<PAGE>  1

                                CONFORMED
 
                              UNITED STATES
                   SECURITIES AND EXCHANGE COMMISSION
                         WASHINGTON, D.C.  20549
 
                                FORM 10-Q
 
 (Mark One)
 
 [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND 
                          EXCHANGE ACT OF 1934
 
 For the quarterly period ended September 30, 1996
 
                                   or
 
 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND 
                          EXCHANGE ACT OF 1934
 
 For the transition period from _____________________ to _____________________ 
 Commission file number 1-542
 
                                GROSSMAN'S INC.                            
 -----------------------------------------------------------------------------
 (Exact name of registrant as specified in its charter)
 
                 Delaware                                 38-0524830        
 -----------------------------------------          -------------------------
      (State or other jurisdiction of                  (I.R.S. Employer
      in corporation or organization)                 Identification No.)
 
              45 Dan Road                                            
          Canton, Massachusetts                              02021          
 -----------------------------------------          --------------------------
 (Address of principal executive offices)                 (Zip Code)
 
                                 (617) 830-4000                             
 -----------------------------------------------------------------------------
              (Registrant's telephone number, including area code)
 
                200 Union Street, Braintree, Massachusetts          
 -----------------------------------------------------------------------------
              (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 Sections 13 or 15(d) of the Securities Exchange Act
 of 1934 during the preceding 12 months (or for such shorter periods that the 
 registrant was required to file such reports), and (2) has been subject to 
 such filing requirements for the past 90 days.  Yes   X    No      
 
      Indicate the number of shares outstanding of the issuer's classes of
 common stock, as of the latest practicable date. 
 
  Common Stock - $.01 Par Value - 27,371,605 shares as of November 8, 1996.



<PAGE>  2

                               FORM 10-Q
                    QUARTER ENDED SEPTEMBER 30, 1996
 
                                  INDEX
 
 
                                                                   Page Number
                                                                   -----------
 
 PART I. FINANCIAL INFORMATION
 -----------------------------
 
 ITEM 1. FINANCIAL STATEMENTS  
   
   GROSSMAN'S INC. AND SUBSIDIARIES
    Consolidated Balance Sheets
      September 30, 1996, December 31, 1995 and September 30, 1995...    3
    
 
    Consolidated Statements of Operations       
      Three Months and Nine Months Ended September 30, 1996 and 1995.    5
 
 
    Consolidated Statements of Cash Flows
      Nine Months Ended September 30, 1996 and 1995..................    6 
 
 
    Notes to Unaudited Interim Consolidated Financial Statements.....    7 
 
 
 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
         AND RESULTS OF OPERATIONS...................................   14
 
 
 PART II. OTHER INFORMATION
 --------------------------
 
 ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS..........   26
 
 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................   27
 
 SIGNATURES..........................................................   28
 
 
 
<PAGE>  3


 PART I. FINANCIAL INFORMATION
 -----------------------------
 
 
 ITEM 1. FINANCIAL STATEMENTS
                      
<TABLE>
      
 
                    GROSSMAN'S INC. AND SUBSIDIARIES
                       CONSOLIDATED BALANCE SHEETS
                  (in thousands, except per share data)
                               (Unaudited)
 
<CAPTION>
 
                                    SEPT. 30,      DEC. 31,     SEPT. 30,
                                       1996          1995         1995  
                                   ------------  ------------ -------------
 <S>                                 <C>           <C>          <C>
 ASSETS
 
 CURRENT ASSETS
  Cash and cash equivalents          $    734      $  2,536     $  4,944
  Receivables, less allowance of            
    $1,322, in 1996, $3,339 at
    December 31, 1995 and $3,339
    at September 30, 1995 in     
    doubtful accounts                  13,279        23,940       26,342
  Inventories                          60,131       102,009      133,025
  Note receivable, net                     -         13,000           -
  Property held for sale               12,824         2,572           - 
  Other current assets                  3,788         3,940        3,770
                                     --------      --------     --------
    Total current assets               90,756       147,997      168,081
 
 PROPERTY, PLANT AND EQUIPMENT, 
    NET OF ACCUMULATED DEPRECIATION 
    OF $16,108 ON SEPTEMBER 30, 1996, 
    $54,663 ON DECEMBER 31, 1995 AND 
    $58,770 ON SEPTEMBER 30, 1995      27,605        94,256       97,796
 PROPERTY HELD FOR SALE                25,762            -            -
 INVESTMENT IN AND ADVANCES TO 
  UNCONSOLIDATED AFFILIATE                174           108          736
 NOTE RECEIVABLE, NET                      -             -        12,528
 OTHER ASSETS                             577         1,168        1,539
                                     --------      --------     --------
    TOTAL ASSETS                     $144,874      $243,529     $280,680
                                     ========      ========     ========

</TABLE>
 
<F1>
 
 The accompanying notes are an integral part of these unaudited interim 
 consolidated financial statements.
 
 
 
 <PAGE>  4
 

<TABLE>
 
                     GROSSMAN'S INC. AND SUBSIDIARIES
                       CONSOLIDATED BALANCE SHEETS
                  (in thousands, except per share data)
                               (Unaudited)
 
<CAPTION>
                                           SEPT. 30,   DEC. 31,  SEPT. 30,
                                             1996        1995      1995 
                                           ---------  ---------  ---------
 <S>                                        <C>        <C>        <C>
 LIABILITIES AND STOCKHOLDERS' INVESTMENT
 
 CURRENT LIABILITIES 
  Accounts payable and accrued liabilities  $ 56,884   $ 91,308   $105,570
  Accrued interest                               533      1,403        567
  Current portion of long-term debt 
   and capital lease obligations  
    14% Debentures, paid April 1996               -      16,201     16,201
    Mortgage notes, paid April 1996               -         385        385
    Mortgage notes payable                    12,982         -          -
    Other notes and capital lease   
     obligations                               1,687      3,859      5,404
                                            --------   --------   --------
    Total current portion of long-term   
     debt and capital lease obligations       14,669     20,445     21,990
                                            --------   --------   --------
    Total current liabilities                 72,086    113,156    128,127
 
 REVOLVING TERM NOTE PAYABLE                  30,301     32,844     42,757
 LONG-TERM DEBT AND CAPITAL LEASE
  OBLIGATIONS                                   
   Mortgage notes payable                      5,606      3,126      3,564
   Other long-term debt and capital       
    lease obligations                            688      2,542      3,147
                                            --------   --------   --------
   Total Long-Term Debt and Capital
    Lease Obligations                          6,294      5,668      6,711
 PENSION LIABILITY                             1,116      8,270      2,984
 OTHER LIABILITIES                             8,772      9,796     14,050
                                            --------   --------   ---------
    Total liabilities                        118,569    169,734    194,629
 
 COMMITMENTS AND CONTINGENCIES
 STOCKHOLDERS' INVESTMENT 
  Common stock, $.01 par value,
   Shares authorized - 50,000
   Shares issued - 27,372 on 
   September 30, 1996 and 26,137 
   on December 31, 1995 and 
   September 30, 1995                            274        261        261 
  Additional paid-in-capital                 157,292    155,768    155,807
  Retained earnings (accumulated deficit)   (120,269)   (64,206)   (58,304)
  Minimum pension liability                   (9,550)   (16,476)   (10,576)
  Cumulative foreign currency translation
   adjustment                                 (1,442)    (1,442)      (872)
  Less shares in treasury, at cost -
       45 at December 31, 1995 and
      109 at September 30, 1995                   -        (110)      (265)
                                            ---------  ---------  ---------
     Total Stockholders' Investment           26,305     73,795     86,051 
                                            ---------  ---------  ---------
     TOTAL LIABILITIES AND STOCKHOLDERS'
      INVESTMENT                            $144,874   $243,529   $280,680
                                            =========  =========  =========
</TABLE>
 
<F1>

 The accompanying notes are an integral part of these unaudited interim
  consolidated financial statements.   



