SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                   ----------

                                   FORM 10-KSB

(Mark One)

[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934 (Fee required)


                   For the fiscal year ended December 31, 1996


[ ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934 (No fee required)

             For the transition period from __________ to __________

                          Commission file number l-9224


                              HELMSTAR GROUP, INC.
--------------------------------------------------------------------------------
                 (Name of Small Business Issuer in Its Charter)

                DELAWARE                               13-2689850
--------------------------------------------------------------------------------
      (State or Other Jurisdiction of               (I.R.S. Employer
       Incorporation or Organization)              Identification No.)


2 World Trade Center, Suite 2112, New York, N.Y.              10048
--------------------------------------------------------------------------------
     (Address of Principal Executive Offices)              (Zip Code)

                                  212-775-0400
--------------------------------------------------------------------------------
                (Issuer's Telephone Number, including Area Code)

         Securities registered under Section 12(b) of the Exchange Act:

                                                    Name of Each Exchange
          Title of Each Class                        on Which Registered
          -------------------                       -----------------------
    Common stock - par value $.10                   American Stock Exchange

         Securities registered under Section 12(g) of the Exchange Act:

                                   None
                             (Title of Class)

         Check whether the issuer; (1) filed all reports required to be filed by
Section 13 or 15(d) of the  Exchange  Act during the past 12 months (or for such
shorter period that the  registrant was required to file such reports),  and (2)
has been subject to such filing requirements for the past 90 days. Yes [X] No[ ]

                           (Cover page 1 of 2 pages)
<PAGE>
         Check if there is no  disclosure  of  delinquent  filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure will
be contained,  to the best of  registrant's  knowledge,  in definitive  proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]

         Issuer's   revenues  for  1996,  its  most  recent  fiscal  year,  were
$3,489,615.

         As of February 28,  1997,  the  aggregate  market value of voting stock
held by non-affiliates of the Issuer was approximately $2,536,615.

         The number of shares  outstanding  of each of the  issuer's  classes of
common equity, as of the latest practicable date.

           Class                    Outstanding at February 28, 1997

Common stock - par value $.10                5,536,373 shares
-----------------------------                ----------------

                DOCUMENTS INCORPORATED BY REFERENCE

         Part  III of this  Form  l0-KSB  incorporates  by  reference  from  the
issuer's definitive proxy statement for the annual meeting of stockholders to be
held on June 4, l997.

                            (Cover page 2 of 2 pages)
<PAGE>
                                     PART I

Item l.  Description of Business.

                  Background and History

                           Helmstar   Group,   Inc.,   ("Group"),   through  its
                  subsidiaries (collectively referred to as the "Company" unless
                  the  context  requires  otherwise),  is  engaged  in  merchant
                  banking and mortgage banking.

                  Merchant Banking - General

                  Joint Venture Criteria

                           Since  1988,  the  Company  has  engaged in  merchant
                  banking  activities  primarily  concentrating  on real  estate
                  projects  and  real  estate-related  services  companies.  The
                  Company  seeks  projects  that offer strong  upside  potential
                  because of high short-term risk,  albeit  manageable risk, and
                  financial   leverage.   Although   real  estate   development,
                  rehabilitation  or  "value-added"  transactions are of primary
                  interest,  the Company will consider most  industries with the
                  exception of those requiring a highly  specialized  scientific
                  analysis.

                           The   Company's   exacting   standards  of  selecting
                  ventures and  co-venturers  are directed toward  middle-market
                  oriented   activities.   Co-venturers   must   be   thoroughly
                  experienced  and  financially  stable,  as  well as  having  a
                  demonstrated track record in the particular business activity.
                  Talented  co-venturers  are expected to execute each venture's
                  day-to-day  management  plan  developed  through the  combined
                  efforts of the Company and the co-venturers.

                           The Company does not intend to take excessive risk in
                  its joint venture  activities  either through a single venture
                  or  a  series  of  interdependent  ventures  which  result  in
                  excessive  risk  when  taken  in the  aggregate.  The  Company
                  intends to  consider  the risks of any  potential  undertaking
                  independently as well as how the risks of the proposed venture
                  impact on the  Company  in light of its other  ventures.  This
                  risk evaluation is based on a facts and circumstances analysis
                  at the time the  feasibility  of a potential  joint venture is
                  being evaluated. Facts and circumstances are subject to change
                  over time.  Accordingly,  the Company has established flexible
                  criteria in selecting its venture  activities to meet changing
                  market conditions.

                           The Company plans to limit its equity infusion in any
                  single  transaction  to a  maximum  of  $3  million.  Also,  a
                  predetermined  exit strategy is paramount.  The holding period
                  for  a   particular   venture  will  be  based  on  facts  and
                  circumstances,  including  maximizing the Company's  potential
                  return  and  other  opportunities  available  at the time of a
                  possible disposition.
<PAGE>
                           Beginning in 1990,  drawing on its experience in real
                  estate project  finance,  the Company began to offer financial
                  consulting  services to clients on a fee basis.  This  permits
                  the Company to increase its revenue by utilizing  its merchant
                  banking expertise  without  deploying a significant  amount of
                  capital.  The  Company's  primary  focus in this area has been
                  assisting  clients in realizing  lower cost of capital through
                  creative financial  structuring.  This business is transaction
                  oriented,  and potential  revenue therefrom is subject to wide
                  variation. During 1996, 1995, 1994, and 1993 approximately 3%,
                  12%, 20%, and 8% of the Company's  total revenues in each year
                  were  realized  in   connection   with   providing   financial
                  consulting  services  to a  single  financial  institution  in
                  several transactions.

                           The joint ventures in which the Company  participates
                  are described below:

                           1.  Shopping Center - Blowing Rock, N.C.

                           In August 1988, the Company, through its wholly-owned
                  subsidiary,  Burrows, Hayes Company, Inc. ("Burrows"),  funded
                  $1,450,000 for a 50% voting interest and a majority  financial
                  interest in a general partnership which in turn acquired a 50%
                  voting interest and a majority  financial interest in a second
                  general   partnership   that  developed  and  now  operates  a
                  manufacturers outlet center consisting of approximately 98,000
                  net rentable square feet in Blowing Rock, North Carolina.

                           In March 1992,  Burrows purchased the entire interest
                  of the other  partner  in the first  general  partnership  for
                  $245,000.  Accordingly,  the first  partnership was dissolved,
                  and Burrows now is a partner in the project partnership.

                           This project  opened in May 1989 and is currently 94%
                  leased.  Discussions are underway with prospective  tenants to
                  lease the vacant space in the near  future.  A small amount of
                  surplus land remains for potential  development in the future.
                  An affiliate of Burrows'  co-venturer is  responsible  for the
                  day-to-day property management function. This entity also acts
                  as leasing broker for the  partnership.  The partnership  does
                  not have any employees.

                           2.  Shopping Center - Nags Head, N.C.

                           In   December   1989,   the   Company   through   its
                  wholly-owned subsidiary,  Parker, Reld & Co., Inc. ("Parker"),
                  acquired  a  50%  voting  interest  and a  majority  financial
                  interest  in a  general  partnership  formed  to  develop  and
                  operate a  manufacturers  outlet shopping center in Nags Head,
                  North   Carolina.   Parker   funded   $1,500,000   toward  the
                  development of this project consisting of approximately 82,500
                  net rentable square feet. An affiliate of Parker's co-venturer
                  is  responsible   for  the  day-to-day   property   management
                  function.  This  entity  also acts as  leasing  broker for the
                  partnership.  It  also  provides  the  same  services  for the
                  shopping center in Blowing Rock, North Carolina.
<PAGE>
                           Located in an  oceanside  resort,  the center  opened
                  during the 1990 summer  season.  Currently,  it is 97% leased.
                  Discussions are underway with prospective tenants to lease the
                  vacant space in the near future. The partnership does not have
                  any employees.

                           Real Estate Trends

                           Occupancy averaged 94.43% at the manufacturers outlet
                  center  in  Blowing  Rock and  96.72%  at the one in Nags Head
                  during 1996. Retail sales were higher than 1995 levels at both
                  centers.  At Blowing  Rock,  retail  sales per square foot for
                  tenants  who had been open for all of 1996 and 1995  increased
                  to $264 from $260.  Aggregate retail sales per square foot for
                  the entire project  decreased to $247 from $250. At Nags Head,
                  retail sales per square foot for tenants who had been open for
                  all of 1996 and 1995  increased  to $235 from $221.  Aggregate
                  retail sales per square foot for the entire project  increased
                  to $226 from $214.  Average annual base rent  (recomputed on a
                  monthly basis) also  increased  from $11.97  (January 1996) to
                  $12.93  (December  1996) per square  foot at Blowing  Rock and
                  $12.00  (January  1996) to $12.35  (December  1996) per square
                  foot at Nags Head, as tenants  renewed  expiring leases and/or
                  new tenants paid higher rates.  Percentage rent based on sales
                  above  specified  targets  totalled  $88,282  for 1996  versus
                  $76,406  for 1995 at Blowing  Rock and $31,823 for 1996 versus
                  $36,688  for  1995  at  Nags  Head.   Specified   targets  for
                  determining  percentage  rent  typically  rise when a tenant's
                  base rent increases after exercising a renewal option.

                           Mortgage Banking

                           On  June  30,  1991,  McAdam,   Taylor  &  Co.,  Inc.
                  ("McAdam"), a wholly-owned subsidiary of the Company, acquired
                  all  of  the  stock  of  Citizens   Mortgage  Service  Company
                  ("Citizens")  for  approximately  $1,585,000  in cash. At such
                  time, Citizens was primarily engaged in servicing  residential
                  mortgage loans.  During 1992, Citizens expanded its activities
                  to include  mortgage loan  origination  and marketing  certain
                  financial  products  to  mortgagors,  the  loans  of whom  are
                  serviced by Citizens.

                           Citizens focuses its loan  origination  activities on
                  first  mortgage loans on residences  containing  four or fewer
                  dwelling  units. It is approved to originate and service loans
                  for the Federal National Mortgage Association ("FNMA") and the
                  Federal Home Loan Mortgage Corporation ("FHLMC").  It also can
                  originate  and service  loans  insured by the Federal  Housing
                  Administration  ("FHA") and loans partially  guaranteed by the
                  Veterans  Administration  ("VA").  Citizens is  authorized  to
                  issue and service  mortgage-backed  securities  insured by the
                  Government  National  Mortgage  Association  ("GNMA").  It has
                  mortgage banking licenses for Pennsylvania, Delaware, Maryland
                  and  New  Jersey.  Citizens  may  seek to  procure  additional
                  licenses in the future.  Citizens  sold most of its  servicing
                  portfolio in late-1995 and the balance in mid-1996. Currently,
                  Citizens originates loans and only services those loans during
                  the period  between  settlement  with the borrower and sale to
                  the investor.
<PAGE>
                           Mortgage Loan Origination

                           The Company's  primary  objective,  subsequent to the
                  sale of its mortgage servicing  portfolio,  has been to expand
                  loan  origination  activities by increasing the number of loan
                  originators and by expanding the product  offerings to include
                  a  broader  array  of  conforming   product  and  by  offering
                  "non-conforming"  product.  "Non-conforming"  product is being
                  marketed   through  an   "Alternative   Funding"  group  which
                  specializes in hard to place loans.

                           Citizens  closed  mortgage  loans  having   principal
                  balances of $59,079,953; $38,916,362; $31,581,135; $49,530,475
                  and $17,128,250 during 1996, 1995, 1994, 1993 and 1992. Retail
                  originations  were  $55,859,353;   $28,433,496;   $17,977,540;
                  $30,466,985;  and  $17,128,250 in 1996,  1995,  1994, 1993 and
                  1992. In 1992,  all  originations  were done on a retail basis
                  from a single  office in suburban  Philadelphia.  Since it was
                  successful  in  attracting  business  from nearby parts of New
                  Jersey and  Delaware,  during  1993,  Citizens  opened  retail
                  origination  offices in both New Jersey and  Delaware.  Due to
                  increased  competition in the New Jersey and Delaware  markets
                  in  1996,   Citizens   consolidated   its  retail  offices  in
                  operations   in  both   states   into   the  Ft.   Washington,
                  Pennsylvania office. The Company maintains a small origination
                  office in New Jersey. By consolidating  these offices into the
                  main office in Ft.  Washington,  the Company reduced operating
                  costs by over $800,000 per year.

                           In 1996,  1995,  1994,  and 1993,  loan  originations
                  totalling   $3,220,600;    $10,482,865;    $13,603,595;    and
                  $19,063,490  were  originated  through   correspondents  on  a
                  "wholesale" basis.

                           Citizens'   marketing  strategy  has  been  newspaper
                  advertising,  telemarketing,  and  referrals  by  real  estate
                  agents,  attorneys and  accountants.  Commission based account
                  executives typically visit a prospective applicant at the real
                  estate agent's office or in the applicant's home. Accordingly,
                  the  presence  and  size  of  Citizens   offices  are  not  an
                  impediment to  increasing  the volume of  originations  within
                  certain limits.  If market  conditions  justify,  Citizens may
                  open additional origination offices in the future.

                           Mortgage  loan   origination  is  a  highly  cyclical
                  business.  Many  mortgage  bankers incur high fixed charges by
                  maintaining  a network of  origination  offices in  geographic
                  markets. In good times, such companies are poised to capture a
                  solid share of the market.  In poor times,  however,  the high
                  fixed charges can cause severe cash flow squeezes.
<PAGE>
                           The Company recognizes the need for a local presence,
                  and has a network of independent  mortgage brokers and smaller
                  mortgage bankers to generate  mortgage loan  originations on a
                  "wholesale" basis. Through  correspondents,  Citizens receives
                  the benefits of a local  office  without  incurring  the fixed
                  overhead of developing  and  maintaining a branch  office.  In
                  1996,  the  emphasis  of the  Company's  wholesale  operations
                  shifted   from   the   conforming   loan   business   to   the
                  non-conforming  loan business.  Due to increased  competition,
                  the   Company   reevaluated   its   wholesale    correspondent
                  relationships and pricing and terminated those  correspondents
                  who were not generating quality production. In 1993, the first
                  year in which Citizens began a wholesale  business,  it had 17
                  correspondents;  in 1994 and 1995 it had 25;  and in 1996,  it
                  had 16.

                           "Wholesaling"  in effect  means  that  Citizens  will
                  commit in advance of  settlement  with a homeowner to purchase
                  loans from a  correspondent  that meet Citizens'  underwriting
                  standards. Citizens in turn commits to sell those loans in the
                  same manner as it sells loans originated on a "retail" basis.

                           Each  correspondent  must be "approved" by management
                  and  enter  into a formal  agreement  providing  indemnity  to
                  Citizens  in the  event of fraud or  misrepresentation  in the
                  application  and  underwriting  process.  Citizens will review
                  each loan prior to acceptance to ensure that it meets the same
                  quality standards and underwriting  criteria used in Citizens'
                  retail origination activities.

                           Citizens' loan  origination  production  consisted of
                  the following:
<TABLE>
<CAPTION>
                                1996             1995             1994             1993             1992
                                ----             ----              ----             ----            ----
<S>                         <C>              <C>              <C>              <C>              <C>

Conventional Loans

    Number of Loans ...             360              256              332              499              190
    Dollar Volume .....     $34,467,135      $27,128,418      $31,487,045      $48,330,475      $17,000,250
    Percent of Total
      Dollar Volume ...           58.34%           69.71%           99.70%           97.58%           99.25%

FHA Insured Loans

    Number of Loans ...             358              136                1               20                2
    Dollar Volume .....     $24,612,818      $11,787,944      $    94,090      $ 1,200,000      $   128,000
    Percent of Total
      Dollar Volume ...           41.66%           30.29%             .30%            2.42%             .75%

Total Loans

    Number of Loans ...             718              392              333              519              192
    Dollar Volume .....     $59,079,953      $38,916,362      $31,581,135      $49,530,475      $17,128,250
    Average Loan Amount     $    82,284      $    99,276      $    94,838      $    95,434      $    89,210

</TABLE>
<PAGE>
                           Adjustable rate mortgages  represented  approximately
                  21%, 18%, 19%, 3% and 6% of the  conventional  loan production
                  for 1996, 1995, 1994, 1993 and 1992, respectively.

                           Loan sales generally are made on a nonrecourse basis,
                  except for losses  arising  from certain  deficiencies  in the
                  underwriting  of the loan.  Citizens  would remain  liable for
                  such losses to an investor. Citizens' obligations with respect
                  to  foreclosure   losses  on  FHA  or  VA  loans  included  in
                  mortgage-backed  securities  pools  would  be the  same  as an
                  originator  which  sells such  loans or as a servicer  of such
                  loans, unless modified by the sales or servicing contract with
                  a party  financially  capable of  performing  any indemnity or
                  contribution requirements.

                           Citizens funds loan  production  with its own cash or
                  with  proceeds from various  credit and warehouse  facilities.
                  After a loan  closes,  it  generally  takes 7 days  until  all
                  documents are assembled, packaged and delivered to an investor
                  and 7 days  until  the  investor  pays for the  loan.  In some
                  instances,   Citizens  retains  any  interest  earned  on  the
                  mortgage  loan until the  investor  buys such loan.  Citizens'
                  interest  cost, in some cases,  is more than the rate realized
                  while   Citizens   earns   interest  on  the  mortgage   loan.
                  Oftentimes, interest rates vary between the time that Citizens
                  issues  a  commitment  to  make a  loan  to an  applicant  (or
                  purchases a loan at a set price from a correspondent)  and the
                  time at which payment is due from an investor.

