<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 29, 1997

            [ ] 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.)

                         477 Madison Avenue - 14th Floor
                            New York, New York 10022
               (Address of principal executive offices) (Zip Code)

Issuer's telephone number: (212) 872-9684

                        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 there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be

contained, to the best of 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].

         The Index to Exhibits appears at Page 35.


                                                                    Page 1 of 45


<PAGE>


                  For the year ended June 29, 1997, the Issuer had revenues of
$2,457,846.

                  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 November 21, 1997, was $181,685.

                  As of November 21, 1997 there were 9,084,238 shares of common
stock outstanding, excluding 213,333 contingently issuable shares held by an
Escrow Agent.

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

                                                                    Page 2 of 45


<PAGE>



                                     PART I

Item 1.           Description of Business

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

                  Primarily as the result of continuing losses and negative cash
flow experienced by Building Blocks, the Company began experiencing a working
capital shortage in the spring of 1996. Despite a number of actions taken to
reduce operating expenses and to generate revenue from franchising, Building

Blocks and BBFC were not able to achieve profitability or to reverse the
negative cash flow by the end of calendar 1996.

                  Effective January 28, 1997 the outstanding capital stock of
BBFC was sold. The net proceeds from the sale ($43,224) were paid over to
Building Blocks pursuant to an agreement requiring the parent of BBFC to obtain
a general release from Building Blocks to BBFC. On January 31, 1997, Building
Blocks filed a petition for relief under Chapter 11 of Title 11 of the U.S.
Bankruptcy Code ("Chapter 11") in the U.S. Bankruptcy Court for the Southern
District of New York (Case No. 97-B-40684 (BRL)). The petition sought protection
from creditors while Building Blocks attempted to dispose of its retail stores
either through sales of the stores and assignment of their leases or by the
liquidation of inventory and fixtures.

                  Effective February 28, 1997, and pursuant to a Bankruptcy
Court order entered on that date, Building Blocks entered into an Agency
Agreement with a liquidator for the purpose of liquidating its retail inventory.
Building Blocks' ongoing operations include performance of its obligations under
the Agency Agreement; disposition of its furniture, fixtures and equipment, and
collection of receivables all as specified in the February 28, 1997 order; the
negotiation and prosecution of the "Plan" described below; the winding-down of
its retail toy store operations; and the general and administrative matters
related to the bankruptcy. On August 8, 1997, Building Blocks submitted a
Chapter 11 Plan of Reorganization (the "Plan") to the Bankruptcy Court which, if
approved, would have resulted in a discharge of Building Blocks from all claims
of its creditors, including the Company; a discharge of the Company from all
claims of Building

                                                                    Page 3 of 45


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Blocks and Building Blocks' creditors in exchange for the Company satisfying
Building Blocks' obligations under a store lease (which the landlord has agreed
to settle for $30,000); and the merger of Building Blocks with and into the
Company. The Official Committee of Unsecured Creditors (the "Committee") in the
Chapter 11 proceeding filed objections to certain aspects of Building Blocks'
Reorganization Plan on September 18, 1997. The Company and Building Blocks are
communicating with the Committee in an effort to resolve these objections and to
produce a mutually agreeable Chapter 11 Plan. It is expected that a hearing on
the disclosure statement regarding the Plan will be convened by the Bankruptcy
Court before the end of 1997 and, the Plan, as it may be revised, could be
confirmed 25 days later.

                  The Company has only limited cash and had current liabilities
of approximately $515,000 at June 29, 1997. As part of the negotiated revisions
to the Plan the Company will seek credit for funding the settlement of the
above-referenced store lease but may also agree to issue shares of its Common
Stock to the creditors of Building Blocks and/or to settle additional creditor
claims and/or to make payments to Building Blocks. The Company may also be
required, at some future date, to issue up to 213,333 shares of its Common Stock

to certain parties pursuant to the settlement agreement described in "Item 3.
Legal Proceedings." The Company has recorded a non-current liability on its
books in the amount of $80,000 in connection with this obligation (see Note 7B
to the Consolidated Financial Statements).

                  It is not expected that the Company will receive any cash from
Building Blocks upon completion of Building Blocks' bankruptcy proceedings. The
Company has been receiving cash advances in the form of demand loans from three
beneficial owners of its capital stock in order to meet its operating expenses
and has been obtaining forbearances from its principal creditors. At June 29,
1997 the advances from stockholders (which are included in the current
liabilities described above) aggregated $154,251 plus accrued interest of
$3,217. There are no assurances as to the time or extent that the stockholder
advances and/or forbearance will continue.

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

                  The Company is attempting to attract an operating business
with which to effectuate a business combination. There is no assurance that any
business combination can ever be effectuated, and any such combination may
depend, among other things, upon the outcome of BBI's Chapter 11 Petition and
upon the Company's ability to reach settlements of its outstanding obligations.

                                                                    Page 4 of 45


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Employees

                  As of November 21, 1997, the Company had one employee.

Item 2.           Description of Properties

                  The Company occupies approximately 100 square feet of
executive office space in a suite of offices at 477 Madison Avenue, New York,
New York 10022 which is leased by an entity controlled by certain of the
Company's principal stockholders. This occupancy is on an at-will basis.

Item 3.           Legal Proceedings

                  Peter Sayet v. Institute For Laboratory Medicine. Inc.,
ILM Acquisition L.P., M.P. Partners L.P., ILM Acquisition Corporation, LSJM
Partners L.P., ILM N Corporation, Forest Hill Capital Corporation, Healthcare
Venture Management Corporation, Selig Zises, Glenn Meyers and Laurence Lurie.

                  On August 22, 1996, the Company, the plaintiff (Sayet), and
the other parties entered into an Agreement of Settlement and Compromise (the

"Settlement Agreement") of the above-named lawsuit in which Mr. Sayet claimed
damages of approximately $1,400,000 arising from events occurring at the time
his employment with the Company terminated in 1992, when it operated under the
name Institute for Laboratory Medicine, Inc. Under the Settlement Agreement the
Company issued an aggregate of 650,000 shares of its Common Stock to Sayet and a
designee of Sayet's and reserved for issuance 213,333 shares of its Common Stock
which are being held by an Escrow Agent. Pursuant to the requirements of the
Settlement Agreement, the Company also entered into a Registration Rights
Agreement dated August 22, 1996 with Sayet and the designee of Sayet (the
"Registration Rights Agreement"). Pursuant to the Registration Rights Agreement,
the Company filed with the Securities and Exchange Commission a registration
statement to permit the transfer or resale of the shares issued and issuable
pursuant to the Settlement Agreement and agreed to maintain the effectiveness of
the registration statement until the earlier of the disposition of such shares
or the expiration of the applicable Rule 144 holding period.

                  Pursuant to the terms of the Settlement Agreement, in the
event that the holders of the 650,000 Shares (the "Selling Stockholders") sell
any Shares for more than $1.00 per Share, the Company shall receive 67% of such
excess (the "Company Proceeds"). The Settlement Agreement also provides for a
"Price Protection Pool" which shall be equal to the sum of: (i) $160,000 and
(ii) 25% of the Company Proceeds. If, after the sale of all of the 650,000
Shares by the Selling Stockholders, in bona fide open market transactions, the
Selling Stockholders realize gross proceeds of less than $650,000 (the
"Shortfall") the Company will be required to either pay the Shortfall to the
Selling

                                                                    Page 5 of 45


<PAGE>



Stockholders, up to the amount of the Price Protection Pool, or issue to the
Selling Stockholders that number of the contingently issuable shares which have
a market value equal to the Shortfall, up to a maximum of 213,333 shares. The
aforesaid 213,333 contingently issuable shares have been reserved for issuance
and registered in the name of an Escrow Agent. The Company currently anticipates
that its obligation under the guarantee would be satisfied by the delivery of
the required number of escrowed Shares which delivery would be in complete
satisfaction of the Company's obligation under the Settlement Agreement. As of
the date hereof, 325,000 of the Shares have been sold. No shares have been sold
for more than $1.00 per share and the Price Protection Pool is $160,000.

