##### Table of Contents



UNITED
STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549



FORM 10-Q



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



For the quarterly period ended December 28, 2002



OR



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



For the transition period from
 to



Commission File Number 0-20080



GALEY & LORD, INC.

(Exact name of registrant as specified in its charter)



|DELAWARE                                 |  | 56-1593207          
|---------------------------------------- |  | --------------------
|(State or other jurisdiction of          |  | (IRS Employer       
|incorporation or organization)           |  | (Identification No.)
|                                        
|980 Avenue of the Americas               |  |                     
|New York, New York                       |  | 10018               
|(Address of principal executive offices) |  | (Zip Code)          



212/465-3000

(Registrants telephone number, including area code)



Not Applicable

(Former name, former address and former fiscal year, if changed since last report)



Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter 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 as of February 7, 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December 28, 2002, December 29, 2001 and September 28, 2002          |  | 3    
|                              |  | Consolidated Statements of OperationsThree months ended December 28, 2002 andDecember 29, 2001  |  | 4    
|                              |  | Consolidated Statements of Cash FlowsThree months ended December 28, 2002 and December 29, 2001 |  | 5    
|                              |  | Notes to Consolidated Financial StatementsDecember 28, 2002                                     |  | 6-35 
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations            |  | 36-60
|Item 3.                       |  | Quantitative and Qualitative Disclosures About Market Risk                                       |  | 61-63
|Item 4.                       |  | Controls and Procedures                                                                          |  | 64   
|                             
|PART II. OTHER INFORMATION    |  |                                                                                                 
|Item 1.                       |  | Legal Proceedings                                                                                |  | 65   
|Item 2.                       |  | Changes in Securities and Use of Proceeds                                                        |  | 65   
|Item 3.                       |  | Defaults upon Senior Securities                                                                  |  | 65   
|Item 4.                       |  | Submission of Matters to a Vote of Security Holders                                              |  | 65   
|Item 5.                       |  | Other Information                                                                                |  | 65   
|Item 6.                       |  | Exhibits and Reports on Form 8-K                                                                 |  | 65   
|                             
|EXHIBIT INDEX                 |  | 66                                                                                              
|SIGNATURES                    |  | 67                                                                                              
|CERTIFICATIONS                |  | 68-69                                                                                           



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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)



|ASSETS                                              |  | December 28, 2002 (Unaudited) |          |   | December 29, 2001 (Unaudited) |   |          | September 28, 2002 * | 
|--------------------------------------------------- |  | ----------------------------- | -------- | - | ----------------------------- | - | -------- | -------------------- | 
|Current assets:                                     |  |                               |          |   |                               |   |          |                      | 
|Cash and cash equivalents                           |  | $                             | 46,743   |   |                               | $ | 6,497    |                      | 
|Trade accounts receivable                           |  |                               | 107,984  |   |                               |   | 106,451  |                      | 
|Sundry notes and accounts receivable                |  |                               | 7,158    |   |                               |   | 4,533    |                      | 
|Inventories                                         |  |                               | 163,726  |   |                               |   | 190,109  |                      | 
|Income taxes receivable                             |  |                               | 2,925    |   |                               |   | 2,509    |                      | 
|Prepaid expenses and other current assets           |  |                               | 5,236    |   |                               |   | 4,127    |                      | 
|                                                    |  |                               |          |   |                               |   |          |                      | 
|Total current assets                                |  |                               | 333,772  |   |                               |   | 314,226  |                      | 
|Property, plant and equipment, at cost              |  |                               | 434,915  |   |                               |   | 437,755  |                      | 
|Less accumulated depreciation and amortization      |  |                               | (195,625 | ) |                               |   | (185,394 | )                    | 
|                                                    |  |                               |          |   |                               |   |          |                      | 
|                                                    |  |                               | 239,290  |   |                               |   | 252,361  |                      | 
|Investments in and advances to associated companies |  |                               | 36,275   |   |                               |   | 41,310   |                      | 
|Deferred charges, net                               |  |                               | 3,441    |   |                               |   | 11,222   |                      | 
|Other non-current assets                            |  |                               | 1,254    |   |                               |   | 1,425    |                      | 
|Intangibles, net                                    |  |                               | 113,789  |   |                               |   | 113,840  |                      | 
|                                                    |  |                               |          |   |                               |   |          |                      | 
|                                                    |  | $                             | 727,821  |   |                               | $ | 734,384  |                      | 
|                                                    |  |                               |          |   |                               |   |          |                      | 
|LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)      |  |                               |          |   |                               |   |          |                      | 
|Liabilities not subject to compromise:              |  |                               |          |   |                               |   |          |                      | 
|Current liabilities:                                |  |                               |          |   |                               |   |          |                      | 
|Long-term debtcurrent                              |  | $                             | 304,735  |   |                               | $ | 4,657    |                      | 
|Trade accounts payable                              |  |                               | 28,855   |   |                               |   | 40,370   |                      | 
|Accrued salaries and employee benefits              |  |                               | 34,400   |   |                               |   | 19,081   |                      | 
|Accrued liabilities                                 |  |                               | 31,959   |   |                               |   | 36,048   |                      | 
|Income taxes payable                                |  |                               | 4,659    |   |                               |   | 6,254    |                      | 
|                                                    |  |                               |          |   |                               |   |          |                      | 
|Total current liabilities                           |  |                               | 404,608  |   |                               |   | 106,410  |                      | 
|Long-term liabilities:                              |  |                               |          |   |                               |   |          |                      | 
|Long-term debt                                      |  |                               | 23,474   |   |                               |   | 632,532  |                      | 
|Other long-term liabilities                         |  |                               | 12,464   |   |                               |   | 13,055   |                      | 
|                                                    |  |                               |          |   |                               |   |          |                      | 
|Total long-term liabilities                         |  |                               | 35,938   |   |                               |   | 645,587  |                      | 
|Deferred income taxes                               |  |                               | 3,577    |   |                               |   | 3,118    |                      | 
|                                                    |  |                               |          |   |                               |   |          |                      | 
|Total liabilities not subject to compromise         |  |                               | 444,123  |   |                               |   | 755,115  |                      | 
|Liabilities subject to compromise                   |  |                               | 328,029  |   |                               |   |         |                      | 
|Stockholders equity (deficit):                     |  |                               |          |   |                               |   |          |                      | 
|Common stock                                        |  |                               | 124      |   |                               |   | 124      |                      | 
|Contributed capital in excess of par value          |  |                               | 41,957   |   |                               |   | 41,149   |                      | 
|Retained Earnings (Accumulated deficit)             |  |                               | (67,277  | ) |                               |   | (42,842  | )                    | 
|Treasury stock, at cost                             |  |                               | (2,247   | ) |                               |   | (2,247   | )                    | 
|Accumulated other comprehensive income (loss)       |  |                               | (16,888  | ) |                               |   | (16,915  | )                    | 
|                                                    |  |                               |          |   |                               |   |          |                      | 
|Total stockholders equity (deficit)                |  |                               | (44,331  | ) |                               |   | (20,731  | )                    | 
|                                                    |  |                               |          |   |                               |   |          |                      | 
|                                                    |  | $                             | 727,821  |   |                               | $ | 734,384  |                      | 
|                                                    |  |                               |          |   |                               |   |          |                      | 



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



See accompanying notes to consolidated financial statements.



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##### Table of Contents

GALEY & LORD, INC.

