<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                    FORM 10-Q
                                QUARTERLY REPORT
                       PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934


                 FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 1998

                         COMMISSION FILE NUMBER 1-13099
                              THE MAXIM GROUP, INC.
--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)

           Delaware                                      58-2060334
-------------------------------             ------------------------------------
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
incorporation or organization)

210 Town Park Drive, Kennesaw, Georgia                     30144
----------------------------------------             ------------------
(Address of principal executive offices)                 (Zip Code)

Registrant's telephone number, including area code     (678) 355-4000
                                                     ------------------

N/A
--------------------------------------------------------------------------------
(Former name, former address, and former fiscal year, if changed since last
report)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the last 90 days.

         Yes      X                                   No
             -----------                                 -----------

Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date:

       Common Stock, $.001 par value                       18,880,018
     ---------------------------------        ----------------------------------
                   Class                        Outstanding at December 7, 1998
<PAGE>   2
PART I--FINANCIAL INFORMATION

ITEM 1--FINANCIAL STATEMENTS

                     THE MAXIM GROUP, INC. AND SUBSIDIARIES


                      CONDENSED CONSOLIDATED BALANCE SHEETS

                  (In Thousands, Except Per Share Information)

                                   (Unaudited)



<TABLE>
<CAPTION>
                                                                                 October 31,     January 31,
                                    Assets                                          1998            1998
-------------------------------------------------------------------------------  -----------     -----------
<S>                                                                              <C>             <C>
Current assets:
    Cash and cash equivalents, including restricted cash of $8,881 at
       October 31, 1998 and $22,786 at January 31, 1998                           $ 34,152        $ 28,880
    Current portion of franchise license fees receivable, net of allowance
       for doubtful accounts of $417 at October 31, 1998 and $528 at
       January 31, 1998                                                              2,735           3,107
    Trade accounts receivable, net of allowance for doubtful accounts of
       $4,219 at October 31, 1998 and $1,917 at January 31, 1998                    96,460          56,432
    Accounts receivable from officers and employees                                  1,862           1,593
    Current portion of notes receivable from franchisees and related
       parties, net of allowance for doubtful accounts of $132 at
       October 31, 1998 and $261 at January 31, 1998                                 2,255           1,165
    Inventories                                                                    112,450          54,693
    Refundable income taxes                                                          1,865           2,558
    Deferred income taxes                                                            6,666           5,714
    Prepaid expenses                                                                15,060           3,406
                                                                                  --------        --------
              Total current assets                                                 273,505         157,548

Property and equipment, net of accumulated depreciation and
    amortization of $58,715 at October 31, 1998 and $48,039 at
    January 31, 1998                                                               188,446         137,207

Franchise license fees receivable, less current portion, net of allowance
    for doubtful accounts of $210 at October 31, 1998 and January 31, 1998           4,620           2,718

Notes receivable from franchisees, less current portion                              4,251           3,506

Intangible assets, net of accumulated amortization of $1,891 at
    October 31, 1998 and $1,626 at January 31, 1998                                 51,606          13,640

Other assets                                                                        13,667           6,875
                                                                                  --------        --------
                                                                                  $536,095        $321,494
                                                                                  ========        ========
</TABLE>


     See accompanying notes to condensed consolidated financial statements.


                                      -2-
<PAGE>   3
                     THE MAXIM GROUP, INC. AND SUBSIDIARIES


                CONDENSED CONSOLIDATED BALANCE SHEETS, CONTINUED

                  (In Thousands, Except Per Share Information)

                                   (Unaudited)



<TABLE>
<CAPTION>
                                                                        October 31,       January 31,
                 Liabilities And Stockholders' Equity                       1998              1998
----------------------------------------------------------------------  -----------       -----------
<S>                                                                     <C>               <C>
Current liabilities:
    Current portion of long-term debt                                    $ 110,902         $     384
    Current portion of capital lease obligations                               504               501
    Rebates payable to franchisees                                           4,886             3,975
    Accounts payable                                                        61,892            23,376
    Accrued expenses                                                        53,034            14,333
    Deferred revenue                                                         2,561             1,750
    Deposits                                                                 5,443             2,897
                                                                         ---------         ---------
              Total current liabilities                                    239,222            47,216

Long-term debt, less current portion                                       116,041           129,349

Capital lease obligations, less current portion                              1,050             1,429

Deferred taxes                                                               9,007             9,725
                                                                         ---------         ---------
              Total liabilities                                            365,320           187,719
                                                                         ---------         ---------
Commitments and contingencies

Stockholders' equity:
    Preferred stock, $.001 par value; 1,000 shares authorized, no
       shares issued or outstanding                                              0                 0
    Common stock, $.001 par value; 25,000 shares authorized,
       21,143 shares issued at October 31, 1998 and 17,352
       shares issued at January 31, 1998                                        21                17
    Additional paid-in capital                                             184,401           119,264
    Retained earnings                                                       21,171            29,388
    Treasury stock, 2,366 shares at October 31, 1998 and 1,221
       shares at January 31, 1998                                          (34,818)          (14,894)
                                                                         ---------         ---------
              Total stockholders' equity                                   170,775           133,775
                                                                         ---------         ---------
                                                                         $ 536,095         $ 321,494
                                                                         =========         =========
</TABLE>


     See accompanying notes to condensed consolidated financial statements.


                                      -3-
<PAGE>   4
                     THE MAXIM GROUP, INC. AND SUBSIDIARIES


                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

                  (In Thousands, Except Per Share Information)

                                   (Unaudited)



<TABLE>
<CAPTION>
                                                                                      Three Months Ended
                                                                                -----------------------------
                                                                                October 31,       October 31,
                                                                                    1998              1997
                                                                                -----------       -----------
<S>                                                                             <C>               <C>
Revenues:
   Sales of floorcovering products                                               $ 235,116         $  81,017
   Fiber and PET sales                                                               8,257             7,213
   Fees from franchise services                                                     13,698             8,695
   Other                                                                             1,641             1,403
                                                                                 ---------         ---------
            Total revenues                                                         258,712            98,328

Cost of sales                                                                      165,707            66,852
                                                                                 ---------         ---------
            Gross profit                                                            93,005            31,476

Selling, general, and administrative expenses                                       79,211            21,655

Interest income                                                                       (345)             (212)

Interest expense                                                                     3,717             1,589

Other                                                                                    0              (208)
                                                                                 ---------         ---------
            Earnings before income tax expense and extraordinary charge             10,422             8,652

Income tax expense                                                                   4,016             3,470
                                                                                 ---------         ---------
            Earnings before extraordinary charge                                     6,406             5,182

Extraordinary charge--early retirement of debt, net of income tax benefit              377               785
                                                                                 ---------         ---------
            Net earnings                                                         $   6,029         $   4,397
                                                                                 =========         =========

Earnings per common share:
   Basic:
      Earnings before extraordinary charge                                       $    0.33         $    0.32
      Extraordinary charge                                                           (0.02)            (0.05)
                                                                                 ---------         ---------
            Basic earnings                                                       $    0.31         $    0.27
                                                                                 =========         =========

   Diluted:
      Earnings before extraordinary charge                                       $    0.32         $    0.31
      Extraordinary charge                                                           (0.02)            (0.05)
                                                                                 ---------         ---------
            Diluted earnings                                                     $    0.30         $    0.26
                                                                                 =========         =========

Weighted average number of common shares outstanding:
   Basic                                                                            19,428            16,164
                                                                                 =========         =========

   Diluted                                                                          20,241            16,922
                                                                                 =========         =========
</TABLE>


     See accompanying notes to condensed consolidated financial statements.


