<PAGE>

                                   FORM 10-KSB

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

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

                     For the Fiscal Year Ended June 28, 1998

         ( )   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934
                        For the transition period from to

                         COMMISSION FILE NUMBER 0-18707
                         ------------------------------

                          SPECIALTY RETAIL GROUP, INC.
                          ----------------------------
                 (Name of small business issuer in its charter)

               FLORIDA                                      59-2824411        
               -------                                      ----------        
    (State or other jurisdiction                          (IRS Employer)
  of incorporation or organization)                     Identification No.)

   477 MADISON AVENUE, 14TH FLOOR, NEW YORK, NY               10022
   --------------------------------------------               -----
    (Address of principal executive offices)                (Zip Code)

Issuer's telephone number: (212) 872-9600

                              Securities registered
                      pursuant to Section 12(b) of the Act:

                                      None

                              Securities registered
                      pursuant to Section 12(g) of the Act:

                                      None

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the issuer was required to file such reports), and
(2) has been subject to such filing requirements for the 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 Issuer's knowledge, 


                                                                    Page 1 of 17
<PAGE>

in definitive proxy or information statements incorporated by reference in Part
III of this Form 10-KSB or any amendment to this Form 10-KSB |X|.

            The Index to Exhibits appears at Page 17.

            For the year ended June 28, 1998, the Issuer had revenues of $0.

            The aggregate market value of the Issuer's common stock held by
non-affiliates of the Issuer (assuming for this purpose that all officers,
directors and holders of more than 10% of the Company's outstanding voting stock
are affiliates), computed by reference to the average bid and asked prices of
such stock as of April 1, 1999; was $171,866.

            As of April 1, 1999 there were 9,084,238 shares of common stock
outstanding, excluding 213,333 contingently issuable shares held by an Escrow
Agent.

            Transitional Small Business Disclosure Format (check one:) 
Yes |_| - No |X|

DESCRIPTION OF BUSINESS

            The Company was organized under the laws of Florida in 1987. The
Company originally operated a clinical laboratory which it sold as of December
31, 1991. On April 13, 1993, the Company acquired all of the issued and
outstanding capital stock of Building Blocks, Inc. ("Building Blocks") for
shares of the Company's Common Stock. Thereafter, Building Blocks operated a
specialty educational and developmental toy store chain. In early 1996 the
Company determined to pursue expansion of the Building Blocks chain through
franchising, and the Company established Building Blocks Franchise Corp.
("BBFC") as a second-tier wholly-owned subsidiary for that purpose.

            Primarily as the result of continuing losses and negative cash flow
experienced by Building Blocks, the Company began experiencing a working capital
shortage in the spring of 1996. Despite a number of actions taken to reduce
operating expenses and to generate revenue from franchising, Building Blocks and
BBFC were not able to achieve profitability or to reverse the negative cash flow
by the end of calendar 1996.

            Effective January 28, 1997, the outstanding capital stock of BBFC
was sold. The net proceeds of $43,224 from the sale were paid over to Building
Blocks pursuant to an agreement 


                                                                    Page 2 of 17
<PAGE>

requiring the parent of BBFC to obtain a general release from Building Blocks to
BBFC. On January 31, 1997, Building Blocks filed a petition for relief under
Chapter 11.

            In May 1998, a Reorganization Plan in the Chapter 11 proceeding was
approved by the bankruptcy court. Under the terms of the Plan, the Company has
been released from all claims of a Building Blocks and its creditors and has
settled its liability as a guarantor of a Building Blocks Store Lease.

            The Company had approximately $26,711 of assets and had current
liabilities of approximately $861,984 at June 28, 1998 after paying $25,000 due
to or on behalf of Building Blocks in connection with the Plan. The Company may
be required, at some future date, to satisfy a non-current liability carried on
its books in the amount of $80,000 by the issuance of 213,333 shares of its
common stock to certain parties pursuant to the settlement agreement described
in Note H-2 to the financial statements included herewith.

            The Company did not receive any cash or other benefit (including any
right to utilize Building Blocks' net operating loss carryforwards) from
Building Blocks under the Plan. The Company has been receiving cash advances in
the form of demand loans from three beneficial owners of its Capital Stock in
order to meet its operating expenses and has been obtaining forbearances from
its principal creditors. At June 28, 1998, such advances and interest accrued
thereon (which are included in the current liabilities described above)
aggregated $495,947. There are no assurances as to the time or extent that the
stockholder advances and/or forbearance will continue.

            The foregoing raised substantial doubt about the Company's ability
to continue as a going concern. (See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Financial Statements.")

            The Company has attempted to attract an operating business with
which to effectuate a business combination. There is no assurance that any
business combination could ever be effectuated.

EMPLOYEES

            As of April 1, 1999, the Company had no employees.

RECENT DEVELOPMENT

            Reference is made to Item 6, Management's Discussion and Analysis of
Financial Condition and Results of Operations, 


                                                                    Page 3 of 17
<PAGE>

for information concerning an agreement pursuant to which the Company may
receive a capital infusion.

DESCRIPTION OF PROPERTIES

            The Company occupies approximately 100 square-feet of executive
office space in a suite of offices at 447 Madison Avenue, New York, NY 10022
which is leased by an entity controlled by certain of the Company's principal
stockholders. This occupancy is on an at-will basis.

LEGAL PROCEEDINGS

            FASHION MALL PARTNERS, L.P. V BUILDING BLOCKS, INC., CITY COURT  
- WESTCHESTER, NEW YORK, COMMENCED SEPTEMBER 26, 1996.

            The Company guaranteed up to $180,000 of rent payments under a lease
to Building Blocks. The landlord subsequently filed a Proof of Claim with the
Bankruptcy Court in the amount of approximately $480,000. The landlord agreed to
settle this claim and the suit for a payment of $30,000, and on June 8, 1998,
the Company paid $25,000 and Building Blocks paid $5,000 to the landlord.

            PETER SAYET V. INSTITUTE FOR LABORATORY MEDICINE, INC., ILM
ACQUISITION L.P., M.P. PARTNERS L.P., ILM ACQUISITION CORPORATION, LSJM PARTNERS
L.P., ILM N CORPORATION, FOREST HILL CAPITAL CORPORATION, HEALTHCARE VENTURE
MANAGEMENT CORPORATION, SELIG ZISES, GLENN MEYERS AND LAURENCE LURIE.

            On August 22, 1996, the Company, the plaintiff (Sayet), and the
other parties entered into an Agreement of Settlement and Compromise (the
"Settlement Agreement") of above-named lawsuit in which Mr. Sayet claimed
damages of approximately $1,400,000 arising from events occurring at the time
his employment with the Company terminated in 1992, when it operated under the
name Institute for Laboratory Medicine, Inc. Under the Settlement Agreement, the
Company issued an aggregate of 650,000 shares of its Common Stock to Sayet and a
designee of Sayet's and reserved for issuance 213,333 shares of its Common stock
which are being held by an Escrow Agent.

            Pursuant to the terms of the Settlement Agreement, in the event that
the holders of the 650,000 Shares (the "Selling Stockholders") sell any Shares
for more than $1.00 per Share, the Company shall receive 67% of such excess (the
"Company Proceeds"). The Settlement Agreement also provides for a "Price
Protection Pool" which shall be equal to the sum of: (i) $160,000 and (ii) 25%
of the Company Proceeds. If, after the sale of all 


                                                                    Page 4 of 17
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of the 650,000 Shares by the Selling Stockholders, in bona fide open market
transactions, the Selling Stockholders realize gross proceeds of less than
$650,000 (the "Shortfall") the Company will be required to either pay the
Shortfall to the Selling Stockholders, up to the amount of the Price Protection
Pool, or issue to the Selling Stockholders that number of the contingently
issuable shares which have a market value equal to the Shortfall, up to a
maximum of 213,333 shares. The aforesaid 213,333 contingently issuable shares
have been reserved for issuance and registered in the name of an Escrow Agent.
The Company currently anticipates that its obligation under the guarantee would
be satisfied by the delivery of the required number of escrowed Shares which
delivery would be in complete satisfaction of the Company's obligation under the
Settlement Agreement.