Other Legal Proceedings

                  Building Blocks is a defendant in a number of legal
proceedings instituted by landlords of various former Building Blocks store
locations. These cases have been stayed by the bankruptcy proceeding and it is
expected that the underlying claims will be extinguished upon the completion of
the bankruptcy proceeding.

                  Of the aforementioned cases, the Company is a limited

guarantor in Fashion Mall Partners, L.L.P. v. Building Blocks, Inc., City Court
- Westchester, New York, commenced September 26, 1996. This suit seeks $180,000
for rent arrearages under a lease to Building Blocks which was guaranteed by the
Company, which guaranteed up to $180,000 of rent payments under this lease. The
landlord subsequently filed a Proof of Claim with the Bankruptcy Court in the
amount of approximately $480,000. The landlord has agreed to settle this claim
and the suit for a payment of $30,000. (See Note 3 to the Consolidated Financial
Statements.)

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 was quoted on the NASDAQ SmallCap System from
July 1, 1994 through November 26, 1996, and on the OTC Bulletin Board since
November 27, 1996 under the symbol "SRGC". The following table sets forth the
high and low sales prices on the NASDAQ SmallCap System and on the OTC Bulletin
Board as reported by NASDAQ and the OTC Bulletin Board, respectively, for the
periods indicated:

                                                                    Page 6 of 45


<PAGE>



Period                                                High             Low

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            19/32
July 1, 1996 - September 29, 1996                     13/16            1/4
September 30, 1996 - December 29, 1996                9/32             .02
December 30, 1996 - March 30, 1997                    .07              .015
March 31, 1997 - June 29, 1997                        .17              .02

                  On November 21, 1997, there were approximately 230 holders of
record of the Company's Common Stock and one holder of record of the Company's
Series A-1 Preferred Stock.

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

Item 6.           Management's Discussion and Analysis of Financial
                  Condition and Results of Operations


                  Set forth below is a discussion of (1) the Company's lack of
liquidity and capital resources; (2) the significant factors affecting the
operating results of discontinued operations (i.e., those of Building Blocks and
BBFC) for the 52 weeks ended June 29, 1997 ("fiscal 1997") and the 52 weeks
ended June 30, 1996 ("Prior Period"); and (3) the items set forth under other
income (expense) in the Consolidated Statements of Operations included in the
Company's financial statements. These discussions should be read in conjunction
with the financial statements and notes thereto.

                  The reported results of operations are not indicative of
future results of operations or financial position of the Company. The Company
has no ongoing revenue-generating operations. The financial statements have been
prepared in accordance with generally accepted accounting principles applicable
to a going concern, which principles assume that assets will be realized and
liabilities will be discharged in the normal course of business. The financial
statements do not include adjustments relating to the recoverability of recorded
asset amounts and classification of recorded assets and liabilities which may
result from the Company's lack of capital resources or ongoing operations as
described below.

Liquidity and Capital Resources

                  Certain of the matters discussed under this caption that are
forward looking statements involve risks and uncertainties, as described herein
and others which may arise

                                                                    Page 7 of 45


<PAGE>



from changes in general economic conditions, unanticipated changes in the
Company's circumstances, and other factors.

                  The principal operating subsidiary of the Company during
Fiscal 1996 and Fiscal 1997 (through January 31, 1997) was Building Blocks,
which the Company acquired on April 13, 1993 and which thereafter operated a
chain of specialty retail toy stores. BBFC was organized subsequent to June 30,
1996, as a second-tier subsidiary, and was engaged in marketing and selling
franchises for Building Blocks stores.

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

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

Blocks filed a petition for relief under Chapter 11. The petition sought
protection from creditors while Building Blocks attempted to dispose of its
retail stores either through sales of the stores and assignment of their leases
or by the liquidation of inventory and fixtures.

                  Effective February 28, 1997, and pursuant to a Bankruptcy
Court order entered on that date, Building Blocks entered into an Agency
Agreement with a liquidator for the purpose of liquidating its retail inventory.
Building Blocks' ongoing operations include performance of its obligations under
the Agency Agreement; disposition of its furniture, fixtures and equipment, and
collection of receivables all as specified in the February 28, 1997 order; the
negotiation and prosecution of the Plan as described below; the winding-down of
its retail toy store operations; and the general and administrative matters
related to the bankruptcy. On August 8, 1997, Building Blocks submitted a
Chapter 11 Plan of Reorganization to the Bankruptcy Court which, if approved,
would have resulted in a discharge of Building Blocks from all claims of its
creditors, including the Company; a discharge of the Company from all claims of
Building Blocks and Building Blocks' creditors in exchange for the Company
satisfying Building Blocks' obligations under a store lease (which the landlord
has agreed to settle for $30,000); and the merger of Building Blocks with and
into the Company. The Official Committee of Unsecured Creditors (the
"Committee") in the Chapter 11 proceeding filed objections to certain aspects of
Building Blocks' Reorganization Plan on September 18, 1997. The Company and
Building Blocks are communicating with the Committee in an

                                                                    Page 8 of 45


<PAGE>



effort to resolve these objections and to produce a mutually agreeable Chapter
11 Plan. It is expected that a hearing on the disclosure statement regarding the
Plan will be convened by the Bankruptcy Court before the end of 1997 and,
subject to the outcome of this hearing, the Plan may be confirmed 25 days later.

                  The Company has only limited cash and had current liabilities
of approximately $515,000 at June 29, 1997. As part of the negotiated revisions
to the Plan the Company will seek credit for funding the settlement of the
above-referenced store lease but may also agree to issue shares of its Common
Stock to the creditors of Building Blocks and/or to settle additional creditor
claims and/or to make payments to Building Blocks. The Company may also be
required, at some future date, to issue up to 213,333 shares of its Common Stock
pursuant to the settlement agreement described in "Item 3. Legal Proceedings."
In connection with this obligation, the Company has recorded a non-current
liability on its books in the amount of $80,000, measured by the difference
between the settlement amount of $650,000 and the market value of the shares
actually issued on August 22, 1996 as part of the settlement. See Note 7B to the
Consolidated Financial Statements.

                  It is not expected that the Company will receive any cash from
Building Blocks upon completion of Building Blocks' bankruptcy proceedings. The
Company has been receiving cash advances in the form of demand loans from three

beneficial owners of its capital stock in order to meet its operating expenses
and has been obtaining forbearances from its principal creditors. At June 29,
1997 the advances from stockholders (which are included in the current
liabilities described above) aggregated $154,251 plus accrued interest of
$3,217. There are no assurances as to the time or extent that the stockholder
advances and/or forbearance will continue.

                  As a result of these matters, the report of the Company's
auditor on the Company's June 29, 1997 financial statements contains a "going
concern" explanatory paragraph.

                  The Company is attempting to attract an operating business
with which to effectuate a business combination. There is no assurance that any
business combination can ever be effectuated, and any such combination may
depend, among other things, upon the outcome of BBI's Chapter 11 Petition and
upon the Company's ability to reach settlements of its outstanding obligations.

                                                                    Page 9 of 45


<PAGE>



Results of Discontinued Operations -- 52-week period ended
June 29, 1997 compared with the corresponding period ended
June 30, 1996


Operations

                  Net sales, substantially all of which were generated by
Building Blocks, were $2,457,846 for the 52-week period ended June 29, 1997, a
decrease of approximately 65% when compared with $7,126,444 for the
corresponding period ended June 30, 1996. This decrease in net sales was due
principally to the decreased number of stores operated by Building Blocks
through January 31, 1997, after which the results of Building Blocks' operations
are no longer consolidated with the Company, and the Company's lack of working
capital to purchase holiday season inventory.

                  Gross Profit as a percentage of net sales decreased from
approximately 42% for the 52-week period ended June 30, 1996 to approximately
35% for the 52-week period ended June 29, 1997. This is primarily the result of
price discounting associated with the closing of stores during the fiscal 1997
period.