                                      -4-
<PAGE>   5
                     THE MAXIM GROUP, INC. AND SUBSIDIARIES


                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

                  (In Thousands, Except Per Share Information)

                                   (Unaudited)



<TABLE>
<CAPTION>
                                                                                              Nine Months Ended
                                                                                        -----------------------------
                                                                                        October 31,       October 31,
                                                                                            1998              1997
                                                                                        -----------       -----------
<S>                                                                                     <C>               <C>
Revenues:
   Sales of floorcovering products                                                       $ 403,101         $ 229,388
   Fiber and PET sales                                                                      20,431            19,726
   Fees from franchise services                                                             34,980            23,268
   Other                                                                                     5,613             4,414
                                                                                         ---------         ---------
            Total revenues                                                                 464,125           276,796

Cost of sales                                                                              308,907           189,078
                                                                                         ---------         ---------
            Gross profit                                                                   155,218            87,718

Selling, general, and administrative expenses                                              123,510            62,818

Interest income                                                                               (763)             (437)

Interest expense                                                                             8,917             4,252

Other                                                                                         (307)             (292)

Nonrecurring charges                                                                        33,000                 0
                                                                                         ---------         ---------
            (Loss) earnings before income tax (benefit) expense and extraordinary
               charge                                                                       (9,139)           21,377

Income tax (benefit) expense                                                                (1,299)            8,359
                                                                                         ---------         ---------
            (Loss) earnings before extraordinary charge                                     (7,840)           13,018

Extraordinary charge--early retirement of debt, net of income tax benefit                      377               785
                                                                                         ---------         ---------
            Net (loss) earnings                                                          $  (8,217)        $  12,233
                                                                                         =========         =========

(Loss) earnings per common share:
   Basic:
      (Loss) earnings before extraordinary charge                                        $   (0.45)        $    0.81
      Extraordinary charge                                                                   (0.02)            (0.05)
                                                                                         ---------         ---------
            Basic (loss) earnings                                                        $   (0.47)        $    0.76
                                                                                         =========         =========

   Diluted:
      (Loss) earnings before extraordinary charge                                        $   (0.45)        $    0.78
      Extraordinary charge                                                                   (0.02)            (0.05)
                                                                                         ---------         ---------
            Diluted (loss) earnings                                                      $   (0.47)        $    0.73
                                                                                         =========         =========

Weighted average number of common shares outstanding:
   Basic                                                                                    17,385            16,189
                                                                                         =========         =========

   Diluted                                                                                  17,385            16,723
                                                                                         =========         =========
</TABLE>


     See accompanying notes to condensed consolidated financial statements.


                                      -5-
<PAGE>   6
                     THE MAXIM GROUP, INC. AND SUBSIDIARIES


                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

                  (In Thousands, Except Per Share Information)

                                   (Unaudited)



<TABLE>
<CAPTION>
                                                                                              Nine Months Ended
                                                                                        ---------------------------
                                                                                        October 31,     October 31,
                                                                                            1998            1997
                                                                                        -----------     -----------
<S>                                                                                     <C>             <C>
Cash flows from operating activities:
   Net (loss) earnings                                                                  $    (8,217)    $    12,233
                                                                                        -----------     -----------
   Adjustments to reconcile net (loss) earnings to net cash provided by (used  in)
      operating activities:
         Nonrecurring charges                                                                33,000               0
         Depreciation and amortization                                                       12,082           8,722
         Deferred income taxes                                                               (1,670)           (479)
         Changes in assets and liabilities:
            Increase in receivables                                                         (31,525)        (18,934)
            Increase in inventories                                                         (19,294)         (2,975)
            Decrease in refundable income taxes                                                 693             784
            Increase in prepaid expenses and other assets                                   (14,247)         (5,766)
            Increase in rebates and accounts payable, accrued expenses, deferred
               revenue, and deposits                                                         37,361           2,903
                                                                                        -----------     -----------
                 Total adjustments                                                           16,400         (15,745)
                                                                                        -----------     -----------
                 Net cash provided by (used in) operating activities                          8,183          (3,512)
                                                                                        -----------     -----------
Cash flows from investing activities:
   Capital expenditures                                                                     (46,015)        (26,769)
   Acquisitions, net of cash acquired                                                       (25,354)         (1,738)
                                                                                        -----------     -----------
                 Net cash used in investing activities                                      (71,369)        (28,507)
                                                                                        -----------     -----------
Cash flows from financing activities:
   Proceeds from issuance of common stock, net                                                    0          47,240
   Proceeds from exercise of options, net                                                     3,737           1,000
   Purchase of treasury stock                                                               (19,924)        (14,043)
   Borrowings under revolving credit agreement                                              128,481          33,199
   Repayments of revolving credit agreement                                                 (43,461)              0
   Principal payments on capital lease obligations                                             (375)           (590)
                                                                                        -----------     -----------
                 Net cash provided by financing activities                                   68,458          66,806
                                                                                        -----------     -----------
Net increase in cash                                                                          5,272          34,787

Cash, beginning of period                                                                    28,880           6,439
                                                                                        -----------     -----------
Cash, end of period                                                                     $    34,152     $    41,226
                                                                                        ===========     ===========

Supplemental disclosures of cash flow information:
   Cash paid during period for:
      Interest                                                                          $    11,601     $     4,283
                                                                                        ===========     ===========

      Income taxes                                                                      $       242     $     3,312
                                                                                        ===========     ===========

Supplemental disclosure of noncash investing and financing activities:
   Common stock issued in connection with acquisitions                                  $    61,400     $     3,000
                                                                                        ===========     ===========

   Note payable issued in connection with acquisition                                   $    11,000     $         0
                                                                                        ===========     ===========
</TABLE>



     See accompanying notes to condensed consolidated financial statements.


