<PAGE>   1
================================================================================

                       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 MAY 2, 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 001-09630
                       ---------

                             CML GROUP, INC.
          ------------------------------------------------------
          (Exact Name of Registrant as Specified in its Charter)

         Delaware                                       04-2451745
------------------------                    ------------------------------------
(State of Incorporation)                    (IRS Employer Identification Number)

 524 Main Street, Acton, Massachusetts                     01720
----------------------------------------                ----------
(Address of principal executive offices)                (Zip Code)

Registrant's telephone number, including area code: (978) 264-4155
                                                    --------------

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

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or 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
                                                   -----        -----

Number of shares outstanding of each of the issuer's classes of common stock:
50,142,409 shares of common stock, $.10 par value, as of June 09, 1998.

================================================================================
<PAGE>   2
                        CML GROUP, INC. AND SUBSIDIARIES

                                    FORM 10-Q

                                      INDEX

                                                                            Page
                                                                            ----

Part I:  Financial Information

         Item 1: Financial Statements

                 Consolidated Condensed Balance Sheets
                 as of May 2, 1998 and July 31, 1997                       3 - 4
 
                 Consolidated Condensed Statements of Operations
                 for the three-month and six-month periods ended
                 May 2, 1998 and May 3, 1997                                   5

                 Consolidated Condensed Statements of Cash
                 Flows for the six-month periods ended
                 May 2, 1998 and May 3, 1997                                   6

                 Notes to Consolidated Condensed Financial Statements     7 - 13

         Item 2: Management's Discussion and Analysis of Financial
                 Condition and Results of Operations                     14 - 21

Part II: Other Information

         Item 1: Legal Proceedings                                            22

         Item 2: Changes in Securities and Use of Proceeds                    22

         Item 6: Exhibits and Reports on Form 8-K                             22

         Signatures                                                           22

         Exhibit Index                                                        23






                                       2
<PAGE>   3


                          Part I: FINANCIAL INFORMATION

Item 1.  FINANCIAL STATEMENTS

                         CML GROUP, INC. & SUBSIDIARIES
                      CONSOLIDATED CONDENSED BALANCE SHEETS
                                 (In thousands)

                                     ASSETS

                                                  May 2, 1998     July 31, 1997
                                                  -----------     -------------

Current assets:
   Cash and cash equivalents                        $  2,773         $  4,359
   Accounts receivable, net                            7,432            8,151
   Inventories:
     Raw materials                                     2,183            1,971
     Work in process                                     575              836
     Finished goods                                   38,252           31,115
                                                    --------         --------

       Total inventories                              41,010           33,922
   Refundable income taxes                               231               --
   Deferred income taxes                                  --            3,903
   Other current assets                                6,874            8,479
                                                    --------         --------

       Total current assets                           58,320           58,814
                                                    --------         --------

Property, plant and equipment, at cost:
   Land and buildings                                 14,213           19,404
   Machinery and equipment                            38,920           45,257
   Leasehold improvements                             27,603           30,020
                                                    --------         --------

                                                      80,736           94,681

   Less accumulated depreciation                     (45,628)         (46,223)
                                                    --------         --------

                                                      35,108           48,458
                                                    --------         --------

Goodwill                                               8,368            8,546
Deferred income taxes                                     --           24,412
Other assets                                           4,145            6,106
                                                    --------         --------

                                                    $105,941         $146,336
                                                    ========         ========



            See Notes to Consolidated Condensed Financial Statements.


                                       3
<PAGE>   4


                         CML GROUP, INC. & SUBSIDIARIES
                      CONSOLIDATED CONDENSED BALANCE SHEETS
                     (In thousands except share information)

                LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)

                                                  May 2, 1998     July 31, 1997
                                                  -----------     -------------

Current liabilities:
   Current portion of long-term debt                $      29        $     35
   Revolving line of credit                            42,324              --
   Accounts payable                                    20,009          10,839
   Accrued compensation                                 5,148           4,339
   Accrued advertising                                  1,987           1,514
   Accrued insurance                                    3,872           4,544
   Accrued lease termination costs                        100           2,587
   Other accrued expenses                              30,486          25,261
                                                    ---------        --------

   Total current liabilities                          103,955          49,119
                                                    ---------        --------

Noncurrent liabilities:
   Long-term debt                                         231             245
   Convertible subordinated debentures                 41,593          41,593
   Other noncurrent liabilities                        13,478           9,651
                                                    ---------        --------

   Total noncurrent liabilities                        55,302          51,489
                                                    ---------        --------

Stockholders' equity (deficiency):
   Common stock, par value $.10 per share
     Authorized - 120,000,000 shares
     Issued - 52,810,792 shares and
       52,738,268 shares                                5,281           5,274
   Additional paid-in capital                          82,993          80,654
   Accumulated deficit                               (106,013)         (3,642)
                                                    ---------        --------

                                                      (17,739)         82,286

   Less treasury stock, at cost, 2,823,497 
   shares and 2,901,401 shares                        (35,577)        (36,558)
                                                    ---------        --------

                                                      (53,316)         45,728
                                                    ---------        --------

                                                    $ 105,941        $146,336
                                                    =========        ========



            See Notes to Consolidated Condensed Financial Statements.

                                       4
<PAGE>   5
                         CML GROUP, INC. & SUBSIDIARIES
                 CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
                        (In thousands except share data)

For the periods ended May 2, 1998
and May 3, 1997

<TABLE>
<CAPTION>
                                                          Three Months                     Nine Months
                                                    ------------------------        -------------------------
                                                      1998            1997             1998            1997
                                                    --------        --------        ---------        --------

<S>                                                 <C>             <C>             <C>              <C>     
Net sales                                           $ 59,770        $ 96,061        $ 226,831        $278,400
                                                    --------        --------        ---------        --------

Less costs and expenses:
  Cost of goods sold                                  38,478          47,557          127,839         129,135
  Selling, general and administrative expenses        42,626          61,102          153,163         189,149
  Impairment charges                                      --              --            2,877             497
  Restructuring charges                                   --              --            8,533              --
  Interest expense                                     3,263             436            5,374           1,192
                                                    --------        --------        ---------        --------

                                                      84,367         109,095          297,786         319,973
                                                    --------        --------        ---------        --------

Loss before income taxes                             (24,597)        (13,034)         (70,955)        (41,573)
Income tax provision (benefit)                        19,071          (4,432)          31,416         (14,135)
                                                    --------        --------        ---------        --------

Net loss                                            $(43,668)       $ (8,602)       $(102,371)       $(27,438)
                                                    ========        ========        =========        ========

Loss per share:
  Basic                                             $  (0.87)       $  (0.17)       $   (2.05)       $  (0.55)
                                                    ========        ========        =========        ========
  Diluted                                           $  (0.87)       $  (0.17)       $   (2.05)       $  (0.55)
                                                    ========        ========        =========        ========

Weighted average number of shares outstanding     50,038,368      49,968,299       49,998,817      49,898,540
</TABLE>


            See Notes to Consolidated Condensed Financial Statements.


