<PAGE>   1
                UNITED STATES 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 September 26, 1998
                -------------------------------------------------

                                     OR

          [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
           For the transition period from ___________ to __________

                         Commission file number 0-18446

                              Fairwood Corporation
                              --------------------
             (Exact name of registrant as specified in its charter)

<TABLE>
<S>                                                    <C>
                 Delaware                                  13-3472113
                 --------                                  ----------
     (State or other jurisdiction of                    (I.R.S. Employer
      incorporation or organization)                   Identification No.)

One Commerce Center
1201 N. Orange St., Suite 790, Wilmington, DE             19801
---------------------------------------------             -----
(Address of principal executive offices)                (Zip Code)
</TABLE>

                                 (302) 884-6749
                                 --------------
              (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, and (2) has been subject to such filing requirements
for the past 90 days.                                  Yes  X        No
                                                          -----        -----

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

<TABLE>
<CAPTION>
                                                        Outstanding at
          Class                                      September 26, 1998
          -----                                    --------------------
<S>                                                <C>
Class A Voting, $.01 Par Value                                   500
------------------------------                     --------------------

Class B Non-Voting, $.01 Par Value                           999,800
----------------------------------                 --------------------
</TABLE>


<PAGE>   2


                      FAIRWOOD CORPORATION AND SUBSIDIARIES
                      Condensed Consolidated Balance Sheets
                    (Dollars in thousands except share data)



<TABLE>
<CAPTION>
                                                           September 26,     December 31,
                           Assets                               1998            1997
                           ------                          -------------    ------------
                                                            (Unaudited)       (Audited)
<S>                                                        <C>              <C>
Current Assets:

  Cash and cash equivalents                                 $    1,569            605
                                                              --------       --------


  Accounts and notes receivable:
    Trade                                                       23,211         28,119
    Notes receivable, affiliate                                    500            500
    Due from affiliate                                           2,400          1,420
    Other                                                            4             48
                                                              --------       --------
                                                                26,115         30,087
  Less allowance for discounts and doubtful accounts             1,308          4,216
                                                              --------       --------

                                                                24,807         25,871
                                                              --------       --------

  Inventories                                                   13,905         13,950

  Prepaid expenses and other current assets                      2,393          1,911
                                                              --------       --------


               Total current assets                             42,674         42,337
                                                              --------       --------



Property, plant and equipment, at cost                          32,832         31,518
  Less accumulated depreciation and amortization                19,900         18,517
                                                              --------       --------
                                                                12,932         13,001
                                                              --------       --------


Other assets                                                       406          1,434
                                                              --------       --------






                                                            $   56,012         56,772
                                                              ========       ========
</TABLE>


                                                                     (Continued)


                                      - 2 -
<PAGE>   3


                      FAIRWOOD CORPORATION AND SUBSIDIARIES
                      Condensed Consolidated Balance Sheets
                    (Dollars in thousands except share data)



<TABLE>
<CAPTION>
                                                           September 26,   December 31,
                 Liabilities and Deficit                       1998            1997
                 -----------------------                   ------------    -----------
                                                            (Unaudited)     (Audited)
<S>                                                        <C>             <C>
Current Liabilities:
  Notes payable                                             $   22,582         15,554
  Overdraft                                                      1,430              -
  Current maturities of long-term debt:
    Revolving credit                                           284,388              -
    Senior subordinated debentures                              80,000              -
    Senior subordinated pay-in-kind debentures                 105,853        105,853
    Merger debentures                                           62,928         62,928
    Other                                                           45            233
  Accounts payable                                               5,992         11,056
  Accrued interest                                             122,151         91,436
  Accrued expenses                                              10,392          9,035
  Federal and state income taxes                                 5,007          5,034
                                                              --------       --------

               Total current liabilities                       700,768        301,129
                                                              --------       --------

Long-term debt:
  Revolving credit                                                   -        254,714
  Senior subordinated debentures                                     -         80,000
  Mortgage payable                                               2,017          2,052
                                                              --------       --------

                                                                 2,017        336,766
                                                              --------       --------

Deferred income taxes                                            1,179          1,179
Other liabilities                                                1,876          1,653
                                                              --------       --------

                                                                 3,055          2,832
                                                              --------       --------

Redeemable preferred stock:
  Junior preferred, cumulative, par value $.01 per share           100            100
                                                              --------       --------

Common stock and other shareowners' deficit:
  Common stock and additional paid-in capital                   55,948         55,948
  Accumulated other comprehensive income                     (     353)     (     353)
  Retained deficit                                           ( 705,523)     ( 639,650)
                                                              --------       --------
                                                             ( 649,928)     ( 584,055)
                                                              --------       --------


                                                            $   56,012         56,772
                                                              ========       ========
</TABLE>

See accompanying notes to the Unaudited Condensed Consolidated Financial
Statements.