                                      -6-
<PAGE>   7
                     THE MAXIM GROUP, INC. AND SUBSIDIARIES


              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

              (Dollars In Thousands, Except Per Share Information)

                                   (Unaudited)

1.       Consolidated Financial Statements

         The accompanying unaudited condensed consolidated financial statements
         have been prepared in accordance with the instructions to Form 10-Q and
         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. These statements should be read in
         conjunction with the consolidated financial statements and notes
         thereto included in the Company's 1998 Annual Report on Form 10-K as
         filed with the Securities and Exchange Commission.

         The results of operations for the periods presented are not necessarily
         indicative of the operating results to be expected for the full year.


2.       Inventories

         Inventories consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                                 October 31,      January 31,
                                                    1998             1998
                                                 -----------      -----------
                  <S>                            <C>              <C>
                  Raw materials                   $ 21,289         $ 14,809
                  Work in process                    3,755            3,363
                  Finished goods                    87,406           36,521
                                                  --------         --------
                                                  $112,450         $ 54,693
                                                  ========         ========
</TABLE>

3.       Senior Subordinated Notes

         On October 16, 1997, the Company completed the sale of $100 million of
         9-1/4% Senior Subordinated Notes ("Notes") due 2007, to institutional
         buyers in a private offering under Rule 144A promulgated under the
         Securities Act of 1933. The net proceeds to the Company from the
         offering of the Notes were approximately $96 million, net of an issue
         discount and fees and related costs. The Company used the net proceeds
         from the offering of the Notes to repay all borrowings outstanding
         under its revolving credit agreements of approximately $82.7 million
         and for general corporate purposes, including capital expenditures.


                                      -7-
<PAGE>   8
         Each of the Company's subsidiaries has fully and unconditionally
         guaranteed the Notes on a joint and several basis. The guarantor
         subsidiaries comprise all of the direct and indirect subsidiaries of
         the Company. The Company has not presented separate financial
         statements and other disclosures concerning the guarantor subsidiaries
         because management has determined that such information is not material
         to investors. There are no significant restrictions on the ability of
         the guarantor subsidiaries to make distributions to the Company.

         The Company is currently in default of the restricted payment covenant
         contained in the Indenture (the "Indenture") pursuant to which the
         Notes were issued. The default occurred on September 3, 1998 when the
         Company repurchased shares of its common stock in the open market
         pursuant to its ongoing stock repurchase program. At the time of this
         stock repurchase, the Company believed that it had sufficient funds
         available under the restricted payments provision of the Indenture to
         make the repurchase. The Company, however, excluded from the
         calculation of its restricted payment availability, nonrecurring
         charges totaling $33 million taken in the quarter ended July 31, 1998,
         believing such charges to be excluded from consolidated net income of
         the Company, as defined in the Indenture, and thus not effecting a
         reduction in the Company's restricted payments availability thereunder.
         By the time the Company realized that its treatment of this
         nonrecurring charge was impermissible under the Indenture, it had
         purchased additional shares of common stock in the open market in
         violation of the terms of the Indenture.

         On November 12, 1998, the Company notified the Trustee under the
         Indenture of its default of the restricted payment covenant in the
         Indenture. In accordance with the terms of the Indenture, the Trustee
         on November 17, 1998 notified the Company that such default shall
         become an event of default on December 17, 1998 (30 days after the date
         of the Trustee's notice to the Company). If this default is not cured
         by the Company prior to December 17, 1998, the Trustee or the holders
         of not less than 25% in aggregate principal amount of Notes outstanding
         may declare all unpaid principal of, premium, if any, and accrued
         interest of all Notes to be due and payable. The Company will seek the
         consent of the Note holders for a waiver of these inadvertent
         violations of the restricted payment convenant of the Indenture. In
         order to be effective, holders of a majority in aggregate principal
         amount of all outstanding Notes must consent to the waiver.

         Because either the Trustee or the holders of not less than 25% in
         aggregate principal amount of Notes outstanding may accelerate payment
         of the Notes beginning on December 17, 1998, the Notes are classified
         as current liabilities of the Company on the accompanying October 31,
         1998 balance sheet. Once the Company receives the requisite consent to
         the waiver from the holders of Notes, however, the Notes will again be
         classified as long-term debt of the Company.


4.       Nonrecurring Charges

         During the period ended July 31, 1998, the Company reevaluated its
         retail strategy. As a result of the assessment, the Company made the
         determination that it would amend its franchise agreement, close
         certain Company-owned stores, and write down the value of certain
         retail assets including goodwill.


                                      -8-
<PAGE>   9
         The Company recorded a $33 million charge for certain nonrecurring
         items during the period ended July 31,1998. On June 1, 1998 the Company
         amended its franchise agreement with the majority of its members,
         whereby the Company established certain requirements for more
         uniformity in the appearance and merchandising of the franchise stores.
         As part of the amended franchise agreement, the number of vendors
         available to franchise members through the Company, to buy from and
         earn rebates, has been reduced. The Company has recorded allowances for
         receivables due from vendors replaced in the amended franchise
         agreement and has also established a reserve to settle claims from
         certain parties. In addition, the Company has written down to fair
         value certain assets made obsolete by the new franchise agreement. The
         Company also accrued for the costs of closing 14 Company-owned retail
         stores. The Company anticipates all stores will be closed within nine
         months.

         As part of the Company's reevaluation of its retail strategy, the
         acquisition of the retail store assets of Shaw Industries, Inc. was
         considered and consummated.

         In connection with the reevaluation of the Company's retail strategy
         described above, the Company analyzed the performance of its Company
         owned retail regions. This analysis indicated that significant
         strategic and operational changes would be necessary in some stores,
         including changes in the customer mix, location, store design, and
         merchandising. These factors also caused management to assess the
         realizability of the goodwill recorded for these regions.

         The determination of goodwill impairment was made by comparing the
         unamortized goodwill balance for each region to the estimate of the
         related region's undiscounted future cash flows. The assumptions used
         reflected earnings, market and industry conditions, as well as current
         operating plans. The assessment indicated a permanent impairment of
         goodwill related to certain of the regions, therefore such goodwill was
         written down to fair market value which resulted in a write-off
         totaling $4.2 million.

         The major components of the nonrecurring charges are as follows:

<TABLE>
<CAPTION>
                                                                       CHARGED
                                                                         TO
                                                           INITIAL     RELATED     REMAINING
                                                            CHARGE     ACCOUNTS     BALANCE
                                                           -------     --------    ---------
                  <S>                                      <C>         <C>         <C>
                  Vendors' receivable allowances           $ 5,300     $ 5,300      $     0
                  Claims reserves                           10,700           0       10,700
                  Write-down of equipment                    2,200       2,200            0
                  Store closure and carrying costs          10,600         933        9,667
                  Write-down of goodwill                     4,200       4,200            0
                                                           -------     -------      -------
                                                           $33,000     $12,633      $20,367
                                                           =======     =======      =======
</TABLE>


                                      -9-
<PAGE>   10
5.       Earnings Per Share

         Effective January 31, 1998, the Company adopted Statement of Financial
         Accounting Standards ("SFAS") No. 128, "Earnings Per Share", which
         specifies the computation, presentation and disclosure requirements for
         earnings per share. Basic earnings per share is computed by dividing
         net earnings by the weighted average number of common shares
         outstanding during each period. Diluted earnings per common share
         assumes exercise of outstanding stock options and the conversion into
         common stock during the periods outstanding.