                  Selling, general and administrative expenses consist primarily
of payroll, occupancy and advertising expenses associated with the Building
Blocks stores. Such expenses were approximately 105% of net sales and
approximately 74% of net sales during the 52-week periods ended June 29, 1997
and June 30, 1996, respectively. This increase as a percentage of sales is
primarily due to the decline in revenue and the existence of fixed overhead
expenses.


Store Closing Costs and Related Expenses

                  For the years ended June 29, 1997 and June 30, 1996, the
Company recorded restructuring and other expense charges of $520,420 and
$660,767, respectively, for the disposition of fixed assets and other costs
related to the closing or expected closings of certain mall stores.

Other Income (Expense)

                  In fiscal 1997 the Company recorded a $44,406 gain on the sale
of its equity investment in CM Franchise Corp. Such gain results from the
Company transferring its rights and interests in the investee's common stock
with a recorded value of $179,744 in satisfaction of a $224,150 debt. In fiscal
1996 the Company recorded its proportionate share of the investee's loss against
the $224,150 original acquisition cost of the investment. See "Item 12: Certain
Relationships and Related Transactions" and Note 5 to the Consolidated Financial
Statements.

                                                                   Page 10 of 45


<PAGE>




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

                  The Company had interest income of $1,624 in 1997 and $110,437
in 1996, earned principally on interest-bearing cash accounts. In 1997, $3,333
of interest expense was incurred, principally on stockholder loans; none was
incurred in 1996.

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

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

                  The legal settlement relates to the settlement in August 1996
of a litigation in which the Company, without admitting liability, issued an
aggregate of 650,000 shares of the Company's common stock with a market value of
$570,000 on the date of issuance to the plaintiff and his designee. The Company
also gave a limited guarantee of the realization by them of an average of $1 per
share and reserved for issuance and delivered to an escrow agent 213,333 of its
common shares for such purpose. In fiscal 1997, the Company recorded an
additional obligation and expense of $80,000 arising from such guarantee.

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


Loss Per Share

                  The loss per share for the year ended June 30, 1996 has been
restated at $.01 higher than previously reported as the result of a correction
to the weighted average number of shares outstanding applicable to such period.

Item 7.           Financial Statements and Supplementary Data

Independent Auditor's Report ..............................................F-1
Report of Independent Certified Public Accountants.........................F-2
Consolidated Balance Sheet at June 29, 1997................................F-3

Consolidated Statements of Operations for the Years Ended

      June 29, 1997 and June 30, 1996......................................F-4
Consolidated Statements of Stockholders' Equity (Deficit) for

      the Years Ended June 29, 1997 and June 30, 1996......................F-5
Consolidated Statements of Cash Flows for the Years Ended

      June 29, 1997 and June 30, 1996......................................F-6
Notes to Consolidated Financial Statements.........................F-7 to F-15

                                                                   Page 11 of 45

<PAGE>
                                                                   Page 12 of 45

                         INDEPENDENT AUDITOR'S REPORT

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

I have audited the accompanying consolidated balance sheet of Specialty Retail
Group, Inc. and Subsidiaries as of June 29, 1997, and the related consolidated
statements of operations, stockholders' equity (deficit) and cash flows for the
52 weeks then ended. These financial statements are the responsibility of the
Company's management. My responsibility is to express an opinion on these
financial statements based on my audit.

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

In my opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of

Specialty Retail Group. Inc. and Subsidiaries, as of June 29, 1997 and the
consolidated results of their operations and cash flows for the 52 weeks then
ended in conformity with generally accepted accounting principles.

As discussed in the following paragraph and in Notes 1, 2 and 3 to the
accompanying consolidated financial statements, in accordance with generally
accepted accounting principles the consolidated reporting entity has been
changed, effective as of January 31, 1997, to exclude the accounts of the
Company's wholly-owned and last remaining operating subsidiary, Building Blocks,
Inc., which filed a petition in bankruptcy on such date.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As further discussed in Notes
1, 2 and 3 to the consolidated financial statements, pursuant to the Chapter 11
bankruptcy filing, the subsidiary has permanently ceased operations and
liquidated its operating assets. The Company has no remaining operating
businesses. None of the subsidiary's assets are expected to remain at the
conclusion of the bankruptcy proceedings. As set forth on the accompanying
consolidated balance sheet at June 29, 1997, the Company has total assets of
$53,318 and deficits in working and equity capital at such date of $464,937 and
$541,684, respectively. Such factors coupled with the lack of any revenue
producing operations raise substantial doubt about the Company's ability to
continue as a going concern. As also discussed in Note 2, management of the
Company is seeking a business combination with an operating company. There is no
assurance that management will be successful in such endeavor. The consolidated
financial statements do not include any adjustments relating to the
recoverability and classification of recorded assets, or the amounts and
classifications of liabilities that might be necessary in the event the Company
cannot continue in existence.

                                            /s/ Jeffrey M. Brinn
                                            ---------------------------
                                            Certified Public Accountant

South Huntington, New York
November 4, 1997

                                     F-1


<PAGE>
                                                                   Page 13 of 45

Report of Independent Certified Public Accountants

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

We have audited the consolidated statements of operations, stockholders' equity,
and cash flows of Specialty Retail Group, Inc. and Subsidiary for the year ended
June 30, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of the operations and cash flows
of Specialty Retail Group, Inc. and Subsidiary for the year ended June 30, 1996,
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. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.

/s/ BDO Seidman, LLP
--------------------

New York, NY

September 20, 1996

                                     F-2

<PAGE>
                                                                   Page 14 of 45

                SPECIALTY RETAIL GROUP, INC. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEET
                                JUNE 29, 1997

                                    ASSETS

<TABLE>
<S>                                                                                          <C>
Current assets:

    Cash                                                                                      $     32,156
    Prepaid insurance                                                                               17,909
                                                                                              ------------
    Total current assets                                                                            50,065

Property and equipment, net (Notes 1F and 4)                                                         3,253
                                                                                              ------------

Total assets                                                                                  $     53,318
                                                                                              ============

                                   LIABILITIES AND STOCKHOLDERS' DEFICIT

Current liabilities:

    Accounts payable and accrued expenses                                                     $    312,164
    Lease guarantee settlement payable (Note 3)                                                     30,000
    Corporation taxes payable                                                                        5,370
    Demand loans payable to stockholders (Note 6A)                                                 157,468
    Due to unconsolidated subsidiary (Note 2)                                                       10,000
                                                                                              ------------

    Total current liabilities                                                                      515,002

Other liabilities:

    Legal settlement (Note 7B)                                                                      80,000
                                                                                              ------------

Total liabilities                                                                                  595,002
                                                                                              ------------

Commitments and contingencies (Notes 2, 3, 7, 8 and 9)

Stockholders' deficit:

    Series A-1 Preferred Stock; 10,000,000 shares authorized; $.001 par value;
        issued and outstanding, 2,394,130 shares (Note 7A)                                           2,394
    Common stock; 100,000,000 shares authorized; $.001 par value; 9,324,738
        shares issued (Note 7B)                                                                      9,325
    Additional paid-in capital                                                                  11,573,570
    Accumulated deficit                                                                        (11,951,309)

    Treasury stock, 240,500 shares at cost (Note 1L)                                              (175,664)
                                                                                              ------------

Total stockholders' deficit                                                                       (541,684)

Total liabilities and stockholders' deficit                                                   $     53,318
                                                                                              ============
</TABLE>

         See accompanying notes to consolidated financial statements.