(DEBTORS-IN-POSSESSION)

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)



(Amounts in thousands except per share data)



|                                                                                                |  | Three Months Ended |        
|----------------------------------------------------------------------------------------------- |  | ------------------ | -------
|                                                                                                |  | December 28, 2002  |        
|Net sales                                                                                       |  | $                  | 143,365
|Cost of sales                                                                                   |  |                    | 129,099
|                                                                                                |  |                    |        
|Gross profit                                                                                    |  |                    | 14,266 
|Selling, general and administrative expenses                                                    |  |                    | 7,357  
|Amortization of intangibles                                                                     |  |                    | 7      
|Impairment of fixed assets                                                                      |  |                    |       
|Plant closing costs                                                                             |  |                    | (385   
|Net gain on benefit plan curtailments                                                           |  |                    |       
|                                                                                                |  |                    |        
|Operating income                                                                                |  |                    | 7,287  
|Interest expense (contractual interest of $12,504 for the three months ended December
28, 2002) |  |                    | 5,660  
|Equity in (income) loss from associated companies                                               |  |                    | (2,544 
|                                                                                                |  |                    |        
|Income (loss) before reorganization items and income taxes                                      |  |                    | 4,171  
|Reorganization items                                                                            |  |                    | 3,366  
|Income tax expense (benefit):                                                                   |  |                    |        
|Current                                                                                         |  |                    | 1,141  
|Deferred                                                                                        |  |                    | (32    
|                                                                                                |  |                    |        
|Net loss                                                                                        |  | $                  | (304   
|                                                                                                |  |                    |        
|Net loss per common share:                                                                      |  |                    |        
|Basic:                                                                                          |  |                    |        
|Average common shares outstanding                                                               |  |                    | 11,997 
|Net loss per common shareBasic                                                                 |  | $                  | (0.03  
|                                                                                                |  |                    |        
|Diluted:                                                                                        |  |                    |        
|Average common shares outstanding                                                               |  |                    | 11,997 
|Net loss per common shareDiluted                                                               |  | $                  | (0.03  
|                                                                                                |  |                    |        



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)



|                                                                                                   |  | Three Months Ended |        
|-------------------------------------------------------------------------------------------------- |  | ------------------ | -------
|                                                                                                   |  | December 28, 2002  |        
|Cash flows from operating activities:                                                              |  |                    |        
|Net income (loss)                                                                                  |  | $                  | (304   
|Adjustments to reconcile net income (loss) to net cash provided by (used in) operating
activities: |  |                    |        
|Depreciation of property, plant and equipment                                                      |  |                    | 7,360  
|Amortization of intangible assets                                                                  |  |                    | 7      
|Amortization of deferred charges                                                                   |  |                    | 922    
|Deferred income taxes                                                                              |  |                    | (32    
|Non-cash compensation                                                                              |  |                    | 3      
|(Gain)/loss on disposals of property, plant and equipment                                          |  |                    | 258    
|Undistributed income from associated companies                                                     |  |                    | (2,544 
|Impairment of fixed assets                                                                         |  |                    |       
|Net gain on benefit plan curtailments                                                              |  |                    |       
|Other                                                                                              |  |                    | (23    
|Changes in assets and liabilities:                                                                 |  |                    |        
|(Increase)/decrease in accounts receivablenet                                                     |  |                    | 32,116 
|(Increase)/decrease in sundry notes & accounts receivable                                          |  |                    | (1,679 
|(Increase)/decrease in inventories                                                                 |  |                    | (17,967
|(Increase)/decrease in prepaid expenses and other current assets                                   |  |                    | 671    
|(Increase)/decrease in other non-current assets                                                    |  |                    | 44     
|(Decrease)/increase in accounts payabletrade                                                      |  |                    | (5,043 
|(Decrease)/increase in accrued liabilities                                                         |  |                    | (272   
|(Decrease)/increase in income taxes payable                                                        |  |                    | 106    
|(Decrease)/increase in other long-term liabilities                                                 |  |                    | (249   
|(Decrease)/increase in plant closing costs                                                         |  |                    | (536   
|                                                                                                   |  |                    |        
|Net cash provided by (used in) operating activities                                                |  |                    | 12,838 
|Cash flows from investing activities:                                                              |  |                    |        
|Property, plant and equipment expenditures                                                         |  |                    | (3,296 
|Proceeds from sale of property, plant and equipment                                                |  |                    | 55     
|Distributions received from associated companies                                                   |  |                    | 5,171  
|Other                                                                                              |  |                    |       
|                                                                                                   |  |                    |        
|Net cash provided by (used in) investing activities                                                |  |                    | 1,930  
|Cash flows from financing activities:                                                              |  |                    |        
|Increase/(decrease) in revolving line of credit                                                    |  |                    | (3,092 
|Principal payments on long-term debt                                                               |  |                    | (6,989 
|Issuance of long-term debt                                                                         |  |                    | 2,465  
|                                                                                                   |  |                    |        
|Net cash provided by (used in) financing activities                                                |  |                    | (7,616 
|Effect of exchange rate changes on cash and cash equivalents                                       |  |                    | 216    
|                                                                                                   |  |                    |        
|Net increase/(decrease) in cash and cash equivalents                                               |  |                    | 7,368  
|Cash and cash equivalents at beginning of period                                                   |  |                    | 39,375 
|                                                                                                   |  |                    |        
|Cash and cash equivalents at end of period                                                         |  | $                  | 46,743 
|                                                                                                   |  |                    |        



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

December 28, 2002

(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, to permanently reduce such maximum amount of revolving credit borrowings from $100 million to $75 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) in an amount not exceeding the lesser of $100 million (effective September 24, 2002, it was permanently reduced to $75 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



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##### Table of Contents

GALEY & LORD, INC.

(DEBTORS-IN-POSSESSION)

Notes to Consolidated
Financial Statements

December 28, 2002

(Unaudited)



NOTE ABankruptcy Filing (Continued)



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) .5% 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
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



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##### Table of Contents

GALEY & LORD, INC.

(DEBTORS-IN-POSSESSION)

Notes to Consolidated
Financial Statements

December 28, 2002

(Unaudited)



NOTE ABankruptcy Filing (Continued)



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 December 28, 2002, 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.



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).



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##### Table of Contents

GALEY & LORD, INC.

(DEBTORS-IN-POSSESSION)

Notes to Consolidated
Financial Statements

December 28, 2002

(Unaudited)



NOTE ABankruptcy Filing (Continued)



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 plan.



Performance Incentive PlanThe Debtors are negotiating with their senior lenders and their unsecured creditors committee 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 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 two 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 and
December 11, 2002, the Bankruptcy Court extended this deadline up through and including April 16, 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 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.



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##### Table of Contents

GALEY & LORD, INC.

(DEBTORS-IN-POSSESSION)

Notes to Consolidated
Financial Statements

December 28, 2002

(Unaudited)



NOTE ABankruptcy Filing (Continued)



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. 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 three orders collectively extending the Debtors exclusive right to file a plan through and including March 31, 2003, and extending the Debtors exclusive right to solicit acceptances of such plan through and including June 2,
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.



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##### Table of Contents

GALEY & LORD, INC.

(DEBTORS-IN-POSSESSION)

Notes to Consolidated
Financial Statements

December 28, 2002

(Unaudited)



NOTE ABankruptcy Filing (Continued)



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 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 comply with the DIP Financing Agreement, 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



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##### Table of Contents

GALEY & LORD, INC.

(DEBTORS-IN-POSSESSION)

Notes to Consolidated
Financial Statements

December 28, 2002

(Unaudited)



NOTE ABankruptcy Filing (Continued)



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 December 28, 2002 are identified below (in thousands):



|91 / 8 % Senior Subordinated Notes |  | $ | 300,000
|---------------------------------- |  | - | -------
|Interest accrued on above debt     |  |   | 12,775 
|Accounts payable                   |  |   | 11,464 
|Liability for rejected leases      |  |   | 2,165  
|Other accrued expenses             |  |   | 1,625  
|                                   |  |   |        
|                                   |  | $ | 328,029
|                                   |  |   |        



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 $3.4 million associated with the Chapter 11 Filings for the three months ended December 28, 2002, respectively. Of these charges, $1.8 million were for fees payable to
professionals retained to assist with the Chapter 11 Filings and $1.6 million were related to incentive and retention programs.



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##### Table of Contents

GALEY & LORD, INC.

