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





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


For the Quarterly Period ended October 3, 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 5,994,900 shares of Common Stock outstanding at October 3, 1998 
--------------------------------------------------------------------------------
                                                                                

<PAGE>


                  THE LESLIE FAY COMPANY, INC AND SUBSIDIARIES

<TABLE>
<CAPTION>


                                      INDEX

                                                                                          Page No 
                                                                                          -------


PART I  - FINANCIAL INFORMATION

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

                  Consolidated Statements of Operations for the
                     Thirty-Nine, Eighteen and Twenty-Two Weeks Ended
                     October 3, 1998, October 4, 1997 and June 4, 1997, respectively           4

                  Consolidated Statements of Operations for the
                     Thirteen Weeks Ended October 3, 1998 and
                     October 4, 1997, respectively                                             5

                  Consolidated Statements of Cash Flows for the
                     Thirty-Nine, Eighteen and Twenty-Two Weeks Ended
                     October 3, 1998, October 4, 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                                         17

PART II  -  OTHER INFORMATION

Item 1   Legal Proceedings                                                                    25
Item 2   Changes in Securities                                                                25
Item 3   Defaults Upon Senior Securities                                                      25
Item 4   Submission of Matters to a Vote of Security Holders                                  25
Item 5   Other Information                                                                    25
Item 6   Exhibits and Reports on Form 8-K                                                     25

SIGNATURES                                                                                    26

INDEX TO EXHIBITS                                                                           E-1
</TABLE>

                                        2

<PAGE>

                  THE LESLIE FAY COMPANY, INC AND SUBSIDIARIES

                                CONSOLIDATED BALANCE SHEETS
                                 (In thousands)
<TABLE>
<CAPTION>

                                                                                            UNAUDITED           AUDITED     

                                                                                             October 3,        January 3,   
                                          ASSETS                                                1998               1998     
                                                                                           ---------------     ------------
                                                                                                           
<S>                                                                                            <C>           <C>    
Current Assets:  
       Cash and cash equivalents                                                                     $557          $18,455
       Restricted cash and cash equivalents                                                         3,530            1,358
       Restricted short term investments                                                                -            2,989
       Accounts receivable- net of allowances for possible losses                        
           of $3,470 and $3,236, respectively                                                      32,843            9,747
       Inventories                                                                                 25,116           26,701
       Prepaid expenses and other current assets                                                    1,066              807
                                                                                           ---------------     -----------
          Total Current Assets                                                                     63,112           60,057

       Property, plant and equipment, at cost, net of                                                           
          accumulated depreciation of $221 and $14, respectively                                    2,141              845
       Deferred charges and other assets                                                              149              149
                                                                                           ---------------     -----------

       Total Assets                                                                               $65,402          $61,051
                                                                                           ===============     ===========

                         LIABILITIES AND STOCKHOLDERS' EQUITY                            
Current Liabilities:                                                                     
       Short term debt                                                                             $1,494      $         -
       Accounts payable                                                                             8,570           11,530
       Accrued expenses and other current liabilities                                               4,781            4,542
       Accrued expenses and other current confirmation liabilities                                  3,530            4,347
       Income taxes payable                                                                         2,740               25
       Current portion of capitalized leases                                                           46              160
                                                                                           ---------------     -----------
          Total Current Liabilities                                                                21,161           20,604

       Excess of revalued net assets acquired over equity under fresh-start reporting,   
            net of accumulated amortization of $6,096 and $2,667, respectively                      7,612           11,041
       Long term debt-capitalized leases                                                               29               49
       Deferred liabilities                                                                           366              143
                                                                                           ---------------     -----------
          Total Liabilities                                                                        29,168           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, respectively                                                68               68
       Capital in excess of par value                                                              28,564           25,837
       Accumulated retained earnings                                                               12,225            3,309
                                                                                           ---------------     -----------
                                                                                                   40,857           29,214
       Less:                                                                             
       Treasury stock at cost , 817 and -0- common shares, respectively                             4,623                -
                                                                                           ---------------     ------------
              Total Stockholders' Equity                                                           36,234           29,214
                                                                                           ---------------     ------------

       Total Liabilities and Stockholders' Equity                                                 $65,402         $61,051
                                                                                           ===============     ============
</TABLE>


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

                                        3

<PAGE>
                  THE LESLIE FAY COMPANY, INC AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                 (In thousands, except share and per share data)
<TABLE>
<CAPTION>
                                                                          UNAUDITED                  AUDITED
                                                                         Reorganized               Predecessor
                                                                           Company                   Company
                                                              ------------------------------    --------------
                                                                 Thirty-Nine       Eighteen         Twenty-Two
                                                                Weeks Ended      Weeks Ended       Weeks Ended
                                                                  October 3,      October 4,          June 4,
                                                                    1998            1997                1997
                                                              --------------  --------------    --------------

<S>                                                             <C>              <C>              <C>                        
Net Sales                                                          $122,723         $47,097          $197,984
Cost of Sales                                                        91,087          36,242           147,276
                                                                                                             

