<PAGE>
 
                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
 
                                   FORM 10-Q
 
                                  (MARK ONE)
 
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Quarterly Period Ended December 31, 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 0-22356
 
 
                                FRIEDMAN'S INC.
-------------------------------------------------------------------------------
            (Exact name of registrant as specified in its charter)
 
 
 
             Delaware                                          58-2058362
--------------------------------------                 -------------------------
  (State or other jurisdiction of                           (I.R.S. Employer
   incorporation or organization)                          Identification No.)
 
 
 
         4 West State Street
       Savannah, Georgia 31401                                    31401
------------------------------------------             -------------------------
 (Address of principal executive offices)                      (Zip Code)
 
 
                                (912) 233-9333
-------------------------------------------------------------------------------
             (Registrant's telephone number, including area code)
 
 
     Indicate by check mark whether the registrant: (1) has filed all reports
     required to be filed by Section 13 or 15(d) of the Securities Exchange Act
     of 1934 during the preceding 12 months (or for such shorter period that the
     registrant was required to file such reports) and (2) has been subject to
     such filing requirements for the past 90 days. Yes  X   No _____
 
  
     Indicate the number of shares outstanding of each of the issuer's classes
     of common stock, as of the latest practical date.
 
     The number of shares of Registrant's Class A Common Stock $.01 par value
     per share, outstanding at February 12, 1999 was 13,449,218.
 
     The number of shares of Registrant's Class B Common Stock $.01 par value
     per share, outstanding at February 12, 1999 was 1,196,283.
<PAGE>
 
                                     INDEX

                                FRIEDMAN'S INC.
 
 
Part I.     Financial Information
                       
Item 1.     Condensed Consolidated Financial Statements (Unaudited)

            Income Statements - Three months ended December 31, 1998 and 1997
 
            Balance Sheets - December 31, 1998 and 1997 and September 30, 1998
 
            Statements of Cash Flows - Three months ended December 31, 1998 and
            1997
 
            Notes to Condensed Consolidated Financial Statements
 
 
Item 2.     Management's Discussion and Analysis of Financial Condition and
            Results of Operations

Item 3.     Quantitative and Qualitative Disclosures About Market Risk
             
 
Part II.    Other Information
                       
Item 6.     Exhibits and Reports on Form 8-K
                       
 
Signatures
<PAGE>
 
Part I.  Financial Information
Item 1.


                                FRIEDMAN'S INC.
                   CONDENSED CONSOLIDATED INCOME STATEMENTS
                                  (Unaudited)
          (Dollars in thousands, except per share and share amounts)

<TABLE>
<CAPTION>
                                                       Three months ended
                                                           December 31,
                                                       -------------------
                                                        1998         1997
                                                      --------     --------
<S>                                                   <C>          <C>
Revenues:
  Net merchandise sales.............................  $122,640     $103,412
  Finance charges and other.........................    12,269        9,442
      Total revenues................................   134,909      112,854

Operating Costs and Expenses:
  Cost of goods sold including occupancy,
    distribution and buying.........................    61,069       50,126
  Selling, general and administrative...............    35,470       28,251
  Provision for doubtful accounts...................    12,551       10,540
                                                      --------     --------
                                                       109,090       88,917
Operating income before depreciation
  and amortization..................................    25,819       23,937

Depreciation and amortization.......................     1,442        1,241
                                                      --------     --------
Income from operations..............................    24,377       22,696

Interest income from related party..................      (637)        (559)
Interest expense....................................     1,157          548
                                                      --------     --------
                                                           520          (11)
                                                      --------     --------
Income before income taxes..........................    23,857       22,707
Income tax expense..................................     9,065        8,743
                                                      --------     --------
Net income..........................................  $ 14,792     $ 13,964
                                                      ========     ========

                                                      --------     --------
Earnings per share - basic..........................  $   1.01     $   0.96
                                                      ========     ========

Earnings per share - diluted........................  $   1.01     $   0.95
                                                      ========     ========

Weighted average shares.............................    14,641       14,723

Number of stores open...............................       469          425
</TABLE>

           See notes to condensed consolidated financial statements



<PAGE>
 
                                FRIEDMAN'S INC.
                     CONDENSED CONSOLIDATED BALANCE SHEETS
          (Dollars in thousands, except per share and share amounts)

