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                                    FORM 10-Q


                             SECURITIES AND EXCHANGE
                                   COMMISSION
                             WASHINGTON, D.C. 20549


                QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
                     OF THE SECURITIES EXCHANGE ACT OF 1934


FOR THE QUARTERLY PERIOD ENDED JULY 5, 1997           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 3,400,000 shares of Common Stock outstanding at August 2, 1997.



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<PAGE>


                  THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES





                                      INDEX
                                                                        Page No.
PART I  -  FINANCIAL INFORMATION

Item 1.    Financial Statements:

             Consolidated Balance Sheet at July 5, 1997 . . . . . . . . . . . .3

             Consolidated Statement of Operation for the Five Weeks
                Ended July 5, 1997. . . . . . . . . . . . . . . . . . . . . . .4

             Consolidated Statement of Cash Flows for the Five Weeks
              Ended July 5, 1997. . . . . . . . . . . . . . . . . . . . . . . .5

             Consolidated Balance Sheets at June 4, 1997 and
                December 28, 1996 . . . . . . . . . . . . . . . . . . . . . . .6

             Consolidated Statements of Operations for the Twenty-Two
                and Eight Weeks Ended June 4, 1997 and the Twenty-One
                and Eight Weeks Ended May 25, 1997 . . . . . . . . . . . . . . 7

             Consolidated Statements of Cash Flows for the Twenty-Two
                and Eight Weeks Ended June 4, 1997 and the Twenty-One
                and Eight Weeks Ended May 25, 1997 . . . . . . . . . . . . . . 8

             Notes to Consolidated Financial Statements . . . . . . . . . . .  9

Item 2.    Management's Discussion and Analysis of Financial Condition and
               Results of Operations. . . . . . . . . . . . . . . . . . . . . 26

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 . . . . . . . . . . . . . . . . . . . . . . . . .33
Item 6.    Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . 33

SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35

INDEX TO EXHIBITS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36


                                      - 2 -



<PAGE>



                 THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEET
                                 (In thousands)

                                  (UNAUDITED)

                                                                     July 5,
ASSETS                                                                 1997
Current Assets:                                                       ------
        Cash and cash equivalents ................................   $35,065
        Accounts receivable- net of allowances for possible 
         losses of $4,465 ........................................    11,430
        Inventories ..............................................    22,960
        Prepaid expenses and other current assets ................     5,436
            Total Current Assets .................................    74,891
                                                                     -------

        Property, Plant and Equipment, at cost ...................       140
        Deferred Charges and Other Assets ........................       249
                                                                     -------
        Total Assets .............................................   $75,280
                                                                     -------

LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
        Accounts payable .........................................   $ 9,018
        Accrued expenses and other current liabilities ...........    25,348
        Income taxes payable .....................................     2,188
           Total Current Liabilities .............................    36,554

        Excess of Revalued Net Assets Acquired over
             Equity under Fresh-Start Reporting ..................    13,327

        Long Term Debt-Capitalized Lease .........................       325
           Total Liabilities .....................................    50,206

Stockholders' Equity:
        Common stock, $.01 par value; 3,500 shares authorized;
              3,400 shares issued and outstanding ................        34
        Capital in excess of par value ...........................    24,966
        Accumulated retained earnings ............................        74
            Total Stockholders' Equity ...........................    25,074
                                                                     -------

        Total Liabilities and Stockholders' Equity ...............   $75,280
                                                                     =======




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


                                     - 3 -



<PAGE>


                 THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES


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

                                  (UNAUDITED)

                                                                        Five
                                                                     Weeks Ended
                                                                       July 5,
                                                                        1997
                                                                    -----------

Net Sales .......................................................   $     5,535
                                                                    -----------
Cost of Sales ...................................................         4,410
                                                                    -----------

   Gross profit .................................................         1,125
                                                                    -----------

Operating Expenses:
   Selling, warehouse, general and
       administrative expenses ..................................         1,514
   Amortization of excess revalued net assets ac ................          (381)
                                                                    -----------

   Total operating expenses .....................................         1,133
                                                                    -----------

   Operating income .............................................            (8)

Interest (Income) Expense, net and Financing Cos ................          (102)
                                                                    -----------

   Net Income before taxes ......................................            94

Taxes ...........................................................            20
                                                                    -----------

   Net Income ...................................................   $        74
                                                                    ===========


  Net Income per Common Share - Basic ...........................   $      0.02
                                                                    ===========
                              - Assuming Dilution ...............   $      0.02
                                                                    ===========

  Weighted Average Common Shares Outstanding - Basic.............     3,400,000
                                                                    ===========
                              - Assuming Dilution ...............     4,146,212
                                                                    ===========


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


                                     - 4 -

<PAGE>


                  THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES

                   CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)

                                  (UNAUDITED)


                                                                         Five
                                                                     Weeks Ended
                                                                         July 5,
                                                                          1997  
                                                                          ----  
Cash Flows from Operating Activities:            
  Net income ....................................................      $     74
  Adjustments to reconcile net loss to net cash
       provided by (used in) operating activities:
     Depreciation and amortization ..............................          --   
     Amortization of excess purchase price over
       net assets acquired ......................................          (381)
     Provision for possible losses on account receivable ........           (99)
     Decrease (increase) in:
       Accounts receivable ......................................         5,079
       Inventories ..............................................        (3,845)
       Prepaid expenses and other current expenses ..............        (4,252)
       Deferred charges and other assets ........................          (249)
     (Decrease) increase in:
       Accounts payable, accrued expenses and other
          current liabilities ...................................        (2,172)
       Income taxes payable .....................................           (11)
       Deferred credits and other noncurrent liabilities ........           (19)
          Total adjustments .....................................        (5,949)
                                                                       --------
          Net cash (used in) by operating activities ............        (5,875)
                                                                       --------

Cash Flows from Investing Activities:
  Capital expenditures ..........................................          (140)
          Net cash (used in) by investing activities ............          (140)
                                                                       --------
Cash Flows from Financing Activities:
  Proceeds from borrowings ......................................          --   
  Repayment of borrowings .......................................          --
          Net cash provided by financing activities .............          --

Net (decrease) in cash and cash equivalents .....................        (6,015)

Cash and cash equivalents, at beginning of period ...............        41,080
                                                                       --------

Cash and cash equivalents, at end of period .....................      $ 35,065
                                                                       ========

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


                                      - 5 -

<PAGE>


                                                                  
                 THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
                                                                  
                          CONSOLIDATED BALANCE SHEETS
                                 (In thousands)

                                  (UNAUDITED)
<TABLE>
<CAPTION>
                                                                  June 4,  December 28,
                              ASSETS                               1997        1996
                                                                ---------   ---------
<S>                                                             <C>         <C>      
Current Assets:
 Cash and cash equivalents ..................................   $  41,080   $  21,977
 Accounts receivable- net of allowances for possible losses
     of $5,447 and $24,353, respectively ....................      16,410      63,456
 Inventories ................................................      19,115     104,383
 Prepaid expenses and other current assets ..................       1,184       2,290
 Assets of divisions held for sale or disposition ...........        --         3,003
    Total Current Assets ....................................      77,789     195,109
                                                                ---------   ---------

Property, Plant and Equipment, at cost less accumulated
     depreciation and amortization of $0 and $19,549 ........        --        17,575
Excess of Purchase Price over Net Assets Acquired-net of
     accumulated amortization of $0 and $10,848, respectively        --        23,795
Deferred Charges and Other Assets ...........................        --         1,182

 Total Assets ...............................................   $  77,789   $ 237,661
                                                                ---------   ---------

LIABILITIES AND STOCKHOLDERS' DEFICIT

Current Liabilities:
 Accounts payable ...........................................       9,407      20,341
 Accrued expenses and other current liabilities .............      27,131      23,154
 Income taxes payable .......................................       2,199         634
 Direct liabilities of divisions held for sale or disposition        --         1,577
    Total Current Liabilities ...............................      38,737      45,706

Excess of Revalued Net Assets Acquired over
     Equity under Fresh-Start Reporting .....................      13,708        --

Long Term Debt - Capitalized Lease ..........................         344        --   
Liabilities Subject to Compromise ...........................        --       337,433
                                                                ---------   ---------
    Total Liabilities .......................................      52,789     383,139
                                                                ---------   ---------