     Gross profit                                                    31,636          10,855            50,708
                                                                                                             

Operating Expenses:                                         
  Selling, warehouse, general and administrative expenses            20,735           7,856            35,459
  Non cash stock based compensation                                   1,430             120                  
  Depreciation and amortization expense                                 198               3             2,090
                                                                                                             
     Total operating expenses                                        22,363           7,979            37,549

  Other income                                                         (877)           (462)           (1,196
  Amortization of excess revalued net assets acquired over equity    (3,429)         (1,524)                 
                                                                                                             

  Total operating expenses, net                                      18,057           5,993            36,353
                                                                                                             

Operating income                                                     13,579           4,862            14,355

Interest and Financing Costs (excludes contractual interest of
    $ 0  and $ 0  and $7,513, respectively)                             680             212             1,372
                                                                                                             

  Income before reorganization costs, taxes, gain           
    on sale, fresh start revaluation and extraordinary item          12,899           4,650            12,983

Reorganization Costs                                                                                    3,379
                                                                                                             

    Income before taxes, gain on sale,                      
    fresh start revaluation and extraordinary item                   12,899           4,650             9,604

Provision for taxes                                                   3,983              65               451
                                                                                                             


Net Income before gain on sale, fresh start                 
  revaluation and extraordinary item                                  8,916           4,585             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 discharge                                  -               -           136,341
                                                              ==============  ==============    =============
   Net Income                                                        $8,916          $4,585          $145,494
                                                              ==============  ==============    =============

   Net Income Per Common Share                              
        Basic                                                         $1.33           $0.67           *      
                                                              ==============  ==============    =============
        Diluted                                                       $1.26           $0.67           *      
                                                              ==============  ==============    =============

  Weighted Average Common Shares Outstanding                
        Basic                                                     6,718,960       6,800,000           *      
                                                              ==============  ==============    =============
        Diluted                                                   7,065,228       6,842,624           *      
                                                             ==============  ==============    =============
</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>
                  THE LESLIE FAY COMPANY, INC AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                 (In thousands, except share and per share data)

                                   (UNAUDITED)
<TABLE>
<CAPTION>
                                                                                         Thirteen              Thirteen
                                                                                       Weeks Ended           Weeks Ended
                                                                                        October 3,            October 4,
                                                                                           1998                  1997
                                                                                     -----------------     -----------------

<S>                                                                                 <C>                   <C>    
Net Sales                                                                                     $48,789               $41,562
Cost of Sales                                                                                  36,640                31,832
                                                                                     -----------------     -----------------

     Gross Profit                                                                              12,149                 9,730
                                                                                     -----------------     -----------------

Operating Expenses:                                                               
  Selling, warehouse, general and administrative expenses                                       7,084                 6,224    
  Non-cash stock based compensation                                                               342                   120    
  Depreciation and amortization expense                                                           128                     3    
                                                                                     -----------------     -----------------
     Total operating expenses                                                                   7,554                 6,347    

  Other income                                                                                   (302)                 (344)
  Amortization of excess revalued net assets acquired over equity                              (1,143)               (1,143)   
                                                                                     -----------------     -----------------

  Total operating expenses, net                                                                 6,109                 4,860    
                                                                                     -----------------     -----------------

Operating income                                                                                6,040                 4,870

Interest and financing costs                                                                      360                   314    
                                                                                     -----------------     -----------------

  Income before taxes                                                                           5,680                 4,556

Provision for taxes                                                                             1,911                    45
                                                                                     -----------------     -----------------

  Net Income                                                                                   $3,769                $4,511        
                                                                                     =================     =================

   Net Income Per Common Share                                                    
      - Basic                                                                                   $0.58                 $0.66
                                                                                     =================     =================
      - Diluted                                                                                 $0.55                 $0.66
                                                                                     =================     =================

  Weighted Average Common Shares Outstanding                                      
      - Basic                                                                               6,552,033             6,800,000
                                                                                     =================     =================
      - Diluted                                                                             6,842,790             6,877,190
                                                                                     =================     =================

</TABLE>

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

                                        5
<PAGE>


                  THE LESLIE FAY COMPANY, INC AND SUBSIDIARIES


<TABLE>
<CAPTION>
 

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

                                                                               Thirty-Nine            Eighteen        Twenty-Two 
                                                                              Weeks Ended            Weeks Ended      Weeks Ended
                                                                           October 3, 1998        October 4, 1997    June 4, 1997
                                                                        ------------------------------------------------------------

