SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K
                                  ANNUAL REPORT

                       Pursuant to Section 13 or 15(d) of
                       the Securities Exchange Act of 1934

                   For the fiscal year ended December 29, 1998
                           Commission File No. 0-20498

                            TOPS APPLIANCE CITY, INC.
             (Exact name of registrant as specified in its charter)

New Jersey                                                   22-3174554
--------------------------------------------------------------------------------
(State of Incorporation)                                (I.R.S. Employer ID No.)

45 Brunswick Avenue, Edison, NJ                                08818
--------------------------------------------------------------------------------
(Address of principal executive offices)                      (Zip Code)


Registrant's phone number, including area code:              (732) 248-2850
Securities registered pursuant to Section 12(b) of the Act:  None

Securities  registered  pursuant to Section 12(g) of the Act: Common Stock, No 
Par Value


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

     The  aggregate  market value of Common Stock held by  non-affiliates  based
upon the average price of such stock as quoted on NASDAQ for March 26, 1999, and
reported by the National Quotation Bureau, Inc. was $3,296,319. Shares of Common
Stock held by each officer and director,  and each person who owns 5% of more of
the  outstanding  Common  Stock have been  excluded in that such  persons may be
deemed to be affiliates.

        Registrant's  Common Stock (no par value) outstanding at March 26, 1999,
was 15,305,537 shares.


Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of  Regulation  S-K is not  contained  herein  and will not,  to the best of the
Registrant's   knowledge,  be  contained  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment to this Form 10-K ___

                           Total Number of Pages: 93
                              Exhibit List: Page 36

Documents Incorporated by Reference: (a) Proxy Statement for 1999 Annual Meeting
<PAGE>


                                TABLE OF CONTENTS



              ITEM                                                        PAGE

1.  Business.............................................................  3

2.  Properties........................................................... 10

3.  Legal Proceedings.................................................... 10

4.  Submission of Matters to a Vote of Security Holders.................. 10

5.  Market for the Registrant's Common Stock and Related Stockholder 
    Matters.............................................................. 10

6.  Selected Financial Data.............................................. 11

7.  Management's Discussion and Analysis of Financial Condition and
    Results of Operations................................................ 12

8.  Financial Statements and Supplementary Data.......................... 17

9.  Changes in and Disagreements with Accountants on Accounting
    and Financial Disclosure............................................. 35

10. Directors and Executive Officers of the Registrant................... 35

11. Executive Compensation............................................... 35

12. Security Ownership of Certain Beneficial Ownership and Management.... 35

13. Certain Relationships and Related Transactions....................... 35

14. Exhibits, Financial Statement Schedule and Reports on Form 8-K....... 36


<PAGE>

                                     PART I

                                ITEM 1. Business

                                     General

     Tops Appliance City, Inc.  ("Tops" or the "Company") is a leading  retailer
of home appliances and consumer electronics,  serving a customer base within the
Greater New York Metropolitan Area. The Company operates nine retail megastores,
ranging  in size from  20,000 to  120,000  square  feet,  in  heavily  populated
locations within New Jersey and New York. The Company also operates a commercial
division,  selling  to small  independent  retailers,  builders  and  landlords,
corporate buying groups, major corporations and municipalities,  which accounted
for approximately 12.0% and 9.2% of its net sales and service revenues in fiscal
1998 and fiscal 1997, respectively.  Additionally, Tops offers a full selection
of its products and services over the Internet, through a web site, electronics.
net, as further described below.

     Tops'  stores  display  a  broad  selection  of  high  quality,  nationally
recognized brand names in each of its product categories.  The Company's primary
products include major appliances,  such as  refrigerators,  washers and dryers,
electronics   including   televisions,   VCRs,   DVDs,   camcorders,   room  air
conditioners,  personal electronics,  home and car audio equipment,  home office
products, small electronic appliances, and other related products such as vacuum
cleaners,  seasonal goods, housewares,  related accessories and extended service
plans.  The Company  maintains a knowledgeable,  well-trained  sales force which
builds and reinforces  customer  confidence in Tops' value-driven  merchandising
strategy.  As part of that  strategy,  the  Company  offers a number of customer
services,  such as home delivery and removal of old appliances.  Tops emphasizes
competitive  pricing in its  advertising  and guarantees the lowest price on its
products  through a variety of offers,  including a 45 day best price  guarantee
and a $500 best price challenge.

     The Company  experienced a comparable  sales  improvement of 4.5% in fiscal
1998 compared to fiscal 1997, the first such increase since fiscal 1992.

     In fiscal 1997, the Company contracted with The Kitchen Place Inc. ("TKP"),
a provider of kitchen  cabinetry,  countertops and related  hardware.  TKP sells
its' products within  designated areas of several of the Company's  stores,  and
offers  design and  installation  services.  Tops  incurs no  expense  from this
arrangement,  and receives a commission on each TKP order placed.  During fiscal
1998,  the  Company  expanded  the  Kitchen  Place  concept  to four  stores and
operated,  from May through July, six room air conditioner  outlets in Manhattan
and Brooklyn.

     In October, 1998, the Company launched Electronics.Net LLC, a joint venture
with Cybershop Holding Corp. ("Cybershop"), in which the Company maintains a 49%
interest.  Electronics.Net LLC is engaged in the business of selling high volume
electronics,  computers and appliance  merchandise  through the use of web-based
electronic commerce.


Business Strategy

     Tops' business  strategy is to be the dominant  retailer of home appliances
and consumer  electronics in each of its markets by developing  customer loyalty
through a marketing  program  that  emphasizes  price,  service  and  selection.
Management  believes that the Company's  strong sales and customer loyalty are a
result of Tops'  pricing,  customer  service and relations,  product  selection,
advertising  strategy,  store  environment,  store locations and the quality and
experience of its personnel.

     Pricing.  The  Company's  policy is to offer its  products at low prices in
each of its markets.  The Company monitors prices at competing stores on a daily
basis and adjusts its prices as necessary to adhere to its "everyday best price"
strategy.  The Company  believes that a "sale"  oriented  marketing  strategy is
still necessary in this competitive industry and marketplace. Tops offers a $500
pre-sale  best price  challenge,  which  encourages  the consumer to shop at the
Company's  stores in order to ensure  receiving the lowest  available price. The
Company also offers a 45 day best price  guarantee,  which provides the consumer
with price protection following the sale.

     Customer Service and Relations. The Company is committed to a high level of
service for its  customers,  providing both value and  responsiveness.  Included
among the services it offers are home  delivery  and removal of old  appliances,
cartons and  packaging.  The Company  also offers a liberal  return

                                      3
<PAGE>


and  exchange   policy.   Tops  maintains  a  staff  of  customer   service
representatives  who answer telephone  inquiries six (6) days per week regarding
product use,  delivery,  service,  warranties and other customer  concerns.  The
Company  also  staffs its  stores  with  technically  trained  customer  service
representatives who are responsible for free instructional  assistance,  product
analysis and customer service.

     Product  Selection.  Tops offers a broad range of high quality,  nationally
recognized  brand names  within each product  category and at all price  points,
with  greater  inventory  depth at the  middle to higher  price  level than most
retailers. The Company's stores display in excess of 5,000 products and maintain
over 9,000  products in  inventory.  The Company  offers the full line of models
from each of its vendors in all of the Company's major product  categories.  The
Company's policy is to maintain all products in stock for immediate availability
to the customer.

     Advertising. The Company utilizes an advertising strategy that stresses the
offering of nationally  recognized  brands at significant  savings.  The Company
generally  advertises  weekly  in 8 to 14  regional  and local  newspapers,  and
supplements this with radio, television and billboard advertising.  In addition,
Tops operates a direct mail program to Tops charge card  customers.  The Company
also uses a variety of promotional sales and sales events to increase traffic in
its stores.

     Store Environment. Tops' in-store environment seeks to create an atmosphere
of  excitement  through  the  intensity  of  its  visual  merchandising,   sales
promotion,  signage and layout,  and the  quality,  value and variety of product
assortment.  The stores have an open, clean, bright,  exciting atmosphere,  with
disciplined  product  presentation,  attractive  in-store displays and efficient
check-out  procedures,  designed  to  create  a  friendly,  convenient  shopping
experience. Tops' sales force is given extensive and ongoing training to provide
customers with knowledgeable, prompt and courteous assistance.

     Store Locations.  The Company's strategy is to locate its stores in heavily
populated areas that are easily accessible from major highways and have adequate
parking for high sales volume.

     Personnel  Development.   The  Company  devotes  significant  resources  to
training  its  employees,  both to  ensure  basic  selling  skills  and  product
knowledge and to enhance customer  relations.  The Company emphasizes  promoting
employees from within the organization. This policy, combined with above-average
compensation,  comprised  of salary,  commission  and  incentives  for its sales
force, has produced loyal,  motivated  employees with a low turnover record. The
Company believes that its employees are among the most qualified and experienced
in its industry.

Products

     The  Company's   stores  stock  over  9,000  home  appliance  and  consumer
electronic  products.  The  Company  sells  brand-name  products,  offering  its
customers a large  selection  of styles and price  points in each of its product
categories.  The Company  sells no private  label or house  brands.  The Company
displays in excess of 5,000 products in its stores, in the following categories:


                                       4
<PAGE>

<TABLE>
<CAPTION>

   CATEGORY                    PRODUCTS                        PRINCIPAL BRAND NAMES
<S>                               <C>                          <C> 


Major Appliances            Refrigerators,                     Amana, Frigidaire, General Electric, Hotpoint,
                            Dishwashers,                       Jenn-Air, KitchenAid, Magic Chef, Maytag
                            Washers/Dryers                     Roper, Sub Zero, Westinghouse, Whirlpool

Televisions                                                    Daewoo, Hitachi, JVC, Panasonic,
                                                               Philips, Proscan, Quasar, RCA, Samsung,
                                                               Sharp, Sony, Toshiba, Zenith

Video                       VCRs, DVD                          Hitachi, JVC, Panasonic, Philips
                            Camcorders                         RCA, Samsung, Sony, Toshiba, Zenith



Ranges/                     Ranges,                            General Electric, Jenn-Air, Magic Chef, Panasonic,
Microwaves                  Cooktops,                          Sharp, Tappan, Thermador, Viking, Whirlpool
                            Range Hoods,
                            Microwaves

Air Conditioners                                               Carrier, Emerson, Fedders, Friedrich,
                                                               General Electric, Goldstar, Quasar, Samsung,
                                                               Sharp, Whirlpool

Audio                       Stereo Systems,                    Aiwa, Bose, Denon, Infinity, JBL, JVC, Kenwood, Klipsch, Mission,
                            Components and                     Onkyo, Pioneer, RCA, Sony ES, Technics,
                            Speakers                           Yamaha

Electronics                 Cameras, Walkman                   AT&T, Bushnell, Canon, Fuji, General Electric, 
                            Radar Detectors,                   Hitachi, JVC, Kenwood, Magnavox, Minolta, Nikon,
                            Portable Radios,                   Olympus, Panasonic, RCA, Samsung, Sony,
                            Audio and Car                      Yashica
                            Alarms, Telephones,                
                            Cellular Phones

Home Office                 Computers,                         Brother, Canon, Compaq,
Products                    Printers, Fax                      Epson, Hewlett Packard,
                            Machines,                          IBM, Lexmark, Sharp, Sony, Toshiba
                            Wordprocessors,
                            Typewriters,
                            Copiers

Vacuums,Seasonal            Vacuum Cleaners,                   Black and Decker, Braun, Corningware,
Items/Housewares            Humidifiers,                       Cuisinart, Eureka, Farberware,
                            Fans,                              General Electric,  Holmes, Hoover,
                            Space Heaters,                     Pfaltzgraff, Sharp, Sunbeam, T-Fal,
                            Small Electrical                   Weber, Westinghouse
                            Appliances
                            (coffee makers,
                            blenders, etc.),
                            Barbecue Grills,
                            Cookware,
                            Dinnerware

</TABLE>


                                       5
<PAGE>


         The Company  tailors its product mix to meet the needs of its customers
by regularly  evaluating  sales and profit  performance for each of its products
through its computerized perpetual inventory system. Product mix by category has
remained  relatively stable over the past five years.  Management  believes that
this  stability  makes the Company less  vulnerable to short term product trends
and  changing  economic   conditions.   The  following  chart  demonstrates  the
percentage of retail and commercial  sales  represented by each of the Company's
product categories during the past three years:

<TABLE>
<CAPTION>


                                                         Percent of Total Sales
Product Category                                     1996        1997       1998
                                                   --------    --------   --------
<S>                                                  <C>         <C>         <C>

Major Appliances (Refrigerators,
  Washers, Dryers) .........................         21.4%       20.8%       19.1%
Ranges/Microwaves/Dishwashers ..............         13.4        13.5        12.4
Air Conditioners ...........................          7.2        10.2         8.9
Vacuums/Seasonal Items/Housewares ..........          5.3         4.7         4.5
                                                    -----       -----       -----

   Subtotal ................................         47.3        49.2        44.9

Televisions ................................         14.7        14.6        14.5
Video/Projection Televisions ...............         11.2        11.3        12.1
Audio ......................................          6.9         6.5         6.8
Home Office and Other
  Consumer Electronics .....................         15.6        13.8        16.1
                                                    -----       -----       -----

   Subtotal ................................         48.4        46.2        49.5

Extended Service Plans and
  Miscellaneous Income .....................          4.3         4.6         5.6
                                                    -----       -----       -----

                                                    100.0%      100.0%      100.0%
                                                    ======      ======      ======

</TABLE>



Extended Service Plans

     The Company offers extended service plans for most categories of its retail
products.  The extended service plans cover services or time periods not covered
by the manufacturer's  warranty on such products and are  non-cancelable.  These
plans  are   administered  for  the  Company  by  Warrantech   Corporation,   an
unaffiliated  third party,  which performs the repair  services  required by the
plans through factory authorized service centers.  Warrantech is required by its
agreement  with the Company to maintain  insurance to protect the Company in the
event  that  Warrantech  fails to fulfill  its  obligations  under the  extended
service plans.  The Company sells the extended  service plans to Warrantech on a
non-recourse  basis. In 1990, the Company began offering  customers who purchase
five-year  extended  service  plans  vouchers  entitling  them to certain  store
discounts, subject to certain restrictions, if the customer does not utilize the
extended service contract during the five-year term. The Company has established
a reserve on its balance  sheet to cover the  potential  cost of honoring  these
vouchers.  Gross margins from the sale of extended service plans are higher than
gross margins from the sale of the Company's other products.

Purchasing

     The  Company  offers  a broad  range of name  brands  within  each  product
category at all price points,  with a greater  inventory  depth at the middle to
higher price level than most retailers.  Because Tops purchases complete product
lines in large volumes,  with an emphasis on middle to higher priced models, the
Company  is  able  to  obtain  quality   products  at  competitive   prices  and
discretionary  advertising  subsidies  from vendors to promote the sale of their
products.  Although  certain vendors are  significant to the Company's  business
because  of their  name  recognition,  the  Company  does not  believe  that its
business is dependent  upon any one vendor or  particular  group of vendors.  In
fiscal  1998,  two vendors  each  accounted  for more than 10% of the  Company's
purchases.  Tops purchases over 70% of its products from the 15 vendors shown in
the following chart.


                                       6
<PAGE>


                                 Top 15 Vendors

   Aiwa                     G.E. / Hot Point              Sharp
   Compaq                   JVC                           Sony
   Fedders                  Maytag / Magic Chef           Thomson / RCA
   Friedrich                Packard Bell                  Whirlpool /Kitchen Aid
   Frigidaire               Panasonic                     Zenith


     The  Company's  merchandise  purchasing  is managed  through its buying and
merchandising  group,  consisting of the Chief Executive  Officer and a staff of
eight buyers. Each buyer is responsible for purchasing products within specified
product categories.  Within each category, the buyer is responsible for choosing
the product mix, insuring product  availability based upon the rate of sale, and
negotiating prices, payment terms and other vendor support items. The buyers are
also responsible for analyzing potential new business.

     The Company  generally  orders  inventory  one month in advance of delivery
dates,  but  provides  key  vendors  with 120 day  rolling  forecasts  to ensure
availability of important items.


Advertising

     The Company uses a "price and item" approach in its advertising,  stressing
the  offering  of  nationally  recognized  brands at  significant  savings.  The
emphasis of the  Company's  advertising  is to stress the  Company's low prices,
product  selection  and  customer  service  features,  such  as  home  delivery.
Advertisements  are placed in 8 to 14 regional  newspapers  weekly and on radio,
television,  and billboards.  The Company also uses a circular program showing a
broader  selection of advertised  products.  Advertisements  are complemented by
in-store  signage  highlighting  brand-name  products and values.  The Company's
advertising  strategy  includes a series of special  events,  and private  sales
throughout  the year to  generate  traffic  and to  maintain a sense of shopping
excitement.  Tops also  employs  direct  mail to its private  label  credit card
holders and to other selected groups.

     Tops employs a six-person  staff to coordinate its  advertising and develop
promotional  strategies.  Certain manufacturers provide the Company with various
discretionary funding subsidies to promote the sale of their products.

Customer Service and Relations

     Tops places a strong emphasis on customer  service and relations as part of
its business  strategy.  The Company  emphasizes the quality of its sales force,
devoting  significant  resources  to  training,   and  is  committed  to  having
sufficient  sales people  available  at all times to service all  customers in a
store.

     The  Company  maintains  a staff of customer  service  representatives  who
respond  to   customer   calls  six  days  per  week.   The   customer   service
representatives are trained to answer questions regarding product use, delivery,
service,  warranties and other customer  concerns.  Tops has regular contacts at
each of its  vendors who enable  Tops to respond  promptly  to specific  product
questions.

Customer Credit

     Tops'  customers  may pay for  their  purchases  with the Tops  proprietary
credit card, Visa, Master Card, American Express, Discover, cash, check or debit
card. The Company  periodically  offers extended payment term financing programs
which are often sponsored by manufacturers.

     Since  1987,  the  Company's  proprietary  credit  card  program  had  been
administered  by  General  Electric  Credit  Corporation  ("GECC"),  through  an
arrangement  with Monogram Bank of Georgia.  This agreement with GECC expired on
January 7, 1999 and was not renewed. With the pending expiration in January 1999
GECC, during fiscal 1998,  limited the types of financing programs that Tops was
able to



                                       7
<PAGE>

offer to the cardholders.  As a result of the limited  financing offers,
sales on the Tops credit card  dropped  from 24.8% of total sales in fiscal 1997
to 15.5% of total sales in fiscal 1998.

     Tops entered into a five year agreement with Household  Retail Systems Inc.
("HRSI") to offer a Tops credit card to its' customers.  Tops began to offer its
customers the new Tops credit card on January 8, 1999.

                                                    1996        1997      1998

Tops Credit Card ..........................         25.4%       24.8%     15.5%
Visa, MasterCard, American
Express, Discover .........................         48.3%       47.6%     54.4%
Cash, Check, Debit Card, Other ............         26.3%       27.6%     30.1%


Warehousing and Distribution

     The Company  operates a 350,000  square  foot  warehouse  and  distribution
center at its Edison, New Jersey headquarters,  from which it serves all nine of
its stores. The center has three subdivisions, devoted to receiving, storage and
home delivery, respectively. The Company believes this facility has the capacity
to service  existing stores and commercial  operations and at least 3 additional
stores. The facility is leased from the Company's former Chairman, who remains a
principal  shareholder.   See  Item  13  -  Certain  Relationships  and  Related
Transactions.

     The Company  purchases  in bulk and  utilizes  distribution  personnel  and
systems to transfer  merchandise to store locations and to manage the quantities
moved  into and out of the  warehouse.  The  distribution  system  supports  the
Company's advertising strategy by prioritizing and processing needed merchandise
through  the  distribution  center.  Store  inventory  levels are  reviewed  and
adjusted constantly toward calculated targets in most product categories.

     Tops makes  approximately  3,500 product  deliveries per week to customers'
homes  from  its  distribution   center,   using  trucks  owned  by  independent
owner-operators   and   administered   by  Merchants   Home   Delivery   Service
("Merchants") and Westbury Terminals,  Inc. of Georgia ("WTI"). The Company uses
a computerized delivery system to coordinate routing and increase  efficiencies.
In addition,  the Company  makes  deliveries  to its stores every day to support
inventories  of items that  customers can take with them.  The Company pays only
for  completed  deliveries  and,  at  a  lower  rate,  for  certain  uncompleted
deliveries.  The Company's  agreements provide that Merchants and WTI assume the
risk of loss for merchandise upon taking delivery from the Company.  The Company
has also contracted with WTI for the  transportation of merchandise  between its
distribution center and store locations.