                           Citizens  offers mortgage loan  applicants,  directly
                  through  its  retail  operation  and  indirectly  through  its
                  correspondents,  the option of fixing an interest  rate at any
                  time  prior  to  5  days  before  settlement.  Obviously,  all
                  applications  and  commitments  do not generate a closed loan,
                  and  Citizens  is exposed  to an  interest  rate  risk,  if it
                  commits to fund a mortgage  at a certain  rate and an investor
                  is only willing to buy the loan at a higher rate.  Application
                  fees, paid at the time of application,  and origination  fees,
                  paid at the time of an applicant's  acceptance of a commitment
                  or "financed" through a higher loan balance,  however,  offset
                  some  of  the   potential   loss.   In  the  case  of  certain
                  refinancings of loans on  owner-occupied  residences,  Federal
                  law requires  that a total refund of all fees be made,  if the
                  mortgagor  rescinds the transaction  within 3 business days of
                  closing.  Obviously,  no disbursement of loan proceeds is made
                  until the expiration of such period.

                           Citizens registers all production on a "best efforts"
                  delivery basis with an investor.  Accordingly, if a loan fails
                  to  close,  Citizens  does  not  have  any  obligation  to the
                  investor, and thus minimizes any interest rate risk.
<PAGE>
                           Mortgage Servicing

                           During  1996,   management   completed  its  exit  of
                  mortgage  servicing as a separate  activity,  with the sale of
                  the  remaining  servicing  portfolio  for  $172,500.  The sale
                  resulted  in  a  gain  of  approximately  $130,000.   Citizens
                  continues  to  service  mortgage  loans  for  a  brief  period
                  following the closing of a loan.  Servicing rights may be sold
                  to the investor who  purchases  the loan or to other  mortgage
                  servicers.

                           At  December   31,  1996,   the  mortgage   servicing
                  portfolio  amounted to $1,359,000 as compared with $22,625,000
                  at December 31, 1995.

                           The  following  table sets forth an  analysis  of the
                  carrying amount of the Company's  purchased mortgage servicing
                  rights:
<TABLE>
<CAPTION>

                                                        Year Ended December 31,
                                 1996           1995             1994            1993              1992
<S>                        <C>              <C>              <C>              <C>              <C>
Purchased Mortgage
Servicing Rights
Beginning Balance ....     $    46,886      $ 2,077,108      $ 2,632,657      $ 2,018,464      $ 1,284,806

Add:  Purchases ......            --             96,357          151,513        1,016,284        1,086,905

Less:  Sales .........         (42,365)      (1,765,218)        (227,121)            --               --

Less:  Post Closing
       Adjustments
       Relating to
       Original
       Acquisition and
       Bulk Purchases             --               --            (12,848)            --               --

       Amortization
       Expense .......          (4,521)        (361,361)        (467,093)        (402,091)        (353,247)
                           -----------      -----------      -----------      -----------      -----------

Ending Balance .......     $         0      $    46,886      $ 2,077,108      $ 2,632,657      $ 2,018,464
                           ===========      ===========      ===========      ===========      ===========

</TABLE>
<PAGE>
                  The table  set forth  below is an  analysis  of the  Company's
                  mortgage   servicing   portfolio   based  on  the  unamortized
                  principal  balance  of  all  loans  being  serviced.  "Runoff"
                  includes regular principal payments as well as prepayments for
                  any reason.
<TABLE>
<CAPTION>

                                               Year Ended December 31,
                          ---------------------------------------------------------------------

Dollars in Thousands          1996          1995          1994           1993           1992
                              ----          ----          ----           ----           ----

     Mortgage
Servicing Portfolio:
<S>                       <C>            <C>            <C>            <C>            <C>
Beginning Balance ...     $  22,625      $ 217,327      $ 263,089      $ 236,552      $ 205,447

Add:  Loan Production        59,080         38,916         31,581         49,530         17,128

      Bulk Servicing
      Acquired ......             0          9,274            845         69,616         84,450

Less: Servicing Sales       (79,169)      (215,690)       (32,809)        (4,127)        (1,324)

      Runoff ........        (1,177)       (27,202)       (45,379)       (88,482)       (69,149)
                          ---------      ---------      ---------      ---------      ---------

Ending Balance ......     $   1,359      $  22,625      $ 217,327      $ 263,089      $ 236,552
                          =========      =========      =========      =========      =========

</TABLE>

                           The remaining mortgage  servicing  portfolio consists
                  of servicing  rights for loans to be sold in the normal course
                  of  business,  usually  thirty  to sixty  days,  and  loans in
                  foreclosure. As of December 31, 1996, the principal balance of
                  loans in  foreclosure  is $291,000.  Citizens will continue to
                  service these loans until the foreclosures are completed.  The
                  Company  does  not  bear  any  significant  risk  of  loss  in
                  connection  with  the  foreclosures  pending.  In some  cases,
                  Citizens has made  advances and incurred  certain  expenses in
                  connection with those  foreclosures.  In most instances,  such
                  advances and any uncollected servicing fees should be received
                  from the sale  proceeds of the  underlying  collateral or have
                  been fully reserved against.
<PAGE>
                           Viatical Settlements

                           In May 1995,  the  Company  began a new  business  of
                  arranging  "viatical   settlements."  Helmstar  Funding,  Inc.
                  ("Funding")  arranges for the sale of a life insurance  policy
                  for a  critically  ill  individual.  The  insured  receives  a
                  discounted  payment  representing  all of, or a  predetermined
                  portion of, the death benefit while that person is alive.  The
                  purchaser  maintains the policy and collects the death benefit
                  when the insured  dies.  Funding does not purchase the policy;
                  rather, it will receive a commission from the purchaser when a
                  transaction is completed.

                           Funding works with hospital social workers, discharge
                  planners,   hospice   professionals,   and  employee  benefits
                  managers to assist  critically  ill persons and their families
                  meet  their  financial  challenges.  The  insured  can use the
                  proceeds in any manner such person deems fit.  The  discounted
                  amount   depends  on  a  number  of  factors   including  life
                  expectancy.

                           Funding did not derive any  revenue in 1995  compared
                  with  an   insignificant   amount  in  1996  and  incurred  an
                  immaterial  amount  of  operating  expenses.  Considering  the
                  breakthroughs in life extending medication now available,  the
                  Company  has decided to curtail  this line of business  and is
                  currently  seeking a  marketing  arrangement  with an  outside
                  party.

                           General

                            The Company was  incorporated  under the laws of the
                  State of Delaware  in 1968.  It  maintains  offices at 2 World
                  Trade  Center,  Suite 2112,  New York,  New York 10048 and its
                  telephone  number  is  (2l2)  775-0400.   Unless  the  context
                  requires  otherwise,  the term  "Company"  refers to  Helmstar
                  Group,  Inc.  ("Group")  and  its  wholly-owned  subsidiaries:
                  Matthews  &  Wright,  Inc.  ("Matthews  &  Wright");   Snider,
                  Williams & Co., Inc. ("Snider");  Randolph, Hudson & Co., Inc.
                  ("Randolph");  Eden  Consulting,  Inc.  ("Eden");  Shaw Realty
                  Company,  Inc. ("Shaw");  Helmstar Funding,  Inc.  ("Funding,"
                  formerly CMS Insurance Agency, Inc.); Burrows,  Hayes Company,
                  Inc.  ("Burrows");  Dover,  Sussex  Company,  Inc.  ("Dover");
                  Housing Capital Corporation ("Housing"); Randel, Palmer & Co.,
                  Inc.  ("Randel");  Parker,  Reld & Co.,  Inc.  ("Parker")  and
                  McAdam,  Taylor & Co., Inc. ("McAdam").  Additionally,  unless
                  the  context  requires   otherwise,   "Company"  includes  all
                  wholly-owned subsidiaries of Group including Citizens Mortgage
                  Service  Company  ("Citizens"),  a wholly-owned  subsidiary of
                  McAdam.

                            As of March l, 1997, the Company had 39 employees of
                  whom 36 were full time employees.
<PAGE>
                  Financial Information Relating to Industry Segments

                           The  Company's  operations  are  classified  into two
                  principal  industry  segments:  merchant  banking and mortgage
                  banking. The Company first engaged in mortgage banking in 1991
                  with its  acquisition of Citizens on June 30, 1991.  Since the
                  Company's  new  business  of  viatical   settlements  did  not
                  generate any revenue and its expenses  and  identified  assets
                  are  immaterial,   the  Company  included  such  expenses  and
                  identified   assets  as  part  of  the  amounts  for  "general
                  corporate."
<TABLE>
<CAPTION>
                                                    Year Ended December 31,
                                              -----------           -----------
                                                   1996                 1995
                                              -----------           -----------
<S>                                           <C>                   <C>
Revenue from unaffiliated customers:

Merchant banking ...................          $   676,037           $ 2,711,078
Mortgage banking ...................            2,136,580             2,094,400
Other corporate income .............              676,998             1,396,981
                                              -----------           -----------

Total revenues .....................          $ 3,489,615           $ 6,202,459
                                              ===========           ===========

Income (loss) from
   operations:

Merchant banking ...................          $  (491,579)          $ 1,437,920
Mortgage banking ...................           (1,570,464)             (349,200)
                                              -----------           -----------

Income (loss) from
   operations ......................           (2,062,043)            1,088,720

General corporate
   income (expense) ................             (309,922)              133,560

Income (loss) before
   income tax ......................          $(2,371,965)          $ 1,222,280
                                              ===========           ===========

Identifiable assets:

Merchant banking ...................          $ 1,418,383           $ 1,324,023
Mortgage banking ...................            4,611,869             3,840,700

General corporate ..................            2,258,646             4,821,943

     Total Assets ..................          $ 8,288,898           $ 9,986,666
                                              ===========           ===========
</TABLE>
<PAGE>
                  Competition

                           Competition  in the  Company's  business  of merchant
                  banking  focusing on middle market  oriented,  real estate and
                  other businesses is widespread and highly  fragmented.  In its
                  activities  as a  co-venturer  with a focus on  smaller,  more
                  specialized  ventures  having defined  markets,  institutional
                  joint venturers  including large public real estate or venture
                  capital  partnerships and real estate investment trusts should
                  not be significant  competitors.  Likely  competition  will be
                  encountered  from  small  syndicators;  individual  investors,
                  typically from the local market;  smaller insurance companies;
                  and  participating  mortgage  lenders.  Many of the  Company's
                  likely  competitors  have  greater  access to capital than the
                  Company.  Similarly,  the Company encounters stiff competition
                  from a broad range of  financial  services  firms when seeking
                  financial consulting assignments.

                           The  Company  encounters  fierce  competition  in its
                  mortgage  banking  business  from numerous  sources  including
                  banks, thrifts and independent mortgage companies. The Company
                  tries to  differentiate  itself  through  prompt and efficient
                  service to the  borrower.  Companies  with  greater  access to
                  capital  at lower  cost,  however,  may be able to offer  more
                  varied  mortgage loan products,  possibly even at lower rates,
                  than  the  Company.  This  is  especially  true of  banks  and
                  thrifts.  Furthermore,  many larger mortgage bankers may offer
                  correspondents lower cost mortgages, higher profit margins and
                  more diversified products than the Company.

                  Regulation

                           In the course of conducting  its business of merchant
                  banking,  the  Company  may  acquire  interests  in  regulated
                  activities.   Such   regulation  may  be  either  directly  or
                  indirectly related to the Company's interest.

                           With respect to its real estate joint  ventures,  the
                  Company may encounter  Federal,  state and local regulation in
                  connection   with  land  use,   building  code   requirements,
                  environmental,  and similar restrictions on development and/or
                  operations.

                           Mortgage  banking is a highly  regulated  businesses.
                  Citizens  has  mortgage   banking  licenses  in  Pennsylvania,
                  Delaware,  Maryland and New Jersey. Citizens has all necessary
                  approvals  as are  required to  originate  and  service  loans
                  purchased or guaranteed by FNMA,  FHLMC, FHA, GNMA and the VA.
                  Citizens may have to procure  additional  licenses in order to
                  expand its mortgage banking business.

<PAGE>
Item 2.  Description of Property.

                           The Company leases approximately 7,000 square feet of
                  office space at 2 World Trade Center, New York, New York 10048
                  under the terms of a lease that  expires  February  28,  2006.
                  This office is utilized as the Company's  executive  office in
                  addition to housing its merchant banking activities.

                           Citizens  leases  approximately  6,500 square feet of
                  office  space at 500 Office  Center  Drive,  Fort  Washington,
                  Pennsylvania 19034. This lease expires on March 31, 1998. This
                  office  is  utilized  in  the   Company's   mortgage   banking
                  activities.  Citizens transferred its New Jersey branch office
                  to another company in late 1996 and did not renew its Delaware
                  lease.

                           The future  minimum  annual base  rental  commitments
                  under these leases are  reflected  in the amounts  provided in
                  Note F[1] in Notes to  Financial  Statements  included in Part
                  II, Item 7 of this Form 10-KSB.

<PAGE>
Item 3.  Legal Proceedings.

                           In addition to the litigations described below, there
                  are various claims against the Company with respect to matters
                  arising out of the ordinary  conduct of its business.  Outside
                  counsel for the  Company  has  advised  that at this time they
                  cannot offer an opinion as to the  probable  outcome of any of
                  these matters. In the opinion of management, the resolution of
                  these matters will not have a material  adverse  effect on the
                  Company's financial position or the results of operations.

                            Cross  Creek  Village v.  Housing  Authority  of the
                  County of Riverside, et al., Case No. 236813

                           This  action was filed in the  Superior  Court of the
                  State of California,  County of Riverside, in July 1993, and a
                  summons was served on Matthews & Wright in September  1993. It
                  was  indexed  as  Case  No.  93-7732.  The  complaint  asserts
                  numerous claims against multiple defendants arising out of the
                  issuance of  $13,000,000  Housing  Authority  of the County of
                  Riverside,  Multi-Family  Housing Revenue Bonds,  Series 1985A
                  (Ironwood Apartments Project), issued by the Housing Authority
                  of the County of Riverside,  California ("Housing  Authority")
                  and  underwritten by Matthews & Wright for the construction of
                  the Ironwood  Apartments  project.  The complaint alleges that
                  the bonds were  issued  pursuant  to a "sham  closing" in 1985
                  when in fact the bonds were not  actually  issued  until 1986,
                  resulting in an assertion by the Internal Revenue Service (the
                  "IRS") that the interest on the bonds is not  tax-exempt.  The
                  plaintiff in this action is Cross Creek Village, a partnership
                  which  allegedly   acquired  the  project  from  the  original
                  developer.  The plaintiff maintains that the Housing Authority
                  claimed to have  incurred more than $500,000 in legal costs in
                  contesting the IRS' assertion for which the Housing  Authority
                  seeks indemnity from the plaintiff.

                           The original complaint in this action asserted claims
                  against Matthews & Wright for equitable indemnity,  fraud, and
                  negligent misrepresentation.  In September 1993, the plaintiff
                  dismissed the complaint  without  prejudice against Matthews &
                  Wright and others.  In October  1993,  the  plaintiff  filed a
                  First Amended  Complaint  arising out of the same facts as the
                  initial     complaint,     and    named     Group    as    the
                  successor-in-interest   to   Matthews   &  Wright   among  the
                  defendants.  The  First  Amended  Complaint  alleged  the same
                  claims  against  Group as had formerly  been  alleged  against
                  Matthews & Wright.  In  November  1993,  Group filed an answer
                  denying all liability.

                           In addition,  cross-claims have been filed by certain
                  co-defendants  in this  action  against  Group and  Matthews &
                  Wright.  One  co-defendant,   legal  counsel  to  the  Housing
                  Authority,  filed a cross-complaint  for  indemnification  and
                  apportionment  of fault  against  multiple  parties  including
                  Group.  In addition,  the County of Riverside,  California and
                  the  Housing  Authority,   two  other  co-defendants  filed  a
                  cross-complaint  that, in addition to alleging  claims arising
<PAGE>
                  out of the Ironwood  Apartments bonds, adds claims arising out
                  of the issuance of $17,500,000 Housing Authority of the County
                  of Riverside, Multi-Family Housing Revenue Bonds, Series 1985A
                  (Whitewater Garden Apartments Project),  issued by the Housing
                  Authority and underwritten by Matthews & Wright. The claims in
                  the second cross-complaint arise out of allegations concerning
                  the  manner in which the  closings  on both bond  issues  were
                  conducted.  The second cross-complaint  alleges claims against
                  "Matthews  &  Wright,   Inc.,   dba  Helmstar"  for  equitable
                  indemnity,     intentional    misrepresentation,     negligent
                  misrepresentation,  fraudulent  concealment of material facts,
                  negligence,  breach of fiduciary duty, RICO, and conspiracy to
                  make   intentional  or  negligent   misrepresentations.   Both
                  cross-complaints  assert claims against  defendants already in
                  the case as well as against new  defendants.  By a  standstill
                  agreement dated January 21, 1994,  cross-claimants and certain
                  other  parties,  including  Group and Matthews & Wright,  have
                  agreed not to pursue cross-claims  against one another at this
                  time. The parties also agreed to extend the time to respond to
                  the pending  cross-claims  until 30 days after  termination of
                  the agreement.

                           In December 1993,  this action was removed by another
                  defendant, the Federal Deposit Insurance Corporation ("FDIC"),
                  to the  U.S.  District  Court  for  the  Central  District  of
                  California. On January 7, 1994, the FDIC moved to transfer the
                  venue  of this  action  to the  U.S.  District  Court  for the
                  Southern  District of Texas. The Court severed and transferred
                  claims  involving the FDIC to the U.S.  District Court for the
                  Southern  District of Texas. All other claims were remanded to
                  the Superior Court of California, County of Riverside, as Case
                  No. 236813.