                                     F-3

<PAGE>
                                                                   Page 15 of 45

                SPECIALTY RETAIL GROUP, INC. AND SUBSIDIARIES
                    CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                             52 Weeks Ended
                                                              ------------------------------------------ 
                                                                 June 29, 1997            June 30, 1996
                                                              ------------------        ----------------
<S>                                                           <C>                       <C>
Results of Discontinued Operations:

    Net sales                                                     $ 2,457,846              $ 7,126,444
    Cost of sales                                                   1,602,663                4,136,490
                                                                  -----------              -----------
    Gross profit                                                      855,183                2,989,954
                                                                  -----------              -----------

    Operating costs:

        Selling, general and administrative expenses                2,587,603                5,302,821
        Store closing costs and related expenses (Note 11)            520,420                  660,767
                                                                  -----------              -----------
                                                                    3,108,023                5,963,588
                                                                  -----------              -----------

    Loss from operations                                           (2,252,840)              (2,973,634)

    Other income (expenses):

        Gain on sale of (loss attributable to) equity
           investment (Notes 5 and 6B)                                 44,406                  (44,406)
        Gain on sale of franchising subsidiary (Note 2)                43,224                      -
        Interest income (expense), net of income of
           $1,624 in 1997                                              (1,709)                 110,437
        Other income                                                   54,744                  124,955
        Settlement of guarantor obligation related to
           bankrupt subsidiary (Note 3)                               (30,000)                     -
        Legal settlement, non-cash (Note 7B)                          (80,000)                (570,000)
        Gain on deconsolidation of bankrupt subsidiary
           (Note 3)                                                   786,269                      -
                                                                  -----------              -----------
    Loss before income taxes                                       (1,435,906)              (3,352,648)

    Income tax expense (Notes 1K and 9)                                   -                     26,020
                                                                  -----------              -----------
    Net loss                                                      $(1,435,906)             $(3,378,668)
                                                                  ===========              ===========
    Net loss per share (Note 1L)                                  $      (.16)             $      (.40)
                                                                  -----------              -----------


    Weighted average number of common shares
        outstanding (Note 1L)                                       8,991,635                8,434,238
                                                                  ===========              ===========

</TABLE>
               See accompanying notes to financial statements.

                                     F-4

<PAGE>
                                                                   Page 16 of 45

                         SPECIALTY RETAIL GROUP, INC.
                               AND SUBSIDIARIES
          CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                52 WEEKS ENDED JUNE 29, 1997 AND JUNE 30, 1996

<TABLE>
<CAPTION>

                     Preferred Stock     Common Stock
                    -----------------  -----------------
                                                           Additional                                      Total
                    Number of          Number of             Paid-in      Accumulated    Treasury      Stockholders'
                     Shares    Amount   Shares    Amount     Capital        Deficit       Stock      Equity (Deficit)
                    ---------  ------  ---------  ------   ----------     -----------    --------    ----------------
<S>                 <C>        <C>     <C>        <C>      <C>          <C>             <C>          <C>
Balance,
  July 2, 1995      2,394,130  $2,394  8,674,738   $8,675  $11,004,220  $ (7,136,735)   $(175,664)      $ 3,702,890

Net loss                   -       -          -        -            -     (3,378,668)         -          (3,378,668)
                    ---------  ------  ---------   ------  -----------  ------------    ---------       -----------

Balance, June 30,
  1996,             2,394,130   2,394  8,674,738    8,675   11,004,220   (10,515,403)    (175,664)          324,222

Shares issued for
  legal settlement    
  (Note 7B)                -       -     650,000      650      569,350            -            -            570,000

Net loss                                                                  (1,435,906)                    (1,435,906)
                    ---------  ------  ---------   ------  -----------  ------------    ---------       -----------

Balance, June 29,
  1997              2,394,130  $2,394  9,324,738   $9,325  $11,573,570  $(11,951,309)   $(175,664)      $  (541,684)
                    =========  ======  =========   ======  ===========  ============    =========       ===========

</TABLE>

         See accompanying notes to consolidated financial statements.

                                     F-5

<PAGE>
                                                                   Page 17 of 45

                SPECIALTY RETAIL GROUP, INC. AND SUBSIDIARIES
                    CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                             52 Weeks Ended
                                                              ------------------------------------------
                                                                 June 29, 1997            June 30, 1996
                                                              ------------------        ----------------
<S>                                                           <C>                       <C>
Cash flows from operating activities:

    Net loss                                                     $(1,435,906)              $(3,378,668)
                                                                 -----------               -----------
    Adjustments to reconcile net loss to net cash 
      used in operating activities:
           Depreciation and amortization                              47,674                   307,248
           Writeoff of goodwill                                      136,882                       -
           Loss on disposal of equipment and writeoff
               of leasehold improvements                             330,776                   699,674
           Loss (gain) attributable to equity investment             (44,406)                   44,406
           Gain on sale of subsidiary                                (43,224)                      -
           Gain on deconsolidation of bankrupt subsidiary           (786,269)                      -
           Legal settlement                                           80,000                   570,000

    Decrease (increase) in:
        Inventory                                                    846,777                   120,099
        Other current assets                                          86,863                   (11,213)
        Other assets                                                  89,027                   (45,116)

    Increase (decrease) in:
        Accounts payable and accrued liabilities                     (46,514)                 (496,330)
        Lease guarantee settlement payable                            30,000                        -
                                                                 -----------               -----------
    Total adjustments                                                727,586                 1,188,768
                                                                 -----------               -----------
    Net cash used in operating activities                           (708,320)               (2,189,900)
                                                                 -----------               -----------
    Cash flows from investing activities:

        Cash of bankrupt subsidiary at date of
           bankruptcy                                                (64,541)                      -
        Expenditures for property and equipment, net                  (3,614)                 (112,132)
        Proceeds from sale of subsidiary, net                         43,224                       -
        Equity investment (Note 5)                                       -                    (224,150)
                                                                 -----------               -----------
        Net cash used in investing activities                        (24,931)                 (336,282)
                                                                 -----------               -----------

    Cash flows from financing activities:

        Loans from stockholders                                      378,401                       -
                                                                 -----------               -----------
        Net cash provided by financing activities                    378,401                       -
                                                                 -----------               -----------
    Net decrease in cash and cash equivalents                       (354,850)               (2,526,182)

    Cash and cash equivalents, beginning of year                     387,006                 2,913,188
                                                                 -----------               -----------
    Cash and cash equivalents, end of year                       $    32,156               $   387,006
                                                                 ===========               ===========
Supplemental disclosure of cash flow information
    (Note 10)

</TABLE>

               See accompanying notes to financial statements.

                                     F-6

<PAGE>
                                                                   Page 18 of 45


                SPECIALTY RETAIL GROUP, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     A.  Organization

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

         As discussed in Notes 2 and 3, as of January 31, 1997 the Company had
         sold or discontinued all business operations and its subsidiary,
         Building Blocks, Inc., ("BBI"), filed a petition for relief under
         Chapter 11 of the U.S. Bankruptcy Code. The only current operations are
         the general and administrative costs related to the bankruptcy,
         maintaining a business office and complying with its reporting
         obligations as a publicly-owned company. The Company is seeking
         opportunities for business combinations.

     B.  Basis of Consolidation and Financial Statement Presentation

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

     C.  Cash Equivalents

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

     D.  Inventories

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


     E.  Store Opening and Closing Costs

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

     F.  Property and Equipment

         Property and equipment are stated at cost. Depreciation is provided on
         the straight-line method over the estimated useful lives of 3 to 7
         years. Leasehold improvements had been amortized over 10 years or the
         related lease term, whichever was shorter. Applicable property and
         equipment were written off as stores were closed and the assets were
         abandoned or sold.

     G.  Goodwill

         The excess of purchase price over the fair value of net assets acquired
         was amortized on the straight-line method over 15 years. Due to BBI's
         bankruptcy and the sale of BBFC, the Company determined that goodwill
         had no future value and wrote off the balance of $136,882 at December
         29, 1996.