(DEBTORS-IN-POSSESSION)

Notes to Consolidated
Financial Statements

December 28, 2002

(Unaudited)



NOTE BAdoption of New Accounting Standard



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 book value. To the extent the fair value of any reporting unit is less than its book 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 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. The Company expects to complete the second portion of the transitional test in the second quarter of fiscal 2003, which
could result in an impairment writedown up to the remaining net book value of $111 million. Any impairment writedown resulting from the transitional testing will be reported as a cumulative effect of a change in accounting principle, retroactive to
the first day of fiscal 2003. In future years, an impairment review of Intangible Assets will be conducted at least annually, and any impairment charges that are required to be recorded would be charged to operating income.



In addition, 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 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 December 28, 2002.



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##### Table of Contents

GALEY & LORD, INC.

(DEBTORS-IN-POSSESSION)

Notes to Consolidated
Financial Statements

December 28, 2002

(Unaudited)



NOTE BAdoption of New Accounting Standard (Continued)



In accordance with FAS 142, prior period amounts were not restated. The following table adjusts the reported net loss for the three months ended December 29, 2001 and the loss per share amounts to
exclude the amortization of Intangible Assets (in thousands, except per share data):



|                                  |  | Three Months Ended December 29, 2001 |       
|--------------------------------- |  | ------------------------------------ | ------
|Reported net loss                 |  | $                                    | (5,233
|Amortization of Intangible Assets |  |                                      | 979   
|                                  |  |                                      |       
|Adjusted net loss                 |  | $                                    | (4,254
|                                  |  |                                      |       
|Reported loss per share           |  | $                                    | (0.44 
|Amortization of Intangible Assets |  |                                      | 0.08  
|                                  |  |                                      |       
|Adjusted net loss per share       |  | $                                    | (0.36 
|                                  |  |                                      |       



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.



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 December 28, 2002 and the consolidated results of operations and cash flows for the periods ended December 28, 2002 and December 29, 2001. Such adjustments consisted only of normal recurring items. Interim results are not necessarily
indicative of results for a full year. These financial statements should be read in conjunction with the financial statements and footnotes included in the Companys Annual Report on Form 10-K for the fiscal year ended September 28, 2002.



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##### Table of Contents

GALEY & LORD, INC.

(DEBTORS-IN-POSSESSION)

Notes to Consolidated
Financial Statements

December 28, 2002

(Unaudited)



NOTE DInventories



The components of inventory at December 28, 2002, December 29, 2001, and September 28, 2002 consisted of the following (in thousands):



|                                 |  | December 28, 2002 |         |   | December 29, 2001 |   |         | September 28, 2002 | 
|-------------------------------- |  | ----------------- | ------- | - | ----------------- | - | ------- | ------------------ | 
|Raw materials                    |  | $                 | 5,528   |   |                   | $ | 4,779   |                    | 
|Stock in process                 |  |                   | 15,740  |   |                   |   | 17,018  |                    | 
|Produced goods                   |  |                   | 135,392 |   |                   |   | 163,252 |                    | 
|Dyes, chemicals and supplies     |  |                   | 11,662  |   |                   |   | 11,568  |                    | 
|                                 |  |                   |         |   |                   |   |         |                    | 
|                                 |  |                   | 168,322 |   |                   |   | 196,617 |                    | 
|Adjust to LIFO cost              |  |                   | (229    | ) |                   |   | 4,211   |                    | 
|Lower-of-cost-or-market reserves |  |                   | (4,367  | ) |                   |   | (10,719 | )                  | 
|                                 |  |                   |         |   |                   |   |         |                    | 
|                                 |  | $                 | 163,726 |   |                   | $ | 190,109 |                    | 
|                                 |  |                   |         |   |                   |   |         |                    | 



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 $1.3 million of lower-of-cost-or-market (LCM) reserves were reversed in the quarter ended December 29, 2001 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.



During the first quarter of fiscal 2002, the Company recorded
a LIFO LCM charge of approximately $0.6 million, primarily in its Galey & Lord Apparel business. This LCM charge resulted from LIFO inventories carried at higher costs prevailing in prior years compared to current market values, the effect of
which increased cost of sales and decreased net income.



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##### Table of Contents

GALEY & LORD, INC.

(DEBTORS-IN-POSSESSION)

Notes to Consolidated
Financial Statements

December 28, 2002

(Unaudited)



NOTE ELong-Term Debt



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



|                                                   |  | December 28, 2002 |         | December 29, 2001 |   | September 28, 2002
|-------------------------------------------------- |  | ----------------- | ------- | ----------------- | - | ------------------
|Long-term debt not subject to compromise:          |  |                   |         |                   |   |                   
|Long-term debtcurrent                             |  |                   |         |                   |   |                   
|Debtor-in-Possession Financing                     |  | $                 |        |                   | $ |                  
|Senior Credit Facility:                            |  |                   |         |                   |   |                   
|Revolving Credit Note                              |  |                   | 116,610 |                   |   |                  
|Term Loan B                                        |  |                   | 105,860 |                   |   | 1,219             
|Term Loan C                                        |  |                   | 75,096  |                   |   | 864               
|Other borrowings with various rates and maturities |  |                   | 7,169   |                   |   | 2,574             
|                                                   |  |                   |         |                   |   |                   
|                                                   |  |                   | 304,735 |                   |   | 4,657             
|                                                   |  |                   |         |                   |   |                   
|Long-term debt                                     |  |                   |         |                   |   |                   
|Senior Credit Facility:                            |  |                   |         |                   |   |                   
|Revolving Credit Note                              |  |                   |        |                   |   | 121,800           
|Term Loan B                                        |  |                   |        |                   |   | 111,736           
|Term Loan C                                        |  |                   |        |                   |   | 79,264            
|91 / 8 % Senior Subordinated Notes                 |  |                   |        |                   |   | 299,074           
|Canadian Loan:                                     |  |                   |         |                   |   |                   
|Revolving Credit Note                              |  |                   | 785     |                   |   | 7,343             
|Term Loan                                          |  |                   | 3,837   |                   |   | 5,609             
|Italian Credit Agreements                          |  |                   | 18,387  |                   |   | 2,013             
|Other borrowings with various rates and maturities |  |                   | 465     |                   |   | 5,693             
|                                                   |  |                   |         |                   |   |                   
|                                                   |  |                   | 23,474  |                   |   | 632,532           
|                                                   |  |                   |         |                   |   |                   
|Total long-term debt not subject to compromise     |  |                   | 328,209 |                   |   | 637,189           
|                                                   |  |                   |         |                   |   |                   
|Long-term debt subject to compromise:              |  |                   |         |                   |   |                   
|91 / 8 % Senior Subordinated Notes                 |  |                   | 300,000 |                   |   |                  
|                                                   |  |                   |         |                   |   |                   
|                                                   |  | $                 | 628,209 |                   | $ | 637,189           
|                                                   |  |                   |         |                   |   |                   



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) 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. See Note A above for a description of the DIP Financing Agreement.



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##### Table of Contents

GALEY & LORD, INC.

(DEBTORS-IN-POSSESSION)

Notes to Consolidated
Financial Statements

December 28, 2002

(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
March quarter 2001.



During the March quarter
2002, Klopman International used existing cash balances and borrowings under its credit agreements to complete a capital



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##### Table of Contents

GALEY & LORD, INC.

(DEBTORS-IN-POSSESSION)

Notes to Consolidated
Financial Statements

December 28, 2002

(Unaudited)



NOTE ELong-Term Debt (Continued)



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 91/8% 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 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 (as defined herein). 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



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##### Table of Contents

GALEY & LORD, INC.

(DEBTORS-IN-POSSESSION)

Notes to Consolidated
Financial Statements

December 28, 2002

(Unaudited)



NOTE ELong-Term Debt (Continued)



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., had net borrowings of approximately $17.0 million outstanding under various unsecured bank line-of-credit agreements as of December 28, 2002. The
average interest rate on these borrowings was 3.8% per annum during the December quarter 2002 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 December 28, 2002, total unused credit under these agreements was approximately $35.0 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



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##### Table of Contents

GALEY & LORD, INC.