Commitments and Contingencies

Stockholders' Deficit:
 Common stock, $.01 and $1.00 par value; 3,500 and
    50,000 shares authorized 3,400 and 18,772 shares
    issued and outstanding, respectively ....................          34      20,000
 Preferred Stock, $.01 par value; 500 shares
    authorized; none issued .................................        --          --
 Capital in excess of par value .............................      24,966      49,012
 Accumulated retained earning ...............................        --       202,105
 Foreign currency translation adjustment ....................        --           581
       Subtotal .............................................      25,000    (132,512)
 Treasury stock, at cost - 0 and 1,228 shares, respectively .        --       (12,966)
     Total Stockholders' Deficit ............................      25,000    (145,478)
                                                                ---------   ---------

 Total Liabilities and Stockholders' Deficit ................   $  77,789   $ 237,661
                                                                =========   =========
</TABLE>

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

                                     - 6 -




<PAGE>


                 THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES

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

(UNAUDITED)
<TABLE>
<CAPTION>

                                                         Twenty-Two      Twenty-One        Eight          Eight
                                                         Weeks Ended     Weeks Ended    Weeks Ended    Weeks Ended
                                                           June 4,         May 25,       June 4,         May 25,
                                                            1997            1996           1997           1996
                                                        ------------    ------------   ------------   ------------
<S>                                                     <C>             <C>            <C>            <C>         
Net Sales ...........................................   $    197,984    $    173,452   $     55,229   $     52,886
Cost of Sales .......................................        147,276         131,981         41,289         40,473
                                                        ------------    ------------   ------------   ------------
   Gross profit .....................................         50,708          41,471         13,940         12,413
                                                        ------------    ------------   ------------   ------------

Operating Expenses:
   Selling, warehouse, general and
       administrative expenses ......................         35,880          33,632         12,772         12,289
   Amortization of intangibles ......................            473             483            189            213
                                                        ------------    ------------   ------------   ------------

   Total operating expenses .........................         36,353          34,115         12,961         12,502

   Operating income .................................         14,355           7,356            979            (89)

Interest and Financing Costs (excludes contractual
     interest of $7,513, $7,513, $3,005 and
     $3,005, repectively ............................          1,372             837            504            335

   Income (Loss) before, reorganiuzation costs,
     taxes, gain on sale, fresh-start revaluation
     and extraordinary item .........................         12,983           6,519            475           (424)

Reorganization Costs ................................          3,379           1,560          2,911            857

    Income (Loss) before taxes, gain on sale
       fresh-start revaluation and extraordinary
       item .........................................          9,604           4,959         (2,436)        (1,281)

Taxes ...............................................            451             435            135            119

   Net Income (Loss) before gain on sale, fresh-start
      revaluation and extraordinary items ...........          9,153           4,524         (2,571)        (1,400)

Gain on Sale/Transfer of the Sassco Fashions
      Division (net of $3,728 of income tax .........         99,810            --           99,810           --
Revaluation of Assets and Liabilities Pursuant
      to the Adoption of Fresh-Start Reporting ......        (27,010)           --          (27,010)          --
Extraordinary Item - Gain on Debt Discharge .........         63,541            --           63,541           --

   Net Income (Loss) ................................   $    145,494    $      4,524   $    133,770   ($     1,400)
                                                        ============    ============   ============   ============ 


  Net Income (Loss) per Share of Common S ...........              *    $       0.24              *   ($      0.07)
                                                        ------------    ------------   ------------   ------------

  Weighted Average Common Shares Outstand ...........              *      18,771,836              *     18,771,836
                                                        ------------    ------------   ------------   ------------
</TABLE>

    * Earnings per share is not presented for the twenty-two and eight weeks
      ended June 4, 1997 because such presentation would not be meaningful.
      The old stock was cancelled 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 financial statements.

                                     - 7 -

<PAGE>



                 THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)

                                  (UNAUDITED)
<TABLE>
<CAPTION>

                                                                                 Twenty-Two    Twenty-One     Eight         Eight
                                                                                Weeks Ended   Weeks Ended  Weeks Ended  Weeks Ended
                                                                                   June 4,      May 25,      June 4,      May 25,  
                                                                                     1997         1996         1997         1996
                                                                                  ---------    ---------    ---------    ---------
<S>                                                                               <C>          <C>          <C>          <C>       
Cash Flows from Operating Activities:
        Net income ............................................................   $ 145,494    $   4,524    $ 133,770    ($  1,400)
        Adjustments to reconcile net income  to net cash
            used in operating activities:
           Depreciation and amortization ......................................       1,749        1,420          705          564
           Amortization of excess purchase price over
              net assets acquired .............................................         473          483          189          213
           Provision for possible losses on accounts receivable ...............         199          492         (325)          52
           (Gain) on sale of fixed assets .....................................        (347)        --           --           --
        (Increase) decrease in:
             Accounts receivable ..............................................      (1,248)     (17,158)      28,489       30,666
             Inventories ......................................................      25,538       13,251       (2,748)        (691)
             Prepaid expenses and other current assets ........................         (66)       1,810          (51)         765
             Income taxes refundable ..........................................        --         10,345         --           --
             Deferred charges and other assets ................................         125           99          983           31
        (Decrease) increase in:
             Accounts payable, accrued expenses and other
             current liabilities ..............................................      (4,167)     (14,131)         543      (10,533)
             Income taxes payable .............................................      (1,515)          60       (1,524)          32
             Deferred credits and other noncurrent liabilities ................         374          384          238          289
        Changes due to reorganization activities:
             Fresh-start revaluation charge ...................................      27,010         --         27,010         --
             Extraordinary gain on sale/transfer of Sassco Fashions Division ..     (99,810)        --        (99,810)        --
             Extraordinary gain on debt discharge .............................      63,541)        --        (63,541)        --
             Reorganization costs .............................................       3,379        1,560        2,911          857
             Payment of reorganization costs ..................................        (917)      (3,196)          81       (2,031)
                                                                                  ---------    ---------    ---------    ---------
                Total adjustments .............................................    (112,764)      (4,581)    (106,850)      20,214
                                                                                  ---------    ---------    ---------    ---------
                Net cash provided by (used in) operating activities ...........      32,730          (57)      26,920       18,814
                                                                                  ---------    ---------    ---------    ---------

Cash Flows from Investing Activities:
        Capital expenditures ..................................................      (3,731)      (2,155)      (1,705)      (1,149)
        Proceeds from sale of assets ..........................................         467         --           --           --
        Proceeds from sale of Castleberry .....................................         600         --            600         --
        Cash paid to sell/transfer the Sassco Fashions division ...............     (10,963)        --        (10,963)        --
                                                                                  ---------    ---------    ---------    ---------
                Net cash (used in)  investing activities ......................     (13,627)      (2,155)     (12,068)      (1,149)
                                                                                  ---------    ---------    ---------    ---------

Cash Flows from Financing Activities:
        Proceeds from borrowings ..............................................        --            993         --            993
        Repayment of borrowings ...............................................        --           (993)        --           (993)
                                                                                  ---------    ---------    ---------    ---------
                Net cash provided by financing activities .....................        --           --           --           --   
                                                                                  ---------    ---------    ---------    ---------

Net increase in cash and cash equivalents .....................................      19,103       (2,212)      14,852       17,665
                                                                                  ---------    ---------    ---------    ---------

Cash and cash equivalents, at beginning of period .............................      21,977       32,324       26,228       12,447
                                                                                  =========    =========    =========    =========

Cash and cash equivalents, at end of period...................................    $  41,080    $  30,112    $  41,080    $  30,112
                                                                                  =========    =========    =========    =========

</TABLE>

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


                                      - 8 -

<PAGE>


                  THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                   (UNAUDITED)

1.  BASIS OF PRESENTATION:

           The condensed  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  condensed  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  December 28, 1996 (the "1996 Form
10-K").

