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

                Quarterly Report Pursuant to Section 13 or 15(d)
                     of the Securities Exchange Act of 1934


For the Quarterly Period ended July 4, 1998         Commission File No. 1-9196



                          THE LESLIE FAY COMPANY, INC.



              Delaware                                      13-3197085
 (State of other jurisdiction of           (I.R.S. Employer Identification No.)
incorporation or organization)


          1412 Broadway
       New York, New York                                     10018
(Address of principal executive offices)                    (Zip Code)


       Registrant's telephone number, including area code: (212) 221-4000


Indicate by check mark  whether the  registrant  (1) has filed all reports 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
    ----         ----

There were 6,812,000 shares of Common Stock outstanding at August 14, 1998.

================================================================================
<PAGE>



                  THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES

                                      INDEX
<TABLE>
<CAPTION>

                                                                                  Page No.

PART I  - FINANCIAL INFORMATION

<S>            <C>                                                                  <C>      
Item 1.           Financial Statements:
                  Consolidated Balance Sheets as of July 4, 1998
                     and January 3, 1998.................................................3

                  Consolidated Statements of Operations for the
                     Twenty-Six, Five and Twenty-Two Weeks Ended
                     July 4, 1998, July 5, 1997 and June 4, 1997, respectively...........4

                  Consolidated Statements of Operations for the
                     Thirteen, Five and Eight Weeks Ended July, 4, 1998,
                     July 5, 1997 and June 4, 1997, respectively.........................5

                  Consolidated Statements of Cash Flows for the
                     Twenty-Six, Five and Twenty-Two Weeks Ended
                     July 4, 1998, July 5, 1997 and June 4, 1997, respectively...........6

Notes to Consolidated Financial Statements...............................................7

Item 2.           Management's Discussion and Analysis of Financial
                  Condition and Results of Operations...................................25

PART II  -  OTHER INFORMATION

Item 1.           Legal Proceedings.....................................................33
Item 2.           Changes in Securities.................................................33
Item 3.           Defaults Upon Senior Securities.......................................33
Item 4.           Submission of Matters to a Vote of Security Holders...................33
Item 5.           Other Information.....................................................35
Item 6.           Exhibits and Reports on Form 8-K......................................35

SIGNATURES..............................................................................36

INDEX TO EXHIBITS.....................................................................E-1
</TABLE>

                                       -2-

<PAGE>
                         PART I - FINANCIAL INFORMATION

                          Item 1. Financial Statements.

                  THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                                 (In thousands)

<TABLE>
<CAPTION>


                                                                                UNAUDITED         AUDITED
                                                                                July 4,         January 3,
                                ASSETS                                           1998              1998
                                                                            ----------------  ----------------
<S>                                                                            <C>              <C>
Current Assets:
    Cash and cash equivalents                                                        $8,568           $18,455
    Restricted cash and cash equivalents                                              3,786             1,358
    Restricted short term investments                                                    --             2,989
    Accounts receivable- net of allowances for possible losses
        of $3,207 and $3,236, respectively                                           12,762             9,747
    Inventories                                                                      33,585            26,701
    Prepaid expenses and other current assets                                         1,045               807
                                                                            ----------------  ----------------
       Total Current Assets                                                          59,746            60,057

    Property, Plant and Equipment, at cost, net of
       accumulated depreciation of $91 and $14, respectively                          1,725               845
    Deferred Charges and Other Assets                                                   105               149
                                                                            ----------------  ----------------

    Total Assets                                                                    $61,576           $61,051
                                                                            ================  ================

                 LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
    Accounts payable                                                                 $6,606           $11,530
    Accrued expenses and other current liabilities                                    4,494             4,542
    Accrued expenses and other current confirmation liabilities                       3,786             4,347
    Income taxes payable                                                                124                25
    Current portion of capitalized leases                                                46               160
                                                                            ----------------  ----------------
       Total Current Liabilities                                                     15,056            20,604

    Excess of revalued net assets acquired over equity under fresh-start reporting,
         net of accumulated amortization of $4,952 and $2,667, respectively           8,755            11,041
    Long term debt-capitalized lease                                                     42                49
    Deferred liabilities                                                                240               143
                                                                            ----------------  ----------------
       Total Liabilities                                                             24,093            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;
         6,812 and 6,800 shares issued and outstanding, respectively                     68                68
    Capital in excess of par value                                                   28,958            25,837
    Accumulated retained earnings                                                     8,457             3,309
                                                                            ----------------  ----------------
           Total Stockholders' Equity                                                37,483            29,214

    Total Liabilities and Stockholders' Equity                                      $61,576           $61,051
                                                                            ================  ================

</TABLE>

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

                                       -3-

<PAGE>
<TABLE>
<CAPTION>


                                                                               UNAUDITED                  AUDITED
                                                                             Reorganized                Predecessor     
                                                                               Company                    Company
                                                                 ------------------------------------  --------------


                                                                    Twenty-Six          Five            Twenty-Two
                                                                  Weeks Ended        Weeks Ended        Weeks Ended
                                                                    July 4,            July 5,            June 4,
                                                                     1998               1997               1997
                                                                 --------------     --------------     --------------

<S>                                                                 <C>                 <C>              <C>            
Net Sales                                                              $73,934             $5,535           $197,984  
Cost of Sales                                                           54,447              4,410            147,276  
                                                                 --------------     --------------     --------------

   Gross profit                                                         19,487              1,125             50,708  
                                                                 --------------     --------------     --------------

Operating Expenses:
   Selling, warehouse, general and administrative expenses              14,739              1,632             35,459
   Depreciation and amortization expense                                    70                 --              2,090    
                                                                 --------------     --------------     --------------
      Total operating expenses                                          14,809              1,632             37,549  

   Other income                                                           (575)              (118)            (1,196) 
   Amortization of excess revalued net assets acquired over equity      (2,286)              (381)                --           
                                                                 --------------     --------------     --------------

   Total operating expenses, net                                        11,948              1,133             36,353  
                                                                 --------------     --------------     --------------

   Operating income (loss)                                               7,539                 (8)            14,355  

Interest and Financing Costs (excludes contractual interest of
   $-0-, $-0- and  $7,513, respectively)                                   320               (102)             1,372
                                                                 --------------     --------------     --------------

   Income before reorganization costs, taxes, gain
      on sale, fresh-start revaluation and extraordinary item            7,219                 94             12,983    

Reorganization Costs                                                        --                 --              3,379  
                                                                 --------------     --------------     --------------

   Income before taxes, gain on sale,  
      fresh-start revaluation and extraordinary item                     7,219                 94              9,604  

Provision for taxes                                                      2,072                 20                451  
                                                                 --------------     --------------     --------------

   Net Income before gain on sale, fresh-start
      revaluation and extraordinary item                                 5,147                 74              9,153  

Gain on  disposition  of Sassco  Fashions Line (net of $3,728 of
income  taxes), loss on revaluation of assets pursuant to adoption of
fresh-start reporting and extraordinary gain on debt discharg               --                 --            136,341
                                                                 --------------     --------------     --------------

  Net Income                                                            $5,147                $74           $145,494  
                                                                 ==============     ==============     ==============

  Net Income per Common Share - Basic                                    $0.76              $0.01             *           
                                                                 ==============     ==============     ==============
                              - Diluted                                  $0.72              $0.01             *           
                                                                 ==============     ==============     ==============

  Weighted Average Common Shares Outstanding - Basic                 6,801,967          6,800,000             *
                                                                 ==============     ==============     ==============
                                             - Diluted               7,149,484          6,800,000             *        
                                                                 ==============     ==============     ==============
</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.