Commercial Sales Division

     The Company  operates a  commercial  sales  division  which  accounted  for
approximately  12.0% and 9.2% of the Company's net sales and service revenues in
fiscal 1998 and fiscal 1997, respectively. The commercial operations are made up
of five categories: (i) sales to small independent retailers; (ii) telemarketing
sales  through  several  corporate  benefit  buying  clubs in which the  Company
participates;  (iii)  sales  to  builders  and  landlords;  (iv)  sales to major
corporations  for their  various gift and incentive  programs,  and (v) sales to
exporters.  These  sales are  generally  made at lower  gross  margins  than the
Company's retail sales, but are made with less operating expense to the Company.

                                       8
<PAGE>

Management Information and Control Systems

     The Company has placed substantial  emphasis on its management  information
and  control  systems.  Control of the  Company's  merchandising  activities  is
maintained by a sophisticated set of on-line systems,  including a point-of-sale
and sales reporting  system.  These systems are completely  integrated and track
merchandise  from order through sale. They are used to compare actual to planned
results and to highlight areas requiring management attention.

     All  operational  data is fully  integrated  with the  Company's  financial
systems. The inventory  information in the systems is verified through a program
of cycle counting and testing.

Year 2000 Compliance

     The Company expects to complete its year 2000  remediation by October 1999.
However,  the  Company's  ability to execute its plan in a timely  manner may be
adversely  affected  by a  variety  of  factors,  some of which are  beyond  the
Company's  control  including  turnover  of  key  employees,   availability  and
continuity  of  consultants  and the  potential  for  unforeseen  implementation
problems.  The Company's  business could be interrupted if the year 2000 plan is
not implemented in a timely manner, if the Company's vendors,  service providers
or other third parties are not year 2000 ready or if the  Company's  contingency
plans are not successful.  Based on current available information,  and although
no  assurance  can be  given,  the  Company  does  not  believe  that  any  such
interruptions  are likely to have a  material  adverse  effect on the  Company's
results of operation, liquidity or financial condition.


Expansion Strategy

     The Company  continues  to  evaluate  expansion  plans in existing  markets
within the Greater New York Metropolitan Area. The Company has plans for a tenth
store in  Brooklyn,  New York,  which it  intends  to open in fiscal  1999.  The
availability of financial resources may limit the Company's expansion plans, and
no assurances can be given that the Company will expand.

     In evaluating store locations,  the Company considers a number of criteria,
including   proximity  to  its  existing  stores  and  the  size,  strength  and
merchandising  philosophy  of potential  competitors.  In selecting a site,  the
Company  searches for  buildings  which are between  35,000 - 60,000 square feet
with ample  customer  parking areas to support high sales  volumes.  The Company
also considers local demographics, traffic patterns and overall retail activity.
Although the Company seeks  locations that are  conveniently  reached and highly
visible  from  major  highways,  the  stores  need  not be  located  in the most
important retail location in the particular market.


Competitors

     The Company operates in a highly competitive marketplace. The Company faces
competition for customers from traditional  department stores,  discount stores,
warehouse clubs and other  specialty  retailers.  Some of these  competitors are
units of large national or regional  chains that may have greater  financial and
other resources than the Company.  Circuit City, a national retailer of consumer
electronics,  music and appliances,  entered the New Jersey/New York marketplace
during fiscal 1997. Although most of the Company's  competitors have more stores
than the Company, the stores are generally smaller and the Company believes that
they produce lower sales than the Company on a per store basis.

     Competition  within the Company's industry is based upon breadth of product
selection,  product  quality,  customer  service and price. The Company believes
that it is  comparable  with or  superior to all of its  competitors  in each of
these categories.

                                       9
<PAGE>

Employees

     As of December 29, 1998,  the Company had  approximately  750 full time and
275  part-time   employees.   The  Company  also  employs  additional  part-time
salespersons  and cashiers  during peak selling  periods.  None of the Company's
employees  are  represented  by  a  labor  union.   The  Company  believes  that
relationships with its employees are good. 

Service Marks

     The  service  mark  TOPS  and a  Tops  logo  used  in the  Company's  print
advertising,  have  been  registered  by the  Company  in the  U.S.  Patent  and
Trademark   Office.   The  Company  believes  that  these  marks  have  acquired
substantial  goodwill and reputation and broad consumer  recognition as marks of
the Company within its market area and that their  continued use is important to
the development of its business.

ITEM 2.  Properties

     The Company  operates nine stores in heavily  populated areas in New Jersey
and New York, all of which are leased by the Company. The Company's Edison store
and its office and distribution  center, also located in Edison, are leased from
the Company's former Chairman.  See "Item 13. Certain  Relationships and Related
Transactions." The store leases,  including all options to renew, expire between
2008 and 2042. The following chart sets forth certain information  regarding the
store leases.  The Company also has an option to purchase  property in Brooklyn,
New York for a tenth store.

<TABLE>
<CAPTION>

                                       Date                 Approximate        Approximate
Location                               Opened               Sq. Footage(1)     Selling Space(2)
-------------------                    ----------------     --------------     ----------------
<S>                                    <C>                     <C>                 <C>


Edison, NJ                             June, 1979               45,059             33,940
Secaucus, NJ                           December, 1986          120,360             44,928
East Hanover, NJ                       April, 1989              65,600             38,407
Lakewood, NJ                           May, 1990                50,500             31,200
Hawthorne, NY                          October, 1992            63,935             48,935
Union, NJ                              November, 1993           54,920             44,320
Queens, NY                             August, 1994             77,000             43,826
Manhattan, NY                          August, 1998             22,000             17,500
Manhattan, NY                          October, 1998            22,800             17,000



</TABLE>

(1)  Includes mezzanine area.

(2) Selling space is total square  footage less the Company's  estimate of store
space not used for selling merchandise.


ITEM 3. Legal Proceedings

         The Company is not a party to any material legal proceedings.


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

     The Company did not submit any matters to a vote of security holders in the
fourth quarter of fiscal 1998.



                                       10
<PAGE>


                                     PART II

ITEM 5.  Market for Registrant's Common Stock and Related Stockholder Matters

     The Company's  Common Stock is traded under the symbol "TOPS" on the NASDAQ
National Market System.

     The following table sets forth, for the fiscal quarters indicated, the high
and low sale prices for the Company's Common Stock on the NASDAQ National Market
System.   NASDAQ  National   Market  System   quotations  are  based  on  actual
transactions and not bid prices.



                                                         Prices
                                            High                         Low

Year Ended December 29, 1998
        First Quarter                     2  9/16                       15/16
        Second Quarter                    6  7/16                     1  7/8
        Third Quarter                     4  1/2                      2
        Fourth Quarter                    4  9/16                     2

Year Ended December 30, 1997
        First Quarter                     1  5/8                        13/16
        Second Quarter                    1  9/32                        3/4
        Third Quarter                     1 19/32                       15/16
        Fourth Quarter                    1  7/16                     1 

     On March 26,  1999,  the closing sale price of the Common Stock as reported
on the NASDAQ National Market System was $1.375 per share. On December 29, 1998,
there were approximately 563 holders of record of the Company's Common Stock.

     The Company has never paid any cash  dividends on its Common Stock and does
not anticipate  paying cash dividends in the  foreseeable  future.  Any decision
made by the  Company to declare  dividends  in the future  will  depend upon the
Company's future earnings,  capital requirements,  financial condition and other
factors deemed relevant by its Board of Directors.

ITEM 6.  Selected Financial Data

     Selected  financial  data is set forth  below as of and for the years ended
December 27, 1994,  December 26, 1995,  December 31, 1996, December 30, 1997 and
December 29, 1998.  The selected  financial  data should be read in  conjunction
with the  financial  statements,  related notes and other  information  included
herein and  "Management's  Discussion  and Analysis of Results of Operations and
Financial Condition."


                                       11
<PAGE>

<TABLE>
<CAPTION>

                                     Year Ended     Year Ended    Year Ended    Year Ended     Year Ended
Statement of Operating Data:          12/27/94       12/26/95      12/31/96      12/30/97       12/29/98
                                    ------------    -----------   -----------   -----------    -----------

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

Net sales and service revenues .   $   462,494   $   422,197    $   317,437    $   293,924    $   290,359
Cost of sales ..................       350,881       324,079        250,117        229,073        226,642
                                       -------       -------        --------      --------       --------

Gross profit ...................       111,613        98,118         67,320         64,851         63,717
Selling, general and adminis-
  trative expenses .............       107,317        96,859         82,461         65,712         59,485
                                       -------       -------        --------      --------       --------

Income (loss) from operations ..         4,296         1,259        (15,141)          (861)         4,232
Interest Expense ...............         3,934         4,478          6,240          6,264          6,282
Equity in loss on joint venture              0             0              0              0            385
                                       -------       -------        --------      --------       --------

Income (loss) before income
taxes and extraordinary item ...           362        (3,219)       (21,381)        (7,125)        (2,435)
Provision (benefit) for
  income taxes .................           145        (1,288)        (2,000)             0              0
                                       -------       -------        --------      --------       --------

Income (loss) before
  extraordinary item ...........           217        (1,931)       (19,381)        (7,125)        (2,435)
Extraordinary item-gain
  on debt extinguishment .......             0             0              0          8,482          1,309
                                       -------       -------        --------      --------       --------

Net income (loss) ..............   $       217   $    (1,931)   $   (19,381)   $     1,357    $    (1,126)
                                       =======       ========       ========      ========       =========

Income (loss) per common share
  before extraordinary item ....   $      0.03   $     (0.27)   $     (2.66)   $     (0.98)   $     (0.26)
Gain per common share on
  extraordinary item ...........             0             0              0           1.16           0.14
                                       -------       -------        --------      --------       --------

Net income (loss) per
  common share .................   $      0.03   $     (0.27)   $     (2.66)   $      0.18    $     (0.12)
                                       =======       ========       ========      =========     ==========

Weighted Average Common
  Shares Outstanding ...........     7,252,990     7,277,229      7,277,229      7,294,901      9,491,593
                                     =========     =========      =========      =========      =========

</TABLE>



<PAGE>

<TABLE>
<CAPTION>

                                                  Year          Year         Year          Year           Year
                                                  Ended         Ended        Ended         Ended          Ended
                                                 Dec. 27,      Dec. 26,     Dec. 31,      Dec. 30,       Dec. 29,
                                                  1994          1995         1996          1997           1998
                                                --------      --------      --------     --------       --------
                                                                       (dollars in thousands)
<S>                                             <C>           <C>           <C>           <C>            <C>  

Operating Data (at period end) (unaudited):
Number of stores open .....................           8             8             8             7             9
Inventory turns (a) .......................        5.7x          5.4x          4.3x          4.2x          4.2x
Square feet of retail selling space .......     332,032       332,032       332,032       285,556       320,056
Average retail sales per store open
 entire year ..............................   $  56,456     $  47,010     $  34,777     $  33,931     $  34,793
Percentage increase (decrease) in
 comparable sales .........................       (14.1%)       (20.1%)       (26.4%)        (3.6%)         4.5%
Retail sales per weighted average
 square foot of selling space .............   $   1,377     $   1,133     $     842     $     832     $     847

Balance Sheet Data:
Inventory .................................   $  61,289     $  59,847     $  56,184     $  53,895     $  62,060
Working Capital ...........................      25,132        32,112        14,785        16,894        16,370
Total Assets ..............................     121,076       113,552       101,020        94,850       106,213
Long-Term Debt and Capital Lease,
  net of current portion ..................      40,689        49,201        48,944        47,623        36,382
Other long-term liabilities ...............       5,110         4,512         3,933         2,559         2,910
Shareholders' Equity ......................      21,952        20,099           750         2,118        13,582

</TABLE>


(a) 1998  reflects the  annualization  of data related to the two stores  opened
during the year.

     ITEM 7.  Management's  Discussion  and Analysis of Financial  Condition and
Results of Operations

     The Company's fiscal year ends on the last Tuesday of December. Fiscal 1996
contains 53 weeks, and fiscal 1997 and fiscal 1998 contain 52 weeks.

Results of Operations

Year Ended December 29, 1998 Compared to the Year Ended December 30, 1997.

     Net  sales  and  service   revenues  for  fiscal  1998  decreased  1.2%  to
$290,359,000  from  $293,924,000  for  fiscal  1997.  The prior  year's  results
included 10 months of sales from the Westbury,  New York store which the Company
closed in October  1997.  The fiscal 1998 results  include  sales from Tops' 5th
Avenue and 14th Street stores in New York City,  which opened in August 1998 and
November 1998, respectively. Total comparable sales increased 4.5% compared to a
3.6% decrease in fiscal 1997.

     Gross  revenues from the sale of product  protection  plans for fiscal 1998
decreased  5.6% to $12,993,000  from  $13,768,000  for fiscal 1997.  Incremental
costs related to these sales totaled  $5,711,000 and  $5,912,000,  respectively,
for the comparable periods. These product protection plans are non-cancelable.


                                       12
<PAGE>


     Gross margin as a percentage  of net sales and service  revenues for fiscal
1998  was  21.9%  compared  to 22.1%  for  fiscal  1997.  Gross  margins  in the
commercial division decreased to 8.2% from 9.7% for the comparable period. Gross
margins in the commercial division tend to be lower than gross margins on retail
sales.  

     Selling, general and administrative expenses for fiscal 1998 decreased 9.5%
to $59,485,000 from $65,712,000 in fiscal 1997. This net decrease was due to the
closing of Tops'  Westbury,  New York store in October 1997  combined with other
cost cutting initiatives.  These cost reduction efforts were partially offset by
the selling  expenses  associated  with the two new Manhattan  stores which were
opened in August  1998 and  November  1998.  Included  in  selling,  general and
administrative  expense for fiscal 1997 was $1,500,000 related to the closing of
the Company's Westbury, New York store.

     Income from operations  improved to $4,232,000 in fiscal 1998 compared to a
loss of $861,000 in fiscal 1997.

     Interest expense in fiscal 1998 increased marginally to $6,282,000 compared
to  $6,264,000  in  fiscal  1997.  Lower  interest  on  the 6  1/2%  Convertible
Subordinated  Debentures  was  offset  by  the  net  interest  expense  increase
associated with the capitalization of the Queens store lease.

     The  Company  did not record an income tax  provision  or benefit in either
fiscal 1998 or fiscal 1997.

     The  Company's  net loss  before  extraordinary  items for fiscal  1998 was
$2,435,000  ($0.26 per share)  compared to a net loss of  $7,125,000  ($0.98 per
share) for fiscal 1997.

     During  fiscal 1998 the Company  recorded an  extraordinary  gain  totaling
$1,309,000  relating to the repurchase of $3,000,000 of Tops 6 1/2%  Convertible
Subordinated  Debentures.  During fiscal 1997 the Company recorded extraordinary
gains totaling  $8,482,000  relating to the exchange and repurchase of a portion
of Tops 6 1/2%  Convertible  Subordinated  Debentures with a conversion price of
$22.25 for $7,687,500 in New 6 1/2% Convertible  Subordinated  Debentures with a
conversion  price of $1.75.  The Company  also  repurchased  during  fiscal 1997
$1,320,000  face  value  of the  Original  Debentures  for a  purchase  price of
$525,550.

     The Company's net loss for fiscal 1998, after the extraordinary gain on the
early  extinguishment  of debt, was $1,126,000 ($0.12 per share) compared to net
income for fiscal 1997, after the extraordinary gain on the early extinguishment
of debt, of $1,357,000 ($0.18 per share).  

     Year ended December 30, 1997 Compared to the Year Ended December 31, 1996.

     Net  sales  and  service   revenues  for  fiscal  1997  decreased  7.4%  to
$293,924,000  from  $317,437,000 for fiscal 1996. Net sales and service revenues
for fiscal 1997  included 52 weeks versus 53 weeks in fiscal  1996.  Fiscal 1997
also included only 10 months of sales from the Westbury, Long Island store which
the Company closed in October 1997.  This decrease is also  attributable  to the
highly  competitive and continuing weak retail  environment in the appliance and
consumer  electronics  industry.  The lack of new  products in the market,  high
consumer  debt levels,  retail price  deflation  in selected  categories  and an
unseasonably  cooler  summer  which  affected  room air  conditioner  sales also
contributed to the decrease. Total comparable store sales decreased 3.6% for the
period compared to a decrease of 26.4% for the same period last year. Sales from
the commercial division decreased 8.2% or $2,844,000.

     Gross  revenues from the sale of product  protection  plans for fiscal 1997
increased  0.5% to $13,768,000  from  $13,705,000  for fiscal 1996.  Incremental
costs related to these sales totaled $5,912,000 and $5,830,000 respectively, for
the comparable periods. These product protection plans are non-cancelable.

     Gross margin as a percentage  of net sales and service  revenues for fiscal
1997  increased to 22.1% from 21.2% last year.  This increase was due in part to
the company's focus on higher margin  merchandise and product  protection plans.
Gross margins in the commercial  sales division  increased to 


                                       13
<PAGE>

9.7% from 9.1% for the comparable  period.  Gross margins in the commercial
sales division tend to be lower than gross margins on retail sales.

     Selling,  general and  administrative  expenses  for fiscal 1997  decreased
20.3% to $65,712,000  from  $82,461,000  for fiscal 1996.  This net decrease was
achieved  primarily by reducing payroll and related  expenses,  net advertising,
reduced net variable selling expenses and other cost cutting measures.  Selling,
general and  administrative  expenses as a  percentage  of net sales and service
revenues decreased to 22.4% from 26.0% for the comparable periods. This decrease
was due to the reduced level of expenses.

     Included in selling,  general and administrative  expenses is $1,500,000 of
costs  related to the closing of the  Company's  Westbury,  Long Island store in
October  1997.  The marginal  operating  performance  of this store was severely
exacerbated  by the costs to advertise for this single  location.  The Company's
income from  operations  before  store  closing  costs  improved to $639,000 for
fiscal 1997 compared to a loss from operations of $15,141,000 for fiscal 1996.

     Interest expense  increased  slightly to $6,264,000 from $6,240,000 for the
comparable  periods.  This was caused by higher  average  borrowings and related
interest  expense on the revolving  credit  facility offset by lower interest on
the 6-1/2%  Convertible  Subordinated  Debentures  during the year.  Fiscal 1996
included the  write-off  of $630,000 of  capitalized  loan fees  relating to the
Company's previous revolving credit facility.

     The Company did not record an income tax provision for fiscal 1997 compared
to an income tax benefit at an effective  rate of 9.4% or $2,000,000  for fiscal
1996.

     The  Company's  net loss  before  extraordinary  items for fiscal  1997 was
$7,125,000  ($0.98 per share)  compared to a net loss of $19,381,000  ($2.66 per
share) for fiscal 1996.

     During  fiscal  1997 the  Company  recorded  extraordinary  gains  totaling
$8,482,000  relating  to the  exchange  and  repurchase  of a portion  of 6-1/2%
Convertible  Subordinated  Debentures  with a  conversion  price of  $22.25  for
$7,687,500 in New 6-1/2% Convertible  Subordinated  Debentures with a conversion
price of $1.75.  The Company also  repurchased  during the year  $1,320,000 face
value of the Original Debentures for a purchase price of $525,550.

     The Company's net income for fiscal 1997, after the  extraordinary  gain on
the early  extinguishment of debt was $1,357,000 ($0.18 per share) compared to a
net loss of $19,381,000 ($2.66) per share for fiscal 1996.

     In November  1997,  the Company  entered  into a sale and  leaseback of its
Queens, New York store. The Company received $14.5 million in gross proceeds and
paid off an outstanding mortgage on the property of $9.0 million.

Seasonality

     Sales  levels are  generally  highest in the fourth  quarter as a result of
increased demand for consumer  electronics  during the holiday season and higher
during either the second or third quarter, depending on weather conditions, as a
result of  demand  for room air  conditioners  during  the  summer  months.  The
unseasonably cooler weather during the summer of 1998 severely impacted room air
conditioner  sales. Room air conditioner  sales were  approximately 14% lower in
fiscal 1998 compared to fiscal 1997.

     The Company experiences a build up of inventory and accounts payable during
the second quarter due to the purchase of room air  conditioners in anticipation
of the May through August selling season and the fourth quarter in  anticipation
of the holiday season.

                                       14
<PAGE>

Year 2000 Compliance

     The Company  has  initiated  a program to prepare  the  Company's  computer
systems and applications  for the year 2000. This is necessary  because computer
programs  have been  written  using two  digits  rather  than four to define the
applicable year. Any of the Company's computer programs that have time-sensitive
software  may  recognize a date using "00" as the year 1900 rather than the year
2000.  This  could  result  in  a  system  failure  or  miscalculation   causing
disruptions of operations,  including, among other things, a temporary inability
to process  normal  business  transactions.  In addition,  many of the Company's
vendors and service  providers are also faced with similar issues related to the
year 2000.

