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 30, 1999

  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.
              (Exact 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 [X] No[ ]

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

State issuer's revenues for its most recent fiscal year.             $21,386,507

State the number of shares outstanding of each of the issuer's classes of common
equity, as of January 10, 2000.                                       3,282,833

As of January 10, 2000, the aggregate  market value of the  registrant's  common
stock held by  nonaffiliates  computed  by  reference  to the price at which the
stock was sold was  $4,558,108.  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>


                                                                              37
Part I

Item 1. Description of Business.

General

Harvey  Electronics,  Inc.  ("Harvey" or the "Company") 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"),  high
definition  television  ("HDTV"),  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-two  years. The Company
currently  operates six Harvey  specialty retail stores and one Bang and Olufsen
branded store.  The two Harvey  Manhattan stores are located on Broadway at 19th
Street and on 45th Street at Fifth Avenue.  The  Company's  newest Harvey stores
opened in November 1998 on Glen Cove Road in  Greenvale/Roslyn,  Long Island and
Main Street in Mount Kisco,  Westchester  County, New York. Its other two Harvey
stores are located on Route 17 in Paramus, New Jersey, and on West Putnam Avenue
in  Greenwich,  Connecticut.  In July 1999,  the  Company  opened a new Bang and
Olufsen branded store in the Union Square area of lower Manhattan.

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.

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 Harvey  Electronics,  LLC  ("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,  were used to open three new retail stores and for
general working capital purposes.


<PAGE>


The net  proceeds  from the  Offering  were also used to repay  temporarily  the
Company's credit facility  ($2,262,306)  and to retire the principal  ($350,000)
and interest ($47,627) of a term loan.

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.

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  was  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.

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 eliminate the lock-up  arrangement
with respect to shares owned by the  Company's  majority  shareholder,  HAC, and
members of management.  As a result, the Company 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.

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, Vienna Acoustics,
Sonus Faber, Kef, Nakamichi 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.


<PAGE>


For the fiscal year ended October 30, 1999,  the  Company's  audio product sales
represented  approximately  71% 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   28%.  The  Company  also  provides  custom
installation  of  products  it sells.  Approximately  22% of net  product  sales
currently involve custom installation.  The labor portion of custom installation
presently  represents  approximately  4% 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 49%,  represent 1% of
the Company's net sales.

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.

                                            Fiscal Year        Fiscal Year
                                               Ended              Ended
                                             October 30,       October 31,
                                                1999               1998
                                           -------------------------------------

Audio Components                                 49%                52%
Mini Audio Shelf Systems                          8                  7
TV and Projectors                                18                 17
VCR/DVD/DSS                                       7                  7
Furniture                                         5                  4
Cable and Wire                                    5                  5
Accessories                                       6                  6
Extended Warranties                               1                  1
Miscellaneous                                     1                  1
                                           _____________________________________
                                                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.


<PAGE>


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, HDTV, DVD and plasma flat-screen 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 has significantly improved 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 28%, 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 41%.

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  54% of the  Company's  purchases for the
fiscal year ended October 30, 1999. These ten  manufacturers are Bang & Olufsen,
Bose, Marantz, McIntosh,  Mitsubishi,  Monster Cable, Nakamichi,  Pioneer Elite,
Sony and Vienna  Acoustics.  Sony  accounted  for more than 10% of the Company's
purchases  for the fiscal year ended  October 30,  1999,  and Bang & Olufsen and
Marantz each  accounted  for more than five (5%)  percent of purchases  for such
period.


<PAGE>


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,  Niles
Audio Corporation,  Inc. and Runco  International.  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.  The Company's  dealer  agreement  with Niles Audio  requires the
Company to purchase at least $240,000 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.

Bang & Olufsen products have been sold by the Company since 1980. 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,  with one  exception,  all
other retailers effective May 31, 1999. Since this date, Bang & Olufsen products
are available only in Branded Stores.  For the period prior to May 31, 1999, the
line  represented  approximately  $628,000 or 3% of the  Company's net sales for
fiscal 1999.

On  January  7,  1999,  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 of lower  Manhattan.  The Company opened this new store
in July 1999. All related  preoperating  expenses and results of operations have
been included in the Company's  results of operations  for the fiscal year ended
October 30, 1999.  This is the  Company's  seventh store and is the third opened
since its successful public offering, completed in April 1998.

The Company has received a commitment  from Bang & Olufsen  permitting,  but not
requiring,  the Company to open two  additional  Branded Stores in Manhattan and
Connecticut.  Pursuant to this  commitment,  the Company  must agree to purchase
these locations by May 2000.

The new  Branded  Store sells  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,
HDTV's,  DVD players,  plasma  flat-screen  televisions,  and A/V  furniture and
accessories.   The  store  also  offers   professional  custom  installation  of
multi-room audio and home theater systems.


<PAGE>


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.

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 fiscal year ended October
30, 1999, 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.


<PAGE>


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.

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.


<PAGE>


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,   camcorders   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 Bose
products,  radios  and  other  portable  products,  are  available  at the  mass
merchants. Of the major video products sold by the Company, generally only Sony,
Panasonic and Mitsubishi televisions are sold by the mass merchants.

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.

In the latter part of fiscal 1999, the Company decided to materially  modify its
advertising  program,   including  the  decision  to  begin  network  and  cable
television  advertising,  which had not been done in the past by the Company. In
addition,  the  frequency and size of the  Company's  print ads were  increased.
Finally,  the Company  returned to  advertising  on radio.  The new campaign was
fully  implemented in November 1999. The results of this significant  investment
in increased advertising have been quite positive to date.


<PAGE>


The  television,  radio,  direct  mail  and  certain  of the  print  advertising
differentiates  the Company by emphasizing  the Harvey home theater  experience,
including  superior  audio/video  products  custom  installed by the Company and
controlled by one easy to operate remote control.

The Company currently uses larger, more frequent print advertising,  emphasizing
image,  products,  and  technology  in the New York  Times,  New York  Magazine,
Greenwich Magazine,  Newsday, Bergen Record,  Greenwich Times, Stanford Advocate
and  the  Gannett  Journal  News.  The  Company  also  distributes  direct  mail
advertising  several times a year to reach its customer database of over 65,000.
Some of the direct mail promotions are for specific manufacturers,  products, or
technology, and are supported by the manufacturers.

Television advertising is currently a 30 second commercial run on the WNBC, WABC
and WCBS networks as well as cable advertising on CNN, ESPN, MSG and CNBC. Radio
advertising  is currently  running on news,  sports and business  stations on AM
radio.

All  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.

                                         Fiscal Year          Fiscal Year
                                             Ended                Ended
                                          October 30,          October 31,
                                             1999                 1998
                                       -----------------------------------------

Gross advertising costs                    $1,220,000          $ 962,000
Net advertising expenses                     227,000             233,000
Percentage of net sales                          1.1%                1.3%

The Company has  retained  an outside  advertising  agency who is paid a monthly
retainer of $10,000 plus approved expenses.  This agreement expired December 31,
1999 and the Company has renewed this  agreement for one year with a new monthly
retainer of $15,000.


<PAGE>


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.

Employees

As of October  30,  1999,  the  Company  employed  approximately  109  full-time
employees  of  which  15  were  management  personnel,  12  were  administrative
personnel, 47 were salespeople, 16 were warehouse workers and 19 were engaged in
custom installation.

The  salespeople,  warehouse  workers,  and  installation  staff (82 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.


<PAGE>


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.