                           The plaintiff seeks compensatory and punitive damages
                  as well  as  indemnification  and  equitable  relief.  In four
                  counts,  two of which  involve  the  Company  as well as other
                  defendants,  the  plaintiff  seeks  compensatory  damages plus
                  interest  estimated to be not less than $5 million.  It is too
                  early to assess  the  potential  for,  and the  amount of, any
                  damages in connection with this action. At a status conference
                  held on  December  17,  1996,  Plaintiffs'  counsel  failed to
                  appear and then at a hearing held on February  26,  1997,  the
                  judge   dismissed   the  complaint  by  the   plaintiff.   The
                  cross-complaint  of the Housing Authority is still pending and
                  the status conference on that complaint was continued to March
                  25, 1997.

                            In October 1995, the United States Tax Court held in
                  Harbor  Bancorp v.  Commissioner,  105 T.C.  No. 19,  that the
                  interest  on the bonds  forming  the basis of the Cross  Creek
                  Village case was not excludable from the bondholders'  taxable
                  income.  In January  1996,  the  petitioners  appealed the Tax
                  Court's  decision  to the U.S.  Court of Appeals for the Ninth
                  Circuit.
<PAGE>
                            Fred W. Wasserman, et al. v. Jeffrey P. Christopher,
                  et al., Case No. 278699

                           In May 1996,  the  Company  was served with a summons
                  and complaint in connection  with a class action  commenced in
                  March 1996 against multiple parties.  This action was filed in
                  the Superior  Court of  California,  County of Riverside.  The
                  plaintiffs brought this action on behalf of themselves and all
                  other  purchasers of bonds issued by the Housing  Authority of
                  the County of Riverside for the Whitewater  Garden  Apartments
                  project and the Ironwood Apartments project (the "Bonds"). The
                  plaintiffs  maintain the  defendants  misrepresented  that the
                  interest on the Bonds would be exempt from federal income tax.
                  The plaintiffs allege negligent misrepresentation,  fraudulent
                  misrepresentation,    and   concealment    against    multiple
                  defendants,  including  the Company,  relating to actions with
                  respect to the issuance and  underwriting of the Bonds in 1985
                  and 1986. The plaintiffs also filed claims involving breach of
                  written contract, breach of oral contract, breach of fiduciary
                  duty, and negligent representation against multiple defendants
                  other than the Company. The plaintiffs are seeking damages for
                  taxes, penalties, and interest they have paid or are obligated
                  to pay,  attorneys fees, costs,  punitive  damages,  and other
                  relief the court  deems just.  The  plaintiffs  maintain  that
                  taxes,  interest, and penalties are in excess of $3 million or
                  an amount to be proved at the time of trial.

                            In October 1995, the United States Tax Court held in
                  Harbor  Bancorp  &  Subsidiaries,  et al. v.  Commissioner  of
                  Internal  Revenue,  105 T.C.  No. 19, that the interest on the
                  Bonds at issue in the Wasserman case was not  excludable  from
                  the taxpayers'  taxable income. In January 1996, the taxpayers
                  appealed the Tax Court's decision to the U.S. Court of Appeals
                  for the Ninth Circuit.

                            The Company  has agreed to enter into a  stipulation
                  with  plaintiffs  which  will  stay  all  proceedings  without
                  prejudice  pending  the  outcome  of an appeal  now before the
                  United States Court of Appeals for the Ninth Circuit in Harbor
                  Bancorp. A proposed  stipulation staying the proceedings,  and
                  consolidating  a related  action not involving the Company was
                  filed by the  plaintiff  in July  1996.  The court has not yet
                  approved the proposed stipulation.

                           On November 15, 1996,  this case was continued for 90
                  days by the  court;  the court did not hold such  hearing  and
                  currently there are no further proceedings.

                           The Company plans to defend vigorously against all of
                  the plaintiffs'  allegations  involving it. It is too early to
                  assess the  potential  for,  and the amount of, any damages in
                  connection with this action.
<PAGE>


Item 4.  Submission of Matters to a Vote of Security-Holders.

                           None.


                                     PART II

Item 5.           Market For Common Equity and Related Stockholder Matters.

                  Exchange Listing:

                            The common stock of Helmstar  Group,  Inc. is listed
                  on the American Stock Exchange (trading symbol HLM).

                            The approximate  number of  recordholders  of Common
                  Stock as of February 28, 1997 was 293.

<TABLE>
<CAPTION>

                  Equity Sale Prices:

             1st Quarter     2nd Quarter     3rd Quarter     4th Quarter
             -----------     -----------     -----------     -----------
            High    Low     High    Low     High    Low     High    Low
            ----    ---     ----    ---     ----    ---     ----    ---
<S>        <C>      <C>    <C>     <C>      <C>      <C>    <C>     <C>
1996       1 5/16   7/8     1 1/8   3/4     1 1/2    3/4    1 3/8    3/4

1995         9/16   7/16     3/4    3/8     1 1/4    1/2    1 3/16  11/16

</TABLE>

                  Dividends:

                           The Company has not previously paid cash dividends on
                  its common  stock.  The Board of Directors  does not presently
                  intend  to pay cash  dividends  on the  outstanding  shares of
                  common stock in the foreseeable future. The payments of future
                  dividends  and  the  amount   thereof  will  depend  upon  the
                  Company's earnings,  financial condition, capital requirements
                  and such other  factors as the Board of Directors may consider
                  relevant.
<PAGE>


Item 6.           Management's Discussion and Analysis.

         A.       Results of Operations

         1.       1996 Compared to 1995

                            Total revenue  decreased to $3,489,615 for 1996 from
                  $6,202,459 for 1995.

                           Profit from joint ventures  decreased to $557,037 for
                  1996 from $1,939,087 for 1995. This classification  represents
                  the  Company's  share  of  income  and  losses,   computed  in
                  accordance with the equity method of accounting,  from various
                  joint  ventures  in which the  Company is  participating.  The
                  types of ventures  being  pursued  typically  require  several
                  years of careful  management before they provide the projected
                  returns envisioned.

                           During 1996, this category included $200,000 received
                  from certain individuals who had guaranteed the obligations of
                  the  co-venturer in Stoneledge with respect to a project which
                  had been sold at a foreclosure  sale in 1992.  The  guarantors
                  made  such  payment  in  satisfaction  of  the   co-venturer's
                  existing  obligations to the Company. In 1991, the Company had
                  created a loss provision  equal to the full carrying amount of
                  the  partnership  interest.  In contrast,  during  1995,  this
                  category included a gain of approximately  $1,276,000 from the
                  sale of First Highpoint's  apartment project and $250,000 as a
                  result  of the  Company's  receipt  of cash  distributions  in
                  excess of the book value of its  interest  in Blowing  Rock in
                  connection  with the April 1995  refinancing  of its  mortgage
                  debt to $6,550,000 from $3,757,828.

                           Excluding the effects of Stoneledge, First Highpoint,
                  and the  Blowing  Rock  refinancing,  the  Company's  share of
                  profit from joint  ventures  increased  to  $357,037  for 1996
                  compared to $334,551 for 1996.

                           Notwithstanding  improved  operating  results  at the
                  venture,  the  Company's  share of income  from  Blowing  Rock
                  should  be  lower  in  future  periods,  due  in  part  to the
                  substantial  increase  in  interest  expense,  as a result  of
                  refinancing  the venture's  mortgage  debt from  $3,757,828 to
                  $6,550,000  in  April  1995.   Furthermore,   the  partnership
                  agreement provides that the Company's share of income and cash
                  flow would  decline,  once the  Company  recovered  its entire
                  capital   contribution   from  certain  events  including  the
                  refinancing  of the  venture's  debt.  The Company  received a
                  distribution  in excess of its capital  contribution  from the
                  refinancing  proceeds.  The  venture's  cash flow,  at current
                  interest  rates,  was not  negatively  impacted  because  debt
                  service  on the new loan is  lower  than on the old  loan.  In
                  addition  to  interest,   the  old  loan  required   principal
                  amortization payments of $40,000 per month.
<PAGE>
                           Although operating results continue to improve as the
                  ventures  mature,  some  variation  in  profit  or loss  for a
                  specific  interim  period may  result  due to such  factors as
                  receiving  annual  payments  of  percentage  rent;   incurring
                  periodic  operating  expenses  which will occur only every few
                  years,  such  as  painting  the  entire  project;   accounting
                  adjustments  between  interim  periods;  lost  rent due to the
                  turnover  of a tenant  notwithstanding  that a new  tenant has
                  been secured at a higher rent; etc.

                           Financial  consulting  fees decreased to $116,000 for
                  1996 from $766,500 for 1995.  The Company  provides  financial
                  structuring advice on a fee basis. Typically, an engagement is
                  based on a specific assignment to assist a client to lower its
                  cost  of  capital.  Due to the  transactional  nature  of this
                  business, significant variations in revenue are likely.

                           Loan  origination  fees  increased to $1,770,464  for
                  1996 from $596,941 in 1995. This category includes fees earned
                  in  connection  with making  mortgage  loans and net profit or
                  loss from sales of such loans to  investors.  This increase is
                  the result of the expanded retail loan origination  efforts in
                  1996 during  which loan  origination  volume  increased to 718
                  loans,  representing a dollar volume of $59,079,953,  from 392
                  loans, representing a dollar volume of $38,916,362, in 1995.

                           Loan  servicing  fees  decreased  to $36,131 for 1996
                  from $800,197 in 1995.  The decrease is the result of the sale
                  of  substantially  all of  the  Company's  mortgage  servicing
                  portfolio in December  1995 and the sale of the balance of the
                  portfolio in July and August 1996. This category includes fees
                  earned  in  processing   residential   mortgage  payments  and
                  servicing loans on behalf of various  investors.  In 1996, the
                  Company has  repositioned  its mortgage  banking  operation to
                  originate  residential mortgage loans and sell them with their
                  servicing rights to permanent investors.

                           In  1996,   the  sale  of  the  remaining   servicing
                  portfolio  generated  revenues of  approximately  $170,000 and
                  realized a gain of  $142,100.  In 1995,  the sale of  mortgage
                  servicing   rights   generated   revenues   of   approximately
                  $2,300,000 and a realized gain of $379,705.

                           Interest  income  increased to $463,868 for 1996 from
                  $362,906 for 1995, due in large part to interest earned in the
                  securities held in the trading and investing activities, which
                  offset  lower  interest  earned  in  the  mortgage   servicing
                  activity. In late 1995, the Company sold most of its servicing
                  portfolio  and  the  balance  in  mid-1996  causing  a loss of
                  interest earnings on escrow balances for those mortgages being
                  serviced.

                           In the  mortgage  origination  activity,  the Company
                  uses its own cash or borrows from  "warehouse  facilities"  to
                  fund mortgage loans  originated  for resale to investors.  The
                  Company earns interest  income on the mortgage loans until the
                  time of  completing  the sale thereof to investors  and incurs
                  interest expense only when using the "warehouse facility."
<PAGE>
                           Investment income decreased to $428,954 for 1996 from
                  $1,083,884 for 1995. This category  primarily  consists of net
                  profit  or  loss  from  investing  in  futures,  puts,  calls,
                  municipal  bonds,  equities  and  other  securities  for  cash
                  management,  trading and risk management  purposes relating to
                  the Company's  interest  fluctuation  exposure in its mortgage
                  banking operation. During 1995, the Company reported a gain on
                  the sale of stock in a public  company  which was  received in
                  connection with the sale of the Company's  interest in a joint
                  venture in a prior period.

                           Other  income  resulted  in a loss of $24,922 in 1996
                  compared  to a profit of  $273,239  in 1995.  The 1996 loss is
                  attributable  to  a  write-off  of  $40,000  on  the  sale  of
                  furniture  and fixtures  related to the sale of the New Jersey
                  mortgage  origination office offset by sundry fees received in
                  connection  with the Company's  mortgage  banking  operations.
                  During 1995, the Company received payment of an item which was
                  previously considered uncollectible.

                           Gain  on  the  sale  of  mortgage   servicing  rights
                  decreased to $142,083 for 1996  compared to $379,705 for 1995.
                  The Company sold  substantially all of its mortgage  servicing
                  for  approximately  $2.3 million in 1995. The balance was sold
                  in 1996 for approximately $172,000.

                            Total expenses increased to $5,861,580 for 1996 from
                  $4,980,179 for 1995.

                           Compensation   and   related   costs   increased   to
                  $3,593,614 for 1996 from  $2,678,293 for 1995. The increase is
                  due  principally  to higher  commission  payments  to  account
                  executives  as a result of higher  production  at Citizens and
                  the hiring of additional  administrative  and processing staff
                  to support  the  increase in mortgage  loan  originations.  In
                  1995,  an  incentive  bonus was  accrued  in  connection  with
                  profits  derived from joint venture  activities,  however,  no
                  bonus was accrued in 1996.

                           Occupancy  costs  decreased to $369,018 for 1996 from
                  $423,321 for 1995. This decrease is due principally to the new
                  lease  entered into by the Company for its existing  executive
                  offices at a significantly lower rent.

                           Amortization of mortgage  servicing  rights decreased
                  to $4,521 for 1996 from  $361,422  for 1995.  The Company sold
                  the majority of the mortgage  servicing  portfolio during 1995
                  and the  remainder  in  mid-1996.  With  its  withdrawal  from
                  mortgage servicing as a separate activity, the Company will no
                  longer have a mortgage  servicing  portfolio to amortize.  The
                  Company intends to sell the mortgage servicing rights on loans
                  it  originates  in the future  either to the purchaser of such
                  loans or to third parties in independent transactions.
<PAGE>
                           General  and  administrative  expenses  increased  to
                  $1,506,562 for 1996 from $905,145 for 1995.  This increase was
                  due  principally  to greater  activity in the  Company's  loan
                  origination   business   including  such  direct  expenses  as
                  appraisal  fees, tax service fees,  funding fees and warehouse
                  expenses.  The  Company  increased  the bad  debt  reserve  in
                  connection  with its mortgage  activities and incurred  higher
                  advertising and public relations expenses than in 1995.

                           Professional   fees   and   litigation    settlements
                  decreased  to $149,963 for 1996 from  $605,371 for 1995.  This
                  decrease  was due  principally  to the  settlement  of certain
                  litigation  during 1995 and the moderate  level of activity on
                  pending litigation in 1996.

                           Interest expense  increased to $237,902 for 1996 from
                  $6,627 for 1995,  principally  as a result of the  significant
                  increase in mortgage  origination  activity  requiring greater
                  use of the Company's credit  facilities to fund mortgage loans
                  held for sale.  Additionally,  the Company  incurred  interest
                  expense  in   connection   with  its  trading  and   investing
                  activities.

                           On a  pre-tax  basis,  the  Company  had  a  loss  of
                  $2,371,965  for 1996 compared with a profit of $1,222,280  for
                  1995.  In  1996,  the  Company  had a tax  benefit  of  $7,885
                  compared  to a tax  expense of $37,611  for 1995.  These items
                  consist   solely  of  state  and  local   taxes  and   various
                  adjustments.  For Federal income tax purposes,  as of December
                  31, 1996, the Company has net operating loss  carryforwards of
                  approximately  $13,750,000  available to reduce future taxable
                  income.  These carryforwards  expire in the years 2005 through
                  2011.

                           The  Company's  net  loss  for  1996  was  $2,364,080
                  compared  with a net profit of  $1,184,669  for 1995. On a per
                  share basis,  the net loss was $.43 for 1996  compared  with a
                  net  profit  of $.20 for  1995.  Income  per share for 1995 is
                  computed  based  on the  weighted  average  number  of  shares
                  actually outstanding plus the shares that would be outstanding
                  assuming  the  exercise  of  stock  options  relating  to  the
                  Company's incentive  compensation plan which are considered to
                  be common  stock  equivalents.  The assumed  exercise of stock
                  options relating to the Company's incentive  compensation plan
                  were not  included in the  computation  for 1996,  because the
                  effect of their inclusion would be antidilutive. The number of
                  shares used in the  computations  were  5,544,480  in 1996 and
                  5,820,800 in 1995.

                  Inflation

                           Inflation  may affect the Company in certain areas of
                  both its  merchant  banking and mortgage  banking  activities.
                  Changes in interest rates typically  follow actual or expected
                  changes in the inflation  rate.  Accordingly,  interest  rates
                  usually increase during periods of high inflation and decrease
                  during   periods  of  low   inflation.   The  volume  of  loan
                  originations  usually increases during periods of low interest
                  rates and decreases during periods of high interest rates.
<PAGE>
                           The Company has interests in two joint ventures which
                  developed  and  now  operate   manufacturers  outlet  shopping
                  centers. One joint venture has a mortgage loan with a variable
                  interest  rate equal to Citibank's  six-month  LIBOR rate plus
                  3.10%.  The  interest  rate resets on March 1 and  September 1
                  each year until maturity on May 1, 2002. The maximum  interest
                  rate is 13.5375% under the terms of the loan. The current rate
                  through August 31, 1997 is 8.788%.

                           Virtually  all of the  leases  at  the  two  shopping
                  centers require tenants to pay a proportionate share of normal
                  operating  expenses including taxes and insurance with respect
                  to their premises as well as for common areas. Similarly, most
                  leases  provide for  percentage  rents in excess of  specified
                  targets.  Percentage  rent based on  increasing  retail  sales
                  attributable to inflation alone would generate additional cash
                  flow. Furthermore, most leases have an initial term of five or
                  fewer years,  so increases  in base rents are  possible.  Many
                  tenants have renewal  options  providing for higher rent based
                  on changes in the Consumer Price Index.  Each venture would be
                  responsible for any applicable increased costs associated with
                  structural repairs or vacancies.

                           As with all real estate projects,  however,  there is
                  no assurance that rents can be increased quickly enough, while
                  maintaining a high  occupancy  level,  to mitigate  escalating
                  operating  costs  as well as  necessary  capital  repairs  and
                  improvements.