(DEBTORS-IN-POSSESSION)

Notes to Consolidated
Financial Statements

December 28, 2002

(Unaudited)



NOTE ELong-Term Debt (Continued)



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 $150,000 U.S. dollars 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 1.5% (for
borrowings in Canadian dollars). Thereafter, borrowings will bear interest at a per annum rate, at Drummondvilles option, of either (i) the U.S. prime rate plus 0%, .25%, .50%, .75%, or 1.0% (for borrowings in U.S. dollars), (ii) the Canadian
prime rate plus .75%, 1.0%, 1.25%, 1.50%, or 1.75% (for borrowings in Canadian dollars), or (iii) LIBOR plus 2.00%, 2.25%, 2.50%, 2.75% or 3.00% (for borrowings in U.S. dollars ), all based on Drummondville maintaining certain quarterly
excess borrowing availability levels under the revolving line of credit or Drummondville achieving certain fixed charge coverage ratio levels (as set forth in the Canadian Loan Agreement).



Drummondvilles obligations under the Canadian Loan Agreement are secured by all of the assets of
Drummondville. The Canadian Loan Agreement contains certain covenants, including without limitation, those limiting Drummondvilles ability to incur indebtedness (other than incurring or paying certain intercompany indebtedness), incur liens,
sell or acquire assets or businesses, pay dividends, make loans or advances or make certain investments. In addition, the Canadian Loan Agreement requires Drummondville to maintain a certain level of tangible net worth (as defined in the Canadian
Loan Agreement). At December 28, 2002, 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

December 28, 2002

(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 |       
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ------
|                                                                                                                                            |  | December 28, 2002  |       
|Numerator:                                                                                                                                  |  |                    |       
|Net income (loss)                                                                                                                           |  | $                  | (304  
|                                                                                                                                            |  |                    |       
|Denominator:                                                                                                                                |  |                    |       
|Denominator for basic earnings per share share  weighted average
shares                                                                    |  |                    | 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 exercises |  |                    | 11,997
|                                                                                                                                            |  |                    |       



Incremental shares for diluted earnings per share represent the dilutive effect of options outstanding during the quarter. Options to purchase 141,350 shares and 161,149 shares of common stock were outstanding during the three months
ended December 28, 2002 and December 29, 2001, 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 common stock were outstanding during the three months ended December 28, 2002 and December 29, 2001, 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

December 28, 2002

(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, an intangible pension asset equal to the unrecognized prior service cost and if the additional liability required to
recognized exceeds unrecognized service cost, the excess shall be reported in accumulated other comprehensive income (loss) as a separate component of equity. In accordance with FAS 87, the consolidated balance sheet at December 28, 2002 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 benefit 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

December 28, 2002

(Unaudited)



NOTE HStockholders Equity (Deficit)



Comprehensive income (loss) represents the change in stockholders equity (deficit) during the period from non-owner sources. Currently, changes from non-owner sources consist of net income (loss), foreign currency
translation adjustments, gains on derivative instruments and minimum pension liability. Total comprehensive income (loss) for the three months ended December 28, 2002 and December 29, 2001 was $3.5 million and $(8.0) million, respectively.



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



|                                                  |  | Current Year Comprehensive Income (Loss) |       |   | Common Stock |   | Contributed Capital |  | Accumulated Deficit |        |  | Treasury Stock |         |   | Accumulated Other Comprehensive Income (Loss) |   |        | Total | 
|------------------------------------------------- |  | ---------------------------------------- | ----- | - | ------------ | - | ------------------- |  | ------------------- | ------ |  | -------------- | ------- | - | --------------------------------------------- | - | ------ | ----- | 
|Balance at September 28, 2002                     |  |                                          |       |   |              | $ | 124                 |  | $                   | 41,954 |  | $              | (66,973 | ) |                                               | $ | (2,247 | )     | 
|Compensation earned related to stock options      |  |                                          |       |   |              |   |                    |  |                     | 3      |  |                |        |   |                                               |   |       |       | 
|                                                  |  |                                          |       |   |              |   |                     |  |                     |        |  |                |         |   |                                               |   |        |       | 
|Comprehensive income (loss):                      |  |                                          |       |   |              |   |                     |  |                     |        |  |                |         |   |                                               |   |        |       | 
|Net loss for three months ended December 28, 2002 |  | $                                        | (304  | ) |              |   |                    |  |                     |       |  |                | (304    | ) |                                               |   |       |       | 
|Foreign currencyTranslation adjustment            |  |                                          | 3,808 |   |              |   |                    |  |                     |       |  |                |        |   |                                               |   |       |       | 
|Gain on derivative instruments                    |  |                                          | 18    |   |              |   |                    |  |                     |       |  |                |        |   |                                               |   |       |       | 
|                                                  |  |                                          |       |   |              |   |                     |  |                     |        |  |                |         |   |                                               |   |        |       | 
|Total comprehensive income (loss)                 |  | $                                        | 3,522 |   |              |   |                     |  |                     |        |  |                |         |   |                                               |   |        |       | 
|                                                  |  |                                          |       |   |              |   |                     |  |                     |        |  |                |         |   |                                               |   |        |       | 
|Balance at December 28, 2002                      |  |                                          |       |   |              | $ | 124                 |  | $                   | 41,957 |  | $              | (67,277 | ) |                                               | $ | (2,247 | )     | 
|                                                  |  |                                          |       |   |              |   |                     |  |                     |        |  |                |         |   |                                               |   |        |       | 



Accumulated Other Comprehensive Income (Loss) at December 28, 2002 represents a $7.8 million loss related to foreign currency translation adjustment, a $9.3 million loss related to a minimum pension liability and $0.2 million gain
related to derivative instruments.



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GALEY & LORD, INC.

(DEBTORS-IN-POSSESSION)

Notes to Consolidated
Financial Statements

December 28, 2002

(Unaudited)



NOTE IIncome Taxes



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



|                                 |  | Three Months Ended
|-------------------------------- |  | ------------------
|                                 |  | December 28, 2002 
|Current tax provision:           |  |                   
|Federal                          |  | $                 
|State                            |  |                   
|Foreign                          |  |                   
|                                 |  |                   
|Total current tax provision      |  |                   
|Deferred tax provision:          |  |                   
|Federal                          |  |                   
|State                            |  |                   
|Foreign                          |  |                   
|                                 |  |                   
|Total deferred tax provision     |  |                   
|                                 |  |                   
|Total provision for 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, 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 December 28, 2002, the Company had outstanding net operating loss carryforwards (NOLs) for U.S. federal tax purposes of
approximately $158 million and state tax purposes of approximately $170 million. 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 $34.5 million related to domestic and international operating income losses has been established since it is more likely than not that some portion of the deferred tax assets
will not be realized.



Included in the valuation
allowance is a ($3.4) 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 $3.4 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

December 28, 2002

(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.



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##### Table of Contents

GALEY & LORD, INC.

(DEBTORS-IN-POSSESSION)

Notes to Consolidated
Financial Statements

December 28, 2002

(Unaudited)



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



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 three months ended December 28, 2002 (in thousands):



|                             |  | Accrual Balance at September 28, 2002 |       | Cash Payments |   |    | Change in Estimate |  |   | Accrual Balance at December 28, 2002
|---------------------------- |  | ------------------------------------- | ----- | ------------- | - | -- | ------------------ |  | - | ------------------------------------
|Severance benefits           |  | $                                     | 442   |               | $ |   |                    |  | $ |                                    
|Lease cancellation and other |  |                                       | 1,171 |               |   | (2 | )                  |  |   | (240                                
|                             |  |                                       |       |               |   |    |                    |  |   |                                     
|                             |  | $                                     | 1,613 |               | $ | (2 | )                  |  | $ | (240                                
|                             |  |                                       |       |               |   |    |                    |  |   |                                     



Of the
lease cancellation and other accrual balance related to the Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives outstanding at December 28, 2002, $0.9 million is included in liabilities subject to compromise. See Note ABankruptcy Filing.



