SECURITIES AND EXCHANGE COMMISSION
                                              Washington, D.C.  20549

                                                    FORM 10-KSB

[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 (Fee Required)

For the Fiscal Year Ended September 30, 1997 or

[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (No Fee Required)

                                           Commission file number 333-3501

                                           The Harmat Organization, Inc.
                                  (Name of Small Business Issuer in Its Charter)

         NEW YORK                                    11-2780723
(State or Other Jurisdiction of                     I.R.S. Employer
Incorporation or Organization)                       Identification No.)

         Old Country Road, P.O. Box 539, Quogue, New York 11959
         (Address of Principal Executive Offices)   (Zip Code)

Issuers Telephone Number:     (516) 653-3303

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

                                                      None

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

                                                     None
                                              (Title or Class)

Check  whether the Issuer (1) filed all reports  required to be filed by Section
13 or 15(d) of the Securities  Exchange Act of 1934 during the preceding  twelve
(12) months (or such  shorter  period that the  registrant  was required to file
such reports), and (2) has been subject to such filing requirements for the past
ninety (90) days. X Yes No

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        Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form,  and no disclosure  will be
contained,  to the  best of  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. [ ]

         If the following  documents  are  incorporated  by  reference,  briefly
describe them and identify the part of the Form 10-KSB  (e.g.,  Part I, Part II,
etc.)  into  which  the  document  is  incorporated:  (1) any  annual  report to
security-holders; (2) any proxy or information statement; and (3) any prospectus
filed  pursuant  to Rule  424(b) or (c) under  the  Securities  Act of 1933 (the
"Securities  Act").  The  listed  documents  should  be  clearly  described  for
identification purposes:

         3.1      Registrant's  Articles  of  Incorporation  as amended to date,
                  incorporated   herein  by   Reference   to   Exhibit   3.1  to
                  Registrant's  Registration  Statement  on Form SB-2,  File No.
                  333-3501.

         3.2      Registrant's By-Laws, as amended to date,  incorporated herein
                  by  Reference  to  Exhibit  3.2 to  Registrant's  Registration
                  Statement on Form SB-2, File No.333-3501.

         4.1      Form of  Common  Stock  Certificate,  incorporated  herein  by
                  Reference   to  Exhibit  4.1  to   Registrant's   Registration
                  Statement on Form SB-2, File No. 333-3501.

         4.2      Form of Warrant and Warrant Agreement, incorporated
                  herein by Reference to Exhibit 4.2 to Registrant's
                  Registration Statement on Form SB-2, File No. 333-3501.

         4.3      Form of Series B Warrant,  incorporated herein by Reference to
                  Exhibit 4.3 to  Registrant's  Registration  Statement  on Form
                  SB-2, File No. 333-3501.

         4.4      Form of Representative's Purchase Option, incorporated
                  herein by Reference to Exhibit 4.4 to Registrant's
                  Registration Statement on Form SB-2, File No. 333-3501.


         4.5               Registrant's 1996 Stock Option Plan incorporated
                           herein by Reference and as amended June 19, 1997
                           (Exhibit 4.5 to Registrant's Registration
                           Statement on Form SB-2, File No.333-3501).


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<PAGE>

         10.2              Employment Agreement dated April 1, 1996,
                           incorporated herein by Reference to Exhibit 10.2
                           to Registrant's Registration Statement on Form
                           SB-2, File No. 333-3501 and as amended August 3,
                           1996, January 23, 1997 and June 19, 1997 between
                           the Registrant and Matthew C. Schilowitz.

         The Registrant has 2,612,500  shares of Common Stock  outstanding as of
December 31, 1997.

         The Issuer's  revenues for its most recent fiscal year ended  September
30, 1997 is $1,591,791.

         The  aggregate  market  value of the  outstanding  common stock held by
non-affiliates of the Registrant on December 31, 1997 was $645,750.




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                                                     PART I

Item 1.           Business

         (a)      General Development of Business

         The  Harmat  Organization,  Inc.  (hereinafter  with  its  Subsidiaries
collectively  "Harmat,"  or the  "Company,"  or the  "Registrant"),  a  Delaware
corporation,  is a  construction,  architectural  and landscape  design and real
estate  development  firm based in Long Island,  New York.  Harmat builds custom
homes on either  the  client's  land or on  properties  owned or  controlled  by
entities  affiliated  with  Harmat.  The  Company  also  builds  commercial  and
residential  rental  properties.   The  Company  also  offers  interior  design,
renovation and  restoration  services to its clients.  In addition,  Harmat owns
undeveloped land, storage facilities containing 115 units, rental properties and
is involved in real estate development projects. Over the past twelve years, the
Company  has focused  its  efforts in the  Suffolk  County area of eastern  Long
Island,  New York,  where it has built over 150  single-family  homes as well as
such  commercial/public  projects as the 6,000 square feet center of Jewish Life
in  Westhampton  Beach,  the  Hamptons  Synagogue.   The  Company  is  currently
constructing  several private  residential  homes. The Company is in contract to
purchase  approximately  seven  acres of zoned  resort-residential  property  in
Greenport,  New York to construct a 69-unit, each with two bedrooms,  waterfront
resort with pool and tennis courts.  The Company is also in contract to purchase
vacant land in Westhampton Beach, New York.

         (b)      Financial Information about Industry Segments

         The Company engages in two industry segments: construction
and rental of real estate. (See "Financial Statements" for details
regarding segment information)

         (c)      Narrative Description of Business

         General

         The Company has,  since its  inception in 1985,  built in excess of 150
single-family  homes in the Hamptons  resorts area of Long Island,  New York. It
has also been able to acquire residential and commercial rental properties which
generated additional cash flow for the Company. In addition,  the Company owns a
12-lot  subdivision,  Polo  Grounds,(five  of which  have been  sold),  which is
currently in development and the Company also owns an agricultural  reserve with
a large barn which is being

<PAGE>


rented. The Company continues to actively market polo grounds. The Company is in
contract  to  purchase  approximately  seven  acres of zoned  resort-residential
property in Greenport,  New York to construct a 69-unit, each with two bedrooms,
waterfront  resort with pool and tennis courts.  The Company is also in contract
to purchase vacant land in Westhampton Beach, New York.

         The Company will continue to market existing properties for sale and/or
development.  However,  the Company is now  transitioning  its focus  toward the
acquisition and construction of hotels, motels, bed-and-breakfasts and providing
hospitality  services.  Management  feels that special  projects  requiring such
services are readily available.

         To date,  the  Company's  strategy for growth has been to integrate the
foregoing  services into a "turn key" business which can offer its customers the
convenience  of obtaining all of the necessary  elements and services  regarding
the purchase  and  maintenance  of a home,  including  the land,  architectural,
interior and landscape design services.  The Company believes that it has carved
a niche for itself as one of the premier full-service  builder/developers in the
western portion of the Hamptons.

         Since  Harmat  Homes'  inception  in 1985,  the  Company's  founder and
principal  shareholder,  Matthew C.  Schilowitz,  has sought to not only provide
construction  services  through  the  Company  but also to invest in real estate
development   ventures  by  purchasing   large  parcels  of  real  property  for
development.  To date,  the majority of such  investments  have been made by Mr.
Schilowitz  individually,  as a general  partner,  joint  venturer or  principal
stockholder  of a  corporation.  Mr.  Schilowitz  has been able to invest in the
majority of such  properties  using private  non-recourse  financing with only a
modest down payment on the purchase price.  This type of financing is attractive
because the investor is often able to recoup its cash  investment  after selling
only a small  number of lots while being able to market the balance with minimal
exposure.  The Company believes that such sources and terms of financing will be
available for future  projects,  although no  assurances  can be given that this
will be the case. Some projects have involved the  construction of single-family
homes as well as the development and  construction  of luxury  properties  where
each home has its own swimming pool and tennis court.

         The  Company  has  built  homes  ranging  in  price  from  $200,000  to
$2,000,000.  While  the bulk of the homes  built in the  Hamptons  are  vacation
homes, the Company believes that approximately 25%

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of its clients live in their homes on a year-round basis.

Strategy

         Harmat provids first class construction  design and management services
not only to residential but to certain  commercial  clients as well. The Company
will continue to market  existing  properties  for sale and/or  development.  In
addition,  the  Company  is  seeking  to  construct  hotel,  motels  and bed and
breakfast and to provide hospitality  services to similar resort properties with
pool and tennis courts.

         The Company  intends to expand into the  commercial  real estate  field
including income producing  properties and will therefore  aggressively seek out
opportunities  to construct,  manage and/or  invest in shopping  malls,  hotels,
motels,   bed-and-breakfasts,   golf   courses,   industrial   parks  and  other
income-producing  properties  and  also to  provide  hospitality  services.  The
Company  believes  that its officers and directors  have the  requisite  skills,
contacts and experience to successfully  enter this field, but no assurances can
be given that such goals will be achieved  or that any of  Harmat's  future real
estate investments will be profitable.

Competition

         The Company believes that it is one of the larger,  more  sophisticated
builders in the western Suffolk County area. Unlike smaller local builders,  the
Company  maintains a permanent  sales office and has a  registered  architect on
staff to supervise construction and work with clients who request such services.
The construction  business is highly  competitive,  however,  and the Company is
aware of many  builders who are able to meet or improve upon a price the Company
can offer its clients for a given  construction  project.  The Company  seeks to
compete  not  solely  on the  basis of  price,  but on the  ability  to  provide
integrated quality real estate, design and construction services under one roof.
No assurances can be given that this strategy will enable the Company to compete
successfully.

Employees

         As of December 31, 1997, the Company has four full-time employees, 3 in
management  and 1 in clerical.  Since 1990,  Harmat has not employed a full-time
construction  staff but has hired skilled non-union local labor on a per-project
basis.  The Company believes that its  relationships  with its employees and its
sub-contractors are good, and that the supply of skilled

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labor in the area is adequate for its needs.

Item 2.           Properties

         At December 31, 1997,  the  Company's  wholly-owned  subsidiaries  hold
title to certain real property.  Such properties include (i) The Polo Grounds, a
development with 12 one acre lots (five of which have been sold) in Southampton,
New York, each building lot contains room for one house with all amenities, pool
and tennis court;  (ii) one six bedroom home in Westhampton  Beach, New York and
the other an 8 bedroom house in  Southampton,  New York both rented on an annual
basis;  (iii)  agricultural  reserve  with  large  barn from  which the  Company
receives  rental  income;  (iv) the 4,000  square foot  premises in Quogue,  NY,
housing the Company's  executive  offices and corporate sales office,  which the
Company  believes  is  adequate  for its  foreseeable  needs  (the  front of the
building  has  been  rented  to  an  unaffiliated   company);  (v)  a  115  unit
mini-storage  facility in Quogue,  NY;(vi) Pond Side Development in Westhampton,
NY which consists of 30 acres of undeveloped land for future development.

         The Company issued 1,750,000 shares of its common stock to
Mr. Schilowitz upon transfer of the stock of the corporations
holding title to the certain of the foregoing properties.  See
"Certain  Relationships and Related Transactions."

         The Company currently has the following projects under contract:

         Emerald Woods, Lot 4 located in East Quoque, New York; Beach
         Lane, located in Westhampton Beach; Cedar Crest located in
         Noyak, New York.