                                     F-7
<PAGE>
                                                                   Page 19 of 45

                SPECIALTY RETAIL GROUP, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

     H.  Long-Lived Assets

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

     I.  Stock Options

         The Company, consistent with generally accepted accounting principles,
         accounts for stock options pursuant to the intrinsic value method
         specified by Accounting Principles Board Opinion No. 25, "Accounting
         for Stock Issued to Employees," whereunder compensation cost is not
         recognized as long as the exercise price of the option equals or 
         exceeds the fair value of the underlying stock on the date of grant. 
         In October

         1995, the Financial Accounting Standards Board issued Statement of
         Financial Accounting Standards No. 123, "Accounting for Stock-Based
         Compensation," which requires that the fair value of stock options be
         measured on the date of grant using an applicable statistically-based,
         market-sensitive, computerized financial model. However, this
         pronouncement allows companies to continue to account for stock options
         under the previous intrinsic value method as long as they disclose the
         pro-forma effects as if the new method had been adopted. (See Note 8).

     J.  Revenue Recognition

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

     K.  Income Taxes

         The Company accounts for income taxes pursuant to Statement of
         Financial Accounting Standards No. 109 ("SFAS No. 109"), "Accounting
         for Income Taxes," which requires the use of the liability method.
         Under this method, deferred income taxes are recognized for the tax
         consequences of temporary differences by applying enacted statutory tax
         rates applicable to future years to differences between the financial
         statement carrying amounts and tax bases of existing assets and
         liabilities. Deferred income tax benefit or expense is measured by the
         change in deferred income tax assets or liabilities during the year.
         Under SFAS No. 109, the effect on deferred taxes of a change in tax
         rates is recognized in income in the period that includes the enactment
         date. (See Note 9).

     L.  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 1997 and 1996
         computations as their effect would be antidilutive during these
         periods. The weighted average number of shares outstanding for fiscal
         1996 has been restated to reflect the effect of 240,500 shares held in
         the treasury throughout such period. Such shares were acquired during
         fiscal 1995. The effect of 213,333 shares issuable pursuant to a
         settlement of litigation in August 1996 is not reflected as it is also
         antidilutive. (See Note 7B). It is not anticipated that the Company's
         per share data will be materially affected by application of Statement
         of Financial Accounting Standards No. 128, "Earnings Per Share," issued
         in February 1997 and effective for annual and interim periods ending
         after December 15, 1997.

     M.  Fiscal Year

         The Company has a 52/53 week fiscal year ending on the Sunday closest
         to June 30. Fiscal 1997 and 1996 each consisted of 52 weeks.

                                     F-8


<PAGE>
                                                                   Page 20 of 45

                SPECIALTY RETAIL GROUP, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

     N.  Fair Value of Financial Instruments

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

     O.  Use of Estimates

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

NOTE 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.

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

The Company, which has no other business operations, is seeking to locate an
operating business with which to effectuate a business combination. At June 29,
1997, the Company has $53,318 of assets and $515,002 of liabilities, excluding
$80,000 of liabilities which are payable through the issuance of 213,333 shares
of common stock. (See Note 7B). The Company has been receiving cash advances in
the form of demand loans from three of its stockholders in order to meet its
operating expenses and has been obtaining forbearances from its principal
creditors. At June 29, 1997 such advances (which are included in the liabilities
described above) aggregated $154,251 plus accrued interest of $3,217. There are
no assurances as to the time or extent that the stockholder advances and/or
forbearance will continue. Further, there is no assurance that any business
combination can ever be effectuated. Any such combination may depend upon the
outcome of BBI's Chapter 11 reorganization plan and the Company's ability to

reach settlements of its outstanding obligations. The foregoing raise
substantial doubt about the Company's ability to continue as a going concern.

NOTE 3 - BANKRUPTCY OF BBI SUBSIDIARY

As discussed in Notes 1A and 2, BBI filed a petition for relief under Chapter 11
of the U.S. Bankruptcy Code on January 31, 1997. In a Chapter 11 case,
substantially all liabilities of the debtor, as of the date of the filing are
subject to resolution under a plan of reorganization to be voted upon by the
debtor's creditors and stockholders and confirmed by the Bankruptcy Court.
Financial schedules filed by the debtor as of the date of the filing showed that
liabilities exceeded assets by approximately $800,000. Differences between
amounts shown by the debtor and claims filed by creditors are investigated and
resolved. The amount and settlement terms for such disputed liabilities are
subject to allowance by the Bankruptcy Court. Ultimately the adjustment of all
liabilities of the debtor remains subject to a Bankruptcy Court approved plan of
reorganization and, accordingly, is not presently determinable.

                                     F-9

<PAGE>
                                                                   Page 21 of 45

                SPECIALTY RETAIL GROUP, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 - BANKRUPTCY OF BBI SUBSIDIARY (continued)

Under the Bankruptcy Code, the debtor may elect to assume or reject real estate
leases, employment contracts, personal property leases, service contracts and
other executory pre-petition contracts, subject to Bankruptcy Court review. BBI
rejected all of its leases and contracts other than an employment agreement with
one officer, which contract was assigned to, and assumed by the Company. The
debtor cannot presently determine or reasonably estimate the ultimate liability
which may result from the filing of claims for any rejected contracts and no
provisions have yet been made for these items. All assets of the debtor have
either been sold or written down to a realizable value. Based on such values,
both the Company and BBI have determined that none of BBI's assets will be
distributable to the Company.

Upon the filing of its Chapter 11 petition, the accounts of BBI were no longer
consolidatable with that of the Company. The Company recorded a gain on the
deconsolidation of $786,269, measured by the net deficit in the subsidiary at
the time of filing. The carrying value of the Company's investment in BBI had
previously been written down to zero. Subsequent to June 29, 1997 the Company
agreed to settle an obligation arising from its limited guarantee of a BBI lease
by agreeing to pay $30,000 to the claimant landlord in exchange for a complete
release of all claims by the landlord against BBI and the Company. Such claims
by the landlord totaled $478,000 against BBI, of which the Company was liable
for up to $180,000. The $30,000 liability payable to the landlord in
satisfaction of the Company's contingent obligation as limited guarantor has
been accrued at June 29, 1997. In addition, a release of all claims by BBI
against the Company is being sought in the bankruptcy proceedings. Bankruptcy
Court approval is required for releases given either to or from BBI. Further, as

part of negotiated revisions to BBI's plan of reorganization, the Company may
agree to settle other claims against BBI and/or make payments to or on behalf of
BBI and/or issue shares of the Company's common stock to BBI's creditors.

The proposed release by BBI of all claims it may have against the Company will
include a release of a possible claim which arose subsequent to the filing of
the bankruptcy petition by BBI. Such claim, if it is asserted by BBI's
Creditors' Committee, will have arisen in the Company's opinion from unaudited
financial information previously filed with the Bankruptcy Court. Such unaudited
financial information erroneously reported an intercompany receivable due from
the Company to BBI in the amount of $220,000. The Company has determined that
such receivable should not have been reported as outstanding in reports to the
Bankruptcy Court as it should properly have been offset by or deemed paid by
amounts in excess of $6,000,000 loaned to and/or invested in BBI by the Company.
The Company does not believe that the Court will uphold any such claim if one is
made against the Company by the Creditors' Committee.

The ultimate outcome of these matters are presently not determinable.

Capsule balance sheet information of BBI at June 29, 1997 is as follows:

         Cash, including $262,919 in escrow         $   265,208
         Due from affiliate (BBHI)                       10,000
         Other current assets                             7,272
         Security deposits                               14,228
                                                    -----------
         Total assets                               $   296,708
                                                    ===========
         Accounts payable and accrued expenses      $   148,173
         Liabilities subject to compromise            1,520,021
                                                    -----------
         Total liabilities                          $ 1,668,194
                                                    ===========
         Stockholder's deficit                      $(1,371,486)
                                                    ===========

                                     F-10
<PAGE>
                                                                   Page 22 of 45

                SPECIALTY RETAIL GROUP, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 - PROPERTY AND EQUIPMENT

This account consists of furniture, fixtures and equipment, net of accumulated
depreciation of $59,299.