                                      - 3 -
<PAGE>   4


                      FAIRWOOD CORPORATION AND SUBSIDIARIES

            Unaudited Condensed Consolidated Statements of Operations

                                 (In thousands)



<TABLE>
<CAPTION>
                                     Three Months Ended              Nine Months Ended
                               ----------------------------    ----------------------------

                               September 26,  September 27,    September 26,  September 27,
                                    1998           1997             1998           1997
                               -------------  -------------    -------------  -------------
<S>                            <C>            <C>              <C>            <C>
Net sales                        $  32,675         32,918          113,943        104,664
                                   -------        -------          -------        -------


Cost of sales                       30,928         32,222          106,241         99,095
Selling, administrative and
  general expenses                   6,165          6,373           20,529         22,432
                                   -------        -------          -------        -------


                                    37,093         38,595          126,770        121,527
                                   -------        -------          -------        -------


Operating loss                    (  4,418)      (  5,677)        ( 12,827)      ( 16,863)


Interest income                         65              8              135             96


Interest on indebtedness          ( 18,177)      ( 16,466)        ( 53,313)      ( 48,073)


Other income                            72             91              192            287
                                   -------        -------          -------        -------


Loss before income taxes          ( 22,458)      ( 22,044)        ( 65,813)      ( 64,553)                     

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


Net loss                         $( 22,458)      ( 22,044)        ( 65,813)      ( 64,553)
                                   =======        =======          =======        =======
</TABLE>


See accompanying notes to the Unaudited Condensed Consolidated Financial
Statements.


                                      - 4 -
<PAGE>   5


                      FAIRWOOD CORPORATION AND SUBSIDIARIES
            Unaudited Condensed Consolidated Statements of Cash Flows
                                 (In thousands)


<TABLE>
<CAPTION>
                                                                  Nine Months Ended
                                                             ---------------------------

                                                             September 26, September 27,
                                                                 1998          1997
                                                             ------------- -------------
<S>                                                          <C>           <C>
Cash flows from operating activities:
  Net loss                                                    $( 65,813)     ( 64,553)
  Adjustments to reconcile net loss to net cash
    used in operating activities:
      Depreciation and amortization                               1,383         1,427
      Gain on disposal of property, plant and equipment               -      (     60)
      Changes in assets and liabilities:
        Accounts receivable                                       1,064         2,308
        Inventories                                                  45      (    847)
        Prepaid expenses and other current assets              (    482)           13
        Accounts payable                                       (  5,124)     (  1,772)
        Federal and state income taxes                         (     28)           19
        Accrued expenses                                         32,072        33,729
        Other, net                                                1,251           793
                                                                --------      -------
Cash used - operating activities                               ( 35,632)     ( 28,943)
                                                                --------      -------

Cash flows from investing activities:
  Dispostion of property, plant and equipment                         -            60
  Capital expenditures                                         (  1,314)     (    174)
                                                                -------       -------
Cash used - investing activities                               (  1,314)     (    114)
                                                                -------       -------

Cash flows from financing activities:
  Overdraft                                                       1,430      (    715)
  Proceeds from long-term debt                                   29,674        25,416
  Repayment of long-term debt                                  (    222)     (    180)
  Proceeds from credit line, net                                 22,582             -
  Proceeds from (repayments to) factor, net                    ( 15,554)        4,816
                                                                -------       -------
Cash provided - financing activities                             37,910        29,337
                                                                -------       -------

Increase in cash and cash equivalents                               964           280
Cash and cash equivalents:
  Beginning of period                                               605           429
                                                                -------       -------
  End of period                                               $   1,569           709
                                                                =======       =======

Supplemental schedule of cash flow information
----------------------------------------------
Cash paid during year for:
  Interest                                                    $  22,598        18,709
  Income tax refunds (payments), net                           (     28)           19
</TABLE>

Supplemental schedule of noncash operating and financing activities
-------------------------------------------------------------------
In the nine month periods ending September 26, 1998 and September 27, 1997 the
Company recognized $60 thousand and $51 thousand, respectively, of accrued
dividends payable to shareholders, which dividends have not been paid.

Cash and cash equivalents include cash in banks and highly-liquid short-term
investments having a maturity of three months or less on date of purchase.


See accompanying notes to the Unaudited Condensed Consolidated Financial
Statements.