<PAGE>  5

<TABLE>
                   GROSSMAN'S INC. AND SUBSIDIARIES
                  CONSOLIDATED STATEMENTS OF OPERATIONS
                  (in thousands, except per share data)
                               (Unaudited)

<CAPTION>

                                      THREE MONTHS           NINE MONTHS
                                     ENDED SEPT. 30,       ENDED SEPT. 30,
                                  --------------------  -------------------
                                    1996        1995      1996       1995
                                    ----        ----      ----       ----
 <S>                              <C>        <C>        <C>       <C>
 SALES                            $ 95,972   $193,978   $296,657  $514,738
 COST OF SALES                      71,122    146,778    224,051   391,813 
                                  ---------  ---------  --------- ---------
   Gross Profit                     24,850     47,200     72,606   122,925
   
 OPERATING EXPENSES                   
   Selling and administrative       22,675     39,405     83,638   116,917 
   Depreciation and amortization     1,043      2,786      3,889     8,650
   Store closing expense                -       4,500     40,150     4,500
   Store preopening expense             51        317        807       462 
                                  ---------  ---------  --------- ---------
                                    23,769     47,008    128,484   130,529 
                                  ---------  ---------  --------- ---------
 OPERATING INCOME (LOSS)             1,081        192    (55,878)   (7,604)
 
 OTHER EXPENSES (INCOME)
   Interest expense                  1,444      2,111      4,080     6,438 
   Net gain on disposals of 
    property                           (72)   (18,115)       (99)  (18,313)
   Other                            (1,939)      (985)    (4,190)   (2,550)
                                   --------  ---------  --------- ---------
                                      (567)   (16,989)      (209)  (14,425)
 EQUITY IN NET LOSS OF 
  UNCONSOLIDATED AFFILIATE              78        158        394       483
                                  ---------  ---------  --------- ---------
 INCOME (LOSS) BEFORE INCOME TAXES   1,570     17,023    (56,063)    6,338
 PROVISION FOR INCOME TAXES             -       1,703         -        634
                                  ---------  ---------  --------- ---------
 NET INCOME (LOSS)                $  1,570   $ 15,320   $(56,063) $  5,704 
                                  =========  =========  ========= =========
 NET INCOME (LOSS) PER COMMON
   SHARE (Primary and Fully
   Diluted)                         $ 0.05      $0.59     $(2.11)   $ 0.22 
                                  =========  =========  ========= =========
 WEIGHTED AVERAGE SHARES AND 
   EQUIVALENT SHARES OUTSTANDING 
   (Primary and Fully Diluted)      34,044     26,031     26,571    25,949
                                  =========  =========  ========= =========

</TABLE>
<F1>
  
 The accompanying notes are an integral part of these unaudited interim
  consolidated financial statements.



<PAGE>  6

<TABLE>
                        GROSSMAN'S INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                      (in thousands, except per share data)
                                   (Unaudited)
 
<CAPTION>
                                                       NINE MONTHS ENDED
                                                         SEPTEMBER 30,    
                                                   ------------------------
                                                        1996         1995 
                                                        ----         ----
 <S>                                                  <C>         <C>
 OPERATING ACTIVITIES
 Net loss                                             $(56,063)   $  5,704
 Adjustments to reconcile net loss to net
  cash (used for) operating activities:
   Depreciation and amortization                         3,889       8,650
   Net (gain) on disposals of property                     (99)    (18,313)
   Provision for losses on accounts receivable           1,777       1,262
   Provision for store closing                          25,911          - 
   Undistributed loss of unconsolidated affiliate          394         483 
   (Increase) decrease in assets:
    Receivables                                          8,067      (8,155)
    Inventories                                         28,834     (16,423)
    Note receivable and other assets                    12,839         303 
   (Decrease) in accounts payable and accrued 
     liabilities and other liabilities                 (42,403)      6,726 
                                                      ---------   ---------
    Total adjustments                                   39,209     (20,802)
 
  NET CASH (USED FOR) OPERATING ACTIVITIES             (16,854)    (15,098)
 
 INVESTING ACTIVITIES
 Capital expenditures                                   (1,871)     (6,150)
 Proceeds from sales of property, net                   24,277      26,828 
 Investment in unconsolidated affiliate                   (460)       (194)
                                                      ---------   ---------
  NET CASH PROVIDED BY INVESTING ACTIVITIES             21,946      20,484 
 
 FINANCING ACTIVITIES
 Proceeds from mortgage financing                       33,000          -
 Payments on mortgage financing                        (18,876)         -
                                                      ---------   ---------
    Net proceeds from mortgage financing                14,124          -
 Payments on long-term debt and capital lease               
  obligations                                          (18,540)    (16,354)
 Net borrowings from (repayments to) revolving 
  term note payable                                     (2,543)     12,869
 Issuance of common stock as payment for 
  Directors' fees                                           65         165
 Issuance of other common stock                             -            9 
                                                      ---------   ---------
  NET CASH (USED FOR) FINANCING ACTIVITIES              (6,894)     (3,476)
 
 Net increase (decrease) in cash and cash equivalents   (1,802)      1,910
 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD        2,536       3,034 
                                                      ---------   ---------
 CASH AND CASH EQUIVALENTS AT END OF PERIOD           $    734    $  4,944
                                                      =========   =========

</TABLE>
<F1>
 
 The accompanying notes are an integral part of these unaudited interim 
 consolidated financial statements.




<PAGE>  7

                       GROSSMAN'S INC. AND SUBSIDIARIES
          NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 1996
 
 NOTE 1 - BASIS OF PRESENTATION 
 ------------------------------
 
 The accompanying Unaudited Interim Consolidated Financial Statements have 
 been prepared in conformity with generally accepted accounting principles 
 applied on a consistent basis and, in the opinion of management, include 
 all adjustments, consisting of normal recurring accruals, necessary for a 
 fair presentation of the results for the interim periods.  The results of 
 operations for the interim periods are not necessarily indicative of
 results to be expected for the year.
 
 These interim consolidated financial statements should be read in
 conjunction with the consolidated financial statements and related notes
 contained in the Annual Report on Form 10-K of Grossman's Inc. for the
 year ended December 31, 1995 and the Quarterly Reports on Form 10-Q for
 the quarterly periods ended March 31, 1996 and June 30, 1996.  The balance
 sheet as of December 31, 1995 has been derived from the audited financial
 statements as of that date.
 
 The Unaudited Interim Consolidated Financial Statements include the
 accounts of Grossman's Inc. and its wholly-owned subsidiaries (the
 "Company") after elimination of intercompany balances and transactions. 
 
 The Company's fiscal year end is December 31.  The Company records
 activity in quarterly accounting periods of equal length, ending on the
 last Saturday of each quarter.  The differences in amounts presented and
 those which would have been presented using actual quarter end dates are
 not material.
 
 Certain amounts in the consolidated financial statements for prior periods
 have been reclassified to conform to the current period classification. 
 Such reclassifications had no effect on previously reported results of
 operations.
 
 
 NOTE 2 - RESTRUCTURING, REFINANCING AND UNAUDITED CONDENSED PRO FORMA
 FINANCIAL STATEMENTS
 ---------------------------------------------------------------------  
 
 In March 1996, the Company announced a restructuring and refinancing plan 
 under which its 60 Grossman's stores, located in eight Northeastern
 states, were closed and a $40.2 million restructuring charge was recorded. 
 The total non-cash portion of the reserve was approximately $22.2 million;
 $12.8 million for inventory liquidation costs and $9.4 million for the net
 unrecoverable amount of property, plant and equipment.  Included in the
 restructuring charge were estimated severance payments of $8.0 million,
 incremental professional fees of $6.0 million and $4.0 million expected to
 be paid over a three year period for estimated lease payments and carrying
 costs to be incurred during the period in which leases are terminated and
 properties sold.
 
 The Company began the closing and liquidation of its Grossman's stores on
 March 28, 1996 and all stores were closed by the end of May 1996. 
 Concurrent with the timing of the store closings, administrative support
 functions in the Company's headquarters were reduced.  