                                   
<S>                                                                            <C>                    <C>                <C>        
Cash Flows from Operating Activities:
    Net income                                                                   $8,916                 $4,585             $145,494 
    Adjustments to reconcile net income to net cash                     
      (used in) provided by operating activities:                       
      Depreciation and amortization                                                 207                      3                2,222
      Amortization of excess revalued net assets acquired                                       
        over equity                                                              (3,429)                (1,524)                   - 
      Provision for possible losses on accounts receivable                          (25)                   (27)                 199
      Provision for non-cash stock based compensation                             1,430                    120                    - 
      Gain on sale of fixed assets                                                    -                      -                 (347)
      Decrease (increase) in:                                                                   
        Restricted short term investments                                         2,989                 (2,989)                   -
        Accounts receivable                                                     (23,071)               (13,239)              (1,248)
        Inventories                                                               1,585                  1,757               25,538 
        Prepaid expenses and other current assets                                  (259)                   (94)                 (66)
        Deferred charges and other assets                                             -                   (216)                 125
      (Decrease) increase in:                                           
        Accounts payable, accrued expenses and other                    
          current liabilities                                                    (2,721)                  (285)              (4,167)
        Income taxes payable                                                      2,715                   (751)              (1,515)
        Deferred credits and other noncurrent liabilities                           223                      -                  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                                    1,297                      -                    - 
                                                                        ---------------------------------------     ----------------
          Total adjustments                                                     (19,059)               (17,245)            (112,764)
                                                                        ---------------------------------------     ----------------
          Net cash (used in) provided by operating activities                   (10,143)               (12,660)              32,730
                                                                        ---------------------------------------     ----------------

Cash Flows from Investing Activities:                                   
    Capital expenditures                                                         (1,503)                  (378)              (3,731)
    Treasury stock repurchases                                                   (4,623)                     -                  467 
    Proceeds from sale of Castleberry                                                 -                      -                  600
    Cash paid to sell/transfer the Sassco Fashions line                               -                      -              (10,963)
                                                                        ---------------------------------------     ----------------
          Net cash (used in) investing activities                                (6,126)                  (378)             (13,627)
                                                                        ---------------------------------------     ----------------

Cash Flows from Financing Activities:                                   
      Short term debt                                                             1,494                      -                    - 
      Repayment - capitalized leases                                               (134)                   (76)                   -
      Payment of confirmation liabilities under Plan of Reorganization             (817)               (17,059)                   -
                                                                        ---------------------------------------     ----------------
          Net cash provided by (used in) financing activities                       543                (17,135)                   - 
                                                                        ---------------------------------------     ----------------

Net (decrease) increase in cash and cash equivalents                            (15,726)               (30,173)              19,103

Cash and cash equivalents, at beginning of period                                19,813                 41,080               21,977
                                                                        ---------------------------------------     ----------------

Cash and cash equivalents, at end of period                                      $4,087                $10,907              $41,080
                                                                        =======================================     ================

</TABLE>

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

                                        6

<PAGE>


                  THE LESLIE FAY COMPANY, INC AND SUBSIDIARIES


                   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/A for the  Fiscal  Year  ended  January  3, 1998 (the "1997 Form  10-K/A").
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 eighteen  weeks ended October 4, 1997 to conform to the
current quarterly presentation.

                                        7

<PAGE>


                  THE LESLIE FAY COMPANY, INC AND SUBSIDIARIES


2.       Reorganization Case and Fresh-Start Reporting:

         On April 5, 1993 ("the Filing Date"),  The Leslie Fay  Companies,  Inc.
("Leslie Fay") and certain of its subsidiaries  filed a voluntary petition under
chapter 11 of the Bankruptcy Code (the "Bankruptcy Code").

         Substantially  all  liabilities  as of the Filing Date were  subject to
compromise. On December 5, 1996, Leslie Fay filed a Disclosure Statement for the
Amended Joint Plan of Reorganization  ("the Plan") pursuant to chapter 11 of the
Bankruptcy Code (the "Disclosure  Statement"),  which was subsequently  amended.
The Plan  provided  for,  among other  things,  the  separation  of Leslie Fay's
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.  Leslie Fay  obtained  Bankruptcy  Court  approval  of the  Disclosure
Statement on February 28, 1997. The creditors approved the Plan 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.

3.       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 purchases 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.

4.       Inventories:

         Inventories consist of the following:

                                            Unaudited
                                            October 3,        January 3,
                                              1998              1998
                                                   (In Thousands)

Raw materials                                $10,189           $  9,638
Work in process                                4,094              4,540
Finished goods                                10,833             12,523
                                            --------           --------

   Total inventories                        $ 25,116           $ 26,701
                                            ========           ========

                                       8
<PAGE>


                  THE LESLIE FAY COMPANY, INC AND SUBSIDIARIES

5.       Debt:

         On June 2, 1997, 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.  Direct  borrowings  bore interest at prime plus 1.0% (9.25% at October 3,
1998) and the CIT Credit Agreement  requires a fee, payable monthly,  on average
outstanding letters of credit at a rate of 2% annually.  There was $1,494,000 in
direct  borrowings  outstanding under the CIT Credit Agreement and approximately
$6,694,000  was  committed  under  unexpired  letters of credit as of October 3,
1998.

         On  October  27,  1998,  an  amendment  to the June 2, 1997 CIT  Credit
Agreement  was  signed  increasing  the  maximum  working  capital  facility  to
$37,000,000  throughout the remainder of 1998 and to  $42,000,000  thereafter as
well as increasing the letter of credit  sublimit to  $25,000,000.  The interest
rate on  direct  borrowings  was  decreased  to prime  minus  1/4% (7 3/4% as of
November 13, 1998).