NOTE 5 - EQUITY INVESTMENTS

Effective December 14, 1995, the Company acquired 25% of the Common Stock of CM

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

In July 1996, the Company received a loan of $224,150 to cover a working capital
shortfall. Under the agreement, the Company had the right to either repay the
advance without interest or to transfer to the lender all of the Company's
rights and interests in the common stock of CM Franchise Corp. and warrants to
purchase additional shares of such common stock it acquired in December 1995.
The Company transferred the rights and interests in satisfaction of the loan on
September 29, 1996. As a result, the Company recorded a $44,406 gain on this
transaction. (See Note 6B).

NOTE 6 - RELATED PARTY TRANSACTIONS

      A. Demand Loans Payable to Stockholders

         Since December 23, 1996, the Company has received cash advances in the
         form of demand loans from three of its stockholders bearing interest at
         8% per annum. The total amount due stockholders at June 29, 1997 was
         $157,468, including accrued interest of $3,217.

      B. Transfer of Equity Interest in Satisfaction of Stockholder Loan

         In July 1996, pursuant to an agreement negotiated between Selig A.
         Zises and Kevin R. Greene, Chairman of the Board of the Company, the
         Company received $224,150 from Mr. Zises to cover a working capital
         shortfall which was subsequently repaid. (See Note 5).

      C. Other

         On November 17, 1995, the Company invested in a series of promissory
         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
         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. (See Note 7A).

NOTE 7 - COMMITMENTS AND CONTINGENCIES

     A.  Terms and Preferences of Preferred Stock

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

                                     F-11

<PAGE>
                                                                   Page 23 of 45

                SPECIALTY RETAIL GROUP, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7 - COMMITMENTS AND CONTINGENCIES (continued)

     B.  Legal Settlement - Issuance of Common Stock

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

         The Company also agreed to guarantee up to $160,000 for any shortfall
         from $650,000 realized upon the sale by the holders of all of the
         650,000 shares. The Company may satisfy the guarantee by a cash payment
         or issuance to the holders of an additional 213,333 common shares
         currently being held by an escrow agent. The agreement further provides
         for the Company to receive 67% of the excess over $650,000, if any, of
         proceeds received by the plaintiff and his designee from market sales
         of the shares. For the year ended June 29, 1997, the Company has
         recognized an additional obligation and expense of $80,000 related to
         the settlement arising from its agreement to guarantee the shortfall.

     C.  Lease Commitments

         The Company presently has no operating lease commitments. The Company
         currently occupies office space on a month-to-month basis in premises
         leased by an entity controlled by certain of the Company's principal
         stockholders. Rent expense for store and office leases approximated
         $596,000 and $1,214,000 for the fiscal years ended June 29, 1997 and
         June 30, 1996, respectively.

     D.  Employment Agreement

         The Company has an employment agreement with its sole officer/employee.
         Such agreement is for the 23 months ending February 28, 1998. As of
         June 29, 1997, base compensation payable for the remainder of the
         employment term aggregates $90,000. The officer also receives an
         automobile allowance of $1,000 per month, reimbursement of reasonable

         expenses and fringe benefits of the type usually provided to corporate
         officers. The agreement contains standard confidentiality covenants and
         provides for certain consulting services if required by the Company
         subsequent to the termination of employment. A related agreement
         provides for the officer's indemnification under certain conditions.

NOTE 8 - 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 29, 1997, an aggregate
of 770,000 shares remain available for future grant of options under the Plans.

                                     F-12

<PAGE>
                                                                   Page 24 of 45

                SPECIALTY RETAIL GROUP, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8 - STOCK OPTION PLANS (continued)

Nonqualified stock option activity has been as follows:

<TABLE>
<CAPTION>
                                                                 Number of           Exercise price
                                                                  shares                per share
                                                                 ---------           --------------
<S>                                                              <C>                 <C>
         Outstanding at July 2, 1995                              560,000            $1.00 to $2.31
         Granted                                                  130,000            $. 75 to $1.00
         Expired/canceled                                        (100,000)           $1.00 to $1.50
         Exercised                                                     -                   -
                                                                 --------            --------------
         Outstanding at June 30, 1996, of
           which 466,667 were exercisable                         590,000            $ .75 to $2.31
                                                                 --------            --------------
         Granted:
           Conditional, subsequently forfeited                     80,000            $1.25 to $2.00
           Fully vested at year-end                               430,000            $ .05
         Canceled and/or forfeited:

           Outstanding, beginning of year                        (590,000)           $ .75 to $2.31
           Granted during year                                    (80,000)           $1.25 to $2.00


         Exercised during year                                         -                   -
                                                                 --------            --------------
         Outstanding and exercisable, June 29, 1997               430,000            $.05
                                                                 ========            ==============
</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 prior
to the 430,000 options exercisable at June 29, 1997 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.

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

The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related Interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation" requires use of option valuation
models that were not developed for use in valuing employee and compensatory
stock options. Under APB 25, because the exercise price of the Company's stock
option equals or exceeds the market price of the underlying stock on the date of
grant, no compensation expense is recognized. Pro-forma information regarding
net income and earnings (loss) per share is required by Statement 123, and has
been determined as if the Company had accounted for its stock options under the
fair value method of that Statement. The fair value of non-conditional options
granted in fiscal 1997 and 1996 was estimated at the date of each grant using a
Black-Scholes option pricing model with the following weighted average
assumptions:
                                                  1997            1996
                                                  ----            ----
     Weighted average expected life of options     4.0             4.0
     Risk free interest rate                       6.0%            6.0%
     Dividend yield                                0.0%            0.0%
     Volatility factor                           160.0%          169.0%

                                     F-13

<PAGE>
                                                                   Page 25 of 45

                SPECIALTY RETAIL GROUP, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8 - STOCK OPTION PLANS (continued)

The conditional options granted in 1997, which were to vest incrementally in
proportion to the number of Building Blocks franchises sold by BBFC, were not
susceptible of fair value measurement due to the impossibility of quantifying 
the likelihood of their being exercised; accordingly they are not considered to
be stock options giving rise to compensation expense as defined by the 
Statement. Such options were forfeited in fiscal 1997 due to the termination of
their holders' employment. Under the Black-Scholes option pricing model used by
the Company, the 430,000 options granted on February 1, 1997 each had a fair
value of $.05.

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's stock options have characteristics significantly different from
those of traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of its stock options. However, if compensation cost had been determined on
the basis of the Statement for the non-conditional options issued in fiscal 1997
and 1996, net loss and loss per share (both primary and fully diluted) would
have changed as follows:

                                   1997                        1996
                          ----------------------      ----------------------
                          Reported     Pro-forma      Reported     Pro-forma
                          --------     ---------      --------     ---------
 
    Net loss           $(1,435,906)  $(1,457,406)  $(3,378,668)  $(3,467,768)
                        ===========   ===========   ===========   ===========
     Loss per share     $      (.16)  $      (.16)  $      (.40)  $      (.41)
                        ===========   ===========   ===========   ===========


NOTE 9 - INCOME TAXES

The provision for income taxes consists of the following:

                                          52 Weeks Ended
                                ----------------------------------
                                June 29, 1997        June 30, 1996
                                -------------        -------------
         Currently payable:
           Federal                 $     -             $     -
           State                         -               26,020
                                   --------            --------
                                         -               26,020
                                   --------            --------
         Deferred:
           Federal                       -                   -

           State                         -                   -
                                   --------            --------
                                         -                   -
                                   --------            --------
         Total                     $     -             $ 26,020
                                   ========            ========

The Company files a consolidated federal tax return including all of its
subsidiaries. Consolidated taxable losses in fiscal 1997 and 1996 provided no
income tax benefits in either year. The Company has not yet filed its tax
returns for fiscal 1996. However, no federal income tax was incurred in 1996 and
virtually all of the state tax liabilities had been prepaid; any minor balances
payable were accrued as applicable.

