<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
                              EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 1997

                                       or

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

For the transition period from _____________________ to_____________________
Commission file number 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
     incorporation 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)

-----------------------------------------------------------------------------
              (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 by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities and
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes ____ 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 - 28,080,215 shares as of August 14, 1997.


                                     1


<PAGE>   2






                                 GROSSMAN'S INC.
                                    FORM 10-Q
                           QUARTER ENDED JUNE 30, 1997

                                      INDEX


                                                                Page Number
                                                                -----------

PART I. FINANCIAL INFORMATION
-----------------------------

ITEM 1. FINANCIAL STATEMENTS

  GROSSMAN'S INC. AND SUBSIDIARIES
   Consolidated Balance Sheets
     June 30, 1997, December 31, 1996 and June 30, 1996.............


   Consolidated Statements of Operations
     Three Months and Six Months Ended June 30, 1997 and 1996.......


   Consolidated Statements of Cash Flows
     Six Months Ended June 30, 1997 and 1996........................


   Notes to Unaudited Interim Consolidated Financial Statements.....


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

PART II. OTHER INFORMATION
--------------------------

ITEM 1. LEGAL PROCEEDINGS...........................................

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

SIGNATURES..........................................................

















                                     2

<PAGE>   3

PART I. FINANCIAL INFORMATION
-----------------------------


ITEM 1. FINANCIAL STATEMENTS



                        GROSSMAN'S INC. AND SUBSIDIARIES
                             (DEBTOR-IN-POSSESSION)
                           CONSOLIDATED BALANCE SHEETS
                      (in thousands, except per share data)
                                   (Unaudited)


<TABLE>
<CAPTION>
                                        JUNE 30,  DECEMBER 31,   JUNE 30,
                                          1997       1996          1996
                                       ---------  ------------   --------

ASSETS

CURRENT ASSETS
<S>                                     <C>          <C>         <C>     
 Cash and cash equivalents              $    128     $  1,058    $    679
 Receivables, less allowance of
   $2,209 at June 30, 1997
   $2,810 at December 31, 1996
   and $745 at June 30, 1996               3,050       10,710      14,548
 Inventories                              59,922       56,662      61,229
 Property held for sale                    8,819       15,199       4,802
 Other current assets                      2,464        1,559       3,884
                                        --------     --------    --------
   Total current assets                   74,383       85,188      85,142

PROPERTY, PLANT AND EQUIPMENT, net of 
   accumulated depreciation of $17,416 
   at June 30, 1997, $16,114 at 
   December 31, 1996 and $15,220 on
   June 30, 1996                          23,035       25,549      30,324
PROPERTY HELD FOR SALE                        -            -       38,232
PREPAID PENSION ASSET                      9,691        9,536         125
OTHER ASSETS                               3,109        3,168         927
                                        --------     --------    --------
   TOTAL ASSETS                         $110,218     $123,441    $154,750
                                        ========     ========    ========
</TABLE>


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










                                     3


<PAGE>   4



                        GROSSMAN'S INC. AND SUBSIDIARIES
                             (DEBTOR-IN-POSSESSION)
                           CONSOLIDATED BALANCE SHEETS
                      (in thousands, except per share data)
                                   (Unaudited)


<TABLE>
<CAPTION>

                                          JUNE 30,  DECEMBER 31,  JUNE 30,
                                            1997       1996         1996  
                                            ----       ----         ----
LIABILITIES AND STOCKHOLDERS' INVESTMENT

<S>                                         <C>        <C>       <C>     
CURRENT LIABILITIES
 Accounts payable and accrued liabilities   $ 25,630   $ 60,229  $ 71,444
 Liabilities subject to Compromise            46,202        --        --
 Accrued interest                                500        397       410
 Revolving term note payable                  32,443     30,024       --
 Current portion of long-term debt and
  capital lease obligations                    2,860     12,228     7,095
                                           ---------   --------  ---------
   Total current liabilities                 107,135    102,878    78,949

REVOLVING TERM NOTE PAYABLE                      --         --     20,310
LONG-TERM DEBT AND CAPITAL LEASE
 OBLIGATIONS                                     140        634    22,117

PENSION LIABILITY                                --         --      8,247
OTHER LIABILITIES                              9,173      7,241     8,390
                                            --------   --------  ---------
   Total liabilities                         116,948    110,753   138,013

COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' INVESTMENT
 Common stock, $.01 par value, 
  Shares authorized - 50,000 
  Shares issued - 28,080 in 1997, 
  27,676 at December 31, 1996 and
  26,519 at June 30, 1996                        281        277       265
 Additional paid-in-capital                  157,992    157,825   156,229
 Retained earnings (deficit)                (165,003)  (145,414) (121,839)
 Minimum pension liability                       --         --    (16,476)
 Cumulative foreign currency translation
  adjustment                                     --         --     (1,442)
                                            ---------  --------- ---------
    Total Stockholders' Investment            (6,730)    12,688    16,737
                                            ---------  --------- ---------
    TOTAL LIABILITIES AND STOCKHOLDERS'
     INVESTMENT                             $110,218   $123,441  $154,750
                                            =========  ========= =========
</TABLE>

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







                                     4


<PAGE>   5



                        GROSSMAN'S INC. AND SUBSIDIARIES
                             (DEBTOR-IN-POSSESSION)
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      (in thousands, except per share data)
                                   (Unaudited)