         A reconciliation of net earnings (loss) and the weighted average number
         of common shares outstanding used to calculate basic and diluted
         earnings (loss) per common share for the three and nine months ended
         October 31, 1998 and 1997 is as follows:

<TABLE>
<CAPTION>
                                                  Three Months Ended            Nine Months Ended
                                                      October 31                    October 31
                                               -----------------------       -----------------------
                                                 1998           1997           1998           1997
                                               --------       --------       --------       --------
         <S>                                   <C>            <C>            <C>            <C>
         Basic earnings (loss) per common
           share:
             Earnings (loss) before
               extraordinary charge            $  6,406       $  5,182       $ (7,840)      $ 13,018
             Extraordinary charge                   377            785            377            785
                                               --------       --------       --------       --------
             Net earnings (loss)               $  6,029       $  4,397       $ (8,217)      $ 12,233
                                               ========       ========       ========       ========

         Weighted average number of
           common shares outstanding             19,428         16,164         17,385         16,189
                                               ========       ========       ========       ========

         Basic earnings (loss) per common
           share:
             Earnings (loss) before
               extraordinary charge            $   0.33       $   0.32       $  (0.45)      $   0.81
             Extraordinary charge                 (0.02)         (0.05)         (0.02)         (0.05)
                                               --------       --------       --------       --------
             Basic earnings (loss)             $   0.31       $   0.27       $  (0.47)      $   0.76
                                               ========       ========       ========       ========

         Diluted earnings (loss) per
           common share:
             Earnings (loss) before
               extraordinary charge            $  6,406       $  5,182       $ (7,840)      $ 13,018
             Extraordinary charge                   377            785            377            785
                                               --------       --------       --------       --------
             Net earnings (loss)               $  6,029       $  4,397       $ (8,217)      $ 12,233
                                               ========       ========       ========       ========
</TABLE>


                                      -10-
<PAGE>   11
<TABLE>
<CAPTION>
                                                  Three Months Ended            Nine Months Ended
                                                      October 31                    October 31
                                               -----------------------       -----------------------
                                                 1998           1997           1998           1997
                                               --------       --------       --------       --------
         <S>                                   <C>            <C>            <C>            <C>
         Weighted average number of
           common shares outstanding             19,428         16,164         17,385         16,189
         Shares issuable from assumed
           exercise of outstanding stock
           options                                  813            758            N/A(a)         534
                                               --------       --------       --------       --------
         Weighted average number of
           common and common
           equivalent shares                     20,241         16,922         17,385         16,723
                                               ========       ========       ========       ========

         Diluted earnings (loss) per
           common share:
             Earnings (loss) before
               extraordinary charge            $   0.32       $   0.31       $  (0.45)      $   0.78
             Extraordinary charge                 (0.02)         (0.05)         (0.02)         (0.05)
                                               --------       --------       --------       --------
             Diluted earnings (loss)           $   0.30       $   0.26       $  (0.47)      $   0.73
                                               ========       ========       ========       ========
</TABLE>

                  (a)      Common equivalent shares are antidilutive for the
                           nine months ended October 31, 1998.


6.       Acquisitions

         Effective August 9, 1998, the Company acquired substantially all of the
         residential retail store assets of Shaw Industries, Inc. and its wholly
         owned subsidiary, Shaw Carpet Showplace, Inc. (collectively, "Shaw"),
         pursuant to an Agreement and Plan of Merger dated as of June 23, 1998.
         These assets include 266 retail stores with annual revenues of
         approximately $584 million and are being operated through the Company's
         newly organized Maxim Retail Stores, Inc. subsidiary. The Company
         intends to continue operating the residential retail stores acquired
         from Shaw as retail floorcovering stores. Under the terms of the Merger
         Agreement, the Company issued to Shaw 3,150,000 shares of common stock
         of the Company and a one-year note in the principal amount of $18
         million (adjusted to $11 million after giving effect to purchase price
         adjustments) and paid Shaw $25 million in cash. The acquisition has
         been reflected on a purchase basis of accounting. The purchase price
         has been allocated to the assets acquired and liabilities assumed based
         upon estimates of the fair values at the date of acquisition. The
         allocation has been based on preliminary estimates and studies which
         may be revised at a later date.

         The operating results of the retail stores acquired from Shaw are
         included in the Company's consolidated statement of operations from the
         date of acquisition. The following unaudited pro forma summary presents
         the consolidated results of operations as if the acquisition of the
         retail store assets of Shaw (which occurred on August 8, 1998) had
         occurred on February 1, 1997. The pro forma expenses include the
         recurring costs which are directly attributable to the acquisition,
         such as interest expense and amortization of goodwill and their related
         tax effects.


                                      -11-
<PAGE>   12
<TABLE>
<CAPTION>
                                                          Three Months Ended              Nine Months Ended
                                                             October 31,                     October 31,
                                                        ------------------------       ------------------------
                                                          1998           1997            1998            1997
                                                        --------      ----------       --------        --------
         <S>                                            <C>           <C>              <C>             <C>
         Net revenues                                   $258,712      $  229,956       $737,081        $656,024
                                                        ========      ==========       ========        ========

         Net earnings (loss)                            $  6,029      $      573       $(12,343)       $  8,862
                                                        ========      ==========       ========        ========

         Basic earnings (loss) per common share         $    .31      $      .05       $   (.63)       $    .46
                                                        ========      ==========       ========        ========

         Diluted earnings (loss) per common share       $    .30      $      .05       $   (.63)       $    .45
                                                        ========      ==========       ========        ========
</TABLE>


         Effective September 25, 1998, the Company acquired CarpetsPlus of
         America, LLC, a floorcovering buying group with approximately 200
         member stores. The acquisition has been reflected on a purchase basis
         of accounting at a price of approximately $9.2 million, consisting of a
         cash payment of $2.3 million, and the issuance of $6.9 million in
         stock. In addition to the consideration received at closing, the
         shareholders of CarpetsPlus of America may receive up to $2.3 million
         of shares of common stock of the Company based on the profitability of
         the acquired company during the two-year period ending January 31,
         2001.


7.       Subsequent Event

         On November 12, 1998, the Company executed a definitive agreement to
         sell substantially all of the assets of its Image Industries, Inc.
         subsidiary to a subsidiary of Mohawk Industries, Inc. Under the terms
         of the agreement, total consideration is $232 million, which includes
         the assumption of approximately $52 million in related debt and
         short-term liabilities. The transaction is expected to close on or
         about January 22, 1999.