The Company leases the following retail premises:

                            Expiration
                             Date of                  Approximate
                             Current                    Selling
                             Annual       Renewal       Square           Rent
                             Lease        Options       Footage         Expense
Location
________________________________________________________________________________

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         $258,000
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         $213,000
Greenwich, CT

44 Glen Cove Road           8/15/2009      None          4,600         $192,000
Greenvale, NY

115 Main St.                8/31/2008      None          3,100         $67,000
Mt. Kisco, NY

973 Broadway               12/31/2005      5 year        1,500         $114,000
New York, NY
(Bang & Olufsen Branded Store)

Item 3. Legal Proceedings.

Except as set forth herein,  the Company  believes that it is not a party to any
material  asserted  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 ssurance 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  $52,000 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 May 20, 1999,  the Company's  shareholders  at an Annual  Meeting (i) elected
Franklin C. Karp (3,005,988 shares in favor,  13,056 shares against),  Joseph J.
Calabrese  (3,055,988 shares in favor, 13,056 shares against),  Michael E. Recca
(3,055,450 shares in favor, 13,594 shares against), Fredric J. Gruder (3,005,950
shares in favor,  13,094 shares against),  Stewart L. Cohen (3,005,988 in favor,
13,056 shares against) and William F. Kenny (3,005,988  shares in favor,  13,056
shares  against)  and William F. Kenny III  (3,005,988  shares in favor,  13,056
shares  against) as directors of the Company;  and (ii) approved the appointment
of Ernst & Young LLP as the Company's  independent  auditors for the fiscal year
ending October 30, 1999 (3,018,024 shares in favor, 1,009 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 1999 and 1998:

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

January 30, 1999              $2.0625        $   .875
May 1, 1999                    3.250            1.4688
July 31, 1999                  2.6875           1.875
October 30, 1999               1.9375           1.2812
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 on common stock in the future.

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  10,  2000,  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 10, 2000,  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 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 over a three-year period. The preference rate for
calendar  year 1997 is $105 per  share,  with  interest  at the rate of 8.5% per
annum. The December 1999 ($35,000) and 1998 ($38,000)  installments  relating to
the 1997 dividends have been paid to date by the Company.  Total Preferred Stock
dividends of $112,809 were paid in fiscal 1999. 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.

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.

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

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 fiscal years ended  October 30, 1999 and
October 31, 1998, appearing elsewhere in this Form 10-KSB.

Statements of Operations Data:
                               Fiscal Year      Fiscal Year        Fiscal Year
                                 Ended             Ended              Ended
                                October 30,     October 31,        November 1,
                                  1999             1998               1997
                             ---------------------------------------------------
                                      (In thousands, except share data)

Net sales                       $ 21,386         $ 17,262           $ 15,398
Cost of sales                     13,082           10,646              9,765
                             ---------------------------------------------------
Gross profit                       8,304            6,616              5,633
Gross profit percentage             38.8%            38.3%              36.6%
Interest expense                     179              224                325
Selling, general and               9,043            6,756              6,706
administrative expenses
Other income                          72               70                 73
Stock compensation expense             -              297                  -
Financial advisory and
consulting fee to                      -              124                  -
Underwriter
Costs associated with                  -              114                  -
lease transaction
                             ---------------------------------------------------
Net loss                            (846)            (829)            (1,325)

                               Fiscal Year      Fiscal Year        Fiscal Year
                                 Ended            Ended              Ended
                               October 30,      October 31,        November 1,
                                 1999             1998               1997
                            ----------------------------------------------------
                                    (In thousands, except share data)

Accretion of                            -                (6)               (78)
Preferred Stock
Preferred Stock                       (74)              (83)               (71)
dividend requirement
                            ====================================================
Net loss attributable            $   (920)         $  (918)          $ (1,474)
to Common Stock
                            ====================================================
Basic and diluted net loss
applicable to common             $   (.28)         $  (.32)          $   (.65)
shareholders
                            ====================================================
Basic and diluted weighted
average outstanding              3,282,833         2,844,751         2,257,833
during the period
                            ====================================================

Balance Sheet Data:

                                          October 30,        October 31,
                                             1999               1998
                                      -------------------------------------
                                                  (in thousands)

Working capital                              $ 925 (1)         $2,355 (1)
Total assets                                 9,745              8,389
Long-term liabilities                          251                266
Total liabilities                            5,140 (1)          2,865 (1)
Total shareholders' equity                   4,605              5,525

(1) The balance  outstanding  under the Company's  revolving line of credit
facility ($1,477,603) at October 30, 1999 is presented as a current liability as
the line was  temporarily  paid down in December  1999.  At October 31, 1998, no
amounts were outstanding under the revolving line of credit facility.

Fiscal Year Ended October 30, 1999 as Compared
   to Fiscal Year Ended October 31, 1998

Net Loss

The net loss for the fiscal year ended October 30, 1999 was $845,519 as compared
to a net loss of $828,871 for the fiscal year ended  October 31,  1998.  The net
loss for fiscal 1999 includes  preoperating  expenses relating to the opening of
the new Bang & Olufsen  store in the Union  Square  area in lower  Manhattan  of
approximately $115,000.

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  consulting  fees 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.
Revenues

Net sales for the fiscal year ended October 30, 1999, aggregated $21,387,000, an
increase of  approximately  $4,124,000 or 23.9% from the prior year.  Comparable
store  sales  for the year  ended  October  30,  1999,  increased  approximately
$602,000 or 3.5% from the prior fiscal year.

Fiscal 1999  includes  sales from four mature  Harvey  retail stores and two new
Harvey stores opened in November 1998.  Fiscal 1999 also includes sales from the
Company's  new Bang & Olufsen  branded  store opened in July 1999.  Net sales in
1999 have also been  positively  affected by the  Company's  e-commerce  efforts
particularly  with product  offerings on eBay and from increased  demand for its
custom installation services.

Fiscal 1998 includes  sales from three mature Harvey stores and one Harvey store
opened in Greenwich,  Connecticut in January 1997.  Also included in fiscal 1998
sales,  is  approximately  one month of sales relating to the Mount Kisco store,
acquired in August 1998.

Custom  installation  services  continue to expand and account for approximately
26% of net sales  for  fiscal  1999 as  compared  to 25% for  fiscal  1998.  The
increase in net sales for fiscal 1999 is  attributed  to the volume of goods and
services sold and to a lesser extent, changes in product lines or prices.

Comparable  store sales for fiscal 1999  increased  over fiscal 1998,  primarily
from  increased  demand  for new  digital  products  such as DVD,  HDTV,  plasma
flat-screen televisions and an increase in our custom installation services.

The overall performance of the Company was negatively impacted by the decline in
sales during the third and fourth quarters.  In particular during May (the first
month of the third quarter),  overall sales declined by approximately  17% while
comparable  store sales  declined by  approximately  30%. May 1999 was the first
month that Harvey experienced a decline in total sales since 1996.

Costs and Expenses

Total  cost of sales for the fiscal  year  ended  October  30,  1999,  increased
approximately $2,436,000 or 22.9% from the prior fiscal year. This was primarily
the result of increased sales, offset by improved gross profit margins.

The gross profit  margin for the fiscal year ended October 30, 1999 was 38.9% as
compared to 38.3% for the prior fiscal year.  The gross profit margin  improved,
despite  additional  promotional  activities  in 1999,  as a result of increased
sales of new digital  technologies,  increased custom installation  services and
from a strong product mix. Sales training efforts and merchandising  emphasis on
the sale of higher margin inventory  categories and accessories have also helped
to increase the gross profit margin.