<PAGE>  8

 NOTE 2 - RESTRUCTURING, REFINANCING AND UNAUDITED CONDENSED PRO FORMA
 FINANCIAL STATEMENTS (CONTINUED)
 ---------------------------------------------------------------------
 
 Four transactions were undertaken to improve liquidity.  The $15.8 million
 note receivable from Kmart Corporation was sold in March 1996.  The
 Company's 14% Debentures due January 1996 were refinanced, with cash and
 notes issued in April 1996.  A $33.0 million mortgage loan, secured by
 owned properties, was funded in April 1996.  A new $50.0 million long-term
 revolving credit agreement, with increased borrowing availability, was
 signed in May 1996.
 
 The following unaudited condensed pro forma financial statements have been
 prepared in accordance with applicable rules of the Securities and
 Exchange Commission, giving effect to the restructuring and refinancing
 plan transactions as if they had been completed, for balance sheet
 purposes, on September 30, 1996 and, for statement of operations purposes,
 on January 1, 1996.  The pro forma information is not necessarily
 indicative of the results that would have been reported had such events
 actually occurred on the dates specified, nor is it indicative of the
 Company's future results.




<PAGE>  9

 NOTE 2 - RESTRUCTURING, REFINANCING AND UNAUDITED CONDENSED PRO FORMA
 FINANCIAL STATEMENTS (CONTINUED)
 ---------------------------------------------------------------------

<TABLE>
 
               UNAUDITED CONDENSED PRO FORMA BALANCE SHEET
                  (in thousands, except per share data)
 
<CAPTION>
                                                SEPTEMBER 30, 1996 
                                        ---------------------------------
                                                                Pro Forma
                                           As     Pro Forma    Continuing
                                        Reported Adjustments   Operations
                                        -------- -----------   ----------
<S>                                     <C>       <C>           <C> 
ASSETS
 
 CURRENT ASSETS
  Cash and cash equivalents             $    734  $     -       $    734   
  Receivables, net                        13,279      (192)(a)    13,087 
  Inventories                             60,131        -         60,131 
  Note receivable, net                        -         -             -
  Property held for sale                  12,824        -         12,824
  Other current assets                     3,788        -          3,788
                                        --------- ---------     ---------
   Total current assets                   90,756      (192)       90,564
 
 PROPERTY, PLANT AND EQUIPMENT, NET       27,605        -         27,605 
 PROPERTY HELD FOR SALE                   25,762        -         25,762
 OTHER ASSETS                                751        -            751
                                        --------- ---------     ---------
   TOTAL ASSETS                         $144,874  $   (192)     $144,682
                                        ========= =========     =========
 LIABILITIES AND STOCKHOLDERS' 
  INVESTMENT
 
 CURRENT LIABILITIES
  Accounts payable and accrued                                   
   liabilities                          $ 57,417  $ (1,836)(a)  $ 55,581
  Current portion of long-term debt
   and capital lease obligations          14,669      (631)(a)    14,038
                                        --------- ---------     ---------
   Total current liabilities              72,086    (2,467)       69,619
 REVOLVING TERM NOTE PAYABLE              30,301     2,275 (b)    32,576
 LONG-TERM DEBT AND CAPITAL LEASE 
  OBLIGATIONS                              6,294        -          6,294
 OTHER LIABILITIES                         9,888        -          9,888 
                                        --------- ---------     ---------
   Total liabilities                     118,569      (192)      118,377
 
 TOTAL STOCKHOLDERS' INVESTMENT           26,305        -         26,305
                                        --------- ---------     ---------
 TOTAL LIABILITIES AND STOCKHOLDERS'
  INVESTMENT                            $144,874  $   (192)     $144,682
                                        ========= =========     =========
</TABLE>
 
<F1>
 (a) Elimination of amounts pertaining to closed Grossman's stores.
<F2>
 (b) Projected borrowings necessary after reflecting activity described     
     in (a).




<PAGE>  10


 NOTE 2 - RESTRUCTURING, REFINANCING AND UNAUDITED CONDENSED PRO FORMA
 FINANCIAL STATEMENTS (CONTINUED)
 ---------------------------------------------------------------------

<TABLE>
 
          UNAUDITED CONDENSED PRO FORMA STATEMENT OF OPERATIONS
                  (in thousands, except per share data)
 
<CAPTION>
                                    NINE MONTHS ENDED SEPTEMBER 30, 1996
                                  -----------------------------------------
                                             Less                 Pro Forma
                                    As      Closed    Pro Forma  Continuing
                                 Reported Operations Adjustments Operations
                                 -------- ---------- ----------- ----------
 <S>                             <C>       <C>        <C>         <C>
 SALES                           $296,657  $ 47,953   $     -     $248,704
 COST OF SALES                    224,051    36,161         -      187,890
                                 --------- ---------  ---------   ---------
  Gross Profit                     72,606    11,792         -       60,814
 
 OPERATING EXPENSES
  Selling and administrative       83,638    17,060       (921)(a)  65,657
  Depreciation and amortization     3,889       875                  3,014
  Store closing expense            40,150    40,150         -           -
  Preopening expense                  807        45         -          762
                                 --------- ---------  ---------   ---------
                                  128,484    58,130       (921)     69,433
                                 --------- ---------  ---------   ---------
 OPERATING INCOME (LOSS)          (55,878)  (46,338)      (921)     (8,619)
 
 OTHER EXPENSES (INCOME)
  Interest expense                  4,080       645        112 (b)   3,547 
  Net gain on disposals
   of property                        (99)      (12)        -          (87)
  Other                            (4,190)     (173)        -       (4,017)
                                 --------- ---------  ---------   ---------
                                     (209)      460        112        (557)
 EQUITY IN NET LOSS OF
  UNCONSOLIDATED AFFILIATE            394        -          -          394
                                 --------- ---------  ---------   ---------
 INCOME (LOSS) BEFORE INCOME 
  TAXES                           (56,063)  (46,798)       809      (8,456)
 PROVISION FOR INCOME TAXES            -         -          -           - 
                                 --------- ---------  ---------   ---------
 NET INCOME (LOSS)               $(56,063) $(46,798)  $    809    $ (8,456)
                                 ========= =========  =========   =========
 NET LOSS PER COMMON SHARE
  (Primary and Fully Diluted)      $(2.11)                          $(0.32)
                                 =========                        =========
 WEIGHTED AVERAGE SHARES AND 
  EQUIVALENT SHARES OUTSTANDING
  (Primary and Fully Diluted)      26,571                           26,571
                                 =========                        =========

</TABLE>

<F1>
 (a) Represents amounts previously allocated to the closed operations,
     reduced by reductions to corporate overhead occurring as a result of
     the reorganization.
<F2>
 (b) Assumes increases for the new secured debt and notes payable, net of
     savings from the retirement of the 14% Debentures, and reductions to
     capital lease obligations and revolving credit borrowings.


<PAGE>  11

 NOTE 3 - LONG-TERM DEBT AND REVOLVING CREDIT AGREEMENT
 ------------------------------------------------------

<TABLE>
 
 Long-term debt consists of the following (in thousands):

<CAPTION> 
                                        SEPT. 30,     DEC. 31,    SEPT. 30,
                                           1996         1995        1995
                                        ---------   ------------  ---------
 <S>                                     <C>          <C>          <C>
 14% Debentures, due January 1, 1996     $    -       $16,201      $16,201
 Convertible notes payable, due 
  April 1999                               1,500           -            -
 Non-convertible notes payable, due 
  April 1999                               2,700           -            -
 Mortgage notes                           14,388        3,511        4,022
 Other notes payable                          -           552          256
 Capital lease obligations                 2,375        5,849        8,222
                                         -------      -------      -------
                                          20,963       26,113       28,701
 
 Less current portion                     14,669       20,445       21,990
                                         -------      -------      -------
                                         $ 6,294      $ 5,668      $ 6,711 
                                         =======      =======      =======

</TABLE>
 
 In May 1996, the Company received a three year line of credit for
 borrowings up to $50 million, including letters of credit up to $15
 million, under a formula based on a percentage of qualified inventory and
 accounts receivable.  The new agreement replaces the revolving credit
 agreement previously in effect.  Borrowings pursuant to this new agreement
 are secured by inventory, receivables and other assets.  The new
 agreement, which bears interest at 1% over Prime Rate, contains no
 financial ratio covenants or dollar limitations on spending for new store
 properties.
 
