U.S. SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB

                                   (Mark One)

[X]    Annual Report under Section 13 or 15(d) of the Securities Exchange Act of
       1934 (Fee required)

        For the fiscal year ended: JANUARY 30, 2000

[ ]    Transition Report under Section 13 or 15(d) of the Securities Exchange
       Act of 1934 (No fee required)

For the transition period from ___________ to ___________.

                        Commission file number: 0-22638

                        RETAIL ENTERTAINMENT GROUP, INC.

                    (FORMERLY STARLOG FRANCHISE CORPORATION)
              (Exact name of Small Business Issuer in Its charter)

New Jersey                                             22-3219281
-------------------------------                        -------------------------
(State or other Jurisdiction of                        (I.R.S. Employer
Incorporation or Organization)                         Identification No.)

22 Meridian Road, Eatontown New Jersey                 07724
----------------------------------------               ------------
 (Address of Principal Executive Offices)              (Zip Code)

Issuer's Telephone Number, Including Area Code:        (732)-380-0991

Securities registered under section 12(b) of the Act:  None

Securities registered under section 12(g) of the Act:  Common Stock,
                                                       $.01 Par Value

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 past 90 days.

YES [ ]  NO [X]

Check if there is no disclosure of delinquent  filers in response to Item 405 of
Regulation S-B 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. [ ]

State issuer's revenues for its most recent fiscal year: -0-

State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the closing sale price of such stock,
as of June 20, 2000 is  $66,472.

Check whether issuer has filed all documents and reports required to be filed by
Section 12, 13, 15(d) of the Exchange Act after the  distribution  of securities
under a plan confirmed by the Court. Yes [ ]  No [X]

As of June 20, 2000, the Issuer had 2,658,870  shares of Common Stock,  $.01 par
value, outstanding.

<PAGE>
ITEM 1.  BUSINESS

Overview

The Company is exclusively engaged in the specialty retail sale of bulk candy.
In 1999 it operated and managed 19 retail stores, under the trade names Candico
and Candy Candy. The Company has determined that in order to become profitable
it must change the size of its stores and the format and content. As a result
the Company has chosen to discontinue operating the Candico and Candy Candy
stores and focus on an acquisition. Previously, the Company operated Starlog
stores that included various science fiction and other products under licensed
names.

Effective July 9, 1998, the Company instituted a 1-for-10 reverse stock split,
which reduced its outstanding shares of common stock from 20,937,640 to
approximately 2,093,764 (including rounding up of fractional shares).
Subsequently, the Company issued approximately 423,000 shares pursuant to
private placements. Share numbers have been adjusted to reflect such reverse
stock split, unless stated to the contrary.

Candico

Candico, Inc. was a retail candy company currently operating 13 stores trading
under the name Candy Candy! or Candico (the "Candico Stores").

The typical Candico store was between 600 and 800 square feet and was located in
an enclosed shopping mall. Candy is an impulse purchase and a bright
contemporary look creates a consumer magnetism. The stores were professionally
designed and utilized creative lighting effects and proprietary acrylic fixtures
to create an upbeat buying atmosphere. In-store sound systems with continuous
programmed music are also an integral part of the formula. Because sales are
directly proportional to mall foot traffic, prime retail locations are critical.

The Candico stores sold approximately 300 bulk candy items displayed in acrylic
bins designed to ensure freshness and cleanliness. Bulk candy is sold with a
singular pricing strategy at $7.76 per pound in most stores. This pricing
formula enabled the stores to enjoy a high gross margin targeted at almost 70%.
The one-price concept also allows the customer to randomly shop the store and
fill his bag with a wide variety of his favorite candies, promoting higher
average sales per customer.

There is no typical customer as the appeal of the Candico stores and product is
universal. Children and teens comprise the largest segment of the stores'
customer profile; however, adults of all ages frequent the stores. A wide
selection of sugar-free candies promotes destination shopping for health
conscious and diabetic customers.

In addition to the bulk candy items, the Candico stores stocked approximately
125 "count goods" (individual wrapped novelties such as Pop Rocks, Pez and
Warheads). The typical layout included two fixtures selling hand-made, specialty
lollipops (such as Mickey Mouse pops selling for several dollars each), two
fixtures selling gift and seasonal items, and a checkout counter offering a
large display of non-sports gaming and trading cards.

The Candico stores averaged about 100,000 transactions a year with the average
transaction averaging approximately $3.50. The stores were open 7 days a week
(72 hours). A typical store was staffed by a manager, a lead, full time sales
person, working 30 hours a week and three part time workers who, among the
three, average an additional 32 hours a week. Additional staffing is required
during busy times such as Christmas and Easter. Generally, there are two sales
persons at the store. The cost of a Candico store can range from $50,000 -
$175,000 for lease improvements and equipment. Initial inventories average
between $12,000 and $15,000.

There are approximately 15 major distributors of bulk candy from whom the
Company can obtain product. The Company typically concentrated its purchases
between two suppliers to ensure good pricing.

                                      -1-
<PAGE>

Competition

The candy industry is a multi billion dollar industry with most retail sales
taking place in the mass markets. Specialty candy retailing is very fragmented.
It is basically divided into two segments: specialty chocolates and bulk
candies.

The chocolate retail segment is very regional with such names as See's (West
Coast) and Fannie Mae (Chicago, Philadelphia and Baltimore). Godiva Chocolatier,
a division of Campbell Soup, with its upscale specialty chocolates and elegant
packaging, operates a chain of company-owned stores located primarily in
regional malls. Escalating occupancy cost and wages have rendered the full
service chocolate business marginally profitable except in high traffic and high
volume locations.

The bulk self-service candy segment is even more fragmented than the chocolate
segment. The dominant mall retailer of bulk candy is Sweet Factory
(approximately 240 stores) owned by Archibald Candy Corporation headquartered in
Chicago. Other active companies in this field are Mr. Bulky's Treats & Gifts,
Candy Express and Candy Headquarters. Candy Barrel, a similar concept
headquartered in Reno, NV, merchandises its product in wooden barrels, rather
than acrylic bins and consequently sells only wrapped and prepackaged candies.

Plans for Expansion

Although the Company has opted to close its current stores, the Company intends
to expand its candy operation and return to profitability through acquisition.
While most of the stores were marginally profitable the current store size and
the cost to convert these stores to our new concept was to prohibitive and as a
result has caused the Company to begin closing the stores. The Company feels
that its efforts are better suited in pursuing an acquisition. By acquiring a
candy retailer and redesigning both the content and format of the stores the
Company believes this is will allow the Company to become profitable. The
Company also intends to develop Candy Carousels which will involve small,
relatively inexpensive, easy to assemble and transport, candy kiosks. These 400
square foot octagon "carousels" will be located in enclosed shopping malls and
are designed to allow the Company to expand its operations at a far lower per
site cost than traditional stores.

(See ITEM 12. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" below)


Stores

In October 1997, The Company acquired 14 KCK stores ("Candico") all of which
have or will be closed. The KCK stores were located throughout the Eastern U.S.
in Connecticut, New Jersey, Maryland, Virginia, Georgia and Florida. The Company
acquired KCK on the date of its reorganization, and emerged from Chapter 11
bankruptcy in late March 1998. Thereafter, the Company merged KCK into Candico
Entertainment, Inc., thus changing its name. (See ITEM 2 "PROPERTIES" below for
a listing of these locations and certain lease terms). In November 1998, a
subsidiary of Hope Associates (which owns more than 50% of the outstanding
shares of the Company) purchased 8 more candy stores which it granted the
Company the right to manage and the option to purchase at Hope Associates' cost.
In July 1999 one of these stores was transferred back to the seller in
settlement of a dispute. All of these stores have also been closed. (See ITEM
12. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" below)

The Company at various times has opened 15 Starlog Stores and 6 Sumon/Hologram
Stores, all of which have been closed.

The ongoing operations of the Company is contingent on the Company's ability to
continue as a going concern, which should be appraised in conjunction with the
Company's history of operating losses and lack of working capital. See Item 6
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

                                      -2-
<PAGE>

OPERATIONS". The Company filed a voluntary petition for relief under Chapter 11
of the United States Bankruptcy Code on November 13, 1995 and emerged from
bankruptcy on August 28, 1996. See Item 3 "LEGAL PROCEEDINGS".

Background / History

The Company was started with one Starlog store in 1992 by the founder of the
Starlog Group, the publisher of several science fiction and horror magazines.
Its original goal was to capitalize on the steadily growing niche market for
science fiction and fantasy literature, apparel and collectibles through a
network of stores. In November 1993 the Company raised $5.5 million through its
initial public offering. Following the offering, the Company's then management
rapidly expanded its operations, opening nine stores in 15 months.

Lacking experience in retail chain operations, the original management made,
what can now be seen, as several critical errors. First, the Company expanded
rapidly based on experience with only one store and without adequate research to
determine proper store size, inventory levels, occupancy factors and start-up
costs. As a result, stores opened during the first year proved to be too large,
with high start-up costs and annual rent commitments which were too high to
permit profitable operation. Additionally, these original stores were found to
be too geographically dispersed for efficient management control. As a result,
during their first fiscal year as a public company, losses were suffered
totaling $3.2 million and were continuing at a rate of approximately $800,000 a
quarter.

Shortly after the Company's current Chief Executive Officer, Mr. John
Fitzgerald, joined the Company he recognized these problems and started taking
steps to reorganize the Company. In June 1995 Mr. Fitzgerald was appointed
President and Chief Operating Officer. In November 1995, the Company filed a
voluntary petition for Chapter 11 Bankruptcy. While in Bankruptcy the Company
was able to rid itself of its most expensive store leases. In an effort to
salvage some of the start-up expenses invested in the stores and to determine if
they could be profitable with more favorable lease terms, the Company
renegotiated much more favorable terms for the leases of eight of the stores and
attempted to operate them. The Company emerged from Chapter 11 in August 1996
and secured working capital from Hope Associates, LLC. ("Hope Associates"),
which in exchange, owned at that time approximately 90% of the Company's
outstanding Common Stock.

Subsequently, in November 1996 the Company's original executive management and
Board of Directors resigned and were replaced by a new Board formed by Hope
Associates' principals and Mr. Fitzgerald. Additionally, the founder of the
Company relinquished substantially all of his stock in the Company.

Following the Chapter 11 reorganization, the Company acquired two new
businesses, KCK Corporation (now Candico, Inc.), in March 1998 (See "BUSINESS-
Candico" above) and, and Goal Post Distributors, Inc. in June 1997.

Elimination of Unprofitable Starlog and Hologram Stores.

After reviewing the results of the last six Starlog and remaining Hologram
Stores, the Company determined in April 1998 that these stores could not operate
profitably, even with the more favorably renegotiated lease terms. During the
period from October 1997 through January 1998, the six Starlog stores had been
suffering operating losses of more than $25,000 a month, greatly offsetting the
operating profits of the Company's other divisions.

As a result, the Company closed five of the last six of the unprofitable Starlog
stores and all of the remaining Hologram stores. The last Starlog store was
closed in October 1998. The leases for four of the six Starlog stores, and all
of the Hologram stores were expired and the Company had no on-going liability
resulting from such closings. In the case of two Starlog stores, the Company was
able to terminate the leases by making payments of $12,000 and $15,000 in
October 1998.

                                      -3-
<PAGE>

Financial Information about Industry Segments

From inception through the period ended January 30, 2000, the Company and its
subsidiaries have operated in the same industry segment.

Employees

As of June 2000, the Company had 7 employees. This includes the Company's
President, General Merchandising Manager, CFO, 1 Marketing Manager and 3 retail
store employees, of which 1 was full time.

ITEM 2.  PROPERTIES

In July 1999, the Company moved its headquarters to it current address of 22
Meridian Road, Eatontown New Jersey. This facility consists of approximately
9,300 square feet lease at a monthly rental of $4,600. This lease terminates on
October 31, 2004.

Candico Stores

The following table sets forth the closed locations of the 13 Candico stores.