            Pursuant to the Settlement Agreement, Peter Sayet has reported the
disposition by him of 325,000 shares of Common Stock issued to him. No Shares
were sold for more than $1.00 per share and the Price Protection Pool is
$160,000. Mr. Sayet's designee has not reported the disposition of any of the
325,000 shares issued to him.

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

            None.

MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

            The Common Stock was quoted on the NASDAQ SmallCap System from July
1, 1996 through November 27, 1996, and on the OTC Bulletin Board since November
27, 1996 under the symbol "SRGC". The following table sets forth the high and
low sales prices on the NASDAQ SmallCap System and on the OTC Bulletin Board as
reported by NASDAQ and the OTC Bulletin Board, respectively, for the periods
indicated:

Period                                                High        Low
------                                                ----        ---

July 1, 1996 - September 29, 1996,                    13/16       1/4
September 30, 1996 - December 29, 1996                9/32        .02
December 30, 1996 - March 30, 1997                    .07         .015
March 31, 1997 - June 29, 1997                        .17         .02
June 30, 1997 - September 29, 1997                    .08         .03
September 30, 1997 - December 28, 1997                .04         .01
December 29, 1997 - March 29, 1998                    .05         .01
March 30, 1998 - June 28, 1998                        .06         .03


                                                                    Page 5 of 17
<PAGE>

            On April 1, 1999, there were approximately 230 holders of record of
the Company's Common Stock and one holder of record of the Company's Series A-1
Preferred Stock.

            The Company has never paid dividends on the Common Stock or on the
Series A-1 Preferred Stock and does not anticipate paying any dividends in the
foreseeable future.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

            Set forth below is a discussion of (1) the Company's lack of
liquidity and capital resources; (2) the significant factors affecting the
operating results of discontinued operations (i.e., those of Building Blocks and
BBFC) for the 52 weeks ended June 28, 1998 ("Fiscal 1998") and the 52 weeks
ended June 29, 1997 ("Prior Period"); and (3) the items set forth under other
income (expense) in the Consolidated Statements of Operations included in the
Company's financial statements. These discussions should be read in conjunction
with the financial statements and notes thereto.

            THE REPORTED RESULTS OF OPERATIONS ARE NOT INDICATIVE OF FUTURE
RESULTS OF OPERATIONS OR FINANCIAL POSITION OF THE COMPANY. THE COMPANY HAS NO
ONGOING REVENUE-GENERATING OPERATIONS. THE FINANCIAL STATEMENTS HAVE BEEN
PREPARED IN ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES APPLICABLE
TO A GOING CONCERN, WHICH PRINCIPLES ASSUME THAT ASSETS WILL BE REALIZED AND
LIABILITIES WILL BE DISCHARGED IN THE NORMAL COURSE OF BUSINESS. AS DISCUSSED IN
NOTE C TO THE FINANCIAL STATEMENTS, SUBSTANTIAL DOUBT EXISTS ABOUT THE COMPANY'S
ABILITY TO CONTINUE AS A GOING CONCERN FOR A REASONABLE PERIOD OF TIME. THE
FINANCIAL STATEMENTS DO NOT INCLUDE ADJUSTMENTS RELATING TO THE RECOVERABILITY
OF RECORDED ASSET AMOUNTS AND CLASSIFICATION OF RECORDED ASSETS AND LIABILITIES
WHICH MAY RESULT FROM THE COMPANY'S LACK OF CAPITAL RESOURCES OR ONGOING
OPERATIONS AS DESCRIBED BELOW.

LIQUIDITY AND CAPITAL RESOURCES

            Certain of the matters discussed under this caption that are forward
looking statements involve risks and uncertainties, as described herein and
others which may arise from changes in general economic conditions,
unanticipated changes in the Company's circumstances, and other factors.

            The principal operating subsidiary of the Company during the Prior
Period (through January 31, 1997) was Building 


                                                                    Page 6 of 17
<PAGE>

Blocks, which the Company acquired on April 13, 1993 and which thereafter
operated a chain of specialty retail toy stores.

            Primarily as the result of continuing losses and negative cash flow
experienced by Building Blocks, the Company began experiencing a working capital
shortage in the spring of 1996. Despite a number of actions taken to reduce
operating expenses and to generate revenue from franchising, Building Blocks and
BBFC were not able to achieve profitability or to reverse the negative cash flow
by the end of calendar 1996.

            Effective January 28, 1997, the outstanding capital stock of BBFC
was sold. The net proceeds from the sale ($43,224) were paid over to Building
Blocks pursuant to an agreement requiring the parent of BBFC to obtain a general
release from Building Blocks to BBFC. On January 31, 1997, Building Blocks filed
a petition for relief under Chapter 11.

            On May 5, 1998, Building Blocks' Chapter 11 Plan of Reorganization
was approved by the Bankruptcy Court. The Plan resulted in a discharge of
Building Blocks from all claims of-its-creditors, including the Company; a
discharge of the Company from all claims of Building Blocks and Building Blocks'
creditors in exchange for the Company satisfying $25,000 of Building Blocks'
obligations under a store lease which the landlord had agreed to settle for
$30,000; and the liquidation and dissolution of Building Blocks.

            At June 28, 1998, the Company had only limited cash and had current
liabilities of approximately $861,984. The Company may also be required, at some
future date, to issue up to 213,333 shares of its Common Stock pursuant to the
settlement agreement described in "Item 3. Legal Proceedings." In connection
with this obligation, the Company has recorded a non-current liability on its
books in the amount of $80,000, measured by the difference between the
settlement amount of $650,000 and the market value of the shares actually issued
on August 22, 1996 as part of the settlement. See Note H-2 to the Consolidated
Financial Statements.

            The Company has been receiving cash advances in the form of demand
loans from three beneficial owners of its capital stock in order to meet its
operating expenses and has been obtaining forbearances from its principal
creditors. At June 28, 1998 the advances from stockholders (which are included
in the current liabilities described above) aggregated $465,251 plus accrued
interest of $30,696. There are no assurances as to the time or extent that the
stockholder advances and/or forbearance will continue.


                                                                    Page 7 of 17
<PAGE>

            As a result of these matters, the reports of the Company's auditors
on the Company's June 28, 1998 and June 29, 1997 financial statements contain
"going concern" explanatory paragraphs.

SUBSEQUENT DEVELOPMENT

            The Company has been attempting to attract an operating business
with which to effectuate a business combination. On February 25, 1999, the
Company signed a letter agreement with TBM Capital II, LLC, Colt Services, Inc.
and Seymour Zises, the sole director of the Company, pursuant to which TBM
Capital II, LLC and Colt Services, Inc. (collectively, the "Purchasers") have
agreed to use their best efforts to purchase and arrange for others to purchase
between $10,000,000 and $25,000,000 of Common Stock of the Company under terms
whereby the shares of the Company's outstanding Common Stock would be reverse
split so that after the capital infusion the present stockholders of the Company
would hold shares of Common Stock valued at between approximately $135,000 and
$110,000 (based upon the selling price per share in the capital infusion and
depending upon the tangible net worth of the Company at the Closing of the
capital infusion) and certain creditors (in settlement of $290,000 of
outstanding invoices for services rendered to and disbursements made on behalf
of the Company), who have agreed to accept same, would hold options to acquire
shares of Common Stock valued at $165,000.

            The options granted to the creditors of the Company are exercisable
at $.10 per share for a period of the earlier of three years from the date of
grant or 181 days after the closing of the capital infusion.

            The Purchasers, upon completion of the equity infusion, will
designate the directors and officers of the Company. The Purchasers have
indicated their intention to use the proceeds of the capital infusion to attempt
to acquire an operating manufacturing business which the Purchasers believe can
be made more profitable by the application of certain manufacturing and other
business principles which an affiliate of TBM Capital II has developed. The
Purchasers intend to return the money invested in capital infusion (net of any
difference between proceeds from the temporary investment of the proceeds and
operating expenses incurred) if the Company has not acquired an operating
business within two years.

