United States
                       Securities and Exchange Commission
                             Washington, D.C. 20549

                                   Form 10-KSB

     Annual Report Under Section 13 or 15(d) of The  Securities  Exchange Act of
1934

     For the fiscal year ended October 31, 1998

     Transition Report Under Section 13 or 15(d) of The Securities  Exchange Act
of 1934 for the Transition Period from _____________ to _______________

                           Commission File No. 1-4626

                            Harvey Electronics, Inc.
                 (Name of small business issuer in its charter)

            New York                                     131534671
(State or other jurisdiction of            (I.R.S. Employer Identification No.)
 incorporation or organization)

                 205 Chubb Avenue, Lyndhurst, New Jersey 07071
              (Address of principal executive offices) (Zip Code)

     Issuer's telephone number: (201) 842-0078

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

     None

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

     Common Stock, $.01 par value
     Redeemable Common Stock Purchase Warrant
              (Title of Class)

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

     Check if there is no disclosure  of  delinquent  filers in response to Item
405 of  Regulation  S-B  contained  in  this  form,  and no  disclosure  will be
contained,  to the best of the  registrant's  knowledge,  in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.

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

     State issuer's revenues for its most recent fiscal year. $17,262,082

     State the number of shares  outstanding of each of the issuer's  classes of
common equity, as of January 8, 1999. 3,282,833

     As of January 8,  1999,  the  aggregate  market  value of the  registrant's
common stock held by non-affiliates  computed by reference to the price at which
the stock was sold was $2,206,713. The shares are currently traded on the NASDAQ
SmallCap  Market  under the symbols  "HRVE" for the Common Stock and "HRVEW" for
the Warrants to purchase Common Stock.


<PAGE>


                                                                            
                                     Part I


     Item 1. Description of Business.

     General

     Harvey Electronics,  Inc. is engaged in the retail sale, service and custom
installation  of high  quality  audio,  video and home  theater  equipment.  The
equipment  includes  high  fidelity  components  and  systems,   video  cassette
recorders  ("VCR"),   digital  versatile  disc  players  ("DVD"),  direct  view,
projection  and  plasma  flat-screen  television  sets,  audio/video  furniture,
digital satellite systems,  conventional telephones and related accessories. The
Company has been engaged in this business in the New York  Metropolitan area for
seventy-one  years. The Company  currently  operates six retail stores.  The two
Manhattan  stores are  located on  Broadway at 19th Street and on 45th Street at
Fifth Avenue.  The Company's  newest stores opened during  November 1998 on Glen
Cove Road in Greenvale,  Long Island and Main Street in Mount Kisco, Westchester
County,  New York. Its other two stores are located on Route 17 in Paramus,  New
Jersey and on West Putnam Avenue in Greenwich, Connecticut.

     The  Company's  stores are  designed to offer an  attractive  and  pleasing
environment  and to display its products in  realistic  home  settings  commonly
known in the industry as "lifestyle home vignettes."  Sales personnel are highly
trained  professionals with extensive product knowledge.  This contrasts sharply
with a more rushed atmosphere and lesser-trained personnel of mass merchants.

     Bankruptcy Proceeding and Reorganization

     On August 3, 1995, the Company (then known as The Harvey Group Inc. and its
subsidiaries)  filed  petitions for relief under Chapter 11 of the United States
Bankruptcy Code with the Bankruptcy Court for the Southern  District of New York
(the "Court").  This filing was the result of certain factors  including but not
limited to: (i) the negative effect of a $2,138,000 judgment entered against the
Company;   (ii)  liabilities   arising  from  The  Harvey  Group  Inc.  and  its
discontinued  food  brokerage  division,  which  remained as  liabilities of the
Company, the payment of which significantly reduced cash; (iii) the recession of
the early 1990's coupled with a soft market in the electronics industry,  all of
which resulted in losses and a shortage of cash flow; and (iv) the delisting (in
June,  1995) of the  Company's  Common Stock from the American  Stock  Exchange,
which delisting rendered a proposed $4.1 million equity placement untenable.

     On November 13, 1996,  the Court  confirmed  the  Company's  Reorganization
Plan. The Effective date of the  Reorganization  Plan was December 26, 1996 (the
"Effective Date of Plan"), at which time the Company emerged from its Chapter 11
reorganization.  At that time,  Harvey Sound,  Inc.,  the Company's  subsidiary,
merged into the Harvey  Group Inc.,  and the merged  entity  changed its name to
Harvey Electronics, Inc.

<PAGE>

     Pursuant to the Reorganization  Plan, as of the Effective Date of Plan, all
of the shares of common and preferred  stock of the Company were  canceled.  The
Company  amended its Restated  Certificate of  Incorporation  to authorize,  for
issuance,  10,010,000 shares of capital stock as follows: (a) 10,000 shares of 8
1/2%  Cumulative  Convertible  Preferred  Stock  with a par value of $1,000  per
share;  and (b)  10,000,000  shares of Common Stock with a par value of $.01 per
share. See "Description of Securities."

     The  Reorganization  Plan also provided for the  distribution of the Common
Stock of the  reorganized  Company as follows:  (a)  2,000,000  shares to Harvey
Acquisition   Company,   L.L.C.   ("HAC")  in   satisfaction  of  $2,822,500  of
subordinated  secured  financing  provided to the Company  during its bankruptcy
proceeding;   (b)  186,306  shares  to  the  Company's  unsecured  creditors  in
satisfaction  of the Company's  pre-petition  obligations  owed to its unsecured
creditors;  (c) 19,962  shares to the  Company's  former  shareholders;  and (d)
51,565  shares  to  InterEquity  Capital  Partners,  L.P.   ("InterEquity"),   a
pre-bankruptcy subordinated secured creditor, in satisfaction of a Court allowed
finder's fee.

     Prepetition amounts from the subordinated secured debtholders,  InterEquity
($600,000) and four  individuals  who purchased the  indebtedness  from National
Westminster  Bank,  USA  ($275,000),  were exchanged for 875 shares of Preferred
Stock, in accordance with the Reorganization Plan.

     Other  significant  provisions of the  Reorganization  Plan  included:  (a)
changing the close of the Company's fiscal year end from the Saturday nearest to
January 31 to the  Saturday  nearest to October 31; and (b)  adoption of a stock
option plan ("Stock Option Plan"),  whereby  options to purchase up to 1,000,000
shares of Common Stock are authorized.

     Sale of Common Stock and Warrants in Public Offering

     On April 7, 1998, the Company completed an issuance of its common stock and
common stock warrants in a public  offering (the  "Offering").  The Offering was
co-managed by The Thornwater Company,  L.P. (the  "Representative"),  which sold
1,200,000  shares of the Company's  common stock of which 1,025,000  shares were
sold  by  the  Company  and  175,000  shares  by  HAC.   2,104,500  of  Warrants
("Warrants")  to acquire  additional  shares of the Company's  common stock were
also sold by the Company. The net proceeds from the Offering, approximately $4.1
million,  are being used for retail store  expansion and general working capital
purposes.

     The net  proceeds  from the  Offering  were used to repay  temporarily  the
Company's  credit  facility  ($2,262,306);  retire the principal  ($350,000) and
interest  ($47,627) of a term loan,  and for retail store  expansion and general
working capital purposes.

     Each  Warrant is  exercisable  for one share of common stock at 110% ($5.50
per share) of the Offering price,  for a period of three years  commencing March
31, 2000. The Warrants are  redeemable (at $0.10 per warrant),  at the Company's
option  commencing  March 31, 2000 if the closing bid price of the common  stock
for 20 consecutive trading days exceeds 150% of the Offering price per share.

<PAGE>

     In late November  1997,  HAC  transferred  85,000 shares of Common Stock to
certain  employees  and  directors  of the  Company and an  individual  who is a
preferred  shareholder  and a member of HAC.  Such transfer has been treated for
accounting purposes as if such shares were issued by the Company as compensation
to such persons.  The Company recorded a deferred  compensation  charge equal to
the fair market value of the shares  ($297,500) and was amortizing  this balance
over a two-year  forfeiture period.  However,  in October 1998, HAC removed this
two-year  forfeiture  provision and the Company  accelerated its charge to stock
compensation  expense. As a result,  $297,500 was recorded to expense for fiscal
1998, of which $209,500 was recorded in the fourth quarter.

     As  compensation  for  the  Offering,   the  underwriters  received  a  10%
commission;  a 3% non-accountable  expense allowance and Warrants for 10% of the
number of shares of common stock and Warrants sold to the public. These Warrants
are   non-exercisable  for  one  year  following  the  Effective  Date  and  are
exercisable thereafter for a period of five years at 120% of the Offering price.
At closing,  the Company  paid the  Representative  $123,660,  representing  the
prepayment of a three-year  financial advisory and consulting  agreement.  As of
October 31, 1998, this financial advisory and consulting  agreement was mutually
terminated.  Additionally,  the  Representative  agreed  to modify  the  lock-up
arrangement with respect to shares owned by the Company's majority  shareholder,
HAC,  and  members  of  management.  The  termination  of the  lock-up  has been
accelerated  to January 1, 1999. As a result,  the Company in the fourth quarter
of fiscal 1998, accelerated the amortization of the prepaid three-year financial
advisory and consulting fee paid to the  Representative and recorded a charge to
operations  of $123,660 for fiscal  1998,  of which  approximately  $110,000 was
recorded in the fourth quarter of fiscal 1998.

     Products

     The Company offers its customers a wide selection of high-quality  consumer
audio, video and home theater products,  the distribution of which is limited to
specialty  retailers  (generally  referred  to  in  the  industry  as  "esoteric
brands.")  The Company is one of the  country's  largest  retailers of "esoteric
brands" manufactured by Bang and Olufsen, Marantz, McIntosh, Meridian and Adcom,
whose products the Company has sold for a number of years.  The Company believes
that it benefits from strong working relationships with these manufacturers. See
page 6, below, for a discussion about Bang & Olufsen.

     For the fifty-two weeks ended October 31, 1998, the Company's audio product
sales represented approximately 72% of the Company's net sales and yielded gross
profit  margins  of  approximately   40%.  The  Company's  video  product  sales
represented  approximately  25% of the  Company's  net sales and  yielded  gross
profit  margins  of   approximately   26%.  The  Company  also  provides  custom
installation  of  products  it sells.  Approximately  23% of net  product  sales
currently involve custom installation.  The labor portion of custom installation
presently  represents  approximately  3% of net sales.  The  Company  also sells
extended  warranties  on  behalf of  third-party  providers.  Sales of  extended
warranties  which yield a gross profit margin in excess of 50%,  represent 1% of
the Company's net sales.

<PAGE>

     The following table shows,  by percentage,  the Company's net product sales
attributable to each of the product categories for the periods indicated.  Audio
components include speakers, subwoofers,  receivers, amplifiers,  preamplifiers,
compact disc players,  cassette decks,  turntables and tuners.  The Company also
sells  digital  satellite  systems  (DSS) which are included in the  VCR/DVD/DSS
category.  Accessories  primarily include  headphones,  surge protectors,  blank
audio and videotapes and projection screens. The miscellaneous category includes
conventional telephones, answering machines, radios and other portable products.

                                         Fifty-Two Weeks      Fifty-Three
                                          Ended October       Weeks Ended
                                            31, 1998       November 1, 1997
                                       ------------------ ------------------

Audio Components                                52%                53%
Mini Audio Shelf Systems                         7                  6
TV and Projectors                               17                 16
VCR/DVD/DSS                                      7                  6
Furniture                                        4                  4
Cable and Wire                                   5                  5
Accessories                                      6                  6
Extended Warranties                              1                  1
Miscellaneous                                    1                  3
                                       ================== ==================
                                               100%               100%
                                       ================== ==================

     The percentage of sales by each product category is affected by promotional
activities,  consumer  preferences,  store  displays,  the  development  of  new
products and elimination or reduction of existing  products and, thus, a current
sales mix may not be indicative of the future sales mix.

     The Company believes that it is well positioned to benefit from advances in
technologies because new technologies tend to be expensive when first introduced
and the Company's target  customers  desire and can afford such products.  Three
new  technologies,  DVD,  plasma  flat-screen  television,  and high  definition
television,  have recently been  introduced.  The DVD player  provides  enhanced
picture  and sound  quality in a format far more  convenient  and  durable  than
videotape.  The plasma flat-screen  television allows a 40 inch television to be
only six inches from front to back. This allows the set to be far less obtrusive
and more easily  integratable  into the home.  High  definition  television will
significantly improve picture quality.

     The Company intends to continue its recent emphasis on custom  installation
(currently  representing  26% of net sales)  which can extend from a single room
audio/video  system  to an  entire  house  with  a  combined  selling  price  of
installation,  labor and product from about $5,000 to in excess of $100,000. The
Company believes custom installation provides the opportunity to bundle products
and increase margins. For example, rather than just selling a television with an
approximate gross profit margin of 26%, custom installation  enables the Company
to sell to the same customer speakers at a margin exceeding 40%,  accessories at
a margin approximating 50% and installation labor with margins of over 45%.

<PAGE>

     Based on customers' desires, custom installation projects frequently expand
on-site.  A single  room home  theater,  for  example,  during the course of the
installation can grow into a multi-room system with increased margins.

     Offering  custom   installation   affords  the  Company  a  unique  selling
opportunity not only because it may not be available at mass merchants, but also
because  custom   installation   can  generate  repeat  customers  and  customer
referrals.  Due to the complexity of the  installation  provided by the Company,
customers  generally remain with the Company,  providing the opportunity to sell
upgrades  to  existing  customers.  The recent  introduction  of DVD players and
advanced  televisions,   as  well  as  other  emerging   technologies,   present
significant opportunities for such upgrades.

     Operations

     Supplies, Purchasing and Distribution

     The Company purchases its products from approximately eighty manufacturers,
ten of which accounted for approximately 53% of the Company's  purchases for the
fifty-two weeks ended October 31, 1998. These ten  manufacturers are Adcom, Bang
&  Olufsen,  KEF,  Marantz,  McIntosh,  Meridian,   Mitsubishi,  Pioneer  Elite,
Sharpvision and Sony. No individual  manufacturer accounted for more than 10% of
the Company's  purchases for the year ended October 31, 1998,  but Sony,  Bang &
Olufsen,  Marantz,  and  Pioneer  Elite each  accounted  for more than five (5%)
percent of purchases for such period.

     The Company has entered into substantially identical dealer agreements with
each of Marantz  America,  Inc.,  Audio Control,  Sony,  Cinemapro  Corporation,
Mitsubishi  Electronics  America,  Inc., Lenbrook America, LLC (a distributor of
KEF products),  Pioneer Electronics (USA), Inc., NAD Electronics of America, and
Niles  Audio  Corporation,  Inc.  Under each  dealer  agreement,  the Company is
authorized to sell the  manufacturer's  products from specified retail locations
to retail  customers  and cannot sell the  products by  telephone or mail order.
Each agreement is for a term of a year or two, subject to renewal or extension.

     Under the dealer agreement between the Company and Mitsubishi,  the Company
is required to purchase an aggregate of $400,000 of equipment annually,  subject
to an increase.  The Company's  dealer  agreement  with Niles Audio requires the
Company to purchase at least $300,000 of equipment per year.

     The Company believes that competitive  sources of supply would be available
for many of the Company's  products if a current  vendor ceased to supply to the
Company.  However,  a loss of a major  source of supply of limited  distribution
product could have an adverse impact on the Company.

<PAGE>

     The  Company has sold the  product  line of a key  vendor,  Bang & Olufsen,
since  1980.  The  line  represented  approximately  $1,176,000  (6.8%)  of  the
Company's  net sales  for the  fifty-two  weeks  ended  October  31,  1998.  The
Company's  relationship  with Bang & Olufsen has changed.  The Company  believes
that its new relationship with Bang & Olufsen represents a positive step for the
Company's  growth,  although no assurance can be given.  Management's  belief is
based on its ability to open Bang & Olufsen  Branded  Stores  near its  existing
Harvey  locations,  together with the elimination of competition with respect to
Bang & Olufsen  products from other  retailers.  Bang & Olufsen has notified the
Company  that it will now focus on  developing  Bang & Olufsen  licensed  stores
("Branded Stores")  throughout the world, of which there are currently more than
250 stores  worldwide.  Bang & Olufsen  has,  accordingly,  canceled  its dealer
agreement with the Company and all other retailers effective May 31, 1999. After
this date, Bang & Olufsen products will only be available in Branded Stores.

     The Company  received a commitment from Bang & Olufsen allowing the Company
to open Branded Stores in Manhattan,  Long Island and  Connecticut.  Pursuant to
this  commitment,  the Company must complete  construction of these locations at
various dates through  November 1999.  Bang & Olufsen has authorized the Company
to open up to five  Branded  Stores,  but no  assurance  can be given  about the
number of Branded Stores that the Company will open.

     On January 7, 1999, as part of its  expansion  plan in the New York region,
the Company signed a lease and a related Prime Site Marketing  Agreement to open
a new 1,500 square foot Bang & Olufsen Branded Store in the Union Square area in
lower  Manhattan.  The  Company  plans to open this new store  prior to April 1,
1999.

     This  Branded  Store will be the first of two stores the  Company  plans to
open in Manhattan in 1999. The new store will sell highly  differentiated Bang &
Olufsen  products,   including   uniquely  designed  audio  systems,   speakers,
telephones,  headphones and accessories. The store will also sell video products
including LCD projectors,  DVD players and plasma flat-screen  televisions,  and
A/V furniture and  accessories.  The store will also offer  professional  custom
installation of multi-room audio and home theater systems.

     This new store will be the Company's  seventh,  and will be the third store
opened within the twelve months of its successful public offering,  completed in
April 1998.