                                      - 5 -

<PAGE>   6


                      FAIRWOOD CORPORATION AND SUBSIDIARIES

         Notes to Unaudited Condensed Consolidated Financial Statements


1.   In the opinion of management, the accompanying unaudited condensed
     consolidated financial statements include all adjustments, consisting of
     only normal recurring adjustments, to present fairly the results of
     operations for the three and nine months ended September 26, 1998 and
     September 27, 1997, the financial position at September 26, 1998 and
     December 31, 1997 and the cash flows for the nine months ended September
     26, 1998 and September 27, 1997. The results of operations for the three
     and nine month periods ended September 26, 1998 are not necessarily
     indicative of the results to be expected for the full year.

2.   The accompanying unaudited condensed consolidated financial statements
     should be read in conjunction with Fairwood Corporation's ("Fairwood or
     Company") audited consolidated financial statements included in the 1997
     annual report on Form 10-K. Fairwood is a holding company as is its
     subsidiary, Consolidated Furniture Corporation ("Consolidated Furniture")
     which is the parent of Futorian Furnishings, Inc. ("Futorian", formerly
     Furniture Comfort Corporation), whose two operating divisions, Stratford
     Division ("Stratford") and Barcalounger Division ("Barcalounger")
     manufacture stationary and motion upholstered residential furniture.

     The Company adopted the provision of Statement of Accounting Standard No.
     130 (FAS 130), Reporting Comprehensive Income, for the periods presented.
     Fairwood's comprehensive income includes a minimum pension liability which
     is calculated and reported annually. As a result, FAS 130 had no effect on
     the quarterly unaudited condensed consolidated statement of operations.

     In June 1997, the Financial Accounting Standards Board issued Statement of
     Financial Accounting Standards No. 131 (FAS No. 131), "Disclosure about
     Segments of an Enterprise and Related Information." FAS No. 131 requires
     Fairwood to present certain information about operating segments and
     related information, including geographic and major customer data, in its
     annual financial statements and in condensed financial statements for
     interim periods. The Company is required to adopt the provision of this
     statement during fiscal year 1998 and plans to implement the provisions of
     this statement at December 31, 1998. Management currently plans to include
     additional disclosures about Fairwood's two operating divisions, Stratford
     and Barcalounger, to comply with this statement's provisions.

3.   All inventories (materials, labor and overhead) are valued at the lower of
     cost or market using the last-in, first-out (LIFO) method. The components
     of inventory, in thousands, are as follows:

<TABLE>
<CAPTION>
                                      September 26, 1998         December 31, 1997
                                      ------------------         -----------------
                                          (Unaudited)               (Audited)
         <S>                          <C>                        <C>
         Raw materials                      $ 10,188                  11,809
         In process                            3,557                   3,591
         Finished goods                        7,974                   6,220
                                              ------                  ------
         Inventories at first-in,
           first-out                          21,719                  21,620
         LIFO reserve                          7,814                   7,670
                                              ------                  ------
         Inventories at LIFO                $ 13,905                  13,950
                                              ======                  ======
</TABLE>


                                      - 6 -

<PAGE>   7

                      FAIRWOOD CORPORATION AND SUBSIDIARIES

         Notes to Unaudited Condensed Consolidated Financial Statements


4.   On February 11, 1998, Futorian entered into a revolving credit and term
     loan agreement with a domestic corporation which replaced its two factoring
     agreements for Barcalounger and Stratford. The new agreement provides for
     an aggregate maximum commitment of $30,750,000 and expires in 2001. The
     agreement consists of a term loan in the amount of $1,020,000 and a
     revolving credit loan with a limit of $29,730,000 and borrowings under the
     agreements are classified as notes payable in the accompanying unaudited
     condensed consolidated balance sheets. These loans bear interest at either
     the prime rate plus 1% or the adjusted eurodollar rate plus 3-1/4% at the
     option of the borrower providing certain conditions are met. The loan is
     secured by accounts receivable, inventory, property and equipment and
     other assets. Other loan costs include a monthly servicing fee of $5,000
     and a monthly unused line fee at a rate equal to three-eights (3/8%)
     percent per annum calculated upon the amount by which $21,500,000 exceeds
     the average daily principal balance on the outstanding Revolving Loans and
     Letter of Credit Accommodations during the immediately preceding month. At
     September 26, 1998 the available unused borrowings under the agreement
     were $2.9 million.

5.   No provision for federal income taxes has been provided during the nine
     months ended September 26, 1998 and September 27, 1997, as the Company is
     in a net operating loss carryforward position, and the valuation allowance
     has been increased to offset any future benefit from this position.