<TABLE>
<CAPTION>
                                    THREE MONTHS           SIX MONTHS
                                   ENDED JUNE 30,         ENDED JUNE 30,
                                  ----------------       ----------------
                                   1997       1996        1997      1996
                                   ----       ----        ----      ----
<S>                              <C>        <C>        <C>       <C>     
SALES                            $ 55,749   $ 87,704   $105,124  $200,685
COST OF SALES                      42,479     66,833     81,986   153,844
                                 ---------  ---------  --------- ---------
  Gross Profit                     13,270     20,871     23,138    46,841

OPERATING EXPENSES
  Selling and administrative       18,386     22,929     39,250    60,963
  Depreciation and amortization       949        997      1,971     2,846
  Store closing expense                -          -          -     40,150
  Preopening expense                   64        395        198       756
                                 ---------  ---------  --------- ---------
                                   19,399     24,321     41,419   104,715
                                 ---------  ---------  --------- ---------
OPERATING (LOSS)                   (6,129)    (3,450)   (18,281)  (57,874)

OTHER EXPENSES (INCOME)
  Interest expense                    712      1,016      1,399     2,636
  Net gain on disposals of
   property                            -          -          -        (27)
  Other                            (1,595)    (1,628)    (2,413)   (3,166)
                                  --------  ---------  --------- ---------
                                     (883)      (612)    (1,014)     (557)
EQUITY IN NET LOSS OF
 UNCONSOLIDATED AFFILIATE              -         108         -        316
                                 ---------  ---------  --------- ---------
(LOSS) BEFORE REORGANIZATION
 ITEMS AND INCOME TAXES            (5,246)    (2,946)   (17,267)  (57,633)

REORGANIZATION ITEMS                2,322         -       2,322        -
                                 ---------  ---------  --------- ---------

(LOSS) BEFORE INCOME TAXES         (7,568)    (2,946)   (19,589)  (57,633)
PROVISION FOR INCOME TAXES             -          -          -         -
                                 ---------  ---------  --------- ---------
NET (LOSS)                       $ (7,568)  $ (2,946)  $(19,589) $(57,633)
                                 =========  =========  ========= =========
NET (LOSS) PER COMMON SHARE
 (PRIMARY)                         $(0.27)    $(0.11)    $(0.70)   $(2.21)
                                 =========  =========  ========= =========
WEIGHTED AVERAGE SHARES AND
 EQUIVALENT SHARES OUTSTANDING
  (Primary)                        28,024     26,458     27,941    26,276
                                 =========  =========  ========= =========
</TABLE>

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

                                     5


<PAGE>   6






                        GROSSMAN'S INC. AND SUBSIDIARIES
                             (DEBTOR-IN-POSSESSION)
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                      (in thousands, except per share data)
                                   (Unaudited)
  
<TABLE>
<CAPTION>
                                                     SIX MONTHS ENDED
                                                          JUNE 30,
                                                  ------------------------
                                                    1997            1996
                                                    ----            ----
<S>                                               <C>            <C>      
OPERATING ACTIVITIES
Net loss                                          $(19,589)      $(57,633)

Adjustments to reconcile net loss to net 
  cash (used for) operating activities:
  Depreciation and amortization                      1,971          2,846
  Net gain on disposals of property                    --             (27)
  Provision for losses on accounts receivable        1,375            776
  Provision for store closings                         --          29,613
  Reorganization items                               2.322            --
  Undistributed loss of unconsolidated affiliate       --             316
  (Increase) decrease in assets:
   Receivables                                       6,285          7,799
   Inventories                                      (3,260)        27,736
   Note receivable and other assets                   (622)        12,677
  (Decrease) in accounts payable and accrued
   and other liabilities                             8,611        (30,205)
                                                  ---------      ---------
   Total adjustments                                16,682         51,531

NET CASH (USED FOR) OPERATING ACTIVITIES            (2,907)        (6,102)
 BEFORE REORGANIZATION PAYMENTS

  Reorganization payments                           (2,697)           --
                                                   --------      ---------
NET CASH (USED FOR) OPERATING ACTIVITIES            (5,604)        (6.102)

INVESTING ACTIVITIES
 Capital expenditures                                 (304)        (1,759)
 Proceeds from sales of property, net
   Pre-Bankruptcy                                    3,641         16,004
   Post-Bankruptcy                                   3,586            --
 Investment in unconsolidated affiliate                --            (333)
                                                  ---------      ---------
NET CASH PROVIDED BY INVESTING ACTIVITIES            6,923         13,912
 FINANCING ACTIVITIES
 Proceeds from mortgage financing                      --          33,000
 Payments on mortgage financing                        --         (12,524)
                                                  ---------      ---------
 Net proceeds from mortgage financing                  --          20,476
 Payment in total of pre-bankruptcy revolver       (15,703)           --
 Proceeds from Debtor in Possession
  financing, net                                    18,122            --
 Payments on long-term debt and capital
  lease obligations                                 (4,836)       (17,643)
 Net (repayments) of revolving
  term note payable                                    --         (12,534)
 Issuance of common stock as payments for
  Directors fees                                       168             34
                                                  ---------      ---------
 NET CASH (USED FOR) PROVIDED BY FINANCING
  ACTIVITIES                                        (2,249)        (9,667)

Net(decrease) in cash and cash equivalents            (930)        (1,857)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD     1,058          2,536
                                                  ---------      ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD        $    128       $    679
                                                  =========      =========
</TABLE>