                                       -4-

<PAGE>
<TABLE>
<CAPTION>


                                                                              UNAUDITED                  UNAUDITED
                                                                             Reorganized                Predecessor
                                                                               Company                    Company
                                                                 ------------------------------------  --------------


                                                                     Thirteen           Five               Eight
                                                                  Weeks Ended        Weeks Ended        Weeks Ended
                                                                    July 4,            July 5,            June 4,
                                                                     1998               1997               1997
                                                                 --------------     --------------     --------------

<S>                                                                 <C>                 <C>               <C>                  
Net Sales                                                              $28,676             $5,535            $55,229              
Cost of Sales                                                           21,187              4,410             41,289              
                                                                 --------------     --------------     --------------

   Gross profit                                                          7,489              1,125             13,940             
                                                                 --------------     --------------     --------------

Operating Expenses:
   Selling, warehouse, general and administrative expenses               7,203              1,632             12,354
   Depreciation and amortization expense                                    53                 --                846   
                                                                 --------------     --------------     --------------
      Total operating expenses                                           7,256              1,632             13,200   

   Other income                                                           (303)              (118)              (239)  
   Amortization of excess revalued net assets acquired over equity      (1,143)              (381)                --          
                                                                 --------------     --------------     --------------

   Total operating expenses, net                                         5,810              1,133             12,961   
                                                                 --------------     --------------     --------------

   Operating income (loss)                                               1,679                 (8)               979   

Interest and Financing Costs (excludes contractual interest of
   $-0-, $-0- and  $3,005, respectively)                                   130               (102)               504
                                                                 --------------     --------------     --------------

   Income before reorganization costs, taxes, gain
      on sale, fresh-start revaluation and extraordinary item            1,549                 94                475       

Reorganization Costs                                                        --                 --              2,911   
                                                                 --------------     --------------     --------------

   Income (loss) before taxes, gain on sale,
      fresh-start revaluation and extraordinary item                     1,549                 94             (2,436)  

Provision for taxes                                                        171                 20                135   
                                                                 --------------     --------------     --------------

   Net Income (loss) before gain on sale, fresh-start
      revaluation and extraordinary item                                 1,378                 74             (2,571)  

Gain on  disposition  of Sassco  Fashions Line (net of $3,728 of 
income  taxes), loss on revaluation of assets pursuant to adoption of
fresh-start reporting and extraordinary gain on debt discharge              --                 --            136,341
                                                                 --------------     --------------     --------------

  Net Income                                                            $1,378                $74           $133,770   
                                                                 ==============     ==============     ==============

  Net Income per Common Share - Basic                                    $0.20              $0.01             *
                                                                 ==============     ==============     ==============
                              - Diluted                                  $0.19              $0.01             *        
                                                                 ==============     ==============     ==============

  Weighted Average Common Shares Outstanding - Basic                 6,803,956          6,800,000             *
                                                                 ==============     ==============     ==============
                                             - Diluted               7,166,261          6,800,000             *        
                                                                 ==============     ==============     ==============
</TABLE>

     * Earnings per share is not presented for the eight 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.

                                       -5-

<PAGE>
<TABLE>
<CAPTION>


                                                                          UNAUDITED                   AUDITED
                                                                         Reorganized                Predecessor
                                                                           Company                    Company
                                                                -------------------------------    ---------------

                                                                 Twenty-Six           Five           Twenty-Two
                                                                  Weeks Ended     Weeks Ended       Weeks Ended
                                                                July 4, 1998       July 5, 1997     June 4, 1997

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

<S>                                                                 <C>                 <C>           <C>                       
Net income                                                             $5,147              $74           $145,494           
Adjustments to reconcile net income to net cash
   provided by (used in) operating activities:
   Depreciation and amortization                                           76               --              2,222
   Amortization of excess net assets acquired
      over equity                                                      (2,286)            (381)                --
   Provision for possible losses on accounts receivable                    19              (99)               199
   Provision for compensation under stock option grants                 1,080               --                 --
   Gain on sale of fixed assets                                            --               --               (347)          
   Decrease (increase) in:                                                 --
     Restricted short term investment                                   2,989               --                 --           
     Accounts receivable                                               (3,034)           5,079             (1,248)
     Inventories                                                       (6,884)          (3,845)            25,538
     Prepaid expenses and other current assets                           (238)          (4,252)               (66)

     Deferred charges and other assets                                     44             (249)               125
   (Decrease) increase in:
     Accounts payable, accrued expenses and other
        current liabilities                                            (4,972)          (1,736)            (4,167)
     Income taxes payable                                                  99              (11)            (1,515)
     Deferred credits and other noncurrent liabilities                     97               --                374
Changes due to reorganization activities:
     Gain on disposition of Sassco Fashions, fresh-start revaluation
       charge and extraordinary gain on debt discharge                     --               --           (136,341)
     Reorganization costs                                                  --               --              3,379
     Payment of reorganization costs                                       --               --               (917)
     Use of pre-consummation deferred taxes                             2,042               --                 --             
                                                                --------------  ---------------  -----------------
        Total adjustments                                             (10,968)          (5,494)          (112,764)
                                                                --------------  ---------------  -----------------
        Net cash (used in) provided by operating activities            (5,821)          (5,420)            32,730
                                                                --------------  ---------------  -----------------


Capital expenditures                                                     (956)            (140)            (3,731)
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                          (956)            (140)           (13,627)
                                                                --------------  ---------------  -----------------


                                                                                            --                 --
                                                                                            --                 --
Repayment - capitalized leases                                           (121)             (19)                --
Payment of obligations under Plan of Reorganization                      (561)            (436)                --
                                                                --------------  ---------------  -----------------
        Net cash (used in) financing activities                          (682)            (455)                --
                                                                --------------  ---------------  -----------------  

                                                                       (7,459)          (6,015)            19,103

                                                                       19,813           41,080             21,977
                                                                --------------  ---------------  -----------------

                                                                      $12,354          $35,065            $41,080
                                                                ==============  ===============    ===============
</TABLE>

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

                                       -6-

<PAGE>



                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                   (UNAUDITED)

1.       Basis of Presentation:

         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), pursuant to the rules
and regulations of the Securities and Exchange  Commission (the "SEC").  Certain
information and footnote  disclosures  normally included in financial statements
prepared in accordance with generally accepted  accounting  principles have been
condensed  or  omitted  from this  report,  as is  permitted  by such  rules and
regulations;  however, the Company believes that the disclosures are adequate to
make the information  presented not  misleading.  These  consolidated  financial
statements  should  be read  in  conjunction  with  the  consolidated  financial
statements and the notes thereto included in the Company's Annual Report on Form
10-K for the Fiscal Year ended  January 3, 1998 (the "1997 Form 10-K").  Interim
taxes were provided based on the Company's  estimated effective tax rate for the
year.

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

         Certain  reclassifications  have been made to the financial  statements
for the  twenty-two and eight weeks ended July 5, 1997 to conform to the current
quarterly presentation.

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
                                       -7-

<PAGE>


                  THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES

November  15, 1995 filing date while  pursuing an orderly  liquidation  of their
assets, also under chapter 11 of the Bankruptcy Code.

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

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

         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 ( as adjusted for the
July 1, 1998  stock  split  (see Note 9) ) to its  creditors  in July  1997. The
remaining  twenty-one (21%) percent is being held back pending the resolution of
certain litigation before the Bankruptcy Court. The existing stockholders of the
Company  at June 4, 1997 did not retain or  receive  any value for their  equity
interest in the  Company.  Reference  is made to the  Exhibits  contained in the
Company's  Form 10-K for the  fiscal  year ended  January 3, 1998,  and Item 1 -
Recent  Developments  contained in the  Company's  Form 10-K for the fiscal year
ended December 28, 1996 for a copy of the Plan and a summary of Plan provisions,
respectively.
                                       -8-

<PAGE>


                  THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES

         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  included  in  the  Extraordinary   Gain  on  Debt  Discharge  in  the
consolidated  statement of  operations  for the  twenty-two  weeks ended June 4,
1997.

Fresh-Start Reporting

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

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

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

         2.  Allocation of the fair market value of the  identifiable net assets
             in  excess  of the  reorganization  value  (negative  goodwill)  in
             accordance  with the purchase  method of  accounting.  The negative
             goodwill  amount  remaining  after  reducing   non-current   assets
             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 in the
"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.
                                       -9-

<PAGE>


                  THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES

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

3.       Dispositions:

         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 included in the Gain on
the  disposition  of the  Sassco  Fashions  product  line  in  the  consolidated
statements of operations for the twenty-two and eight weeks ended June 4, 1997.