6.   The United States Bankruptcy Court (the "Bankruptcy Court") has approved
     the settlement of issues arising out of an Internal Revenue Service
     ("IRS") audit examination of the consolidated Federal income tax returns
     of Fairwood and its subsidiaries for the periods ended July 11, 1988
     through December 31, 1991. The net federal tax cost, including statutory 
     interest and the claim for refund as described below, to Fairwood and its
     subsidiaries under the terms of the settlement is estimated to be
     approximately $5.0 million. The settlement would also significantly reduce
     Fairwood's available net operating loss carryforwards. This settlement
     does not include consideration of the state tax impact. Management is
     currently reviewing the state tax effect of this settlement and believes
     there will not be a material impact. As approved by the Bankruptcy Court,
     the settlement would be funded by additional borrowings under Consolidated
     Furniture's existing revolving credit agreement, with any refund obtained
     (as described below) returned to the lender under that facility.

     This settlement provides Fairwood the opportunity to claim a refund of
     certain taxes paid through carrying the interest component of the
     settlement back up to 10 years. Management believes that it is currently
     more likely than not that taxes totally $1.3 million will be recovered.
     Fairwood has accrued the estimated Federal and state obligations, net of
     expected recoveries of previous taxes paid, in Federal and state income
     taxes on the accompanying balance sheet.



                                      - 7 -
<PAGE>   8


                      FAIRWOOD CORPORATION AND SUBSIDIARIES

         Notes to Unaudited Condensed Consolidated Financial Statements


7.   On each of April 1, 1995, October 1, 1995, and each semi-annual interest
     payment date thereafter, Fairwood failed to make the required interest
     payments due on the senior subordinated pay-in-kind debentures and merger
     debentures (collectively, the "Fairwood Debentures") and Fairwood does not
     expect to make the cash interest payments required under the Fairwood
     Debentures on any future semi-annual interest payment dates. Accrued
     interest of $108.1 million on the Fairwood Debentures, which includes $65.6
     million due to Court Square Capital Limited ("CSCL"), is included in
     accrued interest on the accompanying unaudited condensed consolidated
     balance sheet as of Sepember 26, 1998. An involuntary Chapter 7 petition
     was filed on January 3, 1996 in the United States Bankruptcy Court for the
     Southern District of New York against Fairwood Corporation by certain
     bondholders. In response to the bankruptcy filing, on April 22, 1996,
     Fairwood and certain other entities filed a cross-motion seeking the
     dismissal of the petition. On November 26, 1996, the motion to dismiss was
     denied. On December 26, 1996, Fairwood exercised its right to convert the
     pending involuntary bankruptcy case to a voluntary Chapter 11 proceeding as
     debtor-in-possession. On May 2, 1997, certain holders of the Fairwood
     Debentures filed a Motion seeking to convert Fairwood's Chapter 11 case to
     a Chapter 7 liquidation or, alternatively, to appoint a Chapter 11 trustee.
     On July 21, 1997, the Bankruptcy Court denied the request to convert the
     case and held in abeyance pending further proceedings the request to
     appoint a Chapter 11 trustee. Fairwood cannot predict how the Court may
     rule on the request to appoint a Chapter 11 trustee or when such ruling may
     occur. Fairwood has indicated in Bankruptcy Court papers that if the Motion
     for the appointment of a Chapter 11 trustee is denied, it intends to
     propose a plan of reorganization with the Bankruptcy Court at some time in
     the future. The Chapter 11 case pertains only to Fairwood Corporation. Its
     direct and indirect subsidiaries, including Consolidated Furniture
     Corporation, Futorian Furnishings, Inc., as well as their operating
     divisions, Stratford and Barcalounger, are not parties to the bankruptcy,
     nor are such operations under the supervision of the Bankruptcy Court. It
     is currently expected that these companies will continue to operate in the
     normal course of business.

8.   Consolidated Furniture's revolving line of credit and senior subordinated
     debentures mature on January 2, 1999 and, accordingly, have been classified
     as current liabilities in the accompanying unaudited condensed consolidated
     balance sheet of Fairwood as of September 26, 1998. Consolidated Furniture
     expects to negotiate an extension of these maturity dates or refinance such
     indebtedness prior to January 2, 1999.

     Fairwood's failure to make the April 1, 1995 and subsequent period interest
     payments constitutes an event of default which permits the acceleration of
     the Fairwood Debentures by demand of the holders of the requisite aggregate
     principal amount of the debentures, subject to a 180-day acceleration
     blockage provision. Upon acceleration, the Fairwood Debentures would be
     currently due and payable. Accordingly, the Fairwood Debentures have been
     classified as current liabilities in the accompanying unaudited condensed
     consolidated balance sheet as of September 26, 1998.