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


                                     6

<PAGE>   7

                       GROSSMAN'S INC. AND SUBSIDIARIES
                             (DEBTOR-IN-POSSESSION)
         NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 1997




NOTE 1 - BASIS OF PRESENTATION
------------------------------

On April 7, 1997, the Company and two of its wholly owned affiliates, GRS
Holding Company, Inc. and GRS Realty Company, Inc.,filed Chapter 11 bankruptcy
petitions under Title 11 of the United States Code ("Chapter 11"). The Company
is presently operating its business as a debtor-in-possession subject to the
jurisdiction of the United States Bankruptcy Court for the District of Delaware
(the "Court"). The Company will continue to operate as a debtor-in-possession
while pursuing a reorganization plan to restructure operations and the Company's
capitalization. As a debtor-in-possession in Chapter 11, the Company may not
engage in transactions outside of the ordinary course of business, without
approval, after notice and hearing, of the Court. The accompanying consolidated
financial statements do not include any adjustments to reflect the possible
future effects of the recoverability and classification of assets, the amounts
and classification of liabilities which may be allowed in the Chapter 11 plan,
or the ultimate capitalization of the Company.

The accompanying Unaudited Interim Consolidated Financial Statements have been
prepared on a going concern basis 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.

The Company is following the American Institute of Certified Public Accountants'
(AICPA) Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code". This statement modifies standard
reporting practices, requiring, among other things, separate disclosure of all
liabilities subject to compromise in a Plan of Reorganization and the
segregation of items directly related to the Chapter 11 filing from operating
results.

The principle categories of claims classified as "Liabilities subject to
compromise" are identified below and may be subject to future adjustments
depending on Bankruptcy Court actions, further developments with respect to
disputed claims or other events.

      Accounts Payable prepetition              $  41,175
      Convertible notes payable, due
       April 1999                                   1,500
      Non-convertible notes payable,
       due April 1999                               3,355
      Other                                           172
                                                ---------
                                                $  46,202
                                                =========

The Company provided for or incurred the following expense items during the
second quarter, directly associated with the Chapter 11 reorganization
proceedings:

      Professional fees                         $   2,035
      Other                                           287
                                                ---------
                                                $   2,322
                                                =========

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,
1996. The balance sheet as of December 31, 1996 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 years have
been reclassified to conform to the current year presentation. Such
reclassifications had no effect on previously reported results of operations.


                                     7
<PAGE>   8

NOTE 2 - REFINANCING AND PROJECTED REORGANIZATION
-------------------------------------------------

In each of the past four years,  the Company has downsized  its  operations
and closed  stores.  Net losses  were  reported  in each of these years and
significant operating losses were reported in the past two years.  The
largest group of store closings occurred in March 1996 when the Company closed
its 60 store Grossman's Division. Inventory shortages were experienced in all
divisions prior to and shortly after these store closings, and sales results
following the closure of the Grossman's Division were adversely affected through
the remainder of 1996. During early January 1997, limited availability under the
Company's revolving credit agreement, combined with operating deficits, resulted
in an inability to meet current obligations.

On January 22, 1997, the Company announced that it was experiencing a severe
liquidity shortage. The Company also announced that it was exploring all
available options, including seeking protection from creditors under Chapter 11
of the U.S. Bankruptcy Code.

On February 7, 1997, the Company and JELD-WEN, inc. ("JELD-WEN"), a major
supplier to the Company and an affiliate of its largest shareholder, entered
into a letter of intent which stipulated terms under which the Company would be
provided financing involving JELD-WEN.

On March 4, 1997, the Company announced an agreement with GDI Company, Inc.
("GDI"), a subsidiary of JELD-WEN, pursuant to which GDI purchased the $4
million convertible note payable by GRS Realty Company, Inc. ("GRS"), to
Combined Investors LLP, an affiliate of Gordon Brothers Partners Realty, Inc.
Following the purchase, $1.1 million of segregated cash collateral from the sale
of real estate was released to the Company. The funds received by the Company
also included $1.99 million pursuant to a note secured by three parcels of real
estate of GRS Realty Company, Inc., previously pledged to secure the $4 million
note.

Following the loan from GDI Company, Inc., Congress Financial Corporation
("Congress") amended its credit agreement with the Company and provided the
Company an additional $10 million, guaranteed and supported by a stand-by letter
of credit obtained by an affiliate of JELD-WEN in favor of Congress and $5
million of real estate previously pledged to secure the $4 million note. The
total $13.1 million of proceeds received were used for essential expenses and
the restocking of inventories. This $10 million loan was refinanced, as
discussed below.

On April 8, 1997, first day orders granting the Company authority to pay
employees, honor customer practices and take certain other actions which assist
business operations in Chapter 11 were entered by the Court. Pursuant to interim
financing orders entered by the Court on April 9 and 10, 1997, Congress,
Grossman's principal pre-bankruptcy revolving credit lender, continued to extend
credit on essentially pre-bankruptcy terms under a revolving loan facility. In
addition GDI made available up to $11 million in overadvances, of which the 
Company had drawn approximately $6 million as of June 30, 1997.








