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 2, 1999             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 of 1934 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. [x]

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
25, 1999 was approximately $14,634,000.

There were 6,041,138 shares of Common Stock outstanding at March 25,1999.

                       Documents Incorporated by Reference
                       -----------------------------------
                                      None

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                                     PART I
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Item 1.  Business.
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         The Company is engaged  principally  in the design,  arranging  for the
manufacture and sale of diversified lines of women's dresses and sportswear. The
Company's  products focus on career,  social occasion and evening  clothing that
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 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 reorganized following a voluntary petition under Chapter
11 of the Bankruptcy Code on June 4, 1997 (See "Reorganization Under Chapter 11"
below).

         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.

Recent Developments

         On October 27, 1998, the Company purchased certain assets of The Warren
Apparel  Group Ltd.  ("Warren").  Warren was a  privately  owned  wholesaler  of
women's  career,  social  occasion and evening  dresses sold in  department  and
specialty stores nationwide  primarily under the "David Warren",  "DW3", "Warren
Petites", "Reggio" and "Rimini" brands. The purchase of those assets facilitates
the Company's return to the better dress business.

         On March 19,  1999,  Dickstein  Partners  Inc. in an  amendment  to its
Schedule 13D, reported that it (which, together with its affiliates,  owns 46.4%
of the  outstanding  stock of the Company)  proposed  that the Company  offer to
exchange up to 2,500,000  shares of Common Stock,  or  approximately  41% of the
outstanding  shares, for debt securities of the Company expected to be valued on
a per share basis in excess of the current  trading  price of the Common  Stock.
The exchange offer would replace the Company's  existing stock buy-back program.
Dickstein  Partners,  Inc. and its  affiliates  indicated in such amendment that
they expected to participate in such an exchange  offer,  but  anticipated  that
they would remain substantial stockholders of the Company following consummation
of the offer. The Company's Board of Directors  has retained advisors to help it
consider this proposal.


<PAGE>



Products

         During  1998,  1997  and  1996,  respectively,  dresses  accounted  for
approximately  64%, 57% and 43% 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 36%,
43% and 57%,  respectively.  During  1999,  dresses are  expected to account for
approximately  70% of total  sales  and  sportswear  30%.  The  increase  in the
expected  dress sales ratio will result  mostly from the  addition of the "David
Warren",  "Warren Petite",  "Rimini" and "Reggio" brands acquired on October 27,
1998 (See "Recent Developments" above).

         Dress Product Lines.  The Company sells  moderately  priced one and two
piece  dresses,  pant dresses and dresses  with  coordinated  jackets  under the
"Leslie  Fay",  "Leslie Fay Petite",  "Leslie Fay Women" and "Leslie Fay Women's
Petites" brands.  These products are offered in petite,  misses and large sizes.
The Company  also sells  moderate to  bridge-priced  career,  social and evening
occasion  dresses under the newly  acquired  "David  Warren",  "Warren  Petite",
"Rimini" and "Reggio" brands. At this time, these products are offered in petite
and misses size ranges. The Company expects to offer a large size range in 1999.

         Sportswear   Product  Lines.  The  Company  markets  moderately  priced
coordinated  sportswear and related separates under the "Leslie Fay Sportswear",
"Leslie Fay Sportswear Petite", "Leslie Fay Sportswear Woman", "Joan Leslie" and
"Haberdashery  by Leslie Fay" brands.  The Company'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.  These products are offered in
petite,  misses and large sizes. The Company also offered  contemporary  knitted
sportswear,  including  knitted  separates  and dresses  under the  "Outlander",
"Outlander Studio",  "Outlander Petite" and "Outlander Woman" brands,  styled to
appeal to women of a wide  range of ages and  available  in  misses,  petite and
large sizes. These Outlander products were discontinued in the Fall of 1997.

Design

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

         The  Company's  product  lines  generally  offer  four  or  five of the
following seasonal lines: Resort,  Spring,  Summer, Fall I, Fall II and Holiday.
The Company  typically  offers  these  seasonal  lines in ten to  thirteen  week
selling periods.


<PAGE>



Trademarks and Licenses

         The brands 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.  These products are in categories  that are not offered by
the Company and currently  include  women's socks,  legwear,  handbags and small
leather goods.

Markets and Distribution

         The Company's  products were sold during 1998 principally to department
and specialty stores located  throughout the United States.  Excluding the sales
of the Sold Product Lines,  during 1998,  1997 and 1996, the Company's Dress and
Sportswear   lines'  products  were  sold  to  1,012,  788  and  857  customers,
respectively.  Management  believes that the increase in the number of customers
is  primarily  attributable  to  additional  customers  shipped by the  recently
acquired dress brands (See "Recent  Developments"  above).  Dillard's Department
Stores, Inc. accounted for 30%, 33% and 35% and JC Penney accounted for 11%, 12%
and 19% 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 the Dillard's Department Stores, Inc. or JC Penney businesses would have
a material adverse effect on its operations.

         The Company  maintains its own employee and commission  sales force and
exhibits  its  products  in its  principal  showroom  in New York,  New York and
additional  showrooms  in  Dallas,  Texas  and  Atlanta,  Georgia.  The  Company
currently has an employee sales force consisting of 3 people in Dallas and 19 in
New  York.  For  further  discussion,  see  "Properties"  below.  While  in some
instances  the  Company's  brands may compete  with each  other,  as a practical
matter,  such  competition  is limited  because of the  differences in products,
price points and market segments.

         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 that are  advertised
and promoted in national magazines and trade publications.


<PAGE>



Manufacturing

         Apparel sold by the Company is produced in accordance with its designs,
specifications  and production  schedules.  All of such apparel is produced by a
number of independent  contractors  located  domestically  and abroad.  In 1998,
products  representing  approximately  85% 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 1998,  three  operating  subsidiaries  of Cambridge  Corp. and Doall
Industries,  S.A.  DE  C.V.  manufactured  44%  and  15%,  respectively,  of the
Company's  total  production.  The Company has had  satisfactory,  long-standing
relationships  with  most of its  contractors.  In 1998,  none of the  Company's
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  center.  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 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.

         The  purchase of raw  materials  is  controlled  and  coordinated  by a
centralized  purchasing function that works with the manufacturing,  design, and
sales staffs.  Most often, the Company  purchases and ships 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 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.


<PAGE>



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 has 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  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 higher cost and additional time needed
to transport  product 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  additional
duties and other charges.

         The  Company  currently  imports  a  substantial  majority  of its  raw
materials,  primarily  fabric,  and a significant  portion of its finished goods
through  Far East  based  service  bureaus.  These  service  bureaus  secure the
manufacture  of raw  materials  from a number of  factories  (about 15)  located
throughout the Far East. The Company's  senior  management also meets with these
manufacturers  prior to placing  orders  with them.  The  Company  believes  its
primary risk is the timely  receipt of its raw materials  and finished  goods to
allow the timely shipment of its product.  Through the present time, the Company
has received its products in a timely manner. The Company monitors the status of
its orders through its Far East service bureaus continually. Payment for the raw
materials  and  finished  goods 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.


<PAGE>



         The Company does not sell its products 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

         On March 20,  1999,  the Company had unfilled  orders of  approximately
$58,041,000 of which  $9,659,000 are for dresses ordered under the brands "David
Warren",  "Warren  Petites",  "Rimini" and "Reggio"  (See "Recent  Developments"
above).  The Company had  $55,750,000 of unfilled orders at a comparable date in
1998. 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").  This agreement provides that CIT purchase the Company's
approved  accounts  receivable  and  guarantee  collection  thereof,  except for
disputed amounts.  The vast majority of the Company's trade accounts  receivable
has been  purchased  by CIT.  As of  January  2, 1999,  the  purchased  accounts
receivable represents 92% of the Company's total accounts receivable.

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  brands.  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 among the leading  producers of
moderate dresses in the United States and that 

<PAGE>

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.

Employees

         In March 1999, the Company employed 421 persons,  of whom approximately
28% were in production, 30% in distribution, 14% in merchandising and design, 8%
in sales and 20% in administrative and financial  operations.  Approximately 37%
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.

Reorganization Under Chapter 11

         On April 5, 1993,  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 

<PAGE>

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 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 6,800,000 new shares of Common
Stock to its creditors in July 1997. The remaining  twenty-one (21%) percent was
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.  An additional  distribution of  approximately
1,250,000  shares  representing 88% of the 21% held for resolution of litigation
was  distributed  during February and March 1999 with approval of the Bankruptcy
Court.  The  remaining  shares are being held pending the  resolution of certain
litigation before the Bankruptcy Court

         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.

Item 2.  Properties.
------   ----------

         Executive and sales offices, as well as design facilities,  are located
in New York City  under a lease  expiring  in 2008  (60,990  square  feet).  The
Company also leases sales offices and  showrooms in Dallas,  Texas (4,396 square
feet) and a showroom in Atlanta,  Georgia (737 square  feet).  In addition,  the
Company  operates two small  manufacturing  support  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 and administrative  center of approximately  194,685
square feet through  August 2008 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 are 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 in April 1993. By an order



<PAGE>

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.

         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  appealed that decision to the United  States  District  Court for the
Southern  District of New York,  and on July 17, 1998,  that Court  affirmed the
decision of the Bankruptcy  Court.  The Claimants have taken a further appeal to
the United States Court of Appeals for the Second Circuit, and that appeal is in
the process of being briefed.

         Five of the Claimants in the above-described appeal 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  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 it is expected that a
summary  judgement motion will be filed by the defending  officers and directors
after a final order has been  entered in the  above-described  Bankruptcy  Court
matter.

         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. 


<PAGE>

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 asserted counter claims. 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
parties have settled the litigation without cost to the Company.

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

         None.


<PAGE>

                                     PART II

Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters.
------   ---------------------------------------------------------------------

         On December 8, 1998,  the common stock of the Company  began trading on
the Nasdaq Small Cap market under the symbol "LFAY".  Prior thereto,  such stock
was traded on the  over-the-counter  market bulletin board.  The following table
sets  forth the high bid and low asked  prices  on the  bulletin  board for each
quarter during 1997 and 1998 and, from June 4, 1997,  have been adjusted to give
retroactive  effect to a 2 for 1 split of the Company's common stock effected in
July 1998:

                  Period                              High           Low
                  ------                              ----           ---

         1997     First Quarter                     $  0.12        $ 0.01
                  Second Quarter                       0.10          0.02 (a)
                    (prior to June 4, 1997)
                  Second Quarter                       4.75          3.69
                    (from June 4, 1997)
                  Third Quarter                        8.07          3.13
                  Fourth Quarter                       8.88          6.00

         1998     First Quarter                     $  8.44        $ 6.00
                  Second Quarter                       8.81          6.63
                  Third Quarter                        9.38          4.75
                  Fourth Quarter                       8.00          4.38

         1999     First Quarter                     $  6.75        $ 3.88
                    (through March 25, 1999)

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

         On March 25, 1999, the high bid price was $4.75 and the low asked price
was $4.38. You are encouraged to obtain current trading information. As of March
25, 1999, there were  approximately  1,297 holders of record of the common stock
of the Company.

         On June 4, 1997 the Company issued an aggregate of 6,800,000  shares of
Common Stock to its creditors  pursuant to its plan of  reorganization.  Of such
shares, 5,372,000 shares were distributed in July 1997 and 1,250,000 shares were
distributed in February and March 1999 (the shares above are adjusted to reflect
the two-for-one  stock split referred to below).  No sales commissions were paid
in connection with the transactions. The shares were issued in reliance upon the
exemption from  registration  afforded by Section 3(a)(10) of the Securities Act
of 1933, as amended (the "Act").

<PAGE>



         On June 3, 1998 the Company  issued an  aggregate  of 12,000  shares of
Common  Stock,  consisting  of  2,000  shares  to each  of its six  non-employee
directors,  in  accordance  with the terms of the  Company's  1997  Non-Employee
Director Stock Option and Stock Incentive Plan (the shares above are adjusted to
reflect the two-for-one  stock split referred to below).  No  consideration  was
paid by such directors for the stock and no sales  commissions  were paid by the
Company in  connection  with its  issuance.  The shares  were  issued  issued in
reliance upon the exemption from registration afforded by Section 4(2) the Act.

         On July 1, 1998 the Company effected a two-for-one stock split pursuant
to which it issued 3,406,000  shares of Common Stock. No sales  commissions were
paid in  connection  with this  transaction.  The shares were issued in reliance
upon the exemption from registration afforded by Section 2(3) of the Act.