     Due to the Company's  strong  relationships  with many of its suppliers and
its volume of  purchases,  the Company  has also been able to obtain  additional
manufacturers'  rebates based on volume buying levels. On occasion,  the Company
has been able to negotiate favorable terms on larger purchases, such as extended
payment terms, additional cooperative advertising contributions or lower prices,
particularly  on large  purchases.  In  addition to being a member of a consumer
electronics  industry  buying group called Home Theater  Specialists  of America
(HTSA), the Company is also a member of Professional Audio Retailers Association
(PARA) and Custom Electronics Design Installation  Association (CEDIA),  both of
which provide the Company with additional training in sales and technology.

<PAGE>

     Purchases are received at the Company's 5,500 sq. ft. warehouse  located in
Fairfield, New Jersey. Merchandise is distributed to the Company's retail stores
at least  twice a week (and more  frequently,  if needed),  using the  Company's
employees and equipment.

     The Company's management information system tracks current levels of sales,
inventory,  purchasing and other key  information  and provides  management with
information which facilitates  merchandising,  pricing, sales management and the
management of warehouse and store inventories. This system enables management to
review and analyze the  performance of each of its stores and sales personnel on
a periodic  basis.  The central  purchasing  department of the Company  monitors
current  sales and  inventory at the stores on a daily basis.  In addition,  the
Company  currently  conducts a physical  inventory  two times a year and between
such physical inventories it conducts monthly and daily cycle counts on selected
types of inventory.  The  purchasing  department  also  establishes  appropriate
levels of  inventory  at each  store and  controls  the  replenishment  of store
inventory based on the current delivery or replenishment schedule.

     The Company  historically has not had material losses of inventory and does
not experience material losses due to cost and market fluctuations, overstocking
or technology.  The Company's  inventory  turnover for the fifty-two week period
ended October 31, 1998, was approximately 2.9 times.

     Sales and Store Operations

     Retail sales are primarily made for cash or by major credit cards. Revenues
are recorded by the Company when the product or service is delivered or rendered
to customers. Customer deposits are recorded as liabilities until the product is
delivered,  at which time a sale is recorded and the  liability for the customer
deposit is relieved.

     In addition,  customers who qualify can obtain longer term financing with a
Harvey credit card,  which the Company  makes  available to its  customers.  The
Harvey credit card is issued by an unrelated  finance company,  without recourse
to the  Company.  The  Company  also  periodically,  as part of its  promotional
activities, makes manufacturer (i.e., Mitsubishi), sponsored financing available
to its  customers.  Generally,  the  cost of such  financing  is paid for by the
Company, but manufacturers  periodically  participate with and contribute to the
Company in financing these promotions.

     Each store is operated by a store manager and a senior sales manager. Store
managers  report to a Vice  President of  Operations  who oversees all sales and
store  operations,  and who is further  responsible  for sales  training and the
hiring of all retail  employees.  Every  Company  store has at least one in-home
audio/video specialist who will survey the job site at a customer's home, design
the custom  installation and provide a cost estimate.  Each store  independently
services  its custom  installations  through a project  manager and  experienced
installers  employed at the store.  All stores are staffed  with  professionally
trained salespeople and warehouse personnel.  Salespeople are paid a base salary
plus commission based on gross margins.

<PAGE>

     All stores have an on-line point of sale computer  system which enables the
store managers and corporate  headquarters  to track sales,  margins,  inventory
levels,  customer  deposits,  back  orders,  merchandise  on loan to  customers,
salesperson  performance and customer  histories.  Store managers  perform sales
audit functions  before reporting daily results to the main office in Lyndhurst,
New Jersey.

     Services and Repairs

     Products under warranty are delivered to the appropriate  manufacturer  for
repair.  Other repairs are sent to the  manufacturers  or an independent  repair
company. Revenues from non-warranty services are not material.

     The Company  offers an extended  warranty  contract  for most of the audio,
video and other merchandise it sells,  which extended warranty contract provides
coverage  beyond the  manufacturer  warranty  period.  Extended  warranties  are
provided  by an  unrelated  insurance  company  on a  non-recourse  basis to the
Company.  The Company  collects the retail sales price of the extended  warranty
contract from customers and remits the customer  information and the cost of the
contract  to  the  insurance  company.  Sales  of  extended  warranty  contracts
represent 1% of the Company's net sales.  The warranty  obligation is solely the
responsibility of the insurance company.

     Competition

     The Company competes in the New York Metropolitan area with mass merchants,
mail order  houses,  discount  stores and numerous  other  consumer  electronics
specialty  stores.  The  retail  electronics  industry  is  dominated  by  large
retailers with massive,  "big box" retail facilities which aggressively discount
mass  merchandise.  These  retailers  operate on narrow profit  margins and high
volume,  driven by aggressive  advertising  emphasizing  low prices.  Nationwide
industry  leaders  are  Circuit  City and Best  Buys.  The New  York  region  is
dominated  by Circuit City and local chains  including  P.C.  Richard & Son, The
Wiz, J&R Music World and Tops Appliance.

     Many of the  competitors  sell a  broader  range  of  electronic  products,
including computers, camcorder and office equipment, and many have substantially
larger sales and greater  financial and other  resources  than the Company.  The
Company  competes by  positioning  itself as a retailer of high quality  limited
distribution  audio and video  products and by offering  services such as custom
installations which are not generally offered by the mass merchants.

     Very few, if any, of the audio  products  sold by the  Company,  other than
radios and other portable products, are available at the mass merchants.  Of the
major video  products sold by the Company,  generally  only Sony and  Mitsubishi
televisions are sold by the mass merchants.

<PAGE>

     The Company seeks to reinforce its  positioning  by displaying its products
in lifestyle home vignettes in an attractive and pleasing store  environment and
by offering  personalized  service through trained sales personnel who are fully
familiar with all of the Company's products.

     Advertising

     During the late  1980's and early  1990's,  the Company  introduced  lesser
quality product lines to become more price competitive.  This strategy placed it
in direct competition with mass merchants. This strategy sent a mixed message to
the traditional  customers of the Company.  Commencing in late 1995, the Company
refocused its operations by returning to its traditional marketing strategy.

     The Company now uses smaller,  but more frequent  advertising,  emphasizing
image,  products,  and  technology  in The New York  Times,  New York  Magazine,
Greenwich  Magazine,  Newsday and the  Westchester  Gannett.  The  Company  also
distributes  direct mail advertising  several times a year to reach its customer
database of over  70,000.  Some of the direct mail  promotions  are for specific
manufacturers, products, or technology, and are supported by the manufacturers.

     Both the print and direct mail  advertising  consistently  offer attractive
financing alternatives on purchases on credit without interest for six or twelve
months.  The Company also  maintains an Internet  site on the World Wide Web, at
www.harveyonline.com.  The site promotes the Company's  manufacturers  and their
products  as  well  as the  Company's  retail  stores  and  custom  installation
services.

     The following  table shows the Company's  gross  advertising  costs and net
advertising expense as a percentage of net sales for the periods presented.  Net
advertising  expense  represents gross advertising cost less market  development
funds,  cooperative  advertising and other promotional amounts received from the
manufacturers.

                                         Fifty-Two Weeks     Fifty-Three Weeks
                                        Ended October 31,    Ended November 1,
                                               1998                 1997
                                      -------------------- --------------------

Gross advertising costs                     $962,000            $1,048,000
Net advertising expenses                     233,000               401,000
Percentage of net sales                       1.3%                 2.6%

     The  Company  has  retained  an  outside  advertising  agency who is paid a
monthly  retainer of $9,000  plus  approved  expenses.  This  agreement  expires
January 31, 1999,  however,  the Company intends to renew this agreement for one
year.

     Licenses and Intellectual Properties

     The Company owns two registered  service marks "HARVEY," issued on March 7,
1989,  and "THE TEMPLE OF HOME  THEATER,"  issued on May 13, 1997.  Both service
marks are registered  for  International  Class 42, which includes  retail store
services  in the field of  audio,  video,  consumer  electronics,  home  theater
products and custom installation of home theater products.  The Company believes
that its service marks have significant value and are important in marketing the
Company's products.

<PAGE>

     Employees

     As of October 31, 1998,  the Company  employed  approximately  86 full-time
employees  of  which  15  were  management  personnel,  10  were  administrative
personnel, 32 were salespeople, 12 were warehouse workers and 17 were engaged in
custom installation.

     The salespeople,  warehouse workers, and installation staff (61 people) are
covered by a collective  bargaining  agreement  with the Company  which  expires
August 1, 2000.  The Company has never  experienced a material work stoppage and
believes  that  its   relationships   with  its  employees  and  the  union  are
satisfactory.

     Item 2. Description of Properties

     All of the premises the Company presently  occupies are leased.  Management
believes that the Company's facilities are adequate and suitable for its present
business.  The Company  believes that  adequate  locations are available for its
proposed expansion.

     The Company leases premises at 205 Chubb Avenue,  Lyndhurst,  New Jersey, a
24,400 square foot facility,  which the Company uses as executive  offices.  The
lease expires April 30, 2001,  subject to a 5 year renewal option. The warehouse
area of 19,500 square feet of the Lyndhurst  facility was sublet in October 1997
for  approximately  $145,000 per year through April 2001. The Company  currently
leases a 5,500 square foot warehouse in Fairfield,  New Jersey at  approximately
$40,000 per year, pursuant to a lease which expires September 2002.



<PAGE>


     The Company leases the following retail premises:
<TABLE>
<CAPTION>

                                          Expiration Date
                                            of Current                          Approximate
               Location                    Annual Lease     Renewal Options   Selling Square
                                                                                  Footage            Rent
---------------------------------------- ------------------ ---------------- ------------------ ----------------
<S>                                        <C>                  <C>               <C>                <C>

2 West 45th Street                          6/30/2005            None              7,500           $  498,000
New York, NY

556 Route 17 North                          6/30/2003            None              7,000           $  239,000
Paramus, NJ

888 Broadway                                1/1/2001             None              4,000           $  300,000
at 19th St.
New York, NY
(within ABC Carpet & Home)

19 West Putnam Ave.                         9/30/2001           5 years            5,300           $  205,000
Greenwich, CT

44 Glen Cove Road                           8/15/2009            None              4,600           $  138,000
Greenvale, NY

115 Main St.                                8/31/2008            None              3,100           $   72,000
Mt. Kisco, NY

973 Broadway                                12/31/2005          5 year             1,500           $  104,000
New York, NY
(Bang & Olufsen Branded Store)

</TABLE>

     Item 3. Legal Proceedings.

     Except as set forth herein,  the Company believes that it is not a party to
any material legal  proceedings  other than those arising in the ordinary course
of business  and which are fully  covered by  insurance.  The Company  maintains
general  liability and commercial  insurance in amounts believed to be adequate.
However,  there can be no assurance  that such  amounts of insurance  will fully
cover claims made against the Company in the future.



<PAGE>


     There are outstanding  disputed tax claims of  approximately  $50,000 which
were made against the Company during its Chapter 11 proceeding.  The Company has
provided reserves of $10,000 for such taxes,  penalties and interest,  which the
Company  believes to be adequate.  However,  there can be no assurance  that the
reserve will be sufficient to cover these tax claims.

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

     On July 23,  1998,  the  Company's  shareholders  at an Annual  Meeting (i)
elected  Franklin C. Karp (2,987,183  shares in favor,  24,245 shares  against),
Joseph J. Calabrese (2,989,183 shares in favor, 22,245 shares against),  Michael
E. Recca (2,987,145 shares in favor,  24,343 shares against),  Fredric J. Gruder
(2,989,085 shares in favor, 22,343 shares against),  Stewart L. Cohen (2,989,123
in favor,  22,305 shares against) and William F. Kenny III (2,898,123  shares in
favor,  22,305  shares  against) as directors of the Company;  (ii) approved the
appointment of Ernst & Young LLP as the Company's  independent  auditors for the
year ending October 31, 1998 (2,994,661 shares in favor, 15,264 shares against);
and (iii) ratified the Company's Stock Option Plan  (1,993,234  shares in favor,
70,441 shares against).

Part II

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

The  Company's  securities  are traded on the NASDAQ  SmallCap  Market under the
symbols  "HRVE" for the Common  Stock and "HRVEW"  for the  Warrants to purchase
Common Stock

The outstanding shares of Common Stock are currently held by approximately 1,600
shareholders of record,  and the Preferred Stock by five holders of record.  The
transfer  agent and  registrar  for the Common Stock is  Registrar  and Transfer
Company, 10 Commerce Drive, Cranford, New Jersey 07016

The following table indicates the quarterly high and low stock prices for fiscal
year 1998:

Quarter Ended                                    High              Low
-------------------------                  ----------------- ----------------

January 31, 1998                               N/A               N/A
May 2, 1998                                    $6.00             $2.00
August 1, 1998                                 $4.50             $1.625
October 31, 1998                               $2.625            $  .625

The Company has paid no dividends on its common stock for the last two years and
does not expect to pay dividends in the future.

<PAGE>

Description of Securities

The total authorized  capital stock of the Company consists of 10,000,000 shares
of Common Stock with a par value of $0.01 per share ("Common Stock"), and 10,000
shares of 8.5% Cumulative Convertible Preferred Stock with a par value of $1,000
per share ("Preferred Stock").  The following  descriptions contain all material
terms and  features of the  securities  of the Company and are  qualified in all
respects by reference to the Company's  Certificate of Incorporation and Amended
and Restated By-Laws of the Company, copies of which are filed as exhibits.

Common Stock

The Company is authorized to issue 10,000,000  shares of Common Stock with a par
value  of  $0.01  per  share.  As of  January  8,  1999,  3,282,833  shares  are
outstanding and held by approximately 1,600 shareholders of record.

The holders of Common Stock are entitled to one vote per share on all matters to
be voted on by stockholders.  There is no cumulative  voting with respect to the
election  of  directors,  with the result  that  holders of more than 50% of the
shares voted for the election of directors can elect all of the  directors.  The
holders of Common  Stock are  entitled  to  receive  dividends  when,  as and if
declared by the Board of Directors from sources legally available  therefor.  In
the event of  liquidation,  dissolution  or winding up of the  Company,  whether
voluntary or  involuntary,  and after  payment in full of the amount  payable in
respect of the Preferred Stock, the holders of Common Stock are entitled, to the
exclusion of the holders of the Preferred  Stock, to share ratably in the assets
of the Company  available  for  distribution  to  stockholders  after payment of
liabilities  and  after  provision  for each  class  of  stock,  if any,  having
preference  over the Common  Stock.  Holders of Common Stock have no  preemptive
rights.  All  outstanding  shares  are,  and all shares to be sold and issued as
contemplated  hereby,  will be fully paid and non-assessable and legally issued.
The Board of Directors is authorized to issue additional  shares of Common Stock
within the limits  authorized by the Company's  charter and without  stockholder
action.

Preferred Stock

The Company's  Certificate  of  Incorporation  authorizes the issuance of 10,000
shares of 8.5% Cumulative Convertible Preferred Stock ("Preferred Stock") with a
par value of $1,000 per share.  As of January 8, 1999,  875 shares of  Preferred
Stock were issued and outstanding and were held by five holders of record.

The Preferred Stock may be issued from time to time without stockholder approval
in one or more  classes  or  series.  A  holder  of the  Preferred  Stock is not
entitled to vote except as required by law.

Dividends  on the  Preferred  Stock  are  cumulative  from  the day of  original
issuance, whether or not earned or declared. In the event the Board of Directors
declares  dividends  to be paid  on the  Preferred  Stock,  the  holders  of the
Preferred  Stock will be entitled to receive  semiannual  dividends  at the rate
(the "Preference  Rate") of eighty-five  ($85) dollars per share payable in cash
on the last  business day of June and December in each year.  For calendar  year
1997, the Company elected to defer payment of the dividends. The Preference Rate
for  calendar  year 1997 is $105 per share,  which  will be paid in three  equal
installments  with  interest at the rate of 8.5% per annum on the last  business
days of December 1998, 1999 and 2000.  Preferred Stock dividends of $36,882 were
paid in fiscal 1998. In addition, no dividend shall be paid, or declared, or set
apart for payment upon, and no other  distribution shall at any time be declared
or made in respect of, any shares of Common Stock, other than a dividend payable
solely in, or a distribution of, Common Stock, unless full cumulative  dividends
of the Preferred  Stock for all past  dividend  periods and for the then current
dividend  period have been paid or have been declared and a sum  sufficient  for
the payment thereof has been set apart.

<PAGE>

The Preferred Stock shall be redeemable, at the Company's option, in whole or in
part,  upon payment in cash of the Redemption  Price in respect of the shares so
redeemed.  The "Redemption Price" per share shall be equal to the sum of (i) One
Thousand  and 00/100  ($1,000.00)  Dollars  and (ii) all  dividends  accrued and
unpaid  on such  shares  to the  date of  redemption.  If less  than  all of the
outstanding  Preferred  Stock is to be redeemed,  the redemption will be in such
amount and by such method (which need not be by lot or pro rata), and subject to
such other  provisions,  as may from time to time be  determined by the Board of
Directors.

In the event of liquidation,  dissolution or winding-up of the Company,  whether
voluntary or  involuntary,  resulting in any  distribution  of its assets to its
shareholders,  the holders of the Preferred Stock  outstanding shall be entitled
to receive in respect of each such share an amount  which  shall be equal to the
Redemption  Price, and no more, before any payment or distribution of the assets
of the Company is made to or set apart for the holders of Common Stock.