                                     8


<PAGE>   9






NOTE 2 - REFINANCING AND PROJECTED REORGANIZATION (CONTINUED)
-------------------------------------------------------------

On April 30, 1997, GDI purchased the Congress loan and collateral position,
subject to a $1 million senior lien on inventory and receivables retained by
Congress, related to a termination fee in dispute. Congress also received a
release from the Company as part of the assignment of its loans. The loan and
security agreement was amended and restated, and under the terms of the final
amended DIP (Debtor in Possession)financing facility from GDI, availability is
calculated on a borrowing base of 60% of eligible inventory plus 80% of eligible
accounts receivable. There is also an available overadvance above this borrowing
base of $11 million, which is currently subject to a $1 million reserve pending
resolution of the disputed Congress termination fee. The interest rate for the
DIP facility is prime plus 1.0% and the maximum amount which can be borrowed is
$50 million (or, if less, the sum of the borrowing base and the overadvance).
This GDI DIP financing facility is in addition to the $5.99 million of
pre-petition real estate loans held by GDI which was paid down to $2.16 million
in the second quarter. See Note 5 for outstanding long term indebtedness as of
June 30, 1997.

Both the final DIP financing facility and the assignment of the loan from
Congress to GDI were approved by the Court on April 30, 1997.


NOTE 3 - 1996 STORE CLOSINGS
----------------------------

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.

NOTE 4 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
-------------------------------------------------

Accounts payable and accrued liabilities consist of the following (in
thousands):
                                     June 30,    December 31,   June 30,
                                       1997          1996         1996
                                     --------    ------------   --------

Accounts payable                      $ 5,092       $37,856      $42,515
Accrued salaries, wages,
 commissions and related taxes          2,529         2,857        2,976
Accrued income and franchise taxes        303           245          325
Accrued taxes other than income
 and franchise                          2,677         3,218        3,171
Accrued store closing costs             6,350         4,322        5,758
Accrued insurance                       5,663         7,403       11,209
Other accrued liabilities               3,016         4,328        5,490
                                      -------       -------      -------
                                      $25,630       $60,229      $71,444
                                      =======       =======      =======

Accounts payable pre-petition         $41,175       $    --      $    --
                                      =======       =======      =======



                                     9


<PAGE>   10



NOTE 5 - LONG-TERM DEBT AND REVOLVING CREDIT AGREEMENT
------------------------------------------------------

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

<TABLE>
<CAPTION>
                                     June 30,   December 31,   June 30,
                                       1997         1996         1996
                                     --------   ------------  ---------

<S>                                   <C>          <C>          <C>    
Convertible notes payable, due
 April 1999                           $   --       $ 1,500      $ 2,500
Non-convertible notes payable,
 due April 1999                           --         2,971        2,700
Mortgage notes                          2,161        6,552       20,476
Other notes payable                       --           224          304
Capital lease obligations                 839        1,615        3,232
                                      -------      -------      -------
                                        3,000       12,862       29,212

Less current portion                    2,860       12,228        7,095
                                      -------      -------      -------
Long term debt                        $   140      $   634      $22,117
                                      =======      =======      =======

Pre-petition long term debt
 Convertible notes payable, due
  April 1999                          $ 1,500          --           --
 Non-convertible notes payable,
  due April 1999                        3,355          --           --
 Other                                    172
                                      -------      -------      -------
                                      $ 5,027          --           --
                                      =======      =======      =======
</TABLE>


In April 1997, the Company received a DIP financing facility from GDI, 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,
accounts receivable and other assets. The new agreement bears interest at 1.0%
over Prime Rate.

At June 30, 1997, cash borrowings under the Company's new DIP financing facility
totalled $32.4 million and outstanding standby letters of credit totalled $4.7
million. The maximum borrowings under this agreement during the six months ended
June 1997 was $37.2 million, including letters of credit of $4.7 million. The
weighted average annual interest rate on such borrowings in the first six months
of 1997 was 9.5%. At June 30, 1997, the DIP financing facility provided for
borrowings of up to $43.2 million.

Upon entering into the DIP financing facility, the Company's prior revolving
credit agreement with Congress was assigned to GDI. The maximum borrowings in
1997 under this agreement was $35.4 million, including letters of credit of $5.4
million. The maximum borrowings in 1996 under this agreement was $31.1 million,
including letters of credit of $8.8 million. The weighted average annual
interest rates on such borrowings in 1997 and 1996 were 10.3% and 11.1%,
respectively.

See Note 2 for discussion of restructuring of the loan and security agreement,
and subsequent termination and replacement of the agreement with
debtor-in-possession financing.


                                    10


<PAGE>   11



NOTE 6 - OTHER LIABILITIES
--------------------------

Other long-term liabilities consist of the following (in thousands):

                                     June 30,    December 31,   June 30,
                                       1997         1996          1996
                                     -------     ------------   -------- 
Accrued insurance claims              $7,546        $6,129        $6,129
Accrued store closing costs              768           768         1,855
Other accrued liabilities                859           344           406
                                      ------        ------        ------
                                      $9,173        $7,241        $8,390
                                      ======        ======        ======



NOTE 7 - EARNINGS PER SHARE
---------------------------

In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("FAS 128"), which
is required to be adopted in the fourth quarter of 1997. At that time, the
Company will be required to change the method currently used to compute earnings
per share ("EPS") and to restate all prior periods. FAS 128 simplifies the
previous standard for computing EPS and replaces the presentation of primary and
fully diluted EPS with the presentation of basic and diluted EPS. The basic EPS
calculation will not include the dilutive effects of stock options, previously
included in the determination of primary EPS. As a result, in profitable periods
the Company's basic EPS calculation will exceed primary EPS. The calculation of
diluted EPS will not differ materially from fully diluted EPS. The differences
between the FAS 128 calculations, as compared to primary and fully diluted EPS,
for the second quarters of 1996 and 1997 are not material.























