Agreement) among the Company and the Debtor subsidiaries and First Union National Bank (the Agent) and Wachovia Securities, Inc., the Company, as borrower, may make revolving credit borrowings (including up to $15 million for
post-petition letters of credit, which was reduced to $10 million by the Financing Extension, as defined below) in an amount not exceeding the lesser of $100 million or the Borrowing Base (as defined in the DIP Financing Agreement). Effective
September 24, 2002, the Company exercised its right, as permitted under the DIP Financing Agreement, to permanently reduce such maximum amount of revolving credit borrowings from $100 million to $75 million. As a result, $0.4 million of deferred
debt fees related to the DIP financing agreement were written off in the fourth quarter of fiscal 2002. Effective July 25, 2003, the Company further exercised its right, as permitted under the DIP Financing Agreement, to permanently reduce such
maximum amount of revolving credit borrowings from $75 million to $50 million. The DIP Financing Agreement will terminate and the borrowings thereunder will be due and payable upon the earliest of (i) August 19, 2003, (ii) the date of the
substantial consummation of a plan of reorganization that is confirmed pursuant to an order by the Bankruptcy Court or (iii) the acceleration of the revolving credit loans made by any of the banks who are a party to the DIP Financing Agreement and
the termination of the total commitment under the DIP Financing Agreement pursuant to the DIP Financing Agreement. Amounts borrowed under the DIP Financing Agreement bear interest at the rate per annum at the Companys option, of either (i) (a)
the higher of the prime rate or the federal funds rate plus .50% plus (b) a margin of 2.00% or (ii) LIBOR plus a margin of 3.25%. There is an unused commitment fee of (A) at such time as First Union National Bank is no longer the sole bank, at the
rate of (i) .75% per annum on the average daily unused total commitment at all times during which the average total commitment usage is



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less than 25% of the total commitment and (ii) .50% per annum on the average daily unused total commitment at all times during which the average total
commitment usage is more than or equal to 25% of the total commitment; or (B) at all times that First Union National Bank is the sole bank, at a rate of .50% per annum on the average daily unused total commitment. There are letter of credit fees
payable to the Agent equal to LIBOR plus 3.25% on the daily average letters of credit outstanding and to a fronting bank, its customary fees plus .25% for each letter of credit issued by such fronting bank.



Borrowings under the DIP Financing Agreement are guaranteed by each of the Debtor
subsidiaries. In general, such borrowings constitute allowed super-priority administrative expense claims and are secured by (i) a perfected first priority lien pursuant to Section 364(c)(2) of the Code, upon all property of the Company and the
Debtor subsidiaries that was not subject to a valid, perfected and non-avoidable lien on the Filing Date, (ii) a perfected junior lien, pursuant to Section 364(c)(3) of the Code upon all property of the Company and the Debtor subsidiaries already
subject to valid, perfected, non-avoidable liens, and (iii) a perfected first priority senior priming lien, pursuant to Section 364(d)(1) of the Code, upon all property of the Company and the Debtor subsidiaries already subject to a lien that
presently secures the Companys and the Debtor subsidiaries pre-petition indebtedness under the existing pre-petition credit agreement, whether created prior to or after the Filing Date (subject to certain specific existing or
subsequently perfected liens). This security interest is subject to certain explicit exceptions.



The DIP Financing Agreement contains covenants restricting the Company and the Guarantors from consolidating or merging with and into another person, disposing of assets, incurring additional indebtedness and
guarantees, creating liens and encumbrances on properties, modifying its or their business, making capital expenditures in excess of $22.5 million through the maturity date or $15.2 million during any 12 month period, declaring and paying dividends,
making investments, loans or advances, and creating super-priority claims. There are certain limitations on affiliate transactions and on costs and expenses incurred in connection with the closing of production facilities. The DIP Financing
Agreement also requires the Company and the Debtor subsidiaries to achieve certain levels of EBITDA (as defined) as specified therein. At June 28, 2003, the Company was in compliance with the covenants of the DIP Financing Agreement.



The DIP Financing Agreement also provides for the mandatory prepayment of all or a portion of
outstanding borrowings upon repatriation of funds from foreign subsidiaries or the sale of assets, or in the event outstanding loans exceed the Borrowing Base.



