<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 30, 1996

              [ ]    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                          (I.R.S. Employer
of incorporation or organization)                     Identification No.)

                            1720 Post Road East, Suite 112
                              Westport, Connecticut 06880
-------------------------------------------------------------------------------
                 (Address of principal executive offices)  (Zip Code)

Issuer's telephone number: (203) 256-4380


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

                                         None

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

                            Common Stock, par value $.001

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  X    No
    ---      ---

Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of Issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB [X].


<PAGE>

         The Issuer's revenues for the year ended June 30, 1996 were
$7,126,444.

         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 September 24, 1996, was $2,088,089.

         As of September 24, 1996 there were 9,538,071 shares of common stock
outstanding, including 213,333 shares held by an escrow agent.

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


                                        - 2 -

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                                        PART I


ITEM  1.  DESCRIPTION OF BUSINESS

Overview

         Specialty Retail Group, Inc. (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 to Cardinal Testing 
Laboratories, Inc. ("Cardinal Transaction").  As a result of the Cardinal 
Transaction, the Company received approximately $6 million.  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.

Building Blocks

RECENT DEVELOPMENTS

         Building Blocks is operating a specialty educational and 
developmental toy store chain presently consisting of 10 stores.  The stores 
are located in Connecticut, New York and Massachusetts.  In early 1996 the 
Company determined to pursue expansion of the Building Blocks chain through 
franchising.  The Company established Building Blocks Franchise Corp. 
("BBFC") in July 1996 as a wholly-owned subsidiary and BBFC began actively 
marketing franchises under an agreement between BBFC and Building Blocks.  At 
September 20, 1996 BBFC had sold franchises for two stores to be located in 
Dallas, Texas and Chicago, Illinois.

         In order to reduce its negative cash flow, Building Blocks closed 
three stores between June and September and adopted a business plan which 
contemplated that it would (i) not open any new company-owned stores; (ii) 
reduce the number of such stores currently in operation by not renewing 
leases as they expired or by transfers of such leases to certain franchisees, 
as purchasers of such stores; and (iii) in the future, rely primarily upon 
the franchising program to generate revenue and profit.  The Company 
anticipated completing transfers of at least two store locations and their 
leases, fixtures and inventories by the end of September 1996.  These 
transactions did not occur and Building Blocks will be unable to fund normal 
build-ups of holiday season inventories.  Building Blocks currently intends 
to close certain of its mall stores and consolidate their inventories at its 
other stores prior to the 1996 holiday season; to continue to aggressively 
pursue, together with BBFC, sales of Building Blocks-operated stores to 
franchisees and, in any event, to phase out the operation of Building 
Blocks-operated stores by Spring 1997.  BBFC will continue to market 
franchises both for existing Building Blocks stores and for new locations.  
See "Management's Discussion and Analysis."

                                        - 3 -

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         The Company is also seeking opportunities for a business combination
with an operating company.

STORE OPERATIONS

         Building Blocks' merchandising has focused on high quality educational
and developmental toys.  Its specialty toy mix consists of children's toys and
accessories that the Company deems to be distinctive and top quality items.  A
substantial portion of Building Blocks' merchandise is comprised of toys
typically found in the specialty toy segment rather than in the mass marketed
toy segment.

         Building Blocks' stores offer a friendly environment for both children
and parents.  A customer entering a store is surrounded with bright colors and
prominently audible children's music.  Also, many toys are displayed for the
parent and child to investigate and use.  Stores regularly schedule special
attractions in the stores, including craft classes, musicians, children's
authors, storytellers, animated characters, seasonal parties and others.  In
addition, unlike the mass merchandising toy chains, Building Blocks stores offer
free gift wrapping, delivery service and over-the-phone ordering.

         The Company believes that the fixtures used in Building Blocks stores
promote the children's "hands-on" environment.  Large wooden blocks filled with
merchandise are the main theme used in store fixtures.  All departments are
clearly signed and floor layouts are designed to achieve an easy customer flow
throughout the store.  Building Blocks has received industry awards for store
design and merchandising.

         Marketing is conducted primarily through direct mail, a "Kids Club"
program, and print and radio advertising.  Management believes that Building
Blocks' advertising conveys a message to the customer that Building Blocks sells
quality and durable developmental toys and offers superior customer service.
Management believes that the stores project themselves to the community as a
resource for expert advice on age-appropriate toys and children's activities.

         Building Blocks stores' business is highly seasonal with approximately
40% of its sales occurring in the last calendar quarter of each year.

         It is expected that BBFC franchisees will operate their stores using
substantially the same merchandise and marketing approaches.

SUPPLIERS

         No supplier to Building Blocks accounted for more than 10% of its 
purchases of inventory in the year ended June 30, 1996.  In view of Building 
Blocks' present business plan, management believes that

                                        - 4 -

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the loss of any supplier would not have a material adverse impact on the
operations of Building Blocks.

COMPETITION

         The toy market is an intensely competitive market.  However, the
specialty toy market is a fragmented market with various regional stores.
Building Blocks' competitors generally have substantially greater resources than
Building Blocks.  Although Building Blocks stores compete for consumer
expenditures with large mass merchandisers, such as Toys 'R Us, as well as the
toy departments of discount stores, where pricing policies typically involve
selling toys at discounted prices, management believes that Building Blocks'
merchandising, customer service and store format strategies differentiate its
stores from such larger competitors.  Building Blocks stores compete more
directly with smaller "mom and pop" stores and regional chains such as "Learning
Express," "Noodle Kidoodle" and "Zainy Brainy," which offer similar product
selection and pricing in a larger store layout.

FRANCHISING PROGRAM

         BBFC has been actively marketing Building Blocks franchises for new
locations.  As of September 1, 1996, two franchises had been sold for stores to
be located in Dallas, Texas and Chicago, Illinois, each of which is expected to
open in the fall of 1996.  Each of the two franchises sold by BBFC provides for
an initial franchise fee of $25,000, an ongoing royalty of 5% of net sales, and
ongoing contributions to an advertising fund.  In addition to marketing
franchises to new locations, BBFC is also marketing franchises for Building
Blocks-operated stores.

TRADEMARKS

         The Company and Building Blocks do not have any patents.  The Building
Blocks logo is registered as a service mark with the United States Patent and
Trademark Office and United States trademark applications are pending for the
Building Blocks name for retail toy store services and for certain marketing
slogans and product line names.

EMPLOYEES

         As of September 15, 1996, the Company and Building Blocks had an
aggregate of 69 employees, 32 of whom were full-time.  Neither the Company nor
Building Blocks is a party to any collective bargaining agreement and both the
Company and Building Blocks believe that their relationship with their employees
are satisfactory.


                                        - 5 -

<PAGE>

ITEM 2.  DESCRIPTION OF PROPERTIES

         The Company leases approximately 2,500 square feet of executive office
space in Westport, Connecticut. This lease expires on November 30, 1996, and 
payments thereunder are approximately $3,400 per month.

         As of September 25, 1996, Building Blocks operated 10 store locations.
These stores average approximately 1,750 square feet.  The store locations are
as follows:


                   Connecticut--
                        Stamford
                        Westport
                        Ridgefield
                        Greenwich

                   New York--
                        Third Ave., NYC
                        Lexington Ave., NYC
                        Nanuet
                        White Plains
                        Queens, NYC

                   Massachusetts--
                        Burlington


         The store leases expire at various dates between July 1997 and January
2006.  Most of the leases require Building Blocks to pay taxes, insurance and
maintenance charges, in addition to a base rent.  Lease expenses for each of the
10 stores in operation currently average approximately $6,300 per month.

         During fiscal 1996, the Company began negotiating for the termination
or revision of its leases at six mall locations.  As of September 1, 1996, the
Company had closed three of these locations and renegotiated the lease terms for
the stores in the Nanuet and Burlington locations.  The Company is in arrears in
its rent for the three closed locations and for one other location. The Company
is presently attempting to negotiate settlements of its rent arrearages and the
termination of its leases for the three closed locations and a modification of
its lease for the fourth location.  In addition, the Company intends to close
three stores in October 1996.  See "Item 3 -- Legal Proceedings" and "Item 6 --
Management's Discussion and Analysis or Plan of Operation."


                                        - 6 -

<PAGE>

ITEM 3.  LEGAL PROCEEDINGS

         On August 22, 1996, the Company, entered into a definitive Agreement 
of Settlement and Compromise (the "Settlement Agreement"), with respect to a 
lawsuit commenced by Peter Sayet entitled SAYET V. INSTITUTE FOR LABORATORY 
MEDICINE, INC., ET AL., 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.  Pursuant to the requirements of the Settlement 
Agreement, the Company also entered into a Registration Rights Agreement 
dated August 22, 1996 (the "Registration Rights Agreement") with Mr. Sayet 
and a designee of Mr. Sayet (the "Selling Stockholders") pursuant to which 
the Company has filed a Registration Statement covering the shares of common 
stock, $.001 par value, of the Company (the "Shares") issued to the Selling 
Stockholders.  Pursuant to the Registration Rights Agreement, the Company 
agreed to use its best efforts to prepare and file with the Commission a 
registration statement to permit the transfer or resale of the Shares and 
agreed to maintain the effectiveness of the registration statement until the 
earlier of the disposition of the Shares or the expiration of the applicable 
Rule 144 holding period.