Selling,  general and administrative  expenses ("SG&A expenses") increased 33.8%
or  approximately  $2,287,000  for the fiscal  year ended  October  30,  1999 as
compared  to the prior year.  Total SG&A  expenses  increased  in fiscal 1999 as
compared to fiscal  1998,  primarily  from the two new Harvey  stores  opened in
November 1998, coupled with the preoperating expenses and the opening of the new
Bang & Olufsen store in July 1999.

Comparable  SG&A  expenses  increased  13.7% or  approximately  $927,000 for the
fiscal year ended  October  30,  1999 as compared to the prior year.  Comparable
SG&A expenses  increased  from  additional  payroll and payroll  related  items,
occupancy costs,  professional  expenses,  insurance costs, expenses relating to
Y2K modifications, depreciation expense and various store operating expenses. In
fiscal 1999, the Company has also incurred  additional  expenses relating to the
expansion of its custom installation business and its training efforts.

Interest expense  decreased  approximately  $44,000 or 19.8% for the fiscal year
ended  October 30, 1999 as compared to the prior fiscal  year.  The decrease was
primarily due to the paydown of outstanding  borrowings under the revolving line
of credit  facility  through  February 1999, from the net proceeds of the public
offering.

Fiscal Year Ended October 31, 1998 as Compared to
   Fiscal Year Ended November 1, 1997

The fiscal year ended 1998 is a fifty-two  week year as compared to  fifty-three
week year for fiscal 1997.

Net Loss

The net loss for the fiscal year ended  October 31, 1998 was reduced to $828,871
as compared to a net loss of  $1,325,212  for the fiscal year ended  November 1,
1997. As mentioned earlier, 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 fiscal year ended  October 31,  1998  increased  approximately
$1,864,000  or 12.1% over the fiscal  year 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 only three months of sales from one retail store which
was closed in February 1997.

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.

Cost and Expenses

Total  cost of sales for the  fiscal  year  ended  October  31,  1998  increased
approximately $882,000 or 9.0% from the fiscal year 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 fiscal year ended  October 31, 1998 was 38.3% as
compared to 36.6% for the fiscal year 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.

Selling,  general and  administrative  expenses ("SG&A expense")  increased less
than 1% or  approximately  $50,000 for the fiscal year ended October 31, 1998 as
compared to the fiscal year 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 fiscal
year ended October 31, 1998 as compared to the fiscal year 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.

Liquidity and Capital Resources

The  Company's  ratio of  current  assets  to  current  liabilities  was 1.19 or
approximately $925,000 at October 30, 1999, as compared to 1.91 or approximately
$2,355,000  at October 31, 1998.  At October 30, 1999,  the balance  outstanding
under  the  Company's  revolving  line  of  credit  facility   ($1,477,603)  was
classified  as a current  liability as the line of credit was  temporarily  paid
down in December 1999 from the increased sales of the Christmas  selling season.
At October 31, 1998, no amounts were  outstanding  under the  revolving  line of
credit  facility.  The decrease in the current ratio is also due to cash used in
operations during fiscal 1999.

Net cash used in operating  activities was  approximately  $669,000 for the
fiscal year ended  October  30,  1999 as compared to cash used of  approximately
$1,229,000 for the prior fiscal year. The  improvement in cash used in operating
activities for fiscal 1999 was due primarily to an increase in accounts  payable
and accrued  expenses and other  current  liabilities,  offset by an increase in
inventories.  In fiscal 1998,  accounts  payable and accrued  expenses and other
liabilities were reduced using the proceeds of the public offering.

Net cash used in investing activities was approximately $831,000 for fiscal 1999
as compared to  approximately  $504,000  used in fiscal  1998.  Net cash used in
fiscal  1999  was due  primarily  to  capital  expenditures  ($828,000)  primary
relating to three new store openings. In fiscal 1998, the Company benefited from
the redemption of a $200,000 certificate of deposit.

Net cash provided from  financing  activities was  approximately  $1,302,000 for
fiscal 1999 as compared to  approximately  $1,944,000 for the prior fiscal year.
In March 1999,  the Company  began to borrow from its  revolving  line of credit
facility and borrowed  approximately  $1,478,000  for fiscal 1999. The revolving
line of  credit  facility  increased  primarily  to  fund  new  store  openings,
increased  accounts  receivable,  prepaid expenses and part of the Company's net
loss.  The  increase  in cash from  financing  activities  for  fiscal  1998 was
primarily from the net proceeds from the Company's  successful  public offering,
offset by the  temporary  repayment of the  Company's  revolving  line of credit
facility and a term loan.

In November 1997, the Company entered into a three-year revolving line of credit
facility with Paragon Capital LLC ("Paragon")  whereby the Company may borrow up
to $3,300,000  based upon a lending formula (as defined)  calculated on eligible
inventory.  The  Paragon  facility  provides  an  improved  advance  rate on the
Company's  inventory,  as  compared  to the  Company's  previous  facility  with
Congress Financial Corporation. 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")  (8.25% at October 30,  1999).  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 (which is being  amortized over three
years) and a facility fee ($24,750) of  three-quarters  of one percent (.75%) of
the maximum credit line will be charged in each fiscal year. Monthly maintenance
charges and a  termination  fee also exist under the line of credit.  At January
10, 2000, there were no outstanding  borrowings under the Paragon revolving line
of credit facility.

The maximum  amount of  borrowings  available to the Company  under this line of
credit is limited to formulas  prescribed in the loan  agreement.  The Company's
maximum borrowing  availability is equal to 73% of acceptable  inventory,  minus
the then unpaid  principal  balance of the loan, minus the then aggregate of any
available  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 cannot exceed certain advance rates
on eligible inventory and must maintain certain levels of net income or loss and
minimum gross profit margins.  Additionally,  the Company's capital expenditures
cannot exceed a predetermined amount.

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  covenants 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).



<PAGE>


On December 2, 1999,  the Company  announced it had reached an agreement in
principle with CoolAudio.com, Inc. ("CoolAudio") to merge the two companies in a
stock for stock  transaction  pursuant to which CoolAudio would have merged with
and into the Company.  As of the date hereof, the Company and CoolAudio have not
reached an agreement regarding the terms of the merger transaction.  The Company
and CoolAudio  continue to negotiate the terms of the proposed merger, but there
can be no  assurance  the Company  will enter into  definitive  agreements  with
CoolAudio or consummate the merger transaction.

In April 1998,  the  Company  completed a public  offering  ("Offering")  of its
common stock and common stock purchase warrants.  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 Harvey  Acquisition  Company,  LLC,  the  Company's  major
shareholder.  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,  were 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. 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 or
$7.50.

The Company's  management believes that the Company's overhead structure has the
capacity to support additional stores without significant  increases in cost and
personnel, and, consequently, that revenues and profit from new stores will have
a positive impact on the Company's operations.

As Bang & Olufsen focuses on developing Bang & Olufsen  licensed  branded stores
("Branded  Stores")  throughout the world, it has canceled its dealer  agreement
with the Company and, with one exception,  all other retailers effective May 31,
1999.  Since this date,  Bang & Olufsen  products are available  only in Branded
Stores.

On  January 7,  1999,  as part of its  expansion  plan in 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  Brand  Store in the Union  Square area in
lower Manhattan. The Company opened this new store in July 1999.