<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>

                                                    (In thousands, except per share data)                                       
                                Reorganized Company                                        Predecessor Company   
                       --------------------------------------------- | --------------------------------------------------
                                                                     |                        For the Years Ended  
                                                                     |                   ------------------------------     
                                                                     | 
                                 Pro Forma                           | 
                    Fifty-Two   Fifty-Three   Thirty-One             |  Twenty-Two
                   Weeks Ended  Weeks Ended   Weeks Ended            | Weeks Ended
                   January 2,   January 3,    January 3,  Pro Forma  |    June 4,
                      1999       1998 (a)      1998 (b)    1996(a)   |   1997 (c)       1996        1995        1994
                      ----       ----           ----        ----     |   ----           ----        ----        ----
                               (Unaudited)               (Unaudited) | 
                                                                     | 
                                                                     | 
<S>                 <C>         <C>        <C>         <C>            <C>         <C>          <C>         <C>     
Net  Sales             $152,867    $132,160    $ 73,091   $110,053   |   $197,984     $429,676     $442,084     $531,843
                                                                     | 
Operating Income                                                     | 
  (Loss)                 13,020      11,782       4,322      4,079   |     14,355       17,965        1,235      (27,278)
                                                                     |                                 
                                                                     | 
Reorganization Costs         --          --          --         --   |      3,379(d)     5,144 (d)   16,575 (d)  115,769 (d)
                                                                     | 
Interest Expense and                                                 | 
  Financing Costs           950       1,113         336      2,298   |      1,372        3,932 (e)    3,262 (e)    5,512 (e)
                                                                     | 
Tax Provision (Benefit)   3,212       2,684         677        130   |        451         (839)(f)     (761)(f)      981 (f)
                                                                     | 
                                                                     | 
Other Non-Recurring                                                  | 
    Items                    --          --          --         --   |    136,341(g)        --           --           --
                                                                     | 
Net Income (Loss)         $8,858     $7,985      $3,309     $1,651   |   $145,494       $9,728     ($17,841)   ($149,540)
                                                                     | 
Net Income (Loss) per                                                | 
  Share - Basic            $1.35      $1.17(h)    $0.49(h)   $0.24(h)|         --        $0.52 (h)   ($0.95)(h)   ($7.97)(h)
        - Diluted          $1.31      $1.16(h)    $0.48(h)   $0.24(h)|         --        $0.52 (h)   ($0.95)(h)   ($7.97)(h)     
                                                                     |               
                                                                     |                                              
                                                                     | 
                                                                     | 
                           As of      As of                          |      As of        As of        As of       As of
                         01/02/99    01/03/98                        |    06/04/97      12/28/96    12/30/95    12/31/94
                         --------    --------                        |    --------      --------    --------    --------     
                                                                     | 
Total Assets             $67,804    $61,051                          |    $77,789     $237,661     $245,980     $281,634
                                                                     | 
Assets of Product                                                    | 
  Lines Held for Sale                                                | 
   and Disposition            --         --                          |         --        3,003 (i)      326 (i)   21,063 (i)
                                                                     | 
Long-Term Debt                                                       | 
 (Including Capital                                                  | 
  Lease)                      17         49                          |        108           -- (j)       -- (j)       -- (j)
                                                                                                

</TABLE>


<PAGE>

Notes to Selected Financial Data
---------------------------------

(a)      The unaudited pro forma 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:
                  The Company used 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 after June 4, 1997.

                  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
<PAGE>

         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.

(d)      The Company incurred  reorganization costs in 1997, 1996, 1995 and 1994
         while operating as a debtor in possession. Included in 1997, 1996, 1995
         and 1994 is a provision of $0,  $652,000,  $3,181,000 and  $53,000,000,
         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  amounts of
         which were $28,672,000 and $3,956,000, respectively. The Company had no
         direct  borrowings  under the  predecessor  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 are described in Note 7(b)
         to the Audited 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 resulted from the complete  utilization  of tax refunds
         from prior years' taxes paid.

(g)      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
         ($27,010,000)  and Gain on Debt  Discharge (an  extraordinary  item) of
         $73,541,000.

(h)      Net income (loss) per share for the pro forma  fifty-three  weeks ended
         January 3, 1998,  thirty-one  weeks ended January 3, 1998 and pro forma
         1996 was  calculated  based on  6,800,000  shares of new common  stock,
         adjusted  to give  effect to the 2 for 1 stock  split  effected in July
         1998, 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 1994 through 1996, was canceled under the Plan and the new
         stock was not issued until June 4, 1997.

(i)      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.

(j)      Amount  excludes  long-term debt  classified in liabilities  subject to
         compromise.

<PAGE>



Item 7. Management's  Discussion and Analysis of Financial Condition and Results
------  ------------------------------------------------------------------------
        of Operations.
        -------------

(a)      Results of Operations


Fifty-two  Weeks Ended  January 2, 1999 as Compared to  Fifty-three  Weeks Ended
--------------------------------------------------------------------------------
January 3, 1998
---------------

         For purposes of this discussion the fifty-three  weeks ended January 3,
1998 was calculated by summarizing the Consolidated  Statements of Operations of
the  Reorganized  Company for the thirty-one  weeks ended January 3, 1998 and of
the Predecessor Company for the twenty-two weeks ended June 4, 1997.

         The Company  recorded net sales of $152,867,000 for the fifty-two weeks
ended January 2, 1999,  compared with  $271,075,000  for the  fifty-three  weeks
ended  January 3, 1998, a net decrease of  $118,208,000,  or 43.6%.  The primary
factors  contributing  to this decrease was the sale of the Sassco  Fashions and
Castleberry   product  lines,  which  generated   $136,107,000  and  $2,808,000,
respectively,  and the  discontinuation  of the Outlander  brand which  provided
$5,877,000 in net sales for the  fifty-three  weeks ended  January 3, 1998.  The
additional week in the period ended January 3, 1998 generated  $1,225,000 of net
sales  for  the  continuing  product  lines.   Offsetting  those  decreases  was
$3,260,000 of additional  volume generated by the Dress brands acquired from the
Warren Apparel Group, Ltd. (See "Business - Recent Developments") and $6,608,000
of volume  generated by the newly  offered  Sportswear  brand  "Haberdashery  by
Leslie Fay" during the  fifty-two  weeks ended  January 2, 1999. On a comparable
basis,  after  excluding the effect of the above  mentioned  businesses  and the
additional week of volume, the remaining  businesses had a net sales increase of
$17,941,000, or 14.3%, for the fifty-two weeks ended January 2, 1999 as compared
to the  fifty-three  weeks  ended  January 3,  1998.  This  increase  was due to
$19,201,000  or 25.6% of increased  volume  within Leslie Fay Dress product line
offset by a $1,260,000 or 2.5% decrease within the Sportswear product line.

         Gross  profit  for the  fifty-two  weeks  ended  January  2,  1999  was
$37,320,000  or 24.4% of net sales  compared with  $65,080,000  or 24.0% for the
fifty-three  weeks ended January 3, 1998.  The Sassco  Fashions and  Castleberry
lines generated $34,534,000 and $545,000,  respectively, in gross profit for the
fifty-three  weeks ended January 3, 1998. These product lines had a higher gross
profit  percent to net sales than the  remaining  lines.  Also,  gross profit of
$321,000 related to the discontinued  Outlander brand and $443,000 for the extra
week was  generated  during the  fifty-three  weeks ended  January 3, 1998.  The
remaining  comparable  businesses,  excluding  $1,377,000  and $880,000 of gross
profit  realized from the new  Haberdashery  and Warren brands,  increased gross
profit by $5,826,000  for the  fifty-two  weeks ended January 2, 1999 versus the
prior year and the gross  margin  percent  increased  to 24.5% from  23.4%.  The
Leslie Fay Dress  line's  gross profit  increased  $5,187,000  or a gross profit
percent of 25.0%  from  24.4%.  The  Sportswear  lines  gross  profit  increased
$639,000 to 23.7% of sales from 21.8%.
<PAGE>

         Selling, warehouse,  general and administrative expenses were 18.4% and
18.0% of net sales for the fifty-two and fifty-three weeks ended January 2, 1999
and January 3, 1998, respectively. After excluding the costs associated with the
product lines sold,  the comparable  remaining  businesses had expenses of 18.2%
for the fifty-three  weeks ended January 3, 1998.  Expenses are up mostly due to
the additional  operating  expenses  related to the Warren brands,  which have a
higher expense ratio than the other operating  brands in the Company,  increased
straight-line  costs  incurred to extend the  Company's  lease for  showroom and
office space in New York and additional costs incurred during the  restructuring
of the Sportswear product line during 1998.

         Depreciation  and  amortization  expense for the fifty-two  weeks ended
January 2, 1999 was  $406,000  due to the  write-off  of fixed assets at June 4,
1997 under fresh-start  reporting.  In addition,  the Company realized income of
$4,572,000  from  amortization  of the excess  revalued net assets acquired over
equity (see Note 2).  Depreciation and amortization  expense for the fifty-three
weeks ended  January 3, 1998  consisted  of  $2,104,000,  including  $860,000 of
depreciation  related  to  product  lines  sold and  amortization  of the excess
purchase  price over net assets  acquired  of  $473,000,  including  $257,000 of
amortization related to the lines sold. This amortization expense related to the
leveraged  buyout of The Leslie  Fay  Company on June 28,  1984.  The  remaining
comparative  product  lines had  depreciation  expense of $771,000  and realized
income of  $2,667,000  from  amortization  of the  excess  revalued  net  assets
acquired  over equity during the  fifty-three  week period ended January 3, 1998
(see Note 2).

         The Company's  adoption of SFAS No. 123,  "Accounting  for  Stock-Based
Compensation", to value stock options and the issuance of shares of common stock
as partial  payment for  services  rendered by the  non-employee  members of the
Company's Board of Directors generated non-cash stock based compensation expense
of $1,724,000 and $351,000 for the fifty-two and fifty-three weeks ended January
2, 1999 and January 3, 1998,  respectively.  There was no  non-cash  stock based
compensation expense recorded prior to June 4, 1997.

         Other  income was  $1,334,000  and  $2,143,000  for the  fifty-two  and
fifty-three weeks ended January 2, 1999 and January 3, 1998,  respectively.  The
decrease is primarily due to the licensing revenues related to trade names which
were  spun-off  with the Sassco  Fashions  product  line and the  expiration  of
certain licensing agreements which were not renewed.

         Interest expense  and  financing  costs,  net of  interest  income  was
$950,000 and $1,708,000 for the fifty-two and fifty-three weeks ended January 2,
1999 and January 3, 1998,  respectively.  The  financing  fees under the new CIT
Credit  Agreement (see Note 7) were offset by income earned on the cash invested
for the fifty-two  weeks ended January 2, 1999. The financing fees incurred were
significantly below those incurred during the fifty-three weeks ended January 3,
1998 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.


<PAGE>



         The provision for taxes was $3,212,000 and $1,128,000 for the fifty-two
and fifty-three  weeks ended January 2, 1999 and January 3, 1998,  respectively.
The   lower    provision   in   1997   resulted   from   net   operating    loss
("NOL")carryforwards  which were  available  for use for the period  through the
Company's emergence from bankruptcy,  which are recorded in capital in excess of
par value after the Company emerged from  bankruptcy.  During the  pre-emergence
period, the NOL utilization reduced the provision for taxes.

The Reorganized  Company's Thirty-One Weeks Ended January 3, 1998 as Compared to
--------------------------------------------------------------------------------
the Predecessor Company's 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  brands,  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 Leslie Fay Dress line. After excluding the
effect of the  discontinued  Outlander  brands,  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  brands,  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
Leslie Fay 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.
<PAGE>


         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 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 trade names 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 7) 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 for the Predecessor Company
------------------------------------

         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 brand and opened  additional retail stores over the preceding 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 for 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

<PAGE>


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
Leslie Fay Dress product  line.  The net sales of the  Castleberry  product line
declined by $1,042,000.

         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  the
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  net  of
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  consisted  primarily of the amortization
of the excess purchase price over net assets acquired and related 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 were  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.
<PAGE>


         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 was no federal income tax provision currently recognizable,
other  than  that  based on the  alternative  minimum  tax  regulations,  due to
existing net operating loss carryforwards.

      (b)  Liquidity and Capital Resources

         On June 2, 1997, the Company  obtained  $30,000,000  of  post-emergence
financing (see Note 7), which became effective with the consummation of the Plan
on June 4, 1997.  The CIT Credit  Agreement  as  amended,  currently  provides a
working  capital  facility  commitment of  $42,000,000,  including a $25,000,000
sublimit  on letters of credit.  The Company  had a net  borrowing  availability
under its Credit  Agreement of $28,949,000 on January 2, 1999 and peak borrowing
during the fiscal  year ended  January 2, 1999 was  $3,734,000.  As of March 26,
1999,  there  were  approximately  $2,502,000  in  direct  borrowings  under the
revolving line of credit and the Company was utilizing approximately  $8,673,000
of the CIT Credit Agreement for letters of credit.

