HARMAT ORGANIZATION INC, DEF 14A, 1998-05-26

HARMAT ORGANIZATION INC
DEF 14A, 1998-05-26
GENERAL BLDG CONTRACTORS - RESIDENTIAL BLDGS

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THE HARMAT ORGANIZATION, INC.
22 Old Country Road
P.O. Box 539
Quogue, New York, 11959

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS TO
BE HELD ON JUNE 19, 1998 AT 10:00 A.M.

To the Shareholders of
The Harmat Organization, Inc.

Notice is hereby given that the Annual Meeting of Shareholders of The
Harmat Organization, Inc., a Delaware corporation (the "Company"), will be held
at the offices of the Company, 22 Old Country Road, Quogue, New York, 11979 on
June 19, 1998 at the hour of 10:00 a.m. local time for the following purposes:

(1) To elect five (5) Directors of the Company for the following
year; and

(2) To transact such other business as may properly come before the
Meeting.

Only shareholders of record at the close of business on May 20, 1998
are entitled to notice of and to vote at the meeting or any adjournment thereof.

By Order of the Board of Directors

Scott Prizer, Secretary

May 20, 1998

IF YOU WISH TO VOTE IN FAVOR OF EACH OF THE PROPOSAL AND FOR
THE NOMINEES PRESENTED, CHECK THE APPROPRIATE BOX AND SIGN,
DATE AND RETURN THE ENCLOSED PROXY IN THE ENCLOSED ENVELOPE
WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES. IN
ANY EVENT, YOUR PROMPT RETURN OF A SIGNED AND DATED PROXY WILL
BE APPRECIATED.

<PAGE>

ANNUAL MEETING OF STOCKHOLDERS

The Harmat Organization, Inc.

June 19, 1998
-----------------

PROXY STATEMENT
-----------------

GENERAL INFORMATION

Proxy Solicitation

This Proxy Statement is furnished to the holders of Common
Stock, $.001 par value per share ("Common Stock"), of The Harmat Organization,
Inc. ("Company") in connection with the solicitation of proxies on behalf of the
Board of Directors of the Company for use at the Annual Meeting of Stockholders
("Annual Meeting") to be held June 19, 1998, or at any continuation or
adjournment thereof, pursuant to the accompanying Notice of Annual Meeting of
Stockholders. The purpose of the meeting and the matters to be acted upon are
set forth in the accompanying Notice of Annual Meeting of Stockholders. The
Board of Directors knows of no other business which will come before the
meeting.

Proxies for use at the meeting will be mailed to stockholders
on or about May 22, 1998 and will be solicited chiefly by mail, but additional
solicitation may be made by telephone, telegram or other means of
telecommunications by directors, officers, consultants or regular employees of
the Company. The Company may enlist the assistance of brokerage houses,
fiduciaries, custodians and other like parties in soliciting proxies. All
solicitation expenses, including costs of preparing, assembling and mailing the
proxy material, will be borne by the Company.

Revocability and Voting of Proxy

A form of proxy for use at the meeting and a return envelope
for the proxy are enclosed. Stockholders may revoke the authority granted by
their execution of proxies at any time before their effective exercise by filing
with the Secretary of the Company a written revocation or duly executed proxy
bearing a later date or by voting in person at the meeting. Shares represented
by executed and unrevoked proxies will be voted in accordance with the choice or
instructions specified thereon. If no specifications are given, the proxies
intend to vote "FOR" each of the nominees for director as described in Proposal
No. 1. Proxies marked as abstaining will be treated as present for purposes of
determining a quorum for the Annual Meeting, but will not be counted as voting
in respect of any matter as to which abstinence is indicated. If any other
matters properly

<PAGE>

come before the meeting or any continuation or adjournment thereof, the proxies
intend to vote in accordance with their best judgment.