           As a result of the  consummation of the Joint Plan of  Reorganization
("the Plan" - see Note 2) and the adoption of  fresh-start  reporting  under the
American Institute of Certified Public Accountants'  Statement of Position 90-7,
"Financial  Reporting by Entities in  Reorganization  Under the Bankruptcy Code"
("SOP 90-7"),  the Company was required to report its financial  results for the
twenty-seven weeks and thirteen weeks ended July 5, 1997 in two separate periods
in this Form 10-Q. One period  contains  financial  statements and notes for the
twenty-two  weeks and eight weeks ended June 4, 1997,  including  the effects of
the  adoption  of  fresh-start  reporting  and  consummation  of the  Plan.  The
significant  fresh-start  reporting  adjustments  are  summarized in Note 2. The
other period  contains  financial  statements and notes for the five weeks ended
July 5, 1997 for the reorganized Company.

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

                                     - 9 -
<PAGE>

           Certain  reclassifications have been made to the financial statements
for the  twenty-one  weeks and eight weeks  periods ended May 25, 1996 and as of
December 28, 1996 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").  In  addition,  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. From their respective  filing
dates until June 4, 1997, the Debtors and Retail Debtors  operated or liquidated
their  businesses,  as applicable,  and as debtors in possession  subject to the
jurisdiction  and  supervision  of the United  States  Bankruptcy  Court for the
Southern District of New York (the "Bankruptcy Court").

           On October  31,  1995,  the Debtors and the  Committee  of  Unsecured
Creditors (the "Creditors Committee") filed a Joint Plan of Reorganization ("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 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.


                                     - 10 -




<PAGE>


                  THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES



           On  June  4,  1997,  the  Plan  was  consummated  by the  Company  1)
transferring the equity interest in both the Company and Sassco  Fashions,  Ltd.
("Sassco"),  which anticipates  changing its name to Kasper ASL, Ltd. as soon as
practical,  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  division to Sassco and the assets and liabilities of
its Dress and  Sportswear  divisions to three wholly owned  subsidiaries  of the
Company. In addition, the Company retained approximately $41,080,000 in cash, of
which  $23,580,000 will be used to pay  administrative  claims as defined in the
Plan.  As provided for in the Plan,  the Company has issued eighty (80%) percent
of its  3,400,000  of new shares to its  creditors in July 1997.  The  remaining
twenty  (20%)  percent  will be held back  pending  the  resolutions  of certain
litigation before the Bankruptcy Court. The existing stockholders of the Company
at June 4, 1997 did not retain or receive any value for their equity interest in
the Company.  Reference is made to the Exhibits attached to, 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.

           On June 4, 1997, as provided for in the Plan of  Reorganization  (the
"Plan") for the Company and its  subsidiaries,  the Company  spun-off the assets
and  liabilities  of its Sassco  Fashions  division to Sassco.  These assets and
liabilities included cash, accounts receivable,  inventory,  property, plant and
equipment,  other  assets  (including  the trade name  Albert  Nipon),  accounts
payable,  accrued expenses and other liabilities  related to the Sassco Fashions
division.  In  addition,  the  Company  transferred  to Sassco  its 100%  equity
interest in several  subsidiaries  associated with the Sassco Fashions division.
As provided in the Plan, the creditors of the Company became the shareholders of
Sassco and of the reorganized Company.

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

           The Company recognized reorganization costs during the twenty-two and
eight week periods ended June 4, 1997 and the  twenty-one and eight week periods
ended May 25, 1996, aggregating $3,379,000, $2,911,000, $1,560,000 and $857,000,
respectively,  which  is  comprised  of  professional  fees and  other  costs of
$2,151,000,  $1,545,000,  $1,806,000 and $950,000;  costs accrued to re-engineer
the business processes,  review and revise the technology requirements and other
related costs to the  downsizing  and  separation of the businesses of $800,000,
$800,000, $0 and $0; and plan administration costs of $1,000,000, $1,000,000, $0
and $0; offset by interest income of $572,000,  $434,000,  $246,000 and $93,000,
respectively.  No  reorganization  costs were recognized in the five weeks ended
July 5, 1997. 

                                     - 11 -
<PAGE>

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

           Pursuant to the guidelines  provided by SOP 90-7, the Company adopted
fresh-start  reporting and reflected the  consummation  distributions  under its
Plan of Reorganization (the "Plan") in the 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 to
              zero was  recorded as a deferred  credit,  "Excess of revalued net
              assets over equity" and will be amortized over three (3) years.

           The  resulting   charge  of  $27,010,000  from  all  the  fresh-start
adjustments,  including  the  write-off of all revalued  noncurrent  assets (but
excluding  the  write-off  of the old stock for  $56,611,000),  is  presented as
"Revaluation of assets and  liabilities  pursuant to the adoption of fresh-start
reporting" in the  consolidated  statement of operations  for the twenty-two and
eight 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  divisions  (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.

           Under fresh-start reporting,  the final consolidated balance sheet as
of June 4, 1997,  will  become the  opening  consolidated  balance  sheet of the
reorganized  Company.  Since  fresh-start  reporting  has been  reflected in the
accompanying  consolidated  balance sheet as of June 4, 1997,  the  consolidated
balance sheet as of that date is not comparable in material respects to any such
balance  sheet as of any prior date or for any prior  period  since the  balance
sheet as of June 4, 1997 is that of a reorganized entity.



                                     - 12 -


<PAGE>


                  THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 (In thousands)

                                   (UNAUDITED)


           The effect of the Plan on the Company's consolidated balance sheet as
of June 4,  1997,  after  accounting  for the sale and  transfer  of the  Sassco
Fashions division, was as follows:

<TABLE>
<CAPTION>
                                                                          HISTORICAL   ADJUSTMENTS TO RECORD PLAN  REORGANIZED
                                                                             AS OF         DEBT        FRESH         AS OF
                                                                         JUNE 4, 1997   DISCHARGE      START      JUNE 4, 1997
                                                                           ---------    ---------    ---------    ---------
<S>                                                                        <C>                                    <C>      
                                     ASSETS
Current Assets:
    Cash and cash equivalents                                              $  41,080         --           --      $  41,080
    Accounts receivable - net of allowances for possible losses
                                                                              16,410         --           --         16,410
     Inventories                                                              19,115         --           --         19,115
     Prepaid expenses and other current assets                                 1,184         --           --          1,184
                                                                           ---------    ---------    ---------    ---------
          Total Current Assets                                                77,789         --           --         77,789

Property, Plant And Equipment, at cost less accumulated depreciation and
    amortization                                                               5,392         --         (5,392)        --

Excess of Purchase Price over Net Assets Acquired                              7,260         --         (7,260)        --

Deferred Charges and Other Assets                                                893         (243)        (650)        --

     Total Assets                                                          $  91,334    ($    243)   ($ 13,302)   $  77,789
                                                                           =========    =========    =========    =========
                      LIABILITIES AND STOCKHOLDERS' DEFICIT

Current Liabilities:
     Accounts payable                                                      $   9,407         --           --      $   9,407
     Accrued expenses and other current liabilities                           18,482        8,649         --         27,131
     Income taxes payable                                                      2,199         --           --          2,199
                                                                           ---------    ---------    ---------    ---------
          Total Current Liabilities:                                          30,088        8,649         --         38,737

Excess of Revalued Net Assets Acquired over
     Equity under FResh-start Reporting                                         --           --         13,708       13,708

Long Term Debt - Capitalized Lease                                               344         --           --            344

Liabilities Subject to Compromise                                             97,433      (97,433)        --           --
                                                                           ---------    ---------    ---------    ---------
     Total Liabilities                                                       127,865      (88,784)      13,708       52,789

Commitments and Contingencies
Stockholders' Equity
     Common Stock                                                             20,000           34      (20,000)          34
     Preferred Stock                                                            --           --           --           --
     Capital in excess of par value                                           49,012       24,966      (49,012)      24,966
     Accumulated retained earnings (deficit)                                 (93,142)      63,541       29,601         --
     Foreign currency translation adjustment                                     565         --           (565)        --
                                                                           ---------    ---------    ---------    ---------
          Subtotal                                                           (23,565)      88,541      (39,976)      25,000

     Treasury stock                                                          (12,966)        --         12,966         --
                                                                           ---------    ---------    ---------    ---------
          Total Stockholders' Equity                                         (36,531)      88,541      (27,010)      25,000
                                                                           ---------    ---------    ---------    ---------

     Total Liabilities and Stockholders' Equity                            $  91,334    ($    243)   ($ 13,302)   $  77,789
                                                                           =========    =========    =========    =========
</TABLE>


           The  Company  stated its  liabilities  at June 4, 1997 at the present
value of the amounts to be paid  pursuant  to the Plan.  The  resulting  gain of
$63,541 from the debt discharge has been presented as an "Extraordinary Item" in
the accompanying consolidated statement of operations. See Note 9 for additional
discussion regarding the reorganized Company's capitalization.