         Pursuant to the terms of the Settlement Agreement, in the event that 
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 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, up to the amount of the Price Protection Pool, 
to the Selling Stockholders or suffer the transfer to the Selling 
Stockholders of Shares having a market value equal to the shortfall, up to a 
maximum of 213,333 Shares. The aforesaid 213,333 Shares have been issued to 
and registered in the name of an escrow agent.  The transfer of the required 
number of escrowed Shares would be in complete satisfaction of the Company's 
payment obligation under the Settlement Agreement.

OTHER LEGAL PROCEEDINGS

    At September 15, 1996, landlords at three mall stores which were closed
between June and September 1996 had instituted legal proceedings against
Building Blocks for rent arrearages in the aggregate amount of approximately
$200,000 and additional damages of approximately $400,000 for breaches of the
underlying leases (Westland Garden State Plaza Limited Partnership v. Building
Blocks, Inc., Superior Court of New Jersey, Bergen County, commenced June 4,
1996; General Growth Properties - Natick Limited Partnership v. Building Blocks,
Inc., District Court,


                                        - 7 -

<PAGE>

Middlesex, Massachusetts, commenced August 12, 1996; and Westland Properties,
Inc. v. Building Blocks, Inc., Superior Court - Fairfield, Connecticut,
commenced June 24, 1996).  Building Blocks is actively defending these damage
claims and believes that such claims are subject to substantial reduction.
Management is engaged in settlement discussions with the landlords of these
three malls and believes, although there can be no assurance, that it can reach
settlements which will be within Building Blocks' anticipated use of its
expected cash resources as set forth in "Management's Discussion and Analysis-
Liquidity and Capital Resources."  Building Blocks has also been attempting to
renegotiate the terms of a lease on a fourth mall store.  Building Blocks has
received a notice of petition from the landlord of this store seeking
approximately $130,000 of rent it has withheld and possession (FASHION MALL
PARTNERS, L.P. V. BUILDING BLOCKS, INC., City Court - Westchester, New York,
commenced September 26, 1996).

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

None.


                                       PART II


ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

         The Common Stock has been quoted on the NASDAQ SmallCap System since
July 1, 1994 and has traded under the symbol "SRGC".  The following table sets
forth the high and low bid prices on the NASDAQ SmallCap System as reported by
NASDAQ for the periods indicated:

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

 July 4, 1994           - October 2, 1994    1 5/16      1 3/16
 October 3, 1994        - January 1, 1995    1 3/8       3/4
 January 2, 1995        - April 2, 1995      1           5/8
 April 3, 1995          - July 2, 1995       7/16        1/4
 July 3, 1995           - October 1, 1995    7/8         1/4
 October 2, 1995        - January 1, 1996    5/8         1/4
 January 2, 1996        - March 31, 1996     31/32       5/16
 April 1, 1996          - June 30, 1996      1 1/4       5/8

         On September 1, 1996, there were 240 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.


                                        - 8 -

<PAGE>

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

         Set forth below is a summary of the significant factors affecting the
operating results, financial condition and liquidity/cash flows of Specialty
Retail Group, Inc. (the "Company") for the 53 weeks ended July 2, 1995 ("fiscal
1995") and the 52 weeks ended June 30, 1996 ("fiscal 1996").  This discussion
should be read in conjunction with the financial statements and notes thereto.

         The operating subsidiary of the Company is Building Blocks, Inc. 
("Building Blocks"), which the Company acquired on April 13, 1993 and which 
operates a chain of specialty retail toy stores.  Building Blocks Franchise 
Corp. ("BBFC"), formed subsequent to June 30, 1996, has been marketing 
franchises for Building Blocks stores. Due to the seasonal nature of the toy 
industry and the effects of store openings and closings in comparable year 
periods, comparisons between results of operations for such periods may not 
be meaningful or possible.  In addition, the Company's results for fiscal 
1996 reflect a liability for a non-cash obligation of $570,000 incurred in 
connection with the Settlement Agreement and charges of approximately 
$660,000 to reflect actual and estimated costs associated with Building 
Blocks' decision to close certain of its stores.

         Results of operations for the year ended June 30, 1996 are not
indicative of future results because of the Company's current business plans as
described under "Liquidity and Capital Resources," below.

LIQUIDITY AND CAPITAL RESOURCES

         The matters discussed under this caption that are forward looking
statements involve risks and uncertainties.  Such risks and uncertainties
include, without limitation, the impact which the economy, competition, or
unusual weather could have on Building Blocks' operating results for the 1996
holiday season; the timing, extent and terms of BBFC's franchise sales,
including the possible sales of existing Building Blocks-operated stores to
franchisees; the outcome of certain negotiations currently ongoing with respect
to the settlement of rent arrearages and disputed additional claims arising from
the closing of three indoor regional mall stores between June and September
1996; and the results of Building Blocks' program to phase out of the operation
of Building Blocks-operated stores described below.

         In the Company's quarterly report for the period ended March 31, 1996,
management projected that the Company would require between $500,000 and
$1,250,000 of additional working capital to fund operations through March of
1997.  Between June and September 1996, three Building Blocks-operated stores
which were operating in indoor regional malls in Massachusetts, Connecticut and
New Jersey were closed and Building Blocks has


                                        - 9 -

<PAGE>

been negotiating with the landlords of such premises for the settlement of 
approximately $200,000 of rent arrearages and of $400,000 of additional 
claims which the Company is actively disputing.  In July 1996 the Company 
received $224,150 under an agreement which provided that the Company would 
either repay such amount or transfer to the lender all of its rights and 
interests in stock and warrants to purchase stock of CM Franchise Corp.  On 
September 30, 1996, the Company will transfer the stock and warrants to the 
lender. BBFC and Building Blocks had anticipated the completion at the end of 
September 1996 of at least two transfers to franchisees of the leases, and 
the sale for cash of the fixtures and inventories, for Building 
Blocks-operated stores. These transactions, together with the above-described 
transactions, would have provided substantially all of the working capital 
required to finance planned holiday season inventory build-ups, and, 
management believes, would have enabled Building Blocks to arrange for any 
needed additional holiday season working capital.  These franchise 
transactions did not occur, and Building Blocks does not have adequate 
working capital to finance additional inventories.

         Management intends to close certain of Building Blocks' stores 
before the 1996 holiday season and to consolidate inventories from these 
stores at its other stores.  BBFC and Building Blocks are also actively 
seeking other potential franchisees to acquire Building Blocks-operated 
stores and their leases, fixtures and inventories.  BBFC is, simultaneously, 
pursuing the sale of franchises for new locations.

         The Company's present plan contemplates that any Building Blocks-
operated stores in operation after January 1997 will be transferred to
franchisees, and, in any event, will be phased out by the Spring of 1997 and
that the Company will thereafter limit its retail toy activities to franchising
by BBFC.  The Company's ability to generate adequate cash flow to sustain its
planned activities beyond December 31, 1996, is therefore dependent upon the
success Building Blocks achieves in its plans to transfer Building Blocks-
operated stores to franchisees and upon BBFC's ability to sell additional
franchises, which, in turn, may be affected by Building Blocks' financial
condition and the closing or franchising of Building Blocks-operated stores.  It
is expected that cash generated by Building Blocks will be applied to reduce its
accounts payable and other obligations and will not be available to fund BBFC's
operations.  BBFC will rely upon cash currently held by the Company and
franchise revenues.

         There can be no assurance as to the ultimate outcome of any of the
foregoing matters, and the Company may require additional working capital, in
amounts which could be substantial.  There can be no assurance that any working
capital will be available on acceptable terms or at all.

         The Company is also seeking opportunities for a business combination
with an operating company (a "Business Combination").  The Company intends to
attempt to negotiate a Business Combination for stock of the Company.  There are
no agreements or understandings with respect to any Business Combination.
Management believes that the Company's status as a publicly traded company and
its net operating loss carryforward


                                        - 10 -

<PAGE>

("NOL") will be attractive to a privately held operating company.  However,
there can be no assurance that the Company will be able to locate a potential
party to a Business Combination or negotiate a Business Combination on terms
satisfactory to the Company or at all.  In addition, the use of the Company's
NOL to offset profits after a business combination is subject to a number of
highly technical rules.

     As a result of these matters, the report of the Company's auditors on the
Company's June 30, 1996 financial statements contains a "going concern"
explanatory paragraph.

RESULTS OF OPERATIONS FISCAL 1996 COMPARED TO FISCAL 1995

RESULTS OF OPERATIONS

         In addition to the Building Blocks acquisition on April 13, 1993, 
the Company established, in May 1993, a real estate consulting division (the 
"Real Estate Division") which it discontinued in fiscal 1995.  The revenues 
and operating costs associated with the Real Estate Division are included in 
fiscal 1995 operations.  Also included in fiscal 1996 and 1995 operations, 
are the general and administrative costs and other expenses associated with 
the Company's corporate overhead, and interest income from cash and cash 
equivalent balances. As described in Note 4 to the Consolidated Financial 
Statements ("Equity Investment"), the Company acquired 25% of the common 
stock of CM Franchise Corp. on December 14, 1995.  The Company's proportion 
of the operating results in CM Franchise Corp. is included in the results of 
operations.

OPERATIONS

         Net sales, substantially all of which were generated by Building
Blocks, were $7,126,444 in fiscal 1996, an increase of 26.6% versus $5,629,643
in fiscal 1995.  This increase in net sales is due principally to the increase
in the number of stores operated by the Company.  Thirteen stores were in
operation at June 30, 1996.  Six of these stores were fully comparable.  That
is, they were fully operational during the entire two fiscal years.  Sales for
these six stores increased 5.7% or $196,351 from fiscal year-end July 2, 1995 to
fiscal year-end June 30, 1996.