     In connection with the Company's programs related to year 2000,  management
has assessed  the  Company's  information  systems,  including  its hardware and
software  systems  and  embedded  systems  contained  in the  Company's  stores,
distribution  facilities  and corporate  headquarters.  Based on the findings of
this  assessment,  the  Company  has  commenced a plan to upgrade or replace the
Company's  hardware or software for year 2000 readiness as well as to assess the
year 2000 readiness of the Company's vendors and service providers. In addition,
the Company's management is currently  formulating  contingency plans, which, in
the event that the Company is unable to fully  achieve year 2000  readiness in a
timely manner,  or any of the Company's  vendors or service  providers  fails to
achieve  year  2000  readiness,  may be  implemented  to  minimize  the risks of
interruptions to the Company's business.

     Based on its assessment to date of the year 2000 readiness of the Company's
vendors,  service  providers and other third parties on which the Company relies
for  business  operations,  the Company  believes  that its  principal  vendors,
service  providers  and other  third  parties  are  taking  action for year 2000
compliance.  However,  the Company has limited  ability to test and control such
third parties' year 2000  readiness,  and the Company  cannot provide  assurance
that failure of such third parties to address the year 2000 issue will not cause
an interruption of the Company's business.

     The  Company  has  committed   significant  resources  in  connection  with
resolving its year 2000 issues.  The Company  expects that the  principal  costs
will be those  associated  with the  replacement  and  testing  of its  computer
applications,  all of which are expected to be replaced over the next year.  The
Company  estimates that the total external costs  associated  with  implementing
year 2000 readiness  will be  approximately  $3.0 million,  consisting of system
replacement  costs of $1.0 million,  equipment  replacement  of $1.0 million and
consulting  costs of $1.0  million.  During  fiscal 1998,  the Company  incurred
$300,000 of  expenditures  (mostly  payroll-related)  associated  with year 2000
readiness.  The  Company  anticipates  that it will  incur the  remaining  costs
ratably over the 10 month  period  beginning  January 1, 1999.  The Company will
finance  $2.2  million  of the cost of its year 2000  remediation  through a new
credit facility with the balance funded by income generated from operations.

     The Company expects to complete its year 2000  remediation by October 1999.
However,  the  Company's  ability to execute its plan in a timely  manner may be
adversely  affected  by a  variety  of  factors,  some of which are  beyond  the
Company's  control  including  turnover  of  key  employees,   availability  and
continuity  of  consultants  and the  potential  for  unforeseen  implementation
problems.  The Company's  business could be interrupted if the year 2000 plan is
not implemented in a timely manner, if the Company's vendors,  service providers
or other third parties are not year 2000 ready or if the  Company's  contingency
plans are not successful.  Based on current available information,  and although
no  assurance  can be  given,  the  Company  does  not  believe  that  any  such
interruptions  are likely to have a  material  adverse  effect on the  Company's
results of operation, liquidity or financial condition.

Liquidity and Capital Resources

     In  the  past,  the  Company  has  relied  primarily  upon  net  cash  from
operations, a revolving credit facility with institutional lenders, trade credit
from  vendors and  inventory  floor plan  financing to fund its  operations  and
growth.

     During fiscal 1993, the Company issued $40,000,000 Convertible Subordinated
Debentures  due 2003 at an annual  interest rate of 6 1/2%.  Interest is payable
semi-annually.  The net  proceeds  were used to fund new store  openings,  repay
certain  indebtedness and for general corporate purposes.  On 

                                       15
<PAGE>


September 1, 1997, the Company  exchanged  $15,375,000  of the  $40,000,000
original par value 6-1/2% Convertible Bonds due 2003 (the "Original Debentures")
into $7,687,500 6-1/2%  Convertible  Subordinated  Debentures due 2003 (the "New
Debentures").  The New Debentures  are  convertible to shares of common stock of
the Company at a conversion  price of $1.75.  During fiscal 1998,  $7,590,000 of
the "New  Debentures"  were  converted to shares of Tops  Appliance  City common
stock,  resulting in a significant  improvement  in  shareholder's  equity and a
corresponding  reduction to long-term  debt. The New Debentures  rank pari passu
with the Original Debentures in respect to principal and interest.

     During fiscal 1998, the Company entered into a series of  transactions  for
the  repurchase  of  Original  Debentures  outstanding.  The  Company  purchased
$3,000,000  face  value  of the  Original  Debentures  for a  purchase  price of
$1,650,000.

     At December 29, 1998, the Company had working  capital of $16.4 million,  a
decrease of $0.5 million from December 30, 1997. The primary  changes in working
capital  components during the year were increases of $7.2 million in short-term
borrowings,  $8.2 million in inventory, and $5.8 million in accounts payable and
a decrease of $2.1 million in accrued liabilities and customer deposits.

     The Company  increases  its inventory  levels during the second  quarter of
each year in anticipation of room air conditioner  sales from May through August
and during the fourth quarter in anticipation of the holiday season.  Short-term
trade credit represents a significant  source of financing for inventory.  Trade
credit arises from the  willingness  of the Company's  vendors to grant extended
payment terms for inventory purchases and is financed either by the vendor or by
third-party  floor planning sources.  The Company currently  utilizes two floor-
planning  companies which in the aggregate at any one time provide financing for
approximately 10% of the Company's inventory purchases.  Payment terms vary from
15 to 150 days,  depending  upon the inventory  product.  The Company  typically
grants the floor  planning  companies  a  security  interest  in those  products
financed. Due to the Company's improved operating performance during fiscal 1997
and fiscal 1998, many trade vendors have begun  extending more favorable  credit
terms to the company.

     The Company has a $40 million secured  revolving  credit facility  expiring
October 28, 2001, which bears interest at the bank's base rate plus 1% or, for a
portion  of the loan,  LIBOR plus 3%. All of the  Company's  unencumbered  cash,
equipment,  inventory and accounts  receivable  are pledged as  collateral.  

     The Company  continues  to  evaluate  expansion  plans in existing  markets
within the Greater New York  Metropolitan  Area. During fiscal 1995, the Company
obtained  an option to  purchase  property  which  will be the site of the tenth
store,  expected to open in fiscal 1999. The availability of financial resources
may limit the Company's expansion plans, and no assurances can be given that the
Company will expand.

     The Company believes that its borrowings under available credit facilities,
short term trade  credit from  vendors  and  inventory  floor plan  arrangements
combined  with the impact on operating  results of the cost  reductions  already
implemented and a normal room air conditioning selling season will be sufficient
to fund the  Company's  operations  and its  anticipated  capital  expenditures,
excluding new stores, of $1.0 million. No assurances can be given that such cost
reductions will produce the desired result.

     This  Annual  Report on Form 10-K may contain  forward-looking  information
about the Company.  The preceding  factors,  and others, may cause the Company's
actual results to differ from those set forth in any forward-looking  statements
made by the Company.  Accordingly,  there can be no  assurances  that any future
results will be achieved.


                                       16
<PAGE>

ITEM 8.  Financial Statements and Supplementary Data


                            Tops Appliance City, Inc.


                        Consolidated Financial Statements
                  As of December 29, 1998 And December 30, 1997
                                  Together With
                    Reports of Independent Public Accountants





                            TOPS APPLIANCE CITY, INC.

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS






REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS                F-1


REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS                F-2


FINANCIAL STATEMENTS:

Consolidated Balance Sheets                             F-3

Consolidated Statements of Operations                   F-4

Consolidated Statements of Shareholders' Equity         F-5

Consolidated Statements of Cash Flows                   F-6


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS              F-8



                                       17
<PAGE>

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To the Shareholders and Board of Directors of Tops Appliance City, Inc.:

     We  have  audited  the  accompanying  consolidated  balance  sheet  of Tops
Appliance City, Inc. (the Company) as of December 29, 1998 and December 30, 1997
and the related consolidated statements of operations,  shareholders' equity and
cash flows for the years then ended. These consolidated financial statements and
schedule referred to below are the  responsibility of the Company's  management.
Our  responsibility  is to express an opinion on these financial  statements and
schedule based on our audits.

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

     In our opinion,  the financial statements referred to above present fairly,
in all material respects,  the consolidated financial position of Tops Appliance
City,  Inc. as of December 29, 1998 and  December 30, 1997 and the  consolidated
results  of its  operations  and its cash  flows  for the  years  then  ended in
conformity with generally accepted accounting principles.

     Our  audits  were made for the  purpose  of forming an opinion on the basic
financial  statements  taken as a whole.  The  schedule  listed  in the index is
presented  for  purposes  of  complying   with  the   Securities   and  Exchange
Commission's  rules  and is not part of the  basic  financial  statements.  This
schedule has been submitted to the auditing  procedures  applied in the audit of
the basic financial statements and, in our opinion, fairly state in all material
respects the financial  data required to be set forth therein in relation to the
basic financial statements taken as a whole.


                                                    Arthur Andersen LLP


Roseland, New Jersey
March 1, 1999



<PAGE>

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


Shareholders and Board of Directors of Tops Appliance City, Inc.

     We have audited the  accompanying  consolidated  statement  of  operations,
shareholders'  equity and cash flows of Tops Appliance  City, Inc. (the Company)
for the year ended  December 31,  1996.  Our audit also  included the  financial
statement  schedule  listed  in the  Index  at Item  14(a).  These  consolidated
financial  statements  and  schedule  are the  responsibility  of the  Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audit.

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

     In our opinion,  the financial statements referred to above present fairly,
in all material respects,  the consolidated results of operations and cash flows
of Tops Appliance City, Inc. for the year ended December 31, 1996, in conformity
with generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements  taken as a whole,  presents  fairly  in all  material  respects  the
information set forth therein.

     The  accompanying  financial  statements  and schedule  have been  prepared
assuming that Tops Appliance  City,  Inc. will continue as a going  concern.  As
more fully  described in Note 1, the Company has incurred a significant  loss in
1996, which has  significantly  decreased its working capital and  shareholders'
equity.  These conditions raise substantial doubt about the Company's ability to
continue  as a going  concern.  The  financial  statements  and  schedule do not
include  any   adjustments  to  reflect  the  possible  future  effects  on  the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.


                                Ernst & Young LLP


MetroPark, New Jersey
1999

<PAGE>

<TABLE>
<CAPTION>


                            TOPS APPLIANCE CITY, INC.
                         CONSOLIDATED BALANCE SHEETS --
                     DECEMBER 29, 1998 AND DECEMBER 30, 1997
                             (dollars in thousands)

            ASSETS                                             1998          1997
                                                             --------     ---------
<S>                                                         <C>           <C>  

CURRENT ASSETS:
Cash and cash equivalents ...............................   $   2,672    $   2,368
Accounts receivable, net of allowance for doubtful
 accounts of $187 and $303 in 1998 and 1997, respectively       1,849        1,101
Merchandise inventory ...................................      62,060       53,895
Prepaid expenses and other current assets ...............       3,128        2,080
                                                              -------      -------

        Total current assets ............................      69,709       59,444

PROPERTY, EQUIPMENT AND LEASEHOLD
  IMPROVEMENTS, NET .....................................      29,883       29,936

DEFERRED TAXES ..........................................       2,958        2,940

OTHER ASSETS ............................................       3,663        2,530
                                                              -------      -------

       Total assets .....................................   $ 106,213    $  94,850
                                                              =======      =======

         LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
Short-term borrowings ...................................   $  30,718    $  23,558
Current portion of obligation under capital lease .......         124          110
Accounts payable ........................................      12,309        6,551
Accrued liabilities and taxes payable ...................       3,994        5,115
Customer deposits .......................................       3,236        4,276
Deferred taxes ..........................................       2,958        2,940
                                                              -------      -------

     Total current liabilities ..........................      53,339       42,550

OBLIGATION UNDER CAPITAL LEASE,
  NET OF CURRENT PORTION ................................      15,979       16,630

LONG-TERM DEBT ..........................................      20,403       30,993

DEFERRED RENT ...........................................       2,188        1,801

OTHER LIABILITIES .......................................         722          758

COMMITMENTS AND CONTINGENCIES                                     ---          ---

SHAREHOLDERS' EQUITY:
Preferred stock, no par value, 20,000,000
  shares authorized; none issued or outstanding .........        ---           ---
Common stock, no par value, 30,000,000
  shares authorized; 13,731,921 and 7,294,901
  shares issued and outstanding in 1998 and 1997,
  respectively                                                   ---           ---

Paid-in capital .........................................      37,396       24,806
Accumulated deficit .....................................     (23,814)     (22,688)
                                                              -------      -------

     Total shareholders' equity .........................      13,582        2,118
                                                              -------      -------
     Total liabilities and shareholders' equity .........   $ 106,213    $  94,850
                                                              =======      =======

</TABLE>

The accompanying notes to consolidated financial statements are an integral part
of these statements.

                                       20
<PAGE>

                            TOPS APPLIANCE CITY, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
 FOR THE YEARS ENDED DECEMBER 29, 1998, DECEMBER 30, 1997 AND DECEMBER 31, 1996
                  (dollars in thousands, except per share data)




                                                   1998           1997           1996
                                              -------------  -------------   ------------
<S>                                          <C>            <C>             <C>




NET SALES AND SERVICE REVENUES ............   $   290,359    $   293,924    $   317,437

COST OF SALES .............................       226,642        229,073        250,117
                                                  -------        -------        -------

         Gross profit .....................        63,717         64,851         67,320

SELLING, GENERAL AND
  ADMINISTRATIVE EXPENSES .................        59,485         65,712         82,461
                                                  -------        -------        -------


        Income (loss) from operations .....         4,232           (861)       (15,141)

INTEREST EXPENSE ..........................         6,282          6,264          6,240
  Equity in loss of joint venture .........           385              0              0
                                                  -------        -------        -------

        Loss before benefit for income
        taxes and extraordinary item ......        (2,435)        (7,125)       (21,381)

BENEFIT FOR INCOME TAXES ..................             0              0         (2,000)
                                                  -------        -------        -------


Loss before extraordinary item ............        (2,435)        (7,125)       (19,381)

EXTRAORDINARY ITEM - Gain on debt
  extinguishment, net .....................         1,309          8,482              0
                                                  -------        -------        -------


        Net income (loss) .................   $    (1,126)   $     1,357    $   (19,381)
                                                  =======        =======        =======


LOSS PER COMMON SHARE BEFORE
  EXTRAORDINARY ITEM ......................   $     (0.26)   $     (0.98)    $    (2.66)

INCOME PER COMMON SHARE APPLICABLE TO
  EXTRAORDINARY ITEM ......................          0.14           1.16              0
                                                  -------        -------        -------

        Basic and diluted net income (loss)
        per common share ..................   $     (0.12)   $      0.18    $     (2.66)
                                                  ========       =======        ========


WEIGHTED AVERAGE SHARES OUTSTANDING .......     9,491,593      7,294,901      7,277,229
                                                =========      =========      =========
</TABLE>


The accompanying notes to consolidated financial statements are an integral part
of these statements.

                                       21
<PAGE>


<TABLE>
<CAPTION>

                            TOPS APPLIANCE CITY, INC.


                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

                     FOR THE YEARS ENDED DECEMBER 29, 1998,
                     DECEMBER 30, 1997 AND DECEMBER 31, 1996

                             (dollars in thousands)



                                       Shares of      Paid-In     Accumulated
                                      Common Stock    Capital       Deficit        Total
                                      ------------   ---------   ------------   -----------

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

BALANCE, December 26, 1995 .........    7,252,990   $   24,763   $   (4,664)   $   20,099

  Net loss .........................         --           --        (19,381)      (19,381)
  Shares issued - Employee Stock
    Purchase Plan ..................       24,239           32         --              32
                                        ---------      -------      --------      --------

BALANCE, December 31, 1996 .........    7,277,229       24,795      (24,045)          750

  Net income .......................         --           --          1,357         1,357
Shares issued - Employee Stock
  Purchase Plan ....................       13,622           11         --              11
Shares issued- Employee Awards .....        4,050         --           --            --
                                        ---------      -------      --------       -------

BALANCE, December 30, 1997 .........    7,294,901       24,806      (22,688)        2,118

Net loss ...........................         --           --         (1,126)       (1,126)
Shares issued - Employee Stock
   Purchase Plan ...................       13,754           22         --              22
Shares issued - Employee Awards ....        3,750           14         --              14

Shares issued -  Options exercised .       15,225           22         --              22

Shares issued - Debt conversion ....    4,337,143        7,492         --           7,492

Shares issued - Sale of common stock    2,067,148        5,040         --           5,040
                                        ---------     --------    ---------      --------

BALANCE, December 29, 1998 .........   13,731,921   $   37,396   $  (23,814)   $   13,582
                                       ==========   ==========   ==========    ==========

</TABLE>


The accompanying notes to consolidated financial statements are an integral part
of these statements.

                                       22
<PAGE>


<TABLE>
<CAPTION>

                            TOPS APPLIANCE CITY, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                     FOR THE YEARS ENDED DECEMBER 29, 1998,
                     DECEMBER 30, 1997 AND DECEMBER 31, 1996

                             (dollars in thousands)



                                                  1998       1997        1996
                                                  ----       ----        ----
<S>                                               <C>        <C>         <C>

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income (loss) ............................   $ (1,126)   $  1,357    $(19,381)
Adjustments to reconcile net income (loss)
  to net cash used in operating activities-
    Depreciation and amortization ............      4,575       4,897       5,897
    Deferred rent ............................        387      (1,378)        387
    Extraordinary gain on debt extinguishment      (1,309)     (8,482)       --
    Write-off of fixed assets relating to
      store closing ..........................       --         1,628        --
    Gain on sale of assets relating to sale
      and leaseback ..........................       --           (72)       --
    Amortization of deferred income ..........       --          --           (73)
    Changes in assets and liabilities-
        Accounts receivable ..................       (748)        254          97
        Inventory ............................     (8,165)      2,289       3,663
        Prepaid expenses and other
          current assets .....................     (1,048)        412        (228)
        Deferred taxes .......................       --          --          (236)
        Accounts payable .....................      3,342      (1,215)     (3,204)
        Accrued liabilities and taxes payable      (1,121)     (2,851)     (1,631)
        Customer deposits ....................     (1,040)        166         180
        Other assets .........................     (1,481)        769      (1,595)
        Other liabilities ....................        (36)          4        (111)
                                                   -------     -------     -------

         Net cash used in operating activities     (7,770)     (2,222)    (16,235)
                                                   -------     -------     -------



CASH FLOWS FROM INVESTING ACTIVITIES:

       Capital expenditures, net .............     (4,174)       (635)     (1,148)
       Net proceeds from sale of assets
        relating to sale and leaseback .......       --        13,772        --
                                                   -------     -------     -------

       Net cash provided by (used in)
           investing activities ..............     (4,174)     13,137      (1,148)
  

                                                   -------     -------     -------
                                       23
<PAGE>


CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from Exercise of Stock Option .......         22        --          --
Proceeds from Employee Stock Purchase Plan ...         36          11          32
Cash overdrafts ..............................      2,416      (1,860)       (358)
Short-term borrowings ........................      7,175       1,654      13,004
Proceeds from issuance of additional equity ..      5,040        --          --
Long-term debt repayments ....................     (2,441)     (9,717)       (655)
Related party payments .......................       --          (782)       (782)
                                                   -------     -------     -------

       Net cash provided by (used in)
         financing activities ................     12,248     (10,694)     11,241
                                                   -------     -------     -------

      Increase (decrease) in cash and
         cash equivalents ....................        304         221      (6,142)

CASH AND CASH EQUIVALENTS, beginning of year .      2,368       2,147       8,289
                                                   -------     -------     -------


CASH AND CASH EQUIVALENTS, end of year .......   $  2,672    $  2,368    $  2,147
                                                   =======     =======     =======

SUPPLEMENTAL DISCLOSURES OF
  CASH FLOW INFORMATION:
Interest paid ................................   $  5,976    $  6,087    $  5,939
Income taxes paid ............................         14           8          30
                                                   =======     =======     =======

NON CASH TRANSACTIONS:
Capital lease obligation incurred ............       --      $ 16,820        --
Debenture Exchange ...........................   $  7,590        --          --

</TABLE>


The accompanying notes to consolidated financial statements are an integral part
of these statements.
                                       24


<PAGE>
                            TOPS APPLIANCE CITY, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1)     ORGANIZATION AND BASIS OF PRESENTATION:

     Tops Appliance  City,  Inc. (the  "Company") is a publicly held retailer of
major  household  appliances,  audio/video  electronic  goods  and  home  office
products with nine megastores,  five of which are located in New Jersey and four
in New York. The Company may be subject to sales  fluctuations  due to increased
competition,  consumer  spending levels and weather  conditions,  as a result of
demand  for air  conditioners  during  the  summer  months  and the  ability  of
customers to travel to stores during the winter months.

     The Report of Independent Public Accountants on the consolidated  financial
statements  for the  year  ended  December  31,  1996  included  an  explanatory
paragraph  regarding the Company's ability to continue as a going concern.  This
opinion was based, among other things, upon the Company's  significant operating
loss  during  that  period,  which  caused a  decline  in  working  capital  and
stockholders' equity.