         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.

                                        9

<PAGE>

                  THE LESLIE FAY COMPANY, INC AND SUBSIDIARIES



6.       Income Taxes:

         The provision for state and federal income taxes is $3,983,000, $65,000
and $451,000 for the thirty-nine, eighteen and twenty-two weeks ended October 3,
1998, October 4, 1997 and June 4, 1997, respectively, and $1,911,000 and $45,000
for the thirteen weeks ended October 3, 1998 and October 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 $2,200,000 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.

7.       Commitments and Contingencies:

         As  discussed  in Note 2, 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
subsidiaries  prior to such filings 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.
Although 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,  by  agreement  among  the  parties  and  the
Bankruptcy Court that matter will be held in abeyance pending the outcome of the
Claimants'  appeal to the Second  Circuit  from the Order  entirely  disallowing
their claims.
 

                                       10

<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  on July  21,  1998.  The  Claimants  filed a  notice  of  appeal  of the
affirmation  of the  Bankruptcy  Court order on August 17, 1998,  and an amended
notice of appeal on September 8, 1998.

         Several  former  employees of the Company,  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 it is
expected that a summary  judgment motion will be filed by the Company to dismiss
the  action  after a  final  order  has  been  entered  in the  above  described
Bankruptcy Court matter.

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

         In  February  1993,  the SEC  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 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

                                       11

<PAGE>

                  THE LESLIE FAY COMPANY, INC AND SUBSIDIARIES


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.  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 appealed and the Company cross-appealed to recover its costs
and expenses in the litigation. The parties to the litigation and Kasper A.S.L.,
Ltd.  executed a Settlement  Agreement  and Release  dated as of August 28, 1998
(the  "Agreement")  dismissing the appeals and  cross-appeal  with prejudice and
releasing each other from all other claims except with regard to the enforcement
of the  Bankruptcy  Court's  Final  Judgement  and Order With  Injunction  dated
January 27, 1998 (the "Final  Order"),  which Nipon and  American  Pop agreed to
abide by as part of the  settlement.  Judge Barbara S. Jones,  the United States
District  Court Judge to whom the appeals and  cross-appeal  had been  assigned,
approved a  Stipulation  and Order  Dismissing  Appeals and  Cross-Appeal  which
dismissed  the appeals and  cross-appeal  and provided  that the District  Court
retain   jurisdiction   over  the  parties  for  the  purposes  of   considering
applications  to enforce the Final Order.  Judge Gallet of the Bankruptcy  Court
approved a Stipulation and Order  Dismissing Any Remaining  Claims,  executed by
the parties,  which  dismissed with  prejudice the Company's  claims for damages
under the Final Order which had accrued up to the date of the  Agreement and any
other claims not resolved by the Final Order,  and provided that the  Bankruptcy
Court  retain  jurisdiction  over the  parties  for the  purpose of  considering
applications  to enforce the Final Order.  The Board of Directors of the Company
approved the terms of the settlement.

8.       Stockholders' Equity:

         On June 3, 1998, the Board of Directors declared a two-for-one split of
the Company's  common stock to stockholders of record on June 17, 1998 which was
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 value 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.

         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


                                       12

<PAGE>

                  THE LESLIE FAY COMPANY, INC AND SUBSIDIARIES


November  1997 and to  20,000,000  shares  with a par value of $.01 per share in
June 1998.

         In addition,  500,000 shares of Preferred Stock 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  June 3, 1998.  This  amendment  was
approved at the annual stockholders meeting on June 3, 1998. As a result, 12,000
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 value to the common stock account.


 9.      Stock Option Plan:

         The Company currently has in effect two stock option 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.                                    

                                       13

<PAGE>


                  THE LESLIE FAY COMPANY, INC AND SUBSIDIARIES



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 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 November 13, 1998,
options for 30,000 shares 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 anniversary, and the final 34% on the third anniversary of the grant.
As of November 13,  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,  of which 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 November 13, 1998,
none of these stock options have been exercised or forfeited.

                                       14
<PAGE>

                  THE LESLIE FAY COMPANY, INC AND SUBSIDIARIES


         At October 3, 1998 there were currently outstanding options granted but
not  exercised  under the  Management  Plan to  purchase  1,142,588  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 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 of the four subsequent  non-employee directors 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 November
13, 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 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 issued  12,000  shares of Common  Stock to its six  non-employee
directors.  Through the  thirty-nine  weeks ended  October 3, 1998,  the Company
recorded $30,000 of non-cash stock based compensation related to these shares.