<TABLE>
<CAPTION>
                                          Retail Square          Lease      Minimum Monthly
Location                                      Footage         Termination        Rent
--------                                      -------         -----------        ----

<S>                                             <C>            <C>              <C>
Harbor Place, Baltimore, MD                     742            04/30/04         $5,874
Crystal Mall, Waterford, CT                     646            01/31/04         $4,583
Bayside Marketplace, Miami, FL                  636            09/10/00         $3,975
Bridgewater Commons, Bridgewater, NJ            836            12/31/03         $6,667
Tampa Bay Center, Tampa, FL                     913            01/30/00         $1,140
Rockaway Town Sq. Rockaway, NJ                  535            10/31/06         $4904
Jacksonville Landing, Jacksonville, FL          563            02/28/00         $1,173
Woodbridge Center, Woodbridge, NJ               889         Month-to-Month      $3,334
Macon Mall, Macon, GA                           662            02/14/03         $2,917
Pembroke Lakes Mall, Pembroke, FL               700            01/31/06         $4,000
Coolsprings Galleria, Franklin, TN              893            03/15/02         $3,333
Coliseum Mall, Hampton, VA                      630            06/30/00         $1,837
The Avenues Mall, Jacksonville, FL              821            03/09/02         $3,417
</TABLE>

All of the above  locations have been closed except  Rockaway Town Sq., which is
scheduled to close in July 2000.  All leases were  terminated  and in most cases
the space has been leased to other tenants.

 (See ITEM 12. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" below)

ITEM 3.  LEGAL PROCEEDINGS

On November 13, 1995, the Company and its subsidiaries filed petitions for
voluntary reorganization under Chapter 11 of the United States Bankruptcy code
in the Bankruptcy Division of the District Court of the United States for the
Middle District of Florida. The Plan of Reorganization was filed on February 29,
1996, and subsequently amended on May 28, 1996. In July 1996 the Plan was
submitted to creditors and stockholders for their vote of approval and on August
28, 1996 the Plan was confirmed by the Court and the Company emerged from
bankruptcy. The major provisions of the Plan were as follows:

Hope Associates, the secured lender, reduced its secured claims against the
Company by $200,000 (leaving it a secured claim of $500,000, all of which was
post-petition financing) in exchange for 1,800,000 shares (post one-for-ten
reverse split) of the Common Stock of the Company. The 167,600 (post one-for-ten
reverse split) shares of Common Stock of the Company whose voting rights had

                                      -4-
<PAGE>

been assigned to the Company in care of Jack Fitzgerald by the Company's founder
and Chairman of the Board, his son and former President of the Company and the
former Chairman as Trustee for his daughter as inducement for the secured
lender, were canceled.

Holders of general unsecured claims received newly issued new warrants to
purchase shares of the Company's Common Stock at the rate of $2.50 (post
one-for-ten reverse split) per share, which were distributed at the rate of one
warrant for each $0.70 of claim. The remaining 30 percent of the claims of
unsecured creditors (totaling $390,000) is to be paid in equal monthly
installments over 60 months. [Such payments were expected to commence during the
third fiscal quarter of 1998.]

Common stock equity owners retained their stock but it was significantly
diluted. Hope Associates, the secured lender, owned approximately 90% of the
Company's outstanding stock before exercise of the creditor warrants and 86% if
such warrants were exercised. The equity ownership of the "old stockholders" of
the Company was diluted, after the Chapter 11, to slightly more than 9.3%.

During 1996, the Company and Hope Associates engaged in negotiations with
Charles Huttoe ("Huttoe") to provide financing to the Company and acquire the
ownership of the shares of the Company's Common Stock owned by Hope. In
September, 1996, pursuant to an agreement between Huttoe, Hope Associates and
its members, Huttoe provided working capital to the Company aggregating $650,000
prior to completion of any written agreement, and on October l7, 1996 an
associate of Huttoe caused a bank loan to Hope Associates in the amount of
$500,000 to be paid in full in alleged compliance with the Sales Agreement. On
November 7, 1996, the SEC filed a complaint in federal court against Huttoe and
others alleging unregistered distribution of the stock of Systems of Excellence,
Inc. and manipulation of its stock price. In November 1996, the Court issued a
temporary restraining order temporarily freezing assets and accounts of Huttoe
and various third party accounts into which payments were made from allegedly
Huttoe-controlled accounts. The SEC amended its complaint to include as "relief
defendants" the Company, Hope Associates and Hope's members and sought to
recover from the relief defendants the sums advanced by Huttoe as working
capital to the Company ($650,000) and the bank loan to Hope Assoc. LLC
($500,000). The SEC made no allegations of wrongdoing as to the Company, Hope
Associates or Hope's owners. After negotiations with the SEC an agreement was
reached and approved by the Company whereby the Company agreed to repay $500,000
of the $650,000 received from Huttoe (plus interest computed at the rate of
5.55% per annum) in four annual installments, the first three of which to be in
the amount of $114,916, and the fourth to comprise the remaining balance of
principal and interest. The first such annual installment was paid in April
1998. Hope Associate's members have also agreed to personally guarantee $250,000
of the $500,000 owed by the Company to the SEC.

The Company acquired KCK Corporation and subsequently merged KCK into Candico
Entertainment, Inc. (Candico) thus changing its name. The purchase price was $10
cash, plus $200,000 in cash loaned to KCK, and warrants to purchase 50,000
shares (after giving effect to the reverse stock split) at $2.50. As part of the
purchase agreement and Plan of Reorganization, the Company converted $100,000 of
it's loan into equity of the debtor thereby owning 1,000 shares of newly owned
stock in KCK (see Item 7. "Financial Statements" and notes thereto below). The
warrants expired unexercised on September 30, 1999.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of the Company's stockholders during the
fourth quarter of the fiscal year ended January 30, 2000.

                                      -5-
<PAGE>

                                     PART II

ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS
          MATTERS

The Common Stock of the Company had previously been quoted on the NASDAQ Small
Cap Market under the symbol "SIFI". The stock was removed from their listing
upon the Company's filing for bankruptcy but continued to trade under that
symbol. Effective July 9, 1998, the Company amended its Articles of
Incorporation so as to change its name to its current name "Retail Entertainment
Group, Inc." and effected a one-for-ten reverse stock split. In September 1998,
the Company changed its trading symbol to "RETN".

The following table sets forth the high and low closing bid prices of the
Company's Common Stock from for the last two fiscal periods, as reported by
NASDAQ. Bid quotations represent high and low prices quoted between dealers, do
not reflect retail markup, markdown or commission, and do not necessarily
represent actual transactions.

                                                           Sales Prices
                                                    --------------------------
                                                       High             Low

FISCAL YEAR 1999

Quarter ended June 1998 ........................    $     .49       $     .10
Quarter ended September 1998 ...................    $    4.00       $    1.125
Quarter ended December 1998 ....................    $    3.50       $    1.125
Quarter ended January 1999 .....................    $    1.125      $    1.125

FISCAL YEAR 1999

Quarter ended April 2000 .......................    $    3.562      $    1.00
Quarter ended July 2000 ........................    $    4.312      $    2.625
Quarter ended October 2000 .....................    $    4.25       $    2.50
Quarter ended January 2000 .....................    $    3.00       $    1.00

On June 20, 2000, the closing price of the Company's Common Stock was $ .25 per
share. However, such price does not necessarily reflect the price that would
result upon the sale or purchase of a significant number of shares.

On June 20, 2000, the Company had 107 holders of record of its Common Stock. The
Company reasonably believes that it has a significantly larger number of
beneficial holders of its Common Stock.

The Company has not paid any cash dividends on its Common Stock to date and does
not anticipate paying any in the foreseeable future. The Board of Directors
intends to retain earnings, if any, to support the growth of the Company's
business.

ITEM 6.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
           RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
Report.

Results of Operations

The Company has closed all of its retail locations in order to concentrate on
acquiring two new candy operations and dramatically changing its focus go
forward. This new focus will result in a dramatically new store concept and will
revolutionize the retail candy store. There is however no assurance that the
acquisitions will be successful.

                                      -6-
<PAGE>

The Fiscal Year (52 Weeks) ended January 30, 2000 ("2000"), compared to the
Fiscal Year (31 Weeks) ended January 31, 1999("1999") and Fiscal Year (52 Weeks)
ended June 27, 1998 ("1998") follow:

The Company's revenues from discontinued operations for 2000, 1999 and 1998 were
earned from the following sources: retail sales for its Candy stores, Gains from
Vendor Settlements, Starlog and Hologram Stores. During the fiscal year 2000 the
company operated thirteen candy stores and managed seven. During the second
quarter of 1998, the Company managed and operated thirteen Candy Stores (after
closing one store and reopening another). The Company owned and operated six
Starlog Stores for the first three fiscal quarters of 1998 and closed all but
one of these stores by the fourth fiscal quarter of 1998. The Company owned and
operated six Hologram Stores during part of 1998, and closed all of them by
fiscal year end 1998. The Company acquired the Goal Post Distributing, Inc. in
late June 1997 and sold the company back at the end of June 1998. All candy
stores were closed after January 2000.

Total revenues from operations for 2000 of $2,222,991 were for the 52-week
period ending January 30, 2000. Total revenues from operations for 1999 of
$1,699,625 were for the 31-week period ending January 31, 1999. This compares to
$2,230,922 that was for the 52-week period ending June 27, 1998. On an
annualized basis [note: annualized = period / 31 x 52] revenues for 1999 were
$2,850,984. The 2000 revenues reflect a decrease of 22% from the annualized
revenues of 1999.

Consolidated cost of sales as a percentage of sales decreased to 31% in 2000 and
1999 compared with 38% in 1998. The increased gross margin % in 2000 and 1999 is
due to the acquisition of Candico Candy Stores, bulk candy margins are nearly
70%. The company exited unprofitable operations for profitable operations in
1999. The decreased gross profit margin in 1998 was due to the acquisition on a
new trading card business (Goal Post) with lower margins and the liquidation of
the Hologram and Starlog store operations at distressed prices for merchandise
sold.

Consolidated selling, general and administrative expenses (excluding
depreciation and amortization) were $2,260,367 in 2000 compared to an annualized
$2,285,265 in 1999 and $4,020,646 in 1998. The 1998 period included
approximately $1,972,943 in S, G & A. applicable to the newly acquired Goal Post
and Candy store operations. The decreased S, G & A from 1998 was due to a
conscientious effort to reduce costs. The Company's selling, general and
administrative expenses for 2000, 1999, and 1998 consisted primarily of
salaries, rent, travel, telephone and utilities, professional fees, insurance,
depreciation and amortization, and the selling, general and administrative
expenses of the retail Candico and Goal Post operations, Starlog and Hologram
stores. In 1998 the provision for bad debts increased to approximately $100,000
of which approximately $84,000 was applicable to the Goal Post operation.
Depreciation and amortization decreased to $98,977 in 2000 from $350,238 in 1998
mainly due to write-offs of liquidated and discontinued operations.

The Company reported a loss of $1,434,284 in 2000. Although most stores were
marginally profitable on a four wall basis it was determined that the format
needed to be revamped and the cost associated with the current stores was
prohibitive. As a result it was determined to discontinue operations of the
candy stores. As a result the loss reflects a non-cash write-off of $814,097 due
to discontinued operations. The candy stores loss from operations amount to
$94,000.

The Company showed a consolidated net profit of $230,095, primarily due to gains
from extinguishment of debt of $707,388. The Candico Candy Stores reported a net
loss of $1,440 for the period. In 1998 the Company reported a loss of
$3,605,833. The total 1998 loss included write-offs of $673,039 applicable to a
loss on sale or abandonment of assets and $513,261 related to reorganization
value both of which related to discontinued operations.

2000 fiscal year reflects a provision for bad debt of $5,460. 1999 fiscal year
reflects a provision for bad debt of $5,400. 1998 fiscal year reflects a
provision for bad debts of approximately $100,000 of which $84,000 is applicable
to the Goal Post operation.

                                      -7-
<PAGE>

Liquidity and Capital Resources

The Company had a working capital deficit at January 30, 2000 of $2,122,068
compared to a working capital deficit at January 31, 1999 of $1,695,932 and a
working capital deficit of $2,190,098 at June 27, 1998. The current ratio was
 .07 to 1 in 2000, .14 to 1 in 1999 and .07 to 1 in 1998. The Company is seeking
to raise additional capital through private placements. Without such capital the
Company does not believe that it has sufficient capital to continue to operate
its business. There is no assurance that the Company will be successful in
raising such capital.