Each share of Preferred Stock may be convertible  into shares of Common Stock at
the option of the holder,  in whole or in part, as follows:  until  December 31,
2000, (i) 50% of the Preferred Stock will be convertible at $6.00 per share; and
(ii) $7.50 per share for the balance. Commencing January 1, 2001, the Conversion
Price shall be equal to the average of the closing bid price of the Common Stock
over the 45 trading days preceding January 1, 2001.

If at any time prior to the  exercise  of the  conversion  rights  afforded  the
holders of the Preferred  Stock, the Preferred Stock is redeemed by the Company,
in whole or in part,  then the  conversion  right shall be deemed  canceled with
respect to such redeemed stock, as of the date of such redemption.

In case of any  capital  reorganization  or any  reclassification  of the Common
Stock,  or in case of the  consolidation  or merger of the Company  with or into
another corporation, or the conveyance of all or substantially all of the assets
of the Company to another corporation,  each Preferred Share shall thereafter be
convertible  into the number of shares of stock or other  securities or property
to which a holder of the  number of shares  of  Common  Stock  deliverable  upon
conversion  of  such  Preferred   Stock  would  have  been  entitled  upon  such
reorganization, reclassification, consolidation, merger, or conveyance.

<PAGE>

Item 6. Management's Discussion and Analysis or  Plan of Operation.

The following discussion and analysis contains forward-looking  statements which
involve  risks and  uncertainties.  When used  herein,  the words  "anticipate,"
"believe,"  "estimate,"  and "expect" and similar  expressions as they relate to
the Company or its  management  are  intended to identify  such  forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. The Company's  actual results,  performance or  achievements  could differ
materially  from the results  expressed  in or implied by these  forward-looking
statements.

General

The  following  discussion  should  be read in  conjunction  with the  Company's
audited financial  statements for the fifty-two weeks ended October 31, 1998 and
the fifty-three weeks ended November 1, 1997,  appearing  elsewhere in this Form
10-KSB. The unaudited financial  information for the fifty-two week period ended
October 26, 1996 is presented for comparison purposes only.



<PAGE>


Statements of Operations Data:
<TABLE>
<CAPTION>

                                                         Fifty-Two       Fifty-Three        Fifty-Two
                                                        Weeks Ended      Weeks Ended       Weeks Ended
                                                        October 31,      November 1,       October 26,
                                                           1998              1997              1996
                                                      ---------------- ----------------- -----------------
                                                                                         (Unaudited) (1)

                                                               (In thousands, except share data)
<S>                                                       <C>              <C>            <C>   

Net sales                                                  $ 17,262         $ 15,398         $  14,025
Cost of sales                                                10,646            9,765             9,230
Gross profit                                                  6,616            5,633             4,796
                                                      ---------------- ----------------- -----------------
Gross profit percentage                                       38.3%            36.6%             34.2%
Interest expense                                                224              325               506
Selling, general and administrative expenses                  6,756            6,706             6,473
Other income                                                     70               73                96
Stock compensation expense                                      297                -                 -
Financial advisory and consulting fee to Underwriter            124                -                 -
Costs associated with lease transaction                         114                -                 -
                                                      ---------------- ----------------- -----------------
Loss before reorganization expenses, fresh start
   adjustments and extraordinary item                          (829)          (1,325)           (2,087)
Reorganization expenses, net                                      -                -              (885)
Fresh start adjustments                                           -                -             1,858
Extraordinary gain on forgiveness of debt                         -                -             5,339
                                                      ---------------- ----------------- -----------------
Net (loss) income                                              (829)          (1,325)            4,225
Accretion of Preferred Stock                                     (6)             (78)                -
Preferred Stock dividend requirement                            (83)             (71)                -
                                                      ================ ================= =================
Net (loss) income attributable to Common Stock             $   (918)        $ (1,474)         $  4,225
                                                      ================ ================= =================

Basic and diluted net (loss) applicable to common
   shareholders                                              $(.32)           $(.65)
                                                      ================ =================

Basic and diluted weighted average outstanding
   during the year                                          2,844,751        2,257,833
                                                      ================ =================


(1) Presented for comparison purposes only.

</TABLE>

<PAGE>


Balance Sheet Data:

                                     
                                   October 31, 1998          November 1,
                                                              1997 (1)
                                  ------------------      ------------------

Working capital                         $2,355                  $1,215
Total assets                             8,389                   7,314
Long-term liabilities                      266                   2,364
Total liabilities                        2,865                   5,301
Total shareholders' equity               5,525                   2,013


     (1)--The  balance  sheet  information  at November 1, 1997 is  presented to
reflect the  Company's  Preferred  Stock in  stockholders'  equity as though the
removal of a Preferred  Stock  redemption  feature,  which  occurred in December
1997, had taken place on November 1, 1997.

     Fifty-Two  Weeks Ended  October 31, 1998 as Compared to  Fifty-Three  Weeks
Ended November 1, 1997

     The fiscal year ended October 31, 1998 is a fifty-two week year as compared
to fifty-three weeks for the prior year.

     Net Loss

     The net loss for the fifty-two  weeks ended October 31, 1998 was reduced to
$828,871 as compared to a net loss of $1,325,212 for the fifty-three weeks ended
November  1,  1997.  The net  loss  for  fiscal  1998  included  non-cash  stock
compensation expense of $297,500 and various costs associated with the surrender
of a real  estate  lease of  $113,782.  Additionally,  fiscal  1998  includes an
expense  of  $123,660   representing  three  years  of  financial  advisory  and
consulting  fees  pre-paid to the  underwriter  at the closing of the  Company's
successful  public  offering.  These fees, which were to be amortized over three
years,  were fully  charged  to expense in fiscal  1998 as a result of the early
termination  of the  Financial  Advisory and  Consulting  Agreement  between the
Company and its  underwriter.  Such  charges to  operations  during  fiscal 1998
aggregated $534,942 or approximately $.19 per share.  Excluding these charges,
the  Company's  loss was  $293,929  for fiscal  1998,  as  compared to a loss of
$1,325,212 for fiscal 1997.

     Revenues

     Net  sales  for the  fifty-two  weeks  ended  October  31,  1998  increased
approximately  $1,864,000 or 12.1% over the fifty-three  weeks ended November 1,
1997.  Comparable store sales for fiscal 1998 increased  approximately  15.8% as
compared to fiscal 1997.

     Fiscal  1998  includes  sales  from three  mature  stores and one new store
opened in Greenwich,  Connecticut in January 1997.  Also included in fiscal 1998
sales is  approximately  one month of sales relating to the newly acquired Mount
Kisco store,  prior to its  renovation  in November  1998.  Fiscal 1997 includes
sales from three mature stores and the Greenwich, Connecticut store for only ten
months.  Fiscal 1997 also  includes  three months of sales from one retail store
which was closed in February 1997.

<PAGE>

     The  increase in the  Company's  net sales is  attributed  to  increases in
volume of goods and  services  sold and to a lesser  extent,  changes in product
lines. The prices of its goods have remained relatively constant.  The Company's
sales continue to benefit from the successful  marketing campaign where emphasis
is  placed on the  quality  of its  manufacturers'  products  displayed  in home
vignette  settings,  new technologies,  service and custom  installation of home
theater and  multi-room  audio/video  systems.  In fiscal 1998,  this  marketing
campaign  included  radio  advertising  for  the  latter  part of the  year  and
additional direct mail activities during the year. Custom installation  services
also continue to expand and account for approximately 26% of net sales for 1998,
as compared to approximately 20% for fiscal 1997.

     As part of its successful  marketing plan, the Company offers its customers
who  qualify a Harvey  credit  card  which is issued by an  unrelated  financial
company.  The Company continuously offers consumers using the Harvey credit card
90 days interest-free financing on any purchases.  As a promotion,  the Company,
from time to time,  offers  consumers  using the Harvey  credit card  attractive
financing  alternatives  of 6 or 12 months  interest-free  financing on specific
products.  The Company  pays the finance  company a fee in  connection  with all
interest-free financing which is a percentage of such sales. For fiscal 1998 and
1997, the cost to the Company for all interest-free  financing was approximately
$44,000 and $34,000, respectively.

     Costs and Expenses

     Total  cost of  sales  for the  fifty-two  weeks  ended  October  31,  1998
increased  approximately  $882,000  or 9.0%  from the  fifty-three  weeks  ended
November 1, 1997.  This was primarily the result of increased  comparable  store
sales  offset  by the one store  closed in  February  1997,  and by the  overall
improvement of gross profit margins.

     Gross  profit  margin for the  fifty-two  weeks ended  October 31, 1998 was
38.3% as compared to 36.6% for the fifty-three weeks ended November 1, 1997.

     The gross profit margin  improved in fiscal 1998 as compared to fiscal 1997
as a result of  increased  custom  installation  sales which have  higher  gross
profit  margins.  Additionally,  an increase  was  realized  from  merchandising
changes  started in fiscal 1997. The Company added higher margin products to its
product line from new  manufacturers  and eliminated lower margin products.  The
marketing  campaign for fiscal 1998 also placed less emphasis on price sensitive
advertisements  as compared to fiscal 1997.  Finally,  the Company maximized its
prompt payment purchase  discounts from its vendors,  while further reducing its
inventory losses from shrinkage,  which was already substantially below industry
average.
<PAGE>

     Selling,  general and  administrative  expenses ("SG&A expense")  increased
less than 1% or approximately  $50,000 for the fifty-two weeks ended October 31,
1998 as compared to the fifty-three weeks ended November 1, 1997.

     The  increase in SG&A  expenses  for fiscal 1998 as compared to fiscal 1997
was primarily due to a general  increase in payroll and payroll  related  items,
professional  expenses,  and  various  store  operating  expenses as a result of
increased sales.  These increases were partially  offset by reduced  advertising
and  occupancy  costs.  The decrease in occupancy  was primarily the result of a
reduction in warehouse  space beginning in fiscal 1998 and from the closing of a
retail store in February 1998.

     Interest  expense  decreased   approximately  $102,000  or  31.2%  for  the
fifty-two  weeks ended  October 31,  1998 as compared to the  fifty-three  weeks
ended November 1, 1997.

     The decrease in interest expense for fiscal 1998 as compared to fiscal 1997
was primarily due to the elimination of debtor-in-possession financing which was
outstanding  through  December  1996,  and the reduction of interest paid to the
Company's lender, subsequent to the paydown of the credit facility in April 1998
using part of the net proceeds from the public offering.

     Fifty-Three Weeks Ended November 1, 1997 as Compared to the Fifty-Two Weeks
Ended October 26, 1996 (Unaudited--Operations Prior to Reorganization)

     The  fiscal  year  ended  November  1, 1997 is a  fifty-three  week year as
compared to fifty-two weeks for the prior year.

     Net (Loss) Income

     The net  loss  for  the  fifty-three  weeks  ended  November  1,  1997  was
$1,325,000 as compared to net income of $4,225,000 for the fifty-two weeks ended
October 26, 1996.  Net income for the  fifty-two  weeks ended  October 26, 1996,
includes an  extraordinary  gain on  forgiveness  of debt of $5,339,000  and the
effect of certain fresh start adjustments  relating to the Company's  successful
reorganization increasing net income by $1,858,000.  Net reorganization expenses
relating  to the  Company's  Chapter 11 process  for the  fifty-two  weeks ended
October 26, 1996 were $885,000.  There were no  reorganization  expenses for the
fifty-three weeks ended November 1, 1997.

     Revenues

     Net sales for the  fifty-three  weeks ended November 1, 1997 increased 9.8%
or  $1,373,000  over the fifty-two  weeks ended  October 26, 1996,  despite 1996
consisting  of  revenues  from  five  established  stores  as  compared  to 1997
revenues,  which consisted of only three established stores and the new store in
Greenwich,  Connecticut.  Comparable store sales for the fifty-three weeks ended
November 1, 1997  increased by 26.7% or  $2,786,000 as compared to the fifty-two
weeks ended  October  26,  1996.  The  increase in the  Company's  revenues  was
attributable  to increases in the volume of goods and  services  sold,  and to a
lesser extent,  changes in product  lines.  The prices of its goods and services
remained relatively constant. In 1996, the Company operated in Chapter 11 and at
times  during  the year did not have  adequate  inventory  levels.  The  Company
believes it currently has adequate inventory levels to support sales.

<PAGE>

     The  increase in sales in fiscal 1997 was due  primarily  to the  Company's
marketing   campaign   where   emphasis   was  placed  on  the  quality  of  its
manufacturers'  products, new technologies,  service, and custom installation of
home  theater  and  multi-room  audio/video  systems.  The  Company  offers  its
consumers  attractive  financing  alternatives  on purchases,  without paying or
incurring  interest  expenses for a six or  twelve-month  period.  Customers who
qualify can obtain longer term  financing  with a Harvey credit card,  which the
Company makes available to its customers. The Harvey credit card is issued by an
unrelated  finance company.  The substantial use of such financing  alternatives
began in June 1997. The total amount of additional  fees paid by the Company for
the five month period ended  November 1, 1997 was  approximately  $34,000.  This
credit  alternative  is a linchpin of the  Company's new  advertising  campaign.
Additional direct mail promotions were also successful during the period.

     Costs and  Expenses.  Total cost of sales for the  fifty-three  weeks ended
November 1, 1997  increased  5.8% or  $535,000  from the  fifty-two  weeks ended
October 26, 1996.  This was primarily the result of increased  comparable  store
sales offset by store closings.

     Gross profit margin for the  fifty-three  weeks ended  November 1, 1997 was
36.6%,  as compared to 34.2% for the fifty-two weeks ended October 26, 1996. The
gross profit margin  increased as a result of the Company's  marketing  campaign
where product  quality was emphasized  rather than price.  The gross margin also
increased as a result of increased sales of custom installation which has higher
gross profit margins.  Additionally, an increase was realized from merchandising
changes made in late 1996 and throughout  1997, where new higher margin products
from new manufacturers were added and lower margin products, such as camcorders,
cellular phones, and home office equipment, were eliminated.

     Selling, general and administrative expenses increased 3.6% or $233,000 for
the fifty-three  weeks ended November 1, 1997 as compared to the fifty-two weeks
ended October 26, 1996.  Comparable  store selling,  general and  administrative
expenses increased 12.2% or $631,000 for the fifty-three weeks ended November 1,
1997 as compared to the fifty-two  weeks ended October 26, 1996. The fifty-three
weeks ended November 1, 1997 includes net advertising  expenses of $401,000,  as
compared  to  $221,000  for  the   fifty-two   weeks  ended  October  26,  1996.
Additionally, the fifty-three weeks ended November 1, 1997 includes an aggregate
amount for management fees and amortization of reorganization value in excess of
amounts  allocable to identifiable  assets of $96,000.  The Company  incurred no
expense for these items  during the  fifty-two  weeks  ended  October 26,  1996.
Payroll  and  payroll  related  expenses  increased  15.2% or  $418,000  for the
fifty-three  weeks ended  November 1, 1997 as  compared to the  fifty-two  weeks
ended October 26, 1996. This was primarily the result of additional  commissions
and incentives on increased sales and gross margins and the hiring of additional
sales,  warehouse and custom  installation  personnel.  The Company also hired a
full-time Vice President of Operations in June 1996.

     Interest  expense  decreased  35.8% or $181,000 for the  fifty-three  weeks
ended  November 1, 1997,  as compared to the  fifty-two  weeks ended October 26,
1996.   Interest   expense   decreased   primarily   from   the   reduction   of
debtor-in-possession  financing, including the loan servicing fees due to HAC in
the current  period (which was converted to equity).  The decrease was offset by
interest on a $350,000 loan made by E. H. Arnold,  a Preferred  Stockholder  and
member of HAC, during February and March 1997.

<PAGE>

     Liquidity and Capital Resources

     On November 13, 1996, the  Bankruptcy  Court  confirmed the  Reorganization
Plan  ("Confirmation  Date"). The effective date of the Reorganization  Plan was
December 26, 1996 (the  "Reorganization  Date").  For information  regarding the
Reorganization  Plan,  reference  is made to Item 1,  above,  and the  notes  to
financial statements.

     The Company's  ratio of current assets to current  liabilities was 1.91, or
approximately  $2,355,000,  at  October  31,  1998,  as  compared  to  1.41,  or
approximately $1,215,000, at November 1, 1997. The increase in the current ratio
at October 31, 1998 was  primarily  the result of the impact of the net proceeds
from the Company's successful public offering offset by the Company's net loss.

     Net cash used in operating  activities  was  approximately  $1,229,000  for
fiscal 1998 as compared to a net use of $550,000 for fiscal 1997, as the Company
used its  revolving  line of credit  facility and a portion of the proceeds from
the public offering to reduce trade payables,  accrued  expenses,  other current
liabilities and income taxes, and to fund an increase in accounts receivable and
prepaid  expenses and other current  assets.  This use of cash was offset by the
reduction in the Company's net loss.

     Net cash used in investing activities was approximately $504,000 for fiscal
1998 as compared to  approximately  $663,000 used for fiscal 1997.  The decrease
was primarily due to the redemption of a certificate of deposit in fiscal 1998.

     Financing  activities  provided net cash of  approximately  $1,944,000  for
fiscal 1998 as compared to net cash  provided of  approximately  $1,220,000  for
fiscal 1997.  The increase was primarily due to the net proceeds from the public
offering offset by, among other items, the temporary  repayment of the Company's
revolving line of credit  facility with Paragon  Capital LLC ("Paragon") and the
repayment of a term loan.