Record Date and Voting Rights

Only stockholders of record at the close of business on May
20, 1998 are entitled to notice of and to vote at the Annual Meeting of
Shareholders or any continuation or adjournment thereof. Each share of Common
Stock is entitled to one vote per share. Any share of Common Stock held of
record on May 20, 1998 shall be assumed, by the Board of Directors, to be owned
beneficially by the record holder thereof for the period shown on the Company's
stockholder records. The affirmative vote of a majority of the shareholders
present in person or by proxy at the meeting is required for the election of the
directors to be elected by such shares. The present directors and officers of
the Company holding approximately 20% of the outstanding Common Stock of the
Company intend to vote "FOR" the slate of directors.

PROPOSAL NO. 1

ELECTION OF DIRECTORS

The By-Laws of the Company provide for a Board of Directors of
not less than five (5) members. The Board of Directors currently consists of
five (5) members. At the meeting, five directors will be elected to serve until
the 1999 Annual Meeting of Stockholders and until their successors have been
elected and qualified. Present vacancy or vacancies which occur during the year
may be filled by the Board of Directors, and any directors so appointed must
stand for reelection at the next annual meeting of stockholders. All current
directors have been nominated for reelection. The nominees to be voted on by
stockholders are Messrs. Schilowitz, Prizer, Siegel, Sass and Eiten.

All nominees have consented to be named and have indicated
their intent to serve if elected. The Company has no reason to believe that any
of these nominees are unavailable for election. However, if any of the nominees
become unavailable for any reason, the persons named as proxies may vote for the
election of such person or persons for such office as the Board of Directors of
the Company may recommend in the place of such nominee or nominees. It is
intended that proxies, unless marked to the contrary, will be voted in favor of
the election of Messrs. Schilowitz, Prizer, Siegel, Sass and Eiten.

The Board of Directors recommends that the stockholders vote "FOR" the
election of the following five nominees (Item No. 1 on the proxy card).

<PAGE>

NOMINEES FOR ELECTION

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

Name Age Title

Matthew C. Schilowitz 35 President, CEO & Chairman

Scott Prizer 36 Secretary & Director

Seymour G. Siegel 56 Treasurer & Director

David W. Sass 62 Director

David S. Eiten 34 Director

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

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

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

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

<PAGE>

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

During Fiscal 1997 the Board of Directors held three meetings and acted
two times by unanimous written consent. The Board determined that outside
directors would receive an honorarium of $2,500 per meeting attended but no more
than $10,000 per year.

SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT

On May 20, 1998, there were 2,612,500 shares of Common Stock
outstanding. The following table sets forth as of May 20, 1998, the number of
shares of Common Stock of the Company and the percentage of that class owned
beneficially, within the meaning of Rule 13d-3 promulgated under the Securities
Exchange Act of 1934, as amended, and the percentage of the Company's voting
power owned by (i) all the directors of the Company who are stockholders; (ii)
all stockholders known by the Company to own more than five percent of the
Company's Common Stock; and (iii) all directors and officers as a group. All
shares set forth in the following table are entitled to one vote per share and
the named beneficial owner has sole voting and investment power.

Matthew C. Schilowitz 500,000(1)(2) 20%
c/o Harmat Homes Inc.
P.O. Box 539
Quogue, NY 11959

Scott Prizer 10,000(3) 0%
145 West 67th St.
New York, NY 10023

Seymour G. Siegel 10,000(3) 0%
c/o Siegel Rich Resources, Inc.
1180 Avenue of the Americas
New York, NY 10036

David W. Sass 10,000(3) 0%
c/o McLaughlin & Stern, LLP
380 Lexington Ave.
New York, NY 10168

David S. Eiten 10,000(3) 0%
7 Thorngrove Lane
Dix Hills, New York 11746

All officers and directors 500,000 20%
as a group (5 persons)
- ------------------
* No shares owned.

