SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                    FORM 10-Q

(Mark One)
[X]      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934.

For the quarterly period ended October 3, 1998

                                       OR

[ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934.

For the transition period from                       to

                         Commission file number: 0-24179
                                                 -------

                               KASPER A.S.L., Ltd.
              ----------------------------------------------------
             (Exact name of registrant as specified in its charter)


               Delaware                                 22-3497645  
           ----------------                             ----------           
       (State of Incorporation)            (IRS Employer Identification No)

                    77 Metro Way, Secaucus, New Jersey 07094
     -----------------------------------------------------------------------
              (Address and zip code of principal executive office)

                                 (201) 864-0328
     -----------------------------------------------------------------------
              (Registrant's telephone number, including area code)


         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes X   No
                                              --     --

                APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
                  PROCEEDINGS DURING THE PRECEDING FIVE YEARS.

         Indicate by check mark whether the  registrant  has filed all documents
and reports  required  to be filed by Section 12, 13 or 15(d) of the  Securities
Exchange Act of 1934 subsequent to the  distribution of securities  under a plan
confirmed by a court.  Yes  X   No
                           --      --

                      APPLICABLE ONLY TO CORPORATE ISSUERS

         The number of shares of the registrant's  Common Stock, $.01 par value,
outstanding as of November 16, 1998 was 6,800,000.

<PAGE>


                      KASPER A.S.L., LTD. AND SUBSIDIARIES

<TABLE>
<CAPTION>



                                      INDEX


                                                                                                              Page No.
                                                                                                              -------
PART I - FINANCIAL INFORMATION


<S>                                                                                                            <C>     
Item 1.  Financial Statements:

               Condensed Consolidated Balance Sheets at October 3, 1998 and January 3, 1998..........................1

               Condensed Consolidated Statements of Operations for the Thirteen weeks
                  ended October 3, 1998 and Thirteen weeks ended October 4, 1997.....................................2

               Condensed Consolidated/Combined Statements of Operations for the Thirty-nine weeks
                  ended October 3, 1998, Seventeen weeks ended October 4, 1997, and Twenty-three weeks
                  ended June 4, 1997.................................................................................3

               Condensed Consolidated/Combined Statements of Cash Flows for the Thirty-nine weeks
                  ended October 3, 1998, Seventeen weeks ended October 4, 1997, and Twenty-three weeks
                  ended June 4, 1997.................................................................................4

               Notes to Condensed Consolidated/Combined Financial Statements.........................................6

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations......................10


PART II - OTHER INFORMATION

Item 4.  Submission of Matters to a Vote of Security Holders........................................................19

Item 6.  Exhibits and Reports on Form 8-K...........................................................................19

SIGNATURES..........................................................................................................20

EXHIBIT INDEX.......................................................................................................21

</TABLE>
<PAGE>

                      KASPER A.S.L., LTD. AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                      (In thousands, except per share data)
<TABLE>
<CAPTION>



                                                                      October 3,           January 3,
                              ASSETS                                     1998                 1998
                                                                   ----------------      ---------------
                                                                     (Unaudited)
Current Assets:
<S>                                                                    <C>                    <C>       
   Cash and cash equivalents......................................     $      2,219           $   16,677
   Accounts receivable-net of allowances for possible losses of                                          
      $20,125 and $18,725 respectively............................           63,391               30,000
   Inventories....................................................           87,277               78,796
   Prepaid expenses and other current assets......................            5,435                4,462
                                                                   ----------------      ---------------
        Total Current Assets......................................          158,322              129,935
                                                                   ----------------      ----------------
Property, Plant and Equipment, at cost less accumulated                                                  
   depreciation and amortization of $4,718 and $2,985,                                                   
   respectively...................................................           16,781               14,337
Reorganization value in excess of identifiable assets, net of                                            
   accumulated amortization of $4,345 and $1,902, respectively....           60,836               63,279
Trademarks, net of accumulated amortization of $1,943 and $850,                                          
   respectively...................................................           49,057               50,150
Other Assets, at cost less accumulated amortization of $1,241 and                                        
   $596, respectively.............................................            2,309                2,955
                                                                   ----------------      ---------------
        Total Assets..............................................       $  287,305           $  260,656
                                                                   ================      ===============

               LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
   Accounts payable...............................................      $    13,085          $    17,637
   Accrued expenses and other current liabilities.................            6,902                6,703
   Interest Payable...............................................              108                3,555
   Income taxes payable...........................................            3,533                1,164
                                                                   ----------------      ---------------
        Total Current Liabilities.................................           23,628               29,059
Long-Term Liabilities:
   Deferred Taxes.................................................              639                  639
   Long-Term Debt.................................................          110,000              110,000
   Bank Revolver..................................................           24,551                   --
   Minority Interest..............................................              617                   --
                                                                   ----------------      ---------------
        Total Liabilities.........................................          159,435              139,698
Commitments and Contingencies
Shareholders' Equity:
   Common Stock, $0.01 par value; 20,000,000 shares authorized;                                          
      6,800,000 shares issued and outstanding.....................               68                   68
   Preferred Stock, $0.01 par value; 1,000,000 shares authorized;                                        
      none issued and outstanding.................................               --                   --
   Capital in excess of par value.................................          119,932              119,932
   Retained Earnings..............................................            7,929                  972
Accumulated Comprehensive Income:
   Cumulative Translation Adjustment..............................              (59)                 (14)
        Total Shareholders' Equity................................          127,870              120,958
                                                                   ----------------      ---------------
   Total Liabilities and Shareholders' Equity.....................       $  287,305           $  260,656
                                                                   ================      ===============

</TABLE>

The accompanying Notes to Condensed  Consolidated/Combined  Financial Statements
are an integral part of these balance sheets.

                                       -1-

<PAGE>



                      KASPER A.S.L., LTD. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                      (In thousands, except per share data)
<TABLE>
<CAPTION>

                                                   Thirteen Weeks              Thirteen Weeks
                                                       Ended                       Ended
                                                   --------------              --------------
                                                     October 3,                  October 4,
                                                        1998                        1997
                                               ----------------------      ----------------------
                                                     (Unaudited)                   (Unaudited)
<S>                                                  <C>                         <C>        
Net Sales....................................             $    94,080                 $   103,795
Cost of Sales................................                  63,252                      74,530
                                               ----------------------      ----------------------
   Gross profit..............................                  30,828                      29,265
Operating Expenses:
Selling, warehouse, general and                                                                   
   administrative expenses...................                  15,221                      13,738
Depreciation and Amortization................                   2,173                       2,012
                                               ----------------------      ----------------------
      Total operating expenses...............                  17,394                      15,750
                                               ----------------------      ----------------------
Operating income.............................                  13,434                      13,515
Interest and Financing Costs.................                   4,514                       4,325
                                               ----------------------      ----------------------
Income before provision for income taxes.....                   8,920                       9,190
Provision for Income Taxes...................                   3,745                       3,420
                                               ----------------------      ----------------------
Net Income...................................            $      5,175               $       5,770
                                               ======================      ======================
Basic earnings per share.....................                     .76                         .85
                                               ======================      ======================
Diluted earnings per share...................                     .76                         .85
                                               ======================      ======================
Weighted average number of shares used in                                                         
   computing Basic earnings per share........               6,800,000                   6,800,000
Weighted average number of shares used in                  
   computing Diluted earnings per share......               6,800,000                   6,808,000

