HARVEY ELECTRONICS INC, 424B5, 1998-04-01

HARVEY ELECTRONICS INC
424B5, 1998-04-01
RADIO, TV & CONSUMER ELECTRONICS STORES

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<PAGE>
Filed Pursuant to Rule 424(b)(5)
Registration Number 333-42121
PROSPECTUS
HARVEY (Registered)
1,200,000 Shares of Common Stock and
1,830,000 Redeemable Common Stock Purchase Warrants

HARVEY ELECTRONICS, INC.
------------------------------

This prospectus (the 'Prospectus') relates to an offering (the 'Offering')
by Harvey Electronics, Inc., a New York corporation (the 'Company'), of
1,025,000 shares of common stock, par value $0.01 per share ('Common Stock') and
1,830,000 redeemable common stock purchase warrants ('Warrants'), through The
Thornwater Company, L.P. ('Representative'), as representative of the several
underwriters ('Underwriters') named elsewhere in this Prospectus. This
Prospectus also relates to the offering through the Underwriters of 175,000
shares of Common Stock by Harvey Acquisition Company, LLC ('HAC'), a principal
shareholder of the Company. The Company will not receive any of the proceeds
from the offering of the shares by HAC, but HAC will pay $70,000 of the expenses
of this Offering in addition to its share of the underwriting discounts and
commissions and non-accountable expense allowance. The shares of Common Stock
offered hereby and Warrants (collectively, the 'Securities') are being offered
and sold separately and will be separately transferable immediately upon
issuance.

Each Warrant entitles the holder thereof to purchase one share of Common
Stock at an exercise price equal to 110% of the per share offering price of the
Shares, subject to adjustment in certain events, during the three-year period
commencing two years from the Effective Date as defined below, or earlier with
the consent of the Representative. The Warrants are subject to redemption by the
Company at $.10 per Warrant, at any time commencing two years (or earlier with
the consent of the Representative) from the date that the Securities and
Exchange Commission ('SEC') declares the registration statement ('Registration
Statement'), of which this Prospectus forms a part, effective (the 'Effective
Date'), and prior to their expiration, provided the closing bid price of the
Common Stock if traded on the NASDAQ SmallCap Market ('NASDAQ SmallCap') or the
OTC Electronic Bulletin Board, or the last sales price per share if listed on
the NASDAQ National Market or a national exchange, exceeds 150% of the per share
public offering price ($7.50 per share) for 20 consecutive trading days during
such three-year period. If redeemed the Warrants will be exercisable until the
close of the trading day preceding the date fixed for redemption. See
'Description of Securities -- Warrants.'

There is currently no active trading market for the Common Stock or
Warrants, and there can be no assurance that an active trading market will
develop for the Securities in the future or that if developed, it will be
sustained. The Common Stock and the Warrants have been approved for
quotation on the NASDAQ SmallCap.

The per share public offering price of the Shares and the exercise price and
other terms of the Warrants were determined by negotiation between the Company
and the Representative and do not necessarily bear any relationship to the

Company's assets, earnings, book value, net worth, or other generally accepted
criteria of value. See 'Underwriting.'

INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES A HIGH
DEGREE OF RISK AND IMMEDIATE SUBSTANTIAL DILUTION.
SEE 'RISK FACTORS' BEGINNING ON PAGE 8 AND 'DILUTION' ON PAGE 16.
------------------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.

<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) SECURITYHOLDER(3)
<S> <C> <C> <C> <C>
Per Share......................................... $ 5.00 $ 0.50 $ 4.50 $ 4.50
Per Warrant....................................... $ 0.10 $ 0.01 $ 0.09 --
Total (4)......................................... $6,183,000.00 $ 618,300.00 $4,777,200.00 $ 787,500
</TABLE>

(1) Does not include additional compensation to the Representative consisting of
(i) a non-accountable expense allowance equal to 3% of the aggregate
purchase price of the Securities sold by the Company, or $159,240
($160,063.50 if the Representative's over-allotment option is exercised in
full); (ii) a warrant to purchase 120,000 shares of Common Stock at $8.00
per share and/or 183,000 Warrants at $.16 per Warrant (the 'Representative's
Warrant') exercisable during the four year period commencing one year from
the Effective Date. Each warrant is identical to the Warrants except the
price to purchase one share is $8.80; and (iii) a three-year consulting
agreement providing for fees totalling $123,660, which is payable to the
Representative in full on the closing of this Offering. For additional
information concerning additional terms of the Representative's Warrant and
further agreements between the Company and the Underwriters, including an
agreement to indemnify the Underwriters against certain civil liabilities,
including liabilities under the Securities Act of 1933, as amended
('Securities Act'), and to pay the Underwriters under certain circumstances
a warrant solicitation fee of 5% of the exercise price of each Warrant
exercised, see 'Underwriting.'

(2) Before deducting the non-accountable expense allowance, consulting fee or
other compensation payable to the Representative, and other estimated
expenses of the Offering approximating $405,000 payable by the Company net
of $70,000 of such expenses being paid by HAC.

(3) Before deducting the non-accountable expense allowance being paid by HAC to
the Representative of $26,250 ($53,250 if the Over-Allotment Option is
exercised in full) and $70,000 of expenses of the Offering to be paid by
HAC.

(4) The Company and HAC, the selling securityholder, have granted the
Underwriters an option, exercisable for 45 days after the Effective Date to
purchase up to an additional 180,000 shares of Common Stock and/or 274,500
Warrants (the 'Over-Allotment Option'). All shares of Common Stock subject
to the Over-Allotment Option will be sold by HAC. All Warrants subject to
the Over-Allotment Option will be sold by the Company. Securities sold under
the Over-Allotment Option will be sold upon the same terms and conditions
set forth above. If the Over-Allotment Option is exercised in full, the
total Price to Public, Underwriting Discounts and Commissions, Proceeds to
Company and Proceeds to Selling Securityholder will be $7,110,450, $711,045,
$4,801,905 and $1,597,500, respectively. See 'Underwriting.'
------------------------------

The Securities are being offered by the Underwriters, when, as and if delivered
to and accepted by them subject to certain conditions. It is expected that
certificates for the shares of Common Stock and the Warrants offered hereby will
be available for delivery on or about April 6, 1998, at the office of The
Thornwater Company, L.P., 107 A East 37th Street, New York, New York.
------------------------------

THE THORNWATER COMPANY, L.P.

March 31, 1998

<PAGE>

CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK AND
WARRANTS OFFERED HEREBY, INCLUDING PURCHASES OF THE COMMON STOCK OR WARRANTS TO
STABILIZE THE MARKET PRICES, PURCHASES OF THE COMMON STOCK OR WARRANTS TO COVER
SOME OR ALL OF A SHORT POSITION IN THE COMMON STOCK OR WARRANTS MAINTAINED BY
THE UNDERWRITERS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE 'UNDERWRITING.'

<PAGE>

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements
(including the notes thereto) appearing elsewhere in this Prospectus. Each
prospective investor is urged to read this Prospectus in its entirety. Unless
otherwise indicated, all information herein assumes (i) no exercise of the
Over-Allotment Option; (ii) no exercise of the Representative's Warrant; (iii)
no exercise of options granted or available for grant under the Company's Stock
Option Plan; (iv) no exercise of other outstanding warrants; and (v) no
conversion of outstanding Preferred Stock. See 'Description of Securities' and
'Underwriting.' The following discussion and analysis contains forward-looking
statements which involve risks and uncertainties. Factors that could cause or
contribute to such uncertainties include those discussed in 'Risk Factors.'

THE COMPANY

Harvey Electronics, Inc. is engaged in the retail sale, service and custom
installation of high quality audio, video and home theater equipment. The
equipment includes high fidelity components and systems, video cassette
recorders, digital versatile disc players, direct view and projection television
sets, audio/video furniture, digital satellite systems, conventional telephones
and related accessories. The Company has been engaged in this business in the
New York Metropolitan area for seventy years. The Company currently operates
four retail stores. The two Manhattan stores are located on Broadway at 19th
Street and on 45th Street at Fifth Avenue. The Company's other two stores are
located on Route 17 in Paramus, New Jersey and on West Putnam Avenue in
Greenwich, Connecticut.

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

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

The Company's audio product sales represent approximately 73% of the
Company's net sales and yield gross profit margins of approximately 39%. The
Company's video product sales represent approximately 24% of the Company's net
sales and yield gross profit margins of approximately 27%. The Company also
provides custom installation of products it sells. Currently, approximately 17%
of net product sales involve custom installation. The labor portion of custom
installation presently represents approximately 3% of net sales.

The Company believes that offering custom installation helps to distinguish
it from the mass merchants. Custom installation is one example of the Company's
refocused marketing and advertising efforts which emphasize quality products and
services rather than price. The Company's target customers are affluent
consumers in the New York Metropolitan area.

The Company intends to utilize the net proceeds from this Offering to open
or acquire five additional retail stores within the next twenty four months. The
Company plans to locate these new stores in affluent suburbs similar to
Greenwich, Connecticut, such as the north shore of Long Island, New York;
southern New Jersey, including Monmouth County; Westchester County, New York;
and southern Connecticut.

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

On November 13, 1996, the Court confirmed the Company's Restated Modified
Amended Joint and Substantially Consolidated Plan of Reorganization (the
'Reorganization Plan'). The effective date of the Reorganization Plan was
December 26, 1996, at which time the Company emerged from its Chapter 11
reorganization.

The Company is a New York corporation organized in 1946 under the name of
Harvey Radio Company, Inc. as successor to an existing business formed in 1927.
The Company subsequently changed its name to Harvey Electronics, Inc. The
Company's principal executive offices are located at 205 Chubb Avenue,
Lyndhurst, New Jersey 07071, and its telephone number is (201) 842-0078.

<PAGE>
THE OFFERING

<TABLE>
<S> <C>
SECURITIES OFFERED........................ 1,025,000 shares of Common Stock and 1,830,000 Warrants by the
Company and 175,000 shares of Common Stock by HAC, the selling
securityholder. The Shares and the Warrants may be purchased
separately and will be transferable separately upon issuance. See
'Description of Securities' and 'Underwriting.'

TERMS OF WARRANTS......................... Each Warrant is exercisable at an exercise price of 110% of the per
share offering price of the Shares, subject to adjustment in certain
circumstances. The Warrants are exercisable for a period of three
years commencing two years from the Effective Date (or earlier with
the consent of the Representative). The Warrants are redeemable by
the Company commencing two years from the Effective Date, or earlier
with the consent of the Representative, at $0.10 per Warrant,
provided the closing bid price per Share if traded on the NASDAQ
SmallCap or the OTC Electronic Bulletin Board, or the last sales
price per Share if listed on the NASDAQ National Market or a national
exchange, for 20 consecutive trading days exceeds $7.50 (150% of the
per share public offering price). See 'Description of
Securities -- Warrants.'

COMMON STOCK OUTSTANDING BEFORE
OFFERING................................ 2,257,833 shares

COMMON STOCK OUTSTANDING AFTER OFFERING... 3,282,833 shares(1)

WARRANTS OUTSTANDING PRIOR TO OFFERING.... 36,458 warrants(2)

WARRANTS OUTSTANDING AFTER OFFERING....... 1,866,458 warrants(1)

USE OF PROCEEDS........................... The net proceeds to the Company from the sale of the Securities are
estimated to be approximately $4,089,000 after deducting commissions
and expenses of the Offering estimated at $1,095,000, net of $70,000
of such expenses being paid by HAC and prepaid consulting fees of
approximately $124,000. The Company intends to use the net proceeds
of this Offering to open or acquire additional retail stores, to
promote their openings, and for working capital and general corporate
purposes. See 'Use of Proceeds.'

RISK FACTORS.............................. The Securities offered hereby are speculative and involve a high
degree of risk and immediate substantial dilution and should not be
purchased by anyone who cannot afford the loss of his entire invest-
ment. See 'Risk Factors' and 'Dilution.'
</TABLE>

<TABLE>
<CAPTION>
NASDAQ
SMALLCAP
SYMBOL(3)

---------
<S> <C>
COMMON STOCK.............................. HRVE
WARRANTS.................................. HRVEW
</TABLE>

- ------------------
(1) Assumes no exercise of the Warrants and other outstanding warrants, the
Over-Allotment Option, the Representative's Warrant, stock options granted
or to be granted under the Company's stock option plan, and no conversion of
outstanding Preferred Stock.

(2) Issued to holders of Preferred Stock in December 1997 and which are
identical to the Warrants, but are not registered under the Securities Act.

(3) There is currently no active trading market for the Common Stock or the
Warrants and there can be no assurance that an active trading market for the
Common Stock or the Warrants will develop after this Offering. The Company's
Common Stock and Warrants have been approved for quotation on NASDAQ
SmallCap.

5
<PAGE>
There can be no assurance that the listing will be maintained.
See 'Risk Factors.'

FINANCIAL INFORMATION

The summary financial information set forth below is derived from and
should be read in conjunction with the financial statements, including the notes
thereto, appearing elsewhere in the Prospectus.

On November 13, 1996, the Company emerged from its Chapter 11 Bankruptcy
proceeding. The Company's Reorganization Plan provides that the Company change
its fiscal year end from the Saturday closest to January 31 to the Saturday
closest to October 31. On October 26, 1996 (the 'Fresh Start Date') the Company
adopted Fresh Start Reporting. The Company for periods prior to the Fresh Start
Date is hereinafter occasionally referred to as the 'Predecessor,' and for the
period at or subsequent to the Fresh Start Date, is hereinafter occasionally
referred to as the 'Successor.' The following information should be read in
conjunction with the Company's audited financial statements for the fifty-three
weeks ended November 1, 1997 and the thirty-nine week period ended October 26,
1996, and the unaudited financial statements for the thirteen weeks ended
January 31, 1998 and the fourteen weeks ended February 1, 1997, appearing
elsewhere in this Prospectus.