During Fiscal 2000, the Company had net cash used in operations of $170,215.
This resulted primarily from increased payables and reserves. The Company's
expenditures for property and equipment for Fiscal 2000 were approximately
$21,,000 (mainly new computer equipment for the Home Office).

During Fiscal 1999, the Company had net cash used in operations of $564,574.
This resulted primarily from a net gain from forgiveness of debt of $707,388.
The Company's expenditures for property and equipment for Fiscal 1999 were
approximately $44,000 (mainly new property and equipment related to the
renovation of one Candico store).

During Fiscal 1998, the Company had net cash used in operations of $1,125,579.
This resulted primarily from a net loss of $3,605,833 less approximately
$1,476,000 in non-cash expenses, gains and losses, including depreciation and
amortization, recording of Reorganization Value in Excess of Assets Allocated
applicable to KCK offset by the write-off of Reorganization Value applicable to
Starlog, less write-downs of Trade and other Claims from the emergence from
bankruptcy. Decreases in inventories and increases in accounts payable and
accruals and reserves for closed stores applicable to Starlog operations offset
the decrease in cash. The Company's expenditures for property and equipment for
Fiscal 1998 were approximately $98,000 (mainly new leasehold improvements
related to the renovation of one Candico store).

KCK Corporation was a retailer that owned and operated 14 candy stores under the
trade name Candy Candy, and Candico. The Company acquired KCK Corporation, in
October, 1997, in exchange for $10.00 cash for 1,000 shares of stock, $200,000
super-priority financing and warrants to purchase 50,000 shares of common stock
(40,000 shares at a strike price of $2.50 per share if exercised by September
28, 1998 or for $4.00 per share if exercised thereafter and 10,000 shares at a
strike price of $5.00 a share). All warrants expire on October 1, 1999.
Effective the date of acquisition $100,000 of super-priority financing was
converted to equity.

The Independent Auditors Report, which accompanies and is part of the Company's
audited financial statements as of January 30, 2000 and January 31, 1999 and are
included as part of this Annual Report, is qualified by the following statement:
"The accompanying consolidated financial statements have been prepared assuming
that Retail Entertainment Group, Inc. (formerly Starlog Franchise Corporation)
and Subsidiaries will continue as a going concern. As discussed in Note 12 to
the consolidated financial statements, the Company has incurred recurring losses
from operations. The Company has not yet shown the ability to generate cash from
operations and as such, this raises substantial doubt about the entity's ability
to continue as a going concern. The consolidated financial statements do not
include any adjustments relating to the recoverability and classification of
reported asset amounts or the amounts and classification of liabilities that
might result from the outcome of these uncertainties."

ITEM 7.    FINANCIAL STATEMENTS

This information appears in a separate section of this Report following Part
III.

ITEM 8.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
           FINANCIAL DISCLOSURE.

None.

                                      -8-
<PAGE>

                                    PART III

ITEM 9.    DIRECTORS AND OFFICERS OF THE REGISTRANT

As of June 30, 1998, the Directors and officers of the Company were as follows:

Name                                 Age                  Position
------------------------------------------------------------------------------
Herman Rush                          71       Co-Chairman of Board of Directors
Michael Michaelson                   77       Co-Chairman of Board of Directors
John (Jack) Fitzgerald               58       President, CEO and Director
Ray Markman                          72       Director
Allan R. Lyons                       59       Director

Herman Rush was appointed Chairman of the Board in November of 1995. Mr. Rush,
former Chairman and Chief Executive Officer of Coca-Cola Telecommunications,
Inc., Senior Vice President of the Entertainment Business Sector of the
Coca-Cola Company and a member of the Board of Directors of Columbia Pictures
Industries, Inc. and past Chief Operating Officer of Columbus Pictures
Television Group, has more than thirty years experience in executive, production
and marketing positions. In 1992, Mr. Rush formed Katz- Rush Entertainment whose
credits include "The Montel Williams Show" and "The Susan Powter Show." Mr. Rush
began his television career in 1951. Mr. Rush was instrumental in the television
packaging and network placement of such programs as "Voyage to the Bottom of the
Sea", "Lost in Space", "Time Tunnel" and "Land of the Giants".

Michael Michaelson was appointed to the Board of Directors in November of 1995.
Earning a BS degree at New York University in 1948, Mr. Michaelson's career has
been spent in magazine publishing and direct marketing. Mr. Michaelson currently
serves as a member of the Board of Directors of Allied Devices Inc., a publicly
held precision tool company. Mr. Michaelson began his career with Look Magazine.
He then joined Ziff-Davis where he was Vice President, Circulation Director and
a member of the board. In 1961 he became President of Franklin Square
Subscription Agency, where he created the first college student multi-magazine
subscription card, becoming the official agency of the National Association of
College Stores under the name of Campus Subscriptions. In 1979 Mr. Michaelson
sold Campus Subscriptions to Publishers Clearing House where he became Senior
Vice President, Marketing. He left there in 1980 to found GAMES MAGAZINE with
his partner Chip Block. GAMES were sold to PLAYBOY in 1982. He then founded
RAINWATER ENTERPRISES, a consulting firm that has served such clients as Rodale
Press, Hearst Magazines, Fairchild Publications, Meredith Publishing and the
Smithsonian. From 1986 to 1989 Mr. Michaelson was Chairman of the Council on
Economic Priorities. He served in the U.S. Army, 35th Infantry, 25th Division in
the South Pacific as a Company Commander from 1942 to 1946, receiving a Bronze
Star and Purple Heart. From 1986 to 1998, Mr. Michaelson is President and owner
of Rainwater Associates, Inc., providing publishing management and marketing
consultation services.

John (Jack) Fitzgerald was appointed President and Chief Operating Officer of
the Company effective June 1, 1995. Previously, Mr. Fitzgerald served as Vice
President and General Manager of the Company since July 1994. Prior thereto,
from 1990, he owned a consulting firm which developed and implemented retail
concepts such as Candy Candy Inc., The Candy Store in Baton Rouge, LA and
Shop-N-Stop (Sweet 99), the bulk candy concept for K-Mart Stores. Prior thereto,
from 1989, he was Chief Operating Officer and President of Candico Stores, a
bulk candy specialty concept. From 1984 to 1989 he was Executive Vice President
and Chief Operating Officer for J & D Brauner Butcher Block Stores. From 1974 to
1984 he was Vice President of Store Operations for Lechters.

Ray Markman was appointed to the Board of Directors of the Company in November
1995. Mr. Markman is a multi-faceted entrepreneur with a degree in journalism,
advertising and economics at the University of Missouri with post graduate work
at the University of Chicago. Mr. Markman has lectured at the N.Y.U. School of
Management and the Kellogg Executive MBA Program at Northwestern University on
Strategic Planning. He was Executive Vice President at Encyclopaedia Britannica
and a senior executive at the Leo Burnett and McCann-Erickson (Division of

                                      -9-
<PAGE>

Interpublic Group of Companies) advertising agencies. Mr. Markman was a founder
of two companies that pioneered the distribution of pre-recorded video cassettes
to mass market outlets for such companies as Disney, Hanna/Barbera and the
original Jane Fonda aerobic tapes. He is a member and lecturer at the Direct
Marketing Association and Chairman of the Echo Awards Committee (creative
marketing awards) and a contributing author for a book on direct marketing. Mr.
Markman founded FIND (Foundation for Inventions and New Developments), founded
FACT, an organization devoted to public economic education. He was a Director of
Chicago City Bank, founder and Director of Mayflower Life Insurance Co. and
Seago Real Estate Co., which companies he helped to take public. He is currently
President and founder of Life Planning Company which provides financial planning
services for high net worth individuals, corporations and pension plans.

Allan R. Lyons had been a director of the Company from August 1993 until his
resignation on November 15, 1995. Mr. Lyons was reelected to serve as a director
by the Board of Directors effective May 15, 1998. Allan R. Lyons, CPA, is a
retired senior member of the firm Piaker & Lyons in Vestal, New York, which he
joined in 1964. Mr. Lyons is an active investor and has served on a number of
Boards. He is currently a member of the Board of Directors of Ambanc, Inc.,
Franklin Credit Management Corporation, Officeland, Inc., and Scoreboard, Inc.
Scoreboard, Inc. filed for Chapter 11 bankruptcy in March 1998. Mr. Lyons is a
member of the American Institute of CPAs, the New York State Society of CPA's
and the International Association for Financial Planning. Mr. Lyons was the
Comptroller and Finance Director of the Town of Vestal from 1970 to 1997 and is
on the Board of Advisor-School of Management -Binghamton University, Treasurer
and Trustee of United Health Services and a member of the Endowment Committee of
the United Jewish Appeal of Broome County, New York.

All directors hold office until the next annual meeting of shareholders and the
election and qualification of their successors. No fees have been paid or
accrued to directors as compensation for their acting in such capacity. The
Company has established an Audit Committee consisting of Allan Lyons and Michael
Michaelson and a Compensation Committee, consisting of Messrs. Michaelson, Rush
and Lyons. Officers are elected annually by the Board of Directors and serve at
the discretion of the Board.

ITEM 10.  EXECUTIVE COMPENSATION

Summary Compensation Table

The following table sets forth all compensation awarded to, earned by, or paid
for all services rendered to the Company during Fiscal 1998, Fiscal 1997 and
Fiscal 1996 by the Company's Executive Officers but does not include information
regarding Executive Officers with annual compensation under $100,000, except
current Chief Executive Officer.

<TABLE>
<CAPTION>
Annual Compensation

                                                                           Other Annual
   Name and Principal Compensation     Year      Salary $      Bonus $     Compensation $
-----------------------------------------------------------------------------------------
<S>                                    <C>       <C>             <C>
John (Jack) Fitzgerald                 1998      $110,000       -0-
 President CEO, Director               1999      $110,000       -0-               (1)
                                       2000      $150,000       -0-
</TABLE>

(1)      Does not include the cost to the Company of the use of automobiles
         leased by the Company, or the cost to the Company of benefits,
         including premiums for life and health insurance and any other personal
         benefits provided by the Company to such persons in connection with the
         Company's business since such amounts total less than (i) $50,000 or
         (ii) 10% of the Executive Officer's disclosed compensation.

                                      -10-
<PAGE>

Contingent Stock Options Granted in Last Fiscal Year:

Option/SAR Grants in Last Fiscal Year-Individual Grant
<TABLE>
<CAPTION>
            (a)                        (b)                       (c)                       (d)               (e)
                            % of Total Options /SARs
                               Number of Securities    Granted to Employees in
                                Underlying Options           Fiscal Year            Exercise or Base      Expiration
            Name                /SARs Granted (#)                                     Price ($/Sh)           Date
----------------------------- ----------------------- --------------------------- ---------------------- -------------
<S>                                    <C>                      <C>                       <C>                <C>
   John (Jack) Fitzgerald
       President-CEO                   0(1)                      --%                       --                 --
</TABLE>

(1)      On April 1, 1997, the Company granted Mr. Fitzgerald, President and CEO
         of the Company an option to acquire 300,000 shares (post one-for-ten
         reverse split) of the Company's common stock until March 31, 2003. The
         option to acquire 100,000 (post one-for-ten reverse split) of such
         shares is currently exercisable. The option to acquire the second
         100,000 shares (post one-for-ten reverse split) is exercisable only if
         the Company has $500,000 of annual net profits, before interest, taxes,
         depreciation and amortization ("EBITDA"), and the option to acquire the
         remaining 100,000 shares (post one-for-ten reverse split) will be
         exercisable only if and Company has $1,000,000 of annual net profits
         EBITDA. This option was in replacement of other options previously
         granted to Mr. Fitzgerald.

Mr. Kevin VanderKelen, founder of Goal Post Distributing, Inc., in connection
with the original acquisition of Goal Post was granted an option to purchase up
to 100,000 shares (post one-for-ten reverse split) for prices ranging from $5.00
to $9.00 on a sliding scale over the next five years provided that certain
annual gross sale projections from $5,000,000 to $9,000,000 were met. This
option was terminated when the Company sold Goal Post back to Mr. VanderKelen
effective June 27, 1998.

None of the Company's outstanding options or warrants were exercised during the
Fiscal Year ended January 30, 2000 or since then, through June 22, 2000, by any
of the name Executive Officers or any other parties. The Company has no
long-term incentive plans.