                                       15
<PAGE>


                  THE LESLIE FAY COMPANY, INC AND SUBSIDIARIES



Accounting for Stock Option Compensation

         On  June  4,  1997,   effective  with  the  Company's   emergence  from
bankruptcy,  the Company  adopted  the  provisions  of  Statement  of  Financial
Accounting Standards ("SFAS") No.123, "Accounting for Stock-Based Compensation."
Under SFAS No. 123, the Company has recorded $1,400,000 and $120,000 of non-cash
stock  based  compensation  expense  for the  thirty-nine  and forty weeks ended
October 3, 1998 and October 4, 1997, respectively.  These amounts were offset as
adjustments  to  Capital  in  excess of par  value in the  consolidated  balance
sheets.

10.      New Accounting Pronouncements:

         Effective  January 4, 1998, the Company  adopted the provisions of 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
as the Company has no items that would be considered other comprehensive income.

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

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

11.      Net Income Per Share:

         For the  thirty-nine  weeks ended October 3, 1998,  the basic  weighted
average common shares outstanding is 6,718,960,  and the weighted average shares
outstanding assuming dilution is 7,065,228. The difference of 346,268 represents
the incremental shares issuable upon exercise of dilutive stock options.

                                       16

<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

Thirty-Nine Weeks Ended October 3, 1998 as Compared to
Forty Weeks Ended October 4, 1997

         The Company  recorded  net sales of  $122,723,000  for the  thirty-nine
weeks ended  October 3, 1998,  compared  with  $245,081,000  for the forty weeks
ended  October 4, 1997, a net  decrease of  $122,358,000  or 49.9%.  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 $5,191,000,  respectively,  in net
sales for the forty  weeks  ended  October 4, 1997.  The extra  week's  shipping
volume in the  continuing  product lines  accounted for  $1,225,000 in net sales
during the forty weeks  ended  October 4, 1997.  The  Company's  newly  released
product  line,  Haberdashery  by Leslie Fay  Sportswear,  generated net sales of
$5,581,000  for the  thirty-nine  week  period  ending  October 3,  1998.  After
excluding the effect of the above  mentioned  product lines,  the extra week and
$14,000 of returns in 1998 relating to the closed  Outlander  product line,  the
continuing product lines had a net sales increase of $17,406,000,  or 17.4%, for
the  thirty-nine  weeks  ended  October 3, 1998 as  compared  to the  comparably
adjusted  period ended October 4, 1997.  The Dress  product  lines  generated an
increase  for the  period  of  $15,482,000  or 25.5%  directly  as a  result  of
increased  production  of the Spring  through  Holiday  season  lines to service
increased  customer demand. Net sales for the comparable  continuing  Sportswear
product lines, excluding the Haberdashery line, increased by $1,924,000 or 4.9%.

         Gross  profit  for the  thirty-nine  weeks  ended  October  3, 1998 was
$31,636,000  and 25.8% of net sales compared with  $61,563,000 and 25.1% for the
forty  weeks  ended  October  4,  1997.  The Sassco  Fashions,  Castleberry  and
Outlander   product  lines   generated   $34,533,000,   $545,000  and  $217,000,
respectively,  in gross  profit for the forty weeks ended  October 4, 1997.  The
extra  week of  shipping  during the  quarter  ended  October 4, 1997  generated
$443,000 of gross profit.  The newly offered  Haberdashery line and discontinued
Outlander  line  generated  gross profit  (loss) of  $1,729,000  and  ($20,000),
respectively,  for the  thirty-nine  weeks ended October 3, 1998. The comparable
continuing  businesses  increased gross profit by $4,102,000 for the thirty-nine
weeks ended  October 3, 1998  versus the prior year while the gross  margin as a
percentage of net sales decreased to 25.5% from 25.9%.  Increased  production of
the Spring through  Holiday  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 $2,924,000 but the percentage to net

                                       17

<PAGE>
                  THE LESLIE FAY COMPANY, INC AND SUBSIDIARIES


sales fell to 26.1% from 27.9%. The gross profit produced by the Sportswear line
for the  thirty-nine  weeks ended  October 3, 1998,  excluding the effect of the
extra week and the new product line,  increased by $1,178,000 and the percentage
of net sales  increased  to 24.5% from  22.7% for the  comparable  period  ended
October 4, 1997.

         Selling,  warehouse,  general and administrative ("SG&A") expenses were
$20,735,000 or 16.9% of net sales and  $43,315,000 or 17.7% of net sales for the
thirty-nine  and  forty  weeks  ended  October  3,  1998 and  October  4,  1997,
respectively.  After excluding the costs associated with the product lines sold,
the pro forma  remaining  business had expenses of  $18,649,000  or 17.6% of net
sales for the forty  weeks  ended  October  4, 1997.  The  expense  increase  of
$2,086,000 was caused by several items that affected  direct  comparability.  In
the prior period,  SG&A expenses  included a $532,000  reduction  resulting from
collecting  receivables in excess of the bad debt reserve established before the
Company  emerged  from  bankruptcy.   The  prior  period  included  $814,000  in
transitional,  bankruptcy-related  expenses that were  eliminated  following the
emergence from bankruptcy and 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 $2,118,000.  An additional $589,000 in professional
fees was  incurred  in 1998 in  connection  with  public  filings  and  investor
relations,  by outsourcing the internal audit function,  contracting consultants
to  develop a three  year  management  information  plan and by  contracting  an
engineering firm to work with the Company to improve operating  efficiency.  The
Company has invested an  additional  $381,000 in  advertising  in support of its
customers as well as to launch the Haberdashery by Leslie Fay Sportswear product
line.   Shipping   expenses  also  rose  $217,000  despite  improved   operating
productivity  due to the additional costs to ship product received late from the
Company's  suppliers.  Occupancy  expenses increased $239,000 as a result of the
costs incurred with obtaining additional space to house the offices of the newly
acquired  Warren Group  product line and the  extension of the lease for the New
York  showroom  space  through  August 2008.  The  remaining  $692,000  increase
represents a growth over 1997 of 3.7% that supported a 17.4% sales increase.