STATEMENTS OF OPERATIONS DATA:

JANUARY 31, FEBRUARY 1, NOVEMBER 1, OCTOBER 26, OCTOBER 26, OCTOBER 28,
1998 1997 1997 1996 1996 1995
----------- ----------- ----------- ------------ -------------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Net sales.......................... $ 4,870 $ 4,567 $ 15,398 $ 14,025 $ 9,263 $11,107
Cost of sales...................... 2,997 2,916 9,765 9,230 6,095 7,312
----------- ----------- ----------- ------------ ------- -----------
Gross profit....................... 1,873 1,651 5,633 4,796 3,168 3,795
Gross profit percentage............ 38.5% 36.2% 36.6% 34.2% 34.2% 34.2%
Interest expense................... 91 115 325 506 356 307
Selling, general and administrative
expenses......................... 1,668 1,770 6,706 6,473 4,937 5,782
Other income....................... 16 9 73 96 88 78
----------- ----------- ----------- ------------ ------- -----------
Income (loss) before reorganization
expenses, fresh start adjustments
and extraordinary item........... 130 (225) (1,325) (2,087) (2,037) (2,216)
Reorganization expenses, net....... -- -- -- (885) (247) (520)
Fresh start adjustments............ -- -- -- 1,858 1,858 --
Extraordinary gain on forgiveness
of debt.......................... -- -- -- 5,339 5,339 --
----------- ----------- ----------- ------------ ------- -----------
Net income (loss).................. 130 (225) (1,325) 4,225 4,913 (2,736)
Accretion of Preferred Stock....... (6) (19) (78) -- -- --
Preferred Stock dividend
requirement...................... (18) (18) (71) -- -- --
----------- ----------- ----------- ------------ ------- -----------
Net income (loss) attributable to
Common Stock..................... $ 106 $ (262) $ (1,474) $ 4,225 $ 4,913 $(2,736)
----------- ----------- ----------- ------------ ------- -----------
----------- ----------- ----------- ------------ ------- -----------
Net income (loss) per common
share............................ $ .05 $ (.12) $ (.65)
----------- ----------- -----------
----------- ----------- -----------
Weighted average number of common
shares outstanding during the
period........................... 2,257,833 2,257,833 2,257,833
----------- ----------- -----------
----------- ----------- -----------
</TABLE>

6
<PAGE>
BALANCE SHEET DATA:

<TABLE>
<CAPTION>
ACTUAL
AS ADJUSTED -----------------------------------------
JANUARY 31, JANUARY 31, NOVEMBER 1, OCTOBER 26,
1998 1998 1997 1996

------------ ----------- ----------- -----------
(UNAUDITED) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Working capital.................................................. $ 5,870 $ 1,528 $ 1,215 $ 1,436
Total assets..................................................... 11,574 7,426 7,314 7,167
Long-term liabilities including capital leases................... 2,620 2,620 2,364 942
Total liabilities and temporary equity........................... 5,185 5,250 5,697 3,757
Total shareholders' equity....................................... 6,389 2,176 1,617 3,410
</TABLE>

- ------------------
(1) To give effect to the receipt and application of the net proceeds of the
Offering, and assumes no exercise of the Warrants and other outstanding
warrants, the Over-Allotment Option, the Representative's Warrant and stock
options granted or to be granted under the Company's stock option plan, and
no conversion of outstanding Preferred Stock.

7
<PAGE>
RISK FACTORS

The securities offered hereby involve a high degree of risk and immediate
substantial dilution. Each prospective investor should carefully consider the
following risk factors, in addition to other information and financial data
contained in this Prospectus, in evaluating an investment in the Securities
offered hereby.

The following discussion and analysis contains forward-looking statements
which involve risks and uncertainties. When used herein, the words 'anticipate,'
'believe,' 'estimate,' 'expect' and similar expressions as they relate to the
Company or its management, are intended to identify such forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. The Company's actual results, performance or achievements could differ
materially from the results expressed in or implied by these forward-looking
statements. Factors that could cause or contribute to such differences include
those discussed below and should be read in conjunction with, and is qualified
in its entirety by, the Company's financial statements, including the notes
thereto, appearing elsewhere in this Prospectus. Historical results are not
necessarily indicative of trends in operating results for any future period.

DEPENDENCE ON PROCEEDS OF OFFERING; CONTINUED LOSSES

The Company had operated at a loss since prior to its filing for protection
under Chapter 11 of the United States Bankruptcy Code in August 1995 through
November 1, 1997. For the thirteen weeks ended January 31, 1998, the Company had
net income of $130,217 but as at such date, had an accumulated deficit of
$1,368,011. Without additional revenues and continued operating profit from its
existing stores and the new stores which the Company plans to open with the net
proceeds from this Offering, the Company may not be able to operate profitably.
Even with the proceeds of this Offering and the implementation of the Company's
expansion plan, there can be no assurance the Company will be able to operate
profitably. See 'Management's Discussion and Analysis of Financial Condition and
Results of Operations' and 'Business -- Expansion.'

UNCERTAINTY AS TO GOING CONCERN IN INDEPENDENT AUDITOR'S REPORT

In connection with the audit of the Company's financial statements for the
fifty-three weeks ended November 1, 1997, the Company has received a report from
its independent auditors that includes an explanatory paragraph describing the
uncertainty as to the ability of the Company to continue as a going concern. See
'Management's Discussion and Analysis of Financial Condition and Results of
Operations' and the Company's financial statements (and the related notes
thereto) included elsewhere in this Prospectus.

EMERGENCE FROM BANKRUPTCY

On August 3, 1995, the Company (then known as the Harvey Group Inc. and its
subsidiaries) filed a petition for relief pursuant to Chapter 11 of the United
States Bankruptcy Code. On November 13, 1996, the Bankruptcy Court issued an
order confirming the Reorganization Plan which had been proposed by the Company.
Notwithstanding the Company's emergence from bankruptcy, there can be no
assurance that the Company's prior bankruptcy will not hamper its ability to
establish new relationships with commercial lenders, customers, landlords, and
trade creditors or adversely impact on the business prospects of the Company.
See 'Business -- Bankruptcy Proceeding and Reorganization.'

RISKS INVOLVED WITH EXPANSION PLAN AND POSSIBLE UNSPECIFIED ACQUISITIONS

Since 1995, the Company closed five of its eight retail stores. The Company
presently has four retail stores, having opened its Greenwich, Connecticut store
in early 1997. The Company believes that it needs to open additional new stores,
and increase its revenues, to fully benefit from its overhead structure and
advertising expenditures. This expansion may cause significant strain on the
Company's management, financial, and other resources. Moreover, expansion
involves numerous risks including additional rent obligations, attracting and
training additional staff, and an increase in expenses related to the operation
of a particular store. If the Company is unable to manage growth effectively, of
which there can be no assurance, its business operating results and financial
condition will be materially adversely affected.

8
<PAGE>
Instead of leasing and developing new locations, the Company may acquire
the business of an existing consumer electronics retailer, although no
agreements have been reached with any such company and no negotiations are
pending. As a result, investors in this Offering will not have an opportunity to
evaluate the specific merits or risks, or vote upon, any potential acquisition.
See 'Use of Proceeds,' 'Business--Expansion,' and 'Management.'

POSSIBLE NEED FOR ADDITIONAL FINANCING

The Company expects that cash flow from operations, together with the net
proceeds of this Offering and funds available under its revolving line of credit
facility, will meet its cash requirements for at least the 24 months following
the consummation of the Offering. However, additional financing may be required
in the event the Company incurs significant operating losses in the future or
new retail stores do not generate sufficient cash. In addition, additional
financing may be required in order to increase the number of the Company's

retail showrooms as planned by management. Because there can be no assurance
that adequate additional financing will be available on acceptable terms, if at
all, the Company may be forced to limit such planned expansion or reduce its
operations. See 'Use of Proceeds.' Any future financings that involve the sale
of the Company's equity securities may result in dilution to the then current
stockholders. See 'Dilution.'

DEPENDENCE ON AVAILABILITY OF LEASED LOCATIONS

All of the Company's retail stores are located in leased premises. Most of
the leases will expire within five years. One lease is on a month-to-month
basis. The Company also intends to open four new retail locations by the end of
1999. There can be no assurance that the Company will be able to renew its
current leases, locate suitable locations for new stores, arrange acceptable
leases for new locations, or open new retail stores in a timely manner. The
inability of the Company to properly address those concerns may have a material
adverse effect on the Company's financial condition. See 'Business -- Expansion'
and 'Business -- Properties.'

SECURED LOANS AND EXISTENCE OF LIENS ON THE COMPANY'S ASSETS

Substantially all of the Company's assets have been pledged to a financial
institution to secure certain indebtedness under a revolving line of credit
facility. In the event that the Company defaults on its obligations, including
the payment of principal and interest, the Company's indebtedness could be
accelerated and, in certain cases, the Company's assets could be subject to
foreclosure. Moreover, to the extent that the Company's assets continue to be
pledged to secure outstanding indebtedness, such assets will remain unavailable
to secure additional debt financing. Such unavailability may adversely affect
the Company's ability to borrow in the future. See 'Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources.'

DEPENDENCE ON ECONOMIC CONDITIONS AND CONSUMER PREFERENCES

The Company's business is subject to economic cycles and changing consumer
preferences. Purchases of discretionary audio or video products tend to decline
in periods of economic uncertainty. The Company is particularly vulnerable since
the Company's products are upscale and expensive. As such, any significant
decline in general economic conditions or uncertainties regarding future
economic prospects that affect consumer spending could have a material adverse
effect on the Company's business, results of operations and financial condition.
See 'Business.'

POSSIBLE ADVERSE EFFECTS OF GEOGRAPHIC CONCENTRATION

The Company's retail stores are all located in the New York Metropolitan
area. The Company intends to continue to concentrate its retail facilities in
the same area. Accordingly, the Company is susceptible to fluctuations in its
business caused by adverse economic or market conditions in this area. See
'Business -- Properties.'

9
<PAGE>

ADVERSE EFFECT CAUSED BY THE DEVELOPMENT OF TECHNOLOGY

The retail consumer electronics market is dominated by mass merchants.
Historically, mass merchants have emphasized volume by selling lower performing
products at lower prices. In contrast, specialty boutiques, including the
Company, have emphasized selling higher quality products at higher prices.
However, development of technologies, which has been extremely rapid in the
electronics industry, has substantially reduced the difference between more
expensive and less expensive products. Future technological advances may further
reduce this difference, possibly to the point at which performance and features
will be indistinguishable. Thus, there can be no assurance that the Company will
be able to continue to rely on this difference to implement its operating
strategy. See 'Business -- Products.'

COMPETITION

The retail consumer electronics industry is extremely competitive. Although
the Company has sought to distinguish itself by emphasizing high quality
products, custom installation, and service, the Company nonetheless competes
with a number of mass merchants including, but not limited to, Circuit City,
Nobody Beats the Wiz, P.C. Richard & Son, J&R Music World, Tops Appliance City,
and a large group of boutique stores. Many of these competitors have greater
financial and management resources and marketing capabilities, including name
recognition, than the Company. Additionally, there is likely to be a significant
change in the local competitive environment because Circuit City has begun to
open stores in the New York Metropolitan market. In order to succeed, the
Company must be able to compete effectively with existing and new competitors
for customers. There is no assurance that the Company will be able to
successfully execute its marketing strategy and compete effectively. See
'Business -- Competition,' 'Business -- Operations,' and
'Business -- Advertising.'

IMMEDIATE AND SUBSTANTIAL DILUTION

This Offering involves an immediate and substantial dilution to investors
in the Offering. Purchasers of Shares in the Offering will incur an immediate
dilution of $3.53 per Share (71%) in the net tangible book value of their
investment from the per Share public offering price. Investors in the Offering
will pay $5.00 per Share, as compared with an average cash price of $1.23 per
Share paid by existing stockholders. See 'Dilution.'

DEPENDENCE ON KEY PERSONNEL

The success of the Company is largely dependent upon the abilities and
efforts of Franklin C. Karp, President, Joseph J. Calabrese, Executive Vice
President and Chief Financial Officer, and Michael Beck, Vice President of
Operations of the Company. None of these employees have an employment agreement
with the Company except Mr. Karp, who will enter into a two-year employment
agreement with the Company commencing on the Effective Date. The loss of the
services of any of these executive officers or the services of other key
management personnel could have a material adverse effect upon the Company. The
Company will seek to obtain a $3,000,000 policy of 'key man' insurance on the
life of Mr. Karp upon the consummation of this Offering. The Company does not
maintain key man life insurance with respect to any of its other executive

officers. See 'Management -- Directors and Executive Officers.'

CONTROL BY CERTAIN SHAREHOLDERS

As of the date of this Prospectus, the largest shareholder of the Company
(HAC) holds an aggregate of approximately 85% of the outstanding shares of
Common Stock. After giving effect to this Offering (excluding the exercise of
the Over-Allotment Option), HAC will hold approximately 53% of the outstanding
shares of Common Stock. In addition, a member and manager of HAC is the Chairman
of the Company's Board of Directors. Accordingly, HAC can elect all members of
the Board of Directors of the Company, control the Board, and decide any matters
on which the Company's shareholders' vote is needed. See 'Management' and
'Securities Ownership of Certain Beneficial Owners and Management.'

10
<PAGE>
BROAD DISCRETION OF MANAGEMENT IN APPLICATION OF PROCEEDS

Approximately 20.5% of the net proceeds of the Offering will be applied to
working capital and used for general corporate purposes. In addition, management
may from time to time reallocate funds among the uses discussed in 'Use of
Proceeds' or to new uses if it believes such reallocation to be in the Company's
best interests. Accordingly, management of the Company will have broad
discretion in the use of the proceeds. See 'Use of Proceeds.'

LACK OF EXPERIENCE OF REPRESENTATIVE

The Representative has completed one public offering of securities and was
the co-underwriter in another public offering since the commencement of its
operations. Accordingly, the Representative does not have extensive experience
as a managing underwriter of public offerings of securities. There can be no
assurance that the Representative's lack of experience will not adversely affect
the trading market for the Securities. See 'Underwriting.'

NO DIVIDENDS ANTICIPATED

The Company has not paid dividends to the holders of its Common Stock in
the past, and does not anticipate paying any dividends on its Common Stock in
the foreseeable future. The Company's revolving line of credit facility contains
certain restrictions on the Company's ability to pay dividends. See 'Dividend
Policy,' 'Description of Securities,' 'Capitalization' and 'Management's
Discussion and Analysis of Financial Conditions and Results of Operations.'

POTENTIAL ANTI-TAKEOVER EFFECTS OF NEW YORK LAW

Certain provisions of New York law could delay and impede the removal of
incumbent directors and could make a merger, tender offer or proxy contest
involving the Company more difficult, even if such event could be beneficial in
the short term to the interests of the stockholders. Such provisions could limit
the price that potential investors might be willing to pay in the future for the
Company's securities.

ELIMINATION OF PERSONAL LIABILITIES OF DIRECTORS

As permitted under the New York Business Corporation Law, the Company's
certificate of incorporation provides for the elimination of the personal
liability of the directors of the Company for damages due to breaches of their
fiduciary duty as directors. As a result of the inclusion of such provision,
shareholders may be unable to recover damages against directors for actions
taken by them which constitute negligence or gross negligence or that are in
violation of their fiduciary duties. The inclusion of this provision in the
Company's certificate of incorporation may reduce the likelihood of derivative
litigation against directors and other types of shareholder litigation. See
'Management -- Limitation of Liability of Directors and Indemnification of
Directors and Officers; Directors and Officers Insurance.'

SHARES ELIGIBLE FOR FUTURE SALE

All of the 2,257,833 shares of Common Stock outstanding as of the Effective
Date were issued in connection with the Company's Reorganization Plan, in
exchange for either a claim against, or an interest in, or a claim for an
administrative expense in the Company's bankruptcy proceeding. These shares are
deemed exempted securities under Section 1145 of the United States Bankruptcy
Code and, therefore, are freely tradable. A sale of shares in significant
amounts may have substantial adverse effects on the price of the Common Stock.