Seasonality

         The Company  generally  experiences  a decrease in revenues in the fall
when it commences the majority of its construction  projects, and an increase in
revenues  during the summer,  when it does most of its marketing.  The Company's
projects  usually begin in the fall with most sales  completed in the spring and
early summer.  The Company sometimes obtains bridge loans to cover  construction
costs and  utilizes  its rental  income from houses and the storage  facility to
cover its partial overhead during slow periods, as needed.




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<PAGE>



Licensing

         The Company does not require any State or County  license or permits to
perform services as a general contractor,  but does require (and possess) a home
improvement license from the Town of Southampton.

Government Regulation

         In the  construction  business,  the  Company is  required  to meet and
satisfy both State and local  building and zoning  regulations  as well as State
and local environmental  regulations.  Prior to the commencement of construction
building plans must be approved which show full  compliance  with all applicable
rules and regulations.  In addition,  building permits are needed.  To date, the
Company has had no problems in meeting and satisfying such  requirements  and in
obtaining all permits that it needs for its projects.

Item 3.           Legal Proceedings

         On January 20, 1997,  the Greater  Westhampton  Civic  Association  and
Edward  Batcheller  commenced  in New York State  Supreme  Court,  a  proceeding
against  the Town of  Southampton  Planning  Board  pertaining  to the  approval
process  of the  Jagger  Village  Subdivision,  the  Company's  41-acre  parcel.
Although not named as a defendant,  the Company intervened to defend and filed a
motion to dismiss the  petition.  Oral  argument was heard on April 30, 1997 and
the petition was dismissed on June 10, 1997. In December, 1997, the Company sold
the  Jagger  Village  Subdivision.   See  "Certain   Relationships  and  Related
Transactions".

         The  Company is  involved  in legal  proceedings  which are  considered
routine and  incidental  to its  business.  The Company  believes that the legal
proceedings which are presently pending have no potential  liability which would
have an adverse material effect on the financial  condition,  operations or cash
flows of the Company.



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

         During the last quarter of the Company's  fiscal period ended September
30,  1997,  no matter was  submitted  to a vote of the  security  holders of the
Company.


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                                                      PART II

Item 5.  Market for Common Equity and Related Shareholder Matters

         (a) The Company  completed its initial public  offering on September 9,
1996. The Company's Common Stock is traded in the over-the-counter market and is
generally  quoted either by the market makers for the Company's  Common Stock or
in brokers' bid and asked  quotations on the Bulletin Board. The following table
sets forth the high and low  closing bid  quotations  for the  Company's  Common
Stock for the last six quarters since the Company's initial public offering.

         1996                                High Bid                  Low Bid

3rd Quarter                                     9                         6
(commencing September 9, 1996)

4th Quarter                                  7 1/2                        3

         1997

1st Quarter                                  2 1/2                        1 7/8

2nd Quarter                                     3                         1 1/4

3rd Quarter                                  1 1/4                        13/32

4th Quarter                                     3/8                       9/32

         The  above  quotations  represent  prices  between  dealers  and do not
include retail markups,  markdowns or commissions,  nor do they represent actual
transactions.

         (b) As of  December  31,  1997,  there  were 12 record  holders  of the
Company's Common Stock.

         (c) The Company has not paid any cash dividends to its shareholders and
has no present intention of paying any cash dividends in the foreseeable future.

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

Review of 1997 Results

         The year ended  September 30, 1997 and the nine months ended  September
30, 1996.

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         Total  revenues for the year ended  September 30, 1997 were  $1,591,791
compared to revenues of $2,727,870 for the nine months ended September 30, 1996,
a decrease of approximately $1,136,079 or 42%.

         Construction Sales.  Deliveries of 3 homes resulted in housing revenues
of $1,390,883  for the year ended  September 30, 1997. For the nine months ended
September 30, 1996, the Company delivered 6 homes which generated  $2,496,926 of
housing  revenues.  The  reason  for  the  decrease  in  construction  sales  is
competitive pricing,lower profit margin and reduction of inventory available for
development.

         The Company's plan is to shift its focus and move into the hotel
and motel construction  market  and  to  provide  hospitality services  in 
addition  to successfully completing current projects under development.

         Rental  Income.  Rental based  properties  resulted in rental income of
$200,908  for the year ended  September  30,  1997.  For the nine  months  ended
September 30, 1996,  the Company  generated  rental  income of $153,944.  Rental
income in 1997  increased  by $46,964.  Quick  Storage of Quogue,  Inc.,  a self
storage  facility  generated  rental  income  of  $108,422  for the  year  ended
September  30, 1997.  The reason for the  increase in rental  income is that the
Company's  rental  income was for a full year 1997 as opposed to nine months for
1996.

         Gross  Profit  Margin.  The  Company's  gross  profit  margin  on homes
delivered was  approximately  three percent [3%] during the year ended September
30, 1997,  compared to twenty  percent [20%] in the nine months ended  September
30, 1996.  The gross profit  margin on homes  decreased  due to the  competitive
pricing and increased construction costs.

         Selling,  General and Administrative  Expenses.  The Company's Selling,
General and  Administrative  expenses  increased to $1,114,494 [70% of Revenues]
for the year ended  September  30, 1997,  compared to $702,290 [26% of revenues]
for the nine months ended  September 30, 1996. The increase has occured due to a
full year's  expenses  being  reflected  as opposed to nine months for 1996.  In
addition,  the Company has incurred certain  recurring costs associated with its
being a public entity such as directors fees,  professional  fees,payroll  costs
and insurance costs.

         Charge for Executive Compensation Capitalized.  The $14,750
for the nine months ended September 30, 1996, represents the fair
market value of services provided for executive compensation that

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would have been paid had the Company chose to do so.

         Income from Operations. The Company's income (loss) from operations for
the year ended  September  30, 1997 and for the nine months ended  September 30,
1996 was ($948,386) and ($227,939), respectively. This decrease of approximately
$720,447 is  primarily  attributable  to the  increase  in Selling,  General and
Administrative  Expenses for the year ended September 30, 1997 of  approximately
$412,204 and the gross profit margin decrease to three (3%)percent.

         Gross Interest  Costs.  Gross interest costs were $104,915 for the year
ended  September  30,  1997  compared  to  $175,972  for the nine  months  ended
September 30, 1996. During 1997 the Company had funds available from the initial
public  offering which enabled it to satisfy  various of it's existing debts and
obligations. 

         Other Income  [Expense].  Included in other income [expense] in 1997 is
$13,638  which  represents  gain on sale of marketable  securities,  compared to
$47,976 for the nine months ended  September 30, 1996. The interest and dividend
income for the year ended September 30, 1997 is $80,912. During 1997 the Company
had funds  remaining from the initial public  offering which provided  available
working capital and which was fully invested during the year.

Review of 1996 Results

         The nine months ended  September  30, 1996 and the year ended  December
31, 1995.

         Total  revenues  for the nine  months  ended  September  30,  1996 were
$2,727,870  compared to revenues of $2,323,524 for the year ended  September 30,
1995, an increase of approximately $404,000 or 17%.

         Construction Sales.  Deliveries of 6 homes resulted in housing revenues
of $2,496,926  for the nine months ended  September 30, 1996. For the year ended
December 31, 1995, the Company  delivered 6 homes which generated  $2,065,126 of
housing revenues. Housing revenues in 1996 increased $431,800.

         Rental Income.  Acquisition of additional rental based
properties resulted in rental income of $183,398 for the year
ended December 31, 1995.  For the nine months ended September 30,

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1996,  the Company  generated  rental income of $153,944.  Rental income in 1996
decreased by $29,454  which  reflects nine months rental income of Quick Storage
of Quogue, Inc., a self storage facility with 115 units. This facility generated
rental income of $77,100 for the nine months ended September 30, 1996.

         Construction  Management Revenue.  Construction Management Services for
the year ended December 31, 1995 generated  $75,000  compared to $25,000 for the
nine months ended September 30, 1996. This decrease reflects the completion of a
contract secured by the Company to perform construction  management  supervision
for a 14 unit condominium development in Westhampton.

         Gross  Profit  Margin.  The  Company's  gross  profit  margin  on homes
delivered was  approximately  twenty  percent [20%] during the nine months ended
September  30, 1996,  compared to  twenty-nine  percent  [29%] in the year ended
December  31,  1995.  The  gross  profit  margin on homes  decreased  due to the
competitive  pricing of the homes built in 1996. In 1995, the Company positioned
itself in the upscale market segment.

         Selling,  General and Administrative  Expenses.  The Company's Selling,
General and Administrative  expenses increased to $702,290 [26% of Revenues] for
the nine months ended September 30, 1996, compared to $367,498 [16% of revenues]
for the year ended December 31, 1995. The increase percentage is principally due
to the increase in  expenditure  necessary to accomplish  the completed  initial
public  offering -  Administrative  Staffing  and  Professional  fees($225,000),
additional Insurance Coverage, Office Expense and Improvements ($55,000).

         Charge for Executive Compensation Capitalized. The $14,750 for the nine
months ended September 30, 1996 and the $105,000 for the year ended December 31,
1995  represents  the fair  market  value of  services  provided  for  executive
compensation that would have been paid had the Company chosen to do so.

         Income from Operations. The Company's income (loss) from operations for
the nine months  ended  September  30, 1996 and for the year ended  December 31,
1995 was ($227,939) and $131,710  respectively.  This decrease of  approximately
$359,649 is  primarily  attributable  to the  increase  in Selling,  General and
Administrative  Expenses  for  the  nine  months  ended  September  30,  1996 of
approximately $335,000.

         Gross Interest Costs.  Gross interest costs were $175,972
for the nine months ended September 30, 1996 compared to $157,678
for the year ended December 31, 1995.  The increase in gross

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interest  cost for the nine months ended  September  30, 1996  resulted from the
acquisition  of Quick Storage of Quogue,  Inc. [a self storage  facility],  Polo
Grounds [12 units subdivision] and other real estate ventures whereby additional
debt was incurred upon acquisition.

         Other Income  [Expense].  Included in other income [expense] in 1995 is
$245,022 which  represents  gain on sale of marketable  securities,  compared to
$47,976 for the nine months ended September 30, 1996.

         Pro Forma Net  Income.  Pro forma net  income  gives rise to income tax
consideration  assuming  that  each of the  subsidiary  entities  had been a "C"
Corp.,  for the year ended  December  31,  1995.  Since  each of the  subsidiary
entities was an "S" Corp.,  no  provision  for income  taxes was  necessary.  In
accordance therewith, an estimated pro forma income of $94,903 gave effect to an
income tax provision had each of the subsidiaries been a "C" Corp rather than an
"S" Corp. Effective March 1, 1996, each of the "S" Corporations terminated their
"S"  Corporation  status  and  became  "C"  Corporations.  The  Company  has net
operating losses of approximately  $370,000  available to reduce future taxes as
at September 30, 1996.


Item 7.           Financial Statements

         The financial  information  required by Item 7 is included elsewhere in
this Report. (See Part IV, Item 13).