                                        5


<PAGE>   6



                         CML GROUP, INC. & SUBSIDIARIES
                 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                            For The Nine Months Ended
                                                                           ---------------------------
                                                                           May 2, 1998     May 3, 1997
                                                                           -----------     -----------
<S>                                                                         <C>              <C>      
Cash flows from operating activities:
    Net loss                                                                $(102,371)       $(27,438)
                                                                            ---------        --------
    Adjustments to reconcile net loss to net cash
       provided by operating activities:
          Impairment charges                                                    2,877             497
          Restructuring charges                                                 8,533              --
          Depreciation and amortization                                        11,804          11,115
          (Gain) loss on disposal of assets                                      (127)            672
          Decrease in working capital items                                     7,583          29,482
          (Increase) decrease in other assets                                  25,804         (10,751)
          Decrease in other noncurrent liabilities                              3,865             (36)
                                                                            ---------        --------
    Total adjustments                                                          60,339          30,979
                                                                            ---------        --------
    Net cash provided by (used in) operating activities                       (42,032)          3,541
                                                                            ---------        --------
Cash flows from investing activities:
    Additions to property, plant and equipment                                 (4,881)         (3,924)
    Net proceeds from the sale of discontinued operation                           --           1,413
    Net proceeds from the sale of businesses                                      768           3,913
    Net proceeds from the sale of assets                                        2,094              --
    Reductions in notes receivable                                                 42              39
                                                                            ---------        --------
    Net cash provided by (used in) investing activities                        (1,977)          1,441
                                                                            ---------        --------
Cash flows from financing activities:
    Decrease in long-term debt                                                    (20)            (17)
    Increase in revolving line of credit                                       42,324              --
    Dividends paid                                                                 --            (497)
    Exercise of stock options                                                     119             281
                                                                            ---------        --------
    Net cash provided by (used in) financing activities                        42,423            (233)
                                                                            ---------        --------
Net increase (decrease) in cash and cash equivalents during the period         (1,586)          4,749
Cash and cash equivalents at the beginning of the period                        4,359          17,673
                                                                            ---------        --------
Cash and cash equivalents at the end of the period                          $   2,773        $ 22,422
                                                                            =========        ========
</TABLE>


            See Notes to Consolidated Condensed Financial Statements.

                                        6


<PAGE>   7



                         CML GROUP, INC. & SUBSIDIARIES
              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

NOTE 1

The accompanying Consolidated Condensed Financial Statements and Notes should be
read in conjunction with the consolidated financial statements contained in the
Annual Report on Form 10-K of CML Group, Inc. (the "Company"). In the opinion of
the Company's management, the accompanying Consolidated Condensed Financial
Statements include all adjustments necessary for a fair presentation of the
results of the interim periods presented and all such adjustments are of a
normal recurring nature, except for the adjustments discussed in Note 3. The
retail industry is seasonal in nature and the results of operations for the
interim periods presented may not be indicative of the results for a full year.

The preparation of consolidated financial statements in accordance with
generally accepted accounting principles requires the Company to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingencies as of the date of the consolidated financial
statements and the reported amount of revenues and expenses during the period.
Actual results could differ from those estimates.

The Company's fiscal year ends on July 31; references to fiscal 1998 and fiscal
1997 refer to the fiscal year ending July 31, 1998 and fiscal year ended July
31, 1997, respectively. Certain fiscal 1997 amounts have been reclassified to
conform to the fiscal 1998 presentation.

Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," is effective for the Company beginning in fiscal 1999.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" is effective for financial statements for periods beginning after
December 15, 1997 but is not required to be applied to interim financial
statements in the initial year of application. Adoption of these statements is
not expected to have a material effect on the consolidated financial statements.

The Company adopted SFAS No. 128, "Earnings per Share," in the second quarter of
fiscal 1998. SFAS No. 128 requires the Company to restate prior-period earnings
per share data presented, if necessary. Implementation of SFAS No. 128 had no
effect on previously reported earnings per share information presented herein.

NOTE 2 - MANAGEMENT'S PLAN

The Company incurred a net loss of $43.7 million in the third quarter of fiscal
1998, including an income tax provision of $19.1 million. For the first nine
months of fiscal 1998, the Company had a net loss of $102.4 million, including
an income tax provision of $31.4 million. In fiscal 1997, the Company incurred a
net loss of $8.6 million in the third quarter and $27.4 million during the first
nine months of the year. The loss for the third quarter of fiscal 1998 was
primarily due to operating losses at NordicTrack, higher interest charges and a
$19.1 million income tax provision. The third quarter loss in fiscal 1997 was
primarily due to operating losses at NordicTrack. The loss for the first nine
months of fiscal 1998 was primarily due to operating losses at NordicTrack,
$11.4 million of restructuring and impairment charges recorded by NordicTrack in
the second quarter, the $31.4 million income tax provision, and interest
expense. In fiscal 1997, the loss for the first nine months was primarily due to
operating losses at NordicTrack.


                                       7
<PAGE>   8


In fiscal 1998, NordicTrack's operating losses were primarily the result of
significantly lower net sales, lower gross margins, and restructuring and asset
impairment charges, partially offset by lower operating costs. See Note 3 for 
information concerning NordicTrack's reorganization.

During the second quarter of fiscal 1998, the Company's Board of Directors
announced a comprehensive review of the Company's strategic alternatives, which
is ongoing. Strategic alternatives include the possible sale, recapitalization
and/or joint venture opportunities for the Company and/or its two operating
subsidiaries. To the extent the Company continues to own and operate
NordicTrack, it will be required to expend substantial resources to fund
NordicTrack's operations until NordicTrack attains break-even financial
performance.

The Company's financial performance during the fourth quarter of fiscal 1998 and
in the future will depend upon its ability to purchase goods and services on
credit, to meet its obligations as they become due, to borrow funds under its
revolving credit agreement and to successfully implement the restructuring plan
at NordicTrack. To obtain the funds necessary to support its operations, the
Company may be required to sell assets or to effect public or private financing
transactions, or both. No assurance can be given, however, that the Company will
be able to raise the required funds on favorable terms or on any terms, and, if
it fails to do so, the Company may either be sold or seek protection under the
insolvency laws.