</TABLE>

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

                                       -2-

<PAGE>



                      KASPER A.S.L., LTD. AND SUBSIDIARIES
            CONDENSED CONSOLIDATED/COMBINED STATEMENTS OF OPERATIONS
                      (In thousands, except per share data)
<TABLE>
<CAPTION>



                                                                                              |      Predecessor
                                                            Reorganized Company               |        Company
                                                --------------------------------------------  |--------------------
                                                    Thirty-nine              Seventeen        |     Twenty-three
                                                    Weeks Ended             Weeks Ended       |      Weeks Ended
                                                    -----------             -----------       |      -----------
                                                    October 3,               October 4,       |        June 4,
                                                       1998                     1997          |         1997
                                                -------------------     --------------------  |   -------------------
                                                    (Unaudited)             (Unaudited)       |
<S>                                                     <C>                      <C>          |        <C>        
Net Sales......................................         $   252,582              $   120,659  |           $   136,107
Cost of Sales..................................             175,583                   86,685  |               101,479
                                                -------------------     --------------------  |   -------------------
   Gross profit................................              76,999                   33,974  |                34,628
Operating Expenses:                                                                           |
Selling, warehouse, general and                                                               |                       
   administrative expenses.....................              45,940                   18,005  |                23,374
Depreciation and Amortization..................               6,424                    2,662  |                 1,191
                                                -------------------     --------------------  |   -------------------
      Total operating expenses.................              52,364                   20,667  |                24,565
                                                -------------------     --------------------  |   -------------------
Operating income...............................              24,635                   13,307  |                10,063
Interest and Financing Costs...................              12,644                    5,462  |                   667
                                                -------------------     --------------------  |   -------------------
Income before provision for income taxes.......              11,991                    7,845  |                 9,396
Provision for Income Taxes.....................               5,034                    3,531  |                 3,758
                                                -------------------     --------------------  |   -------------------
Net Income.....................................         $     6,957                $   4,314  |             $   5,638
                                                ===================     ====================  |   ===================
Basic earnings per share.......................                1.02                      .63  |                   --
                                                ===================     ====================  | 
Diluted earnings per share.....................                1.02                      .63  |                   --
                                                ===================     ====================  | 
Weighted average number of shares used in                                                     |                        
   computing Basic earnings per share..........           6,800,000                6,800,000  |                   --
Weighted average number of shares used in                                                     |
   computing Diluted earnings per share........           6,800,000                6,809,000  |                   --         
                                                                                                                  
</TABLE>

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

                                       -3-

<PAGE>



                      KASPER A.S.L., LTD. AND SUBSIDIARIES
            CONDENSED CONSOLIDATED/COMBINED STATEMENTS OF CASH FLOWS
                                 (In thousands)

<TABLE>
<CAPTION>

                                                                                                           |     Predecessor
                                                                           Reorganized Company             |       Company
                                                               --------------------------------------------|  ------------------
                                                                   Thirty-nine            Seventeen        |     Twenty-three
                                                                   Weeks Ended           Weeks Ended       |     Weeks Ended
                                                                   -----------           -----------       |     -----------     
                                                                   October 3,             October 4,       |       June 4,
                                                                      1998                   1997          |         1997
                                                               -------------------   --------------------  |  ------------------
                                                                   (Unaudited)           (Unaudited)       |
                                                                                                           |
<S>                                                                <C>                    <C>              |     <C>      
Cash Flows from Operating Activities:                                                                      |
   Net income.................................................           $   6,957              $   4,314  |            $   5,638
   Adjustments to reconcile net income to net cash (used in) /                                             |                     
      provided by operating activities:                                                                    |                     
      Depreciation and amortization...........................               3,980                  1,578  |                  916
      Amortization of reorganization value in excess of                                                    |                     
        identifiable assets...................................               2,444                  1,100  |                   --
      Amortization of excess purchase price over net assets                                                |                     
        acquired..............................................                  --                     --  |                  275
      Excess of cost over fair value of assets acquired.......                  --                     --  |                  (26)
      Income applicable to minority interest..................                 617                     --  |                   --
      Change in provision for possible losses on accounts                                                  |                     
        receivable............................................               1,400                  3,912  |               (4,348)
      (Increase) decrease in:                                                                              |
        Accounts receivable...................................             (34,791)               (28,199) |                9,071
        Inventories...........................................              (8,481)                (1,942) |               24,158
        Prepaid expenses and other current assets.............                (973)                (1,332) |               (1,080)
      Increase (decrease) in:                                                                              |
        Accounts payable, accrued expenses and other                                                       |                     
           current liabilities................................              (4,353)                 3,608  |               (1,236)
        Interest Payable......................................              (3,447)                    --  |                   --
        Income taxes payable..................................               2,369                  3,890  |                  246
                                                               -------------------   --------------------  |  -------------------
           Total adjustments..................................             (41,235)               (17,385) |               27,976
                                                               -------------------   --------------------  |  -------------------
   Net cash (used in) / provided by operating activities......             (34,278)               (13,071) |               33,614
                                                               -------------------   --------------------  |  -------------------
                                                                                                           |
Cash Flows from Investing Activities:                                                                      |
   Capital expenditures net of proceeds from the sale of fixed                                             |                     
      assets..................................................              (4,686)                  (907) |              (2,960)
                                                               -------------------   --------------------  |  -------------------
        Net cash used in investing activities.................              (4,686)                  (907) |              (2,960)
                                                               -------------------   --------------------  |  ------------------
                                                                                                           |
Cash Flows from Financing Activities:                                                                      |
   Bank Revolver..............................................              24,551                 12,664  |                  --
   Net (decrease) in cash invested with Leslie Fay............                  --                     --  |             (30,479)
                                                               -------------------   --------------------  |  ------------------
      Net cash provided by / (used in)  financing activities..              24,551                 12,664  |             (30,479)
                                                               -------------------   --------------------  |  ------------------
Effect of exchange rate changes on cash and cash equivalents..                 (45)                    38  |                  --
                                                               -------------------   --------------------  |  ------------------
Net (decrease) increase in cash and cash equivalents..........             (14,458)                (1,276) |                 175
                                                                                                           |
Cash and cash equivalents, at beginning of period.............              16,677                  3,081  |               1,886
                                                               -------------------   --------------------  |  ------------------
                                                                                                           |
Cash and cash equivalents, at end of period...................           $   2,219              $   1,805  |           $   2,061
                                                               ===================   ====================  |  ==================
                                                                                                           
</TABLE>                                                               
                                                                                
The accompanying Notes to Condensed  Consolidated/Combined  Financial Statements
are an integral part of these financial statements.                             
                                                                                
                                       -4-                                      
                                                                                
<PAGE>                                                                          
                                                                                
                                                                                
                                                                         
                      KASPER A.S.L., LTD. AND SUBSIDIARIES
            CONDENSED CONSOLIDATED/COMBINED STATEMENTS OF CASH FLOWS
                                 (In thousands)
<TABLE>
<CAPTION>