         B.       Liquidity and Capital Resources

                           Management   of  the  Company   believes  that  funds
                  generated from operations,  its warehouse facilities, and cash
                  distributions   from  joint  ventures,   supplemented  by  its
                  available assets, will provide it with sufficient resources to
                  meet all present and  reasonably  foreseeable  future  capital
                  needs.  A  significant  portion  of the  Company's  assets are
                  readily convertible into cash.

                           The   Company   invests   excess   funds  in  liquid,
                  short-term  financial  instruments  in order to  maximize  its
                  current cash return with  minimum  interest  rate risk,  while
                  preserving  the ability to move quickly in funding  attractive
                  merchant  banking  ventures.  Such  investments  include  U.S.
                  Government and municipal  obligations,  futures  contracts and
                  money  market  funds.   Additionally,   since  commencing  the
                  mortgage loan  origination  business,  the Company may use its
                  own cash to carry a portion of its inventory of mortgage loans
                  originated for resale. Prior to funding any loans, the Company
                  procures  firm  commitments  from  investors to purchase  such
                  loans.  Fourteen  days is the typical time  between  funding a
                  mortgage loan and receiving payment from an investor.
<PAGE>
                           The  Company's  primary  financing  needs  are in its
                  mortgage  banking  activities.  In  addition  to its own  cash
                  resources, the Company meets its mortgage funding requirements
                  by  borrowing  the  necessary   amounts  from  three  separate
                  warehouse bank lines aggregating $12,250,000.  At December 31,
                  1996, approximately $2,200,000 had been borrowed against these
                  lines.  The Company can draw down up to 98% of the face amount
                  of an individual  mortgage loan from the warehouse  bank which
                  is  replenished  from the purchase  price paid by the investor
                  who had committed to purchase such loan.

                           In connection with its interests in real estate,  the
                  Company  uses  separate  subsidiaries  for each  venture.  The
                  Company  utilizes  the  equity  method of  accounting  for its
                  interests  in real estate  joint  ventures.  Accordingly,  the
                  assets and  liabilities  of such  ventures are not included in
                  the Company's consolidated balance sheets.

                           The two operating  real estate  projects in which the
                  Company is a co-venturer,  currently  have strong  occupancies
                  and positive cash flow. Cash  maintained by each  partnership,
                  supplemented  with  cash  flow  from  operations,   should  be
                  sufficient  to cover  all  operating  costs  and debt  service
                  requirements   of  each  venture,   so  that  additional  cash
                  contributions  from the Company or its co-venturers  would not
                  be necessary. Facts and circumstances, however, are subject to
                  change for  reasons  beyond the  Company's  control.  Based on
                  current estimates,  the Company expects to continue to receive
                  cash   distributions   from  its  real  estate  joint  venture
                  activities during 1997.

                           In April 1993, one of the Company's real estate joint
                  ventures entered into a modification agreement with the lender
                  holding the venture's  mortgage loan. The lender converted the
                  loan from a  short-term,  variable rate loan into a four-year,
                  fixed rate loan.  Interest  is payable at 8.5% per annum.  The
                  lender charged an extension fee which was paid as follows: (1)
                  $15,000 at the time the extension was consummated; (2) $15,000
                  on April 1, 1994;  and $33,818 (an amount equal to the product
                  of the outstanding  principal balance $4,609,079 multiplied by
                  .0075) on April 1, 1995. Regular amortization is determined on
                  a 20-year  schedule  for the first  year and then on a 15-year
                  self-liquidating basis. Additional amortization payments equal
                  to 25% of  "excess  cash  flow"  were paid  during  the second
                  12-month period.  Thereafter, 50% of "excess cash flow" is due
                  as additional amortization. The loan matures on April 1, 1997.
                  The Company is  currently in the process of  refinancing  this
                  loan and expects to complete such  refinancing  prior to April
                  1, 1997.
<PAGE>
                           In April 1995, the Company's  other real estate joint
                  venture  refinanced  the  mortgage  loan on its  project.  The
                  principal  amount of the new,  nonrecourse loan is $6,550,000;
                  the interest rate equals Citibank's  six-month LIBOR rate plus
                  3.10% and the interest  rate resets each  September and March;
                  the maximum interest rate is 13.5375%;  principal amortization
                  is based on a 25-year schedule; and the loan matures on May 1,
                  2002.  The current  interest  rate through  August 31, 1997 is
                  8.788%.  The interest  rate had been 8.3%  through  August 31,
                  1996 and 8.85% from  September  1, 1996  through  February 28,
                  1997.  The  principal  balance  of  the  refinanced  loan  was
                  $3,757,828.  The proceeds  from  refinancing,  net of expenses
                  including points,  fees, title insurance,  escrows,  etc., was
                  approximately   $2.5   million.   The   Company   received   a
                  distribution  from the joint  venture  of  approximately  $2.2
                  million.

                           Although the venture's outstanding debt was increased
                  substantially, at current interest rates, monthly debt service
                  decreased  slightly  because  the old  loan  required  monthly
                  principal  payments of $40,000  through  its  maturity in July
                  1995.  In addition to principal  and interest  payments,  debt
                  service  for the new loan  includes  contributions  to various
                  reserve accounts.  The funds from such reserve accounts may be
                  used, in accordance with the loan agreement,  to offset future
                  expenses, if any, for structural repairs, tenant improvements,
                  leasing commissions, and interest expense.

                           The  carrying  amounts  reflected  on  the  Company's
                  consolidated  balance  sheet  for its  various  joint  venture
                  interests is determined  in accordance  with the equity method
                  of accounting. Such carrying amounts may not be representative
                  of  the  realizable  value  on  a  sale  of  those  interests.
                  Management  reviews  the  carrying  amount of each  venture to
                  determine if an  adjustment  for any  impairment  other than a
                  temporary decline is required.  If management believes in good
                  faith  that any  impairment  is other than  temporary,  a loss
                  provision  equal to such  amount  will be charged  against the
                  Company's consolidated results of operations.

                           Cash  distributions from joint ventures are reflected
                  in  investing   activities  in  the   Company's   consolidated
                  statements  of  cash  flows.  Equity  contributions  to  joint
                  ventures as well as any  advances to joint  ventures  also are
                  reflected   in   investing   activities   in   the   Company's
                  consolidated statements of cash flows.

                           While the Company  believes that currently  available
                  funds will  provide it with  sufficient  resources to meet all
                  present and reasonably  foreseeable  future capital needs, the
                  Company may seek  various  forms of credit in order to finance
                  its merchant banking,  mortgage banking or other activities in
                  the future. The Company does not have any material commitments
                  for capital expenditures as of December 31, 1996.
<PAGE>
                           The  Company  is a  defendant  in  various  lawsuits.
                  Although   the  Company  has  reached   settlements   in  some
                  instances, an unfavorable result in those remaining could have
                  a significant  adverse effect upon the Company's liquidity and
                  capital resources.


Item 7.  Financial Statements.

                           The  Company's  financial   statements  to  be  filed
                  hereunder  follow,  beginning  with  page  F.  Following  such
                  financial statements, are the financial statements for each of
                  the operating  real estate joint ventures in which the Company
                  is a joint venturer.

<PAGE>










                     HELMSTAR GROUP, INC. AND SUBSIDIARIES

                       CONSOLIDATED FINANCIAL STATEMENTS

                    DECEMBER 31, 1996 AND DECEMBER 31, 1995
<PAGE>
                         REPORT OF INDEPENDENT AUDITORS



Board of Directors and Stockholders
Helmstar Group, Inc.
New York, New York


        We have audited the consolidated  balance sheet of Helmstar Group,  Inc.
and  subsidiaries  as  at  December  31,  1996,  and  the  related  consolidated
statements of  operations,  changes in  stockholders'  equity and cash flows for
each of the  years  in the  two-year  period  ended  December  31,  1996.  These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audits. We did not audit the 1996 and 1995 financial  statements of the real
estate joint ventures  described in Note B. The Company's  equity in these joint
ventures  aggregated  $1,417,883  at  December  31,  1996 and they  account  for
$357,037 and $1,939,087 of income included in income (loss) before taxes for the
years ended December 31, 1996 and December 31, 1995, respectively. The financial
statements of these  entities were audited by other  auditors whose reports have
been furnished to us, and our opinion insofar as it relates to these entities is
based solely on the reports of the other auditors.

        We conducted our audits in accordance with generally  accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We  believe  that our audits and the  reports  of the other  auditors  provide a
reasonable basis for our opinion.

        In our opinion,  based on our audits and the reports of other  auditors,
the  financial  statements  enumerated  above  present  fairly,  in all material
respects,  the  consolidated  financial  position of Helmstar  Group,  Inc.  and
subsidiaries  at  December  31,  1996,  and the  consolidated  results  of their
operations  and  their  consolidated  cash  flows  for each of the  years in the
two-year  period ended December 31, 1996 in conformity  with generally  accepted
accounting principles.

        As  described  more  fully  in  Note  G to  the  consolidated  financial
statements, the Company was a defendant in various lawsuits.



/s/Richard A. Eisner & Company, LLP
-----------------------------------
Richard A. Eisner & Company, LLP

New York, New York
February 26, 1997
<PAGE>
<TABLE>
<CAPTION>
                         HELMSTAR GROUP, INC. AND SUBSIDIARIES

                               CONSOLIDATED BALANCE SHEET

                                AS AT DECEMBER 31, 1996

                  A S S E T S
<S>                                                                       <C>
Cash and cash equivalents (Note A)  .................................     $  1,679,454
Marketable securities (Note A)  .....................................        1,350,441
Joint ventures including advances (Notes A and B) ...................        1,418,383
Mortgage loans held for sale (Notes A and C)  .......................        2,647,692
Due from mortgage investors (Note C)  ...............................            4,123
Furniture, equipment and leasehold improvements - at
   cost, less accumulated depreciation and amortization
   of $415,504 (Note A) .............................................          237,673
Other assets ........................................................          951,132
                                                                          ------------

          T O T A L .................................................     $  8,288,898
                                                                          ============


                  L I A B I L I T I E S

Notes payable (Note C)  .............................................     $  2,246,672
Accrued expenses and other liabilities (Note A) .....................          979,298
                                                                          ------------

          Total liabilities .........................................        3,225,970
                                                                          ------------

Commitments, contingencies and other matters (Notes B, F, G, H and I)

                  STOCKHOLDERS' EQUITY
                  (Note E)

Common stock - authorized 10,000,000 shares,
   par value $.10; issued 6,749,600 shares ..........................          674,960
Paid-in surplus .....................................................       14,984,510
(Deficit) ...........................................................       (7,683,718)
                                                                          ------------

          T o t a l .................................................        7,975,752

Less treasury stock, at cost - 1,213,227 shares .....................       (2,912,824)
                                                                          ------------

          Total stockholders' equity ................................        5,062,928
                                                                          ------------

          T O T A L .................................................     $  8,288,898
                                                                          ============
</TABLE>
Attention  is  directed  to  the  foregoing   accountants'  report  and  to  the
accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
                      HELMSTAR GROUP, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                                                       Year Ended December 31,
                                                    ---------------------------
                                                          1996           1995
                                                    -----------      -----------
<S>                                                 <C>              <C>

Revenues:
   Profit from joint ventures (Note B) ........     $   557,037      $ 1,939,087
   Financial consulting fees (Note F[3]) ......         116,000          766,500
   Loan servicing fees (Notes A and J) ........          36,131          800,197
   Loan origination fees (Note A)  ............       1,770,464          596,941
   Interest income ............................         463,868          362,906
   Investment income ..........................         428,954        1,083,884
   Gain on sale of mortgage servicing rights
     (Note J)  ................................         142,083          379,705
   Other income (loss) ........................         (24,922)         273,239
                                                    -----------      -----------

          Total revenues ......................       3,489,615        6,202,459
                                                    -----------      -----------

Expenses:
   Compensation and related costs .............       3,593,614        2,678,293
   Occupancy cost .............................         369,018          423,321
   Amortization of mortgage servicing rights ..           4,521          361,422
   General and administrative .................       1,506,562          905,145
   Professional fees and provision for
     contingencies and settlements ............         149,963          605,371
   Interest ...................................         237,902            6,627
                                                    -----------      -----------

          Total expenses ......................       5,861,580        4,980,179
                                                    -----------      -----------


Profit (loss) before taxes ....................      (2,371,965)       1,222,280

Income tax provision (benefit) (Note D)  ......          (7,885)          37,611
                                                    -----------      -----------

NET INCOME (LOSS)  ............................     $(2,364,080)     $ 1,184,669
                                                    ===========      ===========

Net income (loss) per common share (Note A)  ..     $      (.43)     $       .20
                                                    ===========      ===========

Weighted average number of
   common shares outstanding ..................       5,544,480        5,820,800
                                                    ===========      ===========

Attention  is  directed  to  the  foregoing   accountants'  report  and  to  the
accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                HELMSTAR GROUP, INC. AND SUBSIDIARIES

                                     CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY




                                   Common Stock            Paid-in       (Accumulated           Treasury Stock
                             Shares          Amount        Surplus         Deficit)         Shares         Amount         Total
                             ------          ------        -------         --------         ------         ------         -----
<S>                         <C>         <C>            <C>             <C>                <C>         <C>            <C>
Balance - January 1,
1995..................      6,749,600   $    674,960   $ 14,984,510    $ (6,504,307)        783,905   $  2,518,923   $  6,636,240


Treasury stock
   acquired at cost ..           --             --             --              --           419,322        386,179       (386,179)



Net income ...........           --             --             --         1,184,669            --             --        1,184,669
                            ---------   ------------   ------------    ------------       ---------    -----------   ------------


Balance - December 31,
1995..................      6,749,600        674,960     14,984,510      (5,319,638)      1,203,227      2,905,102      7,434,730



Treasury stock
   acquired at cost ..           --             --             --              --            10,000          7,722         (7,722)



Net (loss) ...........           --             --             --        (2,364,080)           --             --       (2,364,080)
                            ---------   ------------   ------------    ------------       ---------    -----------   ------------



BALANCE - DECEMBER 31,
1996..................      6,749,600   $    674,960   $ 14,984,510    $ (7,683,718)      1,213,227   $  2,912,824   $  5,062,928
                         ============   ============   ============    ============    ============   ============   ============


Attention  is  directed  to  the  foregoing   accountants'  report  and  to  the
accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                      HELMSTAR GROUP, INC. AND SUBSIDIARIES

                                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                                                      Year Ended December 31,
                                                                                   ----------------------------
                                                                                        1996           1995 *
                                                                                   ------------    ------------
<S>                                                                                <C>             <C>
Cash flows from operating activities:
   Net income (loss)  ..........................................................   $ (2,364,080)   $  1,184,669
   Adjustments to reconcile net income (loss) to net cash
     (used in) operating activities:
       Depreciation and amortization ...........................................         95,787         456,722
       Share of (profit) from joint ventures ...................................       (357,037)       (662,820)
       Realized (gain) on sale of joint venture ................................       (200,000)     (1,276,267)
       Realized (gain) on sale or disposal of investments ......................       (440,906)       (325,999)
       Unrealized loss (gain) from marketable securities .......................         12,012         (27,523)
       (Gain) on sale of mortgage loans held for sale ..........................       (130,134)       (379,505)
       Loss on sale of fixed assets ............................................         41,477           1,912
       Changes in operating assets and liabilities:
         (Increase) in mortgage loans held for sale ............................     (1,106,052)     (1,511,640)
         Decrease in due from mortgage investors ...............................         48,056           2,375
         Purchase of marketable securities .....................................    (63,221,393)     (3,541,756)
         Sales of marketable securities ........................................     62,816,478       1,456,610
         (Increase) decrease in other assets ...................................        169,166        (907,900)
         (Decrease) increase in accrued expenses ...............................       (628,895)         97,247
                                                                                   ------------    ------------

           Net cash (used in) operating activities .............................     (5,265,521)     (5,433,875)
                                                                                   ------------    ------------

Cash flows from investing activities:
   Purchase of investment securities ...........................................                     (1,686,692)
   Sale of investment securities ...............................................      3,805,767         508,907
   Distributions from joint ventures - refinancing .............................                      2,227,892
   Distributions from joint ventures ...........................................        262,677         381,521
   Proceeds from sale of interest in joint ventures ............................        200,000       1,681,622
   Proceeds from sale of other investments .....................................                        723,125
   Acquisition of mortgage servicing rights ....................................                        (96,357)
   Proceeds from sale of mortgage service rights ...............................        172,499       2,144,763
   Purchase of fixed assets ....................................................       (153,005)        (18,637)
   Proceeds from sale of fixed assets ..........................................          3,100           8,752
                                                                                   ------------    ------------

           Net cash provided by investing activities ...........................      4,291,038       5,874,896
                                                                                   ------------    ------------

Cash flows from financing activities:
   Proceeds of short term borrowings ...........................................      2,246,672         564,264
   Repayment of short term borrowings ..........................................       (943,743)
   Purchase of treasury stock ..................................................         (7,722)       (386,179)
                                                                                   ------------    ------------

           Net cash provided by financing activities ...........................      1,295,207         178,085
                                                                                   ------------    ------------
<PAGE>
<CAPTION>
                                      HELMSTAR GROUP, INC. AND SUBSIDIARIES

                                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                                                      Year Ended December 31,
                                                                                   ----------------------------
                                                                                        1996           1995 *
                                                                                   ------------    ------------
<S>                                                                                <C>             <C>
NET INCREASE IN CASH AND CASH EQUIVALENTS ......................................        320,724         619,106

Cash and cash equivalents at beginning of year .................................      1,358,730         739,624
                                                                                   ------------    ------------

CASH AND CASH EQUIVALENTS AT END OF YEAR .......................................   $  1,679,454    $  1,358,730
                                                                                   ============    ============

Supplemental disclosures of cash flow information:
   Cash paid during the year for:
     Interest ..................................................................   $    237,902    $      6,627
     Taxes .....................................................................         16,415          35,828

* Reclassified to conform to the current year's presentation.