The Company is subject to contingent liabilities discussed in Note 6.

NOTE 3 - NORDICTRACK REORGANIZATION

During the second quarter of fiscal 1998, NordicTrack announced plans to
strategically reposition its operations by outsourcing its manufacturing and
distribution activities and closing its Glencoe, Minnesota production facility;
exiting or outsourcing its direct response and catalog businesses; and closing
underperforming stores. As a result of these strategic initiatives, NordicTrack
recorded non-recurring restructuring charges of $8.5 million for severance,
plant shutdown and other costs. As of May 2, 1998, $6.3 million of the reserve
had been utilized leaving a balance of $2.2 million to cover future costs. Of
the costs charged against the reserve in the third quarter of fiscal 1998, 
$0.4 million required the expenditure of cash, primarily for severance.

During the second quarter of fiscal 1998, NordicTrack also recorded $2.9 million
of asset impairment charges in compliance with Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." Impaired assets included tooling used to
manufacture cross-country skiers and non-motorized treadmills in Glencoe,
Minnesota and retail store fixed assets. Tooling costs were written off in their
entirety. Store fixed asset write-downs were measured based on a comparison of
the assets' net book value to the net present value of the stores' estimated
future net cash flows.



                                       8
<PAGE>   9


In addition, in the second quarter of fiscal 1998, NordicTrack wrote down
inventory by $1.1 million, which was included in cost of goods sold, and accrued
$2.0 million for lease termination and other costs related to the reorganization
plan.

NOTE 4 - LONG-TERM DEBT

Consolidated long-term debt is summarized as follows:

                                                  (in thousands)
                                            ----------------------------
                                            May 2, 1998    July 31, 1997
                                            -----------    -------------

Note payable                                    $218            $233
Obligations under capital leases                  42              47
                                                ----            ----

                                                 260             280
Less current portion                             (29)            (35)
                                                ----            ----

Long-term debt                                  $231            $245
                                                ====            ====



On March 11, 1998, the Company's senior revolving credit agreement was amended
to, among other things, (i) increase the total amount that the Company's
subsidiaries may borrow from $40.0 million to $50.0 million, (ii) increase the
maximum overadvance amount from $15.0 million to up to $35.0 million, and (iii)
extend the period during which overadvances are permitted to be outstanding. The
amended agreement, which matures July 10, 1998, provides that advances which do
not constitute overadvances under the agreement bear interest at 3.0% above the
lenders' "Base Rate" which approximates the prime rate. Overadvances under the
agreement bear interest at 4.0% above the lenders' Base Rate. In connection with
the financing, the Company issued the lenders warrants to purchase 1,621,741
shares of the Company's Common Stock at a nominal exercise price. The net value
of the warrants, which was estimated to be $3.0 million on March 11, 1998, was
capitalized into other current assets and is being amortized through July 10,
1998. Advances under the Company's revolving line of credit are classified as
current liabilities in the accompanying Consolidated Condensed Balance Sheets.

NOTE 5 - EARNINGS PER SHARE DISCLOSURES

The net losses and the number of shares included in the calculations of the
Company's basic and diluted net losses per share shown on the Consolidated
Condensed Statements of Operations are the same. Certain securities that could
potentially dilute basic earnings per share in the future were not included in
the computations of diluted net losses per share because to do so would have
been antidilutive for the periods presented. These securities include the
Company's convertible subordinated debentures, the warrants which were issued in
connection with the amendment of the Company's credit facility, and stock
options.



                                       9
<PAGE>   10


NOTE 6 - CONTINGENCIES

      LITIGATION

      NordicTrack is named as the defendant in a Consolidated Class Action
Complaint ("Consolidated Complaint") filed on September 25, 1996 in the United
States District Court for the Southern District of New York and subsequently
transferred to the United States District Court for the District of Minnesota on
January 30, 1997. The named plaintiffs, Elissa Crespi and John Lucien Ware, Jr.,
allege in the Consolidated Complaint that NordicTrack made false and misleading
claims in its advertising concerning the weight loss of persons using its ski
exercisers by misrepresenting and failing to disclose material findings of
weight loss studies conducted by or on behalf of NordicTrack. The named
plaintiffs assert claims of common law fraud, fraudulent concealment, negligent
misrepresentation and omission, breach of express and implied warranties, and
violation of Section 349 of the State of New York General Business Law. The
named plaintiffs also seek to represent a class allegedly consisting of all
persons in the United States who purchased a NordicTrack ski exerciser during
the period from November 15, 1993 to April 10, 1996, excluding NordicTrack and
its employees. On September 2, 1997, the named plaintiffs filed a motion to
remand the case to state court in New York, which NordicTrack opposed. The
parties have reached an agreement-in-principle concerning the general terms and
conditions of a class action settlement of the case which has been memorialized
in a Memorandum of Understanding filed with the Minnesota Court. The parties are
in the process of negotiating an acceptable written settlement agreement and
other documents relating to the proposed settlement. On January 8, 1998, the
United States District Court for the District of Minnesota remanded the case to
the Supreme Court for the State of New York for consideration of whether the
proposed settlement should be approved and a final judgment and order entered
thereon. Management believes the contemplated settlement will not have a
material adverse impact on the Company's business, financial condition and
results of operations. The Company can give no assurance at this time that the
parties will be successful in negotiating a mutually acceptable written
settlement agreement or that the proposed settlement will ultimately receive
court approval.

      NordicTrack is the defendant in a lawsuit in the United States District
Court for the District of Minnesota which commenced on August 12, 1996. In this
action, the plaintiff, Precise Exercise Equipment ("Precise"), alleges that
NordicTrack misappropriated trade secrets regarding Precise's abdominal exercise
product and further breached a non-competition agreement. The parties have
entered into settlement discussions and are in the process of negotiating and
drafting an acceptable written settlement agreement. Management believes the
contemplated settlement will not have a material adverse impact on the Company's
business, financial condition and results of operations. There can be no
assurance, however, that the parties will be successful in negotiating a
mutually acceptable written agreement or that the proposed settlement will
ultimately receive court approval.


