<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 August 31, 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.)

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

                                 (212) 840-6047
              (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                          October 14, 1997
             ---------------------                          ----------------
                $.01 par value                                  6,717,333
<PAGE>   2

                     THE HE-RO GROUP, LTD. AND SUBSIDIARIES

Index

PART I.  FINANCIAL INFORMATION                                          Page No.

Item 1.  Financial Statements:

         Consolidated Balance Sheets
         August 31, 1997 and May 31, 1997..........................        3

         Consolidated Statements of Income
         Three Months Ended August 31, 1997 and 1996...............        4

         Consolidated Statements of Changes in Stockholders' Equity
         (deficiency) Three Months Ended August 31, 1997 and 1996..        5

         Consolidated Statements of Cash Flows
         Three Months Ended August 31, 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 - 17

PART II. OTHER INFORMATION.........................................       18
<PAGE>   3

                      THE HE-RO GROUP,LTD. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

                                 (In thousands)

<TABLE>
<CAPTION>
                                                          August 31,     May 31,
                                                             1997         1997
                                                         (unaudited)
                                                         -----------     -------
<S>                                                        <C>           <C>    
        ASSETS
CURRENT ASSETS:
   Cash ................................................   $   168       $   354
                                                           -------       -------
   Accounts receivable:                                               
     Trade, net of allowances for doubtful                            
     accounts of $400 ..................................     3,771         1,016
     Suppliers and other ...............................     2,886         3,311
                                                           -------       -------
                                                             6,657         4,327
   Inventory ...........................................    11,543        10,751
   Other current assets ................................       396           828
                                                           -------       -------
        Total current assets ...........................    18,764        16,260
                                                           -------       -------
FIXED ASSETS - at cost, net of accumulated                            
   depreciation and amortization .......................       443           515
OTHER ASSETS ...........................................     1,030         1,031
                                                           -------       -------
                                                           $20,237       $17,806
                                                           =======       =======
                                                                      
        LIABILITIES AND STOCKHOLDERS' EQUITY                          
CURRENT LIABILITIES:                                                  
   Bank loans ..........................................   $10,710       $ 7,782
   Accounts payable ....................................     8,404         7,604
   Accrued expenses and other current                                 
     liabilities .......................................     2,875         3,082
                                                           -------       -------
        Total current liabilities ......................    21,989        18,468
                                                           -------       -------
                                                                      
Subordinated Notes Payable --                                         
   stockholder, net of current maturities ..............     5,296         5,296
                                                           -------       -------
                                                                      
     COMMITMENTS AND CONTINGENCIES                                    
                                                                      
STOCKHOLDERS' EQUITY:                                                 
   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 .................................   <47,281>      <46,191>
                                                           -------       -------
        Total stockholders' deficit ....................   <7,048>       <5,958>
                                                           -------       -------
                                                           $20,237       $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
                                                  ------------------------
                                                          August 31,
                                                  ------------------------
                                                     1997            1996
                                                     ----            ----
<S>                                               <C>              <C>    
Net sales ..................................      $   9,893        $11,577
                                                                   
Cost of sales ..............................          6,374          6,935
                                                  ---------        -------
                                                                   
   Gross profit ............................          3,519          4,642
                                                                   
Selling, general and administrative expenses          4,048          5,075
                                                                   
Operating loss .............................          <529>          <433>
                                                                   
Interest expense ...........................            561            561
                                                  ---------        -------
                                                                   
   Loss before income taxes ................        <1,090>          <994>
                                                                   
Provision for income taxes .................           --             --
                                                  ---------        -------
                                                                   
   Net loss ................................       $<1,090>         $<994>
                                                  =========        =======
                                                                   
Net loss per common share ..................        $<0.16>        $<0.15>
                                                  =========        =======
                                                                   
Weighted average shares outstanding ........          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                                                       <994>      <994>
                               -----     ---  -------      --------    -------

Balance, August 31, 1996       6,717     $67  $40,166      $<38,496>   $ 1,737
                               =====     ===  =======      ========    =======

Balance, May 31, 1997          6,717     $67  $40,166      $<46,191>   $<5,958>

Net loss                                                     <1,090>    <1,090>
                               -----     ---  -------      --------    -------