            Additional options to acquire, at the price per share in the 
capital infusion, will be granted to the Purchasers and their designees and 
to Seymour Zises, the sole director of the Company (collectively, 

                                                                    Page 8 of 17
<PAGE>

the "Warrants"). The Warrants to be granted to the Purchasers are in 
consideration of the development of the investment strategy, their services 
and time in connection with the letter agreement and the know-how they are 
providing to the Company. The Warrant to be granted to Seymour Zises is in 
consideration of his assuming responsibility for a portion of a contingent 
liability of the Company and for undisclosed liabilities of the Company and 
his agreements to advance certain expenses of the Company in connection with 
the proposed transactions and, in certain circumstances, to reimburse the 
Purchasers for their expenses of the transaction in the event the transaction 
contemplated by the letter agreement does not occur.

            The Warrants will entitle the holders, for a period of 10 years, 
to acquire at the capital infusion price per share, shares of Common Stock. 
In the case of the Purchasers the Warrant is for 20% of the outstanding 
Common Stock, fully diluted at the time of consummation of the initial 
acquisition of an operating manufacturing business. In the case of Seymour 
Zises, the Warrant is for 1% of such diluted Common Stock on the same terms 
as Purchasers' Warrant.

            As a condition of the closing of the capital infusion, Mr. Zises and
his wife will also confirm that they have relinquished their rights under
$289,750 of promissory notes from the Company to them.

RESULTS OF DISCONTINUED OPERATIONS -- FISCAL 1998 COMPARED WITH THE PRIOR 
PERIOD

STORE CLOSING COSTS AND RELATED EXPENSES

            For the years ended June 28, 1998 and June 29, 1997 the Company
recorded restructuring and other expense charges of $0 and $520,420,
respectively, for the disposition of fixed assets and other costs related to the
closing or expected closings of certain mall stores.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

            For the years ended June 28, 1998 and June 29, 1997 the Company
recorded selling, general and administrative expenses of $293,133 and
$2,587,603, respectively.  The decrease was due primarily to the elimination
of expenses attributable to 


                                                                    Page 9 of 17
<PAGE>

discontinued operations.

OTHER INCOME (EXPENSE)

            In the Prior Period the Company recorded a $44,406 gain on the sale
of its equity investment in CM Franchise Corp. Such gain results from the
Company transferring its rights and interests in the investee's common stock
with a recorded value of $179,744 in satisfaction of a $224,150 debt.

            Effective January 28, 1997, the outstanding stock of BBFC was sold
at a gain of $43,224.

            The Company had interest income of $1,624 in 1997 and $32 in 1998,
earned principally on interest-bearing cash accounts. In Fiscal 1998 and the
Prior Period, $27,488 and $3,333, respectively, of interest expense was
incurred, principally on stockholder loans.

            Other income in the Prior Period consisting of various items
primarily attributable to Building Blocks is not expected to recur.

            The settlement of the guarantor obligation related to the bankrupt
subsidiary represents the amount payable by the Company to a landlord in
settlement of a Building Blocks store lease on which the Company was a limited
guarantor.

            The $786,269 gain in the Prior Period on the deconsolidation of
Building Blocks reflects the amount of Building Blocks' net deficit at the time
of the Chapter 11 filing.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Contents .................................................................   F-1

Independent Auditors' Report .............................................   F-2

Independent Auditor's Report .............................................   F-3

Consolidated Balance Sheet at June 28, 1998 ..............................   F-4

Consolidated Statements of Operations for the 52 Weeks Ended
       June 28, 1998 and June 29, 1997 ...................................   F-5


                                                                   Page 10 of 17
<PAGE>

Consolidated Statements of Changes in Capital Deficit for the
       52 Weeks Ended June 28, 1998 and June 29, 1997 ....................   F-6

Consolidated Statements of Cash Flows for the 52 Weeks Ended
       June 28, 1998 and June 29, 1997 ...................................   F-7

Notes to Financial Statements ............................................   F-8


                                                                   Page 11 of 17
<PAGE>

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE

            The following discussion is repeated verbatim from the Item 4 of the
Company's Report on Form 8-K for February 23, 1999:

            On February 23, 1999, the Company terminated the engagement of
Jeffrey M. Brinn, CPA as the principal accountant to audit the Company's
financial statements, and on February 26, 1999, engaged Richard A. Eisner &
Company of New York, New York, as its independent auditor.

            The report of Jeffrey M. Brinn on the Company's financial statements
for the Company's fiscal year ended June 29, 1997, the only year on which he
rendered an opinion on the Company's financial statements, did not contain an
adverse opinion or disclaimer of opinion and was not qualified as to audit scope
or accounting principles but was modified due to uncertainty regarding the
Company's ability to continue as a going concern in light of the bankruptcy
proceedings applicable to its last remaining operating subsidiary.

            The decision to terminate the principal accountant was approved by
the Company's sole Director.

            During the Company's 1997 and 1998 fiscal years and for the
subsequent interim period through February 23, 1999, there was one disagreement
with such principal accountant on a matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure which,
if not resolved to the former accountant's satisfaction, would have caused him
to make reference to the subject matter thereof in connection with his report.
The disagreement involved the reporting of a transaction with the Company's
bankrupt subsidiary and was resolved to the former accountant's satisfaction.
The Board of Directors did not discuss the disagreement with the former
accountant. The Company has authorized the former accountant to respond fully to
inquiries of the successor accountant concerning the subject matter of the
disagreement.

DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH
SECTION 16(A) OF THE EXCHANGE ACT

INFORMATION CONCERNING DIRECTORS AND EXECUTIVE OFFICERS

            The following table sets forth certain information as of April 1,
1999 concerning the directors and executive officers 


                                                                   Page 12 of 17
<PAGE>

of the Company.

Name                                Age         Position
----                                ---         --------

Seymour W. Zises                    45          Director

            SEYMOUR W. ZISES has been a director of the Company since June 1991,
and is currently President and Chief Executive Officer of Family Management
Corporation, a registered investment advisory firm in New York City which he
established in September 1989 and President and Chief Executive Officer of
Family Management Securities, LLC, a NASD registered Broker-Dealer. Mr. Zises
has also served as President and Chief Executive Officer of Forest Hill Capital
Corporation, a merchant banking concern founded by him in 1989. Mr. Zises is
also a director of Disc Graphics, Inc., a product packaging design company.

COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934.

            Based solely on a review of Forms 3 and 4 (and amendments thereto)
furnished to the Company during its fiscal year ended June 28, 1998, and certain
written representations received by it, the Company is not aware of any person
who, during the prior fiscal year, was an officer or director of the Company or
the beneficial owner of more than 10% of its outstanding Preferred Stock or
Common Stock, and who, during the prior or previous fiscal years, failed to file
on a timely basis reports as required by Section 16(a) of the Securities
Exchange Act of 1934.

EXECUTIVE COMPENSATION

            No person who was an operating officer of the Company at June 28,
1998 received annual salary and bonus, which, in the aggregate, exceeded
$100,000 for the fiscal year ended June 28, 1998.

AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END 
OPTION VALUES

            The Company has no SAR's outstanding. No stock options were
exercised by any executive officer during the fiscal year ended June 28, 1998.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

            The following table sets forth certain information, as of June 28,
1998, regarding the beneficial ownership of the Company's Common Stock by (i)
all persons known by the Company to 


                                                                   Page 13 of 17
<PAGE>

own beneficially more than 5% of its outstanding Common Stock or its outstanding
Series A-1 Preferred Stock, (ii) each director and officer of the Company and
(iii) all directors and officers of the Company as a group. Unless otherwise
stated, the Company believes that the beneficial owners of the shares listed
below have sole investment and voting power with respect to such shares.

<TABLE>
<CAPTION>
                                                 Amount and               
                                                 Nature of      Percent
                     Name and Address            Beneficial       of
Title of Class       of Beneficial Owner         Ownership      Class(1)
--------------       -------------------         ---------      --------
<S>                  <C>                        <C>             <C> 
Common Stock         Cathy Zises                   844,377(2)      9.3%
                     477 Madison Avenue
                     New York, New York 10022
Common Stock         Lynn Zises                    796,317         8.8%
                     477 Madison Avenue
                     New York, New York 10022
Common Stock         Nancy Zises                   833,332         9.2%
                     477 Madison Avenue
                     New York, New York 10022
Common Stock         Seymour Zises                 844,377(2)      8.8%
                     477 Madison Avenue
                     New York, New York 10022
Series A-1           ILM Acquisition L.P.        2,394,130(2)    100.0%
Preferred Stock      477 Madison Avenue
                     New York, New York 10022
Common Stock         All directors and             898,127(2)      9.9%
                     officers as a group
                     (1 person)
</TABLE>

(1) Based upon 9,084,238 shares of Common Stock outstanding, which does not
include 213,333 contingently issuable shares held by an Escrow Agent.