No fees have been paid or accrued to any directors in consideration for them
acting as such.

Employment Agreements

The Company originally entered into an employment agreement with Jack Fitzgerald
commencing July 11, 1994. This agreement was subsequently amended as of August
15, 1996. As amended the agreement provides for a five year term, and a salary
of $100,000 per year, increasing by $10,000 a year up to $140,000, plus other
benefits and a monthly car allowance of $500. In addition Mr. Fitzgerald is
eligible for a discretionary bonus of up to 50% of his base salary. Under the
1996 Agreement, Mr. Fitzgerald was to receive an option to purchase, for $.06
per share, such number of shares as equals 5% of the issued and outstanding
shares, each year for three years, subject to certain limitations. At the April
1, 1997 Board meeting, it was agreed to amend Mr. Fitzgerald's employment
agreement as follows: Mr. Fitzgerald's base salary will be increased from
$100,000 to $150,000 when the Company raises $500,000 or more in a currently
proposed private placement. Mr. Fitzgerald's previously granted stock option is
replaced with an option to purchase a total of 300,000 shares of the Company's
common stock (taking into account the reverse split) at $0.60 per shares for a
period of five years, ending March 31, 2003. Under this option, 100,000 of such
shares are immediately exercisable. The right to exercise the option with
respect to the second 100,000 shares will be exercisable only if and after the
Company achieves annual pre-tax profits of $500,000 before interest,
depreciation, taxes, and amortization ("EBITDA") and the right to exercise the
option with respect to the last 100,000 shares will be exercisable only if and
after the Company achieves annual pre-tax profits of $1,000,000 EBITDA.

                                      -11-
<PAGE>

In connection with the acquisition of Goal Post, the Company entered into an
employment agreement with its President, Mr. Kevin VanderKelen, dated June 29,
1997. Mr. VanderKelen's employment agreement and the related stock options were
terminated when the Company sold Goal Post back to Mr. VanderKelen effective
June 27, 1998. (See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" below)

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following tables sets forth certain information regarding the beneficial
ownership of the Company's common stock as of October 1, 1998 by (i) each person
known by the Company to own beneficially 5% or more of any class of the
Company's voting stock, (ii) each director and executive officer of the Company,
and (iii) all directors and executive officers of the Company as a group. All
percentages in this section were calculated on the basis of outstanding
securities plus securities deemed outstanding under Rule 13d-3 of the Exchange
Act. All shares are expressed post reverse stock split.

      Name and Address of Beneficial     Shares of Common      Percentage of
                  Owner                        Stock Held        Shares Held
    -------------------------------------------------------------------------

    Hope Associates, LLC(1)(2)             2,867,000 (2)              72.42%
    c/o Michael Michaelson
    135 E. 71st St., Apt. 3A
    New York, NY 10021

    Kevin VanderKelen(1)(3)                                            6.89%
    Goal Post Distributing, Inc.             272,668 (3)
    13949-9 W. Hillsborough
    Tampa, FL 33634

(1)      Shares outstanding are calculated giving effect to a 1 for 10 reverse
         stock split which occurred effective July 9, 1998.

(2)      Hope Associates, LLC is a limited liability company. The percentage of
         Hope Associates owned by Directors of the Company is as follows:
         Michael Michaelson and Herman Rush each own approximately 25.83%; Ray
         Markman owns approximately 17.22%; Kevin VanderKelen owns approximately
         14.35%; Allan Lyons owns 13.89% and Mark Savel owns approximately
         2.87%. The 2,867,000 shares attributed to Hope Associates includes
         warrants to purchase 500,000 and 300,000 shares and an option to
         purchase 500,000 shares for $1.25 per share. (See Item 12 CERTAIN
         RELATIONSHIPS AND RELATED TRANSACTIONS" for a description of the
         transactions in which the Company granted these warrants and option to
         Hope Associates.)

(3)      Includes 200,928 shares based on Mr. VanderKelen's ownership of 14.35%
         of Hope Associates and a portion of the warrants and the option to
         purchase a total of 1,300,000 shares which were granted by the Company
         in consideration for certain transactions. Hope Associates holds
         1,567,000 shares and Hope and/or its members hold warrants and an
         option to purchase an additional 1,300,000 shares. (See Item 12 CERTAIN
         RELATIONSHIPS AND RELATED TRANSACTIONS")

DIRECTORS AND EXECUTIVE OFFICERS

                                           Shares of Common        Percentage of
Name of Director or Executive Officer            Stock Held          Shares Held
--------------------------------------------------------------------------------
Jack Fitzgerald(1)(2)
President, CEO, Director                            100,000                3.87%

                                      -12-
<PAGE>
                                           Shares of Common        Percentage of
Name of Director or Executive Officer            Stock Held          Shares Held
--------------------------------------------------------------------------------
Kevin M. VanderKelen(1)(3)
Director                                            272,668                6.89%

Herman Rush(1)(4)
Co-Chairman of the Board                            840,669               21.24%

Michael Michaelson(1)(5)
Co-Chairman of the Board                            795,448               20.09%

Mark  Savel(1)(6)
Director of Franchise Development

and Director                                         54,530                1.38%

Ray Markman(1)(7)
Director                                            505,658               12.77%

Allan R Lyons(1)(8)
Director                                            448,149               11.32%

ALL DIRECTORS AND OFFICERS AS A GROUP
(EIGHT PERSONS) (9)
                                                  3,017,122               76.21%

--------------------
(1)      All shares expressed after giving effect to a 1 for 10 Reverse Stock
         Split which occurred effective July 9, 1998. Based on a total number of
         outstanding shares of 2,658,870. Based on a total number of shares
         outstanding and options and warrants which were exercisable on June 1,
         2000. (See Item 12 "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS").

(2)      Includes 100,000 shares pursuant to currently exercisable options.

(3)      Includes 200,928 shares based on Mr. VanderKelen's 14.35% ownership
         interest in Hope Associates and a portion of the warrants and the
         option to purchase a total of 1,300,000 shares which were granted by
         the Company in consideration for certain transactions. Hope Associates
         holds 1,400,000 shares and Hope and/or its members hold warrants and an
         option to purchase an additional 1,300,000 shares. (See "CERTAIN
         RELATIONSHIPS AND RELATED TRANSACTIONS" below.)

(4)      Based on Mr. Rush's approximately 25.83% interest in Hope Associates
         and a portion of the warrants and the option to purchase a total of
         1,300,000 shares which were granted by the Company in consideration for
         certain transactions. Hope Associates holds 1,400,000 shares and Hope
         and/or its members hold warrants and an option to purchase an
         additional 1,300,000 shares. (See "CERTAIN RELATIONSHIPS AND RELATED
         TRANSACTIONS" below.) Includes warrants to purchase 181 shares held by
         Royal Animated Art, Inc of which Mr. Rush owns 66 2/3% of the shares.
         Royal Animated Art received the warrants in October 1997 along with the
         other creditors of Company as part of the Chapter 11 proceedings.

(5)      Based on Mr. Michaelson's approximately 25.83% interest in Hope
         Associates and a portion of the warrants and the option to purchase a
         total of 1,300,000 shares which were granted by the Company in
         consideration for certain transactions. Hope Associates holds 1,400,000
         shares and Hope and/or its members hold warrants and an option to
         purchase an additional 1,300,000 shares. (See "CERTAIN RELATIONSHIPS
         AND RELATED TRANSACTIONS" below.)


                                      -13-
<PAGE>

(6)      Based on Mr. Savel's approximately 2.87% interest in Hope Associates
         and a portion of the warrants and the option to purchase a total of
         1,300,000 shares which were granted by the Company in consideration for
         certain transactions. Hope Associates holds 1,400,000 shares and Hope
         and/or its members hold warrants and an option to purchase an
         additional 1,300,000 shares. (See "CERTAIN RELATIONSHIPS AND RELATED
         TRANSACTIONS" below.)

(7)      Based on Mr. Markman's approximately 17.22% interest in Hope Associates
         and a portion of the warrants and the option to purchase a total of
         1,300,000 shares which were granted by the Company in consideration for
         certain transactions. Hope Associates holds 1,400,000 shares and Hope
         and/or its members hold warrants and an option to purchase an
         additional 1,300,000 shares. (See "CERTAIN RELATIONSHIPS AND RELATED
         TRANSACTIONS" below.)

(8)      Based on Mr. Lyons' approximately 13.89% interest in Hope Associates
         and a portion of the warrants and the option to purchase a total of
         1,300,000 shares which were granted by the Company in consideration for
         certain transactions. Hope Associates holds 1,400,000 shares and Hope
         and/or its members hold warrants and an option to purchase an
         additional 1,300,000 shares. (See "CERTAIN RELATIONSHIPS AND RELATED
         TRANSACTIONS" below.) Additionally includes 20,000 shares held by
         Vestal Venture Capital and 30,000 shares held by Lyonshare Venture
         Capital, two investment partnerships. Mr. Lyons is the Managing Partner
         of these entities and can vote the shares of the Company held by them.
         However, he has no ownership interest in such entities or the shares
         held by them.

(9)      Based on shares held by Mr. VanderKelen, currently exercisable options
         held by Mr. Fitzgerald and another director, the shares held by Hope
         Associates, and warrants and an option Held by Hope Associate and or
         its members to purchase 1,300,000 shares.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In connection with the bankruptcy reorganization of the Company, 1,800,000 (post
one-for-ten reverse split) shares of Common Stock were issued to Hope, resulting
in the beneficial ownership of a majority of the Company's Common Stock by
certain present officers and directors. Hope subsequently surrendered 200,000
(post one-for-ten reverse split) of its shares to the Company reducing its
holdings to 1,600,000 (post one-for-ten reverse split) shares effective July 9,
1998 (of which 200,000 have since been transferred).

In connection with the acquisition of Goal Post Distributing Inc. in June 1997,
430,000 shares of Common Stock (after giving effect to the 1-for-10 reverse
stock split) were issued to Kevin VanderKelen, and in connection with an
employment agreement with Mr. VanderKelen the Company granted Mr. VanderKelen an
option to acquire up to 100,000 additional shares (also after giving effect to
the reverse stock split), subject to the Goal Post Division reaching certain
revenue goals (See Item 11 "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT"). Additionally, Mr. VanderKelen acquired an additional 200,000 (post
reverse split) shares of the Company from the Company at about the time of the
Goal Post acquisition for $250,000.

Effective June 27, 1998, the Company sold the Goal Post business and assets back
to Mr. VanderKelen. In connection with this resale, Mr. VanderKelen transferred
to the Company 330,000 of the 430,000 (post one-for-ten reverse split) Company
shares which he had received when he sold Goal Post to the Company, and the
Company gave Mr. VanderKelen a promissory note for $50,000. Also in connection
with this transaction, Mr. VanderKelen agreed to the cancellation of his
employment agreement and the stock options granted under such agreement.

During fiscal year 1998, the Company borrowed $1,250,000 from BSB Bank in the
form of a note payable. The Company also renewed a previous note due to BSB Bank
in the amount of $500,000. Subsequently, the members of Hope Associates, LLC, a
majority stockholder, personally guaranteed the line of credit from BSB Bank &
Trust Co. to the Company in the amount of $1,750,000 and forgave an additional
$250,000 due to them by the Company. Hope Associates, LLC assumed the total
obligation for the BSB loan, so that the Company will not be a party to the

                                      -14-
<PAGE>

loan, nor will it have any guarantee or liability. The $2,000,000 was recorded
as additional paid-in-capital. In consideration for such assumption, the Company
will pay an investment fee to Hope Associates in the amount of approximately
$20,000 a month. The Company also granted the members of Hope Associates a
warrant to purchase, until May 3, 2003, 500,000 shares of the Company's common
stock (after giving effect to a proposed reverse stock split) for $1.25 per
share.

In April 1998, various of the Directors have made the Company bridge loans
totaling $128,090 as follows: Mr. Rush $39,974, Mr. Michaelson $39,974, Mr.
Lyons $21,492, and Mr. Markman $26,650. Such loans are evidenced by demand notes
and bear 10% interest. It is intended that such loans be repaid from the
proceeds of a proposed private placement of the Company's Common Stock.
Additionally, Mr. Rush loaned the Company $100,000 in March 1997 and converted
it to stock in December 1999. Rainwater Enterprises Ltd., a company owned by Mr.
Michaelson, loaned the Company $100,000 in February 1997, which has been repaid.
Mr. VanderKelen also loaned the Company $60,174 pursuant to a demand note
bearing interest at 10%, which amount was forgiven following the fiscal year
1998.