This  Branded  Store is the first of two  stores  the  Company  plans to open in
Manhattan. There is currently no location or lease agreement for the second Bang
&  Olufsen  store.  The new store  sells  highly  differentiated  Bang & Olufsen
products,  including  uniquely  designed  audio systems,  speakers,  telephones,
headphones and accessories and other approved non-Bang & Olufsen  products.  The
store also offers  professional custom installation of multi-room audio and home
theater systems. This new store is the Company's seventh, and is the third store
opened since its successful public offering, completed in April 1998.



<PAGE>


The  Company  received  a  commitment  from Bang & Olufsen  permitting,  but not
requiring,  the Company to open two  additional  Branded Stores in Manhattan and
Connecticut. Pursuant to this commitment, the Company must agree to pursue these
locations  by May 2000.  No  assurance  can be given about the number of Branded
Stores that the Company will open. Capital expenditures necessary for each 1,500
square foot store, including inventory, should be approximately $350,000.

The Company seeks to open an additional  Harvey  Electronics store in New Jersey
within  the next  eighteen  months,  if the  appropriate  location  or  existing
business can be obtained. The Company estimates that the total cost of opening a
new Harvey  Electronics  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),  legal  expense,  preopening  expenses and
additional advertising and promotion in connection with the opening.

The  Company  intends to continue to redirect  and  substantially  increase  its
marketing  funds  which began in the first  fiscal  quarter of fiscal year 2000.
This  reallocation  of funds will broaden the Company's  media presence with the
addition of cable and network television advertising.

Management  believes that cash on hand, 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 at least the
next twelve-month period.

During the periods presented,  the Company was not significantly impacted by the
effects of inflation.  The Company did benefit from a strong Christmas demand in
November and December 1999.

Year 2000 Modifications

In fiscal 1999, the Company successfully implemented all Year 2000 modifications
to upgrade its operating systems.  Currently, the Company's computer environment
is operating as designed,  as all systems are Year 2000  compliant.  The Company
does not anticipate any additional  material capital  expenditures or management
efforts in this regard for fiscal 2000.


 Financial Statements

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



<PAGE>


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

     None

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:

     Name                            Age (1)           Position
--------------------------------------------------------------------------------

Michael Recca                          49        Chairman and Director
William F. Kenny, III                  68        Director
Stewart L. Cohen (2)                   45        Director
Fredric J. Gruder                      53        Director
Franklin C. Karp                       45        President and Director
Joseph J. Calabrese                    40        Executive Vice President,
                                                 Chief Financial Officer,
                                                 Treasurer, Secretary and
                                                 Director
Michael A. Beck                        40        Vice President of Operations
Roland W. Hiemer                       38        Director of Inventory Control

(1) As of October 30, 1999.
(2) On January 10, 2000, Mr. Cohen resigned from the Company's Board of
    Directors.

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 eight years Mr.  Kenny has been a  consultant  to Meenan Oil Co.,  Inc.
Prior to 1992, Mr. Kenny was the President and Chief Executive Officer of 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.


<PAGE>


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.  Mr. Cohen is also a director for Smith
and Hawkens,  Inc. On January 10, 2000, Mr. Cohen resigned from the Company's
Board of Directors.

Fredric J. Gruder,  a director,  since  September 1996, has since July 1999
been of counsel to Dorsey & Witney LLP. From September 1996 to July 1999, he was
a  partner  in the law firm of  Gersten,  Saage,  Kaplowitz  &  Fredericks,  LLP
("Gersten"),   which  represented   Thornwater  Company,  L.P.   ("Thornwater"),
Representative  of the Company's  underwriters in the Offering.  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 27 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.


<PAGE>


Roland W. Hiemer is an  executive  officer of the  Company and  Director of
Inventory  Control.  Mr.  Hiemer has been with the Company  for nine  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 Frederic J. Gruder 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. Frederic J. Gruder 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 Recca                  1999       $   95,000       $       -        $      -              $    -
Chairman (1)                   1998       $   55,000 (1)   $       -        $      -              $    -
                               1997       $        -       $       -        $                     $    -

Franklin C. Karp               1999       $  126,000       $   5,000        $      -              $    -
President                      1998       $  125,000       $  15,000        $ 10,313 (2)          $    -
                               1997       $  126,000       $       -        $      -              $    -

Joseph J. Calabrese            1999       $  117,000       $   3,750        $      -              $    -
Executive Vice President       1998       $  116,000       $  10,000        $  6,875 (2)          $    -
Chief Financial Officer,       1997       $  117,000       $       -        $      -              $    -
   Treasurer and Secretary


<PAGE>


    Name of Individual                                                       Stock             Long-Term
  and Principal Position       Year         Salary          Bonus         Compensation       Compensation
---------------------------- ---------- ---------------- ------------- ------------------- ------------------

Michael A. Beck                1999       $  101,000       $   3,750        $      -              $    -
Vice President of              1998       $   92,000       $   2,000        $  5,156 (2)          $    -
   Operations                  1997       $   87,000       $     500        $      -              $    -

<FN>
(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  stock  compensation  at fair  market  value from  common  stock
received from HAC, on October 12, 1998.
</FN>
</TABLE>

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.


<PAGE>


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.

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 Fredric J. Gruder 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.


<PAGE>


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.

In fiscal 1999,  the Company's  Compensation  and Stock Option  Committee of the
Board of Directors  ("Compensation  Committee") approved two grants of incentive
stock options,  aggregating 222,500, to the Company's officers,  to purchase the
Company's  common  stock  at an  exercise  price of $1.50  per  share.  The 1999
incentive stock options are exercisable immediately.

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 are exercisable, as amended.


<PAGE>


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 30, 1999, 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:

Name and Address of              Amount and Nature of Beneficial
 Beneficial Owner                        Ownership (2)               Percentage
----------------------------------------------------- --------------------------

Harvey Acquisition Company LLC            783,651                       21.8%
949 Edgewood Avenue
Pelham Manor, NY 10803

Michael Recca                             841,984 (1)                   25.2%
949 Edgewood Avenue
Pelham Manor, NY 10803

Stewart L. Cohen                           20,000 (2)                    *
Harvey Electronics, Inc.
205 Chubb Avenue
Lyndhurst, NJ 07071

William F. Kenny, III                      18,489 (2)                    *
Harvey Electronics, Inc.
205 Chubb Avenue
Lyndhurst, NJ 07071

Fredric J. Gruder                          12,500 (2)                    *
Gersten, Savage, Kaplowitz &
Fredericks, LLP
101 East 52nd Street
New York, NY 10022

Franklin C. Karp                           85,833 (3)                    2.6%
Harvey Electronics, Inc.
205 Chubb Avenue
Lyndhurst, NJ 07071

Joseph J. Calabrese                        69,035 (4)                    2.1%
Harvey Electronics, Inc.
205 Chubb Avenue
Lyndhurst, NJ 07071

Michael A. Beck                            65,833 (4)                    2.0%
Harvey Electronics, Inc.
205 Chubb Avenue
Lyndhurst, NJ 07071



<PAGE>


Name and Address of               Amount and Nature of Beneficial
 Beneficial Owner                       Ownership (2)               Percentage
--------------------------------------------------------------------------------

Roland W. Hiemer                          21,667 (5)                    *
Harvey Electronics, Inc.
205 Chubb Avenue
Lyndhurst, NJ 07071

All Directors and Officers as group    1,135,341 (6)                     31.8%
(8 Persons)

* 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,  plus  options  to  purchase  up to  53,333  shares of the
     Company's  Common  Stock  which are  exercisable  at an  exercise  price of
     between $1.00-$1.50 per share.