                                       10
<PAGE>   11


      In a complaint dated September 30, 1997, filed by Precor Incorporated
("Precor") in the United States District Court for the Western District of
Washington in Seattle, Precor alleges that the manufacture, offering for sale
and sale by NordicTrack of its exercisers marketed under the Ellipse(TM)
trademark infringe a United States patent which Precor has licensed from the
inventor, Larry Miller (the "Miller Patent"). The technology used in
NordicTrack's Ellipse(TM) exercisers is licensed by NordicTrack from a third
party, and the Company believes that NordicTrack's products do not infringe the
Miller Patent. In February 1998, Precor amended the complaint to add
infringement claims against a major wholesale customer of NordicTrack's and the
licenser of NordicTrack's technology. In March 1998, Precor added as parties the
two manufacturers of the Ellipse(TM) exercisers, one in Taiwan and one in
Tennessee. The complaint is scheduled for mediation in September 1998 and for
trial in February 1999. Precor has returned the Miller Patent to the United
States Patent and Trademark Office for further examination. NordicTrack filed a
separate reexamination request in April 1998 and requested a stay of the
litigation pending completion of the reexaminations. The Court has denied the
stay petition. While NordicTrack believes it has meritorious defenses to the
complaint and intends to vigorously defend against the allegations, this lawsuit
is in an early stage and the Company is unable to determine the likelihood and
possible impact on the Company's business, financial condition and results of
operations of an unfavorable outcome.

      On May 8, 1998, NordicTrack was named as a defendant in a complaint filed
by Fitness Quest Inc. ("Fitness Quest") in the United States District Court for
the Eastern Division of the Northern District of Ohio. Fitness Quest alleges the
marketing by NordicTrack of a line of elliptical exercise products under the
Ellipse(TM) trademark infringes the Eclipse Trainer(R) trademark used by Fitness
Quest on its elliptical motion exercise machines and also alleges various
violations of state and federal unfair competition laws. Fitness Quest has also
filed a motion seeking an injunction to block NordicTrack's sale of exercise
machines under the Ellipse(TM) trademark. The Court has not responded to Fitness
Quest's motion for an injunction. While NordicTrack believes it has meritorious
defenses to the complaint and the motion for preliminary injunction, and intends
to vigorously defend against the allegations, this lawsuit is in its earliest
stages and the Company is unable to determine the likelihood and possible impact
on the Company's business, financial condition and results of operations of an
unfavorable outcome.

      The Company is involved in various other legal proceedings which have
arisen in the ordinary course of business. Management believes the outcome of
such other legal proceedings will not have a material adverse impact on the
Company's business, financial condition and results of operations.



                                       11
<PAGE>   12


      ENVIRONMENTAL MATTERS

      On June 3, 1991, the Company received from the United States Environmental
Protection Agency ("EPA") a Special Notice Letter containing a formal demand on
the Company as a Potentially Responsible Party ("PRP") for reimbursement of the
costs incurred and expected to be incurred in response to environmental problems
at a so-called "Superfund" site in Conway, New Hampshire. The EPA originally
estimated the costs of remedial action and future maintenance and monitoring
programs at the site at about $7.3 million. The Superfund site includes a vacant
parcel of land owned by a subsidiary of the Company as well as adjoining
property owned by a third party. No manufacturing or other activities involving
hazardous substances have ever been conducted by the Company or its affiliates
on the Superfund site in Conway. The environmental problems affecting the land
resulted from activities by the owners of the adjoining parcel. Representatives
of the Company have engaged in discussions with the EPA regarding responsibility
for the environmental problems and the costs of cleanup. The owners of the
adjoining parcel are bankrupt. The EPA commenced cleanup activities at the site
in July 1992.

      The EPA expended approximately $1.4 million for the removal phase of the
site cleanup, which has now been completed. The EPA had estimated that the
removal costs would exceed $3.0 million, but only a small portion of the solid
waste removed from the site was ultimately identified as hazardous waste.
Therefore, the EPA's actual response costs for the removal phase were less than
it originally estimated. The EPA implemented the groundwater phase of the
cleanup, which the EPA originally estimated would cost approximately $4.0
million.

      The Company believes that the EPA's estimated cost for cleanup, including
the proposed remedial actions, is excessive and involves unnecessary actions. In
addition, a portion of the proposed remedial cost involves cleanup of the
adjoining property that is not owned by the Company or any of its affiliates.
Therefore, the Company believes it is not responsible for that portion of the
cleanup costs.

      In May 1998, settlement discussions with the EPA resumed regarding
responsibility for the environmental problems and the costs of cleanup. An
agreement in principle has been reached pursuant to which the Company will be
required to pay $0.6 million to the EPA in return for a release from all claims
for reimbursement of the government's response costs. Although the Company's
primary insurer has agreed to pay approximately 80% of the settlement, the
Company believes that substantially all of the settlement amount is covered by
insurance provided by the primary insurance carrier. 

      In June 1992, the EPA notified the Company that it may be liable for the
release of hazardous substances by the Company's former Boston Whaler subsidiary
at a hazardous waste treatment and storage facility in Southington, Connecticut.
The EPA has calculated the Company's volumetric contribution at less than
two-tenths of one percent. Because complete cleanup cost estimates for the site
are not yet available, an accurate assessment of the Company's likely range of
liability cannot be made. Accordingly, the impact on the Company's business,
financial condition and results of operations is not presently determinable.



                                       12
<PAGE>   13


      TAX MATTERS

      The Internal Revenue Service ("IRS") has been engaged in an examination of
the Company's tax returns for the fiscal years 1987 through 1991. The IRS issued
a "30-day letter" to the Company proposing certain adjustments which, if
sustained, would result in a tax deficiency for the years under examination. The
Company has filed an appeal with the IRS protesting the proposed adjustments.
The adjustments proposed by the IRS primarily relate to: (i) the disallowance of
deductions taken by the Company with respect to incentive compensation payments
of $43.0 million made to the former owners of NordicTrack (acquired in June
1986) pursuant to their employment contracts; and (ii) incentive compensation
payments made to the former owners of Britches of Georgetowne (acquired in
August 1983 and sold in April 1996) pursuant to the terms of an earnout
agreement and the valuation of certain assets acquired in connection with the
acquisition of Britches of Georgetowne in the amount of $9.2 million. The net
federal tax due relating to the proposed adjustments approximates $15.9 million.
Interest on the proposed deficiencies approximates $21.1 million as of May 2,
1998.

      The incentive compensation payments to the former owners of NordicTrack
were attributable to substantial increases in NordicTrack's sales and profits
during the years under examination. The Company believes that the tax deductions
taken were valid and in accordance with the Internal Revenue Code and intends to
vigorously oppose the proposed adjustments. However, at this stage no assurance
can be given of a favorable outcome on these matters. If the IRS proposed
adjustments are sustained, any back taxes owed and associated interest would
have a material adverse effect on the Company's consolidated operating results
for the period in which such issues are finally resolved and would also have a
material adverse effect on the Company's consolidated financial condition.