                                      -12-
<PAGE>   13
ITEM 2

                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF

                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS



Results of Operations

         During the three months ended October 31, 1998, the Company acquired
         the retail store assets of Shaw Industries, Inc. ("Shaw"). These assets
         include 266 retail floorcovering stores which, effective on August 9,
         1998, were owned and operated by the Company. The acquisition of these
         assets resulted in a 254.7% increase in the number of Company-owned
         stores. As reflected in the following discussion, the acquisition of
         these assets materially impacted the Company's financial condition and
         results of operations as of and for the three- and nine-month periods
         ended October 31, 1998.

         Total Revenues. Total revenues increased 163.1% to $258.7 million for
         the three months ended October 31, 1998 from $98.3 million for the
         three months ended October 31, 1997. Total revenues increased 67.7% to
         $464.1 million for the nine months ended October 31, 1998 from $276.8
         million reported in the prior year period. The components of total
         revenues are discussed below:

                  Sales of Floorcovering Products. Sales of floorcovering
                  products increased 190.3% to $235.1 million for the three
                  months ended October 31, 1998 from $81.0 million for the three
                  months ended October 31, 1997, and increased 75.7% to $403.1
                  million for the nine months ended October 31, 1998 from $229.4
                  million in the prior year period. Sales of floorcovering
                  products in Company-owned stores increased 414.6% to $186.8
                  million for the three months ended October 31, 1998 from $36.3
                  million for the three months ended October 31, 1997, and
                  increased 154.9% to $263.1 million for the nine months ended
                  October 31, 1998 from $103.2 million in the prior year period.
                  The growth in retail sales of floorcovering products was
                  primarily due to the impact of the acquisition of the retail
                  store assets of Shaw and, to a lesser extent, to internal
                  growth. Sales of manufactured carpet increased 6.9% to $43.3
                  million for the three months ended October 31, 1998 from $40.5
                  million for the three months ended October 31, 1997, and
                  increased 8.6% to $125.8 million for the nine-months ended
                  October 31, 1998 from $115.8 million in the prior year period.
                  Unit sales of manufactured carpet remained constant at 7.2
                  million square yards for the three months ended October 31,
                  1998 and October 31, 1997, and increased 6.0% to 21.2 million
                  square yards for the nine months ended October 31, 1998 from
                  20.0 million square yards in the prior year period. Sales from
                  the Company's two retail distribution centers amounted to $4.6
                  million for the three months ended October 31, 1998 compared
                  to $4.2 million for the three months ended October 31, 1997,
                  and $13.7 million for the nine months ended October 31, 1998
                  compared to $10.7 million in the prior year period, largely
                  representing sales to the Company's franchisees.


                                      -13-
<PAGE>   14
                  Fees From Franchise Services. Fees from franchise services,
                  which include franchise license fees and royalties, brokering
                  of floorcovering products, and advertising, increased 57.5% to
                  $13.7 million for the three months ended October 31, 1998 from
                  $8.7 million for the three months ended October 31, 1997, and
                  increased 50.2% to $35.0 million for the nine months ended
                  October 31, 1998 from $23.3 million in the prior year period.
                  This increase was attributable to increases in brokering
                  activity generated from new CarpetMAX and GCO franchisees,
                  growth in demand for franchise services from existing
                  CarpetMAX and GCO franchisees, greater utilization of
                  advertising and other services offered to franchisees, and an
                  expansion of advertising services offered by the Company.

                  Fiber and PET Sales. Sales of fiber and polyethylene
                  terephthalate ("PET") increased 15.3% to $8.3 million for the
                  three months ended October 31, 1998 from $7.2 million for the
                  three months ended October 31, 1997, and increased 4.1% to
                  $20.4 million for the nine months ended October 31, 1998 from
                  $19.7 million in the prior year period. Unit sales increased
                  1.8% to 17.2 million pounds for the three months ended October
                  31, 1998 from 16.9 million pounds for the three months ended
                  October 31, 1997, and decreased 7.7% to 45.7 million pounds
                  for the nine months ended October 31, 1998 from 49.5 million
                  pounds in the prior year period. The unit sales decrease was
                  the result of increased demand from the Company's carpet
                  operations. The average selling price per pound of fiber and
                  PET for the nine months ended October 31, 1998 increased by
                  11% compared to the prior year period.

         Gross Profit. Gross profit increased 195.2% to $93.0 million for the
         three months ended October 31, 1998 from $31.5 million for the three
         months ended October 31, 1997, and increased 77.0% to $155.2 million
         for the nine months ended October 31, 1998 from $87.7 million in the
         prior year period. As a percentage of revenues, gross profit was 36.0%
         for the three months ended October 31, 1998 compared to 32.0% for the
         three months ended October 31, 1997 and 33.4% for the nine months ended
         October 31, 1998 compared to 31.7% in the prior year period.
         Contributing to the increase in gross profit as a percentage of
         revenues was the continuing change in the business mix of the Company
         to a revenue base consisting principally of the net sales of
         floorcovering products, which change was accelerated by the acquisition
         of the retail store assets of Shaw in August 1998.

         Selling, General, and Administrative Expenses. Selling, general, and
         administrative expenses increased 265.0% to $79.2 million for the three
         months ended October 31, 1998 from $21.7 million for the three months
         ended October 31, 1997, and increased 96.7% to $123.5 million for the
         nine months ended October 31, 1998 from $62.8 million in the prior year
         period. Increases in operating expenses on an absolute basis reflects
         an overall growth in the size of the Company's operations required to
         serve a growing retail base, including the retail store assets acquired
         from Shaw, as well as increased selling costs at Image related to newly
         created territories. As a percentage of revenues, selling, general, and
         administrative expenses increased to 30.6% for the three months ended
         October 31, 1998 from 22.0% for the three months ended October 31, 1997
         and increased to 26.6% from 22.7% for the nine months ended October 31,
         1998 as compared to the prior year period.

         Interest Expense. Interest expense increased 131.3% to $3.7 million for
         the three months ended October 31, 1998 from $1.6 million for the three
         months ended October 31, 1997, and 


                                      -14-
<PAGE>   15
         increased 107.0% to $8.9 million for the nine months ended October 31,
         1998 from $4.3 million in the prior year period, due principally to the
         Company having a higher debt balance and a higher interest rate during
         the nine months ended October 31, 1998 as compared to the prior year
         period. In October 1997, the Company issued $100 million of 9-1/4%
         senior subordinated notes. See "Liquidity and Capital Resources."