(2)  Includes an option to purchase up to 10,000 shares of the Company's  Common
     Stock,  which is  exercisable  at an exercise price of $1.00 per share.

(3)  Includes  options to purchase up to 70,833 shares of the Company's  Common
     Stock,  which are  exercisable  at an exercise price of between $1.00-$3.00
     per share.

(4)  Includes  options to purchase up to 58,333 shares of the Company's  Common
     Stock,  which are  exercisable  at an exercise price of between $1.00-$3.00
     per share.

(5)  Includes  options to purchase up to 19,167 shares of the Company's  Common
     Stock,  which are  exercisable  at an exercise price of between $1.00-$3.00
     per share.

(6)  Includes options to purchase up to 289,999 share of common stock, which are
     exercisable at an exercise price of between $1.00 - $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
was  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  paid  to  HAC  in  fiscal  1998  was
approximately   $66,000.  In  fiscal  1998,  the  Company  recorded  $40,000  in
management  consulting  fees to Recca & Co. Inc.,  of which Michael Recca is the
sole  shareholder,  of which $23,000 was payable at October 30, 1999 and 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.


<PAGE>


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 former  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 3 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.

In October 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, aggregating $11,277, were made to
the Company in fiscal 1999.  The balance of the original note was due on October
30, 1999.  However,  in November 1999, an amendment to the  promissory  note was
executed,  deferring the payment of the remaining principal balance and interest
at 9% per annum as follows: one payment of $44,994 due January 25, 2000 with the
remaining balance of $24,141 due March 25, 2000. As a result,  the amended "note
receivable  from  the  previous  member  of  Underwriter"  ($68,430),  has  been
presented as a current asset at October 30, 1999.

Effective  November 1, 1998,  the Company  signed a consulting  agreement with a
previous  member  of its  Underwriter.  Pursuant  to the  terms of the  two-year
agreement, the consultant received an annual fee of $75,000 for fiscal 1999. The
agreement can be terminated by the Company under certain defined events.


<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

10.2.3--Severance Agreement with Michael A. Beck


<PAGE>


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


<PAGE>


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

(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 hereto incorporated by reference to the Company's
Form 10KSB dated October 31, 1998:

105.7--Lease Agreement with Martin Goldbaum and Sally Goldbaum

105.8--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.

(vi) The following exhibits are annexed hereto:

23.--Consent of Ernst & Young LLP.

27.1--Financial Data Schedule

(b) Reports on Form 8-K

The Company filed a report on Form 8-K dated  December 2, 1999,  announcing
it had  reached  an  agreement  in  principle  with  CoolAudio  to merge the two
companies in a stock for stock  transaction  pursuant to which  CoolAudio  would
have merged with and into the Company.  As of the date  hereof,  the Company and
CoolAudio  have  not  reached  an  agreement  regarding  the  terms  of a merger
transaction.  The Company and  CoolAudio  continue to  negotiate  the terms of a
proposed  merger;  however there can be no assurance the parties will enter into
definitive agreements or consummate a merger transaction.


<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, 2000

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.

    Signature                              Title                      Date
--------------------------------------------------------------------------------

/s/ Franklin C. Karp                President and Director      January 28, 2000
----------------------------
    Franklin C. Karp

/s/ Joseph J. Calabrese             Executive Vice President,   January 28, 2000
----------------------------        Chief Financial Officer,
    Joseph J. Calabrese             Treasurer, Secretary and
                                    Director

/s/ Michael Recca                   Chairman and Director       January 28, 2000
----------------------------
    Michael Recca

/s/ William F. Kenny, III           Director                    January 28, 2000
----------------------------
    William F. Kenny, III

/s/ Fredric Gruder                  Director                    January 28, 2000
----------------------------
    Fredric Gruder





Item 7. Financial Statements.

                            Harvey Electronics, Inc.

                          Index to Financial Statements




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

Balance Sheet--October 30, 1999..............................................F-3

Statements of Operations--Fiscal years ended
   October 30, 1999 and October 31, 1998.....................................F-4

Statements of Shareholders' Equity--Fiscal years ended
   October 30, 1999 and October 31, 1998.....................................F-5

Statements of Cash Flows--Fiscal years ended
   October 30, 1999 and October 31, 1998.....................................F-6

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


<PAGE>


                                                                             F-5







                         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 30, 1999 and the related statements of operations, shareholders' equity,
and cash flows for the fiscal years ended October 30, 1999 and October 31, 1998.
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 auditing standards generally accepted
in the United States. 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 30, 1999,  and the results of its  operations and its cash flows for the
fiscal years ended  October 30, 1999 and October 31, 1998,  in  conformity  with
accounting principles generally accepted in the United States.


                                                /s/ Ernst & Young LLP



Melville, NY
January 7, 2000


<PAGE>


                            Harvey Electronics, Inc.

                                  Balance Sheet

                                October 30, 1999
Assets
Current assets:
   Cash and cash equivalents                                       $   23,947
   Accounts receivable, less allowance of $25,000                     449,057
   Note receivable--previous member of Underwriter                     68,430
   Inventories                                                      4,920,614
   Prepaid expenses and other current assets                          351,962
                                                             -------------------
Total current assets                                                5,814,010
Property and equipment:
   Leasehold improvements                                           1,498,585
   Furniture, fixtures and equipment                                1,145,228
                                                             -------------------
                                                                    2,643,813
   Less accumulated depreciation and amortization                     717,272
                                                             -------------------
                                                                    1,926,541
Equipment under capital leases, less accumulated
   amortization of $349,000                                           141,012
Cost in excess of net assets acquired, less
   accumulated amortization of $7,000                                 143,000
Reorganization value in excess of amounts
   allocable to identifiable assets, less accumulated
   amortization of $198,023                                         1,450,440
Note receivable--officer                                               15,000
Other assets, less accumulated amortization of $160,887               254,684
                                                             -------------------
Total assets                                                     $  9,744,687
                                                             ===================
Liabilities and shareholders' equity
Current liabilities:
   Revolving line of credit facility                             $  1,477,603
   Trade accounts payable                                           1,943,225
   Accrued expenses and other current liabilities                   1,302,848
   Income taxes                                                        25,200
   Cumulative Preferred Stock dividends payable                        61,057
   Current portion of capital lease obligations                        78,880
                                                             -------------------
Total current liabilities                                           4,888,813
Long-term liabilities:
   Cumulative Preferred Stock dividends payable                        30,625
   Capital lease obligations                                           21,504
   Deferred rent                                                      199,083
                                                             -------------------
                                                                      251,212
Commitments and contingencies
Shareholders' equity:
   8-1/2%  Cumulative  Convertible  Preferred Stock,
      par value $1,000 per share; authorized 10,000 shares;
      issued  and   outstanding  875  shares   (aggregate
      liquidation preference--$875,000)                               402,037
   Common  Stock, par  value  $.01  per  share;
      authorized 10,000,000 shares;
      issued and outstanding 3,282,833 shares                          32,828
   Additional paid-in capital                                       7,481,667
   Accumulated deficit                                             (3,311,870)
                                                             -------------------
Total shareholders' equity                                          4,604,662
                                                             -------------------
Total liabilities and shareholders' equity                       $  9,744,687
                                                             ===================

See notes to financial statements.


<PAGE>


                            Harvey Electronics, Inc.