HAC and each officer and director of the Company have entered into written
agreements with the Representative that they will not publicly sell an aggregate
of 1,750,000 shares of the Company's Common Stock without the prior consent of
the Representative for a period of 12 months from the Effective Date as to 25%
of such shares; for a period of 18 months from such date, as to an additional
25% of such shares; and for a period of 24 months from such date, as to the
remaining 50% of such shares.

As of the Effective Date, all holders of the Preferred Stock will have
entered into lock-up agreements with the Representative, which agreements
provide that Common Stock issued upon conversion of Preferred Stock, Warrants

11
<PAGE>
owned by such holders and Common Stock exercisable upon the exercise of such
warrants will not be sold publicly for two years following the Effective Date or
one year from the conversion (whichever is longer). The lock-up will be
suspended, however, if the closing bid price of the Common Stock if traded on
the NASDAQ SmallCap or the OTC Electronic Bulletin Board or the last sales price
of the Common Stock if listed on the NASDAQ National Market or a national
exchange, exceeds $7.50 for 45 consecutive trading days.

InterEquity Capital Partners, L.P. ('InterEquity'), which holds 51,565
shares of the Common Stock, has agreed with the Representative not to publicly
sell such Shares for a period of one year following the Effective Date.

Certain directors, officers and employees of the Company, and Mr. E. H.
Arnold will agree with the Representative not to publicly sell an aggregate of
85,000 Shares for two years following the Effective Date. A sale of Securities
in significant amounts after the expiration of any lock-up agreement may have
substantial adverse effects on the market price of the Common Stock and

Warrants. See 'Description of Securities -- Shares Eligible for Future Sale.'

POTENTIAL ADVERSE EFFECT OF REDEMPTION OF WARRANTS

The Warrants are subject to redemption by the Company at a price of $.10
per Warrant upon certain conditions. Redemption of the Warrants could force the
holders to exercise the Warrants and pay the exercise price at a time when it
may be disadvantageous for the holders to do so, to sell the Warrants at the
current market price when they might otherwise wish to hold the Warrants, or to
accept the redemption price, which may be substantially less than the market
value of the Warrants at the time of redemption. The holders of the Warrants
will automatically forfeit their rights to purchase shares of Common Stock
issuable upon exercise of such Warrants unless the Warrants are exercised before
they are redeemed. The holders of Warrants will not possess any rights as
stockholders of the Company unless and until the Warrants are exercised. See
'Description of Securities -- Warrants.'

CURRENT PROSPECTUS AND STATE BLUE SKY REGISTRATION IN CONNECTION WITH EXERCISE
OF WARRANTS

The Company will be able to issue shares of its Common Stock upon exercise
of the Warrants only if there is a then current prospectus relating to the
Common Stock issuable upon the exercise of the Warrants, under an effective
registration statement filed with the Commission and only if such Common Stock
is then qualified for sale or exempt from qualification under applicable state
securities laws of the jurisdictions in which the various holders of Warrants
reside. Although the Company will use its best efforts to meet such
requirements, there can be no assurance that the Company will be able to do so.
The failure of the Company to meet such requirements may deprive the Warrants of
any value and cause the resale or other disposition of Common Stock issued upon
the exercise of the Warrants to become unlawful. See 'Description of
Securities -- Warrants.'

LACK OF CURRENT PUBLIC MARKET; ARBITRARY DETERMINATION OF OFFERING PRICES;
POSSIBLE VOLATILITY OF SECURITIES

Although shares of the Company's Common Stock were listed and traded on the
American Stock Exchange until June 1995 and subsequently traded on the OTC
Electronic Bulletin Board until November 1995, currently there is no public
market for the Company's Securities. Accordingly, there can be no assurance that
an active trading market for the Common Stock or Warrants will develop or, if
developed, will be sustained upon the completion of this Offering or that the
market prices of the Securities will not decline below the public offering
prices. The public offering prices of the Securities and the terms of the
Warrants have been arbitrarily determined by negotiations between the Company
and the Representative, and do not necessarily bear any relationship to the
Company's assets, book value, net earnings, net sales or other established
criteria of value, and can not be considered indicative of the actual value of
the Securities. The stock market has, from time to time, experienced extreme
price and volume fluctuations, which often have been unrelated to the operating
performance of particular companies. Economic and other external factors, as
well as period-to-period fluctuations in financial results of the Company, may
have a significant adverse impact on the market prices of the Company's
Securities. See 'Underwriting.'

12
<PAGE>
POSSIBLE DELISTING OF SECURITIES; PENNY STOCK REGULATION

The Company's Common Stock and Warrants have been approved for quotation on
NASDAQ SmallCap; the continued trading of the Common Stock and Warrants on
NASDAQ SmallCap is conditioned upon the Company meeting certain criteria. If the
Company fails to meet any of these criteria, the Common Stock and/or the
Warrants could be delisted from trading on NASDAQ SmallCap, which delisting
could materially adversely affect the trading market for the Common Stock and/or
Warrants. There can be no assurance that the Company will meet all the criteria
and its securities will not be delisted. Existing NASDAQ SmallCap maintenance
criteria require, among other things, that an issuer have net tangible assets of
$2 million (or alternatively net income of $500,000 in two of the most recent
three fiscal years, or a market capitalization of $35 million) and that the
listed security has a minimum bid price of $1.00. In the event the Common Stock
or the Warrants are delisted from trading on NASDAQ SmallCap and the trading
price of the Common Stock is less than $5.00 per share, trading in the Common
Stock or Warrants would also be subject to the requirements of Rule 15g-9 under
the Securities Exchange Act of 1934, as amended. Under such rule, a
broker/dealer, who recommends such low-priced securities to persons other than
established customers and accredited investors, must satisfy special sales
practice requirements, including a requirement that they make an individualized
written suitability determination for the purchaser and receive the purchaser's
written consent prior to the transaction. Additional disclosure in connection
with any trades involving a penny stock is also required, including the
delivery, prior to any penny stock transaction, of a disclosure schedule
explaining the penny stock market and the risks associated therewith. Such
requirements could severely limit the market liquidity of the Common Stock or
Warrants and the ability of purchasers in the Offering to sell their securities
in the secondary market. There can be no assurance that the Company's Common
Stock or Warrants will not be treated as a penny stock. See 'Underwriting.'

POSSIBLE ADVERSE IMPACT OF REPRESENTATIVE'S WARRANT

In connection with the Offering, the Company will sell to the
Representative, for nominal consideration, a Warrant ('Representative's
Warrant') exercisable for 120,000 shares of Common Stock at $8.00 per share
and/or 183,000 warrants at $.16 per warrant; each such warrant is identical to
the Warrant except the purchase price for one Share is $8.80. The
Representative's Warrant will be exercisable for a period of four years,
commencing one year after the Effective Date. The Representative's Warrant will
not be redeemable by the Company. The holders of the Representative's Warrant
will have the opportunity to profit from a rise in the market price of the
Securities, if any, without assuming the risk of ownership. The Company may find
it more difficult to raise additional equity capital if it should be needed for
the business of the Company while the Representative's Warrant is outstanding.
At any time when the holders thereof might be expected to exercise them, the
Company would probably not be able to obtain additional capital on terms more
favorable than those provided by the Representative's Warrant. See
'Underwriting.'

POSSIBLE RESTRICTIONS ON MARKET MAKING ACTIVITIES IN THE COMPANY'S SECURITIES

Although it has no legal obligation to do so, the Representative from time
to time may act as a market maker and otherwise effect transactions in the
Securities. Unless granted an exemption by the SEC from Regulation M under the
Securities Exchange Act of 1934 (the 'Exchange Act'), the Representative will be
prohibited from engaging in any market making activities or solicited brokerage
activities with respect to the Securities for the period from five business days
prior to any solicitation by the Representative of the exercise of Warrants
until the completion of such solicitation activity. However, under Regulation M
the foregoing five-day restriction period is reduced to one day where the
security has an average daily trading volume of at least 100,000 shares and the
public float for the issuer's equity securities is at least $25 million. In
addition, Regulation M eliminates the restrictive period where the average daily
trading volume of the security is $1 million and the public float for the
issuer's equity securities is at least $150 million. As a result, the
Representative may be unable to continue to provide a market for the Securities
during certain periods while the Warrants are exercisable. The prices and
liquidity of the Securities may be adversely affected by the cessation of the
Representative's market making activities.

13
<PAGE>
USE OF PROCEEDS

The net proceeds to the Company from the sale of 1,025,000 shares of the
Common Stock and 1,830,000 Warrants offered by the Company, after deducting
underwriting discounts and commissions, the Representative's non-accountable
expense allowance, consulting fees, and other expenses of the Offering, are
estimated to be approximately $4,089,000. The Company expects to use the net
proceeds as follows:

<TABLE>
<CAPTION>
APPROXIMATE APPROXIMATE
DOLLAR AMOUNT PERCENTAGE
------------- -----------
<S> <C> <C>
Opening of five new retail stores(1)........... $ 3,250,000 79.5%
Working Capital and general corporate
purposes(2).................................. 839,000 20.5%
------------- -----
$ 4,089,000 100%
------------- -----
------------- -----
</TABLE>

- ------------------
(1) The Company plans to open five new retail stores during the 24 months
following the Effective Date at an estimated cost of $650,000 per store, or
$3,250,000 in the aggregate. The estimated cost of opening each new store
includes the cost of leasehold improvements, including design and
decoration, machinery and equipment, furniture and fixtures, security
deposits, opening inventory (net of the portion to be borrowed from the
Company's lender), lease acquisition expenses, preopening expenses, and

additional advertising and promotion in connection with the opening. Instead
of leasing and developing a new location, the Company may acquire the
business of an existing consumer electronics retailer, although no
agreements have been reached with any such company, and no such negotiations
are pending.

(2) Possible working capital uses include inventory, advertising and other
ongoing selling, general and administrative expenses, to be determined by
the Company's executive officers based upon their assessment of the
Company's needs.

The amounts and timing of these expenditures may vary depending upon
numerous factors including the ability of the Company to locate suitable
premises or to enter into acceptable leases for the opening of new retail
facilities. The foregoing represents the Company's best estimate of the
allocation of the net proceeds of this Offering, based on both the expected
utilization of funds necessary to finance the Company's existing activities and
the Company's current objectives, as well as current economic conditions. The
Company may from time to time reallocate funds among the uses discussed above or
to new uses if it believes such reallocation to be in its best interests.

Prior to the opening or acquisition of new stores, the net proceeds may be
used to paydown (in full or in part) the Company's outstanding obligations under
its revolving line of credit facility which permits repayment and reborrowing of
funds from time to time. It is the Company's intention to re-borrow any portion
of the credit facility which is paid down as the Company requires the funds. Any
portion not so used will be invested in short-term money market instruments or
direct U.S. Government obligations.

Any proceeds from the exercise of the Warrants and/or the Over-Allotment
Option and any income from investments will be included in the Company's working
capital and used for general corporate purposes.

The Company expects that cash flow from operations, together with the net
proceeds of this Offering and amounts available under its revolving credit
facility, will be sufficient to meet its cash requirements for the twenty-four
month period immediately following the consummation of the Offering.

DIVIDEND POLICY

The Company has paid no cash dividends to date. Both the Company's
revolving line of credit facility with a commercial lender and Preferred Stock
contain certain restrictions as to the Company's ability to pay dividends on
Common Stock. See 'Management's Discussion and Analysis of Financial Condition
and Results of Operations.' Moreover, the Company currently intends to retain
earnings, if any, for use in the operation and expansion of its business, and
therefore, does not anticipate paying cash dividends on Common Stock in the
foreseeable future. The Board of Directors may from time to time declare and the
Company may pay dividends upon its outstanding shares

14
<PAGE>
of capital stock, in the manner and upon the terms and conditions permitted by
law and provided by its Restated Certificate of Incorporation or other

certificate filed pursuant to law relating thereto. The payment of dividends is
within the discretion of the Board of Directors and will be dependent upon,
among other things, earnings, capital requirements, financing commitments and
the financial condition of the Company.

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

CAPITALIZATION

The following table sets forth the capitalization of the Company as of
January 31, 1998, and as adjusted to give effect to the sale of 1,025,000 shares
of Common Stock at $5.00 per share, 1,830,000 Warrants at $.10 per Warrant
offered by the Company and the application of the estimated net proceeds
therefrom. This table should be read in conjunction with the financial
statements and notes thereto included elsewhere in this Prospectus and with
'Management's Discussion and Analysis of Financial Condition and Results of
Operations.'

<TABLE>
<CAPTION>
JANUARY 31, 1998
--------------------------
ACTUAL AS ADJUSTED
----------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Long-term debt and capital lease obligations.............................................. $ 2,476(2) $ 2,476(3)
Stockholders' equity:
Preferred Stock, $1,000 par value, 10,000 shares
authorized, 875 shares outstanding (aggregate liquidation preference--$875,000)....... 402 402
Common Stock, $.01 par value, 10,000,000 shares authorized, 2,257,833 shares
outstanding, actual, 3,282,833 shares outstanding, as adjusted(1)..................... 23 33
Additional paid-in capital.............................................................. 3,377 7,580
Deferred compensation................................................................... (258) (258)
Accumulated deficit..................................................................... (1,368) (1,368)
----------- -----------
Total stockholders' equity.............................................................. 2,176 6,389

----------- -----------
Total capitalization.................................................................... $ 4,652 $ 8,865
----------- -----------
----------- -----------
</TABLE>

- ------------------
(1) Assumes no exercise of the Warrants and other outstanding warrants, the
Over-Allotment Option, the Representative's Warrant and stock options
granted or to be granted under the Company's Stock Option Plan, and no
conversion of the outstanding Preferred Stock.

(2) Includes: (i) amounts due under the Company's revolving line of credit
facility ($2,006,000); (ii) amounts due under a promissory note ($350,000)
made by the Company to an individual, E. H. Arnold, who is a holder of
Preferred Stock and a member of HAC (the selling securityholder); (iii)
capital lease obligations ($31,000); and (iv) cumulative Preferred Stock
dividends payable ($89,000).

(3) May be temporarily repaid in full or in part with the proceeds from this
Offering until the Company opens its new retail stores. See 'Use of
Proceeds.'