<PAGE>

(1) Does not include shares of Common Stock which may be issued pursuant to
the Plan for Incentive Compensation of Matthew Schilowitz (the
"Schilowitz Incentive Plan") adopted by the Board of Directors, and
approved by the Company's stockholders on March 1, 1996 and amended
August 3, 1996, March 24, 1997 and June 19, 1997. Pursuant to the
Schilowitz Incentive Plan, Mr. Schilowitz has been granted an option
(the "Option") to purchase up to an aggregate of 500,000 shares of
Common Stock at an exercise price of $1.125 per share, as amended. The
Option has a duration of ten years. The Option grants: (i) the right to
purchase 250,000 shares of Common Stock, such right to vest and become
exercisable upon the Company realizing annual pre-tax earnings equaling
or exceeding $750,000; and (ii) the right to purchase 250,000 shares of
Common Stock, such right to vest and become exercisable upon the
Company realizing annual pre-tax earnings equaling or exceeding
$1,500,000. The number of shares granted under the Schilowitz Incentive
Plan is subject to adjustment in the event of the Company's declaration
of stock dividends, stock splits, reclassification and the occurrence
of other similar events.

(2) Does not include shares of Common Stock which were issued pursuant to the
Company's 1996 Qualified Stock Option Plan ("1996 Plan") adopted by the Board of
Directors and approved by the Company's stockholders on January 23, 1997. On
March 24, 1997, as part of the 1996 Plan, Mr. Schilowitz was granted an option
of 300,000 shares of the Company's Common Stock at an exercise price of $2.337
per share, being 110% of the fair market value of such shares. On June 19, 1997,
the Board voted to reduce the exercise of such options for Mr. Schilowitz to
$1.25. The Option has a duration of five years.

(3) Includes shares of Common Stock which may be issued pursuant to the
Company's Qualified Stock Option Plan adopted by the Board of Directors
and approved by the Company's stockholders on January 23, 1997,
pursuant to which five year options on 10,000 shares each were granted
and are exercisable at $1.25 per share.

<PAGE>

EXECUTIVE COMPENSATION

The following table sets forth the aggregate cash compensation paid by
the Company during each of the last three fiscal years to its Chief Executive
Officer.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>

Summary Compensation Table
Annual Compensation Long Term Compensation
Name and principal Year
position Awards Payouts
Salary Bonus($) Other Restricted Securities LTIP
($) annual Stock Underlying Payouts ($)
compen- awards Options/SARs (#)
sation
Matthew C. Schilowitz(1)(2)1997 $105,000 500,000 shares
of Common Stock

300,000 shares of
Common Stock

1996 $52,000
1995 $197,000

All other
Compensation
</TABLE>

(1) See the discussion of the Company's employment agreement with Mr. Schilowitz
as described below.

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

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

<PAGE>

CERTAIN TRANSACTIONS

The Company has entered into an employment agreement with Matthew C.
Schilowitz, as described below.

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

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

The Plan for Incentive Compensation of Matthew Schilowitz (the
"Schilowitz Incentive Plan") was adopted by the Board of Directors and approved
by the Company's stockholders on March 1, 1996, amended August 3, 1996, March
24, 1997 and June 19, 1997. Pursuant to such plan, Mr. Schilowitz has been
granted an option (the "Option") to purchase up to an aggregate of 500,000
shares of Common Stock at an exercise price of $1.25 per share. The Option
provides for the grant of: (i) the right to purchase 250,000 shares of Common
Stock such right to vest and become exercisable upon the Company realizing
annual earnings before taxes equaling or exceeding $750,000; and (ii) the right
to purchase 250,000 shares of Common Stock such right to vest and become
exercisable upon the Company realizing annual earnings before taxes equaling or
exceeding $1,500,000. Shares subject to options granted under the Schilowitz
Incentive plan are subject to adjustment in the event of the Company's
declaration of stock dividends, stock splits, reclassification and the
occurrence of other similar events. The Company has reserved 500,000 shares of
Common Stock for issuance under the Schilowitz Incentive Plan. Pursuant to the
terms of the Schilowitz Incentive Plan, the Board of Directors or a committee
established by the Board of Directors administers such plan.