         In  addition,  on May  26,  1997,  the  Company  sold  the  assets  and
liabilities of its Castleberry product line for $600,000.  The resulting loss of
$1,398,000  on the sale was  previously  recorded as  reorganization  expense in
fiscal  1996 and  therefore,  was applied  against  Accrued  expenses  and other
current liabilities at the time of the sale.

         The unaudited pro forma  consolidated  statements of operations for the
twenty-two  and eight 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.

         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
statements of operations  for the twenty-two and eight weeks ended June 4, 1997.
All significant intercompany transactions have been eliminated.
                                      -10-

<PAGE>


                  THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES


         The unaudited pro forma  adjustments  presented in the statement are as
follows:




       Column Heading                     Explanation
       --------------                     -----------

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

Disposition of Sassco         The  operating  results  of  the  Sassco  Fashions
                              product 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 the July 5,
                              1997 period,  the gain recorded on the disposition
                              of the Sassco Fashions line has been reversed.

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

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

                              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.
                                      -11-

<PAGE>


                  THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES

<TABLE>
<CAPTION>



                                                                          Twenty-Two Weeks Ended June 4, 1997
                                                       -----------------------------------------------------------------------------
                                                        Historical     Disposition of   Sale of     Fresh Start      Pro Forma
                                                        Operations       Sassco       Castleberry    Reporting      Adjusted Balance
                                                       --------------  ------------   -----------  ---------------  ----------------

<S>                                                       <C>          <C>             <C>                <C>          <C>      
Net Sales                                                   $197,984     ($136,107)      ($2,808)           $  --        $59,069  
Cost of Sales                                                147,276      (101,573)       (2,262)             (32)        43,409  
                                                       --------------  ------------   -----------  ---------------  -------------
   Gross profit                                               50,708       (34,534)         (546)              32         15,660  
                                                       --------------  ------------   -----------  ---------------  -------------

Operating Expenses:
   Selling, warehouse, general and
     administrative expenses                                  35,459       (23,666)       (1,000)             250         11,043
   Depreciation and amortization expense                       2,090        (1,078)          (41)            (971)            --  
                                                       --------------  ------------   -----------  ---------------  -------------
      Total operating expenses                                37,549       (24,744)       (1,041)            (721)        11,043

   Other (income)                                             (1,196)          260            --               --           (936) 
   Amortization of excess 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 revaluation,
   and extraordinary item                                     12,983        (9,455)          495            2,658          6,681   

Reorganization Costs                                           3,379            --            14           (3,393)            --
                                                       --------------  ------------   -----------  ---------------  -------------

Income (Loss) before taxes, gain on sale,
   fresh-start revaluation, and extraordinary item             9,604        (9,455)          481            6,051          6,681

Taxes                                                            451          (342)           -- --         1,898          2,007  

     Net Income (Loss) before gain on sale,
        fresh-start revaluation, and extraordinary item        9,153        (9,113)          481            4,153          4,674  

Gain on disposition of Sassco Fashions line,  loss on
   revaluation of assets pursuant to adoption of fresh-start
   reporting and extraordinary gain on debt discharge        136,341       (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 Shares Outstanding
 -  Basic and Diluted                                        *                                                         6,800,000   
                                                       ==============                                               =============
</TABLE>

      * Earnings per share 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 

                                      -12-

<PAGE>


                  THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>




                                                                                      Eight Weeks Ended June 4, 1997
                                                       -----------------------------------------------------------------------------
                                                        Historical     Disposition of   Sale of     Fresh Start      Pro Forma
                                                        Operations       Sassco       Castleberry    Reporting      Adjusted Balance
                                                       --------------  ------------   ------------ ---------------  ----------------

<S>                                                       <C>          <C>              <C>              <C>          <C>      
Net Sales                                                    $55,229      ($36,877)        ($679)           $  --        $17,673  
Cost of Sales                                                 41,289       (27,350)         (681)             (14)        13,244  
                                                       --------------  ------------   -----------  ---------------  -------------

   Gross profit                                               13,940        (9,527)            2               14          4,429  
                                                       --------------  ------------   -----------  ---------------  -------------

Operating Expenses:
   Selling, warehouse, general and
     administrative expenses                                  12,354        (8,416)         (449)             100          3,589
   Depreciation and amortization expense                         846          (435)          (11)            (400)            --  
                                                       --------------  ------------   -----------  ---------------  -------------
      Total operating expenses                                13,200        (8,851)         (460)            (300)         3,589

   Other (income)                                               (239)           10            --               --           (229) 
   Amortization of excess revalued net
     assets acquired over equity                                  --            --            --             (762)          (762)
                                                       --------------  ------------   -----------  ---------------  -------------

   Total operating expenses, net                              12,961        (8,841)         (460)          (1,062)         2,598
                                                       --------------  ------------   -----------  ---------------  -------------

   Operating income                                              979          (686)          462            1,076          1,831

Interest and Financing Costs (excludes
    contractual interest)                                        504          (183)           --               --            321
                                                       --------------  ------------   -----------  ---------------  -------------

Income (Loss) before reorganization costs, taxes,
   gain on sale,  fresh-start revaluation,
   and extraordinary item                                        475          (503)          462            1,076          1,510   

Reorganization Costs                                           2,911            --            64           (2,975)            --
                                                       --------------  ------------   -----------  ---------------  -------------

Income (Loss) before taxes, gain on sale,
   fresh-start revaluation, and extraordinary item            (2,436)         (503)          398            4,051          1,510

Taxes                                                            135          (142)           -- --           321            314   
                                                       --------------  ------------   -----------  ---------------  -------------

     Net Income (Loss) before gain on sale,
        fresh-start revaluation, and extraordinary item       (2,571)         (361)          398            3,730          1,196

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)                                   $133,770      ($90,171)         $398         ($42,801)        $1,196  
                                                       ==============  ============   ===========  ===============  =============


  Net Income (Loss) per Share
 -  Basic and Diluted                                        *                                                             $0.18 
                                                                                                                    =============
  Weighted Average Shares Outstanding
 -  Basic and Diluted                                        *                                                         6,800,000  
                                                       ==============                                               =============
</TABLE>

      * Earnings per share 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 


                                      -13-

<PAGE>


                  THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES


4.       Accounts Receivable:

         On June 2, 1997, a wholly-owed subsidiary of the Company entered into a
Factoring Agreement with The CIT Group/Commercial  Services, Inc. ("CIT"). Under
this agreement,  CIT began purchasing the accounts receivable of the Company and
remits the  proceeds  received to the  Company as  collected.  In  exchange  for
collecting  the  receivables,  CIT earns a factoring fee of 0.4% of  receivables
purchased  (with a minimum charge per invoice) as well as an interest  charge of
prime plus 1% on two days cash collections.

5.       Inventories:

         Inventories consist of the following:

                                                     Unaudited

                                                     July 4,         January 3,
                                                      1998              1998
                                                      ----              ----
                                                           (In Thousands)

Raw materials                                          $10,909      $  9,638
Work in process                                          4,927         4,540
Finished goods                                          17,749        12,523
                                                      --------      --------

   Total inventories                                  $ 33,585      $ 26,701
                                                      ========      ========

6.       Debt:

         On June 2, 1997, in  preparation  for the  consummation  of the Plan, a
wholly-  owned  subsidiary  of the  Company  entered  into a two-year  financing
agreement (the "CIT Credit Agreement") with CIT to provide direct borrowings and
the issuance of letters of credit on the Company's behalf in an aggregate amount
not to exceed $30,000,000,  with a sublimit on letters of credit of $20,000,000.
The CIT Credit  Agreement became effective on June 4, 1997 with the consummation
of the Plan. Direct borrowings bear interest at prime plus 1.0% (9.5% at July 4,
1998) and the CIT Credit Agreement  requires a fee, payable monthly,  on average
outstanding  letters  of credit at a rate of 2%  annually.  There were no direct
borrowings   outstanding  under  the  CIT  Credit  Agreement  and  approximately
$6,552,000 was committed under unexpired letters of credit as of July 4, 1998.
                                      -14-

<PAGE>


                  THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES


         The CIT  Credit  Agreement,  as  amended,  contains  certain  reporting
requirements,  as well as financial and operating  covenants  related to capital
expenditures,  a minimum  tangible  net worth and the  maintenance  of a current
assets to current  liabilities  ratio and an interest to earnings  ratio and the
attainment of minimum  earnings.  As  collateral  for  borrowings  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
all requirements contained in the CIT Credit Agreement.