15
<PAGE>
DILUTION

As of January 31, 1998, the Company's net tangible book value (total
tangible assets minus the sum of total liabilities and reorganization value in
excess of amounts allocable to identifiable assets) was $398,000 or $.18 per
Share. Assuming the sale of 1,025,000 shares of Common Stock by the Company in
this Offering at $5.00 per share and 1,830,000 Warrants at $.10 per warrant and
after deducting underwriting discounts, non-accountable expense allowance and
other estimated offering costs, the net tangible book value of the Company as of
January 31, 1998, as adjusted, would have been $4,823,000, or $1.47 per share of
Common Stock, representing an immediate increase in net tangible book value of
$1.29 per share to existing stockholders and an immediate dilution of $3.53 per
share (71%) to investors purchasing shares of Common Stock in this Offering. The
following table illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Assumed public offering price per share.................................................... $5.00
Net tangible book value per share as of January 31, 1998................................... $ .18
Increase per share attributable to new investors........................................... 1.29
-----
Net tangible book value per share as adjusted after giving effect to the Offering.......... 1.47
-----
Dilution in net tangible book value per share to new investors............................. $3.53
-----
-----
</TABLE>

The following table sets forth, as of the Effective Date on a pro forma

basis, giving effect to this Offering, the number of shares of Common Stock
purchased from the Company, the total cash consideration paid to the Company and
the average price per share paid by the existing stockholders and the purchasers
of the Common Stock in this Offering.

<TABLE>
<CAPTION>
SHARES TOTAL
ACQUIRED CONSIDERATION PAID
-------------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ---------- ------- ---------------
<S> <C> <C> <C> <C> <C>
Existing stockholders................................. 2,257,833 68.8% $2,770,000 35.1% $1.23
New investors(1)...................................... 1,025,000 31.2% 5,125,000 64.9% $5.00
--------- ------- ---------- -------
Total................................................. 3,282,833 100.0% $7,895,000 100.0%
--------- ------- ---------- -------
--------- ------- ---------- -------
</TABLE>

16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The following discussion and analysis contains forward-looking statements
which involve risks and uncertainties. When used herein, the words 'anticipate,'
'believe,' 'estimate,' and 'expect' and similar expressions as they relate to
the Company or its management are intended to identify such forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. The Company's actual results, performance or achievements could differ
materially from the results expressed in or implied by these forward-looking
statements. Factors that could cause or contribute to such differences include
those discussed in 'Risk Factors' and should be read in conjunction with, and is
qualified in its entirety by, the Company's financial statements, including the
notes thereto, appearing elsewhere in this Prospectus. Historical results are
not necessarily indicative of trends in operating results for any future period.

GENERAL

1, 1997 and the thirty-nine week period ended October 26, 1996 and the unaudited
financial information for the thirteen weeks ended January 31, 1998 and the
fourteen weeks ended February 1, 1997 appearing elsewhere herein. The unaudited
financial information for the fifty-two week period ended October 26, 1996 and
the thirty-nine weeks ended October 28, 1995 is presented for comparison
purposes only.

STATEMENTS OF OPERATIONS DATA:

<TABLE>
<CAPTION>
POST BANKRUPTCY PRE BANKRUPTCY
----------------------------------------- ---------------------------------------------
THIRTEEN FOURTEEN FIFTY-THREE FIFTY-TWO THIRTY-NINE THIRTY-NINE
WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED
JANUARY 31, FEBRUARY 1, NOVEMBER 1, OCTOBER 26, OCTOBER 26, OCTOBER 28,
1998 1997 1997 1996 1996 1995
----------- ----------- ----------- ------------ -------------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Net sales............................. $ 4,870 $ 4,567 $ 15,398 $ 14,025 $ 9,263 $11,107
Cost of sales......................... 2,997 2,916 9,765 9,230 6,095 7,312
----------- ----------- ----------- ------------ ------- -----------
Gross profit.......................... 1,873 1,651 5,633 4,796 3,168 3,795
Gross profit percentage............... 38.5% 36.2% 36.6% 34.2% 34.2% 34.2%
Interest expense...................... 91 115 325 506 356 307
Selling, general and administrative
expenses............................ 1,668 1,770 6,706 6,473 4,937 5,782
Other income.......................... 16 9 73 96 88 78
----------- ----------- ----------- ------------ ------- -----------
Income (loss) before reorganization
expenses, fresh start adjustments
and extraordinary item.............. 130 (225) (1,325) (2,087) (2,037) (2,216)
Reorganization expenses, net.......... -- -- -- (885) (247) (520)
Fresh start adjustments............... -- -- -- 1,858 1,858 --
Extraordinary gain on forgiveness of
debt................................ -- -- -- 5,339 5,339 --
----------- ----------- ----------- ------------ ------- -----------
Net income (loss)..................... 130 (225) (1,325) 4,225 4,913 (2,736)
Accretion of Preferred Stock.......... (6 ) (19) (78) -- -- --
Preferred Stock dividend requirement.. (18 ) (18) (71) -- -- --
----------- ----------- ----------- ------------ ------- -----------
Net income (loss) attributable to
Common Stock........................ $ 106 $ (262) $ (1,474) $ 4,225 $ 4,913 $(2,736)
----------- ----------- ----------- ------------ ------- -----------
----------- ----------- ----------- ------------ ------- -----------
Net income (loss) per common share.... $ .05 $ (.12) $ (.65)
----------- ----------- -----------
----------- ----------- -----------
Weighted average number of common
shares outstanding during the
period.............................. 2,257,833 2,257,833 2,257,833
----------- ----------- -----------

----------- ----------- -----------
</TABLE>

17
<PAGE>
BALANCE SHEET DATA:

<TABLE>
<CAPTION>
ACTUAL
-----------------------------------------
JANUARY 31, NOVEMBER 1, OCTOBER 26,
1998 1997 1996
----------- ----------- -----------
AS ADJUSTED
JANUARY 31,
1998
-----------
(UNAUDITED) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Working capital..................................................... $ 5,870 $ 1,528 $ 1,215 $ 1,436
Total assets........................................................ 11,574 7,426 7,314 7,167
Long-term liabilities including capital leases...................... 2,620 2,620 2,364 942
Total liabilities and temporary equity.............................. 5,185 5,250 5,697 3,757
Total shareholders' equity.......................................... 6,389 2,176 1,617 3,410
</TABLE>

THIRTEEN WEEKS ENDED JANUARY 31, 1998 AS COMPARED TO FOURTEEN WEEKS ENDED
FEBRUARY 1, 1997

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

Net Income (loss). Net income for the thirteen weeks ended January 31,
1998 was $130,217 as compared to a net loss of $225,059 for the fourteen weeks
ended February 1, 1997.

Revenues. Net sales for the thirteen weeks ended January 31, 1998
increased 6.6% or $303,000 over the fourteen weeks ended February 1, 1997.
Comparable store sales for the first quarter ended January 31, 1998 increased
20.9% or $742,000 from the same period last year. The first quarter ended
January 31, 1998 includes sales from three mature stores and the new store in
Greenwich, Connecticut, which opened in January 1997. The same quarter last year
included sales from four mature stores and the Greenwich, Connecticut store for
only one month. One retail store was closed in February 1997. The increase in
the Company's sales is attributed to increases in the volume of goods and
services sold and to a lesser extent, changes in product lines. The prices of

its goods have remained relatively constant. The Company's sales continue to
benefit from the successful marketing campaign where emphasis is placed on the
quality of its manufacturers' products, new technologies, service and custom
installation of home theater and multi-room audio/video systems.

The Company offers its customers who qualify, a Harvey credit card which is
issued by an unrelated finance company. The Company continuously offers
consumers using the Harvey credit card 90 days interest-free financing on any
purchases. As a promotion, the Company, from time to time, offers consumers
using the Harvey credit card attractive financing alternatives of 6 or 12 month
interest-free financing on specific products. The Company pays the finance
company a fee in connection with all interest-free financing which is a
percentage of such sales. For the thirteen weeks ended January 31, 1998, the
cost to the Company, net of contributions to the Company made by manufacturers,
for the 6 or 12 month financing was approximately $12,000.

Costs and Expenses. Total cost of sales for the thirteen weeks ended
January 31, 1998 increased 2.8% or $80,000 from the fourteen weeks ended
February 1, 1997. This was primarily the result of increased sales, offset by
improved gross profit margins.

Gross profit margin for the first quarter ended January 31, 1998 was 38.5%
as compared to 36.2% for the same quarter last year. The gross profit margin
improved as a result of increased custom installation sales which have higher
gross profit margins. Additionally, an increase was realized from merchandising
changes started in fiscal 1997, where higher margin products from new
manufacturers were added and lower margin products were eliminated. Finally, the
marketing campaign for the first quarter in fiscal 1998 placed less emphasis on
price sensitive advertisements as compared to the same quarter last year.

Selling, general and administrative expenses for the thirteen weeks ended
January 31, 1998 decreased 5.8% or $102,000 as compared to the fourteen weeks
ended February 1, 1997. Comparable store selling, general and administrative
expenses for the first quarter decreased approximately 1.6% or $23,000 as
compared to the same quarter last year. The thirteen weeks ended January 31,
1998 includes net advertising expense of $43,000 as compared to $75,000 for the
fourteen weeks ended February 1, 1997. Additionally, occupancy costs for the
thirteen weeks ended January 31, 1998 decreased 19.6% or $83,000. This was
primarily the result of a reduction in

18
<PAGE>
warehouse space beginning in fiscal 1998 and from the closing of a retail store
in February 1997. The thirteen weeks ended January 31, 1998 also includes
non-cash stock compensation expense of $22,000. No stock compensation expense
was recorded in the fourteen weeks ended February 1, 1997.

Interest expense for the thirteen weeks ended January 31, 1998 decreased
20.4% or $23,000 as compared to the fourteen weeks ended February 1, 1997. This
decrease was primarily due to the elimination of debtor-in-possession financing
which was outstanding through December 1996 of the prior year's quarter, offset
by additional interest on the revolving line of credit facility and the term
loan from a preferred stockholder and member of HAC. This term loan was made
available to the Company in the second quarter of fiscal 1997.

FIFTY-THREE WEEKS ENDED NOVEMBER 1, 1997 (SUCCESSOR) AS COMPARED TO THE
FIFTY-TWO WEEKS ENDED OCTOBER 26, 1996 (UNAUDITED--PREDECESSOR)

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

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

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

Management believes that the increase in sales in fiscal 1997 is due
primarily to the Company's marketing campaign where emphasis is placed on the
quality of its manufacturers' products, new technologies, service, and custom
installation of home theater and multi-room audio/video systems. The Company
offers its customers who qualify, a Harvey credit card which is issued by an
unrelated finance company. The Company continuously offers consumers using the
Harvey credit card 90 days interest-free financing on any purchases. As a
promotion, the Company, from time to time, offers consumers using the Harvey
credit card attractive financing alternatives of 6 or 12 month interest-free
financing on specific products. The Company pays the finance company a fee in
connection with all interest-free financing which is a percentage of such sales.
For the five-month period ended November 1, 1997, the cost to the Company, net
of contributions to the Company made by manufacturers, for the 6 or 12 month
financing was approximately $30,000. Additional direct mail promotions were also
successful during the period.

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

Gross profit margin for the fifty-three weeks ended November 1, 1997 was
36.6%, as compared to 34.2% for the fifty-two weeks ended October 26, 1996. The

gross profit margin has increased as a result of the Company's marketing
campaign where product quality is emphasized rather than price. The gross margin
also increased as a result of increased sales of custom installation which has
higher gross profit margins. Additionally, an increase was realized from
merchandising changes made in late 1996 and throughout 1997, where new higher
margin products from new manufacturers were added and lower margin products,
such as camcorders, cellular phones, and home office equipment, were eliminated.

Selling, general and administrative expenses increased 3.6% or $233,000 for
the fifty-three weeks ended November 1, 1997 as compared to the fifty-two weeks
ended October 26, 1996. Comparable store selling, general

19
<PAGE>
and administrative expenses increased 12.2% or $631,000 for the fifty-three
weeks ended November 1, 1997 as compared to the fifty-two weeks ended October
26, 1996. The fifty-three weeks ended November 1, 1997 includes net advertising
expenses of $401,000, as compared to $221,000 for the fifty-two weeks ended
October 26, 1996. Additionally, the fifty-three weeks ended November 1, 1997
includes an aggregate amount for management fees and amortization of
reorganization value in excess of amounts allocable to identifiable assets of
$96,000. The Company incurred no expense for these items during the fifty-two
weeks ended October 26, 1996. Payroll and payroll related expenses increased
15.2% or $418,000 for the fifty-three weeks ended November 1, 1997 as compared
to the fifty-two weeks ended October 26, 1996. This was primarily the result of
additional commissions and incentives on increased sales and gross margins and
the hiring of additional sales, warehouse and custom installation personnel. The
Company also hired a full-time Vice President of Operations in June 1996.

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

THIRTY-NINE WEEKS ENDED OCTOBER 26, 1996 (PREDECESSOR) AS COMPARED TO
THIRTY-NINE WEEKS ENDED OCTOBER 28, 1995 (PREDECESSOR)

Net Income (Loss). Net income for the thirty-nine weeks ended October 26,
1996 was $4,913,000 as compared to a net loss of $2,736,000 for the comparable
period in 1995. Net income for the thirty-nine weeks ended October 26, 1996,
includes an extraordinary gain on forgiveness of debt of $5,339,000 and the
effect of certain fresh start adjustments increasing net income by $1,858,000,
relating to the Company's successful reorganization. Net reorganization expenses
relating to the Company's Chapter 11 process for the thirty-nine weeks ended
October 26, 1996 were $247,000 as compared to $520,000 for the comparable period
in 1995.

Revenues. Net sales for the thirty-nine weeks ended October 26, 1996
decreased 16.6% or $1,844,000, as compared to the same period in 1995. This
decrease primarily related to four store closings relating to the reorganization
process and the reduction of lower margin corporate sales. Comparable store

sales for the thirty-nine weeks ended October 26, 1996 remained the same as
compared to the prior period, despite the difficulty in obtaining adequate
levels of inventory, the negative effects of the Chapter 11 reorganization and
the difficult market conditions experienced throughout the consumer electronics
industry. The Company encountered difficulty in obtaining adequate levels of
inventory during the thirty-nine week period ended October 26, 1996 because, as
a result of the bankruptcy proceeding, the Company's trade vendors would only
sell inventory on a cash in advance or cash on delivery basis or would extend
only limited credit to the Company.

Cost and Expenses. Cost of sales for the thirty-nine weeks ended October
26, 1996 decreased 16.7% or $1,218,000 from the same period in 1995. This
decrease was primarily due to the store closings and reduced corporate sales as
mentioned above. Gross margins for the thirty-nine weeks ended October 26, 1996
and October 28, 1995 remained consistent at 34.2%.

Selling, general and administrative expenses for the thirty-nine weeks
ended October 26, 1996 decreased 14.6% or $845,000 as compared to the comparable
period in 1995. This decrease was due to store closings and the Company's
ongoing cost reduction program, offset by an additional $358,000 of advertising
expense incurred to reposition the Company during its reorganization process in
1996.

Interest expense for the thirty-nine weeks ended October 26, 1996 increased
15.9% or $49,000 from the comparable period in 1995. This is primarily the
result of a full year of debtor-in-possession financing from HAC. In the prior
year, as a result of the reorganization process, interest on all liabilities
subject to compromise also ceased accruing on August 3, 1995.