Attention  is  directed  to  the  foregoing   accountants'  report  and  to  the
accompanying notes to financial statements.
</TABLE>
<PAGE>
                      HELMSTAR GROUP, INC. AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS


(NOTE A) - The Company and its Significant Accounting Policies:

         The Company is in the merchant  banking business and it has an interest
in two operating  real estate joint  ventures.  In 1991, it entered the mortgage
servicing  business through the acquisition of Citizens Mortgage Service Company
("Citizens").

         During 1992,  Citizens  began  originating  mortgage loans and became a
full service mortgage banker.  During 1995,  Citizens sold  substantially all of
its  mortgage  servicing   portfolio  and  will  concentrate  on  mortgage  loan
originations.

         [1]  Principles of consolidation:

                  The accompanying consolidated financial statements include the
accounts  of  Helmstar  Group,  Inc.  and  its  wholly-owned  subsidiaries  (the
"Company").

                  All significant  intercompany  balances and transactions  have
been eliminated.

         [2]  Joint ventures and other investments:

                  Joint ventures,  with a 20% to 50% voting interest and limited
partnership  investments in investment  partnerships are accounted for under the
equity  method.  If management  believes in good faith that the fair value of an
interest  in a joint  venture or limited  partnership  interest is less than the
carrying  amount  thereof,  determined in  accordance  with the equity method of
accounting,  and such decline in value is other than temporary, the Company will
establish  a loss  reserve  equal to the amount of such  decline.  The  carrying
amount of this asset in the  Company's  consolidated  balance sheet is presented
net of any reserve.  Each interest is reviewed separately,  notwithstanding that
all interests are combined for financial statement presentation purposes.


         [3]      Mortgage banking:

                  (a)      Recognition of income:

                  The Company  originates and processes  mortgage loans for sale
to permanent  investors.  Servicing rights may or may not be retained upon sale.
Loan origination  fees net of certain loan origination  costs are deferred until
the loans are sold. Profit  recognition on the sale of mortgage loans,  which is
included in loan  origination  income,  occurs when all  incidence  of ownership
passes to the  permanent  investor.  Interest  income is  recognized on mortgage
loans held for sale as earned.

(continued)
<PAGE>
                      HELMSTAR GROUP, INC. AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS


(NOTE A) - The Company and its Significant Accounting Policies:
           (continued)

         [3]      Mortgage banking:  (continued)

                  (b)      Mortgage loans held for sale:

                  Mortgage loans held for sale are reported at the lower of cost
or fair value (as determined in good faith by management).

                  (c)      Loan servicing:

                  Fees earned for  servicing  mortgage  loans owned by investors
are  based on a  stipulated  percentage  of the  outstanding  monthly  principal
balance  of such  loans.  Loan  servicing  fees  are  credited  to  income  when
collected, loan servicing costs are charged to expense as incurred.

                  (d)      Mortgage servicing rights:

                  Servicing rights may or may not be sold  concurrently with the
related mortgage loans.  Servicing rights sold in conjunction with mortgage loan
sales are included in loan origination income.

                  When mortgage  loans are sold with servicing  rights  retained
the gain or loss on such sales is adjusted to provide for  recognition of normal
servicing fees over the estimated servicing lives of the related mortgage loans.
The  adjustment  equals the present value of the  difference  between the actual
servicing  fee and the  normal  servicing  fee.  To the  extent  that the actual
servicing fee exceeds the normal  servicing fee, these fees are  capitalized and
amortized to servicing fee income  monthly,  using a level yield method.  If the
actual servicing fees are estimated to be less than the normal servicing fees, a
loss is recognized as of the date of the sale.

                  Purchased  servicing rights are capitalized in an amount equal
to the  lesser  of cost or the  excess  of the  present  value of the  estimated
servicing fee revenue over the present value of the estimated  costs  associated
with each portfolio acquired.  The capitalized amount is amortized in proportion
to and over the estimated servicing life.

                  The Company  reviews the carrying  amount of each portfolio of
mortgage  servicing  rights for possible  impairment.  If the  estimated  future
servicing costs exceed the estimated future servicing revenue,  the Company will
recognize a loss equal to such excess,  and reduce future  amortization  expense
accordingly.

(continued)
<PAGE>
                      HELMSTAR GROUP, INC. AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS


(NOTE A) - The Company and its Significant Accounting Policies:
           (continued)

         [4]  Depreciation and amortization:

                  Furniture,  fixtures and equipment are being depreciated using
both straight-line and accelerated methods over estimated lives of five to seven
years.  Leasehold  improvements are amortized on a straight-line  basis over the
shorter of term of the lease or its useful life.

         [5]  Statements of cash flows:

                  For the purpose of the  statements of cash flows,  the Company
considers all highly liquid debt instruments purchased with an original maturity
of three months or less to be cash equivalents.

         [6]  Income (loss) per share:

                  Income  (loss) per share is computed  based upon the  weighted
average  number of common  shares  outstanding  during each year.  Common  share
equivalents  relating to the  Company's  incentive  compensation  plan have been
excluded from the computation in 1996 as they are antidilutive.

         [7]  Income taxes:

                  The  Company  accounts  for income  taxes in  accordance  with
Statement of Financial  Accounting  Standards  No. 109,  "Accounting  for Income
Taxes" ("SFAS 109"). SFAS 109 measures deferred income taxes by applying enacted
statutory rates in effect at the balance sheet date to the  differences  between
the tax bases of  assets  and  liabilities  and their  reported  amounts  in the
financial  statements.   The  resulting  asset  was  fully  reserved  since  the
likelihood of realization of the benefit cannot be established.

(continued)
<PAGE>
                      HELMSTAR GROUP, INC. AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS


(NOTE A) - The Company and its Significant Accounting Policies:
           (continued)

         [8]  Marketable Securities:

                  The  Company   accounts  for  its  investments  in  marketable
securities  pursuant to  Statement of Financial  Accounting  Standards  No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115").
SFAS 115 requires,  among other things, the classification of investments in one
of three categories based on the Company's intent:  trading,  available-for-sale
and held-to-maturity,  with trading and available-for-sale securities carried at
fair value and held-to-maturity securities carried at amortized cost.

                  The Company invests in marketable  debt securities  consisting
of United States Treasury Bills and municipal debt securities. The United States
Treasury Bills mature in less than one year.  The municipal debt  securities are
bought and held  principally  for the purpose of selling them in the near future
and are carried at market value. These marketable debt securities are classified
as trading securities.

         [9]  Recently issued accounting pronouncements:

                  In 1995,  the  Financial  Accounting  Standards  Board  issued
Statement  of  Financial  Accounting  Standards  No.  121,  "Accounting  for the
Impairment of  Long-Lived  Assets and for  Long-Lived  Assets to be Disposed of"
("SFAS  121"),  and  Statement  of  Financial   Accounting  Standards  No.  123,
"Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 121 requires, among
other things,  that entities  identify events or changes in circumstances  which
indicate that the carrying amount of an asset may not be recoverable.  SFAS 123,
among other things,  encourages companies to establish a fair value based method
of accounting for stock-based  compensation plans and requires certain pro forma
disclosures if the fair value method is not adopted.

                  SFAS 121 and SFAS 123 had no material  effect on the financial
statements.

       [10]  Use of estimates:

                  The  preparation  of financial  statements in conformity  with
generally accepted  accounting  principles requires management to make estimates
and assumptions  that affect the reported  amounts of assets and liabilities and
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements  and the  reported  amounts  of  revenues  and  expenses  during  the
reporting period. Actual results could differ from those estimates.

(continued)
<PAGE>
                      HELMSTAR GROUP, INC. AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS


(NOTE B) - Joint Ventures:

         [1]  Joint ventures as at December 31, 1996 consist of the
following:
<TABLE>
<CAPTION>

         Real  estate  joint  ventures  -  50%  voting  interest  with  majority
            financial interest in partnerships:
<S>                                   <C>                  <C>
              Blowing Rock
                Outlet Partners       Shopping Center      $    1,579

              Nags Head Outlet
                Partners              Shopping Center       1,416,304

                  Other                                           500

                     Total real estate joint ventures      $1,418,383

</TABLE>

         [2] Summary  combined  financial  information  of the real estate joint
ventures as at December 31, 1996, are as follows:
<TABLE>
<CAPTION>
<S>                                                      <C>
         Operating properties . . . . . . . . . . . . .  $11,366,429

         Other assets . . . . . . . . . . . . . . . . .      576,540
                                                         -----------

                   Total assets . . . . . . . . . . . .   11,942,969

         Notes payable. . . . . . . . . . . . . . . . .   10,439,565

         Other liabilities. . . . . . . . . . . . . . .      204,888
                                                         -----------

                   Total liabilities. . . . . . . . . .   10,644,453

                   Net assets . . . . . . . . . . . . .  $ 1,298,516
                                                         ===========

         Company's investment . . . . . . . . . . . . .  $ 1,418,383
                                                         ===========
</TABLE>
(continued)
<PAGE>
                      HELMSTAR GROUP, INC. AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS


(NOTE B) - Joint Ventures:  (continued)

         [2]      (continued)

<TABLE>
<CAPTION>
                                                     Year Ended December 31,
                                                   ----------------------------
                                                       1996             1995
                                                   -----------      -----------
<S>                                                <C>              <C>

             Rental income ...................     $ 2,334,006      $ 2,176,689
             Operating expenses ..............        (838,317)        (830,730)
             Other expense ...................        (902,863)        (876,476)
                                                   -----------      -----------

                       Net income ............     $   592,826      $   469,483
                                                   ===========      ===========

Company's share ..............................     $   357,037      $   334,551
Adjustment for distribution in
       excess of basis .......................                          328,269
                                                   -----------      -----------
                                                       357,037          662,820
    Receipt of an item previously
       reserved (a) ..........................         200,000
    Company's share of gain on sale of
       assets of a joint venture (b)  ........                        1,276,267
                                                   -----------      -----------

    Profit from joint ventures ...............     $   557,037      $ 1,939,087
                                                   ===========      ===========
</TABLE>
         (a)      During 1996 the Company received payment in satisfaction of
                  the co-venturers existing obligations for a venture that was
                  fully reserved for in a prior year.

         (b)      First Highpoint  Limited  Partnership,  a partnership in which
                  the Company had a majority financial interest, sold a 140 unit
                  apartment project, located in Plano, Texas.

         [3] A reconciliation  of the Company's  investment in real estate joint
ventures as at December 31, 1996 is as follows:
<TABLE>
<CAPTION>
<S>                                                    <C>
                  Balance, beginning of year. . . . .  $1,324,023
                  Net income. . . . . . . . . . . . .     357,037
                  Distributions . . . . . . . . . . .    (262,677)
                                                       ----------
                  Balance, end of year. . . . . . . .  $1,418,383
                                                       ==========
</TABLE>
(continued)
<PAGE>
                      HELMSTAR GROUP, INC. AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS


(NOTE C) - Notes Payable:

         The Company has  entered  into  warehouse  loan  agreements  with three
financial institutions,  permitting the Company to borrow a total of $12,250,000
at December 31, 1996.  Borrowings under the warehouse loan agreements are due on
demand and are  collateralized  by mortgage loans held for sale which aggregated
$2,647,692  at December 31, 1996.  The notes bear interest at rates varying from
the prime rate plus 1% to the prime rate plus 2%.

         The Company  maintains a margin account with a broker.  At times during
the year,  the  Company  was  advanced  funds  with the  related  securities  as
collateral.


(NOTE D) - Income Taxes:

         The Company and its subsidiaries file  consolidated  federal income tax
returns.

         The  (benefits)  provisions for income taxes consist of state and local
taxes of $(7,885) and $37,611 for the years ended December 31, 1996 and December
31, 1995, respectively.

         At December 31, 1996 the Company has net operating  loss  carryforwards
for federal income tax purposes of approximately $13,750,000,  which expire from
2005 through 2011. The  difference  between the  accumulated  loss for financial
reporting  purposes and that for federal income tax purposes is primarily due to
losses  which the Company had not been able to carry back to prior years for tax
purposes.

         The Company has not recorded the $6,550,000 benefit from either its net
operating loss  carryforward of $6,325,000 or litigation  provision of $225,000,
because  realization  of the  benefit is  uncertain  and  therefore  a valuation
allowance (increased by approximately $1,550,000 for 1996) has been provided.

         The Internal Revenue Service ("IRS") is examining the Company's federal
income tax returns for the years 1985 through 1989. The IRS has proposed certain
adjustments to the returns for possible  additional income tax due in the amount
of  approximately  $958,000  (exclusive of interest and  penalties). The Company
does not agree with the  proposed  adjustments  and has  engaged  tax counsel to
protest them. (See Note F[4].)

(continued)
<PAGE>
                      HELMSTAR GROUP, INC. AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS


(NOTE D) - Income Taxes:  (continued)

         The  effective tax rate varied from the  statutory  federal  income tax
rate as follows:
<TABLE>
<CAPTION>

                                                    For the
                                                   Year Ended
                                                   December 31,
                                                 --------------
                                                  1996     1995
                                                 ------   ------
<S>                                              <C>      <C>

         Statutory rate (benefit) . . . . . . .  (34.0)%   34.0 %

         State and local taxes (benefit), net
            of federal income tax effect. . . .  (12.2)    14.0

         Nondeductible expenses . . . . . . . .             4.8

         Valuation allowance. . . . . . . . . .   45.9    (49.7)
                                                 ------   ------

         Effective rate . . . . . . . . . . . .    (.3)%    3.1 %
                                                 ======   ======
</TABLE>
(NOTE E) - Incentive Compensation Plan:

         Under the Company's 1990 Incentive  Compensation Plan (the "Plan"), the
Company has increased its reserved  shares by 250,000 in 1996 to an aggregate of
750,000  shares of its  common  stock for  issuance  to  officers  and other key
employees  in the  form  of  incentive  or  nonqualified  stock  options,  stock
appreciation rights, or restricted stock awards. Incentive stock options granted
under the Plan must be exercisable at a price per share not less than 100% (110%
in the case of a 10%  stockholder)  of the fair  market  value of the  Company's
common stock on the date of grant.  Options cannot be exercised  after ten years
(five  years  in  the  case  of a 10%  stockholder)  from  the  date  of  grant.
Nonqualified  stock options  cannot be exercised  prior to one year or after ten
years from the date of grant.  During 1992,  options to purchase  150,000 shares
were granted at an exercise price of $.5625 per share.  In 1996,  50,000 options
were cancelled.  There was 100,000  outstanding options to purchase common stock
at December 31, 1996 of which 75,000 are exercisable.

(NOTE F) - Commitments, Contingencies and Other Matters:

         [1] In 1995,  the Company,  per the terms of its lease on its corporate
headquarters,  paid a penalty of $70,000 to cancel the lease effective  February
29, 1996.  The Company  renegotiated a new lease on the same space thru February
28, 2006 at a lower rate. Rental expense was $351,200 and $319,500 for the years
ended December 31, 1996 and December 31, 1995, respectively.

(continued)
<PAGE>
                      HELMSTAR GROUP, INC. AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS


(NOTE F) - Commitments, Contingencies and Other Matters:  (continued)
<TABLE>
<CAPTION>

                  Minimum future annual rental payments are as follows:
<S>                                                        <C>
                           1997 . . . . . . . . . . . . .  $  205,100
                           1998 . . . . . . . . . . . . .     147,200
                           1999 . . . . . . . . . . . . .     127,900
                           2000 . . . . . . . . . . . . .     127,900
                           2001 . . . . . . . . . . . . .     127,900
                           Thereafter . . . . . . . . . .     532,900
                                                           ----------

                                                           $1,268,900
                                                           ==========
</TABLE>
         [2] The  Company  has a  Retirement  Savings  Plan  for its  employees,
pursuant to Section  401(k) of the Internal  Revenue Code.  The Company,  at its
discretion,  may match 25% of employee contributions.  Employee contributions to
the  Plan  and  the  Company's  matching  contributions  vest  immediately.  The
Company's  contribution to the Plan in 1996 and 1995 was  approximately  $47,600
and $9,300, respectively.

         [3] During 1996 and 1995 consulting fees from one financial institution
accounted for approximately 3% and 12%, respectively, of total revenue.

         [4] In certain  instances the Company  provided  reserves for unsettled
lawsuits and other  matters when the  potential  contingent  liability  could be
reasonably  quantified  and a negative  outcome is probable.  Provision for such
contingent liabilities are included in the Company's financial statements.  When
the potential  contingent  liability could not be reasonably  quantified and the
ultimate outcome presently cannot be determined,  no provision for any liability
that may result has been made in the Company's financial statements.


(NOTE G) - Litigation:

         [1] In July 1993, an action was commenced against multiple  defendants,
including the Company,  in the California  Superior Court. The plaintiff asserts
numerous  claims in  connection  with the  issuance of Housing  Authority of the
County of Riverside, Multi-Family Housing Revenue Bonds, Series 1985A ("Ironwood
Bonds"). The Company was the underwriter of the Ironwood Bonds.

                  This  lawsuit  had  been  transferred  to  the  United  States
District Court for the Central  District of  California.  Certain claims against
one defendant were severed and  transferred to the United States  District Court
for the Southern  District of Texas.  The other claims,  including those against
the  Company,  were  remanded to the  Superior  Court of  California,  County of
Riverside.


(continued)
<PAGE>
                      HELMSTAR GROUP, INC. AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS


(NOTE G) - Litigation:  (continued)

         [1]      (continued)

                  The plaintiff allegedly acquired an apartment project financed
with the  proceeds of such bond issue from the original  developer.  The Housing
Authority sought indemnity from the plaintiff for expenses it allegedly incurred
in contesting the IRS's assertion that the Ironwood Bonds were not tax-exempt.