At June 29, 1997, the Company has net operating loss carryforwards of
approximately $13,475,000 available for federal and state income tax purposes
expiring over the next five to fifteen years, depending on the jurisdiction.
Such loss carryforwards give rise to a deferred tax asset of $5,929,000 at June
29, 1997, all of which is offset by an equivalent valuation allowance. The
valuation allowance increased by $1,184,000 and $1,678,000 in fiscal 1997 and
1996, respectively.

                                     F-14

<PAGE>
                                                                   Page 26 of 45

                SPECIALTY RETAIL GROUP, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10 - SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

In fiscal 1997 the Company had the following non-cash investing and financing
activities: Issued common stock with a fair value of $570,000 in partial
settlement of a liability; distributed an equity investment as repayment of a
$224,150 loan from a stockholder; and wrote off property and equipment with a
net book value of $330,776. The Company paid approximately $35,000 for income
taxes during the 52 weeks ended June 30, 1996. None was paid in fiscal 1997. The
Company paid interest expense of $3,333 in fiscal 1997.

NOTE 11 - STORE CLOSING AND OTHER EXPENSES

Store closing and other expenses consist of:

                                                 1997             1996
                                                 ----             ----
     Disposition of property and equipment
       including related costs of $52,762      $212,712         $660,767
     Write off of leasehold improvements        170,826               -
     Write off of goodwill                      136,882               -
                                               --------         --------
     Total                                     $520,420         $660,767
                                               ========         ========


NOTE 12 - UNAUDITED QUARTERLY FINANCIAL INFORMATION

      A. Restatement of March 30, 1997 Unaudited Financial Statements

         The Company's unaudited financial statements as filed on its quarterly
         Form 10-QSB report as of and for the 39 weeks ended March 30, 1997
         included BBI's balance sheet at such date and its results of operations
         for the entire period. The Company has filed a Form 10-QSB/A amending
         its March 1997 quarterly report to deconsolidate BBI's balance sheet
         and operations after the filing of its bankruptcy petition. The amended
         unaudited consolidated balance sheet of the Company and its
         consolidated subsidiaries reported on such Form 10-QSB/A at March 30,
         1997 reflects current and total assets of $57,480 and $60,958,
         respectively, and current and total liabilities of $421,288 and
         $501,288, respectively. As a result of the deconsolidation,
         stockholders' deficit was reduced from $1,741,760 to $440,330. The
         related amended unaudited consolidated statements of operations for the
         13 and 39 weeks then ended reflect quarterly net income of $698,540 and
         a year-to-date net loss of $1,254,552, both after the deconsolidation
         gain of $786,269. The Company originally reported net losses of
         $812,274 and $2,765,366, or $.09 and $.29 per share, respectively, for
         such periods. (See Note 12B).

      B. Restatement of Prior Quarterly Earnings (Loss) Per Share Data -
         (Unaudited) The Company has recalculated the weighted average number of
         shares outstanding for each of the quarterly and year-to-date periods
         in the year ended June 29, 1997 taking into account the 240,500
         treasury shares and the shares actually issued onAugust 22, 1996. (See
         Note 7B). Shown below are the revised weighted average shares for each
         quarterly and year-to-date period through March 30, 1997 and the
         restated earnings (loss) per share amounts applicable thereto. Loss per
         share increased by $.01 for the first quarter and by $.02 for the six
         months. The amounts reported for the periods ended March 30, 1997 also
         reflect the deconsolidation of the bankrupt subsidiary. (See Note 12A).

<TABLE>
<CAPTION>
                                            Weighted Average                   Earnings (Loss)
                                           Outstanding Shares                     Per Share
                                      ----------------------------       ------------------------------
                                      Quarterly       Year-to-Date       Quarterly        Year-to-Date
                                       Period            Period            Period           Period
                                      ---------       ------------       ---------        ------------       
<S>                                   <C>             <C>                <C>               <C>
           Periods ended:
           September 29, 1996           8,716,847              N/A        $ (.09)              N/A
           December 29, 1996            9,084,238        8,900,542        $ (.13)            $(.22)
           March 30, 1997               9,084,238        8,960,880        $  .08             $(.14)

                                     F-15

<PAGE>

Item 8.           Changes in and Disagreements with Accountants on
                  Accounting and Financial Disclosure

                  On September 16, 1997, the Company terminated the engagement
of BDO Seidman, LLP as the principal accountant to audit the Company's financial
statements, and engaged Jeffrey M. Brinn, CPA, of South Huntington, New York, as
its auditor.

                  The principal accountant's report on the Company's financial
statements for each of the Company's 1995 and 1996 fiscal years did not contain
an adverse opinion or a disclaimer of opinion, and was not qualified or modified
as to audit scope or accounting principles. The accountant's report for the
fiscal year ended June 30, 1996 was modified to reflect substantial doubt as to
the Company's ability to continue as a going concern.

                  The decision to terminate the principal accountant was
approved by the Company's Board of Directors.

                  During the Company's 1995, 1996 and 1997 fiscal years and the
interim period subsequent to the Company's 1997 fiscal year through the date of
termination of the engagement of the principal independent accountant, there
were no disagreements with the principal independent accountant on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure, which, if not resolved to the satisfaction of the former
accountant, would have caused it to make reference to the subject matter thereof
in connection with its report.

                                                                   Page 27 of 45


<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
November 21, 1997 concerning the directors and executive officers of the
Company.

Name                                       Age     Position

Seymour W. Zises                           44      Director
Steven E. Glass                            36      Secretary

                  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 was President and Chief
Executive Officer of Building Blocks from April 1, 1996 to January 7, 1997 and
has been Manager of Operations of Building Blocks since that date. He has also
been Secretary of the Company since April 1, 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.

                                                                   Page 28 of 45

<PAGE>

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 29, 1997,
and certain written representations received by it, the Company is not aware of
any person who, during the prior fiscal year, was an officer or director of the
Company or the beneficial owner of more than 10% of its outstanding Preferred
Stock or Common Stock, and who, during the prior or previous fiscal years,
failed to file on a timely basis reports as required by Section 16(a) of the
Securities Exchange Act of 1934.

Item 10.          Executive Compensation

                  Except for Steven E. Glass, no person who was an operating
officer of the Company at June 29, 1997 received annual salary and bonus which,
in the aggregate, exceeded $100,000 for the fiscal year ended June 29, 1997.



</TABLE>
<TABLE>
<CAPTION>
                                                                                                   Long-Term Compensation
                                                                                                   ----------------------
                                                                                                 Awards              Payouts

                                                                                                 ------              -------
                                                                                               Securities
                                                              Annual Compensation              Underlying           All Other
                                                          ---------------------------         Options/SARS        Compensation
           Name and                  Fiscal Year                         Other Annual         ------------        ------------
      Principal Position                Ended             Salary         Compensation              #                    $
      ------------------             -----------          ------         ------------             ---                  ---
<S>                               <C>                     <C>            <C>                  <C>                 <C>
Steven E. Glass                   June 29, 1997            $118,125         ---                 430,000               ---
Manager of Operations of
BBI and Secretary of the
Company                           June 30, 1996            $ 36,779        $60,000              130,000*              ---

                                  July 2, 1995                  N/A        N/A                  N/A                   N/A
</TABLE>

---------------
* Restructured in fiscal 1997

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 29, 1997.

                                                                   Page 29 of 45

<PAGE>

                  The following table sets forth certain information as to the
number and value of unexercised stock options held by the named officer at June
29, 1997.

<TABLE>
<CAPTION>
                                                                                            Value of Unexercised
                                        Number of Unexercised                               In-The-Money Options
                                      Options at June 29, 1997                                At June 29, 1997
                                      ------------------------                               -----------------

         Name                   Exercisable              Unexercisable             Exercisable*             Unexercisable*
         ----                   -----------              -------------             ------------             --------------
<S>                             <C>                      <C>                       <C>                      <C> 
Steven E. Glass                   430,000                    - 0 -                      ---                      ---

</TABLE>


* None of the foregoing options were in-the-money at June 29, 1997.