                                                                                                                |    Predecessor
                                                                                Reorganized Company             |      Company
                                                                      ----------------------------------------  | -----------------
                                                                         Thirty-nine             Seventeen      |   Twenty-three
                                                                         Weeks Ended            Weeks Ended     |    Weeks Ended
                                                                         -----------            -----------     |   ------------
                                                                         October 3,             October 4,      |      June 4,
                                                                            1998                   1997         |       1997
                                                                      -----------------      -----------------  | -----------------
                                                                         (Unaudited)            (Unaudited)     |
Supplemental schedule of noncash operating, investing and                                                       |               
financing activities                                                                                            |               
                                                                                                                |
                                                                                                                |
<S>                                                                   <C>                <C>                      <C>           
Noncash operating                                                                                               |
Other current assets recorded upon emergence from Bankruptcy          $        --        $          (23)        |$         --
Other current liabilities recorded upon emergence from Bankruptcy              --                 4,923         |          --
Deferred financing costs recorded upon emergence from Bankruptcy               --                (2,422)        |          --
                                                                                                                |
Noncash investing                                                                                               |
Elimination of divisional equity upon emergence from Bankruptcy                --              (132,363)        |          --
Elimination of excess of costs over fair value of assets upon                                                   |              
emergence from Bankruptcy                                                      --                16,066         |          --
Establishment of reorganization in excess of identifiable assets                                                |        
upon emergence from Bankruptcy                                                 --               (65,181)        |          --
Establishment of Trademark valuation upon emergence from                                                        |             
Bankruptcy                                                                     --               (51,000)        |          --
                                                                                                                |
Noncash financing                                                                                               |
Senior notes issued to creditors upon emergence from Bankruptcy                --               110,000         |          --
Issuance of Common Stock to creditors upon emergence from                                                       |
Bankruptcy                                                                     --               120,000         |          --    
                                                                       
</TABLE>                                                                        
                                                                                
The  accompanying  Notes to  Consolidated/Combined  Financial  Statements are an
integral part of these financial statements.                                    
                                                                                
                                       -5-                                      
                                                                                
<PAGE> 

                      KASPER A.S.L., LTD. AND SUBSIDIARIES
          NOTES TO CONDENSED CONSOLIDATED/COMBINED FINANCIAL STATEMENTS


NOTE 1.   GENERAL

         The  Condensed   Consolidated/Combined  Financial  Statements  included
herein have been prepared by Kasper  A.S.L.,  Ltd.  (name  legally  changed from
Sassco Fashions, Ltd. on November 5, 1997) and subsidiaries (Kasper A.S.L., Ltd.
being  sometimes  referred to, and together with its  subsidiaries  collectively
referred to, as the  "Company"  or "Kasper" as the context may require)  without
audit,  pursuant to the rules and  regulations  of the  Securities  and Exchange
Commission (the  "Commission").  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/Combined  Financial  Statements  included  herein
should  be  read  in  conjunction  with  the   Consolidated/Combined   Financial
Statements  and  the  notes  thereto  included  in  the  Company's  Registration
Statement on Form S-1 which was declared  effective by the  Commission on May 1,
1998.

         In the  opinion  of  management,  the  accompanying  interim  Condensed
Consolidated/Combined  Financial  Statements  contain all  material  adjustments
necessary  to  present  fairly  the  Condensed  Consolidated/Combined  financial
condition,  results of operations,  and changes in financial  position of Kasper
and its subsidiaries for the interim periods presented.

         Due to the Company's  Reorganization  and implementation of Fresh Start
Reporting (see Note 2), the Condensed Consolidated/Combined Financial Statements
for the new  Reorganized  Company  (period  starting June 5, 1997, the effective
date of the Reorganized  Company's emergence from bankruptcy) are not comparable
to those of the Predecessor Company.

         A  black   line  has  been   drawn   on  the   accompanying   Condensed
Consolidated/Combined   Financial   Statements   to   distinguish   between  the
Reorganized Company and the Predecessor Company.

NOTE 2.   FRESH START REPORTING

         Kasper was a division of The Leslie Fay Companies, Inc. ("Leslie Fay"),
a Delaware  corporation  which  operated its business as a debtor in  possession
subject to the  jurisdiction  and  supervision  of the United States  Bankruptcy
Court for the Southern District of New York (the "Bankruptcy  Court") until June
4,  1997.  The  Condensed   Consolidated/Combined  Financial  Statements  herein
presented include the operations of three related Hong Kong  corporations,  Asia
Expert  Limited  ("AEL"),  Tomwell  Limited  ("Tomwell"),  and  Viewmon  Limited
("Viewmon"),  none of which were part of the Leslie Fay  bankruptcy  proceeding.
These  three  Hong Kong  corporations  were  subsidiaries  of  Leslie  Fay (upon
emergence from  bankruptcy  these entities  became  subsidiaries of Kasper) that
procure  and  arrange for the  manufacture  of apparel  products in the Far East
solely for the benefit of Kasper. The Condensed  Consolidated/Combined Financial
Statements also include the results of Kasper Europe,  Ltd., Kasper Canada,  ASL
Retail Outlets,  Inc. ("ASL Retail") and ASL/K Licensing Corp., all of which are
wholly-owned subsidiaries of the Company. Kasper Canada is a 70% owner of Kasper
Partnership, a Canadian partnership through which the Company conducts sales and
distribution activity in Canada. The portion of Kasper Partnership pertaining to
its minority  owner is reflected in the  accompanying  financial  statements  as
minority interest. The Condensed  Consolidated/Combined  Financial Statements of
Kasper,  AEL,  Tomwell and Viewmon have been prepared on a stand-alone  basis in
accordance with generally accepted accounting  principles  applicable to a going
concern. The Predecessor Company financial data reflects the combined results of
Kasper, AEL, Tomwell, and Viewmon. The financial statements of the Reorganized

                                       -6-

<PAGE>



Company  are  consolidated  as  opposed  to  combined  because as of the date of
reorganization,  the three Hong Kong corporations became subsidiaries of Kasper.
Prior to the reorganization, these entities were subsidiaries of Leslie Fay and,
accordingly,  the  financial  statements  were combined for those  periods.  The
Company's  fiscal year ends on the Saturday closest to December 31st. The fiscal
year ended January 3, 1998 ("1997") included 53 weeks.

         Prior to June 4,  1997,  Leslie Fay was  operating  its  business  as a
debtor in possession  subject to the  jurisdiction  of the Bankruptcy  Court. On
April 5, 1993, Leslie Fay and certain of its wholly owned  subsidiaries  filed a
voluntary  petition under Chapter 11 of the United States  Bankruptcy  Code (the
"Bankruptcy   Code"),   as  a  result   of  the   announcement   of   accounting
irregularities,  numerous stockholder and other party lawsuits filed against the
Company and its directors, and the breach of certain provisions of its financing
agreement  at the time.  On October 31, 1995,  the Debtors and the  Committee of
Unsecured  Creditors  (the  "Creditors  Committee")  filed  Leslie Fay's 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 Plan
provided for,  among other things,  the  separation of the Debtors'  estates and
assets into two separate reorganized entities.  Under the Plan,  stockholders of
the  Company  would not  retain or  receive  any value for their  interest.  The
Debtors  obtained  Bankruptcy  Court  approval of the  Disclosure  Statement  on
February 28, 1997. The Plan was approved by the creditors and on April 21, 1997,
the Bankruptcy  Court  confirmed the Plan.  Refer to the Condensed  Consolidated
Financial  Statements of Leslie Fay for the fiscal year ended December 28, 1996,
included  in Leslie  Fay's  Annual  Report on Form  10-K,  for more  information
regarding Leslie Fay's bankruptcy proceedings.