         Non-cash,  stock  based  compensation  for stock  options  and  outside
director  compensation  that was  granted  after the  Company's  emergence  from
bankruptcy for the thirty-nine and forty weeks ended October 3, 1998 and October
4, 1997 was $1,430,000 and $120,000, respectively.

         Other income was $877,000 and $1,658,000 for the  thirty-nine and forty
weeks ended October 3, 1998 and October 4, 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.

                                       18

<PAGE>

                  THE LESLIE FAY COMPANY, INC AND SUBSIDIARIES


         Depreciation  and  amortization  expense for the  thirty-nine and forty
weeks ended  October 3, 1998 and October 4, 1997 was  $198,000  and  $2,093,000,
respectively. Depreciation and amortization for the forty weeks ended October 4,
1997 included  $1,119,000 related to the Sassco Fashions and Castleberry product
lines sold during 1997. The remaining decrease was due to the write-off of fixed
and intangible assets at June 4, 1997 under fresh-start reporting.  In addition,
the Company  realized  income of $3,429,000 and $1,524,000 for the periods ended
October 3, 1998 and October 4, 1997,  respectively,  from amortization of excess
revalued net assets acquired over equity.

         Interest  and  financing  costs were  $680,000 and  $1,584,000  for the
thirty-nine  and  forty  weeks  ended  October  3,  1998 and  October  4,  1997,
respectively.  The financing fees under the CIT Credit  Agreement were offset by
income  earned on the cash invested for the  thirty-nine  weeks ended October 3,
1998. The financing fees incurred were significantly below those incurred during
the forty weeks  ended  October 4, 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 $3,983,000
and  $516,000  for the  thirty-nine  and forty weeks  ended  October 3, 1998 and
October 4, 1997,  respectively.  The expense was lower for the forty weeks ended
October 4, 1997 due to the  utilization of  pre-consummation  net operating loss
carryovers available in full for the period up to and including the June 4, 1997
Consummation Date (see Note 6).

                                       19

<PAGE>

                  THE LESLIE FAY COMPANY, INC AND SUBSIDIARIES


Thirteen Weeks Ended October 3, 1998 as Compared to
Thirteen Weeks Ended October 4, 1997

         The Company  recorded net sales of  $48,789,000  for the thirteen weeks
ended October 3, 1998,  compared with  $41,562,0000 for the thirteen weeks ended
October 4, 1997, a net increase of  $7,227,000  or 17.4%.  The  Company's  newly
released  product line,  Haberdashery  by Leslie Fay  Sportswear,  generated net
sales of $3,168,000  for the thirteen week period  ending  October 3, 1998.  The
closed  Outlander  product  line  generated  $2,550,000  in net sales during the
thirteen weeks ended October 4, 1997. The  continuing  comparable  product lines
had a net sales increase of $6,609,000,  or 16.9%,  for the thirteen weeks ended
October 3, 1998. The Dress product lines generated an increase for the period of
$5,251,000 or 27.7% directly as a result of increased production of the Fall and
Holiday season lines to service  anticipated  increases in customer demand.  Net
sales for the comparable  continuing  Sportswear  product  lines,  excluding the
Haberdashery  line,  increased by  $1,359,000  or 6.8% mostly as a result of the
Fall season shipping being  completed in the third quarter of 1998.  These early
shipments  will  result in an  offsetting  decrease  in the fourth  quarter  for
comparable Sportswear product line net sales.

         Gross  profit  for  the  thirteen  weeks  ended  October  3,  1998  was
$12,149,000  and 24.9% of net sales  compared with  $9,730,000 and 23.4% for the
thirteen  weeks ended  October 4, 1997.  The  Outlander  product line  generated
$548,000 in gross profit for the thirteen weeks ended October 4, 1997. The newly
offered  Haberdashery  line generated  gross profit of $898,000 for the thirteen
weeks ended October 3, 1998.  The  comparable  continuing  businesses  increased
gross profit by $2,069,000  for the thirteen  weeks ended October 3, 1998 versus
the prior year while the gross margin as a percentage  of  comparable  net sales
increased  to 24.7% from  23.5%.  Increased  production  of the Fall and Holiday
seasons  for the  Dress  product  line  and the  complete  shipment  of the Fall
Sportswear  line,  as discussed  above,  generated the  additional  gross margin
volume. The increased gross margin percent is due to lower costs achieved within
the sportswear  product line offset by additional  discounts  taken in the Dress
product line due to higher levels of off-price sales and additional  concessions
to regular accounts.  The gross profit from the Dress line rose $680,000 but the
percentage to net sales fell to 23.4% from 26.3%.  The gross profit  produced by
the Sportswear line for the thirteen weeks ended October 3, 1998,  excluding the
effect of the new product line,  increased by $1,389,000  and the  percentage of
net sales increased to 26.1% from 20.9% for the comparable  period ended October
4, 1997.