      As of May 2, 1998, the Company did not have any net deferred tax assets
after recording a valuation reserve of $19.1 million during the third quarter of
fiscal 1998, resulting in a total tax provision of $31.4 million for the first
nine months of fiscal 1998.



                                       13
<PAGE>   14



Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS.

INTRODUCTION

This Quarterly Report contains forward-looking statements. For this purpose, any
statements contained herein that are not statements of historical fact may be
deemed to be forward-looking statements. Without limiting the foregoing, the
words "believes," "anticipates," "plans," "expects," and similar expressions are
intended to identify forward-looking statements. There are a number of factors
that could cause the Company's actual results to differ materially from those
indicated by such forward-looking statements. These factors include, without
limitation, those set forth below under the caption "Certain Factors that May
Affect Future Results."

The Company operates in two industry segments, NordicTrack and Smith & Hawken.
NordicTrack designs, sources and markets physical fitness and exercise equipment
and other health-related products through specialty stores and kiosks operated
by its wholly-owned subsidiary, Nordic Advantage and, beginning in fiscal 1998,
to wholesale customers. During the second quarter of fiscal 1998, NordicTrack
announced plans to strategically reposition its operations by outsourcing its
manufacturing and distribution activites and closing its Glencoe, Minnesota
production facility; exiting or outsourcing its direct response and catalog
businesses; and closing underperforming stores.  NordicTrack intends to focus
its resources on its retail sales channel. Smith & Hawken markets fine gardening
tools, clothing, furniture, plants and accessories through its catalogs and
specialty retail stores.

FINANCIAL CONDITION

On March 11, 1998, the Company announced that it had amended its senior
revolving credit agreement to provide the Company and its subsidiaries with up
to $50.0 million of financing through July 10, 1998. The Company is using the
funds for general corporate purposes, including the execution of a restructuring
plan underway at NordicTrack and the expansion of Smith & Hawken.

Because of the substantial losses incurred in fiscal 1997 and continuing losses
in fiscal 1998 from NordicTrack's operations, the Company will need to raise
additional funds to continue its business at current operating levels, including
a restructured NordicTrack business. Accordingly, the Company is engaged in
discussions with its lenders to extend the existing $50.0 million credit
facility beyond its current July 10, 1998 expiration date and to increase its
credit facility by an additional $25.0 million to $75.0 million. In the event
the Company is unable to obtain the funds needed to continue its business
operations in accordance with its fiscal 1998 business plan, the combination of
potential continued losses and the concern among the Company's customers and
suppliers about the Company's future viability could force the Company to
substantially curtail its business operations or to seek protection under the
insolvency laws.



                                       14
<PAGE>   15
The Company believes that internally generated funds, proceeds from the sale of 
assets and funds which the Company is seeking to obtain under its revolving
credit facility or through private financing transactions will be sufficient to
meet its operating needs and anticipated capital expenditures through the later
of July 10, 1998 or any extension of its revolving credit agreement. However,
there can be no assurance that the Company can obtain an extension of its
revolving credit agreement or complete a private financing transaction on terms
acceptable to the Company.

Stockholders' equity had a deficit balance of $53.3 million at May 2, 1998, a
decrease of $99.0 million from July 31, 1997. The change in stockholders' equity
was primarily due to the net loss of $102.4 million for the first nine months of
the year, offset in part by $3.0 million of additional paid-in capital recorded
in the third quarter in connection with warrants issued to the Company's lenders
under its revolving credit facility. A working capital deficit of $45.6 million
existed at May 2, 1998, compared with working capital of $9.7 million at July
31, 1997. The change in working capital was primarily due to the use of excess
cash and the revolving credit facility to finance operations and an increase in
accounts payable, offset in part by higher inventories. Inventories at May 2,
1998 were $7.1 million higher than at July 31, 1997 primarily due to lower than
expected sales at NordicTrack, additional inventory for new Smith & Hawken
stores, lower than expected Spring sales at Smith & Hawken attributable to poor
weather in the western United States, and the normal seasonal inventory buildup
at Smith & Hawken. During the first nine months of fiscal 1998, the Company
invested approximately $4.9 million in property, plant and equipment, compared
with the $3.9 million spent during the first nine months of fiscal 1997. The
Company had approximately $42.3 million of advances and $3.1 million of letters
of credit outstanding under its revolving credit facility at May 2, 1998.

In January 1998, the Company announced that it had engaged an investment banking
firm to assist in conducting a comprehensive review of the Company's strategic
alternatives including possible sale, recapitalization, and/or joint venture
opportunities for the Company and/or its two operating divisions. The strategic
review is ongoing.

RESULTS OF OPERATIONS

For the third quarter of fiscal 1998, net sales decreased 37.8% to $59.8 million
from $96.1 million in the third quarter of fiscal 1997. Net sales for the first
nine months of fiscal 1998 were $226.8 million, a decrease of 18.5%, compared
with $278.4 million for the first nine months of fiscal 1997. The decrease in
sales in the third quarter and nine month periods was attributable to lower
sales at NordicTrack, which were caused in part by NordicTrack's decision in
January 1998 to exit the direct response and catalog sales channels. Smith &
Hawken's sales increased during the third quarter and nine month periods.

The Company incurred a net loss of $43.7 million in the third quarter of fiscal
1998 compared with a net loss of $8.6 million during the same period of fiscal
1997. For the first nine months of fiscal 1998, the Company reported a net loss
of $102.4 million compared with a net loss of $27.4 million in fiscal 1997. The
net losses for the quarter and first nine months were primarily due to the
income tax provisions recorded in the second and third quarters of fiscal 1998,
restructuring and asset impairment charges recorded by NordicTrack in the second
quarter of fiscal 1998, lower sales and gross margins at NordicTrack, and higher
interest charges.



                                       15
<PAGE>   16
Retail sales for the third quarter of fiscal 1998 decreased 28.0% to $40.2
million from $55.8 million in the third quarter of fiscal 1997 and retail sales
for the first nine months of fiscal 1998 decreased 13.3% to $140.1 million from
$161.6 million in the first nine months of fiscal 1997. The declines in retail
sales were primarily due to lower retail sales at NordicTrack which were
partially offset by higher retail sales at Smith & Hawken.

Direct response and mail order sales decreased $23.7 million to $16.5 million in
the third quarter of fiscal 1998 and decreased $42.1 million to $74.6 million
during the first nine months of fiscal 1998, compared with the similar periods
of fiscal 1997. The decreases in direct response and mail order sales were
primarily due to lower direct response sales at NordicTrack; mail order sales at
Smith & Hawken increased during these same periods.