                                                                   Page 14 of 17
<PAGE>

(2) The Shares reported for Cathy Zises include 148,060 shares held by her as
custodian for her minor children. Cathy Zises is the wife of Seymour Zises. The
shares reported for Seymour W. Zises are the shares held directly or as
custodian by Cathy Zises. Mr. Zises may be deemed the beneficial owner of such
shares. Mr. Zises disclaims such beneficial ownership. Shares of Series A-1
Preferred Stock owned by ILM Acquisition, L.P. ("IALP") represent all of the
Company's issued and outstanding Series A-1 Preferred Stock. Selig A. Zises, a
brother of Seymour W. Zises, may be deemed to be the beneficial owner of all of
the shares of Series A-1 Preferred Stock held by IALP as a result of his
ownership of all of the voting securities of the general partner of IALP. Family
members of Seymour W. Zises are indirect beneficial owners of limited
partnership interests in IALP. Seymour Zises disclaims any beneficial ownership
of any of the Preferred Stock of the Company. The Shares reported for Nancy
Zises include 37,015 shares held by her as custodian for her minor child. Nancy
Zises is a sister-in-law of Seymour W. Zises and Lynn Zises is the daughter of
Selig Zises.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

            During the period from December 23, 1996 through June 30, 1998, the
Company borrowed an aggregate of $465,251 from Cathy Zises, Selig Zises, and
Seymour Zises. All such loans bear interest at 8% per annum.

            Reference is made to "Management's Discussion and Analysis of
Financial Condition and Results of Operations -Subsequent Development" for
information as to certain arrangements made with Seymour Zises in connection
with a proposed capital infusion into the Company.

EXHIBITS AND REPORTS ON FORM 8-K

            (a) Exhibits

            See "Index to Exhibits."

EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS

            (b) Reports on Form 8-K

            No Reports on Form 8-K were filed during the fourth quarter of the
Company's fiscal year ended June 28, l998.


                                                                   Page 15 of 17
<PAGE>

                                   SIGNATURES

            In accordance with Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Company caused this report to be signed on its
behalf by the undersigned, hereunto duly authorized.

Dated: April 23, 1999                     SPECIALTY RETAIL GROUP, INC.


                                          By: /s/ SEYMOUR W. ZISES            
                                              --------------------------
                                              Seymour W. Zises,
                                              Director

            In accordance with the Securities Exchange Act of 1934, as amended,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.


            /s/ SEYMOUR W. ZISES                 April 23, 1999
            ------------------------------
            Seymour W. Zises
            Director


                                                                   Page 16 of 17
<PAGE>

                                INDEX TO EXHIBITS

                                                               Sequentially
   Exhibit                                                       Numbered
     No                       Description                         Pages
   -------                    -----------                      ------------

3.1           Articles of Incorporation (incorporated by
              reference to the Registrant's Report on
              Form 8-K dated July 2, 1991)
3.2           Amended and Restated By-Laws (incorporated by
              reference to Exhibit 3.2 to the Registrant's
              Report on Form 10-KSB for the year ended July
              2, 1995)
10.1          1991 Non-Qualified Stock Option Plan
              (incorporated by reference to Exhibit 10.23 to
              the Registrant's Report on Form 10-KSB for the
              year ended June 30, 1992)
10.2          1994 Stock Option Plan (incorporated by
              reference to Exhibit 10.2 to the Registrant's
              Report on Form 10-KSB for the year ended July
              2, 1995)
10.8(a)       Form of Promissory Notes from the Registrant
              to Selig Zises, Seymour Zises and Cathy Zises
              and list of notes issued through September 30,
              1997 (incorporated by reference to Exhibit
              10.8 to the Registrant's Report on Form 10-KSB
              for the year ended June 29, 1997)
10.8(b)       List of notes issued from October 1, 1997 --
              through December 31, 1998
16.1          Letter of Jeffrey M. Brinn, CPA pursuant to
              Item 304(a)(3) of Regulation S-B (Incorporated
              by reference to Exhibit 16.1 filed with the
              Registrant's Report on Form 8-K for February
              23, 1999)
21.           Subsidiaries of Registrant
23(a)         Consent of Richard A. Eisner & Company, LLP
23(b)         Consent of Jeffrey M. Brinn, CPA
27.           Financial Data Schedule


                                                                   Page 17 of 17
<PAGE>

SPECIALTY RETAIL GROUP, INC. AND SUBSIDIARIES

CONTENTS

<TABLE>
<CAPTION>

                                                                                                PAGE
                                                                                                 ---
<S>                                                                                             <C>
CONSOLIDATED FINANCIAL STATEMENTS

   Independent auditors' report                                                                  F-2

   Independent auditor's report                                                                  F-3

   Balance sheet as of June 28, 1998                                                             F-4

   Statements of operations for the fifty-two weeks ended June 28, 1998 and June 29, 1997        F-5

   Statements of changes in capital deficit for the fifty-two weeks ended June 28, 1998 and
      June 29, 1997                                                                              F-6

   Statements of cash flows for the fifty-two weeks ended June 28, 1998 and June 29, 1997        F-7

   Notes to financial statements                                                                 F-8

</TABLE>


                                                                             F-1

<PAGE>



INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders
Specialty Retail Group, Inc.
New York, New York


We have audited the accompanying consolidated balance sheet of Specialty Retail
Group, Inc. and subsidiaries as of June 28, 1998 and the related consolidated
statements of operations, changes in capital deficit and cash flows for the
fifty-two week period then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.

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

In our opinion, the financial statements enumerated above present fairly, in all
material respects, the consolidated financial position of Specialty Retail
Group, Inc. and subsidiaries as of June 28, 1998, and the consolidated results
of their operations, and their consolidated cash flows for the fifty-two week
period then ended in conformity with generally accepted accounting principles.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As further discussed in
Note C to the financial statements, the Company has no remaining operating
businesses. As set forth in the balance sheet as of June 28, 1998, the Company
has total assets of $26,711 and a working capital deficit of $837,802. Such
factors coupled with the lack of any revenue producing operations raise
substantial doubt about the Company's ability to continue as a going concern. As
discussed in Note C and Note M, management of the Company is seeking a business
combination with an operating company. There can be no assurance that such
merger can be accomplished. The consolidated financial statements do not include
any adjustments relating to the recoverability and classification of recorded
assets, or the amounts and classifications of liabilities that might be
necessary in the event the Company cannot continue in existence.



Richard A. Eisner & Company, LLP

New York, New York
March 24, 1999


                                                                             F-2

<PAGE>


INDEPENDENT AUDITOR'S REPORT


To the Director and Shareholders
Specialty Retail Group, Inc.
New York, New York

I have audited the accompanying consolidated statements of operations, changes
in capital deficit and cash flows of Specialty Retail Group, Inc. and
Subsidiaries for the 52 weeks ended June 29, 1997. These financial statements
are the responsibility of the Company's management. My responsibility is to
express an opinion on these financial statements based on my audit.

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

In my opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated results of operations and cash flows of
Specialty Retail Group. Inc. and Subsidiaries for the 52 weeks ended June 29,
1997, in conformity with generally accepted accounting principles.

As discussed in the following paragraph and in the Notes to the accompanying
consolidated financial statements, in accordance with generally accepted
accounting principles the consolidated reporting entity was changed, effective
as of January 31, 1997, to exclude the accounts of the Company's wholly-owned
and last remaining operating subsidiary, Building Blocks, Inc., which filed a
petition in bankruptcy on such date.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As further discussed in the
Notes to the consolidated financial statements, pursuant to the Chapter 11
bankruptcy filing, the subsidiary has permanently ceased operations and
liquidated its operating assets. The Company has no remaining operating
businesses. Such factors coupled with the lack of any revenue producing
operations raise substantial doubt about the Company's ability to continue as a
going concern. Management of the Company is seeking a business combination with
an operating company. There is no assurance that management will be successful
in such endeavor. The consolidated financial statements do not include any
adjustments relating to the recoverability and classification of recorded
assets, or the amounts and classifications of liabilities that might be
necessary in the event the Company cannot continue in existence.