          The Plan called for the spin-off of Kasper as a newly organized entity
and which consists of Kasper,  AEL, Tomwell,  Viewmon,  Sassco Europe, Ltd. (now
known as Kasper Europe, Ltd.) and ASL Retail.

         On June 4, 1997, the Plan was consummated by Leslie Fay 1) transferring
the equity interest in both Leslie Fay and Kasper,  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 Kasper;  and 3)  transferring  the  assets  (including
$10,963,000 of cash) and  liabilities of the then Sassco  division to Kasper and
the assets and  liabilities  of Leslie Fay's Dress and  Sportswear  divisions to
three wholly-owned  subsidiaries of Leslie Fay. In addition, Leslie Fay 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  approximately  eighty (80%)  percent of its 6,800,000 of new
shares to its  creditors in July 1997.  The  remaining  shares will be held back
pending the resolutions of certain  litigation  before the Bankruptcy  Court. On
June 4, 1997,  Leslie Fay emerged  from  bankruptcy  and Kasper has emerged as a
newly organized separate entity.

         Pursuant to the guidelines  provided by SOP 90-7,  the Company  adopted
fresh-start  reporting with a reorganization value of $120,000,000 and allocated
the  reorganization  value to its net assets on the basis of the purchase method
of accounting.

         The fresh-start  reporting  reorganization  value of  $120,000,000  was
based on averaging  several valuation  methodologies  prepared by an independent
appraiser. A five-year analysis of the Company's actual and projected operations
(fiscal years ended  1997-2001) was prepared by management and a discounted cash
flow methodology was applied to those numbers. An equity value was determined by
calculating  the  impact  of  various   assumption  changes  to  the  five  year
projections  and adding the  projected  cash flows for the first four years to a
"capitalization"  of the fifth year's projected cash flow under each assumption.
The fifth year's  projected cash flow was capitalized  into value and discounted
to the present.

                                       -7-

<PAGE>



         The aggregate cash flow value was then discounted to its present value,
using a discount rate of 14%. The reorganization  values were then weighted with
a range between $118,000,000 and $123,000,000,  and $120,000,000 was established
as the Company's reorganization value.

         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.

NOTE 3.   INVENTORIES

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

         Inventories, net of reserves, consist of the following:


                                         October 3,       January 3,
                                           1998             1998
                                           ----             ----
                                                (in thousands)
Raw materials                             $ 33,647         $ 32,121
Finished goods                              53,630           46,675
                                            ------           ------
         Total inventories                $ 87,277         $ 78,796
                                          ========         ========

NOTE 4.   INCOME PER SHARE

         The  computation  of income per common share is based upon the weighted
average  number of common shares  outstanding  during the period.  The pro forma
weighted  average number of common shares  outstanding  and pro forma net income
per  common  share for the  period  ended  June 4, 1997 have not been  presented
because,  due to the restructuring  and  implementation of Fresh Start Reporting
they are not comparable to subsequent periods.

NOTE 5.   DEBT

         At  October  3,  1998,  there were  direct  borrowings  of  $24,551,000
outstanding under the BankBoston Credit Agreement and approximately  $17,492,000
outstanding   in  letters  of  credit  under  the  facility.   The  Company  has
approximately $24,205,000 available for future borrowings as of October 3, 1998.

         The  Company  paid   $2,422,000  in  commitment  and  related  fees  in
connection  with the credit  facility in June 1997.  These fees are  included in
other assets and will be amortized over the term of the Credit  Agreement (three
years).

NOTE 6.   COMMITMENTS AND CONTINGENCIES

         On April 5, 1993,  Leslie Fay and  several  of its  subsidiaries  filed
voluntary  petitions in the Bankruptcy  Court under Chapter 11 of the Bankruptcy
Code. All civil  litigation  commenced  against Leslie Fay and those  referenced
subsidiaries  prior to that date was stayed  under the  Bankruptcy  Code.  By an
order dated April 30, 1997 (the  "Confirmation  Order"),  the  Bankruptcy  Court
confirmed the Plan. The Plan was consummated on June 4, 1997.

                                       -8-

<PAGE>



         The  Confirmation  Order,  inter alia,  dismissed  with  prejudice  all
pending  litigations,  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.

NOTE 7.   RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

         In 1998,  AcSEC issued SOP No. 98-5 "Reporting on the Costs of Start-Up
Activities." SOP No. 98-5  establishes  standards on accounting for start-up and
organization  costs  and in  general,  requires  such  costs to be  expensed  as
incurred.  This  standard  is  required  to be adopted  on January 1, 1999.  The
Company's current policy is to expense such costs as incurred.

                                       -9-

<PAGE>



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

         The following  discussion  and analysis  should be read in  conjunction
with the foregoing  consolidated  financial  statements and notes thereto.  This
discussion  contains  forward-looking  statements based on current  expectations
that involve risks and  uncertainties.  Actual results and the timing of certain
events may differ  significantly  from those  projected in such  forward-looking
statements due to a number of factors,  including  those set forth at the end of
this Item.

Overview

         On June 4, 1997 Kasper A.S.L.,  Ltd. (the "Company") was separated from
The Leslie Fay Companies,  Inc.  ("Leslie  Fay"),  in accordance with the Fourth
Amended and Restated Joint Plan of Reorganization  (the  "Reorganization  Plan")
approved  by  the  U.S.   Bankruptcy   Court.  On  that  date,  all  assets  and
corresponding  liabilities  associated with the operation of the Sassco Fashions
Division  of  Leslie  Fay,  including  the  Nipon  trademarks,  were sold to the
Company.  Prior to that  date,  the  Company  operated  as the  Sassco  Fashions
Division of Leslie Fay, from the time it was acquired by Leslie Fay in 1980. The
Company  received  the assets and  liabilities  of the  former  Sassco  Fashions
Division as part of the  Reorganization  Plan of Leslie  Fay. In the  aggregate,
$249.6 million of assets, subject to $19.6 million of liabilities,  were sold by
Leslie Fay to the creditors in  satisfaction  of creditor claims of like amount.
The Company in turn transferred to the creditors  6,800,000 shares of its common
stock  with a market  value of $120  million  and  12.75%  Senior  Notes with an
aggregate  principal amount of $110 million in exchange for the net assets.  The
Company is one of the largest  marketers  and  manufacturers  of career  women's
suits in the United States. The Company also markets career dresses,  sportswear
and knitwear.  The Company has grown  through the extension of existing  product
lines,  the  introduction  of new brands and the  expansion of its retail outlet
operations.

         The  accompanying  financial  statements have been prepared to show the
Company as a freestanding  entity apart from Leslie Fay. Until 1996, the Company
was totally dependent upon Leslie Fay for all administrative support,  including
accounting,  credit, collections,  legal, etc. As such, the financial statements
reflect an allocation of Leslie Fay administrative expenses to the Company.

         As a division  of Leslie  Fay,  the Company was not subject to Federal,
State and Local income taxes. Effective June 4, 1997, the Company became subject
to such taxes. The effective tax rate used for the predecessor company financial
statements  reflects the rate that would have been  applicable,  had the Company
been independent at that time.  Provisions for deferred taxes were not reflected
on the Company's  books,  but were  reflected on Leslie Fay's books and records.
Going forward,  the Company will record  deferred  taxes in accordance  with the
provision of Statement of Financial Accounting Standards Number 109, "Accounting
for Income Taxes."

