<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 June 27, 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.)
</TABLE>

<TABLE>
    <S>                                                   <C>
    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                                         June 27, 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>
                                                              June 27,      December 31,
                           Assets                               1998            1997
                           ------                          -------------    ------------
                                                            (Unaudited)       (Audited)
<S>                                                        <C>               <C>
Current Assets:

  Cash and cash equivalents                                 $    1,213            605
                                                              --------       --------


  Accounts and notes receivable:
    Trade                                                       24,866         28,119
    Notes receivable, affiliate                                  3,000            500
    Due from affiliate                                           4,540          1,420
    Other                                                            -             48
                                                              --------       --------
                                                                32,406         30,087
  Less allowance for discounts and doubtful accounts             1,505          4,216
                                                              --------       --------

                                                                30,901         25,871
                                                              --------       --------


  Inventories                                                   14,772         13,950

  Prepaid expenses and other current assets                      2,429          1,911
                                                              --------       --------


               Total current assets                             49,315         42,337
                                                              --------       --------



Property, plant and equipment, at cost                          32,480         31,518
  Less accumulated depreciation and amortization                19,436         18,517
                                                              --------       --------

                                                                13,044         13,001
                                                              --------       --------



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





                                                            $   62,765         56,772
                                                              ========       ========
</TABLE>


                                                                     (Continued)

                                     - 2 -
<PAGE>   3

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



<TABLE>
<CAPTION>
                                                             July 27,     December 31,
                 Liabilities and Deficit                       1998           1997
                 -----------------------                   -----------    -----------
                                                           (Unaudited)     (Audited)
<S>                                                         <C>            <C>
Current Liabilites:
  Notes payable                                             $   22,883         15,554
  Overdraft                                                      1,360              -
  Current maturities of long-term debt:
    Revolving credit                                           277,572              -
    Senior subordinated debentures                              80,000              -
    Senior subordinated pay-in-kind debentures                 105,853        105,853
    Merger debentures                                           62,928         62,928
    Other                                                           48            233
  Accounts payable                                               6,872         11,056
  Accrued interest                                             111,526         91,436
  Accrued expenses                                              10,521          9,035
  Federal and state income taxes                                 5,004          5,034
                                                              --------       --------

               Total current liabilities                       684,567        301,129
                                                              --------       --------

Long-term debt:
  Revolving credit                                                   -        254,714
  Senior subordinated debentures                                     -         80,000
  Mortgage payable                                               2,025          2,052
                                                              --------       --------

                                                                 2,025        336,766
                                                              --------       --------

Deferred income taxes                                            1,179          1,179
Other liabilities                                                2,343          1,653
                                                              --------       --------

                                                                 3,522          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                                           ( 683,044)     ( 639,650)
                                                              --------       --------

                                                            ( 627,449)      ( 584,055)
                                                             --------        --------


                                                           $   62,765          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                 Six Months Ended
                                  -----------------------          -----------------------


                                  June 27,       June 28,          June 27,       June 28,
                                    1998           1997              1998           1997
                                  --------       --------          --------       ---------

<S>                              <C>             <C>               <C>            <C>
Net sales                        $  38,244         34,475            81,268         71,746
                                   -------        -------           -------        -------


Cost of sales                       35,413         33,054            75,313         66,873

Selling, administrative and
  general expenses                   8,142         10,270            14,364         16,059
                                   -------        -------           -------        -------


                                    43,555         43,324            89,677         82,932
                                   -------        -------           -------        -------


Operating loss                    (  5,311)      (  8,849)         (  8,409)      ( 11,186)


Interest income                         66             83                70             88


Interest on indebtedness          ( 18,002)      ( 16,080)         ( 35,136)      ( 31,607)


Other income (expenses), net            70            143               120            196
                                   -------        -------           -------        --------


Loss before income taxes          ( 23,177)      ( 24,703)         ( 43,355)      ( 42,509)