On January 23, 1997, the Board of Directors voted to grant options to
four directors under the terms of the Company's 1996 Qualified Stock Option
Plan. Each individual was granted a five

<PAGE>

year option to purchase 10,000 shares at a price of $1.25.
On March 24, 1997, as part of the Company's 1996 Qualified Stock Option
Plan, Mr. Schilowitz was granted an option of 300,000 shares of the Company's
common stock at an exercise price of $2.337 per share, being 110% of the fair
market value of such shares. On June 19, 1997, the Board voted to reduce the
exercise price of such options for Mr. Schilowitz to $1.25. The Option has a
duration of five-years.

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

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

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

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

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

Crossings Associates, L.P. 1/9th interest
Services
The Crossings had a 14-lot subdivision. The Company
is constructing a house on one remaining lot.

Emerald Woods Development Corp. 50% shareholder
Services
Emerald had a 14-lot subdivision. All of which have
been sold. The has purchased on lot and is
constructing a house on one remaining lot.

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

<PAGE>

Bridle Path Development Corp. 50% shareholder
Services
Bridle Path had a 14-lot subdivision. There are 3
available lots. The Company may provide construction
services to Bridle Path in the future.

Woodland Development Association,
a partnership 1/3 interest

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

Woodland Pines Associates,
a partnership

All 10 remaining building lots located in East
Quogue, New York, are being sold to another builder
by the original owner.

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

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

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

<PAGE>

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

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

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

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

AUDIT MATTERS

It is expected that a representative of the firm of Marks Shron &
Company, independent auditors, will be present at the Annual Meeting of
Shareholders and will be available to respond to appropriate questions.

The Company's 1997 Annual Report on Form 10-KSB to shareholders will be
mailed separately from this Proxy Statement.

OTHER BUSINESS TO BE TRANSACTED

As of the date of this Proxy Statement, the Board of Directors knows of
no other business to be presented for action at the Annual Meeting of
Stockholders. As for any business that may properly come before the Annual
Meeting or any continuation or adjournment thereof, the Proxies confer
discretionary authority to the person named therein. These persons will vote or
act in accordance with their best judgment with respect thereto.

ANNUAL REPORT TO STOCKHOLDERS

The Annual Report to Stockholders for the year ended September 30, 1997
is being mailed to stockholders with this Proxy Statement.

<PAGE>

STOCKHOLDER PROPOSAL - 1999 ANNUAL MEETING

Any stockholder proposals to be considered by the Company for inclusion
in the proxy material for the 1999 Annual Meeting of Stockholders must be
received by the Company at its principal executive offices by December 31, 1998.

The prompt return of your proxy will be appreciated and helpful in
obtaining the necessary vote. Therefore, whether or not you expect to attend the
meeting, please sign the proxy and return it in the enclosed envelope.

BY ORDER OF
THE BOARD OF DIRECTORS

SCOTT PRIZER, Secretary
New York, New York
May 20, 1998

<PAGE>

THE HARMAT ORGANIZATION, INC.

P R O X Y

This Proxy is Solicited on Behalf of the Board of Directors

The undersigned hereby appoints Matthew C. Schilowitz and
Scott Prizer as Proxies, each with the power to appoint his substitute, and
hereby authorizes them to represent and to vote, as designated below, all the
shares of the common stock of The Harmat Organization, Inc. held of record by
the undersigned on April 10, 1997, at the annual meeting of shareholders to be
held on May 9, 1997, or any adjournment thereof.

1. ELECTION OF DIRECTORS

For all nominees listed below Withhold Authority to
(Except as Marked to the Vote All Nominees Listed
Contrary) ___ Below ___

Matthew C. Schilowitz, Scott Prizer, Seymour G. Siegel, David W.
Sass, David S. Eiten

2. In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the meeting.

THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER
DIRECTED HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS
PROXY WILL BE VOTED FOR PROPOSAL 1.