         At January 2, 1999, there was $328,000 in direct borrowings outstanding
under  the CIT  Credit  Agreement  and  cash and cash  equivalents  amounted  to
$4,213,000.   Of  this  amount,   $3,267,000  will  be  used  to  pay  remaining
administrative  claims  as  defined  in  the  Plan.  Working  capital  decreased
$3,875,000,  to $35,578,000 at January 2, 1999 from January 3, 1998. The primary
changes in the  components of working  capital were: a decrease in cash and cash
equivalents and short-term  investments of $18,589,000;  an increase in accounts
receivable of $6,425,000; an increase in inventories of $11,926,000; an increase
of $163,000 in prepaid expenses and other current assets;  offset by an increase
in current liabilities of $3,800,000.  Short-term  investments  decreased as the
Company  liquidated a $2,989,000  one-year US Treasury Note that matured on June
30, 1998,  the proceeds  from which were and will be used to pay  administrative
claims.  Cash and  cash  equivalents  decreased  primarily  as a  result  of the
accounts  receivable and inventory  increases discussed below as well as the use
of: $4,623,000 to repurchase 817,100 shares of the Company's  outstanding common
stock,  $2,331,000 for capital expenditures and $1,250,000 of cash used upon the
acquisition of certain  assets of Warren  Apparel  Group,  Ltd. (See "Business -
Recent  Developments").  Accounts  receivable  increased due to the earlier than
normal  shipping of the Spring season into the fourth quarter and the additional
volume shipped by the recently acquired brands "David Warren",  Warren Petites",
Rimini"  and  "Reggio"  (See  "Business  -  Recent  Developments").  Inventories
increased  as a  result  of the  earlier  production  of  the  Spring  lines  to
accommodate the earlier shipping  windows as well as the investment  required to
build the  necessary  better  priced  dress  products  for the new  brands.  The
increase in current  liabilities  is  predominately  a result of the  additional
contractor  accounts payable related to the higher  investment in current season
inventory,  $1,175,000  of  estimated  remaining  acquisition  expenses  and the
assumption of a short-term note payable of $834,000,  all of which were a result
of the above mentioned acquisition.


<PAGE>



         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
2011. The utilization of the NOL, however, is subject to limitations,  including
an annual limitation of about $1,500,000  imposed by Section 328 of the Internal
Revenue Code. As of January 2, 1999, the remaining  aggregate  loss  utilization
limitation through fiscal year 2011 is approximately $19,500,000.

         Capital  expenditures  were  $2,331,000  for the fifty-two  weeks ended
January 2, 1999. The anticipated capital expenditures of $2,990,000 for the 1999
fiscal year include approximately  $1,400,000 to improve management information,
production and distribution systems,  approximately $670,000 for improvements to
the Company's  distribution  facility,  approximately $550,000 for fixturing the
Company's   in-store   shops  that  are  planned  to  be  opened  in  1999,  and
approximately  $370,000 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 1999.

The provisions of the Company's  Credit Agreement with CIT have been modified to
the following:

         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 which was amended on October 27,
1998 to extend the agreement  through June 2, 2001 to provide direct  borrowings
and to issue letters of credit on the Company's  behalf.  Direct borrowings bear
interest  at prime  minus  .25%  (7.75% at  January  2, 1999) and the CIT Credit
Agreement  requires a fee, payable monthly,  on average  outstanding  letters of
credit at a rate of 2%  annually.  There  were  $328,000  in  direct  borrowings
outstanding  under the CIT Credit  Agreement and  approximately  $8,099,000  was
committed under unexpired letters of credit as of January 2, 1999.

         The CIT Credit Agreement has been modified four times through March 29,
1999 to adjust for changes relating to the Company's  consolidated balance sheet
as it exited from bankruptcy,  reflecting  associated  "fresh start"  accounting
adjustments,  increasing  the  level of  capital  expenditures  to  support  the
Company's growth and Year 2000  requirements,  allowing the Warren  acquisition,
permitting  the  Company's  stock  buy-back  program,  extending  the CIT Credit
Agreement and increasing the Company's  credit line,  reducing  borrowing costs,
and allowing the early  termination of the CIT Credit Agreement at the option of
the Company. Key modifications include:

     The  committed   credit  line  has  been  increased  to  $42,000,000   from
     $30,000,000.  The  sub-limit  on letters of credit has also been  increased
     from  $20,000,000 to $25,000,000.  The limit on inventory based  collateral
     has been raised from $12,000,000 to $15,000,000.

     The interest rate on direct borrowings has been reduced from prime plus 100
     basis points to prime less 25 basis points.


<PAGE>



     The Company may  repurchase  its stock or pay  dividends up to an amount of
     $10,000,000.  As of March 25, 1999, approximately $5,400,000 of this amount
     remains available.

     Covenants  related to capital  expenditures,  minimum ratio of consolidated
     current assets to consolidated  current  liabilities,  minimum consolidated
     tangible net worth and minimum  consolidated  working capital have been set
     at levels  appropriate  for normal  business  conditions  and the Company's
     existing stock repurchase program.

     The Company may, with CIT's approval, acquire new businesses.

     The Company may terminate the CIT Credit Agreement early.

         The CIT  Credit  Agreement,  as  amended,  contains  certain  reporting
requirements,  as well as financial and operating  covenants  related to capital
expenditures,  minimum  tangible net worth,  maintenance  of a current assets to
current  liabilities ratio, and an interest to earnings ratio and the attainment
of minimum earnings. As collateral for borrowing under the CIT Credit Agreement,
the Company has granted to CIT a security  interest in substantially  all of its
assets.  In addition,  the CIT Credit  Agreement  contains  certain  restrictive
covenants,  including  limitations  on the  incurrence of  additional  liens and
indebtedness.  The Company is currently in  compliance  with or has obtained the
necessary waiver for all requirements contained in the CIT Credit Agreement.

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

Year 2000
---------

         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 products,  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 complete and a plan has been developed to meet these
needs.  Overall,  the plan identifies numerous changes required in the Company's
systems (both hardware and software) as well as sensitive operating equipment to
make  them  Year  2000   compliant.   To  maintain   timely   oversight  of  the
implementation  of this plan,  the Company's  Chief  Financial  Officer  reports
regularly to the Audit Committee of the Company's Board of Directors.


<PAGE>



         Certain of these changes were  implemented  in 1998; the others will be
implemented in 1999 at an estimated total cost of approximately $1,900,000 which
has already been incurred by the Company, plus the utilization of internal staff
and other resources both during these  implementations and in the future. On May
4,  1998,  the  Company  implemented  the first  phase of its plan by placing in
operation a new purchase order  management and invoicing  system.  Through March
19,  1999,  the Company  implemented  the second and third phases of its plan by
placing in  operation  Year 2000  compliant  versions of its  accounts  payable,
accounts  receivable,  general ledger and EDI translation  systems. In addition,
the Company has begun its own testing to confirm the  readiness  of its systems.
The Company has purchased  updated  pattern making systems and related  hardware
and has updated its telecommunications software and hardware.

         The  Company  is  also  dependent  on the  efforts  of  its  customers,
suppliers and software  vendors.  The Company's  upgrade of its electronic  data
interchange  software  will need to be tested with the  Company's  customers  to
confirm proper  functioning.  The Company has contacted its major  customers and
suppliers and is cooperating with them to assure Year 2000 readiness. As part of
this effort, the Company has requested that its customers and suppliers complete
questionnaires  detailing their  assessment of their Year 2000  compliance.  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  products  as well as to  invoice  its
customers.  Finally,  the Company's plan is based upon the representations as to
Year 2000 compliance 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.

         In common with other marketers and  distributors  of apparel  products,
the Company  believes  that the most  reasonable  worst case scenario may be the
effects  caused by the  failures of third  parties and  entities  with which the
Company  has no  direct  involvement.  As it  involves  its  own  suppliers  and
customers,  the Company is considering  various  contingency  plans that include
manual  processing  and/or  outsourcing   certain   activities.   More  specific
contingency plans will be developed as more information becomes available.

         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.



<PAGE>



Item 7B. Quantitative and Qualitative Disclosures About Market Risk.
-------  ----------------------------------------------------------

         None.

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.


<PAGE>

                                    PART III
                                    --------

Item 10.  Directors and Executive Officers of the Registrant.
          --------------------------------------------------
<TABLE>
<CAPTION>

Directors of the Company
                                        Principal Occupation and                                          Director
Name and Age                            Offices with the Company                                          Since    
------------                            ------------------------                                          ---------

<S>                               <C>                                                                <C>               
John J. Pomerantz (65)                  Chairman of the Board and Chief Executive Officer                 1984
                                        of the Company

John A. Ward (45)                       President of the Company                                          1997

Clifford B. Cohn (47)                   Principal of Cohn & Associates (1)(2)                             1997

Mark B. Dickstein (40)                  President of Dickstein Partners Inc. (1)(2)                       1997

Chaim Edelstein (56)                    Former Chairman of the Board of Hills Stores,                     1998
                                        Inc. (1) (2)

Mark Kaufman (42)                       Sr. Vice-President  of Amroc Investments  (2)(3)                  1997

Bernard Olsoff  (69)                    Former Chief Executive Officer and President of                   1998
                                        Frederick Atkins, Inc. (2)(3)

Robert L. Sind (64)                     President of Recovery Management                                  1997
                                        Corporation (2)(3)
</TABLE>

--------------------------------------------------------------------------------
(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.




<PAGE>


Executive Officers of the Company

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

John J. Pomerantz               Chairman of the Board and                   65
                                Chief Executive Officer

John A. Ward                    President                                   45

Dominick Felicetti              Senior Vice President-Manufacturing         45
                                and Sourcing

Warren T. Wishart               Senior Vice President-Administration        46
                                and Finance, Secretary and
                                Chief Financial Officer


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.


<PAGE>



         Mark B.  Dickstein  has been the  President of Dickstein  Partners Inc.
since 1986 and is primarily  responsible  for the operations of Dickstein & Co.,
L.P.,  Dickstein Focus Fund L.P. and Dickstein  International  Limited,  each of
which is a private  investment  fund. Mr. Dickstein also serves as a Director of
Marvel Enterprises, Inc. and News Communications Inc.

         Chaim Y. Edelstein was Chairman of the Board of Hills Stores, Inc. from
February 7, 1996 until  December  31,  1998.  From 1985 to February  1994 he was
Chairman  and  Chief  Executive  Officer  of  Abraham & Straus,  a  division  of
Federated   Department  Stores,   Inc.  Mr.  Edelstein  is  a  Director  of  the
Independence Community Bank.

         Mark Kaufman has been a Sr. Vice- President at Amroc  Investments since
January 1999. Prior to joining Amroc,  beginning in July 1992, Mr. Kaufman was a
Vice President of Dickstein Partners, Inc. Prior to that, 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.

         Bernard Olsoff was President and Chief  Executive  Officer of Frederick
Atkins,  Inc.  ("Atkins"),  an international  retail  merchandising  and product
development  organization for department  stores.  He joined Atkins as Executive
Vice President in 1983 and was named  President and Chief  Operating  Officer in
1987. In January 1994 he became Chief  Executive  until his  retirement in April
1997. Prior to joining Atkins he was President of May Department Stores Company,
May  Merchandising  Corporation from 1971 to 1983 and Vice President and General
Merchandise Manager of Associated Merchandising  Corporation from August 1955 to
August 1971.

         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   companies  and  their   creditors.
Previously,  Mr. Sind had been an investment  banker for ten years and, spanning
over twelve years,  held senior  corporate  operating  and financial  positions,
including The Londontown Manufacturing Company, Chief Financial Officer at Beker
Industries  Corporation and Chief Operating  Officer at both Nice-Pak  Products,
Inc. and Marker International.

         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.


<PAGE>



         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 2, 1999.

<PAGE>


Item 11.  Executive Compensation.

         Summary of Cash and Certain  Other  Information.  The  following  table
shows, for 1998, 1997 and 1996, the compensation  paid or accrued by the Company
and its  subsidiaries to the Chief  Executive  Officer and the other most highly
compensated  "named  executive  officers" (as defined in Regulation  S-K) of the
Company during 1998 (the "Named Officers").  All share,  option and exercise and
market price  information in this Item 11 has been adjusted to give  retroactive
effect to a 2 for 1 split of the Company's common stock effective in July 1998.

Summary Compensation Table
<TABLE>
<CAPTION>
                                               Annual Compensation (1)            Long Term Compensation
                                               -------------------------------------------------------------

                                                                                    Awards       Payouts
                                                                                   --------     ---------

                                                                   Restricted     Securities
                                                                     Stock        Underlying     LTIP         All Other
Name and Principal Position   Year      Salary (2)     Bonus        Awards       Options (#)    Payouts     Compensation
---------------------------- --------- ------------- ------------ ------------- ---------------- ---------- ---------------

<S>                          <C>     <C>           <C>            <C>            <C>          <C>       <C>
John J. Pomerantz              1998    $498,654      $350,000                        117,042                $   2,650 (3)
  Chairman of  the             1997    $611,129      $300,000          --            263,756        --      $   8,699 (4)
  Board and Chief              1996    $777,915      $171,700          --                --         --      $   8,938 (5)
  Executive Officer
--------------------------------------------------------------------------------------------------------------------------

John A. Ward                   1998    $449,039      $280,000                         91,440        --      $   2,650 (3)   
   President                   1997    $462,692      $225,000          --            140,120        --      $   2,650 (4)   
                               1996    $521,154      $145,600          --                 --        --      $   2,500 (5)   
--------------------------------------------------------------------------------------------------------------------------
Dominick Felicetti             1998    $349,519      $230,000                         78,638        --      $   2,650 (3)   
  Senior Vice President -      1997    $337,500      $200,000          --            140,120        --      $   1,938 (4)
  Manufacturing and            1996    $267,885      $ 91,200          --                 --        --             --
  Sourcing                                                                                                   
--------------------------------------------------------------------------------------------------------------------------
Warren T. Wishart              1998    $224,519      $200,000                         78,638        --      $   2,650 (3)   
  Senior Vice President-       1997    $207,692      $180,000          --            140,120        --      $ 102,650 (4)   
  Administration and           1996    $200,000      $ 91,200          --                 --        --      $   2,500 (5)   
  Finance, Chief
  Financial  Officer and
  Treasurer
--------------------------------------------------------------------------------------------------------------------------
</TABLE>


(1)      In 1998,  1997 and 1996,  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.  1998 and 1996 were 52 week  years.  Amounts
         represent  salaries  paid  during the above  calendar years.

