<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

                                    FORM 10-Q

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

                For the quarterly period ended November 30, 1997

                                       OR

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

                         Commission file number 1-10860

                              THE HE-RO GROUP, LTD.


             (Exact name of registrant as specified in its charter)

           Delaware                                             13-3615898
(State or other jurisdiction of                              (I.R.S. Employer
incorporation or organization)                               Identification No.)

           530 Seventh Avenue                                 10018
           New York, NY
           (Address of principal                            (Zip Code)
           executive offices)

                                 (212) 398-6161
              (Registrant's telephone number, including area code)

                                 Not Applicable
              (Former name, former address and former fiscal year,
                          if changed since last report)

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 CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.

                                                                 Outstanding at
Class of Common Stock                                           January 13, 1998
   $.01 par value                                                  11,995,238

<PAGE>   2
                     THE HE-RO GROUP, LTD. AND SUBSIDIARIES


   Index

<TABLE>
<CAPTION>
     PART I.    FINANCIAL INFORMATION                                                Page No.
<S>             <C>                                                                  <C>
     Item 1.    Financial Statements:

                Consolidated Balance Sheets
                November 30, 1997 and May 31, 1997........................               3

                Consolidated Statements of Income
                Three and Six months Ended November 30, 1997 and 1996.....               4

                Consolidated Statements of Changes in Stockholders' Equity
                (deficiency) Six months Ended November 30, 1997 and 1996..               5

                Consolidated Statements of Cash Flows
                Six months Ended November 30, 1997 and 1996...............               6

                Condensed Notes to Consolidated Financial Statements......             7 - 13

     Item 2.    Management's Discussion and Analysis of Financial
                Condition and Results of Operations.......................            14 - 19

    PART II.    OTHER INFORMATION.........................................              20
</TABLE>
<PAGE>   3
                      THE HE-RO GROUP,LTD. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

                                 (In thousands)
<TABLE>
<CAPTION>
                                                        November 30,       May 31,
                                                            1997            1997
                                                        -----------        -------
                                                        (unaudited)
<S>                                                     <C>               <C>
    ASSETS
CURRENT ASSETS:
    Cash ........................................        $    575         $    354
                                                         --------         --------
    Accounts receivable:
      Trade, net of allowances for doubtful
      accounts of $300 (November),$400(May) ...             2,591            1,016
      Suppliers and other .......................           2,672            3,311
                                                         --------         --------
                                                            5,263            4,327
    Inventory ...................................           9,671           10,751
    Other current assets ........................             564              828
                                                         --------         --------
           Total current assets .................          16,073           16,260
                                                         --------         --------
FIXED ASSETS - at cost, net of accumulated
    depreciation and amortization ...............             387              515
OTHER ASSETS ....................................             964            1,031
                                                         --------         --------
                                                         $ 17,424         $ 17,806
                                                         ========         ========

           LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
    Bank loans ..................................        $  8,135         $  7,782
    Accounts payable ............................           8,529            7,604
    Accrued expenses and other current
        liabilities .............................           3,040            3,082
                                                         --------         --------
           Total current liabilities ............          19,704           18,468
                                                         --------         --------

Subordinated Notes and Obligations Payable -
    stockholder .................................           5,296            5,296
                                                         --------         --------


        COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' DEFICIT:
    Preferred stock, $.01 par value; 1,000,000
        authorized shares; no shares outstanding               --               --
    Common stock, $.01 par value; 25,000,000
        authorized shares; issued and outstanding
        6,717,333 shares ........................              67               67
    Additional paid-in capital ..................          40,166           40,166
    Accumulated Deficit .........................         (47,809)         (46,191)
                                                         --------         --------
    Total stockholders' deficit .................          (7,576)          (5,958)
                                                         --------         --------
                                                         $ 17,424           17,806
                                                         ========         ========
</TABLE>

The accompanying condensed notes are an integral part of these consolidated
statements.


                                        3
<PAGE>   4
                     THE HE-RO GROUP, LTD. AND SUBSIDIARIES

                        CONSOLIDATED STATEMENTS OF INCOME
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)

                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                Three Months Ended        Six months Ended
                                   November 30,             November 30,
                                -----------------          ---------------
                                1997         1996          1997       1996
                                ----         ----          ----       ----
<S>                            <C>          <C>           <C>        <C>
Net Sales..................    $10,927      $13,904       $20,820    $25,481

Cost of sales .............      7,063        8,664        13,437     15,599
                                 -----        -----       -------     ------

Gross profit ..............      3,864        5,240         7,383      9,882

Selling, general and
administrative expenses...       3,778        4,764         7,826      9,839
                                ------        -----       -------     ------

Operating Income (Loss)....         86          476          (443)        43

Interest Expense ..........        614          605         1,175      1,166
                                 -----        -----       -------     ------

Loss before income taxes          (528)        (129)       (1,618)    (1,123)

Provision for income
taxes ....................           -            -             -          -

Net Loss .................      $ (528)      $ (129)      $(1,618)   $(1,123)
                                =======      =======      ========   ========

Net Loss per common share       $(0.08)      $(0.02)       $(0.24)    $(0.17)
                                =======      =======      ========   ========

Weighted average share
outstanding.                     6,717        6,717         6,717      6,717
                                 =====        =====         =====     ======
</TABLE>

The accompanying condensed notes are an integral part of these consolidated
statements.


