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                                    FORM 10-K


                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                  Annual Report Pursuant to Section 13 or 15(d)
                     of The Securities Exchange Act of 1934

FOR THE FISCAL YEAR ENDED JANUARY 3, 1998             COMMISSION FILE NO. 1-9196

                          THE LESLIE FAY COMPANY, INC.


           DELAWARE                                              13-3197085
(STATE OR OTHER JURISDICTION OF                               (I.R.S. EMPLOYER
 INCORPORATION OR ORGANIZATION)                              IDENTIFICATION NO.)

            1412 BROADWAY
          NEW YORK, NEW YORK                                       10018
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                         (ZIP CODE)

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 221-4000

              SECURITIES REGISTERED UNDER SECTION 12(B) OF THE ACT:

                                      None

              SECURITIES REGISTERED UNDER SECTION 12(G) OF THE ACT:

                           Common Stock, .01 par value

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 during the
preceding 12 months and (2) has been subject to such filing requirements for the
past 90 days.  Yes [X] No [_]

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation S-K is not contained herein. [_]

The  aggregate  market  value of the voting  stock (based on the average bid and
asked prices of such stock) held by  non-affiliates  of the  registrant at March
27, 1998 was approximately $31,800,000.

There were 3,400,000 shares of Common Stock outstanding at March 27, 1998.

                       DOCUMENTS INCORPORATED BY REFERENCE
                       -----------------------------------

                                      None

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                                     PART I

ITEM 1.  BUSINESS.
-------  ---------

           The Company is engaged  principally in the design,  arranging for the
manufacture and sale of diversified  lines of moderately  priced women's dresses
and sportswear.  The Company's products focus on career clothing,  cover a broad
retail  price range and offer the consumer a wide  selection of styles,  fabrics
and colors  suitable for  different  ages,  sizes and fashion  preferences.  The
Company believes that it is among the major producers of moderate-price  dresses
and  sportswear,  and  that  it is  considered  one of the  major  resources  to
retailers  of such  products.  The Leslie Fay  business  has been in  continuous
operation as an apparel company since 1947.

           The  Company's  business  is  seasonal  in nature,  with sales  being
greatest in the first and third quarters.  Accordingly,  the inventory  purchase
levels are highest during the second and fourth quarters.

REORGANIZATION UNDER CHAPTER 11

           On April 5, 1993 (the "Filing Date"), The Leslie Fay Companies,  Inc.
("Leslie Fay") and certain of its wholly-owned subsidiaries  (collectively,  the
"Debtors")  filed a voluntary  petition under chapter 11 of the Bankruptcy  Code
(the  "Bankruptcy  Code").  On November 15,  1995,  certain  other  wholly-owned
subsidiaries of Leslie Fay (collectively,  the "Retail Debtors") filed voluntary
petitions under chapter 11 of the Bankruptcy Code. From their respective  filing
dates  until June 4,  1997,  the  Debtors  and the Retail  Debtors  operated  or
liquidated their businesses,  as applicable, as debtors in possession subject to
the jurisdiction  and supervision of the United States  Bankruptcy Court for the
Southern District of New York (the "Bankruptcy Court").

           On October  31,  1995,  the Debtors and the  Committee  of  Unsecured
Creditors (the "Creditors  Committee") filed a Joint Plan of Reorganization  (as
subsequently amended, the "Plan") pursuant to chapter 11 of the Bankruptcy Code.
On December 5, 1996,  the Debtors  filed a Disclosure  Statement for the Amended
Joint Plan of  Reorganization  pursuant to chapter 11 of the Bankruptcy Code (as
subsequently  amended,  the  "Disclosure   Statement").   The  Debtors  obtained
Bankruptcy Court approval of the Disclosure  Statement on February 28, 1997. The
Plan  was  approved  by the  Debtors'  creditors,  and on  April  21,  1997  the
Bankruptcy Court confirmed the Plan.

           On June 4, 1997 (the  "Consummation  Date"), the Plan was consummated
by the Company by 1)  transferring  the equity  interest in both the Company and
Sassco  Fashions,  ltd.  ("Sassco"),  which has since changed its name to Kasper
A.S.L.,  Ltd., to its creditors in exchange for relief from an aggregate  amount
of claims  estimated at  $338,000,000;  2) assigning  to certain  creditors  the
ownership rights to notes  aggregating  $110,000,000  payable by Sassco;  and 3)
transferring the assets and liabilities of the Company's Sassco Fashions product
line (as more  particularly  described  below)  to  Sassco  and the  assets  and
liabilities  of its Dress and  Sportswear  product  lines to three  wholly-owned
subsidiaries of the Company. The Company retained  approximately  $41,080,000 in
cash, of

                                       -2-

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which  $23,580,000  has  been or will be used to pay  administrative  claims  as
defined in the Plan.  The assets and  liabilities  of the Sassco  Fashions  line
transferred  to  Sassco  included  cash  ($10,963,000),   accounts   receivable,
inventory, property, plant and equipment, other assets (including the trade name
Albert Nipon), accounts payable,  accrued expenses and other liabilities related
to the Sassco Fashions line. In addition,  the Company transferred to Sassco its
100% equity interest in several subsidiaries associated with the Sassco Fashions
line.  As  provided  in the  Plan,  the  creditors  of the  Company  became  the
stockholders of Sassco and of the reorganized  Company.  To effectuate this, the
Company  issued  approximately  seventy-nine  (79%) percent of its 3,400,000 new
shares of Common Stock to its creditors in July 1997.  The remaining  twenty-one
(21%)  percent  is being  held for the  benefit  of its  creditors  pending  the
resolution  of certain  litigation  before the  Bankruptcy  Court.  The existing
stockholders  of the Company at June 4, 1997 did not retain or receive any value
for their equity interest in the Company, which was canceled.

           The gain on the  disposition  of the  assets and  liabilities  of the
Sassco Fashions product line is a taxable event and a substantial portion of the
net operating  loss  carryforward  available to the Company at December 28, 1996
was utilized to offset a  significant  portion of the taxes  recognized  on this
transaction.

PRODUCTS

           During  1997,  1996 and 1995,  respectively,  dresses  accounted  for
approximately  57%, 43% and 41% of the  Company's  net sales  (exclusive  of the
Sassco  Fashions and  Castleberry  product  lines and other lines sold or closed
during such years [the "Sold Product Lines"]); and sportswear accounted for 43%,
57% and 59%,  respectively.  During  1998,  dresses are  expected to account for
approximately  63% of total  sales with  sportswear  expected to account for the
remaining 37%.

           DRESS PRODUCT  LINE.  This line sells  moderately  priced one and two
piece dresses,  pant dresses and pant dresses with coordinated jackets under the
"Leslie  Fay",  "Leslie Fay Petite",  "Leslie Fay Women" and "Leslie Fay Women's
Petites"  labels.  The line's  products are offered in petite,  misses and large
sizes.

           SPORTSWEAR   PRODUCT  LINE.  This  line  markets   moderately  priced
coordinated  sportswear and related separates under the "Leslie Fay Sportswear",
"Leslie Fay Sportswear Petite",  "Leslie Fay Sportswear Woman" and "Joan Leslie"
labels. The line's products include skirts, blouses, sweaters, pants and jackets
which  are  related  in  color  and  material  and  are  intended  to be sold as
coordinated outfits. The line's products are offered in petite, misses and large
sizes. This line also offered contemporary knitted sportswear, including knitted
separates  and dresses under the  "Outlander",  "Outlander  Studio",  "Outlander
Petite" and "Outlander Woman" labels,  styled to appeal to women of a wide range
of ages and  available  in misses,  petite and large  sizes.  These  labels were
discontinued in the Fall of 1997.

           For the  Spring of 1998,  the  Company  is  introducing  a new label:
Haberdashery, which represents a ready-to-wear sportswear product line.


                                       -3-

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DESIGN

           The styles that are produced  under the names used by the Company are
created by the Company's fashion designers or stylists.  The Company has its own
designers and in some instances  utilizes  separate  design staffs for different
products  within a particular  line. The design staff of a line meets  regularly
with representatives of the line's merchandising,  production and sales staff to
review the status of each  collection  and to discuss  adjustments  which may be
necessary in line composition, fabric selection, construction and product mix.

           The Company's Dress and Sportswear product lines generally offer four
or five  seasonal  lines:  Spring,  Summer,  Fall I, Fall II and Holiday.  These
seasonal  lines are  typically  offered  by the  Company  in ten to twelve  week
selling periods.

TRADEMARKS AND LICENSES

           The labels  used by the  Company are  registered  trademarks,  all of
which are owned by the Company. The Company considers its trademarks and license
agreements  to have  significant  value in the  marketing of its  products.  The
Company has licensed  certain of its names and  trademarks to various  companies
for their use in  connection  with the  manufacture  and  distribution  of their
respective products.

MARKETS AND DISTRIBUTION

           The  Company's   products  were  sold  during  1997   principally  to
department and specialty stores located throughout the United States.  Excluding
the sales of the Sold Product  Lines,  during 1997,  1996 and 1995 the Company's
Dress and Sportswear  lines' products were sold to 788, 857 and 1,785 customers,
respectively. Management believes that the decline in the number of customers is
primarily attributable to the Company's chapter 11 filing.  Dillard's Department
Stores, Inc. accounted for 33%, 35% and 24% and JC Penney accounted for 12%, 19%
and 28% of the  Company's  dress and  sportswear  sales  during  the  respective
periods.  No other customer  accounted for as much as 10% of the Company's dress
and  sportswear  sales during these three years.  The Company  believes that the
loss of  Dillard's  Department  Stores,  Inc. or JC Penney would have a material
adverse effect on its operations.

           Each line maintains its own employee and  commission  sales force and
exhibits its products in its principal  showroom in New York City and additional
showrooms in Dallas,  Texas and Atlanta,  Georgia. The Sportswear line currently
has an employee sales force consisting of 3 persons in Dallas and 5 in New York.
The Dress line has 8 salespeople, all based in New York. For further discussion,
see "Properties" below. While in some instances the Company's lines compete with
each other, as a practical  matter,  such  competition is limited because of the
differences in products, price points and market segments.



                                       -4-

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           To most effectively reach its ultimate consumers, the Company assists
retailers in  merchandising  and marketing the Company's  products.  The Company
promotes  its  products  through  special  in-store  events,  as well as through
various sales, promotions and cooperative advertising.

           The  Company's   products  are  sold  under  brand  names  which  are
advertised and promoted in national magazines and trade publications.

MANUFACTURING

           Apparel  sold by the  Company  is  produced  in  accordance  with its
designs,  specifications and production schedules. Almost all of such apparel is
produced by a large number of independent  contractors located  domestically and
abroad.  In  1997,  excluding  the Sold  Product  Lines,  products  representing
approximately  84% of dress  and  sportswear  sales  were  produced  abroad  and
imported into the United States from the Caribbean  Basin countries of Guatemala
and El Salvador and selected contractors in the Far Eastern countries of Taiwan,
South Korea and the People's Republic of China, including Hong Kong.

           In 1997,  three  operating  subsidiaries  of Cambridge Corp. and LVTS
Sportswear of Canada  manufactured 45.0% and 10.1%,  respectively,  of the Dress
and Sportswear product lines' total production. The Company historically has had
satisfactory, long-standing relationships with most of its contractors. In 1997,
none of the Company's domestic contracted production was produced by contractors
who work exclusively for the Company.  The Company  monitors  production at each
contractor's  facility,  in the United  States  and  abroad,  to ensure  quality
control,  compliance with its specifications and fair labor standards and timely
delivery of finished goods to the Company's  distribution  centers.  The Company
believes  it will be able to  obtain  the  services  of a  sufficient  number of
independent  suppliers  to  produce  quality  products  in  conformity  with its
requirements.

           The Company  manufactures  in  accordance  with plans  prepared  each
season which are based primarily on projected orders,  and to a lesser extent on
current  orders and  consultations  with  customers.  These plans also take into
account  current fashion trends and economic  conditions.  The average lead time
from the  commitment of piece goods through the production and shipping of goods
ranges from two to four months for domestic  products and four to six months for
imported  products.  These lead times impose substantial time constraints on the
Company  in that  they  require  production  planning  and  other  manufacturing
decisions and piece good commitments to be made  substantially in advance of the
receipt of orders from customers for the bulk of the items to be produced.

           Historically,  the purchase of raw materials has been  controlled and
coordinated  by a  centralized  purchasing  function  which  consults  with line
management  over most aspects of their  product  production,  manufacturing  and
purchasing  functions.  The Company  supplies the raw  materials to its domestic
contractors and certain of its foreign contractors. Otherwise, the raw materials
are  purchased  directly by the  contractors  in  accordance  with the Company's
specifications.  Raw materials,  which are in most instances made and/or colored
especially for the Company,  consist principally of piece goods and yarn and are
purchased by the Company from a number of domestic


                                       -5-

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and foreign textile mills and  converters.  The Company does not have long-term,
formal  arrangements  with any of its suppliers of raw  materials.  The Company,
however,  has  experienced  little  difficulty  in  satisfying  its raw material
requirements and considers its sources of supply adequate.

IMPORTS AND IMPORT RESTRICTIONS

           The Company's import operations are subject to constraints imposed by
bilateral textile  agreements  between the United States and a number of foreign
countries, including Taiwan, China (including Hong Kong), South Korea, Guatemala
and El Salvador (the principal  countries from which the Company imports goods).
These  agreements  impose  quotas on the amount  and type of goods  which can be
imported into the United States from these countries.  In addition,  each of the
countries in which the  Company's  products  are sold have laws and  regulations
regarding import  restrictions  and quotas.  Because the United States and other
countries in which the Company's  products are  manufactured  and sold may, from
time to time,  impose new quotas,  duties,  tariffs,  surcharges or other import
controls or restrictions,  or adjust presently  prevailing quota  allocations or
duty or tariff  rates or levels,  the Company  intensively  monitors  import and
quota-related  developments.  The  Company  continually  seeks to  minimize  its
potential  exposure to import and  quota-related  risks  through  allocation  of
production to merchandise  categories  that are not subject to quota  pressures,
adjustments  in  product  design and  fabrication,  shifts of  production  among
countries  and  manufacturers,  geographical  diversification  of its sources of
supply and other  measures.  The United  States may enter into  bilateral  trade
agreements with additional countries and may, in the future, include other types
of garments in existing agreements.

           Imports are also affected by the high cost of transportation into the
United States and by the increased competition resulting from greater production
demands abroad.

           The Company's  imported products are subject to United States Customs
duties and, in the ordinary course of its business,  the Company is from time to
time subject to claims by the United States Customs Service for duties and other
charges.

           The  Company  currently  imports a  substantial  majority  of its raw
materials,  primarily  fabric,  through two Korean  based  agents.  These agents
secure the manufacture of these raw materials from a number of factories  (about
10) located  throughout the Far East. The Company's senior management also meets
with these  manufacturers  prior to placing raw material  orders with them.  The
Company  believes its primary risk is the timely receipt of its raw materials to
allow the timely  manufacture and shipment of its finished product.  Through the
present time, the Company has received its raw materials in a timely manner. The
Company monitors the status of its orders through its Korean agents continually.
Payment for the raw  materials  is  guaranteed  through  letters of credit which
require,  among  other  items,  timely  delivery  and  satisfaction  of  quality
standards.

           The Company does not "hedge" its foreign  purchases as all  contracts
are quoted in United States Dollars.  The typical  contract may extend for sixty
days. Prices are re-negotiated with each new contract.


                                       -6-

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           The Company does not sell its product in the Far East.

           In addition to the  factors  outlined  above,  the  Company's  future
import  operations  may  be  adversely   affected  by:  political  or  financial
instability  resulting  in the  disruption  or  delay of  trade  from  exporting
countries;  the  imposition  of additional  regulations  relating to, or duties,
taxes and other charges on, imports; any significant fluctuation in the value of
the dollar  against  foreign  currencies;  and  restrictions  on the transfer of
funds.

BACKLOG

           At March 17, 1998, the Company had unfilled  orders of  approximately
$30,530,000, compared to approximately $23,446,000 of such orders for comparable
continuing  businesses  at a  comparable  date in 1997.  The amount of  unfilled
orders at a particular  time is affected by a number of factors,  including  the
scheduling  of the  manufacture  and  shipment  of the  product,  which  in some
instances is dependent on the desires of the customer. Accordingly, a comparison
of unfilled orders from period to period is not  necessarily  meaningful and may
not be indicative of eventual actual shipments.

CREDIT AND COLLECTION

           Historically, the Company had managed substantially all of its credit
and  collection  functions  internally.  In connection  therewith,  it regularly
evaluated,  approved and monitored the credit of the Company's customers and was
responsible  for  collection of accounts  receivable.  In June 1997, the Company
entered an agreement  with the CIT  Group/Commercial  Services,  Inc.  (the "CIT
Factoring  Agreement") to approve  credit and act as a collection  agent for the
Company.

COMPETITION

           The sectors of the apparel  industry  for which the Company  designs,
manufactures and markets products are highly  competitive.  The Company competes
with many other  manufacturers,  including  manufacturers of one or more apparel
items.  In addition,  department  stores,  including some of the Company's major
customers,  have  from time to time  varied  the  amount  of goods  manufactured
specifically  for them and sold under  their own  labels.  Many such stores have
also changed their manner of  presentation  of  merchandise  and in recent years
have become  increasingly  promotional.  Some of the Company's  competitors  are
larger and have greater resources than the Company.  Based upon its knowledge of
the industry,  the Company  believes  that it is a leading  producer of moderate
dresses in the United States,  among the more significant  producers of moderate
sportswear, and that it is considered one of the major resources of retailers of
such products.  The Company's business is dependent upon its ability to evaluate
and respond to changing consumer demand and tastes and to remain  competitive in
the areas of style,  quality and price,  while operating  within the significant
domestic and foreign production and delivery constraints of the industry.



                                      -7-

<PAGE>



EMPLOYEES

           At  March  17,  1998,  the  Company  employed  343  persons,  of whom
approximately 28% were in production,  36% in distribution,  8% in merchandising
and design,  6% in sales and 22% in  administrative  and  financial  operations.
Approximately 39% of the Company's  employees were members of unions,  primarily
the Union of  Needletrades,  Industrial  and Textile  Employees  ("UNITE"),  the
successor to the  International  Ladies' Garment Workers Union. On June 2, 1997,
the Company and UNITE reached an agreement on a four-year collective  bargaining
agreement,  terminating  on May 31, 2001  covering  non-supervisory  production,
maintenance,  packing and  shipping  employees.  The Company  believes  that its
relationship with its employees is satisfactory.

ITEM 2.  PROPERTIES.
-------  -----------

           Executive  and  sales  offices,  as well as  design  facilities,  are
located in New York City under a lease  expiring in 2002 (40,660  square  feet).
The Company  also leases a sales  office and  showroom in Dallas,  Texas  (3,900
square feet) and a showroom in Atlanta,  Georgia (737 square feet). In addition,
the  Company  operates  two small  manufacturing  facilities  - one  located  in
Pittston, Pennsylvania and owned by the Company (11,368 square feet) and another
leased by the Company in Guatemala (5,202 square feet). Furthermore, the Company
leases a major  distribution  center of approximately  194,685 square feet and a
storage facility of 6,160 square feet in Laflin, Pennsylvania.

           All of the Company's  facilities are in good  condition.  None of the
Company's  principal  facilities are idle. The machinery and equipment contained
in the Company's facilities is modern and efficient.

ITEM 3.  LEGAL PROCEEDINGS.
-------  ------------------

           As discussed above, the Company and several of its subsidiaries filed
voluntary  petitions in the Bankruptcy  Court under chapter 11 of the Bankruptcy
Code. All civil litigation  commenced against the Company and those subsidiaries
prior to that date was stayed under the Bankruptcy Code. By an order dated April
21, 1997 (the  "Confirmation  Order"),  the Bankruptcy Court confirmed the Plan.
The Plan was consummated on June 4, 1997. Certain alleged creditors who asserted
age and other  discrimination  claims  against the Company and whose claims were
expunged  (the  "Claimants")  pursuant  to an Order of a  Bankruptcy  Court (see
below) appealed the  Confirmation  Order to the United States District Court for
the Southern  District of New York. The Company moved to dismiss the appeal from
the Confirmation  Order and the motion was granted and the appeal was dismissed.
An appeal to the United States Court of Appeals for the Second  Circuit from the
Order  dismissing the appeal taken by the Claimants  subsequently was withdrawn,
without prejudice,  and may be refiled in the future. In addition, the Claimants
and two other persons commenced an adversary  proceeding in the Bankruptcy Court
to revoke the Confirmation Order. The Company has moved to dismiss the adversary
proceeding  to revoke  the  Confirmation  Order and that  motion  has been fully
briefed, but has not yet been argued to the Bankruptcy Court.


                                       -8-

<PAGE>



           Both  prior to and  subsequent  to the  Filing  Date,  various  class
actions were commenced on behalf of persons who were stockholders of the Company
prior to April 5, 1993.  Any claims  against  the  Company  arising out of these
suits were discharged as part of, and in accordance with the terms of the Plan.

           The Claimants,  who are former  employees of the Company and who were
discharged  prior to the filing of the chapter 11 cases,  asserted age and other
discrimination  claims,  including punitive damage claims against the Company in
the approximate  aggregate sum of $80 million.  Following a trial on the merits,
the Bankruptcy Court expunged and dismissed those claims in their entirety.  The
Claimants  have appealed that decision to the United States  District  Court for
the Southern  District of New York, the appeal has been fully briefed and argued
and the parties are awaiting a decision.

           Several former employees, who are included among the Claimants in the
above-described  pending appeal,  have commenced an action  alleging  employment
discrimination  against  certain former officers and directors of the Company in
the United  States  District  Court for the Southern  District of New York.  The
Court has dismissed all of the causes of action  arising under federal and state
statutes,  and the only  remaining  claims are those  arising under the New York
City Human  Rights Law.  Discovery  is complete  and a pre-trial  order has been
filed.

           In  November  1992,  a class  action  entitled  "Stephen  Warshaw and
Phillis Warshaw v. The Leslie Fay Companies, Inc., et al." was instituted in the
United States  District Court for the Southern  District of New York. In January
1993 and February 1993, the plaintiffs served amended  complaints and thereafter
twelve other similar actions were commenced against the Company,  certain of its
officers and directors and its then  auditors,  BDO Seidman.  The  complaints in
these cases,  which  purported  to be on behalf of all persons who  purchased or
acquired  stock of the Company  during the period  from  February 4, 1992 to and
including  February 1, 1993,  alleged  that the  defendants  knew or should have
known  material  facts  relating to the sales and earnings  which they failed to
disclose and that if these facts had been  disclosed,  they would have  affected
the price at which the Company's  common stock was traded. A pre-trial order was
entered  which had the effect of  consolidating  all of these  actions  and,  in
accordance  therewith,  the plaintiffs served the defendants with a consolidated
class action complaint  which,  because of the chapter 11 filing by the Company,
did not name the  Company as a  defendant.  In March  1994,  plaintiffs  filed a
consolidated  and amended class action  complaint.  This complaint added certain
additional parties as defendants,  including Odyssey Partners, L.P. ("Odyssey"),
and expanded  the  purported  class period from March 28, 1991 to and  including
April 5, 1993.  In March  1995,  BDO  Seidman  filed an answer and  cross-claims
against certain of the officers and directors of the Company previously named in
this action and filed  third-party  complaints  against  Odyssey,  certain  then
current and former executives of the Company and certain then current and former
directors of the Company.  These cross-claims and third-party complaints alleged
that the Company's  senior  management  and certain of its directors  engaged in
fraudulent   conduct  and  negligent   misrepresentation.   BDO  Seidman  sought
contribution  from  certain  of the  defendants  and  each  of  the  third-party
defendants if it were found liable in the class action,  as well as damages.  On
March 7, 1997, a  stipulation  and  agreement  was signed  pursuant to which all
parties agreed to settle the above described  litigation for an aggregate sum of
$34,700,000. The officers' and directors' share


                                       -9-

<PAGE>



of  the  settlement  was  covered  by the  Company's  officers'  and  directors'
liability insurance.  The settlement specifically provided that the officers and
directors  deny any  liability  to the  plaintiffs  and have  entered  in to the
settlement solely to avoid substantial  expense and inconvenience of litigation.
The  Company  had no  obligations  under this  settlement.  The  District  Court
approved this settlement and signed the final order of dismissal on May 8, 1997.
The settlement has been fully consummated.

           The Company is also involved in the following  legal  proceedings  of
significance:

           In February 1993, the Securities and Exchange  Commission obtained an
order directing a private investigation of the Company in connection with, among
other  things,  the filing by the Company of annual and other  reports  that may
have  contained  misstatements,  and the  purported  failure  of the  Company to
maintain books and records that accurately reflected its financial condition and
operating results. The Company is cooperating in this investigation.