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

         On October 6, 1997,  the Registrant was informed that its auditor Moore
Stephens, P.C.,resigned. The Registrant as a result appointed Callaghan Nawrocki
LLP, as the new auditors for the Registrant. The change in auditors was approved
by  Registrant's  Board of Directors.  In connection with the audits of the nine
month  period  ended  September  30, 1996 and the year ended  December  31, 1995
through  the  date of  resignation,  there  were  no  disagreements  with  Moore
Stephens,  P.C. on any matter of accounting  principles or practices,  financial
statement  disclosure  or audit scope or procedure  which if not resolved to the
satisfaction of the former  accountants would have caused them to make reference
to the subject matter in their report.  The former  accountant's  reports on the
financial  statements for either the nine month period ended  September 30, 1996
and the year ended  December  31,  1995 did not  contain  an adverse  opinion or
disclaimer of opinion, and were not modified as to audit scope

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or  accounting  principles.  The  December  31, 1995  report was  modified as to
uncertainty about the Registrant's ability to continue as a going concern.  None
of the events  listed in paragraphs  (B) through (D) of Regulation  S-B Item 304
(a) (1) (iv) occurred.

         On November  4, 1997,  the  Registrant  was  informed  that its auditor
Callaghan Nawrocki,  LLP, resigned.  As a result, the Registrant appointed Marks
Shron &  Company,  LLP as the new  auditors  for the  Registrant.  The change in
auditors  was  approved  by  the  Registrant's  Board  of  Directors.  Callaghan
Nawrocki, LLP never performed any audit work for the Registrant. The resignation
was due to their work schedule not permitting them to do the Registrant's audit.
There  were no  disagreements  with  Callaghan  Nawrocki,  LLP on any  matter of
accounting  principles or  practices,  financial  statement  disclosure or audit
scope or  procedure  which if not  resolved  to the  satisfaction  of the former
accountants  would have caused them to make  reference to the subject  matter in
their  report.  None of the  events  listed in  paragraphs  (B)  through  (D) of
Regulation S-B, Item 304(a)(i)(iv) occurred.



                                                     PART III

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

         The Executive Officers and Directors of the Company and a brief summary
of their business  experience and certain other information with respect to them
are set forth below:

Name                         Age              Title

Matthew C. Schilowitz        34                President, CEO & Chairman

Scott Prizer                 35                Secretary & Director

Seymour G. Siegel            56                Treasurer & Director

David W. Sass                63                Director

David S. Eiten               33                Director

         All of the foregoing persons are elected as directors for a term of one
year or until their successors are duly elected and

                                                        14

<PAGE>



qualified.  There are no arrangements or understandings between any director and
any other person(s), pursuant to which a director was elected as a director. The
foregoing officers serve at the pleasure of the Board of Directors for a term of
one year, or until their successors are duly elected and qualified.  See Item 13
with regard to contractual obligations of the Company regarding certain officers
of the Company.


                  Matthew C. Schilowitz  Mr. Schilowitz founded Harmat in
1985, and has been its president and chairman since inception.
Mr. Schilowitz has a B.A. in Business Administration from Tulane
University.

                  Scott Prizer  Mr. Prizer became an officer and director
of the Company in July 1995.  From 1990 to 1992, he worked as an
investment banker specializing in mergers and acquisitions at
European Investors, Inc. ("EII").  Since 1992, he has worked as a
investment advisor/asset manager in the real estate group of EII.
He is a Vice President of EII an investment advisor with real
estate and securities portfolios, in excess of $800,000,000. Mr.
Prizer has a B.A. from George Washington University and an M.B.A.
from New York University.  Mr. Prizer is Mr. Schilowitz's first
cousin.

                  Seymour G. Siegel  Mr. Siegel became a director of the
Company in July 1995.  Mr. Siegel is a CPA and from 1969-1990 was
senior partner and founder of Siegel Rich & Co. P.C. ("Siegel
Rich"), an accounting firm specializing in privately owned
businesses and high net worth individuals.  In 1990, Siegel Rich
merged with M.R. Weiser & Co.  Mr. Siegel stayed on as a senior
partner until 1994, when he co-founded Siegel Rich Incorporated,
a firm providing advisory services to businesses regarding
mergers and acquisitions, long-range planning and problem
resolution.  Mr. Siegel is a director of the Oak Hall Capital
Fund and Prime Motor Inns, L.P.

                  David W.  Sass Mr.  Sass has been a  director  of the  Company
since July 1995. For the past 37 years, Mr. Sass has been a practicing  attorney
in New York City and is currently a senior partner in the law firm of McLaughlin
&  Stern,  LLP,  counsel  to  Harmat.  Mr.  Sass is an  officer  of  Ionic  Fuel
Technology,  Inc., a company  engaged in the sale and  distribution  of emission
control  systems;  a director of Genisys  Reservation  Systems,  Inc., a company
engaged in the development of a computerized  limousine reservation system and a
member and Vice Chairman of the Board of Trustees of Ithaca College.



                                                        15

<PAGE>



                  David S. Eiten  Mr. Eiten became a director of the
Company in January 1996.  From 1990 to the present he is the
owner and operator of a residential and commercial construction
company. From 1986 to 1990 he was Vice President of Field
Operations for the Company.




Item 10.          Executive Compensation

(a)      Cash Compensation

         The following table sets forth the aggregate cash compensation paid for
services  rendered to the Company during each of the Company's last three fiscal
years by all individuals  who served as the Company's  Chief  Executive  Officer
during the last fiscal year and the Company's most highly compensated  executive
officers who served as such during the last fiscal year.
<TABLE>
<CAPTION>
<S>     <C>    <C>    <C>    <C>    <C>    <C>


                                                            Summary Compensation Table
                                                   Annual Compensation                         Long Term Compensation
Name and principal         Year                                                                                           All other
position                                                                         Awards                        Payouts  compensation
                                       Salary         Bonus($)       Other       Restric-    Securities          LTIP
                                       ($)                           annual      ted         Underlying          Payouts
                                                                     compen-     Stock       Options/SARs        ($)
                                                                     sation      awards      (#)
Matthew  C.                1997        $105,000                                              500,000 shares
Schilowitz(1)                                                                                of Common
                                                                                             Stock

                                                                                                300,000 shares
                                                                                                of Common
                                                                                                Stock

                           1996        $52,000
                           1995                                      $197,000

</TABLE>


(1) The Plan for Incentive  Compensation of Matthew  Schilowitz (the "Schilowitz
Incentive  Plan") was  adopted by the Board of  Directors  and  approved  by the
Company's  stockholders on March 1, 1996, amended August 3, 1996, March 24, 1997
and June 19, 1997. Pursuant to the Schilowitz Incentive Plan, Mr. Schilowitz has
been granted an option (the  "Option") to purchase up to an aggregate of 500,000
shares of Common Stock with an exercise  price of $1.125 per share,  as amended.
See the discussion of the Company's  employment agreement with Mr. Schilowitz as
described

                                                        16

<PAGE>



in Item 12.

         On March 24, 1997, as part of the Company's 1996 Qualified Stock Option
Plan,  Mr.  Schilowitz  was granted an option of 300,000 shares of the Company's
common  stock at an exercise  price of $2.337 per share,  being 110% of the fair
market value of such shares.  On June 19, 1997, the Company reduced the exercise
price of such  options to $1.25.  The Option has a duration of  five-years.  See
"Certain Relationships and Related Transactions."


         (b)      Compensation Pursuant to Plans
<TABLE>
<CAPTION>
<S>     <C>    <C>    <C>    <C>    <C>    <C>



                                           Option/SAR Grants in Last Fiscal Year
                                                    (Individual Grants
Name                               Number of          Percent of            Exercise or base        Expiration Date
                                   Securities         total                 price ($/Sh)
                                   Underlying         options/SARs
                                   Options/SARs       granted to
                                   granted (#)        employees in
                                                      fiscal year

Matthew C. Schilowitz(1)           300,000                                     $1.25                   March 23, 2002
Scott Prizer(2)                     10,000                                     $2.125                  March 23, 2002
Seymour Siegel(2)                   10,000                                     $2.125                  March 23, 2002
David W. Sass(2)                    10,000                                     $2.125                  March 23, 2002
David S. Eiten(2)                   10,000                                     $2.125                  March 23, 2002
</TABLE>

(1) On March 24, 1997,  as part of the  Company's  1996  Qualified  Stock Option
Plan,  Mr.  Schilowitz  was granted an option of 300,000 shares of the Company's
common  stock at an exercise  price of $2.337 per share,  being 110% of the fair
market  value of such shares.  On June 19,  1997,  the Board voted to reduce the
exercise  price of such options for Mr.  Schilowitz  to $1.25.  The Option has a
duration of five-years. See "Certain Relationships and Related Transactions."

(2) On January 23, 1997,  the Board of Directors  voted to grant options to four
directors and two key employees  under the terms of the Company's 1996 Qualified
Stock Option Plan.  Each  individual  was granted a five year option to purchase
10,000
shares at a price of $2.125.

         (c)      Other Compensation

                  None


                                                        17

<PAGE>



         (d)      Compensation of Directors

         The  directors of the Company  receive  $2,500 per meeting,  but not to
exceed $10,000 per year as compensation for serving in such capacity.

         On January 23, 1997,  the Board of Directors  voted to grant options to
four  directors  under the terms of the Company's  1996  Qualified  Stock Option
Plan.  Each  individual was granted a five year option to purchase 10,000 shares
at a price of $2.125.

         (e)      Termination of Employment and Change of Control
                  Arrangement.

         None.

Item 11.          Security Ownership of Certain Beneficial Owners and
                  Management

         (a)      Security Ownership of Certain Beneficial Owners

         The  following  table  provides  information  as of September  30, 1997
concerning  officers  and  directors  as a group  as well  as  each  person  who
beneficially  owned  more than five (5%)  percent of the  Company's  outstanding
common shares.
<TABLE>
<CAPTION>
<S>     <C>    <C>    <C>    <C>    <C>    <C>


Title of Class                Name and Address of beneficial                   Amount and            Percent of
                              owner                                            Nature of             class
                                                                               Beneficial
                                                                               owner
Common Stock                  Matthew C. Schilowitz                            500,000               20%
                              c/o Harmat Homes Inc.
                              P.O. Box 539
                              Quogue, NY 11959
                              Scott Prizer*                                    0                     0
                              145 West 67th St.
                              New York, NY 10023
                              Seymour G. Siegel*                               0                     0
                              Siegel Rich Resources, Inc.
                              1180 Avenue of the Americas
                              New York, NY 10036
                              David W. Sass*                                   0                     0
                              McLaughlin & Stern, LLP
                              260 Madison Avenue
                              New York, NY 10016
                              David S. Eiten*                                  0                     0
                              7 Thorngrove Lane
                              Dix Hills, New York 11746
                              All officers and directors as a                  500,000               20%
                              group (5) persons
------------------
*        No shares owned.


                                                        18
</TABLE>

<PAGE>



Item 12.          Certain Relationships and Related Transactions

         On April 1,  1996,  the  Company  entered  into a five year  employment
agreement  which was amended August 3, 1996,  January 23, 1997 and June 19, 1997
with Matthew C. Schilowitz,  a stockholder,  director and officer of the Company
(the "Schilowitz Agreement"). Under the Agreement, Mr. Schilowitz's compensation
is $105,000 for the first year,  $155,000 for the second year,  $205,000 for the
third year,  $255,000 for the fourth year and  $305,000  for the fifth year.  In
addition,  Mr.  Schilowitz will receive a bonus of 5% of the pre-tax earnings of
the Company in each fiscal year.