The Company incurred run-out expenses totaling
$0.2 million for the three months ended December 28, 2002. 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.



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##### Table of Contents

GALEY & LORD, INC.

(DEBTORS-IN-POSSESSION)

Notes to Consolidated
Financial Statements

December 28, 2002

(Unaudited)



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 three months ended December 28, 2002 (in thousands):



|                             |  | Accrual Balance at September 28, 2002 |       | Cash Payments |   |     | Usage of Reserve |  |   | Change in Estimate |   |  | Accrual Balance at December 28, 2002
|---------------------------- |  | ------------------------------------- | ----- | ------------- | - | --- | ---------------- |  | - | ------------------ | - |  | ------------------------------------
|Severance benefits           |  | $                                     | 226   |               | $ | (74 | )                |  | $ |                   |   |  | $                                   
|Lease cancellation and other |  |                                       | 1,930 |               |   |    |                  |  |   | (75                | ) |  |                                     
|                             |  |                                       |       |               |   |     |                  |  |   |                    |   |  |                                     
|                             |  | $                                     | 2,156 |               | $ | (74 | )                |  | $ | (75                | ) |  | $                                   
|                             |  |                                       |       |               |   |     |                  |  |   |                    |   |  |                                     



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##### Table of Contents

GALEY & LORD, INC.

(DEBTORS-IN-POSSESSION)

Notes to Consolidated
Financial Statements

December 28, 2002

(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 December 28, 2002, $1.3 million is included in liabilities subject to compromise. See
Note ABankruptcy Filing.



The Company
incurred run-out expenses totaling $0.4 million for the three months ended December 28, 2002. 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 will not be presented as a separate operating segment beginning 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.



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GALEY & LORD, INC.

(DEBTORS-IN-POSSESSION)

Notes to Consolidated
Financial Statements

December 28, 2002

(Unaudited)



NOTE LSegment Information (Continued)



The Company evaluates performance and allocates resources
based on operating income; therefore, certain expenses, principally net interest expense and income taxes, are excluded from the chief operating decision makers assessment of segment performance. Accordingly, such expenses have not been
allocated to segment results. The corporate segments operating income (loss) represents principally the administrative expenses from the Companys various holding companies. The corporate operating loss for the quarter ended December 29,
2001 also included $1.1 of financial advisor fees. Additionally, the corporate segment assets consist primarily of corporate cash, deferred bank charges and investments in and advances to associated companies.



Information about the Companys operations in its
different industry segments for the three months ended December 28, 2002 and December 29, 2001 is as follows (in thousands):



|                                     |  | Three Months Ended |        
|------------------------------------ |  | ------------------ | -------
|                                     |  | December 28, 2002  |        
|Net Sales to External Customers      |  |                    |        
|Galey & Lord Apparel                 |  | $                  | 67,335 
|Swift Denim                          |  |                    | 47,426 
|Klopman International                |  |                    | 28,604 
|                                     |  |                    |        
|Consolidated                         |  | $                  | 143,365
|                                     |  |                    |        
|Operating Income (Loss) (1)(2)       |  |                    |        
|Galey & Lord Apparel                 |  | $                  | 1,237  
|Swift Denim                          |  |                    | 4,488  
|Klopman International                |  |                    | 1,685  
|Corporate                            |  |                    | (123   
|                                     |  |                    |        
|                                     |  |                    | 7,287  
|Interest expense                     |  |                    | 5,660  
|Income from associated companies (3) |  |                    | (2,544 
|Reorganization items (4)             |  |                    | 3,366  
|                                     |  |                    |        
|Income (loss) before income taxes    |  | $                  | 805    
|                                     |  |                    |        
|                                     |  | December 28, 2002  |        
|Assets (5)                           |  |                    |        
|Galey & Lord Apparel                 |  | $                  | 249,064
|Swift Denim                          |  |                    | 316,112
|Klopman International                |  |                    | 117,336
|Corporate                            |  |                    | 45,309 
|                                     |  |                    |        
|                                     |  | $                  | 727,821
|                                     |  |                    |        



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##### Table of Contents

GALEY & LORD, INC.

(DEBTORS-IN-POSSESSION)

Notes to Consolidated
Financial Statements

December 28, 2002

(Unaudited)



NOTE LSegment Information (Continued)



|(1) |  | Operating income (loss) for the three months ended December 28, 2002 includes run-out costs and adjustments of plant closing costs related to the Fiscal 2001 Cost
Reduction and Loss Avoidance Initiatives and Fiscal 2000 Strategic Initiatives of ($0.2) million for Galey & Lord Apparel. Swift Denims operating income includes run-out costs and adjustments of plant closing costs related to the Fiscal
2000 Strategic Initiatives of $0.4 million for the three months ended December 28, 2002.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Operating income (loss) for the three months ended December 29, 2001 includes run-out costs, adjustments of plant closing and fixed asset impairment costs related
to Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives of $1.0 million for Galey & Lord Apparel. Swift Denims operating income includes run-out costs related to the Fiscal 2000 Strategic Initiatives of $0.7 million for the three
months ended December 29, 2001.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Net of amortization of $0 and $163, respectively. The Company adopted Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (FAS 142) on December 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.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | Reorganization items for the three months ended December 28, 2002 include $1.8 million of
professional fees associated with the Chapter 11 Filings and $1.6 million of expenses related to incentive and retention programs.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) |  | Excludes intercompany balances and investments in subsidiaries which are eliminated in consolidation.
|--- |  | -----------------------------------------------------------------------------------------------------



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GALEY & LORD, INC.

(DEBTORS-IN-POSSESSION)

Notes to Consolidated
Financial Statements

December 28, 2002

(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.



|                                            |  | December 28, 2002 |         
|------------------------------------------- |  | ----------------- | --------
|                                            |  | (in thousands)    |         
|Financial Position                          |  | Parent            |         
|Current assets:                             |  |                   |         
|Trade accounts receivable                   |  | $                 |        
|Inventories                                 |  |                   |        
|Other current assets                        |  |                   | 2,265   
|                                            |  |                   |         
|Total current assets                        |  |                   | 2,265   
|Property, plant and equipment, net          |  |                   |        
|Intangibles                                 |  |                   |        
|Other assets                                |  |                   | (7,280  
|                                            |  |                   |         
|                                            |  | $                 | (5,015  
|                                            |  |                   |         
|Liabilities not subject to compromise:      |  |                   |         
|Current liabilities:                        |  |                   |         
|Long-term debtcurrent                      |  | $                 | 297,566 
|Trade accounts payable                      |  |                   | 37      
|Accrued liabilities                         |  |                   | 21,132  
|Other current liabilities                   |  |                   |        
|                                            |  |                   |         
|Total current liabilities                   |  |                   | 318,735 
|Long-term debt                              |  |                   |        
|Other non-current liabilities               |  |                   | (57     
|                                            |  |                   |         
|Total liabilities not subject to compromise |  |                   | 318,678 
|Net intercompany balance                    |  |                   | (592,267
|Liabilities subject to compromise           |  |                   | 312,905 
|Stockholders equity (deficit)              |  |                   | (44,331 
|                                            |  |                   |         
|                                            |  | $                 | (5,015  
|                                            |  |                   |         



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GALEY & LORD, INC.