                                      -13-
<PAGE>


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  division on June 4, 1997 for an  estimated  exchange  value of
$240,000,000.  This value was the estimated  reorganization  value of the Sassco
Fashions  Division  which was  calculated  in a manner  similar to the Company's
reorganization value (see Note 2). A complete valuation study is currently being
performed  to  establish  a book and tax  basis of the new  Sassco  entity.  The
resulting gain of $99,810,000,  net of taxes of $3,728,000,  recorded from these
transactions  is  reflected  as a Gain  from  the  sale of the  Sassco  Fashions
division in the statement of operations.  Any adjustments  from the $240,000,000
valuation will be recorded in the  appropriate  subsequent  period as a purchase
price adjustment to the gain and will have a corresponding offset to gain on the
debt discharge.

           In  addition,  on May 26,  1997,  the  Company  sold the  assets  and
liabilities  of its  Castleberry  Division 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.

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

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



                                     - 14 -




<PAGE>


                  THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES





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

           1. The operating  results of the Sassco  Fashions  division have been
              eliminated to give effect to the  disposition  as of the beginning
              of the period  presented,  including  depreciation  expense on its
              fixed assets,  an allocated  corporate charge based on workload by
              department  related to the  Sassco  Fashions  division  and direct
              interest  charges  associated with financing fees on its factoring
              agreement  and fees  incurred  on letters of credit  issued on its
              behalf,  and reverse the gain recorded on the sale and transfer of
              the division.

           2. The  operating  results of  the  Castleberry  division  have  been
              eliminated to give effect to the  disposition  as of the beginning
              of the period  presented,  including  depreciation  expense on its
              fixed assets and an allocated  corporate  charge based on workload
              by department related to the Castleberry division.

           3. To  record  the  estimated  effect  of  the Plan as if it had been
              effective  as of the  beginning  of  the  period  presented.  This
              included adjustments for the following items:

                  a) The  elimination  of  the   historical   depreciation   and
              amortization,  including  the  amounts  in cost of  sales,  on the
              beginning-of-the-period asset balances for the remaining divisions
              and the recording of the  amortization  credit from the "Excess of
              revalued net assets over equity value 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.





                                     - 15 -



<PAGE>


                  THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

                                   (UNAUDITED)
<TABLE>
<CAPTION>
                                                                             TWENTY-TWO WEEKS ENDED JUNE 4, 1997
                                                                                                                     PRO FORMA
                                                                HISTORICAL    PRO-FORMA ADJUSTMENTS PER NOTE 3       ADJUSTED
                                                                OPERATIONS      (1)          (2)          (3)        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)        --         43,409
                                                                ---------    ---------    ---------    ---------    ---------
     Gross profit                                                  50,708      (34,534)        (546)          32       15,660
Operating Expenses:
     Selling, warehouse, general and
          administrative expenses                                  35,880      (24,228)      (1,043)        (756)       9,853
     Amortization of intangibles                                      473         (256)        --         (2,122)      (1,905)
                                                                ---------    ---------    ---------    ---------    ---------
     Total operating expenses                                      36,353      (24,484)      (1,043)      (2,878)       7,948
                                                                ---------    ---------    ---------    ---------    ---------
     Operating income                                              14,355      (10,050)         497        2,910        7,712
Interest and Financing Costs (excludes contractual interest)        1,372         (595)        --           --            777
                                                                ---------    ---------    ---------    ---------    ---------
     Income (Loss) before fresh-start revaluation,
          reorganization costs, taxes and extraordinary items      12,983       (9,455)         497        2,910        6,935
Reorganization Costs                                                3,379         --             14       (3,393)        --
                                                                ---------    ---------    ---------    ---------    ---------
     Income (Loss) before taxes and extraordinary items             9,604       (9,455)         483        6,303        6,935
Taxes                                                                 451         (343)        --           --            108
                                                                ---------    ---------    ---------    ---------    ---------
     Net Income (Loss) before extraordinary items                   9,153       (9,112)         483        6,303        6,827
Extraordinary Item - Gain on Sale/Transfer of Sassco
     Fashions Division                                             99,810      (99,810)        --           --           --
Revaluation of Assets and Liabilities Pursuant to the
     Adoption of Fresh-Start Reporting                            (27,010)        --           --         27,010         --
Extraordinary Item - Gain on Debt Discharge                        63,541         --           --        (63,541)        --
                                                                ---------    ---------    ---------    ---------    ---------
     Net Income (Loss)                                          $ 145,494    $(108,922)   $     483    $ (30,228)   $   6,827
                                                                =========    =========    =========    =========    =========
</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 cancelled 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 financial statements.


                                      -16-
<PAGE>



                  THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

                                   (UNAUDITED)
<TABLE>
<CAPTION>
                                                                     TWENTY-ONE WEEKS (FIVE MONTHS) ENDED MAY 25, 1996
                                                                                                                         PRO FORMA
                                                         HISTORICAL         PRO-FORMA ADJUSTMENTS PER NOTE 3             ADJUSTED
                                                         OPERATIONS        (1)             (2)             (3)           BALANCE
                                                        ------------   ------------    ------------    ------------    ------------
<S>                                                     <C>            <C>             <C>             <C>             <C>         
Net Sales                                               $    173,452   ($   127,056)   ($     3,850)           --      $     42,546
Cost of Sales                                                131,981        (96,425)         (2,755)            (35)         32,766
                                                        ------------   ------------    ------------    ------------    ------------
     Gross profit                                             41,471        (30,631)         (1,095)             35           9,780
                                                        ------------   ------------    ------------    ------------    ------------
Operating Expenses:
     Selling, warehouse, general and
          administrative expenses                             33,632        (19,947)         (1,163)           (865)         11,657
     Amortization of intangibles                                 483           (257)            (10)         (2,121)         (1,905)
                                                        ------------   ------------    ------------    ------------    ------------
     Total operating expenses                                 34,115        (20,204)         (1,173)         (2,986)          9,752
                                                        ------------   ------------    ------------    ------------    ------------
     Operating income                                          7,356        (10,427)             78           3,021              28
Interest and Financing Costs (excludes 
      contractual interest)                                      837           (541)           --              --               296
                                                        ------------   ------------    ------------    ------------    ------------
     Income (Loss) before fresh-start revaluation,
          reorganization costs, taxes and 
          extraordinary items                                  6,519         (9,886)             78           3,021            (268)
Reorganization Costs                                           1,560           --              --            (1,560)           --
                                                        ------------   ------------    ------------    ------------    ------------
     Income (Loss) before taxes and extraordinary items        4,959         (9,886)             78           4,581            (268)
Taxes                                                            435           (370)           --              --                65
                                                        ------------   ------------    ------------    ------------    ------------
     Net Income (Loss) before extraordinary items              4,524         (9,516)             78           4,581            (333)
Extraordinary Item - Gain on Sale/Transfer of Sassco
     Fashions Division                                          --             --              --              --              --
Revaluation of Assets and Liabilities Pursuant to the
     Adoption of Fresh-Start Reporting                          --             --              --              --              --
Extraordinary Item - Gain on Debt Discharge                     --             --              --              --              --
                                                        ------------   ------------    ------------    ------------    ------------
     Net Income (Loss)                                  $      4,524   ($     9,516)   $         78    $      4,581    $        333
     Net Income (Loss) per Share of Common Stock        $       0.24                                                   $      (0.02)
                                                        ============                                                   ============
     Weighted Average Common Shares Outstanding           18,771,836                                                     18,771,836
                                                        ============                                                   ============
</TABLE>