           In February 1993, the United States  Attorney for the Middle District
of Pennsylvania issued a Grand Jury Subpoena seeking the production of documents
as a result of the Company's announcement of accounting irregularities. In 1994,
Donald F. Kenia,  former  Controller  of the Company,  was indicted by a federal
grand jury in the Middle  District of  Pennsylvania  and  pleaded  guilty to the
crime of securities fraud in connection with the accounting  irregularities.  On
or about October 29, 1996,  Paul F.  Polishan,  former Senior Vice President and
Chief Financial  Officer of the Company,  was indicted by the federal grand jury
in the Middle  District of Pennsylvania  for actions  relating to the accounting
irregularities.  The  trial of the case  against  Paul F.  Polishan  has not yet
occurred.

           In March 1993, a  stockholder  derivative  action  entitled  "Isidore
Langer,  derivatively  on behalf of The Leslie Fay  Companies,  Inc.  v. John J.
Pomerantz et al." was  instituted in the Supreme Court of the State of New York,
County of New York,  against  certain  officers and directors of the Company and
its then  auditors.  This complaint  alleges that the defendants  knew or should
have known  material  facts  relating  to the sales and  earnings of the Company
which they failed to disclose.  The time to answer, move or otherwise respond to
the complaint has not yet expired.  The plaintiff seeks an unspecified amount of
monetary  damages,  together  with  interest  thereon,  and costs  and  expenses
incurred in the action,  including reasonable  attorneys' and experts' fees. The
Company cannot presently determine the ultimate outcome of this litigation,  but
believes  that it  should  not  have any  unfavorable  impact  on its  financial
statements.  Pursuant to the Plan, a Derivative Action Board, comprised of three
persons or entities  nominated by the Creditors'  Committee and appointed by the
Bankruptcy Court, shall determine whether to prosecute, compromise and settle or
discontinue the derivative action.

           On February 23, 1996,  Albert Nipon and American Pop Marketing Group,
Inc.  commenced an action  against the Company in the United  States  Bankruptcy
Court,  Southern  District  of New York,  seeking,  inter  alia,  a  declaratory
judgment with respect to the use of the Company's  "Albert Nipon"  trademark and
tradename.  The Company has asserted counter claims. Upon a record of stipulated
facts and  submissions of memorandum of law, an oral argument on this matter was
heard

                                      -10-

<PAGE>



on May 9, 1997.  On December 23,  1997,  the Court ruled in favor of the Company
finding the  plaintiffs  in  violation  of the  Federal  and New York  trademark
statutes  and of unfair  competition  under  common  law.  The  plaintiffs  have
appealed and the Company has cross-appealed to recover its costs and expenses in
the litigation.


ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
-------  ----------------------------------------------------

           None.











                                      -11-

<PAGE>



                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
-------  ----------------------------------------------------------------------

           The Common  Stock of the  Company  is traded on the  over-the-counter
market bulletin board under the symbol "LFAY". The high bid and low asked prices
on the  bulletin  board  for each  quarter  during  1996,  1997 and 1998 were as
follows:

                 Period                                 High          Low

           1996  First Quarter                       $  0.28         $0.06
                 Second Quarter                         0.34          0.09
                 Third Quarter                          0.23          0.05
                 Fourth Quarter                         0.19          0.02

           1997  First Quarter                       $  0.12         $0.01
                 Second Quarter                         0.10          0.02(a)
                   (prior to June 4, 1997)
                 Second Quarter                         9.50          7.38
                   (June 4, 1997 and subsequent)
                 Third Quarter                         16.13          6.25
                 Fourth Quarter                        17.75         12.00

           1998  First Quarter                        15.75          12.00
                   (through March 27, 1998)

--------------------
(a) The old common stock was canceled on June 4, 1997 and the then  stockholders
of the Company did not retain any value for their equity.

           On March 27, 1998,  the high bid and low asked prices were $15.25 and
$14.50,  respectively.  Potential  investors are  encouraged  to obtain  current
trading  information.  As of March 31, there were 1,621 holders of record of the
Common Stock of the Company.





                                      -12-

<PAGE>



ITEM 6.  SELECTED FINANCIAL DATA.
-------  ------------------------

           The following  selected  financial data of the Company should be read
in  conjunction  with the  Consolidated  Financial  Statements and related Notes
appearing elsewhere in this Form 10-K.

<TABLE>
<CAPTION>
                                                            |
                                Reorganized Company         |                         Predecessor Company
                      --------------------------------------|-------------------------------------------------------------------
                       Pro Forma                            | Twenty-Two
                      Fifty-Three   Thirty-One              |    Weeks
                      Weeks Ended  Weeks Ended              |    Ended                     For the Years Ended
                      January 3,    January 3,   Pro Forma  |   June 4,     ----------------------------------------------------
                        1998(a)       1998(b)      1996(a)  |   1997(c)        1996          1995           1994          1993
                      ---------     ---------     --------- |  ---------    ---------     ---------      ---------     ---------
                     (unaudited)   (unaudited)   (unaudited)|                         
                                                            |(In thousands, except per share)
<S>                   <C>           <C>           <C>          <C>          <C>           <C>            <C>           <C>      
Net Sales ............$ 132,160     $  73,091     $ 110,053 |  $ 197,984    $ 429,676     $ 442,084      $ 531,843     $ 661,779
                                                            |                                                            
Operating Income                                            |                                                            
  (Loss) .............   11,782         4,322         4,079 |     14,355       17,965         1,235        (27,278)      (32,574)
                                                            |                                                            
Reorganization Costs .     --            --            --   |      3,379(d)     5,144(d)     16,575(d)     115,769(d)     45,139(d)
Interest Expense and                                        |                                                            
  Financing Costs ....    1,113           336         2,298 |      1,372        3,932(e)      3,262(e)       5,512(e)     25,783
Tax Provision                                               |                                          
  (Benefit)               2,684           677           130 |        451         (839)(f)      (761)(f)        981(f)     (8,258)(g)
                                                            |                                                            
Other Non-Recurring                                         |                                                            
  Items ..............     --            --            --   |    136,341(h)       --            --             --            --
                                                            |                                                            
Net Income (Loss) ....$   7,985     $   3,309     $   1,651 |  $ 145,494    $   9,728     $ (17,841)     $(149,540)    $ (95,238)
                                                            |                                                            
Net Income (Loss) per                                       |
  Share - Basic ......$    2.35(i)  $    0.97(i)       --(i)|        --(i)  $    0.52(i)  $   (0.95)(i)  $   (7.97)(i) $   (5.07)(i)
                                                            |                                                             

                        As of                                    As of        As of         As of          As of         As of
                      01/03/98                                 06/04/97     12/28/96      12/30/95       12/31/94      01/01/94
                      ---------                                ---------    ---------     ---------      ---------     ---------
Total Assets .........$  61,051                                $  77,789    $ 237,661     $ 245,980      $ 281,634     $ 421,341

Assets of Product
   Lines Held for 
   Sale and
   Disposition........     --                                       --          3,003(j)        326(j)      21,063(j)       --

Long-Term Debt              
  (Including Capital
  Lease)..............       49                                      108          --           --              --          8,022(k)
</TABLE>



                                      -13-

<PAGE>



NOTES TO SELECTED FINANCIAL DATA
--------------------------------

        (a)     The unaudited  proforma  adjustments  to the  statements  are as
                follows:

                Disposition of Sassco:
                        The operating  results of the Sassco  Fashions line have
                been  eliminated  to give  effect to the  disposition  as of the
                beginning  of  the  period  presented,   including  depreciation
                expense  on its  property,  plant and  equipment,  an  allocated
                corporate charge based on workload by department  related to the
                Sassco   Fashions  line  and  direct  charges   associated  with
                financing  fees on its factoring  agreement and fees incurred on
                letters of credit  issued on its behalf.  For periods  including
                June 4, 1997, the gain recorded on the disposition of the Sassco
                Fashions line has been reversed.

                Disposition of Castleberry:
                        The operating  results of the Castleberry line have been
                eliminated to give effect to the disposition as of the beginning
                of the period presented,  including  depreciation expense on its
                property,  plant and equipment and an allocated corporate charge
                based on workload by department related to the Castleberry line.

                Fresh Start Reporting:
                        To record the estimated  effect of the Plan as if it had
                been  effective as of the  beginning of period  presented.  This
                includes adjustments for the following items:

                        i) The  elimination of the historical  depreciation  and
                amortization  for the  remaining  product  lines,  including the
                amounts  in cost of sales,  on the  beginning  of  period  asset
                balances and the  recording of the  amortization  credit for the
                "Excess  of  revalued  net assets  acquired  over  equity  under
                fresh-start  reporting"  (assuming  a  three-year   amortization
                period).

                        ii) The elimination of historical reorganization expense
                that will not be incurred subsequent to the Consummation Date.

                        iii)  The  elimination  of the  fresh-start  revaluation
                charge and the reversal of the gain on debt  discharge  pursuant
                to the Plan.

        (b)     Financial  information for the thirty-one weeks ended January 3,
                1998  represents  the  consolidated  results of the  reorganized
                entity after the consummation of the Plan.

        (c)     Financial  information  for the  twenty-two  weeks ended June 4,
                1997  represents the audited  consolidated  results prior to the
                Company's   consummation  of  the  Plan.  The  income  statement
                information  includes  the  results  of  Castleberry  and Sassco
                Fashions  lines prior to their sale or  spin-off  in  connection
                with the consummation of the Plan.


                                      -14-

<PAGE>



        (d)     The Company incurred  reorganization  costs in 1997, 1996, 1995,
                1994  and  1993  while  operating  as a  debtor  in  possession.
                Included in 1997,  1996,  1995,  1994 and 1993 is a provision of
                $0,   $652,000,   $3,181,000,   $53,000,000,   and   $1,642,000,
                respectively,  for a  write-down  of a  portion  of  the  excess
                purchase  price over net assets  acquired in the 1984  leveraged
                buyout of The  Leslie  Fay  Company,  related  to certain of the
                Company's  product  lines,  which the Company  believes  will be
                unrecoverable.

        (e)     On January 2, 1994, the Company  decided not to accrue  interest
                on approximately  $253,000,000 of pre-petition debt. During 1996
                and 1995 the Company had direct borrowings under the FNBB Credit
                Agreement  on one  hundred  and two (102) days in the second and
                third quarters of 1996 and ten (10) days in the third quarter of
                1995,   the  highest  amount  of  which  was   $28,672,000   and
                $3,956,000,  respectively.  The Company had no direct borrowings
                under  the DIP  Credit  Agreement  in 1994.  Interest  on direct
                borrowings  was incurred at a rate of prime plus 1.5%. The terms
                of the  FNBB  Credit  Agreement  and DIP  Credit  Agreement  are
                described in Note 6(b) to the Consolidated Financial Statements.

        (f)     The Company  recognized an income tax credit of  $1,103,000  and
                $1,811,000  in  1996  and  1995,  respectively,  representing  a
                reduction  of  foreign  income  tax  liabilities  as a result of
                negotiated  settlements  on prior years'  estimated  taxes.  The
                Company only paid state,  local and foreign taxes in 1996,  1995
                and 1994.  The  elimination  of the income tax  benefit in 1994,
                which  was  realized  in  1993,   resulted   from  the  complete
                utilization of tax refunds from prior years' taxes paid.

        (g)     In 1993, the Company  realized an income tax benefit as a result
                of the net losses  incurred  and the  ability to  recognize  the
                carryback of those losses against prior years' taxes paid.

        (h)     Amount  consists  of the  following  three  components:  Gain on
                Sale/Transfer of the Sassco Fashions line of $89,810,000 (net of
                $3,728,000 of income  taxes),  charge for  Revaluation of Assets
                and   Liabilities   Pursuant  to  the  Adoption  of  Fresh-Start
                Reporting  of  $(27,010)   and  Gain  on  Debt   Discharge   (an
                extraordinary item) of $73,541.

        (i)     Net income  (loss) per share for the pro forma  fifty-three  and
                thirty-one  weeks ended January 3, 1998 was calculated  based on
                3,400,000  shares of new Common Stock issued in connection  with
                the consummation of the Plan.  Earnings per common share for the
                twenty-two  weeks  ended June 4, 1997 is not  presented  because
                such  presentation  would  not be  meaningful.  The old stock of
                18,771,836 shares, used in calculating the net income (loss) per
                share in 1993 through 1996,  was canceled under the Plan and the
                new stock was not issued until the Consummation Date.


                                      -15-

<PAGE>



           (j)       The Company  classified certain product lines as "Assets of
                     Product  Lines  Held  for  Sale  and  Disposition",  as the
                     Company had  announced  its  intention  to dispose of these
                     lines.

           (k)       All long-term debt except  capital leases was  reclassified
                     as  Liabilities   subject  to  compromise  because  of  the
                     Company's chapter 11 filing.


                                      -16-

<PAGE>



ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-------   -----------------------------------------------------------
          AND RESULTS OF OPERATIONS.
          --------------------------

(a)        RESULTS OF OPERATIONS

THIRTY-ONE  WEEKS ENDED  JANUARY 3, 1998 AS COMPARED TO  THIRTY-ONE  WEEKS ENDED
DECEMBER 28, 1996

           The Company  recorded  net sales of  $73,091,000  for the  thirty-one
weeks ended January 3, 1998, compared with $256,225,000 for the thirty-one weeks
ended December 28, 1996, a net decrease of  $183,134,000,  or 71.5%. The primary
factor  contributing  to this  decrease was the sale of the Sassco  Fashions and
Castleberry   product  lines,  which  generated   $184,495,000  and  $4,223,000,
respectively,  in net sales for the thirty-one weeks ended December 28, 1996. On
a  comparable  basis,   after  excluding  the  effect  of  the  above  mentioned
businesses,  the remaining businesses had a net sales increase of $5,584,000, or
8.3%,  for the  thirty-one  weeks  ended  January  3,  1998 as  compared  to the
thirty-one weeks ended December 28, 1996,  primarily due to the increased volume
of the Dress line.  Excluding a decrease of $6,255,000  related to discontinuing
its  Outlander  labels,  sales from  continuing  businesses  grew 20.5% over the
comparable  period for 1996. This growth was driven by an increase of 44.5% over
the comparable  period of 1996 by the Dress line.  After excluding the effect of
the discontinued  Outlander labels, the Sportswear line had a sales growth of 1%
over the comparable period for 1996.

           Gross profit for the thirty-one weeks ended January 3, 1998 was 19.7%
of net sales  compared with 22.2% for the  thirty-one  weeks ended  December 28,
1996 (a decrease of  $42,461,000).  The Sassco  Fashions and  Castleberry  lines
generated  $42,442,000  and  $912,000,  respectively,  in gross  profit  for the
thirty-one weeks ended December 28, 1996. These product lines had a higher gross
profit  percent  to net  sales  than the  remaining  businesses.  The  remaining
businesses  increased  gross profit by $842,000 for the  thirty-one  weeks ended
January 3, 1998 versus the prior year and the gross margin percent  decreased to
19.7% from 20.0%.  Excluding the  Discontinued  Outlander  labels,  gross profit
percent  decreased from 21.6% to 19.8% during the period.  The decrease in gross
profit  percent  was  due  to the  additional  markdowns  taken  to  market  the
sportswear  fall  production due to late delivery of a majority of the line. The
Dress line's  gross profit  increased  $3,084,000  or a gross profit  percent of
19.3% from 15.9%.

           Selling,  warehouse,  general and administrative  expenses were 18.7%
and 17.8% for the thirty-one  weeks ended January 3, 1998 and December 28, 1996,
respectively.  After excluding the costs associated with the product lines sold,
the  comparable  remaining  businesses  had expenses of 20.3% for the thirty-one
weeks ended December 28, 1996.  This decrease in the comparable  percentage is a
result of the additional  sales volume during the thirty-one weeks ended January
3, 1998 while continuing to reduce overhead expenses related to downsizing.

           Depreciation and amortization  expense for the thirty-one weeks ended
January 3, 1998 was only $14,000 due to the write-off of fixed assets at June 4,
1997 under fresh-start reporting. In


                                      -17-

<PAGE>



addition,  the Company  realized income of $2,667,000  from  amortization of the
excess revalued net assets acquired over equity (see Note 2).  Depreciation  and
amortization  expense for the thirty-one weeks ended December 28, 1996 consisted
of depreciation  on fixed assets of $2,214,000,  including  $956,000  related to
product lines sold and amortization of the excess purchase price over net assets
acquired of $670,000,  including  $340,000 of amortization  related to the lines
sold. This  amortization  expense related to the leveraged  buyout of The Leslie
Fay Company on June 28, 1984.

           Other income was $947,000 and  $2,294,000  for the  thirty-one  weeks
ended  January 3, 1998 and  December  28,  1996,  respectively.  The decrease is
primarily  due to the  licensing  revenues  related  to  tradenames  which  were
spun-off  with the Sassco  Fashions  product line and the  expiration of certain
licensing agreements which were not renewed.

           Interest  expense,  net of interest  income and financing  costs were
$336,000  and  $3,095,000  for the  thirty-one  weeks ended  January 3, 1998 and
December 28, 1996,  respectively.  The  financing  fees under the new CIT Credit
Agreement (see Note 6) were offset by income earned on the cash invested for the
thirty-one  weeks  ended  January 3, 1998.  The  financing  fees  incurred  were
significantly  below those incurred  during the thirty-one  weeks ended December
28, 1996 due to the higher line needed to finance the  operations  of the Sassco
Fashions and Castleberry  product lines. In addition,  the Company  maintained a
higher  average cash balance  during the period and earned  additional  interest
income compared to the prior year.

           The  provision  for  taxes  was  $677,000  and  ($1,273,000)  for the
thirty-one weeks ended January 3, 1998 and December 28, 1996, respectively.  The
credit in 1996 relates  primarily to foreign taxes on a subsidiary of the Sassco
Fashions line.

TWENTY-TWO  WEEKS ENDED JUNE 4, 1997 AS COMPARED TO TWENTY-ONE  WEEKS
ENDED MAY 25, 1996

           The Company  recorded net sales of  $197,984,000  for the  twenty-two
weeks ended June 4, 1997,  compared with  $173,451,000  for the twenty-one weeks
ended May 25, 1996, a net increase of $24,533,000, or 14.1%. The additional week
accounted for $10,084,000 of the net sales increase.  Additionally, in 1996, the
Sassco  Fashions  product line began  shipping a new product line under the Nina
Charles label and opened additional retail stores over the last 17 months, for a
total of 45 stores in operation at June 4, 1997. These new businesses achieved a
net sales volume of $17,843,000 for the twenty-two  weeks ended June 4, 1997, or
$11,379,000  more than the twenty-one  weeks ended May 25, 1996. On a comparable
basis, after excluding the effect of the above mentioned additional week and new
businesses,  the Sassco Fashions line had a net sales decrease of $8,430,000, or
7.0% for the twenty-two  weeks ended June 4, 1997,  compared with the twenty-one
weeks ended May 25, 1996. This was primarily a result of reducing its production
in 1997 to limit  additional  clearance  markdowns.  The  remaining  Leslie  Fay
businesses accounted for an increase of $12,542,000,  or 29.5%, primarily due to
increased  volume for its Dress product line.  The net sales of the  Castleberry
product line declined by $1,042,000.


                                      -18-

<PAGE>



           Gross profit for the twenty-two weeks ended June 4, 1997 was 25.6% of
net sales  compared  with 23.9% in the  twenty-one  weeks ended May 25, 1996 (an
increase of  $9,237,000).  The  additional  week accounted for $1,998,000 of the
increase in gross profit.  The additional retail stores and new product lines of
the Sassco  Fashions  line  accounted  for  $3,364,000  of the increase in gross
profit.  The  remaining  gross  profit of  Sassco  Fashions  declined  $461,000.
Although the gross  margin for the line  increased  1.3%,  it did not offset the
impact of the net sales volume  decrease on gross profit.  Increased  volume and
better  initial  pricing  (gross  margin  increased  from  22.9%  to  26.5% on a
comparable  basis) of the Leslie Fay Dress and  Sportswear  lines also accounted
for $4,885,000 of additional  gross profit.  The Castleberry line had a decrease
in gross profit of $549,000.

           Selling,   warehouse,   general  and   administrative   expenses  for
twenty-two  weeks ended June 4, 1997  decreased  to 17.9% of net sales  compared
with 19.6% for the twenty-one weeks ended May 25, 1996. The percentage  decrease
is primarily  due to the  additional  sales volume  generated in the  twenty-two
weeks ended June 4, 1997 versus the twenty-one weeks ended May 25, 1996, without
a  corresponding  increase  in  expenses.  For the  period,  expenses  increased
$2,248,000 over the prior year. Sassco Fashions expenses  increased  $4,118,000,
of which  $1,100,000  was related to the extra week and the remainder was due to
the additional  product lines and retail stores opened.  The Leslie Fay business
reduced  expenses by $1,749,000 or 14.1% below the prior year. This decrease was
offset by  approximately  $483,000 of expenses  incurred in the extra week.  The
Castleberry line decreased expenses by approximately $121,000 or 10.4% below the
comparable period in 1996 due to its reduced volume.

           Depreciation and amortization  consists primarily of the amortization
of the excess purchase price over net assets acquired and relates principally to
the leveraged buyout of The Leslie Fay Company on June 28, 1984.

           Interest  and  financing   costs  increased  to  $1,372,000  for  the
twenty-two  weeks ended June 4, 1997  compared to  $837,000  for the  twenty-one
weeks ended May 25, 1996.  The increase was due  primarily to the fee to finance
the accounts  receivable of the Sassco Fashions  product line under an agreement
which began in February 1996.

           While  operating as a debtor in  possession,  the Company  recognized
reorganization  costs of  approximately  $3,379,000  and  $1,560,000  during the
twenty-two  weeks ended June 4, 1997 and  twenty-one  weeks ended May 25,  1996,
respectively,  which  is  comprised  of  professional  fees and  other  costs of
$2,951,000 and $1,806,000;  and plan administration  costs of $1,000,000 and $0;
offset by interest income of $572,000 and $246,000.

           The provision for taxes was $451,000 and $435,000 for the  twenty-two
weeks  ended  June 4,  1997  and  the  twenty-one  weeks  ended  May  25,  1996,
respectively.  There is no federal income tax provision currently  recognizable,
other  than  that  based on the  alternative  minimum  tax  regulations,  due to
existing net operating loss carryforwards.


                                      -19-

<PAGE>



YEAR ENDED DECEMBER 28, 1996 AS COMPARED WITH THE YEAR ENDED DECEMBER 30, 1995
------------------------------------------------------------------------------

           The Company recorded net sales of $429,676,000 for the 52 weeks ended
December 28, 1996 compared with $442,084,000 for the 52 weeks ended December 30,
1995,  a decrease  of 2.8%.  Contributing  to this  decrease  was the  Company's
decision in the second half of 1995 to close its Leslie Fay Retail Outlet stores
and discontinue its Nipon Studio Sportswear line which,  together,  had 1995 net
sales of  $44,091,000.  Also in 1995,  the Company opened 23 retail stores under
the name Kasper for ASL and  organized an  operation in Europe to market  Kasper
suits.  In 1996, the Company began shipping a new line of product under the Nina
Charles  label and opened 16  additional  stores,  bringing  the total stores in
operation  at the end of 1996 to 39. These new  businesses  achieved a net sales
volume of $35,701,000 in 1996, or $27,695,000 more than in 1995. After adjusting
for these closed and new  businesses,  the Company's net sales,  on a comparable
basis, rose $4,140,000 over 1995, or 1.1%.

           Separating  this into the Company's key business  groups,  the Sassco
Fashions  product line had 1996 net sales of $311,550,000,  which  represented a
comparable sales growth of 6.1%, the continuing  Leslie Fay Dress and Sportswear
lines had 1996 net sales of $47,237,000 and  $62,816,000,  or a comparable sales
decline of 10.3% and 5.6%,  respectively from 1995, and the Castleberry line had
1996 net sales of  $8,073,000,  or a decline  of 24.2% from  1995.  The  decline
realized in both the Leslie Fay Dress and  Sportswear  lines was a result of the
Company's  change in business  strategy to focus on higher margin  customers and
reduce its off-price sales.

           The Company had a 1996 gross profit of $98,304,000,  which represents
22.9% of net sales.  This  compares  favorably  to the gross  profit for 1995 of
$96,193,000,  and 21.8% of net sales. The  discontinued  product lines discussed
above accounted for a 1995 gross profit of $11,026,000  while the new businesses
opened in 1996 and 1995 had gross profit of  $13,386,000  in 1996 as compared to
$3,003,000  for  1995.  Adjusting  for these  closed  and new  businesses,  on a
comparable  basis,  the  Company's  gross  profit rose  $2,754,000  over 1995 to
$84,918,000 and 21.6% of net sales versus 21.1% for 1995.