Balance, August 31, 1997       6,717     $67  $40,166     $ <47,281>   $<7,048>
                               =====     ===  =======     =========    =======
</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>
                                                           Three Months Ended
                                                        ------------------------
                                                               August 31,
                                                        ------------------------
                                                          1997           1996
                                                          ----           ----
<S>                                                     <C>                <C> 
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net loss ........................................    <1,090>        $   <994>
                                                        ------         --------
   Adjustments to reconcile net income to net
     cash provided by (used in) operating
     activities:
     Depreciation and amortization .................        72              246
     Amortization of deferred finance costs ........        56               79

(Increase) decrease in assets:
   Trade receivables ...............................    <2,755>          <2,916>
   Other receivables ...............................       425              <68>
   Inventories .....................................      <792>            <252>
   Other current assets ............................       432              <64>
Increase (decrease) in liabilities:
   Accounts payable ................................       800            1,083
   Accrued expenses and other current liabilities ..      <207>             140
                                                       -------          -------
   Total adjustments ...............................    <1,969>          <1,752>
                                                       -------          -------
        Net cash used in operating activities ......    <3,059>          <2,746>
                                                       -------          -------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Acquisition of fixed assets .....................       --               <27>
   Increase in other assets ........................         5               26
                                                       -------          -------
Net cash used in (provided by) investing
activities .........................................         5               <1>
                                                       -------          -------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Increase (decrease) in bank loans ................     2,928            2,994
  Deferred finance costs ...........................       <60>             <39>
                                                       -------          -------
        Net cash provided by financing activities ..     2,868            2,955
                                                       -------          -------

NET INCREASE <DECREASE> IN CASH ....................     <186>             208
                                                       -------          -------

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

CASH, end of period ................................     $168             $613
                                                       =======          =======
</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)

                                 August 31, 1997

1.    BASIS OF PRESENTATION

            The consolidated financial statements include the accounts of The
      HE-RO Group, Ltd. and its subsidiaries (the "Company"). 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 three months ended
      August 31, 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 August 31, 1997.

3.    INVENTORY

            Inventory is stated at the lower of cost (first-in, first-out) or
      market, and at August 31, 1997 was calculated using the gross profit
      method.

<TABLE>
<CAPTION>
                                                     (In Thousands)
                                                 August 31,    May 31,
                                                   1997         1997
                                                 ---------      -----
                                                (UNAUDITED)
      <S>                                         <C>         <C>
      Finished goods.........................     $10,154     $ 9,012
      Raw materials..........................       1,389       1,739
                                                  -------     -------
                                                  $11,543     $10,751
                                                  =======     =======
</TABLE>

4.    FIXED ASSETS

      Fixed assets consist of the following:

<TABLE>
<CAPTION>
                                                     (In Thousands)
                                                   August 31,   May 31,
                                                     1997        1997
                                                 ------------   -----
                                                 (UNAUDITED)
      <S>                                         <C>         <C>
      Machinery and equipment.................    $ 1,943      $1,943
      Furniture and fixtures..................      2,526       2,526
      Leasehold improvements..................      1,894       1,894
                                                  -------      ------
                                                    6,363       6,363
      Less - Accumulated depreciation and
      amortization............................      5,920       5,848
                                                  -------      ------
                                                  $   443      $  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 August 31, 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") for a two year term expiring June 2, 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. As a result of an amendment dated
      August 27, 1997, the term of the Foothill Credit Agreement has been
      extended through November 30, 1997. 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.

            Interest on direct debt is payable at the prime rate (8.50% at
      August 31, 1997) plus 2 1/2% per annum. At August 31, 1997, the direct
      debt outstanding under the Foothill Credit Agreement was $7,960,000 and
      the Company was contingently liable for outstanding letters of credit of
      approximately $472,000.

            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 August 31, 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, evidenced by a term note to each bank with
      interest at 2% above the prime rate. The Company's indebtedness to the
      Bank Group is (i) subordinated to the Company's indebtedness to Foothill
      (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, and (iii) subject to a mandatory
      prepayment of $100,000 for any month in which the Company's inventory in
      Hong Kong and China decrease below certain minimum thresholds. This loan
      is due and payable in monthly installments of principal ranging from
      $50,000 to $150,000 beginning August 1995, plus monthly interest payments,
      with the final payment due in June 1997. These payments are permitted
      under the Foothill Credit Agreement if certain liquidity standards are
      met. For the months ended December 1995 through September 1996, because
      these liquidity standards were not met, the Company was not permitted to
      pay the monthly installments of principal to the Bank Group, and
      accordingly was not in compliance with its credit agreement with the Bank
      Group. As a result of the foregoing and in connection with the current
      transaction negotiations. as discussed in Note 9, the Company will be
      seeking to revise its credit facilities.