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



                                      -17-

<PAGE>

                  THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                         EIGHT WEEKS (TWO MONTHS) ENDED JUNE 4, 1997
                                                                                                                     PRO FORMA
                                                               HISTORICAL      PRO-FORMA ADJUSTMENTS PER NOTE 3      ADJUSTED
                                                               OPERATIONS       (1)          (2)          (3)        BALANCE
                                                                ---------    ---------    ---------    ---------    ---------
<S>                                                             <C>          <C>          <C>                       <C>      
Net Sales                                                       $  55,229    $ (36,876)   $    (679)        --      $  17,674
Cost of Sales                                                      41,289      (27,349)        (682)         (14)      13,244
                                                                ---------    ---------    ---------    ---------    ---------
     Gross profit                                                  13,940       (9,527)           3           14        4,430
Operating Expenses:
     Selling, warehouse, general and
          administrative expenses                                  12,772       (8,739)        (461)        (324)       3,248
     Amortization of intangibles                                      189         (103)        --           (848)        (762)
                                                                ---------    ---------    ---------    ---------    ---------
     Total operating expenses                                      12,961       (8,842)        (461)      (1,172)       2,486
                                                                ---------    ---------    ---------    ---------    ---------
     Operating income                                                 979         (685)         464        1,186        1,944
Interest and Financing Costs (excludes contractual interest)          504         (173)        --           --            331
                                                                ---------    ---------    ---------    ---------    ---------
     Income (Loss) before fresh-start revaluation,
          reorganization costs, taxes and extraordinary items         475         (512)         464        1,186        1,613
Reorganization Costs                                                2,911         --             64       (2,975)        --
                                                                ---------    ---------    ---------    ---------    ---------
     Income (Loss) before taxes and extraordinary items            (2,436)        (512)         400        4,161        1,613
Taxes                                                                 135         (143)        --           --              8
                                                                ---------    ---------    ---------    ---------    ---------
     Net Income (Loss) before extraordinary items                  (2,571)        (369)         400        4,161        1,621
Extraordinary Item - Gain on Sale/Transfer of Sassco
     Fashions Division                                             99,810      (99,810)        --           --           --
Revaluation of Assets and Liabilities Pursuant to the
     Adoption of Fresh-Start Reporting                            (27,010)        --           --         27,010         --
Extraordinary Item - Gain on Debt Discharge                        63,541         --           --        (63,541)        --
                                                                ---------    ---------    ---------    ---------    ---------
     Net Income (Loss)                                          $ 133,770    ($100,179)   $     400    ($ 32,370)   $   1,621
                                                                =========    =========    =========    =========    =========
</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 cancelled 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 financial statements.

                                      -18-

<PAGE>


                  THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                       EIGHT WEEKS (TWO MONTHS) ENDED MAY 25, 1996
                                                                                                                          PRO FORMA
                                                        HISTORICAL           PRO-FORMA ADJUSTMENTS PER NOTE 3             ADJUSTED
                                                        OPERATIONS          (1)             (2)             (3)           BALANCE
                                                       ------------    ------------    ------------    ------------    ------------
<S>                                                    <C>             <C>             <C>                             <C>         
Net Sales                                              $     52,886    ($    37,120)   ($       855)           --      $     14,911
Cost of Sales                                                40,473         (27,981)           (681)            (14)         11,797
                                                       ------------    ------------    ------------    ------------    ------------
     Gross profit                                            12,413          (9,139)           (174)             14           3,114
                                                       ------------    ------------    ------------    ------------    ------------
Operating Expenses:
     Selling, warehouse, general and
          administrative expenses                            12,289          (7,402)           (381)           (334)          4,172
     Amortization of intangibles                                213            (122)             (4)           (849)           (762)
                                                       ------------    ------------    ------------    ------------    ------------
     Total operating expenses                                12,502          (7,524)           (385)         (1,183)          3,410
                                                       ------------    ------------    ------------    ------------    ------------
     Operating income                                           (89)         (1,615)            211           1,197            (296)
Interest and Financing Costs (excludes 
    contractual interest)                                       335            (216)           --              --               119
                                                       ------------    ------------    ------------    ------------    ------------
     Income (Loss) before fresh-start revaluation,
       reorganization costs, taxes and 
       extraordinary items                                     (424)         (1,399)            211           1,197            (415)
Reorganization Costs                                            857            --              --              (857)           --
                                                       ------------    ------------    ------------    ------------    ------------
     Income (Loss) before taxes and extraordinary items      (1,281)         (1,399)            211           2,054            (415)
Taxes                                                           119             (87)           --              --                32
                                                       ------------    ------------    ------------    ------------    ------------
     Net Income (Loss) before extraordinary items            (1,400)         (1,312)            211           2,054            (447)
Extraordinary Item - Gain on Sale/Transfer of Sassco
     Fashions Division                                         --              --              --              --              --
Revaluation of Assets and Liabilities Pursuant to the
     Adoption of Fresh-Start Reporting                         --              --              --              --              --
Extraordinary Item - Gain on Debt Discharge                    --              --              --              --              --
                                                       ------------    ------------    ------------    ------------    ------------
     Net Income (Loss)                                 $      1,400    ($     1,312)   $        211    $      2,054    $        447
     Net Income (Loss) per Share of Common Stock       $       0.07                                                    $      (0.02)
                                                       ------------                                                    ------------ 
     Weighted Average Common Shares Outstanding          18,771,836                                                      18,771,836
                                                       ============                                                    ============
</TABLE>

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




                                      -19-


<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 will remit 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 and assumes the credit risk for these receivables.

5. INVENTORIES:

           Inventories consist of the following:

                                July 5,        June 4,     December 28,
                                 1997           1997            1996

                                           (In thousands)


Raw materials                  $  7,739       $  8,341       $ 33,151
Work in process                   3,530          3,429          2,711
Finished goods                   11,691          7,345         68,521
                               --------       --------       --------

   Total inventories           $ 22,960       $ 19,115       $104,383
                               ========       ========       ========

           The  balances at  December  28,  1996 still  include the  inventories
related to the Sassco Fashions and Castleberry divisions which were subsequently
sold.

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 Company's behalf in an aggregate amount not
exceeding $30,000,000,  with a sublimit on letters of credit of $20,000,000. The
CIT Credit  Agreement  became effective on June 4, 1997 with the consummation of
the Plan.  Direct  borrowings  bear interest at prime plus 1.0% (9.5% at July 5,
1997 and June 4, 1997) 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  $11,048,000 was committed under unexpired letters of credit as of
July 5, 1997.


                                     - 20 -




<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  and the  attainment  of a current  assets to  current  liabilities
ratio,  an interest to earnings  ratio and 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  and a prohibition  on
paying  dividends.  The Company is currently in compliance with all requirements
contained in the CIT Credit Agreement.

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

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

           There were no direct  borrowings  outstanding  under the FNBB  Credit
Agreement and  approximately  $22,195,000  and  $32,169,000  was committed under
unexpired  letters  of  credit  as of  June  4,  1997  and  December  28,  1996,
respectively  (see Note 6 of Notes to Consolidated  Financial  Statements in the
1996 Form 10-K). In addition,  there was  approximately  $3,853,000 of unexpired
letters  of credit  outstanding  at July 5, 1997  which is  collateralized  by a
standby letter of credit under the CIT Credit Agreement.


                                     - 21 -



<PAGE>


                  THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES




           Direct borrowings boar interest at prime plus 1.5% (10.00% at June 4,
1997 and 9.75% at December  28, 1996) and the FNBB Credit  Agreement  required a
fee, payable monthly,  on average  outstanding letters of credit at a rate of 2%
annually.  The FNBB Credit  Agreement,  as amended,  contained certain reporting
requirements,  as well as financial and operating covenants through December 28,
1996 related to minimum and maximum inventory levels,  capital  expenditures and
attainment  of  minimum  earnings  before  reorganization,  interest,  taxes and
depreciation  and  amortization.  As collateral  for  borrowings  under the FNBB
Credit  Agreement,  the Company had granted to FNBB and BABC a security interest
in  substantially  all  assets of the  Company.  In  addition,  the FNBB  Credit
Agreement contained certain restrictive covenants,  including limitations on the
incurrence  of additional  liens and  indebtedness  and a prohibition  on paying
dividends.

           In accordance  with the Plan,  the remaining  Liabilities  subject to
compromise  were  discharged and the Company  recognized a gain of  $63,541,000,
which is reflected as an  Extraordinary  Item in the statement of operations for
the twenty-two and eight weeks ended June 4, 1997.