                                      - 8 -
<PAGE>   9


                      FAIRWOOD CORPORATION AND SUBSIDIARIES

         Notes to Unaudited Condensed Consolidated Financial Statements


9.   Stratford continues to provide new product development and selling
     activities to Simmons, an affiliate. Under the agreement to provide
     services, Stratford recognized approximately $490,801 and $641,532 of
     revenues for the three-month periods ended September 26, 1998 and
     September 27, 1997, respectively, and approximately $1,414,764 and
     $1,944,066 of revenues for the nine-month periods then ended,
     respectively. Stratford also billed Simmons $608,001 and $1,216,002 for
     Stratford employees that provided services for Simmons for the three-month
     and nine-month periods ended September 26, 1998, respectively. Under a
     separate agreement, Stratford decreased its advances to Simmons to
     $500,000.



10.  Certain reclassifications have been made to the December 31, 1997 financial
     statements to conform with the September 26, 1998 unaudited condensed
     consolidated financial statement presentation.









                                      - 9 -

<PAGE>   10


Item 2.

                      FAIRWOOD CORPORATION AND SUBSIDIARIES

           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

                            AND RESULTS OF OPERATIONS


Certain information in this quarterly report on Form 10-Q, including but not
limited to the Management's Discussion and Analysis of Financial Condition and
Results of Operations, may constitute forward-looking statements as such term is
defined in Section 27A of the Securities Act of 1933 (the "Securities Act") and
Section 21E of the Securities Exchange Act of 1934. Certain forward-looking
statements can be identified by the use of forward-looking terminology such as,
"believes," "expects," "may," "will," "should," "seeks," "approximately,"
"intends," "plans," "estimated," or "anticipates" or the negative thereof or
other comparable terminology, or by discussions of strategy, plans or
intentions. Forward-looking statements involve risks and uncertainties,
including those described in the Company's Annual Report on Form 10-K, which
could cause actual results to be materially different than those in the
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date hereof. The
Company assumes no obligation to update such information.

Liquidity and Capital Resources

At September 26, 1998, The Company had total indebtedness of
approximately $557.8 million of which approximately $555.8 million were
classified as current liabilities and approximately $470.2 was owed to Court
Square Capital Limited ("CSCL"), an affiliate. Total indebtedness was
approximately $521.3 million at December 31, 1997, of which $184.6 million were
classified as current liabilities and approximately $440.6 million was owed to
CSCL. Accrued interest on total indebtedness was approximately $122.2 million
and $91.4 million at September 26, 1998 and December 31, 1997, respectively.
Approximately $79.7 million and $56.9 million of the accrued interest was owed
to CSCL at September 26, 1998 and December 31, 1997, respectively. The Company's
outstanding indebtedness includes its senior subordinated pay-in-kind debentures
and merger debentures (collectively, the "Fairwood Debentures"). Fairwood had
the option during the first five years to pay interest on the Fairwood
Debentures either through cash payments or through the distribution of
additional securities. During such five-year period, Fairwood distributed
additional securities in satisfaction of its interest obligations.

Fairwood is a holding company with no operations. The Company has effectively no
cash flow from its subsidiaries because the cash produced by the operations of
the subsidiaries is not expected for the foreseeable future to be sufficient to
permit the subsidiaries to transfer funds to Fairwood. Fairwood's sole asset is
the stock of Consolidated Furniture, its wholly-owned subsidiary. Fairwood's
obligations under the Fairwood Debentures are secured by Fairwood's pledge of
its interest in Consolidated Furniture's stock. CSCL, as holder of Fairwood's
senior subordinated pay-in-kind debentures, has a first priority security
interest in all of the outstanding stock of Consolidated Furniture, and the
holders of the merger debentures have a second priority security interest in
such stock. The Fairwood Debentures are obligations of Fairwood. Consolidated
Furniture is not an obligor under the Fairwood Debentures. However, Consolidated
Furniture is an obligor under the Credit Agreement with CSCL. The Credit
Agreement does not permit Consolidated Furniture to borrow funds and transfer
them to Fairwood to enable Fairwood to make cash interest payments on the
Fairwood Debentures. The borrowings under the Credit Agreement


                                     - 10 -
<PAGE>   11


are secured by substantially all of the assets of Consolidated Furniture.
Consolidated Furniture is also a holding company without operations. Its primary
asset is the outstanding stock of Futorian Furnishings, Inc. ("Futorian",
formerly Furniture Comfort Corporation), which has operations that it conducts
through its two divisions, Stratford and Barcalounger. Futorian is also a direct
obligor under the Credit Agreement and has pledged substantially all of its
assets to secure the obligations under the Credit Agreement. Futorian is not an
obligor on the Fairwood Debentures.