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

         The FNBB Credit Agreement provided for post-petition  direct borrowings
and the  issuance of letters of credit on the  Debtors'  behalf in an  aggregate
amount not to exceed $60,000,000. Beginning January 1, 1997, the sublimit on the
revolving line of credit was  $20,000,000 and the sublimit for letters of credit
was $50,000,000.

         Interest on direct borrowings was charged at prime plus 1.5% (10.00% at
July 5, 1997), and the FNBB Credit Agreement required a fee, payable monthly, on
average outstanding letters of credit at a rate of 2% annually.
                                      -15-

<PAGE>


                  THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES


7.       Income Taxes:

         The provision for state and foreign income taxes is $2,072,000, $20,000
and $451,000 for the twenty-six,  five and twenty-two  weeks ended July 4, 1998,
July 5, 1997 and June 4, 1997,  respectively,  and $171,000 and $135,000 for the
thirteen  and eight  weeks  ended July 4, 1998 and June 4,  1997,  respectively.
Federal income taxes for the  post-consummation  period are substantially offset
by the utilization of pre-consummation net operating loss carryovers,  which are
limited to approximately $1,500,000 in 1998, and post-consummation net operating
loss carryforwards without limitation and deductions available for tax purposes.
Although there is no 1997 Federal income tax provision currently recognizable on
the  pre-consummation  earnings due to existing net operating loss carryforwards
and no Federal income tax benefit currently  recognizable,  the Company provided
$3,728,000 for federal and state income taxes based on the  alternative  minimum
tax regulations for the twenty-two  weeks ended June 4, 1997 related to the gain
on the sale of the Sassco Fashions  product line.  These taxes are reflected net
of the gain shown in the statement of operations for the twenty-two  weeks ended
June 4, 1997.

8.       Commitments and Contingencies:

         As discussed in Note 2, on the Filing Dates, the Company and several of
its subsidiaries filed voluntary petitions in the Bankruptcy Court under chapter
11 of the Bankruptcy Code. All civil litigation  pending against the Company and
those  referenced  subsidiaries  prior to  those  dates  was  stayed  under  the
Bankruptcy  Code. By an order dated April 21, 1997 (the  "Confirmation  Order"),
the Bankruptcy  Court  confirmed the Plan.  The Plan was  consummated on June 4,
1997. Certain alleged creditors who asserted age and other discrimination claims
against the Company,  and whose claims were expunged (the "Claimants")  pursuant
to an Order of 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 was taken from the Order dismissing the appeal
taken by the Claimants,  but 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.
                                      -16-

<PAGE>


                  THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES



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

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

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

         In November 1992, a class action entitled  "Stephen Warshaw and Phillis
Warshaw v. The Leslie Fay  Companies,  Inc. et al." was instituted in the United
States District Court for the Southern District of New York. In January 1993 and
February 1993, the plaintiffs  served amended  complaints and thereafter  twelve
other  similar  actions  were  commenced  against  the  Company,  certain of its
officers and directors and its then  auditors,  BDO Seidman.  The  complaints in
these cases,  which  purported  to be on behalf of all persons who  purchased or
acquired  stock of the Company  during the period  from  February 4, 1992 to and
including  February 1, 1993,  alleged  that the  defendants  knew or should have
known  material  facts  relating to the sales and earnings  which they failed to
disclose and that if these facts had been  disclosed,  they would have  affected
the price at which the Company's  common stock was traded. A pre-trial order was
entered  which had the effect of  consolidating  all of these  actions  and,  in
accordance  therewith,   the  plaintiffs  have  served  the  defendants  with  a
consolidated  class action complaint which,  because of the chapter 11 filing by
the Company, does not name the Company as a defendant. In March 1994, plaintiffs
filed a consolidated  and amended class action  complaint.  This complaint added
certain  additional  parties as defendants,  including  Odyssey  Partners,  L.P.
("Odyssey"),  and expanded the purported class period from March 28, 1991 to and
including  April 5,  1993.  In March  1995,  BDO  Seidman  filed an  answer  and
cross-claims  against  certain of the  officers  and  directors  of the  Company
previously  named  in this  action  and  filed  third-party  complaints  against
Odyssey,  certain then current and former  executives of the Company and certain
then  current  and former  directors  of the  Company.  These  cross-claims  and
third-party  complaints  allege that the Company's senior management and certain
of its directors engaged in fraudulent conduct and negligent  misrepresentation.
BDO Seidman sought  contribution  from certain of the defendants and each of the
third-party defendants if it were found liable in the class action, as
                                    
                                      -17-

<PAGE>


                  THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES

well as damages.  On March 7, 1997, a stipulation  and settlement  agreement was
signed  pursuant  to which all  parties  agreed to  settle  the above  described
litigation  for an aggregate sum of  $34,700,000.  The officers' and  directors'
share of the  settlement  was covered by the Company's  officers' and directors'
liability insurance.  The settlement specifically provides that the officers and
directors  deny  any  liability  to the  plaintiffs  and have  entered  into the
settlement solely to avoid substantial  expense and inconvenience of litigation.
The  Company  has no  obligations  under this  settlement.  The  District  Court
approved this settlement and signed the final order of dismissal on May 8, 1997.
The settlement has been fully consummated.

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

         In February 1993, the United States Attorney for the Middle District of
Pennsylvania issued a Grand Jury Subpoena seeking the production of documents as
a result of the Company's  announcement of accounting  irregularities.  In 1994,
Donald F. Kenia,  former  Controller  of the Company,  was indicted by a federal
grand jury in the Middle District of  Pennsylvania  and pled guilty to the crime
of securities  fraud in connection  with the  accounting  irregularities.  On or
about October 29, 1996, Paul F. Polishan, former Senior Vice President and Chief
Financial Officer of the Company,  was indicted by the federal grand jury in the
Middle  District  of  Pennsylvania   for  actions  relating  to  the  accounting
irregularities.  The  trial of the case  against  Paul F.  Polishan  has not yet
occurred.                                                                    
                                      -18-

<PAGE>


                  THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES


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

         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
trade name. The Company has asserted counter claims. Upon a record of stipulated
facts and  submissions of memorandum of law, an oral argument on this matter was
heard on May 9, 1997.  On  December  23,  1997,  the court ruled in favor of the
Company  finding  the  plaintiffs  in  violation  of the  Federal  and New  York
Trademark  Statutes and of unfair  competition  under common law. The plaintiffs
have  appealed  and the  Company  has cross  appealed  to recover  its costs and
expenses in the litigation.
                                      -19-

<PAGE>


                  THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES


9.       Stockholders' Equity:

         On June 3, 1998 the Board of Directors  declared a two-for-one split of
the  Company's  common  stock to  shareholders  of record on June 17, 1998 to be
distributed  on July 1,  1998.  An amount  equal to the par value of the  common
shares issued was transferred  from capital in excess of par to the common stock
account.  All references to number of shares,  except shares authorized,  and to
per  share  information  in the  consolidated  financial  statements  have  been
adjusted to reflect the stock split on a retroactive basis.

         As  provided  under  the  Plan,  the  authorized  common  stock  of the
reorganized  Company  consisted of  3,500,000  shares of common stock with a par
value $.01 per share. The authorized common stock of the reorganized Company was
increased to 9,500,000 shares of common stock with a par value of $.01 per share
in November 1997 and to 20,000,000  shares with a par value of $.01 per share in
June 1998. At June 4, 1997,  6,800,000  shares were issued and  outstanding  and
were  being held by the plan  administrator  in trust.  In July 1997,  5,372,254
(approximately 79%) of the shares were distributed.  The remaining approximately
twenty-one  (21%)  percent is being held back pending the  resolution of certain
disputed claims before the Bankruptcy  Court.  The old common stock was canceled
at June 4,  1997 and the old  stockholders  of the  Company  did not  retain  or
receive any value for their equity interest.