                                        4
<PAGE>   5
                     THE HE-RO GROUP, LTD. AND SUBSIDIARIES

     CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)

                                 (In thousands)

                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                           Common Stock           
                                                        ------------------        Additional
                                                        No. of                      Paid in            Accumulated
                                                        Shares       Amount         Capital             Deficit              Total
                                                        -----          ---          -------             --------            -------

<S>                                                    <C>           <C>          <C>                  <C>                  <C>
Balance, May 31, 1996                                   6,717          $67          $40,166             $(37,502)           $ 2,731

Net loss                                                                                                  (1,123)            (1,123)
                                                        -----          ---          -------             --------            -------
Balance, November 30, 1996                              6,717          $67          $40,166             $(38,625)           $ 1,608
                                                        =====          ===          =======             ========            =======



Balance, May 31, 1997                                   6,717          $67          $40,166             $(46,191)           $(5,958)

Net loss                                                                                                  (1,618)            (1,618)
                                                        -----          ---          -------             --------            -------

Balance, November 30, 1997                              6,717          $67          $40,166            $ (47,809)           $(7,576)
                                                        =====          ===          =======            =========            =======
</TABLE>

The accompanying condensed notes are an integral part of these consolidated
statements.

                                        5
<PAGE>   6
                     THE HE-RO GROUP, LTD., AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                 (In thousands)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                   Six Months Ended
                                                                     November 30,
                                                              ------------------------
                                                                1997           1996
                                                                ----           ----
<S>                                                           <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net loss .........................................        ($1,618)        $(1,123)
                                                              -------         -------
    Adjustments to reconcile net income to net
        cash provided by (used in) operating
        activities:
        Depreciation and amortization ................            139             473
        Amortization of deferred finance costs .......            113             159

(Increase) decrease in assets:
    Trade receivables ................................         (1,575)         (1,230)
    Other receivables ................................            639            (545)
    Inventories ......................................          1,080           2,316
    Other current assets .............................            264            (360)
Increase (decrease) in liabilities:
    Accounts payable .................................            925             554
    Accrued expenses and other current liabilities ...            (42)            (96)
                                                              -------         -------
    Total adjustments ................................           1543           1,271
                                                              -------         -------

Net cash provided by (used in)
  operating activities ...............................            (75)            148
                                                              -------         -------

CASH FLOWS FROM INVESTING ACTIVITIES:
    Acquisition of fixed assets ......................            (11)            (82)
    Decrease in other assets .........................             67              39
                                                              -------         -------
Net cash provided by (used in) investing
activities ...........................................             56             (43)
                                                              -------         -------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Increase in bank loans .............................            353             257
  Deferred finance costs .............................           (113)            (40)
                                                              -------         -------
           Net cash provided by financing activities .            240             217
                                                              -------         -------

NET INCREASE IN CASH .................................            221             322
                                                              -------         -------

CASH, beginning of period ............................            354             405
                                                              -------         -------

CASH, end of period ..................................        $   575         $   727
                                                              =======         =======
</TABLE>

The accompanying condensed notes are an integral part of these consolidated
statements.


                                        6
<PAGE>   7
                     THE HE-RO GROUP, LTD. AND SUBSIDIARIES
              CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

                                November 30, 1997

1.      BASIS OF PRESENTATION

             The consolidated financial statements include the accounts of The
        HE-RO Group, Ltd. and its subsidiaries (hereinafter collectively
        referred to as the "Company" unless the context clearly otherwise
        requires). The consolidated financial statements are presented in
        accordance with the requirements of the quarterly report on Form 10-Q
        and consequently do not include all of the disclosures normally made in
        an annual report on Form 10-K filing. Accordingly, the consolidated
        financial statements included herein should be reviewed in conjunction
        with the consolidated financial statements and the notes included
        therein with the Company's Annual Report on Form 10-K.

             The financial information as of and for the six months ended
        November 30, 1997 and 1996 has been prepared in accordance with the
        Company's customary accounting practices and has not been audited. In
        the opinion of management, the information presented reflects all
        adjustments necessary for a fair statement of interim results. All such
        adjustments are of a normal and recurring nature. The foregoing interim
        results are not necessarily indicative of the results of operations for
        the full year ending May 31, 1998 ("Fiscal 1998").


2.      RESTRUCTURING

             In February 1997, at a Special Meeting of the Company's Board of
        Directors, as part of its ongoing cost cutting efforts the Board adopted
        a restructuring plan in connection with the subletting of the Company's
        domestic warehouse and distribution center, administrative offices and
        retail store, which were located in a single leased facility in
        Secaucus, New Jersey; and in March, 1997 the Company entered into a
        sublease with Harve Benard with respect to such facility. Because the
        Company has downsized its operation to its core eveningwear business as
        a result of a restructuring plan adopted by the Board in October 1993,
        the Company's current operations no longer justify the use of the more
        expansive facilities located in Secaucus, New Jersey. Accordingly, the
        Company relocated its administrative offices and retail store to smaller
        leased space in Secaucus, and is utilizing an independent third party
        for the distribution and warehousing of inventory.

             In May 1997, at a Special Meeting of the Company's Board of
        Directors, the Board expanded upon the restructuring plan, adopted in
        February 1997 to further cut costs and streamline operations. The Board
        elected to further restructure the Company's Hong Kong operations by
        further downsizing and consolidating the production office and moving
        the sample making operations from Hong Kong to China. Additionally, as
        part of this restructuring, the Company will close certain unprofitable
        retail stores to aid the Company in focusing its resources on developing
        the profitable store operations.