Pursuant to an agreement dated November 24, 1998, Candy Candy Acquisition
Corporation ("CCAC") acquired eight candy stores (the "Jonford Stores") from
Jonford Corporation ("Jonford") for $549,000, of which $225,000 was payable at
the time of sale, and the balance of $324,000 which was in the form of a
promissory note, payable in 12 quarterly installments of $27,000. CCAC is a
wholly owned subsidiary of Hope Associates, which owns over 50% of the Company's
shares and was formed for the purpose of making this acquisition. Hope made this
acquisition because the Company did not have the funds or access to sufficient
credit to make the acquisition itself. However, in connection with this
acquisition, CCAC entered into a "Management and Option Agreement" (M&O
Agreement") with the Company. Pursuant to the M&O Agreement the Company was
retained to manage the eight Jonford Stores and the Company was granted an
option to acquire these stores exercisable until November 30, 2001 for the price
invested by Hope Associates in CCAC in making this acquisition and supplying
necessary working capital to run the Jonford Stores. The M&O Agreement provides
that in consideration for managing the stores, the Company will receive Six
percent (6%) of Gross Sales from the Jonford Stores and fifty percent (50%) of
the "Excess Margin" (amount by which cost of goods sold are less than 38% of
sales price). In consideration for the foregoing, the Company granted to those
members of Hope Associates who funded such acquisition a Warrant to purchase
500,000 shares at $1.25 a share, exercisable until November 30, 2002. At the
time of this acquisition, certain members of Hope loaned or caused to be loaned
to the Company $300,000 of working capital due upon demand, and received an
additional warrant to purchase 300,000 shares at $1.25 a share, exercisable
until November 30, 2002.

In July 1999, in order to settle certain disputes between CCAC and Jonford, the
parties entered an amendment of the Jonford Agreement whereby CCAC resold to
Jonford one of the eight Jonford Stores and paid Jonford approximately $14,000
and balance due on the Promissory Note was reduced from $298,000 to $108,000.

From time to time the Members of Hope Associates, LLC have made direct loans to
the Company or have personally guaranteed working capital loans by outside
banking facilities to the Company on terms no less favorable to the Company than
could have been obtained from unrelated third parties, if such funds would have
been available at all considering the Company's financial circumstances.

Compliance with 16(a) of the Exchange Act

Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
Officers, Directors and persons who own more than ten percent of a registered
class of the Company's equity securities, to file reports of ownership and
changes in ownership with the Securities and Exchange Commission. Officers,
Directors and ten percent shareholders are required by regulation to furnish the
Company with copies of all Section 16(a) forms that they file. Based solely on
the Company's copies of such forms received or written representations from
certain reporting persons that no Form 5's were required for those persons, the
Company believes that, during the time period November 10, 1993 to January 30,
2000, all filing requirements applicable to its Officers, Directors and greater
than ten percent beneficial owners were complied with.

                                      -15-
<PAGE>

ITEM 13.  EXHIBITS, LIST AND REPORTS ON FORM 8-K

(a) Exhibits

The following is a complete list of exhibits  which are  incorporated  herein or
filed herewith as part of this Report.

                                                              Filed Herewith (X)
                                                              or Incorporated By
No.                           Exhibit                              Reference
------------ -------------------------------------------------------------------

3.1      Certificate of Incorporation of the Registrant.               (1)
3.2      By-Laws of the Registrant, as amended.                        (1)
3.3      Amendment to Certificate of Incorporation of
         Registrant filed July 9, 1998.                                (5)
3.4      By-Laws of SF Stores, Inc.                                    (1)
10.10    Employment Agreement dated as of July 1, 1994
         between the Registrant and Jack Fitzgerald.                   (3)
10.33    Notice of Confirmation of Plan of Reorganization
         dated August 28, 1996.                                        (3)
10.34    Notices of Commencement of Case Under Chapter 11 of
         the Bankruptcy Code dated November 13, 1995.                  (3)
10.35    Agreement of Asset Acquisition and Corporate
         Reorganization dated June 28, 1997 between the
         Registrant and Goal Post Distributing, Inc.                   (4)
10.36    Employment Agreement made as of June 29, 1997
         between the Registrant and Kevin M. VanderKelen               (4)
10.37    Employment Agreement made as of August 15, 1998
         between the Registrant and John (Jack) J.
         Fitzgerald.                                                   (4)
10.38    Purchase of Corporation through Stock Purchase,
         dated September 28, 1997 between the registrant and
         KCK Corporation                                               (4)
10.39    Orders dated November 26, 1997 of United States
         District Court for the District of Columbia,
         incorporating agreements relating to repayment of
         sums received from Charles O. Huttoe                          (4)
10.40    Form of Warrant to Purchase Shares                            (5)
10.41    Agreement of Asset Acquisition dated November 24,
         1998 relating to certain stores owned by Jonford
         Corporation                                                   (5)
10.42    Management and Option Agreement dated November 24,
         1998                                                          (5)
10.43    Sale Agreements relating to resale of Goal Post
         effective June 27, 1998                                       (5)
10.44    Assumption Agreement, as of April 1, 1998                     (5)
22.1     Subsidiaries of Registrant                                    (5)

(1)      Incorporated by reference from the Company's Registration Statement on
         Form SB-2 for November 10, 1993 (No. 33-68692-NY).
(2)      Incorporated by reference from the Company's Annual Report on Form 10K-
         SB for the Fiscal year ended June 30, 1994.
(3)      Incorporated by reference from the company's Annual Report on Form
         10K-SB for the Fiscal year ended June 29, 1996.
(4)      Incorporated by reference from the company's Annual Report on Form
         10K-SB for the Fiscal year ended June 28, 1997
(5)      Incorporated by reference from the company's Annual Report on Form
         10K-SB for the Fiscal year ended June 27, 1998

                                      -16-
<PAGE>

Reports on Form 8-K.

No reports on Form 8-K were filed by the Company during the period ended January
30, 2000.

                                      -17-
<PAGE>




                        RETAIL ENTERTAINMENT GROUP, INC.

                        CONSOLIDATED FINANCIAL STATEMENTS

                      JANUARY 30, 2000 AND JANUARY 31, 1999
                   (WITH INDEPENDENT AUDITORS' REPORT THEREON)
<PAGE>

INDEPENDENT AUDITORS' REPORT

The Board of Directors
Retail Entertainment Group, Inc.

We have audited the accompanying consolidated balance sheets of Retail
Entertainment Group, Inc. and Subsidiaries as of January 30, 2000 and January
31, 1999, and the related consolidated statements of operations, stockholders'
deficit, and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Retail
Entertainment Group, Inc. and Subsidiaries at January 30, 2000 and January 31,
1999, and the results of its operations and cash flows for the years then ended
in conformity with generally accepted accounting principles.

The accompanying consolidated financial statements have been prepared assuming
that Retail Entertainment Group, Inc. and Subsidiaries will continue as a going
concern. As discussed in Note 14 to the consolidated financial statements, the
Company has incurred recurring losses from operations. The Company has not yet
shown the ability to generate cash from operations, as such, this raises
substantial doubt about the entity's ability to continue as a going concern. The
consolidated financial statements do not include any adjustments relating to the
recoverability and classification of reported asset amounts or the amounts and
classification of liabilities that might result from the outcome of these
uncertainties.

June 22, 2000

                                       18
<PAGE>
<TABLE>
<CAPTION>
                        RETAIL ENTERTAINMENT GROUP, INC.

                           CONSOLIDATED BALANCE SHEETS

                      JANUARY 30, 2000 AND JANUARY 31, 1999

                                     ASSETS

                                                          JANUARY 30, 2000   JANUARY 31, 1999
                                                          ----------------   ----------------
<S>                                                        <C>                <C>
Current assets:
    Cash                                                   $       45,487     $       42,469
    Accounts receivable, net of allowance for
      doubtful accounts of $5,460 and $5,400
      for 2000 and 1999, respectively                               5,460              5,400
    Inventories, net of reserves of $-0- and $-0-
     for 2000 and 1999, respectively                              101,499            199,862
    Prepaid expenses and other current assets                      12,871             18,255
                                                           --------------     --------------

                     Total current assets                         165,317            265,986

Property and equipment, net                                        80,393            195,408
Reorganizational value in excess of amounts
  allocated to identifiable assets, net                                --            476,696
Other assets                                                        2,534              2,891
                                                           --------------     --------------

                                                           $      248,244     $      940,981
                                                           ==============     ==============

See accompanying notes to consolidated financial statements.

                                      -19-
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                      LIABILITIES AND STOCKHOLDERS' DEFICIT

                                                               JANUARY 30, 2000     JANUARY 31, 1999
                                                               -----------------    -----------------
<S>                                                            <C>                  <C>
Liabilities:
Current liabilities:
    Accounts payable and accrued expenses                      $       1,289,113    $         722,557
    Notes payable - affiliates                                           714,404              638,088
    Current portion of long-term debt                                    320,641              456,444
    Due to Candy Candy Acquisition Corporation                           (36,773)             144,829
    Other liabilities, including restructuring reserves                       --                   --
                                                               -----------------    -----------------

                     Total current liabilities                         2,287,385            1,961,918

Long-term liabilities:
    Long-term debt                                                       785,698              661,587
                                                               -----------------    -----------------

                     Total liabilities                                 3,073,083            2,623,505
                                                               -----------------    -----------------

Stockholders' deficit:
    Common stock, $.01 par value; authorized 6,000,000
      shares, issued and outstanding 2,658,764 and 2,429,764
      shares for 2000 and 1999, respectively                              26,588               24,298
    Additional paid-in capital                                         3,246,512            2,962,552
    Accumulated deficit                                               (6,097,939)          (4,669,374)
                                                               -----------------    -----------------

                     Net stockholders' deficit                        (2,824,839)          (1,682,524)
                                                               -----------------    -----------------


                                                               $         248,244    $         940,981
                                                               =================    =================
</TABLE>


See accompanying notes to consolidated financial statements.

                                      -20-
<PAGE>
<TABLE>
<CAPTION>

                        RETAIL ENTERTAINMENT GROUP, INC.

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                YEARS ENDED JANUARY 30, 2000 AND JANUARY 31, 1999

                                                                 JANUARY 30, 2000     JANUARY 31, 1999
                                                                 -----------------    -----------------
<S>                                                              <C>                  <C>
Net sales                                                        $              --    $              --

    Total revenues                                                              --                   --

Cost of sales                                                                   --                   --

                     Gross profit                                               --                   --

Selling, general and administrative                                        742,848              407,291
                                                                 -----------------    -----------------

Loss from operations                                                      (742,848)            (407,291)

Other income (expense):
    Interest and other income                                                   --                   --
    Interest expense                                                       (32,400)             (96,552)
    Management fee revenue                                                  99,033               56,852
                                                                 -----------------    -----------------

                     Loss before discontinued operations                  (676,215)            (446,991)

Discontinued operations:
    Loss from operations of discontinued operations                       (124,048)              (5,282)
    Loss on disposal of discontinued operations                           (814,096)             (25,020)
                                                                 -----------------    -----------------

                     Loss before extraordinary items                    (1,614,359)            (477,293)

Extraordinary items -
    Gain on extinguishment of debt                                         180,076              707,388
                                                                 -----------------    -----------------

                     Net income (loss)                           $      (1,434,283)   $         230,095
                                                                 =================    =================

Basic and diluted net income (loss) per share of common stock:

  Before discontinued operations                                 $            (.29)   $            (.20)
                                                                 -----------------    -----------------

  Discontinued operations                                        $            (.37)   $            (.01)

  Extraordinary items                                            $             .07    $             .32
                                                                 -----------------    -----------------

    Net income (loss)                                            $            (.56)   $             .10
                                                                 =================    =================
</TABLE>

                                                                     (continued)

                                      -21-
<PAGE>
<TABLE>
<CAPTION>
                        RETAIL ENTERTAINMENT GROUP, INC.