         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.

         The Board of  Directors  of the Company on April 14,  1998  approved an
amendment to the Non-Employee  Director Stock Option and Stock Incentive Plan to
change each non-employee  director's annual compensation to include 2,000 shares
of the Company's  common stock  effective as of June 3, 1998. This amendment was
approved at the annual shareholders meeting on June 3, 1998. As a result, twelve
thousand  shares of the  Company's  common  stock  were  issued to  non-employee
directors on June 3, 1998 for the one year period ending June 3, 1999. An amount
equal to the par value of the common shares issued was transferred  from capital
in excess of par to the common stock account.
                                      -20-

<PAGE>


                  THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES

10.      Stock Option Plan:

The Company currently offers stock options under two plans:

              The 1997  Management  Stock  Option Plan  ("Management  Plan") was
              adopted in June 1997 in connection  with the  Company's  emergence
              from  bankruptcy  and provides  that options may be granted to key
              employees   (including   directors  who  are   employees)  of  and
              consultants to the Company. An amendment to this plan was approved
              by the  stockholders  at the annual meeting on June 3, 1998.  This
              amendment replaced provisions for granting the "Home Run" options.

              The 1997  Non-Employee  Director Stock Option and Stock  Incentive
              Plan (the "Non- Employee  Director Plan") was adopted in June 1997
              and provides that options may be granted to non-employee directors
              of the  Company.  An  amendment  to this plan was  approved by the
              stockholders  at the annual meeting on June 3, 1998 to provide for
              the grant of stock to  non-employee  directors  in addition to the
              grant of stock options.


Discussion of Management Plan

         The   Management   Plan  is   designed   to  attract   and  retain  the
best-qualified personnel for positions of substantial responsibility, to provide
additional  incentive  to  employees  of and  consultants  to the Company and to
promote the success of the Company's business.

         The aggregate number of shares of Common Stock for which options may be
granted under the  Management  Plan,  adjusted for the July 1, 1998  two-for-one
stock split,  is 2,500,000  shares.  The Management  Plan is administered by the
Compensation Committee of the Board of Directors.  Under the Management Plan the
following options have been granted:

         On June 4, 1997,  options to purchase 824,242 shares of common stock at
an exercise price of $3.09 per share were granted to five senior managers of the
Company.  Vesting for these stock options  occurs with respect to 33% on June 4,
1998,  a second 33% on June 4, 1999,  and the final 34% on June 4, 2000.  Due to
the  termination of employment of one of these  executives,  options to purchase
93,412  shares at $3.09 per share have been  forfeited.  As of August 10,  1998,
none of the remaining options have been exercised.

         During  1997,  the Board of  Directors  authorized  the  granting to 22
executives  of the Company,  not  including  any of the senior  managers  above,
incentive  stock options to purchase  76,000 shares at exercise  prices of $5.75
and  $6.25  per  share,  the then  current  market  price of the  shares.  These
incentive stock options vest 33% on the first  anniversary of the grant,  33% on
the second

                                      -21-

<PAGE>


                  THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES

anniversary,  and the final 34% on the third  anniversary  of the  grant.  As of
August 10, 1998, none of these stock options have been exercised or forfeited.

         At the June 3, 1998 annual meeting of stockholders, an amendment to the
Management  Plan was approved to replace the "Home Run" option  provisions  that
were included as part of the Company's  emergence from  bankruptcy.  These "Home
Run"  option  provisions  called for the  granting  of options to purchase up to
618,182  shares  at an  exercise  price of  $3.09  per  share in the  event of a
reorganization,  merger,  sale or disposition of substantially all the assets of
the Company,  the underwritten equity offering of 50% or more of the outstanding
Common Stock or other similar corporate  transaction if the transaction achieved
minimum imputed  enterprise  value targets.  These minimum targets  escalated at
each  anniversary of the Company's  emergence from  bankruptcy.  The replacement
provision  grants the  remaining  four  original  senior  executives  options to
purchase  365,758  shares at an  exercise  price of $3.09.  These  options  were
granted  as of  January  4,  1998.  25% of these  vested  immediately,  with the
remaining  options vesting in equal  installments at each of the following three
anniversaries  of the January 4, 1998 grant date. As of August 10, 1998, none of
these stock options have been exercised or forfeited.

         Adjusted  for the July 1,  1998  two-for-one  stock  split,  there  are
currently  options  granted  but not  exercised  under  the  Management  Plan to
purchase  1,172,586  shares at a weighted  average  exercise  price of $3.26 per
share.


Discussion of Non-Employee Director Plan

         The  Non-Employee  Director  Plan is designed to attract and retain the
best-qualified personnel for director positions and to provide for the long-term
growth and financial success of the Company's business.

         The aggregate number of shares of Common Stock for which options may be
granted or stock awarded under the Non-Employee  Director Plan, adjusted for the
July 1, 1998  two-for-one  stock  split,  is 200,000  shares.  The  Non-Employee
Director  Plan is  administered  by the  Compensation  Committee of the Board of
Directors.  The Plan calls for the issuance of stock  options or stock grants as
follows:

         On June 4, 1997,  each of the five original  non-employee  directors of
the Company was granted  options to purchase  20,000 shares at an exercise price
of $3.09 per share.  Each new non-employee  director has been granted options to
purchase  10,000  shares at an exercise  price equal to the fair market value of
the Common  Stock at the day of the grant.  These  options vest over three years
from the date of the  grant,  one-third  on each of the first  anniversary,  the
second  anniversary  and the third  anniversary.  As of August 10, 1998, none of
these options have been exercised.  There are currently  options granted but not
exercised under the  Non-Employee  Director Plan to purchase 140,000 shares at a
weighted
 
                                      -22-

<PAGE>


                  THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES

average exercise price of $4.09 per share.

         The  Non-Employee  Director  Plan also  provides that a stock grant for
2,000 shares of Common Stock will be issued to each non-employee director of the
Company as of the  conclusion  of each  annual  meeting of  stockholders  of the
Company.  There are no restrictions on the receipt or sale of the shares, except
such as may be imposed by federal or state security laws. This grant of stock is
designed to offset the reduction in the portion of directors'  fee paid in cash.
The Company has granted  12,000  shares of Common Stock to its six  non-employee
directors.

Accounting for Stock Based Compensation

         On  June  4,  1997,   effective  with  the  Company's   emergence  from
bankruptcy,  the Company adopted the provisions of SFAS No. 123, "Accounting for
Stock-Based  Compensation."  Under  SFAS  No.  123,  the  Company  has  recorded
$1,080,000 and $351,000 of non-cash  compensation  expense  included in Selling,
warehouse,   general  and   administrative   expenses  for  the  twenty-six  and
fifty-three  weeks ended July 4, 1998 and January 3, 1998,  respectively.  These
amounts  were  offset as  adjustments  to  Capital in excess of par value in the
consolidated balance sheets at July 4, 1998 and January 3, 1998, respectively.
                                    
                                      -23-

<PAGE>


                  THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES


11.      New Accounting Pronouncements:

         Effective  January 4, 1998,  the  Company  adopted  the  provisions  of
Statement  of  Financial   Accounting   Standards   (SFAS)  No.130,   "Reporting
Comprehensive  Income" which modifies the financial  statement  presentation  of
comprehensive income and its components.  Adoption of this statement expands and
modifies  disclosures and  accordingly has no effect on the Company's  financial
position or operating results during the periods presented.

         In June 1998, the Financial Accounting Standards Board issued Statement
of Financial  Accounting  Standards  No. 133 ("SFAS No.  133"),  Accounting  for
Derivative  Instruments  and  Hedging  Activities.   The  Statement  establishes
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.