(DEBTORS-IN-POSSESSION)

Notes to Consolidated
Financial Statements

December 28, 2002

(Unaudited)



NOTE MSupplemental Condensed Consolidating Financial Information (Continued)



|                                       |  | December 29, 2001 |         
|-------------------------------------- |  | ----------------- | --------
|                                       |  | (in thousands)    |         
|Financial Position                     |  | Parent            |         
|Current assets:                        |  |                   |         
|Trade accounts receivable              |  | $                 |        
|Inventories                            |  |                   |        
|Other current assets                   |  |                   | 837     
|                                       |  |                   |         
|Total current assets                   |  |                   | 837     
|Property, plant and equipment, net     |  |                   |        
|Intangibles                            |  |                   |        
|Other assets                           |  |                   | 34,764  
|                                       |  |                   |         
|                                       |  | $                 | 35,601  
|                                       |  |                   |         
|Liabilities not subject to compromise: |  |                   |         
|Current liabilities:                   |  |                   |         
|Trade accounts payable                 |  |                   |        
|Accrued liabilities                    |  |                   | 22,529  
|Other current liabilities              |  |                   | 2,083   
|                                       |  |                   |         
|Total current liabilities              |  |                   | 24,612  
|Net intercompany balance               |  |                   | (577,362
|Long-term debt                         |  |                   | 611,874 
|Other non-current liabilities          |  |                   | (2,792  
|Stockholders equity (deficit)         |  |                   | (20,731 
|                                       |  |                   |         
|                                       |  | $                 | 35,601  
|                                       |  |                   |         



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##### Table of Contents

GALEY & LORD, INC.

(DEBTORS-IN-POSSESSION)

Notes to Consolidated
Financial Statements

December 28, 2002

(Unaudited)



NOTE MSupplemental Condensed Consolidating Financial Information (Continued)



|                                              |  | Three Months Ended December 28, 2002 |       
|--------------------------------------------- |  | ------------------------------------ | ------
|                                              |  | (in thousands)                       |       
|                                              |  | Parent                               |       
|Results of Operations                         |  |                                      |       
|Net sales                                     |  | $                                    |      
|Gross profit                                  |  |                                      |      
|Operating income (loss)                       |  |                                      | (23   
|Reorganization items                          |  |                                      | (3,366
|Interest expense, income taxes and other, net |  |                                      | (8,402
|Net income (loss)                             |  | $                                    | 5,013 
|                                             
|                                              |  | Three Months Ended December 29, 2001 |       
|                                              |  | (in thousands)                       |       
|                                              |  | Parent                               |       
|Results of Operations                         |  |                                      |       
|Net sales                                     |  | $                                    |      
|Gross profit                                  |  |                                      |      
|Operating income (loss)                       |  |                                      | (1,314
|Interest expense, income taxes and other, net |  |                                      | (5,373
|Net income (loss)                             |  | $                                    | 4,059 



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##### Table of Contents

GALEY & LORD, INC.

(DEBTORS-IN-POSSESSION)

Notes to Consolidated
Financial Statements

December 28, 2002

(Unaudited)



NOTE MSupplemental Condensed Consolidating Financial Information (Continued)



|                                                            |  | Three Months Ended December 28, 2002 |       
|----------------------------------------------------------- |  | ------------------------------------ | ------
|                                                            |  | (in thousands)                       |       
|                                                            |  | Parent                               |       
|Cash Flows                                                  |  |                                      |       
|Cash provided by (used in) operating activities             |  | $                                    | 7,084 
|Cash provided by (used in) investing activities             |  |                                      |      
|Cash provided by (used in) financing activities             |  |                                      | (7,077
|Effect of exchange rate change on cash and cash equivalents |  |                                      |      
|                                                            |  |                                      |       
|Net change in cash and cash equivalents                     |  |                                      | 7     
|Cash and cash equivalents at beginning of period            |  |                                      | 15    
|                                                            |  |                                      |       
|Cash and cash equivalents at end of period                  |  | $                                    | 22    
|                                                            |  |                                      |       



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##### Table of Contents

GALEY & LORD, INC.

(DEBTORS-IN-POSSESSION)

Notes to Consolidated
Financial Statements

December 28, 2002

(Unaudited)



NOTE MSupplemental Condensed Consolidating Financial Information (Continued)



|                                                            |  | Three Months Ended December 29, 2001 |       
|----------------------------------------------------------- |  | ------------------------------------ | ------
|                                                            |  | (in thousands)                       |       
|                                                            |  | Parent                               |       
|Cash Flows                                                  |  |                                      |       
|Cash provided by (used in) operating activities             |  | $                                    | 1,434 
|Cash provided by (used in) investing activities             |  |                                      |      
|Cash provided by (used in) financing activities             |  |                                      | (1,435
|Effect of exchange rate change on cash and cash equivalents |  |                                      |      
|                                                            |  |                                      |       
|Net change in cash and cash equivalents                     |  |                                      | (1    
|Cash and cash equivalents at beginning of period            |  |                                      | 5     
|                                                            |  |                                      |       
|Cash and cash equivalents at end of period                  |  | $                                    | 4     
|                                                            |  |                                      |       







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##### Table of Contents



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. For a description of the DIP Financing Agreement, 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



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##### Table of Contents

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 plan.



Performance Incentive PlanThe Debtors are negotiating with their senior lenders
and their unsecured creditors committee 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.



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##### Table of Contents



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 two
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 and December 11, 2002, the Bankruptcy Court extended this deadline up through and including April 16, 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 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. 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



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hereof, the Bankruptcy Court had entered three orders collectively extending the Debtors exclusive
right to file a plan through and including March 31, 2003, and extending the Debtors exclusive right to solicit acceptances of such plan through and including June 2, 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.



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



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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 comply with the DIP Financing Agreement, 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.



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.



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The principal
categories of obligations classified as liabilities subject to compromise under the Chapter 11 Filings as of December 28, 2002 are identified below (in thousands):



|91 / 8 % Senior Subordinated Notes |  | $ | 300,000
|---------------------------------- |  | - | -------
|Interest accrued on above debt     |  |   | 12,775 
|Accounts payable                   |  |   | 11,464 
|Liability for rejected leases      |  |   | 2,165  
|Other accrued expenses             |  |   | 1,625  
|                                   |  |   |        
|                                   |  | $ | 328,029
|                                   |  |   |        



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 $3.4 million associated with the Chapter 11 Filings for the three months ended December 28, 2002. Of these charges, $1.8 million for the three months ended December 28,
2002 were for fees payable to professionals retained to assist with the Chapter 11 Filings and $1.6 million for the three months ended December 28, 2002 were related to incentive and retention programs.



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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 will not be presented as a separate operating segment beginning 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 months ended December 28, 2002 and December 29, 2001 for each segment are shown below:



|                                                                        |  | Three Months Ended     |        
|----------------------------------------------------------------------- |  | ---------------------- | -------
|                                                                        |  | December 28, 2002      |        
|                                                                        |  | (Amounts in thousands) |        
|Net Sales per Segment                                                   |  |                        |        
|Galey & Lord Apparel                                                    |  | $                      | 67,335 
|Swift Denim                                                             |  |                        | 47,426 
|Klopman International                                                   |  |                        | 28,604 
|                                                                        |  |                        |        
|Total                                                                   |  | $                      | 143,365
|                                                                        |  |                        |        
|Operating Income (Loss) per Segment As Reported                         |  |                        |        
|Galey & Lord Apparel                                                    |  | $                      | 1,237  
|Swift Denim                                                             |  |                        | 4,488  
|Klopman International                                                   |  |                        | 1,685  
|Corporate                                                               |  |                        | (123   
|                                                                        |  |                        |        
|                                                                        |  | $                      | 7,287  
|                                                                        |  |                        |        
|Operating Income (Loss) per Segment Excluding Strategic Initiatives (1) |  |                        |        
|Galey & Lord Apparel                                                    |  | $                      | 1,042  
|Swift Denim                                                             |  |                        | 4,885  
|Klopman International                                                   |  |                        | 1,685  
|Corporate                                                               |  |                        | (123   
|                                                                        |  |                        |        
|                                                                        |  | $                      | 7,489  
|                                                                        |  |                        |        



|(1) |  | For a description of the Companys Fiscal 2001 Cost Reduction and Loss Avoidance
Initiatives, see Note J to the Consolidated Financial Statements. For a description of the Companys Fiscal 2000 Strategic Initiatives, see Note K to the Consolidated Financial Statements.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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December
Quarter 2002 Compared to December Quarter 2001



Net
Sales



Net sales for the December quarter
2002 (first quarter of fiscal 2003) were $143.4 million as compared to $136.4 million for the December quarter 2001 (first quarter of fiscal 2002).