On each of April 1, 1995 and October 1, 1995, and each semi-annual interest
payment date thereafter, Fairwood failed to make the required interest payments
due on the Fairwood Debentures and Fairwood does not expect to make the cash
interest payments required under the Fairwood Debentures on any future
semi-annual interest payment dates. Accrued interest of $108.1 million on the
Fairwood Debentures, which includes $65.6 million due to CSCL, is included in
accrued interest in the accompanying unaudited consolidated balance sheet as of
September 26, 1998.

There can be no assurance that Fairwood will be able to continue as a going
concern. An involuntary Chapter 7 petition was filed on January 3, 1996 in the
United States Bankruptcy Court for the Southern District of New York against
Fairwood Corporation by certain merger debenture holders. In response to the
bankruptcy filing, on April 22, 1996, Fairwood and certain other entities filed
a cross-motion seeking dismissal of the petition. On November 26, 1996, the
motion to dismiss was denied. On December 26, 1996, Fairwood exercised its right
to convert the pending involuntary bankruptcy case to a voluntary Chapter 11
proceeding as debtor-in-possession. On May 2, 1997, certain holders of the
Fairwood Debentures filed a Motion seeking to convert Fairwood's chapter 11 case
to a chapter 7 liquidation or, alternatively, to appoint a chapter 11 trustee.
On July 21, 1997, the Bankruptcy Court denied the request to convert the case
and held in abeyance pending further proceedings the request to appoint a
chapter 11 trustee. Fairwood cannot predict how the Court may rule on the
request to appoint a chapter 11 trustee or when such ruling may occur. Fairwood
has indicated in Bankruptcy Court papers that if the Motion or the appointment
of a chapter 11 trustee is denied, it intends to propose a plan of
reorganization with the Bankruptcy Court at some time in the future. There is no
way to know what the outcome of the proceeding will be. The Chapter 11 case
pertains only to Fairwood Corporation. Fairwood's direct and indirect
subsidiaries, including Consolidated Furniture, Futorian Furnishings, as well as
their operating divisions, Stratford and Barcalounger, are not parties to the
bankruptcy, nor are such operations under the supervision of the Bankruptcy
Court. It is currently expected that Fairwood's direct and indirect subsidiaries
will continue to operate in the normal course of business.

Fairwood's failure to make the April 1, 1995 and subsequent period interest
payments constitutes an event of default which permits the acceleration of the
Fairwood Debentures by the demand of the holders of the requisite aggregate
principal amount of the debentures, subject to a 180-day acceleration blockage
provision. Upon acceleration, the Fairwood Debentures would be due and payable.
Accordingly, the Fairwood Debentures have been classified as current liabilities
in the accompanying unaudited condensed consolidated balance sheet as of
September 26, 1998.





                                     - 11 -
<PAGE>   12


Consolidated Furniture, Fairwood's wholly-owned subsidiary, is expected to
service its interest payment obligations under the Credit Agreement and senior
subordinated debentures from its cash flow from operations and available credit
facilities. Throughout 1997 Consolidated Furniture funded interest obligations
related to long-term indebtedness on the revolving line of credit and the senior
subordinated debentures through increased borrowings from CSCL under the Credit
Agreement. Borrowings from CSCL during the first nine months of 1998 were
approximately $29.7 million. There were no repayments to CSCL during the first
nine months of 1998. Consolidated Furniture is dependent upon CSCL for funding
of its debt service costs. CSCL has in the past increased its revolving credit
line to Consolidated Furniture in order for Consolidated Furniture to meet its
debt service obligations on the revolving line of credit and the senior
subordinated debentures. Under the Credit Agreement, Consolidated Furniture and
its subsidiaries are generally restricted from transferring moneys to Fairwood
with the exception of amounts for (a) specified administrative expenses of
Fairwood and (b) payment of income taxes. The senior subordinated debentures,
senior subordinated pay-in-kind debentures and merger debentures also have
certain restrictions as to the payment and transfer of monies.

On February 11, 1998, Futorian entered into a revolving credit and term loan
agreement with a domestic corporation which replaced its two factoring
agreements for Barcalounger and Stratford. The new agreement provides for an
aggregate maximum commitment of $30,750,000 and expires in 2001. The agreement
consists of a term loan in the amount of $1,020,000 and a revolving credit loan
with a limit of $29,730,000. These loans bear interest at either the prime rate
plus 1% or the adjusted eurodollar rate plus 3-1/4% at the option of the
borrower providing certain conditions are met. The loan is secured by accounts
receivable, inventory, property and equipment and other assets. Other loan costs
include a monthly servicing fee of $5,000 and a monthly unused line fee at a
rate equal to three-eights (3/8%) percent per annum calculated upon the amount
by which $21,500,000 exceeds the average daily principal balance on the
outstanding Revolving Loans and Letter of Credit Accommodations during the
immediately preceding month. At September 26, 1998 the available unused
borrowings under the agreement were $2.9 million.