                                        7
<PAGE>   8
        Included on the accompanying consolidated balance sheets in accrued
        expenses and other current liabilities related to the restructuring
        charges is an accrual of $.7 million as of November 30, 1997.


3.      INVENTORY

             Inventory is stated at the lower of cost (first-in, first-out) or
        market.

<TABLE>
<CAPTION>
                                                     (In Thousands)
                                                  November 30,  May 31,
                                                      1997       1997
                                                  -----------   ------
                                                  (UNAUDITED)

<S>                                               <C>           <C>
        Finished goods.........................     $ 7,946     $ 9,012
        Raw materials..........................       1,725       1,739
                                                    -------     -------
                                                    $ 9,671     $10,751
                                                    =======     =======
</TABLE>

4.      FIXED ASSETS

        Fixed assets consist of the following:

<TABLE>
<CAPTION>
                                                     (In Thousands)
                                                 November 30,    May 31,
                                                     1997         1997
                                                 -----------     ------
                                                 (UNAUDITED)

<S>                                              <C>             <C>
        Machinery and equipment ...........        $1,946        $1,943
        Furniture and fixtures ............         2,527         2,526
        Leasehold improvements ............         1,901         1,894
                                                   ------        ------
                                                    6,374         6,363
        Less - Accumulated depreciation and
        amortization ......................         5,987         5,848
                                                   ------        ------
                                                   $  387        $  515
                                                   ======        ======
</TABLE>

5.      RELATED PARTY TRANSACTIONS

             The Company has an investment of $798,000 in Great Projects Limited
        ("GPL"), a Hong Kong corporation. Fifty percent of GPL is owned by a
        subsidiary of the Company, and 25% is owned by each of two Hong Kong
        companies that are unaffiliated with the Company or its officers or
        directors. As of October 31, 1993, the partners agreed to discontinue
        the operations of GPL. In January 1996, liquidation proceedings in Hong
        Kong were commenced to wind up GPL. Included in accounts payable is
        $2,151,000 due to the foreign affiliate at November 30, 1997 and May 31,
        1996. The Company does not expect any material impact on its results of
        operations due to the liquidation of GPL.

             Notes and obligations payable to the beneficial principal
        stockholder in the aggregate principal amount of $5,296,000 are
        subordinated to bank borrowing and bear interest varying from 8% to 12%
        per annum. These obligations are due upon demand but because these
        obligations are subordinated to the bank borrowing, the liability
        relating thereto has been classified as long-term.


                                        8
<PAGE>   9
6.  BANK LOANS AND LONG TERM DEBT

             On May 12, 1995, the Company signed a credit agreement (the
        "Foothill Credit Agreement") with Foothill Capital Corporation
        ("Foothill") as amended, expiring December 31, 1997, to enable the
        Company to borrow, assuming that borrowing base thresholds are met (for
        direct loans and letters of credit), amounts not exceeding $15,000,000
        during the term of the credit agreement. The indebtedness incurred under
        the Foothill Credit Agreement is secured by a first lien on the
        Company's domestic inventory and accounts receivable, among other
        collateral. At November 30, 1997, the direct debt outstanding under the
        Foothill Credit Agreement was $5,385,000 and the Company was
        contingently liable for outstanding letters of credit of approximately
        $220,000.

             The Company's credit line with Foothill refinanced a substantial
        portion of the indebtedness previously outstanding from the Company to a
        group of four banks (the "Bank Group"). At November 30, 1997, the
        outstanding indebtedness of the Company to the Bank Group was $2,750,000
        in the aggregate under the Company's fourth amended and restated credit
        agreement with its Bank Group (the "Bank Group Credit Agreement").
        Because certain liquidity standards were not met under the Foothill
        Credit Agreement, the Company was not permitted to pay the monthly
        installments of principal due to the Bank Group, and accordingly has not
        been in compliance with the Bank Group Credit Agreement.

             As of November 30, 1997, the Company was not in compliance with
        certain financial covenants under the Foothill Credit Agreement, but
        received a waiver from Foothill relating to such non-compliance. In
        December 1997, the obligations to Foothill were paid in full in
        connection with a new lending facility. (see Note 9 for further
        discussion).


7.      SUPPLEMENTAL CASH FLOW INFORMATION

             Payments of income taxes were $9,000 and $37,000 for the six months
        ended November 30, 1997 and 1996, respectively. Payments of interest
        during the corresponding periods were $918,000 and $914,000
        respectively.


8.      CONTINGENCIES

             Because a substantial amount of the Company's products are
        manufactured in The People's Republic of China ("China"), the loss of
        "most-favored-nation" ("MFN") trading status for China would have, and
        the conditional granting of MFN trading status for China or the
        imposition of retaliatory trade sanctions against China involving the
        Company's products could have a material adverse affect on the Company,
        resulting from significantly higher rates of duty and other trade
        sanctions imposed on goods originating in China.