<TABLE>
<CAPTION> 
                                                                                              December 31,    September 30,
                                                                                          ------------------- -------------
                                                                                             1998       1997        1998
                                                                                          ---------   ---------   ----------
                                                                                               (Unaudited)         (Note)
<S>                                                                                       <C>         <C>         <C>
Assets
Current Assets:
  Cash..................................................................................    $1,026      $1,015         $243
  Accounts receivable, net of allowance for doubtful accounts of $18,081
             at December 31, 1998, $15,459 at December 31, 1997 and $10,473 at
             September 30, 1998.........................................................   123,072     107,276       89,319
  Inventories, at cost..................................................................   114,617     101,613      105,586
  Other current assets..................................................................     2,800       3,247        2,398
                                                                                          --------    --------     --------
             Total current assets.......................................................   241,515     213,151      197,546

Equipment and improvements, net.........................................................    37,363      32,094       36,421
Notes receivable from related party.....................................................    25,000      25,000       25,000
Tradename rights, net...................................................................     6,317       6,788        6,435
Other receivable........................................................................     1,625       1,187        1,625
Other assets............................................................................     2,833       2,139        1,556
                                                                                          --------    --------     --------
             Total assets...............................................................  $314,653    $280,359     $268,583
                                                                                          ========    ========     ========

Liabilities and Stockholders' Equity
Current Liabilities:
  Accounts payable......................................................................   $60,176     $62,486      $16,757
  Accrued liabilities...................................................................    17,033      10,409        6,673
  Income taxes payable..................................................................     6,127       8,602       (2,449)
                                                                                                                   --------
             Total current liabilities..................................................    83,336      81,497       20,981

Bank debt...............................................................................    35,835      13,246       66,969

Stockholders' Equity:
  Preferred stock, par value $.01, 10,000,000 shares authorized
             and none issued............................................................        -           -            -
  Class A common stock, par value $.01, 25,000,000 shares
             authorized, 13,449,218 issued and outstanding..............................       134         131          134
  Class B common stock, par value $.01, 7,000,000 shares
             authorized, 1,196,283 issued and outstanding...............................        12          15           12
  Additional paid-in-capital............................................................   119,948     122,123      119,889
  Retained earnings.....................................................................    75,388      63,347       60,598
                                                                                          --------    --------     --------
             Total  stockholders' equity................................................   195,482     185,616      180,633
                                                                                          --------    --------     --------
             Total liabilities and stockholders' equity.................................  $314,653    $280,359     $268,583
                                                                                          ========    ========     ========
</TABLE>

Note:   The balance sheet at September 30, 1998 has been derived from the
        audited financial statements at that date but does not include all the
        information and footnotes required by generally accepted accounting
        principles for complete financial statements. 


           See notes to condensed consolidated financial statements

<PAGE>
 
                                FRIEDMAN'S INC.
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (Unaudited)
                            (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                        Three months ended
                                                                           December 31,
                                                                    --------------------------
                                                                      1998              1997
                                                                    --------         ---------
<S>                                                                 <C>              <C>
Operating Activities:                                                            
  Net income.......................................................  $14,792          $13,964
  Adjustments to reconcile net income to cash                                    
    provided by operating activities:                                            
    Depreciation and amortization..................................    1,442            1,241
    Provision for doubtful accounts................................   12,551           10,540
    Changes in assets and liabilities:                                           
      Increase in accounts receivable..............................  (46,304)         (40,991)
      Increase in inventories......................................   (9,031)         (22,930)
      Increase in other assets.....................................   (1,678)            (859)
      Increase in accounts payable and                                           
        accrued liabilities........................................   53,778           40,850
      Increase in income taxes payable.............................    8,576            8,310
                                                                    --------          ------- 
        Net cash provided by operating                                           
          activities...............................................   34,126           10,125
Investing Activities:                                                            
  Additions to equipment and improvements..........................   (2,268)          (3,838)
                                                                    --------          ------- 
      Net cash used in investing                                                 
          activities...............................................   (2,268)          (3,838)
Financing Activities:                                                            
  Repayments of bank borrowings....................................  (31,134)          (6,151)
  Proceeds from employee stock purchases and options exercised.....       59              103
                                                                    --------         --------
      Net cash used in financing                                                 
          activities...............................................  (31,075)          (6,048)
                                                                    --------         --------
Increase in cash...................................................      783              239
Cash, beginning of period..........................................      243              776
                                                                    --------         --------
Cash, end of period................................................ $  1,026         $  1,015
                                                                    ========         ========
</TABLE>

           See notes to condensed consolidated financial statements

<PAGE>
 
                                FRIEDMAN'S INC.