                            Statements of Operations


                                                   Fiscal Years Ended
                                         October 30, 1999      October 31, 1998
                                         _______________________________________

Net sales                                     $21,386,507           $17,262,082

Interest and other income                          72,524                70,364
                                         _______________________________________
                                               21,459,031            17,332,446
                                         _______________________________________

Cost of sales                                  13,082,163            10,646,491
Selling, general and
   administrative expenses                      9,043,046             6,756,254
Stock compensation expense (Note 4)                     -               297,500
Financial advisory and consulting fee
   to Underwriter (Note 3)                              -               123,660
Costs associated with lease transaction (Note 9)        -               113,782
Interest expense                                  179,341               223,630
                                         _______________________________________
                                               22,304,550            18,161,317
                                         _______________________________________
Net loss                                         (845,519)             (828,871)

Preferred Stock dividend requirement              (74,376)              (83,376)
Accretion of Preferred Stock                            -                (6,000)
                                         _______________________________________
Net loss applicable to Common Stock
                                                $(919,895)            $(918,247)
                                         =======================================
Net loss per common share applicable to
   common shareholders:
Basic and diluted net loss per common share        $(.28)                 $(.32)
                                         =======================================
Shares used in the calculation of net loss
   per common share:
Basic and diluted weighted-average shares
   outstanding during the year                    3,282,833           2,844,751
                                         =======================================



See notes to financial statements.


<PAGE>

<TABLE>
<CAPTION>

                            Harvey Electronics, Inc.

                       Statements of Shareholders' Equity



                                            Preferred Stock                      Common Stock
                                            ---------------                      ------------
                                        Shares           Amount             Shares           Amount
-----------------------------------------------------------------------------------------------------
<S>                                      <C>         <C>                     <C>             <C>
Balance at November 1, 1997                -         $       -               2,257,833       $22,578
Net loss for the year                      -                 -                       -            -
Transfer of Common Stock
from HAC to employees,
   directors and a member of HAC           -                 -                       -            -
Accretion of Preferred Stock               -                 -                       -            -
Reclassify Preferred Stock to
   shareholders' equity upon
   removal of redemption feature         875           402,037                       -            -
Preferred Stock dividend                   -                 -                       -            -
Deferred compensation earned               -                 -                       -            -
Record value of Common Stock Warrants
granted                                    -                 -                       -            -
Proceeds from public offering of
   common stock                            -                 -               1,025,000       10,250
Proceeds from issuance of 2,104,500
   common stock warrants in
   public offering                         -                 -                       -            -
Expenses of public offering of
   common stock and warrants               -                 -                       -            -
                                        -------------------------------------------------------------
Balance at October 31, 1998              875           402,037               3,282,833       32,828

Net loss for the year                      -                 -                       -            -
Preferred Stock dividend                   -                 -                       -            -
                                        -------------------------------------------------------------
Balance at October 30, 1999              875       $   402,037               3,282,833  $    32,828
                                        =============================================================

                                        Additional                                                         Total
                                         Paid-in               Deferred             Accumulated         Shareholders'
                                         Capital             Compensation             Deficit              Equity
-------------------------------------------------------------------------------------------------------------------------


Balance at November 1, 1997            $ 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                 -                    -                      -              402,037
Preferred Stock dividend                         -                    -                (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                          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              7,481,667                    -             (2,391,975)           5,524,557

Net loss for the year                            -                    -               (845,519)            (845,519)
Preferred Stock dividend                         -                    -                (74,376)             (74,376)
                                      ----------------------------------------------------------------------------------
Balance at October 30, 1999            $ 7,481,667            $       -            $(3,311,870)         $ 4,604,662
                                      ==================================================================================


</TABLE>


See notes to financial statements.


<PAGE>


                                                                             F-7
                            Harvey Electronics, Inc.

                            Statements of Cash Flows

                                                       Fiscal Years Ended
                                           October 30, 1999     October 31, 1998
                                           _____________________________________
Operating activities
Net loss                                        $ (845,519)          $ (828,871)
Adjustments to reconcile net loss
to net cash used in operating activities:
     Depreciation and amortization                 478,284              412,401
     Stock compensation expense                          -              297,500
     Provision for losses on
     accounts receivable                                 -                5,000
     Warranty reserve credit                       (14,713)              (6,000)
     Straight-line impact of rent escalations       15,161               47,511
     Miscellaneous                                   6,347                6,508
     Changes in operating assets and liabilities:
       Accounts receivable                         (83,422)             (98,199)
       Note receivable--previous member
       of Underwriter                                4,891              (73,321)
       Inventories                                (905,678)            (451,158)
       Prepaid expenses and other current assets   (61,919)            (168,614)
       Trade accounts payable                      366,099             (139,629)
       Accrued expenses, other current liabilities
       and income taxes                            371,937             (231,707)
                                           _____________________________________
Net cash used in operating activities             (668,532)          (1,228,579)
    Investing activities
    Restricted cash                                 25,000                    -
    Redemption of certificate of deposit                 -              200,000
    Amount due under lease surrender agreement           -              (70,236)
    Note receivable--officer                       (15,000)                   -
    Acquisition of business                              -             (200,000)
    Purchases of property and equipment           (828,276)            (382,019)
    Purchase of other assets                       (13,060)             (52,065)
                                           _____________________________________
Net cash used in investing activities             (831,336)            (504,320)
                                           _____________________________________
Financing activities
    Proceeds from public offering of
       common stock and warrants                         -            5,335,450
    Public offering costs                                -           (1,112,167)
    Net proceeds from new revolving
       credit facility                           1,477,603            2,262,306
    Temporary repayment of new revolving
       credit facility from proceeds of Offering         -           (2,262,306)
    Costs of new line of credit facility                 -              (82,177)
    Net repayments of old revolving line of
       credit facility                                   -           (1,777,851)
    Repayment of term loan                               -             (350,000)
    Preferred Stock dividends paid                (112,809)             (36,882)
    Principal payments on
       capital lease obligations                   (62,423)             (32,063)
                                           _____________________________________
Net cash provided by financing activities        1,302,371            1,944,310
                                           _____________________________________
(Decrease) increase in cash and
       cash equivalents                           (197,497)             211,411
Cash and cash equivalents at
       beginning of year                           221,444               10,033
                                           _____________________________________
Cash and cash equivalents at end of year        $   23,947           $  221,444
                                           =====================================
Supplement cash flow information
Interest paid                                   $  171,000           $  288,000
                                           =====================================
Taxes paid                                      $   17,000           $   15,000
                                           =====================================

See notes to financial statements.


<PAGE>





                            Harvey Electronics, Inc.

                          Notes to Financial Statements

                                October 30, 1999


1. Description of Business 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.
Revenues from retail sales are 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.  The  Company's  fiscal  year ends the  Saturday
closest to October 31. The fiscal  years ended  October 30, 1999 and October 31,
1998 each consists of 52 weeks.

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 accordance with Financial  Accounting  Standards Board 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," when impairment
indicators are present,  the Company reviews the carrying value of its assets in
determining the ultimate recoverability of their unamortized values using future
undiscounted  cash flows expected to be generated by the assets.  If such assets
are considered impaired,  the impairment recognized is measured by the amount by
which the carrying amount of the asset exceeds the future discounted cash flows.
Assets to be disposed of are  reported  at the lower of the  carrying  amount or
fair value, less cost to sell.

The Company  evaluates the periods of  amortization  continually  in determining
whether  later  events and  circumstances  warrant  revised  estimates of useful
lives. If estimates are changed,  the unamortized  cost will be allocated to the
increased  or  decreased  number of  remaining  periods  in the  revised  lives.
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 indicates that such carrying amounts are expected to be recovered.