                                    11


<PAGE>   12






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

FINANCIAL CONDITION
-------------------

JUNE 30, 1997 COMPARED WITH DECEMBER 31, 1996
---------------------------------------------

INTRODUCTION

This discussion should be read in conjunction with the financial statements
contained in Item 1 hereof, and the consolidated financial statements, related
notes and Management's Discussion and Analysis of Financial Condition and
Results of Operations contained in the Annual Report on Form 10-K for the year
ended December 31, 1996.

PETITION FOR RELIEF UNDER CHAPTER 11

On April 7, 1997 (the "Petition Date"), the Company and two of its wholly owned
affiliates, GRS Holding Company, Inc. and GRS Realty Company, Inc., filed
Chapter 11 petitions for reorganization under Title 11 of the United States Code
("Chapter 11"). The Company is presently operating its business as a
debtor-in-possession, subject to the jurisdiction of the United States
Bankruptcy Court for the District of Delaware (the "Court"). The Company will
continue to operate its business as a debtor-in-possession while pursuing a
reorganization plan to restructure operations and the Company's capitalization.
As a debtor-in-possession in Chapter 11, the Company may not engage in
transactions outside of the ordinary course of business, without the approval,
after notice and hearing, of the Court.

The Chapter 11 filing results in an automatic stay of the commencement or
prosecution of claims against the Company that arose before the Petition Date.
Until a reorganization plan is confirmed by the Court, payments of pre-petition
liabilities will be limited to those payments approved by the Court. As a result
of the filing, the Company may sell or otherwise realize assets and liabilities
for amounts other than those reflected in the financial statements. In addition,
a plan of reorganization could materially change the amounts currently recorded
in the financial statements. The financial statements do not include any
adjustments to reflect the possible future effects of the recoverability and
classification of assets, the amounts and classification of liabilities which
may be allowed in the reorganization plan, or the ultimate capitalization of the
Company.

In each of the past four years, the Company has downsized its operations and
closed stores. Net losses were reported in each of these years and significant
operating losses were reported in both 1995 and 1996. The largest group of store
closings occurred in March 1996 when the Company closed its 60 store Grossman's
Division. Inventory shortages were experienced in all divisions prior to and
shortly after these store closings, and sales results following the closure of
the Grossman's Division were adversely affected through the remainder of 1996.
During early January 1997, limited availability under the Company's revolving
credit agreement, combined with operating deficits, resulted in an inability to
meet obligations.



                                    12
<PAGE>   13
JUNE 30, 1977 COMPARED WITH DECEMBER 31, 1996 (CONTINUED)
---------------------------------------------------------

On January 22, 1997, the Company announced that it was experiencing a severe
liquidity shortage. The Company also announced that it was exploring all
available options, including seeking protection from creditors under Chapter 11
of the U.S. Bankruptcy Code. For a period of approximately six weeks, during
which the Company sought, negotiated and obtained interim financing, almost no
inventory was received from suppliers.

On March 4, 1997, the Company announced an agreement with GDI Company, Inc.
("GDI"), a subsidiary of JELD-WEN, pursuant to which GDI purchased the $4
million convertible note payable by GRS Realty Company, Inc. ("GRS"), to
Combined Investors LLP, an affiliate of Gordon Brothers Partners Realty, Inc.
Following the purchase, $1.1 million of segregated cash collateral from the sale
of real estate was released to the Company. The funds received by the Company
also included $1.99 million pursuant to a note secured by three parcels of real
estate of GRS Realty Company, Inc., previously pledged to secure the $4 million
note.

Following the loan from GDI Company, Inc., Congress Financial Corporation
("Congress"), Grossman's principal pre-bankruptcy revolving credit lender,
amended its credit agreement with the Company and provided the Company an
additional $10 million, guaranteed and supported by a stand-by letter of credit
obtained by an affiliate of JELD-WEN in favor of Congress and $5 million of real
estate previously pledged to secure the $4 million note. The total $13.1 million
of proceeds received were used for essential expenses and the restocking of
inventories. This $10 million loan was refinanced, as discussed below.

Funding levels under the interim financing provided by GDI and Congress did not
allow for the purchase of inventory sufficient to restock the Company's stores.

Pursuant to interim financing orders entered by the Court on April 9 and 10,
1997, Congress continued to extend credit on essentially pre-bankruptcy terms
under a revolving loan facility, and GDI made available up to $11 million in
overadvances of which the Company drew approximately $6 million as of April 30,
1997.

On April 30, 1997, GDI purchased the Congress loan and collateral position,
subject to a $1 million senior lien on inventory and receivables retained by
Congress, related to a termination fee in dispute. Congress also received a
release from the Company as part of the assignment of its loans. The loan and
security agreement was amended and restated, and under the terms of the final
amended DIP financing facility from GDI, availability is calculated on a
borrowing base of 60% of eligible inventory plus 80% of eligible accounts
receivable. There is also an available overadvance above this borrowing base of
$11 million, which is currently subject to a $1 million reserve pending
resolution of the disputed Congress termination fee. The interest rate for the
DIP financing facility is prime plus 1.0% and the maximum amount which can be
borrowed is $50 million (the sum of the borrowing base and the overadvance, if
less). This GDI DIP financing facility is in addition to the $5.99 million of
pre-petition real estate loans held by GDI which was paid down to $2.16 million
in the second quarter.