     On November 5, 1997, the Company  entered into a three-year  revolving line
of credit  facility with Paragon whereby the Company may borrow up to $3,300,000
based upon a lending  formula (as  defined)  calculated  on eligible  inventory.
Proceeds  from  Paragon  were used to pay down and  cancel the  existing  credit
facility with Congress Financial Corporation ("Congress"), reduce trade payables
and pay  related  costs of the  refinancing.  The Paragon  facility  provides an
improved  advance rate of the Company's  inventory  which resulted in additional
net  financing  of  approximately  $750,000  (after  expenses)  compared  to the
Company's previous facility with Congress. The interest rate on borrowings up to
$2,500,000 is 1% in excess of the rate of interest announced publicly by Norwest
Bank,  Minnesota,  National  Association,  from time to time as its "prime rate"
(the "Prime Rate"). The rate charged on outstanding  balances over $2,500,000 is
1.75% above the Prime Rate. A commitment  fee of $49,500 was paid by the Company
at closing and a facility  fee of  three-quarters  of one percent  (.75%) of the
maximum credit line will be charged in each year.  Monthly  maintenance  charges
and a termination  fee also exist under the line of credit.  At January 8, 1999,
there are no outstanding  borrowings under the Paragon  revolving line of credit
facility.

<PAGE>

     The maximum amount of borrowing available to the Company under this line is
limited to formulas  prescribed in the loan  agreements.  The Company's  maximum
borrowing  availability is equal to 75% of acceptable inventory,  minus the then
unpaid  principal  balance  of the  loan,  minus  the  then  aggregate  of  such
availability  reserves as may have been  established by Paragon,  minus the then
outstanding stated amount of all letters of credit.

     Pursuant to the credit facility the Company must maintain certain levels of
inventory,  trade accounts payable,  inventory purchases, net income or loss and
minimum gross profit margins.  Additionally, the Company's capital expenditures,
assuming no retail store expansion, could not exceed $125,000 for fiscal 1998.

     Paragon  obtained a senior security  interest in  substantially  all of the
Company's  assets.  The revolving line of credit facility  provides Paragon with
rights of  acceleration  upon the breach of certain  financial  covenant  or the
occurrence of certain customary events of default  including,  among others, the
event of bankruptcy.  The Company is also  restricted  from paying  dividends on
Common  Stock,  retiring or  repurchasing  its Common  Stock,  and entering into
additional indebtedness (as defined).

     Paragon also received a warrant to purchase  125,000 shares of Common Stock
at an exercise  price of $5.50 per share  subject to  adjustment  under  certain
circumstances,  which is  currently  exercisable  and  expires on April 3, 2001.
Paragon's  warrant and the underlying  shares have not been registered under the
Securities Act.

     On April 7, 1998, the Company completed an issuance of its common stock and
common  stock  warrants in the  Offering.  The Offering  was  co-managed  by The
Thornwater  Company,  L.P.,  which sold 1,200,000 shares of the Company's common
stock of which 1,025,000 shares were sold by the Company and 175,000 shares were
sold by HAC.  2,104,500  Warrants to acquire  additional shares of the Company's
common stock were also sold by the Company.  The net proceeds from the Offering,
approximately  $4.1  million,  are being used for  retail  store  expansion  and
general working capital purposes.

     In April  1998,  the net  proceeds  from the  Offering  were  used to repay
temporarily  the Company's  credit facility  $(2,262,306);  retire the principal
$(350,000) and interest  $(47,627) of a term loan and for retail store expansion
and general working capital purposes.

     Each  Warrant is  exercisable  for one share of common stock at 110% ($5.50
per share) of the Offering price,  for a period of three years  commencing March
31,  2000.  The  Warrants  are also  redeemable  (at $.10 per  Warrant),  at the
Company's  option,  commencing  March 31,  2000 if the  closing bid price of the
common stock for 20 consecutive  trading days exceeds 150% of the Offering price
per share.

<PAGE>

     The Company's management believes that the Company's overhead structure has
the capacity to support additional stores without  significant  increase in cost
and personnel, and, consequently,  that revenues and profit from new stores will
have a positive  impact on the  Company's  operations.  The  Company  intends to
utilize the remaining net proceeds from the Offering and its credit  facility to
open additional retail stores.

     In July 1998, as a part of its  expansion  plan,  the Company  acquired the
business of the Sound Mill, Inc. and its  subsidiary,  Loriel Custom Audio Video
Corporation  (the "Sound Mill"),  to acquire  certain assets and business of the
Sound Mill for a purchase  price of $200,000 (as adjusted) in cash. The purchase
price was allocated as follows:  $50,000 for leasehold improvements,  equipment,
vehicles and tools and $150,000 for cost in excess of net assets  acquired.  The
Company also signed a ten-year lease with an additional five-year option for the
3,100 square foot retail store with the principals of the Sound Mill. Located in
Mount Kisco, in northern  Westchester  County, New York, the Sound Mill has been
engaged  in the  retail  sale and  custom  installation  of  specialty  high-end
audio/video  products for twenty-nine  years. This store was renovated at a cost
of  approximately   $125,000  and  re-opened  in  November  1998.  Inventory  of
approximately $350,000 was obtained for the opening of this store through vendor
credit and cash.

     On August 11,  1998,  the Company  signed a ten year lease with a five year
option to open a new 4,600  square foot retail  showroom  in  Greenvale,  on the
north shore of Long Island, New York. This new retail store,  opened in November
1998, and became the Company's  sixth store in the  Metropolitan  New York area.
Capital expenditures for this store approximated  $400,000 through January 1999.
Inventory  of  approximately  $475,000  was  obtained  for this  store,  and was
substantially financed through vendor credit and cash.

     The Company seeks to open an additional  Company store in New Jersey within
the next  eighteen  months,  if the  appropriate  location can be obtained.  The
Company  estimates  that the total cost of opening this Company  retail store is
approximately  $650,000.  The estimated  cost of opening this store includes the
cost of leasehold improvements,  including design and decoration,  machinery and
equipment,  furniture and fixtures, security deposits, opening inventory (net of
the  portion  to be  borrowed  from the  Company's  lender),  lease  acquisition
expenses,  preopening  expenses  and  additional  advertising  and  promotion in
connection with the opening.

     As Bang & Olufsen  focuses on developing  Bang & Olufsen  licensed  branded
stores  throughout  the world,  it has  canceled its dealer  agreement  with the
Company and all other retailers  effective May 31, 1999. After this date, Bang &
Olufsen products will only be available in Branded Stores.

     The Company  received a commitment from Bang & Olufsen allowing the Company
to open Branded Stores in Manhattan,  Long Island and  Connecticut.  Pursuant to
this  commitment,  the Company must complete  construction of these locations at
various dates through  November 1999. No assurance can be given about the number
of Branded Stores that the Company will open.
<PAGE>

     The  Company  believes  that  its  new  relationship  with  Bang &  Olufsen
represents a positive step for the Company's  growth,  although no assurance can
be given.  Management's  belief is based on its  ability  to open Bang & Olufsen
Branded Stores near its existing Harvey locations, together with the elimination
of  competition  on  Bang &  Olufsen  products  from  other  retailers.  Capital
expenditures  necessary for each 1,500 square foot store,  including  inventory,
should approximate $300,000.

     On January 7, 1999, as part of its  expansion  plan in the New York region,
the Company signed a lease and a related Prime Site Marketing  Agreement to open
a new 1,500 square foot Bang & Olufsen Branded Store in the Union Square area in
lower Manhattan. The Company plans to open this new store prior to May 1, 1999.

     This  Branded  Store will be the first of two stores the  Company  plans to
open in Manhattan in 1999. The new store will sell highly  differentiated Bang &
Olufsen  products,   including   uniquely  designed  audio  systems,   speakers,
telephones,  headphones and accessories. The store will also sell video products
including LCD projectors,  DVD players and plasma flat-screen  televisions,  and
A/V furniture and  accessories.  The store will also offer  professional  custom
installation of multi-room audio and home theater systems.

     This new store will be the Company's  seventh,  and will be the third store
opened within the twelve months of its successful public offering,  completed in
April 1998.

     Management  believes  that the  balance  of the  Offering,  cash  flow from
operations and funds made available under the credit facility with Paragon, will
be  sufficient  to meet the  Company's  anticipated  working  capital  needs and
expansion plan for the next twelve month period.

     During the periods presented, the Company was not significantly impacted by
the effects of inflation or seasonally.

     Year 2000 Modifications

     The Year 2000 Issue is the result of computer  programs being written using
two digits rather than four to define the applicable  year. Any of the Company's
computer programs that have  date-sensitive  software may recognize a date using
"00" as the year 1900 rather than the year 2000.  This could  result in a system
failure or miscalculations causing disruptions of operations,  including,  among
other things, a temporary inability to process  transactions,  send invoices, or
engage in similar normal business activities.

<PAGE>

     Based  on  recent  assessments,  the  Company  determined  that  it will be
required to modify  significant  portions of its software so that those  systems
will properly  utilize  dates beyond  December 31, 1999.  The Company  presently
believes that with modifications of its existing  software,  the Year 2000 Issue
can be  mitigated.  As a result,  the  Company  has  formulated  a plan with its
software and service provider,  called Rescue 2000, to make all modifications to
twelve operating modules in its software  systems.  As of December 31, 1998, 50%
of the module  modifications  have been completed.  No  modifications  have been
implemented or tested. Implementation and testing is expected to be completed by
May 1999.  However,  if such  modifications  are not made,  or are not completed
timely,  the Year 2000 Issue could have a material  impact on the  operations of
the Company.

     The  Company's  plan to resolve the Year 2000 Issue  involves the following
four phases: assessment, remediation, testing, and implementation. As of January
20, 1999,  the Company has fully  completed  its  assessment of all systems that
could be  significantly  affected  by the Year 2000.  The  completed  assessment
indicated that most of the Company's significant  information technology systems
could be affected,  particularly  the general  ledger,  billing,  and  inventory
systems.  The Company  does not believe  that the Year 2000  presents a material
exposure as it relates to the Company's  products.  To date,  the Company is not
aware of any external agent with a Year 2000 issue that would materially  impact
the Company's results of operations, liquidity, or capital resources, except the
bank that processes the payment of the Company's  credit card sales. The Company
has requested  from its bank an assessment of the extent of the bank's Year 2000
compliance. In the event the bank is not Year 2000 compliant in a timely manner,
the Company is prepared to change  banks.  However,  the Company has no means of
ensuring that external agents will be Year 2000 ready. The inability of external
agents to complete their Year 2000 resolution  process in a timely fashion could
materially and adversely impact the Company.

     The Company  will utilize its  external  software  and service  provider to
reprogram,  test and implement the software for the Year 2000 modification,  the
cost of which is not expected to be  significant.  The Company will evaluate the
status of completion of Year 2000 modifications in April 1999 and will undertake
all  remaining  necessary  steps to seek to  ensure  its  systems  are Year 2000
compliant.  In the  event  the  Company  is  unable  to  resolve  its Year  2000
modifications in a timely fashion, the business of the Company may be materially
and adversely impacted.

     Item 7. Financial Statements.

     The  information  required by this item is incorporated by reference to the
Company's financial statements.

     Item 8. Changes In and  Disagreements  With  Accountants  on Accounting and
Financial Disclosure.

     None
<PAGE>

     Part III

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

     The directors and executive officers of the Company are as follows:

<TABLE>
<CAPTION>

             Name                   Age (1)                           Position
-------------------------------- --------------- ---------------------------------------------------
<S>                                  <C>         <C>

Michael E. Recca                       48        Chairman and Director
William F. Kenny, III                  67        Director
Stewart L. Cohen                       44        Director
Fredric J. Gruder                      52        Director
Franklin C. Karp                       44        President and Director
Joseph J. Calabrese                    39        Executive Vice President, Chief Financial
                                                    Officer, Treasurer, Secretary and Director
Michael A. Beck                        39        Vice President of Operations
Roland W. Hiemer                       37        Director of Inventory Control

</TABLE>

     (1) As of October 31, 1998.

     Michael  E. Recca  became the  Chairman  of the Board of  Directors  of the
Company in November  1996.  Mr. Recca has been the president of Recca & Company,
Inc., a financial  consulting firm based in New York City, since 1992. Mr. Recca
is also a member and one of the three  managers of Harvey  Acquisition  Company,
LLC, which is a principal  shareholder of the Company. Mr. Recca was an employee
of  Taglich  Brothers,   D'Amadeo,   Wagner  &  Co.,  Inc.,  a  NASD  registered
broker-dealer, through December 31, 1998.

     William F. Kenny,  III has been a director of the Company  since 1975.  For
the past six years Mr. Kenny has been a consultant  to Meenan Oil Co.,  Inc. Mr.
Kenny has also served as a director of the Empire State  Petroleum  Association,
Petroleum Research Foundation and is President of the East Coast Energy Council.
Mr. Kenny was also the  president of the  Independent  Fuel  Terminal  Operators
Association and the Metropolitan Energy Council.

     Stewart L. Cohen was elected a director of the Company in 1997.  Mr.  Cohen
is the Chief  Executive  Officer of Paragon  Capital LLC, an asset-based  lender
providing  a  revolving  line  of  credit  facility  to the  Company  and  other
retailers. Mr. Cohen is also a managing director of The Ozer Group LLC, an asset
and business  restructuring  firm which  provides  asset  disposition,  business
evaluation,  advisory services,  and asset appraisals for financial institutions
lending primarily to retail businesses. He is also the President of U.S. Dixon's
Holdings,  Inc.  and its  non-operating  subsidiaries,  for which Mr.  Cohen was
retained to wind down the affairs of, and pursue economic  settlements  for, the
company with other parties. Mr. Cohen is also a "Responsible  Officer" of Folger
Adams, a company in Chapter 11, where Mr. Cohen's  responsibilities  include the
administration of all funds and  disbursements  subject to the Folger Adams Plan
of  Confirmation.  Mr.  Cohen is also a member of the Board of  Advisors of Verc
Enterprises,  Inc.,  and is a  Contributing  Editor to the  American  Bankruptcy
Institute Journal.

<PAGE>

     Fredric J. Gruder,  a director since July 1998,  has, since September 1996,
been a  partner  in the New York  law  firm of  Gersten,  Savage  and  Kaplowitz
("Gersten"),   which  represented   Thornwater  Company,  L.P.   ("Thornwater"),
Representative  of the  Company's  underwriters  in the  Offering.  Gersten  may
represent Thornwater in future legal matters.  From March 1996 through September
1996, Mr. Gruder was of counsel to Gersten, having been a sole practitioner from
May 1995 through March 1996. From March 1992 until March 1996, Mr. Gruder served
as vice  president  and  general  counsel to  Sbarro,  Inc.,  a publicly  traded
corporation which owns, operates,  and franchises Italian restaurants.  Prior to
this  time,  Mr.  Gruder  practiced  law in New  York  for  over  twenty  years,
specializing in corporate securities and retail real estate.

     Franklin  C.  Karp has been  with the  Company  since  1990.  Before  being
appointed  as the  Company's  President  in  April  1996,  Mr.  Karp  served  as
Merchandise Manager and later as vice president in charge of merchandising.  Mr.
Karp has been employed in various sales,  purchasing and management positions in
the retail consumer  electronics  business in the New York Metropolitan area for
26 years.

     Joseph J. Calabrese,  a certified public accountant,  joined the Company as
Controller in 1989. Since 1991 Mr. Calabrese has served as Vice President, Chief
Financial  Officer,  Treasurer and Secretary of the Company.  Mr.  Calabrese was
elected  Executive  Vice  President  and a Director of the Company in 1996.  Mr.
Calabrese  began his  career  with Ernst & Young LLP in 1981 where for the eight
year period prior to his joining the Company he performed  audit  services  with
respect to the Company.

     Michael A. Beck has been Vice  President of Operations of the Company since
April  1997.  From June 1996 until such date he was the  Company's  Director  of
Operations  and from  October  1995 until  April 1996 he served as  director  of
operations for Sound City, a consumer electronics retailer. Mr. Beck was a store
manager for the Company from August 1989 until October 1995. Mr. Beck holds a BA
in Psychology from Merrimack College.

     Roland W. Hiemer is an  executive  officer of the  Company and  Director of
Inventory  Control.  Mr.  Hiemer has been with the Company for eight  years.  He
started with the Company as a salesman and advanced to Senior Sales  Manager for
the Paramus store in 1991. He was further promoted to Inventory  Control Manager
in 1991. In 1997, he was promoted to Director of Inventory  Control.  Mr. Hiemer
holds a BA in Business Administration from Hofstra University.

     Committees of the Board of Directors

     The Board of Directors has an Audit Committee and a Compensation  and Stock
Option Committee.

     Audit  Committee.  The  function  of the Audit  Committee  includes  making
recommendations  to the Board of Directors with respect to the engagement of the
Company's  independent  auditors  and the  review of the scope and effect of the
audit  engagement.  William F.  Kenny,  III and Stewart L. Cohen are the current
members of the Audit Committee.

     Compensation and Stock Option  Committee.  The function of the Compensation
and Stock Option Committee is to make  recommendations to the Board with respect
to the compensation of management employees and to administer plans and programs
relating  to  stock  options,  pension  and  other  retirement  plans,  employee
benefits,  incentives, and compensation.  Stewart L. Cohen and William F. Kenny,
III are the current members of the Compensation and Stock Option Committee.

     Item 10. Executive Compensation.

     The following table sets forth the cash  compensation  paid by the Company,
as well as any  other  compensation  paid to or earned  by the  Chairman  of the
Company,  the President of the Company and those executive officers  compensated
at or  greater  than  $100,000  for  services  rendered  to the  Company  in all
capacities during the three most recent fiscal years.