     During fiscal 1997 and fiscal 1998,  management  of the Company  instituted
several  changes that have  improved the Company's  financial  condition and its
results  of  operations.  These  changes  include  a  reduction  in the level of
long-term debt and operating expenses,  the sale of certain real estate property
to provide additional  operating funds, closure of an unprofitable store as well
as re-established  and improved trade credit.  In addition,  in fiscal 1998, the
Company  obtained an increase in the amounts  available under its secured credit
facility  (Note 5),  along with an  infusion  of $5.0  million to  shareholders'
equity,  resulting  from the  purchase of 2.1 million  additional  shares by Bay
Harbour Management, L.C.

         Management  of the Company  believes that these  initiatives,  together
with the  results  of  operations  for  fiscal  1999,  will  provide  sufficient
resources to fund the Company's operations for the coming year.

(2)     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Cash Equivalents-

     The  Company  considers  all  highly-liquid  securities  with  an  original
maturity less than three months to be cash equivalents.

Concentrations of Credit-

     Financial   instruments,   which   potentially   subject   the  Company  to
concentrations   of  credit  risk,   consist   principally   of  temporary  cash
investments.  The Company places its temporary  cash  investments in high credit
quality financial instruments in accordance with debt agreements. At times, such
investments may be in excess of the FDIC insurance limit.

Use of Estimates-

     The  preparation of the 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.

                                       25

<PAGE>


Fair Value of Financial Instruments-

     The carrying value of the Company's  financial  instruments,  excluding the
subordinated debentures (see Note 5), approximates fair value.

Consolidation-

     The consolidated  financial  statements include the accounts of the Company
and its  wholly-owned  subsidiary  as well as its  investment in a joint venture
(Note 3). All  significant  intercompany  accounts  and  transactions  have been
eliminated.

     The Company's 49%  ownership in its joint  venture with  Cybershop  Holding
Corp. is accounted  for  following  the equity  method of  accounting  since the
Company does not have majority ownership or control of this entity. Accordingly,
the Company  records  its  proportionate  share of the  earnings or loss of this
joint venture as more fully described in Note 3.

Merchandise Inventory-

     Merchandise  inventory  is stated at the lower of cost or  market.  Cost is
determined under the first-in, first-out (FIFO) method.

Property, Equipment and Leasehold Improvements-

     Property,  equipment and leasehold  improvements  are stated at cost,  less
accumulated depreciation. Depreciation is computed on a straight-line basis over
the  estimated  useful  lives or the terms of related  leases of the  respective
assets which range from 3 to 25 years.

Deferred Financing Costs-

     Included in other  assets is $809,000 and  $1,157,000  at December 29, 1998
and December 30, 1997, respectively, of costs associated with obtaining the debt
discussed  in  Note 5. The  deferred  costs  associated  with  the  convertible
subordinated  debentures and the revolving  credit  facility are being amortized
over  periods  ranging  from  three  to  ten  years.  Deferred  financing  costs
associated with debt that is either  extinguished or converted are accounted for
in a manner similar to the associated debt.

Preopening Costs-

     Prior to January 1, 1997, it was the Company's  policy to capitalize  costs
(primarily  personnel  and training  costs)  associated  with the opening of new
stores and amortize them on a  straight-line  basis over the twelve month period
following the store opening.  Effective  January 1, 1997,  costs associated with
the  opening of new  stores are being  amortized  in the year  incurred.  During
fiscal 1998,  $312,000 of preopening  costs were incurred and expensed and there
were no  capitalized  preopening  costs as of December 29, 1998.  

     Commencing in fiscal 1999, the Company will be required to adopt  Statement
of Position 98-5  "Reporting the Costs of Start-Up  Activities,"  which requires
that pre-opening and other start-up costs be expensed as incurred.  The adoption
of this new standard  would not have affected any of the results for the periods
presented  and is not  expected  to  have a  material  effect  on the  financial
statements in future periods.

Accounts Payable-

     Included in accounts payable is a cash overdraft  balance of $4,595,000 and
$2,180,000 at December 29, 1998 and December 30, 1997, respectively.

Revenue Recognition-

   Merchandise Sales-

                                       26

<PAGE>


     Revenue is recognized upon receipt of the merchandise by the customer.  The
Company  provides  appropriate  allowances  for sales returns and  uncollectible
accounts based upon reviews of sales and credit history.

Product Protection Plans-

     The Company purchases product protection plans on a non-recourse basis from
a third party who performs the  obligations  of the Company under its protection
plans through factory authorized service centers. The third party is required to
maintain insurance, with the Company named as insured,  guaranteeing performance
of the third party's obligation to the Company. The difference between the sales
price of the Company's protection plan and the purchase price of the third party
protection plan is recognized as revenue at the time of sale,  since the Company
has  substantially  completed  what it must do to be  entitled  to the  benefits
represented  by the  revenue  and it is remote  that any  future  costs  will be
incurred  with  respect  to such  contracts.  The  revenues  and  related  costs
associated with the sale of product protection plans are as follows-



                          December 29,        December 30,        December 31,
                              1998                1997                1996
                          ------------        ------------        ------------

Revenues               $  12,993,000          $13,768,000          $13,705,000
Cost of sales              5,711,000            5,912,000            5,830,000

Selling, General and Administrative Expenses-

     Included in selling,  general and  administrative  expenses are advertising
costs which are charged to operations as incurred.  Advertising  expense, net of
reimbursements from vendors, was ($995,000),  $864,000 and $5,981,000 for fiscal
1998, fiscal 1997 and fiscal 1996, respectively.

Net Income (Loss) Per Share-

     Effective  for the year  ended  December  30,  1997,  the  Company  adopted
Statement  of  Financial  Accounting  Standards  (SFAS) No. 128,  "Earnings  per
Share." The adoption of SFAS No. 128 requires the presentation of Basic Earnings
per Share and Diluted  Earnings per Share.  Basic Earnings per Share is based on
the average number of common shares  outstanding per year.  Diluted Earnings per
Share is based on the average  number of common  shares  outstanding  during the
year plus the common share  equivalents,  if any,  related to outstanding  stock
options and deferred  contingent  common stock awards.  The adoption of SFAS No.
128 had no effect on  previously  reported  earnings  per share and there was no
difference  between  basic  and  diluted  earnings  per  share  for all  periods
presented.

Stock Based Compensation-

     The Company  grants stock options for a fixed number of shares to employees
with an  exercise  price  equal to the fair  value of the  shares at the date of
grant.  As permitted by FASB  Statement No. 123,  "Accounting  and Disclosure of
Stock Based  Compensation",  the Company has elected to account for stock option
grants in accordance  with APB Opinion No. 25,  "Accounting  for Stock Issued to
Employees" and  accordingly,  recognizes no  compensation  expense for the stock
option  grants.  The Company has  adopted the pro forma  disclosure-only  option
under Statement No. 123.

Long-Lived Assets-

     In March 1995,  the FASB issued  Statement  No.  121,  "Accounting  for the
Impairment of Long-Lived  Assets and for  Long-Lived  Assets to be Disposed of",
which  requires  impairment  losses to be recorded on long-lived  assets used in
operations when indicators of impairment are present and the  undiscounted  cash
flows  estimated  to be  generated  by those  assets  are less than the  assets'
carrying amount.  Statement No. 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. The Company  adopted  Statement  No.
121 in the first quarter of fiscal 

                                       27

<PAGE>

1996. The Company  assesses  impairment at the  individual  store level and
believes that no impairment of long-lived assets has occurred as of December 29,
1998 and December 30, 1997.

New Accounting Standards-

     In June 1998, the Financial  Accounting Standards Board issued Statement of
Financial Accounting  Standards No. 133, "Accounting for Derivative  Instruments
and Hedging  Activities"  ("SFAS  133").  SFAS 133  establishes  accounting  and
reporting  standards  requiring that every derivative  instrument be recorded on
the balance  sheet as either an asset or  liability  measured at its fair value.
SFAS 133 requires  that  changes in the  derivative's  fair value be  recognized
currently in earnings  unless specific hedge  accounting  criteria are met. SFAS
133 is  effective  for fiscal  years  beginning  after June 15,  1999 with early
adoption permitted.  The Company does not currently engage in hedging activities
nor has purchased  derivative  instruments and does not expect that the adoption
of SFAS 133 will have a material impact on its financial statements.

Fiscal Year-

     The Company's fiscal year ends on the last Tuesday of December. Fiscal 1996
contains 53 weeks, and fiscal 1997 and fiscal 1998 contain 52 weeks.

Reclassification-

     Certain  December  30,  1997 and  December  31,  1996  balances  have  been
reclassified to conform to the December 29, 1998 presentation.

(3)     JOINT VENTURE

     On June 14, 1998,  the Company  entered into a joint venture with Cybershop
Holding Corp.  ("Cybershop") to form  Electronics.Net  LLC. The Company accounts
for its  49%  interest  in  Electronics.Net  LLC  under  the  equity  method  of
accounting.  The Company and  Cybershop  are required to share in the funding of
cash flow deficits of Electronics.Net LLC. Electronics.Net LLC is engaged in the
business of selling high volume electronics, computers and appliance merchandise
through the use of web-based  electronic  commerce.  The financial statements of
the joint venture were not material in relation to the  financial  statements of
Tops Appliance City, Inc.

     In  connection  with the  formation  of  Electronics.Net  LLC,  the Company
entered a supply agreement with  Electronics.Net LLC whereby the Company will be
the sole supplier of Electronics.Net LLC.

(4)     PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS:


     Property,  equipment and leasehold  improvements  and related  depreciation
periods consist of the following-

<TABLE>
<CAPTION>


                                                 December 29, 1998     December 30, 1997
                                                 -----------------     -----------------
<S>                                                  <C>             <C>

Land and buildings (25 years) ..................     $16,815,000          $16,820,000
Computer equipment and purchased
  software (5 years) ...........................      12,755,000           11,978,000
Transportation equipment (5 years) .............         747,000              746,000
Furniture, fixtures and store
  equipment (5 years) ..........................      10,399,000            9,599,000
Warehouse equipment (5 years) ..................       2,357,000            2,324,000
Leasehold improvements (3 to 25 years) .........      21,392,000           18,823,000
                                                     -----------          -----------

                                                      64,465,000           60,290,000

Less-Accumulated depreciation ..................      34,582,000           30,354,000
                                                     -----------          -----------
                                                     $29,883,000          $29,936,000
                                                     ===========          ===========

</TABLE>

                                       28
<PAGE>

     Depreciation  expense was $4,228,000,  $4,529,000 and $4,906,000 for fiscal
1998, fiscal 1997 and fiscal 1996 respectively.

(5)     DEBT AND CAPITAL LEASES:

Short-Term Debt-

     The  Company  currently  utilizes a $40  million  secured  credit  facility
expiring  October 28, 2001.  The revolver bears interest at the bank's base rate
plus 1% or, for a portion of the loan,  LIBOR plus 3%.  Borrowings  are based on
65% of eligible inventory, as defined, and amounts available under the agreement
may be reduced to reflect availability reserves,  based on certain conditions as
determined  by the  lender.  In  addition,  a  material  adverse  change  in the
Company's  consolidated  financial  condition  may be deemed an event of default
under  the  agreement.  All  of  the  Company's  unencumbered  cash,  equipment,
inventory and accounts receivable are pledged as collateral.  As of December 29,
1998 and  December 30,  1997,  $30,718,000  and  $23,558,000,  respectively  was
outstanding  under this credit  facility.  Additional  borrowings  available  at
December  29, 1998 were  $4,482,000. 

Long-Term Debt-

     Long-term debt consists of the following-

                                             December 29, 1998 December 30, 1997
                                             ----------------- -----------------

Convertible Subordinated
   Original Debentures (A) ...............        $20,305,000        $23,305,000
Convertible Subordinated
   New Debentures (B) ....................             97,500          7,687,500
                                                  -----------        -----------

Total long-term debt .....................        $20,402,500        $30,992,500
                                                  ===========        ===========

     (A) The $20,305,000 of 6-1/2% Convertible  Subordinated Debentures due 2003
(the "Original  Debentures").  Interest is paid semi-annually on February 28 and
August 31. The  Original  Debentures  are  convertible  into common stock of the
Company at a  conversion  price of $22.25 per share,  subject to  adjustment  in
certain  circumstances.  The Original Debentures are redeemable,  in whole or in
part,  for cash at any time on or after  November  30, 1996 at the option of the
Company,  at a redemption  price  beginning at 103.25% and thereafter  declining
ratably to par plus accrued interest to the date of redemption. No quoted market
price is available for the Original  Debentures,  however, the Company estimates
the  fair  value  is  approximately  55% of face  value,  based  on the  limited
transactions for these instruments, including those described below.

     Throughout the course of fiscal 1998, the Company  entered into a series of
transactions for the repurchase of Original Debentures outstanding.  The Company
purchased  $3,000,000 face value of the Original Debentures for a purchase price
of  $1,650,000.  Net  of  related  expenses,  these  transactions  generated  an
extraordinary  gain of  $1,309,000  during the fiscal year ending  December  29,
1998.

     (B) The $97,500 of 6 1/2%  Convertible  Subordinated  Debentures  due 2003.
Interest is paid  semi-annually on February 28 and August 31. The New Debentures
rank pari passu  with the  original  Debentures  in  respect  to  principal  and
interest,  and are convertible  into common stock at a conversion
  
                                     29

<PAGE>

price of $1.75 per share.  No quoted  market price is available for the New
Debentures,  however, the Company believes their carrying cost approximates fair
market value at December 29, 1998.

     During  fiscal 1998,  $7,590,000  of face amount of these  Debentures  were
converted into 4,337,143 shares of the Company's common stock.

     Principal  payments  required under  long-term debt  obligations  for years
subsequent to December 29, 1998 are as follows-

                           1999                  $         0
                           2000                            0
                           2001                            0
                           2002                            0
                           2003                   20,402,500

Obligation Under Capital Lease-

     On  November  5,  1997,  the  Company  entered  into a sale  and  leaseback
agreement  relating to the Queens,  New York store which was previously owned by
the  Company.  Part of the proceeds of the sale were  utilized to eliminate  the
outstanding mortgage on the property.  The Company simultaneously entered into a
lease  agreement  for the property  with an initial term expiring on October 31,
2022.  The lease also  contains  two 10 year  renewal  periods at the  Company's
option.  This lease has been  accounted for as a capital lease with the building
and initial capital lease  obligation  reflected at the fair market value of the
property on the date of lease inception.  The minimum future  obligations  under
the lease have been discounted based upon the implicit lease rate of 12.3%

Principal payments required under capital lease obligations for years subsequent
to December 29, 1998 are as follows-

                         1999                  $   124,000
                         2000                      140,500
                         2001                      158,800
                         2002                      179,400
                         2003                      202,800
                         Thereafter             15,297,500

(6)     COMMITMENTS AND CONTINGENCIES:

Leases-

     Other than the Queens,  New York store  described in Note 5, the  Company's
retail stores,  distribution  center and office space are leased under operating
leases.  The leases have initial  remaining terms of three to twenty-five  years
with  renewal  options  from five to thirty  years.  Most of the leases are net,
requiring additional payments for real estate taxes, maintenance and insurance.

     One of the Company's  stores and the distribution  center/corporate  office
are leased  from a  proprietorship  affiliated  with the former  Chairman of the
Board and current  shareholder.  These rentals are included in the related party
amounts in the table below.


     Rental expense charged to operations  under the leases described above, all
of which are classified as operating leases, are summarized below-

                                                      Year Ended
                                     December 29,    December 30,   December 31,
                                         1998            1997           1996
                                     ------------    ------------   ------------
Rentals under-
  Related party leases .........      $1,979,000      $1,979,000      $1,848,000
  Other leases .................       4,786,000       5,298,000       5,660,000
                                     -----------     ------------   ------------

                                      $6,765,000      $7,277,000      $7,508,000
                                     ===========     ============   ============

                                       30

<PAGE>


     Minimum  annual  rental  payments  under  operating  leases in fiscal years
subsequent to December 29, 1998 are as follows-

                           1999                 $ 7,189,000
                           2000                   7,407,000
                           2001                   8,037,000
                           2002                   6,278,000
                           2003                   6,281,000
                           Thereafter            37,961,000

Employment Contracts-

     The Company  presently has  employment  contracts with three officers which
commit the  Company to various  salary and fringe  benefit  obligations  through
fiscal 2000 (as specified in the individual  agreements).  The aggregate  salary
obligation  under these agreements is $595,000 and $465,000 for the fiscal years
1999 and 2000, respectively.

Financing-

     In  connection  with  the  floor  plan  financing  for  certain   inventory
purchases,  such  floor  planners  have a  security  interest  in the  inventory
purchased through such floor planning arrangements.

     At December 29, 1998 and December 30, 1997, the Company had standby letters
of credit of $2,236,000 and $785,000, respectively.

Litigation-

     The Company is involved in  litigation,  both as plaintiff  and  defendant,
incidental  to the conduct of its  business.  It is the  opinion of  management,
after  consultation  with its counsel,  that the outcome of such litigation will
not have a material adverse effect on the Company's  financial  condition or the
results of its operations.

Common Stock-

     In connection with the sale of common stock to Bay Harbour Management, L.C.
(Note 1), the Company is required to either issue additional  shares or refund a
portion of the proceeds from this issuance in the event that the Company's stock
price declines in value, as defined in the agreement.

(7)     401(K) SALARY SAVINGS PLAN:

     The Company  maintains  a defined  contribution  401(k)  plan which  allows
eligible  employees to defer a portion of their income through  contributions to
the plan.  Under the terms of the plan, the Company  contributes an amount equal
to 2-1/2% of the total annual  compensation  paid to plan  participants  and may
contribute additional amounts on a discretionary basis.  Effective January 1997,
the Company contributes 25% of the participant's  contribution up to 10% of that
participant's  annual  compensation.  Plan  forfeitures are utilized to fund the
Company's contribution requirements, and to pay various expenses associated with
administering the plan.

     The Company's contributions to the plan were as follows-

                            1998                   $214,000
                            1997                    290,000
                            1996                    632,000



                                       31
<PAGE>


(8)     STOCK OPTION AND STOCK PURCHASE PLANS:

     The Company maintains two stock option plans under which both incentive and
non-qualified  options may be granted (the "Plans"). A total of 1,200,000 shares
of common stock are reserved for issuance, in the aggregate, under the Plans. In
addition,  the  Company  has  granted  non-qualified  stock  options  to certain
individuals  that are not  covered by the  Plans.  The  exercise  price of stock
options  granted may not be less than 100% (110% in the case of incentive  stock
options granted to owners of more than 10% of the total combined voting power of
all classes of stock of the  Company)  of the fair  market  value at the time of
grant. Options generally vest over a three year period, and are exercisable over
the ten year period commencing on the date of issuance.

     Stock option transactions for the periods indicated were as follows-


<TABLE>
<CAPTION>

                                 1998                          1997                     1996
                                 ----                          ----                     ----
                                     Weighted                      Weighted                    Weighted
                           Number    Average             Number    Average           Number    Average
                           Shares    Exercise Price      Shares    Exercise Price    Shares    Exercise Price
                           ------    --------------      ------    --------------    --------  --------------
<S>                       <C>          <C>             <C>        <C>               <C>             <C>

Options outstanding at
beginning of year ....    1,156,700    $   2.46        1,110,300  $   2.97            796,700     $   5.49
Granted ..............      268,500    $   3.71          297,000  $   1.15          1,041,300     $   2.35
Canceled .............      (41,468)   $   2.10         (250,600) $   3.14           (727,700)    $   4.84
Exercised ............      (15,225)   $   1.43              0        --                    0           --
                          ----------   --------        ---------  --------          ---------     ---------
Options outstanding at
end of year ..........    1,368,507    $   2.73        1,156,700  $   2.46          1,110,300     $   2.97
                          ==========   ========        =========  ========          ==========    =========

</TABLE>


     The following table summarizes information regarding options outstanding at
December 29, 1998

<TABLE>
<CAPTION>

                      Options Outstanding                                                              Options Exercisable
--------------------------------------------------------------------------------------    ------------------------------------------



   Exercise      Outstanding at      Weighted Average Remaining      Weighted Average         Exercisable at         Weighted Avg
    Prices     December 29, 1998         Contractual Life             Exercise Price         December 29, 1998      Exercise Price
------------   -----------------     --------------------------      -----------------       -----------------      ---------------
<S>             <C>                             <C>                       <C>                    <C>                   <C>   

$1.06-1.44           318,340                        8.7                      $1.19                  131,113                $ 1.24
$2.38-2.63           690,667                        7.0                       2.39                  570,445                  2.39
$3.00-4.13           249,500                        9.2                       3.67                        0                    -
$6.25-6.88           110,000                        0.9                       6.81                  110,000                  6.81
----------         ---------                        ---                      -----                  -------                ------
$1.06-6.88         1,368,507                        7.3                      $2.73                  811,558                $ 2.80
==========         =========                        ===                      =====                  =======                ======


</TABLE>


     The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees,"  and related  interpretations  in accounting for
its plans.  Had  compensation  cost for the  Company's  stock  option plans been
determined  based upon the fair  value at the grant  date,  consistent  with the
methodology  prescribed  under Statement of Financial  Accounting  Standards No.
123,  Accounting  for  Stock-Based  Compensation,  the  Company's net income and
earnings per share would have been as follows-


                                       32
<PAGE>


<TABLE>
<CAPTION>
                                                  1998                  1997                   1996
                                                 ------                ------                 ------
<S>                                           <C>                    <C>                    <C> 

Net income (loss)-
 As reported                                 ($1,126,000)            $1,357,000            ($19,381,000)
 Pro forma                                    (1,907,000)               720,000             (19,864,000)

Pro forma net income
  (loss) per share-
  As reported                                    ($0.12)                  $0.18                  ($2.66)
  Pro forma                                      ($0.20)                   0.10                   (2.72)

</TABLE>

     These pro forma  amounts may not be  representative  of future  disclosures
because the estimated  fair value of stock options is amortized over the vesting
period, and additional options may be granted in future years.