<PAGE>





                            Harvey Electronics, Inc.

                    Notes to Financial Statements (continued)




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

Stock Based Compensation

SFAS No. 123,  "Accounting for Stock-Based  Compensation,"  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 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 follows the disclosure
requirements of SFAS No. 123 (see Note 4).

Segment Disclosures

SFAS  No.  131,  "Disclosures  about  Segments  of  an  Enterprise  and  Related
Information," 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.  SFAS No. 131 also establishes  standards
for related disclosure about products and services,  geographic areas, and major
customers.  The Company  operates in one business  segment and,  therefore,  the
adoption of SFAS No. 131 did not affect the  Company's  results of operations or
financial position, and did not require the disclosure of segment information.

Inventories

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



<PAGE>


1. Description of Business 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 calculated using the straight-line method over
the  estimated  useful  lives of the related  assets,  ranging from three to ten
years.   Amortization  of  leasehold   improvements  is  calculated   using  the
straight-line  method  over the  shorter of the lease term or  estimated  useful
lives of the improvements.

Income Taxes

The Company  follows the  liability  method in  accounting  for income  taxes as
described in SFAS No. 109,  "Accounting  for Income  Taxes."  Under this method,
deferred tax assets and liabilities are determined based on differences  between
financial  reporting  and tax bases 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

Basic and diluted loss per share are calculated in accordance with SFAS No. 128,
"Earnings Per Share." The basic and diluted loss per common share for the fiscal
years ended  October 30,  1999 and October 31, 1998 were  computed  based on the
weighted-average  number of common shares outstanding.  Common equivalent shares
assuming the conversion of Preferred  Stock and exercise of outstanding  options
and  warrants  were  not  considered  since  their  inclusion  would  have  been
antidilutive.


<PAGE>


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

Cash Equivalents

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 recorded  amounts of the Company's 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

In accordance with Statement of Position 93-7, "Reporting of Advertising Costs,"
the Company's advertising expense, net of cooperative advertising allowances, is
charged to operations when the advertising takes place.  Advertising expense for
the fiscal years ended  October 30, 1999 and October 31, 1998 was  approximately
$227,000   and   $233,000,   respectively.   Prepaid   advertising   for   print
advertisements  not run and  broadcast  advertisements  not aired at October 30,
1999 and October 31, 1998 was approximately $167,000 and $75,000, respectively.

Reorganization Value and Fresh Start Reporting

The Company  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," when it
emerged from a Chapter 11 proceeding  on December 26, 1996. At that time,  Fresh
Start Reporting resulted in changes to the balance sheet, including valuation of
assets and  liabilities  at fair market value,  elimination  of the  accumulated
deficit and valuation of equity based on the reorganization value of the ongoing
business.


<PAGE>


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

The   reorganization   value  of  the  Company  was  determined   based  on  the
consideration  received from Harvey Acquisition Company LLC. (HAC) to obtain its
principal 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
Capital Partners, L.P., a pre-reorganization subordinated secured debtholder, 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
($1,450,440),   net  of  amortization  at  October  30,  1999)  is  reported  as
"Reorganization value in excess of amounts allocable to identifiable assets" and
is being  amortized over a 25 year-period.  Amortization  expense of $66,000 was
recorded for fiscal years 1999 and 1998.

2. Revolving Lines of Credit Facilities

In November 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 the existing
credit facility with another lender, 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  (8.25% at October 30,  1999).  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.  The  balance  outstanding
under the revolving line of credit facility  ($1,477,603) at October 30, 1999 is
presented as a current liability as the line of credit was temporarily paid down
in December 1999.



<PAGE>


2. Revolving Lines of Credit Facilities (continued)

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, the line of credit facility containing
certain financial covenants,  which the Company is in compliance with at October
30, 1999.

In connection with the line of credit  facility,  Paragon  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.

3. Sale of Common Stock and Warrants in Public Offering

In April 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
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 used to open three new retail stores
and for 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 $.10 per warrant) 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 or $7.50 per share.


<PAGE>


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

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 eliminate the lock-up  arrangement with
respect to shares owned by the Company's majority shareholder,  HAC, and members
of management.  As a result,  the Company  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.

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 was  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 in fiscal 1998.

4. Stock Based Compensation

Stock Option 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.

In fiscal 1999,  the Company's  Compensation  and Stock Option  Committee of the
Board of Directors  ("Compensation  Committee") approved two grants of incentive
stock  options  aggregating  222,500 to the  Company's  officers to purchase the
Company's  common  stock  at an  exercise  price of $1.50  per  share.  The 1999
incentive stock options are exercisable immediately.


<PAGE>


4. Stock Based Compensation (continued)

On December 5, 1997,  the  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); however, 15,000 options granted to directors were adjusted in fiscal 1999
to be immediate exercisable. The impact of such acceleration was insignificant.

In fiscal 1999 and 1998, the Company reserved 222,500 and 145,000 shares of
common stock,  respectively,  for issuance in connection with stock options. The
following  table  summarizes  activity in stock  options  during fiscal 1999 and
1998:
<TABLE>
<CAPTION>



                                                                                             Weighted-
                                               Shares           Shares Under Option           Average
                                                           -------------------------------
                                           Available for    Option Price     Number of        Exercise
                                              Granting       per Share         Shares          Price
                                           --------------- --------------- --------------- ---------------

               <S>                               <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
        1999 Stock option grants              222,500
        Granted--February 12, 1999            (45,000)         $1.50            45,000         $1.50
        Granted--October 29, 1999            (177,500)         $1.50           177,500         $1.50
        Forfeited                               1,400       $1.00-$2.00         (1,400)        $1.36
                                           ===============                 ===============
     Balance at October 30, 1999                4,600                          362,900         $1.65
                                           ===============                 ===============
</TABLE>

At October 30, 1999,  options for the purchase of 311,400 shares of common stock
are exercisable.  The weighted-average  fair value of options granted during the
fiscal  years  ended  October 30, 1999 and October 31, 1998 was $1.24 and $1.61,
respectively.


<PAGE>


4. Stock Based Compensation (continued)

Exercise prices for options outstanding as of October 30, 1999, are as follows:

                        Number of                              Weighted Average
                        Options             Options            Remaining
 Range of               Outstanding at      Exercisable        Contractual Life
 Exercise Price         Year End            at End of Year     in Years
 -------------------------------------------------------------------------------

   $1.00                   74,100               44,700                9
   $1.50                  222,500              222,500               10
   $2.00                    6,300                4,200                8
   $3.00                   60,000               40,000                8
                       =========================================================
                          362,900              311,400              9.4
                       =========================================================

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>


4. Stock Based Compensation (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 fiscal
years 1999 and 1998: risk-free interest rate of 6.0% and 6.5%, respectively;  no
dividend yield;  volatility factor of the expected market price of the Company's
common stock of 1.507 and 1.489,  respectively;  and a weighted-average expected
life of the options of three 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 1999 and 1998 are as follows:

                                                        1999               1998
                                                    ----------------------------

Pro forma net loss                                   $(1,117,000)     $(880,000)
Pro forma net loss attributable to common stock      $(1,191,000)     $(969,000)
Pro forma basic and diluted loss per share           $      (.36)     $    (.34)

5. 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 is
$402,037 at October 30, 1999.

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 has elected to defer
the fiscal  1997  dividends,  at a  preference  rate of $105 per share  annually
($91,875) plus interest at 8.5% per annum over a three-year period. The December
1999  ($35,000) and 1998 ($38,000)  installments  relating to the 1997 dividends
and $39,000 relating to the 1998 dividends have been paid by the Company.