                                        9
<PAGE>   10
             In May 1997, President Clinton issued a Presidential Determination
        recommending the renewal of "most-favored-nation" trade status for China
        for the twelve months ending July 2, 1998. Although resolutions
        disapproving such renewal were introduced into both the U.S. Senate and
        the House of Representatives, the House resolution was voted on and
        failed to pass. As has occurred in the last three years, in a break with
        previous years, the Presidential Determination did not recommend
        subjecting any future renewal of "most-favored-nation" trade status for
        China to various conditions, such as China's compliance with the 1992
        bilateral agreement with the United States concerning prison labor and
        overall progress with respect to human rights, release and accounting of
        Chinese citizens imprisoned or detained for their political and
        religious beliefs, humane treatment of prisoners, protecting Tibet's
        religious and cultural heritage and permitting international radio and
        television broadcasts into China. However, bills have been introduced
        into Congress which, if enacted, would ban all entries or importations
        of Chinese origin articles which are the product, growth or manufacture
        of forced labor or of certain entities affiliated with the People's
        Liberation Army and which would deny most-favored-rates of duty to goods
        produced by the People's Liberation Army. "Most-favored-nation" trade
        status was renewed effective July 1997 for an additional year. There is
        no assurance that the President will recommend the renewal of
        "most-favored-nation" trade status for China for the year commencing
        July 3, 1998 or thereafter or that Congress will not enact legislation
        denying or conditioning the grant of "most-favored-nation" trade status
        to China in the future or otherwise restricting the importation of goods
        from China.

             In February 1997, the United States and China entered into a four
        year bilateral textile agreement, covering certain cotton, wool,
        man-made fiber, silk blend and other vegetable fiber textiles and
        textile products, expiring December 31, 2000. Among other things, the
        agreement reduces China's export quotas with respect to fourteen (14)
        apparel and fabric categories and permits the United States to impose
        significant penalties for transshipment violations. Such penalties
        include the assessment of "transshipment charges" against the restraint
        levels of affected categories which could result in such levels filling
        more rapidly or becoming fully utilized with little or no advance
        notice. In addition, a separate agreement between the United States and
        China was reached which subjects to quota limitations, China's exports
        of apparel containing 70% or more by weight of silk. This agreement is
        effective with respect to goods produced or manufactured in China and
        exported to the United States during the period from January 1, 1997
        through December 31,1997 and replaces a substantially similar agreement
        which was in effect from April 1, 1994 through December 31, 1996.

             On July 1, 1997, the British Crown Colony of Hong Kong reverted to
        the People's Republic of China. The United States has announced its
        agreement with China on the separate treatment of textile quotas for
        Hong Kong after the reversion of such territory. Should the United
        States in the future determine that goods produced in Hong Kong would be
        subjected to Chinese quota, such a determination would adversely affect
        any contingency plans of the Company which are premised on the shifting
        of production or assembly of the products from China to Hong Kong.


                                       10
<PAGE>   11
             In addition, over the past several years including 1996, the Office
        of the United States Trade Representative has conducted, and may in the
        future conduct, investigations relating to China's trade policies and
        practices. While previous investigations were resolved without resort to
        retaliatory trade sanctions against China by the United States, an
        unfavorable resolution of any future investigation could result in the
        imposition of retaliatory trade sanctions against China and on products
        imported from China, including products manufactured by the Company in
        China.

             Legislation implementing the Uruguay Round of the General Agreement
        on Tariffs and Trade was signed by President Clinton in late 1994. Among
        other provisions, it contained a section which amended the rules of
        origin applicable to textiles and textile products, effective with
        respect to goods entered or withdrawn from warehouse for consumption on
        or after July 1, 1996. Regulations implementing these changes were
        promulgated. In general, and with specified exceptions, the statute and
        regulations provide that most textile apparel articles will be
        considered to originate in the country in which they are wholly
        assembled. In many cases, this represents a change from the manner in
        which country of origin has been determined, which in many instances,
        was based on where the components were cut. The Company cannot now
        predict to what extent the new rules concerning country of origin will
        change import trade patterns or how it will impact upon quota usage from
        exporting countries.

             The Company is a party to various claims, legal actions, and
        complaints arising in the ordinary course of business. In the opinion of
        the Company's management, all such matters are without merit or involve
        such amounts in which an unfavorable disposition would not have a
        material effect on the consolidated financial statements of the Company.


9.      SUBSEQUENT EVENT

             On December 24, 1997 (the "Closing Date"), the Company acquired all
        of the outstanding capital stock of Nah Nah Collection, Inc. ("Nah Nah")
        from Hong J. Han, president of Nah Nah, in exchange for the issuance by
        the Company to Mr. Han of 5,277,905 shares of Common Stock (equivalent
        to 44% of the Company's issued and outstanding capital stock), pursuant
        to a Stock Purchase Agreement dated October 16, 1997 (the "Stock
        Purchase Agreement"), among the Company, Nah Nah, Mr. Han and Della
        Rounick. In addition, Ms. Rounick granted to Mr. Han, or his designee,
        an irrevocable proxy to vote the 4,430,748 shares of Common Stock owned
        by her, giving Mr. Han voting control over a total of approximately 81%
        of the Company's issued and outstanding stock. Nah Nah produces and
        markets several lines of women's ready to wear and special occasion wear
        consisting of suits and dresses under labels including Victor Costa by
        Nahdree, Constance Saunders by Nahdree, Nah Nah Collections and under
        private label through its NNP division. For financial reporting
        purposes, this transaction will be accounted for as a reverse 
        acquisition.