         The  Company's  business  is  primarily  the design,  distribution  and
wholesale sale of women's career suits,  dresses and sportswear to, principally,
major  department  stores and  specialty  shops.  Over the last five years,  the
Company has increased its share of the  wholesale  market by expanding  into all
women's  career suit  markets,  including the "lower  moderate"  (Le  Suit(TM)),
"upper moderate"  (Kasper(R)) and  "bridge"(Nipon(R))  markets.  The Company has
also introduced a career  sportswear  label,  Kasper and Company(R),  and career
knitwear under the name Nina  Charles(TM).  In analyzing the  performance of the
knitwear division and its capital and operational requirements,  the Company has
decided to  discontinue  the Nina  Charles(TM)  label at wholesale in the United
States for the Fall 1998 season.  The Company will  continue to market the label
in its retail stores and in Canada and Europe.  For Fall 1998,  the Company will
incorporate its knitwear business into its Dress and Sportswear lines.

                                      -10-

<PAGE>

         In July 1995, the Company,  then a division of Leslie Fay,  started its
retail outlet operations by acquiring 22 leased properties,  which were assigned
to the  Company by Leslie  Fay on June 4, 1997  pursuant  to the  Reorganization
Plan. As of October 3, 1998, the Company had 55 retail outlet stores  throughout
the United  States.  Sales at the retail outlet stores  totaled $38.6 million in
the year ended January 3, 1998. The stores operate under the name Kasper ASL(R),
but also  sell  the  Company's  other  labels  including  Nipon(R),  Kasper  and
Company(R), Nina Charles(TM), Le Suit(TM) and b. bennett(TM).

         In  connection   with  the  separation  from  Leslie  Fay,  Leslie  Fay
transferred all rights and title to the Nipon trademarks to the Company.  At the
time of the  transfer,  there  were  several  licensing  agreements  in  effect,
including men's sportswear,  dress slacks, ties, ladies coats, etc. In 1997, the
Company  received  approximately  $900,000 in  licensing  income from  licensing
agreements.

         On June 4, 1997,  the Company  acquired the trade name  Kasper(R)  from
Forecast Designs, Inc., a company owned by Herbert Kasper, for $6 million. Prior
to June 4, the Company paid royalties for the use of the Kasper name to Forecast
Designs,  Inc. In accordance  with the agreement,  Forecast  Designs,  Inc. will
retain the right to the  licensing  income  from  pre-existing  licenses,  which
licenses will be transferred to the Company upon Mr. Kasper's death. The Company
will be entitled to 50% of the income generated by any new licenses. Pursuant to
the  terms of the  acquisition  agreement,  the  Company  also  entered  into an
Employment,  Consulting and NonCompetition  agreement with Herbert Kasper.  Such
agreement, which has a term of ten years, provides for the payment to Mr. Kasper
of $300,000 in annual  salary and $7,500 for each 1% by which the gross  profits
from the Company's sales of Kasper(R) women's apparel, namely suits, dresses and
sportswear in each of the six years 1998 to 2003, exceeds the total gross profit
derived by the Company  from the sale of such  products in the year 1995.  Under
the terms of the agreement,  Mr. Kasper may and has been dedicating his business
time to the  licensing  activities  of ASL/K  Licensing  Corp.,  which  includes
meeting with current and  prospective  licensees of the Kasper(R) brand name. He
also  participates  in  marketing  trips and is  involved  in the  Company's  ad
campaigns,  reviews competitor's  products and meets with prospective  wholesale
buyers on behalf of the Company. Mr. Kasper may also perform such other tasks as
he and Mr. Levine, the Chairman of the Board of Directors and Chief Executive of
the Company, may agree.

         The Company launched its initial advertising campaign in the first half
of  1998.  Anticipated  costs  relating  to the  advertising  campaign  are $2.0
million. Costs for advertising are expensed as incurred.

Results of Operations

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

         Net Sales

         Net Sales for the  thirteen  weeks  ended  October 3, 1998 (the  "third
quarter 1998") were $94.1 million as compared to $103.8 million for the thirteen
weeks ended  October 4, 1997 (the "third  quarter  1997").  The  decrease in net
sales of approximately $9.7 million,  or 9.3%, is primarily due to a decrease in
wholesale  sales of $11.2 million  offset by an increase in retail sales of $1.5
million.  Wholesale sales decreased to $82.0 million for the third quarter 1998,
from $93.2 million in the third quarter 1997, a decrease of approximately  $11.2
million,  or  12.0%,  and is  primarily  due to the  discontinuance  of the Nina
Charles knitwear line, as well as a reduction in Sportswear sales as a result of
the competitive pressure in career sportswear.

                                      -11-

<PAGE>

          Retail sales increased to $12.1 million in the third quarter 1998 from
$10.6  million in the third  quarter  1997,  an increase of  approximately  $1.5
million,  or 14.2%, due primarily to the net addition of 10 retail outlet stores
over the last 12 months.  Comparable store sales for the third quarter 1998 were
$9.4 million as compared to $10.4 million for the third quarter 1997, a decrease
of approximately $1.0 million,  or 9.6%, due primarily to lower consumer traffic
in the stores.

         Gross Profit

         Gross  Profit as a percentage  of net sales  increased to 32.8% for the
third  quarter  1998,  compared  to  28.2%  for  the  third  quarter  1997.  The
improvement  over the third  quarter 1997 can be  attributed to lower supply and
production costs in 1998 due to macroeconomic conditions in the Far East and was
offset  partially by higher  markdowns and allowances  which reflect the general
slowdown in retail sales at the  Company's  customers  stores.  Wholesale  gross
profit as a percentage  of sales  increased  to 31.3% in the third  quarter 1998
from 26.8% in the third quarter 1997.

         Retail gross profit as a percentage of sales  increased to 42.1% in the
third quarter 1998 from 39.6% in the third  quarter 1997.  The increase in gross
profit  is  primarily  due to a  decrease  in  markdowns  and lower  supply  and
production costs in 1998 due to macroeconomic conditions in the Far East.

         Selling, General and Administrative Expenses

         Selling, general and administrative expenses increased to $15.2 million
in the third  quarter  1998 as  compared to $13.7  million in the third  quarter
1997, an increase of $1.5 million.  Approximately $600 thousand of this increase
is attributed to increased  selling,  administrative and occupancy costs related
to the net addition of 10 retail outlet stores.

         The  remaining  increase of $900 thousand is primarily due to increased
advertising  expenses  of $600  thousand  as a  result  of the  new  advertising
campaign,  and approximately  $300 thousand in additional  selling,  general and
administrative  expenses as a result of the  consolidation  of Kasper  Canada in
1998.

         Selling, general and administrative expenses include the following: (i)
design  expenses;  (ii) production  expenses,  which includes  purchasing of raw
materials, production planning and scheduling and product costing; (iii) selling
and  marketing   expenses,   including   showroom  sales   personnel  and  sales
representatives  outside  the  showroom;  (iv)  administrative  expenses,  which
include  all back office  functions  such as finance,  human  resources,  import
management,  accounts  receivable and payable,  etc.; (v) advertising  expenses;
(vi)  shipping  expenses;  and (vii)  occupancy  expenses,  which  include costs
related to all owned and or leased facilities,  including rent, utilities,  etc.
These  expenses  are  expected  to  remain  stable in the near  future  with the
exception of  advertising,  which is expected to increase in connection with the
new advertising campaign and continued retail expansion.