     Using the  Black-Scholes  option valuation model, the estimated fair values
of options granted during fiscal years 1998, 1997 and 1996 were $2.50, $0.85 and
$1.68, respectively. The Black-Scholes model was developed for use in estimating
the fair  value  of  traded  options  which  have no  vesting  restrictions.  In
addition,  such models  require  the use of  subjective  assumptions,  including
expected stock price volatility.  In management's opinion, such valuation models
do not  necessarily  provide a reliable  single measure of the fair value of its
employee stock options.

     Principal  assumptions  used in applying  the  Black-Scholes  model were as
follows-

                                          1998     1997     1996
                                          ----     ----     ----

Risk-free interest rate                   5.4%     6.0%      6.6%
Expected life, in years                   5        5         5
Expected volatility                      92%      91%       67%
Expected dividend yield                   0.0%     0.0%      0.0%

     The  Company has also  established  an Employee  Stock  Purchase  Plan (the
"Plan").  A total of 200,000  shares of common  stock are  reserved for issuance
under the  Plan.  The Plan  enables  participating  employees  to  purchase  the
Company's common stock through payroll deductions at a value equal to 85% of the
market  value  of the  common  stock on the  first  or last day of the  offering
period,  whichever is lower.  During  fiscal 1998 and fiscal 1997,  common stock
totaling 13,754 and 13,622 shares, respectively, were issued under the Plan.

(9)    INCOME TAXES:

     Deferred  income  taxes at December  29, 1998 and December 30, 1997 reflect
the net tax effects of temporary  differences  between the  carrying  amounts of
assets and liabilities for financial reporting purposes and the amounts used for
income tax purposes. Significant components of the Company's deferred tax assets
and liabilities are as follows-

                                              1998             1997
                                              ----             ----

Current deferred tax assets-
  Inventory                                $349,000             $301,000
  Accrued liabilities                       130,000              129,000
  Other                                     168,000              223,000
  Valuation allowance                      (485,000)            (481,000)
                                           ---------            ---------

     Total current deferred tax assets      162,000              172,000

Current deferred tax liabilities-
  Vendor allowances                       2,686,000            2,545,000
  Other                                     434,000              567,000
                                           --------             --------

     Total current deferred tax 
     liabilities                          3,120,000            3,112,000
                                         ---------             ---------

    Net current deferred tax 
    liabilities                         $ 2,958,000           $2,940,000
                                        ============           ==========


                                       33
<PAGE>

Long-term deferred tax assets-
  Federal and state loss
  carryforwards                        $ 6,997,000             $6,941,000
  Alternative minimum tax and 
  job credit carryforward                 592,000                 593,000
  Rent                                    978,000                 805,000
  Depreciation                          2,919,000               2,502,000
  Warranty                                323,000                 348,000
  Valuation allowance                  (8,848,000)             (8,244,000)
                                        ---------              ----------

     Total long-term deferred tax
     assets                             2,961,000               2,945,000

Long-term deferred tax liabilities - 
  Other                                     3,000                   5,000
                                      -----------             -------------


Net long-term deferred tax assets     $ 2,958,000              $2,940,000
                                      ===========               ==========



     At  December  29,  1998,  the  Company  has a Federal  net  operating  loss
carryforward of approximately $16,480,000 of which the majority expires in 2010.

     Components of the benefit for income taxes (before  extraordinary item) are
as follows-

                                1998         1997          1996
                           -----------   -----------   -------------

Current-
  Federal ..............   $         0   $         0    ($1,778,000)
  State ................             0             0         14,000
                           -----------   -----------    ------------
                                     0             0     (1,764,000)
Deferred-
  Federal ..............             0             0       (236,000)
  State ................             0             0              0
                           -----------   -----------    ------------

                                     0             0       (236,000)
                           -----------   -----------    ------------
Benefit for income taxes   $         0   $         0    ($2,000,000)
                           ===========   ===========   ============

     A reconciliation of the effective tax rate to the Federal statutory rate is
as follows-

                                     1998          1997            1996
                                  -----------    -----------    -------------

Federal statutory rate ..........    (34.0%)      (34.0%)         (34.0%)
State income taxes, net of
  Federal income tax benefit ....       --          --               --
Increase in valuation allowance
  attributable to Federal net
  operating loss carryforward not
  recognized ....................     34.0         34.0             26.0
Other ...........................      --           --              (1.4)
                                  -----------   -----------    ------------

Effective tax rate ..............      0%             0%            (9.4%)
                                   ==========   ===========    ============


     In  addition,   the  tax  provision   attributable  to  the  gain  on  debt
extinguishment  has  been  offset  by a  reduction  in the  valuation  allowance
attributable to net operating losses incurred in prior periods.


                                       34
<PAGE>


     ITEM 9. Changes in and  Disagreements  with  Accountants  on Accounting and
Financial Disclosure

     Registrant has engaged Arthur  Andersen LLP as its  independent  certifying
accountant  effective  August  28,  1997  replacing  Ernst &  Young,  its  prior
independent  certifying  accountant,   as  of  the  same  date.  The  change  in
independent  certifying  accountant  was  approved by the Board of  Directors of
Registrant.

     The reports of Ernst & Young  respecting  Registrant  for fiscal years 1995
and 1996  contained  no adverse  opinion or  disclaimer  of opinion  and was not
qualified  or  modified  as  to  uncertainty,  audit  scope  or  application  of
accounting principles, except that Ernst & Young qualified its 1996 report as to
registrant's  ability to continue as a going  concern.  During fiscal years 1995
and 1996 and the  subsequent  period  thereto  prior to the dismissal of Ernst &
Young,  there were no disagreements  between Registrant and Ernst & Young on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure.

     During fiscal years 1995 and 1996 and the  subsequent  period thereto prior
to engaging Arthur  Andersen LLP, the Registrant had no discussions  with Arthur
Andersen LLP regarding  either the application of an accounting  principle,  the
type of opinion that would be rendered in Registrant's  financial  statements or
any matter that was the subject of disagreement with Ernst & Young.

     The Company did not experience any changes in and/or disagreements with its
accountants during the 1998 fiscal year.

                                    PART III


ITEM 10.  Directors and Executive Officers of the Registrant

     The  information  required  in  response  to this item is  incorporated  by
reference from the  Registrant's  proxy statement for its 1999 annual meeting of
shareholders  to be filed with the  Securities  and  Exchange  Commission  on or
before April 30, 1999.


ITEM 11.  Executive Compensation

     The  information  required  in  response  to this item is  incorporated  by
reference from the  Registrant's  proxy statement for its 1999 annual meeting of
shareholders  to be filed with the  Securities  and  Exchange  Commission  on or
before April 30, 1999.

ITEM 12.  Security Ownership of Certain Beneficial Ownership and Management

     The  information  required  in  response  to this item is  incorporated  by
reference from the  Registrant's  proxy statement for its 1999 annual meeting of
shareholders  to be filed with the  Securities  and  Exchange  Commission  on or
before April 30, 1999.


ITEM 13.  Certain Relationships and  Related Transactions

     The  information  required  in  response  to this item is  incorporated  by
reference from the  Registrant's  proxy statement for its 1999 annual meeting of
shareholders  to be filed with the  Securities  and  Exchange  Commission  on or
before April 30, 1999.


                                       35
<PAGE>

                                     PART IV

ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K

  (a)(1)  Financial Statements

  Reports of Independent Public Accountants...................................12

  Consolidated Balance Sheets as of December 29, 1998 and
  December 30, 1997............................................................4

  Consolidated Statements of Operations for years
  ended December 29, 1998, December 30, 1997, and
  December 31, 1996............................................................5

  Consolidated Statements of Shareholders' Equity..............................6

  Consolidated Statements of Cash Flows for years
  ended December 29, 1998, December 30, 1997 and
  December 31, 1996............................................................7

  Notes to Consolidated Financial Statements...................................8

 (a)(2)  Financial Statement Schedule

 The following are included in Part II, Item 8:

 Schedule II- Valuation and Qualifying
 Accounts and Reserves.......................................................S-2

(a)(3)  Exhibits

     Except where noted,  all exhibits are  incorporated  by reference  from the
Registrant's registration statement on Form S-1 as filed with the Securities and
Exchange  Commission on June 3, 1992, and amendments  thereto,  Registration No.
33-48326.


       Exhibit Number             Description of Document

          3.1 The Registrant's Certificate of Incorporation

          3.2 The Registrant's By-Laws

          4 Specimen of stock certificate for shares of common stock

          4.2  Indenture  dated as of November 30, 1993  between Tops  Appliance
     City,  Inc.  and  Donaldson,   Lufkin  &  Jenrette  Securities  Corporation
     (incorporated by reference from Form S-3 filed February 10, 1994)

          4.3  Registration  Rights  Agreement  dated as of  November  30,  1993
     between  Tops  Appliance  City,  Inc.  and  Donaldson,  Lufkin  &  Jenrette
     Securities  Corporation  (incorporated  by  reference  from  Form S-3 filed
     February 10, 1993)

          10.1 Security  Agreement dated April 27, 1992 between Maytag Financial
     Service Corp. and Tops Appliance City, L.P.

          10.2  Security  Agreement  dated  January  19,  1989  between  General
     Electric Capital Corporation and Tops Appliance City, L.P.

          10.3 Security  Agreement dated January 15, 1990 between Tops Appliance
     City, L.P. and WCI Acceptance Corporation

          10.4 Floor Plan  Inventory  Security  Agreement  dated  March 19, 1990
     between  Tops  Appliance  City,  L.P.  and  Carrier   Distribution   Credit
     Corporation

          10.5 Lease  dated  March 3, 1984  between  Leslie S.  Turchin and Tops
     Appliance City, L.P., as amended (1745 Route 27, Edison, New Jersey)


                                       36
<PAGE>

          10.6 Lease dated  October 11, 1985 between  Leslie S. Turchin and Tops
     Appliance City, L.P. (45 Brunswick Avenue, Edison, New Jersey)

          10.7  Lease  Dated May 21,  1986  between  Mack  Edison  Co.  and Tops
     Appliance City, L.P., as amended

          10.8  Lease  dated  May 21,  1986  between  Mack  Industries  and Tops
     Appliance City, L.P., as amended

          10.9 Lease dated April 27, 1988 between  Castle Ridge  Shopping  Plaza
     Associates and Tops Appliance City, L.P.

          10.10 Lease dated June 2, 1989 between Sudler Town and Country Limited
     Partnership and Tops Appliance City, L.P.

          10.11 Omitted

          10.12 Omitted

          10.13 Form of Equipment  Loan Agreement  between Tops Appliance  City,
     L.P. and Bell Atlantic Mobile Systems, Inc.

          10.14  Form  of  Hardware/Software   License  Agreement  between  Tops
     Appliance City, L.P. and Bell Atlantic Mobile Systems, Inc.

          10.15 Delivery Agreement dated January 30, 1992 between Tops Appliance
     City, L.P. and Merchants Home Delivery Service, Inc.

          10.16 Form of Amended and Restated  Section 401(k) Plan dated July 29,
     1988 

          10.17 Summary Plan and Description of Amended and Restated 401(k) Plan
     dated January 1, 1988

          10.18 Form of Executive and Deferred Compensation Plan

          10.19 Form of Premium Conversion Plan

          10.20 Form of Stock Option Plan

          10.21  Extended  Service  Agreement  dated  October 19,  1987  between
     Warrantech Corporation and Tops Appliance City, Inc.

          10.22  Extended  Service   Agreement  dated  April  29,  1988  between
     Warrentech Corporation and Tops Appliance City, Inc.

          10.23  Account  Financing  Agreement  dated  December 30, 1986 between
     General Electric Capital Corporation and Tops Appliance City, L.P.

          10.24 Lease dated July 7, 1992  between New York  Medical  College and
     Tops Appliance City, L.P.

          10.25 Omitted

          10.26 Lease dated February 11, 1993 between Tops Appliance  City, Inc.
     and Jerry Spiegel and Jesco Co.  (incorporated  by reference from 8-K filed
     April 6, 1993.)

          10.27 Lease dated May 1993  between  Tops  Appliance  City,  Inc.  and
     Lester Robbins,  Trustee (incorporated by reference from 8-K filed June 11,
     1993).

          10.28 Management  Agreement dated July 31, 1995 between Tops Appliance
     City, Inc. and Rick Jones  (incorporated by reference from Annual Report on
     Form 10-K for year ending December 26, 1995.

          10.29  Management  Agreement dated May 31, 1995 between Tops Appliance
     City, Inc. and Robert Gross  (incorporated  by reference from Annual Report
     on Form 10-K for year ending December 26, 1995.)

          10.30 Addendum to Management  Agreement dated October 15, 1997 between
     Tops Appliance City, Inc. and Thomas L. Zambelli.

          10.31 Addendum to Management Agreement dated November 20, 1997 between
     Tops Appliance City, Inc. and Robert Gross.

          10.32 Addendum to Management  Agreement dated October 15, 1997 between
     Tops Appliance City, Inc. and Richard Jones.

          10.33 Stock Purchase  Agreement  dated November 5, 1997 by and between
     SSP, L.L.C., Tops Appliance City of New York, Inc. and Tops Appliance City,
     Inc.

          10.34 Debenture  Exchange  Agreement dated August 20, 1997,  effective
     September 1, 1997 between Tops Appliance City, Inc. and BEA Associates.

          10.35 First  Amendment  to Lease dated  November 5, 1997  between Tops
     Appliance Realty, Inc. and Tops Appliance City, Inc.

          10.36 Second  Amendment  to Lease dated  November 5, 1997 between Tops
     Appliance Realty, Inc. and Tops Appliance City, Inc.

          10.37 Conversion Agreement,  dated May 8, 1998, between Tops Appliance
     City, Inc.and Robert D. Carl

          10.38 Letter Agreement between Bay Harbour Management, L.L.C. and Tops
     Appliance City, Inc. dated July 16, 1998

          10.39  Share  Purchase  Agreement,  dated July  16,1998,  between  Bay
     Harbour Management, L.C. and Tops Appliance City, Inc.

          10.40 Addendum to Management  Agreement dated December 1, 1998 between
     Tops Appliance City, Inc. and Richard Jones - page 42

          10.41 Addendum to Management  Agreement dated December 1, 1998 between
     Tops Appliance City, Inc. and Thomas L. Zambelli - page 43

          10.42 Merchant Agreement dated December 8, 1998 between Tops Appliance
     City, Inc. and Household Bank N.A. - page 44



                                       38
<PAGE>


          22 List of Subsidiaries of the Registrant

          24.1 Consent of Arthur Andersen LLP.

          24.2 Consent of Ernst & Young LLP.


(b) Reports on Form 8-K

         None

                                       39

<PAGE>

                                   SIGNATURES

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


                                                   TOPS APPLIANCE CITY, INC.


                                                BY:   /s/ Richard L. Jones
                                                   -----------------------------
                                                   RICHARD L. JONES
                                                   Chief Executive Officer


                                                BY:  /s/ Thomas L. Zambelli
                                                   -----------------------------
                                                    THOMAS L. ZAMBELLI
                                                    Chief Accounting Officer
Dated:  March 29, 1999


                                       39
<PAGE>


     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
registrant and in the capacities and on the dates indicated:

Signature                          Title                              Date

/s/ Richard L. Jones
________________________  Co-Chairman of the Board,            March 29, 1999
RICHARD L. JONES           Chief Executive Officer


/s/ Thomas L. Zambelli
________________________   Exec. Vice President,                March 29, 1999
THOMAS L. ZAMBELLI         Chief Accounting Officer
                           Director


/s/ Robert G. Gross
________________________
ROBERT G. GROSS            Director                             March 29, 1999


/s/ Anthony L. Formica
________________________
ANTHONY L. FORMICA         Director                             March 29, 1999


/s/ John H. Hollands
________________________
JOHN H. HOLLANDS           Director                             March 29, 1999


/s/ Douglas P. Teitelbaum
________________________   Co-Chairman of the Board             March 29, 1999
DOUGLAS P. TEITELBAUM      


/s/ Steven A. Van Dyke
________________________
STEVEN A. VAN DYKE         Director                             March 29, 1999


/s/ Walter A. Jones
________________________
WALTER A. JONES            Director                             March 29, 1999

                                       40

<PAGE>

                                   SCHEDULE II
                            TOPS APPLIANCE CITY, INC.

                 VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

              YEARS ENDED DECEMBER 29, 1998, DECEMBER 30, 1997 AND
                               DECEMBER 31, 1996



                                                 Additions
                                    Balance at   Charged to            Balance
                                    Beginning    Costs and             at End
           Description              of Period    Expenses  Deductions  of Period
           -----------              ---------    ---------  ---------  ---------

Year ended December 31, 1996 --
Allowance for doubtful accounts ...   $373,000   $360,000   $465,000   $268,000
                                      --------   --------   --------   --------

Year ended December 30, 1997 --
Allowance for doubtful accounts ...   $268,000   $180,000   $145,000   $303,000
                                      --------   --------   --------   --------

Year ended December 29, 1998 --
Allowance for doubtful accounts ...   $303,000   $180,000   $296,000   $187,000
                                      --------   --------   --------   --------


                                       41
<PAGE>
                                 EXHIBIT 10.40

              SECOND ADDENDUM TO MANAGEMENT AGREEMENT ENTERED INTO
                 AS OF THE 31st DAY OF JULY, 1995 ("AGREEMENT")
                      BETWEEN RICK JONES ("EXECUTIVE") AND
                      TOPS APPLIANCE CITY, INC. ("COMPANY")

     WHEREAS,  Tops  Appliance  City,  Inc.  and  Rick  Jones  entered  into the
above-referenced Agreement, and

     WHEREAS, Company and Executive desire to amend such Agreement,

     In  consideration  of One  ($1.00)  Dollar  and  other  good  and  valuable
consideration, it is agreed as follows:

     1.  Section  2 of the  Agreement  is  amended  to add the  title  of  Chief
Executive  Officer  to  Executive's  existing  titles  of  President  and  Chief
Operating Officer.

     2.  Section  4 of the  Agreement  is  amended  to  extend  the  term of the
Agreement to December 31, 2000.

     3. Section 5 of the Agreement is amended to provide that effective  January
1, 1999  Executive's  Base Salary shall be Two Hundred Seventy Five Thousand and
no/00 ($275,000.00) Dollars per annum.

     3. Section  6(b) of the  Agreement is amended to cause the Company to grant
to the Executive  options to purchase an  additional  thirty  thousand  (30,000)
shares of the  Company's  Common  Stock,  which  options  will  vest and  become
exercisable  in the following  amount on the following  date,  provided that the
Executive is then employed by the Company:

                  Date                           No. of Shares

                  December 31, 2000                  30,000

Such options  shall be granted  pursuant to a separate  agreement to be executed
and delivered  simultaneously with this Addendum, will be non-qualified and will
have an exercise  price per share equal to the  closing  price of the  Company's
Common Stock on December 1, 1998.

     4. Section 18 of the Agreement is added to provide as follows: In the event
of a "change in control" of the Company,  Executive shall be entitled to a bonus
payment  equal to one and  one-half  times  his base  compensation  as in effect
immediately  prior to the change in  control.  Such bonus  shall be paid  within
sixty  (60) days of the change in  control.  For  purposes  of this  Section,  a
"change  in  control"  shall  occur  if more  than  fifty  percent  (50%) of the
Company's  outstanding stock is transferred in a single transaction or series of
transactions   in  consert  with  each  other   including  a  sale  of  all,  or
substantially all, of the assets of the Company.