LIQUIDITY AND CAPITAL RESOURCES

On November 13, 1996, the Court confirmed the Reorganization Plan
('Confirming Date'). The effective date of the Reorganization Plan was December
26, 1996. Prior to the effective date of the Reorganization Plan
('Reorganization Date'), all of the Company's old shares of common and preferred
stock were canceled. The Company simultaneously amended its Certificate of
Incorporation and is authorized to issue 10,010,000 shares

20
<PAGE>
consisting of 10,000 shares of 8 1/2% Cumulative Convertible Preferred Stock
with a par value of $1,000 per share and 10,000,000 shares of Common Stock with
a par value of $.01 per share.

The Reorganization Plan provided for the redistribution of Common Stock as
follows:

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

2,000,000 shares were issued to HAC in satisfaction of the $2,822,500 of
subordinated secured financing provided to the Company during its reorganization
process.

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

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

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

Prior to the Reorganization Date, 875 shares of the Company's Preferred
Stock were issued to the Company's prereorganization subordinated secured debt
holders in exchange for $875,000 of such debt. The reorganization carrying value
of the Preferred Stock has been estimated to be $318,000 based on a sale of such
security, independent of the Company, for 36% of stated value. The difference
between the carrying amount of the prereorganization debt and the reorganization
carrying value has been included with the extraordinary gain on forgiveness of
debt in the accompanying statement of operations for the thirty-nine weeks ended
October 26, 1996.

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

As a result of the operational restructuring, the Company recorded
reorganization expenses for the thirty-nine weeks ended October 26, 1996 of
$497,206. Such charges consisted of costs associated with professional fees, and
the write-off of property, equipment, other assets and certain receivables.
Additionally, the Company recorded income from the sale of a lease during the
thirty-nine weeks ended October 26, 1996 in the amount of $250,000.

Liabilities subject to compromise immediately preceding the Reorganization
Plan ($4,782,000), were satisfied with the issuance of common stock as noted
above and the related forgiveness of debt has been recorded as an extraordinary
gain in the accompanying statement of operations for the thirty-nine weeks ended
October 26, 1996.

The balance sheet as of October 26, 1996 was prepared based on Fresh Start
Reporting which was adopted on the Confirmation Date and applied as of October
26, 1996, the end of the accounting period closest to the Confirmation Date. The
Company has adopted Fresh Start Reporting in accordance with the American
Institute of Certified Public Accountants Statement of Position 90-7, 'Financial
Reporting by Entities in Reorganization under the Bankruptcy Code.' The Company
adopted Fresh Start reporting because the holders of existing voting shares
immediately before filing and confirmation of the plan received less than 50% of
the voting shares of the emerging entity and its reorganization value was less
than its postpetition liabilities and allowed claims. Fresh Start Reporting has
resulted in changes to the balance sheet, including valuation of assets and
liabilities at fair market value and valuation of equity based on the
reorganization value of the ongoing business, and accordingly, the financial
statements for periods prior and subsequent to the adoption of Fresh Start
accounting are not comparable.

The reorganization value of the Company was determined based on the

consideration received from HAC to obtain its ownership in the Company. A
carrying value of $318,000 was assigned to the Preferred Stock. Subsequent to
the Reorganization Date, the Company issued an additional 51,565 shares of
Common Stock to InterEquity, as authorized by the Court, for an approved finders
fee. The excess of the reorganization value over the fair value of net assets
and liabilities ($1,582,440 at November 1, 1997) is reported as 'Reorganization
value in excess of amounts allocable to identifiable assets'. See Note 1 to the
financial statements for further information.

The Company's ratio of current assets to current liabilities was 1.58 at
January 31, 1998 as compared to 1.41 at November 1, 1997. The increase in the
current ratio at January 31, 1998 was primarily the result of the Company's net
profit. The Company's ratio of current assets to current liabilities was 1.41 at
November 1, 1997 as compared to 1.51 at October 26, 1996. The decrease in the
current ratio at November 1, 1997 is primarily due to the

21
<PAGE>
net cash used in operating activities as a result of the Company's net loss for
the year, partially offset by working capital provided by the Company's line of
credit facility.

Net cash provided by investing activities was approximately $183,000 for
the thirteen weeks ended January 31, 1998, which related to the proceeds from
the redemption of a certificate of deposit offset by the purchase of property,
equipment and other assets. Investing activities resulted in a net use of cash
of $663,000 for the fifty-three weeks ended November 1, 1997 as compared to a
net use of cash of $65,000 for the thirty-nine weeks ended October 26, 1996. The
increase in cash used for 1997 was primarily due to the purchases of property
and equipment relating to the opening of the new store in Greenwich,
Connecticut.

Financing activities resulted in an increase in net cash of approximately
$50,000 for the thirteen weeks ended January 31, 1998. This increase was
primarily the result of additional net borrowings from the new revolving line of
credit facility, offset by costs relating to the Company's refinancing of its
previous line of credit facility and from proposed offering costs approximating
$86,000. Financing activities resulted in an increase in net cash of $1,220,000
for the fifty-three weeks ended November 1, 1997 as compared to an increase of
$891,000 for the thirty-nine weeks ended October 26, 1996. This increase was
primarily the result of additional net borrowings from the revolving line of
credit facility and a note from a preferred stockholder and member of HAC,
offset by increased payments of Chapter 11 obligations.

publicly by Norwest Bank, Minnesota, National Association, from time to time as
its 'prime rate' (the 'Prime Rate'). The rate charged on outstanding balances
over $2,500,000 is 1.75% above the Prime Rate. A commitment fee of $49,500 was
paid by the Company at closing and a facility fee of three-quarters of one
percent (.75%) of the maximum credit line will be charged in each year. Monthly
maintenance charges and a termination fee also exist under the line of credit.

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

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

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

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

The amount outstanding under the Paragon revolving line of credit facility
as of March 6, 1998 was approximately $2,191,000.

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

22
<PAGE>
The Company's management estimates that the total cost of opening a retail
store is $650,000, or $3,250,000 for the five planned stores. The estimated cost
of opening each new store includes the cost of leasehold improvements, including
design and decoration, machinery and equipment, furniture and fixtures, security
deposits, opening inventory (net of the portion to be borrowed from the
Company's lenders), lease acquisition expenses, pre-opening expenses and
additional advertising and promotion in connection with the opening.

As an alternative to leasing and developing new stores, the Company will
consider acquiring the business of existing electronics retailers.
Notwithstanding, the Company is not engaged in any negotiations and has not
signed any agreement regarding any such potential acquisition.

Despite net income in the first quarter of fiscal 1998, management can not
predict whether this trend will continue, or whether the proposed public
offering will be consummated, and therefore whether the Company will be able to
continue as a going concern. However, management believes that the net proceeds
from the proposed Offering, plus cash flow from operations and funds made
available under the credit facility, will be sufficient to meet the Company's
anticipated working capital needs and expansion plan for the next twelve month
period.

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

23
<PAGE>
BUSINESS

SUMMARY

Harvey Electronics, Inc. is engaged in the retail sale, service and custom
installation of high quality audio, video and home theater equipment. The
equipment includes high fidelity components and systems, video cassette
recorders ('VCR'), digital versatile disc players ('DVD'), direct view and
projection television sets, audio/video furniture, digital satellite systems,
conventional telephones and related accessories. The Company has been engaged in
this business in the New York Metropolitan area for seventy years. The Company
currently operates four retail stores. The two Manhattan stores are located on
Broadway at 19th Street and on 45th Street at Fifth Avenue. Its other two stores
are located on Route 17 in Paramus, New Jersey and on West Putnam Avenue in
Greenwich, Connecticut.

The Company intends to utilize the net proceeds from this Offering to open
or acquire four additional retail stores within twenty-four months. The Company
plans to locate these new stores in affluent suburbs similar to Greenwich,
Connecticut, such as the north shore of Long Island, New York; Monmouth County,
New Jersey; Westchester County, New York; and southern Connecticut.

On August 3, 1995, the Company (then known as The Harvey Group Inc. and its
subsidiaries) filed petitions for relief under Chapter 11 of the United States
Bankruptcy Code with the United States Bankruptcy Court for the Southern
District of New York ('Court'). This filing was the result of certain factors
including but not limited to: (i) the negative effect of a $2,138,000 judgment
entered against the Company; (ii) liabilities arising from The Harvey Group Inc.
and its discontinued food brokerage division, which remained obligations of the

Company, the payment of which significantly reduced cash; (iii) the recession of
the early 1990's coupled with a soft market in the consumer electronics
industry, all of which resulted in losses and a shortage of cash flow; and (iv)
the delisting (in June, 1995) of the Company's Common Stock from the American
Stock Exchange, which delisting rendered a proposed $4.2 million equity
placement untenable.

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

PRODUCTS

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

For the thirteen weeks ended January 31, 1998, the Company's audio product
sales represent approximately 73% of the Company's net sales and yield gross
profit margins of approximately 39%. The Company's video product sales represent
approximately 24% of the Company's net sales and yield gross profit margins of
approximately 27%. The Company also provides custom installation of products it
sells. Approximately 17% of net product sales currently involve custom
installation. The labor portion of custom installation presently represents
approximately 3% of net sales. The Company also sells extended warranties on
behalf of third party providers. Sales of extended warranties which yield a
gross profit margin in excess of 50%, represent between 1% and 2% of the
Company's net sales.

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

<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED FIFTY-THREE WEEKS ENDED THIRTY-NINE WEEKS ENDED
PRODUCT CATEGORY JANUARY 31, 1998 NOVEMBER 1, 1997 OCTOBER 26, 1996
---------------- -------------------- ----------------------- -----------------------
<S> <C> <C> <C>
Audio Components........................... 49% 53% 51%

Mini Audio Shelf Systems................... 9% 6% 7%
TV and Projectors.......................... 16% 16% 18%
VCR/DVD/DSS................................ 8% 6% 5%
Furniture.................................. 4% 4% 5%
Cable and Wire............................. 4% 5% 4%
Accessories................................ 6% 6% 4%
Extended Warranties........................ 1% 1% 2%
Miscellaneous.............................. 3% 3% 4%
--- --- ---
100% 100% 100%
--- --- ---
--- --- ---
</TABLE>

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

The Company believes that it is well positioned to benefit from advances in
technologies because new technologies tend to be expensive when first introduced
and the Company's target customers desire and can afford such products. Three
new technologies, DVD, flat screen television, and high definition television,
have recently been, or will shortly be, introduced. The DVD player provides
enhanced picture and sound quality in a format far more convenient and durable
than videotape. The flat screen television expected to be introduced in 1998
allows a 40 inch television to be only six inches from front to back. This
allows the set to be far less obtrusive and more easily integratable into the
home. High definition television, which is expected to significantly improve
picture quality, is expected to be introduced in the next year or two.

The Company intends to continue its recent emphasis on custom installation
which can extend from a single room audio/video system to an entire house with a
combined selling price of installation, labor and product from about $5,000 to
in excess of $100,000. The Company believes custom installation provides the
opportunity to bundle products and increase margins. For example, rather than
just selling a television with an approximate gross profit margin of 23%, custom
installation enables the Company to sell to the same customer speakers at a
margin exceeding 40%, accessories at a margin approximating 50% and installation
labor with margins of over 60%.

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

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

25
<PAGE>
OPERATIONS

Supplies, Purchasing and Distribution

The Company purchases its products from approximately eighty manufacturers,
ten of which accounted for approximately 57% of the Company's purchases for the
thirteen weeks ended January 31, 1998. These ten manufacturers are Adcom, Bang &
Olufsen, KEF, Marantz, McIntosh, Meridian, Mitsubishi, Monster Cable, Pioneer
Elite and Sony. For the thirteen weeks ended January 31, 1998, no individual
manufacturer accounted for more than 10% of the Company's purchases except
Marantz (12%). Sony, Bang & Olufsen, Mitsubishi and Pioneer Elite each accounted
for more than five (5%) percent of purchases for such period.

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

Under the dealer agreement between the Company and Mitsubishi, the Company
is required to purchase an aggregate of $400,000 of equipment annually, subject
to an increase. The Company's dealer agreement with Niles Audio requires the
Company to purchase at least $300,000 of equipment per year. The Company's
dealer agreement with Bang & Olufsen requires the Company to purchase $160,000
of equipment annually.

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

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

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

employees and equipment.

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

The Company historically has not had material losses of inventory and does
not experience material losses due to cost and market fluctuations, overstocking
or technology. The Company's inventory turnover for the thirteen week period
ended January 31, 1998, was approximately 3.4 times. The Company has begun to
formulate a plan

26
<PAGE>
with its software and service provider to address the risks associated with the
year 2000 computer issue as it affects the Company's management information
system, the cost of which is not expected to be significant.

Sales and Store Operations

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

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

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

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

Services and Repairs

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

The Company offers an extended warranty contract for most of the audio,
video and other merchandise it sells which extended warranty contract provides
coverage beyond the manufacturer warranty period. Extended warranties are
provided by an unrelated insurance company on a non-recourse basis to the
Company. The Company collects the retail sales price of the extended warranty
contract from customers and remits the customer information and the cost of the
contract to the insurance company. Sales of extended warranty contracts
represent between 1% and 2% of the Company's net sales. The warranty obligation
is solely the responsibility of the insurance company.

COMPETITION

The Company competes in the New York Metropolitan area with mass merchants,
mail order houses, discount stores and numerous other consumer electronics
specialty stores. The retail electronics industry is dominated by large
retailers with massive, 'big box' retail facilities which aggressively discount
mass merchandise. These retailers operate on narrow profit margins and high
volume, driven by aggressive advertising emphasizing low prices. While
nationwide industry leaders are Circuit City and Best Buys, the New York region
has been dominated by local chains including P.C. Richard & Son, Nobody Beats
the Wiz, J&R Music World and Tops Appliance. There is likely to be a significant
change in the local environment inasmuch as Circuit City has begun to open
stores in the New York market. The Company believes that it is the largest
retailer of 'esoteric brands' in the New York metropolitan area.

Many of the competitors sell a broader range of electronic products,
including computers, camcorder and office equipment, and many have substantially
larger sales and greater financial and other resources than the Company. The
Company competes by positioning itself as a retailer of high quality limited
distribution audio and video

27
<PAGE>
products and by offering services such as custom installations which are not
generally offered by the mass merchants.

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

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

ADVERTISING

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

The Company now uses smaller, but more frequent advertising, emphasizing
image, products, and technology in the New York Times, Wall Street Journal,
Village Voice, and New York Magazine. The Company also distributes direct mail
advertising several times a year to reach its customer database of over 100,000.
Some of the direct mail promotions are for specific manufacturers, products, or
technology, and are supported by the manufacturers.