         Amortization of Reorganization Value in Excess of Identifiable Assets

         As a  result  of the  Reorganization,  the  portion  of  the  Company's
reorganization  value not attributable to specific  identifiable assets has been
reported as "reorganization  value in excess of identifiable assets." This asset
is being  amortized  over a 20-year  period  beginning June 4, 1997. The Company
incurred  amortization  charges  for both the third  quarter  1998 and the third
quarter 1997 totaling approximately $825 thousand.

                                      -12-

<PAGE>


         Depreciation and Amortization

         Depreciation and amortization amounted to approximately $1.3 million in
the third  quarter  1998 as opposed to  approximately  $1.2 million in the third
quarter  1997,  and  consist of the  amortization  charges  associated  with the
trademarks and bank fees  associated  with the financing  agreement,  as well as
fixed asset  depreciation.  The  trademarks  are being  amortized  over 35 years
beginning June 4, 1997 and resulted in amortization charges in the third quarter
1998 and 1997 of approximately $365 thousand.  The bank fees are being amortized
over the life of the financing agreement,  which is three years,  beginning June
4, 1997 and resulted in approximately $200 thousand of amortization  charges for
the third quarter 1998 and 1997.

         Interest and Financing Costs

         Interest  and  financing  costs  increased to $4.5 million in the third
quarter 1998 from $4.3 million in the third quarter 1997.  Interest is primarily
attributable to the expense on the $110 million Senior Notes,  which were issued
on June 4, 1997.  The Senior Notes bear  interest at 12.75% per annum and mature
on March 31, 2004.  Interest is payable  semi-annually on March 31 and September
30.  Interest  relating to the Senior  Notes  totaled  $3.5 million for both the
third quarter 1998 and third quarter 1997.  There are no principal  payments due
until  maturity.  To the extent  that the Company  elects to  undertake a public
offering or elects to prepay certain  amounts,  a premium will be required to be
paid.

         Income Taxes

         Provision  for income taxes was $3.7 million for the third quarter 1998
and $3.4 million for the third quarter 1997. This amount differs from the amount
computed by  applying  the federal  income tax  statutory  rate of 34% to income
before taxes because of state and foreign taxes, and timing differences relating
primarily  to customer  reserves and  allowances,  inventory,  depreciation  and
amortization.

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

         Net Sales

          Net Sales for the  thirty-nine  weeks ended  October 3, 1998  ("1998")
were  $252.6  million as  compared  to $256.8  million for the forty weeks ended
October 4, 1997 ("1997") a decrease of $4.2 million,  or 1.6% primarily due to a
decrease in wholesales  sales.  Wholesale  sales  decreased to $219.6 million in
1998,  from  $229.6  million  in 1997,  a  decrease  of $10.0  million,  or 4.4%
primarily due to the  discontinuance  of the Nina Charles knitwear line, as well
as a reduction in Sportswear  sales as a result of the  competitive  pressure in
career  sportswear both occurring during the third quarter 1998.  Overall,  on a
comparable thirty-nine week basis, wholesale sales decreased $4.6 million as the
result of an extra week's wholesale sales of $5.4 million in 1997.

         Retail sales  increased to $32.9  million in 1998 from $27.2 million in
1997, an increase of approximately $5.7 million,  or 21.0%, due primarily to the
net  addition  of 10 retail  outlet  stores  over the last 12 months.  The extra
week's retail sales in 1997 amounted to approximately  $500 thousand,  resulting
in an overall  increase of $6.2 million on a comparable  thirty-nine week basis.
Comparable  store sales in 1998 were $25.9  million as compared to $25.4 million
in 1997, an increase of $500 thousand, or 2.0%.

                                      -13-

<PAGE>



         Gross Profit

         Gross Profit as a percentage  of net sales  increased to 30.4% in 1998,
compared to 26.7% in 1997.  The  improvement  over 1997 can be  attributed to an
increase in retail store margins,  and lower supply and production costs in 1998
due to  macroeconomic  conditions in the Far East.  Wholesale  gross profit as a
percentage of sales increased to 28.7% in 1998 from 25.2% in 1997.

         Retail gross profit as a percentage of sales increased to 41.7% in 1998
from 39.0% in 1997.  The increase in gross profit is primarily due to a decrease
in markdowns and lower supply and production  costs in 1998 due to macroeconomic
conditions in the Far East.

         Selling, General and Administrative Expenses

         Selling, general and administrative expenses increased to $45.9 million
in 1998  compared to $41.4  million in 1997,  an increase of $4.5  million.  The
extra week in 1997  contributed  an extra $1.1  million in selling,  general and
administrative  expenses,  resulting in an overall increase of $5.6 million on a
comparable thirty-nine week period.  Approximately $2.5 million of this increase
is attributed to increased  selling,  administrative and occupancy costs related
to the net addition of 10 retail outlet stores.

         The  remaining  increase of $3.1 million is primarily  due to increased
advertising  expenses of approximately $2.1 million primarily as a result of the
new advertising  campaign.  In addition,  administrative  expenses  increased by
approximately  $900  thousand and relate to  additional  expenses  incurred as a
result of becoming an independent,  public company.  The consolidation of Kasper
Canada in 1998 contributed  approximately  $900 thousand in additional  selling,
general and administrative  expenses.  These increases were offset by a decrease
in royalty expense of  approximately  $600 thousand as a result of the trademark
acquisition,  as well as a decrease in  occupancy  costs of  approximately  $400
thousand  as a result of the new  warehouse.  All  other  selling,  general  and
administrative expenses increased by approximately $200 thousand.

         Amortization of Reorganization Value in Excess of Identifiable Assets

         As a  result  of the  Reorganization,  the  portion  of  the  Company's
reorganization  value not attributable to specific  identifiable assets has been
reported as "reorganization  value in excess of identifiable assets". This asset
is being  amortized over a 20-year period  beginning June 4, 1997.  Accordingly,
the Company incurred  amortization  charges in 1998 totaling  approximately $2.4
million as opposed to  approximately  $1.1  million  in 1997.  The  increase  is
primarily attributable to the nine months of amortization charges in 1998 versus
only four months in 1997.

         Depreciation and Amortization

         Depreciation and amortization  increased to approximately  $4.0 million
in 1998 from  approximately  $2.8  million in 1997  primarily as a result of the
amortization  charges  associated  with the Company's  trademarks  and bank fees
associated with the financing agreement. The trademarks are being amortized over
35 years beginning June 4, 1997 and resulted in amortization  charges in 1998 of
approximately  $1.1 million  compared with $475 thousand in 1997.  The bank fees
are being  amortized  over the life of the financing  agreement,  which is three
years,  beginning  June 4, 1997 and resulted in  approximately  $600 thousand of
amortization  charges for 1998 versus approximately $260 thousand in 1997. These
increases  are  primarily  attributable  to the  nine  months  of  bank  fee and
trademark amortization charges for 1998 versus only four months for 1997.