                CONSOLIDATED STATEMENTS OF OPERATIONS - CONTINUED

                YEARS ENDED JANUARY 30, 2000 AND JANUARY 31, 1999

                                                                 JANUARY 30, 2000     JANUARY 31, 1999
                                                                 -----------------    -----------------
<S>                                                              <C>                  <C>

  Earnings per common share - assuming dilution
    Loss before discontinued operations                          $            (.21)   $            (.12)
      Discontinued operations                                    $            (.26)   $            (.01)
      Extraordinary items                                        $             .05    $             .21
                                                                 -----------------    -----------------

    Net income (loss)                                            $            (.40)   $             .07
                                                                 =================    =================

Weighted number of common shares outstanding                             2,544,264            2,223,232
                                                                 =================    =================

Weighted average number of common shares outstanding -
 dilutive options and warrants                                           3,604,264            3,283,232
                                                                 =================    =================
</TABLE>





See accompanying notes to consolidated financial statements.

                                      -22-
<PAGE>
<TABLE>
<CAPTION>
                        RETAIL ENTERTAINMENT GROUP, INC.

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT

                YEARS ENDED JANUARY 30, 2000 AND JANUARY 31, 1999

                                                Common Stock
                                        --------------------------
                                                          Par         Additional                        Net
                                         Number of       Value          Paid-In      Accumulated    Stockholders'
                                          Shares         Amount         Capital        Deficit        Deficit
                                        -----------    -----------    -----------    -----------    -----------
<S>                                       <C>          <C>            <C>            <C>            <C>
Balances at June 28, 1997                 2,423,764    $    24,238    $   575,612    $(1,293,636)   $  (693,786)

Conversion of debt into additional
 paid-in capital                                 --             --      2,000,000             --      2,000,000

Consideration received and retirement
 of treasury shares                        (330,000)        (3,300)       (29,700)            --        (33,000)

Net loss                                         --             --             --     (3,605,833)    (3,605,833)
                                        -----------    -----------    -----------    -----------    -----------

Balances at June 27, 1998                 2,093,764         20,938      2,545,912     (4,899,469)    (2,332,619)

Issuance of common stock                    336,000          3,360        416,640             --        420,000

Net income                                       --             --             --        230,095        230,095
                                        -----------    -----------    -----------    -----------    -----------

Balances at January 31, 1999              2,429,764         24,298      2,962,552     (4,669,374)    (1,682,524)

Issuance of common stock                    229,000          2,290        283,960             --        286,250

Net income                                       --             --             --     (1,434,283)    (1,434,283)
                                        -----------    -----------    -----------    -----------    -----------

Balances at January 30, 2000              2,658,764    $    26,588    $ 3,246,512    $(6,103,657)   $(2,830,557)
                                        ===========    ===========    ===========    ===========    ===========
</TABLE>


See accompanying notes to consolidated financial statements.

                                      -23-
<PAGE>
<TABLE>
<CAPTION>
                        RETAIL ENTERTAINMENT GROUP, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                YEARS ENDED JANUARY 30, 2000 AND JANUARY 31, 1999

                                                                       JANUARY 30, 2000     JANUARY 31, 1999
                                                                       -----------------    -----------------
<S>                                                                    <C>                  <C>
Cash flows from operating activities:
    Net income (loss)                                                  $      (1,434,284)   $         230,095
    Adjustments to reconcile net loss to net cash from
      operating activities:
    Net effects from purchase of Candico Entertainment, Inc.
      and sale of Goal Post Distributors, Inc.:
        Depreciation and amortization                                             98,977               94,996
        Accretion of interest                                                     17,600                9,800
        Gain on forgiveness of debt                                                   --             (707,388)
        Loss on disposal of property and equipment and
          other assets                                                           814,097               25,020
        Loss on sale of Goal Post Distributors, Inc.                                  --                   --
        Changes in operating assets and liabilities:
             Increase in accounts receivable                                         (60)              (5,039)
             Decrease (increase) decrease in inventories                          98,363              (95,849)
             Decrease (increase) in prepaid expenses and other
               current assets                                                      5,384              (12,611)
             Increase in accounts payable and accrued expenses                   159,413               56,213
             Increase (decrease) other liabilities                               107,143             (304,640)
             Decrease in trade and other miscellaneous claims                         --                   --
             Increase in related party payables                                  (36,848)             144,829
                                                                       -----------------    -----------------

                           Net cash used in operating activities                (170,215)            (564,574)
                                                                       -----------------    -----------------

Cash flows from investing activities:

    Business acquisitions, net of acquired cash                                       --                   --
    Purchases of property and equipment                                           21,361              (43,743)
    Decrease in other assets                                                          --                   --
                                                                       -----------------    -----------------

                           Net cash used in investing activities                  21,361              (43,743)
                                                                       -----------------    -----------------

Cash flows from financing activities:

    Proceeds from long-term borrowings - bank                                         --                   --
    Proceeds from notes payable - affiliates                                    (181,602)             300,000
    Payments to unsecured creditors                                                   --               (5,743)
    Net payments on long-term debt                                               (29,092)            (123,603)
    Payments to affiliates                                                            --                   --
    Proceeds of loans from Stockholders                                           76,316                   --
    Proceeds from common stock private placement                                 286,250              420,000
                                                                       -----------------    -----------------

                           Net cash provided by financing activities   $         151,872    $         590,654
                                                                       -----------------    -----------------
</TABLE>

                                                                     (continued)

                                      -24-
<PAGE>
<TABLE>
<CAPTION>

                        RETAIL ENTERTAINMENT GROUP, INC.

                CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED

                YEARS ENDED JANUARY 30, 2000 AND JANUARY 31, 1999

                                                                       JANUARY 30, 2000     JANUARY 31, 1999
                                                                       -----------------    -----------------
<S>                                                                    <C>                  <C>
Decrease in cash                                                                   3,018              (17,663)

Cash at beginning of year                                                         42,469               60,132
                                                                       -----------------    -----------------

Cash at end of year                                                    $          45,487    $          42,469
                                                                       =================    =================
</TABLE>


Supplemental schedule of non-cash financing activities:

Interest paid was approximately $74,376 and $107,400 for the year ended January
30, 2000 and the seven-months ended January 31, 1999, respectively.




See accompanying notes to consolidated financial statements.


                                       25
<PAGE>
                        RETAIL ENTERTAINMENT GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      JANUARY 30, 2000 AND JANUARY 31, 1999

(1)    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

       (a)      PRINCIPAL BUSINESS ACTIVITY

                The principal business activity of Retail Entertainment Group,
                Inc. (Company) is the retail distribution of bulk candy under
                the name of "Candy Candy" or Candico (the "Candico Stores").
                Previously, the Company operated Starlog stores that included
                various science fiction and other products.

       (b)      CONSOLIDATION

                The accompanying consolidated financial statements include the
                accounts of the Company and its wholly-owned subsidiaries,
                Candico Entertainment, Inc. (Candico). All significant
                intercompany transactions and balances have been eliminated in
                consolidation.

       (c)      DISCONTINUED OPERATIONS REPORTING

                1.   STARLOG FRANCHISE CORPORATION, SUMON, LLC, GOAL POST
                     DISTRIBUTORS, INC. AND SHUTTLECART ENTERPRISES

                     On April 25, 1998, the Company's Board of Directors
                     approved the closing of the remaining Starlog and Hologram
                     stores (Sumon, LLC) and Goal Post Distributors, Inc. As a
                     result, the Company closed five of the remaining six
                     Starlog stores by June 27, 1998 with the last store closing
                     October 1998. In January 1999, the Company also approved
                     the closing of Shuttlecart Enterprises. The results of
                     operations of each subsidiary are reported in the
                     accompanying reclassified consolidated statements of
                     operations and accumulated deficit under discontinued
                     operations. During fiscal year 1998, the Company wrote down
                     certain assets of the retail operations to their net
                     realizable values and the cost of disposing these
                     operations are also reported in the accompanying
                     reclassified consolidated statements of operations and
                     accumulated deficit under discontinued operations. In
                     addition, the leases of four of the six Starlog stores
                     expired leaving the Company with no ongoing liability
                     resulting from such closings and the remaining two leases
                     were renegotiated resulting in a liability of approximately
                     $27,000 (see Note 3).

       (d)      INVENTORIES

                Inventories, consisting of finished goods, are stated at their
                net realizable value using the lower of cost or market, and
                determined by the first-in, first-out method (FIFO).

       (e)      DEPRECIATION AND AMORTIZATION

                Depreciation and amortization of property and equipment is
                calculated using the straight-line method over the estimated
                useful lives of the related assets or life of the lease,
                whichever is shorter.

                                                                     (continued)

                                      -26-
<PAGE>
                        RETAIL ENTERTAINMENT GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      JANUARY 30, 2000 AND JANUARY 31, 1999

       (f)      REVENUE RECOGNITION

                The Company recognizes revenue when goods or services are
provided.

       (g)      ESTIMATES

                The preparation of the consolidated financial statements in
                conformity with generally accepted accounting principles
                requires management to make estimates and assumptions that
                affect certain reported amounts and disclosures. Accordingly,
                actual results may differ from those estimates.

       (h)      SEASONALITY

                The Company's sales are seasonal in nature based, in part, on
                gift buying during holiday periods such as Valentine's Day,
                Halloween, Christmas and Easter.

       (i)      RECLASSIFICATIONS

                Certain amounts in the 1999 consolidated financial statements
                have been reclassified to conform with the 2000 presentation.
                Such reclassifications had no effect on reported total net loss.

       (j)      CASH AND CASH EQUIVALENTS

                The Company considers all highly liquid investments purchased
                with an original maturity of three months or less to be cash
                equivalents.

       (k)      EARNINGS PER SHARE

                In the fourth quarter of fiscal year 1997, the Company adopted
                Statement of Financial Accounting Standards No. 128, Earnings
                Per Share, (SFAS 128). In February 1998, the Securities and
                Exchange Commission issued Staff Accounting Bulletin No. 98
                related to SFAS 128. SFAS 128 replaced the calculation for
                primary and fully diluted earnings per share with basic and
                diluted earnings per share. Unlike primary earnings per share,
                basic earnings per share exclude any dilutive effects of
                options, warrants and convertible securities. Diluted earnings
                per share is similar to the previously reported fully diluted
                earnings per share. The Company had options and warrants at
                January 31, 1999, resulting in diluted earnings per share.
                Certain of the Company's options and warrants were not included
                in computing dilutive net income (loss) per common share because
                their effects were anti-dilutive. At June 27, 1998, the Company
                had no common stock equivalents resulting in diluted earnings
                per share, and the Company's options and warrants were not
                included in computing dilutive net income (loss) per common
                share because their effects were anti-dilutive.

                                                                     (continued)

                                      -27-
<PAGE>
                        RETAIL ENTERTAINMENT GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      JANUARY 30, 2000 AND JANUARY 31, 1999

       (l)      INCOME TAXES

                The Company has adopted Statement of Financial Accounting
                Standards (SFAS 109), Accounting for Income Taxes. Under the
                asset and liability method of SFAS 109 deferred tax assets and
                liabilities are recognized for the future tax consequences
                attributable to differences between the financial statement
                carrying amounts of existing assets and liabilities and their
                respective tax bases. Deferred tax assets and liabilities are
                measured using enacted tax rates expected to apply to taxable
                income in the years in which those temporary differences are
                expected to be recovered or settled. Valuation allowances are
                established when necessary to reduce deferred tax assets to
                amounts expected to be realized.

       (m)      RISKS AND UNCERTAINTIES

                (1)  CONCENTRATION OF CREDIT RISK

                     Financial instruments, which potentially subject the
                     Company to significant concentrations of credit risk,
                     consist principally of cash and cash equivalents. The
                     carrying amounts reported in the consolidated balance
                     sheets for cash and cash equivalents approximate their fair
                     values. The balances, at times, may exceed federally
                     insured limits.

                (2)  CONCENTRATIONS OF FINANCIAL RISK

                     The Company is dependent upon funding of Hope Associates,
                     LLC (Hope Associates) which owns greater than 50% of the
                     Company's outstanding common stock.