7. INCOME TAXES:

           The provision for Federal, state and foreign income taxes is $451,000
and $135,000 for the  twenty-two  and eight weeks ended June 4, 1997 compared to
state and foreign  income taxes of $435,000 and $119,000 for the  twenty-one and
eight  weeks  ended May 25,  1996,  respectively.  Although  there is no Federal
income tax provision  currently  recognizable 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 and eight weeks
ended  June 4,  1997  related  to the  gain on the sale of the  Sassco  Fashions
division.  These taxes are  reflected  net of the gain shown in the statement of
operations  for the  twenty-two and eight weeks ended June 4, 1997. For the five
weeks ended July 5, 1997, the Company  recognized  $20,000 for state and foreign
income tax.

8.  COMMITMENTS AND CONTINGENCIES:

           As discussed in Notes 1 and 2, on the Filing  Dates,  the Company and
several of its  subsidiaries  filed voluntary  petitions in the Bankruptcy Court
under chapter 11 of the Bankruptcy Code. All civil litigation  commenced against
the Company and those referenced subsidiaries prior to that date had been stayed
under the Bankruptcy  Code. By an order dated April 31, 1997 (the  "Confirmation
Order"),  the Bankruptcy  Court  confirmed the Plan. The Plan was consummated on
June 4, 1997.


                                     - 22 -




<PAGE>


                  THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES




           The  Confirmation  Order,  inter alia,  dismissed  with prejudice all
pending  litigation,  and  released  all claims that could have been  brought in
litigation.  Both prior to and  subsequent  to the Filing  Dates,  various class
action  suits were  commenced  on behalf of certain  prior  stockholders  of the
Company.  Any  claims  against  the  Company  arising  out of these  suits  were
discharged  as  part  of,  and  in  accordance  with  the  terms  of  the  Plan.
Accordingly,  whatever  the  eventual  outcome of these  cases,  there can be no
material financial impact on the Company based on the terms of the Plan.

           In  addition  to,  and  concurrent   with,  the  proceedings  in  the
Bankruptcy Court, the Company is involved in or settled during second quarter of
1997 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  current and former  division heads of the Company and certain
current and former directors of the Company.  These cross-claims and third-party
complaints  allege  that the  Company's  senior  management  and  certain of its
directors  engaged in fraudulent  conduct and negligent  misrepresentation.  BDO
Seidman  sought  contribution  from  certain of the  defendants  and each of the
third-party  defendants if it were found liable in the class action,  as well as
damages.  On March 7, 1997, a stipulation  and agreement was signed  pursuant to
which all  parties  agreed  to settle  the  above  described  litigation  for an
aggregate  sum  of  $34,700,000.  The  officers'  and  directors'  share  of the
settlement  is covered  by the  Company's  officers'  and  directors'  liability
insurance.  The settlement specifically provides that the officers and directors
deny any liability to the plaintiffs and have entered into the settlement solely
to avoid substantial expense and inconvenience of litigation. The Company has no
obligations  under this settlement.  The District Court approved this settlement
and signed the final order of dismissal on May 8, 1997.



                                     - 23 -



<PAGE>


                  THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES





           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.

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

           On February 23, 1996,  Albert Nipon and American Pop Marketing Group,
Inc.  commenced an action  against the Company in the United  States  Bankruptcy
Court, Southern District of New York seeking, inter alia, a declaratory judgment
with respect to the use of the Company's "Albert Nipon" trademark and tradename.
The Company has asserted  counter claims.  Upon a record of stipulated facts and
submissions  of  memorandum of law, an oral argument on this matter was heard on
May 9, 1997.



                                     - 24 -




<PAGE>


                  THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES




9. STOCKHOLDERS' EQUITY:

           As  provided  under  the Plan,  the  authorized  common  stock of the
reorganized  Company  consists of  3,500,000  shares of common  stock with a par
value $.01 per share. At June 4, 1997, 3,400,000 were issued and outstanding and
were being held by the plan adminstrator in trust. In July 1997, 2,720,000 (80%)
of the shares were distributed.  The remaining twenty (20%) percent will be held
back pending the  resolution of certain  disputed  claims before the  Bankruptcy
Court.  The old  common  stock  was  extinguished  at June 4,  1997  and the old
stockholders of the Company did not retain or receive any value for their equity
interest.

           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 Company has adopted the  provisions of the  Financial  Accounting
Standards Board's Statement of Financial  Accounting Standards ("SFAS") No. 128,
"Earnings per Share" effective as of Consummation  Date. Under SFAS No. 128, the
presentation  of both Basic and  Dilutive  Earnings per Share is required on the
Income Statement. Pursuant to the Plan, the Company has granted stock options to
certain  senior  management  equal  to ten  (10%)  percent  of  the  reorganized
Company's  common stock  outstanding  (assuming  the  exercise of all  options),
one-third  of which will vest on each of the first  three  anniversaries  of the
Consummation  Date. In addition,  each outside  director of the Company has been
granted  5,000 stock options for a total of 25,000  options.  The options may be
exercised  for $6.18 per share.  Therefore,  a total of  437,121 of options  are
outstanding at June 4, 1997 and July 5, 1997.  Additional options of another two
and  one-half  (2.5%) to seven and  one-half  (7.5%)  percent of common stock (a
maximum of 309,091  options)  may be issued  upon the  achievement  of a defined
imputed enterprise value in excess of $37,500,000. The exercise of these options
would create the issuance of additional  stock. The issuance of shares in excess
of 100,000  would  require the Company to increase the  authorized  shares.  The
Company  anticipates  seeking  shareholder  approval to amend its Certificate of
Incorporation to increase its authorized common stock.

10. OTHER EVENTS:

           On June 2, 1997,  a  wholly-owned  subsidiary  of the Company and the
Union of Needle  Trade and  Industrial  and  Textile  ("U.N.I.T.E.")  reached an
agreement on a four-year collective bargaining agreement, which will run through
May 31,  2001  covering  non-supervisory  production,  maintenance,  packing and
shipping employees.


                                     - 25 -



<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

FIVE WEEKS ENDED JULY 5, 1997 AS COMPARED TO
           FIVE WEEKS ENDED JUNE 29, 1996

           The Company recorded net sales of $5,535,000 for the five weeks ended
July 5, 1997, compared with $ 30,690,000 for the five weeks ended June 29, 1996,
a net decrease of $25,155,000, or 82.0%. The primary factor contributing to this
decrease was the sale of the Sassco  Fashions and Castleberry  divisions,  which
generated  $25,009,000  and  $603,000,  respectively,  in net sales for the five
weeks ended June 29, 1996. On a comparable basis,  after excluding the effect of
the  above  mentioned  businesses,  the  remaining  businesses  had a net  sales
increase of $457,000, or 9.0%, for the five weeks ended July 5, 1997 as compared
to the five weeks ended June 26, 1997.

           Gross  profit for the five weeks  ended July 5, 1997 was 20.3% of net
sales  compared with 25.2% for the five weeks ended June 29, 1996 (a decrease of
$6,621,000).  The Sassco Fashions and Castleberry divisions generated $6,971,000
in gross profit for the five weeks ended June 26, 1996. The comparable remaining
businesses  increased  gross profit by $350,000 for the five weeks ended July 5,
1997 versus the prior year and the gross margin increased to 20.3% from 15.3%.

           Selling,  warehouse,  general and administrative  expenses were 27.4%
and 22.9% for the five weeks ended July 5, 1997 and June 29, 1996, respectively.
After  excluding the costs  associated  with the divisions  sold, the comparable
remaining business had expenses of 30.7% for the five weeks ended June 29, 1996.
The decrease in the comparable  percentage is a result of the  additional  sales
volume  during the five weeks  ended July 5, 1997  without  additional  overhead
expenses.

           Amortization  of  intangibles  for the five weeks  ended July 5, 1997
consists  of  $381,000  of income  from  amortization  of the  excess net assets
acquired over valuation (see Note 2).  Amortization  of intangibles for the five
weeks  ended June 29,  1996  consists  primarily  of  $95,000  of  expense  from
amortization  of the excess purchase price over net assets  acquired,  including
$57,000 of  amortization  related to the divisions sold. This expense related to
the leveraged buyout of The Leslie Fay Company on June 28, 1984.