                                                /s/ Jeffrey M. Brinn
                                                Certified Public Accountant

South Huntington, New York
November 4, 1997



                                      F-3
<PAGE>


SPECIALTY RETAIL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET
JUNE 28, 1998

<TABLE>

ASSETS
<S>                                                                                     <C>
Current assets:
   Cash                                                                                 $      4,924
   Prepaid insurance                                                                          19,258
                                                                                        ------------

      Total current assets                                                                    24,182

Property and equipment, net                                                                    2,529
                                                                                        ------------

                                                                                        $     26,711
                                                                                        ------------
                                                                                        ------------

LIABILITIES
Current liabilities:
   Accounts payable                                                                     $    364,215
   Corporation taxes payable                                                                   1,822
   Demand loans payable to stockholders                                                      495,947
                                                                                        ------------

      Total current liabilities                                                              861,984

Other liabilities:
   Legal settlement                                                                           80,000
                                                                                        ------------

                                                                                             941,984
                                                                                        ------------

Commitments and contingencies

CAPITAL DEFICIT
Preferred stock; 15,000,000 shares authorized; $.001 par value
   Series A-1 preferred stock: 10,000,000 shares authorized; 2,394,130 shares
   issued and outstanding                                                                      2,394
Common stock; 100,000,000 shares authorized; $.001 par value; 9,324,738 shares issued          9,325
Additional paid-in capital                                                                11,573,570
Accumulated deficit                                                                      (12,324,898)
Treasury stock, 240,500 common shares, at cost                                              (175,664)
                                                                                        ------------

                                                                                            (915,273)
                                                                                        ------------

                                                                                        $     26,711
                                                                                        ------------
                                                                                        ------------


</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS


                                      F-4

<PAGE>


SPECIALTY RETAIL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>

                                                                                                     FIFTY-TWO WEEKS ENDED
                                                                                                   -------------------------
                                                                                                   JUNE 28,         JUNE 29,
                                                                                                     1998             1997
                                                                                                   --------         --------
<S>                                                                                              <C>               <C>
Results of discontinued operations:
   Net sales                                                                                                       $ 2,457,846
   Cost of sales                                                                                                     1,602,663
                                                                                                                   -----------

Gross profit                                                                                                           855,183
                                                                                                                   -----------
Operating costs:
   Selling, general and administrative expenses                                                  $   293,133         2,587,603
   Store closing costs and related expenses (Note L)                                                                   520,420
                                                                                                 -----------       -----------

                                                                                                     293,133         3,108,023
                                                                                                 -----------       -----------

Loss from operations                                                                                (293,133)       (2,252,840)
Other income (expenses):
   Gain on sale of equity investment (Notes F and G[2])                                                                 44,406
   Gain on sale of franchising subsidiary (Note C)                                                                      43,224
   Interest expense, net of income of $32 and $1,624                                                 (27,456)           (1,709)
   Other income                                                                                                         54,744
   Settlement of guarantor obligation related to bankrupt subsidiary (Note D)                        (53,000)          (30,000)
   Legal settlement, noncash (Note H[2])                                                                               (80,000)
   Gain on deconsolidation of bankrupt subsidiary (Note D)                                                             786,269
                                                                                                 -----------       -----------

NET LOSS                                                                                         $  (373,589)      $(1,435,906)
                                                                                                 -----------       -----------
                                                                                                 -----------       -----------

NET LOSS PER SHARE (NOTE B[10]):
   Basic and diluted                                                                               $(.04)             $(.16)
                                                                                                 -----------       -----------
                                                                                                 -----------       -----------

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (NOTE B[10]):
   Basic and diluted                                                                              9,084,238       8,991,635
                                                                                                 -----------       -----------
                                                                                                 -----------       -----------

</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS


                                      F-5

<PAGE>


SPECIALTY RETAIL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN CAPITAL DEFICIT

<TABLE>
<CAPTION>

                                                       PREFERRED STOCK              COMMON STOCK
                                                    ---------------------       --------------------
                                                    NUMBER OF                   NUMBER OF
                                                     SHARES        AMOUNT        SHARES       AMOUNT
                                                    ---------     -------       ---------     ------
<S>                                                 <C>            <C>           <C>           <C>    
BALANCE--JULY 1, 1996                               2,394,130     $ 2,394       8,674,738     $ 8,675
Shares issued for legal settlement (Note H[2])                                    650,000         650
Net loss

                                                    ---------     -------       ---------     -------
BALANCE--JUNE 29, 1997                              2,394,130       2,394       9,324,738       9,325
Net loss

                                                    ---------     -------       ---------     -------
BALANCE--JUNE 28, 1998                              2,394,130     $ 2,394       9,324,738     $ 9,325
                                                    ---------     -------       ---------     -------
                                                    ---------     -------       ---------     -------
                                                 


CONSOLIDATED STATEMENTS OF CHANGES IN CAPITAL DEFICIT--CONTINUED

                                                  ADDITIONAL
                                                   PAID-IN        ACCUMULATED     TREASURY
                                                   CAPITAL          DEFICIT         STOCK         TOTAL
                                                 -----------      -----------     --------        -----

BALANCE--JULY 1, 1996                            $11,004,220     $(10,515,403)    $(175,664)    $ 324,222
Shares issued for legal settlement (Note H[2])       569,350                                      570,000
Net loss                                                           (1,435,906)                 (1,435,906)
                                                 -----------     ------------     ---------     ---------

BALANCE--JUNE 29, 1997                            11,573,570      (11,951,309)     (175,664)     (541,684)
Net loss                                                             (373,589)                   (373,589)

                                                 -----------     ------------     ---------     ---------

BALANCE--JUNE 28, 1998                           $11,573,570     $(12,324,898)    $(175,664)    $(915,273)
                                                 -----------     ------------     ---------     ---------
                                                 -----------     ------------     ---------     ---------


</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS


                                      F-6

<PAGE>


SPECIALTY RETAIL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>

                                                                                       FIFTY-TWO WEEKS ENDED
                                                                                    -------------------------
                                                                                    JUNE 28,         JUNE 29,
                                                                                      1998             1997
                                                                                    --------         --------
<S>                                                                                <C>            <C>         
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net loss                                                                        $ (373,589)    $(1,435,906)
   Adjustments to reconcile net loss to net cash used in operating activities:
      Depreciation and amortization                                                       724          47,674
      Write-off of goodwill                                                                           136,882
      Loss on disposal of equipment and write-off of leasehold improvements                           330,776
      Gain attributable to equity investment                                                          (44,406)
      Gain on sale of subsidiary                                                                      (43,224)
      Gain on deconsolidation of bankrupt subsidiary                                                 (786,269)
      Legal settlement                                                                                 80,000
      Changes in:
        Inventory                                                                                     846,777
        Other current assets                                                           (1,349)         86,863
        Other assets                                                                                   89,027
        Accounts payable                                                               38,503         (46,514)
        Lease guarantee settlement payable                                            (30,000)         30,000
                                                                                   ----------     -----------

           Net cash used in operating activities                                     (365,711)       (708,320)
                                                                                                  -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Cash of bankrupt subsidiary at date of bankruptcy                                                  (64,541)
   Expenditures for property and equipment, net                                                        (3,614)
   Proceeds from sale of subsidiary, net                                                               43,224
                                                                                                  -----------

           Net cash used in investing activities                                                      (24,931)
                                                                                                  -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Loans from stockholders                                                            338,479         378,401
                                                                                   ----------     -----------

NET DECREASE IN CASH AND CASH EQUIVALENTS                                             (27,232)       (354,850)
Cash and cash equivalents, beginning of period                                         32,156         387,006
                                                                                   ----------     -----------

CASH, END OF PERIOD                                                                $    4,924     $    32,156
                                                                                   ----------     -----------
                                                                                   ----------     -----------
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS


                                      F-7


<PAGE>


SPECIALTY RETAIL GROUP, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS
JUNE 28, 1998


NOTE A--THE COMPANY

Specialty Retail Group, Inc. (the "Company") is a holding company that was
engaged through its subsidiaries in the operation and franchising of retail
specialty toy stores. In July 1996, the Company organized a wholly owned
subsidiary, Building Blocks Holdings, Inc., ("BBHI"), which formed and
subsequently sold Building Blocks Franchise Corp. ("BBFC"). Prior to its sale to
unrelated parties in January 1997, BBFC sold two Building Blocks retail store
franchises.