         Cost of sales as a percentage of net sales remained virtually
unchanged from 58.4% in fiscal 1995 to 58.0% in fiscal 1996.  Cost of sales in
dollars increased from $3,286,273 in fiscal 1995 to $4,136,490 in fiscal 1996 to
support higher sales due to a net increase in the number of stores.

         Selling expenses consist primarily of payroll, occupancy and
advertising expenses associated with the Building Blocks stores.  Selling
expenses were $3,159,280 (44.3% of


                                        - 11 -

<PAGE>

net sales) and $2,438,024 (43.3% of net sales) in fiscal years 1996 and 1995,
respectively.  This 29.6% increase in dollars is due to the net increase in the
number of stores operated by the Company. As stores mature, selling costs as a
percentage of sales typically decrease.  Conversely, the opening of new stores
results in selling costs as a percentage of net sales increasing due to high
initial advertising and promotional expenses. Additionally, occupancy costs 
increase when new stores are open.

         General and administrative expenses represent salaries and related 
expenses associated with the corporate staff, as well as the expenses 
associated with Building Blocks' corporate operations and the Real Estate 
Division. General and administrative expenses were $2,143,541 (30.1% of net 
sales) in fiscal 1996, representing a decrease of $782,016 or 26.7% when 
compared with $2,925,557 (52.0% of net sales) for fiscal 1995.  This decrease 
is attributable to various cost reduction measures undertaken by the Company. 
These reductions include the elimination of the Real Estate Division and the 
reduction of administrative payroll and consulting fees.  These reductions, 
combined with the increase in sales, resulted in a strong improvement in 
these expenses measured as a percentage of net sales.

ONE-TIME AND RESTRUCTURING ITEMS

         Effective June 29, 1995 the Company acquired Healthcare Venture 
Management Corp. ("HVM") for 2,685,071 shares of Common Stock valued at 
$1,398,385 and $80,000 in cash.  HVM and the Company were parties to an 
advisory agreement under which HVM was entitled to receive a fee of 3.5% of 
the Company's net sales through June 2011.  These fees will now be retained 
in the Company's consolidated results.  The transaction was treated as a 
tax-free merger, and the Company took a one-time charge of $1.5 million 
related to the transaction.

         During the fourth quarter of fiscal 1995 the Company implemented or
developed plans for several programs designed to restructure its operations.
The Company recorded approximately $653,000 in charges in fiscal 1995 related to
the expected costs of restructuring.  These charges include the estimated costs
of closing certain stores, severance and other personnel-related costs and
related professional fees.  In addition the Company recorded pretax charges of
approximately $256,000 for costs associated with a restructuring of the
management organization.

         For the year ended June 30, 1996, the Company recorded restructuring 
and other expense charges of $660,767 for the disposition of fixed assets and 
other costs related to the closing or expected closings of certain mall 
stores.

         The Company had been a defendant in a lawsuit with a former officer 
who was suing the Company for various alleged claims (see "Item 3 - Legal 
Proceedings").  In fiscal 1995, the Company had taken a reserve of $250,000 
related to estimated legal fees as a result of its defense in this matter.  
As a result of the settlement of this lawsuit, the Company recorded a noncash 
expense of $570,000, which appears as "Legal Settlement-noncash" in the 
accompanying consolidated statement of operations for the year ended June 30, 
1996.

                                        - 12 -

<PAGE>


ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
                                                                        Located
                                                                        at Page
                                                                        --------

Report of Independent Certified Public Accountants..........................F-1
Consolidated Balance Sheet at June 30, 1996................................ F-2
Consolidated Statements of Operations for the years
  ended June 30, 1996 and July 2, 1995......................................F-3
Consolidated Statements of Stockholders' Equity for
  the years ended June 30, 1996 and July 2, 1995............................F-4
Consolidated Statements of Cash Flows for the years
  ended June 30, 1996 and July 2, 1995......................................F-5
Notes to Consolidated Financial Statements..................................F-6

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

         None.


                                        - 13 -

<PAGE>

                                       PART III

ITEM 9.  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 September 25,
1996 concerning the directors and executive officers of the Company.


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

Arnold B. Becker        61          Director
Tony Coelho(2)(3)       54          Director
Daniel Glass(1)         39          Director
Kevin R. Greene(2)(3)   37          Chairman of the Board
C. Anthony
Wainwright(1)           63          Director
Seymour W. Zises(2)(3)  43          Director
Steven E. Glass         35          President and Chief Executive Officer of
                                    Building Blocks ("BB") and Building Blocks
                                    Franchise Corp. ("BBFC"); Secretary of the
                                    Company
Helen M. Trent          49          Vice President of Franchise Development of
                                    BBFC and Secretary of BBFC


         Directors are elected annually for a one-year term. Nonemployee and
non-affiliated Directors receive an annual fee of $2,500 per year plus $500 for
each meeting attended.

         ARNOLD B. BECKER has been a director of the Company since March 7,
1994.  Since January 1996, Mr. Becker has been Chairman of Arnold B. Becker
Group, Inc., a management consulting firm specializing in services to retailers.
From 1980 until February 1996, Mr. Becker was the President of Vendamerica,
Inc., the U.S. investment arm of Vendex International, N.V., a large Dutch
multi-divisional retailing and services company.  In that capacity Mr. Becker
was responsible for implementing Vendex's strategy of taking large minority
equity positions in well-managed, fast-growing retailers in the United States
for investment purposes.  He is a Director of Western Beef, Inc.

         TONY COELHO has been a director of the Company since June 1991.  Since
July, 1995, Mr. Coelho has been Chairman


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

(1) Member of Audit Committee.

(2) Member of Compensation Committee which also administers the Company's Stock
    Option Plans.

(3) Member of Executive Committee.


                                        - 14 -

<PAGE>

and Chief Executive Officer of Coelho Associates, LLC, a New York investment
consulting and brokerage firm.  From 1989 through June, 1995, he was a Managing
Director of Wertheim Schroder & Co., Incorporated, a New York-based
international investment banking and securities firm.  He also served as
President and CEO of Wertheim Schroder Investment Services.  He is a director of
Circus Circus Enterprises, Inc., a lodging and gaming company; Crop Growers
Corporation, an insurance company; ICF Kaiser International Inc., an engineering
and consulting firm; Service Corporation International, a company which owns and
operates funeral homes and cemeteries; Tanknology Environmental, Inc., a company
which provides underground storage tank testing services; and
Tele-Communications, Inc., a company which provides cable television and other
communications services.  Mr. Coelho serves as chairman and CEO of ETC, a
Washington-based education training and communication subsidiary of
Tele-Communications, Inc.  Mr. Coelho is a former U.S. Representative from
California and Majority Whip of the U.S. House of Representatives.  He received
his Bachelor of Arts degree in 1964 from Loyola Marymount University in Los
Angeles.

         DANIEL GLASS has been a director of the Company since March, 1993.
Mr. Glass is President of Universal Records, a division of MCA Music
Entertainment Group, with which he has been associated since August 1995.  From
April 1993 to September 1994, he was President and Chief Executive Officer of
EMI Records Group.  From April 1989 to April 1993, Mr. Glass was Senior Vice
President and General Manager of SBK Records.  From 1983 to April 1989, Mr.
Glass was Senior Vice President of Promotion of Chrysalis Records.  Mr. Glass is
the brother of Steven E. Glass.

         KEVIN R. GREENE has been the Chairman of the Board of Specialty Retail
Group, Inc. since June 1995.  He is the Chairman and Chief Executive Officer of
Value Investing Partners, Inc., which he founded in 1991.  From 1986 to 1991 Mr.
Greene was a Senior Manager of McKinsey & Company, a firm of international
management consultants.  From 1982 through 1984, Mr. Greene was in institutional
sales and commodities research at E.F. Hutton & Co., a U.S.-based investment
bank.  Mr. Greene holds a B.A. in Economics from Georgetown University, an
M.P.P. in International Trade and Finance from Harvard University, and an M.B.A.
in Finance from New York University.  Mr. Greene is a director of New World
Coffee, Inc., which operates a chain of gourmet coffee restaurants.

         C. ANTHONY WAINWRIGHT has been a director of the Company since March
1993.  Since June, 1995 Mr. Wainwright has been Chairman of Harris, Drury,
Cohen, an advertising agency.  From 1989 to May 1995, Mr. Wainwright was
Chairman of CME*KHBB, an international advertising agency.  From 1980 to 1989,
Mr. Wainwright was President and Chief Operating Officer of The Bloom Companies,
a Dallas, Texas based advertising agency.  Mr. Wainwright is also a director of
American Woodmark Corporation, Del Webb Corporation and Gibson Greeting Cards,
Inc.


                                        - 15 -

<PAGE>

Mr. Wainwright received his B.A. in journalism from the University of Colorado
in 1955.

         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.  Mr. Zises also serves as President and Chief
Executive Officer of Forest Hill Capital Corporation, a merchant banking
concern.  Mr. Zises is also an officer and director of RCL Capital Corp., Inc.,
a merchant banking concern, and Disc Graphics, Inc., a product packaging design
company.  Prior to his founding Family Management, he was an independent
financial service representative licensed with Integrated Resources Equity
Corporation.  Mr. Zises was one of several individual general partners or an
officer or shareholder of a corporate general partner of six real estate limited
partnerships which filed petitions for bankruptcy under Chapter 11 of the United
States Bankruptcy Code between 1990 and February 1993.  Mr. Zises serves on the
Board of Trustees of Beth Israel Medical Center in New York City.  Mr. Zises is
a graduate of New York University.