Cost of goods sold as a percentage of net sales increased from 49.5% in the
third quarter of fiscal 1997 to 64.4% in the third quarter of fiscal 1998, and
from 46.4% in the first nine months of fiscal 1997 to 56.4% in the first nine
months of fiscal 1998. The increases in cost of goods sold as a percentage of
sales during each of these periods were primarily due to NordicTrack's reduced
margins on cross-country skiers, non-motorized treadmills and abdominal products
which experienced lower sales and higher discounting; the change in the sales
mix toward lower-margined motorized treadmills; sales promotions and after-sale
product costs of the elliptical exercise machines; liquidation of inventories of
discontinued product lines; Glencoe, Minnesota manufacturing plant
inefficiencies which arose from capacity underutilization; write-down of
inventories resulting from the decision to exit direct response and catalog
operations; and discounts to wholesale customers. The effects of these changes
at NordicTrack were partially offset by lower cost of goods sold as a percentage
of net sales from sales of UltraLift(TM), NordicTrack's strength-training
machine. Smith & Hawken's cost of goods sold as a percentage of sales also
increased primarily due to higher markdowns taken to clear holiday catalog
merchandise and higher markdowns to counteract lower than expected store sales 
due to poor weather in February and March.

Selling, general and administrative expenses increased as a percentage of sales
from 63.6% in the third quarter of fiscal 1997 to 71.3% in the third quarter of
fiscal 1998, and decreased from 67.9% in the first nine months of fiscal 1997 to
67.5% in the same period of fiscal 1998. Both NordicTrack and Smith & Hawken
experienced higher selling, general and administrative expenses as a percentage
of sales. NordicTrack's increase was primarily due to the decrease in sales,
including comparable store sales, over which fixed costs are spread, and higher
costs of shipping its products to customers. The increase at Smith & Hawken
resulted primarily from a variety of activity-related costs which were incurred
in expectation of generating higher sales than were actually realized.





                                       16
<PAGE>   17
During the second quarter of fiscal 1998, NordicTrack announced that it will
focus on its retail and wholesale sales channels and that it plans to exit the
direct response and catalog businesses. NordicTrack also announced that it would
cease manufacturing and distribution activities at its Glencoe, Minnesota
facility. As a result, NordicTrack recorded asset impairment charges of $2.9
million and restructuring charges of $8.5 million to cover estimated costs to
strategically reposition its operations. NordicTrack immediately eliminated 51
full-time positions and 65 seasonal telemarketing positions. When manufacturing
operations ceased at NordicTrack's Glencoe, Minnesota facility in May 1998, an
additional 98 factory positions were phased out. In April 1999, when the
distribution and refurbishment functions are expected to cease in Glencoe,
Minnesota, 101 positions are expected to be eliminated. The restructuring
reserve balance as of May 2, 1998 was $2.2 million. Of the $6.3 million of
restructuring charges charged against the reserve in the third quarter, $0.4
million required the expenditure of cash, primarily for severance. NordicTrack
expects to incur additional restructuring charges in the fourth quarter of
fiscal 1998 and in the first quarter of fiscal 1999 to renegotiate and/or
terminate certain contracts relating to and benefiting the direct response and
catalog businesses.

The Company incurred net interest expense of $3.3 million, or 5.5% of net sales,
in the third quarter of fiscal 1998, compared with $0.4 million, or 0.5% of net
sales, in the third quarter of fiscal 1997. During the first nine months of
fiscal 1998, net interest expense was $5.4 million, or 2.4% of net sales,
compared with $1.2 million, or 0.4% of net sales, in fiscal 1997. The increase
in net interest expense as a percentage of net sales was primarily due to
increased borrowings under the revolving credit facility and higher borrowing
costs in fiscal 1998 relative to fiscal 1997.

The Company recorded an income tax provision of $19.1 million in the third
quarter of fiscal 1998 and an income tax benefit of $4.4 million in the third
quarter of fiscal 1997. For the first nine months of fiscal 1998, the Company
recorded an income tax provision of $31.4 million, compared with an income tax
benefit of $14.1 million in the first nine months of fiscal 1997. The income tax
provisions for the third quarter and first nine months of fiscal 1998 were
primarily attributable to valuation reserves recorded against net deferred tax
assets. The income tax benefits recorded by the Company in fiscal 1997
represented the benefits it expected to realize upon utilization of tax loss
carryforwards.



                                       17
<PAGE>   18
NordicTrack's net sales decreased 48.5% to $40.8 million in the third quarter of
fiscal 1998, compared with $79.2 million in the third quarter of fiscal 1997,
and decreased 26.6% to $166.9 million during the first nine months of fiscal
1998, compared with sales of $227.6 million during the first nine months of
fiscal 1997. Approximately 75.3% and 59.5% of NordicTrack's net sales in the
third quarters of fiscal 1998 and fiscal 1997, respectively, were accounted for
by sales at its Nordic Advantage subsidiary, which operates retail stores and
mall kiosks. In January 1998, NordicTrack announced that it was exiting the
direct response and catalog sales channels. In the future, Nordic Advantage is
expected to account for a larger proportion of NordicTrack's total sales than in
the past.

Nordic Advantage's sales decreased from $47.1 million in the third quarter of
fiscal 1997 to $30.7 million in the third quarter of fiscal 1998, and from
$135.8 million in the first nine months of fiscal 1997 to $110.9 million in the
first nine months of fiscal 1998. The decrease in Nordic Advantage's sales was
primarily due to lower comparable store sales and a decrease in the number of
mall-based stores and kiosks operating during these periods. As of May 2, 1998,
Nordic Advantage operated 105 stores and 56 kiosks compared with 126 stores and
87 kiosks at the end of the third quarter of fiscal 1997. Comparable store sales
at NordicTrack decreased 32.6% in the third quarter and 16.7% during the first
nine months of fiscal 1998. 

Direct response and mail order sales at NordicTrack decreased from $32.1 million
in the third quarter of 1997 to $7.0 million in the third quarter of fiscal
1998, and from $116.8 million during the first nine months of fiscal 1997 to
$43.9 million during the first nine months of fiscal 1998. The decreases in
direct response sales were primarily due to NordicTrack's decision to exit its
direct response and catalog businesses. Wholesale sales at NordicTrack were $3.1
million in the third quarter and $12.1 million during the first nine months of
fiscal 1998. Motorized treadmills continued to demonstrate strong sales through
the first nine months of fiscal 1998, however, the Ellipse(TM) continued to have
a slower than anticipated ramp-up in sales in both the retail and wholesale
channels. Cross-country skiers, AbWorks(TM), non-motorized treadmills, LegShaper
Plus(TM), and rider products experienced continued sales declines during the
third quarter and first nine months of fiscal 1998, compared with the same
periods in fiscal 1997. In addition, sales of UltraLift(TM), NordicTrack's
strength-training machine, decreased during the third quarter of fiscal 1998
compared with the same period of fiscal 1997.