     Summary Compensation Table

<TABLE>
<CAPTION>

    Name of Individual                                                       Stock             Long-Term
  and Principal Position       Year         Salary          Bonus         Compensation       Compensation    
---------------------------- ---------- ---------------- ------------- ------------------- ------------------
<S>                            <C>        <C>             <C>             <C>                   <C>  


Michael E. Recca               1998       $   55,000 (1)   $       -        $      -              $    -
Chairman                       1997       $        -       $       -        $                     $    -
                               1996       $        -       $       -        $      -              $    -

Franklin C. Karp               1998       $  125,000       $  15,000        $ 10,313 (3)          $    -
President                      1997       $  126,000       $       -        $      -              $    -
                               1996       $   88,000 (2)   $       -        $      -              $    -

Joseph J. Calabrese            1998       $  116,000       $  10,000        $  6,875 (3)          $    -
Executive Vice President       1997       $  117,000       $       -        $      -              $    -
Chief Financial Officer,       1996       $   82,000 (2)   $       -        $      -              $    -
   Treasurer and Secretary
</TABLE>


<PAGE>


     (1)--Effective  April 1,  1998,  Mr.  Recca has been  receiving  $7,917 per
month,  representing an annual directors fee in the annual amount of $95,000, in
his capacity as the Chairman of the Board of Directors of the Company.

     (2)--Represents  the nine month  transition  period ended October 26, 1996,
when the  Company's  fiscal  year end was  changed  to the  Saturday  closest to
October 31 from the Saturday closest to January 31.

     (3)--Represents  stock  compensation at fair market value from common stock
received from HAC, on October 12, 1998.

     Severance Agreements

     The Company has entered into  substantially  similar  severance  agreements
("Severance  Agreement")  with each of  Franklin C. Karp,  Joseph J.  Calabrese,
Michael A. Beck, and Roland W. Hiemer.

     Each Severance  Agreement provides that in the event the Company is sold or
merged with another  company,  involved in a corporate  reorganization,  or if a
change of the current  management  takes place, and the party, for the foregoing
reasons,  is terminated or asked to accept a position  other than that of senior
officer  requiring  similar  responsibilities  to those that the party currently
performs, or if the current corporate office is moved to a new location which is
more than thirty miles from either Mineola, New York, or Lyndhurst,  New Jersey,
depending  on who the party is,  as a result  of a  reorganization  or change in
ownership or control, and the party declines the new position or relocation, the
Company or its successor in control will be obligated,  and continue, to pay the
party at the same salary and car allowance,  if any, the party had most recently
been earning,  for a period of one year  following  termination of Mr. Karp, Mr.
Calabrese,  and Mr. Beck and six months for Mr. Hiemer.  In addition,  the party
will be fully covered  under the Company's  benefit  plans,  including,  without
limitation,  the  Company's  medical,  dental,  life  and  disability  insurance
programs,  during the one-year  period for Mr. Karp, Mr.  Calabrese and Mr. Beck
and during the six-month  period for Mr. Hiemer  (including  family coverage for
medical and dental insurance).

     In  the  event  following  any  foregoing  termination  the  party  obtains
employment  at a  lesser  compensation  than  the  party's  compensation  by the
Company,  the Company will pay the party the difference between the two salaries
for the remainder of the one-year or six month period,  whichever is applicable,
plus continued coverage of the Company's benefit plans for the same period.

     Each  Severance  Agreement  also  provides  that in the  event the party is
terminated for any other reasons, except conduct that is materially injurious to
the Company or conviction of any crime  involving moral  turpitude,  the Company
will be obligated and continue to pay the party at the same salary the party has
most recently been earning, for a period of six months following termination for
Mr. Karp, Mr. Calabrese and Mr. Beck and three months for Mr. Hiemer,  plus full
coverage of the Company's benefits for the same period.

<PAGE>

     Employment Agreement

     On April 3, 1998, the Company entered into a two-year employment  agreement
with  Franklin  C. Karp,  the  Company's  President.  The  employment  agreement
provides  that  Mr.  Karp  continue  as the  Company's  President  with the same
compensation and benefits which Mr. Karp currently  receives,  subject to annual
adjustment to be determined and made by the Board of Directors of the Company.

     Stock Option Plan

     In April 1997,  the  Company  adopted a stock  option plan which  currently
covers 1,000,000 shares of the Common Stock. Options may be designated as either
(i) incentive stock options ("ISOs") under the Internal Revenue Code of 1986, as
amended (the "Code") or (ii)  non-qualified  stock options.  ISOs may be granted
under  the  Stock  Option  Plan  to  employees  and  officers  of  the  Company.
Non-qualified  options may be granted to consultants,  directors (whether or not
they  are  employees),  employees  or  officers  of  the  Company  (collectively
"Options").  In certain  circumstances,  the  exercise  of  Options  may have an
adverse effect on the market price of the Common Stock.

     The Stock Option Plan is intended to encourage stock ownership by employees
of the Company, so that they may acquire or increase their proprietary  interest
in the Company and to encourage  such  employees  and directors to remain in the
employ of the  Company and to put forth  maximum  efforts for the success of the
business.  Options  granted  under the Stock Option Plan may be  accompanied  by
either stock appreciation  rights ("SARS") or limited stock appreciation  rights
(the "Limited SARS"), or both.

     The Plan is  administered  by the Company's  Compensation  and Stock Option
Committee as the Board may establish or designate  (the  "Administrators").  The
Committee shall be comprised of not less than two members, and all of whom shall
be outside directors. The members of the Compensation and Stock Option Committee
are Stewart L. Cohen and William F. Kenny III, outside directors.

     The  Administrators,  within the limitation of the Stock Option Plan, shall
have the authority to determine  the types of options to be granted,  whether an
Option shall be  accompanied  by SARS or Limited SARS, the purchase price of the
shares of Common Stock covered by each Option (the "Option Price"),  the persons
to whom, and the time or times at which, Options shall be granted, the number of
shares to be covered by each Option and the terms and  provisions  of the option
agreements.

     The maximum aggregate number of shares of Common Stock as to which Options,
Rights and Limited  Rights may be granted under the Stock Option Plan to any one
optionee during any fiscal year of the Company is 50,000.

     With  respect to the ISOs,  in the event  that the  aggregate  fair  market
value,  determined  as of the date the ISO is  granted,  of the shares of Common
Stock with  respect to which  Options  granted and all other option plans of the
Company,  if any,  become  exercisable for the first time by any optionee during
any calendar  year  exceeds  $100,000,  Options  granted in excess of such limit
shall  constitute  non-qualified  stock  options  for all  purposes.  Where  the
optionee of an ISO is a ten (10%) percent stockholder, the Option Price will not
be less  than  110% of the fair  market  value of the  Company's  Common  Stock,
determined  on the date of grant,  and the exercise  period will not exceed five
(5) years from the date of grant of such ISO.  Otherwise,  the Option Price will
not be less than one  hundred  (100%)  percent of the fair  market  value of the
shares of the Common Stock on the date of grant,  and the  exercise  period will
not exceed ten (10) years from the date of grant. Options granted under the Plan
shall  not be  transferable  other  than by will or by the laws of  descent  and
distribution, and Options may be exercised, during the lifetime of the optionee,
only by the optionee or by his guardian or legal representative.

<PAGE>

     On December 5, 1997, the Company's  Compensation and Stock Option Committee
of the Board of  Directors  approved a grant,  as of the  effective  date of the
Offering,  of 70,000 incentive stock options to many of the Company's  employees
to  purchase  the  Company's  Common  Stock  originally  exercisable  at various
exercise  prices  between  $5.00 and $6.00,  over a  three-year  period from the
effective date. On October 28, 1998, the Company's Compensation and Stock Option
Committee  of the Board of Directors  amended and reduced the exercise  price of
such incentive  stock options to $3.00 for officers and middle  management,  and
$2.00 for other  employees.  These options remain  exercisable  over three years
(33-1/3% per year).  Additionally,  on the said date, the Compensation and Stock
Option  Committee  granted  75,000 new  incentive  stock options to purchase the
Company's  Common Stock to employees and  directors,  with an exercise  price of
$1.00.  These options are also  exercisable  over three years (33-1/3% per year)
except for those  options  granted to Messrs.  Cohen,  Kenny and  Gruder,  whose
options vest as follows: (i) 50% immediately;  (ii) 25% on October 28, 1999; and
(iii) 25% on October 28, 2000.

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

     The  following  table sets forth  certain  information  with respect to the
beneficial  ownership of shares of Common Stock as of October 31, 1998, based on
information  obtained from the persons named below,  by (i) each person known to
the Company to beneficially own more than 5% of the outstanding shares of Common
Stock,  (ii) each executive  officer and director of the Company,  and (iii) all
officers and directors of the Company as a group:


<PAGE>


<TABLE>
<CAPTION>



                Name and Address of                    Amount and Nature of Beneficial
                  Beneficial Owner                                Ownership                 Percentage
----------------------------------------------------- ---------------------------------- ------------------
<S>                                                            <C>                            <C>    

Harvey Acquisition Company LLC                                 1,750,000 (3)                   53.3%
949 Edgewood Avenue
Pelham Manor, NY  10803

Michael E. Recca                                               1,758,333 (1)(5)                53.6%
949 Edgewood Avenue
Pelham Manor, NY  10803

Stewart L. Cohen                                                  15,000(2)                     *
Harvey Electronics, Inc.
205 Chubb Avenue
Lyndhurst, NJ 07071

William F. Kenny, III                                             13,489(2)                     *
Harvey Electronics, Inc.
205 Chubb Avenue
Lyndhurst, NJ 07071

Fredric J. Gruder                                                  7,500(2)                     *
Gersten, Savage, Kaplowitz & Fredericks, LLP
101 East 52nd Street
New York, NY 10022

Franklin C. Karp                                                  23,333(4)                     *
Harvey Electronics, Inc.
205 Chubb Avenue
Lyndhurst, NJ 07071

Joseph J. Calabrese                                               14,035(5)                     *
Harvey Electronics, Inc.
205 Chubb Avenue
Lyndhurst, NJ 07071

Michael A. Beck                                                   10,833(5)                     *
Harvey Electronics, Inc.
205 Chubb Avenue
Lyndhurst, NJ 07071

Roland W. Hiemer                                                   4,167(6)                     *
Harvey Electronics, Inc.
205 Chubb Avenue
Lyndhurst, NJ 07071

All Directors and Officers as group                            1,846,690                       56.3%
(8 Persons)

</TABLE>
<PAGE>

     * Less than 1% of outstanding shares of Common Stock.

     (1) Includes Shares owned by HAC, of which Mr. Recca is a member and one of
three managers.

     (2)  Includes  an option to purchase  up to 5,000  shares of the  Company's
Common Stock, which is exercisable at an exercise price of $1.00 per share.

     (3) 2,000,000 shares of the Company's  Common Stock were originally  issued
to HAC in  satisfaction  of the  $2,822,500 of  subordinated  secured  financing
provided to the Company during its  reorganization  process.  As a result of the
Company's public offering (the "Public  Offering") of 1,200,000 shares of Common
Stock and 1,830,000 Warrants to purchase Common Stock,  completed April 7, 1998,
175,000 shares of Common Stock were sold by HAC. In late November  1997,  85,000
shares of Common  Stock  were  transferred  by HAC to certain  employees  of the
Company (see "Certain  Transactions",  below,  for details).  Additionally,  HAC
purchased 10,000 shares of Common Stock from InterEquity Capital Partners,  L.P.
("InterEquity"),  a prereorganization subordinated secured debtholder, after the
closing of the Public Offering.

     (4)  Includes  an option to purchase  up to 8,333  shares of the  Company's
Common Stock, which is exercisable at an exercise price of $3.00 per share.

     (5)  Includes  an option to purchase  up to 3,333  shares of the  Company's
Common Stock, which is exercisable at an exercise price of $3.00 per share.

     (6)  Includes  an option to purchase  up to 1,666  shares of the  Company's
Common Stock, which is exercisable at an exercise price of $3.00 per share.

     Item 12. Certain Relationships and Related Transactions.

     In 1995 and 1996, during the Company's bankruptcy  proceeding,  the Company
borrowed, in the aggregate,  approximately  $2,822,500 (the "Loan") from HAC. As
of the Effective  Date of the  Company's  Reorganization  Plan,  and pursuant to
certain provisions  contained therein,  HAC's claims in connection with the Loan
were  satisfied by issuing HAC 2,000,000  shares of the Company's  Common Stock.
Subsequently,  Michael  Recca  was  elected  as a  member  and  Chairman  of the
Company's   Board  of   Directors.   Interest   expense   relating  to  the  HAC
debtor-in-possession  financing was  approximately  $149,000 for the fifty-three
weeks  ended  November  1,  1997.  Interest  paid  to HAC  in  fiscal  1998  was
approximately  $66,000.  In connection  with the Loan, the Company paid a $5,000
per month loan servicing fee, which was to be paid to Recca & Co. Inc., of which
Michael  Recca is the sole  shareholder,  through  October  1996.  Subsequently,
through April 1997, a $5,000 per month  management  fee to Recca & Co., Inc. was
accrued.  In fiscal 1998, the Company recorded $40,000 in management  consulting
fees, of which $23,000 is payable at October 31, 1998.

     Effective  April 1, 1998,  Mr. Recca has been  receiving  $7,917 per month,
representing  an annual  director's fee in the annual amount of $95,000,  in his
capacity as the Chairman of the Board of Directors of the Company.

     Reference  is made to  "Management's  Discussion  and  Analysis  or Plan of
Operation--Liquidity  and Capital Resources"  regarding the Company's  revolving
line of credit facility with Paragon, which the Company entered into on November
5, 1997.  Stewart L. Cohen,  a director of the Company,  is the Chief  Executive
Officer and a director of Paragon.

     In February and March, 1997, Mr. E. H. Arnold  ("Arnold"),  a member of HAC
and a holder of  Preferred  Stock,  loaned the Company the  principal  amount of
$350,000,  with an interest rate of 12% per annum.  On April 9, 1998,  this loan
was repaid with interest ($48,000) and without prepayment penalty.

     In November 1997, HAC transferred  85,000 shares of Common Stock to certain
employees  and  directors  of the  Company and  Arnold.  Such  transfer is to be
treated for accounting  purposes as if such shares were issued by the Company as
compensation to such persons.  In fiscal 1998, the Company recorded  $297,500 as
stock compensation expense (see Note 4 to the Financial Statements).

     On April 7, 1998,  HAC  reimbursed  the  Company  $70,000 of the  estimated
expenses of $475,000 in the Offering in addition to the  underwriting  discounts
and commissions and non-accountable expense allowance related to the Shares sold
by it in the  Offering.  In the future the Company  will  present  all  proposed
transactions between the Company and its officers, directors or 5% shareholders,
and  their  affiliates  to the  Board of  Directors  for its  consideration  and
approval.  Any such  transaction,  including  forgiveness of loans, will require
approval by a majority of the disinterested directors and such transactions will
be on terms no less  favorable  than  those  available  to  disinterested  third
parties.

     On October 31, 1998, the Company received a promissory note from a previous
member  of its  underwriter,  in lieu of an  outstanding  trade  receivable  for
$73,321. Payments,  including interest at 9% per annum are due to the Company as
follows;  twelve monthly  payments of $940 and a balloon  payment of $68,430 due
October 31, 1999. As a result,  the amount due to the Company has been presented
as a short-term "note receivable" at October 31, 1998.

<PAGE>

     Item 13. Exhibits and Reports on Form 8-K.

     (a)--The following  exhibits are hereby  incorporated by reference from the
corresponding exhibits filed under the Company's Form SB-2 under Commission File
#333-42121:

     Exhibit Number Description

     3.1.1--Restated Certificate of Incorporation of 1967

     3.1.2--Certificate of Amendment of the Certificate of Incorporation of 1997

     3.1.3--Certificate  of Amendment of the  Certificate  of  Incorporation  of
December 1996

     3.1.4--Certificate  of Amendment of  Certificate of  Incorporation  of July
1988

     3.1.5--Certificate  of Amendment of  Certificate of  Incorporation  of July
1971

     3.1.6--Certificate of Amendment of Certificate of Incorporation of February
1971

     3.1.7--Certificate  of Amendment of  Certificate of  Incorporation  of June
1969

     3.1.8--Certificate   of  Amendment  of  Certificate  of   Incorporation  of
September 1968

     4.1--Sections in Certificate of Incorporation  and the Amended and Restated
By-Laws of Harvey  Electronics,  Inc.,  that define the rights of the holders of
shares of Common  Stock,  Preferred  Stock and holders of  Warrants(included  in
Exhibit Nos. 3.1.2 and 3.1.3)

     4.2--Form of Common Stock Certificate

     4.3--Form of Redeemable Common Stock Purchase Warrant

     4.4--Form of Representative's Warrant

     4.5--Form of Warrant to Holders of Preferred Stock

     10.1.1--Stock Option Plan of Harvey Electronics, Inc.

     10.1.2--Form of Stock Option Agreement

     10.2.1--Severance Agreement with Franklin C. Karp

     10.2.2--Severance Agreement with Joseph J. Calabrese

<PAGE>

     10.2.3--Severance Agreement with Michael A. Beck

     10.2.4--Severance Agreement with Roland W. Hiemer

     10.3--Employment Agreement with Franklin C. Karp

     10.4.1--Dealer  Agreement  between the Company and  Mitsubishi  Electronics
America, Inc.

     10.4.2--Dealer  Agreement between the Company and Niles Audio  Corporation,
Inc.

     10.5.1--Lease between the Company and Joseph P. Day Realty Corp. (2)

     10.5.2--Lease between the Company and Goodrich Fairfield Associates, L.L.C.
(2)

     10.5.3--Lease between the Company and Sprout Development Co. (2)

     10.5.4--Lease between the Company and Service Realty Company (2)

     10.5.5--Lease between the Company and 205 Associates (2)

     10.5.6--Sublease between the Company and Fabian Formals, Inc. and Affiliate
First Nighter of Canada (2)

     10.6--Loan  and  Security  Agreement,  Master Note and  Trademark  Security
Agreement with Paragon Capital LLC




     (ii) The  following  exhibits are hereby  incorporated  by  reference  from
Exhibit A filed as part of the registrant's Form 8-K dated November 3, 1997:

     Exhibit Number Description

     2.1.1--Restated Modified Amended Joint and Substantially  Consolidated Plan
of Reorganization of Harvey Electronics, Inc.