         The foregoing  employment agreement terminates upon death or disability
of the employee and permits the Company to terminate  the  Schilowitz  Agreement
upon the  occurrence of certain  events or the commission of certain acts or for
any other reason  provided  that the Company  pays to such  employee a severance
payment equal to the aggregate base salary  otherwise owed to such employee over
the  remaining  term of the  employment  agreement  (other than for instances in
which such  employee is  terminated  for "cause" as defined in such  agreement).
Pursuant to the  provisions of his employment  agreement,  in the event that Mr.
Schilowitz  is not  nominated or  re-elected  to serve as member of the Board of
Directors,  either may  terminate his  employment  with the Company and will, in
such  event,  be entitled to continue to receive his base salary as set forth in
such  employment  with the Company for the  remainder of the term  thereof.  The
employment  agreement also contains certain  confidentiality and non-competition
provisions  which are  operative  during the term of the agreement and for given
periods of time after termination thereof.

         The  Plan  for  Incentive   Compensation  of  Matthew  Schilowitz  (the
"Schilowitz  Incentive Plan") was adopted by the Board of Directors and approved
by the Company's  stockholders on March 1, 1996,  amended August 3, 1996,  March
24, 1997 and June 19,  1997.  Pursuant  to such plan,  Mr.  Schilowitz  has been
granted an option  (the  "Option")  to purchase  up to an  aggregate  of 500,000
shares of Common Stock.  The Option  provides for the grant of: (i) the right to
purchase  250,000  shares  of  Common  Stock  such  right  to  vest  and  become
exercisable upon the Company  realizing annual earnings before taxes equaling or
exceeding  $750,000;  and (ii) the right to  purchase  250,000  shares of Common
Stock such  right to vest and  become  exercisable  upon the  Company  realizing
annual earnings before taxes equaling or exceeding $1,500,000. Shares subject to
options granted under the Schilowitz Incentive plan are subject to adjustment in
the event of the Company's

                                                        19

<PAGE>



declaration  of  stock  dividends,   stock  splits,   reclassification  and  the
occurrence of other similar events.  The Company has reserved  500,000 shares of
Common Stock for issuance under the Schilowitz  Incentive Plan.  Pursuant to the
terms of the  Schilowitz  Incentive  Plan, the Board of Directors or a committee
established by the Board of Directors administers such plan.

         On January 23, 1997,  the Board of Directors  voted to grant options to
four  directors  under the terms of the Company's  1996  Qualified  Stock Option
Plan.  Each  individual was granted a five year option to purchase 10,000 shares
at a price of $2.125.

         On March 24, 1997, as part of the Company's 1996 Qualified Stock Option
Plan,  Mr.  Schilowitz  was granted an option of 300,000 shares of the Company's
common  stock at an exercise  price of $2.337 per share,  being 110% of the fair
market  value of such shares.  On June 19,  1997,  the Board voted to reduce the
exercise  price of such options for Mr.  Schilowitz  to $1.25.  The Option has a
duration of five-years.

         In July,  1997,  the  Company  entered  into an  agreement  to sell its
interest in the Jagger Woods  Development  and certain  other  properties  to an
unaffiliated third party for approximately $3,130,000.  The sale was consummated
in December, 1997.

         The law firm of  McLaughlin  & Stern,  LLP.,  of  which  Mr.  Sass is a
principal, received aggregate legal fees of $35,000 and $110,000 during 1997 and
1996 respectively for services rendered to the Company.

         Mr.  Schilowitz  has  interests,  either  as a general  partner,  joint
venturer or shareholder,  in a number of entities which either have entered,  or
may in the future enter,  into a variety of  transactions  with the Company.  In
addition,  entities  owned or  controlled  by Mr.  Schilowitz  own  interests in
various real estate  ventures which may retain the Company as a builder for such
developments.

         The following sets forth the name of each of the Company's  affiliates,
Mr.  Schilowitz's  interest  therein,  and its  transactions  (either current or
contemplated), if any, with the Company:







                                                        20

<PAGE>



Woodlands Construction
 Corp. LLP                                                    50% shareholder
                           Woodlands provides contracting Services on small
                           jobs - Woodlands owns no property.  It is possible
                           that the Company may provide services to Woodlands
                           in the future.


Crossings Associates, L.P.                                    1/9th interest
Services
                           The Crossings had a 14-lot subdivision.  There are no
                           available lots remaining.


Emerald Woods Development Corp.    50% shareholder
Services
                           Emerald had a 14-lot  subdivision.  All of which have
                           been  sold.  The  Company  may  provide  construction
                           services to Emerald in the future.


Fairways at Westhampton, Inc.      50% shareholder
Services
                           Fairways had six building lots all of which have been
                           sold. Fairways owns no other property.


Bridle Path Development Corp.                                 50% shareholder
Services
                           Bridle  Path had a 14-lot  subdivision.  There  are 8
                           available lots. The Company may provide  construction
                           services to Bridle Path in the future.

Woodland Development Association, a  partnership               1/3 interest

                           Woodland owns four building
                           lots located in East Quogue, New York The Company may
                           provide construction to Woodland in the future.

Woodland Pines Associates, a partnership                        Joint  Venture

                           Woodland  Pines  owns 10
                           building lots located in East Quogue,  New York.  The
                           Company may provide construction to Woodland Pines in
                           the future.



                                                        21

<PAGE>



         The  Company  issued  1,750,000  shares  of  its  Common  Stock  to Mr.
Schilowitz in  connection  with the transfer to the Company of all of the issued
and outstanding  stock of Harmat Homes,  Inc. a construction  and sales company;
Harmat Capital Corp. which owns the corporate headquarters,  and rental property
in Southampton,  New York.  Northside Woods, Inc., which owns rental property in
Westhampton, New York; Harmat Holding Corp., which owns the subdivision known as
the Polo Grounds;  Harmat  Organization Inc., which owns an interest in Woodland
Development  Associates,  a partnership;  and a fifty percent  interest in Quick
Storage of Quogue, Inc. which owns the storage facility in Quogue, New York.

         In  connection  with the  Company's  initial  public  offering,  at the
request of the Underwriter,  Mr.  Schilowitz has made a capital  contribution to
the Company of 500,000  shares  reducing  his holding to 1,250,000 in lieu of an
escrow of 750,000 shares.

         All  transactions  between  the  Company  and  its  affiliates  will be
reviewed solely by the Company's outside directors, who will determine the value
of any  services  provided by the Company for any  affiliated  entity.  All sums
received by the Company will be equivalent  to those granted by unrelated  third
parties.

         The Company  borrowed from affiliated  persons an aggregate of $240,000
as follows:  $20,000 from Sidney Prizer, the grandfather of Matthew  Schilowitz,
the President of the Company,  which loan bore interest at 6% per annum, matured
on December 31, 1996 and was repaid from the proceeds of the Company's  Offering
in  September,  1996;  $70,000  from  Carol  Bernstein,  the  mother of  Matthew
Schilowitz,  which loan bears  interest at 10% per annum and matured on December
31, 1996 and was repaid from the proceeds of the Offering;  $150,000  payable to
three former  owners of Quick  Storage of Quogue,  Inc. in  connection  with the
purchase by the Company of such persons 50% interest in such company. The monies
due to Carol  Bernstein,Sidney  Prizer and the three former  owners of the Quick
Storage of Quogue, Inc., have been repaid in full. The interest in the amount of
$42,000 is still owed to Carol Bernstein.

         In July 1997,  Matthew  C.  Schilowitz,  the  president,  director  and
principal  shareholder of the Company borrowed $200,000 from the Company,  which
loan was collateralized by 500,000 shares of the Company's common stock owned by
Mr.  Schilowitz.  The  unpaid  balance  of the loan at  September  30,  1997 was
$165,939.  The loan bears  interest at the annual prime rate of Chase  Manhattan
Bank.
This loan is due on demand.

         During 1997 the Company made loans to related parties in the
amount of $67,600.  Such loans have no stated interest rate and

                                                        22

<PAGE>



are due on demand.

         In April 1997 the Company  purchased a building lot from Emerald  Woods
Development Corp.  ("Emerald Woods")(of which Matthew Schilowitz is a 50% owner)
for $195,000  and is in contract to construct  and sell a house on such lot. The
Company  purchased two  additional  building lots from Emerald Woods in December
1997 for $190,000 and simultaneously sold them to an unaffiliated third party.

         All of the  Company's  mortgages  on the  properties  that it owns  are
personally  guaranteed by Matthew Schilowitz,  the President of the Company. The
Company  has agreed to  indemnify  Mr.  Schilowitz  against any  liability  with
respect to such guarantees.



                                                        23

<PAGE>

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


                                                      PART IV

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

         (a)(1)            Financial Statements                                       Page Number

                           Report of Independent Certified
                           Public Accountants                                           F-2-3

                           Consolidated Balance Sheet as of
                           September 30, 1997                                           F-4

                           Consolidated  Statements of  Operations  for the year
                           ended  September  30, 1997 and the nine months  ended
                           September
                           30, 1996                                                      F-5

                           Consolidated  Statements of  Stockholders  Equity for
                           the year ended September 30, 1997 and the nine months
                           ended September
                           30, 1996                                                      F-6

                           Consolidated Statements of Cash Flows for the
                           year ended September 30, 1997 and
                           nine months ended September 30, 1996                          F-7-8

                           Notes to Financial Statements                                 F-9
</TABLE>


Schedules other than those listed above are omitted for the reason that they are
not required,  are not applicable,  or the required  information is shown on the
financial statements or notes thereto.

(a)(2)            Exhibits


         3.1      Registrant's  Articles  of  Incorporation  as amended to date,
                  incorporated   herein  by   Reference   to   Exhibit   3.1  to
                  Registrant's  Registration  Statement  on Form SB-2,  File No.
                  333-3501.



         3.2      Registrant's By-Laws, as amended to date,  incorporated herein
                  by  Reference  to  Exhibit  3.2 to  Registrant's  Registration
                  Statement on Form SB-2, File No.333-3501.


                                                        24

<PAGE>



         4.1      Form of  Common  Stock  Certificate,  incorporated  herein  by
                  Reference to Exhibit 4 to Registrant's  Registration Statement
                  on Form SB-2, File No. 333-3501.

         4.2      Form of Warrant and Warrant Agreement, incorporated
                  herein by Reference to Exhibit 4.2 to Registrant's
                  Registration Statement on Form SB-2, File No. 333-3501.

         4.3      Form of Series B Warrant,  incorporated herein by Reference to
                  Exhibit 4.3 to  Registrant's  Registration  Statement  on Form
                  SB-2, File No. 333-3501.

         4.4      Form of Representative's Purchase Option,  incorporated
                  herein by Reference to Exhibit 4.4 to Registrant's
                  Registration Statement on Form SB-2, File No. 333-3501.

         4.5      Registrant's  1996 Stock  Option Plan  incorporated  herein by
                  Reference  and  as  amended  June  19,  1997  (Exhibit  4.5 to
                  Registrant's   Registration   Statement  on  Form  SB-2,  File
                  No.333-3501).