           Interest  expense  (income),  net and financing costs were $(102,000)
and  $204,000  for the  five  weeks  ended  July 5,  1997  and  June  29,  1996,
respectively.  The financing fees under the new CIT Credit Agreement were offset
by income earned on the cash invested for the five weeks ended July 5, 1997. The
financing fees incurred were significantly  below those incurred during the five
weeks  ended  June  29,  1996 due to the  higher  line  needed  to  finance  the
operations of Sassco Fashions and Castleberry.


                                     - 26 -

<PAGE>

           The  provision  for state and  foreign  income  taxes was $20,000 and
$204,000 for the five weeks ended July 5, 1997 and June 29, 1996,  respectively.
The charge in 1996  relates  primarily to foreign  taxes on a subsidiary  of the
Sassco Fashions division.

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

           The Company  recorded net sales of  $197,985,000  for the  twenty-two
weeks ended June 4, 1997,  compared with  $173,452,000  for the twenty-one weeks
ended May 25, 1996, a net increase of $24,533,000, or 14.1%. The additional week
accounted for $10,084,000 of the net sales increase.  Additionally, in 1996, the
Sassco  Fashions  division  began  shipping  a new  product  line under the Nina
Charles label and opened additional retail stores over the last 17 months, for a
total of 45 stores in operation at June 4, 1997. These new businesses achieved a
net sales volume of $17,843,000 for the twenty-two  weeks ended June 4, 1997, or
$11,379,000  more than the twenty-one  weeks ended May 25, 1996. On a comparable
basis, after excluding the effect of the above mentioned additional week and new
businesses, the Sassco Fashions division had a net sales decrease of $8,430,000,
or 7.0%  for  the  twenty-two  weeks  ended  June 4,  1997,  compared  with  the
twenty-one weeks ended May 25, 1996. This was primarily a result of reducing its
production in 1997 to limit additional clearance markdowns. The remaining Leslie
Fay businesses accounted for an increase of $12,720,000, or 29.3%, primarily due
to increased  volume for its Dress  division.  The net sales of the  Castleberry
division declined by $1,220,000.

           Gross profit for the twenty-two weeks ended June 4, 1997 was 25.6% of
net sales  compared  with 23.9% in the  twenty-one  weeks ended May 25, 1996 (an
increase of  $9,237,000).  The  additional  week accounted for $1,998,000 of the
increase in gross profit.  The additional retail stores and new product lines of
the Sassco Fashions  division  accounted for $3,364,000 of the increase in gross
profit.  The  remaining  gross  profit of  Sassco  Fashions  declined  $461,000.
Although the gross margin for the division increased 1.3%, it did not offset the
impact of the net sales volume  decrease on gross profit.  Increased  volume and
better  initial  pricing  (gross  margin  increased  from  22.9%  to  26.5% on a
comparable  basis)  of the  Leslie  Fay  Dress  and  Sportswear  divisions  also
accounted for $4,957,000 of additional  gross profit.  The Castleberry  division
had a decrease in gross profit of $621,000.



                                     - 27 -




<PAGE>


                  THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES




           Selling,   warehouse,   general  and   administrative   expenses  for
twenty-two  weeks ended June 4, 1997  decreased  to 18.1% of net sales  compared
with 19.4% for the twenty-one weeks ended May 25, 1996. The percentage  decrease
is primarily due to the additional  sales volume generated in the for twenty-two
weeks ended June 4, 1997 versus the twenty-one weeks ended May 25, 1996, without
a  corresponding  increase  in  expense.  For  the  period,  expenses  increased
$2,248,000 over the prior year. Sassco Fashions expenses  increased  $4,118,000,
of which $1,100,000 is related to the extra week and the remainder is due to the
additional  product  lines and retail  stores  opened.  The Leslie Fay  business
reduced  expenses by $1,749,000 or 14.1% below the prior year. This decrease was
offset by  approximately  $483,000 of expenses  incurred in the extra week.  The
Castleberry division decreased expenses by approximately $121,000 or 10.4% below
the comparable period in 1996 due to its reduced volume.

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

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

           While  operating as a debtor in  possession,  the Company  recognized
reorganization  costs of  approximately  $3,379,000  and  $1,560,000  during the
twenty-two  weeks ended June 4, 1997 and  twenty-one  weeks ended May 25,  1996,
respectively,  which  is  comprised  of  professional  fees and  other  costs of
$2,151,000 and $1,806,000;  costs accrued to re-engineer the business processes,
review and revise the  technology  requirements  and other  related costs to the
downsizing  and  separation  of the  businesses  of  $800,000  and $0;  and plan
administration costs of $1,000,000 and $0; offset by interest income of $572,000
and $246,000.

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



                                     - 28 -



<PAGE>


                  THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES




EIGHT WEEKS ENDED JUNE 4, 1997 AS COMPARED TO
           EIGHT WEEKS ENDED MAY 25, 1996

           The Company  recorded  net sales of  $55,229,000  for the eight weeks
ended June 4, 1997,  compared with $52,886,000 for the eight weeks ended May 25,
1996 a net  increase  of  $2,343,000,  or 44.3%.  In 1996,  the Sassco  Fashions
division  began  shipping a new product  line under the Nina  Charles  label and
opened  additional  retail  stores  over the last 17  months,  for a total of 45
stores in operation at June 4, 1997.  These new businesses  achieved a net sales
volume of $7,006,000 for the eight weeks ended June 4, 1997, or $3,908,000  more
than the eight weeks ended May 25, 1996. On a comparable basis,  after excluding
the effect of the new  businesses,  the Sassco Fashions had a net sales decrease
of  $4,152,000,  or 12.2% for the eight weeks ended June 4, 1997,  compared with
the eight weeks ended May 25, 1996.  This was primarily a result of reducing its
production in 1997 to limit additional clearance markdowns. The remaining Leslie
Fay businesses accounted for an increase of $2,763,000,  or 18.5%, primarily due
to increased  volume for its Dress  division.  The net sales of the  Castleberry
division declined by $176,000.

           Gross  profit for the eight weeks ended June 4, 1997 was 25.2% of net
sales  compared with 23.5% in the eight weeks ended May 25, 1996 (an increase of
$1,527,000).  The increase in gross profit  resulted from better initial pricing
of its Dress and Sportswear divisions. The gross profit increased $1,316,000 for
Dress and  Sportswear  and the gross margin  increased to 25.0% from 20.8%.  The
additional  retail stores and new product lines of the Sassco Fashions  division
accounted for  $1,573,000 of the increase in gross profit.  The remaining  gross
profit of Sassco Fashions declined  $1,185,000.  The Castleberry  division had a
decrease in gross profit of $177,000.

           Selling,  warehouse,  general and  administrative  expenses for eight
weeks  ended  June 4, 1997 were 23.1% of net sales  compared  with 23.2% for the
eight weeks ended May 25,  1996.  On a comparable  basis,  after  excluding  the
effect of the new businesses, expenses were 25.3% and 24.7% of net sales for the
for eight weeks ended June 4, 1997 and May 25, 1996, respectively.  The increase
is related  primarily to the establishment of a separate  administration  center
for the Sassco Fashions division in anticipation of its spin-off.

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

           Interest  and  financing  costs  increased  to $504,000 for the eight
weeks ended June 4, 1997  compared to $335,000 for the eight weeks ended May 25,
1996.  The  increase  is due  primarily  to  the  fee to  finance  the  accounts
receivable of the Sassco  Fashions  Division under an agreement  entered into in
February 1996.



                                     - 29 -




<PAGE>


                  THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES




           While  operating as a debtor in  possession,  the Company  recognized
reorganization  costs of approximately  $2,911,000 and $857,000 during the eight
weeks ended June 4, 1997 and May 25, 1996,  respectively,  which is comprised of
professional  fees and other costs of $1,545,000 and $950,000;  costs accrued to
re-engineer   the  business   processes,   review  and  revise  the   technology
requirements  and other related costs to the  downsizing  and  separation of the
businesses of $800,000 and $0; and plan  administration  costs of $1,000,000 and
$0; offset by interest income of $434,000 and $93,000.

           The  provision  for  Federal,  state  and  foreign  income  taxes was
$135,000  and  $119,000 for the eight weeks ended June 4, 1997 and May 25, 1996,
respectively.  There is no Federal income tax provision currently  recognizable,
other than that based on the alternative minimum tax regulations

(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  provides a working capital  facility
commitment  of  $30,000,000,  including  a  $20,000,000  sublimit  on letters of
credit.  As of August 2, 1997, there were no borrowings under the revolving line
of credit and the  Company was  utilizing  approximately  $9,499,000  of the CIT
Credit Agreement for the letters of credit.