(3)      For  1998,   consists  of  amounts   contributed  as  Company  matching
         contributions for each Named Officer under the Company's 401(k) savings
         plan (the "401(k) Plan").



<PAGE>


(4)      For 1997, consists of the following: (a) amounts contributed as Company
         matching  contributions  for each  Named  Officer  under the  Company's
         401(k) Plan as follows:  Mr.  Pomerantz  $2,286;  Mr. Ward $2,650;  Mr.
         Felicetti  $1,938 and Mr.  Wishart  $2,650 and (b) amounts  paid by the
         Company for split  dollar  life  insurance  coverage  as  follows:  Mr.
         Pomerantz  $6,413;  and  (c)  amount  paid  by the  Company  as  earned
         retention for Mr. Wishart $100,000.

(5)      For 1996, consists of the following: (a) amounts contributed as Company
         matching  contributions  for each  Named  Officer  under the  Company's
         401(k) 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.


Option/SAR Grants in Last Fiscal Year

         The  following  table  sets  forth  information  with  respect to stock
options granted to the Named Officers during fiscal 1998:

<TABLE>
<CAPTION>
                     Individual Grants
-------------------------------------------------------------------------------------------------------------------

                     % of Total                                               Potential Realizable Value at    
                     Number of        Options                               Assumed Annual Rates of Stock Price 
                     Securities     Granted to                                  Appreciation for Option Term    
                     Underlying      Employees     Exercise   Expiration   --------------------------------------
        Name      Options Granted   in Fiscal Year  Price (1)   Date(2)       0%          5%           10%                      
-------------------------------------------------------------------------------------------------------------------

<S>                <C>             <C>            <C>        <C>        <C>         <C>          <C>       
John J. Pomerantz     117,042        26.7%          $3.09      1/4/08      $508,840    $  989,005   $1,691,257
John A. Ward           91,440        20.9%          $3.09      1/4/08      $397,535    $  772,668   $1,321,308
Dominick Felicetti     78,638        17.9%          $3.09      1/4/08      $341,879    $  664,491   $1,136,319
Warren T. Wishart      78,638        17.9%          $3.09      1/4/08      $341,879    $  664,491   $1,136,319
</TABLE>

(1)      The market price per share as of the grant date was $7.44
(2)      Exercisable as to 25% of such shares on each of January 4, 
         1998,  January 4, 1999,  January 4, 2000 and January 4, 2001.

<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 1998 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 December  30,
1998 (the last trade day prior to January 2, 1999) was $6.6875.
<TABLE>
<CAPTION>

                                                                Number of Securities          Value of Unexercised
                                  Shares                        Underlying Unexercised        In-the-Money Options
                                  Acquired         Value        Options at Fiscal Year-End    at Fiscal Year-End
Name                              on Exercise      Realized     Exercisable/Unexercisable     Exercisable/Unexercisable (1)
----                              ------------     --------     -------------------------     --------------------------

<S>                         <C>                 <C>        <C>                           <C>       
John J. Pomerantz                 None             N/A          116,300/264,500               $ 418,350/951,450
John A. Ward                      None             N/A           69,100/162,460               $ 248,570/584,400
Dominick Felicetti                None             N/A           65,900/152,860               $ 237,060/549,870
Warren T. Wishart                 None             N/A           65,900/152,860               $ 237,060/549,870
------------------------------------------------------------------------------------------------------------------------
</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.

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 $12,500 and 2,000  shares of the
Company's  common stock.  Each initial  non-employee  director,  upon becoming a
director,  received stock options to purchase 20,000 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  10,000  shares,  vesting
one-third each year.

Employment Contracts

         The Company has an employment agreement with John J. Pomerantz expiring
on January 3, 2001,  pursuant to which he is employed as Chief Executive Officer
at a base salary of $500,000 per annum.

         The Company also has an employment agreement with John A. Ward expiring
on January 3, 2001, pursuant to which he is employed as President of the Company
at a base salary of $450,000 per annum.

         The Company also has an employment  agreement  with Dominick  Felicetti
expiring  on January 3, 2001,  pursuant  to which he is  employed as Senior Vice
President--Manufacturing and Sourcing at a base salary of $350,000 for the first
two years and $375,000 for the third year.



<PAGE>


         The Company  also has an  employment  agreement  with Warren T. Wishart
expiring  on January 3, 2001,  pursuant  to which he is  employed as Senior Vice
President--Administration  and Finance, Chief Financial Officer and Treasurer at
a base salary of  $225,000  for the first two years and  $250,000  for the third
year.

         In addition,  these  employment  agreements  provide for a shared bonus
pool  payable to the  employees  of the  Company  if EBITDA (as  defined in such
agreements) exceeds $4,626,550. The bonus pool will equal 9.6% of EBITDA plus an
additional 0.2% of EBITDA for each $54,430 by which EBITDA exceeds $4,626,550 up
to a maximum  of 12.5% of EBITDA  plus an  additional  5% of the amount by which
EBITDA exceeds $11,500,000, subject to certain adjustments.

         At the Annual Meeting of Stockholders on June 3, 1998, the stockholders
approved an amendment to the 1997  Management  Stock Option Plan.  The amendment
replaced the  so-called  "Home Run"  options for 618,182  shares of common stock
which were  issuable  only if the Company were sold at a certain  minimum  price
with the grant of stock  options to purchase an aggregate  of 365,758  shares of
common  stock at an  exercise  price of $3.09 per share  which will vest in four
equal annual installments beginning January 4, 1998.

Severance Agreements

         In January 1998,  the Company  entered into a severance  agreement with
Catharine  Bandel-Wirtshafter  pursuant  to  which  she  received  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 and were exercised  during fiscal
1998.

Compensation Committee Interlocks and Insider Participation

         The  Compensation  Committee  of the Board of Directors is charged with
determining the compensation of officers, during 1998 the Compensation Committee
consisted of Robert L. Sind (until June 3, 1998),  Bernard  Olsoff (from June 3,
1998 through  November 10,  1998),  Chaim  Edelstein  (from  November 10, 1998),
Clifford B. Cohn and Mark B. Dickstein.



<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 25, 1999.
<TABLE>
<CAPTION>
                                                                 Percentage of 
                                          Number of Shares       Ownership of  
  Names and Address of Beneficial Owners Beneficially Owned      Common Stock
---------------------------------------- --------------------   ---------------
<S>                                 <C>                           <C>
Mark B. Dickstein
c/o Dickstein Partners Inc.                2,803,069 (1)                46.4%
660 Madison Avenue 16th Floor
New York, NY 10021

Pioneering Management Corporation            524,000 (2)                 8.7%
60 State Street
Boston, MA   02109

John A. Motulsky                             390,700 (3)                 6.5%
c/o Stonehill Partners, L.P.
110 East 59th Street
New York, NY 10022
</TABLE>

(1)      Includes 2,015,660,  340,600, 361,476 and 82,000 shares of Common Stock
         directly  owned by Dickstein & Co.,  L.P.,  Dickstein  Focus Fund L.P.,
         Dickstein  International  Limited and Mark B. Dickstein,  respectively.
         Includes  3,333  shares of  Common  Stock  issuable  upon  exercise  of
         presently  exercisable  stock  options.  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.  The  information
         provided  above was  obtained  from  Amendment 9 to Schedule  13D dated
         March 24, 1999.

(2)      The information  provided above was obtained from a Schedule 13G dated
         April 23, 1998.

(3)      Includes  111,200,  146,300  and 133,200  shares of Common  Stock owned
         directly by Stonehill Partners, L.P., Stonehill Institutional Partners,
         L.P. and Stonehill  Offshore  Partners Limited,  respectively.  John A.
         Motulsky is the General Partner of each of Stonehill Partners, L.P. and
         Stonehill  Institutional  Partners,  L.P.  Mr.  Motulsky is a Member of
         Stonehill  Advisers  LLC  which  is a  partner  of  Stonehill  Offshore
         Partners  Limited. The information  provided  above was obtained from a
         Schedule 13G dated March 12, 1999.


<PAGE>
         (b) The following table sets forth certain  information as of March 25,
1999 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.

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

Mark B. Dickstein                           2,803,069(1)              46.4%
c/o Dickstein Partners Inc.
660 Madison Avenue 16th Floor
New York, NY 10021

John J. Pomerantz                             155,561(2)               2.5%

John A. Ward                                   91,960(3)               1.5%

Dominick Felicetti                             87,559(4)               1.4%

Warren T. Wishart                              85,559(3)               1.4%

Chaim Y. Edelstein                             12,000                   (5)

Clifford B. Cohn                                8,666(6)                (5)

Robert L. Sind                                  8,666(6)                (5)

Mark Kaufman                                    7,333(7)                (5)

Bernard Olsoff                                  2,000                   (5)

Officers and Directors as a group           3,262,373(8)              50.4%
(10 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.

(2)      Includes 145,561 shares of Common Stock issuable upon exercise of 
         presently exercisable stock options.

(3)      Consists of shares of Common Stock  issuable upon exercise of presently
         exercisable stock options.

(4)      Includes  85,559  shares  of  Common  Stock  issuable  upon exercise of
         presently exercisable stock options.

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

(6)      Includes  6,666  shares of  Common  Stock  issuable  upon  exercise  of
         presently exercisable stock options.

(7)      Includes  3,333  shares of  Common  Stock  issuable  upon  exercise  of
         presently exercisable stock options.

(8)      Includes  428,637  shares of Common  Stock  issuable  upon  exercise of
         presently exercisable stock options.

Item 13.  Certain Relationships and Related Transactions.
-------   ----------------------------------------------          

None.

<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 1998,  the  Company has
                  not filed any Current Reports on Form 8-K.



<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
2nd day of April, 1999.

                                             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.
<TABLE>
<CAPTION>


   Signatures                                        Title                                  Date
   ----------                                        -----                                  -----

<S>                                       <C>                                    <C>    
     /s/  John J. Pomerantz                  Chief Executive Officer and              April 2, 1999
-------------------------------------        Chairman of the Board of Directors
          John J. Pomerantz                  

     /s/  Warren T. Wishart                  Chief Financial and Accounting Officer   April 2, 1999
-------------------------------------
          Warren T. Wishart

     /s/  John A. Ward                       Director                                 April 2, 1999
-------------------------------------
          John A. Ward

                                             Director                               
-------------------------------------
          Clifford B. Cohn

     /s/   Mark B. Dickstein                 Director                                 April 2, 1999
-------------------------------------
           Mark B. Dickstein

                                             Director                                
-------------------------------------
          Chaim Edelstein
<PAGE>

    Signatures                                 Title                                  Date
    ----------                                 -----                                  -----


     /s/  Mark Kaufman                       Director                                April 2, 1999       
--------------------------------------                                                              
          Mark Kaufman                                                                              
                                                                                                    
    /s/   Bernard Olsoff                     Director                                April 2, 1999 
--------------------------------------                                                              
          Bernard Olsoff                                                                            
                                                                                                    
    /s/   Robert L. Sind                     Director                                April 2, 1999 
--------------------------------------                                                              
          Robert L. Sind                                                              

</TABLE>
<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' 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 - 33


<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 2, 1999 and  January  3,  1998,  and the
related  consolidated  statements of operations,  stockholders'  equity and cash
flows for the fiscal  year ended  January 2, 1999,  the  thirty-one  weeks ended
January 3, 1998,  the  twenty-two  weeks ended June 4, 1997, and the fiscal year
ended December 28, 1996. 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 2, 1999 and  January 3, 1998 and the results of
their operations and their cash flows for the fiscal year ended January 2, 1999,
the thirty-one  weeks ended January 3, 1998, the twenty-two  weeks ended June 4,
1997, and the fiscal year ended  December 28, 1996 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


New York, New York
March 1, 1999,  except with  respect to Notes 2 and 10
as to which the date is March 5, 1999 and
Note 7 as to which the date is March 29, 1999


                                      F-2


<PAGE>
<TABLE>
<CAPTION>
                  THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                      (In thousands, except per share data)