     2.1.2--Order dated November 13, 1996 Confirming Plan of Reorganization



     (iii) The following exhibits are hereby incorporated by reference from Item
7 filed as part of the registrant's Form 8-K dated April 7, 1998:

     Exhibit Number Description

     4.4--Representative's Warrant Agreement

     4.5--Warrant Agent Agreement

     10.1--Underwriting Agreement

     10.2--Financial  Advisory  and  Investment  Banking  Agreement  between the
Company and The Thornwater Company, L.P.

<PAGE>

     (iv) The  following  exhibits are hereby  incorporated  by reference to the
corresponding exhibits filed with the Company's Form 8-K dated October 12, 1998:

     10.01--Bang & Olufsen America,  Inc.  Termination Letter dated September 7,
1998

     10.02--Bang & Olufsen  America,  Inc. New Agreement Letter dated October 8,
1998

     10.03--Agreement  with Thornwater  regarding  termination of agreements and
lock-up amendments dated October 31, 1998

     (v) The following exhibits are annexed hereto:

     10.5.7 Lease Agreement with Martin Goldbaum and Sally Goldbaum

     10.5.8 Lease Agreement with Bender Realty*

     10.7 Surrender of Lease with 873 Broadway Associates

     10.8 Contract of Sale with Martin Goldbaum, Sally Goldbaum, the Sound Mill,
Inc. and Loriel Custom Audio Video Corp.

     10.9 License Agreement with ABC Home Furnishings, Inc.

     27.1--Financial Data Schedule

-----------------------
*  To be filed

<PAGE>

     (b) Reports on Form 8-K

     The  Company  filed a Report  on Form 8-K dated  November  3,  1997,  which
reported events under Items 1, 3, 5, 7 and 8. The Company filed a Report on Form
8-K  dated  April 7,  1998,  which  reported  the  completion  of the  Company's
Offering.

     The  Company  filed a Report  on Form 8-K dated  October  12,  1998,  which
reported  events  relating to the  cancellation  of the  Financial  Advisory and
Investment  Banking  Agreement with its underwriter as well as the change in the
Company's expansion plan regarding Bang & Olufsen Branded Stores.


<PAGE>



                                   Signatures

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

                                      Harvey Electronics, Inc.

                                   By /s/Franklin C. Karp
                                      ----------------------------------
                                      Franklin C. Karp, President

     Dated: January 28, 1999

     In  accordance  with the Exchange Act, this report has been signed below by
the following  persons on behalf of the  Registrant and in the capacities and on
the dated indicated.
<TABLE>
<CAPTION>

            Signature                                   Title                                Date
---------------------------------- ------------------------------------------------- ----------------------
<S>                                <C>                                               <C>    

      /s/ Franklin C. Karp         President and Director                            January 28, 1999
----------------------------------
        Franklin C. Karp

     /s/ Joseph J. Calabrese       Executive Vice President, Chief Financial         January 28, 1999
---------------------------------- Officer, Treasurer, Secretary and Director
       Joseph J. Calabrese

        /s/ Michael E. Recca          Chairman and Director                             January 28, 1999
----------------------------------
          Michael E. Recca

    /s/ William F. Kenny, III      Director                                          January 28, 1999
----------------------------------
      William F. Kenny, III

      /s/ Stewart L. Cohen         Director                                          January 28, 1999
----------------------------------
        Stewart L. Cohen

      /s/ Fredric J. Gruder        Director                                          January 28, 1999
----------------------------------
        Fredric J. Gruder

</TABLE>

<PAGE>


                                                       
     Item 7. Financial Statements.

                            Harvey Electronics, Inc.

                          Index to Financial Statements


<TABLE>
<CAPTION>
<S>                                                                                                   <C> 

Report of Independent Auditors.....................................................................    F-2

Balance Sheet--October 31, 1998....................................................................    F-3

Statements of Operations--Fifty-Two Weeks ended October 31,
   1998 and Fifty-Three Weeks Ended November 1, 1997...............................................    F-4

Statements of Shareholders' Equity--Fifty-Two Weeks ended October 31,
   1998 and Fifty-Three Weeks Ended November 1, 1997...............................................    F-5

Statements of Cash Flows--Fifty-Two Weeks ended October 31,
   1998 and Fifty-Three Weeks Ended November 1, 1997 ..............................................    F-6

Notes to Financial Statements......................................................................    F-7

</TABLE>


<PAGE>


                                                    
                         Report of Independent Auditors

     Shareholders and Board of Directors

     Harvey Electronics, Inc.

     We have audited the accompanying balance sheet of Harvey Electronics,  Inc.
as of October 31, 1998 and the related  statements of operations,  shareholders'
equity,  and cash flows for the  fifty-two  weeks ended October 31, 1998 and the
fifty-three  weeks ended November 1, 1997.  These  financial  statements are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

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

     In our opinion,  the financial statements referred to above present fairly,
in all material respects, the financial position of Harvey Electronics,  Inc. at
October 31, 1998,  and the results of its  operations and its cash flows for the
fifty-two weeks ended October 31, 1998 and the fifty-three  weeks ended November
1, 1997, in conformity with generally accepted accounting principles.

                                        /s/ Ernst & Young LLP
                                        -------------------------------
                                        Ernst & Young LLP




Melville, NY
January 7, 1999


<PAGE>


                            Harvey Electronics, Inc.

                                  Balance Sheet

                                October 31, 1998
<TABLE>
<CAPTION>
<S>                                                                                            <C>   

Assets
Current assets:
   Cash and cash equivalents                                                                   $    221,444
   Accounts receivable, less allowance of $25,000                                                   365,635
   Note receivable                                                                                   73,321
   Inventories                                                                                    4,014,936
   Prepaid expenses and other current assets                                                        278,270
                                                                                            -------------------
Total current assets                                                                              4,953,606

Property and equipment:
   Leasehold improvements                                                                           973,162
   Furniture, fixtures and equipment                                                                842,375
                                                                                            -------------------
                                                                                                  1,815,537
   Less accumulated depreciation and amortization                                                   408,711
                                                                                            -------------------
                                                                                                  1,406,826
Equipment under capital leases                                                                       10,599
Cost in excess of net assets acquired, less accumulated amortization of $1,000                      149,000
Reorganization value in excess of amounts allocable to identifiable
   assets, less accumulated amortization of $132,023                                              1,516,440
Other assets, less accumulated amortization of $155,390                                             352,788
                                                                                            ===================
Total assets                                                                                   $  8,389,259
                                                                                            ===================

Liabilities and shareholders' equity Current liabilities:
   Trade accounts payable                                                                      $  1,577,126
   Accrued expenses and other current liabilities                                                   931,211
   Income taxes                                                                                      24,900
   Cumulative Preferred Stock dividends payable                                                      61,925
   Current portion of capital lease obligations                                                       3,352
                                                                                            -------------------
Total current liabilities                                                                         2,598,514

Long-term liabilities:
   Cumulative Preferred Stock dividends payable                                                      61,556
   Other liabilities                                                                                198,922
   Capital lease obligations                                                                          5,710
Commitments and contingencies

Shareholders' equity:
   8-1/2% Cumulative  Convertible  Preferred  Stock, par value $1,000 per share;
     authorized  10,000  shares;   issued  875  shares  (aggregate   liquidation
     preference--$875,000) 402,037
   Common Stock, par value $.01 per share; authorized 10,000,000 shares;
     issued 3,282,833 shares                                                                         32,828
   Additional paid-in capital                                                                     7,481,667
   Accumulated deficit                                                                           (2,391,975)
                                                                                            -------------------
Total shareholders' equity                                                                        5,524,557
                                                                                            ===================
Total liabilities and shareholders' equity                                                     $  8,389,259
                                                                                            ===================
</TABLE>

See notes to financial statements.


<PAGE>


                            Harvey Electronics, Inc.

                            Statements of Operations

<TABLE>
<CAPTION>


                                                                        Fifty-Two         Fifty-Three Weeks
                                                                   Weeks Ended October    Ended November 1,
                                                                           31,                  1997
                                                                          1998
                                                                  ---------------------- --------------------
<S>                                                                   <C>                    <C>   


Net sales                                                            $  17,262,082          $  15,398,290
Interest and other income                                                   70,364                 72,652
                                                                  ---------------------- --------------------
                                                                        17,332,446             15,470,942
                                                                  ---------------------- --------------------

Cost of sales                                                           10,646,491              9,764,755
Selling, general and administrative expenses                             6,756,254              6,706,180
Stock compensation expense (Note 4)                                        297,500                      -
Financial advisory and  consulting fee to Underwriter (Note 4)             123,660                      -
Costs associated with lease transaction (Note 10)                          113,782                      -
Interest expense                                                           223,630                325,219
                                                                  ---------------------- --------------------
                                                                        18,161,317             16,796,154
                                                                  ---------------------- --------------------
Net loss                                                                  (828,871)            (1,325,212)

Preferred Stock dividend requirement                                       (83,376)               (70,479)
Accretion of Preferred Stock                                                (6,000)               (78,037)
                                                                  ---------------------- --------------------
Net loss attributable to Common Stock                                $    (918,247)            (1,473,728)
                                                                  ====================== ====================
Basic and diluted net loss per common share                                  $(.32)                 $(.65)
                                                                  ====================== ====================
Basic and diluted weighted average shares outstanding
   during the year                                                                        
                                                                         2,844,751              2,257,833
                                                                  ====================== ====================

</TABLE>

See notes to financial statements.


<PAGE>


                            Harvey Electronics, Inc.

                       Statements of Shareholders' Equity

<TABLE>
<CAPTION>
                                                                                 Additional                              Total
                                               Preferred Stock    Common Stock    Paid-in     Deferred    Accumulated Shareholders'
                                               Shares    Amount Shares    Amount  Capital   Compensation    Deficit       Equity
------------------------------------------------ ------------- ------------- ------------- ------------- --------------- ---------
<S>                                            <C>      <C>    <C>        <C>      <C>        <C>             <C>             <C> 

Balance at October 26, 1996                     -        -     2,257,833 $ 22,578 $3,067,799  $   -      $     -        $ 3,090,377
Net loss for the year                           -        -       -          -        -            -       (1,325,212)    (1,325,212)
Cumulative dividends on Preferred Stock         -        -       -          -        -            -          (70,479)       (70,479)
Accretion of Preferred Stock                    -        -       -          -        -            -          (78,037)       (78,037)
                                             -------   ------  --------- -------- ---------- --------     ----------- --------------
Balance at November 1, 1997                     -        -     2,257,833   22,578  3,067,799      -       (1,473,728)     1,616,649

Net loss for the year                           -        -       -          -        -            -         (828,871)      (828,871)
Transfer of Common Stock from HAC to
   employees, directors and a member of HAC     -        -       -          -        297,500  (297,500)         -              -
Accretion of Preferred Stock                    -        -       -          -        -            -           (6,000)        (6,000)
Reclassify Preferred Stock to shareholders'
   equity upon removal of redemption feature    875  $ 402,037   -          -        -            -             -           402,037
Cumulative dividends on Preferred Stock         -        -       -          -        -            -          (83,376)       (83,376)
Deferred compensation earned                    -        -       -          -        -         297,500          -           297,500
Record value of Common Stock Warrants granted   -        -       -          -         30,000      -             -            30,000
Proceeds from public offering of common stock   -        -     1,025,000   10,250  5,114,750      -             -         5,125,000
Proceeds from issuance of 2,104,500 common
   stock warrants in public offering            -        -       -          -        210,450      -             -           210,450
Expenses of public offering of common stock
   and warrants                                  -        -      -          -     (1,238,832)     -             -        (1,238,832)
                                             =======  ======= =========  ========= ==========  =========   ==========    ===========
Balance at October 31, 1998                    875  $ 402,037 3,282,833 $ 32,828 $ 7,481,667      -      $ (2,391,975)   $ 5,524,557
                                             =======  ======= =========  ========= ==========  =========   ==========    ===========

</TABLE>

See notes to financial statements.


<PAGE>


                                                       
                            Harvey Electronics, Inc.

                            Statements of Cash Flows
<TABLE>
<CAPTION>

                                                                               Fifty-Two           Fifty-Three
                                                                              Weeks Ended          Weeks Ended
                                                                              October 31,          November 1,
                                                                                 1998                 1997

                                                                          -------------------- --------------------
<S>                                                                             <C>                <C>    

Operating activities
Net loss                                                                     $    (828,871)       $  (1,325,212)
Adjustments to reconcile net loss to net cash used in
   operating activities:
     Stock compensation expense                                                    297,500                    -
     Depreciation and amortization                                                 412,401              371,434
     Provision (credit) for losses on accounts receivable                            5,000               (5,000)
     Warranty reserve credit                                                        (6,000)                   -
     Write-off of other assets                                                           -               32,164
     Straight-line impact of rent escalations                                       47,511               61,055
     Miscellaneous                                                                   6,508              (10,000)
Changes in operating assets and liabilities:
   Accounts receivable                                                             (98,199)              38,360
   Note receivable                                                                 (73,321)                   -
   Inventories                                                                    (451,158)            (550,940)
   Prepaid expenses and other current assets                                      (168,614)             143,795
   Trade accounts payable                                                         (139,629)             390,937
   Accrued expenses, other current liabilities and income taxes                   (231,707)             303,407
                                                                          -------------------- --------------------
Net cash used in operating activities                                           (1,228,579)            (550,000)
Investing activities:
Redemption of certificate of deposit                                               200,000                    -
Net book value of deletions                                                              -               37,254
Amount due under lease surrender agreement                                         (70,236)                   -
Purchases of property and equipment                                               (382,019)            (629,618)
Acquisition of business                                                           (200,000)                   -
Purchase of other assets                                                           (52,065)             (70,879)
                                                                          -------------------- --------------------
Net cash used in investing activities                                             (504,320)            (663,243)
                                                                          -------------------- --------------------
Financing activities:
Proceeds from public offering of common stock and warrants                       5,335,450                    -
Public offering costs                                                           (1,112,167)            (126,665)
Proceeds from new revolving credit facility                                      2,262,306                    -
Temporary repayment of new revolving credit facility from
   proceeds of offering                                                         (2,262,306)                   -
Costs relating to refinancing                                                      (82,177)             (67,532)
(Repayment) proceeds from note payable                                            (350,000)             350,000
Debtor-in-possession financing                                                           -              605,000
Payments relating to Chapter 11 reorganization                                           -             (456,913)
Net (payments) proceeds from old revolving line of credit facility              (1,777,851)             999,634
Preferred Stock dividends paid                                                     (36,882)                   -
Principal payments on capital lease obligations                                    (32,063)             (83,627)
                                                                          -------------------- --------------------
Net cash provided by financing activities                                        1,944,310            1,219,897
                                                                          -------------------- --------------------
Increase in cash and cash equivalents                                              211,411                6,654
Cash and cash equivalents at beginning of year                                      10,033                3,379
                                                                          ==================== ====================
Cash and cash equivalents at end of year                                     $     221,444        $      10,033
                                                                          ==================== ====================
Supplement cash flow information:
Interest paid                                                                $     288,000        $     282,000
                                                                          ==================== ====================
Taxes paid                                                                   $      15,000        $           -
                                                                          ==================== ====================

</TABLE>

See notes to financial statements.


<PAGE>





                            Harvey Electronics, Inc.

                          Notes to Financial Statements

                                October 31, 1998


     1. Business Description and Summary of Significant Accounting Policies

     Description of Business

     The Company is a specialty  retailer of high quality  audio/video  consumer
electronics and home theater products in the Metropolitan New York area. Revenue
from retail sales is  recognized at the time goods are delivered to the customer
or, for certain  installation  services,  when such  services are  performed and
accepted by the customer.

     Accounting Estimates

     The  preparation of the financial  statements in conformity  with generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions that affect the financial  statements and accompanying notes. Actual
results could differ from those estimates.

     Long-Lived Assets

     In March 1995, the Financial  Accounting  Standards  Board ("FASB")  issued
Statement of Financial  Accounting  Standards ("SFAS") No. 121,  "Accounting for
the  Impairment of Long-Lived  Assets and for  Long-Lived  Assets to Be Disposed
Of," which the Company  adopted  effective in Fiscal 1996. SFAS No. 121 requires
impairment  losses to be recorded on long-lived  assets used in operations  when
indicators of impairment are present and the  undiscounted  cash flows estimated
to be generated by those assets are less than the assets' carrying amount.  SFAS
No. 121 also addresses the accounting for long-lived assets that are expected to
be disposed of.  Operating  losses  subsequent to the Company's  emergence  from
Chapter 11 indicate that the reorganization value in excess of amounts allocable
to identifiable  assets might be impaired.  However,  the Company's  estimate of
undiscounted  cash flows indicate that such carrying  amounts are expected to be
recovered.

     Stock Based Compensation

     In October 1995, the FASB issued SFAS No. 123,  "Accounting for Stock-Based
Compensation."  SFAS No. 123 defines a fair value method of  accounting  for the
issuance of stock  options and other  equity  instruments.  Under the fair value
method,  compensation cost is measured at the grant date based on the fair value
of the award and is recognized over the service period, which is usually the

<PAGE>





                            Harvey Electronics, Inc.