         Nonrecurring Charges. During the three months ended July 31, 1998, the
         Company reevaluated its retail strategy. As a result of the assessment,
         the Company made the determination that it would amend its franchise
         agreement, close certain Company-owned stores, and write down the value
         of certain retail assets including goodwill. The Company recorded a $33
         million charge for certain nonrecurring items during the period ended
         July 31, 1998. On June 1, 1998, the Company amended its franchise
         agreement with the majority of its members, whereby the Company
         established certain requirements for more uniformity in the appearance
         and merchandising of the franchise stores. As part of the amended
         franchise agreement, the number of vendors available to franchise
         members through the Company, to buy from and earn rebates, has been
         reduced. The Company has recorded allowances for receivables due from
         vendors replaced in the amended franchise agreement and has also
         established a reserve to settle claims from certain parties.

         In addition, the Company has written down to fair value certain assets
         made obsolete by the amended franchise agreement. The Company also
         accrued for the costs of closing 14 Company-owned retail stores. The
         Company anticipates all stores will be closed within nine months.

         In connection with the reevaluation of the Company's retail strategy
         described above, the Company analyzed the performance of its
         Company-owned retail regions. This analysis indicated that significant
         strategic and operational changes would be necessary in some stores,
         including changes in the customer mix, location, store design, and
         merchandising. These factors also caused management to assess the
         realizability of the goodwill recorded for these regions.

         The determination of goodwill impairment was made by comparing the
         unamortized goodwill balance for each region to the estimate of the
         related region's undiscounted future cash flows. The assumptions used
         reflected the earnings, market, and industry conditions, as well as
         current operating plans. The assessment indicated a permanent
         impairment of goodwill related to certain of the regions, therefore
         such goodwill was written down to fair market value which resulted in a
         write-off totaling $4.2 million.

         Income Tax Expense. The Company recorded income tax expense of $4.0
         million for the three months ended October 31, 1998 compared to a $3.5
         million expense for the three months ended October 31, 1997, and a $1.3
         million tax benefit for the nine months ended October 31, 1998 compared
         to $8.4 million expense in the prior year period. The decrease in
         income tax expense is due to the Company recording a loss from a
         nonrecurring charge for the nine months ended October 31, 1998, as
         compared to the prior year period.

         Extraordinary Charges. The extraordinary charges recorded in the three
         months ended October 31, 1998 and 1997 resulted from the write-off of
         unamortized financing fees associated with former revolving credit
         facilities. The resultant charges amounted to


                                      -15-
<PAGE>   16
         $377,000, net of an income tax benefit of $236,000 for the three months
         ended October 31, 1998 and amounted to $785,000, net of an income tax
         benefit of $523,000, for the three months ended October 31, 1997.

         Net Earnings. As a result of the foregoing factors, the Company
         recorded net earnings of $6.0 million for the three months ended
         October 31, 1998 compared to net earnings of $4.4 million for the three
         months ended October 31, 1997, and a net loss of $8.2 million for the
         nine months ended October 31, 1998 compared to net earnings of $12.2
         million in the prior year period.

Liquidity and Capital Resources

         General. The Company's primary capital requirements are for new store
         openings, investments in the manufacturing operations, working capital
         and acquisitions. The Company historically has met its capital
         requirements through a combination of cash flow from operations, net
         proceeds from the sale of equity and debt securities, bank lines of
         credit, and standard payment terms.

         In March 1997, the Board of Directors of the Company authorized a stock
         repurchase program pursuant to which the Company has periodically
         repurchased shares of its common stock in the open market. As of
         December 7, 1998, the Company had repurchased an aggregate of 2,365,900
         shares of its common stock in the open market for a total of $34.8
         million. These purchases were, and any future purchases will be,
         financed from borrowings under the Company's revolving credit facility
         and cash balances. As discussed below, the ability of the Company to
         repurchase its common shares is limited by certain restrictions
         contained in the Indenture relating to the Company's Senior Notes.
         See "Senior Notes."

         On November 12, 1998, the Company entered into an agreement to sell
         substantially all the assets of its Image Industries, Inc. subsidiary
         ("Image") to Aladdin Manufacturing Corporation ("Aladdin"), a wholly
         owned subsidiary of Mohawk Industries, Inc. ("Mohawk"). The transaction
         is valued at approximately $232 million, including the assumption by
         Aladdin of approximately $52 million of Image liabilities. The Company
         expects to apply the cash proceeds from this transaction, which is
         expected to close on or about January 22, 1999, to repay debt.

         Credit Facility. On November 25, 1998, the Company established credit
         facilities providing for aggregate commitments of $141 million (the
         "Credit Facility"). The Credit Facility consists of (i) $110 million of
         revolving credit, of which $19.3 million was available for borrowings
         on December 7, 1998 and (ii) a special-purpose letter of credit in the
         amount of up to $31 million for use as credit support for the
         Summerville Loan (defined below) to be used to finance the expansion of
         Image's fiber extrusion capabilities at its plant in Summerville,
         Georgia. As of December 7, 1998, the Company had $84.9 million
         outstanding under the revolving portion of the Credit Facility and had
         $1.5 million outstanding on the letter of credit. The Company's
         obligations under the letter of credit will be assumed by Mohawk in
         connection with Aladdin's purchase of Image and the Company will be
         released from all obligations thereunder. Amounts outstanding under the
         Credit Facility bear interest at a variable rate based on LIBOR or the
         prime rate, at the Company's option. The Credit Facility contains
         customary covenants. As of December 7, 1998, the Company was in
         compliance with all covenants under the Credit Facility.


                                      -16-
<PAGE>   17
         Summerville Loan. Effective September 1, 1997, the Development
         Authority of the city of Summerville, Georgia (the "Authority"), issued
         Exempt Facility Revenue Bonds in an aggregate principal amount of $30
         million (the "Facility Revenue Bonds"). On September 17, 1997, the
         Authority loaned (the "Summerville Loan") the proceeds from the sale of
         the Facility Revenue Bonds to Image to finance, in whole or in part,
         the expansion of Image's fiber extrusion capabilities at its plant in
         Summerville, Georgia. The Facility Revenue Bonds and the interest
         thereon are special, limited obligations of the Authority, payable
         solely from the revenues and income derived from a loan agreement
         between Image and the Authority, which payment thereof and funds which
         may be drawn under the special-purpose letter of credit described
         above. The Facility Revenue Bonds and the Summerville Loan will mature
         on September 1, 2017, and the interest rate of the Facility Revenue
         Bonds is to be determined from time to time based on the minimum rate
         of interest that would be necessary to sell the Facility Revenue Bonds
         in a secondary market at the principal amount thereof. The interest
         rate on the Summerville Loan equals the interest rate on the Facility
         Revenue Bonds. Image's obligations under the Summerville Loan will be
         assumed by Aladdin in connection with Aladdin's purchase of Image and
         Image will be released from all obligations thereunder.