             Historically, the Company incurred losses from operations and
        there was insufficient liquidity, as required by its former senior
        lender, Foothill, to pay the Company's obligations to the Bank Group. As
        a result, the Company's financial statements have reflected doubt about
        the


                                       11
<PAGE>   12
        Company's ability to continue as a going concern. On the Closing Date,
        the Company and all of its active subsidiaries entered into a new
        factoring and revolving inventory loan and security agreement (the
        "Factoring Agreement") with Heller Financial, Inc. ("Heller"), replacing
        Foothill as the senior lender. All of the outstanding obligations of the
        Company to Foothill were paid in full and Foothill released its liens on
        the assets of the Company and its subsidiaries. The factoring advances,
        inventory and letter of credit facility under the Factoring Agreement
        may not exceed an aggregate of $20,000,000 outstanding at any time and
        includes (a) collection factoring with advances not to exceed 85% of the
        purchase price of net eligible accounts; (b) advances not to exceed 60%
        of eligible finished goods inventory located in the United States; (c)
        documentary letters of credit; and (d) an over advance formula facility.
        The significant restrictive covenants as defined in the Factoring
        Agreement are as follows:

             -     Minimum tangible net worth for each fiscal year: $4,250,000
                   for 1998; $7,000,000 for 1999; $10,500,000 for 2000; and
                   $15,500,000 for each fiscal year thereafter.
             -     Minimum working capital: $2,200,000.
             -     Minimum current ratio: 1.30 to 1.10.
             -     Capital expenditures may not exceed $300,000 in one fiscal
                   year.

               The Company's principal subsidiaries granted to Heller
        continuing security interests in substantially all of their assets,
        including receivables, inventory (other than raw materials and
        work-in-progress), intangibles, equipment, and any proceeds from any of
        the above. The obligations to Heller are further secured by a guaranty
        by the Company and its other subsidiaries, and the obligations of such
        guarantors are secured by liens on substantially all of the assets of
        the guarantors.

               In addition, Mr. Han acquired all of the Company's outstanding
        obligations ($2,750,000 in principal amount) to the Bank Group, and all
        of the collateral therefor, under the Bank Group Credit Agreement. The
        obligations are evidenced by term notes with interest at 2% above prime
        rate. The Company had been in default under the Bank Group Credit
        Agreement and has acknowledged such defaults and that there are no
        obligations to make any loans under the Bank Group Credit Agreement. The
        Company's indebtedness to Mr. Han, as successor to the Bank Group, is
        (i) subordinated to the Company's indebtedness to Heller, its new senior
        lender, and (ii) secured by a second lien on the domestic inventory and
        accounts receivable, among other collateral, and a first lien on the
        inventory located in Hong Kong and China. The Bank Group also
        surrendered to the Company for cancellation warrants to purchase 250,000
        shares of common stock of the Company.

               Pursuant to certain conditions set forth in the Stock Purchase
         Agreement, on the Closing Date, Mr. Han also purchased from Ms. Rounick
         subordinated indebtedness of The He-Ro Group, Inc. ("HGI") to the
         Estate of Herbert Rounick (of which Ms. Rounick is executrix) in the
         amount of $4,296,000, plus accrued interest. Ms. Rounick retained
         $1,000,000, plus accrued interest, of subordinated indebtedness. The
         aggregate indebtedness (in the principal amount of $6,660,801, which
         includes the accrued interest) is evidenced by subordinated notes of
         the Company in favor of each of Mr. Han and Ms. Rounick bearing
         interest at 9.278% per annum. The principal is due and payable on
         demand and the interest is


                                       12
<PAGE>   13
         due on the first of each month commencing January 1, 1998, or otherwise
         on demand. The Company and all its subsidiaries (except HGI) have
         guaranteed payment and performance of the notes. The payments on, and
         any conversion of, the notes, as well as other provisions on the notes,
         will be on a pari passu basis, subject to certain restrictions, and Ms.
         Rounick may not take any action to collect, enforce, convert or
         otherwise deal with her note unless Mr. Han has taken such action (in
         which event Ms. Rounick may take such action but only to the same
         extent and on the same terms as Mr. Han) or unless she has received Mr.
         Han's prior written consent.

             Under the terms of subordination and intercreditor agreements with
         Heller, all interest payments to Ms. Rounick and Mr. Han are subject to
         certain conditions.


                                       13
<PAGE>   14
                     THE HE-RO GROUP, LTD. AND SUBSIDIARIES
                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS


               GENERAL

                     The following discussion provides information and analysis
         of the Company's results of operations for the six month period ended
         November 30, 1997, and its liquidity and capital resources. The
         following discussion and analysis should be read in conjunction with
         the Unaudited Consolidated Financial Statements included elsewhere
         herein.

                     Because a substantial amount of the Company's products are
         manufactured in The People's Republic of China ("China"), the loss of
         "most-favored-nation" ("MFN") trading status for China would have, and
         the conditional granting of MFN trading status for China or the
         imposition of retaliatory trade sanctions against China involving the
         Company's products could have a material adverse affect on the Company,
         resulting from significantly higher rates of duty and other trade
         sanctions imposed on goods originating in China.