In July 2003, the DIP Financing Agreement was amended, among other things, to extend the maturity date from August 19, 2003 to October 3, 2003 (the Financing
Extension). The Company has filed a motion seeking, among other things, Bankruptcy Court approval of the Financing Extension. On August 7, 2003, the Bankruptcy Court approved the Financing Extension on an interim basis and is scheduled to
consider approval of the Financing Extension on a permanent basis on September 17, 2003. There can be no assurance that the DIP Financing Agreement will be approved on a final basis. In the event that the Financing Extension is not approved, it will
expire by its terms on September 19, 2003.



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The Financing Extension allows the Company to have a maximum aggregate principal amount of loans and letters of credit
outstanding of $25 million and reduces the maximum aggregate amount available for letters of credit from $15 million to $10 million. As part of the Financing Extension, among other things:



|i. |  | Upon the sale of the capital stock of the entities which constitute Klopman International and certain intellectual property rights thereof no less than $24.4 million will be
repatriated to the Company and the Company will apply such repatriated funds in accordance with the DIP Financing Agreement, as amended.
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|ii. |  | Provide a draft plan of reorganization and disclosure statement by September 15, 2003 to the lenders and the lenders agent.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------



The DIP Financing Agreement was also modified to provide for cash collateral for letters of
credit from the proceeds of foreign repatriations, after the repayment of any outstanding loans under the DIP Financing Agreement.



The Company intends to seek an additional extension of the DIP Financing Agreement that will include the establishment of future EBITDA covenants through the extension
period. There can be no assurance that the Company will obtain such extension. The Company has no current commitments or arrangements for additional debtor-in-possession financing and, if the DIP Financing Agreement is not extended, there can be no
assurance that replacement debtor-in-possession financing will be available on acceptable terms (or that any such financing will be approved by the Bankruptcy Court), or at all.



Pre-Petition 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, 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.



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



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$20,098,295 and a final amount of $17,024,140 on Term Loan Cs maturity of April 1, 2006.



The Companys obligations under the Senior Credit Facility 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.



As a result of the February 2001 funding of the Companys Canadian Loan Agreement (as
defined below), the Company repaid $12.7 million in principal on 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 second quarter of fiscal 2001.



During the second quarter of fiscal 2002, Klopman International used existing cash balances and borrowings under its credit agreements to complete a capital reduction of $20.2 million with its European parent holding company (which is a
wholly-owned subsidiary of the Company). (See Liquidity and Capital Resources above)



As a result of the Chapter 11 Filings, the Company and the Debtor subsidiaries are currently in default under the Senior Credit Facility. (See Bankruptcy Filing above)



Pre-Petition 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. 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



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



As a result of the Chapter 11 Filings, the Company and the Debtor subsidiaries are currently in default under the Notes and the Indenture. As of the Filing Date, the Company discontinued its interest accrual on the Notes and wrote off $7.7
million of deferred debt fees and the remaining discount on the Notes.



Italian Loan Agreements



The Companys
wholly-owned Italian subsidiary, Klopman International S.r.l. (Klopman), had net borrowings of approximately $8.8 million outstanding under various unsecured bank line-of-credit agreements as of June 28, 2003. The average interest rate
on these borrowings was 3.00% and 3.40% per annum for the three and nine months ended June 28, 2003, respectively, and the various line-of-credit agreements renew automatically. The amount of outstanding credit allowed is subject to periodic review
by the issuing banks. As of June 28, 2003, total unused credit under these agreements was approximately $44.8 million.



In addition, Klopman has an Italian government term loan of approximately $1.6 million. The term loan requires principal and interest payments through March 2011. The
interest rate on such term loan is 4.11% per annum.



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.



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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. Effective July 24, 2002, the term loan was converted to U.S. dollars payable in equal monthly installments of U.S.
$150,000 with the unpaid balance repayable in February 2004. 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 1.50% (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 1.00% (for borrowings in U.S. dollars), (ii) the Canadian prime rate plus .75%, 1.00%, 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). At June 28, 2003, the Company was in compliance with the covenants of the Canadian Loan
Agreement.



Tax Matters



At June 28, 2003, the Company had outstanding net operating loss carryforwards
(NOLs) for U.S. federal tax purposes and for state tax purposes of approximately $166 million and approximately $202 million, respectively. The federal NOLs will expire in years 2018-2022 if unused, and the state NOLs will expire in
years 2003-2022 if unused. In accordance with the Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, a valuation allowance of $51.2 million related to domestic and international NOLs has been established
since it is more likely than not that some portion of the deferred tax assets will not be realized.