         Senior Notes. On October 16, 1997, the Company completed the sale of
         $100 million of 9-1/4% senior subordinated notes ("Senior Notes") due
         2007. Each of the Company's subsidiaries has fully and unconditionally
         guaranteed the Senior Notes on a joint and several basis. The guarantor
         subsidiaries comprise all of the direct and indirect subsidiaries of
         the Company. The Company has not presented separate financial
         statements and other disclosures concerning the guarantor subsidiaries
         because management has determined that such information is not material
         to investors. There are no significant restrictions on the ability of
         the guarantor subsidiaries to make distributions to the Company.

         The Company is currently in default of the restricted payment covenant
         contained in the Indenture (the "Indenture") pursuant to which the
         Senior Notes were issued. The default occurred on September 3, 1998
         when the Company repurchased shares of its common stock in the open
         market pursuant to its ongoing stock repurchase program. At the time of
         this stock repurchase, the Company believed that it had sufficient
         funds available under the restricted payments provision of the
         Indenture to make the repurchase. The Company, however, excluded from
         the calculation of its restricted payment availability, nonrecurring
         charges totaling $33 million taken in the quarter ended July 31, 1998,
         believing such charges to be excluded from consolidated net income of
         the Company, as defined in the Indenture, and thus not effecting a
         reduction in the Company's restricted payments availability thereunder.
         By the time the Company realized that its treatment of this
         nonrecurring charge was impermissible under the Indenture, it had
         purchased additional shares of common stock in the open market in
         violation of the terms of the Indenture.

         On November 12, 1998, the Company notified the Trustee under the
         Indenture of its default of the restricted payment covenant in the
         Indenture. In accordance with the terms of the Indenture, the Trustee
         on November 17, 1998 notified the Company that such default shall
         become an event of default on December 17, 1998 (30 days after the date
         of the Trustee's notice to the Company). If this default is not cured
         by the Company prior to December 17, 1998, the Trustee or the holders
         of not less than 25% in aggregate principal


                                      -17-
<PAGE>   18
         amount of Senior Notes outstanding may declare all unpaid principal of,
         premium, if any, and accrued interest of all Senior Notes to be due and
         payable. The Company will seek the consent of the Senior Note holders
         for a waiver of these inadvertent violations of the restricted payment
         convenant of the Indenture. In order to be effective, holders of a
         majority in aggregate principal amount of all outstanding Senior Notes
         must consent to the waiver.

         Because either the Trustee or the holders of not less than 25% in
         aggregate principal amount of Senior Notes outstanding may accelerate
         payment of the Senior Notes beginning on December 17, 1998, the Senior
         Notes are classified as current liabilities of the Company on the
         accompanying October 31, 1998 balance sheet. Once the Company receives
         the requisite consent to the waiver from the holders of Senior Notes,
         however, the Senior Notes will again be classified as long-term debt of
         the Company.

         Although the Company believes that it will be able to obtain a default
         waiver from the holders of the Senior Notes, there can be no assurance
         that such waiver will be granted. If a waiver is not obtained by the
         Company, repayment of the Senior Notes may be accelerated, as discussed
         above. Any such acceleration, as well as the failure of the Company to
         obtain a default waiver from the Senior Note holders by January 31,
         1999, will constitute an event of default under the Credit Facility.
         There can be no assurance that the Company will be able to obtain
         alternative sources of financing if repayment of either the Senior
         Notes or the Credit Facility is accelerated.
         
         Cash Flows. During the nine months ended October 31, 1998, operating
         activities provided $8.2 million of cash compared to $3.5 million of
         cash used in the nine months ended October 31, 1997. The increase in
         cash provided by operating activities resulted primarily from an
         increase in trade liabilities. The increase in trade liabilities,
         partially offset by an increase in inventories and accounts receivable,
         was due to increased product purchases and higher sales of
         floorcovering products to franchisees and other carpet retailers.

         During the nine months ended October 31, 1998, investing activities
         used cash of $71.4 million compared to $28.5 million for the nine
         months ended October 31, 1997. The increase is primarily due to an
         increase in capital expenditures relating to manufacturing operations
         and the acquisition of the retail store assets of Shaw.

         During the nine months ended October 31, 1998, financing activities
         provided cash of $68.5 million compared to $66.8 million in the nine
         months ended October 31, 1997. This increase is primarily due to
         borrowings under the Company's revolving credit agreement.

         Capital Expenditures. The Company anticipates that it will require
         approximately $10 million for the remainder of fiscal 1999 to (i) open
         approximately two new Gallery stores (assuming approximately 50% of
         such stores will be located on Company-owned property and the remainder
         on leased property), (ii) reconfigure eight existing CarpetMAX stores,
         and (iii) upgrade its management information systems. The actual costs
         that the Company will incur in opening new Gallery stores cannot be
         predicted with precision because the opening costs will vary based upon
         geographic location, the size of the store, the amount of supplier
         contributions and the extent of the buildout required at the selected
         site. The Company anticipates that it will require approximately $3
         million during the remainder of fiscal 1999 for capital expenditures at
         Image, including the expansion of Image's polyester fiber production
         capacity.

         The Company believes that borrowings under the Credit Facility,
         proceeds from the sale of Image, and cash flows from operating
         activities will be adequate to meet the Company's working capital
         needs, planned capital expenditures, and debt service obligations
         through fiscal 2000. As the Company's debt matures, or is accelerated,
         as described above, the Company may need to refinance such debt. There
         can be no assurance that such debt can be refinanced or, if so, whether
         it can be refinanced on terms acceptable to the Company. If the Company
         is unable to service its indebtedness, it will be required to adopt


                                      -18-
<PAGE>   19
         alternative strategies, which may include actions such as reducing or
         delaying capital expenditures, selling assets, restructuring, or
         refinancing its indebtedness or seeking additional equity capital.
         There can be no assurance that any of these strategies could be
         effected on satisfactory terms, if at all.

         Recent Accounting Pronouncements. Effective with the three months ended
         April 30, 1998, the Company adopted Statement of Financial Accounting
         Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income". SFAS
         130 establishes standards for reporting and display of comprehensive
         income and its components in financial statements. SFAS 130 did not
         have an impact on the Company's financial statements.

         In June 1997, the FASB issued Statement of Financial Accounting
         Standards No. 131 ("SFAS 131"), "Disclosures About Segments of an
         Enterprise and Related Information", which is effective for fiscal
         years beginning after December 15, 1997. SFAS 131 establishes reporting
         standards for public companies concerning operating segments and
         related disclosures about products and services, geographic areas and
         major customers. SFAS 131 will be adopted with the Company's Annual
         Report for the fiscal year ending January 31, 1999.

         In June 1998, the FASB issued Statement of Financial Accounting
         Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments
         and Hedging Activities", which is effective for fiscal years beginning
         after June 15, 1999. Early adoption is encouraged. SFAS 133 establishes
         accounting and reporting standards for derivative instruments and
         transactions involving hedge accounting. The Company does not
         anticipate this statement will have an impact on its financial
         statements.