                     In May 1997, President Clinton issued a Presidential
         Determination recommending the renewal of "most-favored-nation" trade
         status for China for the twelve months ending July 2, 1998. Although
         resolutions disapproving such renewal were introduced into both the
         U.S. Senate and the House of Representatives, the House resolution was
         voted on and failed to pass. As has occurred in the last three years,
         in a break with previous years, the Presidential Determination did not
         recommend subjecting any future renewal of "most-favored-nation" trade
         status for China to various conditions, such as China's compliance with
         the 1992 bilateral agreement with the United States concerning prison
         labor and overall progress with respect to human rights, release and
         accounting of Chinese citizens imprisoned or detained for their
         political and religious beliefs, humane treatment of prisoners,
         protecting Tibet's religious and cultural heritage and permitting
         international radio and television broadcasts into China. However,
         bills have been introduced into Congress which, if enacted, would ban
         all entries or importations of Chinese origin articles which are the
         product, growth or manufacture of forced labor or of certain entities
         affiliated with the People's Liberation Army and which would deny
         most-favored-rates of duty to goods produced by the People's Liberation
         Army. "Most-favored-nation" trade status was renewed effective July
         1997 for an additional year. There is no assurance that the President
         will recommend the renewal of "most-favored-nation" trade status for
         China for the year commencing July 3, 1998 or thereafter or that
         Congress will not enact legislation denying or conditioning the grant
         of "most-favored-nation" trade status to China in the future or
         otherwise restricting the importation of goods from China.

                     In February 1997, the United States and China entered into
         a four year bilateral textile agreement, covering certain cotton, wool,
         man-made fiber, silk blend and other vegetable fiber textiles and
         textile products, expiring December 31, 2000. Among other things, the
         agreement reduces China's export quotas with respect to fourteen (14)
         apparel and


                                       14
<PAGE>   15
                     THE HE-RO GROUP, LTD. AND SUBSIDIARIES
                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

         fabric categories and permits the United States to impose significant
         penalties for transshipment violations. Such penalties include the
         assessment of "transshipment charges" against the restraint levels of
         affected categories which could result in such levels filling more
         rapidly or becoming fully utilized with little or no advance notice. In
         addition, a separate agreement between the United States and China was
         reached which subjects to quota limitations, China's exports of apparel
         containing 70% or more by weight of silk. This agreement is effective
         with respect to goods produced or manufactured in China and exported to
         the United States during the period from January 1, 1997 through
         December 31,1997 and replaces a substantially similar agreement which
         was in effect from April 1, 1994 through December 31, 1996.

                     On July 1, 1997, the British Crown Colony of Hong Kong
         reverted to the People's Republic of China. The United States has
         announced its agreement with China on the separate treatment of textile
         quotas for Hong Kong after the reversion of such territory. Should the
         United States in the future determine that goods produced in Hong Kong
         would be subjected to Chinese quota, such a determination would
         adversely affect any contingency plans of the Company which are
         premised on the shifting of production or assembly of the products from
         China to Hong Kong.

                      In addition, over the past several years including 1996,
         the Office of the United States Trade Representative has conducted, and
         may in the future conduct, investigations relating to China's trade
         policies and practices. While previous investigations were resolved
         without resort to retaliatory trade sanctions against China by the
         United States, an unfavorable resolution of any future investigation
         could result in the imposition of retaliatory trade sanctions against
         China and on products imported from China, including products
         manufactured by the Company in China.

                      Legislation implementing the Uruguay Round of the General
         Agreement on Tariffs and Trade was signed by President Clinton in late
         1994. Among other provisions, it contained a section which amended the
         rules of origin applicable to textiles and textile products, effective
         with respect to goods entered or withdrawn from warehouse for
         consumption on or after July 1, 1996. Regulations implementing these
         changes were promulgated. In general, and with specified exceptions,
         the statute and regulations provide that most textile apparel articles
         will be considered to originate in the country in which they are wholly
         assembled. In many cases, this represents a change from the manner in
         which country of origin has been determined, which in many instances,
         was based on where the components were cut. The Company cannot now
         predict to what extent the new rules concerning country of origin will
         change import trade patterns or how it will impact upon quota usage
         from exporting countries.

                      The Company is a party to various claims, legal actions,
         and complaints arising in the ordinary course of business. In the
         opinion of the Company's management, all such matters are without merit
         or


                                       15
<PAGE>   16
                     THE HE-RO GROUP, LTD. AND SUBSIDIARIES
                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

         involve such amounts in which an unfavorable disposition would not have
         a material effect on the consolidated financial statements of the
         Company.


         RESULTS OF OPERATIONS
         SECOND QUARTER FISCAL 1998 COMPARED TO SECOND QUARTER FISCAL 1997

               Net sales of $10.9 million for the three months ended November
         30, 1997 decreased by $3.0 million, or (21.4)% compared to net sales of
         $13.9 million for the three months ended November 30, 1996. The
         decrease is primarily attributable to reduced sales for the Niteline
         division due to increased competition and the disrupted business
         including loss of personnel resulting from transaction negotiations for
         the contemplated sale of the Company.

               Cost of sales for the three months ended November 30,1997 was
         $7.1 million, or 64.6% of net sales compared to $8.7 million, or 62.3%
         of net sales for the three months ended November 30, 1996. Gross profit
         for the three months ended November 30, 1997 was $3.9 million, or 35.4%
         of net sales, compared to $5.4 million, or 37.7% of net sales for three
         months ended November 30, 1996. The decrease in gross profit dollars
         and as a percent of sales is primarily attributable to the decrease in
         sales described above.

               Selling, general and administrative expenses were $3.8 million,
         or 34.5% of net sales for the three months ended November 30, 1997,
         compared to $4.8 million, or 34.2% of net sales for the three months
         ended November 30, 1996. The lower selling, general and administrative
         expenses for the quarter ending November 30, 1997 are primarily
         attributable to planned reductions in salary expenses, rent and
         occupancy, professional fees and insurance.