         10.2     Employment Agreement dated April 1, 1996,  incorporated herein
                  by  Reference  to Exhibit  10.2 to  Registrant's  Registration
                  Statement  on Form  SB-2,  File No.  333-3501  and as  amended
                  August 3, 1996, January 23, 1997 and June 19, 1997 between the
                  Registrant and Matthew C.
                  Schilowitz.

(b)      Reports on Form 8-K

         Two  reports  on Form 8-K was filed  during  the first  quarter  of the
fiscal year ended September 30, 1998.





                                                        25

<PAGE>


 
                                      SIGNATURES

         Pursuant to the  requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

Dated: January 14, 1998



                                    The Harmat Organization, Inc.

                                    BY: /s/ Matthew C. Schilowitz
                                            Matthew C. Schilowitz,
                                         President and Chairman of the Board of
                                         Directors

         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 on
the dates indicated.

                                    BY:  /s/ Matthew C. Schilowitz
                                         President and Chairman of the Board of
                                         Directors (Chief Executive Officer)
                                    Date:            January 14, 1998

                                    BY: /s/ Seymour G. Siegel
                                            Treasurer and a Director (Chief
                                            financial and Accounting officer)
                                    Date:            January 14, 1998

                                    BY: /s/ Scott Prizer
                                            Secretary and a Director
                                    Date:            January 14, 1998


                                    BY:  /s/ David W. Sass
                                            Director
                                    Date:            January 14, 1998


                                    BY:  /s/ David S. Eiten
                                            Director
                                    Date:            January 14, 1998





 

<PAGE>

                          THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES

                                                   Financial Statements

                                                    September 30, 1997


<PAGE>


                              THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES

                                                    Table of Contents
<TABLE>
<CAPTION>
<S>     <C>    <C>    <C>    <C>    <C>    <C>





                                                                                                              Page
                                                                                                   --------------------------
                        Independent Auditors' Reports                                                          F-2-3



                        Consolidated Balance Sheet - As of September 30, 1997                                  F-4

                        Consolidated Statements of Operations -
                          For the Year Ended September 30, 1997 and
                          the Nine Months Ended September 30, 1996                                             F-5

                        Consolidated Statements of Stockholders' Equity                                        F-6

                        Consolidated Statements of Cash Flows -
                          For the Year Ended September 30, 1997
                          and the Nine Months Ended September 30, 1996                                         F-7-8

                        Notes to Consolidated Financial Statements                                             F-9



                                         F-1

</TABLE>
<PAGE>



                                             INDEPENDENT AUDITOR'S REPORT

To the Board of Directors and Stockholders of
   The Harmat Organization, Inc. and its Subsidiaries
   Quogue, New York



                  We have audited the  accompanying  statements  of  operations,
stockholders'  equity and cash flows of The Harmat  Organization,  Inc.  and its
subsidiaries  for  the  nine  month  period  ended  September  30,  1996.  These
consolidated  financial  statements  are  the  responsibility  of the  Company's
management.  Our  responsibility is to express an opinion on these  consolidated
financial statements based on our audit.

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

                  In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects,  the consolidated  results of
operations and cash flows of The Harmat Organization,  Inc. and its subsidiaries
for the nine month period ended September 30, 1996, in conformity with generally
accepted accounting principles.







                                         MOORE STEPHENS, P.C.
                                        Certified Public Accountants.
Cranford, New Jersey
December 17, 1996


                                      F-2

<PAGE>

                                               Independent Auditors' Report


To the Board of Directors and Stockholders of
The Harmat Organization, Inc. and Subsidiaries
Quogue, New York



We have  audited  the  accompanying  consolidated  balance  sheet of The  Harmat
Organization,  Inc. and  Subsidiaries  as of September 30, 1997, and the related
statements of operations,  stockholders' equity and cash flows for the year then
ended.  These  financial  statements  are the  responsibility  of the  Company's
management.  Our  responsibility is to express an opinion on these  consolidated
financial statements based on our audit.

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

In our opinion, the consolidated  financial statements referred to above present
fairly,  in  all  material  respects,  the  financial  position  of  The  Harmat
Organization,   Inc.  and  Subsidiaries  as  of  September  30,  1997,  and  the
consolidated  results  of its  operations  and its cash  flows for the year then
ended, in conformity with generally accepted accounting principles.


Marks Shron & Company, LLP
Great Neck, New York
November 24, 1997
Except for Note 13, as to which the date is December 2, 1997


                                    F-3


<PAGE>








                             THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES

                                                Consolidated Balance Sheet

                                                    September 30, 1997

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

CURRENT ASSETS
  Cash and cash equivalents                                                                     $   193,996
  Marketable securities                                                                              10,637
  Accounts receivable                                                                                33,466
  Loan receivable - stockholder                                                                     165,939
  Loans receivable - other                                                                           75,000
  Other receivables - related parties                                                                67,600
  Land and construction costs                                                                     3,702,539
  Prepaid expenses                                                                                   56,970
                                                                                                  ----------
Total Current Assets                                                                              4,306,147

PROPERTY AND EQUIPMENT - NET                                                                      1,243,774
                                                                                                  ---------
OTHER ASSETS
  Goodwill - net                                                                                     60,598
  Investment in Partnership                                                                          26,447
  Land deposits                                                                                     110,000
  Other deposits                                                                                     45,749
                                                                                                -------------
                                                                                                    242,794
                                                                                                -------------
TOTAL ASSETS                                                                                     $5,792,715
                                                                                                 ===========

                                        LIABILITIES AND STOCKHOLDERS' EQUITY


CURRENT LIABILITIES
  Current portion of notes and mortgages payable                                                 $1,811,393
  Accounts payable and accrued expenses                                                             189,838
  Accrued interest                                                                                  194,510
  Customer and security deposits                                                                     56,466
                                                                                                  ---------

Total Current Liabilities                                                                         2,252,207

OTHER LIABILITIES
  Notes and mortgages payable - net of current maturities                                           811,611
                                                                                                 -----------
COMMITMENTS AND CONTINGENCIES                                                                                          -

TOTAL LIABILITIES                                                                                 3,063,818

STOCKHOLDERS' EQUITY
  Preferred stock - $.001 par value, 5,000,000 shares authorized
    no shares issued and outstanding                                                                 -

  Common stock - $.001 par value, 25,000,000 shares authorized,
    2,612,500 shares issued and outstanding                                                          2,612

  Additional paid-in capital - common stock                                                      4,253,604

  Accumulated (Deficit)                                                                         (1,527,319)

Total Stockholders' Equity                                                                       2,728,897
                                                                                                -----------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                                      $5,792,715
                                                                                                ===========

See Independent Auditors' Report and Notes to Consolidated Financial Statements.

</TABLE>


                                F-4
<PAGE>

                       THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES

                             Consolidated Statements of Operations
<TABLE>
<CAPTION>
<S>     <C>    <C>    <C>    <C>    <C>    <C>





                                                                                                          Nine Months
                                                                                  Year Ended               Ended
                                                                                 September 30,           September 30,
                                                                                   1997                    1996
                                                                             ----------------           ----------
REVENUES
  Construction sales                                                             $1,390,883              $2,496,926
  Sale of land held for development                                                  -                       52,000
  Rental income                                                                     200,908                 153,944
  Management fee income                                                             -                        25,000
                                                                             -------------------        ------------

    Total Revenues                                                                1,591,791               2,727,870

COST OF SALES AND DIRECT OPERATING EXPENSES                                       1,425,683               2,238,769
                                                                             ------------               -------------

  Gross profit                                                                      166,108                 489,101

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES                                      1,114,494                 702,290

CHARGE FOR EXECUTIVE COMPENSATION CAPITALIZED                                         -                      14,750
                                                                             -------------------         -----------

(LOSS) INCOME FROM OPERATIONS                                                      (948,386)               (227,939)
                                                                             -------------               ------------

OTHER INCOME (EXPENSE)
  Gain on sale of marketable securities                                              13,638                  47,976
  Unrealized gain (loss) on marketable securities                                    (3,268)                  4,394
  Interest and dividend income                                                       80,912                   5,050
  Interest expense                                                                 (104,915)               (175,972)
                                                                             --------------              ------------

Total Other Income (Expense)                                                        (13,633)               (118,552)
                                                                             ---------------           --------------

(LOSS) BEFORE INCOME TAXES                                                   $     (962,019)           $   (346,491)

INCOME TAXES                                                                           -                      -
                                                                             --------------------       --------------

NET (LOSS)                                                                   $     (962,019)           $   (346,491)
                                                                             =============             ===============

  (Loss) per share                                                           $         (.37)           $       (.19)
                                                                             =================         ===============

  Weighted average number of shares                                               2,612,500                1,806,661
                                                                             ==============            ===============


See Independent Auditors' Report and Notes to Consolidated Financial Statements.

</TABLE>
                                        F-5
<PAGE>



                          THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES

                         Consolidated Statements of Stockholders' Equity


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


                                            Common Stock
                                            ------------
                                                                             Additional                                Total
                                        Number of           Amount             Paid-In          Accumulated        Stockholders'
                                        Shares              (At Par)           Capital          (Deficit)             Equity
                                       ----------           -------          ----------         -----------        -------------

Balance - December 31, 1995         1,250,000          $      1,250       $   129,250        $  (312,430)        $  (181,930)

  March 1, 1996 - transfer of S
    Corporation deficit to
    Additional paid-in capital          -                      -             (342,437)          342,437                 -

  Proceeds from private
    placement                        500,000                    500           499,500             -                   500,000

  Net proceeds from an initial
    public offering of common
    stock on September 13,
    1996                             862,500                    862         3,928,811            -                  3,929,673

  Contribution of capital by a
    shareholder                        -                         -             23,730            -                     23,730

  Executive compensation
    capitalized                        -                         -             14,750            -                     14,750

Net (Loss)                             -                         -                  -           (346,491)            (346,491)

Distribution to stockholder            -                         -                  -           (248,816)            (248,816)
                                    -----------                ------          --------         ---------            ---------

Balance - September 30, 1996        2,612,500                  2,612        4,253,604           (565,300)           3,690,916

Net (Loss)                             -                         -                -             (962,019)            (962,019)
                                    -----------               -------       ---------           ---------           ----------

Balance - September 30, 1997        2,612,500                $ 2,612       $4,253,604        $(1,527,319)          $2,728,897
                                    ===========              =========     ==========        ============          ==========



See Independent Auditors' Report and Notes to Consolidated Financial Statements.