         STEVEN E. GLASS has been associated with the Company as an employee or
consultant since September, 1995 and has been President and Chief Executive
Officer of Building Blocks since April, 1996.  From June 1993 until March 1995,
Mr. Glass was Director of Special Projects for EMI Records where he supervised
strategic sales and marketing projects for television, film and children's
music, including the implementation and direction of EMI's "Barney Music"
division.  Prior to joining EMI Mr. Glass spent 13 years in municipal
government, including his last position as Special Assistant to the Borough
President of Brooklyn, with responsibility for various business and commercial
development projects.  Mr. Glass is the brother of Daniel Glass.

         HELEN M. TRENT has been Vice President of BBFC since June 1996.  Ms.
Trent has over 20 years of experience in national and regional franchising.
From November, 1993 until joining BBFC she was Vice President, Franchise
Development for Huntington Learning Centers, Inc.  From 1990 until she joined
Huntington Learning Centers, Inc., Ms. Trent was a franchising consultant,
providing sales and marketing advice to, and developing brochures, advertising
and other materials for, national and regional franchisors.  Ms. Trent's prior
experience includes service as a franchising executive for Mr. Sign Franchising
Corp., Burger King and Jack-in-the-Box Restaurants.


COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE
ACT OF 1939

         Based solely on a review of Forms 3 and 4 (and amendments thereto)
furnished to the Company during its fiscal year ended June 30, 1996, and certain
written representations


                                        - 16 -

<PAGE>

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.


ITEM 10. EXECUTIVE COMPENSATION

         Except for Jonathon Heller, no person who was an operating officer of
the Company at June 30, 1996 received annual salary and bonus which, in the
aggregate, exceeded $100,000 for the fiscal year ended June 30, 1996.  In June
1995, Kevin R. Greene became Chairman of the Board of Directors of the Company.
Through June 30, 1996, Mr. Greene received no cash or other compensation other
than the $2,500 per year and $500 per meeting paid to directors who are not
employees or beneficial owners of 10% or more of the outstanding capital stock
of the Company.



<TABLE>
<CAPTION>


                                                                                      Long-Term Compensation
                                                                                      ----------------------
                                                                                       Awards             Payouts
                                                                                       ------             -------
                                                                                     Securities
                                                                                     Underlying          All Other
                                                    Annual Compensation             Options/SARS        Compensation
                                                    -------------------             ------------        ------------
    Name and             Fiscal Year                            Other Annual
Principal Position         Ended             Salary $           Compensation             #                    $
------------------       -----------         ---------          ------------        ----------            --------
<S>                     <C>                 <C>                 <C>                 <C>                 <C>
Jonathon Heller,        June 30, 1996       $108,401                 --                  --                  --
Co-President of
Building Blocks
                        July 2, 1995        $ 95,692                 --                  --                  --

                        July 3, 1994        $ 30,288                 --                  --                  --

</TABLE>


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 30, 1996.

         The following table sets forth certain information as to the number
and value of unexercised stock options held by the named officer at
June 30, 1996.

<TABLE>
<CAPTION>

                                                                          Value of Unexercised
                                 Number of Unexercised                    In-The-Money Options
                                Options at June 30, 1996                    at June 30, 1996
                                ------------------------               ---------------------------
             Name            Exercisable         Unexercisable       Exercisable*        Unexercisable*
         ------------        -----------         -------------       -----------         -------------
         <S>                 <C>                 <C>                 <C>                 <C>
         Jonathon Heller       43,333               66,667                --                   --

</TABLE>

_______________________
* None of the foregoing options were in-the-money at June 30, 1996.


                                        - 17 -

<PAGE>

         Steven E. Glass, the President and Chief Executive Officer of Building
Blocks, is employed pursuant to an employment agreement which became effective
April 1, 1996 and expires in February 1998.  The agreement provides for a
signing bonus of $10,000 and an annual salary of $112,500 the first year and
$135,000 thereafter, a bonus of 5% of pre-tax profits before certain
extraordinary items, an expenditure by the Company of up to $1,000 a month to
provide a leased vehicle and certain related automobile expenses for Mr. Glass,
and reimbursement of all business-related expenses.

         Mr. Glass has also been granted options to acquire 110,000 shares of
Common Stock at $.75 per share and 20,000 shares of Common Stock at $1.00 per
share.


                                        - 18 -

<PAGE>

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The following table sets forth certain information, as of September 1,
1996, regarding the beneficial ownership of the Company's Common Stock by (i)
all persons known by the Company to 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
                    Name and Address                            Beneficial           Percent of
Title of Class     of Beneficial Owner                          Ownership             Class(1)
-------------      -------------------                          ----------            --------
<S>                <C>                                          <C>                  <C>
Common Stock       Arnold B. Becker                              50,000(2)                *

Common Stock       Tony Coelho                                   50,000(2)                *

Common Stock       Daniel Glass                                  50,000(2)                *

Common Stock       Kevin R. Greene(3)                           247,000(3)             2.5%

Common Stock       C. Anthony Wainwright                         50,000(2)                *

Common Stock       Cathy Zises(4)                               944,377               10.1%
                   477 Madison Avenue
                   New York, New York  10022

Common Stock       Lynn Zises                                   796,317                8.5%
                   477 Madison Avenue
                   New York, New York  10022

Common Stock       Nancy Zises
                   477 Madison Avenue
                   New York, New York  10022                    833,332                8.9%

Common Stock       Seymour W. Zises(4)                          944,377               10.1%

Common Stock       Steven E. Glass                               56,667(2)                *

Series A-1         ILM Acquisition L.P.(4)
Preferred Stock    477 Madison Avenue
                   New York, New York  10022                  2,394,130                100%

Common Stock       All directors and officers as a group      1,448,044(2)(3)(4)       14.8
                   (7 persons)
</TABLE>

_______________________

*   Less than 1%.
(1) Based upon 9,324,738 shares of Common Stock outstanding, which does not
    include 213,333 shares held by an Escrow Agent or shares of Common Stock
    issuable upon the exercise of the options described below in footnote (2).
    However, in computing the respective percentages of the Common Stock
    beneficially owned by the holders described in footnote (2), and in
    calculating the percentage of the Common Stock owned by all officers and
    directors as a group, the shares of Common Stock subject to options
    described in footnote (2) were deemed outstanding.

(2) The total for each of Arnold Becker, Tony Coelho, Daniel Glass, Steven E.
    Glass, and C. Anthony Wainwright represents the number of shares of Common
    Stock purchasable pursuant to currently exercisable options held by him.


                                        - 19 -

<PAGE>


    All such options were granted pursuant to the Company's Amended and
    Restated 1991 Non-Qualified Stock Option Plan or the Company's 1994 Stock
    Option Plan, except an option for 110,000 shares granted to Steven E. Glass
    (of which 36,667 shares are currently exercisable).

(3) The shares reported for Mr. Greene include 243,250 shares of Common Stock
    issuable upon exercise of a warrant held by Value Investing Partners, Inc.
    of which Mr. Greene is the principal stockholder.

(4) 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 W.
    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-l Preferred Stock.  Selig A. Zises, a brother of Seymour W. Zises, is 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 the general partner of IALP.  Family members of Seymour
    W. Zises are indirect beneficial owners of limited partnership interests in
    IALP.  Seymour W. Zises disclaims any beneficial ownership of any of the
    Preferred Stock of the Company.


ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         Effective June 1991, the Company retained the services of Healthcare
Venture Management Corp. (the "Adviser"), an affiliate of ILM Acquisition, L.P.
("IALP"), as an adviser in connection with certain financial consulting services
pursuant to a 20-year advisory agreement approved by the Company's shareholders
(the "Advisory Agreement").  The Advisory Agreement originally provided that,
for its services as adviser, the Company would pay the Adviser a monthly
advisory fee in an amount equal to 3.5% of the Company's revenues from its
billings for its products and services during such month.

         As a result of the Cardinal Transaction, from December 31, 1991 and
until April 13, 1993, the Company did not have any revenues from billings for
products and services, and, accordingly, the Adviser did not receive an advisory
fee.  In June 1992, the Board of Directors amended the advisory agreement to
provide that until June 30, 1995, the monthly advisory fee payable pursuant to
the June 20, 1991 Advisory Agreement would be an amount equal to 3.5% of the
net revenues from the Company's billings for its products and services during
the immediately preceding calendar month, less $20,834 per month.  Because of
this amendment to the Advisory Agreement, no advisory fees were paid through
June 30, 1995.

         Effective June 29, 1995 the Company acquired the Adviser for 2,685,071 
shares of Common Stock valued at $1,398,385 and $80,000 in cash.  As a result of
the acquisition the fees payable under the Advisory Agreement will be retained 
in the Company's consolidated results.  The transaction was treated as a tax-
free merger, and, in fiscal 1995,  the Company took a one-time charge of $1.5 
million related to the transaction.

                                        - 20 -

<PAGE>


         In connection with IALP's acquisition of a controlling interest in the
Company in June 1991, the Company received from IALP $1,000,000 in cash and a
$1,000,000 five year promissory note, accruing interest at 10% per annum, which
was secured by the Common Stock and Preferred stock of the Company acquired by
IALP.  On June 29, 1995 the Company purchased the 2,817,581 shares of Common
Stock held by IALP at a price of $.52 per share.  The purchase was paid for
through the cancellation by the Company of the $1,000,000 promissory note from
IALP and of interest accrued thereon of $467,407.  IALP retained ownership of
2,394,130 shares of the Registrant's Series A-1 Preferred Stock.