Please sign name exactly as appears below. When shares are held by
joint tenants, both should sign. When signing as attorney, as executor,
administrator, trustee or guardian, please give full title as such. If a
corporation, please sign in full corporate name by President or other authorized
officer. If a partnership, please sign in partnership name by authorized person.

Dated: , 1997

Signature

Signature, if held jointly

PLEASE MARK, SIGN, DATE AND RETURN THE PROXY USING THE ENCLOSED
ENVELOPE

<PAGE>

THE HARMAT ORGANIZATION, INC.

ANNUAL REPORT

SEPTEMBER 30, 1997

<PAGE>

Name Position

Matthew C. Schilowitz President, CEO & Chairman

Scott Prizer Secretary & Director

Seymour G. Siegel Treasurer & Director

David W. Sass Director

David S. Eiten Director

Transfer Agent

American Stock Transfer & Trust Company
40 Wall Street
New York, NY 10005

Auditors

Marks Shron & Company, LLP
111 Great Neck Road
Great Neck, New York 11021

Counsel

McLaughlin & Stern, LLP
260 Madison Avenue
New York, New York 10016

Subsidiaries

Harmat Homes, Inc.
P0 Box 539
Quogue, New York
11959

Harmat Capital Corp.
P0 Box 539
Quogue, New York
11959

Northside Woods, Inc.
P0 Box 539
Quogue, New York
11959

Harmat Holding Corp
P0 Box 539
Quogue, New York 11959

Harmat Organization, Inc
P0 Box 539
Quogue, New York 11959

Quick Storage of Quogue, Inc.
P0 Box 572
Quogue, New York 11959

<PAGE>

May 20, 1998

Dear Stockholders:

Your Company's financial performance during the fiscal year ended
September 30, 1997 was disappointing to management. Accordingly, steps are being
taken to position your Company to take advantage of new business opportunities
which may have greater potential for growth than Harmat's traditional real
estate development activities. We are in process of closing out current real
estate projects to improve the Company's liquidity and ability to finance an
acquisition or merger. The Company has engaged an investment banking firm to
assist in identifying and evaluating prospective merger candidates. We are
optimistic about future prospects and will keep you informed of significant
developments.

Total revenues for the year ended September 30, 1997 were $1,591,791
as compare to revenues of $2,727,870 for the nine months ended September 30,
1996. This represents a decrease of approximately $1,136,079, or 42%, in spite
of the current fiscal year having three additional months. Principal reason for
the decline in revenue was the delivery of three homes in the latest fiscal
year, resulting in revenue of $1,390,883, in contrast to the delivery of six
homes the prior year with revenue of $2,496,926. In fiscal 1997, the residential
new construction market in Eastern Long Island addressed by the Company was
characterized by competitive pricing, low profit margins and less property
available for development. Rental income increased to $200,908 in fiscal 1997,
up from $153,944 in fiscal 1996.

Cost of sales and direct operating expenses in the latest fiscal year
declined to $1,425,883 as compared to $2,238,769 in the period ended September
30, 1996. However, in view of the greater decline in revenue, gross profit was
$166,108 (3% of revenue) in fiscal 1997 as compared to $489,101 (20% of revenue)
in fiscal 1996. Selling, general and administrative expenses were $1,425,883 in
the year ended September 30, 1997 as compared to $702,290 in the nine months
ended September 30, 1996. This increase reflects the additional three months in
fiscal 1997 as well as certain costs associated with being a public company such
as professional and director fees, personnel expenses and insurance costs.

Loss from operations was $948,386 in fiscal 1997 against $227,939 loss
from operations in fiscal 1996. After inclusion of other income and expenses,
net loss was $962,019 in the fiscal year ended September 30, 1997 as compared to
net loss of $346,491 in the nine months ended September 30, 1996.

We thank our employees for their contributions and dedication during a
difficult year. We believe that the potential exists for a "New Harmat" which
may be involved in business activities unrelated to real estate development.
Your management and board of directors are diligently pursuing opportunities to
increase shareholder value. The patience and support of our stockholders during
this process is very much appreciated.