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

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

<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED FIFTY-THREE WEEKS ENDED THIRTY-NINE WEEKS ENDED
JANUARY 31, 1998 NOVEMBER 1, 1997 OCTOBER 26, 1996
-------------------- ----------------------- -----------------------
<S> <C> <C> <C>
Gross Advertising Costs.................... $184,000 $ 1,048,000 $ 690,000
Net Advertising Expenses................... $ 42,500 $ 401,000 $ 358,000
Percentage of Net Sales.................... .9% 2.6% 3.9%
</TABLE>

As the Company repositioned itself during and after its reorganization, it
incurred additional advertising costs for the fifty-three weeks ended November
1, 1997 as compared to the thirty-nine weeks ended October 26, 1996. The Company
has retained an outside advertising agency who is paid a monthly retainer of
$9,000 plus approved expenses. This agreement expires January 31, 1999.

EXPANSION

The Company intends to utilize the net proceeds from this Offering to open

five new retail stores, expected to be in leased premises within twenty four
months following the Consummation of this Offering. The design and layout of the
new stores is expected to be similar to the Company's Greenwich, Connecticut
store, which was opened in early 1997. The Company plans to locate these new
stores in affluent suburbs similar to Greenwich, Connecticut such as the North
Shore of Long Island and Westchester County in New York, southern New Jersey,
including Monmouth County, and southern Connecticut.

The Company has preliminarily identified these general locations as
potential sites for the new stores because the demographics of these areas are
consistent with what the Company believes to be its target customer base and
because these areas are served by the media in which the Company already
advertises. By spreading the advertising costs over more stores and greater
revenues, the Company believes it will receive better value for its advertising
expenditures. It is also believed that its overhead structure can support
additional stores without significant increase

28
<PAGE>
in cost or personnel. Therefore, the revenues and profit from operating new
stores should have a positive impact on the Company's results of operations.
However, expansion entails significant risks including an increase in rent and
expenses related to the operation of a particular store. There can be no
assurance that new stores, if opened, will, in fact, generate sufficient revenue
to cover the operating expenses incurred by such stores, or contribute
positively to the Company's results of operations. Except for preliminary
discussions with one landlord regarding a particular location, the Company has
not identified other specific locations for expansion nor has it had any
discussions with other prospective landlords. The Company believes acceptable
retail space is available in the areas where it intends to expand.

As an alternative to leasing and developing new stores, the Company will
consider acquiring the business of an existing electronics retailer.
Notwithstanding, the Company is not engaged in any negotiations and has not
signed any agreement regarding any such potential acquisition.

EMPLOYEES

As of January 31, 1998, the Company employed approximately 70 full-time
employees of which 11 were management personnel, 11 were administrative
personnel, 25 were salespeople, 13 were warehouse workers and 10 were engaged in
custom installation.

The salespeople, warehouse workers, and installation staff (48 people) are
covered by a collective bargaining agreement with the Company which expires
August 1, 2000. The Company has never experienced a material work stoppage and
believes that its relationships with its employees and the union are
satisfactory.

PROPERTIES

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

proposed expansion.

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

The Company leases the following retail premises:

<TABLE>
<CAPTION>
EXPIRATION DATE RENEWAL APPROXIMATE SELLING CURRENT
LOCATION OF LEASE OPTIONS SQUARE FOOTAGE ANNUAL RENT
-------- --------------- ------- ---------------------------------- -----------
<S> <C> <C> <C> <C>
2 West 45th Street
New York, NY........................ 6/30/2005 None 7,500 $ 488,000
556 Route 17 North
Paramus, NJ......................... 6/30/2003 None 7,000 $ 238,000
888 Broadway at 19th St.
New York, NY
(within ABC Carpet & Home) ......... Month to month None 4,000 $ 180,000
19 West Putnam Ave.
Greenwich, CT....................... 9/30/2001 5 years 5,300 $ 176,000
</TABLE>

LICENSES AND INTELLECTUAL PROPERTIES

The Company owns two registered service marks 'HARVEY,' issued on March 7,
1989, and 'THE TEMPLE OF HOME THEATER,' issued on May 13, 1997. Both service
marks are registered for International Class 42, which includes retail store
services in the field of audio, video, consumer electronics, home theater

29
<PAGE>
products and custom installation of home theater products. The Company believes
that its service marks have significant value and are important in marketing the
Company's products.

BANKRUPTCY PROCEEDING AND REORGANIZATION

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

the delisting (in June, 1995) of the Company's Common Stock from the American
Stock Exchange, which delisting rendered a proposed $4.2 million equity
placement untenable.

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

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

The Reorganization Plan also provided for the distribution of the Common
Stock of the reorganized Company as follows: (a) 2,000,000 shares to Harvey
Acquisition Company, L.L.C. in satisfaction of $2,822,500 of subordinated
secured financing provided to the Company during its bankruptcy proceeding; (b)
186,306 shares to the Company's unsecured creditors in satisfaction of the
Company's pre-petition obligations owed to its unsecured creditors; (c) 19,962
shares to the Company's former shareholders; and (d) 51,565 shares to
InterEquity Capital Partners, L.P. ('InterEquity'), a pre-bankruptcy
subordinated secured creditor, in satisfaction of a Court allowed finder's fee.
Accordingly, 2,257,833 shares of Common Stock are issued and outstanding.

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

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

LEGAL PROCEEDINGS

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

There are outstanding disputed tax claims of approximately $50,000 which
were made against the Company during its Chapter 11 proceeding. The Company has
provided reserves of $17,000 for such taxes, penalties and interest, which the
Company believes to be adequate. However, there can be no assurance that the

reserve will be sufficient to cover these tax claims.

30
<PAGE>
MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

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

<TABLE>
<CAPTION>
NAME AGE(1) POSITION
- ---- ------ --------
<S> <C> <C>
Michael Recca................ 47 Chairman and Director
William F. Kenny, III........ 66 Director
Stewart L. Cohen............. 43 Director
Franklin C. Karp............. 44 President and Director
Joseph J. Calabrese.......... 38 Executive Vice President, Chief Financial Officer,
Treasurer, Secretary and Director
Michael A. Beck.............. 39 Vice President of Operations
Roland W. Hiemer............. 37 Director of Inventory Control
</TABLE>

- ------------------
(1) As of March 1, 1998.

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

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

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

Bankruptcy Institute Journal.

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

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

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

31
<PAGE>
Roland W. Hiemer is an executive officer of the Company and Director of
Inventory Control. Mr. Hiemer has been with the Company for seven years. He
started with the Company as a salesman and advanced to Senior Sales Manager for
the Paramus store in 1991. He was further promoted to Inventory Control Manager
in 1991. In 1997, he was promoted to Director of Inventory Control. Mr. Hiemer
holds a BA in Business Administration from Hofstra University.

EXECUTIVE COMPENSATION

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

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
NAME OF INDIVIDUAL ---------------------------- ----------------------
AND PRINCIPAL POSITION YEAR SALARY BONUS
- ---------------------- ---- -------- ------
<S> <C> <C> <C> <C>
1997 $ 0 -- --
Michael Recca 1996 $ 0 -- --
Chairman(1)................................ 1995 $ 0 -- --

1997 $126,000 -- --
Franklin C. Karp 1996 $ 88,000(2) -- --
President.................................. 1995 $108,000 -- --

Joseph J. Calabrese,
Executive Vice President, 1997 $117,000 -- --
Chief Financial Officer, 1996 $ 82,000(2) -- --
Treasurer and Secretary.................... 1995 $101,000 -- --
</TABLE>

- ------------------

(1) Beginning on April 1, 1998, Mr. Recca will receive an annual salary in the
amount of $95,000 in his capacity as the Chairman of the Board of Directors
of the Company.
(2) Represents the nine month transition period ended October 26, 1996, when the
Company's fiscal year end was changed to the Saturday closest to October 31
from the Saturday closest to January 31.

COMMITTEES OF THE BOARD OF DIRECTORS

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

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

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

SEVERANCE AGREEMENTS

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

32
<PAGE>
Each Severance Agreement provides that in the event the Company is sold or
merged with another company, involved in a corporate reorganization, or if a
change of the current management takes place, and the party, for the foregoing
reasons, is terminated or asked to accept a position other than that of senior
officer requiring similar responsibilities to those that the party currently
performs, or if the current corporate office is moved to a new location which is
more than thirty miles from either Mineola, New York, or Lyndhurst, New Jersey,
depending on who the party is, as a result of a reorganization or change in
ownership or control, and the party declines the new position or relocation, the

Company or its successor in control will be obligated, and continue, to pay the
party at the same salary and car allowance, if any, the party had most recently
been earning, for a period of one year following termination of Mr. Karp and Mr.
Calabrese, and six months for Mr. Beck and Mr. Hiemer. In addition, the party
will be fully covered under the Company's benefit plans, including, without
limitation, the Company's medical, dental, life and disability insurance
programs, during the one-year period for Mr. Karp and Mr. Calabrese and during
the six month period for Mr. Beck and Mr. Hiemer (including family coverage for
medical and dental insurance).

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

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

EMPLOYMENT AGREEMENT

The Company will enter into a two year employment agreement with Franklin
C. Karp, the Company's President, commencing on the Effective Date. The
employment agreement provides that Mr. Karp continue as the Company's President
with the same compensation and benefits which Mr. Karp currently receives,
subject to annual adjustment to be determined and made by the Board of Directors
of the Company.

LIMITATION OF LIABILITY OF DIRECTORS; INDEMNIFICATION OF DIRECTORS AND OFFICERS;
DIRECTORS AND OFFICERS INSURANCE

The Company's certificate of incorporation provides that a director shall
not be personally liable to the Company or its stockholders for monetary damages
for breach of fiduciary duty as a director, except for liability if a judgment
or other final adjudication adverse to him establishes that his acts or
omissions were in bad faith or involved intentional misconduct or a knowing
violation of law or that he personally gained in fact a financial profit or
other advantage to which he was not legally entitled or that his acts violated
Section 719 of the New York Business Corporation Law. Any repeal or modification
of what is set forth hereinabove will not adversely affect any right or
protection of a director of the Company existing at the time of such repeal or
modification with respect to acts or omissions occurring prior to such repeal or
modification. The effect of this provision is to eliminate the rights of the
Company and its stockholders (through stockholders' derivative suits on behalf
of the Company) to recover monetary damages against a director for breach of the
fiduciary duty of care as a director (including breaches resulting from
negligent or grossly negligent behavior) except in certain limited situations.
This provision does not limit or eliminate the rights of the Company or any
stockholder to seek non-monetary relief such as an injunction or rescission in

the event of a breach of a director's duty of care. These provisions will not
alter the liability of directors under federal securities laws.

The Company's By-Laws provide that the Company shall to the fullest extent
permitted by applicable law, as amended from time to time, indemnify any person
who is or was made, or threatened to be made, a party to any action or
proceeding, whether civil or criminal, whether involving any actual or alleged
breach of duty, neglect or error, any accountability, or any actual or alleged
misstatement, misleading statement or other act or omission and whether brought
or threatened in any court or administrative or legislative body or agency,
including any action by

33
<PAGE>
or in the right of the Corporation to procure a judgment in its favor and an
action by or in the right of any other corporation of any type or kind, domestic
or foreign, or any partnership, joint venture, trust, employee benefit plan or
other enterprise, which any director or officer of the Corporation is serving or
served in any capacity at the request of the Corporation, by reason of the fact
that he, his testator or intestate, is or was a director or officer of the
Corporation, or is serving or served such other corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise in any capacity,
against judgments, fines, amounts paid in settlement, and expenses (including
attorneys' fees, cost and charges) incurred as a result of such action or
proceeding, or appeal therein, except to such person who is a director or
officer of the Company and a judgment or other final adjudication adverse to
such director or officer establishes that (i) his acts were committed in bad
faith or were the result of active and deliberate dishonest and, in either case,
were material to the cause of action so adjudicated, or (ii) he personally
gained in fact a financial profit or other advantage to which he was not legally
entitled.

Section 722 of the New York Business Corporation Law empowers a New York
corporation to indemnify any person, made, or threatened to be made, a party to
an action or proceeding other than one by or in the right of the corporation to
procure a judgment in its factor, whether civil or criminal, including an action
by or in the right of any other corporation of any type or kind, domestic or
foreign, or any partnership, joint venture, trust, employee benefit plan or
other enterprise, which any director or officer of the corporation served in any
capacity at the request of the corporation, by reason of the fact that he, his
testator or intestate, was a director or officer of the corporation, or served
such other corporation, partnership, joint venture, trust, employee benefit plan
or other enterprise in any capacity, against judgments, fines, amounts paid in
settlement and reasonable expenses, including attorney's fees actually and
necessarily incurred as a result of such action or proceeding, or any appeal
therein, if such director or officer acted, in good faith, for a purpose which
he reasonably believed to be in, or in the case of service for any other
corporation or any partnership, joint venture, trust, employee benefit plan or
other enterprise, not opposed to, the best interests of the corporation and, in
criminal actions or proceedings, in addition, had no reasonable cause to believe
that his conduct was unlawful.

In addition, Section 722 of the New York Business Corporation Law states
that a New York corporation may indemnify any person made, or threatened to be

made, a party to an action by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that he, his testator or intestate,
is or was a director or officer of the corporation, or is or was serving at the
request of the corporation as a director or officer of any other corporation of
any type of kind, domestic or foreign, of any partnership, joint venture, trust,
employee benefit plan or other enterprise, against amounts paid in settlement
and reasonable expenses, including attorneys' fees, actually and necessarily
incurred by him in connection with the defense or settlement of such action, or
in connection with an appeal therein if such director or officer acted, in good
faith, for a purpose which he reasonably believed to be in, or, in the case of
service for any other corporation or any partnership, joint venture, trust,
employee benefit plan or other enterprise, not opposed to, the best interests of
the corporation, except that no indemnification under this paragraph shall be
made in respect of (1) a threatened action, or a pending action which is settled
or otherwise disposed of, or (2) any claim, issue or matter as to which such
person shall have been adjudged to be liable to the corporation, unless and only
to the extent that the court on which the action was brought, or, if no action
was brought, any court of competent jurisdiction, determines upon application
that, in view of all the circumstances of the case, the person is fairly and
reasonably entitled to indemnity for such portion of the settlement amount and
expenses as the court deems proper.

Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Company pursuant
to the foregoing provisions, or otherwise, the Company has been advised that in
the opinion of the SEC such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.

The Company maintains directors and officers liability insurance.

34
<PAGE>
STOCK OPTION PLAN

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

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

The Plan is administered by the Company's Compensation and Stock Option
Committee as the Board may establish or designate (the 'Administrators'). The

Committee shall be comprised of not less than two members, and all of whom shall
be outside directors. The members of the Compensation and Stock Option Committee
are Stewart L. Cohen and William F. Kenny III, outside directors.