12.      Net Income (Loss) Per Share:

         As  of  July  4,  1998,  the  basic  weighted   average  common  shares
outstanding is 6,801,967,  and the weighted average shares outstanding  assuming
dilution is  7,149,484.  The difference of 347,517  represents the  incremental
shares issuable upon exercise of dilutive stock options.
                                      -24-

<PAGE>


                  THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES


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

(a)  Results of  Operations

Twenty-six Weeks Ended July 4, 1998 as Compared to
Twenty-seven Weeks Ended July 5, 1997

         The Company  recorded net sales of $73,934,000 for the twenty-six weeks
ended July 4, 1998,  compared with $203,519,000 for the twenty-seven weeks ended
July 5, 1997,  a net  decrease of  $129,585,000  or 63.7%.  The primary  factors
contributing  to  this  decrease  were  the  sale  of the  Sassco  Fashions  and
Castleberry  product  lines,  the closing of the Outlander  product line and the
extra week of shipping volume in the first quarter 1997,  offset by sales of new
product lines in the first half of 1998. The Sassco,  Castleberry  and Outlander
lines generated $136,107,000,  $2,808,000 and $2,641,000,  respectively,  in net
sales for the  twenty-seven  weeks ended July 5, 1997. The extra week's shipping
volume in the  continuing  product lines  accounted for  $1,225,000 in net sales
during the  twenty-seven  week period ended July 5, 1997.  The  Company's  newly
released  product line,  Haberdashery  by Leslie Fay  Sportswear,  generated net
sales of $2,413,000  for the twenty-six  week period ending July 4, 1998.  After
excluding  the  effect of the above  mentioned  businesses,  the extra  week and
$13,000 of returns relating to the closed Outlander product line, the continuing
product  lines had a net  sales  increase  of  $10,796,000,  or  17.8%,  for the
twenty-six  weeks  ended July 4, 1998 as  compared  to the  comparably  adjusted
period ended July 5, 1997. The Dress product lines generated an increase for the
period of $10,231,000  or 24.4% directly as a result of increased  production of
the Spring and Summer season lines to service anticipated  increases in customer
demand.  Net sales  for the  comparable  continuing  Sportswear  product  lines,
excluding the Haberdashery line, increased by $565,000 or 3.0%.
                                                                  
                                      -25-

<PAGE>


                  THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES


         Gross  profit  for  the  twenty-six   weeks  ended  July  4,  1998  was
$19,487,000  and 26.4% of net sales compared with  $51,833,000 and 25.5% for the
twenty-seven  weeks ended July 5, 1997.  The Sassco  Fashions,  Castleberry  and
Outlander  product  lines  generated   $34,534,000,   $546,000  and  ($331,000),
respectively, in gross profit for the twenty-seven weeks ended July 5, 1997. The
extra week of shipping during the quarter ended July 5, 1997 generated  $443,000
of gross profit. The newly offered Haberdashery line and discontinued  Outlander
line generated gross profit (loss) of $831,000 and ($17,000),  respectively, for
the twenty-six  weeks ended July 4, 1998. The comparable  continuing  businesses
increased gross profit by $2,032,000 for the twenty-six weeks ended July 4, 1998
versus  the  prior  year  while the gross  margin as a  percentage  of net sales
decreased  to 26.1% from 27.4%.  Increased  production  of the Spring and Summer
seasons as discussed above  generated the additional  gross margin volume in the
Dress and  Sportswear  product lines.  The lower gross profit  percentage is due
mostly to  additional  discounts  taken in the Dress  product line due to higher
levels of off-price sales and to discounts offered on late shipments.  The gross
profit from the Dress line,  excluding the effect of the additional  week,  rose
$2,244,000 but the  percentage to net sales fell to 27.4% from 28.7%.  The gross
profit  produced by the Sportswear  line for the twenty-six  weeks ended July 4,
1998, excluding the effect of the extra week and the new product line, decreased
by $212,000 and the  percentage  of net sales  decreased to 22.7% from 24.5% for
the comparable period ended July 5, 1997. This decrease resulted  primarily from
the  competitive  repricing  strategy of the Leslie Fay Sportswear  product line
that was implemented during the second half of 1997.

         Selling,  warehouse,  general and administrative ("SG&A") expenses were
$14,739,000 or 19.9% of net sales and  $37,091,000 or 18.2% of net sales for the
twenty-six  and  twenty-seven  weeks  ended  July 4,  1998  and  July  5,  1997,
respectively.  After excluding the costs associated with the product lines sold,
the pro forma  remaining  business had expenses of  $12,675,000  or 19.6% of net
sales for the  twenty-seven  weeks ended July 5, 1997.  The expense  increase of
$2,064,000 was caused by several items that affected  direct  comparability.  In
the year ago period,  SG&A expenses included a $520,000 reduction resulting from
collecting  receivables in excess of the bad debt reserve established before the
Company  emerged  from  bankruptcy.  The year ago period  included  $814,000  in
transitional,  bankruptcy-related  expenses that were  eliminated  following the
emergence from  bankruptcy.  Also, the year ago period included revenue payments
for support provided the Sassco Fashions product line of $250,000. Adjusting for
these items,  SG&A expenses for the 1998 period  increased by  $2,108,000.  This
year includes an accrual of $1,080,000  for non-cash,  stock based  compensation
for  stock  options  that  were  granted  after  the  Company's  emergence  from
bankruptcy.  Also an additional $303,000 in professional fees have been incurred
due to  requirements  of public filings and investor  relations,  by contracting
Arthur Andersen LLP to also serve as internal  auditors for the company,  and by
contracting  an engineering  firm to work with the Company to improve  operating
efficiency.  The Company has invested an additional  $200,000 in  advertising in
support of its  customers  as well as to launch the  Haberdashery  by Leslie Fay
Sportswear  product line.  Shipping expenses also rose $318,000 despite improved
operating  productivity  due to additional costs caused to ship product received
late from the Company's suppliers.  The remaining $207,000 increase represents a
growth over 1997 of under 2% that supported a 17.8% sales increase.
                                      -26-

<PAGE>


                  THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES

         Other  income  was  $575,000  and  $1,314,000  for the  twenty-six  and
twenty-seven  weeks  ended  July 4,  1998 and July 5,  1997,  respectively.  The
decrease  is due to the  licensing  revenues  related to trade  names which were
spun-off with the Sassco  Fashions  product line,  renegotiated  minimum payment
terms for the HUE legwear  license and excess 1996 licensing  revenues  received
and recognized as income during the first quarter of 1997.

         Depreciation  and  amortization  expense for the twenty-six weeks ended
July 4, 1998 was $70,000 due to the  write-off  of fixed  assets at June 4, 1997
under  fresh-start  reporting.  In  addition,  the  Company  realized  income of
$2,286,000 from  amortization of excess revalued net assets acquired over equity
(see Note 2).  Depreciation and amortization  expense for the twenty-seven weeks
ended July 5, 1997  consisted of  depreciation  on fixed  assets of  $1,617,000,
including  $1,119,000  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.

         Interest  and  financing  costs were  $320,000 and  $1,270,000  for the
twenty-six  and  twenty-seven  weeks  ended  July 4,  1998  and  July  5,  1997,
respectively.  The financing fees under the new CIT Credit Agreement were offset
by income  earned on the cash  invested for the  twenty-six  weeks ended July 4,
1998. The financing fees incurred were significantly below those incurred during
the  twenty-seven  weeks  ended  July 5, 1997 due to the higher  line  needed to
finance the operations of the Sassco Fashions and Castleberry product lines.