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


Net loss                         $( 23,177)      ( 24,703)         ( 43,355)      ( 42,509)
                                   =======        =======           =======        =======
</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>
                                                                    Six Months Ended
                                                                 -----------------------

                                                                  June 27,      June 28,
                                                                    1998          1997  
                                                                  --------      --------

<S>                                                              <C>            <C>
Cash flows from operating activities:
  Net loss                                                       $( 43,355)     ( 42,509)
  Adjustments to reconcile net loss to net cash
    used in operating activities:
      Depreciation and amortization                                    919           967
      Gain on disposal of property, plant and equipment                  -      (     60)
      Changes in assets and liabilities:
        Accounts receivable                                       (  2,530)        2,935
        Inventories                                               (    822)          522
        Prepaid expenses and other current assets                 (    518)          609
        Accounts payable                                          (  4,223)     (    544)
        Accrued expenses                                            21,576        22,303
        Federal and state income taxes                            (     30)           19
        Other, net                                                   1,718           690
                                                                   --------      -------
Cash used - operating activities                                  ( 27,265)     ( 15,068)
                                                                   --------      ------- 

Cash flows from investing activities:
  Dispostion of property, plant and equipment                            -            60
  Capital expenditures                                            (    962)     (     98)
  Advances to affiliate                                           (  2,500)            -
                                                                   -------       -------
Cash used - investing activities                                  (  3,462)     (     38)
                                                                   -------       -------

Cash flows from financing activities:
  Overdraft                                                          1,360           252
  Proceeds from long-term debt                                      22,858        12,030
  Repayment of long-term debt                                     (    212)     (   180)
  Proceeds from credit line                                         22,883             -
  Proceeds from Factor, net                                       ( 15,554)        3,259
                                                                   -------       -------
Cash provided - financing activities                                31,335        15,361
                                                                   -------       -------

Increase (decrease) in cash and cash equivalents                       608           255
Cash and cash equivalents:
  Beginning of period                                                  605           429
                                                                   -------       -------
  End of period                                                  $   1,213           684
                                                                   =======       =======

Supplemental schedule of cash flow information
----------------------------------------------
Cash paid during year for:
  Interest                                                       $  14,109        12,830
  Income tax refunds (payments), net                              (     30)           19
</TABLE>

Supplemental schedule of noncash operating and financing activities
In the six month periods ending June 27, 1998 and June 28, 1997 the Company
recognized $39 thousand and $33 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 six months ended June 27, 1998 and June
         28, 1997, the financial position at June 27, 1998 and December 31, 1997
         and the cash flows for the six months ended June 27, 1998 and June 28,
         1997. The results of operations for the three and six month periods
         ended June 27, 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 Segment 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>
                                           June 27, 1998     December 31, 1997
                                           -------------     -----------------
                                            (Unaudited)          (Audited)

<S>                                        <C>                <C>   
         Raw materials                       $ 11,818             11,809
         In process                             3,487              3,591
         Finished goods                         7,234              6,220
                                             --------           --------
         Inventories at
           first-in, first-out                 22,539             21,620
         LIFO reserve                           7,767              7,670
                                             --------           --------
         Inventories at LIFO                 $ 14,772             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 condensed unaudited 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 June
         27, 1998 the available borrowings under the agreement were $4,869,000.

5.       No provision for income taxes has been provided during the six months
         ended June 27, 1998 and June 28, 1997, as the Company is in a net
         operating loss carryforward position.

6.       Fairwood and the Internal Revenue Service ("IRS") have reached an
         agreement regarding the settlement of issues arising out of an IRS
         audit examination of the consolidated Federal income tax returns of
         Fairwood and its subsidiaries for the years ended July 11, 1988 through
         December 31, 1991. The net federal tax cost, including statutory
         interest, to Fairwood and its subsidiaries under the terms of the
         settlement is estimated to be approximately $4.8 million. The
         settlement would also significantly reduce Fairwood's available net
         operating loss carryforwards. While the terms of settlement have been
         approved by the IRS, they remain subject to the approval of the United
         States Bankruptcy Court, and no assurances can be given that any such
         approval will be given. Fairwood expects to bring a motion for approval
         of the settlement before the Bankruptcy Court during the third quarter
         of 1998. This settlement does not include consideration of the state
         tax impact which has been estimated by management.