As discussed in Notes C and D, as of January 31, 1997, the Company had sold or
discontinued all business operations and its former subsidiary, Building Blocks,
Inc., ("BBI"), filed and was granted a petition for relief under Chapter 11 of
the U.S. Bankruptcy Code and was subsequently dissolved. The only current
operations of the Company constitute maintaining a business office and complying
with its reporting obligations as a publicly owned company. The Company is
seeking opportunities for business combinations (see Note M).


NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

[1]    BASIS OF CONSOLIDATION AND FINANCIAL STATEMENT PRESENTATION:

       The consolidated financial statements include the accounts of the Company
       and its subsidiaries, BBHI and SRG Management Corp., a wholly-owned
       subsidiary, neither of which has any present operations. The results of
       operations of BBFC and BBI are included through the date of the sale of
       BBFC and BBI's bankruptcy filing, respectively which dates were January
       28, 1997 and January 31, 1997. All significant intercompany balances and
       transactions have been eliminated in consolidation. The Company recorded
       a gain of $786,269 upon the deconsolidation of BBI (see Note D). As
       discussed above, the Company has discontinued all of its revenue
       producing business operations. Except as specifically noted, no
       adjustments have been made to revalue assets or liabilities. All
       operations are reported as results of discontinued operations.

[2]    CASH EQUIVALENTS:

       Cash equivalents for purposes of reporting cash flows consisted
       principally of highly liquid money market accounts purchased with an
       original maturity of three months or less. Such accounts are carried at
       cost plus accrued interest, which approximates market.

[3]    STORE OPENING AND CLOSING COSTS:

       The Company had deferred store pre-opening costs and was expensing such
       amounts over a 12-month period. Unexpired store pre-opening costs were
       written off during the 52 week period ended June 29, 1997 and additional
       costs associated with a store closing were accrued when the decision was
       made to close the location.

[4]    PROPERTY AND EQUIPMENT:

       Property and equipment are stated at cost. Depreciation is provided on
       the straight-line method over the estimated useful lives of three to
       seven years. Leasehold improvements had been amortized over 10 years or
       the related lease term, whichever was shorter. Applicable property and
       equipment were written off as stores were closed and the assets were
       abandoned or sold during the 52 week period ended June 29, 1997.

[5]    GOODWILL:

       The excess of purchase price over the fair value of net assets acquired
       was being amortized on the straight-


                                      F-8

<PAGE>
SPECIALTY RETAIL GROUP, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS
JUNE 28, 1998

NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  (CONTINUED)


       line method over 15 years. Due to BBI's bankruptcy and the sale of BBFC,
       the Company determined that goodwill had no future value and wrote off
       the balance of $136,882 at December 29, 1996.





                                      F-9


<PAGE>

SPECIALTY RETAIL GROUP, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS
JUNE 28, 1998

NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  (CONTINUED)

[6]    LONG-LIVED ASSETS:

       Statement of Financial Accounting Standards No. 121 requires a review of
       long-lived assets and certain identifiable intangible assets related to
       those assets for impairment whenever changed circumstances and situations
       indicate that the carrying amounts may not be recoverable. If the
       undiscounted future cash flows are less than the assets' carrying
       amounts, their carrying amounts are reduced to fair value and an
       impairment loss is recognized. Applicable write downs were recorded at
       December 29, 1996.

[7]    STOCK OPTIONS:

       The Company, consistent with generally accepted accounting principles,
       accounts for stock options pursuant to the intrinsic value method
       specified by Accounting Principles Board Opinion No. 25, "Accounting for
       Stock Issued to Employees," whereunder compensation cost is not
       recognized as long as the exercise price of the option equals or exceeds
       the fair value of the underlying stock on the date of grant. In October
       1995, the Financial Accounting Standards Board issued Statement of
       Financial Accounting Standards No. 123, "Accounting for Stock-Based
       Compensation", which requires that the fair value of stock options be
       measured on the date of grant using an applicable statistically-based,
       market-sensitive, financial model. However, this pronouncement allows
       companies to continue to account for stock options under the previous
       intrinsic value method as long as they disclose the pro forma effects as
       if the new method had been adopted (see Note I).

[8]    REVENUE RECOGNITION:

       Revenue from sales of the Company's products was recognized at the time
       of sale.

[9]    INCOME TAXES:

       The Company accounts for income taxes pursuant to Statement of Financial
       Accounting Standards No. 109 ("SFAS No. 109"), "Accounting for Income
       Taxes", which requires the use of the liability method. Under this
       method, deferred income taxes are recognized for the tax consequences of
       temporary differences by applying enacted statutory tax rates applicable
       to future years to differences between the financial statement carrying
       amounts and tax bases of existing assets and liabilities. Deferred income
       tax benefit or expense is measured by the change in deferred income tax
       assets or liabilities during the year. Under SFAS No. 109, the effect on
       deferred taxes of a change in tax rates is recognized in income in the
       period that includes the enactment date (see Notes J and M).

[10]   PER SHARE DATA:

       Per share data is calculated based on the weighted average number of
       shares of common stock outstanding during the period. The Company's
       outstanding stock options are excluded from the computations as their
       effect would be antidilutive. The effect of 213,333 shares issuable
       pursuant to a settlement of litigation in August 1996 is not reflected as
       it is also antidilutive (see Note H[2]). The Company adopted Statement of
       Financial Accounting Standards No. 128, "Earnings Per Share", issued in
       February 1997, effective June 28, 1997.

[11]   FISCAL YEAR:

       The Company previously adopted a 52/53 week fiscal year ending on the
       Sunday closest to June 30. Fiscal 1998 and 1997 consisted of 52 weeks.
       The Company changed its fiscal year to a twelve month reporting period
       and its year end to December 31 resulting in a short period beginning
       June 29, 1998 and ended


                                      F-10

<PAGE>

SPECIALTY RETAIL GROUP, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS
JUNE 28, 1998

NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  (CONTINUED)


December 31, 1998.


                                      F-11

<PAGE>

SPECIALTY RETAIL GROUP, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS
JUNE 28, 1998

NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  (CONTINUED)

[12]   FAIR VALUE OF FINANCIAL INSTRUMENTS:

       The carrying amounts of cash and accounts payable approximate fair value
       because of the short maturity of these items.

[13]   USE OF ESTIMATES:

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


NOTE C--GOING CONCERN

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern; they do not include
adjustments relating to the recoverability of recorded asset amounts and
classification of recorded assets and liabilities.

On January 31, 1997, BBI filed a petition for relief under Chapter 11 of the
U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of
New York (Case No. 97-B-40684 (BRL)). The petition sought protection from
creditors while BBI liquidated its inventory and fixtures. Such petition was
confirmed on May 5, 1998. Effective January 28, 1997, the outstanding capital
stock of BBFC, which owned the "Building Blocks" trademarks, was sold by BBHI.
The net proceeds from the sale were used first to repay amounts owed by BBFC to
the Company and BBI. The remainder of the proceeds of approximately $10,000 was
paid to BBI pursuant to an agreement under which BBHI obtained a general release
from BBI. The Company recognized a gain of $43,224 on the sale of BBFC.

The Company, which has no other business operations, is seeking to identify an
operating business with which to effectuate a business combination. At June 28,
1998, the Company has $26,711 of assets and $861,984 of liabilities, excluding
$80,000 of liabilities which are payable through the issuance of 213,333 shares
of common stock (see Note H[2]). The Company has been receiving cash advances in
the form of demand loans from three of its stockholders in order to meet its
operating expenses and has been obtaining forbearances from its principal
creditors. At June 28, 1998, such advances (which are included in the
liabilities described above) aggregated $465,251, plus accrued interest of
$30,696. There are no assurances as to the time or extent that the stockholder
advances and/or forbearance will continue. Further, there is no assurance that
any business combination can ever be effectuated. Any such combination may
depend upon the Company's ability to reach settlements of its outstanding
obligations. The foregoing raise substantial doubt about the Company's ability
to continue as a going concern.