         As a result of the acquisition of the Advisor, (i) Lynn Zises acquired
an aggregate of 9.7% of the Company's then outstanding common stock and 7.4% of
the Company's then outstanding voting stock, (ii) Nancy Zises acquired directly
and as custodian for her minor child an aggregate of 9.9% of the Company's then
outstanding common stock and 7.6% of the Company's then outstanding voting
stock, and (iii) Cathy Zises acquired directly and as custodian for her minor
children an aggregate of 11.2% of the Company's then outstanding common stock
and 8.7% of the Company's then outstanding voting stock.

         By virtue of its ownership of all of the outstanding shares of Series
A-1 Preferred Stock, IALP controls approximately 20.4% of the voting power of
the Company.  Selig A. Zises, a brother of Seymour W. Zises, is 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 W. Zises disclaims any
beneficial ownership of any Preferred Stock of the Company.

         Each of Selig A. Zises, Cathy Zises, Lynn Zises and Nancy Zises
disclaims being a control person of the Company and disclaim that any two or
more of them constitute a group.  Seymour W. Zises is the husband of Cathy
Zises, the brother of Selig Zises, the uncle of Lynn Zises and the
brother-in-law of Nancy Zises.  Selig A. Zises is the father of Lynn Zises.

         Effective January 1, 1994, the Company entered into a consulting
agreement with Seymour W. Zises, a director of the Company, under which Mr.
Zises rendered consulting services to the Company in connection with its pursuit
and evaluation of opportunities to expand its specialty retail operations.  Mr.
Zises received a fee of $5,000 per month and reimbursement of expenses.  The
agreement was terminated as of January 31, 1995.

         On November 17, 1995, the Company invested in a series of promissory
notes (the "Notes") for an aggregate of $1,000,000.  The Maker of the Notes was
a corporation engaged in the finance industry.  The Notes were automatically
renewed for 90-day maturities unless the Company determined not to renew.
$400,000


                                        - 21 -

<PAGE>

of the original Notes were repaid during the quarter ended March 31, 1996.  The
remaining Notes, each for $300,000, matured, and were paid in April 1996 and
June 1996.  The Notes bore interest at a rate of 15% compounded annually and
payable monthly.  The Notes were guaranteed by Selig A. Zises, who is a
significant investor in the Maker of the Notes.

         In July 1996, pursuant to an agreement negotiated between Selig A.
Zises and Kevin R. Greene, Chairman of the Board of the Company, the Company
received $224,150 from Mr. Zises to cover a working capital shortfall.  Under
the agreement with Mr. Zises the Company has the right to either repay the
advance without interest or to transfer to him all of the Company's rights and
interests in the common stock of CM Franchise Corp. and in warrants to purchase
additional shares of such Common Stock it acquired in December 1995 for a total
of $224,150.  Payment of the advance or transfer of the aforesaid interests is
due on September 30, 1996 and the Company will transfer the rights and interests
on that date.

         Reference is made to "Executive Compensation" for information as to
certain compensation arrangements with, and options granted to, present and
former officers and directors of the Company.


                                        - 22 -

<PAGE>

ITEM 13. EXHIBITS AND
         REPORTS ON FORM 8-K



(a) Exhibits

         See "Index to Exhibits".

    Executive Compensation Plans and Arrangements

         Exhibit 10.1  -   1991 Non-Qualified Stock Option Plan
         Exhibit 10.2  -   1994 Stock Option Plan
         Exhibit 10.7  -   Employment Agreement dated as of April 1, 1996
                           between Building Blocks and Steven E. Glass
         Exhibit 10.8  -   Option Agreement dated April 12, 1996 between
                           Registrant and Steven E. Glass
         Exhibit 10.9  -   Option Agreement dated October 2, 1995 between
                           Registrant and Steven E. Glass
         Exhibit 10.13 -   Option Agreement dated March 7, 1994 between
                           Registrant and Jonathon Heller
         Exhibit 10.14 -   Option Agreement dated November 1, 1994 between
                           Registrant and Jonathon Heller

(b) Reports on Form 8-K

    None.


                                        - 23 -

<PAGE>

                                      SIGNATURES

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

Dated:  September 27, 1996             SPECIALTY RETAIL GROUP, INC.

                                       By:KEVIN R. GREENE
                                          ---------------------------------
                                            Chairman of the Board,
                                            Chief Executive and
                                            Financial Officer

         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.


    Arnold B. Becker                        September 27, 1996
    -------------------------
    Arnold B. Becker
    Director


                                            September   , 1996
    -------------------------
    Tony Coelho
    Director


                                            September   , 1996
    -------------------------
    Daniel Glass
    Director


    Kevin R. Greene                         September 27, 1996
    -------------------------
    Kevin R. Greene,
    Director


    C. Anthony Wainwright                   September 27, 1996
    -------------------------
    C. Anthony Wainwright
    Director


    Seymour W. Zises                        September 27, 1996
    -------------------------
    Seymour W. Zises
    Director


                                        - 24 -

<PAGE>

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To The Board of Directors and Stockholders of
   Specialty Retail Group, Inc.

We have audited the consolidated balance sheet of Specialty Retail Group, Inc.
and subsidiary as of June 30, 1996, and the related consolidated statements of
operations, stockholders' equity, and cash flows for the 52 weeks ended
June 30, 1996 and the 53 weeks ended July 2, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Specialty Retail
Group, Inc. and subsidiary at June 30, 1996, and the results of their operations
and their cash flows for the 52 weeks ended June 30, 1996 and the 53 weeks
ended July 2, 1995 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 discussed in Note 2 to the
consolidated financial statements, the Company has suffered recurring losses
from operations which raises substantial doubt about its ability to continue as
a going concern. Management's plans in regard to those matters also are
described in Note 2. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.

BDO Seidman, LLP



New York, NY

September 20, 1996


                                                                     F-1

<PAGE>

                                   SPECIALTY RETAIL GROUP, INC. AND SUBSIDIARY


                                                    CONSOLIDATED BALANCE SHEET


<TABLE>
<CAPTION>

JUNE 30, 1996
-------------
<S>                                                                       <C>
ASSETS 
CURRENT:
  Cash and cash equivalents                                               $    387,006
  Inventory                                                                  1,281,777
  Other current assets                                                         129,538
                                                                            ----------
       TOTAL CURRENT ASSETS                                                  1,798,321
PROPERTY AND EQUIPMENT, NET (NOTE 3)                                           778,326
GOODWILL, NET OF ACCUMULATED AMORTIZATION OF $223,925                          143,032
EQUITY INVESTMENT (NOTES 4 AND 12)                                             179,744
OTHER ASSETS, PRIMARILY SECURITY DEPOSITS                                      103,255
                                                                            ----------
                                                                          $  3,002,678
                                                                            ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT:
  Accounts payable                                                        $  1,252,432
  Accrued liabilities                                                          856,024
                                                                            ----------
       TOTAL CURRENT LIABILITIES                                             2,108,456
                                                                            ----------
LEGAL SETTLEMENT - EQUITY TO BE ISSUED (NOTE 5)                                570,000
                                                                            ----------
COMMITMENTS AND CONTINGENCIES (NOTE 5)
STOCKHOLDERS' EQUITY (NOTES 6 AND 7)
Series A-1 preferred stock, $.001 par value - shares authorized
  10,000,000; issued and outstanding 2,394,130                                   2,394
Common stock, $.001 par value - shares authorized 100,000,000; issued
  and outstanding 8,674,738                                                      8,675
  Additional paid-in capital                                                11,004,220
  Accumulated deficit                                                      (10,515,403)
  Treasury stock, 240,500 shares                                              (175,664)
                                                                            ----------
       TOTAL STOCKHOLDERS' EQUITY                                              324,222
                                                                            ----------
                                                                          $  3,002,678
                                                                            ==========

</TABLE>
                   SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                                                     F-2

<PAGE>

                                   SPECIALTY RETAIL GROUP, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>

                                                    CONSOLIDATED STATEMENTS OF OPERATIONS

                                                                  52 WEEKS ENDED      53 weeks ended
                                                                   JUNE 30, 1996        July 2, 1995
                                                                  --------------      --------------
<S>                                                                  <C>                 <C>
NET SALES                                                            $7,126,444          $5,629,643
COST OF SALES                                                         4,136,490           3,286,273
                                                                      ---------           ---------
     GROSS PROFIT                                                     2,989,954           2,343,370
OPERATING COSTS:
  Selling                                                             3,159,280           2,438,024
  General and administrative                                          2,143,541           2,925,557
  Restructuring and other expenses (Note 10)                            660,767           2,788,626
                                                                      ---------           ---------
LOSS FROM OPERATIONS                                                 (2,973,634)         (5,808,837)
OTHER INCOME (EXPENSE:)
  Interest income, net of interest expense of $-0- and $28,316          110,437             338,498
  Loss on equity investment (Note 4)                                    (44,406)                  -
  Legal settlement - noncash (Note 5)                                  (570,000)                  -
  Other income                                                          124,955                   -
                                                                      ---------           ---------
     LOSS BEFORE INCOME TAX EXPENSE                                  (3,352,648)         (5,470,339)
INCOME TAX EXPENSE (NOTE 8)                                              26,020              29,000
                                                                      ---------           ---------
LOSS FROM OPERATIONS                                                $(3,378,668)        $(5,499,339)
                                                                      =========           =========
PER SHARE AMOUNTS:
  Net loss                                                                $(.39)              $(.63)
                                                                      =========           =========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING                  8,674,738           8,660,063
                                                                      =========           =========