         This settlement provides Fairwood the opportunity to recover previous
         taxes paid through carrying back the interest component of the
         settlement back up to 10 years. This carryback is available to Fairwood
         under current IRS regulations and management believes that it is
         currently more likely than not that previous taxes paid 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.
         
         Fairwood estimates that the aggregate tax liability, if all initially
         proposed adjustments that arose from the IRS examination were resolved
         unfavorably would, together with statutory interest and state income
         tax, total approximately $145 million and eliminate substantially all
         of Fairwood's net operating loss carryforwards.



                                      - 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 $101.3 million on the Fairwood
         Debentures, which includes $61.5 million due to Court Square Capital
         Limited ("CSCL"), is included in accrued interest on the accompanying
         unaudited condensed consolidated balance sheet as of June 27, 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 June
         27, 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
         June 27, 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 $218,922 and $298,463 for
         the three-month periods ended June 27,1998 and June 28, 1997,
         respectively, and approximately $368,922 and $623,963 for the six-month
         periods then ended, respectively. Under a separate agreement, Stratford
         increased its advances to Simmons to $3,000,000.

10.      Certain reclassifications have been made to the December 31, 1997
         financial statements to conform with the June 27, 1998 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 June 27, 1998, The Company had total indebtedness of approximately $551.3
million of which approximately $549.2 million was current and approximately
$463.4 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 was current and approximately $440.6 million was owed to CSCL.
Accrued interest on total indebtedness was approximately $111.5 million and
$91.4 million at June 27, 1998 and December 31, 1997, respectively.
Approximately $71.7 million and $56.9 million of the accrued interest was owed
to CSCL at June 27, 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

                                     - 10 -

<PAGE>   11

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 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 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 $101.3 million on the
Fairwood Debentures, which includes $61.5 million due to CSCL, is included in
accrued interest in the accompanying unaudited condensed consolidated balance
sheet as of June 27, 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 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
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 June
27, 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 six months of 1998 were
approximately $22.9 million. There were no repayments to CSCL during the first
six 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 moneys.

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 June 27, 1998 the available borrowings under
this agreement were $4,869,000.

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 condensed consolidated balance
sheet as of June 27, 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 June 27, 1998 Versus Three Months Ended June 28, 1997

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

Net sales on a consolidated basis were approximately $38.2 million in the second
quarter of 1998, an increase of 10.7% from last year's second quarter
consolidated net sales of approximately $34.5 million.

Second quarter 1998 net sales (including intercompany sales) by the Stratford
increased 11.4% to approximately $25.4 million as compared to $22.8 million for
the comparable period in 1997. Second quarter sales to Simmons Upholstered
Furniture Corporation ("Simmons"), were approximately $1.3 million, a decrease
of 50.0% from 1997 second quarter sales of $2.6 million. Total Stratford volume,
excluding frame and coil sales which accounted for approximately 7.3% of second
quarter 1998 net sales and 14.2% of second quarter 1997 net sales and excluding
sales to Simmons, increased 25.1% during the second quarter of 1998 as compared
to 1997. This increase is due to becoming a major supplier to a major retailer
during 1998.

Stratford's average furniture selling price for the quarter, which is dependent
on the type of product and customer, decreased 1.2% percent from the comparable
period in 1997. Excluding sales to Simmons who became an affiliate during
November 1995, net sales for the second quarter of 1998 were approximately $24.9
million compared to approximately $20.2 million for the second quarter of 1997,
an increase of 23.3%.