     5. Except as otherwise  provided for herein,  the Agreement shall remain in
effect as it was prior to the execution of this Addendum. However, to the extent
of any inconsistency between the Agreement and this Addendum,  the provisions of
this Addendum shall control.

     6. This  Addendum is binding on the  successors  and assigns of the parties
hereto.

     IN WITNESS WHEREOF,  the parties have set their hands and seals this ______
day of _______________, 1998.

                                       TOPS APPLIANCE CITY, INC.


_______________________             By:   /s/
Rick Jones                             _________________________________________

<PAGE>

                                  EXHIBIT 10.41

              SECOND ADDENDUM TO MANAGEMENT AGREEMENT ENTERED INTO
               AS OF THE 3RD DAY OF SEPTEMBER, 1996 ("AGREEMENT")
                    BETWEEN THOMAS ZAMBELLI ("EXECUTIVE") AND
                      TOPS APPLIANCE CITY, INC. ("COMPANY")

     WHEREAS,  Tops Appliance City,  Inc. and Thomas  Zambelli  entered into the
above-referenced Agreement, and

     WHEREAS, Company and Executive desire to amend such Agreement,

         In  consideration  of One  ($1.00)  Dollar and other good and  valuable
consideration, it is agreed as follows:

     1.  Section  4 of the  Agreement  is  amended  to  extend  the  term of the
Agreement to December 31, 2000.

     2. Section 5 of the Agreement is amended to provide that effective  January
1, 2000,  Executive's Base Salary shall be One Hundred Ninety Thousand and no/00
($190,000.00) Dollars per annum.

     3. Section  6(b) of the  Agreement is amended to cause the Company to grant
to the Executive  options to purchase an  additional  twenty  thousand  (20,000)
shares of the  Company's  Common  Stock,  which  options  will  vest and  become
exercisable  in the following  amount on the following  date,  provided that the
Executive is then employed by the Company:

                       Date                       No. of Shares

                  December 31, 2000                  20,000

Such options  shall be granted  pursuant to a separate  agreement to be executed
and delivered  simultaneously with this Addendum, will be non-qualified and will
have an exercise  price per share equal to the  closing  price of the  Company's
Common Stock on December 1, 1998.

         4. Section 17 of the  Agreement is added to provide as follows:  In the
event of a "change in control" of the Company,  Executive shall be entitled to a
bonus payment equal to one and one-half times his base compensation as in effect
immediately  prior to the change in  control.  Such bonus  shall be paid  within
sixty  (60) days of the change in  control.  For  purposes  of this  Section,  a
"change  in  control"  shall  occur  if more  than  fifty  percent  (50%) of the
Company's  outstanding stock is transferred in a single transaction or series of
transactions   in  consert  with  each  other   including  a  sale  of  all,  or
substantially all, of the assets of the Company.

         5. Except as otherwise  provided for herein, the Agreement shall remain
in effect as it was prior to the  execution of this  Addendum.  To the extent of
any  inconsistency  between the Agreement and this  Addendum,  the provisions of
this Addendum shall control.

         6. This  Addendum  is  binding  on the  successors  and  assigns of the
parties hereto.

         IN WITNESS  WHEREOF,  the  parties  have set their hands and seals this
______ day of _______________, 1998.

                                                  TOPS APPLIANCE CITY, INC.

_______________________                     By: /s/
Thomas Zambelli                                _________________________________

<PAGE>


                                 EXHIBIT 10.41

                               Merchant Agreement

BANK: Household Bank (SB), N.A.             MERCHANT: Tops Appliance City, Inc.
1111 Town Center Drive                      45 Brunswick Ave.
Las Vegas, Nevada 89134                     Edison, NJ 08818
                                            Facsimile No. (732) 248-2731

     This Merchant  Agreement  ("Agreement")  is made and entered into as of the
day of December,  1998 ("Effective  Date"),  by and between Household Bank (SB),
N.A.  (herein   "Household")  and  Tops  Appliance  City,  Inc.,  a  New  Jersey
corporation  (herein  "Merchant").  In  consideration  of the  mutual  promises,
covenants,  and  agreements  set forth  below and for  other  good and  valuable
consideration,  the receipt and  sufficiency  of which are hereby  acknowledged,
Merchant and Household agree as follows:

     Section 1. Definitions.  In addition to the words and phrases defined above
and elsewhere in this Agreement,  the following words and phrases shall have the
following meanings:

     a.  "Account"  means an account  resulting  from the issuance of a Card. An
Account may have more than one Card issued for it. Each  Account  shall be owned
by, and deemed to be the property of, Household.

     b.  "Affiliate"  means any entity that is owned by, owns or is under common
control with Household or Merchant or its ultimate parent.

     c. "Applicable Law" means  collectively or individually any applicable law,
rule,  regulation or judicial,  governmental or  administrative  order,  decree,
ruling, opinion or interpretation.

     d. "Authorization" means permission from Household to make a Card Sale.

     e. "Authorization Center" means the facility designated by Household as the
facility at which Card Sales are authorized.

     f. "Business Day" means any day except Saturday or Sunday or a day on which
banks are closed in the State of Nevada.

     g. "Card" means the private  label credit card issued by Household  for the
Program.

     h.  "Cardholder"  means (i) the  person in whose name an Account is opened,
and (ii) any other authorized users of the Account and Card.

     i. "Card Sale" means any sale of Goods that Merchant  makes to a Cardholder
pursuant to this Agreement that is charged to an Account.

     j. "Chargeback" means the return to Merchant and reimbursement to Household
of a Sales Slip or Card Sale for which Merchant was previously paid.

     k. "Credit Slip" means  evidence of a credit in a paper or electronic  form
for Goods purchased from Merchant.

     l.  "Goods"  means the  products  described  in  Section  2 below,  certain
warranties  expressly  authorized  by  Household,  and related  services sold by
Merchant  in the  ordinary  course  of  Merchant's  business  to  consumers  for
individual, family, personal or household use.

     m.  "LIBOR"  shall  mean  the  daily  average  of the one (1)  year  London
Interbank Offered Rate as published by Bloomberg Financial Markets. For purposes
of this Agreement "Base LIBOR" shall be 5.00%.

     n. "MONTH" means a calendar  month unless used in connection  with a Credit
Promotion.

     o. "Operating  Instructions" means the Regulatory  Guidelines and operating
instructions and/or procedures  designated by Household and provided to Merchant
from time to time concerning the Program.  Household shall provide Merchant with
reasonable written notice of any changes to the Operating Instructions.

     p.  "Program"  means  the  private  label  revolving  credit  card  program
associated with Merchant  whereby Accounts will be established and maintained by
Household,   Cards  issued  by  Household  to  qualified  consumers   purchasing
Merchant's  Goods,  and Card  Sales  funded  all  pursuant  to the terms of this
Agreement.

     q. "Program Year" means any consecutive twelve (12) month period commencing
with the first day of funding of any Accounts  after the Effective Date and each
subsequent twelve (12) month period.

     r. "Sales Slip" means  evidence of a Card Sale in paper or electronic  form
for Goods purchased from Merchant.

     s.  "Terminal"  means  an  electronic   terminal  or  computer  capable  of
communicating  by  means  of an  on-line  or  dial-up  electronic  link  with an
Authorization Center.

     Section 2. Scope and Purpose.  Merchant  engages in the sale of appliances,
consumer  electronics and other related products and related services  including
extended  warranties  ("Goods") and Merchant desires to make financing available
to consumers  purchasing  Goods and services from Merchant and to participate in
the  Program  in  accordance  with the  terms and  conditions  set forth in this
Agreement.  Household, a credit card bank in the business of providing revolving
credit financing pursuant to a credit card, has agreed to provide such financing
under the Program to individual qualified consumers purchasing  Merchant's Goods
pursuant to the terms and conditions set forth in this Agreement.


<PAGE>


     a.  Forms  and  Cards.   Household   will  provide  to  Merchant   standard
application/agreements,  Sales Slips, Credit Slips, and other forms from time to
time for use by Merchant in the  Program,  which  documents  may be changed from
time to time by Household. Merchant shall be charged a fee for nonstandard forms
requested  by Merchant.  The design and content of Cards and billing  statements
shall  be  mutually  agreed  upon by  Household  and  Merchant.  The  terms  and
conditions  of  Accounts  and  application/agreements  shall  be  determined  by
Household and are subject to change by Household from time to time.

     b. Credit Review:  Ownership of Accounts.  All completed  applications  for
Accounts  submitted  by Merchant to  Household  whether  mailed,  telephoned  or
otherwise electronically  transmitted will be processed and approved or declined
in accordance with such credit criteria and procedures  established from time to
time by Household,  with Household  having and retaining all rights to reject or
accept such applications.  Household will only accept applications for revolving
credit pursuant to the credit card it issues for individual, personal, family or
household use. Household or its Affiliates shall own the Accounts, including the
Cardholder names and addresses associated with the Accounts,  and shall bear the
credit risk for such Accounts.  Except as otherwise  provided in this Agreement,
Merchant acknowledges and agrees that it shall have no ownership interest in the
Accounts. Upon Merchant's request,  Household will provide Merchant with mailing
lists of Cardholder  names and addresses and available credit lines for purposes
of soliciting additional purchases. Household shall not be obligated to take any
action under an Account, including making future advances or credit available to
Cardholders.  Household shall not be obligated to accept applications for a Card
or to  approve  any Card Sale for  consumers  that do not have  their  principal
residence and billing address in the Continental United States.

     c. Card Promotions,  Services and Enhancements.  Household and Merchant may
from time to time mutually  agree to offer to existing or potential  Cardholders
special  credit  promotions,  additional  services  and/or  enhancements.  These
services shall include,  but not be limited to,  performing an initial marketing
audit related to the Program,  assisting Merchant in creating a credit marketing
plan,  with creative  design and development of point of sale materials and such
other services as become  available or as Household  offers to other  merchants.
The terms of such promotions, services and enhancements shall be mutually agreed
upon by Household  and Merchant and are subject to change upon mutual  agreement
of the  parties or  discontinuance  by  Household  upon notice to  Merchant.  In
consideration  of  Household's   providing  special  credit  promotions  and  to
compensate  Household for such  promotions,  Merchant agrees to pay to Household
for the period agreed upon by Household  and Merchant such rates,  discounts and
amounts as may be agreed upon by Household  and  Merchant.  Household may deduct
amounts owed to it hereunder from amounts owed to Merchant under this Agreement.

     Section 3. Fees, Discounts. Charges, Rates and Funding.

     a.  Consumer  Rate.  The annual  percentage  rate  ("APR") to be charged on
purchases  with the Card  shall be a  variable  APR of the Prime  Rate plus 14.4
percentage   points,  or  plus  16.4  percentage  points  for  the  default  APR
("Spread"). The Prime Rate shall be determined based upon the highest Prime Rate
published  in The Wall  Street  Journal  "Money  Rates" on the first  Tuesday of
January,  April, July and October,  and will take effect on the first day of the
billing cycle for February, May, August and November. The APR shall not be lower
than 22.9% during the Initial Term of this  Agreement.  The APR shall not exceed
the maximum  interest rate  allowable by  Applicable  Law,  rule,  regulation or
statute  and shall be  subject  to change  from time to time by  Household  upon
notice to Merchant. The initial APR shall be 22.9%

     b. Merchant.  Merchant agrees to pay Household the following  nonrefundable
fees,  charges and  discounts  (some of which are more fully  described  in this
Agreement):  (i) "Discount": 0% of the amount of each non-credit promotion Sales
Slip accepted and funded by Household.  (ii) "Credit  Promotion  Discount  Fee":
Household shall make certain  deferred  payment and/or deferred  interest credit
promotions  ("Credit  Promotionsn)  available  to  Merchant.   Each  Sales  Slip
generated  pursuant  to each  Credit  Promotion  shall  be  subject  to a Credit
Promotion discount fee ("Discount Fee") as set forth herein.  During the term of
this  Agreement,  the  percentage  of total annual  dollar  volume of Card Sales
generated by the 12 Month Same as Cash With Payments Credit Promotion ("12 Month
SAC Volume")  shall not exceed ten percent (10%) of the 12 month average  dollar
volume of  promotional  and non  promotional  Card  Sales  ("12 Month SAC Volume
Maximum") during each Program Year. The initial Credit  Promotion  Discount Fees
shall be as follows:

<PAGE>

Credit Promotion                    Discount Fee       12 Month SAC Maximum
----------------                    ------------       --------------------

Non Promotional Card Sales                  0.00%             N/A
90 Day Same as Cash/Without Payments        0.85%             N/A
6 Month Same as Cash/With Payments  3.50%                     N/A
6 Month Same as Cash/Without Payments       3.90%             N/A
12 Month Same as Cash/With Payments 7.50%                     10%

     The Credit  Promotion  Discount  Fees set forth in this  Subsection 3b (ii)
shall be  reviewed  and  adjusted  under  the  following  circumstances:  (A) in
accordance  with any increase or decrease in Base LIBOR as set forth below;  (B)
in the event Household  determines that the 12 Month SAC Volume Maximum exceeded
10% for any  Program  Year  during  the term of this  Agreement  as set forth in
Schedule A below;  (C) in accordance  with the provisions of Section 6 b (vi) if
Household  determines  that Fraud  Losses (as  defined in Section 6 b (vi)) will
exceed the percentage set forth therein during the term of this Agreement.

     Any  adjustment in the Discount Fees based upon changes in Base LIBOR shall
be made  semiannually  during each Program Year on January 1st and July 1st (the
Adjustment Dates), and shall be the difference,  if any, in the LIBOR determined
as of the Adjustment Date (Current LIBOR) from Base LIBOR ("LIBOR Spread").  The
Current  LIBOR shall be  determined  by the average LIBOR for the Month prior to
the  applicable  Adjustment  Date. The new Discount Fee shall be effective as to
all promotional  volume accepted and funded by Household for the next six Months
starting after the applicable Adjustment Date. The Credit Promotion Discount Fee
shall be  determined  by adding or  subtracting  the LIBOR Spread to or from the
initial  Discount Fee for each Credit  Promotion.  For  example,  if the Current
LIBOR on January 1st is 5.13% for that  Adjustment  Date, the Discount Fee for a
"12 Month Same As Cash With Payments"  promotion would be calculated as follows:
5.13% (Current  LIBOR) minus 5.00% ("Base LIBOR") = .13% (LIBOR  Spread).  7.50%
(12 Month SAC With Payments  Initial Discount Fee) + .13% (LIBOR Spread) = 7.63%
(New  Discount  Fee for 12 Month  SAC With  Payments).  Provided,  however,  the
maximum decrease in the Discount Fee for any Credit Promotion as a result of any
decrease in the Current LIBOR below Base LIBOR shall be 20 basis points.

     Any  change in the  Discount  Fee for 12 Month SAC  promotions  based  upon
Merchant  exceeding  the 12 Month SAC Volume  Maximum shall be determined at the
end of each Program Year as set forth in Schedule A below. Household will charge
Merchant the  additional  Discount Fee set forth below on the  aggregate  dollar
amount of the 12 Month SAC Volume for that Program  Year.  Household  shall bill
Merchant  for the  additional  Discount  Fee  within  30 days of the end of such
Program Year and Merchant shall pay Household the additional Discount Fee within
30 days of billing.

                                   Schedule A
<TABLE>
<CAPTION>

12 Month SAC Volume as a % of Total Card Sale Volume          Additional Discount Fee
----------------------------------------------------          -----------------------
<S>             <C>                                                  <C>

                  .01% to10%                                         .00%
                10.01% to 25%                                        .40%
                25.01% to 50%                                        .70%
                50.01% to 75%                                        .95%
                75.01% to 100%                                      1.15%

</TABLE>


     (iii)  "Convenience  Usage  Charge":  0% of all finance  charges that would
otherwise  be  paid  by the  Cardholder  but  for  the  payment  in  full of the
outstanding  Account  balance during any grace period or promotional  period and
which have not been  previously  paid to  Household  as a  discount.  (Under the
Program,  Household may permit Cardholders to pay the entire outstanding balance
due without  finance  charges during any applicable  grace period or promotional
period).

     (iv) "Returned  Merchandise  Charge":  0% of the accrued finance charges on
Accounts  with  respect to Goods that are  returned  and a credit is not applied
prior to the end of the  billing  cycle  period in which the Card Sale was made.

     (v) "Start-up Fee": $0.00.

     (vi) "Forms Fee":  $0.00. 

     (vii)  "Application  Fee":  $0.00 per Cardholder  application  presented to
Household under the Program.


<PAGE>


     The rate, fees, discounts and charges described above in this Section 3 are
subject to change by Household in  accordance  with the terms and  conditions as
set forth in this Section 3 upon prior written notice to Merchant.  In the event
Household discontinues all Credit Promotions,  Merchant shall have the option to
terminate  this  Agreement  prior to the end of the Initial  Term or any Renewal
Term upon ninety (90) days prior written notice to Household.

     c.  Acceptance,  Offset  &  Funding.  Subject  to  the  terms,  conditions,
warranties and  representations in this Agreement and provided that Merchant has
satisfied all of the conditions set forth in this Agreement,  including, without
limitation, Sections 4, 5, and 7, Household agrees to pay to Merchant the amount
of each valid and authorized  Sales Slip presented to Household  during the term
of this Agreement, less the amount of the fees, charges, and discounts described
above in this Section 3, outstanding Account balances for Sales Slips subject to
Chargeback, reimbursements, refunds, customer credits and any other amounts owed
to  Household by Merchant  under this  Agreement.  Household  may also offset or
recoup said amounts from future amounts owed to Merchant  under this  Agreement.
Any amounts owed by Merchant to Household  which cannot be paid by the aforesaid
means  shall be due and  payable by  Merchant  on demand.  Any  payment  made by
Household  to  Merchant  shall not be final but shall be subject  to  subsequent
review and verification by Household and Merchant. Merchant shall electronically
submit Sales Slips to Household for funding Monday through Friday. Transmissions
received  prior to 7:30 a.m.  Central Time shall be funded by Household the same
Business Day.  Household's  liability to Merchant with respect to the funding or
processing  of any Card  Sale,  Sales  Slip or Credit  Slip shall not exceed the
amount on the Sales Slip or Credit Slip in connection with such transaction.  In
no event shall Household be liable for any incidental or  consequential  damages
or for failure to fund  transactions on the next Business Day.  Funding of Sales
Slips by Household to Merchant shall be made by wire transfer.

     Section 4.  Merchant  Responsibilities  Concerning  Consumer  Transactions.
Merchant covenants and agrees that Merchant shall:

     a. Honor all valid Cards without discrimination, when properly presented by
Cardholders for payment of Goods.

     b. Not require,  through an increase in price or otherwise,  any Cardholder
to pay any  surcharge at the time of sale or pay any part of any charge  imposed
by Household on Merchant.

     c. Not establish  minimum or maximum  charge  amounts  without  Household's
prior written approval.

     d.  Prominently   display  at  each  of  its  locations,   if  appropriate,
advertising and promotional  materials  relating to the Card,  including without
limitation take-one  applications for the Card and use or display such materials
in accordance  with any  specifications  provided by Household.  Such  materials
shall be used only for the purpose of soliciting  accounts for the Program.  Any
solicitation,  written material, advertising or the like relating to the Program
or the products  offered  pursuant to the Program shall be prepared or furnished
by Household or shall receive Household's prior written approval. Household will
charge Merchant and Merchant  agrees to pay the actual and reasonable  costs for
any such advertising and promotional  materials as may be requested by Merchant.
Any such materials shall not be used by Merchant  following  termination of this
Agreement.

   e.  Use  only  the  form  of,   or  modes  of   transmission   for,
application/agreements,  Sales  Slips  and  Credit  Slips  as  are  provided  by
Household, and not use any application/agreements, Sales Slips, and Credit Slips
provided by Household other than in connection with an application for a Card or
a Card  transaction.  

     f. With respect to applications for a Card:

     (i) make sure all information  requested on the application is complete and
legible;

     (ii) obtain the signature on the application of all persons whose name will
appear on the Account or will be responsible for the Account;

     (iii) give the applicant the initial disclosures at the time of signing the
application/agreement prior to the first transaction under the Account;

     (iv)  verify  the  identification  of the  individual(s)  applying  for the
Account,  which  verification may include obtaining  driver's license and social
security numbers;

     (v) provide all  information  required by  Household  from time to time for
approval of  applications  by telephone  or other  electronic  transmission  and
legibly insert the Account number on the application in the designated area; and

     (vi) send the actual original  approved signed  application to Household at
Household's  address  on page one  above or such  other  address  designated  by
Household  within  fifteen (15) Business Days of approval of the  application by
Household.

     g. With respect to Sales Slips:

     (i)  Enter   legibly  on  a  single  Sales  Slip  prior  to  obtaining  the
Cardholder's  signature  (1) a  description  of all Goods  purchased in the same
transaction in detail  suffficient to identify the transaction;  (2) the date of
the transaction; (3) the Authorization number; and (4) the entire amount due for
the transaction (including any applicable taxes);



<PAGE>


     (ii) REQUEST AUTHORIZATION FROM HOUSEHOLD'S  AUTHORIZATION CENTER UNDER ALL
CIRCUMSTANCES.  (Household  may  refuse to accept or fund any Sales Slip that is
presented to Household for payment more than one hundred twenty (120) days after
the date of  Authorization  of the Card Sale).  Merchant  agrees not to divide a
single transaction  between two or more Sales Slips or between a Household Sales
Slip and a sales slip for another  credit  provider  who could  validly  claim a
security  interest in the Goods. If Authorization is granted,  legibly enter the
Authorization  number in the designated area on the Sales Slip. If Authorization
is denied,  do not complete the transaction and follow any instructions from the
Authorization  Center.  Merchant shall use reasonable efforts, by reasonable and
peaceful means, to retain or recover a Card:

     (a)  if  Merchant  is  advised  to  retain  the  Card  in  response  to  an
Authorization request; or

     (b) if  Merchant  has  reasonable  grounds  to  believe  that  the  Card is
counterfeit,  fraudulent,  or stolen. The obligation to retain or recover a Card
imposed by this Section  does not  authorize a breach of the peace or any injury
to persons or property, and Merchant will hold Household harmless from any claim
arising from any injury to person or property or other breach of the peace.