 At September 30, 1996, cash borrowings under the Company's new loan and
 security agreement totalled $30.3 million and outstanding standby letters
 of credit totalled $5.6 million.  The maximum borrowings under this new
 agreement during the nine months ended September 30, 1996 were $38.5
 million, including letters of credit of $5.6 million.  The weighted
 average annual interest rate on such borrowings was 10.1%.  At 
 September 30, 1996, the loan and security agreement provided for
 borrowings of $39.4 million.
 
 Upon entering into the loan and security agreement, the Company's prior
 revolving credit agreement with BankAmerica Business Credit, Inc. was
 terminated.  The maximum borrowings in 1996 under this agreement were
 $52.3 million, including letters of credit of $9.2 million.  The maximum
 borrowings in 1995 under this agreement was $63.1 million, including
 letters of credit of $11.8 million.  The weighted average annual interest
 rate on such borrowings in 1996 and 1995 was 9.9% and 9.5%, respectively.
 
 In April 1996, as part of the restructuring and refinancing plan
 undertaken, $33.0 million mortgage notes payable, secured by owned
 properties, were funded.  Notes of $4.0 million are non-interest bearing
 and convertible into Common Stock at $0.75 per share.  The remaining notes
 bear interest at 15% per annum, payable monthly, and include a right to
 convert $2.0 million into shares of Common Stock at $1.50 per share upon
 certain events, including a default at maturity.  The interest bearing
 notes are required to be repaid with proceeds from the sale of closed
 stores.  At September 30, 1996, the remaining loan balance totalled $14.1 
 


<PAGE>  12

 NOTE 3 - LONG-TERM DEBT AND REVOLVING CREDIT AGREEMENT (CONTINUED)
 ------------------------------------------------------------------
 
 million, $10.1 million of which has been classified as current,
 representing the non-convertible portion.  Subsequent to September 30,
 1996, an additional $2.4 million has been repaid.  Although the remaining
 principal is not due until April 1998, the Company expects to sell
 properties and repay the remaining balance within a 12 month period.
 
 Also as part of the restructuring and refinancing plan, the Company's 14%
 Debentures due January 1996 were refinanced in cash and notes.  Cash
 payments totalled approximately $12 million.  Convertible notes payable of
 $3 million due in three years, with interest payable semi-annually at 10%
 per annum, were issued.  These notes are convertible at the holder's
 option into shares of Common Stock at $1.30 per share.  On each of April
 9, July 9, and July 26, 1996, $500 thousand was converted into 384,615
 shares of Common Stock, for a total of 1,153,845 shares converted.  The
 remaining $1.5 million is classified as long-term.  An additional $2.7
 million of non-convertible notes payable, with interest payable semi-
 annually at 15%, were also issued.  These notes are due in April 1997 and
 may be repaid prior to maturity from proceeds of real estate sales, after
 full repayment of the mortgage notes described above.  These notes have
 been classified as current, as the Company expects to repay these notes
 with proceeds from property sales within a 12 month period.
 
 NOTE 4 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
 -------------------------------------------------
<TABLE>
 
 Accounts payable and accrued liabilities consist of the following (in
 thousands):
 
<CAPTION>
                                         SEPT. 30,    DEC. 31,    SEPT. 30,
                                           1996         1995        1995  
                                         ---------  ------------  ---------
 <S>                                     <C>           <C>         <C>
 Accounts payable                        $34,948       $63,236     $ 71,001
 Accrued salaries, wages, commissions                                    
  and related taxes                        2,834         3,630        4,655
 Accrued income and franchise taxes          252           391        1,109
 Accrued taxes other than income and
  franchise                                3,726         2,819        3,746
 Accrued store closing costs               2,026         4,593        9,855
 Accrued insurance                         8,606         9,933        7,459
 Other accrued liabilities                 4,492         6,706        7,745
                                         -------       -------     --------
                                         $56,884       $91,308     $105,570
                                         =======       =======     ========
</TABLE>

 
 NOTE 5 - OTHER LIABILITIES
 --------------------------
<TABLE>
 
 Other long-term liabilities consist of the following (in thousands):
 
<CAPTION>
                                         SEPT. 30,    DEC. 31,    SEPT. 30,
                                           1996         1995        1995
                                         ---------- ------------  ---------
 <S>                                       <C>         <C>         <C>
 Accrued insurance claims                  $6,729      $6,955      $ 9,340
 Accrued store closing costs                1,685       2,347        4,154
 Other accrued liabilities                    358         494          556
                                           ------      ------      -------
                                           $8,772      $9,796      $14,050
                                           ======      ======      =======
</TABLE>


<PAGE>  13


 NOTE 6 - DEFINED BENEFIT PENSION PLAN
 -------------------------------------
 
 A noncontributory defined benefit pension plan, the Grossman's Inc.
 Retirement Plan (the "Retirement Plan"), is sponsored covering
 substantially all associates employed at December 31, 1995.  Benefits
 through 1990 are based upon years of service multiplied by a percentage of
 reference earnings.  Beginning in 1991, the benefit is based upon annual
 reference earnings.
 
 As of May 31, 1996, a revaluation of the Retirement Plan was performed,
 including a recalculation of net periodic pension cost for 1996,
 recognizing the reduction in number of associates as a result of the
 restructuring of the Company in March 1996.
 
 Assumptions used by the Retirement Plan's actuaries to develop the funded
 status of the Retirement Plan under the unit credit actuarial cost method
 are as follows:

<TABLE>
<CAPTION>
                                                    1996             1995 
                                                   ------           ------
 <S>                                                <C>              <C>
 Discount rate                                      8.25%            7.25%
 Expected long-term rate of return on assets         9.0              9.0 
 Rate of general wage increase                       4.5              4.5
 
</TABLE>

 
 The components of net periodic pension cost through the valuation dates
 are as follows (in thousands):

<TABLE>
<CAPTION>
 
                                            FIVE MONTHS ENDED   YEAR ENDED
                                              MAY 31, 1996         1995 
                                            -----------------   ----------
 <S>                                             <C>              <C>
 Service cost for the period                     $   602          $ 1,245
 Interest accrued on projected benefit 
  obligation                                       2,193            4,820
 Return on plan assets                            (2,135)          (4,628)
 Net amortization and deferral                       608            1,040 
                                                 --------         --------
     Net periodic pension cost for the period    $ 1,268          $ 2,477 
                                                 ========         ========
</TABLE>
 
 For the nine month period ended September 1996, total net periodic pension
 cost was $1,844 thousand, including $265 thousand required to reflect a
 partial termination of the plan related to the Company's downsizing in
 March 1996.  The $265 thousand curtailment expense and $447 thousand of
 pension expense related to terminated employees was provided for in the
 store closing provision recorded in March 1996.  Accordingly, these
 amounts have been charged against store closing reserves, resulting in a
 net amount of $1,132 thousand being reflected as pension expense for the
 nine month period in the accompanying statement of operations.  Net
 pension expense reflected in the statement of operations for the third
 quarter of 1996 was $86 thousand.  Additional pension expense of $166
 thousand will be recorded in the fourth quarter.
 