       (n)      RECENT ACCOUNTING PRONOUNCEMENTS

                (1)  COMPREHENSIVE INCOME

                     The Company adopted SFAS No. 130, Reporting Comprehensive
                     Income (SFAS 130). Under SFAS 130 changes in net assets of
                     an entity resulting from transactions and other events and
                     circumstances from non-owner sources are reported in the
                     financial statements for the period in which they are
                     recognized. Because there were no such changes, adoption of
                     SFAS 130 did not impact the consolidated financial
                     statements of the Company.

                (2)  SEGMENT REPORTING

                     The Company adopted SFAS No. 131, Disclosures About
                     Segments of an Enterprise and Related Information. The
                     Company currently operates as a single segment and will
                     evaluate additional segment disclosure requirements as it
                     expands its operations.


                                                                     (continued)

                                      -28-
<PAGE>
                        RETAIL ENTERTAINMENT GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      JANUARY 30, 2000 AND JANUARY 31, 1999

                (3)  DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

                     In June 1998, SFAS No. 133, Accounting for Derivative
                     Instruments and Hedging Activities, was released. The
                     statement requires the recognition of all derivatives as
                     either assets or liabilities in the balance sheet and the
                     measurement of those instruments at fair value. The
                     accounting for changes in the fair value of a derivative
                     depends on the planned use of the derivative and the
                     resulting designation. The Company is required to implement
                     the statement in the first quarter of fiscal 2000. The
                     Company has not used derivative instruments and believes
                     the impact of adoption of this statement will not have a
                     significant effect on the consolidated financial
                     statements.

                (4)  LONG-LIVED ASSETS

                     The Company has adopted SFAS No. 121, Accounting for the
                     Impairment of Long-Lived Assets and for Long-Lived Assets
                     to be Disposed of, (SFAS 121). SFAS 121 requires that
                     long-lived assets and certain identifiable intangibles held
                     and used by an entity be reviewed for impairment whenever
                     events or changes in circumstances indicate that the
                     carrying amount of an asset may not be recoverable. If the
                     sum of the expected future cash flows (undiscounted and
                     without interest) is less than the carrying amount of the
                     asset, an impairment loss is recognized. Measurement of
                     that loss would be based on the fair value of the asset.
                     SFAS 121 also generally requires long-lived assets and
                     certain identifiable intangibles to be disposed of to be
                     reported at the lower of the carrying amount or the fair
                     value less cost to sell.

                (5)  ACCOUNTING FOR STOCK-BASED COMPENSATION

                     The Company has adopted the disclosure-only provisions of
                     Statement of Financial Accounting Standards No. 123,
                     "Accounting for Stock Based Compensation" (SFAS 123).
                     Accordingly, no compensation costs have been recognized for
                     the Company's granted stock options and warrants. Had
                     compensation and other cost for the Company's granted stock
                     options and warrants been determined based on the fair
                     value at the grant date or issuance for awards in 1998 and
                     1999 consistent with the provisions of SFAS 123, the impact
                     on operations would have been immaterial.

                                                                     (continued)

                                      -29-
<PAGE>
                        RETAIL ENTERTAINMENT GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      JANUARY 30, 2000 AND JANUARY 31, 1999

(2)      DISCONTINUED OPERATIONS

         For the year ended January 30, 2000 and the seven-months ended January
         31, 1999, the Company recorded a net loss of $124,048 and $5,282,
         respectively, as part of discontinued operations in the accompanying
         consolidated statement of operations. For financial reporting purposes,
         the assets, liabilities, results of operations and cash flows of
         Candico Entertainment are included in the Company's consolidated
         financial statements. A summary of these assets and liabilities as of
         January 30, 2000 and January 31, 1999 are as follows:

<TABLE>
<CAPTION>
                                                           JANUARY 30, 2000    JANUARY 31, 1999
                                                           ----------------    ----------------
<S>                                                           <C>                <C>
         Assets:
           Cash and cash equivalents                          $      45,447      $       34,093
           Accounts receivable, net                                   5,460               5,400
           Inventory                                                101,499             199,861
           Other current assets                                      14,637              21,036
           Property, plant and equipment                             59,786             647,776
                                                              -------------      --------------

                Total assets - discontinued operations        $     226,829      $      908,166
                                                              =============      ==============

         Liabilities:
           Accounts payable and accrued liabilities           $     865,281      $      255,333
           Other current liabilities                                (17,366)            263,029
           Long-term liabilities                                    303,088             381,552
                                                              -------------      --------------

                Total liabilities - discontinued operations       1,151,003             899,914
                                                              -------------      --------------

                Net assets (liabilities) of discontinued
                  operations                                  $    (924,174)     $        8,252
                                                              =============      ==============
</TABLE>

       The 1998 liabilities of discontinued operations were paid and/or
       renegotiated and recorded as an extraordinary gain in the accompanying
       consolidated statement of operations under extraordinary items.

       The remaining liabilities of discontinued operations are expected to be
       paid in fiscal period ended January 31, 2000. The repayment will come
       from cash from continuing operations or other financing sources.

                                                                     (continued)

                                      -30-
<PAGE>
                        RETAIL ENTERTAINMENT GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      JANUARY 30, 2000 AND JANUARY 31, 1999

(3)    PROPERTY AND EQUIPMENT

       Property and equipment consist of the following:

<TABLE>
<CAPTION>
                                                                                             Estimated
                                               JANUARY 30, 2000        JANUARY 31, 1999    Useful Life
                                               ----------------        ----------------    -----------
<S>                                                     <C>                     <C>         <C>
           Trade show exhibition displays       $             -          $            -       3 years
           Computer equipment and software              119,207                 119,207     3-5 years
           Furniture, fixtures and equipment            264,024                 275,939     3-7 years
           Leasehold improvements                         3,057                  79,206    Life of lease
                                                ---------------          --------------     or 10 years

                                                        386,288                 474,352
                                                ---------------          --------------

           Less accumulated depreciation
             and amortization                          (305,895)               (278,944)
                                                ---------------          --------------

                                                $        80,393          $      195,408
                                                ===============          ==============
</TABLE>

       Depreciation and amortization related to property and equipment totaled
       approximately $99,000 and $95,000 for the year ended January 30, 2000 and
       the seven-months ended January 31, 1999, respectively.

       Approximately $30,000 of net property and equipment reported in prior
       year was disposed of in the current period as part of discontinued
       operations.

(4)    ACCOUNTS PAYABLE AND ACCRUED EXPENSES

       Accounts payable and accrued expenses consist of the following:

                                         JANUARY 30, 2000      JANUARY 31, 1999
                                         ----------------      ----------------

           Accounts payable                 $     713,834        $      482,551
           Accrued professional fees              108,923               130,000
           Accrued payroll                         19,568                29,239
           Accrued taxes                          107,143                60,233
           Accrued interest                        39,111                20,000
           Accrued rents                                -                     -
           Other                                  300,534                   534
                                            -------------        --------------

                                            $   1,289,113        $      722,557
                                            =============        ==============

       Approximately $815,000 of accounts payable and accrued expenses reported
       in the prior year related to discontinued operations (see Note 3).

                                                                     (continued)

                                      -31-
<PAGE>
                        RETAIL ENTERTAINMENT GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      JANUARY 30, 2000 AND JANUARY 31, 1999

(5)    NOTES PAYABLE - AFFILIATES

       During 1997, two members of Hope provided $200,000 working capital
       financing to the Company. One of the members was repaid $100,000 during
       fiscal year 1998.

       On March 5, 1998, Hope Associates, LLC provided $60,000 of working
       capital to the Company for operating needs. Interest accrues at the rate
       of 10% per year payable with principal 90 days after issuance. Interest
       after default shall be at the rate of 18% per year. At June 27, 1998,
       none of the note has been repaid.

       In April 1998, certain members of Hope provided funds totaling $188,264
       which remained outstanding at June 27, 1998. All of the notes are due
       upon demand and bear interest at 10% per year. During the current period,
       $60,174 was forgiven and is reported as an extraordinary gain on
       extinguishment of debt in the accompanying consolidated statements of
       operations.

       On June 27, 1998, the Company sold the remaining net assets of Goal Post
       Distributing, Inc. (Goal Post) to its original owner (see Note 1). As
       part of the terms of the sale, the Company agreed to pay $50,000 to the
       former owner of Goal Post. The $50,000 is recorded as part of notes
       payable - affiliates and is due upon demand.

       In November 1998, Hope Associates, LLC (Hope Associates) and certain of
       its members, loaned the Company $300,000 in working capital to be used to
       purchase inventories and pay current overhead expenses. The note will
       accrue interest at 10% with interest payable monthly, due upon demand. In
       conjunction with the money received from Hope Associates, the Company
       granted to the members of Hope Associates 300,000 common stock warrants
       at an exercise price of $1.25 expiring November 30, 2002.

(6)    RELATED PARTY TRANSACTIONS

       The Company paid Hope Associates, LLC ("Hope Associates") $60,000 in
       management fee expenses per an agreement requiring payments of $20,000
       per month depending on excess cash flows (see Note 12), which is included
       in selling, general, and administrative expenses in the accompanying
       consolidated statements of operations. It also incurred an additional
       $144,829 of expenses in connection with Candy Candy Acquisition
       Corporation, which is also included in selling, general, and
       administrative expenses in the accompanying consolidated statements of
       operations. The Company earned management fee revenues of $56,852 related
       to a management agreement with Hope Associates allowing the Company to
       manage eight candy stores previously acquired by Hope Associates (see
       note 8). The revenues are reported as management fee revenues in other
       income in the accompanying consolidated statements of operations.

                                                                     (continued)

                                      -32-
<PAGE>
                        RETAIL ENTERTAINMENT GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      JANUARY 30, 2000 AND JANUARY 31, 1999

(7)    MANAGEMENT AND OPTION AGREEMENT

       On November 24, 1998, the Company entered into a management and option
       agreement with Hope Associates, LLC, (Hope Associates) a related party,
       whereby the Company will manage certain retail candy stores (Candy Candy
       Acquisition Corporation) belonging to Hope Associates, and in exchange
       grant to Hope Associates 500,000 common stock warrants at $1.25 per share
       expiring in November 2002. The Company will receive quarterly
       compensation, based upon a specified formula as noted in the agreement,
       for its services with respect to the agreement. In addition, the Company
       has the right and option to purchase, effective the date of the
       agreement, until November 30, 2001, all of the outstanding common stock
       of Candy Candy Acquisition Corporation. The exercise price for the option
       is equal to the cost of the Candy Candy Acquisition Corporation plus the
       outstanding balance of any Hope loans and any additional capital
       contributions or loans made by Hope to the Company and Candy Candy
       Acquisition Corporation.

(8)    LONG-TERM DEBT

       Amounts due to unrelated entities at January 30, 2000 and January 31,
1999 consists of the following:

<TABLE>
<CAPTION>
                                                                         JANUARY 30, 2000        JANUARY 31, 1999
                                                                         ----------------        ----------------
<S>                                                                         <C>                    <C>
           Note payable to Securities Exchange Commission due in annual
           installments through January 2002, with interest
           payable annually at 5.5%.                                        $   303,820            $    303,820

           Notes payable to unsecured creditors due in monthly installments
           through June 2002 with interest payable monthly at 12% (net

           of unamortized portion imputed interest of $43,400).                 364,000                 346,600

           Note payable to Gray and Crawley due in
           monthly installments through May 2001 with
           interest at 9%.                                                      189,998                 206,777

           Note payable to NB Services, Inc. due in monthly
           installments through May 2001 with interest
           at 9%.                                                               144,845                 148,491
           Note payable to Gray and Crawley due in monthly
           installments through April 2003 with interest at 10%.                 53,525                  58,086

           Notes payable to unsecured creditors due in monthly
           installments through May 2003 with interest at 10%.                   50,151                  54,257
                                                                            -----------            ------------
                Total                                                       $ 1,106,339            $  1,118,031
</TABLE>

                                                                     (continued)

                                      -33-
<PAGE>
                        RETAIL ENTERTAINMENT GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      JANUARY 30, 2000 AND JANUARY 31, 1999

(8)    LONG-TERM DEBT - CONTINUED
<TABLE>
<CAPTION>

                                                           JANUARY 30, 2000    JANUARY 31, 1999
                                                           ----------------    ----------------
<S>                                                                <C>                 <C>
           Less current installments of long-term debt             320,641             456,444
                                                               -----------        ------------

           Long-term debt, excluding current installments      $   785,698        $    661,587
                                                               ===========        ============
</TABLE>

       The aggregate of future maturities of long-term indebtedness are as
follows:

           FISCAL YEAR ENDING JANUARY:
           ---------------------------
                  2001                                 890,308
                  2002                                 161,632
                  2003                                  54,399
                                                   -----------
                                                   $ 1,106,339
                                                   ===========

       During fiscal year 1998, the Company borrowed $1,250,000 from BSB Bank in
       the form of a note payable. The Company also renewed a previous note due
       to BSB Bank in the amount of $500,000. Subsequently, in September 1998,
       Hope Associates, LLC, a majority stockholder, assumed the $1,750,000
       notes payable to BSB Bank and forgave an additional $250,000 due to them
       by the Company, all of which was recorded as a contribution to capital
       (see Note 12). In consideration for such assumption and contribution, the
       Company will pay a monthly fee to Hope Associates of approximately
       $20,000 per month. Subsequently, Hope Associates agreed to waive certain
       monthly management fees until the Company is able to operate profitably
       and obtain excess cash flows. In connection with the above transactions
       the Company also granted the members of Hope Associates a warrant to
       purchase 500,000 shares of the Company's common stock at an exercise
       price of $1.25 per share. The warrant expires May 3, 2003. The warrants
       estimated at fair market value at date of issuance was not material to
       the Company's financial statements.