           At July 5, 1997, there were no cash borrowings  outstanding under the
CIT Credit Agreement, and cash and cash equivalents amounted to $35,065,000.  Of
this amount, $20,192,000 will be used to pay administrative claims as defined in
the Plan. Working capital decreased $716,000,  to $37,748,000 for the five weeks
ended July 5, 1997.  The primary  changes in the  components of working  capital
were a decrease in accounts receivable of $5,079,000, an increase in inventories
of  $3,845,000  and an  increase of  $4,252,000  in prepaid  expenses  and other
current assets.  Accounts  receivable  decreased due to historically  light June
shipments offset by collections. Inventories increased to meet anticipated third
quarter  volume.   Other  current  assets  increased  as  the  Company  invested
$3,005,000 in a 1 Year US Treasury Note maturing on June 30, 1998,  the proceeds
from which will be used to pay administrative claims.


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                  THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES





           At June 4, 1997, there were no cash borrowings  outstanding under the
CIT Credit Agreement, and cash and cash equivalents amounted to $41,080,000.  Of
this amount, $23,580,000 will be used to pay administrative claims as defined in
the Plan. The Company's working capital decreased  $111,940,000,  to $37,463,000
for the twenty two weeks ended June 4, 1997. The sale of the Sassco Fashions and
Castleberry divisions generated a decrease in working capital of $99,810,000 and
the reclass to current  liabilities of the priority  claims  required to be paid
subsequent to Consummation Date decreased working capital further by $8,649,000.
Cash flow  generated  from the Sassco  Fashions and  Castleberry  divisions  was
$34,295,000  and $690,000,  respectively.  The primary  changes in the remaining
components of working  capital were an increase in cash and cash  equivalents of
$19,103,000,  an increase in accounts  receivable of  $1,248,000,  a decrease in
inventories  of  $25,538,000,  a decrease of  $4,167,000  in  accounts  payable,
accrued  expenses  and other  current  liabilities  and an  increase  in accrued
reorganization expenses of $3,379,000.  Inventories decreased as Spring 1997 and
excess Fall 1996 Sassco Fashions  product built up through December 1996 and was
sold in the first quarter of 1997.

           Although,  the Company's results of operations indicated an Operating
income of  $14,355,000  for the  twenty-two  weeks and $4,000 for the five weeks
ended July 5, 1997, these results are not necessarily  indicative of results for
an entire  year.  Due to the  seasonality  of the  business  and the sale of the
Sassco Fashions  division,  operating profits realized in the second half of the
year will be much less than the first half.

           The Company's working capital decreased $122,359,000,  to $37,463,000
for the eight  weeks  ended June 4, 1997.  The sale of the Sassco  Fashions  and
Castleberry divisions generated a decrease in working capital of $99,810,000 and
the reclass to current  liabilities of the priority  claims  required to be paid
subsequent to Consummation Date decreased working capital further by $8,649,000.
Cash flow  generated  from the Sassco  Fashions and  Castleberry  divisions  was
$22,417,000  and $493,000,  respectively.  The primary  changes in the remaining
components of working  capital were an increase in cash and cash  equivalents of
$14,852,000,  a decrease in accounts  receivable of $28,489,000,  an increase in
inventories of $2,748,000 and an increase in accrued reorganization  expenses of
$2,911,000.  Accounts  receivable  decreased  as Spring  1997  receivables  were
collected and replaced by the historically lower second quarter sales volume.

           Capital  spending  was $140,000 for the five weeks ended July 5, 1997
and $3,730,000 for the twenty-two weeks ended June 4, 1997. Capital expenditures
are expected to be $4,866,000 for the fiscal year 1997,  including $3,152,000 of
expenditures  related to the Sassco  Fashions  Division.  The  anticipated  post
emergence   capital   expenditures  of  $1,136,000  are  primarily   related  to
improvements in management  information  systems.  The Company believes that its
financing  arrangements and anticipated level of internally generated funds will
be sufficient to finance its capital spending during 1997.


                                     - 31 -
<PAGE>



                  THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES



           Other  than  the  capital  expenditures  described  above,  no  other
long-term  investment or financing  activities  are  anticipated  throughout the
remainder of 1997. The Company has no plans to pay dividends in the  foreseeable
future.

           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,  pending legal
proceedings and the  achievement  and  maintenance of profitable  operations and
positive cash flow.

           The  Company's  ability to continue as a going  concern is  dependent
upon the  ability  to  maintain  compliance  with all debt  covenants  under the
financing and the  maintenance of profitable  operations and positive cash flow.
Management believes the continued availability of financing facilities, together
with the Company's available cash and expected cash flows from operations should
enable it to fund expected  needs for working  capital and capital  spending for
the foreseeable future.



                                     - 32 -




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                  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 1996 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 1997,  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 1997 or thereafter,  other than ordinary routine litigation incidental to the
business of the  Company  and the  settlement  of the class  action  proceedings
described  in  Note 8 of the  Notes  to the  Consolidated  Financial  Statements
contained herein.

ITEM 2.    CHANGES IN SECURITIES.

           Pursuant to the Plan of Reorganization,  all theretofore  outstanding
shares of Common Stock,  $1.00 par value,  were  canceled.  The Company filed an
Amended and Restated  Certificate of Incorporation  (the "Amended  Certificate")
authorizing the issuance of 3,500,000  shares of common stock, par value $01 per
share, and 500,000 shares of preferred stock, par value of $.01 per share.  Each
share of common stock has one vote in connection  with the any matter  presented
to shareholders.  The common stock has no cumulative voting rights,  pre-emptive
rights or sinking  fund  provisions.  The Amended  Certificate  provides  that a
Business  Combination with an Interested  Stockholder (as said terms are defined
therein) must be approved by the affirmative vote of the holders of at least 80%
of the outstanding voting stock including the affirmative vote of the holders of
at least 80% of the voting stock not owned by the Interested  Stockholder or any
Affiliate  thereof.  Such  provisions  do not apply in the  event  the  Business
Combination  has been approved by a majority of the  Continuing  Directors or if
the  consideration  paid in the  combination  meets  certain  provisions as more
particularly  set forth in the  Amended  Certificate.  The CIT Credit  Agreement
contains a prohibition on the payment of the dividends (see Note 8).

           On June 4, 1997 in connection  with the  consummation  of the Plan of
Reorganization,  the Company  issued to its  creditors an aggregate of 3,400,000
shares of its common stock in  cancellation of all obligations to such creditors
by the Company. The certificates  evidencing such shares were actually delivered
in July 1997. An aggregate of  $88,784,000 of  indebtedness  was canceled by the
Registrant  in  consideration  for such  stock.  The  shares  were  exempt  from
registration  under the  Securities  Act of 1933,  as amended,  by virtue of the
provisions of Section 3(a)(10) thereof.

                                     - 33 -
<PAGE>


                  THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES




           In addition,  the Company granted options to purchase an aggregate of
412,121 shares to five  executives and options to purchase 25,000 shares to five
management directors, all exercisable at $6.18 per share.

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
                      34 hereof.

           b)         Reports on Form 8-K

                      Since the end of the first  quarter  of fiscal  1997,  the
                      Company  filed a Current  Report on Form 8-K dated June 4,
                      1997,  reporting on items 2, 3 and 5. Pro-Forma  financial
                      statements are to be filed by amendment.




                                     - 34 -



<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:  August 25, 1997                   The Leslie Fay Company, Inc.
                                         ----------------------------
                                                   (Company)



                                         By: /s/ Warren T. Wishart
                                             -------------------------
                                             Warren T. Wishart
                                             Secretary and Chief Financial 
                                              Officer




                                     - 35 -




<PAGE>


                  THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES







                                INDEX TO EXHIBITS



Exhibit No.                    Description


10.2 (a)          Employment  Agreement dated as of June 4, 1997 between The
                  Leslie Fay Company, Inc. and John J. Pomerantz.


10.2(b)           Employment  Agreement dated as of June 4, 1997 between The
                  Leslie Fay Company, Inc. and John Ward.


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


27                Financial Data Schedule