 


<PAGE>  14


 NOTE 6 - DEFINED BENEFIT PENSION PLAN
 -------------------------------------
 
 The pension liability at September 30, 1996 totals $1,113 thousand.  The
 funded status of the Retirement Plan as of the valuation dates is as
 follows (in thousands):      

<TABLE>
<CAPTION>
 
                                            MAY 31, 1996  DECEMBER 31, 1995
                                            ------------  -----------------
 <S>                                          <C>             <C>
 Actuarial present value of projected 
  benefit obligation:
  Vested employees                            $ 57,978        $ 67,105
  Non-vested employees                           1,568           1,073
                                              ---------       ---------
 Accumulated benefit obligation                 59,546          68,178
 Impact of future salary increases                 663           2,606
                                              ---------       ---------
 Projected benefit obligation for service 
  rendered to date                              60,209          70,784
 Market value of plan assets, primarily cash              
  equivalents and publicly traded stocks and 
  bonds                                         58,244          59,908 
                                              ---------       ---------
 Projected benefit obligation in excess of
  plan assets                                    1,965          10,876 
 Items not yet recognized in earnings:                               
  Unrecognized net transition asset                531             749
  Unrecognized prior service cost                 (265)           (590)
  Adjustment required to recognize minimum 
   liability                                     9,816          17,067
  Unrecognized net loss                        (10,745)        (19,832)
                                              ----------      --------- 
     Pension liability                        $  1,302        $  8,270 
                                              ==========      =========
</TABLE>


 Statement of Financial Accounting Standards No. 87 requires the
 recognition of a minimum liability, to the extent that actuarially
 computed plan benefits exceed the fair value of plan assets, and the
 recognition of a related intangible asset, to the extent of any
 unrecognized prior service cost.  In 1996, the discount rate assumption
 was changed from 7.25% to 8.25%, resulting in an adjustment decreasing the
 minimum pension liability by $7,251 thousand, reducing the intangible
 asset by $325 thousand, and the difference of $6,926 thousand was credited
 to stockholders' investment.
 
 Prior to the plan revaluation and change in the discount rate assumption,
 total net periodic pension expense was estimated to be $700 thousand for
 the third quarter, $2.1 million for the nine month period and $2.8 million
 for the full year.  The change in estimate resulted in an improvement to
 third quarter and year to date net income by $520 thousand.  Additionally,
 earnings per share for the third quarter and nine month period improved by
 1 cent and 2 cents, respectively, as a result of the change.
 
 


<PAGE>  15
 
 NOTE 7 - EMPLOYEE STOCK OPTION PLANS
 ------------------------------------
 
 A nonqualified stock option plan covering officers and other key
 management employees ("1986 Plan") expired on August 31, 1996.  The 1986
 Plan provided for granting of nonqualified options through August 31,
 1996, up to a total of 3,750,000 shares of Common Stock.  At September 30,
 1996, 2,082,333 shares were outstanding under the 1986 Plan and no shares
 were available for future grants of options.
 
 A nonqualified stock option plan covers key management employees who are
 not officers ("1993 Plan").  The 1993 Plan provides for nonqualified
 options to purchase a total of 600,000 shares of Common Stock, with a
 maximum of 5,000 shares per employee.  The maximum number of options which
 may be granted in any calendar year is 300,000 shares.  At September 30,
 1996, 402,875 shares were available for future grants of options under the
 1993 Plan.
 
 The 1995 Non-Employee Directors' Stock and Option Plan (the "Directors'
 Plan") provides for the issuance of Common Stock, or the granting of
 nonstatutory stock options for shares of Common Stock, up to an aggregate
 of 700,000 shares.  During the nine months ended September 30, 1996,
 55,885 shares if Common Stock were issued to Directors for services
 rendered.  At September 30, 1996, 343,406 shares were available for future
 grants of options or payment for services rendered under the Directors'
 Plan.
 
 A summary of option transactions during the nine months ended September
 30, 1996 is as follows:

<TABLE>
<CAPTION>
 <S>                                           <C>
 Options outstanding, January 1, 1996            2,746,600 
 
 Options granted                                   601,000
 Price range                                   $1.63-$1.84
 
 Options exercised                                   6,250
 Price range                                   $      2.31
 
 Options cancelled                                 876,892   
 Price range                                   $1.84-$4.50
                                               -----------
 
 Options Outstanding, September 30, 1996         2,464,458
 Price range                                   $1.31-$4.50
                                               ===========
 
 Options Exercisable, September 30, 1996         1,651,321
 Price range                                   $1.63-$4.50
                                               ===========
</TABLE>
 
 All options granted are ten-year nonqualified options and were granted at
 market value.  Of the options outstanding at September 30, 1996, 455,000
 were exercisable when issued, and the balance become exercisable in either
 three or four annual installments following the respective dates of grant. 
 All outstanding options become exercisable upon a change of control, as
 defined in the option agreements.  At September 30, 1996, 3,210,739 shares
 of Common Stock were reserved for future issuance under the plans.
 
 


<PAGE>  16


 ITEM 2.      
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS
                 ---------------------------------------------
 
 FINANCIAL CONDITION
 -------------------
 
 September 30, 1996 Compared with December 31, 1995
 --------------------------------------------------
 
 Financial condition at September 30, 1996 reflects the actions taken with
 regard to the restructuring and refinancing plan announced on March 28,
 1996.  Under this plan, the remaining 60 Grossman's stores were closed and
 several actions were taken to improve liquidity.  A $40.2 million
 restructuring charge was recorded in March 1996. The total non-cash
 portion of the reserve was approximately $22.2 million; $12.8 million for
 inventory liquidation costs and $9.4 million for the net unrecoverable
 amount of property, plant and equipment.  Included in the restructuring
 charge were estimated severance payments of $8.0 million, incremental
 professional fees of $6.0 million and $4.0 million expected to be paid
 over a three year period for estimated lease payments and carrying costs
 to be incurred during the period in which leases are terminated.
 
 All stores operating under the name "Grossman's" were closed by the end of
 May 1996.  The Company entered into an Agency Agreement for the
 liquidation of inventories at closed stores, and payments for inventory
 totalling approximately $34.0 million were received between March and June
 1996.  Furniture, fixtures and equipment in the stores were also
 liquidated during this time period, with net proceeds of approximately
 $3.0 million.  Forty of the stores closed were owned and have been
 actively marketed for sale, along with 15 other owned surplus properties
 which were already being marketed for sale.
 
 Four transactions were undertaken to improve liquidity.  The $15.8 million
 note receivable from Kmart Corporation, originally discounted for
 financial reporting purposes to $12.4 million, was sold for cash of $13
 million in March 1996.  The Company's 14% Debentures were refinanced, with
 cash and notes issued in April 1996.  A $33.0 mortgage loan, secured by
 owned properties was obtained, with funding occurring in April 1996.  A
 new $50 million long-term revolving credit agreement, with increased
 borrowing availability, was obtained in May 1996.  
 
 The $16.2 million of 14% Debentures and related interest, which were due
 in January 1996, were settled in April 1996 in a combination of cash and
 notes payable.  Cash payments totalled approximately $12 million.  Notes
 payable of $3 million due in three years, with interest payable
 semi-annually at 10%, were issued.  These notes are convertible at the
 holder's option into shares of the Company's Common Stock at $1.30 per
 share.  On April 9, July 9, and July 26, 1996, $500 thousand of notes were
 converted into 384,615 shares of Common Stock, respectively.  An
 additional $2.7 million of non-convertible notes payable, with interest
 payable semi-annually at 15% per annum, were also issued.  These notes are
 due in three years and may be repaid prior to maturity from proceeds of
 real estate sales, after full repayment of the mortgage notes described
 below.  Interest on these notes may be deferred at the Company's option.



<PAGE>  17

 
 FINANCIAL CONDITION
 -------------------
 
 September 30, 1996 Compared with December 31, 1995 (CONTINUED)
 --------------------------------------------------------------
 
 GRS Realty Company, Inc., a subsidiary of the Company, issued a series of
 mortgage notes payable to a non-affiliated investor group.  The mortgage
 notes are secured by both closed and operating owned properties conveyed
 to GRS Realty Company, Inc. and are required to be repaid with proceeds
 from the sale of closed stores.  Proceeds received in the second quarter
 of 1996 total $33.0 million, $2.9 million of which was non-interest
 bearing and repaid from the first sale of properties.  An additional $4.0
 million is non-interest bearing and convertible into Common Stock at $0.75
 per share, subsequent to repayment of the mortgage notes.  The remaining
 $26.1 million bears interest at 15% per annum, payable monthly and include
 a right to convert $2 million into shares of the Company's Common Stock at
 $1.50 per share upon certain events, including default at maturity.
 