                  A cross-claim was filed against multiple defendants, including
the Company, by one co-defendant for indemnification and apportionment of fault.
Two other  co-defendants  filed a cross-complaint  alleging claims in connection
with the Ironwood Bonds and another bond issue,  Housing Authority of the County
of Riverside,  Multi-Family  Housing  Revenue Bonds,  Series 1985A  ("Whitewater
Bonds")  against  multiple  defendants,  including the Company.  By a standstill
agreement dated January 21, 1994, cross-claimants and certain parties, including
the Company,  have agreed not to pursue cross-claims against one another at this
time.

                  The plaintiff seeks  compensation and punitive damages as well
as  indemnification  and equitable relief. In four counts,  two of which involve
the  Company  as well as other  defendants,  the  plaintiff  seeks  compensatory
damages plus interest estimated to be no less than $5 million per count.

                  At  a  status  conference  held  on  December  17,  1996,  the
plaintiff's  counsel failed to appear and then at a hearing held on February 26,
1997,  the judge  dismissed the complaint by the plaintiff.  The  cross-claim is
still pending and the status conference on that claim was continued to March 26,
1997.  The Company  believes  that the action is without merit and is vigorously
defending  its position.  It is too early to assess the  potential  for, and the
amount of, any damage in connection with this lawsuit.

                  In October 1995, the United States Tax Court  determined  that
interest  earned  on the  Ironwood  Bonds  and  the  Whitewater  Bonds  was  not
tax-exempt.  The  petitioners,  who are not  related  to the  plaintiff  in this
litigation, have appealed the Tax Court's decision to the United States Court of
Appeals for the Ninth Judicial Circuit.

         [2] In May 1996, the Company was served with a summons and complaint in
connection with a class action commenced in March 1996 against multiple parties.
This action was filed in the Superior Court of California,  County of Riverside.
The  plaintiffs  brought  this  action  on behalf  of  themselves  and all other
purchasers  of bonds issued by the Housing  Authority of the County of Riverside
for the Whitewater Garden Apartments project and the Ironwood Apartments

(continued)
<PAGE>
                      HELMSTAR GROUP, INC. AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS


(NOTE G) - Litigation:  (continued)

         [2]  (continued)

project (the  "Bonds").  The plaintiffs  maintain the defendants  misrepresented
that the  interest  on the Bonds would be exempt from  federal  income tax.  The
plaintiffs allege negligent misrepresentation, fraudulent misrepresentation, and
concealment  against  multiple  defendants,  including the Company,  relating to
actions with respect to the issuance and  underwriting  of the Bonds in 1985 and
1986. The plaintiffs  also filed claims  involving  breach of written  contract,
breach of oral contract,  breach of fiduciary duty, and negligent representation
against multiple  defendants other than the Company.  The plaintiffs are seeking
damages for taxes,  penalties,  and interest  they have paid or are obligated to
pay, attorneys fees, costs,  punitive damages,  and other relief the court deems
just. The plaintiffs maintain that taxes,  interest, and penalties are in excess
of $3 million or an amount to be proved at the time of trial.

                  The  Company has agreed to enter into a  stipulation  with the
plaintiffs which will stay all proceedings without prejudice pending the outcome
of an appeal now before the United States Court of Appeals for the Ninth Circuit
in Harbor  Bancorp,  a  separate  action in which the  United  States  Tax Court
determined  that  interest  earned on the Bonds was not tax  exempt.  A proposed
stipulation  staying the  proceedings,  and  consolidating  a related action not
involving the Company was filed by the plaintiff in July 1996.

                  On November 15, 1996,  this case was  continued for 90 days by
the  court;  the court  did not hold such  hearing  and  currently  there are no
further proceedings.

                  The  Company  plans to defend  vigorously  against  all of the
plaintiffs'  allegations  involving  it. It is too early to assess the potential
for, and the amount of, any damages in connection with this action.

         [3] There are  various  claims  against  the  Company  with  respect to
matters arising out of the ordinary conduct of its business. Outside counsel for
the Company has advised that at this time they cannot offer an opinion as to the
probable  outcome of any of these  matters.  In the opinion of  management,  the
resolution  of these  matters  will not have a  material  adverse  effect on the
Company's financial position or the results of operations.

(continued)
<PAGE>
                      HELMSTAR GROUP, INC. AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS


(NOTE H) - Financial Information Relating to Industry Segments:

         The Company's  operations  are classified  into two principal  industry
segments: merchant banking and mortgage banking.
<TABLE>
<CAPTION>
                                          Year Ended December 31,
                                         ------------  ----------
                                             1996         1995
                                         ------------  ----------
<S>                                      <C>           <C>
Revenues from unaffiliated customers:
   Merchant banking . . . . . . . . . .  $   676,037   $2,711,078
   Mortgage banking . . . . . . . . . .    2,136,580    2,094,400
   Other corporate income . . . . . . .      676,998    1,396,981
                                         ------------  ----------

          Total revenues. . . . . . . .  $ 3,489,615   $6,202,459
                                         ============  ==========
Income (loss) from operations:
   Merchant banking . . . . . . . . . .  $  (491,579)  $1,437,920
   Mortgage banking . . . . . . . . . .   (1,570,464)    (349,200)
                                         ------------  -----------

          Income (loss) from operations   (2,062,043)   1,088,720

General corporate income (expenses) -
   net. . . . . . . . . . . . . . . . .     (309,922)     133,560
                                         ------------  ----------

Income (loss) before taxes. . . . . . .  $(2,371,965)  $1,222,280
                                         ============  ==========
Identifiable assets:
   Merchant banking . . . . . . . . . .  $ 1,418,383   $1,324,023
   Mortgage banking . . . . . . . . . .    4,611,869    3,840,700
   General corporate. . . . . . . . . .    2,258,646    4,821,943
                                         ------------  ----------

               T o t a l. . . . . . . .  $ 8,288,898   $9,986,666
                                         ============  ==========
</TABLE>
(NOTE I) - Financial Instruments With Off-Balance-Sheet Risk and
                   Concentration of Risk:

         [1] In the  normal  course  of  business,  the  Company  is a party  to
financial instruments which have  off-balance-sheet  risk. The Company's risk of
accounting  loss due to the credit risks and market risks  associated with these
off-balance-sheet  instruments varies with the type of financial  instrument and
principal  amounts and are not necessarily  indicative of the degree of exposure
involved.  Credit risk  represents the  possibility of a loss occurring from the
failure of another party to perform in accordance  with the terms of a contract.
Market risk represents the possibility  that future changes in market prices may
make a financial instrument more or less valuable.

(continued)
<PAGE>
                      HELMSTAR GROUP, INC. AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS


(NOTE I) - Financial Instruments With Off-Balance-Sheet Risk and
                   Concentration of Risk:  (continued)

         [1]  (continued)

                  The  following  table  summarizes  the  Company's  significant
financial  instruments  attributable  to  its  mortgage  banking  operations  at
December 31, 1996:
<TABLE>
<CAPTION>
<S>                                                          <C>
         Commitments to extend credit for mortgage loans. .  $4,766,600
         Commitments to sell mortgage loans . . . . . . . .   4,766,600
</TABLE>


                  In the normal course of business the Company  enters into both
optional and mandatory  commitments  to sell mortgage  loans that it originates.
The Company  commits to sell the loans at  specified  prices in a future  period
ranging  from 30 to 120 days from the date of  commitment  directly  to mortgage
investors.  Market risk is associated  with these  financial  instruments  which
results from  movements in interest rates and is reflected by gains or losses on
the sale of the mortgage loans determined by the difference between the price of
the loan and the price guaranteed in the commitment.  In certain instances,  the
Company is liable to certain  investors  for losses  incurred.  Losses have been
historically minimal.

                  As part of its  investment and risk  management  strategies to
profit  from  anticipated  market  movements,   the  Company  maintains  trading
positions  in a variety  of  derivative  financial  instruments  (e.g.,  futures
contracts, market indexes, and option contracts). Trading in derivatives is used
to leverage the price volatility in the underlying financial instrument or index
and  for  speculative  and  risk  management  purposes.  Futures  contracts  are
exchange-traded  commitments to purchase or sell other financial  instruments at
specified terms at specified future dates.  Option contracts  provide the holder
with  the  right,  but not  the  obligation,  to  purchase  or sell a  financial
instrument at a specified price before or on an established date.

                  All positions are reported at fair value,  and changes in fair
value are reflected in operations as they occur.

(continued)
<PAGE>
                      HELMSTAR GROUP, INC. AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS

(NOTE I) - Financial Instruments With Off-Balance-Sheet Risk and
                   Concentration of Risk:  (continued)

         [2] The following table presents  derivative  contracts at December 31,
1996 and average fair value for the year ended December 31, 1996.
<TABLE>
<CAPTION>
                Trading Account

                                                                    Position at End of Year
                                           ---------------------------------------------------------------
                                           Number of            Average            Notional
                                           Contracts           Fair Value            Value        Position
                                           ---------           ----------            -----        --------
<S>                                           <C>             <C>                 <C>              <C>
United States Treasury Bonds . . .            50              $5,631,000          $5,000,000       Long
<CAPTION>

                                                           Average Fair Value During the Year
                                               -----------------------------------------------------------
                                                Average                             Average
                                                 Fair                                Fair
                                                 Value         Position              Value       Position
                                                 -----         --------              -----       --------
<S>                                            <C>               <C>               <C>              <C>
United States Treasury Bonds . . .             $2,117,000        Long              $2,613,000       Short
Muni index . . . . . . . . . . . .              1,330,000        Long               4,369,000       Short
Japanese Yen . . . . . . . . . . .                 56,000        Long                   2,000       Short
Option contracts . . . . . . . . .                  4,000        Long                               Short
</TABLE>

                  Net   gains   aggregated   on   these   financial   instrument
transactions  for the year ended  December  31, 1996 and  December 31, 1995 were
$478,496 and $711,180, respectively.

         Substantially  all the  Company's  cash and  securities  positions  are
deposited with clearing brokers for safekeeping purposes. The brokers are highly
capitalized and are members of major securities exchanges.
<PAGE>






















                          BLOWING ROCK OUTLET PARTNERS

                      FINANCIAL STATEMENTS AND AUDIT REPORT

                                December 31, 1996
<PAGE>






                          BLOWING ROCK OUTLET PARTNERS
                                    CONTENTS





          REPORT OF INDEPENDENT ACCOUNTANTS

          BALANCE SHEET

          STATEMENTS OF INCOME AND VENTURERS' DEFICIT

          STATEMENTS OF CASH FLOWS

          NOTES TO FINANCIAL STATEMENTS

<PAGE>
                                Joseph Decosimo
                                  and Company
                          Certified Public Accountants

              A TENNESSEE REGISTERED LIMITED LIABILITY PARTNERSHIP

Private Companies Practice Section          Member AICPA Division for CPA Firms
                              SEC Practice Section



                        REPORT OF INDEPENDENT ACCOUNTANTS



To the Co-Venturers
Blowing Rock Outlet Partners
Nashville, Tennessee

We have audited the accompanying  balance sheets of Blowing Rock Outlet Partners
(a joint venture) as of December 31, 1996, and the related  statements of income
and venturers'  deficit and cash flows for the years ended December 31, 1996 and
1995. These financial  statements are the  responsibility of the joint venture's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects, the financial position of Blowing Rock Outlet Partners as
of December 31, 1996,  and the results of its  operations and its cash flows for
the years  ended  December  31,  1996 and 1995,  in  conformity  with  generally
accepted accounting principles.



/s/Joseph Decosimo and Company, LLP






Chattanooga, Tennessee
January 14, 1997
<PAGE>
<TABLE>
<CAPTION>
                          BLOWING ROCK OUTLET PARTNERS
                                  BALANCE SHEET
                                December 31, 1996





          ASSETS
<S>                                                                 <C>
Land ....................................................           $ 1,658,000
Building and Improvements ...............................             5,132,517
Construction-In-Progress ................................                13,738
Fixtures ................................................                 7,551
                                                                    -----------
                                                                      6,811,806
Accumulated Depreciation ................................            (1,369,899)
                                                                    -----------
                                                                      5,441,907

Cash and Cash Equivalents ...............................                45,825
Receivables .............................................                14,697
Prepaid Expenses ........................................               104,668
Intangible Assets, net ..................................               180,740
                                                                    -----------

TOTAL ASSETS ............................................           $ 5,787,837
                                                                    ===========


          LIABILITIES AND VENTURERS' DEFICIT

LIABILITIES
  Note Payable ..........................................           $ 6,421,555
  Accounts Payable and Deferred Revenue .................                 9,302
  Tenant Deposits .......................................                37,950
  Due to Related Parties ................................                43,930
  State Income Taxes Payable ............................                33,877
                                                                    -----------

          Total Liabilities .............................             6,546,614

VENTURERS' DEFICIT ......................................              (758,777)
                                                                    -----------

TOTAL LIABILITIES AND VENTURERS' DEFICIT ................           $ 5,787,837
                                                                    ===========







    The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                          BLOWING ROCK OUTLET PARTNERS
                   STATEMENTS OF INCOME AND VENTURERS' DEFICIT
                     Years Ended December 31, 1996 and 1995



                                                        1996             1995
                                                    -----------      -----------
<S>                                                 <C>              <C>
REVENUES
  Rental Revenue ..............................     $ 1,365,476      $ 1,243,504
                                                    -----------      -----------

EXPENSES
  Management Fees .............................          68,274           62,175
  Leasing Commissions .........................          21,869           22,469
  Professional Services .......................          11,298            8,250
  Common Area Maintenance, net of
    recoveries from tenants ...................          18,215            9,077
  Landlord Repairs ............................           5,815           15,425
  Bad Debt Expense (Recoveries) ...............           7,165             (315)
  Other .......................................            --                 47
                                                    -----------      -----------
                                                        132,636          117,128
                                                    -----------      -----------

INCOME FROM OPERATIONS ........................       1,232,840        1,126,376
                                                    -----------      -----------

OTHER INCOME (EXPENSE)
  Interest Income .............................           7,488            7,262
  Interest Expense ............................        (556,815)        (506,455)
  Depreciation ................................        (199,695)        (201,759)
  Amortization ................................         (36,797)         (49,851)
  State Income Tax ............................         (33,877)         (31,051)
  Real Estate Taxes, net of recoveries
    from tenants ..............................          (2,712)          (2,198)
                                                    -----------      -----------
                                                       (822,408)        (784,052)
                                                    -----------      -----------

NET INCOME ....................................         410,432          342,324

VENTURERS' EQUITY (DEFICIT) - beginning of year        (764,209)       1,834,880

  Distributions ...............................        (405,000)      (2,941,413)
                                                    -----------      -----------

VENTURERS' DEFICIT - end of year ..............     $  (758,777)     $  (764,209)
                                                    ===========      ===========








    The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                          BLOWING ROCK OUTLET PARTNERS
                            STATEMENTS OF CASH FLOWS
                     Years Ended December 31, 1996 and 1995


                                                          1996             1995
                                                      -----------      -----------
<S>                                                   <C>              <C>
RECONCILIATION OF NET INCOME TO NET CASH
  PROVIDED BY OPERATING ACTIVITIES
  Net Income ....................................     $   410,432      $   342,324
  Adjustments to Reconcile Net
    Income to Net Cash Provided by
    Operating Activities -
    Depreciation and Amortization ...............         236,492          251,610
    Bad Debt Expense (Recoveries) ...............           7,165             (315)
    Changes in Operating Assets and Liabilities -
      Decrease (Increase) in -
        Receivables .............................         (20,207)           2,534
        Prepaid Expenses ........................         (33,566)          39,311
        Deferred Leasing Fees ...................         (15,722)          (3,511)
      Increase (Decrease) in -
        Accounts Payable and Deferred Revenue ...         (21,647)          15,313
        Accrued Interest ........................            --             51,171
        Tenant Deposits .........................           8,012           (3,409)
        Due to Related Parties ..................           4,188              173
        State Income Taxes Payable ..............           2,812           (7,287)
                                                      -----------      -----------

       Net Cash Provided by Operating Activities          577,959          687,914
                                                      -----------      -----------

CASH FLOWS FROM INVESTING ACTIVITIES
  Capital Expenditures ..........................         (71,975)         (34,825)
                                                      -----------      -----------
CASH FLOWS FROM FINANCING ACTIVITIES
  Net Proceeds from Issuance of
    Long-Term Debt ..............................            --          2,551,413
  Repayment of Notes Payable ....................         (79,486)        (168,959)
  Distributions to Venturers ....................        (405,000)      (2,941,413)
  Loan Fees Paid ................................            --            (90,894)
                                                      -----------      -----------

       Net Cash Used by Financing Activities ....        (484,486)        (649,853)
                                                      -----------      -----------
NET INCREASE IN CASH
  AND CASH EQUIVALENTS ..........................          21,498            3,236

CASH AND CASH EQUIVALENTS -
    beginning of year ...........................          24,327           21,091
                                                      -----------      -----------
CASH AND CASH EQUIVALENTS -
    end of year .................................     $    45,825      $    24,327
                                                      ===========      ===========

    The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                          BLOWING ROCK OUTLET PARTNERS
                            STATEMENTS OF CASH FLOWS
                     Years Ended December 31, 1996 and 1995


                                                       1996              1995
                                                  -----------       -----------
<S>                                               <C>               <C>
SUPPLEMENTAL DISCLOSURES OF CASH
  FLOW INFORMATION
  Cash Paid During the Year for -
    Interest ..............................       $   556,815       $   455,284
    Income Taxes ..........................       $    31,064       $    38,338


SUPPLEMENTAL DISCLOSURE OF
  NONCASH FINANCING ACTIVITIES
  Issuance of Note Payable ................       $      --         $ 6,550,000
  Intangible Assets Paid at Closing .......              --            (106,103)
  Prepaid Assets Paid at Closing ..........              --             (56,656)
  Interest Paid at Closing ................              --             (78,000)
  Repayment of Note Payable
    at Closing ............................              --          (3,757,828)
                                                  -----------       -----------

NET PROCEEDS FROM ISSUANCE OF
  LONG-TERM DEBT ..........................       $      --         $ 2,551,413
                                                  ===========       ===========




    The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
                          BLOWING ROCK OUTLET PARTNERS
                          NOTES TO FINANCIAL STATEMENTS
                                December 31, 1996



SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The significant  accounting policies and practices followed by the joint venture
are as follows:

DESCRIPTION  OF  BUSINESS - Blowing  Rock  Outlet  Partners  is a joint  venture
engaged in the business of renting retail space to manufacturers'  outlet stores
in Watauga County, North Carolina.