     (iii) if applicable, imprint legibly on the Sales Slip the embossed legends
from the Card and from Merchant's imprinter plate or if the transaction is to be
completed electronically or otherwise without a Card imprint, then enter legibly
on the  Sales  Slip  sufficient  information  to  identify  the  Cardholder  and
Merchant,  including at least,  Merchant's  name and address,  and  Cardholder's
name, Account number.

     (iv) check the effective date, if any, on the Card;

     (v) obtain the signature of the  Cardholder on the Sales Slip,  and compare
the  signature  on the Sales  Slip with the  signature  panel of the Card and if
identification is uncertain or if Merchant  otherwise  questions the validity of
the Card, contact Household's Authorization Center for instructions;

     (vi) IDENTIFICATION OF THE CARDHOLDER IS THE RESPONSIBILITY OF MERCHANT;

     (vii) not present the Sales Slip to Household  for funding  until all Goods
are  delivered  (if  delivery  is to be more than ten (10) days from the date of
sale)  and  all  the  services  are  performed  to the  Cardholder's  reasonable
satisfaction.  If the Card Sale is canceled or the Goods or services canceled or
returned in accordance  with the  Merchant's  reasonable and posted or published
merchandise  return  policy as  established  from time to time by Merchant,  the
Sales Slip is subject to Chargeback;

     (viii) enter the Card Sale into the Terminal; and

     (ix) deliver a true and completed  copy of the Sales Slip to the Cardholder
at the time of the Card Sale.

     h. Credit  Slips.  If Goods are  returned,  any Card Sale or  services  are
terminated or canceled,  or Merchant allows any price adjustment,  then Merchant
shall not make any cash  refund,  but shall  complete  and  deliver  promptly to
Household a Credit Slip  evidencing  the refund or adjustment and deliver to the
Cardholder a true and complete copy of the Credit Slip at the time the refund or
adjustment is made.  Merchant shall date each Credit Slip and include  thereon a
brief description of the Goods returned, services terminated or canceled, refund
or  adjustment  made,  the date of the original  Card Sale,  Cardholder's  name,
address  and  Account  number,  and the date and  amount of the  credit,  all in
sufficient detail to identify the transaction. Merchant shall imprint or legibly
reproduce  on each  Credit  Slip  the  embossed  legends  from the Card and from
Merchant's  imprinter  plate.  The amount of the Credit Slip  cannot  exceed the
amount of the original  transaction  as  reflected  on the Sales Slip.  Merchant
shall issue Credit Slips only in  connection  with previous bona fide Card Sales
and only as permitted hereunder.

     i Not receive any payments  from a Cardholder  for charges  included on any
Sales Slip  resulting  from the use of any Card, nor receive any payments from a
Cardholder  to prepare and present a Credit Slip for the purpose of  effecting a
credit to the Cardholder's  Account.  

     j. Cardholder  Complaints.  Merchant shall within ten (10) Business Days of
receipt  provide  Household  with  a copy  of any  written  complaint  from  any
Cardholder concerning his/her Account.

     k. Satisfy all other requirements  designated in any Operating Instructions
or as may be required from time to time by Household upon  reasonable  notice to
Merchant.  In  the  event  there  is any  inconsistency  between  any  Operating
Instructions  and this Agreement,  this Agreement shall govern unless  otherwise
expressly indicated by Household in any Operating Instructions.

     Section 5. Representations and Warranties.

     a. Merchant  represents  and warrants to Household as of the Effective Date
and throughout the term of this Agreement the following:

     (i) That each Card Sale will arise out of a bona fide sale of Goods  and/or
services  by  Merchant  and will not  involve  the use of the Card for any other
purpose.

     (ii) That to the best of Merchant's  knowledge  each Card Sale will be to a
consumer for personal, family, or household purposes.

<PAGE>


     (iii) That  Cardholder  applications  will be  available  to the public (i)
without regard to race, color,  religion,  national origin, sex, marital status,
or age  (provided  the  applicant  has the  capacity  to  enter  into a  binding
contract)  and  (ii) not in any  manner  which  would  discriminate  against  an
applicant or discourage an applicant from applying for the Card.

     (iv) That it has full  corporate or other power and authority to enter into
this  Agreement;   that  all  corporate  or  other  action  required  under  any
organization  documents to make this  Agreement  binding and valid upon Merchant
according  to its terms has been taken;  and that this  Agreement is and will be
binding, valid and enforceable upon Merchant according to its terms.

     (v) Neither (A) the execution,  delivery and performance of this Agreement,
nor (B) the consummation of the transactions contemplated hereby will constitute
a violation of law or a violation  or default by Merchant  under its articles of
incorporation,  bylaws or any organization  documents, or any material agreement
or contract and no authorization  of any  governmental  authority is required in
connection with the performance by Merchant of its obligations hereunder.

     (vi) That dates after  December  31, 1999 will be properly  recognized  and
date related  calculations  will be correctly  made in the operation of computer
systems  and  functions  material  to the  operation  of the  Program,  and that
Merchant has undertaken procedures to address Year 2000 ("Y2K") computer issues.

     (vii) Merchant has and will retain all licenses  required by local or state
law to conduct its business and to perform its obligations under this Agreement.

     (viii) Any Card Sale subject to rescission has not been rescinded.

     b.  Household  represents and warrants to Merchant as of the Effective Date
and throughout the term of this Agreement the following:

     (i) That it has full  corporate or other power and  authority to enter into
this  Agreement;   that  all  corporate  or  other  action  required  under  any
organization  documents to make this Agreement  binding and valid upon Household
according  to its terms has been taken;  and that this  Agreement is and will be
binding, valid and enforceable upon Household according to its terms.

     (ii) Neither (A) the execution, delivery and performance of this Agreement,
nor (B) the consummation of the transactions contemplated hereby will constitute
a violation of law or a violation  or default by  Household  under its bylaws or
organization   documents,   or  any  material   agreement  or  contract  and  no
authorization of any  governmental  authority is required in connection with the
performance by Household of its obligation hereunder.

     (iii) That dates after  December 31, 1999 will be properly  recognized  and
date related  calculations  will be correctly  made in the operation of computer
systems  and  functions  material  to the  operation  of the  Program,  and that
Household has undertaken procedures to address Year 2000 ("Y2K") computer issues
as set forth in Exhibit 1 attached hereto.

     Section 6. Chargebacks to Merchant. Merchant agrees as follows:

     a. Chargebacks.  Any Sales Slip or Card Sale is subject to Chargeback under
any one or more of the following circumstances,  and thereupon the provisions of
Section 6.c. below shall apply:

     (i) The application or any information on the application or the Sales Slip
or any  required  information  on the Sales  Slip (such as the  account  number,
description  of  Merchant  or Goods  purchased,  transaction  amount or date) is
illegible or incomplete, or the Sales Slip or application is not executed by the
Cardholder;  or  Authorization  is not obtained from  Household's  Authorization
Center, or a valid Authorization number is not correct, in any material respect,
and  legibly  written or  recorded on the Sales  Slip;  or the  Sales Slip  is a
duplicate  of an item  previously  paid,  or the price of the Goods or  services
shown on the Sales Slip differs from the amount shown on the  Cardholder's  copy
of the Sales Slip;

     (ii)  Household  reasonably  determines  that (1)  Merchant has breached or
failed to satisfy, any material term,  condition,  covenant,  warranty, or other
provision of this Agreement,  including,  without  limitation,  Sections 4 and 5
above, or of the Operating  Instructions,  in connection with a Sales Slip, Card
Sale or the transaction to which it relates, or an application for a Card or the
opening of an Account; or (2) the Sales Slip, application/agreement or Card Sale
is fraudulent or is subject to any bona fide claim of illegality,  cancellation,
rescission,  avoidance or offset for any reason whatsoever,  including,  without
limitation,  negligence, fraud, misrepresentation,  or dishonesty on the part of
the  customer  (except as  provided  in Section  6b.) or Merchant or its agents,
employees,  licensees, or franchisees,  or that the related transaction is not a
bona fide transaction in Merchant's ordinary course of business;

     (iii) the  Cardholder,  in good faith,  disputes or denies the Card Sale or
other   Card    transaction,    the    execution    of   the   Sales   Slip   or
application/agreement,  or the delivery,  quality,  or performance of the goods,
services or warranties purchased,  or the Cardholder has not authorized the Card
Sale,  or  alleges  in good faith that 


<PAGE>

a credit  adjustment was requested and refused or that a credit  adjustment
was issued by Merchant but not posted to the Account in violation of  Merchant's
disclosed policy or Applicable Law; or

     (iv) Merchant  fails to deliver to Household  the Sales Slip,  Credit Slip,
application or other records of the Card  transaction  within the times required
in this  Agreement  and such  failure to deliver in any way impairs  Household's
ability to meet its obligations  under Applicable Law (including its obligations
under the Fair  Credit  Billing  Act) or  otherwise  to  respond  to  questions,
disputes, complaints,  lawsuits,  counterclaims or claims concerning Accounts or
requests from Cardholders, or to enforce any rights Household may have against a
Cardholder,  including, without limitation,  litigation by or against Household,
collection efforts and bankruptcy proceedings.

     b. Fraud Chargeback Exception.  Notwithstanding anything to the contrary in
this Section 6,  Household and Merchant  agree that where  Merchant  follows the
procedures and provides the information  set forth below,  an application,  Card
Sale, Sales Slip or other Card transaction reasonably determined by Household to
be the result of customer  fraud  ("Fraud  Chargeback")  shall not be subject to
Chargeback  under this Section 6 if the  following  conditions  have been met by
Merchant:  (i) For  applications,  Merchant  shall provide  verification  of the
applicant's  identify and current address by (1) witnessing the signature on the
application  of each person whose name will appear on the Account or who will be
responsible  for the Account;  and (2) obtaining a copy of one of the following:
an unexpired in state driver's license  containing the applicant's photo (except
no photo  required on New Jersey  driver's  license)  and current  residence  as
listed on the application,  or a current in-state identification card containing
the applicant's photo and current  residence as listed on the application,  or a
valid US Government  issued  military  identification,  or a valid United States
Passport  containing the applicant's photo and reviewing such  identification to
ensure that the applicant  substantially resembles the person described thereon;
and (3) reviewing an unexpired major credit card (e.g.  American Express,  VISA,
MasterCard,  Sears,  Discover or major  department  store or oil company  credit
card) and  comparing the signature on such credit card with the signature on the
application  and/or  Sales Slip;  and (4)  recording  on the  application  where
designated the drivers  license  number or the card type,  account number (where
permissible) and expiration date of such credit card identification.

     (ii) If the address on the photo  identification does not match the address
on the  application,  Merchant  must obtain a photocopy of other  identification
showing the  applicant's  current address such as a utility bill, bank statement
or car  registration.  

     (iii) Within fifteen (15) Business Days of receipt of Household's  request,
or such earlier time as may be required by Household,  Merchant shall provide to
Household a copy of the identification described in 6b(i) and (ii) above to meet
its  obligations  under  Applicable  Law or otherwise  to respond to  questions,
disputes,  inquiries,  investigations,  complaints,  lawsuits,  counterclaims or
other claims concerning  Accounts or requests from Cardholders or to enforce any
rights Household may have against a Cardholder.  (iv) For add on sales after the
initial Card Sale,  Merchant  shall compare and verify the signature on the Card
with  the  signature  on the  Sales  Slip  and  also  swipe  the Card or take an
impression of the Card; provided, however, if a Cardholder does not have his/her
Card  at the  time  of the  purchase,  Merchant  will  be  required  to  provide
verification of the Cardholder's identity by (1) witnessing the signature on the
Sales Slip of the person signing the Sales Slip; and (2) obtaining a copy of one
of  the  following:  an  unexpired  in-state  driver's  license  containing  the
Cardholder's  photo (except no photo required on New Jersey driver's license) or
a  valid  U.S.   Government  issued  military   identification   containing  the
Cardholder's photo or a valid United States Passport containing the Cardholder's
photo  and  reviewing  such   identification   to  ensure  that  the  Cardholder
substantially  resembles  the person  described  thereon;  and (3)  reviewing an
unexpired major credit card (e.g.  American Express,  Visa,  MasterCard,  Sears,
Discover or major department store or oil company credit card) and comparing the
signature  on such credit  card with the  signature  on the Sales Slip;  and (4)
recording on the Sales Slip the driver's  license  number or credit card account
number   (where   permissible)   and   expiration   date  of  such  credit  card
identification.  (v) In the event  Merchant  fails to comply with the  foregoing
provisions with respect to any application to open an Account,  any Card Sale or
Sales Slip for which Household  reasonably  determined the transaction to be the
result of  customer  fraud,  Household  reserves  the right to  Chargeback  such
Account,  Card  Sale or Sales  Slip  under the  terms  set  forth  herein.  (vi)
Household  shall  review the amount of Fraud  Chargebacks  after each six Months
this  Agreement is in effect.  In the event losses to Household  resulting  from
Fraud  Chargebacks  ("Fraud Losses") exceed .25% (on an annualized basis) of the
average  receivables  outstanding,  Household  may adjust the Discount  Fees set
forth in Section 3 b (iii) above.  The increase in the Discount  Fees under this
subsection  shall be one basis  point for each  basis  point  increase  in Fraud
Losses above .25% and shall be in effect for the next six Months. Any subsequent
decease in Fraud Losses from, the preceding 

review  shall  result in a similar one for one decrease in the Discount Fee
down to .25% and shall be in effect for the next six Months.  c.  Resolution and
Payment.   Merchant  is  required  to  resolve  any  dispute  or  other  of  the
circumstances described above in (a) of this Section 6 to Household's reasonable
satisfaction  within fifteen (15) days of notice of Chargeback or Merchant shall
pay to Household the full amount of each such Sales Slip or Card Sale subject to
Chargeback or the portion thereof  designated by Household,  as the case may be,
plus the finance charges thereon,  any attorney fees incurred by Household,  and
other fees and charges  provided for in the  Cardholder  agreement not otherwise
recovered  by  Household.  Upon  Chargeback  to Merchant of a Sales Slip or Card
Sale,  Merchant  shall bear all  liability and risk of loss or right of recovery
associated with such Sales Slip or Account,  or the applicable  portion thereof,
without  warranty  by, or recourse or liability  to,  Household.  Household  may
deduct  amounts  owed to  Household  under this Section from any amounts owed to
Merchant  under this  Agreement.  d. The terms and  provisions of this Section 6
shall survive the termination of this Agreement.

     Section 7. Tape or Electronic  Transmission  & Records.  Data,  records and
information shall be transmitted and maintained as described below.

     a. Transmission of Data. In lieu of forwarding paper Sales Slips and Credit
Slips  to  Household,  Merchant  shall  transmit  to  Household,  by  electronic
transmission  or other form of  transmission  designated  by Household  all data
required by this  Agreement to appear on Sales Slips and Credit Slips.  All data
transmitted  shall be in a medium,  form and format  designated by Household and
shall be presorted  according to  Household's  instructions.  Any errors in such
data or in its transmission  shall be the sole  responsibility of Merchant.  The
means of  transmission  indicated  above in this Section  shall be the exclusive
means  utilized by Merchant  for the  transmission  of Sales Slip or Credit Slip
transaction  data to  Household.  

     b. Receipt of Transmission.  Upon successful  receipt of any  transmission,
Household  shall accept such  transmission  and pay Merchant in accordance  with
this Agreement,  subject to subsequent  review and verification by Household and
to all other rights of  Household  and  obligations  of Merchant as set forth in
this Agreement. If data transmission is by tape, Merchant agrees to deliver upon
demand by  Household a duplicate  tape of any prior tape  transmission,  if such
demand is made within forty-five (45) days of the original transmission.

     c. Records.  Merchant shall  maintain the actual paper Sales Slips,  Credit
Slips, and other records pertaining to any transaction covered by this Agreement
for such  time and in such  manner as  Household  or any law or  regulation  may
require,  but in no  event  less  than two (2)  years  after  the date  Merchant
presents each transaction data to Household,  and Merchant shall make and retain
for at least seven (7) years  legible  copies of both sides of such actual paper
Sales Slips,  Credit Slips or other  transaction  records.  Within  fifteen (15)
days,  or such  earlier  time as may be  required  by  Household,  of receipt of
Household's request,  Merchant shall provide to Household the actual paper Sales
Slips, Credit Slips or other transaction records, any other documentary evidence
available  to  Merchant  and  reasonably  requested  by  Household  to meet  its
obligations  under law (including its obligations  under the Fair Credit Billing
act) or otherwise to respond to questions,  complaints,  lawsuits, counterclaims
or claims concerning  Accounts or requests from  Cardholders,  or to enforce any
rights Household may have against a Cardholder,  including,  without limitation,
litigation  by  or  against   Household,   collection   efforts  and  bankruptcy
proceedings,  or for any other reason.  In the event Merchant fails to comply in
any  respect  with the  provisions  of this  Section,  Household  may  process a
Chargeback for each Card Sale involved pursuant to Section 6 above. 

     Promptly  upon  termination  of this  Agreement  or  upon  the  request  of
Household,  Merchant  will provide  Household  with all  original and  microfilm
copies of documents required to be retained under this Agreement.

     Section 8. Payments by Cardholder  and  Endorsement.  Merchant  agrees that
Household has the sole right to receive  payments on any Sales Slip or Card Sale
funded by  Household.  Unless  specifically  authorized in writing by Household,
Merchant agrees not to make any collections on any such Sales Slip or Card Sale.
Merchant agrees to hold in trust for Household any payment  received by Merchant
of all or part of the  amount of any such Sales Slip or Card Sale and to deliver
promptly  the same in kind to Household  as soon as received  together  with the
Cardholder's  name,  Account number,  and any  correspondence  accompanying  the
payment and deliver same  promptly  within five (5) days of receipt by Merchant.
Merchant  agrees that Merchant  shall be deemed to have endorsed any Sales Slip,
Credit Slip, or Cardholder  payments by check,  money order, or other instrument
made payable to Merchant that a Cardholder  presents to Household in Household's
favor,  and  Merchant  hereby  authorizes  Household  to supply  such  necessary
endorsements on behalf of Merchant.

     Section 9.  Merchant  Credit  Information.  Household  may annually  review
Merchant's  financial  stability.  To assist  Household  in doing  this and upon
Household's request,  Merchant shall deliver to Household no later than 120 days
after the end of each fiscal year,  an audited  financial  statement  including,
without  limitation,  all footnotes,  and supporting  materials with  sufficient
detail to  accurately  portray the  financial  condition of  Merchant.  Merchant
warrants and 


<PAGE>

represents  that its credit  application  and financial  statements
submitted  to  Household  by or on behalf of Merchant  are true and accurate and
Merchant  agrees to supply such additional  credit  information as Household may
reasonably  request  from time to time.  Any  information  provided  by Merchant
pursuant to this Section 9 shall be subject to the confidentiality provisions of
Section 19 below. Merchant understands that Household may verify the information
on any financial  statement or other information  provided by Merchant and, from
time to time,  may seek credit and other  information  concerning  Merchant from
others and may provide financial and other  information  regarding the portfolio
to its  Affiliates  or to others for purposes of its asset  securitizations  and
sales.