</TABLE>
                                     F-6
<PAGE>



                       THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES

                             Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
<S>     <C>    <C>    <C>    <C>    <C>    <C>





                                                                                                          Nine Months
                                                                                  Year Ended                 Ended
                                                                                 September 30,            September 30,
                                                                                   1997                      1996
                                                                                --------------            ------------
OPERATING ACTIVITIES:
  Net (loss) income                                                          $     (962,019)         $     (346,491)

  Adjustments to reconcile  net (loss) income to net cash (used for) provided by
    operating activities:
      Depreciation and amortization                                                  37,317                  27,063
      Gain on sale of marketable securities                                         (13,638)                (47,976)
      Change in unrealized (gain) loss on investments                                 3,268                  (4,394)
      Loss on Partnership investment                                                  -                       3,280
      Executive compensation capitalized                                              -                      14,750

    Changes in assets and liabilities:
      Accounts receivable                                                           (73,472)                (12,830)
      Other deposits                                                                (45,749)                    -
      Purchase of marketable securities                                               -                    (242,148)
      Sales of marketable securities                                                 22,240                 456,105
      Prepaid expenses                                                              (13,472)                (42,323)
      Accounts payable and accrued expenses                                         159,558                (421,985)
      Customer deposits                                                              44,543                 (85,576)
                                                                                   ----------              ----------

      Total Adjustments                                                             120,595                (356,034)
                                                                                   ----------              ----------

      Net Cash Used by Operating Activities                                        (841,424)               (702,525)
                                                                                   ---------               ----------

INVESTING ACTIVITIES:
  Acquisition of land, property and equipment                                      (123,228)               (48,079)
  Deposits on land                                                                 (110,000)               (10,000)
  Land and construction costs                                                    (2,919,354)               193,031
  Loans receivable - other                                                          (75,000)                    -
  Land held for development                                                          -                      72,298
                                                                                  -----------              --------

      Net Cash from (used by) Investing Activities                               (3,227,582)                207,250
                                                                                 ------------              ---------


See Independent Auditors' Report and Notes to Consolidated Financial Statements.
</TABLE>

                                           F-7
<PAGE>

                   THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES

                         Consolidated Statements of Cash Flows

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



                                                                                                          Nine Months
                                                                                  Year Ended                 Ended
                                                                                 September 30,           September 30,
                                                                                   1997                    1996
                                                                             ----------------        ----------

NET CASH - OPERATING ACTIVITES - brought forward                             $    (841,424)          $  (702,525)
                                                                             --------------          ------------

NET CASH  - INVESTING ACTIVITIES - brought forward                              (3,227,582)              207,250
                                                                             --------------           ------------

FINANCING ACTIVITIES:
  Loan receivable - stockholder - net                                             (165,939)                 -
  Repayment of notes payable - related party                                       (90,000)             (125,000)
  Proceeds of notes and mortgages payable                                        1,463,510               500,000
  Repayments of notes and mortgages payable                                       (148,238)             (624,619)
  Net proceeds of sale of common stock                                               -                 3,929,673
  Contribution by shareholder                                                        -                    23,730
  Repayments of notes payable - stockholder                                          -                  (277,000)
  Proceeds of notes payable - other                                                  -                    38,700
  Repayments of notes payable - other                                                -                    (6,560)
  Distribution to stockholders                                                       -                   (65,419)
  Proceeds of private placement                                                      -                   500,000
  Repayment to bank                                                                  -                  (240,000)
  Deferred offering costs                                                            -                    30,000
                                                                                ------------            ---------

    Net Cash from Financing Activities                                           1,059,333             3,683,505
                                                                                ------------           ----------

NET INCREASE (DECREASE) IN CASH AND CASH
  EQUIVALENTS                                                                   (3,009,673)            3,188,230

CASH AND CASH EQUIVALENTS - beginning of period                                  3,203,669                15,439
                                                                                -----------            ---------

CASH AND CASH EQUIVALENTS - end of period                                     $    193,996            $3,203,669
                                                                               ============           ==========


SUPPLEMENTAL DISCLOSURES OF CASH FLOW
  INFORMATION:
    Cash paid during the periods for:
      Interest                                                               $    222,734            $   180,319
                                                                             ============            ============
      Income taxes                                                           $     34,379            $    14,567
                                                                             =============           ============


SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:  During
  the nine months ended September 30, 1996, the Company  distributed  marketable
  securities  with a fair value of  $186,400 to its then sole  stockholder  as a
  distribution.

  On August 3, 1996, the major  stockholder of the Company  contributed  500,000
  shares of the Company's common stock to the Company (see Note 9).

See Independent Auditors' Report and Notes to Consolidated Financial Statements.
</TABLE>

                                      F-8
<PAGE>



                     THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES

                        Notes to Consolidated Financial Statements

                                   September 30, 1997
             PRINCIPLES OF CONSOLIDATION AND BUSINESS



In November 1995, The Harmat  Organization,  Inc. (Delaware) (the "Company") was
formed  for the  purpose  of  offering  securities  to the  general  public  and
1,750,000  shares of common stock were issued to the  individual  stockholder of
the Harmat Companies. On March 1, 1996, the individual stockholder of the Harmat
Companies   transferred  his  stock  in  the  Harmat  Companies  to  The  Harmat
Organization   (Delaware)   for  a  100%   ownership   interest  in  the  Harmat
Organization, Inc. (Delaware).


The  September  30, 1997 and 1996  financial  statements  reflect the  financial
position  and results of  operations  of The Harmat  Organization,  Inc. and its
subsidiaries  on a  consolidated  basis,  which  reflects the Company's  current
organizational   structure.   The  Company's   policy  is  to  consolidate   all
majority-owned  subsidiaries.  All intercompany  amounts have been eliminated in
consolidation.

Entity                                                   

Parent Company:

The Harmat Organization, Inc. - Delaware: A Holding Company

Subsidiaries:

Harmat Homes, Inc.("Harmat Homes"): Construction of custom homes and residential
and commercial  rental  properties,  in the eastern portion of Long Island,  New
York

Harmat  Holding  Corp.("Harmat  Holding"):   Subdivision  and  development  of
undeveloped land in the eastern portion of Long Island, New York

Northside  Woods, Inc.("Northside"):  Rental of  residential  property  in the
eastern portion of Long Island, New York.

Harmat Capital Corp.("Harmat  Capital"): Rental of residential  property in the
eastern portion of Long Island, New York

Harmat  Management, Inc.:  Limited Partner in real estate partnership in the
eastern portion of Long Island, New York

Quick  Storage, Inc.: Short-term rental of storage facilities in the eastern
portion of Long Island, New York

                                   F-9
<PAGE>




                          THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES

                              Notes to Consolidated Financial Statements

                                                    September 30, 1997




NOTE 1:               PRINCIPLES OF CONSOLIDATION AND BUSINESS (continued)

The construction industry poses certain inherent risks to the Company, such as a
shortage  of skilled  labor.  In  addition,  certain  other  problems  may arise
resulting in construction  delays such as weather  delays,  cost of supplies and
late  deliveries  and/or  cost  overruns  that the  Company  may have to absorb.
Furthermore,  the Company may incur  unexpected  costs with  respect to warranty
service on completed projects even though it carries warranty insurance to cover
such  contingencies.  Such construction risks can affect the Company's cash flow
and  profits.  To date,  the  Company has not been  materially  affected by such
construction  risks.  The  Company  faces  competition  from a  number  of local
builders,  many of which can offer either the same or lower  building costs than
the Company.

The principal stockholder of the Company is a general partner in the partnership
in which Harmat Management, Inc. has a limited partnership interest.

NOTE 2:               SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

                  Accounting Period

Effective  September  30, 1996,  the Company  changed to a fiscal year ending on
September  30th.  Prior to 1996,  the Company  utilized a calendar year end. The
accompanying  financial  statements include audited financial statements for the
nine-month, short year, ended September 30, 1996.

                  Cash and Cash Equivalents

The Company considers all highly liquid instruments purchased with a maturity of
three  months  or  less  to  be  cash  equivalents.   Cash  equivalents  totaled
approximately $126,951 at September 30, 1997. Cash includes $57,500 set aside to
satisfy a Suffolk County bonding requirement.


                  Concentration of Credit Risk

Financial instruments which potentially subject the Company to concentrations of
credit risk are cash and cash equivalents and accounts  receivable  arising from
its normal business  activities.  The Company  routinely  assesses the financial
strength of its customers and based upon factors  surrounding the credit risk of
its  customers,   establishes  an  allowance  for  uncollectible   accounts  (as
necessary),  and as a consequence,  believes that its accounts receivable credit
risk exposure beyond such allowances is limited.  Deposits are usually  required
on  house  construction  contracts.   The  Company  places  its  cash  and  cash
equivalents  with high  credit  quality  financial  institutions.  The amount on
deposit in any one institution that exceeds  federally insured limits is subject
to credit risk. Such amount was approximately $26,951 at September 30, 1997. The
Company believes no significant concentration of credit risk exists with respect
to these cash equivalents.


                                    F-10

<PAGE>





                     THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES

                         Notes to Consolidated Financial Statements

                                    September 30, 1997



NOTE 2:               SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

                  Economic Dependency

There  were  three and five  construction  contracts  which  were  deemed  major
customers  and  accounted  for  total  construction  sales  for the  year  ended
September 30, 1997 and the nine months ended  September  30, 1996.  For the year
ended  September 30, 1997,  these contracts  represented  33%, 33%, 34% of total
sales. For the nine months ended September 30, 1996, these contracts represented
25%, 20%, 19%, 18% and 17% of total sales. At September 30, 1997 and 1996, there
was $17,712 and $25,000 respectively,  due under construction contracts. Most of
the Company's business is of a nonrecurring nature. The Company must continually
market  its homes in order to attract  new  purchasers.  Unless  the  Company is
successful in attracting  new purchasers for its homes, a lack of new purchasers
will have a severe negative impact to the Company in the near term.

                  Marketable Securities

The Company  accounts  for its  investments  pursuant to  Statement of Financial
Accounting  Standards ("SFAS") No. 115,  "Accounting for Certain  Investments in
Debt and Equity Securities". SFAS No. 115 addresses the accounting and reporting
for investments in equity securities that have readily  determinable fair values
and  for  all  investments  in  debt  securities.  Those  investments  are to be
classified  into  the  following   three   categories:   held-to-maturity   debt
securities; trade securities; and available-for-sale securities.


Management determines the appropriate  classification of its investments in debt
and equity securities at the time of purchase and reevaluates such determination
at  each  balance  sheet  date.  At  September  30,  1997,  all of  the  Company
investments  were  classified  as trading  securities.  Trading  securities  are
securities  bought and held  principally  for the purpose of selling them in the
near term and are  reported  at fair  value,  with  unrealized  gains and losses
included in operations  for the current  year.  The Company  primarily  uses the
specific  identification  method for gains and losses on the sales of marketable
securities (see Note 3).

                  Property and Equipment and Depreciation

Property and  equipment  are stated at cost.  Depreciation  is computed over the
estimated  useful  lives of the  assets,  using  the  straight-line  method  for
buildings and building  improvements  and accelerated  methods for furniture and
equipment, as follows:


                  Building and Building Improvements   40 years
                  Furniture and Equipment              5 to 7 years



                                    F-11

<PAGE>





                               THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES

                                 Notes to Consolidated Financial Statements

                                                    September 30, 1997




NOTE 2:               SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

                  Earnings (Loss) Per Share

Earnings (loss) per share are computed by dividing the net income (loss) for the
year by the weighted average number of common shares outstanding.  Stock options
and warrants are assumed converted to stock, when dilutive.


                  Use of Estimates

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

                  Land Development Costs


Costs that clearly relate to land development  projects are  capitalized.  Costs
are  allocated  to project  components  by the  specific  identification  method
whenever  possible.  Otherwise,  acquisition  costs are allocated based on their
relative  fair value before  development,  and  development  costs are allocated
based on their  relative  sales  value.  Interest  costs are  capitalized  while
development is in progress.