RENTAL  INCOME - Rent is reported as income over the lease term as it is earned.
Rent received from tenants in advance is accounted for as deferred revenue.

CASH  EQUIVALENTS - The venture  considers all money market  accounts and highly
liquid debt instruments  purchased with a maturity of three months or less to be
cash equivalents.

PROPERTY AND EQUIPMENT - Property and equipment are stated at cost. Expenditures
for repairs and maintenance are charged to expense as incurred and additions and
improvements that significantly extend the lives of assets are capitalized. Upon
sale or other  retirement  of  depreciable  property,  the cost and  accumulated
depreciation  are  removed  from the  related  accounts  and any gain or loss is
reflected in operations.

Depreciation is provided on the  straight-line  method over the estimated useful
lives of the depreciable assets.

INTANGIBLE  ASSETS - Developmental  and other costs incurred  before  operations
commenced  are  capitalized  as start-up  costs.  Initial  and  renewal  leasing
commissions  are  amortized  over  the  remaining  lease  periods.  The  cost of
intangible assets is amortized using the straight-line method over the following
estimated useful lives:

                                                              Years
                                                              -----

         Deferred Leasing Fees                                  5
         Loan Fees                                              7

INCOME  TAXES - No  provision  for  federal  income  taxes is  reflected  in the
financial  statements  since the tax effects of the venture's income or loss are
passed  through to the individual  venturer.  State income taxes in the State of
North Carolina are paid by the venture on behalf of the venturers.

ESTIMATES  AND  UNCERTAINTIES  - The  preparation  of  financial  statements  in
conformity with generally accepted accounting  principles requires management to
make estimates and  assumptions  that affect the reported  amounts of assets and
liabilities  and disclosure of contingent  assets and liabilities at the date of
the  financial  statements  and the  reported  amounts of revenues  and expenses
during the reporting period. Actual results could differ from those estimates.
<PAGE>
                          BLOWING ROCK OUTLET PARTNERS
                          NOTES TO FINANCIAL STATEMENTS
                                December 31, 1996



ORGANIZATION

Blowing Rock Outlet  Partners was organized under the laws of the State of North
Carolina  on June  10,  1988,  for the  purpose  of  acquiring,  developing  and
operating a shopping center in Watauga County, North Carolina. The two venturers
are Burrows,  Hayes  Company,  Inc. (BHC) and Company  Stores  Management  Corp.
(CSMC).

The joint venture agreement provides that net cash flow, as defined therein,  is
allocated  and  distributed  first to BHC up to the amount of the  current  year
preferred return and any unpaid preferred return from prior years. Any remaining
balance is allocated 55% to BHC and 45% to CSMC.  The preferred  return is equal
to  10%  per  annum  of  BHC's  capital  contribution  of  $1,449,000  less  any
distributions  in excess of the preferred  return paid from sale or  refinancing
proceeds.  In April 1995, the joint venture  refinanced the rental  property and
BHC  received  a  distribution  from loan  proceeds  in  excess  of  $1,449,000.
Accordingly,  the  joint  venture  no  longer  has to  make a  preferred  return
allocation. All net cash flow is distributable 55% to BHC and 45% to CSMC.

Taxable income is allocated first to BHC to the extent of all  distributions  of
the  preferred  return for the current  year and for all prior  years,  less all
prior   allocations  of  taxable  income   relating  to  the  preferred   return
distributions  made in previous years.  Thereafter,  taxable income is allocated
55% to BHC and 45% to CSMC.


INTANGIBLE ASSETS

Intangible assets consist of the following:
<TABLE>
<CAPTION>
<S>                                                                   <C>
Deferred Leasing Fees .................................               $  52,187
Loan Fees .............................................                 196,997
                                                                      ---------
                                                                        249,184
Accumulated Amortization ..............................                 (68,444)
                                                                      ---------
                                                                      $ 180,740
                                                                      =========
</TABLE>
<PAGE>
                          BLOWING ROCK OUTLET PARTNERS
                          NOTES TO FINANCIAL STATEMENTS
                                December 31, 1996



NOTE PAYABLE

The note  payable is a LIBOR plus 3.10% note  collateralized  by real estate and
the assignment of leases and rents. The interest rate is determined semiannually
at the lesser of LIBOR plus 3.10%,  13.5375% or the maximum legal rate.  Monthly
payments were $54,297 including  interest as of December 31, 1996, and are reset
semiannually  to reflect  changes in the interest rate. The remaining  principal
balance and accrued  interest are due May 1, 2002.  The venture is also required
under the note agreement to make monthly  payments  totaling $3,500 to establish
reserves  which may be drawn against under  certain  circumstances  for interest
payments,   leasing   commissions  and  certain   improvements  and  maintenance
expenditures.

The note is dated April 11, 1995, and the proceeds from this borrowing were used
to satisfy by direct  payment at closing all  remaining  indebtedness  under the
note payable to NationsBank of North Carolina.

Aggregate maturities of long-term debt for the five years subsequent to December
31, 1996, are as follows:
<TABLE>
<CAPTION>

    Year Ending
    -----------
<S>                                                            <C>
  December 31, 1997                                            $  94,585
  December 31, 1998                                            $ 103,464
  December 31, 1999                                            $ 113,177
  December 31, 2000                                            $ 123,802
  December 31, 2001                                            $ 135,422
</TABLE>


RELATED PARTY TRANSACTIONS

Effective  April 1, 1995, CS Partners (CSP) began  managing the rental  property
for 5% of  total  rents  collected.  CSP is an  affiliate  of  CSMC,  one of the
venturers.  Prior to such time, CSMC managed the rental property for 5% of total
rents  collected.  Management fees paid totaled $68,274 for 1996 and $62,175 for
1995.

CSP also assumed  leasing  agent  responsibilities  on April 1, 1995.  The joint
venture  pays CSP an  initial  fee of 12.5% of the  total  base  rental  dollars
accruing  for the first  year of new  leases  and 3% of the base and  percentage
rents each year thereafter for the term of said lease. In addition,  the venture
pays a 2% commission on any leases which are renewed.  Prior to April 1, 1995, a
different  affiliate  of CSMC  acted as  leasing  agent for the same  commission
arrangement as outlined above. Leasing commissions paid totaled $37,590 for 1996
and $25,980 for 1995.
<PAGE>
                          BLOWING ROCK OUTLET PARTNERS
                          NOTES TO FINANCIAL STATEMENTS
                                December 31, 1996



LEASES

Minimum future  rentals to be received by the joint venture under  noncancelable
operating leases as of December 31, 1996, consist of the following:
<TABLE>
<CAPTION>

     Year Ending
     -----------
<S>                                                            <C>
  December 31, 1997                                            $ 1,156,716
  December 31, 1998                                              1,090,935
  December 31, 1999                                                726,739
  December 31, 2000                                                370,746
  December 31, 2001                                                231,129
  Later Years                                                      279,622
                                                                 ---------
                                                               $ 3,855,887
                                                               ===========
</TABLE>


The joint  venture  receives  rents from tenants under  noncancelable  operating
leases typically with five year lease terms. Virtually all tenants pay a minimum
guaranteed  rental based on square  footage and a  percentage  rental based on a
percentage of gross sales over a certain sales level per year.  Percentage rents
totaled $88,282 for 1996 and $76,406 for 1995.


FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amount of cash and cash equivalents  approximates fair value due to
the short maturity of those instruments.

The  carrying  amount of the note payable  approximates  fair value based on the
borrowing  rates  currently  estimated to be available to the joint  venture for
bank loans with similar terms.
<PAGE>
























                           NAGS HEAD OUTLET PARTNERS,

                         A NORTH CAROLINA JOINT VENTURE

                      FINANCIAL STATEMENTS AND AUDIT REPORT

                                December 31, 1996

<PAGE>







                           NAGS HEAD OUTLET PARTNERS,
                         A NORTH CAROLINA JOINT VENTURE
                                    CONTENTS






          REPORT OF INDEPENDENT ACCOUNTANTS

          BALANCE SHEET

          STATEMENTS OF INCOME AND VENTURERS' EQUITY

          STATEMENTS OF CASH FLOWS

          NOTES TO FINANCIAL STATEMENTS
<PAGE>
                                Joseph Decosimo
                                   and Company
                          Certified Public Accountants

              A TENNESSEE REGISTERED LIMITED LIABILITY PARTNERSHIP

Private Companies Practice Section          Member AICPA Division for CPA Firms
                              SEC Practice Section



                        REPORT OF INDEPENDENT ACCOUNTANTS


To the Co-Venturers
Nags Head Outlet Partners,
  a North Carolina Joint Venture
Nags Head, North Carolina

We have audited the accompanying  balance sheets of Nags Head Outlet Partners, a
North Carolina Joint Venture as of December 31, 1996, and the related statements
of income and venturers'  equity and cash flows for the years ended December 31,
1996  and  1995.  These  financial  statements  are  the  responsibility  of the
venture's  management.  Our  responsibility  is to  express  an opinion on these
financial statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the financial  position of Nags Head Outlet Partners,  a
North  Carolina  Joint  Venture as of December 31, 1996,  and the results of its
operations and its cash flows for the years ended December 31, 1996 and 1995, in
conformity with generally accepted accounting principles.



/s/Joseph Decosimo and Company, LLP






Chattanooga, Tennessee
January 14, 1997
<PAGE>
<TABLE>
<CAPTION>
                           NAGS HEAD OUTLET PARTNERS,
                         A NORTH CAROLINA JOINT VENTURE
                                  BALANCE SHEET
                                December 31, 1996




          ASSETS
<S>                                                                 <C>
Land .....................................................          $ 1,273,072
Building and Improvements ................................            6,207,189
                                                                    -----------
                                                                      7,480,261
Accumulated Depreciation .................................           (1,555,739)
                                                                    -----------
                                                                      5,924,522

Cash and Cash Equivalents ................................              155,135
Receivables, net .........................................                  159
Prepaid Expenses .........................................               52,897
Intangible Assets, net ...................................               22,419
                                                                    -----------

TOTAL ASSETS .............................................          $ 6,155,132
                                                                    ===========


          LIABILITIES AND VENTURERS' EQUITY

LIABILITIES
  Note Payable ...........................................          $ 4,018,010
  Accounts Payable and Deferred Revenue ..................                8,875
  Accrued Interest .......................................               16,128
  Tenant Deposits ........................................               28,751
  Due to Related Parties .................................                3,996
  State Income Taxes Payable .............................               22,079
                                                                    -----------

          Total Liabilities ..............................            4,097,839

VENTURERS' EQUITY ........................................            2,057,293
                                                                    -----------

TOTAL LIABILITIES AND VENTURERS' EQUITY ..................          $ 6,155,132
                                                                    ===========







    The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                           NAGS HEAD OUTLET PARTNERS,
                         A NORTH CAROLINA JOINT VENTURE
                   STATEMENTS OF INCOME AND VENTURERS' EQUITY
                     Years Ended December 31, 1996 and 1995



                                                     1996               1995
                                                 -----------        -----------
<S>                                              <C>                <C>
REVENUES
  Rental Revenue .........................       $   968,530        $   933,185
                                                 -----------        -----------

EXPENSES
  Management Fees ........................            48,427             46,659
  Leasing Commissions ....................            14,392              8,260
  Professional Services ..................            18,652              5,750
  Common Area Maintenance, net of
    recoveries from tenant ...............               949             (8,600)
  Landlord Repairs .......................            12,427              9,596
  Tenant Improvements ....................             2,248                859
  Bad Debt Expense .......................              --                4,852
  Other ..................................             4,673              4,259
                                                 -----------        -----------
                                                     101,768             71,635
                                                 -----------        -----------

INCOME FROM OPERATIONS ...................           866,762            861,550
                                                 -----------        -----------

OTHER INCOME (EXPENSE)
  Interest Income ........................             6,258              5,913
  Interest Expense .......................          (359,794)          (383,196)
  Depreciation ...........................          (277,934)          (285,256)
  Amortization ...........................           (30,500)           (54,301)
  State Income Tax .......................           (22,398)           (17,551)
                                                 -----------        -----------
                                                    (684,368)          (734,391)
                                                 -----------        -----------

NET INCOME ...............................           182,394            127,159

VENTURERS' EQUITY - beginning of year ....         1,904,899          1,937,740

    Distributions ........................           (30,000)          (160,000)
                                                 -----------        -----------

VENTURERS' EQUITY - end of year ..........       $ 2,057,293        $ 1,904,899
                                                 ===========        ===========


    The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                           NAGS HEAD OUTLET PARTNERS,
                         A NORTH CAROLINA JOINT VENTURE
                            STATEMENTS OF CASH FLOWS
                     Years Ended December 31, 1996 and 1995

                                                          1996           1995
                                                       ---------      ---------
<S>                                                    <C>            <C>
RECONCILIATION OF NET INCOME TO
  NET CASH PROVIDED BY
  OPERATING ACTIVITIES
  Net Income .....................................     $ 182,394      $ 127,159
  Adjustments to Reconcile Net Income to
    Net Cash Provided by Operating Activities -
    Depreciation and Amortization ................       308,434        339,557
    Bad Debt Expense .............................          --            4,852
    Changes in Operating Assets and Liabilities -
      Decrease (Increase) in -
        Receivables ..............................         8,654        (10,220)
        Prepaid Expenses .........................       (38,036)        12,911
        Deferred Leasing Fees ....................        (4,702)        (6,435)
      Increase (Decrease) in -
        Accounts Payable and Deferred Revenue ....        (2,621)        (1,813)
        Accrued Interest .........................        (1,155)        (1,045)
        Tenant Deposits ..........................        (8,695)        14,540
        Due to Related Parties ...................            82            415
        State Income Taxes Payable ...............         5,321          8,880
                                                       ---------      ---------
       Net Cash Provided by Operating Activities .       449,676        488,801
                                                       ---------      ---------
CASH FLOWS FROM INVESTING ACTIVITIES
  Capital Expenditures ...........................        (6,595)       (35,770)
                                                       ---------      ---------
CASH FLOWS FROM FINANCING ACTIVITIES
  Repayment of Note Payable ......................      (287,739)      (260,325)
  Distributions to Venturers .....................       (30,000)      (160,000)
  Loan Fees Paid .................................          --          (33,817)
                                                       ---------      ---------
       Net Cash Used by Financing Activities .....      (317,739)      (454,142)
                                                       ---------      ---------
NET INCREASE (DECREASE) IN CASH AND
  CASH EQUIVALENTS ...............................       125,342         (1,111)

CASH AND CASH EQUIVALENTS - beginning of year ....        29,793         30,904
                                                       ---------      ---------

CASH AND CASH EQUIVALENTS - end of year ..........     $ 155,135      $  29,793
                                                       =========      =========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW
  INFORMATION
  Cash Paid During the Year for -
    Interest .....................................     $ 360,949      $ 384,241
    Income Taxes .................................     $  17,077      $   8,671

    The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
                           NAGS HEAD OUTLET PARTNERS,
                         A NORTH CAROLINA JOINT VENTURE
                          NOTES TO FINANCIAL STATEMENTS
                                December 31, 1996



SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The significant accounting policies and practices followed by the venture are as
follows:

DESCRIPTION  OF BUSINESS - Nags Head Outlet  Partners,  a North  Carolina  Joint
Venture,  is engaged in the business of renting  retail space to  manufacturers'
outlet stores in Nags Head, North Carolina.

RENTAL  INCOME - Rent is reported as income over the lease term as it is earned.
Rent received from tenants in advance is accounted for as deferred revenue.

CASH  EQUIVALENTS - The venture  considers all money market  accounts and highly
liquid debt instruments  purchased with a maturity of three months or less to be
cash equivalents.

LAND,  BUILDINGS AND IMPROVEMENTS - Land,  buildings and improvements are stated
at cost.  Expenditures  for  repairs and  maintenance  are charged to expense as
incurred and additions and improvements that  significantly  extend the lives of
assets are capitalized.  Upon sale or other retirement of depreciable  property,
the cost and accumulated  depreciation are removed from the related accounts and
any gain or loss is reflected in operations.

Depreciation is provided on the  straight-line  method over the estimated useful
lives of the depreciable assets.

INTANGIBLE  ASSETS - Developmental  and other costs incurred  before  operations
commenced  are  capitalized  as start-up  costs.  Initial  and  renewal  leasing
commissions  are  amortized  over  the  remaining  lease  periods.  The  cost of
intangible assets is amortized using the straight-line method over the following
estimated useful lives:

                                                                  Years
                                                                  -----

Deferred Leasing Fees                                               5
Loan Fees                                                           4

INCOME  TAXES - No  provision  for  federal  income  taxes is  reflected  in the
financial  statements  since the tax effects of the venture's income or loss are
passed through to the individual  venturers.  State income taxes in the State of
North Carolina are paid by the venture on behalf of the venturers.