                                                                 January 2,             January 3,
                                ASSETS                             1999                   1998
                                                                 ----------             ---------
     

<S>                                                                   <C>                  <C>    
Current Assets:
    Cash and cash equivalents.....................................    $ 946                $18,455
    Restricted cash and cash equivalents..........................    3,267                  1,358
    Restricted short term investments.............................       --                  2,989
    Accounts receivable net of allowances for possible losses of
       $6,825 and $3,236, respectively............................   16,172                  9,747   
    Inventories...................................................   38,627                 26,701         
    Prepaid expenses and other current assets.....................      970                    807
                                                                    -------                -------
              
       Total Current Assets......................................    59,982                 60,057              
    Property, plant and equipment, at cost, net of accumulated
       depreciation of $409 and $14, respectively................     2,781                    845
     Excess of purchase price over net assets acquirednet of
       accumulated amortization of $50 and $-0-, respectively....     4,490                     --           
    Deferred charges and other assets............................       551                    149       
                                                                    -------                -------
    Total Assets................................................    $67,804                $61,051
                                                                    =======                =======
   
                 LIABILITIES AND STOCKHOLDERS' EQUITY   
   
Current Liabilities:   
    Short term debt.............................................    $ 1,162               $     --    
    Accounts payable............................................     12,070                 11,530      
    Accrued expenses and other current liabilities..............      7,486                  4,542      
    Accrued expenses and other current confirmation liabilities.      3,267                  4,347      
    Income taxes payable........................................        371                     25      
    Current portion of capitalized leases.......................         48                    160
                                                                     ------                 ------  
       Total Current Liabilities................................     24,404                 20,604
                              
                    
    Excess of revalued net assets  acquired over equity  under 
         freshstart reporting, net of accumulated amortization                 
         of $7,239 and $2,667, respectively....................       6,469                 11,041
    Long term debtcapitalized leases...........................          17                     49              
    Deferred liabilities.......................................         477                    143 
                                                                     ------                 ------                 
    Total Liabilities..........................................      31,367                 31,837
                                                                     ------                 ------
Commitments and Contingencies                                                                     

Stockholders' Equity:                                                                             
Preferred stock, $.01 par value; 500 shares authorized, no                                        
     shares issued and outstanding.............................          --                     --      
Common stock, $.01 par value; 20,000 and 9,500 shares                                                  
     authorized, respectively; 6,858 and 6,800 shares issued,             
     respectively..............................................          69                     68      
 Capital in excess of par value................................      28,824                 25,837   
  Retained earnings............................................      12,167                  3,309
                                                                    -------                -------      
    Subtotal...................................................      41,060                 29,214     
 Treasury stock, at cost; 817 and 0 shares, respectively.......       4,623                     --   
    Total Stockholders' Equity.................................     -------                -------
                                                                     36,437                 29,214      
                                                                    -------                -------
 Total Liabilities and Stockholders' Equity....................     $67,804                $61,051      
                                                                    =======                =======
</TABLE>

           The accompanying Notes to Consolidated Financial Statements
           are an integral part of these consolidated balance sheets.
                                      F-3

<PAGE>
<TABLE>
<CAPTION>
                  THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                 (In thousands, except share and per share data)
                                                                        Reorganized Company                 Predecessor Company
                                                                  ------------------------------------------------------------------
                                                                                                    |
                                                                   Fifty-Two         Thirty-One     |   Twenty-Two     Fifty-Two   
                                                                   Weeks Ended      Weeks Ended     | Weeks Ended     Weeks Ended  
                                                                    January 2       January 3,      |   June 4,       December 28,
                                                                     1999              1998         |     1997           1996
                                                                  --------------   -------------    | -------------   ------------
<S>                                                               <C>                 <C>              <C>           <C>     
Net Sales..............................................             $152,867            $73,091     |      $197,984       $429,676
Cost of Sales..........................................              115,547             58,719     |       147,276        331,372
                                                                   ---------            -------     |      --------       --------
   Gross profit........................................               37,320             14,372     |        50,708         98,304
                                                                   ---------            -------     |      --------       --------
Operating Expenses:                                                                                 |
   Selling, warehouse, general and                                                                  |
         administrative expenses.......................               28,076             13,299     |        35,459         79,570 
   Noncash stock based compensation....................                1,724                351     |            --             --
   Depreciation and amortization expense...............                  406                 14     |         2,090          4,654
                                                                   ---------           --------     |      --------       --------
         Total operating expenses......................               30,206             13,664     |        37,549         84,224  
   Other (income)......................................               (1,334)              (947)    |        (1,196)        (3,885)
                                                                                                    |
   Amortization of excess revalued net assets acquired                                              |                       
         over equity...................................               (4,572)            (2,667)    |            --             --
                                                                   ---------            -------     |      --------       --------
   Total operating expenses, net.......................               24,300             10,050     |        36,353         80,339
                                                                   ---------            -------     |      --------       -------- 
   Operating income....................................               13,020              4,322     |        14,355         17,965
Interest and Financing Costs (excludes contractual                                                  |
         interest of $-0-, $-0-, $7,513, and $18,031,                                               |                
         respectively).................................                  950                336     |         1,372          3,932
                                                                   ---------            -------     |      --------       --------
   Income before reorganization costs, taxes, gain                                                  |                            
             on sale, freshstart revaluation and                                                    |                       
             extraordinary item........................               12,070              3,986     |        12,983         14,033
Reorganization Costs...................................                   --                 --     |         3,379          5,144
                                                                    --------            --------    |      --------        -------
   Income before taxes, gain on sale, freshstart                                                    |
       revaluation and extraordinary item..............               12,070              3,986     |         9,604          8,889
                                                                                                    |
Provision (benefit) for taxes..........................                3,212                677     |           451           (839)
                                                                    --------           --------     |      --------        -------
   Net Income before gain on sale, freshstart                                                       |
       revaluation and extraordinary item                              8,858              3,309     |         9,153          9,728
                                                                                                    |
 Gain on  disposition  of  Sassco  Fashions  line  (net of                                          |                            
   $3,728 of income taxes),  loss on revaluation of assets                                          |                            
   pursuant  to  adoption  of  freshstart  reporting  and                                           |
   extraordinary gain on debt discharge                                   --                 --     |       136,341            --  
                                                                    --------           --------     |    ----------    -----------
   Net Income ........................................                $8,858             $3,309     |      $145,494         $9,728
                                                                 ===========        ===========     |    ==========    ===========
   Net Income  per Share -Basic.......................                 $1.35              $0.49     |        *               $0.52
                                                                 ===========        ===========     |    ==========    ===========
                         -Diluted.....................                 $1.31              $0.48     |        *               $0.52
                                                                 ===========        ===========     |    ==========    ===========
Weighted Average Shares Outstanding - Basic...........             6,553,637          6,800,000     |        *          18,771,836
                                                                 ===========        ===========     |    ==========    ===========
                                    - Diluted.........             6,777,614          6,917,130     |        *          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>
<TABLE>
<CAPTION>


                  THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                        (In thousands, except share data) 
                                                                                                  Accumu-
                                                                                                  lated       Total       
                                                                                                  Other       Stock-      Total
                                      Common Stock       Capital in            Treasury Stock     Compre-     holders'    Compre-
                                -----------------------  Excess of   Retained  -----------------  hensive    (Deficit)    hensive
                                Shares        Par Value  Par Value   Earnings  Shares     Amount  Income      Equity      Income 
                                ----------------------------------------------------------------------------------------------------


<S>                            <C>          <C>       <C>       <C>        <C>        <C>        <C>     <C>           <C>
Balance at December 30, 1995       20,000,000   $20,000   $49,012   ($211,833) 1,228,164  ($12,966) ($121) ($155,908)

Comprehensive Income

   Net Income                              --        --        --       9,728         --        --     --      9,728      $9,728
   Deferred Pension 
         Liability Write-Off               --        --        --          --         --        --    214        214         214
   Foreign Currency
         Translation Adjustments           --        --        --          --         --        --    488        488         488  
                                                                                                                     -----------
Total Comprehensive Income                                                                                               $10,430
--------------------------------------------------------------------------------------------------------------------------------
Balance at December 28, 1996       20,000,000   $20,000   $49,012   ($202,105) 1,228,164  ($12,966)  $581  ($145,478)

Comprehensive Income
   Net Income                             --        --        --      145,494         --        --     --    145,494    $145,494
                                                                                                                     -----------  
   Revaluation Adjustment                  --        --        --      56,611         --        --     --     56,611
   Extinguishment of Old Stock    (20,000,000)  (20,000)  (49,012)         -- (1,228,164)   12,966   (581)   (56,627)
   New Stock Issuance               3,400,000        34    24,966          --         --        --     --     25,000
   As previously reported
      2-for-1 stock split              
      effective July 1, 1998        3,400,000        34       (34)         --         --        --     --         --
                                    ---------   -------   -------   ---------  ---------   -------   ----    -------            
Reorganized as of June 4, 1997      6,800,000       $68   $24,932        $ --         --       $--    $--    $25,000
================================================================================================================================ 

Balance at June 4, 1997             6,800,000       $68   $24,932        $ --         --       $--    $--   $25,000

   Net Income                              --        --        --       3,309         --        --     --     3,309     $3,309
                                                                                                                     ---------  
   Use of PreConsummation 
       Deferred Taxes                      --        --       554          --         --        --     --       554
   SFAS No. 123  Stock
       Option Compensation                 --        --       351          --         --        --     --       351
--------------------------------------------------------------------------------------------------------------------------------
Balance at January 3, 1998          6,800,000       $68   $25,837       $3,309        --      $ --   $ --   $29,214      
               
   Net Income                              --        --        --        8,858        --        --     --    8,858      $8,858
                                                                                                                     ---------  
   New Stock Issuance                  58,238         1       231           --        --        --     --      232
   Treasury Stock Repurchase               --        --        --           --   817,100    (4,623)    --   (4,623)
   Use of PreConsummation
       Deferred Taxes                      --        --     1,084           --        --        --     --    1,084
   SFAS No. 123 Stock
       Option Compensation                 --        --     1,672           --        --        --     --    1,672
================================================================================================================================

Balance at January 2, 1999          6,858,238       $69   $28,824      $12,167   817,100   ($4,623)  $ --  $36,437
                                                         
</TABLE>

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

                                      F-5
<PAGE>
<TABLE>
<CAPTION>


                  THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)
                                                                           Reorganized         |               Predecessor
                                                                            Company            |                  Company
                                                                -------------------------------|     -------------------------------
                                                                    Fifty-Two    Thirty-One    |      Twenty-Two        Fifty-Two   
                                                                   Weeks Ended   Weeks  Ended  |     Weeks Ended      Weeks Ended  
                                                                   January 2,     January 3,   |        June 4,        December 28,
                                                                      1999         1998        |        1997             1996
                                                                -------------------------------|     -------------------------------
                                                                                               | 
<S>                                                                    <C>       <C>           |    <C>                <C>        
Cash Flows from Operating Activities:                                                          | 
   Net income .............................................            $8,858    $3,309        |    $145,494           $9,728     
   Adjustments to reconcile net income to net cash (used in)                                   |                                  
     provided by operating activities:                                                         |                                  
     Depreciation and amortization.........................               445        14        |       2,222            4,971     
     Amortization of excess net assets acquired over equity            (4,572)   (2,667)       |          --               --     
     Deferred taxes........................................                --        --        |          --          (1,103)     
     Provision for possible losses on accounts receivable..              (22)      (182)       |         199              433     
     Provision for stock based compensation and stock option                                   |                                  
          grants...........................................             1,724       351        |          --               --     
     Gain on sale of fixed assets..........................                --        --        |        (347)              --     
     Changes in assets and liabilities, net of impact of acquisition:                          |                                  
       Restricted short-term investments...................             2,989    (2,989)       |          --               --     
       Accounts receivable.................................            (8,155)    6,845        |       (1,248)         (9,296)    
       Inventories.........................................           (10,354)   (7,586)       |       25,538          (5,600)    
       Prepaid expenses and other current assets...........              (148)      377        |          (66)          1,950     
       Income taxes refundable.............................                --        --        |          --           10,345     
       Deferred charges and other assets...................              (402)     (149)       |         125            1,263     
       Accounts payable, accrued expenses and other current                                    |                                  
           liabilities.....................................               359    (6,544)       |      (4,167)         (11,860)    
       Income taxes payable................................               346      (806)       |      (1,515)            (395)    
       Deferred liabilities................................               334       143        |         374              470     
     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     
       Payment of reorganization costs.....................                --        --        |        (917)          (7,757)    
       Use of pre-consummation deferred taxes..............             1,084       554        |          --               --     
                                                                  ----------------------       |    ----------------------------  
                Total adjustments..........................           (16,372)  (12,639)       |    (112,764)         (11,435)    
                                                                  ----------------------       |    ----------------------------  
        Net cash (used in) provided by operating activities            (7,514)   (9,330)       |      32,730           (1,707)     
                                                                  ----------------------       |    ----------------------------  
Cash Flows from Investing Activities:                                                          |                                  
   Capital expenditures....................................            (2,331)     (859)       |      (3,731)          (8,640)    
   Net cash paid for acquisition...........................            (1,250)       --        |          --               --     
   Treasury stock repurchase...............................            (4,623)       --        |          --               --     
   Proceeds from sale of assets............................                --        --        |         467               --     
   Proceeds from sale of Castleberry.......................                --        --        |         600               --     
   Cash paid to sell/transfer the Sassco Fashions line.....                --        --        |     (10,963)              --     
                                                                 ----------------------        |   ----------------------------   
      Net cash (used in) investing activities.............             (8,204)     (859)       |     (13,627)          (8,640)    
                                                                 ----------------------        |   ----------------------------   
Cash Flows from Financing Activities:                                                          |                                  
   Proceeds from borrowings, net ..........................             1,162        --        |          --               --     
   Proceeds from new stock issuance and options                                                | 
     exercised.............................................               180        --        |          --               --       
   Repayment of capital leases ............................              (144)     (135)       |          --               --     
   Payment of obligations under Plan of Reorganization.....            (1,080)  (10,943)       |          --               --     
                                                                 ----------------------        |   ----------------------------   
      Net cash provided by (used in) financing activities..               118   (11,078)       |          --               --     
                                                                 ----------------------        |   ----------------------------   
   Net (decrease) increase in cash and cash equivalents....           (15,600)  (21,267)       |       19,103          (10,347)   
                                                                 ----------------------        |   ----------------------------   
   Cash and cash equivalents, at beginning of period.......            19,813    41,080        |       21,977           32,324    
                                                                 ----------------------        |   ----------------------------   
   Cash and cash equivalents, at end of period.............            $4,213   $19,813        |      $41,080          $21,977    
                                                                 ======================        |   ============================  
</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:

         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.  The Company's fiscal year ends on the
Saturday  closest to December  31st.  The fiscal  years  ended  January 2, 1999,
January  3,  1998  and  December  28,  1996   included  52,  53  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's results for the twenty-two weeks ended June 4, 1997
reflect 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.

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  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.

                                      F-7


<PAGE>



         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.

         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 6,800,000 new shares to its creditors in July
1997. The remaining  twenty-one  (21%) percent was issued,  but was held back by
the Plan  Administrator  pending the resolution of certain litigation before the
Bankruptcy  Court.  During the period of February 15, 1999 through March 5, 1999
approximately  1,250,000  shares  were  distributed   representing  88%  of  the
previously  undistributed  shares.  The existing  stockholders of the Company at
June 4, 1997 did not retain or receive  any value for their  equity  interest in
the Company.

         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  

                                      F-8
<PAGE>

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. Cancelation 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
             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.


                                      F-9


<PAGE>



3.   Summary of Significant Accounting Policies:

(a)  Business -

         The Company is principally engaged in the design,  manufacture and sale
of diversified lines of women's apparel. The Company's products focus on career,
social occasion and evening clothing. The Company currently operates in one line
of business - women's  apparel.  The  operations  of the  Company  are  directed
principally by the Chief Executive Officer, with the consensus of the management
team and Board of Directors.

         The Company  utilizes a common  support  platform for the management of
its  operations,  consisting  of  uniform  distribution,  inventory,  management
strategies  and  marketing  approaches,  as  well  as  a  shared  financial  and
accounting  organization  and  universal  information  systems.  All business is
domestic in nature  with no sales  outside  the U.S.  Accordingly,  there are no
specific operating and geographic segment disclosures,  pursuant to Statement of
Financial Accounting Standard ("SFAS") No. 131, "Disclosure about Segments of an
Enterprise  and  Related  Information,"  other than the  consolidated  financial
position and results of operations.

(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 an original 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. At January 2, 1999,
$3,267,000  of  restricted  cash,   included  within  cash  equivalents  on  the
consolidated  statement of cash flows, will be used to pay administrative claims
as defined in the Plan. At January 3, 1998, short term investments  consisted of
a one year U.S. Treasury Note which matured on June 30, 1998. This note was held
to maturity and was valued at cost.

(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. 

                                      F-10
<PAGE>

Maintenance  and repairs are charged to  earnings  as  incurred.  For  financial
statement  purposes,  depreciation and  amortization are computed  utilizing 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  (a
predecessor  company of The Leslie Fay Companies,  Inc.) 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  were 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 SFAS No. 121 - "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of."

         The excess of purchase price over net assets  acquired of $4,490,000 as
of January  2, 1999  resulted  from the  acquisition  by the  Company of certain
specific  assets and liabilities of The Warren Apparel Group Ltd. on October 27,
1998, (see Note 4). The asset is being amortized on a straight-line basis over a
fifteen year period. The Company incorporated those assets acquired, relating to
better priced day, social and evening occasion  dresses,  into the Dress Product
Line.

(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
year period.

(h)  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 8).  Under this method,  any  deferred  income taxes
recorded  are provided for at  currently  enacted  statutory  rates based 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  underlying  asset or
liability.


                                      F-11
<PAGE>


         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 repatriation.

(i)  Net Income  Per Share -

         Net income per share 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 accordance  with SFAS No. 128 - "Earnings Per
Share." Basic earnings per share  represents net income divided by the weighted
average shares  outstanding.  Diluted  earnings per share  represents net income
divided by the weighted average shares outstanding  adjusted for the incremental
dilution of outstanding  employee stock options and awards,  if dilutive,  using
the treasury stock method.

         For the year  ended  January  2, 1999 and the  thirty-one  weeks  ended
January 3,  1998,  the basic  weighted  average  common  shares  outstanding  is
6,553,637 and 6,800,000,  respectively.  The weighted average shares outstanding
assuming  dilution is 6,777,614  and 6,917,130 as of January 2, 1999 and January
3, 1998,  respectively.  The  differences of 223,977 and 117,130,  respectively,
relate to  incremental  shares  issuable  relating  to  dilutive  stock  options
calculated using the treasury stock method.

(j)  Prior Years' Reclassification -

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

(k) Use of Estimates -

         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.    Acquisitions:

     On October 27, 1998,  the Company  purchased  certain  assets of The Warren
Apparel  Group Ltd.  ("Warren").  Warren was a  privately  owned  wholesaler  of
women's  career,  social  occasion and evening  dresses sold in  department  and
specialty stores nationwide  primarily under the "David Warren",  "DW3", "Warren
Petites",  "Reggio"  and  "Rimini"  brands.  These  brands  were merged into the
Company's  Dress Product Line. The Company  received all rights and ownership of
the  trademarks  related  to  the  brand  names  listed  above  as  part  of the
transaction.  This  transaction  generated an excess of purchase  price over net
assets  acquired  of  $4,540,000  which the Company  elected to amortize  over a
fifteen year period ending October 2013.

         The Company  financed the acquisition of Warren through  operating cash
flow, and a non-interest bearing note to the former owners of Warren,  amounting
to $834,000,  which is payable over one


                                      F-12
<PAGE>

year.  The  Warren  acquisition  has  been  accounted  for as a  purchase,  and,
accordingly, the operating results of Warren have been included in the Company's
consolidated  financial  statements  since  the  date  of the  acquisition.  The
purchase  price  allocation is preliminary  and is subject to refinement  during
fiscal 1999.

The preliminary purchase price allocation as of January 2, 1999 is as follows:

                                                             (In thousands)
Payment for purchase of Warren assets:              
     Cash paid at closing                                      $1,250
     Note to Warren shareholders                                  834
     Price adjustment due the Company                            (497)
Assumed liabilities                                             2,192
Acquisition and integration costs and reserves                  1,798
                                                                -----
Total purchase price                                           $5,577

Fair value of assets acquired, primarily inventory             (1,037)
                                                              -------

Excess of purchase price over net assets acquired              $4,540
                                                               ======



     The following summarized unaudited pro forma combined results of operations
for the fifty-three week period ended January 3, 1998 has been prepared assuming
the Warren Acquisition occurred at the beginning of fiscal 1997. The Company has
not yet received the information from the former owners of the Warren businesses
to compute the 1998 pro forma combined results. However,  unaudited combined net
sales for the fifty-two weeks ended January 2, 1999 were $182,701,000.


     The unaudited pro forma  information  also assumes that the consummation of
the Plan and resulting fresh start  adjustments  occurred as of the beginning of
fiscal 1997 and, as a result,  excludes the  operations of all of the businesses
disposed  of as a part of the  Reorganization.  The  pro  forma  information  is
provided  for  informational  purposes  only and does not contain  estimates  of
synergies which management believes would have occurred upon  consolidation.  It
is  based  on  historical  information,  as  well  as  certain  assumptions  and
estimates,  and does not necessarily  reflect the actual results that would have
occurred nor is it necessarily indicative of future results of operations of the
combined company:
                                           (In thousands, except per share data)
                                                          Unaudited
                                                          ---------

Net sales                                                  $166,598
Net income                                                    6,170
Net income per share:
   - Basic                                                    $0.91   
   - Diluted                                                  $0.90


                                      F-13
<PAGE>


5.   Inventories:

         Inventories consist of the following:
    
                                     January 2,      January 3,
                                        1999            1998
                                        ----            ---- 
(In thousands)
   
Raw materials                          $10,763         $9,638
Work in process                          2,613          4,540
Finished goods                          25,251         12,523
                                      --------       --------   
   Total inventories                  $ 38,627       $ 26,701
                                      ========       ========
    


6.   Property, Plant and Equipment:

         Property, plant and equipment consist of the following:

   
                                           January 2,   January 3,   Estimated 
                                              1999         1998      Useful Life
                                              ----         ----      -----------
In thousands)
   
   
Machinery, equipment and fixtures             $2,651      $ 284     5-10 years 
Leasehold improvements                           238         38     Various 
Construction in progress                         301        537      N/A
                                           ---------     ------
   Property, plant and equipment, at cost      3,190        859             
Less: Accumulated depreciation and
amortization                                   (409)        (14)
                                           ---------     ------
Total property, plant and
  equipment, net                           $   2,781     $  845
                                           =========     =======
   

                                      F-14

<PAGE>



7.   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 which was amended on October 27,
1998 to extend the agreement  through June 2, 2001 to provide direct  borrowings
and to issue letters of credit on the Company's  behalf.  Direct borrowings bear
interest  at prime  minus  .25%  (7.75% at  January  2, 1999) and the CIT Credit
Agreement  requires a fee, payable monthly,  on average  outstanding  letters of
credit at a rate of 2% annually.  The Company had a net  borrowing  availability
under the CIT  Credit  Agreement  of  $28,949,000  on  January  2, 1999 and peak
borrowing  during the fiscal year ended  January 2, 1999 was  $3,734,000.  There
were $328,000 in direct  borrowings  outstanding  under the CIT Credit Agreement
and approximately  $8,099,000 was committed under unexpired letters of credit as
of January 2, 1999.

         The CIT Credit Agreement has been modified four times through March 29,
1999, to adjust for changes relating to the Company's consolidated balance sheet
as it exited from bankruptcy,  reflecting  associated  "fresh start"  accounting
adjustments,  increasing  the  level of  capital  expenditures  to  support  the
Company's growth and Year 2000  requirements,  allowing the Warren  acquisition,
permitting  the  Company's  stock  buy-back  program,  extending  the CIT Credit
Agreement and increasing the Company's credit line and reducing borrowing costs,
and allowing the early  termination of the CIT Credit Agreement at the option of
the Company. Key modifications include:

         The  committed  credit  line has been  increased  to  $42,000,000  from
         $30,000,000. The sub-limit on letters of credit has also been increased
         from   $20,000,000  to  $25,000,000.   The  limit  on  inventory  based
         collateral has been raised from $12,000,000 to $15,000,000.

         The interest rate on direct borrowings has been reduced from prime plus
         100 basis points to prime less 25 basis points.

         The Company may  repurchase  its stock or pay dividends up to an amount
         of $10,000,000. As of January 2, 1999, approximately $5,400,000 of this
         amount remains available.

         Covenants   related  to   capital   expenditures,   minimum   ratio  of
         consolidated   current  assets  to  consolidated  current  liabilities,
         minimum  consolidated  tangible  net  worth  and  minimum  consolidated
         working capital have been set at levels appropriate for normal business
         conditions and the Company's existing stock repurchase program.

         The Company may, with CIT's approval, acquire new businesses.

         The Company may terminate the CIT Credit Agreement early.


                                      F-15
<PAGE>


         The CIT  Credit  Agreement,  as  amended,  contains  certain  reporting
requirements,  as well as financial and operating  covenants  related to capital
expenditures,  minimum  tangible net worth,  maintenance  of a current assets to
current  liabilities  ratio, an interest to earnings ratio and the attainment of
minimum  earnings.  As collateral for borrowing under the CIT Credit  Agreement,
the Company has granted to CIT a security  interest in substantially  all of its
assets.  In addition,  the CIT Credit  Agreement  contains  certain  restrictive
covenants,  including  limitations  on the  incurrence of  additional  liens and
indebtedness.  The Company is currently in  compliance  with or has obtained the
necessary waivers for all requirements contained in the CIT Credit Agreement.