</TABLE>

                    SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                                                            F-3

<PAGE>

                                     SPECIALTY RETAIL GROUP, INC. AND SUBSIDIARY


                                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
52 WEEKS ENDED JUNE 30, 1996 AND 53 WEEKS ENDED JULY 2, 1995
------------------------------------------------------------

                                      Preferred stock                  Common stock           
                                      ---------------                  ------------            Additional
                               Number of                          Number of                     paid-in
                                 shares             Amount        shares           Amount       capital
                               --------             ------        ---------        ------       -------
<S>                           <C>                  <C>            <C>              <C>         <C>
BALANCE, JULY 3, 1994        2,394,130              $2,394       8,807,248        $8,807     $10,940,903
Interest on subscription
  note receivable (Note 6)           -                   -               -             -         132,647
Note redemption (Note 6)             -                   -      (2,817,581)       (2,817)     (1,465,030)
Shares repurchased                   -                   -               -             -               -
HVM acquisition                      -                   -       2,685,071         2,685       1,395,700
Net loss                             -                   -               -             -               -
                             ---------               -----       ---------         -----      ----------
BALANCE, JULY 2, 1995        2,394,130               2,394       8,674,738         8,675      11,004,220
Net loss                             -                   -               -             -               -
                             ---------               -----       ---------         -----      ----------
BALANCE, JUNE 30, 1996       2,394,130              $2,394       8,674,738        $8,675     $11,004,220
                             ---------               -----       ---------         -----      ----------
                             ---------               -----       ---------         -----      ----------


                               Stock
                            subscription           Retained
                               note and            earnings                             Total
                               interest         (accumulated           Treasury       equity
                             receivable            deficit)             stock      stockholders'
                             ----------          ---------             --------    ------------

BALANCE, JULY 3, 1994      $(1,335,203)       $ (1,637,396)         $       -     $ 7,979,505
Interest on subscription
  note receivable (Note 6)    (132,644)                  -                  -               3
Note redemption (Note 6)     1,467,847                   -                  -               -
Shares repurchased                   -                   -           (175,664)       (175,664)
HVM acquisition                      -                   -                  -       1,398,385
Net loss                             -          (5,499,339)                 -      (5,499,339)
                             ----------         ----------            -------       ---------
BALANCE, JULY 2, 1995                -          (7,136,735)          (175,664)      3,702,890
Net loss                             -          (3,378,668)                 -      (3,378,668)
                             ----------         ----------            -------       ---------
BALANCE, JUNE 30, 1996     $         -        $(10,515,403)         $(175,664)    $   324,222
                             ----------         ----------            -------       ---------
                             ----------         ----------            -------       ---------



                                    SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>

                                                                            F-4
<PAGE>
                                     SPECIALTY RETAIL GROUP, INC. AND SUBSIDIARY


                                           CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                                        (NOTE 9)
                                                                         ======
<TABLE>
<CAPTION>

                                                    52 WEEKS ENDED       53 weeks ended
                                                     JUNE 30, 1996        July 2, 1995
                                                     -------------        ------------
<S>                                                 <C>                  <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net loss                                             $(3,378,668)        $(5,499,339)
                                                        ---------           ---------
Adjustments to reconcile net loss to
 net cash used in operating activities:
   Depreciation and amortization                          307,248             492,962
   Loss on disposal of equipment                          699,674             575,782
   Loss on investment in equity acquisition                44,406                   -
   Legal settlement - stock to be issued                  570,000                   -
(Increase) decrease in:
   Inventory                                              120,099            (777,776)
   Other current assets                                   (11,213)            179,419
   Other assets                                           (45,116)             (1,124)
(Increase) decrease in:   
   Accounts payable and accrued liabilities              (496,330)          1,346,279
                                                        ---------           ---------
       TOTAL ADJUSTMENTS                                1,188,768           1,815,542
                                                        ---------           ---------
       NET CASH USED IN OPERATING ACTIVITIES           (2,189,900)         (3,683,797)
                                                        ---------           ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
 Expenditures for property and equipment                 (112,132)         (1,944,527)
 Equity investment (Note 4)                              (224,150)                  -
                                                        ---------           ---------
       NET CASH USED IN INVESTING ACTIVITIES             (336,282)         (1,944,527)
                                                        ---------           ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
 HVM acquisition (Note 10)                                      -           1,398,388
 Repurchase of treasury stock                                   -            (175,664)
 Repayment of notes payable                                     -            (317,632)
                                                        ---------           ---------
       NET CASH PROVIDED BY FINANCING ACTIVITIES                -             905,092
                                                        ---------           ---------
 NET DECREASE IN CASH AND CASH EQUIVALENTS             (2,526,182)         (4,723,232)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR            2,913,188           7,636,420
                                                        ---------           ---------
CASH AND CASH EQUIVALENTS, END OF YEAR                   $387,006          $2,913,188
                                                        =========           =========
</TABLE>


                    SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.


                                                                             F-5

<PAGE>

                                    SPECIALTY RETAIL GROUP, INC. AND SUBSIDIARY


          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.   BUSINESS AND             GENERAL
     SUMMARY OF          
     SIGNIFICANT         
     ACCOUNTING POLICIES      Specialty Retail Group, Inc. (the "Company") is a
                              holding company engaged in the operation and 
                              franchising of retail speciality toy stores.  The
                              Company is also exploring opportunities for 
                              business combinations.

                              Building Blocks, Inc. ("Building Blocks" or the
                              "Subsidiary") operates a specialty educational and
                              developmental toy store chain which, at June 30,
                              1996, consisted of ten stores located in
                              Connecticut, New York, and Massachusetts.

                              Subsequent to June 30, 1996, the Company formed a
                              wholly-owned subsidiary, Building Blocks Holdings,
                              Inc., which formed Building Blocks Franchise Corp.
                              ("Building Blocks Franchise"). Building Blocks
                              Franchise grants franchises to qualified   
                              candidates for the operation of Building Blocks 
                              retail stores.
                              
                              FISCAL YEAR

                              The Company has elected its fiscal year to be
                              based on a 52/53-week fiscal year ending on the
                              Sunday closest to June 30.  Fiscal 1996 and 1995 
                              consisted of 52 and 53 weeks, respectively.

                              PRINCIPLES OF CONSOLIDATION

                              The consolidated financial statements include the
                              accounts of the Company and the Subsidiary. All
                              significant intercompany balances and transactions
                              have been eliminated in consolidation.

                              CASH EQUIVALENTS

                              Cash equivalents consist principally of treasury 
                              securities and 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.

                              INVENTORIES

                              Inventories are principally stated at the lower of
                              cost, determined by the retail inventory method on
                              the first-in, first-out (FIFO) basis.

                              PROPERTY AND EQUIPMENT

                              Property and equipment are stated at cost.
                              Depreciation is provided on the straight-line
                              method over the estimated useful lives of
                              approximately 3 to 7 years for furniture, fixtures
                              and equipment. Leasehold improvements are
                              amortized over 10 years or the related lease term,
                              whichever is shorter.

                              REVENUE RECOGNITION

                              Revenue from sales of the Company's products is 
                              recognized at the time of sale.
                                                                             F-6

<PAGE>


                              GOODWILL

                              The excess of purchase price over the fair value
                              of net assets acquired is being amortized on the
                              straight-line method over 15 years. The Company's
                              policy is to evaluate goodwill for potential
                              impairment of value at each balance sheet date,
                              by analyzing operating results and related cash
                              flows, trends and prospects as well as
                              competitive and economic factors.

                              STORE OPENING AND CLOSING COSTS

                              The Company follows the practice of deferring
                              store pre-opening costs, expensing such amounts
                              over a 12-month period. The costs associated with
                              store closings are accrued when the decision is
                              made to close the location.

                              DEFERRED RENT

                              Cash payments for rent obligations were $1,093,000
                              and $843,000, respectively, for the 52 weeks ended
                              June 30, 1996 and the 53 weeks ended July 2, 1995.
                              Accounting principles require that future rental
                              increments be accrued on a straight-line basis
                              over the term of the lease. The noncash additional
                              rental accruals reflected in the consolidated
                              financial statements amount to $116,000 and
                              $176,000 for the 52 weeks ended June 30, 1996 and
                              the 53 weeks ended July 2, 1995, respectively.




                                                                             F-7

<PAGE>

                              INCOME TAXES

                              The Company adopted Statement of Financial
                              Accounting Standards No. 109 ("SFAS No. 109"),
                              "Accounting for Income Taxes," which calls for the
                              liability method of accounting for income taxes.
                              Under the liability 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)
                              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.

                              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
                              fiscal 1996 and 1995 computations as their effect
                              would be antidilutive or immaterial during these
                              periods.

                              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.

                              FAIR VALUE OF FINANCIAL INSTRUMENTS

                              The carrying amounts of cash and cash 
                              equivalents, other current assets, accounts
                              payable and accrued liabilities
                              approximate fair value because of the short
                              maturity of these items.



                                                                             F-8

<PAGE>

                              LONG-LIVED ASSETS

                              During 1995, Statement of Financial Accounting 
                              Standards No. 121, "Accounting for the 
                              Impairment of Long-Lived Assets and for 
                              Long-Lived Assets to Be Disposed Of" ("SFAS 
                              121"), was issued.  SFAS 121 requires the 
                              Company to review long-lived assets and certain 
                              identifiable assets related to those assets for 
                              impairment whenever circumstances and 
                              situations change such that there is an 
                              indication that the carrying amounts may not 
                              be recoverable.  If the undiscounted future 
                              cash flows of the enterprise are less than 
                              their carrying amounts, their carrying amounts 
                              are reduced to fair value and an impairment loss 
                              is recognized.  The adoption of this 
                              pronouncement in fiscal 1997 is not expected to 
                              have a significant impact on the Company's 
                              financial statements.