ESTIMATES  AND  UNCERTAINTIES  - The  preparation  of  financial  statements  in
conformity with generally accepted accounting  principles requires management to
make estimates and  assumptions  that affect the reported  amounts of assets and
liabilities  and disclosure of contingent  assets and liabilities at the date of
the  financial  statements  and the  reported  amounts of revenues  and expenses
during the reporting period. Actual results could differ from those estimates.
<PAGE>
                           NAGS HEAD OUTLET PARTNERS,
                         A NORTH CAROLINA JOINT VENTURE
                          NOTES TO FINANCIAL STATEMENTS
                                December 31, 1996



ORGANIZATION

Nags Head Outlet Partners,  a North Carolina Joint Venture,  was organized under
the laws of the State of North  Carolina on December 6, 1989, for the purpose of
acquiring,  developing  and  operating  a shopping  center in Nags  Head,  North
Carolina. The two venturers are Parker, Reld & Co., Inc. (JV) and Company Stores
Capital Corp. (CSCC).

Net cash flow,  as defined in the joint  venture  agreement,  is  allocated  and
distributed  first to JV up to the amount of the current year  preferred  return
and any unpaid  preferred  return from prior  years.  Any  remaining  balance is
allocated 63% to JV and 37% to CSCC.

Taxable income is allocated  first to JV to the extent of all  distributions  of
the  preferred  return for the current  year and for all prior  years,  less all
prior   allocations  of  taxable  income   relating  to  the  preferred   return
distributions  made in previous years.  Thereafter,  taxable income is allocated
63% to JV and 37% to CSCC.

Taxable  losses,  should  they  occur,  are  allocated  to JV up to its  capital
contribution  of $1,500,000.  Any remaining  taxable loss is allocated 63% to JV
and 37% to CSCC.


INTANGIBLE ASSETS

Intangible assets consist of the following:
<TABLE>
<CAPTION>
<S>                                                                    <C>
Deferred Leasing Fees ................................                 $ 28,664
Loan Fees ............................................                   63,818
                                                                       --------
                                                                         92,482
Accumulated Amortization .............................                  (70,063)
                                                                       --------
                                                                       $ 22,419
                                                                       ========
</TABLE>

NOTE PAYABLE

The note  payable  is an 8.5%  note  payable  to First  American  National  Bank
collateralized  by real estate.  The note requires  monthly  payments of $46,365
including principal and interest beginning April 1, 1994. Additionally, the note
requires monthly principal payments of 25% of the prior month's excess cash flow
plus  interest  payments  through  March 15, 1995,  and 50% of the prior month's
excess cash flow plus interest payments through April 1, 1997, at which time the
principal  balance plus accrued interest is due and payable in full.  Management
of the venture expects to obtain replacement  long-term financing prior to April
1, 1997.
<PAGE>
                           NAGS HEAD OUTLET PARTNERS,
                         A NORTH CAROLINA JOINT VENTURE
                          NOTES TO FINANCIAL STATEMENTS
                                December 31, 1996



RELATED PARTY TRANSACTIONS

Effective  April 1, 1995, CS Partners (CSP) began  managing the rental  property
for 5% of  total  rents  collected.  CSP is an  affiliate  of  CSCC,  one of the
venturers.  Prior to such time, a different affiliate of CSCC managed the rental
property for 5% of total rents  collected.  Management fees paid totaled $48,427
for 1996 and $46,659 for 1995.

CSP also assumed  leasing  agent  responsibilities  on April 1, 1995.  The joint
venture  pays CSP an  initial  fee of 12.5% of the  total  base  rental  dollars
accruing  for the first  year of new  leases  and 3% of the base and  percentage
rents each year thereafter for the term of said lease. In addition,  the venture
pays a 2% commission on any leases which are renewed.  Prior to April 1, 1995, a
different  affiliate  of CSCC  acted as  leasing  agent for the same  commission
arrangement as outlined above. Leasing commissions paid totaled $19,094 for 1996
and $14,695 for 1995.


LEASES

Minimum  future  rentals  to be  received  by the  venture  under  noncancelable
operating leases as of December 31, 1996, consist of the following:
<TABLE>
    Year Ending
    -----------
<S>                                                            <C>
  December 31, 1997                                            $   933,869
  December 31, 1998                                                872,819
  December 31, 1999                                                732,271
  December 31, 2000                                                460,754
  December 31, 2001                                                111,070
  Later Years                                                       85,403
                                                                 ---------
                                                               $ 3,196,186
                                                               ===========
</TABLE>

The joint  venture  receives  rents from tenants under  noncancelable  operating
leases typically with five year lease terms. Virtually all tenants pay a minimum
guaranteed  rental based on square  footage and a  percentage  rental based on a
percentage of gross sales over a certain sales level per year.  Percentage rents
totaled $31,823 for 1996 and $36,688 for 1995.


FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amount of cash and cash equivalents  approximates fair value due to
the short maturity of those instruments.

The  carrying  amount of the note payable  approximates  fair value based on the
borrowing  rates  currently  estimated to be available to the joint  venture for
bank loans with similar terms.
<PAGE>
Item 8.           Changes in and Disagreements with Accountants on Accounting
                  and Financial Disclosure.

                  None.

                                    PART III


Item 9.           Directors, Executive Officers, Promoters and Control Persons;
                  Compliance with Section 16(a) of the Exchange Act.


                  The information required to be furnished pursuant to this item
                  is  set  forth   under  the   caption   "Management"   in  the
                  registrant's  definitive  proxy statement to be filed with the
                  Securities and Exchange  Commission within 120 days of the end
                  of the fiscal year ended December 31, 1996, the period covered
                  by this Form 10-KSB, and is incorporated herein by reference.


Item 10.          Executive Compensation.

                  The information required to be furnished pursuant to this item
                  is set forth under the caption "Executive Compensation" in the
                  registrant's  definitive  proxy statement to be filed with the
                  Securities and Exchange  Commission within 120 days of the end
                  of the fiscal year ended December 31, 1996, the period covered
                  by this Form 10-KSB, and is incorporated herein by reference.


Item 11.          Security Ownership of Certain Beneficial Owners
                  and Management.

                  The information required to be furnished pursuant to this item
                  is set forth under the caption "Security  Ownership of Certain
                  Beneficial   Owners  and   Management"  in  the   registrant's
                  definitive proxy statement to be filed with the Securities and
                  Exchange  Commission  within 120 days of the end of the fiscal
                  year ended  December 31, 1996, the period covered by this Form
                  10-KSB, and is incorporated herein by reference.


Item 12.          Certain Relationships and Related Transactions.

                  The information required to be furnished pursuant to this item
                  is set forth  under the  caption  "Certain  Relationships  and
                  Related  Transactions"  in the  registrant's  definitive proxy
                  statement  to  be  filed  with  the  Securities  and  Exchange
                  Commission within 120 days of the end of the fiscal year ended
                  December 31, 1996, the period covered by this Form 10-KSB, and
                  is incorporated herein by reference.

<PAGE>
Item 13.          Exhibits, List and Reports on Form 8-K.

                  (a)      Exhibits

                           Certain  of  the  following  exhibits,  as  indicated
                  parenthetically,  were  previously  filed as exhibits to other
                  reports or  registration  statements  filed by the  Registrant
                  under  the  Securities  Act of 1933 or  under  the  Securities
                  Exchange Act of 1934 and are hereby incorporated by reference.

                      3.1   Restated   Certificate  of   Incorporation   of  the
                            Registrant  filed  on July 31,  1987 and  amendments
                            thereto  filed on June 8, 1989,  September  14, 1991
                            and December 2, 1991.  (Incorporated by reference to
                            the  Registrant's  Annual  Report on Form 10-KSB for
                            the year ended December 31, 1992.)

                      3.2   Amended  and  Restated  By-Laws  of the  Registrant.
                            (Incorporated   by  reference  to  the  Registrant's
                            Annual  Report  on Form  10-KSB  for the year  ended
                            December 31, 1995.)

                      10.0  40l(k)  Savings  Plan of the  Company as amended and
                            restated  as of January 1,  1993.  (Incorporated  by
                            reference to the Registrant's  Annual Report on Form
                            10-KSB for the year ended December 31, 1993.)

                      10.1  Lease of Citizens Mortgage Service Company's office,
                            dated November 30, 1992.  (Incorporated by reference
                            to the Registrant's Annual Report on Form 10-KSB for
                            the year ended December 31, 1992.)

                      10.2  Joint  Venture  Agreement  of  Blowing  Rock  Outlet
                            Partners  dated June 10,  1988;  First  Amendment to
                            Joint  Venture  Agreement  of  Blowing  Rock  Outlet
                            Partners   dated  August  19,   1988;   and  certain
                            ancillary     agreements    and     acknowledgments.
                            (Incorporated   by  reference  to  the  Registrant's
                            Annual  Report  on Form  10-KSB  for the year  ended
                            December 31, 1992.)

                      10.3  Second  Amendment  to  Joint  Venture  Agreement  of
                            Blowing  Rock Outlet  Partners  dated as of March 4,
                            1992. (Incorporated by reference to the Registrant's
                            Annual  Report  on Form  10-KSB  for the year  ended
                            December 31, 1995.)

                      10.4  Third  Amendment  to  Joint  Venture   Agreement  of
                            Blowing Rock Outlet  Partners dated as of January 1,
                            1996. (Incorporated by reference to the Registrant's
                            Annual  Report  on Form  10-KSB  for the year  ended
                            December 31, 1995.)

                      10.5  Lease  of the  Company's  executive  offices,  dated
                            February 29, 1996.
<PAGE>
                      10.6  Joint  Venture  Agreement  dated  December  6,  1989
                            between Parker,  Reld & Co., Inc. and Company Stores
                            Capital  Corp.  (Incorporated  by  reference  to the
                            Registrant's Annual Report on Form 10-K for the year
                            ended December 31, 1994.)

                      10.7  First  Amendment to Joint Venture  Agreement of Nags
                            Head  Outlet  Partners  dated as of January 1, 1996.
                            (Incorporated   by  reference  to  the  Registrant's
                            Annual  Report  on Form  10-KSB  for the year  ended
                            December 31, 1995.)

                      10.8  Helmstar  Group,  Inc. 1990  Incentive  Compensation
                            Plan. (Incorporated by reference to the Registrant's
                            Annual  Report  on Form  10-KSB  for the year  ended
                            December 31, 1995.)

                      10.9  Amendment to the Helmstar Group, Inc. 1990 Incentive
                            Compensation Plan.

                      10.10 Mortgage  Selling  and  Servicing  Contract  between
                            Citizens  Mortgage  Service  Company and the Federal
                            National  Mortgage  Association  dated  November 12,
                            1986.

                      10.11 Letter dated  January 10, 1980 from the Federal Home
                            Loan   Mortgage   Corporation   ("FHLMC")  to  First
                            Mortgage  Service  Company  (now  known as  Citizens
                            Mortgage   Service   Company)   approving   Citizens
                            Mortgage  Service  Company's  application  for FHLMC
                            Seller/Servicer  Status for conventional one to four
                            family and FHA/VA loans.

                      10.12 Loan  Servicing  Purchase and Sale  Agreement  dated
                            November 6, 1995 by and between Atlantic  Mortgage &
                            Investment Corporation and Citizens Mortgage Service
                            Company.   (Incorporated   by   reference   to   the
                            Registrant's  Annual  Report on Form  10-KSB for the
                            year ended December 31, 1995.)

                      10.13 Employment  Contract of Eric Fishman  with  Citizens
                            Mortgage  Service  Company  dated  January 17, 1996.
                            (Incorporated   by  reference  to  the  Registrant's
                            Annual  Report  on Form  10-KSB  for the year  ended
                            December 31, 1995.)

                      10.14 Settlement  Agreement  and  Release  by and  between
                            Housing Capital  Corporation,  The Anastasi Stephens
                            Group,   Inc.,   Joseph  G.  Anastasi  and  R.  Glen
                            Stephens,   dated  June  10,   1996  and  a  related
                            agreement.

                      22.0  Subsidiaries of the Registrant.

                  (b)No  reports  on Form 8-K have been  filed  during  the last
                  quarter covered by this report.
<PAGE>



                                                SIGNATURES

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  the  Registrant  has duly  caused  this Report to be signed on its
behalf by the  undersigned,  thereunto duly authorized on the 31st day of March,
1997.



Helmstar Group, Inc.


/s/   George W. Benoit
----------------------
      George W. Benoit, Chairman of the Board
                  and Chief Executive Officer


Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the  following  persons on behalf of the  Registrant in
the capacities indicated on the 31st day of March, 1997.


    Signature                              Title
    ---------                              -----


/s/George W. Benoit          Chairman of the Board, President,
-------------------          Chief Executive Officer
(George W. Benoit)


/s/Roger J. Burns            Director, First Vice President,
-----------------            Chief Financial Officer, Secretary
(Roger J. Burns)


/s/Joseph G. Anastasi        Director
---------------------
(Joseph G. Anastasi)


/s/Charles W. Currie         Director
--------------------
(Charles W. Currie)


/s/James J. Murtha           Director
-------------------
(James J. Murtha)


/s/David W. Dube             Director
----------------
(David W. Dube)

<PAGE>
INDEX TO EXHIBITS

     EXHIBIT NO.
     -----------


         3.1      Restated  Certificate of Incorporation of the Registrant filed
                  on July 31, 1987 and amendments thereto filed on June 8, 1989,
                  September  14,  1991 and  December 2, 1991.  (Incorporated  by
                  reference to the Registrant's Annual Report on Form 10-KSB for
                  the year ended December 31, 1992.)

         3.2      Amended and Restated By-Laws of the Registrant.  (Incorporated
                  by reference to the Registrant's  Annual Report on Form 10-KSB
                  for the year ended December 31, 1995.)

         10.0     40l(k)  Savings Plan of the Company as amended and restated as
                  of  January  1,  1993.   (Incorporated  by  reference  to  the
                  Registrant's  Annual  Report on Form 10-KSB for the year ended
                  December 31, 1993.)

         10.1     Lease of Citizens  Mortgage Service  Company's  office,  dated
                  November   30,  1992.   (Incorporated   by  reference  to  the
                  Registrant's  Annual  Report on Form 10-KSB for the year ended
                  December 31, 1992.)

         10.2     Joint Venture  Agreement of Blowing Rock Outlet Partners dated
                  June 10, 1988;  First Amendment to Joint Venture  Agreement of
                  Blowing  Rock  Outlet  Partners  dated  August 19,  1988;  and
                  certain    ancillary     agreements    and    acknowledgments.
                  (Incorporated by reference to the  Registrant's  Annual Report
                  on Form 10-KSB for the year ended December 31, 1992.)

         10.3     Second  Amendment to Joint  Venture  Agreement of Blowing Rock
                  Outlet  Partners dated as of March 4, 1992.  (Incorporated  by
                  reference to the Registrant's Annual Report on Form 10-KSB for
                  the year ended December 31, 1995.)

         10.4     Third  Amendment  to Joint  Venture  Agreement of Blowing Rock
                  Outlet Partners dated as of January 1, 1996.  (Incorporated by
                  reference to the Registrant's Annual Report on Form 10-KSB for
                  the year ended December 31, 1995.)

         10.5     Lease of the Company's  executive offices,  dated February 29,
                  1996.

         10.6     Joint Venture Agreement dated December 6, 1989 between Parker,
                  Reld  &  Co.,   Inc.   and  Company   Stores   Capital   Corp.
                  (Incorporated by reference to the  Registrant's  Annual Report
                  on Form 10-K for the year ended December 31, 1994.)

         10.7     First Amendment to Joint Venture Agreement of Nags Head Outlet
                  Partners  dated  as  of  January  1,  1996.  (Incorporated  by
                  reference to the Registrant's Annual Report on Form 10-KSB for
                  the year ended December 31, 1995.)

         10.8     Helmstar  Group,  Inc.  1990  Incentive   Compensation   Plan.
                  (Incorporated by reference to the  Registrant's  Annual Report
                  on Form 10-KSB for the year ended December 31, 1995.)
<PAGE>
         10.9     Amendment  to  the  Helmstar   Group,   Inc.  1990   Incentive
                  Compensation Plan.

         10.10    Mortgage  Selling  and  Servicing  Contract  between  Citizens
                  Mortgage  Service  Company and the Federal  National  Mortgage
                  Association dated November 12, 1986.

         10.11    Letter  dated  January  10,  1980 from the  Federal  Home Loan
                  Mortgage  Corporation  ("FHLMC")  to  First  Mortgage  Service
                  Company  (now  known as  Citizens  Mortgage  Service  Company)
                  approving Citizens Mortgage Service Company's  application for
                  FHLMC  Seller/Servicer  Status  for  conventional  one to four
                  family and FHA/VA loans.

         10.12    Loan Servicing  Purchase and Sale Agreement  dated November 6,
                  1995 by and between Atlantic Mortgage & Investment Corporation
                  and  Citizens  Mortgage  Service  Company.   (Incorporated  by
                  reference to the Registrant's Annual Report on Form 10-KSB for
                  the year ended December 31, 1995.)

         10.13    Employment  Contract of Eric  Fishman with  Citizens  Mortgage
                  Service  Company  dated  January 17,  1996.  (Incorporated  by
                  reference to the Registrant's Annual Report on Form 10-KSB for
                  the year ended December 31, 1995.)

         10.14    Settlement  Agreement  and  Release  by  and  between  Housing
                  Capital Corporation, The Anastasi Stephens Group, Inc., Joseph
                  G.  Anastasi and R. Glen  Stephens,  dated June 10, 1996 and a
                  related agreement.

         22.0     Subsidiaries of the Registrant.

         (b)      No reports on Form 8-K have been filed during the last quarter
                  covered by this report.