     Section  10.  Merchant  Business  Practices.  Merchant  agrees  to  provide
adequate services in connection with each Card Sale pursuant to standard customs
and trade practices and any applicable  manufacturer's warranty service provided
by Merchant and to provide such repairs,  service and replacements and take such
other corrective action as may be required by law or any applicable warranty.

     Section  11.  Cardholder  Account  Information.  Merchant  shall  not sell,
purchase,   provide,   or   exchange   Account   information   in  the  form  of
imprinted Sales  Slips,  carbon copies of imprinted Sales Slips,  mailing lists,
tapes or other media obtained by reason of a Card transaction to any third Party
other than to  Merchant's  agents for the purpose of  assisting  Merchant in its
business with Household or pursuant to a government request.

     Section 12. Change in Ownership.  Merchant agrees to send Household written
notice of any change in  Merchant's  name or location,  any  material  change in
ownership  of  Merchant's  business  or any change in Sales Slip or Credit  Slip
information concerning Merchant.

     Section 13. Indemnification.

     a.  Indemnification  by  Merchant.  Merchant  shall be  liable to and shall
indemnify and hold harmless  Household and its Affiliates  and their  respective
officers,  employees,  agents and directors from any losses,  damages, claims or
complaints  incurred  by  Household  or any  Affiliate  of  Household  or  their
respective  officers,  employees,  agents  and  directors  arising  out of:  (i)
Merchant's  failure  to  comply  with  this  Agreement  or any of the  Operating
Instructions;  (ii) any claim, dispute, complaint or setoff made by a Cardholder
in good  faith  with  respect  to  anything  done or not  done  by  Merchant  in
connection  with  Card  Sales or  credits;  (iii)  anything  done or not done by
Merchant in connection with the furnishing of any goods,  warranties or services
purchased  by  Cardholders;  (iv) the death or injury to any person or the loss,
destruction or damage to any property arising out of the design,  manufacture or
furnishing  by  Merchant  of any goods,  warranties  or  services  purchased  by
Cardholders;  (v) any claim or complaint of a third party or governmental agency
made in good faith in connection with Merchant's  advertisements  and promotions
relating to the Card which have not been reviewed or approved by Household; (vi)
any  illegal or  improper  conduct of  Merchant  or its  employees  or agents in
connection with any of the  transactions  contemplated  by this  Agreement;  and
(vii) any claim or complaint by a consumer or  governmental  agency made in good
faith that  Merchant has violated the Equal  Credit  Opportunity  Act,  Truth in
Lending Act, or any other related Applicable Laws and regulations. Household may
deduct any amounts  incurred by  Household  under this  Section from any amounts
owed Merchant under this Agreement.

     b.  Indemnification  by Household.  Household  shall be liable to and shall
indemnify  and hold harmless  Merchant and its  subsidiaries  or affiliates  and
their  respective  officers,  employees,  agents and directors  from any losses,
damages, claims or complaints incurred by Merchant or any parent,  subsidiary or
affiliate  of  Merchant  or their  respective  officers,  employees,  agents and
directors  arising out of (i) Household's  failure to comply with this Agreement
or any of the Operating Instructions;  (ii) any claim, dispute or complaint by a
Cardholder  made in good  faith  resulting  from  anything  done or not  done by
Household in connection  with such  Cardholder's  Account;  (iii) any illegal or
improper  conduct of  Household,  or its employees or agents with respect to the
Card, a Card Sale, an Account or any other matters relating to the Program; (iv)
any claim,  dispute,  complaint or set off by a consumer or governmental  agency
made in good faith resulting from a violation by Household,  with respect to the
application/agreement, of the Equal Credit Opportunity Act, Truth in Lending Act
or any other related Applicable Laws and regulations; and (v) any claim, dispute
or  complaint  of any third party or  governmental  agency made in good faith in
connection with  advertisements and promotions prepared by Household relating to
the Card.  Notwithstanding the foregoing, the indemnification by Household shall
not apply to any claim or  complaint  relating  to the  failure of  Merchant  to
resolve a billing  inquiry  or  dispute  with a  Cardholder  made in good  faith
relating to Goods or services  purchased  on the Card where such failure was not
caused by Household.  

     c.  Notice of Claim &  Survival.  In the event that  Household  or Merchant
shall  receive  any claim or demand or be subject to any suit or  proceeding  of
which a claim may be made against the other under this Section,  the indemnified
party shall give prompt written notice thereof to the indemnifying party and the
indemnifying  party will be entitled to participate in the settlement or defense
thereof with  counsel  satisfactory  to  indemnified  party at the  indemnifying
party's expense.  In any case, the indemnifying party and the indemnified party
shall  cooperate  


<PAGE>

(at no cost to the  indemnified  party) in the  settlement  or
defense  of any such  claim,  demand,  suit,  or  proceeding.  The terms of this
Section 13 shall survive the termination of this Agreement.

     Section  14.   Nonwaiver.   Merchant's   liability  under  this  Agreement,
including, without limitation, its liability under Section 6 above, shall not be
affected by any settlement,  extension,  forbearance, or variation in terms that
Household  may grant in  connection  with any Sales  Slip or  Account  or by the
discharge or release of the obligations of the Cardholder(s) or any other person
by operation of law or otherwise. Merchant hereby waives any failure or delay on
Household's  part in asserting or enforcing any right that Household may have at
any time under this Agreement or under any Account.

     Section 15. Term and Termination.

     a. Term.  This  Agreement  shall be effective as of the Effective Date when
executed by  authorized  officers  of each of the  parties  and shall  remain in
effect for five (5) years ("Initial  Term") and shall  thereafter be renewed for
successive one year terms (the "Renewal Term(s)") unless and until terminated as
provided  herein.  The termination of this Agreement shall not affect the rights
and  obligations  of the parties with respect to  transactions  and  occurrences
which take place prior to the effective date of termination, except as otherwise
provided herein.

     b. Termination. This Agreement may be terminated:

     (i) By  Household  or Merchant at the end of the Initial Term or the end of
any Renewal Term upon not less than one hundred  eighty (180) days prior written
notice to the other prior to the end of the Initial Term or the Renewal Term; or

     (ii) by Merchant  upon ninety (90) days prior  written  notice  pursuant to
Section 3 herein, if Household discontinues all the Credit Promotions; or

     (iii) by  Household  or Merchant  upon  written  notice to the other in the
event the other party shall elect to wind up or  dissolve  its  operation  or is
wound up and dissolved;  becomes  insolvent or repeatedly fails to pay its debts
as they become due;  makes an assignment  for the benefit of creditors;  files a
voluntary  petition in bankruptcy,  or for  reorganization  or is adjudicated as
bankrupt  or  insolvent;  or has a  liquidator  or  trustee  appointed  over its
affairs;  or 

     (iv) by Household or Merchant  upon ninety (90) days written  notice to the
other (a) if there  occurs any  material  change in  ownership  of  Household or
Merchant or if a material  adverse  change occurs in either  parties'  financial
condition as determined by the other party in such party's  reasonable  business
judgment  and such party is not provided  with  reasonable  assurances  that the
other party's financial  condition will improve  substantially in the near term;
or (b) if either party suspends or goes out of business or substantially reduces
its business operations or sends a notice of a proposed bulk sale of all or part
of its  business;  or (c) in the event  either  party  materially  breaches  its
obligations  or any warranty or  representation  under this  Agreement or in any
Operating Instructions and fails to correct such default within thirty (30) days
after written  notice  thereof from the other party;  or (d) if either party has
reasonable cause to believe that the other party will not be able to perform its
obligations  under this Agreement;  or (iv) by Household upon written notice (a)
if  Household  has  reasonable  cause to believe  that  Merchant,  its agents or
employees have engaged in any fraudulent  activity in connection with any of the
transactions  contemplated  by this  Agreement;  or (b) if Household  receives a
disproportionate  number of Cardholder inquiries,  disputes, or complaints.  For
purposes of this subsection b (iv) (b) a  "disproportionate  number" shall exist
when and if the average number of Cardholder inquiries,  disputes and complaints
received by Household each month over any six (6) month period equals or exceeds
15% of the total number of active debit and credit balance  Accounts  (Household
to notify Merchant after 3 months);  or (c) if in Household's  reasonable  legal
judgment,  any  Applicable  Law requires that this  Agreement or either  party's
rights or obligations hereunder be amended, modified, waived or suspended in any
material respect,  including,  without limitation, the amount of finance charges
or fees  that may be  charged  or  collected  or the  consumer  rate that may be
charged on purchases with the Card. 

     c. Duties and Rights Upon Termination.  Upon termination of this Agreement,
Merchant will promptly submit to Household all Card Sales,  Sales Slips,  Credit
Slips  and  other  transaction  documents  or  data  made  through  the  date of
termination. Household is not liable to Merchant for any direct or consequential
damages that Merchant may suffer as a result of Household's  termination of this
Agreement. In the event this Agreement is terminated for any reason or notice of
termination is given by either party,  Household may take such other  reasonable
actions including but not limited to establishing and maintaining a reserve from
payments otherwise payable to Merchant to protect  Household's rights under this
Agreement and to cover Chargebacks,  fraud,  customer  disputes,  warranties and
other  amounts  owing to Household  (the  "Reserve").  The amount of the Reserve
shall be equal to 110% of the amount of Chargebacks  to the Merchant  during the
most recent 12 month period and shall  commence on the date of receipt of notice
of  termination.  The Reserve shall be maintained by Household for two (2) years
from the  date of  termination.  Any  unused  portion  of the  Reserve  shall be
returned to Merchant  

<PAGE>


its successors or assigns at that end of two year period with interest. The
provisions of this subsection shall survive the termination of this Agreement.

     d. Purchase Requirement. Upon termination of this Agreement, Merchant shall
purchase or arrange to purchase by a third party, the Accounts, without recourse
to Household and without  representations or warranty,  express or implied.  The
purchase price shall be 100% of the full amount of all the  outstanding  Account
balances,  plus accrued interest from the last billing cycle through the date of
sale less any  unamortized  Discount Fee on Credit  Promotions.  The purchase to
occur not later than ninety (90) days after the effective date of termination of
the  Agreement  and to be under  such  terms and  conditions  as are  reasonably
acceptable to Merchant and  Household.  In any event  beginning on the effective
date of termination of this Agreement, Merchant shall pay Household on a monthly
basis,  within ten (10) days cf Household's  request,  a liquidation  fee in the
amount  of $3.75 per  active  Account  per  month,  (i)  until  such time as the
purchase is complete and  Household is paid the purchase  price in full, or (ii)
if  no   purchase   occurs,   until  such  time  as  the   outstanding   Account
balances/receivables are liquidated and paid in full.

     Section 16.  Status of the Parties.  In performing  their  responsibilities
pursuant  to this  Agreement,  Household  and  Merchant  are in the  position of
independent contractors, and in no circumstances shall either party be deemed to
be the agent or employee of the other. This Agreement is not intended to create,
nor does it create and shall not be  construed  to  create,  a  relationship  of
principal  and agent,  partner or joint  venturer or an  association  for profit
between  Household or Merchant.  Any amounts ever owing by Merchant  pursuant to
this  Agreement  represent  contractual  obligations  only and are not a loan or
debt.

     Section 17. Force Majeure.  Neither party to this Agreement shall be liable
to the  other by reason of any  failure  in  performance  of this  Agreement  in
accordance  with its terms if such  failure  arises  out of a cause  beyond  the
control  and  without the fault or  negligence  of such  party.  Such causes may
include but are not  limited to acts of God, of the public  enemy or of civil or
military authority,  unavailability of energy resources, system or communication
failure, delay in transportation,  fires, strikes, riots or war. In the event of
any force majeure  occurrence,  the disabled party shall use its best efforts to
meet its obligations as set forth in this Agreement.

     Section 18.  Limited  License.  Merchant  hereby  authorizes  Household for
purposes of this Agreement to use Merchant's name, logo,  registered  trademarks
and service marks (if any) and any other proprietary designations  ("Proprietary
Materials") on the Cards, applications, periodic statements, billing statements,
collection  letters or  documents,  promotional  or  advertising  materials  and
otherwise  in  connection  with the  Program,  subject  to  Merchant's  periodic
reasonable review of such use and to such reasonable specifications of Merchant.
Merchant represents and warrants that it has obtained appropriate federal and/or
state trademark  registrations  to protect its interest in the use and ownership
of the  Proprietary  Materials.  Merchant  shall,  indemnify,  defend  and  hold
Household harmless from any loss, damage,  expense or liability arising from any
claims  of  alleged   infringement  of  the  Proprietary   Materials  (including
reasonable attorneys' fees and costs).  Merchant may not use any name or service
mark of  Household  or any of its  Affiliates  in any manner  without  the prior
written consent of Household.

     Section  19.  Confidentiality.  Merchant  will  keep  confidential  and not
disclose to any person or entity  (except to  employees,  officers,  partners or
directors of Merchant who are engaged in the implementation and execution of the
Program) all  information,  software,  systems and data, that Merchant  receives
from  Household  or from any other  source,  relating to the Program and matters
which are subject to the terms of this Agreement, including, but not limited to,
Cardholder names and addresses or other Account  information,  and shall use, or
cause to be used, such information solely for the purposes of the performance of
Merchant's  obligations  under the terms of this Agreement.  Household will keep
confidential  and not  disclose  to any  person  or  entity  (except  employees,
officers,  agents or directors of Household,  its subsidiaries or affiliates who
are engaged in the  implementation and execution of the Program) any information
that  Household  receives from  Merchant  which is  designated  confidential  by
Merchant.  All financial  statements,  business plans, sales results and similar
information   provided  to  Household  by  Merchant  are  hereby  deemed  to  be
confidential.  In the event  Household  sells or  assigns  the  Accounts  or any
portion of the Accounts under the Program or Merchant  purchases or arranges the
purchase  of the  Accounts by a third party  pursuant  to Section  15.d.  above,
Household  or  Merchant  may  disclose  any  information  under  this  provision
reasonably  necessary  or  required  to  effectuate  such  sale,  assignment  or
purchase.  The  provisions of this Section 19 shall survive the  termination  of
this Agreement.

     Section 20.  Additional  Products & Services.  Household  and/or any of its
Affiliates  may at any time,  whether during or after the term of this Agreement
and whether the Accounts are owned by  Household,  solicit  Cardholders  for any
other credit cards or other types of accounts or financial or insurance services
or products offered by Household  and/or any of its Affiliates.  Household shall
not directly  solicit  Cardholders for any products sold by Merchant or sell the
cardholder list to another consumer electronics or appliances retailer.



<PAGE>


     Section 21.  Notices.  All notices  required or permitted by this Agreement
shall be in writing and shall be sent to the respective  parties as follows:  if
to Household,  to the  Attention of President,  (with a copy to the Attention of
General Counsel,  HRS USA Law Department,  2700 Sanders Road,  Prospect Heights,
Illinois 60070); if to Merchant,  to the Attention of Chief Financial Officer at
their respective addresses set forth on page one of this Agreement or such other
addresses  as each party may  designate to the other by notice  hereunder.  Said
notices shall be deemed to be received when sent to the above addresses (i) upon
three (3) Business Days after deposit in the U.S.  first class mail with postage
prepaid, (ii) upon personal delivery, or (iii) upon receipt by telex, facsimile,
or overnight express courier service or mail.

     Section 22.  Amendments and  Supplementary  Documents.  Household may amend
this  Agreement  upon ten (10) days'  prior  written  notice to Merchant if such
modification  is reasonably  determined by Household to be required by any state
or federal law,  rule,  regulation,  governmental  or judicial  order,  opinion,
interpretation  or decision;  provided,  however,  Merchant may  terminate  this
Agreement  upon  ninety  (90) days prior  written  notice to  Household  if such
modification or amendment  results in a material adverse change in the financial
expectations  of  Merchant  under this  Agreement;  provided  further,  however,
Merchant  waives the right to terminate this Agreement  under this Section 22 if
such notice is not provided to Household  within sixty (60) days after receiving
notice from Household of a modification or amendment.  Reference herein to "this
Agreement"  shall include any schedules,  appendices,  exhibits,  and amendments
hereto.  Any amendment or  modification to this Agreement must be in writing and
signed by a duly  authorized  officer of Household  and Merchant to be effective
and binding upon the  parties;  no oral  amendments  or  modifications  shall be
binding upon the parties.

     Section 23.  Assignment.  This  Agreement  is binding  upon the parties and
their  successors and to Household  assigns.  Notwithstanding,  Merchant may not
assign  this  Agreement  without the prior  written  consent of  Household;  any
purported  assignment without such consent shall be void.  Household may without
Merchant's  consent  assign this  Agreement or any of the rights or  obligations
hereunder  only to any  Affiliate of Household at any time. In the event of such
assignment,  the  assignee  shall have the same rights and remedies as Household
under this Agreement.

     Section  24.  Nonwaiver  and  Extensions.  Neither  party shall by any act,
delay,  omission,  or  otherwise be deemed to have waived any rights or remedies
hereunder.  Either  party's  failure  to enforce  any of its  rights  under this
Agreement  shall not affect  any other  right of such party or the same right in
any other instance.

     Section 25. Rights of Persons Not a Party.  This Agreement shall not create
any rights on the part of any person or entity not a party hereto,  whether as a
third party beneficiary or otherwise.

     Section  26.  Section  Headings.  The  headings  of the  sections  of  this
Agreement are for reference  only, are not a substantive  part of this Agreement
and are not to be used to affect the validity, construction or interpretation of
this Agreement or any of its provisions.

     Section 27.  Integrations.  This  Agreement  contains the entire  agreement
between  the  parties.  There  are  merged  herein  all  prior  oral or  written
agreements, amendments,  representations,  promises and conditions in connection
with the subject matter hereof.  Any  representations,  warranties,  promises or
conditions  not  expressly  incorporated  herein  shall  not be  binding  on the
parties.

     Section 28. Governing Law/Severability. This Agreement shall be governed by
and  construed  in  accordance  with the laws of the State of  Illinois.  If any
provision of this Agreement is contrary to Applicable  Law, such provision shall
be deemed ineffective without invalidating the remaining provisions hereof.

                     (THIS SPACE LEFT BLANK INTENTIONALLY.)





<PAGE>




     Section 29.  JURISDICTION.  ANY SUIT,  COUNTERCLAIM,  ACTION OR  PROCEEDING
ARISING OUT OF OR RELATING TO THIS  AGREEMENT MUST BE BROUGHT BY MERCHANT IN THE
COURTS OF THE STATE OF ILLINOIS OR IN THE UNITED STATES  DISTRICT  COURT FOR THE
NORTHERN DISTRICT OF ILLINOIS;  AND THE MERCHANT HEREBY  IRREVOCABLY  SUBMITS TO
THE EXCLUSIVE  JURISDICTION OF SUCH COURTS AND ANY APPELLATE  COURTS THEREOF FOR
THE PURPOSE OF ANY SUCH SUIT, COUNTERCLAIM,  ACTION,  PROCEEDING OR JUDGMENT (IT
BEING UNDERSTOOD THAT SUCH CONSENT TO THE EXCLUSIVE  JURISDICTION OF SUCH COURTS
WAIVES ANY RIGHT TO SUBMIT ANY DISPUTES HEREUNDER TO ANY COURTS OTHER THAN THOSE
ABOVE).

     Section 30. WAIVER OF JURY TRIAL.  HOUSEHOLD AND MERCHANT HEREBY KNOWINGLY,
VOLUNTARILY AND INTENTIONALLY  WAIVE ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION,
SUIT, PROCEEDING OR COUNTERCLAIM CONCERNING ANY RIGHTS UNDER THIS AGREEMENT, ANY
RELATED DOCUMENT OR UNDER ANY OTHER DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY
IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH OR THEREWITH,  OR ARISING FROM
ANY RELATIONSHIP EXISTING IN CONNECTION WITH THIS AGREEMENT,  AND AGREE THAT ANY
SUCH ACTION, SUIT,  PROCEEDING OR COUNTERCLAIM SHALL BE TRIED BEFORE A COURT AND
NOT BEFORE A JURY;  THIS  PROVISION IS A MATERIAL  INDUCEMENT  FOR HOUSEHOLD AND
MERCHANT ENTERING INTO THIS AGREEMENT.

     IN  WITNESS  WHEREOF,   Household  and  Merchant  have  caused  their  duly
authorized representatives to execute this Merchant Agreement as of the date set
forth above.

BANK:                                                MERCHANT:

HOUSEHOLD BANK (SB), N.A.                   TOPS APPLIANCE CITY, INC.

By:________________________________         By:/s/Thomas L. Zambelli
                                               ________________________________

Print Name:_________________________        Print Name:  Thomas L. Zambelli

Title:______________________________        Title:  EVP-CFO


                                            ATTESTED OR WITNESSED

                                             By: /s/ Wayme F. Sloneker

                                             Print Name:Wayme F. Sloneker

                                           Title: Corporate Customer Finane Mgr.
                                         Merchant's Federal Tax ID #: 22-3174554