           Separating  this into the Company's key business  groups,  the Sassco
Fashions line had a gross profit of $73,073,000  and 23.5% of net sales for 1996
and  $71,556,000  and  26.7%  of net  sales  for  1995.  Adjusting  for  the new
businesses  begun in 1996 and 1995, the  comparable  gross profit for the Sassco
Fashions line  $59,687,000  and 21.6% of net sales for 1996 and  $68,553,000 and
26.4% of net sales for 1995.  This  deterioration  in gross profit resulted from
pricing  concessions,  especially  in  the  Kasper  for  ASL  and  Kasper  Dress
businesses. The Leslie Fay Dress and Sportswear product lines had a gross profit
of  $9,057,000  and  $14,166,000  representing  19.2%  and  22.6% of net  sales,
respectively  for 1996.  Removing the lines closed in 1995, the comparable gross
profit  for the  continuing  Leslie Fay Dress and  Sportswear  lines in 1995 was
($2,167,000) and $12,302,000 or (4.1%) and 18.5% of net sales, respectively. The
1996  improvement in gross profit was the result of the Company's  change in its
business  strategy to focus on higher margin  business,  controlling  production
levels  and  lowering  production  costs  in its  Dress  line  by  shifting  its
manufacturing to third party contractors,  both domestic and overseas, following
the closure of the Company's owned

                                      -20-

<PAGE>



manufacturing  facility in August 1995. The Castleberry  line had a gross profit
of  $2,007,000  and 24.9% of net sales in 1996 and  $3,476,000  and 32.6% of net
sales in 1995. This deterioration was caused by additional  pricing  concessions
as well as by the unsuccessful launch of the Adolfo New York label.

           Selling, warehouse,  general and administrative expenses decreased in
1996 to  $79,570,000  and 18.5% of net sales from  $92,832,000  and 21.0% of net
sales in 1995.  This  represents a reduction of expenses of $13,262,000 or 14.3%
from the level of 1995.  Additional  expenses  were  incurred  in support of the
Sassco  Fashions line for the additional  Kasper for ASL retail stores,  for the
European  sales  operation  organized  in  1995,  and  to  support  the  planned
separation from Leslie Fay. Together,  these efforts added $4,528,000 in expense
in 1996 over 1995, a 9.7% increase. The Castleberry line reduced its expenses by
$365,000 or 12.3% of its 1995 expense level.  The Leslie Fay businesses  reduced
their  expenses by  $18,791,000  or about 42.6% below their 1995 expense  level.
Approximately  $13,400,000  of this  decrease is the result of the closed Leslie
Fay Retail Outlet and Nipon Studio businesses. The remaining reductions occurred
in functions that  previously  supported both the Leslie Fay and Sassco Fashions
lines as well as other areas of the Leslie Fay lines,  including payroll,  rent,
occupancy and other expenses.

           Depreciation  and  amortization  expense includes the amortization of
the excess  purchase price over net assets  acquired and relates  principally to
the leveraged  buyout of The Leslie Fay Company in 1984 and the  acquisition  of
Hue,  Inc.  in  1992.  Amortization  expense  was  reduced  as a  result  of the
write-down  of the asset by $3,181,000  at the end of 1995.  This  reduction was
offset by the reversal of amortization expense recorded in 1995 related to prior
periods.

           Interest and financing costs primarily represent the cost of bank and
other  borrowings  for  working  capital  requirements,  long-term  debt and the
capitalized lease obligation.  Interest and financing costs in 1996 were 0.9% of
net sales,  as compared with 0.7% in 1995.  This increase was due to 1) a fee of
$1,147,000  for  financing  the  accounts  receivable  of the  Company's  Sassco
Fashions  line  under an  agreement  which began in February  1996 and 2) higher
interest cost incurred on the direct  borrowings under the FNBB Credit Agreement
in 1996  for 102  days to  support  higher  inventory  and  accounts  receivable
balances  in the  fifty-two  weeks  ended  December  28,  1996,  with a  maximum
borrowing of $28,672,000  versus direct  borrowings for a total of nineteen days
during the fifty-two  weeks ended December 30, 1995 with a maximum  borrowing of
$3,957,000.  Offsetting  these increases were reduced  financing fees related to
the FNBB Credit Agreement.

           While  operating  as a debtor in  possession,  the  Company  incurred
reorganization  costs of  approximately  $5,144,000 in 1996 and  $16,575,000  in
1995.  Reorganization  costs  included  professional  fees  and  other  costs of
$3,719,000 in 1996 and  $7,995,000 in 1995,  closed  facilities  and  operations
charges of  $1,082,000  in 1996 and  $10,138,000  in 1995, a write-off of excess
purchase  price  of  $652,000  in 1996  and  $3,181,000  in  1995.  The  reduced
reorganization   costs  were  related  to  discontinuing   the  use  of  certain
consultants  as it began  executing its  restructuring  plan and  completing the
closing of  unprofitable  lines and a foreign  buying office in 1995,  offset by
$2,003,000  accrued in 1996 for losses  relating to the sale of the  Castleberry
line. In 1996, the Company

                                      -21-

<PAGE>



increased  its accrual for  employee  related  benefit  plans by  $167,000.  The
decrease in interest  income to $476,000 in 1996 from $4,739,000 in 1995 was due
to less cash  available  for  investing  opportunities  and the  realization  of
$2,375,000 in interest income on Federal income taxes refundable in 1995.

           The Company  recorded a net benefit for taxes of  $(839,000)  in 1996
versus  $(761,000)  in  1995.  These  benefits  of  $1,103,000  and  $1,811,000,
respectively,  represent a reduction of foreign tax  liabilities  as a result of
negotiated  settlements on prior years' estimated taxes.  This credit was offset
by Federal tax expense of $130,000 in 1996.

(b)  LIQUIDITY AND CAPITAL RESOURCES

           On June 2, 1997, the Company obtained  $30,000,000 of  post-emergence
financing (see Note 6), which became effective with the consummation of the Plan
on June 4, 1997. The CIT Credit  Agreement  provides a working capital  facility
commitment  of  $30,000,000,  including  a  $20,000,000  sublimit  on letters of
credit.  As of March 18, 1998, there were no borrowings under the revolving line
of credit and the  Company was  utilizing  approximately  $8,514,000  of the CIT
Credit Agreement for the letters of credit.

           At January 3, 1998, there were no cash borrowings  outstanding  under
the CIT Credit Agreement, and cash and cash equivalents amounted to $19,813,000.
Of this amount,  $1,358,000 will be used to pay remaining  administrative claims
as defined in the Plan.  Working capital increased  $637,000,  to $39,453,000 at
January 3, 1998 from June 4, 1997.  The  primary  changes in the  components  of
working  capital  were a decrease  in  accounts  receivable  of  $6,845,000,  an
increase  in  inventories  of  $7,586,000,  a decrease  of  $377,000  in prepaid
expenses  and  other  current  assets  and  the  payment  of   obligations   and
administrative  claims as  directed  by the Plan net of  preference  income  and
interest  earned  of   $19,233,000.   Accounts   receivable   decreased  due  to
historically low fourth quarter shipments.  Inventories  increased due to higher
shipping  levels for January and February 1998 compared with inventory  required
for  shipping in June and July 1997.  Short term  investments  increased  as the
Company invested  $2,989,000 in a one year US Treasury Note maturing on June 30,
1998, the proceeds from which will be used to pay administrative claims.

           The  Company  estimated  it  had  approximately  $50,000,000  of  NOL
available  at June 4, 1997 to offset  future  taxable  income,  if any,  through
fiscal  year  2012.  The  utilization  of  the  NOL,  however,   is  subject  to
limitations,  including  the annual  limitation of about  $1,500,000  imposed by
Section  328  of  the  Internal   Revenue   Code.   The  Company  has  generated
approximately  $9,000,000 of loss  carryforwards  for the thirty-one weeks ended
January 3, 1998.  These loss  carryforwards  may be available  to offset  future
taxable income, if any, without limitation.

           Capital  expenditures  were $859,000 for the  thirty-one  weeks ended
January 3, 1998 and  $3,731,000  for the  twenty-two  weeks  ended June 4, 1997.
Capital  expenditures  for the  twenty-two  weeks  ended  June 4, 1997  included
$3,152,000 of expenditures  related to the Sassco Fashions product line. Capital
expenditures for the continuing lines were $1,438,000 for the fiscal year 1997.

                                      -22-

<PAGE>



The  anticipated  capital  expenditures  of $2,900,000  for the 1998 fiscal year
include approximately  $2,000,000 to improve management information,  production
and  distribution  systems,  approximately  $500,000 for fixturing the Company's
in-store shops that are planned to be opened in 1998 and approximately  $400,000
for all other purposes. The Company believes that its financing arrangements and
anticipated  level of internally  generated  funds will be sufficient to finance
its capital spending during 1998.

           The provisions of the Company's  Credit  Agreement with CIT have been
modified three times:

           On August 18,  1997,  CIT waived the  provision  contained in section
10.17 of the Credit  Agreement  that set a minimum  ratio of  current  assets to
current liabilities for the quarter ended July 5, 1997. This waiver was required
due to the later than anticipated  consummation of the Plan that caused a higher
level of confirmation  expenses to remain unpaid as of July 5, 1997. Such unpaid
confirmation  expenses  were  collateralized  by an  equal  amount  of cash  and
securities.

           On February 23, 1998,  CIT amended  several of the  provisions of the
Credit Agreement in order to adjust for the fresh start  accounting  adjustments
made in accordance with generally accepted accounting  principles  following the
Company's  exit from  bankruptcy.  As part of the  initial  financing  agreement
entered into by the Company with CIT on June 2, 1997, CIT had agreed to make the
appropriate amendments caused by "fresh start."

           This  February 23, 1998  amendment  also  included an increase in the
level of  allowed  annual  capital  expenditures  to  conform  to the  Company's
requirements.

           On March 31,  1998,  CIT  amended  numerous  sections  of the  Credit
Agreement in order to permit the Company to:

o          Purchase, acquire or invest in businesses, subject to the approval of
           CIT. Such  acquisitions  or investments may include the assumption of
           debt, liens, guarantees, or contingent liabilities.

o          Pay  dividends  or  repurchase  the  Company's  common stock up to an
           aggregate  amount of  $5,000,000  in each  fiscal year 1998 and 1999.
           Such payment may also be limited by not  experiencing or incurring an
           event of  default  under the Credit  Agreement  that  includes  other
           restrictive  covenants.  Further,  such  payment  must also leave the
           Company with no less than $5,000,000 in undrawn availability.

o          Incur additional capital  expenditures to the extent the prior year's
           actual  capital  expenditures  were less than the amount  allowed for
           that year. The Company's 1997 capital  expenditures from June 4, 1997
           through  the end of the fiscal  year were  $859,000.  This amount was
           $641,000 below the 1997 covenant.  Effectively,  this raises the 1998
           limit on capital expenditures to $3,141,000.


                                      -23-

<PAGE>



           The  Company  is  dependent  on a  number  of  automated  systems  to
communicate   with  its  customers  and  suppliers,   to   efficiently   design,
manufacture,  import, and distribute its product,  as well as to plan and manage
the  overall  business.  The  Company  recognizes  the  critical  importance  of
maintaining the proper functioning of its systems.

           In the fourth  quarter  of 1997,  the  Company  began a review of its
systems and technology to address all business requirements, including Year 2000
compliance. This review is substantially completed and a plan has been developed
to meet these needs.  Overall,  the plan identifies numerous changes required to
make  the  Company's  systems  Year  2000  compliant.   These  changes  will  be
implemented  through 1999 at an estimated cost of approximately  $1,500,000 plus
the utilization of internal staff and other resources.

           The  Company  is also  dependent  on the  efforts  of its  customers,
suppliers and software  vendors.  The Company's  upgrade of its electronic  data
intercharge  software  will need to be tested with the  Company's  customers  to
confirm  proper  functioning.  The  Company's  customers  and suppliers are also
required to implement  projects to make their  systems and  communications  Year
2000 compliant.  Failure to complete their efforts in a timely way could disrupt
the Company's  operations  including the ability to receive and ship its product
as well as to invoice its customers.  Finally,  the Company's plan is based upon
the  representation of the vendors that market the software packages selected by
the  Company.  There is no  guarantee  that these new systems  will be compliant
under all the circumstances and volume stresses that may actually be required by
the Company's operations through Year 2000.

           A  number  of  statements   contained   herein  are   forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995 that involve  risks and  uncertainties  that could cause actual  results to
differ materially from those expressed or implied in the applicable  statements.
These risks and uncertainties  include,  but are not limited to, the uncertainty
of potential manufacturing  difficulties,  the dependence on key personnel,  the
possible  impact of competitive  products and pricing,  the Company's  continued
ability  to  finance  its  operations,   general  economic  conditions  and  the
achievement and maintenance of profitable operations and positive cash flow.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
-------  --------------------------------------------

           See the  Consolidated  Financial  Statements and Financial  Statement
Schedule of The Leslie Fay Company,  Inc. and  Subsidiaries  attached hereto and
listed on the index to consolidated financial statements set forth in Item 14 of
this Form 10-K.

ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND 
-------   --------------------------------------------------------------- 
          FINANCIAL DISCLOSURE.
          ---------------------

           None.



                                      -24-

<PAGE>



                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
--------  ---------------------------------------------------

DIRECTORS OF THE COMPANY
                              Principal Occupation and                  Director
Name and Age                  Offices with the Company                     Since
------------                  ------------------------                     -----

John J. Pomerantz (64)        Chairman of the Board and Chief               1984
                              Executive Officer of the Company

John A. Ward (44)             President of the Company                      1997


Clifford B. Cohn (46)         Principal of Cohn & Associates 1)(2)          1997


Mark B. Dickstein (39)        President of Dickstein Partners Inc.(1)(2)    1997

Mark Kaufman (41)             Vice President of Dickstein Partners,         1997
                              Inc.(2)(3)

William J. Nightingale (68)   Senior Advisor of Nightingale &               1997
                              Associates (2)(3)             

Robert L. Sind (64)           President of Recovery Management              1997
                              Corporation (1)(2)(3)

-----------------------------
(1)  Member of Compensation Committee of the Board of Directors.
(2)  Member of the Finance Committee of the Board of Directors.
(3)  Member of the Audit Committee of the Board of Directors.

EXECUTIVE OFFICERS OF THE COMPANY

Name                          Positions with the Company                    Age
----                          --------------------------                    ---

John J. Pomerantz             Chairman of the Board and                     64
                              Chief Executive Officer

John A. Ward                  President                                     44

Dominick Felicetti            Senior Vice President-Manufacturing           44
                              and Sourcing

Warren T. Wishart             Senior Vice President-Administration          45
                              and Finance, Secretary and
                              Chief Financial Officer


                                      -25-

<PAGE>



CERTAIN INFORMATION CONCERNING DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT
EMPLOYEES OF THE COMPANY

           The term of office of each executive  officer of the Company  expires
on the date of the  organizational  meeting  of the  Board of  Directors  of the
Company  following each Annual Meeting of  Stockholders  of the Company and when
his or her respective successor is elected and has qualified.

           John J.  Pomerantz  has been the Chief  Executive or Chief  Operating
Officer of the Company and its predecessors since 1971, and an executive thereof
for over 30 years.  Mr.  Pomerantz was President of the Leslie Fay business from
1971 until August 1986, when he became Chairman of the Board of the Company.

           John A. Ward  joined the Company in August 1989 as head of the Andrea
Gayle  division.  From July 1991 to June 1993 he was  Chairman of the Leslie Fay
Sportswear  Group.  In June 1993 he became  Chairman of the combined  Leslie Fay
Dress and  Sportswear  lines.  He was  elected a Senior  Vice  President  of the
Company in September  1991 and President of the Company in June 1997.  From June
1988 until  August 1989 he was Senior  Vice  President  and General  Merchandise
Manager for Ready-to-Wear,  Men's and Boys' at B. Altman & Co. For fifteen years
prior thereto, he had been an executive at Filene's.

           Clifford B. Cohn has been a principal with Cohn & Associates law firm
since  September 1994. From September 1992 to September 1994, he was a principal
with  Sernovitz & Cohn law firm.  Mr. Cohn is also a Director of Kasper  A.S.L.,
Ltd.

           Mark B.  Dickstein has been the sole  shareholder,  sole director and
President  of  Dickstein  Partners  Inc.  since  prior to 1990 and is  primarily
responsible  for the operations of Dickstein & Co., L.P.,  Dickstein  Focus Fund
L.P. and Dickstein  International  Limited. These businesses invest primarily in
risk  arbitrage  transactions,  securities  and debt  obligations of financially
distressed companies, and other special situations.  Mr. Dickstein is a Director
of Hills  Stores  Company and served as its Chairman of the Board from July 1995
to February 1996. He is also a Director of News Communications Inc.

           Mark Kaufman has been a Vice  President of Dickstein  Partners,  Inc.
since July 1992.  Prior to joining  Dickstein  Partners,  beginning in 1990, Mr.
Kaufman was a Senior  Vice-President of Oppenheimer & Co., an investment banking
firm.  Prior to that,  Mr. Kaufman was a Vice President of GAF Corp., a chemical
and roofing manufacturer.

           William  J.   Nightingale  is  a  senior  advisor  at  Nightingale  &
Associates  LLC,  a general  management  consulting  company,  where he has been
employed since 1975. Mr. Nightingale is also a Director of Kasper A.S.L., Ltd.

           Robert L. Sind founded  Recovery  Management  Corporation  ("RMC") in
1984.  RMC  specializes  in  developing  and  implementing   hands-on  business,
financial and operational turnaround programs and providing crisis management to
troubled commercial, industrial and real estate clients and their creditors. For
20 years prior thereto, Mr. Sind served in corporate operating positions,

                                      -26-

<PAGE>



managing  turnarounds and  restructurings,  including  Londontown  Manufacturing
Company,  Beker Industries,  and Nice-Pak  Products,  Inc. For ten years he also
served  as  investment  banker  for  distressed  companies.  Mr.  Sind is also a
Director of Kasper A.S.L., Ltd.

           Dominick  Felicetti  rejoined  the Company in May 1995 as Senior Vice
President of Worldwide Sourcing and Manufacturing. From 1994 to 1995 he was Vice
President  Manufacturing  and Production for S.L.  Fashions.  Mr.  Felicetti was
previously employed by The Leslie Fay Companies, Inc. from December 1991 to July
1993 in the position of Director of Technical Services and Production.  Prior to
that,  from 1986 to 1990,  he served as President of American  Dress Company and
from 1979 to 1986 as Production Manager for Betsy's Things.

           Warren T.  Wishart  joined  the  Company in March  1993.  He held the
position of Vice  President - Planning from July 1993 through  December 1994. In
January 1995 he became Senior Vice President - Finance. In September 1995 he was
appointed Chief Financial Officer and Treasurer of the Company.  In June 1997 he
became Senior Vice President -  Administration  and Finance and Secretary of the
Company.  Before  joining  Leslie Fay Mr. Wishart was Vice President - Strategic
Planning of Galerias  Preciados from 1991 to the end of 1992.  Prior to that, he
had seventeen  years of financial  management and business  planning  experience
with several  department  stores  including  Filene's and the L.J. Hooker Retail
Group.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

           Pursuant to Section 16 of the  Securities  Exchange  Act of 1934,  as
amended,  officers,  directors  and holders of more than 10% of the  outstanding
shares of the Company's  Common Stock are required to file  periodic  reports of
their ownership of, and transactions involving,  the Company's Common Stock with
the Securities and Exchange Commission.  Based solely on its review of copies of
such reports  received by the Company,  the Company  believes that its reporting
persons have complied with all Section 16 filing requirements applicable to them
with respect to the  Company's  fiscal year ended  January 3, 1998,  except that
Catharine Bandel-Wirtshafter, a former officer, John Ward and Dominick Felicetti
each filed a late Form 5 reflecting  the  cancellation  of old stock options and
the grant of new stock options and Clifford B. Cohn,  William J. Nightingale and
Robert L. Sind each  timely  filed a Form 5  indicating  that he had not filed a
Form 3.


                                      -27-

<PAGE>



ITEM 11.  EXECUTIVE COMPENSATION.
--------  -----------------------

           Summary of Cash and Certain Other  Information.  The following  table
shows, for 1997, 1996 and 1995, the compensation  paid or accrued by the Company
and its  subsidiaries  to the Chief  Executive  Officer  and the other four most
highly compensated "named executive  officers" (as defined in Regulation S-K) of
the Company during 1997 (the "Named Officers").

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                           Annual Compensation (1)        Long Term Compensation
                                    ------------------------------------------------------------
                                                                           Awards        Payouts
                                                                         ----------      -------
                                                              Restricted  Securities
Name and Principal                                              Stock     Underlying      LTIP     All Other
Position                   Year     Salary (2)      Bonus      Awards    Options (#)     Payouts  Compensation
--------                   ----     ----------      -----      ------    -----------     -------  ------------
<S>                        <C>       <C>           <C>         <C>        <C>            <C>        <C>     <C>
---------------------------------------------------------------------------------------------------------------
John J. Pomerantz          1997      $611,129      $171,700       --          --           --       $ 8,699 (3)
  Chairman of  the         1996      $777,915      $   --         --          --           --       $ 8,938 (4)
  Board and Chief          1995      $780,000      $   --         --          --           --       $ 8,600 (5)
  Executive Officer                                                                                 
---------------------------------------------------------------------------------------------------------------
John A. Ward               1997      $462,692      $145,600       --          --           --       $ 2,650 (3)
   President               1996      $521,154      $ 50,000       --          --           --       $ 2,500 (4)
                           1995      $500,000      $   --         --          --           --       $ 2,730 (5)
---------------------------------------------------------------------------------------------------------------
Dominick Felicetti         1997      $337,500      $ 91,200       --          --           --       $ 1,938 (3)
  Senior Vice President -  1996      $267,885      $ 25,000       --          --           --           --
  Manufacturing and        1995      $167,212          --         --          --           --           --
  Sourcing                                                                                          
---------------------------------------------------------------------------------------------------------------
Catharine Bandel-          1997      $273,654      $166,200       --          --           --       $ 1,260 (3)
  Wirtshafter              1996      $300,000      $ 50,000       --          --           --       $    --
  Senior Vice              1995      $274,038      $ 25,000       --          --           --       $    --
  President                                                                                         
---------------------------------------------------------------------------------------------------------------
Warren T. Wishart          1997      $207,692      $191,200       --          --           --       $ 2,650 (3)
  Senior Vice President-   1996      $200,000      $ 25,000       --          --           --       $ 2,500 (4)
  Administration and       1995      $198,461      $   --         --          --           --       $ 3,035 (5)
  Finance, Chief                                                                                  
  Financial  Officer and
  Treasurer
---------------------------------------------------------------------------------------------------------------
</TABLE>

-------------------------------

(1)   In 1997, 1996 and 1995,  perquisites  and other personal  benefits did not
      exceed the lesser of $50,000 or 10% of reported  annual salary and bonuses
      for any of the Named Officers.

(2)   1997  was a 53 week  year.  1996  and  1995  were 52 week  years.  Amounts
      represent salaries paid during the above calendar years.

(3)   For 1997,  consists of the following:  (a) amounts  contributed as Company
      matching  contributions  for each Named Officer under the Company's 401(k)
      savings  plan as follows:  Mr.  Pomerantz  $2,286;  Mr. Ward  $2,650;  Mr.
      Felicetti $1,938; Ms. Bandel-

                                      -28-

<PAGE>





      Wirtshafter  $1,260 and Mr.  Wishart  $2,650 and (b)  amounts  paid by the
      Company for split dollar life insurance coverage as follows: Mr. Pomerantz
      $6,413.

(4)   For 1996,  consists of the following:  (a) amounts  contributed as Company
      matching  contributions  for each Named Officer under the Company's 401(k)
      Savings Plan as follows:  Mr.  Pomerantz  $2,286;  Mr. Ward $2,500 and Mr.
      Wishart  $2,500 and (b) amounts  paid by the Company for split dollar life
      insurance coverage as follows: Mr. Pomerantz $6,652.

(5)   For 1995,  consists of the  following (a) amounts  contributed  as Company
      matching  contributions  for each Named Officer under the Company's 401(k)
      Savings Plan as follows:  Mr.  Pomerantz  $2,230,  Mr. Ward $2,230 and Mr.
      Wishart $2,535; (b) amounts contributed by the Company under the Company's
      defined benefit cash balance  retirement plan as follows:  Mr.  Pomerantz,
      Mr. Ward and Mr.  Wishart  $500 each;  and (c) amounts paid by the Company
      for split dollar life insurance coverage as follows: Mr. Pomerantz $5,870.