Galey & Lord ApparelGaley & Lord Apparels net sales for the December quarter 2002 were $67.3 million, a $4.6
million increase as compared to the December quarter 2001 net sales of $62.7 million. The improvement was due to an increase in fabric sales volume of approximately 11.5% and an improved product mix.



Swift Denim Swift Denims net sales for the
December quarter 2002 were $47.4 million as compared to $44.0 million in the December quarter 2001. The $3.4 million increase was primarily attributable to a 7.6% increase in volume and a 3.3% increase in mix partially offset by a 2.0% decline in
selling prices.



Klopman
International Klopman Internationals net sales for the December quarter 2002 were $28.6 million, a $1.1 million decline as compared to the December quarter 2001 net sales of $29.7 million. The decline was primarily attributable to a
16.3% decrease in sales volume offset by a 11.4% increase in net sales due to exchange rate changes used in translation.



Operating Income (Loss)



Operating income for the December quarter 2002 was $7.3 million as compared to $6.6 million for the December quarter 2001. Excluding the
effect of the Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives and the Fiscal 2000 Strategic Initiatives, the December quarter 2002 operating income would have been $7.5 million. Excluding the effect of the Fiscal 2001 Cost Reduction and
Loss Avoidance Initiatives and the Fiscal 2000 Strategic Initiatives, the December quarter 2001 operating income would have been $8.3 million.



Galey & Lord Apparel Galey & Lord Apparels operating income was $1.2 million for the December quarter 2002 as
compared to $3.1 million operating loss for the December quarter 2001. Excluding the effect of the Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives and the Fiscal 2000 Strategic Initiatives, Galey & Lord Apparels operating income
for the December quarter 2002 would have been $1.0 million. Excluding the effect of the Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives, Galey & Lord Apparels operating loss for the December quarter 2001



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would have been $2.1 million. The increase in operating income is due to lower manufacturing costs and
higher first quality yields, lower raw material prices, increased fabric sales volume, improved product mix and reduced lower-of-cost-or-market adjustment for LIFO inventories. The increase in operating income was partially offset by a reduction in
fabric selling prices.



Swift Denim
Swift Denims operating income was $4.5 million for the December quarter 2002 compared to $10.5 million for the December quarter 2001. Excluding the effect of the Fiscal 2000 Strategic Initiatives, operating income for the December quarter 2002
and December quarter 2001 would have been $4.9 million and $11.2 million, respectively. The decrease in Swift Denims operating income is principally due to Swift recognizing a benefit curtailment gain of $3.4 million in the December quarter of
fiscal 2001 related to the curtailment of postretirement benefits for employees not retired as of December 31, 2001. In addition, in the prior year quarter, Swift recognized a reduction of lower-of-cost-or-market (LCM) reserves due to the change in
method of accounting for inventories to the last-in, first-out (LIFO) inventory method effective September 30, 2001. The remainder of the decrease is primarily due to higher labor costs and the decline in selling prices partially offset by
improvements in sales volume.



Klopman InternationalKlopman Internationals operating income in the December quarter 2002 increased $1.0 million to $1.7 million as compared to the December quarter 2001 operating income of $0.7 million. The
increase is principally due to improved manufacturing variances primarily reflecting lower raw material and supply costs partially offset by the impact of lower sales volume.



Corporate The corporate segment reported an operating loss for the December quarter 2002 of
$0.1 million as compared to an operating loss for the December quarter 2001 of $1.5 million. The corporate segments operating loss typically represents the administrative expenses from the Companys various holding companies, however, the
December quarter 2001 included financial advisor fees of $1.1 million.



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Income from Associated
Companies



Income from associated companies
was $2.5 million in the December quarter 2002 as compared to $2.3 million in the December quarter 2001. The income represents amounts from several joint venture interests that manufacture and sell denim products. The increase in income from
associated companies is due to improved results in the December quarter 2002 over the December quarter 2001 of both the Swift Denim-Hidalgo and Swift Europe joint ventures partially offset by the Companys decreased ownership percentage in its
European joint ventures.



Interest Expense



Interest expense was $5.7 million for the December quarter
2002 compared to $13.2 million for the December quarter 2001. The decrease in interest expense was primarily due to the discontinuation of the 91/8% Senior Subordinated Notes (Subordinated Notes) interest accrual as of the Filing Date and lower prime and LIBOR base rates in the December quarter 2002 as compared to the December quarter
2001. The average interest rate paid by the Company on its bank debt, excluding the Subordinated Notes, in the December quarter 2002 was 5.7% per annum as compared to 6.3% per annum in the December quarter 2001.



Income Taxes



The Companys overall tax rate for the December quarter
2002 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 December quarter 2002
of $0.3 million, inclusive of $3.4 million of reorganization costs, or $.03 per common share compared to a net loss for the December quarter 2001 of $5.2 million or $.44 per common share.



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Order
Backlog



The Companys order backlog
at December 28, 2002 was $75.4 million, a 5.0% increase from the December 29, 2001 backlog of $71.8 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.



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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.



The Company and its subsidiaries had cash and cash equivalents
totaling $46.7 million and $6.5 million at December 28, 2002 and December 29, 2001, 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 December 28, 2002, the Companys borrowing availability under its DIP Financing Agreement was $68.9 million. As of December 28, 2002, the Companys Canadian
operations also had a total of U.S. $8.9 million of revolving credit borrowing availability under the Canadian Loan Agreement (as defined below).



During the December quarter 2002, 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).



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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) 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 September quarter 2002. 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 less than 25% of the total commitment and (ii) .5% 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



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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 December 28, 2002, 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.



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



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$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 $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.



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revolving line of credit by $12.3 million to $187.7 million. The repayment of the Term Loan B and Term
Loan C principal balances ratably reduced the remaining quarterly principal payments. The reduction in the U.S. revolving line of credit facility resulted in a write-off of $0.1 million of deferred debt charges which is included in selling, general
and administrative expenses in the March quarter 2001.



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). (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 91/8% Senior Subordinated Notes Due 2008 (the Notes).
In May 1998, the Notes were exchanged for freely transferable identical Notes registered under the Securities Act of 1933. Net proceeds from the offering of $289.3 million (net of initial purchasers discount and offering expenses), were used
to repay (i) $275.0 million principal amount of bridge financing borrowings incurred to partially finance the acquisition of the apparel fabrics business of Dominion Textile, Inc. on January 29, 1998 and (ii) a portion of the outstanding amount
under a revolving line of credit provided for under the Senior Credit Facility (as defined herein). Interest on the Notes is payable on March 1 and September 1 of each year.



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



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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., had net borrowings of approximately $17.0 million outstanding under various unsecured bank line-of-credit agreements as of December 28, 2002. The average interest rate on these borrowings was 3.8% per annum
during the December quarter 2002 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 December 28, 2002, total unused credit under these
agreements was approximately $35.0 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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Canadian Loan Agreement



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



Under the Canadian Loan Agreement, the revolving line of credit expires in February 2004 and the principal amount of the term loan is repayable in equal monthly installments of $229,500 CDN with the
unpaid balance repayable in February 2004; provided, however, that the revolving line of credit and the maturity of the term loan may be extended at the option of Drummondville for up to two additional one year periods subject to and in accordance
with the terms of the Canadian Loan Agreement. Effective July 24, 2002, the term loan was converted to U.S. dollars payable in equal monthly installments of $150,000 U.S. dollars 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 1.5% (for borrowings in Canadian dollars). Thereafter, borrowings will bear interest at a per annum rate, at Drummondvilles option, of either (i) the U.S.
prime rate plus 0%, .25%, .50%, .75%, or 1.0% (for borrowings in U.S. dollars), (ii) the Canadian prime rate plus .75%, 1.0%, 1.25%, 1.50%, or 1.75% (for borrowings in Canadian dollars), or (iii) LIBOR plus 2.00%, 2.25%, 2.50%, 2.75% or 3.00%, all
based on Drummondville maintaining certain quarterly excess borrowing availability levels under the revolving line of credit or Drummondville achieving certain fixed charge coverage ratio levels (as set forth in the Canadian Loan Agreement).