Adequacy of Capital Resources



As
discussed above, the Company and the Debtor subsidiaries are operating their businesses as debtors-in-possession under Chapter 11 of the Bankruptcy Code. In addition to the cash requirements necessary to fund ongoing operations, the Company
anticipates that it will incur significant professional fees and other restructuring costs in connection with the Chapter 11 Filings and the restructuring of its business operations. As a result of the uncertainty surrounding the Companys
current circumstances, it is difficult to predict the Companys actual liquidity needs and sources at



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this time. However, based on current and anticipated levels of operations, and efforts to effectively manage working capital, the Company anticipates that
its cash flow from operations together with cash on hand, cash generated from asset sales, and amounts available under the DIP Financing Agreements (provided the term of such facility is extended or such facility is replaced), the Canadian Loan
Agreement and certain other foreign bank loans (entered into by the non-Debtor subsidiaries), will be adequate to meet its anticipated cash requirements during the pendency of the Chapter 11 Filings.



In the event that cash flows and available borrowings under the DIP Financing Agreement, the
Canadian Loan Agreement and other foreign bank loans are not available or not sufficient to meet future cash requirements, the Company may be required to reduce planned capital expenditures, sell assets or seek additional financing. The Company can
provide no assurance that reductions in planned capital expenditures or proceeds from asset sales would be sufficient to cover shortfalls in available cash or that additional financing would be available or, if available, offered on acceptable
terms.



As a result of the Chapter 11 Filings, the Companys access to
additional financing is, and for the foreseeable future will likely continue to be, very limited. The Companys long-term liquidity requirements and the adequacy of the Companys capital resources are difficult to predict at this time, and
ultimately cannot be determined until a plan of reorganization has been developed and confirmed by the Bankruptcy Court in connection with the Chapter 11 Filings.



Other



The Company expects to spend approximately $12.9 million for capital expenditures in fiscal 2003, of which $11.1 million was spent in the first nine months of fiscal
2003. The Company anticipates that approximately 40% of the forecasted capital expenditures will be used to enhance the Companys capacity while the remaining 60% will be used to maintain existing capacity.



IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS



In January 2003, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46). FIN 46 requires unconsolidated variable interest entities to be consolidated by their primary beneficiaries. The Company does not believe that the adoption of
FIN 46 will have a material impact on the Companys consolidated financial statements or related disclosures.



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CRITICAL ACCOUNTING POLICIES



The preparation of financial statements in accordance with U.S. Generally Accepted Accounting Principles requires management to make
estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.



Chapter 11 Filings:On February 19, 2002, the Company and each of its domestic subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy
Court for the Southern District of New York (Case Nos. 02-40445 through 02-40456 (ALG)). The Chapter 11 Filings pending for the Debtors are being jointly administered for procedural purposes only. The Debtors direct and indirect foreign
subsidiaries and foreign joint venture entities did not file petitions under Chapter 11 of the Bankruptcy Code and are not the subject of any bankruptcy proceedings.



The accompanying consolidated financial statements are presented in accordance with SOP 90-7. See Bankruptcy Filing.



Inventories: Inventories are stated at the lower of cost or market. On
September 30, 2001, the Company changed its method of accounting for inventories to the last-in, first-out (LIFO) method for its Swift Denim business which was acquired on January 28, 1998. The LIFO method is used to cost substantially all
inventories in the U.S. and Canada. The cost of other inventories is determined by the first-in, first-out (FIFO) method. The Company believes that utilizing LIFO for the Swift Denim business 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 $0.4 million and $2.7 million of
lower-of-cost-or-market (LCM) reserves were reversed in the three and nine months ended June 29, 2002 due to the change from FIFO to LIFO. In implementing the change in inventory method for Swift Denim, 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.



Impairment of Goodwill and Other Intangible Assets:Effective as of the beginning of
the Companys fiscal 2003, the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (FAS 142). This new standard eliminates the amortization of goodwill and intangible
assets with indefinite useful lives (collectively, the Intangible Assets). Instead these assets must be tested at least annually for impairment. In the year of adoption, FAS 142 also requires the Company to perform an initial assessment
of its reporting units to determine whether there is any indication that the Intangible Assets carrying value may be impaired. This transitional assessment is made by comparing the fair value of each reporting unit, as determined in accordance
with the new standard, to its carrying value. To the extent the fair value of any reporting unit is less than its carrying value, which would indicate that potential impairment of Intangible Assets exists, a second transitional test is required to
determine the amount of impairment.