OPTION/SAR GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
                          Individual Grants
----------------------------------------------------------------------------------------------------------------
                      Number of      % of Total                                 Potential Realizable Value at
                      Securities      Options                                   Assumed Annual Rates of Stock
                      Underlying     Granted to                              Price Appreciation for Option Term
                       Options      Employees in     Exercise    Expiration  -----------------------------------
    Name               Granted      Fiscal Year     Price (1)      Date(2)      0%            5%           10%
----------------------------------------------------------------------------------------------------------------
<S>                    <C>              <C>          <C>           <C> <C>   <C>        <C>           <C>       
John J. Pomerantz      131,878          29.4%        $ 6.18        6/3/07    199,136    $  837,425    $1,815,960
John A. Ward            70,060          15.6%        $ 6.18        6/3/07    105,791    $  444,881    $  964,726
Dominick Felicetti      70,060          15.6%        $ 6.18        6/3/07    105,791    $  444,881    $  964,726
Catharine Bandel-                                                  
    Wirtshafter         70,060          15.6%        $ 6.18        6/3/07    105,791    $  444,881    $  964,726
Warren T. Wishart       70,060          15.6%        $ 6.18        6/3/07    105,791    $  444,881    $  964,726
</TABLE>

(1)   The market price per share on the grant date was $7.69.
(2)   Exercisable  as to 33% of such shares  commencing  on each of June 4, 1998
      and June 4, 1999 and as to the balance on June 4, 2000.



                                      -29-

<PAGE>



AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR
END VALUE TABLE

           The following table sets forth  information with respect to the Named
Officers  concerning the exercise of options during 1997 and unexercised options
held as of the end of such year.  The  average bid and asked price of a share of
Common  Stock of the  Company  on the close of  business  on January 2, 1998 was
$14.13.

<TABLE>
<CAPTION>
                                             Number of Securities         Value of Unexercised
                     Shares                  Underlying Unexercised       In-the-Money Options
                     Acquired on  Value      Options at Fiscal Year-End   at Fiscal Year-End
Name                 Exercise     Realized   Exercisable/Unexercisable    Exercisable/Unexercisable(1)
----                 ---------    --------   -------------------------    -------------------------
<S>                                                  <C>                         <C> <C>      
John J. Pomerantz    None         N/A                0/131,878                   $ 0/1,048,430
John A. Ward         None         N/A                 0/70,060                   $ 0/556,977
Dominick Felicetti   None         N/A                 0/70,060                   $ 0/556,977
Catharine Bandel                                                               
   -Wirtshafter      None         N/A                 0/70,060                   $ 0/556,977
Warren T. Wishart    None         N/A                 0/70,060                   $ 0/556,977
</TABLE>

(1)   Aggregate  market  value of the  shares of  Common  Stock  covered  by the
      options at fiscal year end less the exercise price of such options.

RETIREMENT PLAN

           Until December 31, 1996, when it was  terminated,  the Company had in
effect a defined  benefit,  cash balance  retirement plan. Each year the Company
contributed a percentage  of earnings to an account for each  eligible  employee
based on attained age and years of service.  The benefit credits were calculated
using a defined formula. In tabular form, the formula was as follows:

                            Percent of Pay                 Percent of Pay
Age Plus                    Up to One-Half the             Over One-Half the
Completed                   Social Security                Social Security
Years of Service            Wage Base                      Wage Base
----------------            ------------------             -----------------
Less than 50                     2.00%                          3.00%
50-59                            2.75%                          3.75%
60-69                            3.75%                          4.75%
70-79                            5.25%                          6.25%
80 or more                       7.25%                          8.25%

           At December 28, 1996, the annual benefits  payable upon retirement at
normal  retirement  age  for  each of John J.  Pomerantz,  John  Ward,  Dominick
Felicetti,  Catharine Bandel-Wirtshafter and Warren Wishart were $7,344, $7,014,
$0,  $0 and  $1,436,  respectively.  These  projected  amounts  do  not  reflect
continued plan credits.


                                      -30-

<PAGE>



           The retirement plan was amended to freeze benefit accruals  effective
December 31, 1994 and the  retirement  plan was terminated on December 31, 1996.
All participants have been paid their accumulated benefits.

COMPENSATION OF DIRECTORS

           Each director who is not a full-time employee of or consultant to the
Company receives an annual director's fee of $30,000.  Each initial non-employee
director,  upon becoming a director,  received stock options to purchase  10,000
shares,  vesting one-third each year and each subsequent  non-employee director,
upon becoming a director, has received or will receive stock options to purchase
5,000 shares, vesting one-third each year.

EMPLOYMENT CONTRACTS

           The Company has an employment  agreement with John J. Pomerantz dated
as of June 2, 1997, which provides for his employment in his present capacity as
Chief Executive Officer until June 4, 1998 at a salary of $430,000 per annum. In
addition to such salary, the employment agreement provides that Mr. Pomerantz is
entitled to certain other perquisites and additional bonus compensation based on
the  achievement of certain  corporate  financial and personal  goals, as agreed
upon by the Company and Mr. Pomerantz.

           The Company has an employment agreement with John A. Ward dated as of
June 2, 1997,  pursuant to which he is employed as President of the Company at a
minimum total compensation of $400,000 per annum until June 4, 1998. In addition
to such salary,  the employment  agreement provides that Mr. Ward is entitled to
certain  other  perquisites  and  additional  bonus  compensation  based  on the
achievement of certain corporate financial and personal goals, as agreed upon by
the Company and Mr. Ward.

           The Company also has one-year  agreements with Dominick Felicetti and
Warren T. Wishart dated as of June 4, 1997,  pursuant to which they are employed
at a base salary of $325,000 and $200,000 per annum,  respectively.  In addition
to such salary, the employment agreements provide that each employee is entitled
to certain other  perquisites  and additional  bonus  compensation  based on the
achievement of certain corporate financial and personal goals, as agreed upon by
the Company and the employee.

           On or  about  March  16,  1998,  the  Compensation  Committee  of the
Company's  Board of Directors  proposed new contracts for these four  employees.
While no  agreement  has been  completed,  and the  Board of  Directors  has not
approved  the  contracts,  the proposal  included,  among other  provisions,  an
extension of the existing  contracts and other  adjustments that would cause the
Company to record  higher  compensation  expense for fiscal year 1998 and future
years.

        The Company's Stock Option Plan provides that upon a sale of the Company
where the imputed  enterprise  value exceeds  $37,500,000,  the above executives
would  receive  options  for up to a maximum of  309,091  shares.  The  proposal
referred  to above also  includes  provisions  that  would  reduce the number of
options granted and eliminate the condition for the sale of the Company.


                                      -31-

<PAGE>



SEVERANCE AGREEMENTS

           In January 1998, the Company entered into a severance  agreement with
Catharine  Bandel-Wirtshafter  pursuant to which she will  receive in a lump sum
$290,000  representing  six (6) months  compensation  as well as bonus and other
amounts  under her  employment  agreement  with the Company  dated as of June 4,
1997. In addition,  one-third of the options previously granted to her vested on
the effective date of the severance agreement.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

           On June 10,  1997,  the Board of Directors  appointed a  Compensation
Committee consisting of David H. Morse,  Clifford B. Cohn and Larry G. Schafran,
which is charged with determining the compensation of officers. On September 22,
1997, Messrs. Morse and Schafran resigned as directors of the Company. They were
replaced on the Compensation  Committee by Robert L. Sind and Mark B. Dickstein.
Prior to June 4,  1997,  during  the  period  the  Company  was  subject  to the
jurisdiction  of the Bankruptcy  Court,  issues  regarding the  compensation  of
officers were submitted to the creditors  committee  and/or the Bankruptcy Court
for approval prior to action by the Compensation  Committee.  The members of the
Compensation  Committee  during 1996 and until June 4, 1997 were Ralph  Destino,
Peter W. May and Faye Wattleton.






                                      -32-

<PAGE>



ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
--------  ---------------------------------------------------------------

            (a) The following table sets forth certain  information with respect
to each person  (including any "group" as that term is used in Section  13(d)(3)
of the  Securities  and  Exchange  Act of 1934,  as amended) who is known to the
Company to be the beneficial owner of more than 5% of the Company's Common Stock
as of March 18, 1998.


                                                                  Percentage of
Names and Address                     Number of Shares            Ownership of
of Beneficial Owners                  Beneficially Owned          Common Stock
--------------------                  ------------------          ------------
                                                                
Mark B. Dickstein                       1,261,922(1)                  37.1%
c/o Dickstein Partners Inc.                                     
660 Madison Avenue 16th Floor                                   
New York, NY 10021                                              
                                                                
John C. "Bruce" Waterfall                 308,306(2)                   9.1%
10 East 50th Street                                             
New York, NY 10022                                              
                                                                
Edwin H. Morgens                          308,306(2)                    9.1%
10 East 50th Street                                             
New York, NY 10022                                              
                                                                
------------------                                        
(1)   Includes  910,919,  147,613,  163,390  and 40,000  shares of Common  Stock
      directly  owned by  Dickstein  & Co.,  L.P.,  Dickstein  Focus  Fund L.P.,
      Dickstein International Limited and Mark B. Dickstein,  respectively. Does
      not include  96,911,  22,687 and 17,348 shares of Common Stock that may be
      purchased  by  Dickstein  & Co.,  L.P.,  Dickstein  Focus  Fund  L.P.  and
      Dickstein International Limited,  respectively, on an "if and when issued"
      basis from a third- party. Mark B. Dickstein is the sole shareholder, sole
      director and  president of Dickstein  Partners  Inc.  ("DPI").  DPI is the
      general  partner of  Dickstein  Partners  L.P.  which is the sole  general
      partner of Dickstein & Co.,  L.P.  and  Dickstein  Focus Fund.  DPI is the
      adviser for Dickstein  International  Limited and makes all investment and
      voting decisions for that entity. Also does not include 1,000 shares owned
      directly  by  Mark  Kaufman,  a Vice  President  of DPI.  The  information
      provided above was obtained from Schedules 13D dated November 6, 1997.

(2)   Includes 9,746, 58,893,  87,904,  61,732,  37,107,  12,988, 18,665, 3,652,
      10,330  and  7,289  shares  of  Common  Stock  directly  owned by  Morgens
      Waterfall Income Partners ("MWIP");  Restart Partners,  L.P.  ("Restart");
      Restart  Partners II, L.P.  ("Restart  II");  Restart  Partners  III, L.P.
      ("Restart  III");  Restart  Partners  IV,  L.P.  ("Restart  IV");  Restart
      Partners V, L.P. ("Restart V"); Endowment Restart,  L.L.C.  ("Endowment");
      Betje Partners ("Betje");  Phoenix Partners, L.P. ("Phoenix"); and Phaeton
      BVI ("Phaeton"),  respectively. Mr. Waterfall is president and Mr. Morgens
      is chairman of Morgens,  Waterfall,  Vintiadis & Co.,  Inc.,  which is the
      investment advisor to Betje and Phaeton; they are also managing members of
      MW

                                      -33-

<PAGE>



      Capital.  L.L.C., the general partner of MWIP; the president and chairman,
      respectively,  of Prime Inc., the general  partner of each of Prime Group,
      L.P.,  Prime Group II, L.P.,  Prime Group III, L.P.,  Prime Group IV, L.P.
      and Prime  Group V, L.P.,  the general  partners  of Restart,  Restart II,
      Restart III, Restart IV and Restart V,  respectively;  managing members of
      MW Management, L.L.C., the general partner of Phoenix; and managing member
      of  Endowment  Prime,  L.L.C.,  the  managing  member  of  Endowment.  The
      information  provided  above was obtained from Forms 4 dated  November 12,
      1997.

           (b) The following  table sets forth certain  information  as of March
18, 1998 with respect to the beneficial  ownership of the Company's Common Stock
by each director,  each of the Named Officers and by all directors and executive
officers of the Company as a group.  Unless otherwise noted, the address of each
beneficial owner named below is the Company's corporate address.


                                                                   Percentage of
Names and Address                            Number of Shares      Ownership of
of Beneficial Owners                        Beneficially Owned     Common Stock
--------------------                        ------------------     ------------

Mark B. Dickstein                               1,261,922(1)             37.1%
c/o Dickstein Partners Inc.                                         
660 Madison Avenue 16th Floor                                       
New York, NY 10021                                                  
                                                                    
Mark Kaufman                                        1,000(2)             (3)
                                                                    
John J. Pomerantz                                    --                --
                                                                    
John A. Ward                                         --                --
                                                                    
Clifford B. Cohn                                     --                --
                                                                    
William J. Nightingale                               --                --
                                                                    
Robert L. Sind                                       --                --
                                                                    
Catharine Bandel-Wirtshafter                       23,353(4)             (3)
                                                                    
Dominick Felicetti                                   --                --
                                                                    
Warren T. Wishart                                    --                --
                                                                    
Officers and Directors as a group (9            1,262,922                37.1%
persons)                                                      

------------------
(1)   See  footnote  (1) to table (a) under the caption  "Security  Ownership of
      Certain   Beneficial  Owners  and  Management"  for  certain   information
      concerning Mr. Dickstein's beneficial ownership of Common Stock.



                                      -34-

<PAGE>



(2)   Does not include any of the shares included in footnote (1).

(3)   Less than 1% of the outstanding Common Stock.

(4)   Consists of currently exercisable stock options.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
--------  -----------------------------------------------

           Bear,  Stearns & Co. Inc.  ("Bear  Stearns") and its affiliates  have
rendered the  following  advisory  services to the Company.  Bear Stearns  Asset
Management,  a division  of Bear  Stearns,  acts as  investment  manager for the
Company's  401(k) Savings Plan and  Retirement  Plan and receives fees therefor.
Michael L.  Tarnopol,  a director  of the Company  until June 1997,  is a Senior
Managing Director and a member of the Executive  Committee of Bear Stearns and a
director and Executive  Vice President of The Bear Stearns  Companies,  Inc., an
affiliate of Bear Stearns.




                                      -35-

<PAGE>



                                     PART IV
                                     -------


ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
--------  -----------------------------------------------------------------

      (a)   Documents filed as part of this report:

            (1)   Financial Statements:

                  The  Consolidated  Financial  Statements  are set forth in the
                  Index  to  Consolidated  Financial  Statements  and  Financial
                  Statement Schedule on page F-1 hereof.

            (2)   Financial Statement Schedule:

                  The Financial  Statement Schedule is set forth on the Index to
                  Consolidated  Financial  Statements  and  Financial  Statement
                  Schedule on page F-1 hereof.

            (3)   Exhibits:

                  Exhibits  are set forth on the "Index to Exhibits" on page E-1
                  hereof.

      (b)   Reports on Form 8-K:

            Since the end of the third  quarter  of 1997,  the  Company  has not
            filed any Current Reports on Form 8-K.




                                      -36-

<PAGE>


                                   SIGNATURES

           Pursuant  to the  requirements  of the  Securities  Act of 1934,  the
Company  has  duly  caused  this  report  to be  signed  on  its  behalf  by the
undersigned,  thereunto duly  authorized,  in the City of New York, State of New
York, on the 31st day of March, 1998.

                                                  THE LESLIE FAY COMPANY, INC.

                                                  By: /s/ John J. Pomerantz
                                                      -------------------------
                                                      John J. Pomerantz
                                                      Chief Executive Officer
                                                      and Chairman of the 
                                                      Board of Directors


           Pursuant to the  requirements  of the  Securities  Act of 1934,  this
report has been signed by the following  persons on behalf of the Company and in
the capacities and on the dates indicated.

   Signatures                      Title                    Date


/s/  John J. Pomerantz        Chief Executive Officer and         March 31, 1998
---------------------------   Chairman of the Board of
John J. Pomerantz             Directors



/s/ Warren T. Wishart         Chief Financial and Accounting      March 31, 1998
---------------------------   Officer
Warren T. Wishart



/s/ John A. Ward              Director                            March 31, 1998
---------------------------
John A. Ward



/s/ Clifford B. Cohn          Director                            March 31, 1998
---------------------------
Clifford B. Cohn



/s/ Mark B. Dickstein         Director                            March 31, 1998
---------------------------
Mark B. Dickstein



/s/ Mark Kaufman              Director                            March 31, 1998
---------------------------
Mark Kaufman



/s/ William Nightingale       Director                            March 31, 1998
---------------------------
William Nightingale



/s/ Robert L. Sind            Director                            March 31, 1998
---------------------------
Robert L. Sind



                                      -37-

<PAGE>


                  THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS





                                                                        Page No.

Report of Independent Public Accountants                                  F-2

Consolidated Financial Statements:

           Consolidated Balance Sheets                                    F-3

           Consolidated Statements of Operations                          F-4

           Consolidated Statements of Stockholders' (Deficit) Equity      F-5

           Consolidated Statements of Cash Flows                          F-6

           Notes to Consolidated Financial Statements                     F-7

Financial Statement Schedule:

           Schedule II-Valuation and Qualifying Accounts                  F-35




                                       F-1

<PAGE>



                    Report of Independent Public Accountants


To the Stockholders and Board of Directors of
The Leslie Fay Company, Inc.:

We have audited the accompanying  consolidated  balance sheets of The Leslie Fay
Company,  Inc. (a Delaware  corporation  and formerly The Leslie Fay  Companies,
Inc.) and  subsidiaries  as of January 3, 1998 and December  28,  1996,  and the
related consolidated  statements of operations,  stockholders'  (deficit) equity
and cash flows for the  thirty-one  weeks ended January 3, 1998,  the twenty-two
weeks  ended June 4, 1997,  and the fiscal  years  ended  December  28, 1996 and
December 30, 1995. These financial statements and the schedule referred to below
are the  responsibility of the Company's  management.  Our  responsibility is to
express an opinion  on these  financial  statements  and  schedule  based on our
audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

As more fully  described  in Note 2 to the  consolidated  financial  statements,
effective June 4, 1997, the Company emerged from protection  under chapter 11 of
the U.S.  Bankruptcy Code pursuant to a Reorganization  Plan which was confirmed
by the Bankruptcy Court on April 21, 1997. In accordance with AICPA Statement of
Position 90-7, the Company adopted "Fresh Start  Reporting"  whereby its assets,
liabilities  and new capital  structure were adjusted to reflect  estimated fair
values as of June 4, 1997. As a result,  the consolidated  financial  statements
for the periods subsequent to June 4, 1997 reflect the Reorganized Company's new
basis  of  accounting  and  are  not  comparable  to the  Predecessor  Company's
pre-reorganization consolidated financial statements.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the financial  position of The Leslie Fay Company,  Inc.
and subsidiaries as of January 3, 1998 and December 28, 1996, and the results of
their  operations and their cash flows for the thirty-one weeks ended January 3,
1998,  the  twenty-two  weeks  ended June 4, 1997,  and the fiscal  years  ended
December 28, 1996 and December 30, 1995 in conformity  with  generally  accepted
accounting principles.

Our audit was made for the purpose of forming an opinion on the basic  financial
statements  taken  as  a  whole.  The  schedule  listed  in  the  index  to  the
consolidated  financial  statements is presented for purposes of complying  with
the  Securities  and  Exchange  Commission's  rules and is not part of the basic
financial  statements.   This  schedule  has  been  subjected  to  the  auditing
procedures  applied in the audit of the basic  financial  statements and, in our
opinion,  fairly states in all material  respects the financial data required to
be set forth therein in relation to the basic  financial  statements  taken as a
whole.


                                                         /s/ ARTHUR ANDERSEN LLP

                                                           ARTHUR ANDERSEN LLP
New York, New York
February 27, 1998, except with respect to
Note 6 as to which the date is March 31, 1998


                                       F-2

<PAGE>



                  THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                    (IN THOUSANDS, EXCEPT FOR PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                                   REORGANIZED  |  PREDECESSOR
                                                                                     COMPANY    |    COMPANY
                                                                                    JANUARY 3,  |   DECEMBER 28,
                                                                                       1998     |      1996    
                                                                                    ---------   |   ---------
<S>                                                                                 <C>             <C>      
                                     ASSETS                                                     | 
Current Assets:                                                                                 | 
    Cash and cash equivalents ..................................................    $  18,455   |   $  21,977
    Restricted cash and cash equivalents .......................................        1,358   |        --
    Restricted short term investments ..........................................        2,989   |        --
    Accounts receivable- net of allowances for possible losses of $3,236                        | 
        and $15,081, respectively ..............................................        9,747   |      63,456
    Inventories ................................................................       26,701   |     104,383
    Prepaid expenses and other current assets ..................................          807   |       2,290
    Assets of product lines held for sale or disposition .......................         --     |       3,003
                                                                                    ---------   |   ---------
        Total Current Assets ...................................................       60,057   |     195,109
    Property, plant and equipment, at cost, net of accumulated                                  | 
        depreciation of $14 and $19,549, respectively ..........................          845   |      17,575
    Excess of purchase price over net assets acquired-net of accumulated                        | 
        amortization of $-0- and $10,848, respectively .........................         --     |      23,795
    Deferred charges and other assets ..........................................          149   |       1,182
                                                                                    ---------   |   ---------
    Total Assets ...............................................................    $  61,051   |   $ 237,661
                                                                                    =========   |   =========
                  LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)                                | 
Current Liabilities:                                                                            | 
    Accounts payable ...........................................................    $  11,530   |   $  20,341
    Accrued expenses and other current liabilities .............................        4,542   |      23,154
    Accrued expenses and other current confirmation liabilities ................        4,347   |        --
    Income taxes payable .......................................................           25   |         634
    Current portion of capitalized leases ......................................          160   |        --
    Direct liabilities of product lines held for sale or disposition ...........         --     |       1,577
                                                                                    ---------   |   ---------
        Total Current Liabilities ..............................................       20,604   |      45,706
    Excess of revalued net assets acquired over equity under fresh-start                        | 
        reporting, net of accumulated amortization of $2,667 ...................       11,041   |        --
    Long term debt-capitalized leases ..........................................           49   |        --
    Deferred liabilities .......................................................          143   |        --
    Liabilities subject to compromise ..........................................         --     |     337,433
                                                                                    ---------   |   ---------
    Total Liabilities ..........................................................       31,837   |     383,139
                                                                                    ---------   |   ---------
                                                                                                |
Commitments and Contingencies                                                                   |
                                                                                                |
Stockholders' (Deficit) Equity:                                                                 |
    Preferred stock, $.01 and $-0- par value,  respectively ; 500 and -0- shares                
        authorized, respectively ; no shares issued                                             |
        and outstanding ........................................................         --     |        --   
     Common stock, $.01 and  $1 par value, respectively; 9,500 and                              |  
         50,000 shares authorized, respectively; 3,400 and 20,000                               |  
         shares issued and outstanding, respectively ...........................           34   |      20,000
     Capital in excess of par value ............................................       25,871   |      49,012
     Accumulated retained earnings (deficit) ...................................        3,309   |    (202,105)
     Foreign currency translation adjustment ...................................         --     |         581
                                                                                    ---------   |   ---------
         Subtotal ..............................................................       29,214   |    (132,512)
     Treasury stock, at cost -0- and 1,228 shares, respectively ................         --     |     (12,966)
                                                                                    ---------   |   ---------
         Total Stockholders' (Deficit) Equity ..................................       29,214   |    (145,478)
                                                                                    ---------   |   ---------
     Total Liabilities and Stockholders' (Deficit) Equity ......................    $  61,051   |   $ 237,661
                                                                                    =========   |   =========
</TABLE>

       The accompanying Notes to Consolidated Financial Statements are an
            integral part of these consolidated financial statements.