Smith & Hawken's net sales increased $2.2 million, or 13.0%, to $19.0 million
during the third quarter of fiscal 1998 and increased $9.1 million, or 17.8%, to
$59.9 million in the first nine months of fiscal 1998 compared with the
corresponding periods of fiscal 1997. Retail sales increased $0.8 million, or
9.2%, to $9.5 million in the third quarter of fiscal 1998, and increased 
$3.3 million, or 13.0%, to $29.2 million in the first nine months of fiscal
1998. The increase in retail sales during the third quarter was primarily due to
new store openings. Comparable store sales decreased 1.1% during the third
quarter, but increased 7.3% during the first nine months of fiscal 1998. Smith &
Hawken opened three new stores during the third quarter of fiscal 1998 and
operated 28 stores at the end of the third quarter of fiscal 1998, compared with
25 stores at the end of the third quarter of fiscal 1997. Mail order sales at
Smith & Hawken rose 17.0% to $9.5 million in the third quarter of fiscal 1998
and increased 22.9% to $30.7 million in the first nine months of fiscal 1998,
compared with the corresponding periods of fiscal 1997.



                                       18
<PAGE>   19
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS

The following important factors, among others, could cause actual results to
differ materially from those indicated by forward-looking statements made in
this Quarterly Report and presented elsewhere by management from time to time.

      Recent Operating Losses
      Because of the substantial losses incurred in fiscal 1997 and the 
continuing losses in fiscal 1998 from NordicTrack's operations, the Company will
need to raise additional funds to continue its business at current operating
levels, including a restructured NordicTrack business. Accordingly, the Company
is engaged in discussions with its lenders to extend the existing $50.0 million
credit facility beyond its current July 10, 1998 expiration date and to increase
its credit facility by an additional $25.0 million to $75.0 million. In the
event the Company is unable to obtain the funds needed to continue its business
operations in accordance with its fiscal 1998 business plan, the combination of
potential continued losses and the concern among the Company's customers and
suppliers about the Company's future viability could force the Company to
substantially curtail its business operations or to seek protection under the
insolvency laws.

      Available Funds
      The Company's future financial performance will also depend on its ability
to purchase goods and services on credit and to borrow funds under its revolving
credit agreement. If the Company is unable to purchase goods and services on
credit or the Company's lenders do not provide the Company with favorable credit
arrangements, the Company may need to seek additional funds from other parties.
There can be no assurance, however, that the Company would be able to obtain any
such third-party funding or obtain such funding on terms acceptable to the
Company. Also, in the event the Company elects to raise additional funds through
the sale of assets or securities or both, the Company may not be able to
complete such sales in a timely manner or on terms favorable to the Company.

      Consumer Spending
      The success of the Company is influenced by a number of economic
conditions affecting disposable consumer income, such as employment levels,
business conditions, interest rates and taxation rates. Adverse changes in these
economic conditions may restrict consumer spending, thereby negatively affecting
the Company's results of operations. In addition, the Company's results of
operations could be adversely affected if consumer spending is lower than
anticipated.

      Competition
      The markets in which the Company is engaged are highly competitive.

      NordicTrack competes with several companies which design, manufacture and
distribute physical fitness and exercise equipment, have greater financial
resources and offer a greater selection of products. During the past several
years, NordicTrack's competitors have introduced several new and competitive
products at competitive prices which have adversely affected NordicTrack's
revenues and profits. The future success of NordicTrack depends in part upon its
ability to introduce new and competitive products successfully, on a timely
basis and at competitive prices. The failure of NordicTrack to successfully
compete with its competitors could materially adversely affect the Company's
business, financial condition and results of operations.


                                       19

<PAGE>   20


      Many of the competitors of Smith & Hawken are larger companies with
greater financial resources, a greater selection of merchandise and nationwide
distribution, including a large number and wide variety of specialty retail
stores, discount stores and department stores. Smith & Hawken also competes with
mail order catalogs that sell gardening-related merchandise and independent
garden stores and plant nurseries in towns and cities throughout the United
States. The failure of Smith & Hawken to successfully compete with these
companies could adversely affect the Company's business, financial condition and
results of operations.

      New Products
      Several new and enhanced products were introduced by the Company in fiscal
1997 and a new line of elliptical products was introduced by NordicTrack in the
first quarter of fiscal 1998. The Company's future financial performance will
depend on the continued market acceptance of the Company's existing products and
the successful development, introduction and customer acceptance of new and
enhanced products. If these products do not receive favorable market acceptance,
the Company's future operating results would be adversely affected. There can be
no assurance that the Company will be successful in developing new products and
marketing its existing or new products.

      New Management Team
      The Company has replaced a number of key executives within the Company and
its NordicTrack subsidiary. There can be no assurance, however, that the new
personnel will be able to successfully increase revenues or reduce costs at the
Company or NordicTrack in the future.

      Seasonality
      The Company's businesses are seasonal, with significant amounts of retail
sales in the second and third quarters of the Company's fiscal year. The Company
expects this seasonality to continue in the future. Because of this seasonality,
the Company's revenues and earnings have fluctuated and will continue to
fluctuate from quarter to quarter.

      Advertising and Marketing Programs
      The inability of the Company to periodically design and successfully
execute new and effective advertising and marketing programs could adversely
affect the Company's business, financial condition and results of operations.
During the second quarter of fiscal 1998, NordicTrack announced plans to exit
the direct response and catalog businesses, and pursue a partnership with a
direct response marketing company, which is ongoing. There can be no assurances,
however, that such a partnership will occur or its advertising efforts will be
successful.

      Cost Reduction Programs
      In the first nine months of fiscal 1998 and during fiscal 1997, the
Company was able to significantly reduce its operating costs as net sales
decreased. There can be no assurance, however, that the Company will be able to
further reduce operating costs if sales decline in the future.

      In addition, postage expenses associated with mailing catalogs and
shipping charges associated with acquiring and distributing products and
merchandise to customers are significant factors in the operation of the
Company's businesses. Increases in postage or shipping costs, or disruptions in
delivery and shipping services, could adversely affect the Company's business,
financial condition and results of operations.