Management believes that cash flow from operations and funding from CSCL will be
adequate to meet Consolidated Furniture's obligations on the revolving line of
credit and the senior subordinated debentures through December 31, 1998.

Consolidated Furniture's revolving line of credit and senior subordinated
debentures mature on January 2, 1999 and, accordingly, have been classified as
current liabilities in the accompanying unaudited consolidated balance sheet as
of September 26, 1998. Consolidated Furniture expects to negotiate an extension
of these maturity dates with CSCL or refinance such indebtedness prior to
January 2, 1999. However, there can be no assurance that the Consolidated
Furniture will be able to negotiate such an extension, or that the terms of such
extension or refinancing will not be on terms less favorable than those
currently in place.

For a discussion of the status of the IRS examination, refer to Fairwood's
audited consolidated financial statements as of December 31, 1997 included in
Fairwood's Form 10-K, and footnote 6 to Fairwood's unaudited condensed
consolidated financial statements included herein.






                                     - 12 -
<PAGE>   13


Results of Operations

Three Months Ended September 26, 1998 Versus Three Months Ended September 27,
1997

The following discussion presents the material changes in results of operations
which have occurred in the third quarter of 1998 in comparison to the same
period in 1997.

Net sales on a consolidated basis were approximately $32.7 million in the third
quarter of 1998, a decrease of 0.6% from last year's third quarter consolidated
net sales of approximately $32.9 million.

Third quarter 1998 net sales (including intercompany sales and sales to Simmons
Upholstered Furniture Corporation ("Simmons")), by Stratford decreased 6.7% to
approximately $20.7 million as compared to $22.1 million for the comparable
period in 1997. Third quarter sales to Simmons were approximately $1.5 million,
a decrease of 45.5% from 1997 third quarter sales of $2.7 million. Total
Stratford volume, excluding frame and coil sales which accounted for
approximately 7.8% of third quarter 1998 net sales and 12.0% of third quarter
1997 net sales and excluding sales to Simmons, increased 6.1% during the third
quarter of 1998 as compared to 1997. This increase is due to additional volume
with National Warehouse Clubs.

Stratford's average furniture selling price for the quarter, which is dependent
on the type of product and customer, decreased 2.3% percent from the comparable
period in 1997. Excluding sales to Simmons, net sales for the third quarter of
1998 were approximately $19.2 million compared to approximately $19.4 million
for the third quarter of 1997, a decrease of 1.0%.

Third quarter 1998 net sales by Barcalounger increased 7.0% to approximately
$12.5 million as compared to $11.7 million for the comparable period in 1997.
This increase in sales reflects an increase in total volume of 1.8%, and a 5.1%
increase in average sales prices. The increase is due to the continued strategy
of offering a finer, more exclusive product, with the emphasis on quality,
service and value.

Cost of sales on a consolidated basis decreased 4.0% in the third quarter of
1998 to $30.9 million, or 94.5% of net sales, as compared to $32.2 million, or
97.9% of net sales, in 1997. Stratford's cost of sales decreased to 103.4% of
net sales in the third quarter of 1998, as compared to 107.4% in the third
quarter of 1997. The decrease was attributable to better factory utilization.
Barcalounger cost of sales increased to 80.5% of net sales in the third quarter
of 1998, as compared to 80.1% in the third quarter of 1997.

Selling, administrative and general expenses on a consolidated basis
for the third quarters of 1998 and 1997 were approximately $6.2 million and
$6.4 million, respectively, representing a decrease of 3.1%. The decrease was
due primarily to an increase in allowance for doubtful accounts in the third
quarter of 1997 by Stratford for expected non-collection of amounts due from a
large national retail chain, the write down of non-performing assets and
prepaid expenses, offset partially by costs incurred to transfer certain
administrative operations to Chicago in 1998.

Other income was approximately $0.1 million for the third quarters of 1998 and
1997.





                                     - 13 -
<PAGE>   14


Nine Months Ended September 26, 1998 Versus Nine Months Ended September 27, 1997

The following discussion presents the material changes in results of operations
which have occurred in the first nine months of 1998 in comparison to the same
period in 1997.

Net sales on a consolidated basis were approximately $113.9 million in the first
nine months of 1998, an increase of 8.8% from last year's first nine months
consolidated net sales of approximately $104.7 million, due primarily to an
increase of sales at Stratford.