                    Notes to Financial Statements (continued)




     1. Business  Description  and Summary of  Significant  Accounting  Policies
(continued)

vesting period. Pursuant to SFAS No. 123, companies are encouraged, but are
not  required,  to adopt  the fair  value  method  of  accounting  for  employee
stock-based  transactions.  Companies are also  permitted to continue to account
for such transactions  under Accounting  Principles Board Opinion No. 25, as the
Company  has  elected to do,  but are  required  to  disclose  in the  financial
statement  footnotes,  pro-forma  net  income  and per share  amounts  as if the
Company had applied the new method of accounting for all grants made since 1996.
SFAS No. 123 also requires  increased  disclosures for stock-based  compensation
arrangements.  The Company has adopted the disclosure  requirements  of SFAS No.
123 (see Note 6).

     Segment Disclosures

     In June 1997, the FASB issued SFAS No. 131,  "Disclosures about Segments of
an Enterprise and Related  Information." SFAS No. 131 establishes  standards for
the way that public  business  enterprises  report  information  about operating
segments in annual  Financial  Statements  and requires  that those  enterprises
report  selected  information  about  operating  segments  in interim  financial
reports.  It also establishes  standards for related  disclosures about products
and services,  geographic areas, and major customers.  SFAS No. 131 is effective
for financial statements for fiscal years beginning after December 31, 1997, and
therefore,  the  Company  will  adopt  the  new  requirements  in  Fiscal  1999.
Management has not completed its review of SFAS No. 131, but does not anticipate
that the  adoption  of this  statement  will  have a  significant  impact on the
Company.

     Inventories

     Inventories  are stated at the lower of cost  (average-cost  method,  which
approximates the first-in, first-out method) or market.



<PAGE>


     1. Business  Description  and Summary of  Significant  Accounting  Policies
(continued)

     Depreciation and Amortization

     Property and Equipment are stated at cost less accumulated depreciation and
amortization.  Depreciation  of  property  and  equipment,  including  equipment
acquired under capital leases, is provided for by the straight-line  method over
the estimated useful lives of the related  equipment,  ranging from three to ten
years.  Leasehold  improvements  are amortized  over the lease term or estimated
useful life of the improvements, whichever is shorter.

     Income Taxes

     The financial  statements  have been  prepared in conformity  with SFAS No.
109,  "Accounting  for Income  Taxes."  This  statement  requires the use of the
liability method in accounting for income taxes. Under this method, deferred tax
assets and liabilities  are determined  based on differences  between  financial
reporting  and tax basis of assets and  liabilities  and are measured  using the
enacted  tax rates and laws that  will be in  effect  when the  differences  are
expected to reverse.

     Deferred  income  taxes  reflect the net effects of  temporary  differences
between the carrying  amounts of assets and liabilities for financial  reporting
purposes and the amounts used for income tax purposes (see Note 6).

     Loss Per Share

     In 1997,  the FASB issued SFAS No. 128,  "Earnings Per Share." SFAS No. 128
replaced the  calculation  of primary and fully diluted  earnings per share with
basic and diluted earnings per share.  Unlike primary earnings per share,  basic
earnings  per share  excludes  any  dilutive  effects of options,  warrants  and
convertible  securities.  Diluted  earnings  per  share is very  similar  to the
previously reported fully diluted earnings per share. Earnings per share amounts
for  all  periods  have  been   presented  and  conform  to  the  SFAS  No.  128
requirements.



<PAGE>


     1. Business  Description  and Summary of  Significant  Accounting  Policies
(continued)

     The basic loss per common share for the  fifty-two  weeks ended October 31,
1998 and the fifty-three  weeks ended November 1, 1997 was computed based on the
weighted average number of common shares  outstanding.  Common equivalent shares
of  approximately  131,250,  relating to the conversion of Preferred  Stock, for
fiscal 1998 and 1997, were not considered  since their inclusion would have been
antidilutive.

     Statement of Cash Flows

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

     Fair Value of Financial Instruments

     The  book  values  of  cash  and  cash  equivalents,   accounts  and  notes
receivable,  accounts  payable and accrued  liabilities  approximate  their fair
values principally because of the short term nature of these items.

     Concentration of Credit Risk

     The  Company's  operations  consist of the retail sale,  service and custom
installation of high quality audio,  video and home theater equipment in the New
York Metropolitan area. The Company performs credit evaluations of its customers
financial  condition  and  payment  history  but  does not  require  collateral.
Generally,  accounts  receivable  are due within 30 days and credit  losses have
historically been immaterial.

     Advertising Expense

     Advertising expense, net of cooperative advertising allowances,  is charged
to operations  when the  advertising  takes place.  Advertising  expense for the
fifty-two weeks ended October 31, 1998 and the fifty-three  weeks ended November
1,  1997  was  approximately  $233,000  and  $401,000,   respectively.   Prepaid
advertising for print advertisements not run at October 31, 1998 and November 1,
1997 was approximately $75,000 and $15,000, respectively.



<PAGE>


     2. Plan of Reorganization and Fresh Start Reporting

     Plan of Reorganization

     On August 3, 1995,  the Company  (then known as The Harvey  Group Inc.  and
Subsidiaries  or  "Predecessor")  filed petitions for relief under Chapter 11 of
the United States  Bankruptcy Code with the United States  Bankruptcy  Court for
the Southern  District of New York (the "Court").  This filing was the result of
certain negative  factors  including but not limited to: (i) the negative effect
of a $2,138,000  judgment  entered against the Company;  (ii) liabilities of The
Harvey Group Inc.,  including the obligations of its discontinued food brokerage
division,  the payment of which significantly  reduced cash; (iii) the recession
in the early 1990's  coupled  with the soft market in the  consumer  electronics
industry,  all of which resulted in losses and a shortage of cash flow; and (iv)
the delisting of the Predecessor's common stock from the American Stock Exchange
in June 1995,  which  delisting  made a proposed $4.2 million  equity  placement
untenable.

     On November 13, 1996 (the  "Confirmation  Date"),  the Court  confirmed the
Restated  Modified  Amended  Joint  and   Substantially   Consolidated  Plan  of
Reorganization  of The  Harvey  Group  Inc.  (the  "Reorganization  Plan").  The
Effective  date  of  the   Reorganization   Plan  was  December  26,  1996  (the
"Reorganization  Date"),  at which time The Harvey  Group Inc.  emerged from its
Chapter 11 reorganization and changed its name to Harvey  Electronics,  Inc. The
Company has given effect to the Reorganization  Plan as of October 26, 1996, the
end of the accounting period nearest to the Confirmation Date.

     Prior to the Reorganization Date, all of the Company's old shares of common
and  preferred  stock were  canceled.  The  Company  simultaneously  amended its
Certificate  of  Incorporation  and is  authorized  to issue  10,010,000  shares
consisting of 10,000 shares of 8.5% Cumulative  Convertible Preferred Stock (see
Note 5) with a par  value of  $1,000  per  share  (the  "Preferred  Stock")  and
10,000,000  shares of  Common  Stock  with a par  value of $.01 per  share  (the
"Common Stock").



<PAGE>


     2. Plan of Reorganization and Fresh Start Reporting (continued)

     The Reorganization Plan provided for the following:

     a. Redistribution of Common Stock

     Prior to the Reorganization  Date, the new shares of common stock in Harvey
Electronics, Inc. were issued as follows:

     2,000,000 shares were issued to Harvey Acquisition Company,  L.L.C. ("HAC")
in satisfaction of the $2,822,500 of subordinated  secured financing provided to
the Company during its reorganization process.

     186,306  shares  were  issued  to the  Company's  unsecured  creditors;  in
satisfaction of prepetition liabilities compromised.

     19,962 shares were issued to the Company's former shareholders.

     InterEquity  Capital Partners,  L.P.  ("InterEquity"),  a prereorganization
subordinated  secured  debtholder,  received  51,565  shares of Common  Stock as
payment in full of an allowed finders fee.

     As a result of the above,  2,257,833  shares of Common Stock were issued on
the Effective date.

     b. Issuance of Preferred Stock (see Note 5)

     Prior to the  Reorganization  Date,  875 shares of the Company's  Preferred
Stock were issued to the Company's pre-reorganization  subordinated secured debt
holders in exchange for $875,000 of such debt. The reorganization carrying value
of the Preferred Stock has been estimated to be $318,000 based on a sale of such
security, independent of the Company, for 36% of stated value.



<PAGE>


     2. Plan of Reorganization and Fresh Start Reporting (continued)

     c. Convenience Claims/Miscellaneous

     Convenience  claims  of  $1,000  or less  were  paid in cash  approximating
$20,000.  The Reorganization Plan also provided for cash distributions ($452) of
$1.00 to any  former  shareholders  holding  100 or fewer  shares of old  common
stock.

     d. Agreement and Plan of Merger

     Pursuant to the  Reorganization  Plan,  the  Company's  Board of  Directors
approved the  Agreement  and Plan of Merger  effective  December 26, 1996 by and
between the Company and its 100%  wholly-owned  subsidiary,  Harvey Sound,  Inc.
("Sound"), pursuant to which Sound was merged with and into the Company.

     e. Change in Fiscal Year

     The  Company's  Board of Directors  approved an amendment to its By-Laws to
reflect the change in the  Company's  fiscal year from the  Saturday  closest to
January 31 to the Saturday closest to October 31.

     f. Stock Option Plan

     The  Company's  Board of Directors  approved the Harvey  Electronics,  Inc.
Stock Option Plan ("Stock Option Plan").  The Stock Option Plan provides for the
granting of options to purchase up to  1,000,000  shares of common  stock of the
Company (see Note 5). The Stock Option Plan was approved by the  shareholders in
fiscal 1998.

     g. Prepetition Liabilities Subject to Compromise

     Under Chapter 11, certain claims against the Company in existence  prior to
the filing of the  petitions  for relief  under the Code were  stayed  while the
Company continued its operations as a debtor-in-possession.

     Liabilities subject to compromise  immediately preceding the Reorganization
Plan  ($4,782,000),  were  satisfied  with the issuance of common stock as noted
above and the related  forgiveness of debt was recorded as an extraordinary gain
in the 1996 fiscal period.


<PAGE>


     2. Plan of Reorganization and Fresh Start Reporting (continued)

     Fresh Start Reporting

     Fresh Start Reporting was adopted on the  Confirmation  Date and applied as
of  October  26,  1996,  the  end  of  the  accounting  period  closest  to  the
Confirmation Date.  Results of operations and balance sheet differences  between
such dates were insignificant.  The Company has adopted Fresh Start Reporting in
accordance with the American Institute of Certified Public Accountants Statement
of Position 90-7,  "Financial  Reporting by Entities in Reorganization under the
Bankruptcy Code." The Company adopted fresh-start  reporting because the holders
of existing voting shares immediately before filing and confirmation of the plan
received  less than 50% of the  voting  shares of the  emerging  entity  and its
reorganization  value is less  than its  postpetition  liabilities  and  allowed
claims.

     Fresh  Start  Reporting  has  resulted  in  changes to the  balance  sheet,
including valuation of assets and liabilities at fair market value,  elimination
of the  accumulated  deficit  through  October 26, 1996 and  valuation of equity
based on the reorganization value of the ongoing business.

     The  reorganization  value  of the  Company  was  determined  based  on the
consideration  received  from HAC to obtain  its  ownership  in the  Company.  A
carrying  value of $318,000  was assigned to the  Preferred  Stock (see Note 5).
Subsequent to the  Reorganization  Date, the Company issued an additional 51,565
shares of Common  Stock to  InterEquity,  as  authorized  by the  Court,  for an
approved finders fee. The excess of the reorganization value over the fair value
of net assets and  liabilities  ($1,516,440  at October 31, 1998) is reported as
"Reorganization value in excess of amounts allocable to identifiable assets" and
is being  amortized  over a  twenty-five  year period.  Amortization  expense of
approximately $66,000 was recorded for fiscal years 1998 and 1997.

     3. Revolving Lines of Credit Facilities

     On November 5, 1997, the Company  entered into a three-year  revolving line
of credit facility with Paragon Capital L.L.C.  ("Paragon")  whereby the Company
may borrow up to $3,300,000 based upon a lending formula (as defined) calculated
on eligible  inventory.  Proceeds  from Paragon were used to pay down and cancel
the existing credit facility with Congress Financial  Corporation  ("Congress"),
reduce trade  payables and pay related  costs of the  refinancing.  The interest
rate on borrowings up to $2,500,000 is 1% over the prime rate

<PAGE>


     3. Revolving Lines of Credit Facilities (continued)

     (8% at October 31,  1998).  The rate charged on  outstanding  balances over
$2,500,000  is 1.75% above the prime rate.  A commitment  fee of $49,500  (being
amortized  over three  years) was paid by the  Company at closing and a facility
fee of  three-quarters  of one percent (.75%) of the maximum credit line will be
charged each year. Monthly maintenance charges and an early termination fee also
exist under the line of credit.

     Paragon also received a warrant to purchase 125,000 shares of common stock,
subject to  adjustment,  which is currently  exercisable at a price of $5.50 per
share and  expires  April 3, 2001.  The Company is  amortizing  the value of the
warrants over a three-year  period,  based upon the estimated fair value of such
warrant of approximately $24,000.

     Paragon has a senior security interest in all of the Company's assets.  The
line of credit facility  provides  Paragon with rights of acceleration  upon the
occurrence of certain customary events of default  including,  among others, the
event of bankruptcy.  The Company is restricted from paying  dividends on common
stock,  retiring or  repurchasing  its common stock and entering into additional
indebtedness (as defined). Additionally, certain financial covenants exist.

     The Paragon  credit  facility  replaced the Company's  previously  existing
$3,000,000  revolving line of credit with Congress.  The Congress line of credit
required a $200,000  certificate  of deposit as security  during the term of the
line of credit; such certificate of deposit was released upon termination of the
line of credit and redeemed by the Company.

     Subsequent to the Reorganization Date, an individual who is a member of HAC
and holder of Preferred Stock, issued to the Company a $350,000 term loan, to be
used for working capital purposes. This term loan with interest of approximately
$48,000 was repaid in April 1998,  with the proceeds of the public offering (see
Note 4). Interest expense relating to such term loan was  approximately  $20,000
and $28,000 for fiscal years 1998 and 1997, respectively.

     4. Sale of Common Stock and Warrants in Public Offering

     On April 7, 1998, the Company completed an issuance of its common stock and
common stock warrants in a public  offering (the  "Offering").  The Offering was
co-managed  by The  Thornwater  Company,  L.P.  (the  "Underwriter")  which sold
1,200,000  shares of the Company's  common stock, of which 1,025,000 shares were
sold by the Company and 175,000 shares were sold by HAC, and 2,104,500 of



<PAGE>


     4. Sale of Common Stock and Warrants in Public Offering (continued)

Warrants  ("Warrants") to acquire additional shares of the Company's common
stock. The net proceeds from the Offering, which approximated $4.1 million, were
used to temporarily  repay amounts  borrowed  under the Paragon credit  facility
($2,262,306) and to retire the principal  ($350,000) and interest ($47,627) of a
term  loan,  with  the  balance  of the  proceeds  to be used for  retail  store
expansion and general working capital purposes.

     Each  Warrant is  exercisable  for one share of common stock at 110% ($5.50
per share) of the Offering  price for a period of three years  commencing  March
31, 2000, two years from the effective  date of the Offering.  The Warrants also
are redeemable (at a prescribed price) at the Company's option,  beginning March
31, 2000 if the closing bid price of the common stock for 20 consecutive trading
days exceeds 150% of the Offering price per share.

     At closing,  the Company paid the Underwriter  $123,660,  representing  the
prepayment of a three-year financial advisory and consulting agreement which was
to be amortized  over the life of the  agreement.  As of October 31, 1998,  this
financial   advisory  and   consulting   agreement   was  mutually   terminated.
Additionally,  the  Underwriter  agreed to modify the lock-up  arrangement  with
respect to shares owned by the Company's majority shareholder,  HAC, and members
of management. The termination of the lock-up has been accelerated to January 1,
1999. As a result, the Company in the fourth quarter of fiscal 1998, accelerated
the amortization of the prepaid three-year financial advisory and consulting fee
paid to the  Underwriter  and  recorded a charge to  operations  of $123,660 for
fiscal 1998, of which  approximately  $110,000 was charged in the fourth quarter
of fiscal 1998.

     In November 1997, HAC transferred  85,000 shares of common stock to certain
employees  and  directors  of the Company and an  individual  who is a preferred
shareholder and a member of HAC. Such transfer has been accounted for as if such
shares were issued by the Company as compensation  to such persons.  The Company
recorded deferred stock  compensation  expense equal to the fair market value of
the shares  ($297,500)  which was to be  amortized  over a  two-year  forfeiture
period.  However, in October 1998, HAC removed the two-year forfeiture provision
and the  Company  accelerated  the  amortization  of the  deferred  compensation
expense.  As a result,  $297,500  of stock  compensation  expense was charged to
operations  during  fiscal  1998,  of which  $209,500  was charged in the fourth
quarter of fiscal 1998.