               Operating income was $.1 million or .8% of net sales for the
         three months ended November 30, 1997 compared to an operating income of
         $.5 million or 3.4% of net sales for the three months ended November
         30, 1996. The decrease in operating income was attributable to the
         reduced sales and gross profit dollars described above.

               Interest expense for the three months ended November 30, 1997 was
         $.6 million, or 5.6% of net sales compared to $.6 million, or 4.4% of
         net sales for the three months ended November 30, 1996.

               As a result of the factors described above, the Company's net
         loss increased to $(0.5) million, or (4.8)% of net sales during the
         three months ended November 30, 1997, compared to $(0.1) million, or
         (0.9)% of net sales for the three months ended November 30, 1996.


                                       16
<PAGE>   17
                     THE HE-RO GROUP, LTD. AND SUBSIDIARIES
                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

                   RESULTS OF OPERATIONS
                   SIX MONTHS ENDED NOVEMBER 30, 1997 COMPARED TO SIX MONTHS 
                   ENDED NOVEMBER 30, 1996

                   Net Sales of 20.8 million for the six months ended months
         November 30, 1997 decreased by 4.7 million (18.3%) below the net sales
         of 25.5 million for the six months ended November 30, 1996. This
         decrease is primarily attributable to reduced sales for the Niteline
         division due to increased competition and the disrupted business
         including loss of personnel resulting from transaction negotiations for
         the contemplated sale of the Company.
                  
                   Cost of sales for the six months ended November 30, 1997 was
         $13.4 million, or 64.5% of net sales compared to $15.6 million, or
         61.2% of net sales for the six months ended November 30, 1996. Gross
         profit for the six months ended November 30, 1997 was $7.4 million, or
         35.4% of net sales, compared to $9.9 million or 38.7% of net sales for
         the six months November 30, 1996. The decrease in gross profit dollars
         and as a percent of sales is primarily attributable to the decrease in
         sales described above.

                   Selling, general and administrative expenses of $7.8 million
         or 37.5% of net sales for the six months ended November 30, 1997
         compared to $ 9.8 million, or 38.6% for the six months ended November
         30, 1996. The lower selling, general and administrative expenses for
         the quarter ending November 30, 1997 are primarily attributable to
         planned reductions in salary expenses, rent and occupancy, professional
         fees and insurance.

                   Operating loss of $(0.4) million or .2% of net sales for the
         six months ended November 30, 1997 compared to $0.1 million or 2.0% of
         net sales for the six months ended November 30, 1996. This increase in
         operating loss was primarily attributable to the reduced sales and
         gross profit dollars and described above.

                   Interest expense of $1.2 million or 5.6% of net sales for the
         six months ended November 30, 1997, compared to $1.2 million, or 4.5%
         of net sales for the six months ended November 30, 1996.

                   As a result of the factors described above, the company's net
         loss was $(1.6) million (or $(0.24) per share)for the six months ended
         November 30, 1997 compared to a net loss of $(1.1) million (or $0.17
         per share) for the six months ended November 30, 1996.


                                       17
<PAGE>   18
                     THE HE-RO GROUP, LTD. AND SUBSIDIARIES
                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

               LIQUIDITY AND CAPITAL RESOURCES

             At November 30, 1997, the Company had a decrease in cash flows from
         operating activities of $.1 million. This decrease resulted primarily
         from a net increase in accounts receivable of $.9 million and a net
         loss of $1.6 million, offset by an increase in accounts payable of $.9
         million and a decrease in inventories of 1.1 million. The Company's
         level of cash flows from operating activities varies from quarter to
         quarter due to the seasonality of its business.

             In regard to cash flows from investing activities, during the first
         six months of fiscal 1998 and 1997, capital improvements and
         replacement expenditures were not significant. Capital improvements and
         replacements for the full fiscal 1998 year are expected to approximate
         $.2 million.

             Cash flows from financing activities increased by $.2 million
         resulting primarily from an increase in bank borrowings under the
         Company's revolving credit facilities.

             On December 24, 1997 (the "Closing Date"), the Company acquired all
        of the outstanding capital stock of Nah Nah Collection, Inc. ("Nah Nah")
        from Hong J. Han, president of Nah Nah, in exchange for the issuance by
        the Company to Mr. Han of 5,277,905 shares of Common Stock (equivalent
        to 44% of the Company's issued and outstanding capital stock), pursuant
        to a Stock Purchase Agreement dated October 16, 1997 (the "Stock
        Purchase Agreement"), among the Company, Nah Nah, Mr. Han and Della
        Rounick. In addition, Ms. Rounick granted to Mr. Han, or his designee,
        an irrevocable proxy to vote the 4,430,748 shares of Common Stock owned
        by her, giving Mr. Han voting control over a total of approximately 81%
        of the Company's issued and outstanding stock. Nah Nah produces and
        markets several lines of women's ready to wear and special occasion wear
        consisting of suits and dresses under labels including Victor Costa by
        Nahdree, Constance Saunders by Nahdree, Nah Nah Collections and under
        private label through its NNP division. For financial reporting
        purposes, this transaction will be accounted for as a reverse 
        acquisition.