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

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

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

The Compensation and Stock Option Committee has approved the grant, as of
the Effective Date, of ISOs to purchase an aggregate of 70,000 shares of Common
Stock to certain employees of the Company. These Options will be exercisable as
to one-third of such shares at an exercise price of $5.00 per share commencing
one year from the Effective Date, as to an additional one-third of such shares
at an expercise price of $5.50 per share commencing two years from the Effective
Date; and as to an additional one-third of such shares at an exercise price of
$6.00 per share commencing three years from the Effective Date provided the
Optionee shall be employed by the Company at the time of exercise.

35
<PAGE>
SECURITIES OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information as of the date of the
Prospectus and as adjusted to reflect the sale of the Securities offered hereby,
based on information obtained from the persons named below, with respect to the
beneficial ownership of shares of Common Stock by (i) each person known to the
Company to beneficially own more than 5% of the outstanding shares of Common
Stock, (ii) each executive officer and director of the Company, and (iii) all

officers and directors of the Company as a group:

<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
BENEFICIAL OWNERSHIP PERCENTAGE
----------------------------- ------------------------
NAME AND ADDRESS OF BEFORE AFTER BEFORE AFTER
BENEFICIAL OWNER OFFERING OFFERING(2) OFFERING OFFERING(2)
- ------------------- --------- ---------------- --------- -----------
<S> <C> <C> <C> <C>
Harvey Acquisition Company LLC ............................ 1,915,000(3) 1,750,000(4) 84.8% 53.3%
c/o Recca & Co., Inc.
100 Wall Street, 10th Floor
New York, NY 10005
Michael Recca ............................................. 1,920,000(1)(3) 1,755,000(1)(4) 85.0% 53.5%
Recca & Co., Inc.
100 Wall Street, 10th Floor
New York, NY 10005
Stewart L. Cohen .......................................... 10,000 10,000 * *
Harvey Electronics, Inc.
205 Chubb Avenue
Lyndhurst, NJ 07071
William F. Kenny, III ..................................... 8,489 8,489 * *
Harvey Electronics, Inc.
205 Chubb Avenue
Lyndhurst, NJ 07071
Franklin C. Karp .......................................... 15,000 15,000 * *
Harvey Electronics, Inc.
205 Chubb Avenue
Lyndhurst, NJ 07071
Joseph J. Calabrese ....................................... 10,702 10,702 * *
Harvey Electronics, Inc.
205 Chubb Avenue
Lyndhurst, NJ 07071
Michael A. Beck ........................................... 7,500 7,500 * *
Harvey Electronics, Inc.
205 Chubb Avenue
Lyndhurst, NJ 07071
Roland W. Hiemer .......................................... 2,500 2,500 * *
Harvey Electronics, Inc.
205 Chubb Avenue
Lyndhurst, NJ 07071
InterEquity Capital Partners .............................. 141,565(3)(5) 131,565(4)(5) 6.0% 3.9%
220 Fifth Avenue, 10th Floor
New York, NY 10001
All Directors and Officers as a group ..................... 1,974,191 1,809,191(4) 87.4% 55.1%
(7 Persons)
</TABLE>

- ------------------
* Less than 1% of outstanding shares of Common Stock.
(1) Includes Shares owned by HAC, of which Mr. Recca is a member and one of
three managers.

(2) Assumes no exercise of the Warrants and other outstanding warrants, the
Over-Allotment Option, the Representative's Warrant, stock options granted
or to be granted under the Company's Stock Option Plan, and no conversion of
the outstanding Preferred Stock.
(3) Assumes no exercise of a put option granted by HAC to InterEquity, the
exercise of which will require HAC to purchase the 51,565 Shares held by
InterEquity for $70,000 prior to the Effective Date ('Put Option') and does
not include the 10,000 Shares to be purchased by HAC from InterEquity at
$5.00 per Share within 10 days of the closing of the Offering.
(4) Includes 10,000 Shares to be purchased by HAC from InterEquity at $5.00 per
Share within 10 days of the closing of the Offering, but assumes no exercise
of the Put Option. If the Over-Allotment Option were exercised in full, HAC
would own 1,570,000 Shares (or 47.8%) and all Directors and Officers as a
group would own 1,629,191 Shares (or 49.6%).
(5) Includes 90,000 Shares issuable on conversion of Preferred Stock.

36
<PAGE>
SELLING SECURITYHOLDER

In addition to the 1,025,000 shares of Common Stock and 1,830,000 Warrants
to be sold by the Company in the Offering and the 175,000 shares of Common Stock
to be sold by HAC, the selling securityholder, the Representative has been
granted an option (the 'Over-Allotment Option'), exercisable for a period of 45
calendar days from the date of the closing of this Offering, to purchase at the
per share public offering prices less underwriting discounts and the
non-accountable expense allowance, an aggregate of 180,000 additional shares of
Common Stock and/or an aggregate of 274,500 additional Warrants. In the event
the Representative exercises the Over-Allotment Option, the shares of Common
Stock will be sold by HAC and the Warrants will be sold by the Company.

HAC has agreed to purchase from InterEquity 10,000 Shares at $5.00 per
Share within 10 days of the closing of the Offering.

HAC is a principal shareholder of the Company owning approximately 85% of
its outstanding Common Stock before the Offering. Mr. Michael Recca, a member
and manager of HAC, is Chairman and a director of the Company.

The following table sets forth certain information with respect to the sale
of the 175,000 shares of Common Stock by HAC in the Offering. The Company will
not receive any proceeds from the sale of shares by HAC.

<TABLE>
<CAPTION>
BENEFICIAL BENEFICIAL
OWNERSHIP OWNERSHIP
OF SHARES OF COMMON OF SHARES OF COMMON
SELLING SECURITYHOLDER STOCK PRIOR TO SALE SHARES TO BE SOLD STOCK AFTER SALE
- ---------------------- ------------------- ----------------- -------------------
<S> <C> <C> <C>
Harvey Acquisition Company, LLC........................... 1,915,000 175,000 1,750,000(1)
</TABLE>

- ------------------

(1) Includes 10,000 Shares to be purchased by HAC from InterEquity at $5.00 per
Share within 10 days of the closing of the Offering, but assumes no exercise
of the Over-Allotment Option or the Put Option. If the Over-Allotment Option
as to the Shares were exercised in full, HAC would own 1,570,000 Shares and
would have sold 355,000 Shares.

37
<PAGE>
CERTAIN TRANSACTIONS

In 1995 and 1996, during the Company's bankruptcy proceeding, the Company
borrowed, in the aggregate, approximately $2,822,500 (the 'Loan') from HAC. As
of the effective date of the Company's Reorganization Plan, and pursuant to
certain provisions contained therein, HAC's claims in connection with the Loan
was satisfied by issuing HAC 2,000,000 shares of the Company's Common Stock.
Subsequently, Michael Recca was elected as a member and Chairman of the
Company's Board of Directors. In connection with the Loan, the Company paid a
$5,000 per month loan servicing fee, which was to be paid to Recca & Co. Inc.,
of which Michael Recca is the sole shareholder, through October 1996.
Subsequently, through April 1997, a $5,000 per month management fee to Recca &
Co., Inc. was accrued. For fiscal 1998 Recca & Co., Inc. will receive a $40,000
management consulting fee.

Harvey E. Sampson, former director and officer of the Company and a holder
of approximately 7% of the Company's Common Stock prior to the Company's
reorganization, executed a promissory note ('Note') to the Company in the
principal amount of $153,371, payable in 6 annual payments of $25,561.83
commencing on January 1, 1997, with an annual interest rate of 6%. The Note was
delivered as payment for the purchase by Mr. Sampson of certain insurance
policies and their related cash surrender values, which were owned by the
Company. On June 15, 1995, Mr. Sampson resigned as a director and officer of the
Company, but continued to hold approximately 7% of the Company's Common Stock.
On the effective date of the Company's reorganization, Mr. Sampson became a
holder of less than 1% of the Company's Common Stock. In July 1996, Mr. Sampson,
with the agreement of the Company, satisfied the note by paying $125,000 and the
Company obtained the release of personal guaranty of the Company's indebtedness
to Congress Financial Corporation.

On February 9, 1996 the Company entered into a severance agreement with
Arthur Shulman, the then President, Chief Executive Officer and a director of
the Company. In consideration of Mr. Shulman's resignation effective February
29, 1996 from all offices and positions he held in the Company and its
subsidiaries, the Company:

(1) paid Mr. Shulman $75,000;

(2) on February 29, 1996 paid Mr. Shulman a sum equal to 3 weeks accrued
vacation pay;

(3) provided Mr. Shulman with, and paid for, all medical benefits under
COBRA for an 18-month period following the termination; and

(4) agreed to provide Mr. Shulman with all indemnification, and all
limitation of liability, existing in favor of Mr. Shulman as provided

in the Company's certificate of incorporation and by-laws for six years
from termination.

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

In February and March, 1997, Mr. E. H. Arnold ('Arnold'), a member of HAC
and a holder of Preferred Stock, loaned the Company the principal amount of
$350,000, with an interest rate of 12% per annum. This loan is due on December
31, 1998 and can be prepaid without penalty.

In late November 1997, HAC transferred 85,000 shares of Common Stock to
certain employees and directors of the Company and Arnold. Such transfer is to
be treated for accounting purposes as if such shares were issued by the Company
as compensation to such persons. The Company has recorded deferred compensation
equal to the fair market value of the shares (70% of the per share public
offering price) and will amortize this balance over a two year period, during
which the shares are subject to forfeiture by the transferees. The Company
recorded stock compensation expense of $22,000 for the thirteen weeks ended
January 31, 1998.

In March 1998 HAC agreed to pay, or reimburse the Company, $70,000 of the
estimated $475,000 expenses of this Offering in addition to the underwriting
discounts and commissions and non-accountable expense allowance related to the
Shares being sold by it in this Offering.

In the future the Company will present all proposed transactions between
the Company and its officers, directors or 5% shareholders, and their affiliates
to the Board of Directors for its consideration and approval. Any such
transaction, including forgiveness of loans, will require approval by a majority
of the disinterested directors and such transactions will be on terms no less
favorable than those available to disinterested third parties.

38
<PAGE>
DESCRIPTION OF SECURITIES

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

COMMON STOCK

The Company is authorized to issue 10,000,000 shares of Common Stock with a
par value of $0.01 per share. As of the Effective Date, 2,257,833 shares are
outstanding and held of record by 364 shareholders.

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

WARRANTS

1,830,000 Warrants will be sold in this Offering at a public offering price
of $0.10 per Warrant. In addition, 36,548 Warrants were issued to the holders of
the Company's Preferred Stock, which are identical to the Warrants, but are not
registered under the Securities Act. Each Warrant entitles its holder to
purchase one share of Common Stock at a price of 110% of the per share public
offering price of the Common Stock, subject to adjustment in certain
circumstances. Each Warrant is exercisable for a period of three years
commencing two years from the Effective Date (or earlier with the consent of the
Representative).

The Warrants may be redeemed by the Company at $0.10 per Warrant at any
time commencing two years from the Effective Date, or earlier with the consent
of the Representative, and until their expiration, provided the closing bid
price, if listed on the NASDAQ SmallCap or the OTC Electronic Bulletin Board, or
the last sales price, if listed on the NASDAQ National Market or a national
exchange, of the Common Stock for twenty (20) consecutive trading days during
such three-year holding period, exceeds $7.50 per share. The Warrants are
exercisable until the close of the trading day preceding the date fixed for
redemption. Holders of Warrants do not have any of the rights of holders of
Common Stock. The Warrants offered herein will be sold and traded separately
from the Company's Common Stock.

No Warrants will be exercisable unless at the time of exercise there is a
current prospectus covering the shares of Common Stock issuable upon exercise of
such Warrants under an effective registration statement filed with the
Commission and such shares have been qualified for sale or are exempt from
qualification under the securities laws of the state of residence of the holder
of such Warrants. Although the Company intends to have all shares so qualified
for sale in those states where the Securities are being offered and has
undertaken to maintain a current prospectus relating thereto until the
expiration of the Warrants, subject to the terms of the Warrant Agreement, there
can be no assurance that it will do so.

39
<PAGE>
A holder of Warrants will not have any rights, privileges or liabilities as
a stockholder of the Company prior to exercise of the Warrants. The Company is
required to keep available a sufficient number of authorized shares of Common
Stock to permit exercise of the Warrants.

The exercise price of the Warrants and the number of shares issuable upon
exercise of the Warrants will be subject to adjustment to protect against
dilution in the event of stock dividends, stock splits, combinations,
subdivisions, and reclassifications. No assurance can be given that the market
price of the Common Stock will exceed the exercise price of the Warrants at any
time during the exercise period.

PREFERRED STOCK

The Company's certificate of incorporation authorizes the issuance of
10,000 shares of 8.5% Cumulative Convertible Preferred Stock ('Preferred Stock')
with a par value of $1,000 per share. Prior to the date of this Prospectus, 875
shares of Preferred Stock were issued and outstanding and were held by five
holders of record.

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

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

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

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

Each share of Preferred Stock may be convertible into shares of Common
Stock at the option of the holder, in whole or in part, as follows: until
December 31, 2000, (i) 50% of the Preferred Stock will be convertible at $6.00
per share; and (ii) $7.50 per share for the balance. Commencing January 1, 2001,
the Conversion Price shall be equal to the average of the closing bid price of
the Common Stock over the 45 trading days preceding January 1, 2001 (if traded
on the NASDAQ SmallCap or the OTC Electronic Bulletin Board) or the average of
the last sales price of the Common Stock over the 45 trading days preceding
January 1, 2001 (if listed on the NASDAQ National Market or a national
exchange.)

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

40
<PAGE>
In case of any capital reorganization or any reclassification of the Common
Stock, or in case of the consolidation or merger of the Company with or into
another corporation, or the conveyance of all or substantially all of the assets
of the Company to another corporation, each Preferred Share shall thereafter be
convertible into the number of shares of stock or other securities or property
to which a holder of the number of shares of Common Stock deliverable upon
conversion of such Preferred Stock would have been entitled upon such
reorganization, reclassification, consolidation, merger, or conveyance.

SHARES ELIGIBLE FOR FUTURE SALE

HAC has entered into a written agreement with the Representative that it
will not publicly sell an aggregate of 1,750,000 (assuming neither the Put
Option nor the Over-Allotment Option are exercised) shares of the Company's
Common Stock without the prior consent of the Representative for a period of 12
months from the Effective Date as to 25% of such shares; for a period of 18
months from such date, as to an additional 25% of such shares; and for a period
of 24 months from such date, as to the remaining 50% of such shares.

As of the Effective Date, all holders of the Preferred Stock will have
entered into lock-up agreements with the Representative, which agreements

provide that Common Stock issued upon conversion of Preferred Stock, Warrants
owned by such holders and Common Stock exercisable upon the exercise of such
warrants will not be sold publicly for two years following the Effective Date or
one year from the conversion (whichever is longer). The lock-up will be
suspended, however, if the closing bid price of the Common Stock if traded on
the NASDAQ SmallCap or the OTC Electronic Bulletin Board or the last sales price
of the Common Stock if listed on the NASDAQ National Market or a national
exchange, exceeds $7.50 for 45 consecutive trading days.