 Significant progress has been made with respect to sales of the 55 surplus
 properties and payment of the mortgage notes.  As of September 30, 1996, 
 23 properties have been sold, with net proceeds of $18.9 million.  Three
 additional properties have subsequently been sold, with net proceeds of
 $2.4 million, and the remaining properties continue to be actively
 marketed.  Minimum required payments for the total series of mortgage
 notes have been met with respect to $4.5 million due in October 1996, $6.0
 million due in April 1997 and $9.0 million due in October 1997.  The
 remainder of the note is due in April 1998.  The $10.1 million
 non-convertible portion of the note has been classified as current, along
 with the $2.7 million non-convertible note discussed above, as the Company
 expects to sell properties and retire this debt within a 12 month period. 
 Fees due under the various notes, totalling $2.9 million, were paid in
 April 1996 upon the loan closing.
 
 In May 1996, the Company entered into a three year line of credit for
 borrowings up to $50 million, including letters of credit of up to $15
 million, under a formula based upon a percentage of qualified inventory
 and accounts receivable.  The new agreement replaces the revolving term
 note agreement previously in effect.  Borrowings pursuant to this new
 agreement are secured by inventory, receivables and other assets.  The
 agreement, which bears interest at 1% over Prime Rate, contains no
 financial ratio covenants or dollar limitations on spending for new stores
 properties.  At September 30, 1996, cash borrowings under the new loan and
 security agreement totalled $30.3 million, outstanding standby letters of
 credit totalled $5.6 million, and availability under the loan totalled
 $3.5 million.  Management anticipates the use of the revolving credit
 facility throughout the remainder of 1996 and beyond, with availability
 sufficient to meet requirements.
 
 In November 1996, the Company announced the engagement of TM Capital Corp.
 as its investment banker and financial advisor.  Alternative sources of 
 both fixed and working capital are being sought to allow for accelerated
 expansion of the Contractors' Warehouse concept.
 
 In April 1996, the Company repaid $3.4 million of outstanding mortgage
 notes.
 



<PAGE>  18

 FINANCIAL CONDITION
 -------------------
 
 September 30, 1996 Compared with December 31, 1995 (CONTINUED)
 --------------------------------------------------------------
 
 Receivables, inventories, accounts payable and accrued liabilities at
 September 30, 1996, compared to December 31, 1995, reflect the closing of
 the Grossman's stores.  Inventory supply problems, which were experienced
 during the first quarter, normalized during the second quarter, as vendors
 were paid for amounts due.  The final $2.0 million of payments due former
 suppliers of Grossman's stores were paid in July 1996.  All stores have
 been considered fully stocked with inventory since late in the second
 quarter.
 
 Property held for sale at September 30, 1996 totals $38.6 million,
 reflecting the net book value of owned real property.  The $12.8 million
 current portion of property represents the property necessary to be sold
 to retire the non-convertible debt discussed above.  As stated, the
 Company expects to sell sufficient properties to retire this debt within
 the next twelve months.
 
 In the March 1996 restructuring charge discussed above, the $9.4 million
 provided for the net unrecoverable amount of property, plant and equipment
 related to leasehold improvements, furniture and fixtures and machinery
 and equipment.  Estimated market values of properties to be sold were
 expected to exceed book values and, accordingly, no impairment to the book
 values was recorded.  In the fourth quarter of 1996, management is
 reviewing cash flow alternatives, including marketing the remaining
 properties to be sold more aggressively than an original self-imposed
 three year liquidation period.  An impairment to book value is likely,
 although the amount is undeterminable until the strategies to be employed
 are finalized.
 
 In September 1996, the Company recorded the effects of a May 1996
 revaluation of its defined benefit pension plan.  Statement of Financial
 Accounting Standards No. 87 requires the recognition of a minimum
 liability, to the extent that actuarially computed plan benefits exceed
 the fair value of plan assets, and the recognition of a related intangible
 asset, to the extent of any unrecognized prior service cost.  In 1996, the
 discount rate assumption was changed from 7.25% to 8.25%, resulting in an
 adjustment decreasing the minimum pension liability by $7,251 thousand,
 reducing the intangible asset by $325 thousand, and the difference of
 $6,926 thousand was credited to stockholders' investment.
 
 In November 1996, the Company announced plans to relocate its corporate
 offices from Canton, Massachusetts to one of the existing Contractors'
 Warehouse offices in either Cincinnati, Ohio or Sacramento, California. 
 Estimated costs of closing the Canton office, including severance and
 lease expenses, will be accrued in the fourth quarter, when determinable.
 
 

<PAGE>  19

 RESULTS OF OPERATIONS
 ---------------------
 
 Nine months ended September 30, 1996 compared with nine months ended 
 --------------------------------------------------------------------
 September 30, 1995
 ------------------
 
 Results of operations include both the results of ongoing operations and
 of the Grossman's Division, whose operations terminated on March 28, 1996,
 as previously described.  Pro forma results of operations, which exclude
 the Grossman's Division, are presented in the Notes To Financial
 Statements. 
 
 Sales and results of operations during 1996 were affected by first quarter
 inventory supply problems and out-of-stock-situations.  During the second
 quarter, vendor relationships were reestablished, vendors were paid for
 past obligations, inventory positions returned to required levels, and
 substantial progress was made toward reestablishing customer
 relationships, which had been strained during the period of inventory
 shortages.  Efforts are continuing to both renew old and establish
 customer relationships.
 
 Of the Company's two ongoing operating divisions, the Contractors' 
 Warehouse Division was more significantly impacted by low inventory levels
 earlier in 1996.  Contractors' Warehouse sales are often dependent on the
 ability to supply customers with a complete array of merchandise necessary
 to complete projects.  Inability to provide this expected level of service
 resulted in a decline in customer traffic, which the division has been
 gradually recovering from.
 
 Mr. 2nd's Bargain Outlet stores advertise on a "quantities limited" basis
 and customers do not necessarily expect to find all of their required
 items.  The inability to stock sufficient quantities earlier in 1996
 affected sales, but recovery in this division was quicker once the low
 inventory levels were rectified.
 


<PAGE>  20
 
 RESULTS OF OPERATIONS
 ---------------------
 
 Nine months ended September 30, 1996 compared with nine months ended 
 --------------------------------------------------------------------
 September 30, 1995 (CONTINUED)
 ------------------------------
 
 The following table shows comparative sales results by division and store
 type (dollars in millions):
 
<TABLE>
<CAPTION>
 
                             Six Months     Three Months     Nine Months
                             Ended June      Ended Sept.     Ended Sept.
                           --------------  --------------  --------------
                            1996    1995    1996    1995    1996    1995
                            ----    ----    ----    ----    ----    ---- 
 <S>                       <C>     <C>     <C>     <C>     <C>     <C>
 SALES
 Ongoing Operations
  Contractors' Warehouse   $124.7  $116.4  $ 79.9  $ 70.7  $204.6  $187.1 
  Mr. 2nd's Bargain Outlet   28.0    24.9    16.1    12.0    44.1    36.9
                           ------  ------  ------  ------  ------  ------
    Total Ongoing 
     Operations             152.7   141.3    96.0    82.7   248.7   224.0
 Closed Stores
  Grossman's                 48.0   179.5      -    111.4    48.0   290.8
                           ------  ------  ------  ------  ------  ------
 Total Grossman's Inc.     $200.7  $320.8  $ 96.0  $194.1  $296.7  $514.8
                           ======  ======  ======  ======  ======  ======
 