(9)    INCOME TAXES

       The Plan of Reorganization of the Company was approved by the United
       States Bankruptcy Court on August 28, 1996, provided for the issuance of
       new common stock to satisfy the Company's indebtedness and resulted in an
       "ownership change" under Section 382 of the United States Tax Code. As a
       result, total usage of the Company's net operating loss carryforwards of
       $7,900,000 that occurred prior to emergence from bankruptcy, noted below,
       will be limited to approximately $20,000 annually or $300,000 over the
       next 15 years. In addition, deferred deductions, described below, that
       become deductible for tax purposes during the five year period following
       the effective date of the bankruptcy are also subject to the annual
       limitation. Net operating carryforwards (NOL) and future deductions
       exceeding the annual limitation will expire unutilized. NOL's which
       resulted subsequent to emergence from bankruptcy will not be fully
       available for future utilization. (continued)

                                      -34-
<PAGE>
                        RETAIL ENTERTAINMENT GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      JANUARY 30, 2000 AND JANUARY 31, 1999

(9)    INCOME TAXES - CONTINUED

       The Company accounts for income taxes pursuant to the Statement of
       Financial Accounting Standards No. 109. The approximate amounts of
       deferred assets at January 30, 2000 and January 31, 1999, respectively,
       resulting from temporary differences and carryforwards were as follows:

<TABLE>
<CAPTION>
                                                              JANUARY 30, 2000    JANUARY 31, 1999
                                                              ----------------    ----------------
<S>                                                              <C>                <C>
           Net operating loss carryforwards                      $   9,960,900      $    9,220,900
           Expenses recognized for financial
             reporting purposes not yet deductible:
                Other                                                        -                   -
                                                                 -------------      --------------
                                                                     9,996,900           9,220,900
                Effective federal and state tax rate                        40%                 40%
                                                                 -------------      --------------

           Total deferred tax asset                                  3,984,360           3,688,360

           Valuation allowance for deferred tax asset               (3,984,360)         (3,688,360)
                                                                 -------------      --------------

           Net deferred tax asset                                $          --      $           --
                                                                 =============      ==============
</TABLE>

(10)   COMMITMENTS AND CONTINGENCIES

       The Company has entered into various non-cancelable operating leases for
       office, warehouse and retail store space expiring at various dates
       through 2006. Certain of the leases provide for minimum annual rentals
       plus additional rental payments based upon sales volume.

       At January 30, 2000, aggregate approximate future minimum rental payments
       required under operating leases are as follows:

           FISCAL YEAR ENDING JANUARY:

                  2001                           $   415,631
                  2002                               335,675
                  2003                               276,006
                  Thereafter                         371,818
                                                 -----------
                                                 $ 1,399,130

       Rent expense charged to operations for the years ended January 30, 2000
       and January 31, 1999 was approximately $802,392 and $501,923,
       respectively.

                                                                     (continued)

                                      -35-
<PAGE>
                        RETAIL ENTERTAINMENT GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      JANUARY 30, 2000 AND JANUARY 31, 1999

(10)   COMMITMENTS AND CONTINGENCIES - CONTINUED

       The Company entered into an employment agreement with the President and
       CEO commencing July 11, 1994 and subsequently amended August 15, 1996. As
       amended, the agreement provided for a five-year term and a salary of
       $100,000 per year, increasing by $10,000 a year up to $140,000, plus
       other benefits including a discretionary bonus of up to 50% of his base
       salary. In April 1998, the Board of Directors amended the employment
       agreement to provide a base salary of $150,000 when the Company raises
       $150,000 or more in a currently proposed private placement of common
       stock. The employment agreement also granted certain other stock options
       (see Note 14).

       The Company is party to various claims and legal actions arising in the
       ordinary course of business. Management does not believe that the outcome
       of such claims and legal actions will have a material effect on financial
       position or results of operations of the Company.

(11)   STOCKHOLDERS' EQUITY

       On May 10, 1998, the Company's Board of Directors and shareholders
       approved a one-for-ten reverse stock split of the outstanding shares of
       Retail Entertainment Group, Inc. to shareholders of record on July 9,
       1998. In addition to the reverse split, the Company reduced the number of
       shares of common stock authorized from 40,000,000, with a .001 par value,
       to 6,000,000 shares with a .01 par value. Shareholders' equity has been
       restated to give retroactive recognition to the reverse stock split in
       prior periods. The total number of shares outstanding following the
       reverse split was 2,093,764.

       In September 1998, Hope Associates, LLC (Hope Associates), the Company's
       majority shareholder, assumed $1,750,000 of debt owed by the Company to
       BSB Bank and forgave $250,000 of debt owed to them by the Company. The
       transaction resulted in a contribution of $2,000,000 to additional
       paid-in-capital (see Note 9). The members of Hope Associates had
       personally guaranteed the amounts due to BSB Bank.

       Effective June 27, 1998, the Company entered into an agreement for the
       sale of Goal Post Distributors, Inc., a wholly owned subsidiary, back to
       its original owner. The sale of Goal Post resulted in a loss of
       approximately $265,000. In addition, in exchange for Goal Post, the
       Company received as consideration 330,000 shares of the Company's own
       common stock valued at $.10 per share. The shares were accounted for as
       treasury shares and resulted in a charge to common stock and additional
       paid-in-capital of approximately $33,000. The shares were subsequently
       retired and accounted for using the cost method (see Note 1).

       In November 1998, the Company issued approximately 336,000 shares of
       common stock at $1.25 per share pursuant to private placements under
       Regulation D of U.S. Securities laws. The proceeds of approximately
       $420,000 will be used to provide for working capital and repay certain
       debts to affiliates.

       None of the Company's outstanding options or warrants have been exercised
       during the year ended January 30, 2000 or the seven-months ended January
       31, 1999.

                                                                     (continued)

                                      -36-
<PAGE>
                        RETAIL ENTERTAINMENT GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      JANUARY 30, 2000 AND JANUARY 31, 1999

(12)    STOCK OPTIONS AND WARRANTS

        On April 1, 1997 and subsequently revised in April 1998, the Company
        granted the President and CEO an option to acquire 300,000 (post
        one-for-ten reverse split) shares of the Company's common stock until
        March 31, 2003. The option to acquire 100,000 (post one-for-ten reverse
        split) of such shares is currently exercisable. The option to acquire
        the second 100,000 (post one-for-ten reverse split) shares is
        exercisable only if and after the Company has $500,000 of annual net
        profits, before interest, taxes, depreciation and amortization (EBITDA)
        and the option to acquire the remaining 100,000 shares will be
        exercisable only if and after the Company has $1,000,000 of annual net
        profits EBITDA. This option is in replacement of other options
        previously granted. None of the options have been exercised. The Company
        has no other long-term incentive plans.

        AGGREGATE STOCK OPTION ACTIVITY

        The following tables summarize information about the aggregate stock
        option and warrant activity (post one-for-ten reverse split) for the
        year ended January 30, 2000:

                                                                       Weighted-
                                                                       average
                                                        Number         exercise
                                                      of Shares        price
                                                     -----------      ----------
           Outstanding, beginning of year              1,544,000      $     1.39
             Granted                                      50,000            1.25
             Exercised                                         -               -
             Forfeited                                         -               -
                                                     -----------      ----------

           Outstanding, end of year                    1,594,000            1.39
                                                     -----------      ----------

           Options and warrants vested, end of year    1,594,000      $     1.39
                                                     ===========      ==========

           OPTIONS AND WARRANTS OUTSTANDING AND EXERCISABLE
           ------------------------------------------------
                                                                  Weighted-
                                                 Weighted-         average
                                                 average          remaining
            Average               Number         exercise         contractual
        Exercise Price          outstanding      price           life (years)
        --------------          -----------   -------------      ------------

          $.60 - 2.50               194,000       $ 1.52              4
          1.25 - 5.00               550,000         1.53              2
            1.25                    800,000         1.25              2
            1.25                     50,000         1.25              4
                                  ---------         ----             --

                                  1,594,000        $1.39              2
                                  =========         ====             ==

       These tables do not include options and warrants in which certain events
       or contingencies must be met prior to grant.

                                                                     (continued)

                                      -37-
<PAGE>

                        RETAIL ENTERTAINMENT GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      JANUARY 30, 2000 AND JANUARY 31, 1999

(12)    STOCK OPTIONS AND WARRANTS - CONTINUED

        ACCOUNTING FOR STOCK-BASED COMPENSATION

        The Company accounts for its stock option plans under Accounting
        Principles Board Opinion No. 25 (APB 25), under which no compensation
        expense has been recognized. In October 1995, the FASB issued SFAS No.
        123, " Accounting for Stock-Based Compensation" (SFAS 123), which was
        effective for fiscal years beginning after December 15, 1995. SFAS 123
        allows companies to continue following the accounting guidance of APB
        25, but requires pro forma disclosure of net income and earnings per
        share for the effects on compensation expense had the accounting
        guidance of SFAS 123 been adopted. The pro forma disclosures are
        required only for options granted in fiscal years beginning after
        December 15, 1994.

        The Company adopted the disclosure-only provisions of SFAS 123 for the
        seven-months ended January 31, 1999 and the year ended June 27, 1998.
        Accordingly, no compensation cost has been recognized for the Company's
        granted stock options and warrants. Had compensation and other costs for
        the Company's granted stock options and warrants been determined based
        on the fair value at the grant date or issuance for awards in 1999 and
        1998, consistent with the provisions of SFAS 123, the impact on net
        operations would have been immaterial.

(13)    GOING CONCERN

        As shown in the accompanying consolidated financial statements, the
        Company has incurred recurring losses from operations. These losses have
        contributed to the Company's working capital deficiency and resulting
        cash flow problems. Although the Company's cash flows increase during
        the holiday season, it has not been profitable on a year round basis.
        The Company has raised cash through various debt financing from
        affiliates, however, its ability to continue as a going concern will
        require the attainment of profitable operations for extended periods,
        conversion of debt into permanent equity or obtaining additional
        permanent equity. The Company is currently pursuing various debt and
        equity opportunities.

                                      -38-

<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.

Dated: June 21, 2000

RETAIL ENTERTAINMENT GROUP, INC.

BY:        /s/ John Fitzgerald                  June 22, 2000
    ------------------------------------        Date
         John (Jack) Fitzgerald
         President, CEO & CFO

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.


/s/ JOHN FITZGERALD             President, Chief Executive   Date: June 22, 2000
---------------------------     Officer and Director
John (Jack) Fitzgerald

/s/ MICHAEL MICHAELSON          Director                     Date: June 22, 2000
---------------------------
Michael Michaelson

/s/ HERMAN RUSH                 Director                     Date: June 22, 2000
---------------------------
Herman Rush

/s/ RAY MARKMAN                 Director                     Date: June 22, 2000
---------------------------
Ray Markman

/s/ ALLAN R. LYONS              Director                     Date: June 22, 2000
---------------------------
Allan R. Lyons


                                      -39-