             Notes to Condensed Consolidated Financial Statements

                                  (Unaudited)

                               December 31, 1998


NOTE A - BASIS OF PRESENTATION

     The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X.  Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.  In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included.  Operating results for the three month period ended December 31,
1998 are not necessarily indicative of the results that may be expected for the
year ending September 30, 1999.  For further information, refer to the financial
statements and footnotes thereto included in the Friedman's Inc. Annual Report
on Form 10-K for the year ended September 30, 1998.

NOTE B - EARNINGS PER SHARE

     The dilutive effect of stock options on the dilutive weighted average
number of shares outstanding for the period were zero and 119,000 for the three
months ended December 31, 1998 and 1997, respectively.

NOTE C - RECLASSIFICATIONS

     Certain balances as of December 31, 1997 have been reclassified to conform
to the current year financial statement presentation.
<PAGE>
 
Item 2.  Management's Discussion and Analysis of Financial Condition and Results
of Operations


RESULTS OF OPERATIONS
---------------------

     Total revenues, comprised of net merchandise sales and finance charges and
other revenues, increased 19.5% to $134.9 million for the three months ended
December 31, 1998 from $112.9 million for the three months ended December 31,
1997.  Net merchandise sales increased $19.2 million, or 18.6%, for the three
months ended December 31, 1998 compared to the same period in the prior year.
Of the $19.2 million increase in net merchandise sales, comparable stores
contributed $9.3 million, or 9.3%, and $9.9 million was attributable to new
stores.  The increases in total revenues and net merchandise sales during the
three months ended December 31, 1998 was primarily due to the increase in
comparable store sales and a 10.4% increase in the number of stores in operation
to 469 stores at December 31, 1998 from 425 stores at December 31, 1997.
Finance charges and other revenues increased 29.9% for the three month period
ended December 31, 1998 compared to the same period in the prior year.

     Cost of goods sold, including occupancy, distribution and buying, for the
three months ended December 31, 1998 was $61.1 million, or 49.8% of net
merchandise sales, compared with $50.1 million, or 48.5% of net merchandise
sales, for the same period in the prior year.  This increase as a percentage of
net merchandise sales was the result of higher merchandise costs and increased
occupancy costs, compared to the same period in 1997.

     Selling, general and administrative expenses increased to $35.5 million for
the three months ended December 31, 1998 from $28.3 million for the three months
ended December 31, 1997.  Selling, general and administrative expenses increased
to 26.3% of total revenues for the three months ended December 31, 1998 from
25.0% of total revenues in the comparable period in the prior year.  This
increase as a percentage of total revenues was attributable primarily to an
increased reserve for potential inventory shortages and higher payroll
incentives associated with the increase in sales.

     The provision for doubtful accounts increased 19.1% to $12.6 million for
the three months ended December 31, 1998, from $10.5 million for the same period
in the prior year.  As a percentage of total revenues, the provision for
doubtful accounts remained flat at 9.3% of total revenues for the three month
periods ended December 31, 1998 and 1997, respectively.  At December 31, 1998,
the allowance for doubtful accounts as a percentage of net accounts receivable
increased to 12.8% compared to 12.6% at December 31, 1997.  Delinquencies
greater than 90 days on a recency basis represented 7.4% of total accounts
receivable at December 31, 1998, compared to 8.6% at December 31, 1997.

     Depreciation and amortization expenses increased 16.2% to $1.4 million for
the three months ended December 31, 1998 compared to $1.2 million for the three
months ended December 31, 1997.  As a percentage of total revenues, depreciation
and amortization expense remained flat at 1.1% compared to the prior year.

     Interest expense for the three months ended December 31, 1998 totaled
$520,000 compared to interest income of $11,000 for the same period in the prior
year.  The increase in interest expense was primarily attributed to higher
average outstanding borrowings on the Company's line of credit during the
quarter compared to the same period last year.