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, 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.


<PAGE>


5. 8.5% Cumulative Convertible Preferred Stock (continued)

The Preferred Stock  originally  contained a mandatory  redemption  feature.  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 3). The balance sheet at October 30, 1999 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 $91,682 are  outstanding and
classified between current  ($61,057),  and long-term  ($30,625)  liabilities at
October 30, 1999. Dividends  aggregating $74,376 were recorded as a reduction of
retained earnings at October 30, 1999.

6. Income Taxes

At October 30, 1999, the Company has available net operating loss  carryforwards
of  approximately  $3,400,000 which expire in various years through fiscal 2019.
Of this  amount,  approximately  $2,250,000  relates to  pre-reorganization  net
operating loss carryforwards. 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.

At October 30, 1999,  October 31, 1998, and November 1, 1999 the Company had net
deferred  tax  assets  of   approximately   $1,700,000   and   $1,400,000,   and
$1,207,000espectively,  arising  primarily from the future  availability  of the
above  tax  attributes.  Such  amounts  have been  offset  in full by  valuation
allowances.

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.

7. Pension and Profit Sharing Plan

The Company maintains the Harvey  Electronics,  Inc. Savings and Investment
Plan (the "Plan") which 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  fiscal  1999 and 1998.  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.  Capital  lease  additions of  approximately  $154,000 were recorded
during fiscal 1999. No such leases were recorded in fiscal 1998.  Future minimum
rental  commitments,  by year and in the aggregate,  for equipment under capital
and  noncancelable  operating leases with initial or remaining terms of one-year
or more consisted of the following at October 30, 1999.

                                             Operating               Capital
                                              Leases                 Leases
                                          --------------------------------------

Fiscal 2000                                  $1,705,000              $87,000
Fiscal 2001                                   1,475,000               12,000
Fiscal 2002                                   1,384,000               11,000
Fiscal 2003                                   1,295,000                1,000
Fiscal 2004                                   1,108,000                    -
Thereafter                                    2,125,000                    -
                                          --------------------------------------

Total minimum lease payments                 $9,092,000              111,000
                                          ====================
Less amount representing interest                                     10,000
                                                            --------------------
Present value of net minimum lease payments                          101,000
Less current portion                                                  79,000
                                                            --------------------
                                                                     $22,000
                                                            ====================

Minimum rental commitments are offset by certain sublease  agreements which earn
sublease  income of  approximately  $93,000  for fiscal  2000 and  approximately
$39,000 for fiscal 2001.

Total rental  expense for  operating  leases was  approximately  $1,853,000  and
$1,376,000,  for fiscal 1999 and 1998, respectively.  Certain leases provide for
the payment of  insurance,  maintenance  charges  and taxes and contain  renewal
options.


<PAGE>


8. Commitments and Contingencies (continued)

Contingencies

The Company is a party in 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,  results of
operations or liquidity.

Included  in prepaid and other  current  assets at October 30, 1999 is a $25,000
certificate of deposit which is held as collateral  under a $25,000  outstanding
letter of credit which expires on March 31, 2000.

9. Other Information

Accrued Expenses and Other Current Liabilities
                                                                   October 30,
                                                                      1999
                                                              ------------------

Payroll and payroll related items                                $   232,000
Accrued professional fees                                            147,000
Customer deposits                                                    656,000
Sales taxes                                                          145,000
Other                                                                123,000
                                                              ==================
                                                                 $ 1,303,000
                                                              ==================

Note Receivable

During  October  1998,  the Company  received a promissory  note from a previous
member  of its  Underwriter,  in  lieu of an  outstanding  trade  receivable  of
$73,321. Payments aggregating $11,277,  including interest at 9% per annum, were
paid to the Company during fiscal 1999. The balance of the original note was due
on October  30,1999;  however,  in November 1999, an amendment to the promissory
note was executed,  deferring the payment of the remaining principal balance and
interest so that a payment of $44,994 is due January 25,  2000,  and payments of
the remaining balance of $24,141 is due March 25, 2000.


<PAGE>


9. Other Information (continued)

Other

Interest paid to HAC in fiscal 1998 was approximately  $66,000.  Management fees
of $40,000,  relating to a Company affiliated with the Company's  Chairman,  was
charged to operations in fiscal 1998.  Approximately  $23,000 of management fees
and other  miscellaneous  amounts  were  payable to this  Company at October 30,
1999.

A  director's  fee of $95,000  and $55,000  was paid to the  Company's  Chairman
during fiscal 1999 and 1998, respectively.

Effective November 1, 1998, the Company entered into a consulting agreement with
a previous  member of its  Underwriters.  Pursuant to the terms of the  two-year
agreement,  the consultant received an annual fee of $75,000 during fiscal 1999.
The agreement can be terminated by the Company under certain defined events.

10. Costs Associated With Lease Transaction

During June 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.




<PAGE>


10. Costs Associated With Lease Transaction (continued)

In conjunction with the lease surrender agreement, the Company received payments
of $50,000 in  December  1998 and  $40,000 in  December  1999 and is due a final
payment of $35,000 on December 22, 2000. In addition,  the security  deposit was
returned to the Company in January  1999.  The present  value  ($70,236)  of the
remaining  payments  are  classified  as $36,773 in "Prepaid  expenses and other
current assets" and $33,462 in "Other Assets" at October 30, 1999. During 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."

11. Retail Store Acquisition and Expansion

In July 1998,  as a part of its expansion  plan,  the Company  acquired  certain
assets and the  business  of the 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, 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 store was renovated for
a November 1998 grand  re-opening.  The results of operations for this new store
was included in the Company's operations from the date of acquisition. Pro-forma
information as if the  acquisition  been made as of the beginning of fiscal 1998
has not been presented as such information is not material.

In August 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/Roslyn, 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.


<PAGE>


11. Retail Store Acquisition and Expansion (continued)

Bang & Olufsen products have been sold by the Company since 1980. Bang & Olufsen
now focuses on developing  Bang & Olufsen  licensed  stores  ("Branded  Stores")
throughout the world,  and  accordingly,  canceled its dealer agreement with the
Company  effective May 31, 1999.  Since this date,  Bang & Olufsen  products are
available  only in Branded  Stores.  For the period prior to May 31, 1999,  this
line  represented  approximately  $628,000 or 3% of the  Company's net sales for
fiscal 1999 and $1,176,000 or 6.3% of the Company's net sales for fiscal 1998.

On  January  7,  1999,  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 of lower  Manhattan.  The Company opened this new store
in July 1999. All related  preoperating  expenses and results of operations from
the date this new store opened have been  included in the  Company's  results of
operations  for the year ended October 30, 1999.  This is the Company's  seventh
store and is the third opened since its successful public offering, completed in
April 1998.

The Company has the option to open two additional  Bang & Olufsen Branded Stores
in Manhattan and  Connecticut.  The Company must agree to pursue these locations
by May 2000.

12. Subsequent Event

On  December  2,  1999,   the  Company  signed  a  letter  of  intent  with
CoolAudio.com,  Inc.  ("CoolAudio")  to  merge  the two  companies  through  the
issuance of the Company's  common stock. As of the date hereof,  the Company and
CoolAudio  have  not  reached  an  agreement  regarding  the  terms  of a merger
transaction.  The Company and  CoolAudio  continue to  negotiate  the terms of a
proposed  merger;  however there can be no assurance the parties will enter into
definitive agreements or consummate a merger transaction.