            The Bank Group holds warrants to purchase up to an aggregate of
      250,000 shares of the Company's common stock at a price of $2.00 per
      share, expiring on September 17, 1999.


                                        9
<PAGE>   10

            The Company's credit agreements with Foothill and the Bank Group
      requires Della Rounick and the estate of Herbert Rounick, collectively, to
      own or control at least 51% of the Company's outstanding common stock. In
      addition, the more significant restrictive covenants as defined in the
      Foothill Credit Agreement are as follows:

      - The minimum current ratio must equal: 1.0 to 1

      - The maximum liabilities to net worth must equal: 38.0 to 1

      - The minimum net worth required: $400,000

      - The minimum working capital required : $3,500,000

      - Capital expenditures may not exceed $500,000 in one year.

      - The Company is prohibited from paying dividends throughout the term of
        the agreement.

      - The net income on a cumulative basis and measured at the end of each
        fiscal quarter may not fall below negative $4,500,000 from June 1, 1995.

            As of August 31, 1997, the Company was not in compliance with
      certain financial covenants under the Foothill Credit Agreement. The
      Company has received a waiver from Foothill relating to the foregoing
      non-compliance (see Note 9 for further discussion).

7.    SUPPLEMENTAL CASH FLOW INFORMATION

            Payments of income taxes were $9,000 and $37,000 for the three
      months ended August 31, 1997 and 1996, respectively. Payments of interest
      during the corresponding periods were $519,000 and $554,000 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.

            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


                                       10
<PAGE>   11

      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 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
      in 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.

            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,
      for the first time, 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
      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.


                                       11
<PAGE>   12

            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.    GOING CONCERN CONSIDERATION

            Because the Company has been incurring losses from operations, there
      has been insufficient liquidity, as required by its credit agreement with
      its senior lender, Foothill Capital Corporation ("Foothill"), to allow the
      Company to pay required monthly installments of principal to its group of
      four banks that rank junior to Foothill. In addition, the Company is
      projecting losses from operations for the year ending May 31, 1998, which
      will result in its non-compliance with the financial covenants under its
      credit agreement with Foothill in fiscal 1998. In addition, the Company's
      credit agreement with Foothill currently expires on November 30, 1997. The
      combination of these factors raises substantial doubt about the Company's
      ability to continue as a going concern. In the fourth quarter of fiscal
      1996, the Company began to explore its options relative to alleviating its
      financial instability including strategic alliances with other companies,
      an infusion of capital into the Company, the sale or merger of the
      Company, or any combination of the foregoing. On September 4, 1997, the
      Company


                                       12
<PAGE>   13

      signed a letter of intent (the "Letter of Intent") with Nah Nah
      Collections, Inc., a New York corporation ("Nah Nah"), pursuant to which
      Mr. Han, the President, CEO and owner of Nah Nah would receive up to 49%
      of the common stock of the Company in return for the sale to the Company
      of all the issued and outstanding capital stock of Nah Nah. The
      transaction is subject to due diligence to be conducted by each of Nah Nah
      and He-Ro, execution of definitive agreements currently being negotiated,
      obtaining financing, third party approvals, obtaining a fairness opinion
      and other closing conditions. Nah Nah Collections, Inc., a privately held
      company, produces and markets several lines of women's ready to wear and
      special occasion wear consisting of suits and dresses under the labels
      including Victor Costa by Nahdree, Constance Saunders by Nahdree Nah Nah
      Collections and under private label through its NNP division.

            In the absence of the consummation of any of the contemplated
      transactions or similar events that would provide plans to restructure
      debt, to reduce or delay expenditures, or to increase ownership equity,
      there could be a substantial doubt as to the Company's success of future
      operations. The result includes a possible discontinuance of operations in
      which there is a commencement of dissolution or bankruptcy, or there could
      be an externally forced revision of its present operating structure.


                                       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 three month period ended August 31,
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 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 in 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.

      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


                                       14
<PAGE>   15

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

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, for the first time, 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.


                                       15

<PAGE>   16

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

      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.