                                       F-3

<PAGE>



                  THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                 REORGANIZED  |
                                                                   COMPANY    |                PREDECESSOR COMPANY
                                                                ------------  |   ----------------------------------------------
                                                                 THIRTY-ONE   |    TWENTY-TWO       FIFTY-TWO        FIFTY-TWO
                                                                WEEKS ENDED   |   WEEKS ENDED      WEEKS ENDED      WEEKS ENDED
                                                                  JANUARY 3,  |      JUNE 4,       DECEMBER 28,     DECEMBER 30,
                                                                    1998      |       1997             1996             1995
                                                                ------------  |   ------------     ------------     ------------
<S>                                                             <C>               <C>              <C>              <C>         
Net Sales ..................................................    $     73,091  |   $    197,984     $    429,676     $    442,084
Cost of Sales ..............................................          58,719  |        147,276          331,372          345,891
                                                                ------------  |   ------------     ------------     ------------
    Gross profit ...........................................          14,372  |         50,708           98,304           96,193
                                                                ------------  |   ------------     ------------     ------------
Operating Expenses:                                                           |
    Selling, warehouse, general and                                           |
        administrative expenses ............................          13,650  |         35,459           79,570           92,832
    Depreciation and amortization expense ..................              14  |          2,090            4,654            6,154
        Total operating expenses ...........................          13,664  |         37,549           84,224           98,986
    Other (income) .........................................            (947) |         (1,196)          (3,885)          (4,028)
    Amortization of excess revalued net assets                                |
        acquired over equity ...............................          (2,667) |           --               --               --
                                                                ------------  |   ------------     ------------     ------------
    Total operating expenses, net ..........................          10,050  |         36,353           80,339           94,958
                                                                ------------  |   ------------     ------------     ------------
    Operating income .......................................           4,322  |         14,355           17,965            1,235
                                                                              |
Interest and Financing Costs (excludes contractual                            |
    interest of $-0-, $7,513, $18,031 and $18,031,                            |
    respectively) ..........................................             336  |          1,372            3,932            3,262
                                                                ------------  |   ------------     ------------     ------------
Income(loss) before reorganization costs, taxes,                              |
    gain on sale, fresh-start revaluation and                                 |
    extraordinary item .....................................           3,986  |         12,983           14,033           (2,027)
                                                                              |
Reorganization Costs .......................................            --    |          3,379            5,144           16,575
                                                                ------------  |   ------------     ------------     ------------
                                                                              |
    Income (loss) before taxes, gain on sale,                                 |
        fresh-start revaluation and extraordinary                             |
        item ...............................................           3,986  |          9,604            8,889          (18,602)
                                                                              |
Provision (Benefit) for taxes ..............................             677  |            451             (839)            (761)
                                                                ------------  |   ------------     ------------     ------------
                                                                              |
    Net Income (loss) before gain on sale, fresh-                             |
        start revaluation and extraordinary item ...........           3,309  |          9,153            9,728          (17,841)
                                                                              |
Gainon disposition of Sassco Fashions line (net of $3,728 of                  |
    income taxes), loss on revaluation of assets pursuant to                  |
    adoption of fresh-start reporting and extraordinary                       |
    gain on debt discharge .................................            --    |        136,341             --               --
                                                                ------------  |   ------------     ------------     ------------
                                                                              |
    Net Income (Loss) ......................................    $      3,309  |   $    145,494     $      9,728     ($    17,841)
                                                                ============  |   ============     ============     ============
                                                                              |
    Net Income (Loss) per Share - Basic ....................    $       0.97  |              *     $       0.52     ($      0.95)
                                                                ============  |   ============     ============     ============
               - Diluted ...................................    $       0.85  |              *     $       0.52     ($      0.95)
                                                                ============  |   ============     ============     ============
                                                                              |
Weighted Average Shares Outstanding - Basic ................       3,400,000  |              *       18,771,836       18,771,836
                                                                ============  |   ============     ============     ============
               - Diluted ...................................       3,888,692  |              *       18,771,836       18,771,836
                                                                ============  |   ============     ============     ============
</TABLE>


             *Earnings per share is not presented for the twenty-two
               weeks ended June 4, 1997 because such presentation
               would not be meaningful. The old stock was canceled
               under the plan of reorganization and the new stock
                   was not issued until the consummation date.

       The accompanying Notes to Consolidated Financial Statements are an
            integral part of these consolidated financial statements.

                                       F-4

<PAGE>



                  THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
            CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
                        (IN THOUSANDS, EXCEPT SHARE DATA)

[TABLE 1 OF 2]
<TABLE>
<CAPTION>
                                                                                         EXCESS OF
                                                                                        ACCUMULATED
                                                                                          PENSION                         FOREIGN   
                                                COMMON STOCK             CAPITAL IN      OBLIGATION     ACCUMULATED       CURRENCY  
                                        ---------------------------      EXCESS OF       OVER PLAN        (DEFICIT)     TRANSLATION 
                                           SHARES        PAR VALUE       PAR VALUE        ASSETS           EQUITY        ADJUSTMENT 
                                        -----------     -----------     -----------     -----------     -----------     ----------- 
<S>                                      <C>            <C>             <C>             <C>             <C>             <C>         
BALANCE AT JANUARY 1, 1995               20,000,000     $    20,000     $    49,012     $      --       ($  193,992)    $        11 
Fiscal Year 1995
   Net Loss                                    --              --              --              --           (17,841)           --   
   Deferred Pension Liability                  --              --              --              (214)           --              --   
   Foreign Currency Translation
      Adjustments                              --              --              --              --              --                82 
                                        -----------     -----------     -----------     -----------     -----------     ----------- 

BALANCE AT DECEMBER 30, 1995             20,000,000     $    20,000     $    49,012            (214)    ($  211,833)    $        93 
Fiscal Year 1996
   Net Income                                  --              --              --              --             9,728            --   
   Deferred Pension Liability Write-
      Off                                      --              --              --               214            --              --   
   Foreign Currency Translation
      Adjustments                              --              --              --              --              --               488 
                                        -----------     -----------     -----------     -----------     -----------     ----------- 

BALANCE AT DECEMBER 28, 1996             20,000,000     $    20,000     $    49,012     $      --       ($  202,105)    $       581 
   Twenty-Two Weeks Ended June 4,
                                                                                                                                    
   Net Income                                  --              --              --              --           145,494            --   
   Revaluation Adjustment                      --              --              --              --            56,611            --   
   Extinguishment of Old Stock          (20,000,000)        (20,000)        (49,012)           --              --              (581)
   New Stock Issuance                     3,400,000              34          24,966            --              --              --   
   Foreign Currency Translation
      Adjustments                              --              --              --              --              --              --   
                                        -----------     -----------     -----------     -----------     -----------     ----------- 

REORGANIZED AS OF JUNE 4, 1997            3,400,000     $        34     $    24,966     $      --       $      --       $      --   
                                        ===========     ===========     ===========     ===========     ===========     =========== 

Balance at June 4, 1997                   3,400,000     $        34     $    24,966     $      --       $      --       $      --   
Thirty-One Weeks Ended January 3,
                                                                                                                                    
   Net Income                                  --              --              --              --             3,309            --   
   Use of Pre-Consummation
      Deferred Taxes                           --              --               554            --              --              --   
   SFAS No. 123 - Stock Option
      Compensation                             --              --               351            --              --              --   
                                        -----------     -----------     -----------     -----------     -----------     ----------- 

BALANCE AT JANUARY 3, 1998                3,400,000     $        34     $    25,871     $      --       $     3,309     $      --   
                                        ===========     ===========     ===========     ===========     ===========     =========== 
</TABLE>



[TABLE 2 OF 2]
<TABLE>
<CAPTION>
                                        
                                        
                                                                          TOTAL
                                             TREASURY STOCK             STOCKHOLDERS'
                                        ---------------------------      (DEFICIT)
                                          SHARES           AMOUNT         EQUITY
                                        -----------     -----------     -----------
<S>                                       <C>           <C>             <C>         
BALANCE AT JANUARY 1, 1995                1,228,164     ($   12,966)    ($  137,935)
Fiscal Year 1995
   Net Loss                                    --              --           (17,841)
   Deferred Pension Liability                  --              --              (214)
   Foreign Currency Translation
      Adjustments                              --              --                82
                                        -----------     -----------     -----------

BALANCE AT DECEMBER 30, 1995              1,228,164     ($   12,966)    ($  155,908)
Fiscal Year 1996
   Net Income                                  --              --             9,728
   Deferred Pension Liability Write-
      Off                                      --              --               214
   Foreign Currency Translation
      Adjustments                              --              --               488
                                        -----------     -----------     -----------

BALANCE AT DECEMBER 28, 1996              1,228,164     ($   12,966)    ($  145,478)
   Twenty-Two Weeks Ended June 4,
                                                                               1997
   Net Income                                  --              --           145,494
   Revaluation Adjustment                      --              --            56,611
   Extinguishment of Old Stock           (1,228,164)         12,966         (56,627)
   New Stock Issuance                          --              --            25,000
   Foreign Currency Translation
      Adjustments                              --              --              --
                                        -----------     -----------     -----------

REORGANIZED AS OF JUNE 4, 1997          $      --       $      --       $    25,000
                                        ===========     ===========     ===========

Balance at June 4, 1997                        --       $      --       $    25,000
Thirty-One Weeks Ended January 3,
                                                                               1998
   Net Income                                  --              --             3,309
   Use of Pre-Consummation
      Deferred Taxes                           --              --               554
   SFAS No. 123 - Stock Option
      Compensation                             --              --               351
                                        -----------     -----------     -----------

BALANCE AT JANUARY 3, 1998              $      --       $      --       $    29,214
                                        ===========     ===========     ===========
</TABLE>



       The accompanying Notes to Consolidated Financial Statements are an
            integral part of these consolidated financial statements.

                                       F-5

<PAGE>

                  THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                 REORGANIZED |
                                                                   COMPANY   |            PREDECESSOR COMPANY
                                                                  ---------  |   -------------------------------------
                                                                 THIRTY-ONE  |  TWENTY-TWO     FIFTY-TWO     FIFTY-TWO
                                                                 WEEKS ENDED |  WEEKS ENDED   WEEKS ENDED   WEEKS ENDED
                                                                  JANUARY 3, |    JUNE 4,     DECEMBER 28,  DECEMBER 30,
                                                                    1998     |     1997          1996          1995
                                                                  ---------  |   ---------     ---------     ---------
<S>                                                               <C>            <C>           <C>           <C>       
CASH FLOWS FROM OPERATING ACTIVITIES:                                        |
   Net income (loss) .........................................    $   3,309  |   $ 145,494     $   9,728     ($ 17,841)
   Adjustments to reconcile net income (loss) to net cash                    |
      (used in) provided by operating activities:                            |
      Depreciation and amortization ..........................           14  |       2,222         4,971         7,116
      Amortization of excess net assets acquired over equity .       (2,667) |        --            --            --
      Deferred taxes .........................................         --    |        --          (1,103)       (1,811)
      Provision for possible losses on accounts receivable ...         (182) |         199           433         1,254
      Provision for compensation under stock option grants ...          351  |        --            --            --
      (Gain) on sale of fixed assets .........................         --    |        (347)         --            --
      Decrease (increase) in:                                                |
        Restricted short-term investments ....................       (2,989) |        --            --            --
        Accounts receivable ..................................        6,845  |      (1,248)       (9,296)          494
        Inventories ..........................................       (7,586) |      25,538        (5,600)       11,291
        Prepaid expenses and other current assets ............          377  |         (66)        1,950           (16)
        Income taxes refundable ..............................         --    |        --          10,345        (1,735)
        Deferred charges and other assets ....................         (149) |         125         1,263         1,926
      (Decrease) increase in:                                                |
        Accounts payable, accrued expenses and other current                 |
           liabilities .......................................       (6,544) |      (4,167)      (11,860)        6,902
        Income taxes payable .................................         (806) |      (1,515)         (395)       (1,113)
        Deferred credits and other noncurrent liabilities ....          143  |         374           470          (243)
      Changes due to reorganization activities:                              |
        Gain on disposition of Sassco Fashions line, fresh-                  |
           start revaluation and extraordinary gain on debt                  |
           discharge .........................................         --    |    (136,341)         --            --
        Reorganization costs .................................         --    |       3,379         5,144        16,575
        Payment of reorganization costs ......................         --    |        (917)       (7,757)      (25,792)
        Use of pre-consummation deferred taxes ...............          554  |        --            --            --
                                                                  ---------  |   ---------     ---------     ---------
           Total adjustments .................................      (12,639) |    (112,764)      (11,435)       14,848
                                                                  ---------  |   ---------     ---------     ---------
           Net cash (used in) provided by operating activities       (9,330) |      32,730        (1,707)       (2,993)
                                                                  ---------  |   ---------     ---------     ---------
                                                                             |
CASH FLOWS FROM INVESTING ACTIVITIES:                                        |
   Capital expenditures ......................................         (859) |      (3,731)       (8,640)       (3,977)
   Proceeds from sale of assets ..............................         --    |         467          --            --
   Proceeds from sale of Castleberry .........................         --    |         600          --            --
   Cash paid to sell/transfer the Sassco Fashions line .......         --    |     (10,963)         --            --
   Proceeds from sale of Next Day Apparel (net of cash                       |
      provided of $405) ......................................         --    |        --            --           3,081
                                                                  ---------  |   ---------     ---------     ---------
           Net cash (used in) investing activities ...........         (859) |     (13,627)       (8,640)         (896)
                                                                  ---------  |   ---------     ---------     ---------
                                                                             |
CASH FLOWS FROM FINANCING ACTIVITIES:                                        |
   Proceeds from borrowings ..................................         --    |        --          55,170        11,940
   Repayment of borrowings ...................................         --    |        --         (55,170)       (8,440)
   Repayment of long-term debt ...............................         (135) |        --            --            --
   Payment of obligations under the Plan of Reorganization ...      (10,943) |        --            --            --
                                                                  ---------  |   ---------     ---------     ---------
           Net cash (used in) provided by financing activities      (11,078) |        --            --           3,500
                                                                  ---------  |   ---------     ---------     ---------
                                                                             |
   Net (decrease) increase in cash and cash equivalents ......      (21,267) |      19,103       (10,347)         (389)
                                                                             |
   Cash and cash equivalents, at beginning of period .........       41,080  |      21,977        32,324        32,713
                                                                  ---------  |   ---------     ---------     ---------
                                                                             |
   Cash and cash equivalents, at end of period ...............    $  19,813  |   $  41,080     $  21,977     $  32,324
                                                                  =========  |   =========     =========     =========
</TABLE>


       The accompanying Notes to Consolidated Financial Statements are an
           integral part of these consolidated financial statements.

                                       F-6

<PAGE>



                  THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.    BASIS OF PRESENTATION AND ORGANIZATION, RESTATEMENT OF PRIOR FINANCIAL 
      STATEMENTS AND RELATED EVENTS:

           The  consolidated  financial  statements  included  herein  have been
prepared by The Leslie Fay Company,  Inc.  (formerly  The Leslie Fay  Companies,
Inc.)  and   subsidiaries   (The  Leslie  Fay  Company,   Inc.  being  sometimes
individually  referred  to,  and  together  with its  subsidiaries  collectively
referred to, as the  "Company" as the context may require),  in accordance  with
generally accepted accounting principles, which, for certain financial statement
accounts,  requires the use of  management's  estimates.  Actual  results  could
differ from those  estimates.  The  Company's  fiscal year ends on the  Saturday
closest to December 31st.  The fiscal years ended January 3, 1998,  December 28,
1996 and December 30, 1995 included 53, 52 and 52 weeks, respectively.

           As a result of the  consummation of the Joint Plan of  Reorganization
("the Plan" - see Note 2) and the adoption of  fresh-start  reporting  under the
American Institute of Certified Public Accountants'  Statement of Position 90-7,
"Financial  Reporting by Entities in  Reorganization  Under the Bankruptcy Code"
("SOP  90-7"),  the Company  reported its financial  results for the  twenty-two
weeks ended June 4, 1997. This period contains  financial  statements and notes,
including the effects of the adoption of fresh-start  reporting and consummation
of the Plan. The significant fresh-start reporting adjustments are summarized in
Note 2.

           In the opinion of management,  the information furnished reflects all
additional adjustments, all of which are of a normal recurring nature, necessary
for a fair presentation of the results for the reported interim periods. Results
of operations for interim periods are not necessarily  indicative of results for
the full year, and the seasonality of the business may make  projections of full
year results based on interim periods unreasonable.

2.    REORGANIZATION CASE AND FRESH-START REPORTING:

           On April 5, 1993 ("the Filing Date"), The Leslie Fay Companies,  Inc.
("Leslie Fay") and each of Leslie Fay Licensing Corp., Spitalnick Corp. and Hue,
Inc.,  wholly-owned  subsidiaries  of Leslie Fay  (collectively  the "Debtors"),
filed  a  voluntary  petition  under  chapter  11 of the  Bankruptcy  Code  (the
"Bankruptcy  Code").  The  Debtors  operated  their  businesses  as  debtors  in
possession  subject to the  jurisdiction  and  supervision  of the United States
Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court").
Pursuant to an order of the Bankruptcy  Court,  the individual  chapter 11 cases
were consolidated for procedural purposes only and were jointly  administered by
the Bankruptcy Court.

           On November 15, 1995,  Leslie Fay Retail  Outlets,  Inc.;  Leslie Fay
Factory Outlet (Alabama),  Inc.; Leslie Fay Factory Outlet  (California),  Inc.;
Leslie Fay Factory Outlet (Iowa), Inc.; and Leslie


                                       F-7

<PAGE>



Fay Factory Outlet  (Tennessee),  Inc., all wholly-owned  subsidiaries of Leslie
Fay (collectively referred to as the "Retail Debtors") filed voluntary petitions
under chapter 11 of the  Bankruptcy  Code.  The Retail  Debtors  operated  their
businesses as debtors in possession  following the November 15, 1995 filing date
while pursuing an orderly  liquidation of their assets, also under chapter 11 of
the Bankruptcy Code.

           In the  chapter 11 cases,  substantially  all  liabilities  as of the
Filing Date were subject to compromise under the Plan. As part of the cases, the
Debtors  and Retail  Debtors  notified  all known  claimants  for the purpose of
identifying  all  pre-petition  claims  against them.  Pursuant to orders of the
Bankruptcy  Court, all proofs of claim were required to be filed by December 10,
1993  against the  Debtors and  December  12, 1995  against the Retail  Debtors.
Excluded from the  requirement to file by the December 10, 1993 bar date,  among
others, were certain claims by the Internal Revenue Service ("IRS"),  which were
required to be filed by March 31, 1995. On April 8, 1996, the Debtors and Retail
Debtors filed amended  schedules of liabilities  with the Bankruptcy Court which
established May 8, 1996 as the supplemental bar date for certain creditors.

           On October  31,  1995,  the Debtors and the  Committee  of  Unsecured
Creditors (the "Creditors  Committee")  filed the Plan pursuant to chapter 11 of
the  Bankruptcy  Code.  The Plan was  subsequently  amended  on March 13,  1996,
December 5, 1996,  February 3, 1997 and February 28, 1997.  On December 5, 1996,
the  Debtors  filed  a  Disclosure  Statement  for  the  Amended  Joint  Plan of
Reorganization  pursuant to chapter 11 of the Bankruptcy  Code (the  "Disclosure
Statement"),  which  was also  subsequently  amended  on  February  3,  1997 and
February 28, 1997. The Plan provided for, among other things,  the separation of
the Debtors' estates and assets into two separate  reorganized  entities.  Under
the Plan,  stockholders of the Company would not retain or receive any value for
their interest. The Debtors obtained Bankruptcy Court approval of the Disclosure
Statement on February 28, 1997.  The Plan was approved by the  creditors  and on
April 21, 1997, the Bankruptcy Court confirmed the Plan.

           The total number of claims,  after resolution of the claims objection
process,  approximated  4,300  and the  claims  value  aggregated  approximately
$338,000,000.  The  principal  categories of claims  classified  as  Liabilities
subject to compromise in the consolidated balance sheet at December 28, 1996 are
identified below.


                Liabilities Subject to Compromise             December 28, 1996
                ---------------------------------             -----------------
                                                                (In thousands)
            Trade and expense payable                              $  42,187
            Unsecured debt                                           253,004
            Accrued interest                                              82
            Other claims                                              42,160
                                                                   ---------
               Total                                               $ 337,433
                                                                   =========

           The  Company  had  accrued   $13,366,000  in  1993  for  interest  on
pre-petition debt accrued during the post-petition  period, even though all or a
significant  portion  of such  interest  may not have been  payable or paid as a
consequence of the Bankruptcy Code, which excuses such an obligation


                                       F-8

<PAGE>



under certain circumstances.  For this reason, the Company decided not to accrue
interest on  pre-petition  debt in 1995 and 1994,  and the interest  payable was
reflected in  pre-petition  liabilities  at December 29, 1995.  The Plan did not
provide for the payment of this interest and,  accordingly,  this  liability was
reclassified  to provide for other claims,  including an  additional  withdrawal
liability from a union retirement plan.

           On June 4, 1997 (the  "Consummation  Date"), the Plan was consummated
by the  Company 1)  transferring  the equity  interest  in both the  Company and
Sassco Fashions, Ltd. ("Sassco"),  which changed its name to Kasper A.S.L., Ltd.
on November 5, 1997,  to its creditors in exchange for relief from the aggregate
amount  of the  claims  estimated  at  $338,000,000;  2)  assigning  to  certain
creditors  the ownership  rights to notes  aggregating  $110,000,000  payable by
Sassco;  and 3)  transferring  the assets  (including  $10,963,000  of cash) and
liabilities  of the  Company's  Sassco  Fashions  product line to Sassco and the
assets  and  liabilities  of its Dress  and  Sportswear  product  lines to three
wholly-owned  subsidiaries  of the Company.  In addition,  the Company  retained
approximately $41,080,000 in cash of which $23,580,000 was to pay administrative
claims as defined in the Plan. As provided for in the Plan,  the Company  issued
seventy-nine  (79%) percent of its 3,400,000 new shares to its creditors in July
1997.  The  remaining  twenty-one  (21%)  percent is being held back pending the
resolution  of certain  litigation  before the  Bankruptcy  Court.  The existing
stockholders  of the Company at June 4, 1997 did not retain or receive any value
for their  equity  interest in the  Company.  Reference  is made to the Exhibits
attached  hereto,  and Item 1 - Recent  Developments  contained in the Company's
Form 10-K for the fiscal year ended December 28, 1996 for a copy of the Plan and
a summary of Plan provisions, respectively.

           In accordance  with the Plan,  the remaining  Liabilities  subject to
compromise  were  discharged and the Company  recognized a gain of  $73,541,000,
which  is  reflected  as  an  Extraordinary   Gain  on  Debt  Discharge  in  the
consolidated  statement of  operations  for the  twenty-two  weeks ended June 4,
1997.

Fresh-Start Reporting
---------------------

           Pursuant to the guidelines  provided by SOP 90-7, the Company adopted
fresh-start  reporting and reflected the  consummation  distributions  under its
Plan in the consolidated balance sheet as of June 4, 1997 (the effective date of
the  consummation  of the  Plan  for  accounting  purposes).  Under  fresh-start
reporting,  the Company's  reorganization  value of $25,000,000 was allocated to
its net assets on the basis of the purchase method of accounting.

           The significant  fresh-start  reporting adjustments are summarized as
follows:

            1.    Cancellation  of the old  common  stock  pursuant  to the Plan
                  against the accumulated deficit.

            2.    Allocation  of the fair market value of the  identifiable  net
                  assets  in  excess  of  the  reorganization   value  (negative
                  goodwill)  in   accordance   with  the   purchase   method  of
                  accounting.  The  negative  goodwill  amount  remaining  after
                  reducing non-current assets

                                       F-9

<PAGE>



                  acquired to zero was recorded as a deferred credit, "Excess of
                  revalued net assets  acquired  over equity  under  fresh-start
                  reporting" and is being amortized over three (3) years.

           The  resulting   charge  of  $27,010,000  from  all  the  fresh-start
adjustments,  including  the  write-off of all revalued  noncurrent  assets (but
excluding the write-off of the old stock for $56,611,000), is presented as "loss
on revaluation of assets  pursuant to adoption of fresh-start  reporting" in the
consolidated  statement of  operations  for the  twenty-two  weeks ended June 4,
1997.

           The  fresh-start  reporting  reorganization  value of $25,000,000 was
established as the midpoint of a range  ($20,000,000 - $30,000,000)  established
by the Company's financial advisors. The calculation of the range was based on a
five-year  analysis of the  Company's  projected  operations  for the  remaining
operating product lines (fiscal years ended 1996 - 2001),  which was prepared by
management, and a discounted cash flow methodology was applied to those numbers.

           The  five-year  cash flow  projections  were based on  estimates  and
assumptions  about  circumstances and events that have not yet taken place. Such
estimates and  assumptions  are inherently  subject to significant  economic and
competitive  uncertainties and contingencies  beyond the control of the Company,
including,  but not limited to, those with  respect to the future  course of the
Company's business activity.

           Since  fresh-start  reporting has been reflected in the  accompanying
consolidated balance sheet as of January 3, 1998, the consolidated balance sheet
as of that date is not comparable in material respects to any such balance sheet
for any period prior to June 4, 1997.

3.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

(a)   BUSINESS -

           The Company is  principally  engaged in the design,  manufacture  and
sale of women's apparel.

(b)   PRINCIPLES OF CONSOLIDATION -

           The  consolidated  financial  statements  include the accounts of the
Company  and  its  subsidiaries.   All  significant  intercompany  balances  and
transactions have been eliminated in consolidation.