                                       20
<PAGE>


                  THE LESLIE FAY COMPANY, INC AND SUBSIDIARIES


         SG&A expenses were  $7,084,000 or 14.5% of net sales and  $6,224,000 or
15.0% of net sales for the thirteen  weeks ended  October 3, 1998 and October 4,
1997, respectively. The expense increase of $860,000 was caused by several items
that  affected  direct  comparability.  In the period ended  October 3, 1998, an
additional  $286,000 in  professional  fees has been incurred in connection with
public  filings and  investor  relations,  by  outsourcing  the  internal  audit
function, contracting consultants to develop a three year management information
plan and by contracting an engineering  firm to work with the Company to improve
operating  efficiency.  The Company has also invested an additional  $181,000 in
advertising in support of its customers as well as to launch the Haberdashery by
Leslie Fay Sportswear product line. Occupancy expenses rose $155,000 as a result
of the costs  incurred with obtaining  additional  space to house the offices of
the newly acquired  Warren Group product line and the extension of the lease for
the New York showroom space through August 2008. The remaining $238,000 increase
represents a growth over 1997 of 3.8% that supported a 17.4% sales increase.

         Non-cash  stock  based  compensation  for  stock  options  and  outside
director  compensation  that was  granted  after the  Company's  emergence  from
bankruptcy  for the thirteen weeks ended October 3, 1998 and October 4, 1997 was
$342,000 and $120,000, respectively.

         Other income was  $302,000  and  $344,000 for the thirteen  weeks ended
October 3, 1998 and October 4, 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
October 3, 1998 and October 4, 1997,  respectively,  was $128,000 and $3,000 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  for both  periods  from
amortization of excess revalued net assets acquired over equity.

         Interest  and  financing  costs  were  $360,000  and  $314,000  for the
thirteen  weeks  ended  October 3, 1998 and October 4, 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 October 3, 1998 and October 4,
1997.

         The provision for federal,  state and local income taxes was $1,911,000
and $45,000 for the  thirteen  weeks ended  October 3, 1998 and October 4, 1997,
respectively. The expense was lower for the thirteen weeks ended October 4, 1997
due to  the  utilization  of  pre-consummation  net  operating  loss  carryovers
available  in  full  for  the  period  up to and  including  the  June  4,  1997
Consummation Date (see Note 6).                               

                                       21

<PAGE>


                  THE LESLIE FAY COMPANY, INC AND SUBSIDIARIES



(b)  Liquidity and Capital Resources

         On June 2, 1997, the Company  obtained  $30,000,000  of  post-emergence
financing (See Note 5), which became effective with the consummation of the Plan
on June 4, 1997. The CIT Credit  Agreement  provided a working capital  facility
commitment  of  $30,000,000,  including  a  $20,000,000  sublimit  on letters of
credit. As of October 3, 1998 the Company was utilizing approximately $6,694,000
of the  CIT  Credit  Agreement  for  the  letters  of  credit,  and  there  were
outstanding cash borrowings of $1,494,000.

         On  October  27,  1998 an  amendment  to the June 2,  1997  CIT  Credit
Agreement  was  signed  increasing  the  maximum  working  capital  facility  to
$37,000,000  throughout the remainder of 1998 and to  $42,000,000  thereafter as
well as increasing the letter of credit sublimit to $25,000,000.

         At October 3, 1998 the Company's cash and cash equivalents  amounted to
$4,087,000 of which  $3,530,000  is  restricted to pay remaining  administrative
claims  as  defined  in the  Plan.  Working  capital  increased  $2,498,000,  to
$41,951,000 for the thirty-nine weeks ended October 3, 1998. The primary changes
in the components of working capital were: a decrease in cash, cash  equivalents
and  short  term  investments  of  $18,715,000;  an  increase  in  net  accounts
receivable of $23,096,000;  a decrease in inventories of $1,585,000; an increase
in prepaid  expenses and other  current  assets of $259,000;  and an increase of
$557,000 in total  current  liabilities.  Accounts  receivable  increased due to
significant  seasonal  shipping  volume in the  second  and third  months of the
thirteen  weeks ended  October 3, 1998 which are not  expected to turn until the
first and second months of the subsequent  period.  Inventories  sold during the
period  were offset by new  inventory  purchases  to  accommodate  the  upcoming
Holiday and Spring seasons.