                  Revenue Recognition

The Company  recognizes  revenue from the  acquisition,  development and sale of
land, and construction and sale of houses on such land. Pursuant to the terms of
such contracts and Statement of Financial  Accounting Standards ("SFAS") No. 66,
"Accounting  for Sales of Real Estate",  the Company uses the deposit  method of
accounting.  This method  provides  that all  construction  costs be recorded as
incurred and monies  received from the  purchases be recorded as deposits  until
the  purchase  contracts  close at which time all revenue  costs and profits are
recognized.

The Company  classifies all land and construction  costs that are expected to be
completed  within one year as a current asset.  At September 30, 1997, such land
and construction costs totaled  $3,702,539.  Customer deposits on such contracts
totaled $45,558 at September 30, 1997.

Rental income is  recognized as it is earned  pursuant to the term of each lease
on a straight-line  basis. Leases generally have an initial or remaining term of
one year or less.


                                    F-12

<PAGE>





              THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                                                    September 30, 1997




NOTE 2:               SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

                  Income Taxes

                  Under FAS No.  109,  "Accounting  for  Income  Tax",  deferred
income taxes  reflect the net tax effects of (a) temporary  differences  between
the carrying amounts of assets and liabilities for financial  reporting purposes
and  the  amounts  used  for  income  tax  purposes,   and  (b)  operating  loss
carryforwards.  The tax effects of  significant  items  comprising the Company's
deferred taxes as of September 30, 1997 are as follows:

Deferred Tax Liabilities:
  Difference between book and tax basis of property,
    plant and equipment                                        $  (36,500)

Deferred Tax Assets:
  Federal and State Net Operating Loss Carryforwards              279,700
  Less: Valuation Allowance                                      (243,200)
                                                               ---------------
Net Deferred Tax Liability                                     $    -
                                                               ================


                  The  provision  for income taxes for both 1996 and 1997 arises
from the amount computed by applying  statutory rates for the reasons summarized
below:

Provision Based on Statutory Rates                              34 %
Benefit of Graduated Rates                                     (19)%
State Taxes Net of Federal Benefit                               6 %
Benefit of NOL Carryforward                                    (21)%
                                                               -----

Total                                                            - %
                                                               =====

The  Company  will  have  net  operating  loss  carryforwards  of  approximately
$1,332,000  available to reduce future taxes. These  carryforward  losses expire
through  the year 2012.  Pursuant to Section 382 of the  Internal  Revenue  Code
regarding substantial changes in Company ownership,  utilization of these losses
may be limited.

                  Goodwill

The cost of the newly acquired subsidiary,  Quick Storage, in excess of the fair
value of the net assets of such  subsidiary  has been charged to  goodwill.  The
Company  has decided to amortize  its  goodwill  over a period of up to 10 years
under the straight-line method.  Accumulated  amortization at September 30, 1997
was  $20,105.  The  Company's  policy is to  evaluate  the  periods of  goodwill
amortization to determine whether later events and circumstances warrant revised
estimates of useful lives. The Company also evaluates whether the carrying value
of goodwill has become  impaired by comparing the carrying  value of goodwill to
the value of projected undiscounted cash flows from the acquired assets of Quick
Storage, Inc. Impairment is recognized if the recorded goodwill is less than the
projected undiscounted cash flow from acquired assets or business.


                                    F-13

<PAGE>




                THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES

                Notes to Consolidated Financial Statements

                                                    September 30, 1997




NOTE 2:               SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

             Stock Options and Similar Equity Instruments Issued to Employees

The Company currently accounts for its stock-based  compensation plans using the
accounting  prescribed by Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees  (see Note 10).  Since the Company is not required
to adopt the fair value based recognition  provisions prescribed under Statement
of  Financial   Accounting   Standards  No.  123,   Accounting  for  Stock-Based
Compensation, it has elected only to comply with the disclosure requirements set
forth in the Statement, which includes disclosing pro forma net income as if the
fair value based method of accounting had been applied (See Note 10).

NOTE 3:               MARKETABLE SECURITIES

Marketable  securities  consist of investments in equity and debt  securities at
fair value. The cost of such securities is $25,118. The change in the unrealized
gain account for the year ended September 30, 1997 and for the nine month period
ended September 30, 1996 was $(3,268) and $4,394, respectively.


NOTE 4:               PROPERTY AND EQUIPMENT

                  Property and  equipment  consist of the following at September
30, 1997:

Land                                                           $   523,974
Building and building improvements                                 855,844
Furniture and office equipment                                      65,786
                                                               --------------

Total                                                            1,445,604
Less: Accumulated depreciation                                     201,830
                                                                 -----------

Property and Equipment - Net                                   $ 1,243,774
                                                               ===========


                  Depreciation expense for the year ended September 30, 1997 and
for the nine months  ended  September  30,  1996  totaled  $37,317 and  $21,032,
respectively.


NOTE 5:               LOANS RECEIVABLE

                  Stockholder

The Company loaned Mr.  Schilowitz,  its primary  stockholder,  $200,000 in July
1997.  The loan is evidenced by a  Promissory  Note with simple  interest at the
Prime Rate charged by Chase Manhattan Bank, NA. Mr.  Schilowitz  pledged 500,000
shares of Common  Stock of the Company as  collateral  security.  The balance of
this loan as of September 30, 1997 is $165,939.

                                 F-14

<PAGE>





                              THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES

                                   Notes to Consolidated Financial Statements

                                                    September 30, 1997



NOTE 5:               LOANS RECEIVABLE (continued)

                  Other

The Company loaned $50,000 to Axxess, Inc., an unaffiliated third party, and has
agreed to loan an  additional  $125,000 (of which $25,000 was loaned in October,
1997).  The loan is  evidenced  by a $175,000  Promissory  Note dated August 15,
1997.  The note bears  interest at 2% above prime rate and unpaid  interest  and
principal is due August 15, 1998.  Axxess,  Inc.  pledged  600,000 shares of its
common stock as security  collateral  and  authorized  the issuance of rights to
purchase  1,000,000 warrants for a price of $.50 per share (as amended) expiring
August 14, 2000.

The Company loaned $25,000 to an unaffiliated third party. The loan is evidenced
by a Promissory  Note dated  August,  1997.  The Note bears  interest at 12% per
annum and is due August, 1998.


NOTE 6:               NOTES AND MORTGAGES PAYABLE
<TABLE>
<CAPTION>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

                  At September 30, 1997, the notes and mortgages payable consist
of the following:

Two mortgages payable, dated August 19, 1996, in the original amount of $250,000
each, payable in monthly  installments of $1,971 each, bearing interest at 8.25%
and  maturing  on  September  1,  2021.  The  mortgages  are  secured  by rental
properties.


                                                                                   $  493,160

Mortgage  payable,  dated November 30, 1992, in the original amount of $400,000,
bearing interest at 4% plus contingent interest  participation payments upon the
sale of  subdivided  lots.  This  mortgage is secured by property with a cost of
approximately $450,000 and the personal guaranty of the principal stockholder of
the  Company.  This  mortgage  requires  semi-annual  payments of interest  only
commencing June 30, 1993 through October 31, 1997 when the mortgage  matures and
contingent  interest  participation  payments upon the sale of  subdivided  lots
becomes due. For the year ended  September 30, 1997,  two  subdivided  lots were
sold  under this  participation  agreement.  Pursuant  to such  sales,  mortgage
repayments totaling $80,000 and interest participation payments totaling $36,000
were  made.  The  balance  due  under the  mortgage  was paid in  December  1997
including additional contingent interest of $90,000.

                                                                                      200,000


Mortgage payable dated March 26, 1997, in the original amount of $215,400,  with
monthly interest at prime plus 1.5% payable in monthly installments until April,
1999 when unpaid  principal and interest is due. The mortgage is secured by land
and building having a cost of approximately $415,000.

                                                                                       210,234



                                F-15
<PAGE>




                               THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES

                                   Notes to Consolidated Financial Statements

                                                    September 30, 1997

NOTE 6:               NOTES AND MORTGAGES PAYABLE (continued)

Mortgage  payable  dated  January  17,  1991 and  amended  June 14,  1994 in the
original amount of $180,000, payable in monthly installments of $1,975 including
interest through February 1, 2006. Interest is payable at an adjustable interest
rate (10.125% at September 30, 1997) which is determined annually.  The mortgage
is secured by land and building having a cost of approximately $200,000.


                                                                                      130,295

Construction  loan dated June 1997, in the original amount of $363,750,  payable
monthly with interest only at 9.75% until  September 1998 when the principal and
unpaid interest is due. The loan is secured by a building lot at the development
known as the Polo Grounds.


                                                                                      300,644

Acquisition and development loan dated May, 1996, payable with interest at prime
plus 1%. This loan was paid in full in December, 1997 when the development known
as Jagger Woods, the property securing the debt, was sold.


                                                                                    1,162,866

Loan payable with  interest at 12% per annum and is due on demand.  Repayment of
this loan is guaranteed by the principal stockholder of the Company.

                                                                                      100,000

Legal  settlement  obligation  from 1991 to a  contractor  is  payable  in equal
semi-annual  installments  on June 1 and  December  1 of each year  with  annual
payments of $8,120.

                                                                                       19,680

Other notes and mortgages                                                               6,125
                                                                                  ------------
Total Notes and Mortgages Payable                                                   2,623,004
Less: Current Portion                                                              (1,811,393)
                                                                                   -----------

Total Long Term Notes and Mortgages Payable                                       $   811,611
                                                                                   ===========

</TABLE>

                  Annual  maturities  of  notes  and  mortgages  payable  are as
follows:

For the Period Ended
    September 30,

1998                                      $1,811,393
1999                                          44,242
2000                                          38,628
2001                                          42,533
2002                                          46,841
Thereafter                                   639,367
                                             --------
Total Notes and Mortgages Payable         $2,623,004
                                          ==========


             During the fiscal  year  ended  September  30,  1997,  interest  of
$296,775 was incurred, of which $191,860 has been capitalized.

                                       F-16

<PAGE>




                         THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES

                               Notes to Consolidated Financial Statements

                                                    September 30, 1997




NOTE 7:               FAIR VALUE OF FINANCIAL INSTRUMENTS

Effective December 31, 1995, the Company adopted SFAS No. 107, "Disclosure about
Fair Value Financial  Instruments",  fair value of financial  investments  which
requires   disclosing  fair  value  to  the  extent  practicable  for  financial
instruments  which are recognized or unrecognized in the balance sheet. The fair
value  of  the  financial   instruments  disclosed  herein  is  not  necessarily
representative  of the amount that could be  realized  or settled,  nor does the
fair value amount  consider the tax  consequences  of realization or settlement.
The following table summarizes financial instruments by individual balance sheet
accounts as of September 30, 1997:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>


                                                      Carrying Amount                 Fair Value
                                                      --------------                 -----------
Debt maturing within one year                           $1,811,393                   $1,811,393
Long-term debt                                             811,611                      811,611
                                                       -------------                 ----------

Totals                                                  $2,623,004                   $2,623,004
                                                        ==========                   ==========

</TABLE>

                  For certain  financial  instruments,  including  cash and cash
equivalents, trade receivables and payables, short term loans, customer deposits
and short-term debt, it is estimated that the carrying amount  approximated fair
value because of the near term maturities of such obligations. The fair value of
long-term debt is based on current rates at which the Company could borrow funds
with  similar  remaining  maturities.  The  carrying  amount of  long-term  debt
approximates fair value.