         The provision for federal,  state and local income taxes was $2,072,000
and $471,000 for the  twenty-six and  twenty-seven  weeks ended July 4, 1998 and
July 5, 1997,  respectively.  The expense was lower for the  twenty-seven  weeks
period ended July 5, 1997 due to the expected  availability of the net operating
loss carryforwards available in full for the period up to and including the June
4, 1997 Consummation Date (see Note 7).
                                      -27-

<PAGE>


                  THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES


Thirteen Weeks Ended July 4, 1998 as Compared to
Thirteen Weeks Ended July 5, 1997

         The Company  recorded net sales of  $28,676,000  for the thirteen weeks
ended July 4, 1998,  compared with $60,764,000 for the thirteen weeks ended July
5,  1997,  a  net  decrease  of  $32,088,000  or  52.8%.   The  primary  factors
contributing  to  this  decrease  were  the  sale  of the  Sassco  Fashions  and
Castleberry  product lines and the closing of the Outlander product line, offset
by sales of new product  lines.  The Sassco,  Castleberry  and  Outlander  lines
generated $36,877,000, $679,000 and $644,000, respectively, in net sales for the
thirteen  weeks ended July 5, 1997. The Company's  newly released  product line,
Haberdashery by Leslie Fay Sportswear, generated net sales of $1,121,000 for the
thirteen week period ending July 4, 1998. On a comparable basis, after excluding
the effect of the above mentioned businesses and $7,000 of sales in 1998 related
to the closed  Outlander  product line, the  continuing  product lines had a net
sales  increase of  $4,984,000,  or 22.1%,  for the thirteen weeks ended July 4,
1998 as compared to the comparably adjusted period ended July 5, 1997. The Dress
product  lines  generated  an  increase  for the period of  $4,700,000  or 27.9%
directly as a result of  increased  production  of the Spring and Summer  season
lines to service  anticipated  increases in customer  demand.  Net sales for the
comparable continuing Sportswear product lines, excluding the Haberdashery line,
increased by $284,000 or 4.9%.

         Gross profit for the thirteen  weeks ended July 4, 1998 was  $7,489,000
and 26.1% of net sales  compared  with  $15,065,000  and 24.8% for the  thirteen
weeks ended July 5, 1997. The Sassco Fashions, Castleberry and Outlander product
lines generated $9,527,000, $2,000 and ($97,000),  respectively, in gross profit
for the thirteen weeks ended July 5, 1997. The newly offered  Haberdashery  line
generated  gross profit of $428,000  for the thirteen  weeks ended July 4, 1998.
The comparable  continuing  businesses  increased gross profit by $1,428,000 for
the  thirteen  weeks  ended  July 4, 1998  versus the prior year while the gross
margin as a percentage  of comparable  net sales  decreased to 25.0% from 25.6%.
Increased  production  of the  Spring  and Summer  seasons  as  discussed  above
generated the  additional  gross margin volume in both the Dress and  Sportswear
product  lines.  The lower gross profit  percentage  is due mostly to additional
discounts  taken in the Dress  product  line due to higher  levels of  off-price
sales and to  discounts  offered on late  shipments.  The gross  profit from the
Dress line rose  $1,381,000  but the  percentage of net sales fell to 25.9% from
26.6%.  The gross profit  produced by the Sportswear line for the thirteen weeks
ended July 4, 1998,  excluding the effect of the new product line,  increased by
$47,000 and the  percentage  of net sales  increased to 22.4% from 22.0% for the
comparable period ended July 5, 1997.
                                      -28-

<PAGE>


                  THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES


         SG&A expenses were  $7,203,000 or 25.1% of net sales and $13,986,000 or
23.0% of net sales for the  thirteen  weeks ended July 4, 1998 and July 5, 1997,
respectively.  After excluding the costs associated with the product lines sold,
the pro forma  remaining  business  had expenses of  $5,221,000  or 22.5% of net
sales for the comparably adjusted thirteen weeks ended July 5, 1997. The expense
increase  of  $1,982,000  was  caused by  several  items  that  affected  direct
comparability.  In the  year ago  period,  SG&A  expenses  included  a  $520,000
reduction  resulting  from  collecting  receivables  in  excess  of the bad debt
reserve  established  before the Company emerged from  bankruptcy.  The year ago
period included $427,000 in transitional,  bankruptcy-related expenses that were
eliminated  following the emergence from  bankruptcy.  Also, the year ago period
included  revenue payments for support provided the Sassco Fashions product line
of  $100,000.  Adjusting  for these  items,  SG&A  expenses  for the 1998 period
increased by $1,789,000. This year includes an accrual of $684,000 for non-cash,
stock based compensation for stock options that were granted after the Company's
emergence from bankruptcy. Also an additional $259,000 in professional fees have
been incurred due to requirements of public filings and investor  relations,  by
contracting  of Arthur  Andersen LLP to also serve as internal  auditors for the
Company,  and by  contracting  an  engineering  firm to work with the Company to
improve operating efficiency. The Company has invested an additional $117,000 in
advertising in support of its customers as well as to launch the Haberdashery by
Leslie Fay Sportswear product line. Shipping expenses also rose $243,000 despite
improved  operating  productivity due to additional costs caused to ship product
received late from the Company's suppliers. The quarter also included an $85,000
increase  reflecting  new contracts for the four senior  managers which included
base salary increases effective January 4, 1998. The remaining $401,000 increase
represents a growth over 1997 of under 8% that supported a 22.1% sales increase.

         Other income was  $303,000  and  $357,000 for the thirteen  weeks ended
July 4,  1998  and  July  5,  1997,  respectively.  The  decrease  is due to the
renegotiated minimum payment terms for the HUE legwear license.

         Depreciation and amortization expense for the thirteen weeks ended July
4, 1998 was $53,000 due to the  write-off  of fixed assets at June 4, 1997 under
fresh-start  reporting.  In addition,  the Company realized income of $1,143,000
from  amortization  of excess revalued net assets acquired over equity (see Note
2).  Depreciation and amortization  expense for the thirteen weeks ended July 5,
1997 consisted of depreciation on fixed assets of $657,000,  including  $344,000
related to product lines sold,  and  amortization  of the excess  purchase price
over net assets acquired of $189,000, including $102,000 of amortization related
to the lines sold. This amortization  expense related to the leveraged buyout of
The Leslie Fay Company on June 28, 1984.

         Interest  and  financing  costs  were  $130,000  and  $402,000  for the
thirteen weeks ended July 4, 1998 and July 5, 1997, respectively.  The financing
fees under the new CIT Credit Agreement were offset by income earned on the cash
invested for the thirteen  weeks ended July 4, 1998. The financing fees incurred
were significantly below those incurred during the thirteen weeks ended July
                                      -29-

<PAGE>


                  THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES

5, 1997 due to the higher line needed to finance  the  operations  of the Sassco
Fashions and Castleberry product lines.

         The  provision  for federal,  state and local income taxes was $171,000
and  $155,000  for the  thirteen  weeks  ended  July 4,  1998 and July 5,  1997,
respectively.

(b)  Liquidity and Capital Resources

         On June 2, 1997, the Company  obtained  $30,000,000  of  post-emergence
financing (see Note 6), which became effective with the consummation of the Plan
on June 4, 1997. The CIT Credit  Agreement  provides a working capital  facility
commitment  of  $30,000,000,  including  a  $20,000,000  sublimit  on letters of
credit. As of July 4, 1998 the Company was utilizing approximately $6,552,000 of
the CIT Credit Agreement for the letters of credit.

         At July 4, 1998,  there were no cash borrowings  outstanding  under the
CIT Credit  Agreement,  and the Company's cash and cash equivalents  amounted to
$12,354,000.   Of  this  amount,  $3,786,000  is  restricted  to  pay  remaining
administrative  claims  as  defined  in  the  Plan.  Working  capital  increased
$5,237,000,  to  $44,690,000  for the  twenty-six  weeks ended July 4, 1998. The
primary  changes in the  components of working  capital were a decrease in cash,
cash  equivalents  and  short  term  investments  of  $10,448,000,  offset by an
increase  in  net  accounts   receivable  and   inventories  of  $3,015,000  and
$6,884,000,  respectively,  and a decrease of  $5,533,000  in accounts  payable,
accrued expenses and other current  liabilities.  Accounts receivable  increased
due to additional  shipping  volume in the Summer season as well as earlier than
planned Fall  shipments.  Inventories  sold during the period were offset by new
inventory purchases to accommodate the upcoming Fall season.

         Although,  the Company's  results of operations  indicated an operating
income of $7,539,000 for the twenty-six  weeks ended July 4, 1998, these results
are not necessarily indicative of results for an entire year.