                                    13
<PAGE>   14


FINANCIAL CONDITION
-------------------

JUNE 30, 1997 COMPARED WITH DECEMBER 31, 1996 (CONTINUED)
---------------------------------------------------------

Both the final DIP financing facility and the assignment of the loan from
Congress to GDI were approved by the Court on April 30, 1997. The DIP financing
has allowed for the stores to be fully restocked during the second quarter. At
June 30, 1997 cash borrowings under the Company's new DIP financing facility
totalled $32.4 million and outstanding standby letters of credit totalled $4.7
million. At that date the DIP financing facility provided for borrowings/
letters of credit up to $43.2 million. In August 1997, the Company has begun to 
experience cash shortages. The shortage is primarily due to  unavailability of
vendor credit and larger than anticipated payments in advance of recipt and
inclusion of inventory in the borrowing base. GDI has agreed to a temporary
loan of up to $2 million, provided in transit inventory is at least $5 million.
The Company completed formulating its revised 1997 business plan during June.
The Company is formulating a proposed plan of reorganization, which is not
currently expected to provide a recovery for stockholders.

The Company and the Subsidiaries filed a motion on May 6, 1997 which asks the
Court to establish procedures requiring prior written notice to the Company by
any party or group proposing (i) to acquire shares of Company's stock resulting
in a more than 1,350,000 share block, or (ii) to acquire prepetition unsecured
claims against the Company or its subsidiaries resulting in a more than $6
million block of such claims. The procedures also would require such notice by
any party or group proposing to acquire such stock or claims if such party or
group hold or are acquiring both stock and claims. If the Company objects during
a 30 day period after such notice, the transaction would become effective only
upon Court approval. The Company believes that this relief is necessary to
protect the Net Operating Loss Carryforwards (approximately $300 million at
December 31, 1996), which it believes will be critical to its ability to
reorganize. An order granting interim approval was signed on May 14, 1997 by the
Court and will remain in effect until a final hearing date currently scheduled
for September 1997.


OTHER FINANCIAL CONDITION CHANGES

Inventory levels increased by $3.3 million during the period as the stores were
restocked to support seasonal demand.

Real property held for sale declined by $7.9 million during the quarter,
reflecting the continued sale of surplus properties.

Pre-petition accounts payable are subject to compromise, and any payment must be
approved by the Bankruptcy Court.

One Bargain Outlet store opened during the quarter, with limited capital
investment, and one Bargain Outlet store was closed.






                                    14


<PAGE>   15

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

SIX MONTHS ENDED JUNE 30, 1997 COMPARED WITH SIX MONTHS ENDED
-------------------------------------------------------------
JUNE 30, 1996
-------------

Results of operations during the six months ended June 30, 1996 include the
results of the Grossman's Division, whose operations terminated on March 31,
1996.

The Company's first quarter historically has been a period of low sales activity
with resultant losses, as fewer home improvement projects and construction
activities in the Company's markets are undertaken during the winter months.
Sales from ongoing operations during the first six months of 1997 were adversely
affected by out-of-stock situations which did not improve until late in the
period. Sales results in 1996 were also affected by inventory supply problems
encountered in advance of the closing of the Grossman's stores, but not to the
extent that 1997 sales were affected.

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

SIX MONTHS ENDED JUNE 30, 1997 COMPARED WITH SIX MONTHS ENDED
-------------------------------------------------------------
JUNE 30, 1996 (CONTINUED)
-------------------------

The following table shows comparative sales results by division and store type
during each quarter and for the total six months (dollars in millions):

<TABLE>
<CAPTION>
                              Three Months         Three Months        Six Months
                               Ended March          Ended June         Ended June
                             ----------------   -----------------  -----------------
                              1997      1996      1997       1996     1997     1996
                              ----      ----      ----       ----     ----     ----
<S>                       <C>       <C>       <C>       <C>       <C>       <C>     
SALES                                                          
Ongoing Operations
 Contractors' Warehouse   $   38.0  $   54.5  $   39.8  $   70.2  $   77.8  $  124.7
 Bargain Outlet               11.4      10.5      15.9      17.5      27.3      28.0
                          --------  --------  --------  --------  --------  --------
   Total Ongoing
    Operations                49.4      65.0      55.7      87.7     105.1     152.7
Closed Stores
 Grossman's                   --        48.0      --        --        --        48.0
                          --------  --------  --------  --------  --------  --------
Total Grossman's Inc.     $   49.4  $  113.0  $   55.7  $   87.7  $  105.1  $  200.7
                          ========  ========  ========  ========  ========  ========

% OF TOTAL SALES
Ongoing Operations
 Contractors' Warehouse       76.9%     48.2%     71.5%     80.0%     74.0%     62.1%
 Bargain Outlet               23.1       9.3      28.5      20.0      26.0      14.0
                          --------  --------  --------  --------  --------  --------
   Total Ongoing
    Operations               100.0      57.5     100.0     100.0     100.0      76.1
Closed Stores
 Grossman's                   --        42.5      --        --        --        23.9
                          --------  --------  --------  --------  --------  --------
Total Grossman's Inc.        100.0%    100.0%    100.0%    100.0%    100.0%    100.0%
                          ========  ========  ========  ========  ========  ========
</TABLE>