         In April 1998, the American Institute of Certified Public Accountants
         issued Statement of Position 98-5 ("SOP 98-5"), "Reporting on the Costs
         of Start-Up Activities", which is effective for fiscal years beginning
         after December 15, 1998. SOP 98-5 requires entities to expense certain
         start-up costs and organization costs as they are incurred. The Company
         does not anticipate that this statement will have an impact on its
         financial statements.

         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.

         Based on the assessment of the Company's information technology
         systems, management presently believes that with the planned conversion
         to new software and hardware and the planned modifications to existing
         software and hardware, the effects of the year 2000 issue will be
         timely resolved. The Company is in the process of conducting an
         inventory and business risk assessment at its noninformation technology
         systems. These noninformation technology systems include items such as
         embedded technology, including microcontrollers used in the Company's
         manufacturing processes. The Company will develop remediation plans for
         such noninformation technology systems if its business risk assessment
         indicates such is warranted. All costs associated with 


                                      -19-
<PAGE>   20
         analyzing the year 2000 issue or making conversions to existing systems
         are being expensed as incurred.

         The Company is planning formal communications with all of its
         significant suppliers of goods and services to determine the extent to
         which the Company's operations and systems are vulnerable to those
         third parties' failure to remediate their own year 2000 issues. There
         can be no guarantee that the systems of other companies on which the
         Company's operations and systems rely will be timely converted and will
         not have an adverse effect on the Company's results of operations. The
         Company will utilize predominately internal resources to reprogram, or
         replace, and test the Company's software for year 2000 compliance by
         June 1999, which is prior to any anticipated impact on its operating
         systems. Management has not estimated a total cost of the year 2000
         issues; however, such costs are not expected to have a material effect
         on the results of operations during any quarterly or annual reporting
         period.

         The costs to the Company of year 2000 compliance 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 assurance 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.

         Forward-Looking Statements. This Report contains statements that
         constitute "forward-looking statements" within the meaning of Section
         27A of the Securities Act of 1933 and Section 21E of the Securities
         Exchange Act of 1934. Those statements appear in a number of places in
         this Report and include statements regarding the intent, belief or
         current expectations of the Company, its directors or its officers with
         respect to, among other things: (i) the timing, magnitude and costs of
         the roll-out of the Gallery Stores; (ii) potential acquisitions by the
         Company; (iii) the Company's financing plans; (iv) trends affecting the
         Company's financial condition or results of operations; (v) the
         Company's business and growth strategies; and (vi) the declaration and
         payment of dividends. Any such forward-looking statements are not
         guarantees of future performance and involve risks and uncertainties,
         and actual results may differ materially from those projected in the
         forward-looking statements as a result of various factors. The
         accompanying information contained in this Report, including without
         limitation the information set forth under the headings "Management's
         Discussion and Analysis of Financial Condition and Results of
         Operations," identifies important factors that could cause such
         differences.


                                      -20-
<PAGE>   21
ITEM 3--QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

N/A














                                      -21-
<PAGE>   22
PART II--OTHER INFORMATION


ITEM 3--DEFALTS UPON SENIOR SECURITIES.

The Company is currently in default of the restricted payment covenant
contained in the Indenture (the "Indenture") pursuant to which the 9 1/4% Senior
Subordinated Notes due October 15, 2007 (the "Notes") of the Company were
issued. The default occurred on September 3, 1998 when the Company repurchased
shares of its common stock in the open market pursuant to its ongoing stock
repurchase program. At the time of this stock repurchase, the Company believed
that it had sufficient funds available under the restricted payments provision
of the Indenture to make the repurchase. The Company, however, excluded from the
calculation of its restricted payment availability nonrecurring charges totaling
$33.0 million taken in the quarter ended July 31, 1998, believing such charges
to be excluded from Consolidated Net Income of the Company, as defined in the
Indenture, and thus not effecting a reduction in the Company's restricted
payments availability thereunder. By the time the Company realized that its
treatment of this nonrecurring charge was impermissible under the Indenture, it
had purchased additional shares of common stock in the open market in violation
of the terms of the Indenture.

On November 12, 1998, the Company notified the Trustee under the
Indenture of its default of the restricted payment covenant in the
Indenture. In accordance with the terms of the Indenture, the Trustee
on November 17, 1998 notified the Company that such default shall
become an Event of Default on December 17, 1998 (30 days after the date
of the Trustee's notice to the Company). If this default is not cured
by the Company prior to December 17, 1998, the Trustee or the holders
of not less than 25% in aggregate principal amount of Notes outstanding
may declare all unpaid principal of, premium, if any, and accrued
interest on all Notes to be due and payable. The Company will seek the
consent of the Note holders for a waiver of these inadvertent
violations of the restricted payment covenant of the Indenture. In
order to be effective, holders of a majority in aggregate principal
amount of all outstanding Notes must consent to the waiver.

ITEM 6--EXHIBITS AND REPORTS ON FORM 8-K


         (A) Exhibits

         
         10.23    Credit Agreement among the Company, the Domestic Subsidiaries
                  of the Company, as Guarantors, the Lenders identified therein,
                  NationsBank, N.A., as Administrative Agent, SunTrust Bank,
                  Atlanta, as Documentation Agent, and Fleet National Bank, as
                  Co-Agent, dated as of November 25, 1998, in the aggregate
                  principal amount of $126 million.

         10.24    364-Day Credit Agreement among Maxim Retail Stores, Inc., as
                  Borrower, the Domestic Subsidiaries of the Borrower, as 
                  Guarantors, the Lenders identified therein and NationsBank, 
                  N.A., as Agent, dated as of November 25,1998, in the 
                  aggregate principal amount of $15 million.


                                      -22-
<PAGE>   23


         11       Statements Regarding Computation of Per Share Earnings

         27.1     Financial Data Schedule (for SEC use only)

         27.2     Restated Financial Data Schedule (for SEC use only)


(B)      Reports on Form 8-K

         The following report on Form 8-K was filed during the quarter ended
         October 31, 1998: Current Report on Form 8-K dated August 9, 1998
         (reporting that the Company had acquired substantially all the
         residential retail store assets of Shaw Industries, Inc. and its wholly
         owned subsidiary, Shaw Carpet Showplace, Inc., pursuant to an Agreement
         and Plan of Merger dated June 23, 1998).








                                      -23-
<PAGE>   24
                                   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.

                                             THE MAXIM GROUP, INC.


Dated: December 7, 1998             By:  /s/ A. J. Nassar
                                        ----------------------------------------
                                         A. J. Nassar, President and Chief
                                         Executive Officer

Dated: December 7, 1998             By:  /s/ Gary Brugliera
                                        ----------------------------------------
                                         Gary Brugliera, Chief Financial Officer








                                      -24-