                                      F-12

<PAGE>

SPECIALTY RETAIL GROUP, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS
JUNE 28, 1998

NOTE D--BANKRUPTCY OF BBI SUBSIDIARY

As discussed in Notes B[1] and C, BBI filed a petition for relief under
Chapter 11 of the U.S. Bankruptcy Code on January 31, 1997. Such petition was
granted on May 5, 1998. In a Chapter 11 case, substantially all liabilities of
the debtor, as of the date of the filing, are subject to resolution under a plan
of reorganization to be voted upon by the debtor's creditors and stockholders
and confirmed by the Bankruptcy Court. Financial schedules filed by the debtor
as of the date of the filing showed that liabilities exceeded assets by
approximately $800,000. Differences between amounts shown by the debtor and
claims filed by creditors were investigated and resolved. The amount and
settlement terms for such disputed liabilities were subject to allowance by the
Bankruptcy Court. Ultimately the adjustment of all liabilities of the debtor was
subject to the Bankruptcy Court plan of reorganization confirmed May 5, 1998.

Under the Bankruptcy Code, the debtor may elect to assume or reject real estate
leases, employment contracts, personal property leases, service contracts and
other executory pre-petition contracts, subject to Bankruptcy Court review. BBI
rejected all of its leases and contracts other than an employment agreement with
one officer, which contract was assigned to, and assumed by the Company. All
assets of the debtor have either been sold or written down to net realizable
value. Based on such values, both the Company and BBI have determined that none
of BBI's assets were distributable to the Company.

Upon the filing of its Chapter 11 petition, the accounts of BBI were no longer
consolidatable with that of the Company. During the year ended June 29, 1997,
the Company recorded a gain on the deconsolidation of $786,269, measured by the
net deficit in the subsidiary at the time of filing. The carrying value of the
Company's investment in BBI had previously been written down to zero. Subsequent
to June 29, 1997, the Company agreed to settle an obligation arising from its
limited guarantee of a BBI lease by agreeing to pay $30,000 to the claimant
landlord in exchange for a complete release of all claims by the landlord
against BBI and the Company. Such claims by the landlord totaled $478,000
against BBI, of which the Company was liable for up to $180,000. The $30,000
liability payable to the landlord in satisfaction of the Company's contingent
obligation as limited guarantor was accrued at June 29, 1997. Additionally, the
Company paid $53,000 to BBI as an additional settlement amount during the 52
week period ended June 28, 1998. In addition, a release of all claims by BBI
against the Company was sought in the bankruptcy proceedings. Bankruptcy Court
approval was required for releases given either to or from BBI. Such release was
granted on the confirmed petition. Further, as part of negotiated revisions to
BBI's plan of reorganization, the Company could have agreed to settle other
claims against BBI and/or make payments to or on behalf of BBI and/or issue
shares of the Company's common stock to BBI's creditors. No such items were
agreed to by the Company on the confirmed petition.

The release by BBI of all claims it may have had against the Company included a
release of a possible claim which arose subsequent to the filing of the
bankruptcy petition by BBI. Such possible claim had arisen from unaudited
financial information previously filed with the Bankruptcy Court. Such unaudited
financial information erroneously reported an intercompany receivable due from
the Company to BBI in the amount of $220,000. The Company has determined that
such receivable should not have been reported as outstanding in reports to the
Bankruptcy Court as it should properly have been offset by or deemed paid by
amounts in excess of $6,000,000 loaned to and/or invested in BBI by the Company.
No such claim was made against the Company by the Creditors' Committee.


                                      F-13

<PAGE>

SPECIALTY RETAIL GROUP, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS
JUNE 28, 1998

NOTE E--PROPERTY AND EQUIPMENT, NET

Property and equipment, net consist of furniture, fixtures and equipment, net of
accumulated depreciation of $60,023 as of June 28, 1998.


NOTE F--EQUITY INVESTMENTS

Effective December 14, 1995, the Company acquired 25% of the common stock of CM
Franchise Corp., a franchiser of specialty carpet retailers operating under the
registered trademark of "Carpet Master" for a total consideration of $224,150.
In addition, as part of the transaction, the Company obtained an option to
acquire an additional 12.5% of CM Franchise Corp.'s common stock. The Company
accounted for this transaction using the equity method.

In July 1996, the Company received a loan of $224,150 to cover a working capital
shortfall. Under the agreement, the Company had the right to either repay the
advance without interest or to transfer to the lender all of the Company's
rights and interests in the common stock of CM Franchise Corp. and warrants to
purchase additional shares of such common stock it acquired in December 1995.
The Company transferred the rights and interests in satisfaction of the loan on
September 29, 1996. As a result, the Company recorded a $44,406 gain on this
transaction (see Note G[2]).


NOTE G--RELATED PARTY TRANSACTIONS

[1]    DEMAND LOANS PAYABLE TO STOCKHOLDERS:

       Since December 23, 1996, the Company has received cash advances in the
       form of demand loans from three of its stockholders bearing interest at
       8% per annum. Amounts due to stockholders at June 28, 1998 were $495,947
       including accrued interest of $30,696.

[2]    TRANSFER OF EQUITY INTEREST IN SATISFACTION OF STOCKHOLDER LOAN:

       In July 1996, pursuant to an agreement negotiated between Selig A. Zises
       and Kevin R. Greene, Chairman of the Board of Directors of the Company,
       the Company received $224,150 from Mr. Zises to cover a working capital
       shortfall which was subsequently repaid (see Note F).


NOTE H--COMMITMENTS AND CONTINGENCIES

[1]    TERMS AND PREFERENCES OF PREFERRED STOCK:

       The Series A-1 preferred stock pays no dividends or interest and is not
       convertible into common stock. It has a liquidation preference of $.001
       per share, is redeemable at $.001 per share and votes on the basis of one
       vote per share with the holders of the common stock, as a single class,
       on all matters presented to stockholders.


                                      F-14

<PAGE>

SPECIALTY RETAIL GROUP, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS
JUNE 28, 1998

NOTE H--COMMITMENTS AND CONTINGENCIES  (CONTINUED)

[2]    LEGAL SETTLEMENT--ISSUANCE OF COMMON STOCK:

       The Company was one of several defendants in a lawsuit with a former
       officer, director and stockholder of the Company's predecessor
       corporation who alleged, among other things, breach of contract, fraud,
       defamation, interference with stock transfer rights, breach of fiduciary
       duties by certain former officers of the Company, conspiracy to defraud,
       and interference with respect to a termination payment of $1,400,000
       pursuant to an employment agreement with the Company. In August 1996, the
       Company settled this litigation without admitting liability by issuing an
       aggregate of 650,000 shares of the Company's common stock to the
       plaintiff and his designee. Accordingly, the Company recorded a noncash
       expense of $570,000 which appeared as "Legal Settlement, noncash" in the
       consolidated statements of operations for the 52 weeks ended June 30,
       1996. Such noncash expense was based on the market value of the Company's
       common stock at the time of issuance.

       The Company also agreed to guarantee up to $160,000 for any shortfall
       from $650,000 realized upon the sale by the holders of all of the 650,000
       shares. The Company may satisfy the guarantee by a cash payment or
       issuance to the holders of an additional 213,333 common shares currently
       being held by an escrow agent. Such shares have been issued, but are not
       included in the accompanying statements of changes in capital deficit.
       The agreement further provides for the Company to receive 67% of the
       excess over $650,000, if any, of proceeds received by the plaintiff and
       his designee from market sales of the shares. For the 52 weeks ended June
       29, 1997, the Company recognized an additional obligation and expense of
       $80,000 related to the settlement arising from its agreement to guarantee
       the shortfall.