             Historically, the Company incurred losses from operations and there
        was insufficient liquidity, as required by its former senior lender,
        Foothill Capital Corporation ("Foothill") to pay the Company's
        obligations to its bank group which ranked junior to Foothill (the
        "Bank Group"). As a result, the Company's financial statements have
        reflected doubt about the Company's ability to continue as a going
        concern. On the Closing Date, the Company and all of its active
        subsidiaries entered into a new factoring and revolving inventory loan
        and security agreement (the "Factoring Agreement") with Heller
        Financial, Inc. ("Heller"), replacing Foothill as the senior lender.
        All of the outstanding obligations of the Company to Foothill were paid
        in full and Foothill released its liens on substantially all of the
        assets of the Company and its subsidiaries. Mr. Han also acquired all
        of the obligations due and owing by the Company to the Bank Group, and
        all of the collateral therefor, under the fourth amended and restated
        revolving credit agreement dated May 15, 1995 between the Company and
        the Bank Group (the "Bank Group Credit Agreement"), in the aggregate
        principal amount of $2,750,000. The obligations are evidenced by term
        notes with interest at 2% above the prime rate. The Company had been in
        default under the Bank Group Credit Agreement and has acknowledged such
        defaults and that there are no obligations to make any loans under the
        Bank Group Credit Agreement. The Company's indebtedness to Mr. Han, as
        successor to the Bank Group is (i) subordinated to the Company's
        indebtedness to Heller, its new senior lender, and (ii) secured by a
        second lien on the domestic inventory and accounts receivable, among
        other collateral, and a first lien on the inventory located in Hong
        Kong and China. The Bank Group also surrendered to the Company for
        cancellation warrants to purchase 250,000 shares of common stock
        of the Company.
        

                                       18
<PAGE>   19
                     THE HE-RO GROUP, LTD. AND SUBSIDIARIES
                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

             The Factoring Agreement provides for Heller to purchase eligible
         receivables and advance to the Company's principal operating
         subsidiaries up to 85% of the purchase price (as such term is defined
         in the Factoring Agreement) of net eligible accounts. In addition,
         Heller has agreed to make revolving loans (including letters of credit)
         to each of such parties upon request and in Heller's discretion, in
         amounts up to approximately 60% of each such party's eligible finished
         goods inventory located in the United States, plus certain supplemental
         amounts. The factoring advances, inventory and letter of credit
         facility under the Factoring Agreement may not exceed an aggregate of
         $20,000,000 outstanding at any time.


                                       19
<PAGE>   20
                     THE HE-RO GROUP, LTD. AND SUBSIDIARIES

                           PART II. OTHER INFORMATION

                  Item 6.  Exhibits and Reports on Form 8-K

                  (a)      Exhibits:

                  3.1      Restated Certificate of Incorporation of Registrant.

                  3.2      Bylaws of Registrant, as amended.

                  10.1     Stock Purchase Agreement dated October 16, 1997 among
                           The He-Ro Group, Ltd., Nah Nah Collection, Inc., Hong
                           J. Han and Della Rounick.

                  27.1     Financial Data Schedule

                  99.1     Factoring Agreement dated December 24, 1997 among
                           Heller Financial, Inc., The He-Ro Group, Inc., HRNL
                           Inc., Nah Nah Collection, Inc., The He-Ro Group, Ltd.
                           and certain other subsidiaries.

                  (b)      Reports on Form 8-K:

                           The Company did not file any report on Form 8-K 
                           during the three months ended November 30, 1997


                                   SIGNATURES

                   Pursuant to the requirements of the Securities Exchange Act
         of 1934, The He-Ro Group, Ltd. has duly caused this Quarterly Report on
         Form 10-Q to be signed on its behalf by the undersigned thereunto duly
         authorized.

               Date:  January 13, 1998            THE HE-RO GROUP, LTD.
                                                      (Registrant)

                                                  By: /s/ Hong J. Han
                                                      --------------------------
                                                      Hong J. Han
                                                      Chairman of the Board
                                                      of Directors and Chief
                                                      Executive Officer

               Date:  January 13, 1998
                                                      /s/ Sam D. Kaplan
                                                      --------------------------
                                                      Sam D. Kaplan
                                                      Chief Financial Officer
                                                      (Principal Financial and
                                                      Accounting Officer)


                                       20
<PAGE>   21
                                INDEX TO EXHIBITS
                                       TO
                              THE QUARTERLY REPORT
                     FOR THE QUARTER ENDED November 30, 1997
                                       OF
                              THE HE-RO GROUP, LTD.



                  3.1      Restated Certificate of Incorporation of Registrant.
                           Incorporated by reference to Exhibit 3.1 of
                           Registrant's Annual Report on Form 10-K for the year
                           ended May 31, 1995 ("Registrant's 1995 10-K").

                  3.2      Bylaws of Registrant, as amended. Incorporated by
                           reference to Exhibit 3.2 of Registrant's 1995 10-K.

                  10.1     Stock Purchase Agreement dated October 16, 1997 among
                           The He-Ro Group, Ltd., Nah Nah Collection, Inc., Hong
                           J. Han and Della Rounick. Incorporated by reference
                           to Exhibit 2.1 to the Registrant's Current Report on
                           Form 8-K dated December 31, 1997.

                  *27.1    Financial Data Schedule

                  99.1     Factoring Agreement dated December 24, 1997 among
                           Heller Financial, Inc., The He-Ro Group, Inc., HRNL
                           Inc., Nah Nah Collection, Inc., The He-Ro Group Ltd.
                           and certain other subsidiaries. Incorporated by
                           reference to Exhibit 99.1 to the Registrant's Current
                           Report on Form 8-K dated December 31, 1997.


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