Sincerely,

May 20, 1998
Matthew C. Schilowitz
President and Chairman

<PAGE>

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-KSB

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

For the Fiscal Year Ended September 30, 1997 or

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

Commission file number 333-3501

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

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

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

Issuers Telephone Number: (516) 653-3303

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

None

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

None
(Title or Class)

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

<PAGE>

Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]

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

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

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

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

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

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

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

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

2
<PAGE>

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

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

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

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

<PAGE>

PART I

Item 1. Business

(a) General Development of Business

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

(b) Financial Information about Industry Segments

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

General

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

<PAGE>

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

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

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

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

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

<PAGE>

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

Strategy

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

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

Competition

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

Employees

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

<PAGE>

labor in the area is adequate for its needs.

Item 2. Properties

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

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

The Company currently has the following projects under contract:

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

Seasonality

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

<PAGE>

Licensing

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

Government Regulation

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

Item 3. Legal Proceedings

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

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

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

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

<PAGE>

PART II

Item 5. Market for Common Equity and Related Shareholder Matters

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

1996 High Bid Low Bid

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

4th Quarter 7 1/2 3

1997

1st Quarter 2 1/2 1 7/8

2nd Quarter 3 1 1/4

3rd Quarter 1 1/4 13/32

4th Quarter 3/8 9/32

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

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

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

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

Review of 1997 Results

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

<PAGE>

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

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

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

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

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

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

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

<PAGE>

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

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

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

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

Review of 1996 Results

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

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

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

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

<PAGE>

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

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

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

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

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

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

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

<PAGE>

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

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

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

Item 7. Financial Statements

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

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

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

<PAGE>

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

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

PART III

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

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

Name Age Title

Matthew C. Schilowitz 34 President, CEO & Chairman

Scott Prizer 35 Secretary & Director

Seymour G. Siegel 56 Treasurer & Director

David W. Sass 62 Director

David S. Eiten 33 Director

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

<PAGE>

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

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

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

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

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

<PAGE>

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

Item 10. Executive Compensation

(a) Cash Compensation

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

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

300,000 shares
of Common
Stock

1996 $52,000
1995 $197,000

</TABLE>

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

<PAGE>

in Item 12.

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

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

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

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

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

None

<PAGE>

(d) Compensation of Directors

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

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

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

None.

Item 11. Security Ownership of Certain Beneficial Owners and
Management

(a) Security Ownership of Certain Beneficial Owners

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

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

18
</TABLE>

<PAGE>

Item 12. Certain Relationships and Related Transactions

<PAGE>

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

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

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

<PAGE>

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

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

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

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

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

Woodland Development Association, a partnership 1/3 interest

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

Woodland Pines Associates, a partnership Joint Venture

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

<PAGE>

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

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

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

<PAGE>

are due on demand.

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

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

<PAGE>

PART IV

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

(a)(1) Financial Statements Page Number

Report of Independent Certified
Public Accountants F-2-3

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

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

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

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

Notes to Financial Statements F-9
</TABLE>

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

(a)(2) Exhibits

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

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

<PAGE>

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

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

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

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

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

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

(b) Reports on Form 8-K

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

<PAGE>

SIGNATURES

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

Dated: January 14, 1998

The Harmat Organization, Inc.

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

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

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

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

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

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

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

<PAGE>

THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES

Financial Statements

September 30, 1997

<PAGE>

THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES

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

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

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

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

Consolidated Statements of Stockholders' Equity F-6

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

Notes to Consolidated Financial Statements F-9

F-1

</TABLE>
<PAGE>

INDEPENDENT AUDITOR'S REPORT

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

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

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

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

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

F-2

<PAGE>

Independent Auditors' Report

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

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

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

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

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

F-3

<PAGE>

THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES

Consolidated Balance Sheet

September 30, 1997

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

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

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

LIABILITIES AND STOCKHOLDERS' EQUITY

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

Total Current Liabilities 2,252,207

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

TOTAL LIABILITIES 3,063,818

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

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

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

Accumulated (Deficit) (1,527,319)
Total Stockholders' Equity 2,728,897
-----------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $5,792,715
===========
See Independent Auditors' Report and Notes to Consolidated Financial Statements.
</TABLE>
F-4
<PAGE>

THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES

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

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

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

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

Gross profit 166,108 489,101

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

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

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

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

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

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

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

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

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

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

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

</TABLE>
F-5
<PAGE>

THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders' Equity

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

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

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

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

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

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

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

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

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

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

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

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

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

</TABLE>
F-6
<PAGE>

THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES

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

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

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

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

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

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

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

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

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

F-7
<PAGE>

THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

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

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

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

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

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

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

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

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

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

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

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

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

F-8
<PAGE>

THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 1997
PRINCIPLES OF CONSOLIDATION AND BUSINESS

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

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

Entity

Parent Company:

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

Subsidiaries:

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

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

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

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

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

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

F-9
<PAGE>

THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 1997

NOTE 1: PRINCIPLES OF CONSOLIDATION AND BUSINESS (continued)

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

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

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Accounting Period

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

Cash and Cash Equivalents

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

Concentration of Credit Risk

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

F-10

<PAGE>

THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 1997

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Economic Dependency

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

Marketable Securities

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

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

Property and Equipment and Depreciation

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

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

F-11

<PAGE>

THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 1997

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Earnings (Loss) Per Share

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

Use of Estimates

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

Land Development Costs

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

Revenue Recognition

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

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

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

F-12

<PAGE>

THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 1997

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Income Taxes

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

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

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

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

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

Total - %
=====

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

Goodwill

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

F-13

<PAGE>

THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 1997

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Stock Options and Similar Equity Instruments Issued to Employees

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

NOTE 3: MARKETABLE SECURITIES

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

NOTE 4: PROPERTY AND EQUIPMENT

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

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

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

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

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

NOTE 5: LOANS RECEIVABLE

Stockholder

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

F-14

<PAGE>

THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 1997

NOTE 5: LOANS RECEIVABLE (continued)

Other

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

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

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

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

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

$ 493,160

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

200,000

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

210,234

F-15
<PAGE>

THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 1997

NOTE 6: NOTES AND MORTGAGES PAYABLE (continued)

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

130,295

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

300,644

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

1,162,866

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

100,000

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

19,680

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

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

</TABLE>

Annual maturities of notes and mortgages payable are as
follows:

For the Period Ended
September 30,

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

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

F-16

<PAGE>

THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 1997

NOTE 7: FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

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

</TABLE>

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

NOTE 8: PRIVATE PLACEMENT

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

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

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

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

</TABLE>

F-17
<PAGE>

THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 1997

NOTE 9: COMMON STOCK

Capital Contribution

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

Initial Public Offering

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

NOTE 10: COMMITMENTS AND CONTINGENCIES

Land Contract

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

Legal Proceedings

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

Commitments and Stock Option Plans

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

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

Earnings Before Taxes Shares to be Issued

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

F-18

<PAGE>

THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 1997

NOTE 10: COMMITMENTS AND CONTINGENCIES (continued)

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

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

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

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

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

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

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

</TABLE>

F-19
<PAGE>

THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 1997

NOTE 10: COMMITMENTS AND CONTINGENCIES (continued)

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

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

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

</TABLE>

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

Employment Agreement

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

NOTE 11: RELATED PARTY TRANSACTIONS

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

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

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

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

F-20

<PAGE>

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

September 30, 1997

NOTE 12: SEGMENT INFORMATION

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

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

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

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

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

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

NOTE 13: SUBSEQUENT EVENTS

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

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

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

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

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

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

F-21
<PAGE>

<PAGE>

SIGNATURES

Dated: January 14, 1998

The Harmat Organization, Inc.

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

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

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

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

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

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

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