                                     15




<PAGE>   16



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

SIX MONTHS ENDED JUNE 30, 1997 COMPARED WITH SIX MONTHS ENDED
-------------------------------------------------------------
JUNE 30, 1996 (CONTINUED)
-------------------------

(TABLE CONTINUED)
<TABLE>
<CAPTION>
                               Three Months         Three Months          Six Months
                                Ended March          Ended June           Ended June
                              -------------        -------------         -------------
                               1997    1996         1997    1996          1997    1996
                               ----    ----         ----    ----          ----    ----
 <S>                         <C>          <C>      <C>          <C>      <C>          <C>  
SALES % INCREASE (DECREASE)
 VERSUS PRIOR YEAR
Ongoing Operations
 Contractors' Warehouse     (30.3)%      6.7%     (43.3)%      7.5 %    (37.6)%      7.1 %
 Bargain Outlet               8.6        1.9       (9.1)      19.9       (2.5)      12.4
                            ------     -----     -------     ------     ------     ------
   Total Ongoing                                                                  
    Operations              (24.0)       5.9      (36.5)       9.8      (31.2)       8.1
Closed Stores                                                                     
 Grossman's                (100.0)     (26.6)        NA     (100.0)    (100.0)     (73.3)
                           -------     ------     ------     ------     ------     ------
Total Grossman's Inc.       (56.3)%    (10.9)%    (36.5)%    (54.8)%    (47.6)%    (37.4)%
                           =======     ======    =======     ======     ======     ======
                                                                                  
COMPARABLE STORE SALES %                                                          
 INCREASE (DECREASE)                                                              
 VERSUS PRIOR YEAR                                                                
Ongoing Operations                                                                
 Contractors' Warehouse     (32.8)%     (3.7)%    (41.6)%     (8.4)%    (37.7)%     (6.4)%
 Bargain Outlet              (9.8)     (12.7)     (22.7)      (2.1)     (18.0)      (7.2)
                            ------     ------    -------     ------     ------     ------
   Total Ongoing                                                                  
    Operations              (29.0)%     (5.2)     (37.7)      (7.3)     (34.0)      (6.5)
Closed Stores                                                                     
 Grossman's                    NA         NA         NA         NA         NA         NA
                            ------     ------     ------     ------     ------     ------
Total Grossman's Inc.       (29.0)%     (5.2)%    (37.7)%     (7.3)%    (34.0)%     (6.5)%
                            ======     ======     ======     ======     ======     ======
                                                                                  
TOTAL NUMBER OF STORES                                                            
Ongoing Operations                                                                
 Contractors' Warehouse        15         15                               15         16
 Bargain Outlet                28         24                               28         24
Closed Stores                                                                     
 Grossman's                     -          -                                -          -
                            ------     ------                           ------     ------
Total Number of Stores         43         39                               43         40
                            ======     ======                           ======     ======
                                                                                  
</TABLE>


                                    16
<PAGE>   17
SIX MONTHS ENDED JUNE 30, 1997 COMPARED WITH SIX MONTHS ENDED
-------------------------------------------------------------
JUNE 30, 1996 (CONTINUED)
-------------------------

Sales results also were affected by store openings and closings. The 1997
results include the results of five Bargain Outlet stores opened and one store
closed subsequent to the second quarter of 1996. Contractors' Warehouse results
reflect one Midwest store opened in May 1996 and the December 1996 closing of
the Reno, Nevada store.

Gross profit declined by $23.7 million, reflecting the sales decline and a
decrease in gross margin from 23.3% to 22.0%. The decrease in gross margin was
due principally both to the closing of the Grossman's stores, which operated at
higher margin rates, and a decline within Contractors' Warehouse stores, due to
the sales mix experienced as inventories became depleted.

Selling and administrative expenses declined by $21.7 million, reflecting the
Grossman's store closings, but experienced a large increase as a percent of
sales, from 30.4% in 1996 to 37.3% in 1997, due to the extremely low sales
volume.

Depreciation and amortization declined from $2.8 million in 1996 to $2.0 million
in 1997, reflecting the downsizing. Depreciation on all Grossman's Division
stores ceased after March 1996.

Store closing expense in 1996 totalled $40.2 million, related to the Grossman's
store closings.

Interest expense declined from $2.6 million in 1996 to $1.4 million in 1997,
reflecting lower revolving credit borrowings, lower levels of capital lease
financing due to store closings, and savings related to long-term debt paid with
proceeds from property sales.

Other income declined by $753 thousand, principally due to lower volume of tool
rentals in Contractors' Warehouse stores.

The Company's Mexican joint venture, for which the Company's share of net loss
during the six months ended June 30, 1996 was $316 thousand, was terminated in
December 1996.










                                    17
<PAGE>   18
THREE MONTHS ENDED JUNE 30, 1997 COMPARED WITH THREE MONTHS ENDED
------------------------------------------------------------------
JUNE 30, 1996
-------------

A net loss of $7.6 million for the second quarter of 1997 compared with a net
loss of $2.9 million in 1996. The lingering effects of first quarter inventory
supply problems and out-of-stock situations affected sales and results of
operations throughout the second quarter, although to a lesser extent as the
quarter progressed.

Gross profit declined by $7.6 million, as a result of decreased sales. Gross
margin was 23.8% for the second quarter of 1997, the same as the second quarter
1996.