(c)   CASH EQUIVALENTS AND SHORT TERM INVESTMENTS

           All highly  liquid  investments  with a  remaining  maturity of three
months or less at the date of acquisition  are  classified as cash  equivalents.
The carrying  amount of cash  equivalents  approximates  fair value.  Short term
investments consists of a one year U.S. Treasury Note maturing on June 30, 1998.
This note will be held to maturity and as such is valued at cost.  At January 3,
1998,  $1,358,000 of restricted  cash and  $2,989,000 in short term  investments
will be used to pay administrative claims as defined in the Plan.


                                      F-10

<PAGE>



(d)   INVENTORIES -

           Inventories  are  valued at the lower of cost  (first-in,  first-out;
"FIFO") or market.

(e)   PROPERTY, PLANT AND EQUIPMENT -

           Land, buildings,  fixtures,  equipment and leasehold improvements are
recorded at cost.  Property  under capital lease is recorded at the lower of the
net present value of the lease  payments or the fair market value when acquired.
Major  replacements or betterments are capitalized.  Maintenance and repairs are
charged to earnings as incurred. For financial statement purposes,  depreciation
and amortization are computed using the straight-line  method over the estimated
useful lives of the assets.

(f)   EXCESS OF PURCHASE PRICE OVER NET ASSETS ACQUIRED -

           The Excess of purchase price over net assets  acquired first arose in
connection  with the 1984  leveraged  buyout of The Leslie Fay  Company  and was
allocated based upon the applicable product line's proportionate contribution to
pretax income. The asset was amortized on a straight-line basis,  primarily over
a forty year period.  On June 4, 1997, in connection with fresh-start  reporting
requirements the remaining asset of $10,366,000 and the related  ($3,106,000) of
accumulated  amortization was written-off as part of the revaluation adjustments
(see Note 2). In 1996, the Company determined the Excess purchase price over net
assets acquired of its Castleberry  product line was no longer recoverable based
on an offer to purchase  the  Castleberry  product  line in the fourth  quarter.
Therefore,  the  Company  recognized   reorganization  charges  of  $652,000  to
write-down  a portion of the  excess  purchase  price over net assets  acquired,
which  the  Company  believed  would be  unrecoverable  in  accordance  with the
Financial  Accounting Standards Board ("FASB") Statement of Financial Accounting
Standards ("SFAS") No. 121 - "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of."

(g)   EXCESS  OF  REVALUED  NET  ASSETS  ACQUIRED  OVER EQUITY UNDER FRESH-START
      REPORTING -

           Upon  consummation  of the Plan, the Company  revalued its assets and
liabilities in accordance with the purchase  method of accounting.  The revalued
net assets under fresh-start  reporting exceeded the equity value of the Company
by  $13,708,000.  This negative  goodwill amount is being amortized over a three
(3) year period.

(h)   FOREIGN CURRENCY TRANSLATION -

           The  December  28,  1996  balance  sheet  accounts  of the  Company's
Canadian and European  subsidiaries  were  translated  into U.S.  dollars at the
current exchange rate.  Their income  statement  accounts were translated at the
average exchange rate for the period.  Translation  adjustments were included in
stockholders'  (deficit)  equity.  The  Company's  Far  East  subsidiaries  were
financed by U.S.  dollar  advances and all of their finished goods sales were to
the parent.  Accordingly,  the functional  currency of the Far East subsidiaries
was the U.S. dollar, and remeasurement gains and losses (which


                                      F-11

<PAGE>



were not material) were included in determining  net income for the period.  The
effect  of  exchange  rate  changes  on cash was not  significant.  All  foreign
subsidiaries were either closed or spun-off in  reorganization  prior to June 4,
1997 (see Note 2).

(i)   INCOME TAXES -

           The Leslie  Fay  Company  and its  subsidiaries  file a  consolidated
Federal income tax return and record their tax expense and liabilities under the
liability  method (see Note 7).  Under this method,  any  deferred  income taxes
recorded  are  provided  for  at  currently   enacted  statutory  rates  on  the
differences  in the  basis  of  assets  and  liabilities  for tax and  financial
reporting  purposes.  If recorded,  deferred  income taxes are classified in the
balance sheet as current or non-current based upon the expected future period in
which such deferred income taxes are anticipated to reverse.

           No provision has been made for Federal income taxes on  approximately
$24,200,000 of foreign  earnings of  subsidiaries,  repatriated as a part of the
Plan as of June 4, 1997, as the Company's net operating  loss  carryforward  was
utilized to offset the extent of the repatriation.

(j)   NET INCOME (LOSS) PER SHARE -

           Net income (loss) per share,  throughout  the periods  presented,  is
based on the weighted  average  common shares  outstanding  and the common stock
equivalents that would arise from the exercise of stock options, if dilutive. In
March 1997, the FASB issued SFAS No. 128 - "Earnings Per Share",  which requires
the  presentation  of net income  (loss) per share to be  replaced  by basic and
diluted  earnings per share.  "Basic earnings  (loss) per share"  represents net
income divided by the weighted average shares outstanding and is consistent with
the Company's  historical  presentations.  "Diluted  earnings  (loss) per share"
represents net income (loss) divided by the weighted average shares  outstanding
adjusted for the incremental  dilution of outstanding employee stock options and
awards,  if  dilutive.  The  Company  adopted  SFAS  No.  128 at June  4,  1997.
Restatement of prior periods is not meaningful  due to the  consummation  of the
Plan,  the  extinguishment  of the existing stock and the issuance of new stock.
Had the  provisions  of SFAS No. 128 been applied as of December  28, 1996,  the
Company  believes it would not have a material  impact on Net Income  (Loss) per
share.

           As of January 3,  1998,  the basic  weighted  average  common  shares
outstanding is 3,400,000,  and the weighted average shares outstanding  assuming
dilution is 3,888,692.  The difference of 488,692 relates to incremental  shares
issuable relating to dilutive stock options.

(k) COMPREHENSIVE INCOME -

      SFAS No.130,  "Reporting  Comprehensive  Income" establishes standards for
reporting and displaying  comprehensive  income and its components in a full set
of general  purpose  financial  statements.  The  objective of SFAS No.130 is to
report a measure of all  changes in equity of an  enterprise  that  result  from
transactions  and other  economic  events of the period other than  transactions
with owners ("comprehensive income"). Comprehensive income is the total of net

                                      F-12

<PAGE>



income and all other  non-owner  changes  in equity  which is  presented  in the
consolidated financial statements.

(l)  SEGMENT DISCLOSURE -

           SFAS No.  131,  "Disclosures  about  Segments of and  Enterprise  and
Related  Information"  was issued in June 1997.  This statement is effective for
the Company's fiscal year ending January 2, 1999. This statement changes the way
public  companies report  information  about segments of their business in their
annual  financial  statements  and  requires  them to  report  selected  segment
information  in their  quarterly  reports.  Adoption  of SFAS No. 131 relates to
disclosure  within  the  financial  statements  and is not  expected  to  have a
material effect on the Company's financial statements.

(m)  PRIOR YEARS' RECLASSIFICATION -

           Certain  items  previously  reported  in  specific  captions  in  the
accompanying  financial  statements  have been  reclassified to conform with the
current year's classifications.

(n)  ACCOUNTING ESTIMATE -

           The preparation of financial  statements in conformity with generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that  affect the  reported  amounts of assets and  liabilities  and
disclosure  of  contingent  gains  and  losses  at the  date  of  the  financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.

4.    INVENTORIES:

           Inventories,  net of  assets  of  product  lines  held  for  sale and
disposition (see Note 12) consist of the following:


                                          January 3,    |     December 28,
                                             1998       |         1996
                                           --------     |       --------
(In thousands)                                          |
                                                        |
Raw materials                              $  9,638     |       $ 33,151
Work in process                               4,540     |          2,711
Finished goods                               12,523     |         68,521
                                           --------     |       --------
                                                        |
   Total inventories                       $ 26,701     |       $104,383
                                           ========     |       ========
                                                        
                                                        
           The balances at December 28, 1996 include the inventories  related to
the Sassco Fashions product line which was subsequently sold.
                                                        


                                      F-13

<PAGE>



5.    PROPERTY, PLANT AND EQUIPMENT:

           Property,  plant and  equipment,  net of assets of product lines held
for sale and disposition (see Note 12), consist of the following:

                                         January 3, |  December 28,  Estimated
                                            1998    |     1996      Useful Life
                                          --------  |   --------
                         (In thousands)             |
                                                    |
Land and buildings                        $   --    |   $    170    25-40 years
Machinery, equipment and fixtures              284  |     23,395    5 - 10 years
Leasehold improvements                          38  |      9,948    Various
Construction in progress                       537  |      3,611    N/A
                                          --------  |   --------
                                                    |
   Property, plant and equipment, at cost      859  |     37,124
Less: Accumulated depreciation and                  |
   amortization                                (14) |    (19,549)
                                          --------  |   --------
                                                    |
Total property, plant and                           |
    equipment, net                        $    845  |   $ 17,575
                                          ========  |   ========


           The  balances at December 28, 1996  include the  property,  plant and
equipment related to the Sassco Fashions product line which was sold/transferred
on June 4, 1997 as provided in the Plan.  In addition,  all  non-current  assets
were written-off at June 4, 1997 under fresh-start reporting (see Note 2).

6.    DEBT:

(a) CIT CREDIT AGREEMENT -

           On June 2, 1997, in preparation  for the  consummation of the Plan, a
wholly-owned  subsidiary  of  the  Company  entered  into a  two-year  financing
agreement (the "CIT Credit Agreement") with CIT to provide direct borrowings and
to issue  letters of credit on the Company's  behalf in an aggregate  amount not
exceeding $30,000,000,  with a sublimit on letters of credit of $20,000,000. The
CIT Credit  Agreement  became effective on June 4, 1997 with the consummation of
the Plan. Direct borrowings bear interest at prime plus 1.0% (9.5% at January 3,
1998) and the CIT Credit Agreement  requires a fee, payable monthly,  on average
outstanding  letters  of credit at a rate of 2%  annually.  There were no direct
borrowings   outstanding  under  the  CIT  Credit  Agreement  and  approximately
$8,514,000  was  committed  under  unexpired  letters of credit as of January 3,
1998.

           The CIT Credit  Agreement,  as amended,  contains  certain  reporting
requirements, as well as financial and operating covenants.  Financial covenants
include the  attainment of a current  assets to current  liabilities  ratio,  an
interest to earnings  ratio and minimum  earnings.  In addition,  the CIT Credit
Agreement contains certain restrictive  covenants,  including limitations on the
incurrence  of  additional  liens  and  indebtedness,  a  prohibition  on paying
dividends, and limitation on capital expenditures.  As collateral for borrowings
under the CIT  Credit  Agreement,  the  Company  has  granted  to CIT a security
interest  in  substantially  all of its  assets.  The  Company is  currently  in
compliance with all requirements contained in the CIT Credit Agreement.


                                      F-14

<PAGE>



           The  Company  paid  $150,000  in  commitment   and  related  fees  in
connection with the credit facility which was written-off as part of fresh-start
reporting. Another $250,000 in commitment fees was paid in June 1997. These fees
are being  amortized as interest and  financing  costs over the two year term of
the CIT Credit Agreement.

           The provisions of the Company's  Credit  Agreement with CIT have been
modified three times:

           On August 18,  1997,  CIT waived the  provision  contained in section
10.17 of the Credit  Agreement  that set a minimum  ratio of  current  assets to
current liabilities for the quarter ended July 5, 1997. This waiver was required
due to the later than  anticipated  consummation  of the Plan of  Reorganization
that caused a higher level of confirmation  expenses to remain unpaid as of July
5, 1997.  Such unpaid  confirmation  expenses  were  collateralized  by an equal
amount of cash and securities.

           On February 23, 1998,  CIT amended  several of the  provisions of the
Credit Agreement in order to adjust for the fresh start  accounting  adjustments
made in accordance with generally accepted accounting  principles  following the
Company's  exit from  bankruptcy.  As part of the  initial  financing  agreement
entered into by the Company with CIT on June 2, 1997, CIT had agreed to make the
appropriate amendments caused by "fresh start."

           This  February 23, 1998  amendment  also  included an increase in the
level of  allowed  annual  capital  expenditures  to  conform  to the  Company's
requirements.

           On March 31,  1998,  CIT  amended  numerous  sections  of the  Credit
Agreement in order to permit the Company to:

                  o     Purchase,  acquire or invest in  businesses,  subject to
                        the approval of CIT. Such  acquisitions  or  investments
                        may include the assumption of debt,  liens,  guarantees,
                        or contingent liabilities.

                  o     Pay dividends or repurchase  the Company's  common stock
                        up to an aggregate  amount of  $5,000,000 in each fiscal
                        year 1998 and 1999.  Such payment may also be limited by
                        not  experiencing or incurring an event of default under
                        the Credit  Agreement  that includes  other  restrictive
                        covenants.  Further,  such  payment  must also leave the
                        Company  with  no  less  than   $5,000,000   in  undrawn
                        availability.

                  o     Incur additional capital  expenditures to the extent the
                        prior year's actual capital  expenditures were less than
                        the amount  allowed for that year.  The  Company's  1997
                        capital  expenditures  from June 4, 1997 through the end
                        of the  fiscal  year  were  $859,000.  This  amount  was
                        $641,000  below  the 1997  covenant.  Effectively,  this
                        raises  the  1998  limit  on  capital   expenditures  to
                        $3,141,000.


                                      F-15

<PAGE>



(b) FNBB CREDIT AGREEMENT/DIP CREDIT AGREEMENT -

           The  Company  previously  had a  facility  for a  $60,000,000  credit
agreement  with The First  National  Bank of  Boston  ("FNBB")  and  BankAmerica
Business Credit,  Inc.  ("BABC"),  as Facility Agents and FNBB as Administrative
Agent (the "FNBB Credit Agreement").  In connection with the consummation of the
Plan, the Company entered into an agreement (the "Paydown  Agreement")  with its
lenders  under the FNBB Credit  Agreement to paydown any  remaining  obligations
under the FNBB Credit  Agreement and terminate the FNBB Credit Agreement on June
4, 1997. The FNBB Credit Agreement had expired on May 31, 1997, but continued in
effect until the  consummation  of the Plan with the consent of both the lenders
and the Company.

           The  FNBB  Credit  Agreement   provided  for   post-petition   direct
borrowings  and the issuance of letters of credit on the  Debtors'  behalf in an
aggregate amount not exceeding $60,000,000, subject to being permanently reduced
on a dollar-for-dollar basis for any net cash proceeds received from the sale of
assets after March 20, 1995 for which the proceeds  exceeded  $20,000,000 in the
aggregate up to a maximum of  $40,000,000 on a cumulative  basis.  No qualifying
asset sales were made which would have  reduced the facility  borrowing  limits.
Beginning  January 1, 1997,  the  sublimit on the  revolving  line of credit was
$20,000,000 and the sublimit for letters of credit was $50,000,000.

           There were no direct  borrowings  outstanding  under the FNBB  Credit
Agreement and approximately $32,169,000 was committed under unexpired letters of
credit as of December 28, 1996.

           Direct borrowings bore interest at prime plus 1.5% (9.75% at December
28, 1996) and the FNBB Credit  Agreement  required a fee,  payable  monthly,  on
average outstanding letters of credit at a rate of 2% annually.  The FNBB Credit
Agreement,  as amended,  contained  certain reporting  requirements,  as well as
financial and operating  covenants  through December 28, 1996 related to minimum
and maximum  inventory  levels,  capital  expenditures and attainment of minimum
earnings  before   reorganization,   interest,   taxes  and   depreciation   and
amortization.  As collateral for borrowings under the FNBB Credit Agreement, the
Company had granted to FNBB and BABC a security  interest in  substantially  all
assets of the Company. In addition,  the FNBB Credit Agreement contained certain
restrictive  covenants,  including  limitations  on the incurrence of additional
liens and indebtedness and a prohibition on paying dividends.

           The   Company   incurred   $473,000,   $1,234,000   and   $1,876,000,
respectively,  in  commitment  and related  fees in  connection  with the credit
facilities for the twenty-two, fifty-two and fifty-two weeks ended June 4, 1997,
December 28, 1996 and December 30, 1995.  These fees were  amortized as interest
and financing costs over the terms of the respective agreements.

(c)   SENIOR DEBT -

           On January 4, 1990, the Company issued $50,000,000 of 9.53% unsecured
Senior  Notes  ("Senior  Notes")  and  $25,000,000  of 10.54%  unsecured  Senior
Subordinated  Notes  ("Subordinated  Notes"),  pursuant to note agreements.  The
Senior  Notes and  Subordinated  Notes were  payable in annual  installments  of
$7,142,857  beginning  January  1994  and  $8,333,333  beginning  January  2000,
respectively.

                                      F-16

<PAGE>



The Company defaulted on these notes with its chapter 11 filings and these notes
were settled as part of the Plan.

           As a result  of the  chapter  11  filings  (see  Notes 1 and 2),  all
long-term  debt  outstanding  at April 5,  1993 was  classified  as  Liabilities
subject to compromise.  The Company breached  covenants in substantially  all of
its then existing debt instruments as a result of the accounting  irregularities
and the chapter 11 filing.

           Debt consisted of the following:

<TABLE>
<CAPTION>

                                                  January 3,   |     December 28,
           (In thousands)                            1998      |        1996
                                                   --------    |      --------
<S>                                                <C>                <C>   
CIT Credit Agreement                               $   --      |      $   --
FNBB Credit Agreement                                  --      |          --
                                                               | 
Financing Agreement:                                           | 
   Revolver; variable interest                                 | 
       rates, due through December 31, 1994            --      |        78,004
   Lines of credit; variable interest rates,                   | 
       due through December 31, 1994                   --      |       100,000
                                                               |      --------
         Total debt under financing agreement          --      |       178,004
                                                   --------    |      --------
                                                               | 
Senior debt:                                                   | 
   Senior notes; 9.53% interest rate, due                      | 
        January 15, 2000                               --      |        50,000
   Senior subordinated notes; 10.54% interest                  | 
       rate, due January 15, 2002                      --      |        25,000
                                                   --------    |      --------
         Total senior debt                             --      |        75,000
                                                               |      --------
                                                               | 
Total debt                                             --      |       253,004
                                                               | 
Less: Liabilities subject to compromise                --      |       253,004
                                                               |      --------
                                                               | 
    Total long-term debt                           $   --      |      $   --
                                                   ========    |      ========
                                                               
</TABLE>
                                                               
           In accordance  with the Plan, the  Liabilities  subject to compromise
were discharged on June 4, 1997.
                                                               
                                                               

                                      F-17

<PAGE>



7.    INCOME TAXES:

           For the thirty-one,  twenty-two,  fifty-two and fifty-two weeks ended
January  3,  1998,  June 4, 1997,  December  28,  1996 and  December  30,  1995,
respectively, the following provisions (benefits) for income taxes were made:

                                                       (In thousands)
<TABLE>

                              Thirty-One |  Twenty-Two    Fifty-Two    Fifty-Two
                             Weeks Ended |  Weeks Ended  Weeks Ended  Weeks Ended
                              January 3, |    June 4,    December 28, December 30,
                                 1998    |      1997         1996         1995
                               -------   |    -------      -------      -------
<S>                            <C>            <C>          <C>          <C>     
Current:                                 |                             
             Federal           $   460   |    $ 1,400      $   130      $   (37)
             State                 217   |      2,428           39          100
             Foreign              --     |        351           95          987
                               -------   |    -------      -------      -------
                                   677   |      4,179          264        1,050
                               -------   |    -------      -------      -------
Deferred:                                |                             
             Federal              --     |       --           --           --
             State                --     |       --           --           --
             Foreign              --     |       --         (1,103)      (1,811)
                               -------   |    -------      -------      -------
                                  --     |       --         (1,103)      (1,811)
                               -------   |    -------      -------      -------
                                         |                             
Total tax provision (benefit)            |                             
for income taxes                   677   |      4,179         (839)        (761)
                                         |                             
Less: Taxes on sale                      |                             
of Sassco Fashions line           --     |     (3,728)        --           --
                               -------   |    -------      -------      -------
                                         |                             
Tax provision (benefit)                  |                             
for income taxes               $   677   |    $   451      $  (839)     $  (761)
                               =======   |    =======      =======      =======
</TABLE>
                                                                          
           The  Company  recognized  Federal  and  state  income  taxes  for the
thirty-one  weeks  ended  January 3, 1998 of  $677,000.  There is no Federal tax
provision  currently  recognizable,  other than based on the alternative minimum
tax  regulations,  due to existing  net  operating  loss  carryforwards  and the
benefits of  significant  temporary  differences  recognized in the period ended
January 3, 1998.

           The Company  recognized  Federal,  state and foreign income taxes for
the twenty-two weeks ended June 4, 1997 of $451,000.  There is no Federal income
tax provision currently  recognizable,  other than that based on the alternative
minimum tax regulations,  due to existing net operating loss  carryforwards.  An
additional  $3,728,000 of Federal and state taxes were recorded against the Gain
on the disposition of the Sassco Fashions  product line. For the fifty-two weeks
ended December 28, 1996 and December 30, 1995, the Company  recognized an income
tax credit of $1,103,000 and $1,811,000, respectively,  representing a reduction
of foreign income tax liabilities as a result of negotiated settlements on prior
years' estimated taxes, which offset the Federal, state, local and foreign taxes
of $264,000 and $1,050,000 in 1996 and 1995, respectively.

                                      F-18

<PAGE>



           In connection  with the adoption of fresh start  reporting  (see Note
2), the net book values of all non-current  assets existing at the  consummation
date were  eliminated  by negative  goodwill.  As a  consequence,  tax  benefits
realized for book purposes for any period after the  consummation for cumulative
temporary   differences,   net  operating  loss  carryforwards  and  tax  credit
carryforwards  existing  as of the  consummation  date  will be  reported  as an
addition to paid-in-capital in excess of par value rather than as a reduction in
the tax provision in the statement of operations.

           The difference  between the Company's  effective  income tax rate and
the statutory Federal income tax rate is as follows:

                       (In thousands, except percentages)

<TABLE>
<CAPTION>
                                Thirty-One  |  Twenty-Two      Fifty-Two      Fifty-Two
                                Weeks Ended |  Weeks Ended     Weeks Ended    Weeks Ended
                                January 3,  |    June 4,      December 28,   December 30,
                                   1998     |      1997           1996           1995
                                 --------   |   ----------      --------      ---------
<S>                              <C>            <C>             <C>           <C>       
Tax provision (benefit) for                 |
  income taxes                   $    677   |   $    4,179      $   (839)     $    (761)
                                            |
Income (Loss) before                        |
  provision (benefit) for                   |
  income taxes                   $  3,986   |   $  149,673      $  8,889      $ (18,602)
                                 ========   |   ==========      ========      =========
                                            |
Effective Tax Rate                  17.0%   |         2.8%          9.4%           4.1%
                                            |
Net state tax                       (5.4%)  |        (1.3%)        (0.3%)          0.4%
Net foreign tax                      --     |        (0.2%)        11.3%         (11.4%)
Intangibles                         23.4%   |         --           (7.1%)          7.9%
Operating losses not utilized        --     |         --            --            34.2%
Utilization of net operating                |
  losses                             --     |          35%         23.2%           --
Other                                --     |        (1.3%)        (1.5%)         (0.2%)
                                 --------   |   ----------      --------      ---------
                                            |
Federal statutory rate              35.0%   |        35.0%         35.0%          35.0%
                                 ========   |   ==========      ========      =========
</TABLE>                                    

                                      F-19
                                            
<PAGE>                                      
                                            
                                            

           The amounts  comprising the temporary  differences  (the  differences
between  financial  statement  carrying  values  and the tax basis of assets and
liabilities) at the end of the respective periods are as follows:

<TABLE>
<CAPTION>
                                                           (In thousands)

                                   Thirty-One  | Twenty-Two     Fifty-Two     Fifty-Two
                                   Weeks Ended | Weeks Ended   Weeks Ended   Weeks Ended
                                   January 3,  |   June 4,     December 28,  December 30,
                                      1998     |     1997          1996          1995
                                    --------   |   --------      --------      --------
<S>                                 <C>            <C>           <C>           <C>     
Customer reserves and allowances    $  4,108   |   $  3,812      $ 11,550      $ 12,000
Restructuring and investigation          300   |     10,963        30,770        37,700
Depreciation                           6,713   |      7,304         1,700          (300)
Inventory                              2,553   |      2,337        12,640        16,500
Multi-employer pension payments         --     |       --            --            (316)
Worker's compensation                          |                            
   insurance                             572   |        572         4,280         2,500
Vacation pay accrual                     490   |        421         1,200         1,300
Others                                   308   |        921         1,420         4,500
                                    --------   |   --------      --------      --------
                                               |                            
Total temporary differences         $ 15,044   |   $ 26,330      $ 63,560      $ 73,884
                                    ========   |   ========      ========      ========
</TABLE>

           The  following is a summary of the estimated  deferred  income taxes,
i.e., future Federal income tax benefits at currently enacted rates,  which have
been reflected in the financial statements as indicated below:

<TABLE>
<CAPTION>
                                                      (In thousands, except percentages)

                                      Thirty-One  |  Twenty-Two     Fifty-Two     Fifty-Two
                                      Weeks Ended |  Weeks Ended   Weeks Ended   Weeks Ended
                                      January 3,  |    June 4,    December 28,  December 30,
                                         1998     |     1997          1996          1995
                                       --------   |   --------      --------      --------
<S>                                    <C>            <C>           <C>           <C>     
Temporary differences                  $ 15,044   |   $ 26,330      $ 63,560      $ 73,884
Tax rate                                     35%  |         35%           35%           35%
                                       --------   |   --------      --------      --------
Tax effect of temporary differences       5,265   |      9,216        22,246        25,859
Valuation Allowance                      (5,265)  |     (9,216)      (22,246)      (25,859)
                                       --------   |   --------      --------      --------
                                                  |
Deferred tax assets recognized         $   --     |   $   --        $   --        $   --
                                       --------   |   --------      --------      --------
</TABLE>
                                                  
           At June 4, 1997 there were  consolidated  tax net operating losses of
approximately  $50 million  available to offset future taxable  income,  if any,
through fiscal year 2010. The utilization of these loss  carryforwards to offset
future  taxable  income is subject to  limitation  under the "change in control"
provision of Section 382 of the Internal  Revenue  Code.  The Company  estimated
that  the  annual   limitation   imposed  on  the   utilization  of  these  loss
carryforwards  by  Section  382  will  be  approximately  $1,500,000 

                                      F-20

<PAGE>



per  year,  resulting  in an  aggregate  limitation  on the  use of  these  loss
carryforwards of approximately $21,000,000 through 2010.