     As a result of the factors above, net income increased 5.9% to $14.8
million for the three months ended December 31, 1998 from $14.0 million for the
same period in the prior year. Diluted earnings per share for the three months
ended December 31, 1998 were $1.01, on 14,641,000 weighted average shares
outstanding, compared to diluted earnings per share of $0.95, on 14,723,000
weighted average shares outstanding, for the comparable period in 1997.
<PAGE>
 
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------

     For the three months ended December 31, 1998, net cash provided by
operating activities were $34.1 million compared to $10.2 million during the
three months ended December 31, 1997.  Cash provided by operations was favorably
impacted by better management of net inventory levels including accounts
payable, offset to some extent by increases in customer accounts receivable.
Investing activities used cash of $2.3 million for the three months ended
December 31, 1998 compared to $3.9 million during the three months ended
December 31, 1997.  The Company added eight new stores during the quarter ended
December 31, 1998, (while 10 stores were closed during the quarter for which the
lease obligations were reserved for in fiscal 1998) compared to 41 net new
stores in the comparable quarter last year.  Financing activities used $31.1
million of cash to repay bank borrowings during the three months ended December
31, 1998 versus $6.2 million during the three months ended December 31, 1997.

     During fiscal 1997, the Company invested $25 million in Crescent Jewelers
Inc. and its wholly owned subsidiary Crescent Jewelers (together "Crescent"), a
privately-owned West-coast based specialty retailer of fine jewelry currently
operating 150 stores.  Part of the investment is in the form of a $20 million
convertible senior subordinated secured loan (the "term loan").  The three-year
loan is junior to Crescent's $65 million bank-provided credit facility, bears a
similar rate of interest to such facility and is secured, after the credit
facility, by all of Crescent's assets.  The loan is convertible into a minority
equity position in Crescent.  Additionally, during fiscal 1997, the Company
purchased $5 million principal amount of 10% senior subordinated convertible
notes (the "notes") issued by Crescent pursuant to a previously entered into
standby purchase commitment.   Based upon the most recent financial statements
of Crescent, Crescent is in default under the term loan and the notes.  The
Company gave Crescent notice of this default pursuant to provisions of the term
loan agreement and the notes, and, as a result, the Company has received an
increase in the interest rate of two percentage points on the outstanding
indebtedness.  The Company believes that the term loan and the notes are
recoverable.  Accordingly, no reserve for losses has been established for such
indebtedness as of December 31, 1998.  It is possible that future events and
circumstances could change this assessment.

     Currently, the Company has an $80.0 million credit facility with its
existing banks with $10.0 million maturing on July 31, 1999 and $77.0 million 
maturing on January 31, 2000. Management believes that the Company's credit
facility will be sufficient to fund the Company's working capital requirements
through fiscal 1999. At December 31, 1998, $35.8 million was outstanding under
the Loan Agreement, with interest accruing on such borrowings at a range from
6.045% to 7.379%.

     On November 19, 1998, the Company announced that its Board of Directors had
approved the repurchase of up to $5.0 million of its outstanding Class A Common
Stock for a period of one year.  The repurchases will be made in the open market
through block purchases or in privately negotiated transactions, at the
discretion of management and pursuant to applicable securities rules.  The
Company intends to finance the repurchases from cash flow from operations and
availability under its existing credit facility.  As of December 31, 1998, the
Company had not repurchased any shares under the stock repurchase program.

     The Company's long term incentive program consists of loans to certain
executives, the repayment of which will be forgiven upon the attainment of
specific stock price targets.  To date, 50% of the principal amount of the loans
has been forgiven.  The remaining principal amount will be forgiven through 1999
if the stock price reaches targets ranging from $30.00 to $32.00, and thereafter
through 2004 if the stock price reaches targets ranging from $32.50 to $60.00.

IMPACT OF YEAR 2000

     The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year.  Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000.  This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices or
engage in similar normal business activities.

     The Company currently operates under two principal information systems:
(i) an accounting system that covers all financial information processes from
the general ledger to the compilation of financial statements, and (ii) a retail
system that covers the Company's credit extension processes as well as inventory
management and point-of-sale processes.  Based on a recent assessment, the
Company determined that it will be required to modify 
<PAGE>
 
or replace significant portions of its software so that these computer systems
will function properly with respect to dates in the year 2000 and thereafter.