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


(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.

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

         Interest  was  not  accrued  during  the  periods   presented  for  the
pre-petition  debt  obligations,  as the  Company  did not  believe  it would be
required to pay it under the Bankruptcy laws.

(c) Short-Term Notes Payable -

                                      F-16

<PAGE>


         Partial  payment for the assets acquired from The Warren Apparel Group,
Ltd.  (see  Note 4) was made in the form of a  short-term  note  payable  in the
amount  of  $834,000.  Payment  is due on  this  note in  four  equal  quarterly
installments ending on October 27, 1999.



                                      F-17
<PAGE>



8.   Income Taxes:

         For the fifty-two,  thirty-one,  twenty-two  and fifty-two  weeks ended
January  2,  1999,  January  3,  1998,  June 4,  1997  and  December  28,  1996,
respectively, the Company recognized the following tax provision (benefit).
<TABLE>
<CAPTION>

                                                     (In thousands)

                              Fifty-Two       Thirty-One    Twenty-Two Weeks   Fifty-Two 
                              Weeks Ended      Weeks Ended    Weeks Ended      Weeks Ended 
                              January 2,       January 3,       June 4,        December 28,
                                 1999            1998            1997              1996
                              ------------    ------------ |  ----------------   ------------
                                                           | 
<S>                          <C>              <C>                <C>                <C>   
Current:                                                   | 
             Federal            $ 1,851          $ 460     |        $ 1,400            $ 130 
             State                  733            217     |          2,428               39
             Foreign                 --             --     |            351               95
                                -------        -------     |       --------         --------      
                                  2,584            677     |          4,179              264
                                -------        -------     |       --------         -------- 
Deferred:                                                  | 
                                                           | 
             Federal             ( 334)             --     |             --               --
             State               ( 122)             --     |             --               --
             Foreign                --              --     |             --           (1,103)   
                                -------        -------     |       --------         --------      
                                 ( 456)             --     |             --           (1,103)
Deferred NonCash                                           | 
PreEmergence Tax Provision:                                | 
                                                           | 
             Federal               675              --     |             --               --                   
             State                 409              --     |             --               --
                               -------         -------     |       --------         --------                 
                                 1,084              --     |             --               --  
                               -------         -------     |       --------         --------                                
                                                           | 
Total tax provision (benefit)for                           | 
income taxes                     3,212             677     |          4,179             (839)
Less: Taxes on sale                                        | 
of Sassco Fashions line             --              --     |         (3,728)              --                    
                               -------         -------     |        --------         -------- 
Tax provision (benefit)                                    |
for income taxes                $3,212            $677     |           $451            ($839)
                               =======         =======     |       ========         ========
</TABLE>
      
                                      F-18


<PAGE>


         As a consequence of the adoption of fresh-start  reporting and SFAS No.
109,  any tax  benefits  realized  after the  Consummation  Date  pertaining  to
pre-consummation temporary differences,  as well as for the pre-consummation net
operating  loss  carryforwards,  are reported as  additions  to paid-in  capital
rather than as reductions in the tax provision.

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

                            Fifty-Two    Thirty-One    Twenty-Two     Fifty-Two
                           Weeks Ended  Weeks Ended   Weeks Ended   Weeks Ended 
                           January 2,    January 3,     June 4,     December 28,
                              1999         1998           1997          1996
                           -----------  -----------  | -----------  ------------
                                                     | 
                                                     | 
Effective Tax Rate            26.6%        17.0%     |      2.8%           9.4%
                                                     | 
Net state tax                ( 5.6%)       (5.4%)    |    ( 1.3%)         (0.3%)
Net foreign tax                 --           --      |    ( 0.2%)         11.3%
Intangibles                   12.9%        23.4%     |       --           (7.1%)
Utilization of net operating                         | 
  losses                        --           --      |       35%          23.2%
Other                          0.1%          --      |     (1.3%)         (1.5%)
                           --------     -------      |  --------       --------
Federal statutory rate        34.0%        35.0%     |     35.0%          35.0%
                           ========     ========     |  ========       ========
                                                    

                       
         The amounts comprising the temporary differences,  characterized by the
difference  between  financial  statement  carrying  values and the tax basis of
balance sheet elements, at the end of the respective periods are as follows:

                                                       (In thousands)
   
                                              January 2,          January 3,    
                                                1999                 1998
                                              ---------           ---------
   
Customer reserves and allowances              $ 6,620             $ 4,108  
Depreciation                                   14,487               6,713   
Inventory                                       5,240               2,553 
Worker's compensation
   insurance                                      181                 572   
Vacation pay accrual                              646                 490   
Other                                           3,106                 608 
                                             --------            -------- 
Total temporary differences                   $30,280            $ 15,044
                                             ========            ========

Tax effect of temporary differences          $ 12,718              $5,265
Valuation allowance                           (12,718)             (5,265)
                                             --------            --------
Deferred tax assets recognized               $     --            $     --
                                             ========            ========

                                      F-19
<PAGE>

 
         At June 4, 1997 approximately $50,000,000 of consolidated net operating
losses were  available to reduce future taxable income through fiscal year 2011.
However,  the  utilization of such losses is subject to an annual  limitation as
set forth in Internal  Revenue  Code  Section  382.  The  maximum  amount of net
operating  losses  that may be utilized by the Company in any period is annually
limited to  $1,500,000.  As of January 2, 1999,  the  remaining  aggregate  loss
utilization limitation through fiscal year 2011 is approximately $19,500,000. As
such,  the  NOL  available  to  the  Company,  after  taking  into  account  the
aforementioned  limitation,  is  $19,500,000  as of  January  2,  1999.  A  full
valuation  reserve has been  established  for the deferred tax asset  associated
with the net operating loss carryforwards.

9.   Commitments and Contingencies:

(a)  Leases -

         The Company rents real and personal  property under leases  expiring at
various  dates  through 2008.  Certain of the leases  stipulate  payment of real
estate  taxes and other  occupancy  expenses.  Total  rent  expense  charged  to
operations for the fifty-two,  thirty-one,  twenty-two and fifty-two weeks ended
January 2, 1999,  January 3, 1998, June 4, 1997 and December 28, 1996,  amounted
to $2,540,000, $1,365,000, $4,599,000 and $8,007,000,  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 2, 1999 are summarized as follows:

                                                                   Capitalized
             Fiscal                  Real         Equipment           Equipment
             Years                  Estate       & Other    (including interest)
             ------                 ------       ---------- --------------------

                                                   (In thousands)

             1999                      $ 2,185      $  263              $   54
             2000                        2,284         209                  18
             2001                        2,025         177                  --
             2002                        1,811          --                  --
             2003                        2,013
             2004 and thereafter        10,154          --                  -- 
                                       -------      --------           --------

     Total minimum lease payments      $20,472      $  649              $   72
                                       =======      =========          ========


                                      F-20
<PAGE>



(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 in April 1993. 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 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.

         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  appealed that decision to the United  States  District  Court for the
Southern  District of New York,  and on July 17, 1998,  that Court  affirmed the
decision of the Bankruptcy  Court.  The Claimants have taken a further appeal to
the United States Court of Appeals for the Second Circuit, and that appeal is in
the process of being briefed.

         Five of the Claimants in the above-described appeal 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  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 it is expected that a
summary  judgement motion will be filed by the defending  officers and directors
after a final order has been  entered in the  above-described  Bankruptcy  Court
matter.

         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 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.


                                      F-21
<PAGE>


         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 asserted counter claims. 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
parties have settled the litigation without cost to the Company.

(c)  Management Agreements -

         The Company entered into two and three year  management  contracts with
several   officers  and  key  employees  with  annual  salaries  of  $2,564,000,
$2,208,000 and $2,035,000 for fiscal 1999, 2000 and 2001, respectively.



                                      F-22
<PAGE>



(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-two  weeks ended January 2, 1999,  three  customers  accounted for
30%, 11% and 9% of the Company's sales. 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.  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 2, 1999 the Company's accounts receivable included  $14,915,000 due from
CIT, net of reserves.

10.      Stockholders' Equity

         The  authorized  common stock of the  reorganized  Company  consists of
20,000,000 shares of common stock with a par value of $.01 per share. On June 3,
1998,  the  Company's  Board of Directors  approved a  two-for-one  common stock
split. As a result of the split, the stockholders  received one additional share
of  common  stock  for each one they  held as of June 17,  1998.  The par  value
remained $.01 per share.  The  Consolidated  Financial  Statements and financial
information   contained   elsewhere  in  this  report  have  been   adjusted  to
retroactively  reflect  the  effects of the common  stock  split for all periods
presented.  At June 4, 1997,  6,800,000 shares,  adjusted  retroactively for the
stock  split,  were  issued  and  outstanding  and were  being  held by the plan
administrator  in  trust.  In July  1997,  5,372,000  (79%) of the  shares  were
distributed.  During the period from  February 15, 1999  through  March 5, 1999,
approximately  1,250,000  (88%) of the remaining  shares were  distributed.  The
remaining shares are being held back by the plan  administrator  until the final
disputed  claims are settled before the Bankruptcy  Court.  The old common stock
was extinguished  prior to emergence from bankruptcy on June 4, 1997 and the old
stockholders of the Company did not retain or receive any value for their equity
interest.

         The  Company  acquired  for cash  817,100  shares of its  common  stock
outstanding  at a cost of  $4,623,000  during the third quarter ended October 3,
1998. 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.

                                      F-23

<PAGE>


11.  Stock Option Plan:

         Information  regarding  the  Company's  stock option plan is summarized
below. All shares and option prices have been retroactively  adjusted to reflect
the 2-1 stock split on July 1, 1998:

                                                       Weighted Average Option
                                  Number of Shares     Price Per Share
                                  ----------------     -----------------------

Granted (post-emergence)            1,020,236                $3.34 
                                    ---------                      
Outstanding at January 3, 1998      1,020,236                 3.34 

Granted                               458,258                 3.76 
Exercised or surrendered             (140,120)                3.09 
                                    --------- 
Outstanding at January 2, 1999      1,338,374                 3.51 
                                    =========
                                
         The Plan provided stock options to certain senior  management  equal to
seventeen and one-half  (17.5%) percent of the Company's  common stock issued at
the time of the grant (6.8 million shares adjusted for the 2-1 stock split).  Of
this amount,  824,236  options were  granted,  as of June 4, 1997.  One-third of
these options vest on each of the first three  anniversaries of the Consummation
Date. On January 4, 1998, the remaining  365,758 options were granted to replace
the options that were part of the Company's  exit from  bankruptcy,  twenty-five
percent of these options were immediately  vested with an additional twenty-five
percent  vesting on each of the first  three  anniversaries  of the grant  date.
Since June 4, 1997 thirty-five managers were granted 148,500 options.  One-third
of these  options  vest on each of the first  three  anniversaries  of the grant
dates.  These grants include 25,000 stock options to the two senior  managers of
the newly acquired  Warren brands (see Note 4). The exercise of these options is
in  part   contingent   upon  the  Warren  brands   operating   results  meeting
predetermined  management  goals.  In addition,  the five original  non-employee
directors of the Company have been granted  20,000  stock  options  each.  These
options  vest  one-third  on  each  of  the  first  three  anniversaries  of the
Consummation  Date.  The four  non-employee  directors  of the Company that were
elected since have been granted 10,000 stock options that vest one-third at each
anniversary of the date each director joined the Board of Directors. The options
may be exercised for between  $3.09 and $7.44 per share.  At January 2, 1999 and
January 3, 1998, 381,878 and -0- options, respectively, were exercisable.

         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 during the fifty-two weeks
ended January 2, 1999 and during the thirty-one  weeks ended January 3, 1998 was
estimated using the Black-Scholes  option pricing model based upon the following
weighted-average  assumptions:  risk  free  interest  rate  of  5.4%  and  6.4%,
respectively,  expected life of 5 years for both periods,  and volatility of 39%
and 34%,  respectively.  Had SFAS No. 123 been adopted prior to the Consummation
Date, there would have been no effect on the Company's financial statements.