 % OF TOTAL SALES
 Ongoing Operations
  Contractors' Warehouse     62.1%   36.2%   83.2%   36.4%   68.9%   36.3%
  Mr. 2nd's Bargain Outlet   14.0     7.8    16.8     6.2    14.9     7.2
                           ------  ------  ------  ------  ------  ------
    Total Ongoing 
     Operations              76.1    44.0   100.0    42.6    83.8    43.5
 Closed Stores
  Grossman's                 23.9    56.0      -     57.4    16.2    56.5
                           ------  ------  ------  ------  ------  ------
 Total Grossman's Inc.      100.0%  100.0%  100.0%  100.0%  100.0%  100.0% 
                           ======  ======  ======  ======  ======  ======
</TABLE>

 

<PAGE>  21

 RESULTS OF OPERATIONS
 ---------------------
 
 Nine months ended September 30, 1996 compared with nine months ended 
 --------------------------------------------------------------------
 September 30, 1995 (CONTINUED)
 ------------------------------

<TABLE>
<CAPTION>
 
 (TABLE CONTINUED)
                            Six Months       Three Months    Nine Months
                            Ended June        Ended Sept.    Ended Sept.
                           --------------   --------------  --------------
                            1996    1995     1996    1995    1996    1995
                            ----    ----     ----    ----    ----    ---- 
 <S>                        <C>     <C>      <C>     <C>     <C>     <C>
 SALES % INCREASE (DECREASE) 
  VERSUS PRIOR YEAR
 Ongoing Operations
  Contractors' Warehouse     7.1 %  13.0 %   13.0 %  20.2 %   9.4 %  35.0 %
  Mr. 2nd's Bargain Outlet  12.4    17.5     34.2     2.6    19.5    29.9
                           ------  ------  -------  ------  ------  ------
    Total Ongoing
     Operations              8.1    13.8     16.1    17.3    11.0    34.1
 Closed Stores 
  Grossman's               (73.3)  (22.3)  (100.0)  (28.4)  (83.5)  (10.2)
                           ------  ------  -------  ------  ------  ------
 Total Grossman's Inc.     (37.4)%  (9.8)%  (50.5)% (14.2)% (42.4)%   4.8 %
                           ======  ======  =======  ======  ======  ======
 
 COMPARABLE STORE SALES %
  INCREASE (DECREASE)
  VERSUS PRIOR YEAR
 Ongoing Operations
  Contractors' Warehouse    (6.4)%  (1.3)%   (3.6)%   9.4 %  (5.4)%   1.5 %
  Mr. 2nd's Bargain Outlet  (7.2)    6.6      7.3       -    (2.8)    4.2 
                           ------  ------  -------  ------  ------  ------
    Total Ongoing
     Operations             (6.5)    0.1     (2.0)    7.9    (4.9)    1.9
 Closed Stores 
  Grossman's                  NA    (4.1)      NA   (13.7)     NA    (6.4)
                           ------  ------  -------  ------  ------  ------
 Total Grossman's Inc.      (6.5)%  (2.4)%   (2.0)%  (6.1)%  (4.9)%  (3.2)%
                           ======  ======  =======  ======  ======  ======
 
 TOTAL NUMBER OF STORES
 Ongoing Operations
  Contractors' Warehouse      16      13                       16      14
  Mr. 2nd's Bargain Outlet    24      20                       26      19
 Closed Stores
  Grossman's                   -      72                        -      71
                           ------  ------                   ------  ------ 
 Total Number of Stores       40     105                       42     104 
                            ======  ======                   ======  ======

</TABLE>



<PAGE>  22

 Nine months ended September 30, 1996 compared with nine months ended 
 --------------------------------------------------------------------
 September 30, 1995 (CONTINUED)
 ------------------------------
 
 Sales results were also affected by store openings and closings.  The 1996
 results include the results of three Contractors' Warehouse stores opened
 in 1995, two of which were opened subsequent to the second quarter, and
 one store opened in mid-May 1996.  The 1996 results also include the sales
 of two Mr. 2nd's Bargain Outlets opened in 1995, one which opened late in
 the first quarter and one in the second quarter, and the results of three
 stores opened in March 1996 and three additional stores opened in May
 1996.  The 1996 results exclude the results of 18 Grossman's stores which
 closed in late 1995.  Additionally, Contractors' Warehouse sales results
 in 1995 reflect heavy rainfall in California in the months of January and
 March, which were partially offset by second quarter increases.
 
 Gross profit declined by $50.3 million, reflecting the closing of the
 Grossman's stores, the store openings described above, and an increase in
 gross margin from 23.9% in 1995 to 24.5% in 1996.  A first quarter gross
 margin decline from 24.4% in 1995 to 23.5% in 1996 was offset by increases
 in the second quarter from 22.9% to 24.2% and third quarter from 24.3% to
 25.9%.
 
 First quarter margin declines reflected the increase in Contractors'
 Warehouse sales, which focus on lower margin professional sales, as a
 percent of total sales.  First quarter 1996 margins were also affected by
 the Company's inability to avoid out-of-stock situations.  The margin
 increase in the second and third quarters principally relates to margins
 on commodity lumber.  Commodity lumber margins, which were extremely low
 in 1995 due to falling prices, rebounded in 1996 when prices were
 relatively stable. 
 
 Gross margins on a divisional basis for the nine month period were as
 follows:
<TABLE>
<CAPTION>
 
                                            Nine Months Ended
                                            September 30, 1996
                                            ------------------
                                             1996        1995
                                            ------      ------
 <S>                                         <C>         <C> 
 Ongoing Operations:
  Contractors' Warehouse                     23.0%       23.2%
  Mr. 2nd's Bargain Outlet                   31.2        30.5
                                             -----       -----
    Total Ongoing Operations                 24.5        24.4
 Closed Stores
  Grossman's                                 24.5        23.4
                                             -----       -----
 Total Grossman's Inc.                       24.5%       23.9%
                                             =====       =====
</TABLE>
 
 
 Contractors' Warehouse overall margin decline of 0.2% for the nine month
 period principally relates to Midwest stores, where the impact of first
 quarter out-of-stock situations was most severe, in part due to the larger
 size of these stores.  


<PAGE>  23
 
 Nine months ended September 30, 1996 compared with nine months ended 
 --------------------------------------------------------------------
 September 30, 1995 (CONTINUED)
 ------------------------------
 
 Selling and administrative expenses declined by $33.3 million from 1995 to
 1996 and increased as a percent of sales from 22.7% in 1995 to 28.2% in
 1996, both resulting from the effect of downsizing.  Selling and
 administrative expenses, the largest component of which is payroll, are
 expected to remain at higher than historic percentages of sales, due to
 the Company's structure following the downsizing.  Management continues to
 reevaluate and adjust administrative service levels and functions, which
 is expected to yield future savings.  Included in the items expected to
 yield future cost savings is the planned move of the corporate offices to
 one of the existing Contractors' Warehouse divisional offices sometime
 prior to September 1997.
 
 Included within selling and administrative expense is pension expense,
 which decreased from $2.2 million for the nine month period in 1995 to
 $1.1 million for the comparable period in 1996.  The reduction resulted
 from both the downsizing and a revaluation of the pension plan as of May
 1996, relative to the downsizing.  In the revaluation, the discount rate
 assumption was changed from 7.25% to 8.25%,  The change in estimate
 resulted in an improvement to nine month net income by $520 thousand, or 2
 cents per share. 
 
 Depreciation and amortization declined from $8.7 million in 1995 to $3.9
 million in 1996, reflecting the store closings, partially offset by
 depreciation for new stores.   Depreciation for ongoing operations was
 approximately $1.0 million in each of the first three quarters of 1996, as
 limited capital spending has occurred.
 
 As a result of the restructuring and refinancing plan, the Company
 reflected a $40.2 million restructuring charge in the first quarter of
 1996 related to severance costs, lease payments, inventory liquidation
 costs, other expenses and the net unrecoverable amount of property plant
 and equipment.
 
 Store preopening expense increased from $462 thousand in 1995 to $807 in
 1996, reflecting the store opening activity described above.
 