[3]    LEASE COMMITMENTS:

       The Company presently has no operating lease commitments. The Company
       currently occupies office space on a month-to-month basis in premises
       leased by an entity controlled by certain of the Company's principal
       stockholders. Rent expense for store and office leases approximated
       $596,000 for the 52 weeks ended June 29, 1997. There was no rent expense
       for the 52 weeks ended June 28, 1998.


NOTE I--STOCK OPTION PLANS

In December 1991 and October 1994, the Company established the 1991 Nonqualified
Stock Option Plan and the 1994 Stock Option Plan (the "Plans") under which a
total of 700,000 and 500,000 shares, respectively, of the Company's common stock
could be issued to officers, directors, employees and independent contractors of
the Company upon the exercise of options granted under the Plans. The Plans are
administered by a committee appointed by the Board of Directors (the
"Committee"). The Committee has authority, subject to the terms of the Plans to
determine the individuals to whom options may be granted, the exercise price and
the number of shares of common stock subject to each option, the time or times
during which all or a portion of each option may be exercised and certain other
provisions of each option. As of June 28, 1998, an aggregate of 770,000 shares
remain available for future grant of options under the Plans.


                                      F-15

<PAGE>

SPECIALTY RETAIL GROUP, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS
JUNE 28, 1998

NOTE I--STOCK OPTION PLANS  (CONTINUED)

Nonqualified stock option activity has been as follows:

<TABLE>
<CAPTION>

                                                                                                         EXERCISE
                                                                                        NUMBER OF          PRICE
                                                                                         SHARES          PER SHARE
                                                                                        ---------        ---------

      <S>                                                                                <C>           <C>
      Outstanding at July 1, 1996, of which 466,667 were exercisable                      590,000      $.75 to $2.31

      Granted:
         Conditional, subsequently forfeited                                               80,000      $1.25 to $2.00
         Fully vested at year-end                                                         430,000           $.05

      Cancelled and/or forfeited:
         Outstanding, beginning of period                                                (590,000)     $.75 to $2.31
         Granted during the period                                                        (80,000)     $1.25 to $2.00
                                                                                          -------

      Outstanding and exercisable at June 29, 1997 and June 28, 1998                      430,000           $.05
                                                                                          -------
                                                                                          -------

</TABLE>

Pursuant to the Plans, the exercise price of shares is determined by the
Committee at the time of grant but may not be less than the lesser of (i) the
book value per share of common stock as of the end of the fiscal year of the
Company immediately preceding the date of grant or (ii) 50% of the fair market
value per share of common stock at the date of grant. All options granted prior
to the 430,000 options exercisable at June 29, 1997 have exercise prices which
approximated the then current fair market value. The term of an option may not
exceed 10 years from the date of grant. Unless otherwise determined by the
Committee, options granted vest and become exercisable at a rate of at least 33%
per year from the date of grant.

On February 1, 1997, the Company granted nonqualifying options to purchase
430,000 shares, exercisable at $.05 per share, which price exceeded the market
price of the Company's shares at the date of grant. At June 29, 1997, all of
such options were fully vested. Of such options, all of which are held by a
former officer of the Company, 280,000 may be exercised until January 31, 2003
and 150,000 may be exercised until June 30, 2003. Such exercise rights survived
the termination of the officer/employee's employment and also survive the
merger, corporate reorganization or acquisition of the Company.

The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation" ("Statement No.
123") requires use of option valuation models that were not developed for use in
valuing employee and compensatory stock options. Under APB 25, because the
exercise price of the Company's stock option equals or exceeds the market price
of the underlying stock on the date of grant, no compensation expense is
recognized. Pro forma information regarding net loss and loss per share is
required by Statement No. 123, and has been determined as if the Company had
accounted for its stock options under the fair value method of Statement
No. 123. The fair value of nonconditional options granted in fiscal 1997 was
estimated at the date of each grant using a Black-Scholes option pricing model
with the following weighted average assumptions:

<TABLE>
      <S>                                           <C>
      Weighted average expected life of options       4.0
      Risk-free interest rate                         6.0%
      Dividend yield                                  0.0%
      Volatility factor                             160.0%

</TABLE>

                                      F-16


<PAGE>

SPECIALTY RETAIL GROUP, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS
JUNE 28, 1998

NOTE I--STOCK OPTION PLANS  (CONTINUED)

No options were granted in 1998. The conditional options granted in 1997, which
were to vest incrementally in proportion to the number of Building Blocks
franchises sold by BBFC, were not susceptible of fair value measurement due to
the impossibility of quantifying the likelihood of their being exercised;
accordingly, they are not considered to be stock options giving rise to
compensation expense as defined by the Statement No. 123. Such options were
forfeited in fiscal 1997 due to the termination of their holders' employment.
Under the Black-Scholes option pricing model used by the Company, the 430,000
options granted on February 1, 1997 each had a fair value of $.05.

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's stock options have characteristics significantly different from
those of traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of its stock options. However, if compensation cost had been determined on
the basis of the Statement No. 123 for the nonconditional options issued in
fiscal 1997, net loss and loss per share (both basic and diluted) would have
changed as follows:

<TABLE>
<CAPTION>

                                                   JUNE 28, 1998                     JUNE 29, 1997
                                              ------------------------         ------------------------
                                              REPORTED       PRO FORMA         REPORTED       PRO FORMA
                                              --------       ---------         --------       ---------
<S>                                         <C>             <C>              <C>             <C>         
       Net loss                             $ (373,589)     $ (373,589)      $(1,435,906)    $(1,457,406)
                                            ----------      ----------       -----------     -----------
                                            ----------      ----------       -----------     -----------
       Loss per share                          $(.04)          $(.04)           $(.16)          $(.16)
                                            ----------      ----------       -----------     -----------
                                            ----------      ----------       -----------     -----------
</TABLE>


NOTE J--INCOME TAXES

The Company files a consolidated federal tax return including all of its
subsidiaries. Consolidated taxable losses in fiscal 1998 and 1997 provided no
income tax benefits in either year. The Company has not yet filed its tax
returns for the six months ended December 31, 1998. However, no federal income
tax was incurred in 1998 and all of the state tax liabilities are for minimum
taxes and have been accrued as applicable.

At June 28, 1998, the Company has net operating loss carryforwards of
approximately $3,270,000 available for federal and state income tax purposes
expiring over the next five to fifteen years, depending on the jurisdiction.
Such loss carryforwards give rise to a deferred tax asset of $1,440,000 at June
28, 1998, all of which is offset by an equivalent valuation allowance. The
valuation allowance increased by $136,000 and $229,000 during fiscal 1998 and
1997, respectively (see Note M).


NOTE K--SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

In fiscal 1997, the Company had the following noncash investing and financing
activities: issued common stock with a fair value of $570,000 in partial
settlement of a liability; distributed an equity investment as repayment of a
$224,150 loan from a stockholder; and wrote off property and equipment with a
net book value of $330,776. No income taxes were paid during fiscal 1998 or
1997. The Company paid interest expense of $3,333 in fiscal 1997. No interest
was paid during fiscal 1998.


                                      F-17

<PAGE>

SPECIALTY RETAIL GROUP, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS
JUNE 28, 1998

NOTE L--STORE CLOSING AND OTHER EXPENSES

Store closing and other expenses during the fifty-two week period ended June 29,
1997 consist of:

<TABLE>
      <S>                                                                        <C>
      Disposition of property and equipment including related costs of $52,762   $ 212,712
      Write-off of leasehold improvements                                          170,826
      Write-off of goodwill                                                        136,882
                                                                                 ---------

                                                                                 $ 520,420
                                                                                 ---------
                                                                                 ---------

</TABLE>


NOTE M--SUBSEQUENT EVENTS

On February 25, 1999, the Company signed a letter of agreement ("Letter") by
which it would be the target in a reverse takeover acquisition. The Letter calls
for the payment, forgiveness or conversion to equity or stock purchase options
of substantially all of the Company's liabilities. Other provisions of the
Letter include a reverse stock split and revision of the corporate articles of
incorporation and by-laws. If the contemplated transaction is completed, the
federal net operating loss carryforward in any one year will be severely limited
in accordance with Internal Revenue Code Section 382 regarding changes in
ownership of more than 50%. As a result, any federal net operating loss
carryforwards and the benefits attributable to them will be insignificant.

                                      F-18