                                      F-24

<PAGE>



A summary of stock options  outstanding  and  exercisable as of January 2, 1999,
follows:
<TABLE>
<CAPTION>

                                Options Outstanding                       Options Exercisable
-----------------------------------------------------------------------------------------------------
                                   Weighted average
  Range of            Number      remaining life    Weighed average      Number      Weighed average
  exercise prices    Outstanding       (in years)      exercise price   exercisable   exercise price
------------------   -----------  ----------------  -----------------   -----------  ---------------
<S>              <C>                <C>             <C>            <C>             <C>  
    $3.09            1,149,874          8.61            $3.09          350,198         $3.09
$5.75 - $7.44          188,500          9.22             6.09           31,680         $5.77
</TABLE>


12.  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 were made primarily in U.S. Government
obligations and common stock.  The following major  assumptions were used in the
actuarial valuations:

                                            1997      1996
                                            ----      ----
Discount rate                               7.5%      7.5%
Long-term rate of return on assets          8.8%      8.8%


         Net periodic pension cost recognized in the thirty-one,  twenty-two and
fifty-two  weeks ended January 3, 1998,  June 4, 1997 and December 28, 1996 were
as follows:


                                     Thirty-one       Twenty-two  Fifty-two    
                                     weeks ended      weeks ended weeks ended
                                     January 3,       June 4,     December 28,
                                      1998              1997         1996
                                      ----              ----         ----


Service costs                         $ --             $ --            $ --    
Interest cost                           47               38             127  
Actual return on assets                (74)             (98)           (111) 
Recognition of partial settlement
   of pension obligations               --               --             106   
Net amortization and deferral           27               60              73   
                                     -----             ----           -----
     Net periodic pension cost       $  --             $ --           $ 195
                                     =====             ====           =====

                                      F-25
<PAGE>



         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. All payments to participants were made during fiscal 1997.

(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 fifty-two,  thirty-one,
twenty-two and fifty-two  weeks ended January 2, 1999,  January 3, 1998, June 4,
1997 and December 28, 1996 amounted to $211,000, $75,000, $113,000 and $321,000,
respectively.

(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 amounted to approximately  $965,000. 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 amount of  contributions  to the pension fund for the  continuing
operations in 1998 and 1997 amounted to $362,000 and $364,000 respectively.

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

13.  Product Lines Sold or Disposed of:

         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 on
disposition  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.


                                      F-26
<PAGE>


         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.

         Unaudited pro forma  consolidated  statements for the twenty-two  weeks
ended June 4, 1997 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 period 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 . All  significant
intercompany transactions have been eliminated.


                                      F-27

<PAGE>


         The unaudited pro forma  adjustments  presented in the statement 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-28

<PAGE>
<TABLE>
<CAPTION>

                  THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
                 PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
                 (In thousands, except share and per share data)
                                   (UNAUDITED)

                                                               Twenty-two Weeks Ended June 4, 1997
                                         -----------------------------------------------------------------------------------------

                                          Historical     Disposition of       Sale of        Fresh Start      Pro Forma 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) expense............         (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
Interest and Financing Costs (excludes                                                                      
      Contractual interest)...........           1,372             (595)             --                --                     777
                                         --------------  ----------------  --------------  ----------------  ---------------------
Income (loss) before reorganization costs,                                                                                          
      taxes, gain on sale, fresh start          12,983           (9,455)            495             2,658                   6,681
      revaluation and extraordinary item

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           (89,810)             --           (46,531)                     --
                                         --------------  ----------------  --------------  ----------------  =====================
    Net Income (loss)..................      $145,494          ($98,923)           $481          ($42,378)                 $4,674
                                         ==============
    Net Income (loss)  per Share                                                                             
                  - Basic and Diluted..         *                                                                           $0.69
                                         ==============                                                      =====================
    Weighted Average Common Shares
      Outstanding - Basic and Diluted..         *                                                                       6,800,000 
                                         ==============                                                      =====================

</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-29
<PAGE>


14.      Reorganization Costs:

         The  Predecessor  Company  recognized  reorganization  costs during the
twenty-two  and fifty-two  week periods ended June 4, 1997 and December 28, 1996
as follows:

                                               (In thousands)
                                   Twenty-Two             Fifty-Two
                                   Weeks Ended          Weeks Ended
                                    June 4,             December 28,
                                       1997                 1996
                                       ----                 ----
Professional fees and other
  costs                               $2,951                $ 3,719
Closed facilities and operations          --                  1,082 
Write-down of excess purchase             --                    652 
  price
Plan administration costs              1,000                     --   
Retirement plan termination               --                    676 
Employee retention plan                   --                   (509)
Interest income                         (572)                  (476)
                                      ------                  -----
  Total reorganization costs          $3,379                $ 5,144
                                      ======                =======

15.  Accrued Expenses and Other Current Liabilities:

         The components of Accrued  expenses and other current  liabilities were
as follows:

                                         (In thousands)
                                   January 2,       January 3,
                                      1999             1998
                                   ---------        ---------

    Bonus and Profit Sharing       $ 1,274          $ 1,240
    Accrued Acquisition Costs        1,175               --
        (see Note 4)
   Duty                                806              399
   Vacation                            635              490
    Professional Fees                  389              601
    Reorganization Costs                --              301
    Other                            3,207            1,511
                                    ------            -----
          Total                    $ 7,486           $4,542
                                   =======           ======

                                      F-30
<PAGE>



16.  Supplemental Cash Flow Information:

         Net  cash  paid  (received)  for  interest  and  income  taxes  for the
fifty-two,  thirty-one,  twenty-two  and fifty-two  weeks ended January 2, 1999,
January 3, 1998, June 4, 1997 and December 28, 1996 were as follows:

                                                                                
                                         (In thousands)

                   Fifty-Two      Thirty-One        Twenty-Two        Fifty-Two
                  Weeks Ended     Weeks Ended      Weeks Ended      Weeks Ended
                   January 2,     January 3,         June 4,        December 28,
                   1999            1998                1997            1996     
                   ----            -----               ----            ----

Interest          $  953           $ 367             $ 1,412          $ 1,047
Income taxes       2,892             928              (2,694)          (7,311)  


         The Company issued a short-term non-interest bearing promissory note in
the amount of $834,000  payable in four equal quarterly  installments  ending on
October 27,  1999 as partial  payment  for the assets  acquired  from the Warren
Apparel Group, Ltd. (see Note 4)

17. Other Matters:

         In June 1998, SFAS No. 133, "Accounting for Derivative  Instruments and
Hedging Activities" was issued,  establishing accounting and reporting standards
requiring  that  every  derivative   instrument  (including  certain  derivative
instruments  embedded in other  contracts)  be recorded in the balance  sheet as
either an asset or liability  measured at its fair value. The Statement requires
that changes in the derivative's fair value be recognized  currently in earnings
unless  specific  hedge  accounting  criteria are met.  Special  accounting  for
qualifying  hedges  allows a  derivative's  gains and  losses to offset  related
results on the hedged item in the income statement,  and requires that a company
must formally  document,  designate and assess the effectiveness of transactions
that receive hedge accounting.

         The Company has not engaged in hedging activities and has not purchased
any derivative  instruments.  The Company  believes the adoption of SFAS No. 133
would have no impact on these consolidated financial statements.



                                      F-31
<PAGE>



18.  Unaudited Quarterly Results:

Unaudited  quarterly  financial  information  for 1998 and 1997 is set  forth as
follows:
<TABLE>
<CAPTION>

                              (In thousands, except per share data)
        
                          Quarter              Quarter          Quarter       Quarter 
                          ended                ended            ended         ended   
      1998                April 4              July 4           October 3     January 2,1999
                          -------              ------           ---------     --------------
  
<S>                        <C>                  <C>            <C>             <C>        
Net sales                  $ 45,258             $28,676        $ 48,789        $30,144    
Gross profit                 11,998               7,489          12,149          5,684    
Net income (loss)             3,769               1,378           3,769            (58)    
                                                                                          
Net income (loss) per share                                                               
                                                                                          
- Basic                       $0.55               $0.20           $0.58         ($0.01)    
- Diluted                     $0.54               $0.19           $0.55         ($0.01) 
                                


                            Quarter    Two months One month    Quarter         Quarter      
                            ended      ended      ended        ended           ended                                       
      1997                  April 5    June 4     July 5       October 4       January 3, 1998  
                            -------    ------   --------      ----------       ---------------
                                                                                          
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                          *        *     $   .01        $    .67        $  (.19)  
- Diluted                        *        *     $   .01        $    .66           (.19)  
                                                                              
</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-32

<PAGE>
<TABLE>
<CAPTION>

                                                                     SCHEDULE II

                  THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
                        VALUATION AND QUALIFYING ACCOUNTS
                                 (In thousands)

                                            Reserves      Beginning                                   
                                           Related to      Balance                                    
                              Balance at      Sold       Related to        Costs                       Balance at
           Description        Beginning      Product     Continuing      Charged to    Deductions         End
                              of Period       Lines      Operations       Expense                       of Period
--------------------------------------------------------------------------------------------------------------------   
Fifty-Two Weeks Ended          
 January 2,  1999

<S>                             <C>        <C>           <C>            <C>         <C>                <C>   
Reserve for Allowances             $3,098       --          $3,098        $13,879      ($10,377)         $ 6,600

Other Receivable Reserves              24       --              24             --            --               24

Reserve for Doubtful Accounts          48       --              48             22            --               70

Reserve for Returns                    66       --              66          1,394        (1,329)             131
                                  -------     --------     -------        -------       --------         -------
Total Receivable Reserves          $3,236     $ --          $3,236        $15,295      ($11,706)         $ 6,825
                                  =======     =========    =======        =======       ========         ======= 
Taxation Valuation Allowance       $5,265     $ --          $5,265        $ 7,453       $    --          $12,718
                                  =======     =========    =======        =======       ========         =======
                                                                           

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

Reserves 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
                                  =======     =========   =======         =======       ========         =======
                                      
</TABLE>

                                      F-33
<PAGE>


                                                         SCHEDULE II (continued)
<TABLE>
<CAPTION>
  
                THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
                        VALUATION AND QUALIFYING ACCOUNTS
                                 (In thousands)

                                                   Reserves      Beginning                                   
                                                  Related to      Balance                                    
                                     Balance at      Sold       Related to        Costs                       Balance at
           Description               Beginning      Product     Continuing      Charged to    Deductions         End
                                     of Period       Lines      Operations       Expense                       of Period
--------------------------------------------------------------------------------------------------------------------------

Twenty-Two Weeks Ended
 June 4, 1997

<S>                                 <C>         <C>              <C>            <C>          <C>              <C>   
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
Reserves for Discounts                   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
Reserves 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-34

<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 2, 1999             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
-------             -----------

2.1                 Amended Joint Plan of Reorganization.(2)

3.1(a)              Restated Certificate of Incorporation of the registrant.(2)

3.1(b)*             Amendment to Restated  Certificate of  Incorporation  of the
                    registrant.

3.2(a)              Amended and Restated By-laws of the registrant.(2)

3.2(b)*             Amendment to Amended and Restated By-laws of the registrant.

4.1                 Specimen  Copy of Stock  Certificate  for  shares  of Common
                    Stock of the registrant.(9)

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

4.3                 First  Amendment  dated  February 23, 1998 to the  Revolving
                    Credit Agreement between LFM and CIT.(4)

4.4                 Second  Amendment  dated  March  31,  1998 to the  Revolving
                    Credit Agreement between LFM and CIT.(4)

4.5                 Third  Amendment  dated  October 28,  1998 to the  Revolving
                    Credit Agreement between LFM and CIT.(8)

10.1                Employment Agreement dated as of January 4, 1998 between the
                    registrant and John J. Pomerantz.(7)

10.2                Employment Agreement dated as of January 4, 1998 between the
                    registrant and John Ward.(7)

10.3                Employment Agreement dated as of January 4, 1998 between the
                    registrant and Dominick Felicetti.(7)

10.4                Employment Agreement dated as of January 4, 1998 between the
                    registrant and Warren T. Wishart.(7)

10.5                1997 Management Stock Option Plan.(5)

10.6                1997 Non-Employee  Director Stock Option and Stock Incentive
                    Plan.(6)

10.7                Factoring  Agreement  dated  June 4,  1997  between  LFM and
                    CIT.(2)

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 141
                    Broadway, New York, New York.(1)

10.9                Modification  of  Lease  Agreement  dated  August  11,  1998
                    between  Fashion  Gallery  Owners  (formerly  1412  Broadway
                    Associates) and the Company for certain  premises located at
                    1412 Broadway, New York, New York.(7)

10.10               Lease  Agreement dated August 1, 1997 between John J. Passan
                    and the  registrant  for  certain  premises  located  at One
                    Passan   Drive,   Borough   of   Laflin,   Luzerne   County,
                    Pennsylvania.(3)

21.1                List of Subsidiaries.(4)

23.1*               Consent of Arthur Andersen LLP.

27*                 Financial Data Schedule

------------------------------
*filed herewith

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

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

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

(4)      Incorporated  by  reference  to  the Annual Report on Form 10-K for the
         fiscal year ended January 3, 1998.

(5)      Incorporated by reference to the registrant's Registration Statement on
         Form S-8  relating to shares  under the 1997  Management  Stock  Option
         Plan.

(6)      Incorporated by reference to the registrant's Registration Statement on
         Form S-8 relating to shares under the 1997 Non-Employee  Director Stock
         Option and Stock Incentive Plan.

(7)      Incorporated by reference to the Quarterly Report on Form 10-Q for the
         fiscal quarter ended July 4, 1998.

(8)      Incorporated by reference to the Quarterly Report on Form 10-Q for the
         fiscal quarter ended October 3, 1998.

(9)      Incorporated by reference to Post-Effective Amendment No. 1 to the 
         registrant's Registration Statement on Form S-1.