 Interest expense declined from $6.4 million in 1995 to $4.1 million,
 reflecting lower revolving credit borrowings, lower levels of capital
 lease obligations as a result of closing stores in both 1995 and 1996, and
 savings related to long-term debt paid as part of the refinancing. 
 Interest expense is expected to continue to decline as properties are sold
 and mortgage debt is paid.
 
 Other income increased by $1.6 million due primarily to an increase in
 tool rental income in both new and existing Contractors' Warehouse stores.
 


<PAGE>  24

 Three months ended September 30, 1996 compared with three months ended
 ----------------------------------------------------------------------
 September 30, 1995
 ------------------
 
 Third quarter 1996 net income was $1.6 million, or 5 cents per share,
 compared with $15.3 million, or 59 cents per share, in the same period in
 1995.  The 1995 third quarter results included an $18.1 million gain on
 the sale of the company's former headquarters and establishment of a $4.5
 million reserve for store closing expenses.  The lingering effects of
 first quarter inventory supply problems and out-of-stock situations
 affected sales and results of operations during the third quarter of 1996,
 particularly in Contractors' Warehouse stores.
 
 Third quarter sales in 1995 include $111.4 million from the now closed
 Grossman's stores.  Sales from ongoing operations increased by 11.0% from
 1995 to 1996, reflecting sales from the new stores described above, offset
 in part by a 4.9% comparable store sales decline.
 
 Gross profit declined by $22.4 million, reflecting the closing of the
 Grossman's stores and the store openings described above.  The increase in
 gross margin from 24.3% in 1995 to 25.9% in 1996, reflects the elimination
 of the Grossman's division, which operated at a 23.0% margin in 1995, and
 flat margins from the combined ongoing operations.
 
 Gross margins on a divisional basis for the third quarter were as follows:
 
<TABLE>
<CAPTION>
 
                                          Three Months Ended
                                          September 30, 1996
                                          ------------------
                                           1996        1995
                                          ------      ------
 <S>                                       <C>         <C>
 Ongoing Operations:
  Contractors' Warehouse                   25.0%       25.4%
  Mr. 2nd's Bargain Outlet                 30.3        29.0
                                           -----       -----
    Total Ongoing Operations               25.9        25.9 
 Closed Stores
  Grossman's                                  NA       23.0 
                                           -----       -----
 Total Grossman's Inc.                     25.9%       24.3%
                                           =====       =====
</TABLE>
 
 
 Within Contractors' Warehouse stores, a decline in margins, particularly
 in Midwest stores, was partially offset by improved margins on commodity
 lumber.  Commodity lumber margins, which were extremely low in 1995 due to
 falling prices, rebounded in 1996 when prices were relatively stable.
 
 Selling and administrative expenses declined by $16.7 million from 1995 to
 1996 and increased as a percent of sales from 20.3% in 1995 to 23.6% in
 1996, both resulting from the effect of downsizing.  Selling and
 administrative expenses, the largest component of which is payroll, are
 expected to remain at higher than historic percentages of sales, due to
 the Company's structure following the downsizing.  Management continues to
 reevaluate and adjust administrative service levels and functions, which
 is expected to yield future savings.
 



<PAGE>  25

 Three months ended September 30, 1996 compared with three months ended
 ----------------------------------------------------------------------
 September 30, 1995 (CONTINUED)
 ------------------------------
 
 Included within selling and administrative expenses is pension expense,
 which decreased from $784 thousand for the third quarter in 1995 to $84
 thousand for the comparable period in 1996.  The reduction resulted from
 both the downsizing and a revaluation of the pension plan as of May 1996,
 relative to the downsizing.  In the revaluation, the discount rate
 assumption was changed from 7.25% to 8.25%,  The change in estimate
 resulted in an improvement to third quarter net income by $520 thousand,
 or 1 cent per share. 
 
 Depreciation and amortization declined from $2.8 million in 1995 to $1.0
 million in 1996, reflecting the store closings, partially offset by
 depreciation for new stores. 
 
 Store preopening expense, increased from $51 thousand in the third quarter
 of 1995 to $317 thousand in 1996, reflecting the store opening activity
 described above.
 
 Interest expense declined from $2.1 million in 1995 to $1.4 million,
 reflecting lower revolving credit borrowings,  lower levels of capital
 lease obligations as a result of closing stores in both 1995 and 1996, and
 savings related to long-term debt paid as part of the refinancing.  
 Interest expense is expected to continue to decline as properties are sold
 and mortgage debt is paid.
 
 Other income increased by $950 thousand due primarily to an increase in
 tool rental income in both new and existing Contractors' Warehouse stores.
 


<PAGE>  26

 PART II - OTHER INFORMATION
 ---------------------------
 
 ITEM 4.    SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
 
        (a) The date of the meeting and whether it was an annual
            or special meeting:
 
            Annual Meeting of Stockholders of Grossman's Inc. was
            held on September 12, 1996.
 
        (b) All nominees as directors were elected as set forth 
            in paragraph (c) below.
 
        (c) A brief description of each matter voted upon at the
            meeting and state the number of votes cast for, 
            against or withheld, as well as the number of 
            abstentions and broker nonvotes, as to each such 
            matter, including a separate tabulation with respect
            to each nominee for office.
 
        The following matters were voted upon at the Annual Meeting
        of Stockholders of Grossman's Inc.
 
<TABLE>

        (i) Election of Directors
<CAPTION>
 
             Name                  For               Withheld
        <S>                     <C>                  <C>
        Russell N. Cox          21,507,951           1,511,753
        John R. Grey            21,508,251           1,511,453
        Maurice Grossman        21,510,584           1,509,120
        Leo Kahn                21,544,229           1,475,475
        Sydney L. Katz          21,499,091           1,520,613
        Robert K. Swanson       21,547,429           1,472,275

</TABLE>
 
        An aggregate of 3,876,287 were not present at the meeting
        in person or by proxy and were not voted on the election 
        of directors.
 
        (ii)  Approval of Ernst & Young as independent auditors 
              for registrant for 1996
<TABLE>
<CAPTION>
 
           For                   Against            Abstentions
        <S>                      <C>                   <C>
        22,764,169               218,760               36,775

</TABLE>
 
        An aggregate of 3,876,287 were not present at the meeting
        in person or by proxy and were not voted on the approval of
        Ernst & Young as independent accountants.
 
        (iii)  Approval of the issuance of registrant's Common
               Stock upon the conversion of convertible notes.
<TABLE>
<CAPTION>
 
           For                   Against            Abstentions
        <S>                      <C>                  <C> 
        15,025,340               552,382              441,406

</TABLE>
 
        (d) Not applicable.
 
 
 
<PAGE>  27

 PART II - OTHER INFORMATION (CONTINUED)
 ---------------------------------------
 
 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
 
 
        (a)   EXHIBITS
 
        3(a)-9     Certificate of Designation Relating to Certain
                   Restrictions on the Acquisition of Common Stock
                   pursuant to Article Ninth of the Company's 
                   Restated Certificate of Incorporation, is filed
                   herewith.
 
        10iii(h)-3 Retirement Agreement, dated as of October 4, 1996,
                   between Grossman's Inc. and Sydney L. Katz, filed
                   herewith.
 
        10iii(o)-1 Amended and Restated Agreement, dated as of 
                   October 4, 1996, between Grossman's Inc. and Robert
                   K. Swanson, filed herewith.
 
        11(a)      Statement re computation of earnings per share,
                   filed herewith.
 
        (b)        REPORTS ON FORM 8-K
 
                   The Company did not file any reports on Form 8-K
                   during the three months ended September 30, 1996.
 



<PAGE>  28

 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.
 
                                        GROSSMAN'S INC.
                                           Company
 
 
 
                                     by    /s/ Steven L. Shapiro           
                                     --------------------------------------
                                               Steven L. Shapiro
                                           Vice President - Controller
 
 
 
 
 
 
 
 
 
 DATE:  November 14, 1996