NOTE 8:               PRIVATE PLACEMENT

                  In  February of 1996,  Harmat  Organization,  Inc.  (Delaware)
                  offered  500,000  units at $1.00 per unit as part of a private
                  placement  transaction.  The  units  consist  of one  share of
                  common stock,  three Series A warrants entitling the holder to
                  purchase  three  shares of common stock for $6.00 for a period
                  of four years and one Series B warrant entitling the holder to
                  purchase  one share of common  stock for $9.00 for a period of
                  four  years.  The  shares  of common  stock  and the  Series A
                  warrants  were  registered  as  part  of  the  initial  public
                  offering.  On February 22, 1996, the Company received proceeds
                  of $500,000 from the private placement.
<TABLE>
<CAPTION>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

                                         No. of                               FMV at          No. of
      Date of                           Warrants           Exercise           Date of         Warrants
    Grant               Type            Issued             Price              Grant            Exercised

February 1996         Series A        1,500,000          $  6.00            $  5.75            -
February 1996         Series B          500,000          $  9.00            $  5.75            -
                                      ----------

Total                                 2,000,000
                                      ----------

</TABLE>

                                          F-17
<PAGE>



                         THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES

                              Notes to Consolidated Financial Statements

                                                    September 30, 1997




NOTE 9:               COMMON STOCK

                  Capital Contribution

                  On  August  3,  1996,  the  Company's  principal   stockholder
contributed 500,000 shares of the Company's common stock to the Company.
The 500,000 contributed shares were cancelled.

                  Initial Public Offering

                  In September  1996,  the Company  completed the initial public
offering of 862,500 units  (including the 112,500  underwriter's  over-allotment
shares)  at  $5.75  per  unit  resulting  in  net  proceeds  to the  Company  of
$3,929,673.


NOTE 10:              COMMITMENTS AND CONTINGENCIES

                  Land Contract

In July 1997, the Company deposited  $100,000 in escrow relating to the proposed
acquisition  of  certain  real  estate  properties  in  Florida.  This money was
refunded  in  October,  1997 as the  Company  was no  longer  interested  in the
properties.  In  addition,  the  Company  entered  into a contract to purchase a
parcel of unimproved  land in Westhamption  Beach,  N.Y. for $227,000 and made a
$10,000 deposit pursuant to such contract as of September 30, 1997.

                  Legal Proceedings

The Company is involved in legal  proceedings  which are considered  routine and
incidental to its  business.  The Company  believes  that the legal  proceedings
which are  presently  pending  have no potential  liability  which would have an
adverse material effect on the financial condition,  operations or cash flows of
the Company. Due to the inherent uncertainty of the legal process, however, this
assessment may be subject to change in the near term.


   Commitments and Stock Option Plans

The Company has two stock-based  compensation  plans, which are described below.
The Company applies APB Opinion No. 25 and related interpretations in accounting
for its plans. Accordingly, no compensation cost has been recognized.


A)    The Plan for Incentive Compensation of Matthew Schilowitz (the "Schilowitz
Incentive Plan"), who is the principal stockholder,  was adopted by the Board of
Directors and approved by the Company's  sole  stockholder  on March 1, 1996 and
amended August 3, 1996.  Pursuant to such plan, Mr.  Schilowitz has been granted
an option to purchase up to an aggregate of 500,000 shares of common stock at an
exercise  price of $5.75  per  share  ($1.125,  as  amended).  In the  event the
Company's  earnings  before taxes first equals or exceeds an amount listed below
for any  fiscal  year  ending  after the date of the  Company's  initial  public
offering, the shares shall be released to such stockholder as follows:

Earnings Before Taxes                     Shares to be Issued

         $   750,000                      250,000
         $ 1,500,000                      250,000


                                   F-18

<PAGE>



                       THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES

                          Notes to Consolidated Financial Statements

                                             September 30, 1997






NOTE 10:              COMMITMENTS AND CONTINGENCIES (continued)

If  the  above  earnings  levels  are  achieved,   the  Company  will  recognize
compensation  expense equal to the difference  between the fair market value and
the exercise price at the time the performance conditions are achieved. Issuance
of the shares may result in substantial  compensation  expense to the Company in
future years.


B) In February 1996, the Board of Directors adopted the 1996 Joint Incentive and
Non-Qualified Stock Option Plan (the "Plan") providing for the granting of up to
400,000  shares of the  Company's  common stock.  In January  1997,  the Company
granted five year options under the Plan  providing for 10,000 shares at a price
of $2.125 per share to four  directors and two key employees of the Company.  In
March 1997, the Company's chief executive officer and principal  shareholder was
granted  300,000  shares at an  exercise  price of $2.337 per share  ($1.25,  as
amended).

The fair value of each  option  grant is  estimated  on the grant date using the
Black-Scholes   option-pricing   model  with  the   following   weighted-average
assumptions used for grants in 1997:  dividend yield of 0%,  risk-free  interest
rate of 6.3%, expected volatility of 109%, and expected lives of 5 years for the
options.


                  A summary of the status of the Company's  stock option plan as
of September 30, 1997, and the changes during the year ending September 30, 1997
is presented below:
<TABLE>
<CAPTION> 
<S> <C> <C> <C> <C> <C> <C>


                                                                         Weighted-Averaged
                   Fixed Options                      Shares             Exercise Price
                   -------------                      ------         ------------------
October 1, 1996                                       0                       -
Granted                                               360,000             $  1.40
Exercised                                             0                       -
Forfeited                                             0                       -
                                                      -----------     -------------

September 30, 1997                                    360,000             $  1.40
                                                      =======             ========


Exercisable at September 30, 1997                     360,000
Weighted-average fair value of
    options granted during the year                                       $  1.71



</TABLE>

                                       F-19
<PAGE>




                             THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES

                                  Notes to Consolidated Financial Statements

                                                    September 30, 1997



NOTE 10:              COMMITMENTS AND CONTINGENCIES (continued)

                  The following table summarizes  information  about fixed stock
options outstanding at September 30, 1997.
<TABLE>
<CAPTION>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

                                 Outstanding Options                                      Exercisable Options
    -------------------------------------------------------------------------    -----------------------------------      
                          Number        Weighted average        Weighted -          Number
    Outstanding        Outstanding          Remaining             Average        Exercisable        Weighted-average
  Exercise Price        9/30/97        Contractual Life      Exercise Price       At 9/30/97         Exercise Price

$1.25 to $2.215       360,000              4.5 years         $    1.40              360,000      $   1.40


</TABLE>

                  If the  Company  had used  the  fair  value  based  method  of
accounting  for its employee  stock option plan,  as  prescribed by Statement of
Financial Accounting No. 123, compensation cost included in the net loss for the
year ended  September 30, 1997 would have increased by  approximately  $614,000,
resulting  in a net loss of  $(1,576,000),  net of tax,  and  loss per  share of
$(.60).

                  Employment Agreement

On April 1, 1996, the Company entered into a five year employment agreement with
the president and chief executive officer,  who is also the Company's  principal
stockholder,  effective  September  1996,  for a base  salary of  $105,000  with
increments  of $50,000  each year  thereafter.  In  addition,  the officer  will
receive a bonus of 5% of pre tax  annual  earnings  and is  granted  options  to
purchase up to an  aggregate of 500,000  shares of the Company  common stock for
ten years,  exercisable at $1.125 per share with rights vesting upon  attainment
of certain earnings levels (see above).


NOTE 11:              RELATED PARTY TRANSACTIONS

In April,  1997,  the  Company  purchased  a  building  lot from  Emerald  Woods
Development Corp. ("Emerald Woods") (of which Matthew Schilowitz is a 50% owner)
for  $195,000  and is in contract to  construct a house on such lot. The Company
purchased 2 additional  building lots from Emerald  Woods in December,  1997 for
$190,000  and  simultaneously  sold  them to an  unaffiliated  third  party  for
$200,000 (see Note 13).


The Company loaned $67,600 to entities related to Matthew Schilowitz. Such loans
are due on demand and have no stated interest rate.


Notes payable to related parties  aggregating  $90,000 were satisfied during the
fiscal  year ended  September  30,  1997.  Accrued  interest of $42,000 is still
payable as of September 30, 1997.


                  The  Company  paid legal  fees of  approximately  $35,000  and
$110,000  in 1997 and 1996,  respectively,  to a firm in which a director of the
Company is a partner.



                                  F-20

<PAGE>


                      THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES
                           Notes to Consolidated Financial Statements

                                                    September 30, 1997


NOTE 12:              SEGMENT INFORMATION

The Company's operations are classified into two industry segments: construction
and rental. The following is a summary of segment information for 1997 and 1996:
<TABLE>
<CAPTION>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

                                               Construction            Rental                  Consolidated
Revenue from Non-Affiliates:
1997                                       $ 1,390,883             $    200,908            $ 1,591,791
                                           ===========             ============            ============
1996                                       $ 2,573,836             $    153,944            $ 2,727,780
                                           ===========             ============            ============

(Loss) Income from Operations:
1997                                       $(1,055,687)            $    107,301            $  (948,386)
                                           ============            ============            ============
1996                                       $  (251,043)            $     23,104            $  (227,939)
                                           =============           ============            ============

Identifiable Assets:
1997                                       $  4,439,120             $  1,353,595            $ 5,792,715
                                           ===========             ============            ============
1996                                       $  3,932,763             $  1,392,598            $ 5,325,361
                                           ===========             ============            ============

Depreciation and Amortization:
1997                                       $      6,215             $     31,102            $    37,317
                                           ==============           ============            ============
1996                                       $      4,658             $     22,405            $    27,063
                                           ==============           ============            ============

Capital Expenditures:
1997                                       $       -0-              $    123,228            $    123,228
                                           ==============           ============            ============
1996                                       $      16,457            $     31,622            $     48,079
                                           =============            ============            ============
</TABLE>

NOTE 13:              SUBSEQUENT EVENTS

In  December,  1997,  the Company  sold part of its interest in the Jagger Woods
Development and certain other  properties to an unaffiliated  third party for an
aggregate  purchase  price of  $3,130,000.  The Company will recognize a gain of
approximately $1,130,000 on this transaction.

                  The  Company  loaned  $78,000  to several  unaffiliated  third
parties.

                  The Company formed a new subsidiary, Harmat Hospitality, Inc.,
to purchase and operate resort properties.

The Company is in negotiations to purchase approximately 7 acres of zoned resort
residential property in Greenport, N.Y. to construct a 69 unit waterfront resort
with  pool and  tennis  courts.  A $75,000  deposit  was made in  October,  1997
pursuant to the purchase agreement.

The Company is in contract to sell three homes and has a  construction  contract
to build another home. The contracts  total  $1,925,400.  The Company  estimates
total land and construction costs to be approximately $1,745,000.


In October,  1997, the Company entered into an acquisition agreement to purchase
2.50%  of a  Class  A  limited  partnership  interest  in  Woodland  Development
Associates  (of which Matthew  Schilowitz  owns 33.33%) for a purchase  price of
$50,000. Woodland Development Associates owns 3 building lots in East Quogue.

                                   F-21