Second quarter 1998 net sales by Barcalounger increased 11.7% to approximately
$13.4 million as compared to $12.0 million for the comparable period in 1997.
This increase in sales reflects an increase in total volume of 7.2%, and a 4.1%
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 increased 6.9% in the second quarter of
1998 to $35.4 million, or 92.7% of net sales, as compared to $33.1 million, or
95.9% of net sales, in 1997. Stratford cost of sales decreased to 99.1% of net
sales in the second quarter of 1998, as compared to 103.6% in the second quarter
of 1997. The decrease was attributable to better factory utilization.
Barcalounger cost of sales decreased to 80.6% of net sales in the second quarter
of 1998, as compared to 81.3% in the second quarter of 1997.

Selling, administrative and general expenses on a consolidated basis for the
second quarters of 1998 and 1997 were approximately $8.1 million and $10.3
million, respectively, representing a decrease of 21.4%. The decrease was due
primarily to reserves taken in the second quarter of 1997 by Stratford for
expected non-collection of amounts due from a large national retail chain and
the write down of non-performing assets and prepaid expenses, offset partially
for costs to transfer certain administrative operations to Chicago. 

Other income was approximately $.1 million for the second quarters of 1998 and
1997.





                                     - 13 -

<PAGE>   14
Six Months Ended June 27, 1998 Versus Six Months Ended June 28, 1997

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

Net sales on a consolidated basis were approximately $81.3 million in the first
six months of 1998, an increase of 13.4% from last year's first six months
consolidated net sales of approximately $71.7 million, due primarily to an
increase of sales at Stratford.

Stratford Division net sales (including intercompany sales) for the first six
months of 1998 increased 13.8% to approximately $55.1 million as compared to
$48.4 million for the comparable period in 1997. Sales to Simmons for the six
month period in 1998, were approximately $3.3 million, a decrease of 41.1% from
1997 second quarter sales of $5.6 million. Total Stratford volume excluding
frame and coil sales which accounted for approximately 7.8% of the first six
months of 1998 net sales and 10.7% of the first six months of 1997 net sales
and excluding sales to Simmons, has increased 25.8% for the first six months of
1998 as compared to the first six months of 1997.  The average furniture
selling price for the 1998 six month period, which is dependent upon the type of
product and customer, increased 0.5% from the comparable period in 1997.  These
increases are due to becoming a major supplier to a large retailer during 1998.

Barcalounger net sales for the first six months of 1998 were approximately $27.3
million, an increase of 12.3%, as compared to 1997 second quarter sales of $24.3
million, reflective of a 7.3% increase in the number of pieces sold and a 4.5%
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 12.6% in first six months of
1998 to  approximately $75.3 million, or 92.6% of net sales, as compared to
$66.9 million, or 93.2%  of net sales, in 1997.  Stratford's cost of sales
decreased to 98.8% of net sales in  the first six months of 1998, as compared to
99.5% in the first six months of 1997.  The decrease was attributable to better
factory utilization and improved pricing. Barcalounger's cost of sales decreased
to 80.7% of net sales in the first six months of 1998, as compared to 81.0% of
net sales in the first six months of 1997. The decrease in cost of sales as a
percentage of net sales was the result of continued sales increases and a slight
reduction in fixed overhead costs as a percentage of sales.

Selling, administrative and general expenses on a consolidated basis for the
first six months of 1998 and 1997 were approximately $14.4 million and $16.1
million, respectively, representing a decrease of 10.6%. The decrease was due
primarily to reserves taken in the second 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 for costs
incurred in 1998 to transfer certain administrative operations to Chicago.

Other income was approximately $.1 million and $.2 million for the first six
months of 1998 and 1997.

No income taxes have been provided in the first six 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.

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 being programs that have time written
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.


                                     - 14 -
<PAGE>   15
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.  Management does not except the remaining costs to exceed
$500,000.

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, 1996 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:  August 11, 1998



                                      - 16-