           The  Company  has also  generated  approximately  $9,000,000  of loss
carryforwards during the period ended January 3, 1998 as a result of recognizing
various cumulative  temporary  differences arising in prior periods.  These loss
carryforwards  may be available to offset future taxable income, if any, without
limitation.

           On February 26, 1996, the Company received  $7,970,000 for the refund
from the amended tax returns for 1989 through 1991 plus interest of $2,375,000.

8.    COMMITMENTS AND CONTINGENCIES:

(a)   LEASES -

           The Company rents real and personal property under leases expiring at
various  dates  through 2002.  Certain of the leases  stipulate  payment of real
estate  taxes and other  occupancy  expenses.  Total  rent  expense  charged  to
operations for the thirty-one,  twenty-two,  fifty-two and fifty-two weeks ended
January 3, 1998, June 4, 1997, December 28, 1996 and December 30, 1995, amounted
to $1,365,000, $4,599,000, $8,007,000 and $13,926,000, respectively. All capital
lease assets were written-off under fresh-start reporting (see Note 2).

           Minimum annual rental  commitments  under  operating and  capitalized
leases in effect at January 3, 1998 are summarized as follows:

<TABLE>
<CAPTION>
                                                         Capitalized
     Fiscal          Real               Equipment         Equipment
     Years           Estate             & Other      (including interest)
     -----           ------             -------      --------------------
                                    (In thousands)
<S>   <C>             <C>               <C>               <C>   
      1998            $1,431            $  228            $  160
      1999             1,551               196                54
      2000             1,658               181                18
      2001             1,377               166              --
      2002               342              --                --
                      ------            ------            ------

                      Total minimum lease payments     $ 6,359                          $  771                     $  232
                                                       =======                          ======                     ======
</TABLE>

(b)   LEGAL PROCEEDINGS -

           As discussed in Notes 1 and 2, on the Filing  Dates,  the Company and
several of its  subsidiaries  filed voluntary  petitions in the Bankruptcy Court
under chapter 11 of the Bankruptcy Code. All civil litigation  commenced against
the Company and those referenced subsidiaries prior to that date had been stayed
under the Bankruptcy  Code. By an order dated April 21, 1997 (the  "Confirmation
Order"),  the Bankruptcy  Court  confirmed the Plan. The Plan was consummated on
June  4,  1997.   Certain   alleged

                                      F-21

<PAGE>


creditors who asserted age and other discrimination  claims against the Company,
and whose claims were  expunged  (the  "Claimants")  pursuant to an Order of the
Bankruptcy  Court (see  below)  appealed  the  Confirmation  Order to the United
States  District Court for the Southern  District of New York. The Company moved
to dismiss the appeal from the Confirmation Order and the motion was granted and
the appeal was  dismissed.  An appeal to the United  States Court of appeals for
the Second  Circuit from the Order  dismissing the appeal taken by the Claimants
subsequently was withdrawn, without prejudice, and may be refiled in the future.
In  addition,  the  Claimants  and two  other  persons  commenced  an  adversary
proceeding in the Bankruptcy Court to revoke the Confirmation Order. The Company
has moved to dismiss the adversary  proceeding to revoke the Confirmation  Order
and that  motion  has been  fully  briefed,  but has not yet been  argued to the
Bankruptcy Court.

           Both prior to and  subsequent  to the  Filing  Dates,  various  class
action suits were  commenced on behalf of persons who were  stockholders  of the
Company prior to April 5, 1993.  Any claims  against the Company  arising out of
these suits were  discharged as part of, and in accordance with the terms of the
Plan.

           The  Claimants,  who are former  employees  of the  Company  who were
discharged  prior to the filing of the chapter 11 cases,  asserted age and other
discrimination  claims,  including punitive damage claims against the Company in
the approximate  aggregate sum of $80 million.  Following a trial on the merits,
the Bankruptcy Court expunged and dismissed those claims in their entirety.  The
Claimants  have appealed that decision to the United States  District  Court for
the Southern  District of New York, the appeal has been fully briefed and argued
and the parties are awaiting a decision.

           Several former employees, who are included among the Claimants in the
above-described  pending appeal,  have commenced an action  alleging  employment
discrimination  against  certain former officers and directors of the Company in
the United  States  District  Court for the Southern  District of New York.  The
Court has dismissed all of the causes of action  arising under federal and state
statutes,  and the only  remaining  claims are those  arising under the New York
City Human  Rights Law.  Discovery  is complete  and a pre-trial  order has been
filed.

           In  addition  to,  and  concurrent   with,  the  proceedings  in  the
Bankruptcy  Court,  the Company is involved  in or settled the  following  legal
proceedings of significance:

           In  November  1992,  a class  action  entitled  "Stephen  Warshaw and
Phillis Warshaw v. The Leslie Fay Companies,  Inc. et al." was instituted in the
United States  District Court for the Southern  District of New York. In January
1993 and February 1993, the plaintiffs served amended  complaints and thereafter
twelve other similar actions were commenced against the Company,  certain of its
officers and directors and its then  auditors,  BDO Seidman.  The  complaints in
these cases,  which  purported  to be on behalf of all persons who  purchased or
acquired  stock of the Company  during the period  from  February 4, 1992 to and
including  February 1, 1993,  alleged  that the  defendants  knew or should have
known  material  facts  relating to the sales and earnings  which they failed to
disclose and that if these facts had been  disclosed,  they would have  affected
the price at which the Company's  common stock was traded. A pre-trial order was
entered  which had the effect of  consolidating  all of these  actions  and,  in
accordance  therewith,   the  plaintiffs  have  served  the  defendants  with  a
consolidated  class action complaint which,  because of the 



                                      F-22

<PAGE>



chapter 11 filing by the Company,  does not name the Company as a defendant.  In
March 1994,  plaintiffs filed a consolidated and amended class action complaint.
This complaint added certain additional parties as defendants, including Odyssey
Partners,  L.P. ("Odyssey"),  and expanded the purported class period from March
28, 1991 to and  including  April 5, 1993.  In March 1995,  BDO Seidman filed an
answer and  cross-claims  against  certain of the officers and  directors of the
Company previously named in this action and filed third-party complaints against
Odyssey,  certain then current and former  executives of the Company and certain
then  current  and former  directors  of the  Company.  These  cross-claims  and
third-party  complaints  allege that the Company's senior management and certain
of its directors engaged in fraudulent conduct and negligent  misrepresentation.
BDO Seidman sought  contribution  from certain of the defendants and each of the
third-party  defendants if it were found liable in the class action,  as well as
damages.  On March 7, 1997, a stipulation  and agreement was signed  pursuant to
which all  parties  agreed  to settle  the  above  described  litigation  for an
aggregate  sum  of  $34,700,000.  The  officers'  and  directors'  share  of the
settlement  is covered  by the  Company's  officers'  and  directors'  liability
insurance.  The settlement specifically provides that the officers and directors
deny any liability to the plaintiffs and have entered into the settlement solely
to avoid substantial expense and inconvenience of litigation. The Company has no
obligations  under this settlement.  The District Court approved this settlement
and signed the final order of dismissal on May 8, 1997.  The settlement has been
fully consummated.

           In February 1993, the Securities and Exchange  Commission obtained an
order directing a private investigation of the Company in connection with, among
other  things,  the filing by the Company of annual and other  reports  that may
have  contained  misstatements,  and the  purported  failure  of the  Company to
maintain books and records that accurately reflected its financial condition and
operating results. The Company is cooperating in this investigation.

           In February 1993, the United States  Attorney for the Middle District
of Pennsylvania issued a Grand Jury Subpoena seeking the production of documents
as a result of the Company's announcement of accounting irregularities. In 1994,
Donald F. Kenia,  former  Controller  of the Company,  was indicted by a federal
grand jury in the Middle District of  Pennsylvania  and pled guilty to the crime
of securities  fraud in connection  with the  accounting  irregularities.  On or
about October 29, 1996, Paul F. Polishan, former Senior Vice President and Chief
Financial Officer of the Company,  was indicted by the federal grand jury in the
Middle  District  of  Pennsylvania   for  actions  relating  to  the  accounting
irregularities.  The  trial of the case  against  Paul F.  Polishan  has not yet
occurred.

           In March 1993, a  stockholder  derivative  action  entitled  "Isidore
Langer,  derivatively  on behalf of The Leslie Fay  Companies,  Inc.  v. John J.
Pomerantz et al." (the "Derivative  Action") was instituted in the Supreme Court
of the State of New  York,  County of New York,  against  certain  officers  and
directors of the Company and its then auditors.  This complaint alleges that the
defendants  knew or should have known  material  facts relating to the sales and
earnings of the Company which they failed to disclose.  The time to answer, move
or otherwise  respond to the complaint has not yet expired.  The plaintiff seeks
an unspecified amount of monetary damages,  together with interest thereon,  and
costs and expenses incurred in the action,  including reasonable  attorneys' and
experts' fees. The Company cannot  presently  determine the ultimate  outcome of
this litigation,  but believes that it should not have any unfavorable impact on
the financial statements.  Pursuant to the Modification of the Third Amended and
Restated  Joint  Plan of  Reorganization  filed on April 4, 1997,  a  Derivative
Action Board, comprised of three persons or entities 


                                      F-23

<PAGE>




appointed by the Bankruptcy Court, upon nomination by the Creditors'  Committee,
shall  determine by a majority vote whether to prosecute,  compromise and settle
or discontinue the Derivative Action.

           On February 23, 1996,  Albert Nipon and American Pop Marketing Group,
Inc.  commenced an action  against the Company in the United  States  Bankruptcy
Court, Southern District of New York seeking, inter alia, a declaratory judgment
with respect to the use of the Company's "Albert Nipon" trademark and tradename.
The Company has asserted  counter claims.  Upon a record of stipulated facts and
submissions  of  memorandum of law, an oral argument on this matter was heard on
May 9, 1997.  On  December  23,  1997,  the court  ruled in favor of the Company
finding the  plaintiffs  in  violation  of the  Federal  and New York  Trademark
Statutes  and of unfair  competition  under  common  law.  The  plaintiffs  have
appealed and the Company has cross appealed to recover its costs and expenses in
the litigation.

(c)   MANAGEMENT AGREEMENTS -

           In  connection  with the Plan,  the  Company  entered  into  one-year
management  contracts  with  several  officers  and key  employees  with  annual
salaries of $1,900,000.

(d)   CONCENTRATIONS OF CREDIT RISK -

           Financial   instruments  which  potentially  expose  the  Company  to
concentrations  of credit risk, as defined by SFAS No. 105, consist primarily of
trade accounts  receivable.  The Company's customers are not concentrated in any
specific geographic region, but are concentrated in the retail apparel business.
For the  fifty-three  weeks ended January 3, 1998,  excluding the Sassco Fashion
and  Castleberry  product lines,  three  customers of the continuing  Leslie Fay
business  accounted for 33%, 12% and 8% of the reorganized  Company's  sales. In
1996 for continuing businesses only, three customers accounted for 35%, 19%, and
4.5% of the  Company's  sales.  The Company has  established  an  allowance  for
possible  losses  based upon  factors  surrounding  the credit  risk of specific
customers, historical trends and other information.

           On June 2, 1997 the Company  entered into a factoring  agreement with
CIT,  whereby CIT provides a guarantee of collection for all shipments  approved
by CIT. Under the factoring agreement these receivables are purchased by CIT. On
January 3, 1998 the Company's accounts  receivable  included $8,800,000 due from
CIT net of reserves.

9.    STOCKHOLDERS' (DEFICIT) EQUITY

           The authorized  common stock of the reorganized  Company  consists of
9,500,000  shares of common  stock with a par value  $.01 per share.  At June 4,
1997,  3,400,000  shares were issued and  outstanding and were being held by the
plan  administrator  in trust. In July 1997,  2,686,000 (79%) of the shares were
distributed.  The remaining  twenty-one (21%) percent is being held back for the
benefit of its  creditors  pending the  resolution  of certain  disputed  claims
before the Bankruptcy  Court.  The old common stock was  extinguished at June 4,
1997 and the old stockholders of the Company did not retain or receive any value
for their equity interest.



                                      F-24

<PAGE>



           In addition,  500,000  shares of Preferred  Stock of the  reorganized
Company were  authorized at June 4, 1997 with a par value of $.01.  None of such
shares have been issued.

10.        STOCK OPTION PLAN:

           Information  regarding the Company's  stock option plan is summarized
below:


                                        Number of Shares  Option Price Per Share
                                        ----------------  ----------------------
Outstanding at December 30, 1995             148,875         $ 3.31  -  $14.00
                                                            
Granted                                         --              --   -     --
Exercised or surrendered                        --              --   -     --
Canceled                                     (22,000)          3.50  -   14.00
                                             -------        
                                                            
Outstanding at December 28,1996              126,875           3.31  -   14.00
                                                            
Termination of old plan                     (126,875)          3.31  -   14.00
Granted                                      508,621           6.18  -   11.50
Exercised or surrendered                        --              --   -     --
Canceled                                        --              --   -     --
                                             -------                    
Outstanding at January 3, 1998               508,621           6.18  -   11.50
                                                         
           The Plan provides stock options to certain senior management equal to
seventeen and one-half (17.5%) percent of the reorganized Company's common stock
outstanding  (assuming the exercise of all options).  Of this amount,  the first
ten (10%) or 412,121 options were granted as of June 4, 1997, one-third of which
will vest on each of the first three  anniversaries of the Consummation Date. In
addition,  each  non-employee  director of the Company has been  granted  10,000
stock  options for a total of 50,000  options.  The options may be exercised for
between $6.18 and $11.50 per share. The Plan provided that additional options of
another two and one-half  (2.5%) to seven and one-half  (7.5%) percent of common
stock (a maximum of 309,091  options) will be granted upon a sale of the Company
where  the  imputed  enterprise  value  exceeds  $37,500,000.  No  options  were
exercisable at January 3, 1998.

           On or  about  March  16,  1998,  the  Compensation  Committee  of the
Compnay's Board of Directors proposed new contracts for four employees:  John J.
Pomerantz,  John A. Ward,  Dominick  Felicetti and Warren T.  Wishart.  While no
agreement  has been  completed,  and the Board of Directors has not approved the
contracts,  the proposal included  provisions that would restructure the 309,091
of additional  options referred to above. The proposal would lower the number of
options  granted  but the  grant  would  not be  conditioned  upon a sale of the
Company.

           Effective  as of the  Consummation  Date,  the  Company  adopted  the
provisions of SFAS No. 123 "Accounting for Stock-Based Compensation." Under SFAS
No.123 utilizing the fair value based method,  compensation  cost is measured at
the grant  date  based  upon the value of the award and is  recognized  over the
service  period.  The fair  value of the  options  granted  on June 4,  1997 was
estimated using the Black-Scholes  option pricing model based upon the following
assumptions:  risk free  interest rate of 6.47%,  expected life of 5 years,  and
volatility of 34%. The  compensation  expense of  approximately  $1.8 million is
being  recognized over the service period of three years.  Had SFAS No. 123 been
adopted  prior to the  Consummation  Date in  fiscal  years  1995,  1996 and the
twenty-two  weeks  ended  June 4, 1997,  there  would have been no effect on the
Company's financial statements.

           The  consummation  of the Plan  terminated  all options under a Stock
Option Plan which had  provided for the grant of up to an aggregate of 1,000,000
shares of its common stock to its key

                                      F-25

<PAGE>




employees.  In December 1992, the Board of Directors approved an increase in the
aggregate  number of shares which could be granted to  1,500,000.  This increase
was subject to stockholder approval which was never solicited.

           Under the plan,  incentive  stock  options  were  granted to purchase
shares of common  stock at not less than the fair market value of such shares at
the date of the  grant.  Additionally,  non-qualified  options  were  granted to
purchase  shares  of  common  stock at an  amount  not less than 98% of the fair
market value of such shares at the date of grant. In general, the options vested
over a four year period and were  exercisable  no later than five years from the
date of grant.

11.        RETIREMENT PLANS:

(a)   DEFINED BENEFIT PLAN -

           In January 1992, the Company  established a non-contributory  defined
benefit  pension plan covering  certain  salaried,  hourly and  commission-based
employees.  Plan benefits are based upon the participants' salaries and years of
service.  The plan was amended to freeze benefit accruals effective December 31,
1994 and, in connection with the Company's reorganization, to terminate the plan
effective December 31, 1996.  Investments are made primarily in U.S.  Government
obligations and common stock.  The following major  assumptions were used in the
actuarial valuations:


                                         1997      1996      1995
                                         ----      ----      ----
Discount rate                            7.5%      7.5%      8.8%
Long-term rate of return on assets       8.8%      8.8%      8.8%
Average increase in compensation         N/A       N/A       N/A

           Net periodic  pension cost recognized in the thirty-one,  twenty-two,
fifty-two and fifty-two weeks ended January 3, 1998, June 4, 1997,  December 28,
1996 and December 30, 1995 were $0, $0, $195,000 and $341,000, respectively. The
components of this cost are as follows:

<TABLE>
<CAPTION>
                                   THIRTY-ONE |  TWENTY-TWO     FIFTY-TWO     FIFTY-TWO
                                  WEEKS ENDED |  WEEKS ENDED   WEEKS ENDED   WEEKS ENDED
                                   JANUARY 3, |    JUNE 4,     DECEMBER 28,  DECEMBER 30,
                                      1998    |      1997          1996          1995
                                     -----    |     -----         -----         -----
<S>                                  <C>           <C>           <C>           <C>
Service costs                        $--      |     $--           $--           $--
Interest cost                           47    |        38           127           223
Actual return on assets                (74)   |       (98)         (111)          417
Recognition of partial settlement             |                                
   of pension obligations             --      |      --             106           200
Net amortization and deferral           27    |        60            73          (499)
                                     -----    |     -----         -----         -----
                                              |                                
     Net periodic pension cost       $--      |     $--           $ 195         $ 341
                                     =====    |     =====         =====         =====
</TABLE>                                      


                                      F-26

<PAGE>



           The  following  table  summarizes  the funding  status of the plan at
January 3, 1998, June 4, 1997, December 28, 1996 and December 30, 1995:

<TABLE>
<CAPTION>
                                                                      (In thousands)

                                         THIRTY-ONE   |  TWENTY-TWO       FIFTY-TWO       FIFTY-TWO
                                        WEEKS ENDED   |  WEEKS ENDED     WEEKS ENDED     WEEKS ENDED
                                         JANUARY 3,   |    JUNE 4,       DECEMBER 28,    DECEMBER 30,
                                            1998      |      1997            1996            1995
                                        ------------  |  -----------     -----------     -----------
<S>                                     <C>              <C>             <C>             <C>         
Actuarial present value of                            |
benefit obligations:                                  |
                                                      |
Accumulated benefit obligations                       |
      Vested                            $       --    |  $    (1,867)    $    (2,034)    $    (1,639)
      Non-vested                                --    |         --               (97)           (196)
                                        ------------  |  -----------     -----------     -----------
                                                      |                                       
Total accumulated benefit obligation    $       --    |  $    (1,867)    $    (2,131)    $    (1,835)
                                        ============  |  ===========     ===========     ===========
                                                      |                                       
Projected benefit obligation                    --    |       (1,867)         (2,131)         (1,835)
Estimated fair value of assets                  --    |        1,054           1,062           1,359
                                        ------------  |  -----------     -----------     -----------
Excess of projected benefit                           |                                       
     obligation over plan assets                --    |         (813)         (1,069)           (476)
Unrecognized prior service costs                --    |         --              --               262
Unrecognized net loss                           --    |         --              --               313
Additional minimum liability under              --    |         --              --              (575)
     SFAS No. 87                                      |                                       
                                        ------------  |  -----------     -----------     -----------
                                                      |                                       
     Accrued Pension Costs              $       --    |  $      (813)    $    (1,069)    $      (476)
                                        ============  |  ===========     ===========     ===========
</TABLE>
                                           
           Under the  requirements  of SFAS No. 87 - "Employers'  Accounting for
Pensions",  an additional  minimum pension liability  representing the excess of
accumulated  benefits over plan assets and accrued pension costs, was recognized
at December 30, 1995. A  corresponding  amount was  recognized  as an intangible
asset to the  extent  of  unrecognized  prior  service  costs  with the  balance
recorded as a separate  reduction of  stockholders'  equity.  As a result of the
plan  termination,  in the  fourth  quarter of 1996,  the  Company  recorded  an
additional  $676,000 as  reorganization  expense to  write-off  these assets and
record an additional liability of $813,000 to fully fund the plan.

(b)   DEFINED CONTRIBUTION PLAN -

           The Company also maintains a qualified voluntary  contributory profit
sharing plan covering certain salaried,  hourly and commission-based  employees.
Certain  Company  matching  contributions  to  the  plan  are  mandatory.  Other
contributions to the plan are discretionary. Total contributions to the plan may
not exceed the amount permitted as a deduction  pursuant to the Internal Revenue
Code. The  contributions  charged to operations for the thirty-one,  twenty-two,
fifty-two and fifty-two weeks ended January 3, 1998, June 4, 1997,  December 28,
1996 and December 30, 1995 amounted to $75,000, $113,000, $321,000 and $531,000,
respectively.


                                      F-27

<PAGE>



(c) OTHER -

           The Company participates in a multi-employer pension plan. Such plans
were  underfunded as of January 1, 1994. The plans provide  defined  benefits to
unionized  employees.  Amounts  charged to operations for  contributions  to the
pension  funds  in  1996  and  1995  amounted  to  approximately   $965,000  and
$1,295,000.  The Company  increased the established  reserve within  Liabilities
subject to compromise in 1996 to the expected  settlement of  $14,875,000.  This
claim was settled upon consummation of the Plan.

           The Company does not provide for  post-employment  or post-retirement
benefits other than the plans described above.

12.    ASSETS OF PRODUCT LINES HELD FOR SALE OR DISPOSITION:

           As discussed in Note 2, in connection  with the  consummation  of the
Plan,  the Company sold or  transferred  all the assets and  liabilities  of its
Sassco Fashions product line on June 4, 1997 for an estimated  exchange value of
$230,000,000.  This value was the estimated  reorganization  value of the Sassco
Fashions  product line which was calculated in a manner similar to the Company's
reorganization  value (see Note 2). The resulting  gain of  $89,810,000,  net of
taxes of  $3,728,000,  recorded from these  transactions  is reflected as a Gain
from the sale of the Sassco  Fashions  line in the  consolidated  statements  of
operations.