                                       20
<PAGE>   21


      Intellectual Property Rights
      The Company will continue to be subject to the risk of adverse claims and
litigation alleging infringement of intellectual property rights. There can be
no assurance that third parties will not assert infringement claims in the
future with respect to the Company's current or future products or that any such
claims will not require the Company to enter into royalty arrangements or result
in costly litigation. While the Company believes that it currently has all
licenses necessary to conduct its business, no assurance can be given that
additional licenses will not be required in the future. Furthermore, no
assurance can be given that, if any additional licenses are required, such
licenses could be obtained on commercially reasonable terms.

      Tax Matters
      The Internal Revenue Service ("IRS") has been engaged in an examination of
the Company's tax returns for the fiscal years 1987 through 1991. The IRS issued
a "30-day letter" to the Company proposing certain adjustments which, if
sustained, would result in a tax deficiency for the years under examination. The
Company has filed an appeal with the IRS protesting the proposed adjustments.
The adjustments proposed by the IRS primarily relate to: (i) the disallowance of
deductions taken by the Company with respect to incentive compensation payments
of $43.0 million made to the former owners of NordicTrack (acquired in June
1986) pursuant to their employment contracts; and (ii) incentive compensation
payments made to the former owners of Britches of Georgetowne (acquired in
August 1983 and sold in April 1996) pursuant to the terms of an earnout
agreement and the valuation of certain assets acquired in connection with the
acquisition of Britches of Georgetowne in the amount of $9.2 million. The net
federal tax due relating to the proposed adjustments approximates $15.9 million.
Interest on the proposed deficiencies approximates $21.1 million as of May 2,
1998.

      The incentive compensation payments to the former owners of NordicTrack
were attributable to substantial increases in NordicTrack's sales and profits
during the years under examination. The Company believes that the tax deductions
taken were valid and in accordance with the Internal Revenue Code and intends to
vigorously oppose the proposed adjustments. However, at this stage no assurance
can be given of a favorable outcome on these matters. If the IRS proposed
adjustments are sustained, any back taxes owed and associated interest would
have a material adverse effect on the Company's consolidated operating results
for the period in which such issues are finally resolved and would also have a
material adverse effect on the Company's consolidated financial condition.

      Year 2000 Software Issues
      The Company has reviewed the implications of year 2000 compliance and has
taken steps designed to ensure that the Company's computer systems and
applications will manage dates beyond 1999. The Company believes that it has
allocated adequate resources for this purpose and that planned software
upgrades, which are in the normal course of business, will address the Company's
internal year 2000 needs. However, there can be no assurance that the systems of
other parties upon which the Company's businesses also rely will be converted on
a timely basis. The Company's business, financial condition and results of
operations could be materially adversely affected by the failure of its systems
and applications or those operated by other parties to properly operate or
manage dates beyond 1999.



                                       21
<PAGE>   22



                           PART II: OTHER INFORMATION

Item 1:     Legal Proceedings.

            ENVIRONMENTAL MATTERS

            See Note 6 of Notes to Consolidated Condensed Financial Statements
            in Item 1 of Part I hereof, which is hereby incorporated by
            reference for information concerning environmental matters.

            LITIGATION

            See Note 6 of Notes to Consolidated Condensed Financial Statements
            in Item 1 of Part I hereof, which is hereby incorporated by
            reference for information concerning litigation.

            TAX MATTERS

            See Note 6 of Notes to Consolidated Condensed Financial Statements
            in Item 1 of Part I hereof, which is hereby incorporated by
            reference for information concerning tax matters.


Item 2:     Changes in Securities and Use of Proceeds.

            On March 11, 1998, the Company issued warrants for 1,621,741 shares
            of Common Stock to the Company's lenders, BankBoston, N.A. and
            Rothschild Recovery Fund, L.P., in connection with an amendment to
            the Company's Revolving Credit Agreement. The warrants were issued
            in consideration of the amendment. Each warrant may be exercised for
            shares of Common Stock at an exercise price of $0.10 per share. The
            warrants expire on March 11, 2008. For this issuance, the Company
            has relied upon an exemption from registration under Section 4(2) of
            the Securities Act of 1933 as an issuance not involving a public
            offering.
            
Items 3-5:   None

Item 6:     Exhibits and Reports on Form 8-K.

                (a) Exhibits - See Exhibit Index.

                (b) Reports on Form 8-K:

                    On April 22,1998, the Company filed a Current Report on Form
                    8-K announcing under Item 5 (Other Events) the election of
                    John A. C. Pound as Chairman of the Board and Chief
                    Executive Officer and G. Robert Tod as Vice Chairman, and
                    the resignation of Charles M. Leighton as a member of the
                    Board of Directors.

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.

                                      CML GROUP, INC.
                                      ---------------
                                      (Registrant)

Date: June 16, 1998                   /s/ Paul J. Bailey
      -------------                   ----------------------------
                                      Paul J. Bailey
                                      Controller
                                      Principal Accounting Officer




                                       22
<PAGE>   23



                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
                                                                                 Page No.
                                                                                 --------

<S>         <C>                                                                     <C>

10(a) --    Amendment No. 1, dated March 11, 1998,  to the Revolving Credit
            Agreement, dated as of April 17, 1996 and amended and restated as of
            August 28, 1997, among the Company, NordicTrack, Inc., Nordic
            Advantage, Inc., Smith & Hawken, Ltd., BankBoston, N.A. and
            Rothschild Recovery Fund, L.P. is incorporated herein by reference
            to Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q
            filed June 11, 1996.                                                    24 - 63

10(b) --    Amendment No. 2, dated March 30, 1998, to the Revolving Credit
            Agreement, dated as of April 17, 1996 and amended and restated as of
            August 28, 1997, among the Company, NordicTrack, Inc., Nordic
            Advantage, Inc., Smith & Hawken, Ltd., BankBoston, N.A. and
            Rothschild Recovery Fund, L.P. is incorporated herein by reference
            to Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q
            filed June 11, 1996.                                                    64 - 69

10(c) --    Amendment No. 3, dated April 1, 1998, to the Revolving Credit
            Agreement, dated as of April 17, 1996 and amended and restated as of
            August 28, 1997, among the Company, NordicTrack, Inc., Nordic
            Advantage, Inc., Smith & Hawken, Ltd., BankBoston, N.A. and
            Rothschild Recovery Fund, L.P. is incorporated herein by reference
            to Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q
            filed June 11, 1996.                                                    70 - 76

27    --    Financial Data Schedule                                                 77
</TABLE>





                                       23