                  Steven E. Glass, the former President and Chief Executive
Officer of Building Blocks, was employed pursuant to an employment agreement
which became effective April 1, 1996 and expires in February 1998. The agreement
provided 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. The Company
guaranteed Building Blocks' obligations under the employment agreement.

                  In January, 1997, the Company and Steven E. Glass entered into
an agreement which, among other things, modified the Company's obligations under
its guarantee. As a result, the Company obtained the right, under certain
circumstances, to employ Mr. Glass on the same economic terms as were provided
in the employment agreement. In June, 1997, the Company exercised this right.
The Company's obligation under the employment agreement terminates if Mr. Glass'
employment is terminated (i) for "cause" as defined, (ii) by Mr. Glass'
withdrawal other than due to non-payment, or (iii) by virtue of Mr. Glass' death
or disability. In all other termination events, the Company will be liable for
Mr. Glass' salary, subject to offset for income earned by Mr. Glass from other
employment.

                  In February, 1997, options to purchase 130,000 shares of
Common Stock previously held by Mr. Glass were restructured and he currently
holds options to purchase up to 430,000 shares of common stock of the Company at
$.05 per share. Of such options, all of which are vested, 280,000 are
exercisable through January 31, 2003, and 150,000 are exercisable through June
30, 2003.

                  The Company has agreed to indemnify Steven E. Glass in respect
of claims against him arising from certain statements set forth in the Chapter
11 Petition based upon information provided

                                                                   Page 30 of 45

<PAGE>

to him by other persons associated with the Company or Building Blocks.

Item 11.          Security Ownership of Certain Beneficial owners and
                  Management

                  The following table sets forth certain information, as of
November 21, 1997, 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               Cathy Zises                                               898,127(2)               9.9%
                           477 Madison Avenue
                           New York, New York 10022

Common Stock               Lynn Zises                                                796,317                  8.8%
                           477 Madison Avenue
                           New York, New York 10022

Common Stock               Nancy Zises                                               833,332                  9.2%
                           477 Madison Avenue
                           New York, New York 10022

Common Stock               Seymour W. Zises                                          898,127(2)               9.9%
                           477 Madison Avenue
                           New York, New York 10022

Common Stock               Steven E. Glass                                           523,000(3)               5.5%
                           477 Madison Avenue
                           New York, New York 10022

Series A-1                 ILM Acquisition L.P.                                    2,394,130(2)             100.0%
Preferred Stock            477 Madison Avenue
                           New York, New York  10022

Common Stock               All directors and officers as a group                   1,421,127(2)(3)           14.9%
                           (2 persons)
</TABLE>

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

                                                                   Page 31 of 45


<PAGE>



     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 Shares reported for Cathy Zises include 148,060 shares held by her as
     custodian for her minor children. Cathy Zises is the wife of Seymour Zises.
     The shares reported for Seymour W. Zises are the shares held directly or as
     custodian by Cathy Zises. Mr. Zises may be deemed the beneficial owner of
     such shares. Mr. Zises disclaims such beneficial ownership. Shares of
     Series A-l 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, may be deemed to be
     the beneficial owner of all of the shares of Series A-1 Preferred Stock
     held by IALP as a result of his ownership of all of the voting securities
     of the general partner of IALP. Family members of Seymour W. Zises are
     indirect beneficial owners of limited partnership interests in IALP.
     Seymour Zises disclaims any beneficial ownership of any of the Preferred
     Stock of the Company. Nancy Zises is a sister-in-law of Seymour W. Zises
     and Lynn Zises is the daughter of Selig Zises.

(3)  Includes 430,000 shares of Common Stock purchasable pursuant to a currently
     exercisable stock option.


Item 12.  Certain Relationships and Related Transactions

         In July 1996, pursuant to an agreement negotiated between Selig A.
Zises and Kevin R. Greene, former 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 had 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 was
due on September 30, 1996 and the Company transferred the rights and interests
on that date.

         During the period from December 23, 1996 through September 30, 1997,
the Company borrowed an aggregate of $242,251 from Cathy Zises, Selig Zises, and
Seymour Zises. All such loans bear interest at 8% per annum.

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

Item 13.  Exhibits and Reports on Form 8-K

(a)      Exhibits

         See "Index to Exhibits."

                                                                   Page 32 of 45

<PAGE>

     Executive Compensation Plans and Arrangements


     Exhibit 10.1    -   1991 Non-Qualified Stock Option Plan

     Exhibit 10.2    -   1994 Stock Option Plan

     Exhibit 10.3    -   Letter Agreement dated January 24, 1997
                         between Registrant and Steven E. Glass


     Exhibit 10.4    -   Employment Agreement dated as of April
                         1, 1996 between Building Blocks, Inc.
                         and Steven E. Glass

     Exhibit 10.5    -   Amendment to Employment Agreement dated
                         January 24, 1997 between Registrant and
                         Steven E. Glass

     Exhibit 10.6    -   Option Agreement dated February 1, 1997
                         between Registrant and Steven E. Glass

     Exhibit 10.7    -   Letter Agreement dated January 24, 1997
                         between Registrant and Steven E. Glass
                         regarding options

(b)      Reports on Form 8-K

         No Reports on Form 8-K were filed during the fourth quarter of the
         Company's fiscal year ended June 29, 1997.

                                                                   Page 33 of 45


<PAGE>

                                   SIGNATURES


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



Dated: November 25, 1997                    SPECIALTY RETAIL GROUP, INC.


                                            By: /s/ STEVEN E. GLASS
                                                ---------------------------
                                                Steven E. Glass, Secretary


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


         /s/ SEYMOUR W. ZISES                                 November 25, 1997
         --------------------------
         Seymour W. Zises
         Director

         /s/ STEVEN E. GLASS                                  November 25, 1997
         --------------------------
         Steven E. Glass, Secretary



                                                                   Page 34 of 45

<PAGE>

                                INDEX TO EXHIBITS

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

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

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


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

10.2            1994 Stock Option Plan (incorporated by
                reference to Exhibit 10.2 to the
                Registrant's Report on Form 10-KSB for
                the year ended July 2, 1995)

10.3            Letter Agreement dated January 24, 1997
                between Registrant and Steven E. Glass
                (incorporated by reference to Exhibit
                10.3 to the Registrant's Report on Form
                8-K dated February 7, 1997)

10.4            Employment Agreement dated April 1,
                1996 between Building Blocks, Inc. and
                Steven E. Glass (incorporated by
                reference to Exhibit 10.7 to the
                Registrant's Report on Form 10-K for
                the year ended June 29, 1996)

10.5            Amendment to Employment Letter
                Agreement dated January 24, 1997
                between Building Blocks, Inc. and
                Steven E. Glass (incorporated by
                reference to Exhibit 10.2 to the
                Registrant's Report on Form 8-K dated
                February 7, 1997)

10.6            Option Agreement dated February 1, 1997
                between Registrant and Steven E. Glass
                (incorporated by reference to Exhibit
                10.5 to the Registrant's Report on Form
                8-K dated February 7, 1997)

                                                                   Page 35 of 45

<PAGE>

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

10.7            Letter Agreement dated January 24, 1997
                between Registrant and Steven E. Glass

                regarding options (incorporated by
                reference to Exhibit 10.4 to the
                Registrant's Report on Form 8-K dated


                February 7, 1997)

10.8            Form of Promissory Notes from the                       37
                Registrant to Selig Zises, Seymour
                Zises and Cathy Zises and list of notes
                issued through September 30, 1997

10.9            Indemnity Agreement dated January 30,                   40
                1997 between Registrant and Steven E.
                Glass

16.             Letter of BDO Seidman, LLP to the
                Securities and Exchange Commission
                (incorporated by reference to Exhibit
                16 to the Registrant's Report on Form
                8-K dated September 22, 1997, as
                amended)

21.             Subsidiaries of Registrant                              42

23(a)           Consent of BDO Seidman, LLP                             43

23(b)           Consent of Jeffrey M. Brinn, CPA                        44

27.             Financial Data Schedule                                 45


                                                                   Page 36 of 45