         Capital  expenditures were $956,000 for the twenty-six weeks ended July
4, 1998. Capital  expenditures are expected to be $3,000,000 for the fiscal year
1998. The  anticipated  capital  expenditures of $2,044,000 for the remainder of
the year are primarily related to improvements in management information systems
and  fixturing  the  Company's  in-store  shops that are planned to be opened in
1998. The Company believes that its financing arrangements and anticipated level
of internally generated funds will be sufficient to finance its capital spending
during 1998.

         At its  April  14,  1998  meeting,  the  Company's  Board of  Directors
authorized the repurchase of up to $5,000,000 of the Company's common stock. The
repurchase  will be  based  upon the  trading  price  of the  stock  and will be
supervised  by a  subcommittee  of the  Board of  Directors.  While  there is no
assurance  that  any  stock  will be  repurchased,  any  repurchase  made  would
adversely affect the overall liquidity of the Company.
                                      -30-

<PAGE>


                  THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES

         The Company is currently  preparing  definitive  documentation  for the
purchase of selected  assets of The Warren Apparel Group Ltd. a manufacturer  of
dresses  that are sold at "better"  price  points in  departments  stores.  This
acquisition  , if  completed,  will require the  modification  of the  Company's
existing credit facility to provide a substantially higher credit line and other
modifications to covenants and other terms. The Company is currently negotiating
these modifications with its lender.

         In August 1998 the Company entered into a modification of its lease for
its showroom and offices at 1412 Broadway, New York, New York. This modification
extended the lease through August 2008 and included the leasing of approximately
an additional 20,333 square feet of space.

         The  Company  is  not   restricted   from  paying  cash   dividends  or
repurchasing  its  stock  under  the CIT  Credit  Agreement  as  long  as  those
disbursements  do not cause the Company to be in  violation  of the  restrictive
covenants,  as amended, and they do not exceed $5,000,000 in either fiscal years
1998 or  1999.  (Reference  is made  to the  1997  Form  10-K  Note  6(a) to the
Consolidated  Financial  Statements.)  The  Company  has no  plans  to pay  cash
dividends in the foreseeable future.

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

         In the  fourth  quarter  of 1997,  the  Company  began a review  of its
systems and technology to address all business requirements, including Year 2000
compliance.  This review is substantially complete and a plan has been developed
to meet these needs.  Overall,  the plan identifies numerous changes required to
make  the  Company's  systems  Year  2000  compliant.   These  changes  will  be
implemented  in  1998  through  1999  at  an  estimated  cost  of  approximately
$1,500,000 plus the utilization of internal staff and other resources. 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 August
10,  1998,  the Company  implemented  the second phase of its plan by placing in
operation Year 2000 compliant  versions of its accounts payable,  general ledger
and EDI translation systems.

         The  Company  is  also  dependent  on the  efforts  of  its  customers,
suppliers and software  vendors.  The Company's  upgrade of its electronic  data
intercharge  software  will need to be tested with the  Company's  customers  to
confirm  proper  functioning.  The  Company's  customers  and suppliers are also
required to implement  projects to make their  systems and  communications  Year
2000 compliant.  Failure to complete their efforts in a timely way could disrupt
the Company's  operations  including the ability to receive and ship its product
as well as to invoice its customers.  Finally,  the Company's plan is based upon
the  representation of the vendors that market the software packages selected by
the Company. There is no guarantee that these new systems will be compliant
                                      -31-

<PAGE>


                  THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES

under all the circumstances and volume stresses that may actually be required by
the Company's operations through Year 2000.

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

                                      -32-

<PAGE>


                  THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES

PART II  -  OTHER INFORMATION

Item 1.    Legal Proceedings.

         The Company has previously reported the proceedings under chapter 11 of
the  Bankruptcy  Code and other  pending legal  proceedings  in Item 3. - "Legal
Proceedings"  in the 1997 Form l0-K.  The Company's Plan of  Reorganization  was
approved by the creditors and on April 21, 1997, the Bankruptcy  Court confirmed
the Plan. On June 4, 1997,  the Plan was  consummated  and the Company no longer
operates under chapter 11. For information  concerning legal  proceedings at the
end of the second  quarter of 1998,  reference is made to Note 8 of the Notes to
Consolidated Financial Statements contained herein.

         No other legal proceedings were terminated during the second quarter of
1998 or thereafter,  other than ordinary  routine  litigation  incidental to the
business of the Company.

Item 2.    Changes in Securities.

                  None.

Item 3.    Defaults Upon Senior Securities.

                  None.

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

(a)      Date of Annual Meeting of Stockholders - June 3, 1998

(b)      The Election of Eight Directors.

         STOCKHOLDER VOTES
         -----------------
                                        For                        Withheld
                                        ---                        --------

         Clifford B. Cohn               2,455,851                  410
         Mark B. Dickstein              2,456,258                  3
         Chaim Y. Edelstein             2,456,258                  3
         Mark Kaufman                   2,456,258                  3
         Bernard Olsoff                 2,456,258                  3
         John J. Pomerantz              2,456,258                  3
         Robert L. Sind                 2,456,258                  3
         John A. Ward                   2,456,258                  3

                                                                        
                                      -33-

<PAGE>


                  THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES

(c)      Approval of an  amendment to the Amended and  Restated  Certificate  of
         Incorporation  of the  Company to  increase  the  number of  authorized
         shares of Common Stock from 9,500,000 to 20,000,000 shares.

         STOCKHOLDER VOTES
         -----------------

         For:                       1,877,643
         Against:                     578,777
         Abstentions:                      21
         Broker Non-Votes:                 --

(d)      Approval of an  amendment to the Amended and  Restated  Certificate  of
         Incorporation  of the Company to permit  stockholder  action by written
         consent.

         STOCKHOLDER VOTES
         -----------------

         For:                       2,443,808
         Against:                      12,450
         Abstentions:                       3
         Broker Non-Votes:                 --

(e)      Approval of the provision of the Company's 1997 Management Stock Option
         Plan  limiting the number of shares for which options may be granted to
         any one employee  over the life of such plan and the  amendment to such
         plan to modify the terms of certain options contemplated thereunder.

         STOCKHOLDER VOTES
         -----------------

         For:                       2,265,095
         Against:                     191,091
         Abstentions:                     153
         Broker Non-Votes:                 --

(f)      Approval of an amendment to the Company's  1997  Non-Employee  Director
         Stock  Option  and Stock  Incentive  Plan to permit  the grant of stock
         awards thereunder.

         STOCKHOLDER VOTES
         -----------------

         For:                       2,443,306
         Against:                      12,790
         Abstentions:                     153
         Broker Non-Votes:                 --
                                                    
                                      -34-

<PAGE>


                  THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES

(g)      Ratification  of the  action of the Board of  Directors  in  appointing
         Arthur Andersen LLP as independent accountants of the Company.

         STOCKHOLDER VOTES
         -----------------

         For:                       2,448,710
         Against:                       7,547
         Abstentions:                       3
         Broker Non-Votes:                 --

Item 5.    Other Information.

         None.

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

                  a)       Exhibits

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


                                                                            
                                      -35-

<PAGE>





                                   SIGNATURES

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

Date:  August 18, 1998                 THE LESLIE FAY COMPANY, INC.
                                       ----------------------------
                                                (Company)




                                       By:/s/ Warren T. Wishart
                                          -----------------------------------
                                          Warren T. Wishart
                                          Senior Vice President - Administration
                                          and Finance, Chief Financial Officer
                                          and Treasurer

                                      -36-

<PAGE>





                                INDEX TO EXHIBITS
                                -----------------



Exhibit No.       Description
----------        -----------

     10.10        Employment Agreement dated as of  January 4, 1998 between the
                  Company and John J. Pomerantz

     10.11        Employment Agreement dated as of  January 4, 1998 between the 
                  Company and John Ward.

     10.12        Employment Agreement dated as of  January 4, 1998 between the 
                  Company and Warren T. Wishart.

     10.13        Employment Agreement dated as of  January 4, 1998 between the 
                  Company and  Dominick Felicetti.

     10.14        Amended 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.

      27          Financial Data Schedule.

                                       E-1