                              STOCK OPTIONS

                              The Company accounts for all transactions under 
                              which employees receive shares of stock or 
                              other equity instruments in the Company or the 
                              Company incurs liabilities to employees 
                              in amounts based on the price of its stock in 
                              accordance with the provisions of Accounting 
                              Principles Board Opinion No. 25, "Accounting 
                              for Stock Issued to Employees."  The Company 
                              does not anticipate adopting the fair value 
                              method encouraged by Statement of Financial 
                              Accounting Standards No. 123,  "Accounting for 
                              Stock-Based Compensation."
                              
                              PRESENTATION OF PRIOR YEAR DATA
                              
                              Certain reclassifications have been made to
                              conform prior year data with the current
                              presentation.

2.   GOING CONCERN            The accompanying 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. The Company has
                              incurred losses of approximately $10,515,000 
                              from inception through June 30, 1996, including
                              significant losses in the last two fiscal years.
                              This condition raises substantial doubt about the
                              Company's ability to continue as a going concern.

                              Management intends to close certain of Building
                              Blocks' stores before the 1996 holiday season and
                              to consolidate inventories from these stores at 
                              its other stores. Building Blocks Franchise and
                              Building Blocks are also actively seeking other
                              potential franchisees to acquire Building
                              Blocks-operated stores and their leases, fixtures
                              and inventories. Building Blocks Franchise is,
                              simultaneously, pursuing the sale of franchises
                              for new locations.  At September 20, 1996, 
                              franchises had been sold for Dallas, Texas and 
                              Chicago, Illinois.

                              The Company's present plan contemplates that any
                              Building Blocks-operated stores in operation after
                              January 1997 will be transferred to franchisees
                              or will otherwise be phased out by the Spring of
                              1997 and that the Company will thereafter limit 
                              its retail toy activities to franchising by 
                              Building Blocks Franchise. The Company's ability
                              to generate adequate cash flow to sustain its 
                              to sustain its planned activities beyond 
                              December 31, 1996 is therefore dependent upon the
                              success Building Blocks achieves in its plans to
                              transfer Building Blocks-operated stores to
                              franchisees and upon Building Blocks Franchise's
                              ability to sell additional franchises which, in
                              turn, may be affected by Building Blocks'
                              financial condition and the closing or franchising
                              of Building Blocks-operated stores. It is expected
                              that cash generated by Building Blocks will be
                              applied to reduce its accounts payable and other
                              obligations and will not be available to fund
                              Building Blocks Franchise's operations. Building
                              Blocks Franchise will rely upon cash currently
                              held by the Company and franchise revenues.


                                                                             F-9

<PAGE>

                              There can be no assurance as to the ultimate
                              outcome of any of the foregoing matters, and the
                              Company may require additional working capital, in
                              amounts which could be substantial. There can be
                              no assurances that any working capital will be
                              available on acceptable terms or at all.

                              The Company is also seeking opportunities for a
                              business combination with an operating company (a
                              "Business Combination"). The Company intends to
                              attempt to negotiate a Business Combination for
                              stock of the Company. There are no agreements or
                              understandings with respect to any Business
                              Combination. Management believes that the
                              Company's status as a publicly-traded company and
                              its net operating loss carryforward ("NOL") will
                              be attractive to a privately-held operating
                              company. However, there can be no assurance that
                              the Company will be able to locate a potential
                              party to a Business Combination or negotiate a
                              Business Combination on terms satisfactory to the
                              Company or at all.

3.   PROPERTY AND             JUNE 30, 1996
     EQUIPMENT
                              Leasehold improvements                   $656,892

                              Equipment                                 231,608

                              Furniture and fixtures                    393,035
                                                                      ---------
                                                                      1,281,535
                              Less:  Accumulated depreciation
                                     and amortization                  (503,209)
                                                                      ---------
                                                                       $778,326
                                                                      =========

                                                                            F-10

<PAGE>

4.   EQUITY INVESTMENT        On December 14, 1995, the Company acquired 25% of
                              the common stock of CM Franchise Corp. ("CM"), a
                              franchisor 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
                              also obtained an option to purchase an additional
                              12.5% of CM's common stock. The Company has
                              accounted for this transaction using the equity
                              method. Following is a summary of the Company's
                              investment in CM for the year ended June 30, 1996:


                              Purchase of 25% interest in CM           $224,150

                              Less:  25% share in net loss of
                                     investee                           (44,406)
                                                                       --------
                              Balance in equity investment at
                               June 30, 1996                           $179,744
                                                                       ========

                              This investment has been pledged as collateral 
                              (see Note 12).

5.   COMMITMENTS,             LEGAL SETTLEMENT - NONCASH
     CONTINGENCIES AND
     OTHER                    The Company was a party defendant in a lawsuit
                              with an individual (the "Plaintiff") who was an
                              officer and director of the Company when it
                              operated a medical laboratory business which it
                              sold in 1991.  The Plaintiff 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 the inspection of corporate
                              records. The Plaintiff claimed he was entitled to
                              a termination payment of approximately $1,400,000
                              pursuant to an employment agreement with the
                              Company.  The Company vigorously defended itself
                              against the Plaintiff's allegations and vigorously
                              prosecuted its counterclaims. During the fourth 
                              quarter of fiscal 1995, the Company recorded a 
                              liability of $250,000 related to legal fees for 
                              this matter.

                                                                            F-11

<PAGE>


                              During 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. 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 by the release to
                              the holders of an additional 213,333 shares of
                              common stock being held by an escrow agent.

                              As a result of this settlement, the Company
                              recorded a noncash expense of $570,000 which
                              appears as "Legal Settlement - noncash" in the
                              accompanying consolidated statement of operations
                              for the year ended June 30, 1996. The $570,000
                              noncash expense is based on the market value of
                              the Company's common stock when the parties
                              reached an agreement to settle.

                              OTHER LEGAL PROCEEDINGS

                              At September 20, 1996, landlords at three mall
                              stores which were closed between June and
                              September 1996 had instituted legal proceedings
                              against Building Blocks for rent arrearages in the
                              aggregate amount of approximately $200,000 and
                              additional damages of approximately $470,000 for
                              breaches of the underlying leases. Building Blocks
                              is actively defending these damages claims and
                              believes that such claims are subject to
                              substantial reduction. Management is engaged in
                              settlement discussions with the landlords of these
                              three malls and believes, although there can be no
                              assurance, that it can reach settlements which
                              will be within Building Blocks' anticipated use 
                              of its expected cash resources after completion 
                              of the plan described in Note 2.  The Company 
                              has accrued substantially all rent in arrears 
                              through June 30, 1996.  No amount has been accrued
                              for damages pending the outcome of the settlement 
                              negotiations.  Building Blocks is also attempting 
                              to renegotiate the terms of a lease on a fourth 
                              mall store. Building Blocks has received a notice 
                              of default from the landlord of this store with 
                              respect to approximately $114,000 of rent it has 
                              withheld.  

                              LEASE COMMITMENTS

                              The Company leases office space and retail stores
                              under various noncancellable long-term operating
                              lease agreements for periods ranging from
                              approximately three to ten years. Most leases
                              require the payment of taxes, insurance, common
                              area charges and/or maintenance.


                                                                            F-12

<PAGE>

                              As of June 30, 1996, the Company is committed for
                              aggregate future rentals (exclusive of taxes,
                              insurance, common area charges and maintenance)
                              for the next five fiscal years and thereafter
                              under noncancellable operating leases for various
                              facilities as follows:


                              FISCAL
                              ------
                              1997                                    $1,067,347
                              1998                                       746,380
                              1999                                       693,729
                              2000                                       615,854
                              2001                                       527,984
                              Thereafter                               1,888,661
                                                                       ---------
                                                                      $5,539,955
                                                                       =========

                              The above table excludes the commitments 
                              related to the leases for the three mall stores 
                              which were closed during the period June through 
                              September 1996.  As noted above, the Company is 
                              engaged in settlement discussions with the 
                              landlords of these three stores.

                              Rent expense, excluding executory costs, for all
                              operating leases approximated $1,214,000 and
                              $1,020,000 for the fiscal years ended June 30,
                              1996 and July 2, 1995, respectively.

                              The Company's real estate advisory and consulting
                              division results of operations for fiscal 1996 and
                              1995 were not material.

6.   STOCK TRANSACTIONS       Effective June 29, 1995, the Company acquired
                              Healthcare Venture Management Corp. ("HVM"), an
                              affiliate of ILM Acquisition, L.P. ("IALP"), for
                              2,685,071 shares of common stock.  As a result of
                              the acquisition, the Company will consolidate 
                              payment to HVM of a 3.5% consulting fee on  
                              revenues through 2011. The cost of the acquisition
                              has been charged to other expenses in fiscal 1995
                              (see Note 10).