Results of Operations
First Quarter Fiscal 1998 Compared to First Quarter Fiscal 1997

      Net sales of $9.9 million for the three months ended August 31, 1997
decreased by $1.7 million, or <14.7>% compared to net sales of $11.6 million for
the three months ended August 31, 1996. This decrease is primarily attributable
to reduced sales for evening wear products due to the soft economy in the
apparel industry. 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 August 31, 1997 was $6.4 million,
or 64.4% of net sales compared to $6.9 million, or 59.9% of net sales for the
three months ended August 31, 1996. Gross profit for the three months ended
August 31, 1997 was $3.5 million, or 35.6% of net sales, compared to $4.6
million, or 40.0% of net sales for three months ended August 31, 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 $4.0 million, or 40.9%
of net sales for the three months ended August 31, 1997, compared to $5.1
million, or 43.8% of net sales for the three months ended August 31, 1996. The
lower selling, general and administrative expenses for the quarter ending August
31, 1997 are primarily attributable to planned reductions in salary expenses,
rent and occupancy, professional fees and insurance.

      Operating loss was $<.5> million or <5.4>% of net sales for the three
months ended August 31, 1997 compared to an operating loss of $<.4> million or
<3.7>% of net sales for the three months ended August 31, 1996. The increase in
operating loss was attributable to the reduced sales and gross profit dollars
described above.

      Interest expense for the three months ended August 31, 1997 was $.6
million, or 5.7% of net sales compared to $.6 million, or 4.8% of net sales for
the three months ended August 31, 1996.

      As a result of the factors described above, the Company's net loss
increased to $<1.1> million, or <11.0>% of net sales during the three months
ended August 31, 1997, compared to $<1.0> million, or <8.6>% of net sales for
the three months ended August 31, 1996.


                                       16
<PAGE>   17

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

Liquidity and Capital Resources

      At August 31, 1997, the Company had a decrease in cash flows from
operating activities of $3.1 million. This decrease resulted primarily from a
net increase in accounts receivable of $2.3 million and a net loss of $1.1
million, offset by an increase in accounts payable of $.8 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 three
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 $2.9 million resulting
primarily from an increase in bank borrowings under the Company's revolving
credit facilities.

      Because the Company has been incurring losses from operations, there has
been insufficient liquidity, as required by its credit agreement with its senior
lender, Foothill Capital Corporation ("Foothill"), to allow the Company to pay
required monthly installments of principal to its group of four banks that rank
junior to Foothill. In addition, the Company is projecting losses from
operations for the year ending May 31, 1998, which will result in its
non-compliance with the financial covenants under its credit agreement with
Foothill in fiscal 1998. In addition, the Company's credit agreement with
Foothill currently expires on November 30, 1997. The combination of these
factors raises substantial doubt about the Company's ability to continue as a
going concern. In the fourth quarter of fiscal 1996, the Company began to
explore its options relative to alleviating its financial instability including
strategic alliances with other companies, an infusion of capital into the
Company, the sale or merger of the Company, or any combination of the foregoing.
On September 4, 1997, the Company signed a letter of intent (the "Letter of
Intent") with Nah Nah Collections, Inc., a New York corporation ("Nah Nah"),
pursuant to which Mr. Han, the President, CEO and owner of Nah Nah would receive
up to 49% of the common stock of the Company in return for the sale to the
Company of all the issued and outstanding capital stock of Nah Nah. The
transaction is subject to due diligence to be conducted by each of Nah Nah and
He-Ro, execution of definitive agreements currently being negotiated, obtaining
financing, third party approvals, obtaining a fairness opinion and other closing
conditions. Nah Nah Collections, Inc., a privately held company, produces and
markets several lines of women's ready to wear and special occasion wear
consisting of suits and dresses under the labels including Victor Costa by
Nahdree, Constance Saunders by Nahdree Nah Nah Collections and under private
label through its NNP division.


                                       17
<PAGE>   18

                     THE HE-RO GROUP, LTD. AND SUBSIDIARIES

                           PART II. OTHER INFORMATION

      Item 6. Exhibits and Reports on Form 8-K

      (a)   Exhibits:

      27.   Financial Data Schedule

      (b)   Reports on Form 8-K:

            The Company did not file any report on Form 8-K during the three
            months ended August 31, 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: October 14, 1997                      THE HE-RO GROUP, LTD.
                                               (Registrant)


                                            By:/s/ DELLA ROUNICK
                                               ---------------------------------
                                               Della Rounick
                                               Chairman of the Board
                                               of Directors and Chief
                                               Executive Officer

Date: October 14, 1997


                                               /s/ SAM D. KAPLAN
                                               ---------------------------------
                                               Sam D. Kaplan
                                               Chief Financial Officer
                                               and Secretary
                                               (Principal Financial and
                                               Accounting Officer)


                                       18
<PAGE>   19

                                INDEX TO EXHIBITS
                                       TO
                              THE QUARTERLY REPORT
                      FOR THE QUARTER ENDED AUGUST 31, 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.