Stratford Division net sales (including intercompany sales and sales to Simmons)
for the first nine months of 1998 increased 7.5% to approximately $75.8 million
as compared to $70.5 million for the comparable period in 1997. Sales to Simmons
for the nine month period in 1998, were approximately $4.8 million, a decrease
of 42.7% from first nine month of 1997 sales of $8.3 million. Total Stratford
volume, excluding frame and coil sales which accounted for approximately 7.8% of
the first nine months of 1998 net sales and 11.2% of the first nine months of
1997 net sales and excluding sales to Simmons, has increased 19.5% for the first
nine months of 1998 as compared to the first nine months of 1997. The average
furniture selling price for the 1998 nine month period, which is dependent upon
the type of product and customer, decreased 0.3% from the comparable period in
1997. This decrease is due to additional volume of lower priced products with
National Warehouse Clubs.

Barcalounger net sales for the first nine months of 1998 were approximately
$39.8 million, an increase of 10.6%, as compared to 1997 third quarter sales of
$36.0 million, reflective of a 5.5% increase in the number of pieces sold and a
4.8% increase in average selling prices. The increase is due to the continued
strategy of offering a finer, more exclusive product, with the emphasis on
quality, service and value.

Cost of sales on a consolidated basis increased 7.2% in first nine months of
1998 to approximately $106.2 million, or 93.2% of net sales, as compared to
$99.1 million, or 94.7% of net sales, in 1997. Stratford's cost of sales
decreased to 100.0% of net sales in the first nine months of 1998, as compared
to 102.0% in the first nine months of 1997. The decrease was attributable to
better factory utilization and improved pricing. Barcalounger's cost of sales
decreased to 80.6% of net sales in the first nine months of 1998, as compared to
80.7% of net sales in the first nine months of 1997. 

Selling, administrative and general expenses on a consolidated basis for the
first nine months of 1998 and 1997 were approximately $20.5 million and $22.4
million, respectively, representing a decrease of 8.5%. The decrease was due
primarily to an increase in allowance for doubtful accounts in the third
quarter of 1997 for expected non-collection of amounts due from a large
national retail chain, the write down of non-performing assets and prepaid
expenses, offset partially by costs incurred in 1998 to transfer certain
administrative operations to Chicago in 1998.

Other income was approximately $0.2 million and $0.3 million for the first nine
months of 1998 and 1997, respectively.

No income taxes have been provided in the first nine months of 1998 and 1997,
respectively, as the Company is in a net operating loss carryforward position,
and a valuation allowance has been increased to offset any future benefit from
these positions.


                                     - 14 -
<PAGE>   15

Year 2000

The Company has completed a comprehensive review of its computer system
identifying the systems that could be affected by the "Year 2000" issue and has
virtually completed the implementation plan to resolve the issue. The Year 2000
problem is the result of computer programs designating time using two digits
rather than four to define the application year. Any of the Company's sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000, which could result is a major system failure or miscalculations.

The Company has replaced older software with software that is Year 2000
compliant and modified other older software to be Year 2000 compliant. In
addition, non-critical operational systems are in the process of being converted
or replaced. The Company anticipates that it will be able to test its entire
system using its internal programming staff and outside computer consultants and
intends to make any necessary modifications to prevent disruption to its
operations.

The Company has initiated communications with its critical outside
relationships to determine the extent to which the Company may be affected by
such parties' failure to resolve their own year 2000 issues. Where practical,
the Company will assess and attempt to mitigate its risk with respect to the
failures of these entities to be year 2000 ready. There can be no assurance,
however, that the system of such third parties will be timely converted or that
any such failure to convert by another company would not have a material
adverse effect on the Company. Costs incurred to resolve year 2000 issues
through the third quarter of 1998 are approximately $300,000 and $60,000 for
external and internal expenses, respectively. Management does not expect the
remaining costs to exceed $500,000 for all year 2000 issues.



Part II OTHER INFORMATION

Item 1.  Legal Proceedings

         Reference is made to Item 3, Legal Proceedings, previously reported in
         the Registrant's Form 10-K for the year ended December 31, 1997 for a
         description of pending legal action.

         There are certain legal proceedings arising out of the normal course
         of business, the financial risk of which are not considered material
         in relation to the consolidated financial position of the Company.


Item 6.  Exhibits and Reports on Form 8-K

    (a)  Exhibits

         None


    (b)  Reports on Form 8-K

         None


                                     - 15 -
<PAGE>   16


                      FAIRWOOD CORPORATION AND SUBSIDIARIES


                                   SIGNATURES



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












                                           FAIRWOOD CORPORATION
                                               (Registrant)



                                        /s/ John B. Sganga
                                        ----------------------------
                                        John B. Sganga
                                        Chief Financial Officer,
                                        Executive Vice President,
                                        Secretary and Treasurer



Date:  November 9, 1998


                                      - 16-