                                                                            F-13

<PAGE>

                              In connection with IALP's acquisition of a
                              controlling interest in the Company in June 1991,
                              the Company received from IALP $1,000,000 in cash
                              and a $1,000,000 five-year promissory note,
                              accruing interest at 10% per annum, which was
                              secured by the common stock and preferred stock of
                              the Company acquired by IALP. On June 29, 1995,
                              the Company purchased the 2,817,581 shares of
                              common stock held by IALP at a price of $.52 per
                              share. The purchase was paid for through the
                              cancellation by the Company of the $1,000,000
                              promissory note from IALP and interest accrued
                              thereon of $467,407. IALP retained ownership of
                              2,394,130 shares of the Registrant's Series A-1
                              preferred stock.

7.   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. 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 30, 1996, an aggregate of 610,000 shares
                              remain available for future grant of options under
                              the Plans.


                                                                            F-14

<PAGE>

                              Nonqualified stock option activity has been as
                              follows:

<TABLE>
<CAPTION>

                                                                Number of        Exercise price
                                                                 shares             per share
                                                                ---------        --------------
                              <S>                               <C>
                              Outstanding at July 3, 1994        510,000        $1.50 to $2.3125

                              Granted                            300,000         $1.00 to $1.50

                              Expired/cancelled                 (250,000)        $1.50 to $2.00

                              Exercised                                -               -
                                                                --------         ---------------
                              Outstanding at July 2, 1995        560,000        $1.00 to $2.3125

                              Granted                            130,000         $.75 to $1.00

                              Expired/cancelled                 (100,000)       $1.00 to $1.50

                              Exercised                                -               -
                                                                --------         ---------------
                              Outstanding at June 30, 1996       590,000         $.75 to $2.3125
                                                                ========         ===============
</TABLE>


                              Pursuant to the Plan, 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 to
                              date have approximated the then current fair
                              market value. The term of an option may not exceed
                              10 years from the date of the grant. Unless 
                              otherwise determined by the Committee, options
                              granted vest and become exercisable at a rate of 
                              at least 33-1/3% per year from the date of the 
                              grant. Of the outstanding options to purchase
                              590,000 shares, 466,667 were fully vested at
                              June 30, 1996.


                                                                            F-15

<PAGE>

8.   INCOME TAXES             The components of the income tax provision are
                              as follows:

                              YEAR ENDED            JUNE 30, 1996  JULY 2, 1995
                                                    -------------  ------------
                              Current income taxes:
                                Federal                        $-            $-
                                State                      26,020        29,000
                                                           ------        ------
                                                           26,020        29,000
                                                           ------        ------
                              Deferred income taxes:
                                Federal                (3,542,000)   (2,362,000)
                                State                  (1,041,000)     (705,000)
                                                        ---------     ---------
                                                       (4,583,000)   (3,067,000)
                                                        ---------     ---------
                              Valuation allowance       4,583,000     3,067,000
                                                        ---------     ---------
                                Total                     $26,020       $29,000
                                                        =========     =========


                                                                            F-16

<PAGE>

                              Temporary differences and carryforwards which give
                              rise to deferred tax assets are as follows:

                                                       52 weeks      53 weeks
                                                   ended June 30,  ended July 2,
                                                         1996           1995
                                                       ----------   ------------

                              Deferred tax assets:
                                Depreciation              $43,000      $44,000
                                Straight-line rent        119,000       78,000
                                Federal and state
                                income tax operating
                                loss carryforwards      4,583,000    2,945,000
                                                        ---------    ---------
                                                        4,745,000    3,067,000
                              Valuation allowances      4,745,000    3,067,000
                                                        ---------    ---------
                                                       $        -   $        -
                                                        =========    =========

                              At June 30, 1996, there were net operating loss 
                              carryforwards of approximately $10,049,000     
                              available for Federal and state income tax      
                              purposes expiring over the next five to fifteen 
                              years, depending on the jurisdiction, which may 
                              provide future benefit for income taxes.

9.   SUPPLEMENTAL             The Company paid approximately $35,000 and 
     DISCLOSURES OF CASH      $23,000 for income taxes during the 52 weeks 
     FLOW INFORMATION         ended June 30, 1996 and the 53 weeks ended July 2,
                              1995, respectively, and $28,000 for interest
                              during the 53 weeks ended July 2, 1995.

10.  RESTRUCTURING AND        As discussed in Note 1, the Company's policy is to
     OTHER EXPENSES           accrue store-closing expenses when the decision is
                              made to close a location. Accordingly, for the
                              year ended June 30, 1996, the Company recorded
                              restructuring and other expense charges of
                              $660,767 for the disposition of fixed assets and
                              other costs related to the closing or expected
                              closings of certain mall stores.


                                                                            F-17

<PAGE>

                              Effective June 29, 1995, the Company acquired   
                              Healthcare Venture Management Corp. ("HVM") for 
                              2,685,071 shares of common stock and, as a 
                              result of the acquisition, the consulting       
                              agreement with HVM, whereby HVM is entitled to  
                              receive 3.5% of the Company's revenues through 
                              2011, is consolidated in the Company's results.  
                              HVM's only asset was its consulting agreement   
                              with the Company. Other expenses during the year
                              ended July 2, 1995 include a charge of          
                              approximately $1.5 million in connection with   
                              the issuance of these shares and the cancellation
                              of the consulting agreement. In addition, other
                              expenses include approximately $1.2 million of  
                              costs pertaining to the writedown of goodwill,  
                              severance pay, litigation and the closing of    
                              certain stores.

11.  RELATED PARTY            Effective January 1, 1994, the Company entered
     TRANSACTIONS             into a consulting agreement with Seymour W. Zises,
                              a director of the Company, under which Mr. Zises
                              rendered consulting services to the Company in
                              connection with its pursuit and evaluation of
                              opportunities to expand its specialty retail
                              operations. Mr. Zises received a fee of $5,000 per
                              month and reimbursement of expenses. The agreement
                              was terminated as of January 31, 1995.

                              On November 17, 1995, the Company invested in a
                              series of promissory notes (the "Notes") for an
                              aggregate of $1,000,000. The maker of the Notes
                              was a corporation engaged in the finance industry.
                              The Notes were automatically renewed for 90-day
                              maturities unless the Company determined not to
                              renew. $400,000 of the original Notes were repaid
                              during the quarter ended March 31, 1996. The
                              remaining Notes, each for $300,000, matured and
                              were paid in April 1996 and June 1996. The Notes
                              bore interest at a rate of 15% compounded annually
                              and payable monthly. The Notes were guaranteed by
                              Selig A. Zises, who is a significant investor in
                              the maker of the Notes and may be deemed to be 
                              the beneficial owner of the Company's 
                              outstanding Series A-1 Preferred Stock.


                                                                            F-18

<PAGE>

12.  SUBSEQUENT EVENT         In July 1996, pursuant to an agreement negotiated
                              between Selig A. Zises and Kevin R. Greene,
                              Chairman of the Board of the Company, the Company
                              received $224,150 from Mr. Zises to cover a
                              working capital shortfall. Under the agreement
                              with Mr. Zises, the Company has the right to
                              either repay the advance without interest or to
                              transfer to him 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 for a total of $224,150. Payment 
                              of the advance or transfer of the aforesaid 
                              interests is due on September 30, 1996.
                              The Company intends to transfer the rights and 
                              interests in satisfaction of the debt on that
                              date.
                             
                                                                            F-19

<PAGE>

                                INDEX TO EXHIBITS


Exhibit
  No.       Description
-------     -----------

 3.1        Articles of Incorporation (incorporated by reference to the
            Company's Current Report in Form 8-K dated July 2, 1991)

 3.2        Amended and Restated By-Laws (incorporated by reference to the
            Exhibit 3.2 to Form 10-KSB for the year ended July 2, 1995)

10.1        1991 Non-Qualified Stock Option Plan (incorporated by reference to
            the Exhibit 10.23 to Form 10-KSB for the year ended June 30, 1992)

10.2        1994 Stock Option Plan (incorporated by reference to the Form 10-KSB
            for the year ended July 2, 1995)

10.3        Agreement of Settlement and Compromise dated August 22, 1996 by and
            between Peter Sayet and Registrant

10.4        Registration Rights Agreement dated as of August 22, 1996 by and
            among Peter Sayet, a selling stockholder and Registrant

10.5        Escrow Agreement dated August 22, 1996 by and among Peter Sayet, a
            selling stockholder, Registrant and the Escrow Agent

10.6        Escrow Agreement dated August 22, 1996 by and among Peter Sayet, a
            selling stockholder, Registrant and the Escrow Agent

10.7        Employment Agreement dated as of April 1, 1996 between Building
            Blocks and Steven E. Glass

10.8        Option Agreement dated April 12, 1996 between Registrant and Steven
            E. Glass

10.9        Option Agreement dated October 2, 1995 between Registrant and Steven
            E. Glass

10.10       Agreement dated as of July 29, 1996 between Registrant and Selig A.
            Zises

10.11       Agreement dated June 29, 1995 between Registrant and ILMA
            (incorporated by reference to Exhibit 2.1 to Form 8-K dated June 29,
            1995)

10.12       Agreement and Plan of Merger dated June 30, 1995 between Registrant
            and HVMC (incorporated by reference to Exhibit 2.2 to Form 8-K dated
            June 29, 1995)

10.13       Option Agreement dated March 7, 1994 between Registrant and Jonathon
            Heller (incorporated by reference to Exhibit 10.11 to Form 10-KSB
            for the year ended July 2, 1995)


<PAGE>

10.14       Option Agreement dated March 1, 1995 between Registrant and Jonathon
            Heller (incorporated by reference to Exhibit 10.10 to Form 10-KSB
            for the year ended July 2, 1995)

21.         Subsidiaries of Registrant

23.         Consent of BDO Seidman, LLP