3.3   Specimen Certificate for Common Stock of Registrant. Incorporated by
      reference to Exhibit 3.3 of Registrant's 1995 10-K.

10.1  Lease dated December 20, 1990, between Hartz Mountain Industries, Inc. and
      The He-Ro Group, Inc. relating to the premises located at 35 Enterprise
      Avenue, Secaucus, New Jersey. Incorporated by reference to Exhibit 10.1 of
      Registrant's 1995 10-K.

10.2  Sublease dated March 6, 1997 between The He-Ro Group, Inc. (as sublessor)
      and Harve Benard (as sublessee) relating to the premises located at One
      American Way, Secaucus, New Jersey. Incorporated by reference to Exhibit
      10.2 of Registrant's Annual Report on Form 10-K for the year ended May 31,
      1997

10.3  Lease dated September 21, 1994, between The Louis Adler Realty Company and
      H.R.I., Inc. relating to the premises located at 550 Seventh Avenue, New
      York, New York. Incorporated by reference to Exhibit 10.3 of Registrant's
      1995 10-K.

10.4  Lease dated September 24, 1994, between The Louis Adler Realty Company and
      H.R.I., Inc. relating to the premises located at 550 Seventh Avenue, New
      York, New York. Incorporated by reference to Exhibit 10.4 of Registrant's
      1995 10-K.

10.5  Lease dated September 21, 1994, between The Louis Adler Realty Company and
      H.R.I., Inc.


                                       19
<PAGE>   20

      relating to the premises located at 550 Seventh Avenue, New York, New
      York. Incorporated by reference to Exhibit 10.10 of Registrant's 1995
      10-K.

10.6  Lease dated September 21, 1994, between The Louis Adler Realty Company and
      The He-Ro Group, Inc. relating to the premises located at 530 Seventh
      Avenue, New York, New York. Incorporated by reference to Exhibit 10.6 of
      Registrant's 1995 10-K.

10.7  Tenancy Agreement dated December 20, 1994, between Grandford Development
      and The He-Ro Group, Inc. relating to the premises located at Cosmos Sing
      Shing Building, 81 Hung To Road, Kwun Tong, Kowloon, Hong Kong.
      Incorporated by reference to Exhibit 10.7 of Registrant's 1995 10-K.

10.8  License Agreement dated June 1, 1990, between The He-Ro Group, Inc. and
      Oleg Cassini, Inc. ("Cassini License"). Incorporated by reference to
      Exhibit 10.8 of Registrant's 1995 10-K.

10.8.1 Letter Agreement dated December 15, 1995, from Oleg Cassini, Inc. to the
      He-Ro Group, Inc., amending Cassini License. Incorporated by reference to
      Exhibit 10.8.1 of Registrant's Annual Report on Form 10-K for the year
      ended May 31, 1996 ("Registrant's 1996 10-K").

10.9  Fourth Amended and Restated Revolving Credit Agreement dated as of May 15,
      1995, by and among The He-Ro Group, Inc., and Marine Midland Bank, N.A.,
      as agent, The Chase Manhattan Bank, The Hongkong and Shanghai Banking
      Corporation Limited and ABN AMRO Bank N.V. Incorporated by reference to
      Exhibit 10.9 of Registrant's 1995 10-K.

10.10 Loan and Security Agreement dated as of May 12, 1995, by and between The
      He-Ro Group, Ltd. and certain of its subsidiaries and Foothill Capital
      Corporation, as amended. 10.11 Contribution Agreement dated as of May 20,
      1991, between the Registrant and Herbert


                                       20
<PAGE>   21

      Rounick. Incorporated by reference to Exhibit 10.11 of Registrant's 1995
      10-K.

10.12 1991 Stock Option Plan. Incorporated by reference to Exhibit 10.12 of 
      Registrant's 1995 10-K.

10.13 1992 Outside Director Stock Option Plan. Incorporated by reference to
      Exhibit 10.13 of Registrant's 1995 10-K.

10.14 1993 Outside Director Stock Option Plan. Incorporated by reference to
      Exhibit 10.14 of Registrant's 1995 10-K.

10.15 Amended and Restated 1994 Outside Director Stock Option Plan. Incorporated
      by reference to Exhibit 10.15 of Registrant's 1996 10-K.

21.1  Subsidiaries of the Registrant. Incorporated by reference to Exhibit 21.1
      of Registrant's 1995 10-K.

*27   Financial Data Schedule

---------------------------
*Filed herewith

                                       21