     The accounting system required modifications that the Company has completed
and tested, although complete system-wide implementation has not been completed.
With regard to the retail system, the Company has decided to separate the credit
processes and the inventory/point-of-sale processes into separate systems.  The
credit system will be comprised of a modified version of the current system.
The inventory/point-of-sale system is a new system the Company has purchased
from a third-party vendor.  All modifications and installations are expected to
be completed in July 1999.  The Company presently believes that with
modifications to existing software and conversions to new software, the Year
2000 issue will not pose significant operational problems for its computer
systems.  However, if such modifications and conversions are not made, or are
not completed timely, the Year 2000 issue could have a material impact on the
operations of the Company.

     The Company plans to initiate formal communications with all of its
significant suppliers to determine the extent to which the Company's operations
are vulnerable to those third parties' failure to remediate their own Year 2000
issues.  The Company does not utilize electronic data interchange with any of
its suppliers, and, as a result, the Company believes the risk of a Year 2000
issue with its suppliers is limited.  The Company's total Year 2000 project cost
and estimated timetable include the estimated costs and time associated with the
impact of third party Year 2000 issues based on presently available information.
However, there can be no guarantee that the systems of other companies on which
the Company's systems rely will be timely converted and would not have an
adverse effect on the Company's systems.  The Company has determined it has no
exposure to contingencies related to the Year 2000 issue for the products it has
sold.

     The Company will utilize both internal and external resources to reprogram,
or replace, and test the software for Year 2000 modifications.  The total cost
of the Year 2000 project is estimated at $1.5 million and is being funded
through operating cash flows.  Of the total project cost, approximately $750,000
is attributable to the purchase of new software which will be capitalized. The
remaining $750,000 will be expensed as incurred and is not expected to have a
material effect on the results of operations. As of January 31, 1999, the
Company has incurred approximately $628,000 ($247,000 expensed and $381,000
capitalized) for new systems related to the assessment of, and preliminary
modification efforts on, its Year 2000 project.

     Should the Company's computers fail to function properly with respect to
dates in the year 2000 and thereafter, the Company believes that the
decentralized nature of its store operations would allow it to continue to
operate with limited interruption.  The primary effect of such a failure would
be in the management of inventory levels in the stores and the billing of
accounts receivable.  The Company presently does not have but intends to develop
a detailed contingency plan designed to address this possibility.

     The costs of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources, third party modification plans
and other factors.  However, there can be no guarantee that these estimates will
be achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes, and similar
uncertainties.
<PAGE>
 
Item 3.  Quantitative and Qualitative Disclosures About Market Risk

     There were no material changes in the Company's market risk exposures 
during the quarter ended December 31, 1998. Refer to the Company's 1998 Annual 
Report on Form 10-K, Item 7(A), for disclosures regarding the Company's market 
risk exposures.


<PAGE>
 
Part II.  Other Information


Item 6.  Exhibits and Reports on Form 8-K

     The Company filed no reports on Form 8-K for the three months ended
December 31, 1998.
<PAGE>
 
                                  SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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 on February 16, 1999.
 
 
 
 
                                          FRIEDMAN'S INC.
 
                                    BY:   /s/ Victor M. Suglia
                                          --------------------
                                          Victor M. Suglia
                                          Senior Vice President and Chief 
                                          Financial Officer
<PAGE>
 
                                 EXHIBIT INDEX

Exhibit
Number

  3.1          Registrant's Certificate of Incorporation, as amended
               (incorporated by reference from Exhibit 4(a) to the Registrant's
               Registration Statement on Form S-8 (File No. 333-17755) dated
               March 21, 1997).

  3.2          Bylaws of the Registrant (incorporated by reference from Exhibit
               3.2 to the Registrant's Registration Statement on Form S-1 (File
               No. 33-67662), and amendments thereto, originally filed on August
               19, 1993).

  4.1          See Exhibits 3.1 and 3.2 for provisions of the Certificate of
               Incorporation and Bylaws of the Registrant defining rights of
               holders of Class A and Class B Common Stock of the Registrant.

  4.2          Form of Class A Common Stock certificate of the Registrant
               (incorporated by reference from Exhibit 4.2 to the Registrant's
               Registration Statement on Form S-1 (File No. 33-67662), and
               amendments thereto, originally filed on August 19, 1993).

  10           Amendment No. 1 to Subordination Agreement, dated as of October
               15, 1996, by and among the financial institutions party thereto,
               LaSalle National Bank, as Agent and Friedman's Inc.

  27           Financial Data Schedule (for SEC use only)