                                      -14-

<PAGE>

         Interest and Financing Costs

         Interest and  financing  costs  increased to $12.6 million in 1998 from
$6.1 million in 1997, an increase of approximately $6.5 million. The increase is
primarily  attributable  to the nine  months  of  interest  expense  on the $110
million Senior Notes in 1998, which were issued on June 4, 1997 versus only four
months in 1997. The Senior Notes bear interest at 12.75% per annum and mature on
March 31, 2004. Interest is payable  semi-annually on March 31 and September 30.
Interest relating to the Senior Notes totaled $10.5 million for 1998 compared to
approximately  $4.7 million in 1997.  There are no principal  payments due until
maturity.  To the extent that the Company elects to undertake a public  offering
or elects to prepay certain amounts, a premium will be required to be paid.

         Income Taxes

         Provision  for  income  taxes was $5.0  million  in 1998.  This  amount
differs from the amount  computed by applying the federal  income tax  statutory
rate of 34% to income  before  taxes  because of state and  foreign  taxes,  and
timing  differences  relating  primarily to customer  reserves  and  allowances,
inventory, depreciation and amortization. Income taxes for periods prior to June
4, 1997  were  computed  using  the  effective  tax rate  that  would  have been
applicable had the Company been an independent entity.

Liquidity and Capital Resources

         Net cash used in operating  activities was $34.3 million during 1998 as
compared to cash provided by operations of $20.5 million for 1997,  primarily as
a result of the increase in inventory and accounts  receivable.  The increase in
inventories  is primarily  due to higher levels of finished  goods  necessary to
stock the expanding Quick Response  replenishment program and the growing retail
outlet store  operations,  and due to the earlier receipt of inventory to ensure
timely shipments to customers. The increase in accounts receivable is related to
the seasonal nature of cash collections.

         The  Company's  main sources of liquidity  historically  have been cash
flows  from  operations  and  credit  facilities.  Prior to June 4,  1997,  as a
division of Leslie Fay, the Company either borrowed from, or invested its excess
cash with Leslie Fay. The Company's capital  requirements  primarily result from
working  capital  needs,  retail  expansion and  renovation of department  store
boutiques and other corporate activities.

         Effective June 5, 1997, the Company entered into a $100 million working
capital  facility with  BankBoston as the agent bank for a consortium of lending
institutions. The facility provides for a sub-limit for letters of credit of $50
million. The working capital facility is secured by substantially all the assets
of the Company. The working capital facility expires in fiscal 2000 and provides
for various  borrowing rate options,  including  rates based upon a fixed spread
over LIBOR.  The facility  provides  for the  maintenance  of certain  financial
ratios and covenants and sets limits on the amount of capital  expenditures  and
dividends  to  shareholders.  Availability  under the  facility  is limited to a
borrowing  base  calculated  upon eligible  accounts  receivable,  inventory and
letters of credit.  As of October 3, 1998, there were direct borrowings of $24.6
million  outstanding,  $17.5 million in letters of credit  outstanding and $24.2
million available for future borrowings.

         Pursuant to the Reorganization Plan, the Company issued $110 million in
Senior  Notes.  The Senior Notes bear interest at 12.75% per annum and mature on
March 31, 2004. Interest is payable  semi-annually on March 31 and September 30.
Interest relating the Senior Notes for 1998 totaled $10.5 million. There are no

                                      -15-

<PAGE>



principal payments due until maturity.  To the extent that the Company elects to
undertake a public offering or elects to prepay certain amounts,  a premium will
be required to be paid.

         The Company  assumed  from Leslie Fay a  factoring/financing  agreement
with Heller.  The agreement  was for the sole purpose of  supporting  the Sassco
Fashions  Division of Leslie Fay. The  agreement had a two-year term expiring in
February 1998. It provided for Heller to act as the credit and collection arm of
the Company. The Company would receive funds from Heller as the receivables were
collected. Any amounts unpaid after 120 days would be guaranteed and paid to the
Company by the factor.  The cost was .4% for the first $240 million in sales and
 .35% for sales above that amount.  The  agreement was amended in January 1998 to
add an additional 18 months to the term of the arrangement and lower the rate to
 .35% for the first $250 million in sales and .3% on the excess over that amount.

         Capital  expenditures  were $4.7  million for 1998 and $3.8  million in
1997.  Capital  expenditures  for 1998 represent  spending  associated  with the
relocation to a new sales, production and design office, continued retail outlet
store  development,   overseas   facilities   development  and  computer  system
improvements.  Capital  expenditures  for the fiscal year ending January 2, 1999
are anticipated to total approximately $5.5 million.

Year 2000 Compliance

State of Readiness

         The  Company  has  conducted  a  comprehensive  review of its  computer
systems to identify the systems that could be affected by the "Year 2000" issue.
The Year 2000 problem is the result of computer programs being written using two
digits  rather than four to define the  applicable  year.  Any of the  Company's
programs  that have  time-sensitive  software may recognize a date using "00" as
the year 1900 rather than the year 2000,  which could  result in a major  system
failure or miscalculation.  The Company uses software developed and supported by
third  parties for all mission  critical  applications  including  order  entry,
distribution,  shipping,  electronic data interchange ("EDI") and for its retail
operations.  Each of these  software  vendors has assured the Company in writing
that the  current  version of their  software  has been  tested and is Year 2000
compliant.  The Company has  initiated a testing  project  that will verify such
assurances.  This  testing is expected to be  completed by the early part of the
second quarter 1999.

         The  Company is also  highly  dependent  on its  customers'  ability to
transmit and receive EDI documents such as purchase orders, invoices and advance
shipping  notices.  The  Company is in the  process of testing  the  exchange of
electronic  information  with a number of its significant  customers in order to
ensure Year 2000  compliance and expects this  evaluation to be completed by the
early part of the second quarter 1999.

         In  addition,  the  Company  may  face  some  risk to the  extent  that
suppliers of products  and others with whom the Company has a material  business
relationship  will not be Year 2000  compliant.  Accordingly,  the  Company  has
initiated formal  communications with significant suppliers and third parties in
order to  determine  the extent to which the  Company may be  vulnerable  to the
failure of these  suppliers and third  parties to remediate  their own Year 2000
issues.  The Company  will review and  evaluate  the  responses  it receives and
periodically  monitor  the  progress  of these  suppliers  and third  parties in
addressing their own Year 2000 issues.

         The Company is also reviewing its non-information technology systems to
determine the extent of any changes that may be necessary and currently believes
that minimal changes are necessary for Year 2000 compliance.

                                      -16-

<PAGE>



Costs

         The total cost associated with the required  testing and  modifications
to become Year 2000  compliant is not  expected to be material to the  Company's
financial  position.  The  estimated  total  cost of the Year  2000  project  is
approximately  $500,000. This cost estimate may change as the Company progresses
in its Year 2000 project and obtains additional information and conducts further
testing.

Risks

         Despite all efforts,  however, there is no assurance that these systems
will be Year 2000 compliant under all the circumstances and volume stresses that
may actually be required.  The possible  consequences  of the Company or its key
vendors,  suppliers and customers not being fully year 2000 compliant by January
1, 2000 include, among other things, delays in the delivery of products,  delays
in  the  receipt  of  goods,   invoice  and  collection   errors  and  inventory
obsolescence.  Consequently,  the  business  and  results of  operations  of the
Company could be materially  adversely affected by a temporary  inability of the
Company to conduct  its  business  in the  ordinary  course for a period of time
until after January 1, 2000.