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For purposes of Intangible Assets impairment testing, FAS 142 requires that goodwill be assigned to one or more reporting
units. The Company has assigned goodwill to the Swift Denim and Galey & Lord Apparel reporting units. In addition to goodwill, Swift Denim also owns several trademarks whose useful lives are considered to be indefinite.



The Company, with the assistance of an outside consultant, completed the initial transitional
assessment of its reporting units in the first quarter of fiscal 2003 and has determined that potential impairment of Intangible Assets exists in both reporting units. During the second quarter of fiscal 2003, the Company completed its assessment
and, accordingly, the goodwill balance of $65.2 million ($0.8 million and $64.4 million at the Galey & Lord Apparel and Swift Denim reporting units, respectively) was impaired and $22.2 million of the trademark (Swift Denim reporting unit) was
impaired. The impairment write-down resulting from the transitional testing has been reported as a cumulative effect of an accounting change, retroactive to the first day of fiscal 2003.



FAS 142 requires that an intangible asset not subject to amortization be tested for impairment annually, or more frequently if events or
changes in circumstances indicate the asset might be impaired. If the carrying amount of an intangible asset exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess and the adjusted carrying amount of the
intangible assets shall be its new accounting basis. The Company determined that impairment indicators existed with respect to Swift Denim in the June quarter 2003 due to the further softening in the retail environment in which Swift Denim operates.
Accordingly, the fair value of the Swift Denim trademark was tested for impairment based on the expected value of future cash flows and, based on such testing, a non-cash impairment loss of $5.5 million was recorded on the Swift Denim trademark in
the June quarter 2003.



Investment in and advances to associated
companies:In the consolidated balance sheets, investments in and advances to associated companies represents several joint ventures with ownership interests ranging from 33% to 50%. These joint ventures are accounted for under the
equity method of accounting. The results of the Swift Denim-Hidalgo joint venture, which manufactures denim in Mexico and was formed on August 18, 2001 with Grupo Dioral, is reported on a one-month lag.



At June 28, 2003 and June 29, 2002, the excess of the Companys investment over its
equity in the underlying net assets of its joint venture interests is approximately $9.7 million and $9.9 million, respectively (net of accumulated amortization of $3.0 million and $2.8 million, respectively), and prior to adoption of FAS 142 on
September 29, 2002 (the beginning of the Companys fiscal 2003), was being amortized on a straight-line basis over 20 years as a component of the equity in earnings of the unconsolidated associated companies. Upon adoption of FAS 142, the
Company ceased amortizing the remaining investment over its equity in the underlying net assets of its joint venture interests. However, equity method goodwill will continue to be reviewed in accordance with Accounting Principles Board
(APB) Opinion No. 18 The Equity Method of Accounting for Investments in Common Stock. The Company believes that no impairment of the equity method goodwill existed at June 28, 2003.



Revenue Recognition:The Company recognizes revenues from product sales when goods are
shipped or when ownership is assumed by the customer. Consistent with recognized practice in the textile industry, the Company records



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revenues on a bill and hold basis, invoicing goods that have been produced, packaged and made ready for shipment. The goods are effectively segregated from
inventory which is available for sale. The risk of ownership of the goods has passed to the customer and remittance terms are consistent with all other sales by the Company. During the first nine months of fiscal 2003 and 2002, invoices issued under
these terms represent 10% and 11% of revenue, respectively.



The Company
classifies amounts billed to customers for shipping and handling in net sales and costs incurred for shipping and handling in cost of sales in the consolidated statements of operations.



Allowance for Doubtful Accounts: An allowance for losses is provided for known and potential losses arising from amounts owed by
customers and quality claims. Reserves for quality claims are based on historical experience and known pending claims. The collectibility of customer accounts receivable is based on a combination of factors including the aging of accounts
receivable, write-off experience and the financial condition of specific customers. Accounts are written off when they are no longer deemed to be collectible. General reserves are established based on the percentages applied to accounts receivables
aged for certain periods of time and are supplemented by specific reserves for certain customer accounts where collection is no longer certain. Establishing reserves for quality claims and bad debts requires management judgment and estimates, which
may impact the ending accounts receivable valuation, gross margins and the provision for bad debts.



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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, the availability of future financings on
acceptable terms or at all, 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 28, 2002. In addition, such risks and
uncertainties include those related to the Chapter 11 Filings, including, without limitation, those detailed herein.



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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



Information relative to the Companys market risk sensitive instruments by major category at September 28, 2002 is presented under Item 7a of the registrants Annual Report on Form 10-K for the fiscal year
ended September 28, 2002.