         Although  the  Company's  results of  operations  indicate an operating
income of $13,579,000  for the  thirty-nine  weeks ended October 3, 1998,  these
results are not indicative of results for an entire year.

         Capital  expenditures  were $1,503,000 for the thirty-nine  weeks ended
October  3,  1998.  Capital   expenditures  are  expected  to  be  approximately
$3,000,000 for the fiscal year 1998. The  anticipated  capital  expenditures  of
$1,500,000 for the remainder of the year are primarily  related to  improvements
in management  information systems,  fixturing the Company's in-store shops that
are planned to be opened in 1998 and for leasehold improvements to integrate the
additional  staffing for the Warren Group product line acquired October 27, 1998
(See  below).   The  Company  believes  that  its  financing   arrangements  and
anticipated  level of internally  generated  funds will be sufficient to finance
its capital spending during 1998.
                                 
                                       22

<PAGE>


                  THE LESLIE FAY COMPANY, INC AND SUBSIDIARIES


         In  April  1998  the  Company's  Board  of  Directors   authorized  the
repurchase of up to $5,000,000  of the Company's  common stock.  The Company has
repurchased  817,000  shares of common stock during the period ended  October 3,
1998 for  $4,623,000.  On November  10, 1998 the  Company's  Board of  Directors
authorized  the  repurchase of up to an  additional  $5,000,000 of the Company's
common  stock.  While there is no assurance  that any  additional  stock will be
repurchased, any repurchase made would adversely affect the overall liquidity of
the Company.

         Effective  October 27, 1998, the Company  purchased  selected assets of
The Warren  Apparel  Group  Ltd.,  a  manufacturer  of dresses  that are sold at
"better" price points in department stores. The investment that will be required
throughout the next quarter to build the necessary working capital,  comply with
the  requirements  of  the  purchase   agreement  and  begin  to  implement  the
integration  of  operations  is expected to exceed  $10,000,000.  This  required
modification of the terms of the Company's existing credit facility to provide a
substantially  higher credit line and adjustments to the existing covenants.  As
noted above, these modifications were effected on October 27, 1998.

         In August 1998 the Company entered into a modification of the 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 office space for the newly acquired  Warren
Group product line as noted above.

         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  contained  therein.  The Company can not exceed  $10,000,000 in stock
repurchases or dividends in total for 1998 and 1999. As noted above, the Company
has already expended $4,623,000 of the $10,000,000  available for the repurchase
of its common  shares.  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 products,  as well as to plan and manage
the  overall  business.  The  Company  recognizes  the  critical  importance  of
maintaining the proper functioning of its systems.

         In the  fourth  quarter  of 1997,  the  Company  began a review  of its
systems and technology to address all business requirements, including Year 2000
compliance.  This review is complete and a plan has been developed to meet these
needs.  Overall,  the plan identifies numerous changes required in the Company's
systems (both hardware and software) as well as sensitive operating equipment to
make  them  Year  2000   compliant.   To  maintain   timely   oversight  of  the
implementation  of this plan,  the Company's  Chief  Financial  Officer  reports
regularly to the Audit Committee of the Company's Board of Directors.

                                       23

<PAGE>


                  THE LESLIE FAY COMPANY, INC AND SUBSIDIARIES


                  These  changes  will be  implemented  in 1998  and  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 November 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 has
purchased  updated  pattern making systems and related  hardware and has updated
its telecommunications software and hardware.

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

         At this stage of the process, the Company believes that it is difficult
to specifically  identify the cause of the most reasonable  worst case Year 2000
scenario.  In common with other marketers and distributors of apparel  products,
the Company's most  reasonable  worst case scenario may be the effects caused by
the failures of third  parties and entities with which the Company has no direct
involvement.  As  involves  its own  suppliers  and  customers,  the  Company is
considering  various  contingency  plans that include manual  processing  and/or
outsourcing  certain  activities.   More  specific  contingency  plans  will  be
developed as more information becomes available.

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

                                       24

<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/A.  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 other legal proceedings at
the end of the third  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 third 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.
------     ---------------------------------------------------

                  None.

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.

                  b)       Reports on Form 8-K
                           Since the end of the second  quarter of fiscal  1998,
                           the Company filed a current  report on Form 8-K dated
                           October  28, 1998  reporting  on Item 5. The Form 8-K
                           contained a press release  reporting that the Company
                           had completed its purchase of the apparel business of
                           The Warren Apparel Group Ltd.

                                       25

<PAGE>


                  THE LESLIE FAY COMPANY, INC AND SUBSIDIARIES


                                   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:  November 17, 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



                                       26

<PAGE>


                  THE LESLIE FAY COMPANY, INC AND SUBSIDIARIES


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


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

       4.5        Third  Amendment dated as of October 27, 1998 to the Revolving
                  Credit  Agreement  between Leslie Fay Marketing,  Inc. and the
                  CIT Group/Commercial Services, Inc.

       27         Financial Data Schedule.

                                          

                                       E-1