Drummondvilles obligations under the
Canadian Loan Agreement are secured by all of the assets of Drummondville. The Canadian Loan Agreement contains certain covenants, including without limitation, those limiting Drummondvilles ability to incur indebtedness (other than incurring
or paying certain intercompany indebtedness), incur liens, sell or acquire assets



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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 December 28, 2002, the Company was in compliance with the covenants of the Canadian Loan Agreement.



Tax Matters



At December 28, 2002, the Company had outstanding net
operating loss carryforwards (NOLs) for U.S. federal tax purposes of approximately $158 million and state tax purposes of approximately $170 million. 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 $34.5 million related to domestic and international operating income
losses has been established since it is more likely than not that some portion of the deferred tax asset will not be realized.



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 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, 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 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



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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 $11.7 million for capital expenditures in fiscal 2003, of which $3.3 million was spent in the first three months of fiscal 2003. The Company anticipates that approximately 20% of the
forecasted capital expenditures will be used to increase the Companys capacity while the remaining 80% will be used to maintain existing capacity.



IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS



In July 2002, the Financial Accounting Standards Board (FASB) issued Statement of Accounting Standards No. 146,
Obligations Associated with Disposal Activities (FAS 146), which is effective for disposal activities initiated after December 31, 2002. FAS 146 requires that a liability for a disposal obligation should be recognized and
measured at its fair value when it is incurred. Adopting this standard will not have a material impact on the Companys results of operations or statement of financial position.



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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 (together with the Company, the Debtors) 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 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 $1.3 million of
lower-of-cost-or-market (LCM) reserves were reversed in the quarter ended December 29, 2001 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.



During the first quarter of fiscal 2002, the Company recorded
a LIFO LCM charge of approximately $0.6 million, primarily in its Galey & Lord Apparel business. This LCM charge resulted from LIFO inventories carried at higher costs prevailing in prior



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years compared to current market values, the effect of which increased cost of sales and decreased net
income.



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 book value. To the extent the fair value of any reporting unit is less than its book 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 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. The Company expects to complete the second portion of the transitional test in the second quarter of fiscal 2003, which
could result in an impairment writedown up to the remaining net book value of $111 million. Any impairment writedown resulting from the transitional testing will be reported as a cumulative effect of a change in accounting principle, retroactive to
the first day of fiscal 2003. In future years, an impairment review of Intangible Assets will be conducted at least annually, and any impairment charges that are required to be recorded would be charged to operating income.



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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 December 28, 2002 and December 29, 2001, 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 $10.2 million, respectively, (net of accumulated amortization of $3.0 million and $2.5 million,
respectively, and prior to adoption of FAS 142 on December 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 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 December 28, 2002.



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 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 quarters of fiscal 2003 and 2002, invoices issued under these terms represent 12% and 18% 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.



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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, 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 December 28, 2002, the result of a uniform 10% change in the value of the U.S. dollar relative to currencies of countries in which the Company manufactures or sells
its products would not be material.



Cotton Commodity
Exposures



Purchase contracts are used to
hedge against fluctuations in the price of raw material cotton. Increases or decreases in the market price of cotton may effect the fair value of cotton commodity purchase contracts. A 10% decline in market price as of December 28, 2002 would have a
negative impact of approximately $3.1 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



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Item 3. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK



Derivative
Financial Instruments (Continued)



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.



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 gain was not material for the three months ended December 28, 2002 and is included in selling, general and administrative expenses in the consolidated statement of operations.



At December 28, 2002, the Company expects to
reclassify approximately $252,000 of pre-tax gains on derivative instruments from accumulated other comprehensive income to earnings over the next three months. This reclassification will be made when the forecasted transactions occur.



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Item 3. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK



Derivative
Financial Instruments (Continued)



Fair
Value Hedging Strategy



The Company also
maintains foreign currency forward contracts to hedge receivables and payables denominated in foreign currencies. These contracts are designated as fair value hedges. The gain or loss resulting from hedge ineffectiveness for these contracts is
attributable to the difference in spot exchange rates and forward contract rates.



The Company did not have any foreign currency forward contracts outstanding in the December quarter of fiscal 2003.



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Item 4. CONTROLS AND PROCEDURES



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
(as defined in Rules  13a-14 and 15d-14 of the Securities Exchange Act of 1934, as amended (Exchange Act)) 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
December 28, 2002.



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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 91/8% Senior Subordinated Notes and the Indenture related thereto, and the Companys South Carolina Job and Economic Development Authority Bonds (JEDA Bonds). At December 28, 2002,
principal in the amount of $300 million and $4.8 million is in default in relation to the 91/8% Senior
Subordinated Notes and the JEDA Bonds, respectively. The payment of interest accruing under the 91/8% Senior
Subordinated Notes and the JEDA Bonds after February 19, 2002 is stayed in connection with the Chapter 11 Filings. At December 28, 2002, $12.8 million of accrued interest expense related to the 91/8% 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 $23.7 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



(b) Reports on Form 8-KNone



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EXHIBIT INDEX



|Exhibit Number |  | Description                                                                                                                                      |  | Sequential Page No.
|-------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------ |  | -------------------
|              
|10.82          |  | Second Amendment to the Retirement Plan for Employees of Galey & Lord, Inc., as Amended and
Restated.                                            |  |                    
|              
|10.83          |  | Third Amendment to the Galey & Lord Retirement Savings Plan (401(k)), as Amended and Restated.                                                   |  |                    
|              
|99.1           |  | 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.  |  |                    
|              
|99.2           |  | 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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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. Ferro Vice President




|                 
|-----------------
|February 11, 2003
|Date             



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CERTIFICATIONS



I,
Arthur C. Wiener, certify that:



| | 1.) |  | I have reviewed this quarterly report on Form 10-Q of Galey & Lord, Inc.;
| | --- |  | -------------------------------------------------------------------------



| | 2.) |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3.) |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4.) |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-14 and 15d-14) for the registrant and we have:
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | Evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly
report (the Evaluation Date); and
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c) |  | Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluations as of the Evaluation
Date;
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 5.) |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee
of registrants board of directors (or persons performing the equivalent functions):
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | All significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process,
summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



| | 6.) |  | The registrants other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|February 11, 2003 |  |  |  | /s/ Arthur C. Wiener                                
|----------------- |  |  |  | ----------------------------------------------------
|Date              |  |  |  | Arthur C. Wiener Chairman of the Board and President





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CERTIFICATIONS



I, Leonard F. Ferro, certify that:



| | 1.) |  | I have reviewed this quarterly report on Form 10-Q of Galey & Lord, Inc.;
| | --- |  | -------------------------------------------------------------------------



| | 2.) |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3.) |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4.) |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-14 and 15d-14) for the registrant and we have:
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a. |  | Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. |  | Evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly
report (the Evaluation Date); and
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c. |  | Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluations as of the Evaluation
Date;
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 5.) |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee
of registrants board of directors (or persons performing the equivalent functions):
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a. |  | All significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process,
summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. |  | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



| | 6.) |  | The registrants other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|February 11, 2003 |  |  |  | /s/ Leonard F. Ferro                                        
|----------------- |  |  |  | ------------------------------------------------------------
|Date              |  |  |  | Leonard F. Ferro Vice President and Chief Accounting Officer



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