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 June 28, 2003, 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 June 28, 2003 would have a negative impact of approximately $5.1 million.



Derivative Financial Instruments



The Company follows the accounting provisions of Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended (FAS 133), which requires that all derivative instruments be reported on the balance sheet at fair value and establishes criteria for
designation and effectiveness of hedging relationships.



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 also enters into energy purchase contracts to lock in natural gas prices when rates are attractive for its forecasted natural gas usage in the normal course of business. 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.



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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



Derivative Financial Instruments (Continued)



The Company uses natural gas in the ordinary course of its business and enters into energy
purchase contracts, when deemed appropriate, to hedge the exposure to variability in expected future cash flows attributable to price fluctuations related to the forecasted purchases of natural gas.



Foreign currency forward contracts that hedge forecasted sales and purchases and energy
purchase contracts 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 three and nine months ended June 28, 2003.



At June 28, 2003,
the Company expects to recognize approximately $41,000 of pre-tax losses ($27,000 after-tax) on derivative instruments from accumulated other comprehensive income to earnings over the next twelve months. This recognition 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.



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Item 4. CONTROLS AND PROCEDURES



In designing and
evaluating the Companys disclosure controls and procedures (as defined in Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934, as amended (Exchange Act)), management recognized that any control and procedures, no matter
how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship
of possible controls and procedures. We believe that our disclosure controls and procedures provide such reasonable assurances. Based on a recent evaluation, which was performed within 90 days of the filing of this Quarterly Report on Form 10-Q, our
Chief Executive Officer and Chief Accounting Officer have concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including the Companys consolidated
subsidiaries) required to be included in periodic reports filed under the Exchange Act. There have been no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to June 28, 2003.



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



|Item 1. |  | Legal Proceedings
|------- |  | -----------------



For a discussion of Chapter 11 Filings, see Note ABankruptcy Filing in the Notes to Consolidated Financial Statements and Managements
Discussion and Analysis of Financial Condition and Results of Operations.



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



|Item 3. |  | Defaults Upon Senior Securities
|------- |  | -------------------------------



The commencement of the Chapter 11 Filings constitutes an event of default under the Senior Credit Facility, the 9 1/8% Senior Subordinated Notes and the
Indenture related thereto, and the Companys South Carolina Job and Economic Development Authority Bonds (JEDA Bonds). At June 28, 2003, principal in the amount of $300 million and $4.5 million is in default in relation to the 9
1/8% Senior Subordinated Notes and the JEDA Bonds, respectively. The payment of interest accruing under the 9 1/8 % Senior Subordinated Notes and the JEDA Bonds after February 19, 2002 is stayed in connection with the Chapter 11 Filings. At June 28,
2003, $12.8 million of accrued interest expense related to the 9 1/8% Senior Subordinated Notes is recorded on the Companys Consolidated Balance Sheet and is in default. Had the payment of interest not been stayed subsequent to February 19,
2002, an additional $37.4 million of interest would have been accrued and considered in default.



|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



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EXHIBIT INDEX



|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |  | Sequential Page
No.
|------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------
|              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|10.85         |  | Form of the Third Amendment, dated as of July 29, 2003, to Revolving Credit and Guaranty Agreement, dated as of February 20, 2002, among Galey & Lord, Inc., a debtor and
debtor-in-possession under Chapter 11 of the Bankruptcy Code, Wachovia Bank, National Association, a national banking corporation (formerly known as First Union National Bank), each of the other financial institutions from time to time party thereto
and Wachovia Bank, National Association, as Agent for the Banks. |  |                    
|              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|10.86         |  | Agreement, dated July 8, 2003, for the Sale and Purchase of the Interest in Klopman International, S.R.L., Klopman A.G., Klopman GmbH, Klopman Espana, S.A. and International
Textile S.A. and of Certain Trademark Rights between Dominion Textile International B.V. and Textile S.A.                                                                                                                                                                                                              |  |                    
|              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|31.1          |  | Certification of Principal Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (filed herewith).                                                                                                                                                                                                                                                                             |  |                    
|              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|31.2          |  | Certification of Principal Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (filed herewith).                                                                                                                                                                                                                                                                             |  |                    
|              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|32.1          |  | Chief Executive Officers Certificate Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                      |  |                    
|              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|32.2          |  | Chief Accounting Officers Certificate Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                     |  |                    





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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. FerroLeonard F. FerroVice President




August 12, 2003

Date





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