<PAGE>


     5. Stock Based Compensation Plan and Preferred Stock

     Stock Option Plan

     In  conjunction  with  the  Reorganization  Plan,  the  Company's  Board of
Directors and shareholders  approved the Harvey  Electronics,  Inc. Stock Option
Plan ("Stock  Option  Plan") in fiscal 1998.  The Stock Option Plan provides for
the granting of up to 1,000,000  shares of incentive  and  non-qualified  common
stock  options  and  stock  appreciation  rights  to  directors,   officers  and
employees.  All options are  exercisable  at times as determined by the Board of
Directors not to exceed ten years from the date of grant. The Company's previous
stock option plan was canceled in connection  with the  Reorganization  Plan. On
December 5, 1997, the Company's  Compensation  and Stock Option Committee of the
Board of  Directors  ("Compensation  Committee")  approved  a  grant,  as of the
effective  date of the Offering,  of 70,000  incentive  stock options to certain
employees  to purchase the  Company's  common stock  originally  exercisable  at
various exercise prices between  $5.00-$6.00,  over a three-year  vesting period
from the  effective  date.  On October  28,  1998,  the  Company's  Compensation
Committee  reissued the 70,000 incentive stock options with an exercise price of
$3.00 for officers and middle  management,  and $2.00 for other employees.  Such
options remain  exercisable over a three-year vesting period (33-1/3% per year).
Simultaneously,  the  Compensation  Committee  granted  75,000  incentive  stock
options to certain  employees and  directors,  with an exercise  price of $1.00.
These options are also exercisable over a three-year vesting period (33-1/3% per
year),  except for  Messrs.  Cohen,  Kenny and  Gruder,  whose  options  vest as
follows:  (i) 50%  immediately;  (ii) 25% on October 28, 1999;  and (iii) 25% on
October 28, 2000.

     In fiscal 1998,  the Company  reserved  145,000  shares of common stock for
issuance in  connection  with stock  options.  The  weighted  average  remaining
contractual life of the options  outstanding is three years. The following table
summarizes activity in stock options during fiscal 1998:

<PAGE>
<TABLE>
<CAPTION>

                                                                                              Weighted
                                          Shares            Shares Under Option                Average
                                                      ---------------------------------
                                      Available for    Option Price       Number of        Exercise Price
                                         Granting        per Share         Shares
                                      --------------- ---------------- ---------------- -- ----------------
<S>                                    <C>                <C>                <C>               <C>  
  
    Balance at November 1, 1997              -                                 -
         1998 stock option grant          145,000                                 -
         Granted--December 5, 1998        (70,000)       $2.00-$3.00         70,000              $2.86
         Forfeited                         3,200           $2.00            (3,200)             $2.00
         Granted--October 28, 1998        (75,000)          $1.00            75,000              $1.00
                                      ===============                  ================
      Balance at October 31, 1998          3,200                           141,800              $1.89
                                      ===============                  ================

</TABLE>

<PAGE>


     5. Stock Based Compensation Plan and Preferred Stock (continued)

     Of the  options  outstanding  at October 31,  1998,  a total of 15,000 were
exercisable.  The  weighted  average  fair value of options  granted  during the
fiscal year ended October 31, 1998 was $1.61.

     Exercise  prices for  options  outstanding  as of October  31,  1998 are as
follows:
<TABLE>
<CAPTION>

  Number of Options
 Outstanding at Year                 Options Exercisable
         End                           at End of Year                    Range of Exercise
                                      Price
-----------------------             ----------------------             ----------------------
<S>                                     <C>                                   <C>    

         75,000                            15,000                              $1.00
          6,800                                 -                              $2.00
         60,000                                 -                              $3.00
=======================             ======================             ======================
        141,800                            15,000                         $1.00-$3.00
=======================             ======================             ======================
</TABLE>


     The  alternative  fair value  accounting  provided  for under SFAS No. 123,
requires  use of option  valuation  models  that were not  developed  for use in
valuing employee stock options.  Under APB 25, because the exercise price of the
Company's  Stock  Options  equals or exceeds the market price of the  underlying
stock on the date of grant, no compensation expense is recognized.

     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   employee   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  provide a reliable  single
measure of the fair value of its stock options.

     Pro forma information  regarding net loss and net loss per share (basic and
diluted) is required by SFAS No. 123,  which also requires that the  information
be determined  as if the Company had  accounted  for its stock  options  granted
under the fair value of that statement.
<PAGE>

     5. Stock Based Compensation Plan and Preferred Stock (continued)

     The fair value of these  options was  estimated  at the date of grant using
the  Black-Sholes  option pricing model with the following  assumptions  for the
fiscal year ended October 31, 1998: risk-free interest rate of 6.5%; no dividend
yield;  volatility  factors of the expected market price of the Company's common
stock of 1.489;  and a  weighted  average  expected  life of the  options of 3.0
years.

     For  purposes of pro forma  disclosures,  the  estimated  fair value of the
options is amortized to expense over the options' vesting period.  The Company's
pro forma  information for fiscal year 1998 is as follows (pro forma information
for  fiscal  1997  is  not  required  as  no  stock   options  were  granted  or
outstanding):

Pro forma net loss                                            $   (880,000)
                                                           ------------------
Pro forma net loss attributable to common stock               $   (969,000)
                                                           ------------------
Pro forma basic and diluted loss per share                    $       (.34)
                                                           ==================

8.5% Cumulative Convertible Preferred Stock

     The Company's Preferred Stock has no voting rights and is redeemable at the
option of the  Company's  Board of  Directors  in whole or in part at face value
plus any  accrued  dividends.  The  carrying  value of the  Preferred  Stock was
estimated to be $402,037 at October 31, 1998.

     In the event of  liquidation  of the Company,  the holders of the Preferred
Stock  shall  receive  preferential  rights and shall be  entitled  to receive a
aggregate  liquidation  preference of $875,000 plus any  outstanding  dividends,
prior to any distributions to common shareholders.  The holders of the Preferred
Stock  shall  receive  a  semiannual  8.5%  cumulative  dividend  ($85 per share
annually),  payable on the last business day in June and  December.  The Company
may and has elected to defer only the first year's dividend at a preference rate
of $105 per share annually.  This amount,  plus interest at 8.5% per annum, will
be payable in three equal  annual  installments  from  December 31, 1998 through
2000.

     The  Preferred  Stock may be  converted  into shares of Common  Stock until
December 31, 2000 at the option of the holder,  in whole or in part, as follows:
(i) the first 50% of the  Preferred  Stock can be  converted at $6.00 per share,
and (ii) the balance is convertible at $7.50 per share.  Beginning on January 1,

<PAGE>
5. Stock Based Compensation Plan and Preferred Stock (continued)

2001, the Preferred  Stock is convertible at the average  closing price, as
defined, of the Company's Common Stock for the preceding 45 day period.

     The Preferred Stock also contained a redemption  feature whereby each share
would be redeemed on December 31, 2000. In December 1997, the redemption feature
was eliminated and the holders of the Preferred  Stock received  36,458 Warrants
to purchase shares of common stock (valued at  approximately  $6,000) with terms
equivalent to the Warrants granted during the Offering (see Note 4). The balance
sheet at October 31, 1998 has been  presented to reflect the Preferred  Stock as
part of shareholders' equity, as a result of the eliminated redemption feature.

     Cumulative  Preferred Stock  dividends  payable of $123,481 are outstanding
and classified between current ($61,925), and long-term ($61,556) liabilities at
October 31, 1998.  Such  dividends,  along with the accretion on the  redeemable
Preferred Stock ($6,000),  were recorded as a reduction of retained  earnings at
October 31, 1998.

     6. Income Taxes

     At  October  31,  1998,  the  Company  has  available  net  operating  loss
carryforwards of approximately  $2,900,000 which expire in various years through
fiscal   2013.   Of   this   amount,   approximately   $2,250,000   relates   to
pre-reorganization  net  operating  loss  carryforwards.  As  a  result  of  the
Company's  Reorganization Plan and significant  ownership change,  under Section
382 of the IRS Code, it is estimated that the  pre-reorganization  net operating
loss carryforward and other pre-reorganization tax attributes will be limited to
approximately $150,000 per year over the next fifteen years.

     At October 31, 1998 and November 1, 1997,  the Company had net deferred tax
assets  of  approximately  $1,400,000  and  $1,207,000,   respectively,  arising
primarily from the future availability of the above tax attributes.  Such amount
has been offset in full by a valuation allowance.

     Future benefits  realized,  if any, from  pre-reorganization  net operating
loss carryforwards would first reduce  reorganization value in excess of amounts
allocable to identifiable assets until exhausted and thereafter be reported as a
direct addition to paid in capital.



<PAGE>


     7. Pension and Profit Sharing Plan

     The Harvey Group Inc.  Savings and  Investment  Plan (the "Plan")  includes
profit sharing,  defined  contribution and 401(k) provisions and is available to
all eligible  employees of the Company.  There were no contributions to the Plan
for the fifty-two weeks ended October 31, 1998 and the  fifty-three  weeks ended
November 1, 1997.  Effective  January 1, 1995, the Company's  Board of Directors
temporarily   elected  to  eliminate  the  employer  401(k)  match  on  employee
contributions. Subsequent to the Effective Date of the offering, the Plan's name
was amended and changed to Harvey Electronics, Inc. Savings and Investment Plan.

     8. Commitments and Contingencies

     Commitments

     The Company's  financial  statements  reflect the  accounting for equipment
leases as capital  leases by recording  the asset and the related  liability for
the lease obligation.  No additional  capital leases were recorded during fiscal
1998 and  approximately  $11,000 of such  leases were  recorded in fiscal  1997.
Future  minimum  rental  commitments,  by year and in the  aggregate,  under the
capital  leases and  noncancelable  operating  leases with  initial or remaining
terms of one year or more consisted of the following at October 31, 1998.

<TABLE>
<CAPTION>

                                                            Operating Leases          Capital
                                                                                      Leases
                                                           -------------------- --------------------
<S>                                                              <C>                 <C>   


Fiscal 1999                                                  $     1,608,000          $   5,000
Fiscal 2000                                                        1,701,000              4,000
Fiscal 2001                                                        1,471,000              2,000
Fiscal 2002                                                        1,380,000                  -
Fiscal 2003                                                        1,290,000                  -
Thereafter                                                         3,212,000                  -
                                                                                --------------------
                                                           ====================
Total minimum lease payments                                 $    10,662,000             11,000
                                                           ====================
Less amount representing interest                                                         2,000
                                                                                --------------------
Present value of net minimum lease payments                                               9,000
Less current portion                                                                      3,000
                                                                                ====================
                                                                                      $   6,000
                                                                                ====================

</TABLE>

<PAGE>


     8. Commitments and Contingencies (continued)

     Minimum rental commitments are offset by certain sublease  agreements which
earn sublease income of approximately $93,000 per annum through fiscal 2001.

     Total rental expense for operating leases was approximately  $1,376,000 and
$1,517,000,  for the fifty-two  weeks ended October 31, 1998 and the fifty-three
weeks  ended  November 1, 1997,  respectively.  Certain  leases  provide for the
payment of insurance, maintenance charges and taxes and contain renewal options.

     The Company is obligated  under annual or biannual  agreements with certain
of its  vendors  to  attain  certain  minimum  levels  of  inventory  purchases,
aggregating approximately $900,000 per year over the next two years.

     Contingencies

     The Company is the  subject of or a party to certain  legal  actions  which
arose in the normal course of business.  The outcome of these legal actions,  in
the  opinion of  management,  will not have a material  effect on the  Company's
financial position or operations.

Included  in prepaid and other  current  assets at October 31, 1998 is a $50,000
certificate of deposit which is held as collateral under an outstanding  $50,000
letter of credit.

     9. Other Information

     Accrued Expenses and Other Current Liabilities


                                                               October 31,
                                                                  1998
                                                           --------------------
                                             

Payroll and payroll related items                                $192,825
Accrued professional fees                                         149,516
Customer layaways                                                 373,735
Accrued interest                                                   35,133
Sales taxes                                                        93,208
Other                                                              86,794
                                                           ====================
                                                                 $931,211
                                                           ====================


<PAGE>


     9. Other Information (continued)

     Other Long-Term Liabilities

                                                               October 31,
                                                                  1998
                                                           --------------------

Straight-line impact of lease escalations                        $183,922
Other                                                              15,000
                                                           ====================
                                                                 $198,922
                                                           ====================

     Note Receivable

     On October 31, 1998, the Company received a promissory note from a previous
member  of its  Underwriter,  in lieu of an  outstanding  trade  receivable  for
$73,321. Payments,  including interest at 9% per annum are due to the Company as
follows:  twelve  equal  payments of $940  commencing  October 31, 1998  through
October 31, 1999 and a balloon  payment of $68,430,  due October 31, 1999.  As a
result, the monthly amount due to the Company has been presented as a short-term
"note receivable" at October 31, 1998.

     Other

     Interest  expense  relating to the HAC  debtor-in-possession  financing was
approximately  $35,000 for the  fifty-three  weeks ended  November 1, 1997.  The
debtor-in-possession financing amounted to $2,822,000 at the Reorganization date
when such  financing was converted to 2,000,000  shares of the Company's  common
stock.  Interest  expense  relating to fiscal 1997 and paid to HAC during fiscal
1998 was approximately $66,000.

     Management  fees of $40,000  and $30,000  relating to a Company  affiliated
with the Company's  Chairman,  were  expensed for the fifty-two and  fifty-three
weeks ended October 31, 1998 and November 1, 1997,  respectively.  Approximately
$23,000 of management fees and other miscellaneous  amounts were payable to this
Company at October 31, 1998.



<PAGE>


     9. Other Information (continued)

     Beginning  April 1,  1998,  an annual  director's  fee of  $95,000  will be
payable  to the  Company's  Chairman  of the Board of  Directors.  The  Chairman
received $55,000 during fiscal 1998.

     10. Costs Associated With Lease Transaction

     On June 29, 1998, the Company entered into a lease assumption agreement for
approximately  5,000 square feet of retail space in lower  Manhattan,  purchased
existing leasehold  improvements for approximately  $125,000 and paid a security
deposit of  approximately  $15,000.  Such space was to be used to  relocate  the
Company's  existing  retail  store  within ABC Carpet and Home,  also located in
lower Manhattan, as the landlord was initially unwilling to extend the company's
existing lease agreement.

     In  September  1998,  the Company  entered  into an agreement to extend its
existing retail store lease located within ABC Carpet and Home. As a result, the
Company  entered  into a  lease  surrender  agreement  to  terminate  the  lease
assumption agreement for the replacement retail space with a realty company.

     In conjunction with the lease surrender agreement, the Company will receive
payments aggregating $125,000 in three installments as follows:  $50,000 payment
received in December,  1998; $40,000 payment due December 22, 1999 and a $35,000
payment due  December  22,  2000.  In  addition,  the  security  deposit will be
returned to the Company  prior to January 31,  1999.  The Company  recorded  the
present value  ($120,236) of such  payments and  classified  $50,000 in "prepaid
expenses and other current  assets" and $70,236 in "Other Assets" at October 31,
1998.  In the fourth  quarter of fiscal 1998,  the Company  recorded all related
lease  payments,  real estate  commissions,  legal fees and the  discount on the
present value of the lease surrender agreement payments, aggregating $113,782 to
"Costs Associated with Lease Transaction."



<PAGE>


     11. Retail Store Acquisition and Expansion

     On July 2, 1998, as a part of its expansion  plan, the Company entered into
a definitive  contract with Sound Mill, Inc. and its  subsidiary,  Loriel Custom
Audio Video  Corporation  (the "Sound Mill"), a retailer and custom installer of
specialty  high-end  audio/video  products for twenty-nine  years with one store
located in Mt.  Kisco,  in Northern  Westchester  County,  New York,  to acquire
certain  assets and business of the Sound Mill for a purchase  price of $200,000
(as adjusted) in cash.  The  acquisition  was  accounted for as a purchase.  The
purchase  price was allocated to the assets  acquired based upon the fair values
on the date of  acquisition  as  follows:  $50,000 for  leasehold  improvements,
equipment,  vehicles  and tools and  $150,000  for cost in excess of net  assets
acquired which is being amortized over a  twenty-five-year  period.  The Company
also  signed a ten-year  lease  with a  five-year  renewal  option for the 3,100
square foot retail store  operated by the Sound Mill.  This property is owned by
the former principals of the Sound Mill. The results of operations for the Sound
Mill was included in the Company's  operations  from the date of acquisition and
was not  considered  material  during  fiscal 1998 as the Company  renovated the
store for a November 1998 grand re-opening. Had the acquisition been made during
fiscal 1997,  unaudited pro forma sales, net loss and basic and diluted loss per
share would not have been considered  material for the  fifty-three  weeks ended
November 1, 1997.

     On August 11, 1998,  the Company  signed a ten-year  lease with a five-year
renewal  option for its new 4,600 square foot retail  showroom in Greenvale,  on
the north  shore of Long  Island,  New York.  This new  retail  store  opened in
November 1998 and was not included in the Company's results of operations during
fiscal 1998.

     12. Subsequent Event

     Bang & Olufsen  products have been sold by the Company since 1980,  and the
line represented  approximately  $1,176,000,  or 6.8% of the Company's net sales
for the fifty-two week period ended October 31, 1998. Bang & Olufsen has decided
that it will now focus on developing Bang & Olufsen  licensed  stores  ("Branded
Stores")  throughout the world.  Bang & Olufsen has,  accordingly,  canceled its
dealer  agreement  with the Company and all other  retailers  effective  May 31,
1999. After this date, Bang & Olufsen products will be available only in Branded
Stores.



<PAGE>


     12. Subsequent Event (continued)

     As a result, the Company received a commitment from Bang & Olufsen allowing
the Company to open Branded  Stores in Manhattan,  Long Island and  Connecticut.
Pursuant to this  commitment,  the Company must complete  construction  of these
locations at various dates through  November 1999. Bang & Olufsen has authorized
the Company to open up to five Branded Stores.

     On January 7, 1999, as part of its  expansion  plan in the New York region,
the Company signed a lease and a related Prime Site Marketing  Agreement to open
a new 1,500 square foot Bang & Olufsen  branded  store in Union Square area,  in
lower Manhattan.  The Company plans to open this new store prior to May 1, 1999,
which will be the  Company's  seventh,  and will be the third opened  within the
twelve months of its successful public offering completed in April 1998.