           The  assets  and  liabilities  sold and  transferred  included  cash,
accounts  receivable,  inventory,  property,  plant and equipment,  other assets
(including the trade name Albert Nipon), accounts payable,  accrued expenses and
other liabilities related to the Sassco Fashions line. In addition, the Company
transferred  to  Sassco  its  100%  equity  interest  in  several   subsidiaries
associated with the Sassco Fashions line. As provided in the Plan, the creditors
of the Company became the shareholders of Sassco.

           The gain on the  disposition  of the  assets and  liabilities  of the
Sassco  Fashions line is a taxable  event and a  substantial  portion of the net
operating loss  carryforwards  available to the Company was utilized to offset a
significant portion of the taxes recognized on this transaction.

           In 1996, the Company decided to sell its Castleberry product line and
recorded a  restructuring  charge of $2,004,000 for its  disposition,  including
$1,100,000  to  increase  the  reserve to cover the  write-off  of the Excess of
purchase price over net assets acquired and projected  additional  losses on the
sale of net assets. On May 26, 1997, the Company sold the assets and liabilities
of its  Castleberry  line for $600,000.  The resulting loss of $1,398,000 on the
sale was applied against Accrued  expenses and other current  liabilities at the
time of the sale.



                                      F-28

<PAGE>


           The components of Assets and Direct liabilities of product lines held
for sale and disposition at December 28, 1996 include:

<TABLE>
<CAPTION>
                                                                            (In thousands)
                                                                              Continuing   Held
                                                                    Total     Operations   For Sale
                                                                    -----     ----------   --------
<S>                                                                <C>         <C>         <C>     
Accounts receivable, net                                           $ 63,930    $ 63,456    $    474
Inventories                                                         106,836     104,383       2,453
Prepaid expenses and other current assets                             2,335       2,290          45
Property, plant and equipment, net                                   17,606      17,575          31
Deferred charges and other assets                                     1,182       1,182        --
                                                                                           --------

     Total assets of product lines held for sale or disposition        --          --      $  3,003
                                                                                           ========

Accounts payable                                                   $ 20,521    $ 20,341    $    180
Accrued expenses and other current liabilities                       24,551      23,154       1,397
                                                                                           --------
     Total direct liabilities of product lines held for                                    
           sale or disposition                                                             $   1,577
                                                                                           =========
</TABLE>

           Unaudited pro forma consolidated  statements for the twenty-two weeks
ended June 4, 1997 and for the fiscal year ended December 28, 1996 are presented
below and include adjustments to give effect to the sales and the Plan (see Note
2) as if they occurred as of the beginning of the periods presented. A pro forma
consolidated  balance  sheet as of June 4,  1997 is not  presented  because  the
transactions  recording the Plan and the sale transactions are already reflected
in the balance sheet.

           The unaudited pro forma  financial  statements  have been prepared in
accordance   with   guidelines   established  by  the  Securities  and  Exchange
Commission. The historical balances were derived from the consolidated statement
of operations for the twenty-two  weeks ended June 4, 1997 or from the financial
statements  of the Company  included  in the  December  28, 1996 Form 10-K.  All
significant intercompany transactions have been eliminated.

                                      F-29

<PAGE>



           The unaudited proforma adjustments presented in the statements are as
follows:


Column Heading            Explanation

Column 1       Historical Operations   The Consolidated  Statement of Operations
                                       as it existed prior to the adjustments.


Column 2       Disposition of Sassco   The  operating   results  of  the  Sassco
                                       Fashions  line  have been  eliminated  to
                                       give effect to the  disposition as of the
                                       beginning   of  the   period   presented,
                                       including  depreciation  expense  on  its
                                       property,   plant   and   equipment,   an
                                       allocated   corporate   charge  based  on
                                       workload  by  department  related  to the
                                       Sassco  Fashions line and direct  charges
                                       associated  with  financing  fees  on its
                                       factoring  agreement and fees incurred on
                                       letters of credit  issued on its  behalf.
                                       For periods  including  June 4, 1997, the
                                       gain recorded on the  disposition  of the
                                       Sassco Fashions line has been reversed.

Column 3     Sale of Castleberry       The operating  results of the Castleberry
                                       line have been  eliminated to give effect
                                       to the disposition as of the beginning of
                                       the    period    presented,     including
                                       depreciation  expense  on  its  property,
                                       plant  and  equipment  and  an  allocated
                                       corporate  charge  based on  workload  by
                                       department  related  to  the  Castleberry
                                       line.

Column 4     Fresh Start Reporting     To  record  the  estimated  effect of the
                                       Plan as if it had  been  effective  as of
                                       the beginning of period  presented.  This
                                       includes  adjustments  for the  following
                                       items:
                                                                 
                                       a)  The  elimination  of  the  historical
                                       depreciation  and  amortization  for  the
                                       remaining  product  lines,  including the
                                       amounts   in  cost  of   sales,   on  the
                                       beginning  of period  asset  balances and
                                       the recording of the amortization  credit
                                       for the  "Excess of  revalued  net assets
                                       acquired  over equity  under  fresh-start
                                       reporting"    (assuming   a    three-year
                                       amortization period).
                                                                  
                                       b)   The    elimination   of   historical
                                       reorganization  expense  that will not be
                                       incurred  subsequent to the  Consummation
                                       Date.
                                                                  
                                       c) The  elimination  of  the  fresh-start
                                       revaluation  charge and the  reversal  of
                                       the gain on debt  discharge  pursuant  to
                                       the Plan.

                                      F-30
<PAGE>

                  THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
                 PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
                 (In thousands, except share and per share data)
                                   (UNAUDITED)
<TABLE>
<CAPTION>
                                                                  TWENTY-TWO WEEKS ENDED JUNE 4, 1997
                                                -----------------------------------------------------------------------
                                                                                                           PRO FORMA
                                                  HISTORICAL   DISPOSITION OF   SALE OF     FRESH START    ADJUSTED
                                                  OPERATIONS       SASSCO     CASTLEBERRY    REPORTING      BALANCE
                                                   ---------     ---------     ---------     ---------     ---------
<S>                                                <C>           <C>           <C>           <C>           <C>      
Net Sales .....................................    $ 197,984     ($136,107)    ($  2,808)    $    --       $  59,069
Cost of  Sales ................................      147,276      (101,573)       (2,262)          (32)       43,409
                                                   ---------     ---------     ---------     ---------     ---------
    Gross profit ..............................       50,708       (34,534)         (546)           32        15,660
                                                   ---------     ---------     ---------     ---------     ---------
Operating Expenses:
    Selling, warehouse, general and
      administrative expenses .................       35,459       (23,666)       (1,000)          250        11,043
    Depreciation and amortization expense .....        2,090        (1,078)          (41)         (971)         --
                                                   ---------     ---------     ---------     ---------     ---------
      Total operating expenses ................       37,549       (24,744)       (1,041)         (721)       11,043

    Other (income) ............................       (1,196)          260          --            --            (936)
    Amortization in excess of revalued net
     assets acquired over equity ..............         --            --            --          (1,905)       (1,905)
                                                   ---------     ---------     ---------     ---------     ---------
Total operating expenses, net .................       36,353       (24,484)       (1,041)       (2,626)        8,202
Operating income ..............................       14,355       (10,050)          495         2,658         7,458
Interesting and Financing Costs (excludes
      contractual interest) ...................        1,372          (595)         --            --             777
                                                   ---------     ---------     ---------     ---------     ---------
Income (loss) before reorganization costs,
      taxes, gain on sale, fresh start
      revaluation and extraordinary item ......       12,983        (9,455)          495         2,658         6,681
Reorganization Costs ..........................        3,379          --              14        (3,393)         --
                                                   ---------     ---------     ---------     ---------     ---------
    Income (loss) before taxes, gain on sale,
      fresh start revaluation and extraordinary
      item ....................................        9,604        (9,455)          481         6,051         6,681
Taxes .........................................          451          (342)         --           1,898         2,007
                                                   ---------     ---------     ---------     ---------     ---------
    Net Income (loss) before gain on sale,
      fresh start revaluation and extraordinary
      item ....................................        9,153        (9,113)          481         4,153         4,674
Gain on disposition of Sassco Fashions line,
  loss on revaluation of assets pursuant to
  adoption of fresh-start reporting and
   extraordinary gain on debt discharge .......      136,341       (99,810)         --         (36,531)         --
                                                   ---------     ---------     ---------     ---------     ---------
    Net Income (loss) .........................    $ 145,494     ($108,923)    $     481     ($ 32,378)    $   4,674
                                                   =========     =========     =========     =========     =========
    Net Income (loss) per Share
    -  Basic...................................         *                                                  $    1.38
                                                   =========                                               =========
    Net Income (loss) per Share
    -  Diluted.................................         *                                                  $    1.21
                                                   =========                                               =========
    Weighted Average
      Shares Outstanding - Basic...............         *                                                  3,400,000
                                                   =========                                               =========
    Weighted Average                           
      Shares Outstanding - Diluted.............         *                                                  3,862,121
                                                   =========                                               =========
</TABLE>

*Earnings per share for the twenty-two  weeks ended June 4, 1997 on a historical
basis is based on the old stock  outstanding.  The old stock was canceled  under
the plan of reorganization and new stock was issued. Earnings per share on a pro
forma basis is calculated on the new stock outstanding.


                                      F-31

<PAGE>



                  THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES

                 PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
                 (In thousands, except share and per share data)
                                   (UNAUDITED)
<TABLE>
<CAPTION>
                                                          FIFTY-TWO WEEKS ENDED DECEMBER 28, 1996
                                             -------------------------------------------------------------------
                                                                                                      PRO FORMA
                                             HISTORICAL   DISPOSITION OF   SALE OF     FRESH START     ADJUSTED
                                             OPERATIONS      SASSCO      CASTLEBERRY    REPORTING      BALANCE
                                              ---------     ---------     ---------     ---------     ---------
<S>                                           <C>           <C>           <C>           <C>           <C>      
Net Sales ................................    $ 429,676     $(311,550)    $  (8,073)    $    --       $ 110,053
Cost of  Sales ...........................      331,372      (238,477)       (6,066)          (85)       86,744
                                              ---------     ---------     ---------     ---------     ---------
    Gross profit .........................       98,304       (73,073)       (2,007)           85        23,309
                                              ---------     ---------     ---------     ---------     ---------
Operating Expenses:
    Selling, warehouse, general and
      administrative expenses ............       79,570       (50,936)       (2,585)          600        26,649
    Depreciation and amortization expense         4,654        (1,982)          (31)       (2,641)         --
                                              ---------     ---------     ---------     ---------     ---------
Total operating expenses, net ............       84,224       (52,918)       (2,616)       (2,041)       26,649
    Other income .........................       (3,885)        1,038          --            --          (2,847)
Amortization in excess revalued net assets
   acquired over equity ..................         --            --            --          (4,572)       (4,572)
Total operating expenses .................       80,339       (51,880)       (2,616)       (6,613)       19,230
                                              ---------     ---------     ---------     ---------     ---------
Operating income .........................       17,965       (21,193)          609         6,698         4,079
Interesting and Financing Costs (excludes
      contractual interest) ..............        3,932        (1,634)         --            --           2,298
                                              ---------     ---------     ---------     ---------     ---------
Income (loss) before fresh-start
      reorganization costs and taxes .....       14,033       (19,559)          609         6,698         1,781
Reorganization Costs .....................        5,144          --          (2,004)       (3,140)         --
                                              ---------     ---------     ---------     ---------     ---------
    Income (loss) before taxes ...........        8,889       (19,559)        2,613         9,838         1,781
Taxes ....................................         (839)          969          --            --             130
                                              ---------     ---------     ---------     ---------     ---------
    Net Income (loss) ....................    $   9,728     $ (20,528)    $   2,613     $   9,838     $   1,651
                                              =========     =========     =========     =========     =========
    Net Income (loss) per Share
    -  Basic..............................         *                                                  $     .49
                                              =========                                               =========
    Net Income (loss) per Share
    -  Diluted*...........................         *                                                  $     .43
                                              =========                                               =========
    Weighted Average Common
      Shares Outstanding - Basic..........         *                                                  3,400,000
                                              =========                                               =========
    Weighted Average                           
      Shares Outstanding - Diluted........         *                                                  3,862,121
                                              =========                                               =========
</TABLE>

*Earnings  per  share for the  fifty-two  weeks  ended  December  28,  1996 on a
historical  basis is based  on the old  stock  outstanding.  The old  stock  was
canceled under the plan of reorganization and new stock was issued. Earnings per
share on a pro forma basis is calculated on the new stock outstanding.


                                      F-32

<PAGE>



13.        REORGANIZATION COSTS:

           The Company  recognized  reorganization  costs during the thirty-one,
twenty-two,  fifty-two and fifty-two week periods ended January 3, 1998, June 4,
1997, December 28, 1996 and December 30, 1995 as follows:


<TABLE>
<CAPTION>
                                            (In thousands)

                                 THIRTY-ONE  |  TWENTY-TWO    FIFTY-TWO     FIFTY-TWO
                                 WEEKS ENDED |  WEEKS ENDED  WEEKS ENDED   WEEKS ENDED
                                 JANUARY 3,  |    JUNE 4,    DECEMBER 28,  DECEMBER 30,
                                      1998   |     1997         1996         1995
                                    -------- |   --------     --------     --------
<S>                                             <C>         <C>          <C>     
Professional fees and other                  |   $  2,951    $  3,719     $  7,995
  costs                                      |
Closed facilities and operations        --   |       --          1,082       10,138
Write-down of excess purchase           --   |       --            652        3,181
  price                                      |
Plan Administration Costs               --   |      1,000         --           --
Retirement plan termination             --   |       --            676         --
Employee retention plan                 --   |       --           (509)        --
Interest income                         --   |       (572)        (476)      (4,739)
                                             |   --------    --------     --------
  Total reorganization costs                 |   $  3,379    $  5,144     $ 16,575
                                             |   ========    ========     ========
</TABLE>


           At June 4, 1997,  costs of $800,000 were accrued to  re-engineer  the
business  processes,  review and revise the  technology  requirements  and other
related costs to the  downsizing and separation of the businesses and $1,000,000
to administer the Plan.

14.        ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES:

           The components of Accrued expenses and other current liabilities, net
of direct  liabilities of product lines held for sale or  disposition  (see Note
12), were as follows:


                                              January 3,   |   December 28,
                                                 1998      |       1996
                                               -------     |     -------
Bonus and Profit Sharing                       $ 1,240     |     $ 2,109
Professional Fees                                  601     |         375
Vacation                                           490     |       1,098
Reorganization Costs                               301     |       9,229
Duty                                               399     |       3,626
Other Accrued Confirmation                                 |
   Expenses                                      4,046     |        --
Other                                            1,812     |       6,717
                                               -------     |     -------
      Total                                    $ 8,889     |     $23,154
                                               =======     |     =======


                                      F-33
                                                           
<PAGE>



15.        SUPPLEMENTAL CASH FLOW INFORMATION:

           Net cash  paid  (received)  for  interest  and  income  taxes for the
thirty-one,  twenty-two and fifty-two weeks ended January 3, 1998, June 4, 1997,
December 28, 1996 and December 30, 1995 were as follows:


                      Thirty-One  | Twenty-Two      Fifty-Two       Fifty-Two
                     Weeks Ended  | Weeks Ended    Weeks Ended     Weeks Ended
                      January 3,  |   June 4,      December 28,    December 30,
                         1998     |    1997            1996            1995
                                  |
Interest               $   367    |   $ 1,412        $ 1,047        $ 2,542
Income taxes               928    |    (2,694)        (7,311)          (218)





16.        UNAUDITED QUARTERLY RESULTS:
                                       
Unaudited  quarterly  financial  information  for 1997 and 1996 is set  forth as
follows:
                                       
                      (In thousands, except per share data)
<TABLE>
<CAPTION>

  1997                    March       June 4 |     July 5   September     December
                          -----       ------ |     ------   ---------     --------
<S>                     <C>         <C>          <C>         <C>         <C>     
Net sales               $142,755    $ 55,229 |   $  5,535    $ 41,562    $ 25,994
Gross profit              36,768      13,940 |      1,125       9,730       3,517
Net income (loss)         11,724     133,770 |         73       4,511      (1,275)
Net income (loss)                            |
 per share                                   |
- Basic                     *           *    |   $   0.02    $   1.33      ($0.38)
- Diluted                   *           *    |   $   0.02    $   1.17      ($.033)
                                             
                                             
                                             
  1996                    March       June 4 |     July 5   September     December
                          -----       ------ |     ------   ---------     --------
Net sales               $121,202             |  $ 82,940    $134,907    $ 90,626
Gross profit              29,694             |    19,525      33,511      15,574
                                             |  
                                             |  
                                             |  
Net income (loss)          5,924             |        99       8,045      (4,340)
Net income (loss)                            |  
 per share                                   |  
 - Basic                       *             |         *           *           *
 - Diluted                     *             |         *           *           *

</TABLE>

*   Earnings per share is not presented because such  presentation  would not be
    meaningful.  The old stock was canceled under the Plan of reorganization and
    the new stock was not issued until the consummation date.



                                      F-34

<PAGE>


                                                                     SCHEDULE II
                  THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
                        VALUATION AND QUALIFYING ACCOUNTS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                 RESERVES    BEGINNING
                                                 RELATED TO   BALANCE
                                    BALANCE AT     SOLD      RELATED TO    COSTS                    BALANCE AT
                                    BEGINNING     PRODUCT    CONTINUING  CHARGED TO                    END
   DESCRIPTION                      OF PERIOD      LINES     OPERATIONS    EXPENSE    DEDUCTIONS    OF PERIOD
                                     --------    --------     --------    --------     --------     --------
<S>                                  <C>                      <C>         <C>          <C>          <C>     
THIRTY-ONE WEEKS ENDED
 JANUARY 3, 1998

    Reserve for Allowances           $  2,534        --       $  2,534    $  5,505     ($ 4,941)    $  3,098
    Other Receivable Reserves              88        --             88         (64)        --             24
    Reserve for Discounts (1)             934        --            934        --           (934)        --
    Reserve for Doubtful Accounts         230        --            230        (172)         (10)          48
    Reserve for Returns                    29        --             29         992         (955)          66
                                     --------    --------     --------    --------     --------     --------

    Total Receivable Reserves        $  3,815        --       $  3,815    $  6,261     $ (6,840)    $  3,236
                                     ========    ========     ========    ========     ========     ========

    Taxation Valuation Allowance     $  9,216    $   --       $  9,216    $   --       $ (3,951)    $  5,265
                                     ========    ========     ========    ========     ========     ========

------------------------------------------------------------------------------------------------------------
TWENTY-TWO WEEKS ENDED
 JUNE 4, 1997

    Reserve for Allowances           $  8,619    ($ 6,074)    $  2,545    $  2,952     ($ 2,963)    $  2,534
    Other Receivable Reserves           4,881      (4,212)         669        (581)        --             88
    Reserve for Discounts (1)             588        --            588       3,498       (3,152)         934
    Reserve for Doubtful Accounts         895        (349)         546        (360)          44          230
    Reserve for Returns                    98         (69)          29         488         (488)          29
                                     --------    --------     --------    --------     --------     --------

    Total Receivable Reserves        $ 15,081    ($10,704)    $  4,377    $  5,997      ($6,559)    $  3,815
                                     ========    ========     ========    ========     ========     ========

    Taxation Valuation Allowance     $ 22,246    ($ 8,900)    $ 13,346    $   --       ($ 4,130)    $  9,216
                                     ========    ========     ========    ========     ========     ========

FIFTY-TWO WEEKS ENDED
 DECEMBER 28, 1996

    Reserve for Allowances           $ 14,154    $   --       $ 14,154    $ 37,384     ($42,919)    $  8,619
    Other Receivable Reserves           5,051        --          5,051        (170)        --          4,881
    Reserve for Discounts (2)           2,280        --          2,280      27,827      (29,519)         588
    Reserve for Doubtful Accounts       1,183        --          1,183      (1,074)         786          895
    Reserve for Returns                   423        --            423       9,354       (9,679)          98
                                     --------    --------     --------    --------     --------     --------

    Total Receivable Reserves        $ 23,091    $   --       $23, 091    $ 73,321     ($81,331)    $ 15,081
                                     ========    ========     ========    ========     ========     ========

    Taxation Valuation Allowance     $ 25,859    $   --       $ 25,859    $   --       ($ 3,613)    $ 22,246
                                     ========    ========     ========    ========     ========     ========
</TABLE>


(1)   On June 2, 1997, the Company entered into a factoring  agreement with CIT,
      whereby CIT provides a guarantee of collection  of all shipments  approved
      by CIT.  Discounts  given are no longer a  risk/reserve  of the Company as
      receivables are sold to CIT net of discounts.

(2)   On January 23, 1996, the Company  entered into a factoring  agreement with
      Heller  Financial for its Sassco  Fashions  product line,  whereby  Heller
      provides a guarantee of collection  for all shipments  approved by Heller.
      Discounts  given by the  Company  for its Sassco  products  subsequent  to
      January  23,  1996  were  no  longer  a  risk/reserve  of the  Company  as
      receivables are sold to Heller net of discounts.

                                      F-35
<PAGE>


================================================================================

                                    Exhibits
                                       to
                                    FORM 10-K

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                  Annual Report Pursuant to Section 13 or 15(d)
                     of The Securities Exchange Act of 1934

FOR THE FISCAL YEAR ENDED JANUARY 3, 1998             COMMISSION FILE NO. 1-9196

                          THE LESLIE FAY COMPANY, INC.


           DELAWARE                                             13-3197085
(STATE OR OTHER JURISDICTION OF                              (I.R.S. EMPLOYER
 INCORPORATION OR ORGANIZATION)                              IDENTIFICATION NO.)

           1412 BROADWAY
         NEW YORK, NEW YORK                                       10018
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                        (ZIP CODE)

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 221-4000


================================================================================



<PAGE>



                          THE LESLIE FAY COMPANY, INC.
                                INDEX TO EXHIBITS

EXHIBIT
NUMBER               DESCRIPTION

2                 Amended Joint Plan of Reorganization.(1)

3.1(a)            Restated Certificate of Incorporation of the Company.(1)

3.1(b)            Amendment to Restated  Certification  of  Incorporation of the
                  Company.(3)

3.2               Amended and Restated By-laws of the Company.(1)

4.1               Revolving  Credit Agreement dated June 2, 1997 (the "Revolving
                  Credit Agreement)  between Leslie Fay Marketing,  Inc. ("LFM")
                  and the CIT Group/Commercial Services, Inc. ("CIT").(1)

4.2               Waiver Agreement dated August 18, 1997 to the Revolving Credit
                  Agreement between LFM and CIT.(5)

4.3               Amendment One dated February 23, 1998 to the Revolving  Credit
                  Agreement between LFM and CIT.(5)

4.4               Amendment  Two dated  March 31, 1998 to the  Revolving  Credit
                  Agreement between LFM and CIT.(5)

10.1*             Employment  Agreement  dated as of June 4,  1997  between  the
                  Company and John J. Pomerantz.(2)

10.2*             Employment  Agreement  dated as of June 4,  1997  between  the
                  Company and John Ward.(2)

10.3*             Employment  Agreement  dated as of June 4,  1997  between  the
                  Company and Warren T. Wishart.(3)

10.4*             Employment  Agreement  dated as of June 4,  1997  between  the
                  Company and Dominick Felicetti.(3)

10.5*             1997 Non-Employee Director Stock Option Plan.(5)

10.6*             Severance  Agreement  dated  as of  January  9,  1998  between
                  Catharine Bandel-Wirtshafter and the Company.(5)

10.7              Factoring Agreement dated June 4, 1997 between LFM and CIT.(1)

10.8              Lease  Agreement dated December 13, 1989 between 1412 Broadway
                  Associates  and the Company,  modified as of July 31, 1990 and
                  August 1, 1990, for certain premises located at 1412 Broadway,
                  New York, New York.(4)

10.9              Lease  Agreement  dated  August 1, 1997 between John J. Passan
                  and the  Company for  certain  premises  located at One Passan
                  Drive, Borough of Laflin, Luzerne County, Pennsylvania.(2)

21                List of Subsidiaries.(5)

27                Financial Data Schedule.(5)

------------------------------

                                       E-1

<PAGE>


(1)   Incorporated by reference to Current Report on Form 8-K for an event dated
      June 4, 1997.

(2)   Incorporated by reference to Quarterly  Report on Form 10-Q for the fiscal
      quarter ended July 5, 1997.

(3)   Incorporated by reference to Quarterly  Report on Form 10-Q for the fiscal
      quarter ended October 4, 1997.

(4)   Incorporated  by  reference  to Annual  Report on Form 10-K for the fiscal
      year ended December 28, 1996.

(5)   Filed herewith.

*     Management  contract or  compensation  plan or arrangement  required to be
      noted as provided in Item 14(a)3.


                                       E-2