Contingency Plans

         As an additional precaution, the Company intends to develop contingency
plans to  mitigate  the  possible  disruption  in business  operations  that may
result.  These plans,  which are  dependent in large part to the  responses  the
Company  receives  from  third  parties  with whom the  Company  has a  material
business  relationship,  are also  expected  to be  completed  during the second
quarter 1999. Once developed,  contingency plans and related cost estimates will
be continually refined as additional information becomes available.

Recently Issued Accounting Pronouncements

         In 1998,  AcSEC issued SOP No. 98-5 "Reporting on the Costs of Start-Up
Activities." SOP No. 98-5  establishes  standards on accounting for start-up and
organization  costs  and in  general,  requires  such  costs to be  expensed  as
incurred.  This  standard  is  required  to be adopted  on January 1, 1999.  The
Company's current policy is to expense such costs as incurred.

Change in Method of Accounting

         The effects of the Company's  reorganization under Chapter 11 have been
accounted  for  in the  Company's  financial  statements  using  the  principles
required by the American Institute of Certified Public Accountants' Statement of
Position  90-7,  Financial  Reporting  by Entities in  Reorganization  Under the
Bankruptcy Code ("Fresh Start  Accounting").  Pursuant to such  principles,  the
Company's assets,  upon emergence from Chapter 11 are stated at  "reorganization
value",  which  is  defined  as the  value  of  the  entity  before  considering
liabilities on a going-concern basis following the reorganization and represents
the  estimated  amount a willing  buyer  would pay for the assets of the Company
immediately after the reorganization.  The reorganization  value for the Company
was  determined  by reference to the  remaining  liabilities  plus the estimated
value of shareholders' equity of the outstanding shares of the Common Stock. The
reorganization  value of the Company was  allocated to the assets of the Company
in  conformity  with the  procedures  specified by Accounting  Principles  Board
Opinion No. 16, Business Combinations, for transactions reported on the basis of
the purchase method of accounting. In this allocation,  identifiable assets were
valued at estimated fair values, and any excess

                                      -17-

<PAGE>

reorganization  value has been  recorded as  "reorganization  value in excess of
identifiable assets" (a long-term intangible asset similar to "goodwill").

Impact of Asian Financial and Currency Crisis

         To date,  the Company has not  experienced  any difficulty in obtaining
needed raw  materials  from its primary  sources of supply in the Far East which
are  located  in Japan,  nor has it  experienced  any  problems  with its sewing
contractors in Taiwan, the Philippines, Hong Kong and China. Over the past year,
the region has suffered  extreme  volatility in its local financial  markets and
currency exchanges. As a result, no assurance can be given that the Company will
continue  to have an  uninterrupted  source  of  supply  from  the  region.  The
inability of certain  suppliers to provide  needed items on a timely basis could
materially  adversely  affect the Company's  operations,  business and financial
condition.  During  1998,  the Company has  experienced  favorable  pricing as a
result of the Asian  financial  situation,  which may not be  sustainable in the
long term.

Disclosure Regarding Forward-Looking Information

         This report contains  forward-looking  statements within the meaning of
Section 27A of the  Securities  Act of 1933, as amended,  and section 21E of the
Securities   Exchange   Act  of  1934,   as  amended   (the   "Exchange   Act").
Forward-looking  statements  are typically  identified  by the words  "believe",
"expect", "intend", "estimate" and similar expressions.  Those statements appear
in an number of places in this  report  and  include  statements  regarding  the
intent,  belief or  current  expectation  of the  Company  or its  directors  or
officers  with respect to, among other  things,  trends  affecting the Company's
financial  conditions and results of operations  and the Company's  business and
growth strategies.  Such forward-looking statements are not guarantees of future
performance  and  involve  risks and  uncertainties.  Actual  results may differ
materially  from those  projected,  expressed or implied in the  forward-looking
statements  as a result of various  factors (such factors are referred to herein
as "Cautionary Statements"), including but not limited to the following: (i) the
Company's  limited  operating  history,  (ii)  potential   fluctuations  in  the
Company's  quarterly  operating  results,  (iii) the Company's  concentration of
revenues,  (iv) challenges  facing the Company related to its rapid growth,  (v)
the Company's  dependence on a limited  number of suppliers and (vi) the ability
of  the  Company  and  third  parties,  including  customers  or  suppliers,  to
adequately address Year 2000 issues. The accompanying  information  contained in
this report,  including the information set forth under "Management's Discussion
and  Analysis of  Financial  Condition  and Results of  Operations",  identifies
important  factors  that could  cause  such  differences.  Such  forward-looking
statements  speak only as of the date of this report,  and the Company  cautions
potential investors not to place undue reliance on such statements.  The Company
undertakes no obligation to update or revise any forwardlooking  statements. All
subsequent  written  or  oral  forward-looking  statements  attributable  to the
Company  or  persons  acting on its  behalf  are  expressly  qualified  in their
entirety by the Cautionary Statements.

                                      -18-

<PAGE>

                           PART II - OTHER INFORMATION


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

         The annual meeting of  shareholders of the Company was held on July 30,
1998 for the  purpose  of: (1)  electing  seven  directors;  (2)  approving  the
Company's 1997  Management  Stock Option Plan; and (3) ratifying the appointment
of Arthur Andersen LLP as the Company's independent certified public accountants
for the fiscal  year  ending  January  2, 1999.  Proxies  for the  meeting  were
solicited  pursuant  to  Regulation  14A of the  Exchange  Act and  there was no
solicitation in opposition.

         First, the following directors were elected by the following vote:


                                                    Votes
                                                    -----
                                         For                Withheld
                                         ---                --------
Arthur S. Levine                      6,006,407               15,460
William J. Nightingale                6,006,407               15,460
Salvatore M. Salibello                6,006,294               15,573
Larry G. Schafran                     6,006,294               15,573
Lester E. Schreiber                   6,006,294               15,573
Denis J. Taura                        6,006,294               15,573
Olivier Trouveroy                     6,006,294               15,573

          Second,  the proposal to approve the Company's 1997  Management  Stock
Option Plan was approved by the following  vote:  (a) 3,094,496  votes were cast
"for" the matter;  (b) 463,111  votes were cast  "against"  the matter;  and (c)
1,433 votes  "abstained" from voting on the matter.  There were 2,462,827 broker
non-votes.

         Third, the proposal to ratify the appointment of Arthur Andersen LLP as
the  Company's  independent  certified  public  accountants  for the fiscal year
ending January 2, 1999 was approved by the following  vote: (a) 6,007,354  votes
were cast "for" the matter; (b) 14,402 votes were cast "against" the matter; and
(c) 111 votes "abstained" from voting on the matter.



Item 6.  Exhibits and Reports on Form 8-K

         (a)      Exhibits:

                  27                Financial Data Schedule

         (b)      Reports on Form 8-K:

                  None.

                                      -19-

<PAGE>



                                   SIGNATURES
                                   ----------

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


Dated:   November 16, 1998                           KASPER A.S.L., Ltd.        
                                                     (Registrant)


                                                     /s/  Lester E. Schreiber 
                                                     ---------------------------
                                                     Lester E. Schreiber
                                                     Chief Operating Officer


Dated: November 16, 1998                             /s/  Dennis P. Kelly       
                                                     ---------------------------
                                                     Dennis P. Kelly
                                                     Chief Financial Officer

                                      -20-

<PAGE>


                                  Exhibit Index


Exhibits

27                Financial Data Schedule





                                      -21-