Selling and administrative expenses declined by $4.5 million from 1996 to 1997,
but increased as a percent of sales from 26.1% in 1996 to 33.0% in 1997. Selling
and administrative expenses, the largest component of which is payroll, are
expected to remain at higher than historic percentages of sales during the
Company's restructuring.

Store preopening expense totalled $64 thousand for the period compared with $395
thousand in 1996, reflecting fewer store openings.

Interest expense declined from $1.0 million in 1996 to $700 thousand, 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 $33 thousand due primarily to an increase in tool
rental income in both new and existing Contractors' Warehouse stores.

Reorganization costs of $2.3 million were incurred during the second quarter of
1997 and are anticipated to continue until the Company is reorganized.

Statements contained in this Management's Discussion and Analysis of Financial
Condition and Results of Operations that are not based on historical fact are
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Important factors, beyond the Company's control,
that could cause actual results to differ materially from those in the
forward-looking statements include, but are not limited to, the need for
Bankruptcy Court approvals, adequacy and absence of default under the DIP
facility, competition, stability of customer demand, and the sufficiency of
capital resources. The Company undertakes no obligation to publicly release
revisions to these forward-looking statements to reflect events or circumstances
which occur between filing dates for the Company's reports under the Security
Exchange Act of 1934.









                                       18

<PAGE>   19



PART II - OTHER INFORMATION
---------------------------

ITEM 1. LEGAL PROCEEDINGS

     The Company previously reported on its Form 8-K dated April 22, 1997, the
filing on April 7, 1997 by the Company and two of its subsidiaries (the
"Subsidiaries") of voluntary Chapter 11 bankruptcy petitions in the United
States Bankruptcy Court for the District of Delaware (the "Court") under Title
11 of the United States Code. Due to its pre-petition liquidity crisis, the
Debtors were past due on significant amounts of trade and other unsecured
obligations. In the Company's Chapter 11 petition, it listed $74,177,000 of
unsecured debt. As a general matter, such debt will only be paid when and to the
extent provided in a confirmed Chapter 11 plan.

     The Company files monthly operating reports with the Court; copies of such
reports are available from the Clerk of the Court.

     The Company and the Subsidiaries filed a motion on May 6, 1997 which asks
the Court to establish procedures requiring prior written notice to the Company
by any party or group proposing to (i) acquire shares of Company's stock
resulting in a more than 1,350,000 share block, or (ii) acquire prepetition
unsecured claims against the Company or those subsidiaries resulting in a more
than $6 million block of such claims. The procedures would also require such
notice by any party or group proposing to acquire such stock or claims if such
party or group hold or are acquiring both stock and claims. If the Company
objects during a 30 day period after such notice, the transaction would become
effective only upon Court approval. The Company believes that this relief is
necessary to protect the Net Operating Loss Carryforwards (approximately $300
million at December 31, 1996), which it believes will be critical to its ability
to reorganize. An order granting interim approval was signed on May 14, 1997 by
the Court and will remain in effect until a final hearing date currently
scheduled for September 1997.

ITEM 5. OTHER INFORMATION

     In addition to the previously announced engagement of Thomas E. Arnold,
Jr., as President and Chief Executive Officer on an interim basis and Dirck
Iacobelli as Acting Executive Vice President and Chief Financial Officer, the
following additional changes have occurred.

     (a) Steven L. Shapiro, Vice President - Controller of the Company resigned
         effective June 30, 1997 and his responsibilities have been reassigned.

     (b) Charles O. Hofeller, Vice President - Real Estate left the Company
         effective July 25, 1997, as his position was eliminated.

     On July 23, 1997, the Company's common stock was delisted for the NASDAQ
National Market.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

        (a) EXHIBITS
            4(s)           Amended and Restated Loan and Security Agreement
                           dated April 30, 1997 among GDI Company, Inc., and
                           Grossman's Inc., GRS Holding Company, Inc., and GRS
                           Realty Company, Inc., filed herewith.



                                  19

<PAGE>   20





            10(iii)(o)-3   Second Amended and Restated Agreement, dated
                           April 3, 1997 between the Company and Robert
                           K. Swanson, Chairman of the Board of Directors
                           of the Company, filed herewith.

            10(iii)(o)-4   Special Assignment Agreement, Dated April 17, 1997
                           between the Company and Thomas E. Arnold, Jr., member
                           of the Board of Directors of the Company, filed
                           herewith.

            10(iii)(0)-5   Special Assignment Agreement, Dated April 17,
                           1997 between the Company and Dirck K. Iacobelli,
                           as Interim Executive Vice President and Interim
                           Chief Financial Officer of the Company, filed
                           herewith.

            10(iii)(o)-6   Employment Agreement, Dated June 1, 1997 between the
                           Company and Thomas A. Ford, filed herewith.

            11(a)          Statement re computation of earnings per share,
                           filed herewith.

        (b) REPORTS ON FORM 8-K

            The Company filed forms 8-K with the Security and Exchange
            Commission on April 22, 1997 and July 29, 1997, reporting on the
            filing by the Company and certain subsidiaries for protection from
            creditors under Chapter 11 of the U.S. Bankruptcy Code and the
            delisting by NASDAQ of the Company's common stock, respectively,
            incorporated herein by reference.




                                    20
<PAGE>   21
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/ Arthur S. Ryan
                                    --------------------------------------
                                                Arthur S. Ryan
                                         Vice President and Treasurer
                                          (Chief Accounting Officer)








DATE:  August 14, 1997











                                    21