Certain directors, officers and employees of the Company, and Mr. E. H.
Arnold will agree to with the Representative not to publicly sell an aggregate
of 85,000 Shares for two years following the Effective Date. A sale of Shares in
significant amounts after the expiration of any lock-up agreement may have
substantial adverse effects on the market price of the Common Stock and
Warrants.

MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Shares of Common Stock of The Harvey Group Inc., the predecessor of the
Company, were traded on the American Stock Exchange until June 16, 1995, and
were subsequently traded on the OTC Electronic Bulletin Board through November
1996 when such trading ceased as a result of the confirmation of the Company's
Reorganization Plan. Currently, there is no public trading market for the
Company's Securities.

The outstanding shares of Common Stock are currently held by 364
shareholders of record, and the Preferred Stock by 5 holders of record.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Common Stock and Warrant Agent for
the Warrants is Registrar and Transfer Company, 10 Commerce Drive, Cranford, New
Jersey 07016.

41
<PAGE>
UNDERWRITING

Subject to the terms and conditions set forth in the Underwriting
Agreement, each of the Underwriters named below, for whom The Thornwater
Company, L.P. is acting as representative ('Representative'), has severally
agreed to purchase from the Company and the Company has agreed to sell to the
Underwriters, on a firm commitment basis, the respective number of shares of
Common Stock and/or Warrants set forth below opposite each such Underwriter's
name:

<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
UNDERWRITER SHARES WARRANTS

--------- ---------
<S> <C> <C>
The Thornwater Company, L.P............................................ 325,000 505,625
H.J. Meyers & Co. Inc.................................................. 400,000 600,000
J.W. Barclay & Co., Inc................................................ 300,000 457,500
Robb, Peck & McCoey Clearing Corporation............................... 175,000 266,875
--------- ---------
Total.................................................................. 1,200,000 1,830,000
--------- ---------
--------- ---------
</TABLE>

The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the Securities are subject to
certain conditions precedent, and that the several Underwriters will purchase
all of the Securities shown above if any of such Securities are purchased.

The Representative has advised the Company that the Underwriters propose
initially to offer the Securities directly to the public at the initial public
offering prices set forth on the cover page of this Prospectus and to certain
dealers who are members in good standing with the National Association of
Securities Dealers, Inc. ('NASD') at such prices less a concession not in excess
of $.20 per share of Common Stock and $.004 per Warrant. Neither the
Underwriters nor such dealers will allow any concession to other dealers. After
the initial public offering, the public offering prices, concessions and
re-allowances may be changed.

The Company and HAC have granted to the Representative an option,
exercisable during the 45-day period after the closing date of this Offering, to
purchase from the Company and, if necessary, from HAC at the per share public
offering prices less underwriting discounts and the non-accountable expense
allowance, an aggregate of 180,000 additional shares of Common Stock and/or an
aggregate of 274,500 additional Warrants for the purpose of covering
over-allotments, if any. In the event the Representative exercise the
Over-Allotment Option, all shares of Common Stock will be sold by HAC and all
the additional Warrants will be sold by the Company. To the extent that such
option is exercised in whole or in part, each Underwriter will have a firm
commitment, subject to certain conditions, to purchase the number of additional
Securities proportionate to such Underwriter's initial commitment.

Each of the Company and HAC has agreed to pay to the Representative a
non-accountable expense allowance equal to three percent (3%) of the gross
proceeds of this Offering derived from the sale of the Securities by each.

In addition, subject to the rules of the NASD, the Company has agreed to
engage the Representative as warrant solicitation agent, in connection with
which it would be entitled to a 5% fee upon exercise of the Warrants. In
accordance with the NASD rules, no fee shall be paid: (i) upon the exercise
where the market price of the underlying Common Stock is lower than the exercise
price; (ii) for the exercise of Warrants held in any discretionary account;
(iii) upon the exercise of Warrants where disclosure of compensation
arrangements has not been made and documents have not been provided to customers
both as part of the original Offering and at the time of exercise; (iv) upon the
exercise of Warrants in unsolicited transactions; or (v) upon the exercise of

Warrants where such exercise is solicited by the Company. Notwithstanding the
foregoing, no fees will be paid to the Representative or any other NASD members
upon exercise of the Warrants within the first twelve months after the date of
this Prospectus. In addition, upon consent of the Representative, other NASD
members may solicit the exercise of the Warrants without giving up a portion of
the 5% solicitation fee to the Representative. Further, such NASD broker/dealer
will receive a 5% solicitation fee only when designated in writing by the
warrantholder as the soliciting broker.

42
<PAGE>
In connection with this Offering, the Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock and
Warrants. Such transactions may include stabilization transactions effected in
accordance with Rule 104 of Regulation M, pursuant to which such persons may bid
for or purchase Common Stock or Warrants for the purpose of stabilizing their
respective market prices. The Underwriters also may create a short position for
the account of the Underwriters by selling more shares of Common Stock or
Warrants in connection with the Offering than they are committed to purchase
from the Company, and in such case may purchase shares of Common Stock or
Warrants in the open market following completion of the Offering to cover all or
a portion of such short position. The Underwriters may also cover all or a
portion of such short position by exercising the Over-Allotment Option. In
addition, the Underwriters may impose 'penalty bids' under contractual
arrangements with the Underwriters whereby it may reclaim from an Underwriter
(or dealer participating in the Offering) for the account of other Underwriters,
the selling concession with respect to shares of Common Stock and Warrants that
are distributed in the Offering but subsequently purchased for the account of
the Underwriters in the open market. Any of the transactions described in this
paragraph may result in the maintenance of the price of the Common Stock and
Warrants at a level above that which might otherwise prevail in the open market.
None of the transactions described in this paragraph is required, and, if they
are undertaken they may be discontinued at any time.

Pursuant to the Underwriting Agreement, the Company has agreed that, for
three years from the effective date of the Registration Statement of which this
Prospectus is a part, the Representative may designate one person to the
Company's Board of Directors, subject to the Company's good faith approval. In
the event the Representative elects not to exercise this right, it may designate
one person to attend all meetings of the Board for a period of three years.

The Underwriters have informed the Company that they do not expect any
sales of shares of Common Stock or Warrants to be made to discretionary
accounts.

The Company has agreed to retain the Representative as the Company's
financial consultant for a period of 36 months from the date hereof and to pay
the Representative the amount of $123,660 for such services, all payable in
advance on the closing date of this Offering as set forth in the Underwriting
Agreement.

The Company, the Selling Securityholder and the Underwriters have agreed to
indemnify each other against, or to contribute to losses arising out of, certain

civil liabilities in connection with this Offering, including liabilities under
the Securities Act.

Prior to this Offering, there is currently no active trading market for the
Company's Securities. The initial public offering prices of the Securities and
the terms of the Warrants have been determined by negotiation between the
Company and the Representative. Factors considered in determining the per share
public offering prices of the Securities and the terms of the Warrants, in
addition to prevailing market conditions, included the history of and prospects
for the industry in which the Company competes, an assessment of the Company's
management the prospects of the Company, its capital structure and such other
factors that were deemed relevant.

In connection with this Offering, the Company has agreed to sell to the
Representative, for nominal consideration, a warrant exercisable for four years
commencing one year from the Effective Date, to purchase from the Company
120,000 shares of Common Stock and/or 183,000 Warrants (the 'Representative's
Warrant'). The Representative's Warrant is initially exercisable at a price of
$8.00 per share of Common Stock and $0.16 per warrant. The warrants issuable
upon exercise of the Representative's Warrant are identical to those offered to
the public, except that the price to purchase a Share is $8.80. The
Representative's Warrant contains anti-dilution provisions providing for
adjustment of the number of warrants and exercise price under certain
circumstances. The holder of a majority of the Representative's Warrant or the
securities underlying the Representative's Warrant if the Representative's
Warrant has been fully exercised, will have the right, at anytime commencing on
the first anniversary and expiring on the fifth anniverary of the Effective
Date, to have the Company prepare and file with the SEC, on one occasion, a
registration statement on Form SB-2, S-1 or other appropriate form, and such
other documents, including a prospectus, so as to permit a public offering and
sale, for a period of nine (9) months, of the securities underlying the
Representative's Warrant by such holders and any other holders of the
Representative's Warrant and/or securities underlying the Representative's
Warrant.

In the event the Company files a registration statement with the SEC under
the Securities Act of 1933, as amended (other than in connection with a merger
or other business combination transaction or pursuant to a

43
<PAGE>
Form S-8 registration) during the period commencing on the first anniversary and
expiring on the fifth anniversary of the Effective Date, the holder of
Representative's Warrant or securities underlying the Representative's Warrant
may require the Company to include securities underlying the Representative's
Warrant in such registration statement provided that the Company shall have the
right to elect not to file such proposed registration statement, or to withdraw
the same after the filing but prior to the effective date thereof.

The foregoing includes a summary of the principal terms of the Underwriting
Agreement and does not purport to be complete. Reference is made to the copy of
the Underwriting Agreement that is on file as an exhibit to the Registration
Statement of which this Prospectus is a part. See 'Additional Information.'

While certain officers of the Representative have significant experience in
corporate financing and securities underwriting, the Representative has
previously acted as an underwriter in only two 'firm commitment' underwritings
and has acted as the principal underwriter in one of such offerings.
Accordingly, there can be no assurance that the Representative's limited public
offering experience will not adversely affect the Company's offering of the
Securities and the subsequent development of a trading market in the Securities,
if any.

LEGAL MATTERS

The validity of the Securities offered hereby will be passed upon for the
Company by Ruskin, Moscou, Evans & Faltischek, P.C., Mineola, New York. Certain
legal matters in connection with the Offering will be passed upon for the
Underwriters by Gersten, Savage, Kaplowitz & Fredericks, LLP, New York, New
York.

Ruskin, Moscou, Evans & Faltischek, P.C. will receive at the closing of
this Offering a warrant to purchase 15,000 shares of Common Stock at the public
offering price, which warrant is exercisable for four years.

EXPERTS

The financial statements of the Company at November 1, 1997 and for the
fifty-three weeks ended November 1, 1997 and the thirty-nine weeks ended October
26, 1996, appearing in this Prospectus and Registration Statement have been
audited by Ernst & Young LLP, independent auditors, as set forth in their report
thereon appearing elsewhere herein, and are included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.

ADDITIONAL INFORMATION

The Company has filed with the SEC a Registration Statement on Form SB-2
(the 'Registration Statement') under the Act with respect to the Securities
offered hereby. This Prospectus, which forms a part of the Registration
Statement, does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules thereto. For further information with
respect to the Company and the Securities offered hereby, reference is made to
the Registration Statement and such exhibits and schedules, which may be
inspected without charge at the Public Reference Section of the SEC at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
regional offices of the SEC located at Seven World Trade Center, New York, New
York 10048. Copies of such material may also be obtained at prescribed rates
from the Public Reference Section of the SEC in Washington, D.C. 20549.
Registration Statements filed electronically through the Electronic Data
Gathering Analysis and Retrieval System are publicly available at the SEC's
website (http://www.sec.gov.) Statements contained in the Prospectus as to the
contents of any contract or other document referred to are not necessarily
complete, and in each instance, reference is made to the copy of such contract
or document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference.

The Company intends to furnish its stockholders with annual reports

containing audited financial statements reported on by its independent auditors
and quarterly reports for the first three quarters of each fiscal year
containing unaudited interim financial statements.

<PAGE>
HARVEY ELECTRONICS, INC.
(FORMERLY THE HARVEY GROUP INC. AND SUBSIDIARIES)
INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----

<S> <C>
Report of Independent Auditors................................................................................ F-2

Balance Sheet--November 1, 1997............................................................................... F-3

Statements of Operations--Fifty-Three Weeks Ended November 1, 1997 and Thirty-Nine Weeks Ended October 26,
1996........................................................................................................ F-4

Statements of Shareholders' Equity--Fifty-Three Weeks Ended November 1, 1997 and Thirty-Nine Weeks Ended
October 26, 1996............................................................................................ F-5

Statements of Cash Flows--Fifty-Three Weeks Ended November 1, 1997 and Thirty-Nine Weeks Ended October 26,
1996........................................................................................................ F-6

Notes to Financial Statements................................................................................. F-7
</TABLE>

UNAUDITED FINANCIAL STATEMENTS

<TABLE>
<S> <C>
Statements of Operations (Unaudited)--Thirteen weeks ended January 31, 1998 and Fourteen weeks ended February
1, 1997..................................................................................................... F-18

Balance Sheet--January 31, 1998 (Unaudited)................................................................... F-19

Statements of Cash Flows (Unaudited)--Thirteen weeks ended January 31, 1998 and Fourteen weeks ended February
1, 1998..................................................................................................... F-21

Statement of Shareholders' Equity (Unaudited)--Thirteen weeks ended January 31, 1998.......................... F-22

Notes to Financial Statements (Unaudited)..................................................................... F-23
</TABLE>

F-1

<PAGE>
REPORT OF INDEPENDENT AUDITORS

Shareholders and Board of Directors
Harvey Electronics, Inc.

We have audited the accompanying balance sheet of Harvey Electronics, Inc.
(formerly The Harvey Group Inc. and subsidiaries) as of November 1, 1997 and the
related statements of operations, shareholders' equity, and cash flows for the
fifty-three weeks ended November 1, 1997 (Successor) and the thirty-nine weeks
ended October 26, 1996 (Predecessor). These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Harvey Electronics, Inc. at
November 1, 1997, and the results of its operations and its cash flows for
fifty-three weeks ended November 1, 1997 (Successor) and the thirty-nine weeks
ended October 26, 1996 (Predecessor), in conformity with generally accepted
accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note 1, the
Company has incurred recurring losses and negative cash flows from operations.
These conditions raise substantial doubt about the Company's ability to continue
as a going concern. Management's plans in regard to these matters are described
in Notes 1 and 5. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.

ERNST & YOUNG LLP

Melville, NY
January 9, 1998, except for Note 5,
as to which the date
is March 12, 1998

F-2

<PAGE>
HARVEY ELECTRONICS, INC.
(FORMERLY THE HARVEY GROUP INC. AND SUBSIDIARIES)
BALANCE SHEET
NOVEMBER 1, 1997

<TABLE>
<CAPTION>
PRO FORMA
UNAUDITED
ACTUAL (SEE NOTE 6)
---------- ------------
<S> <C> <C>
ASSETS

Current assets:
Cash and cash equivalents............................................................... $ 10,033 $ 10,033
Accounts receivable, less allowance of $20,000.......................................... 272,436 272,436
Certificate of deposit.................................................................. 200,000 200,000
Inventories............................................................................. 3,559,778 3,559,778
Prepaid expenses and other current assets............................................... 109,656 109,656
---------- ----------
Total current assets...................................................................... 4,151,903 4,151,903
Property and equipment:...................................................................
Leasehold improvements.................................................................. 644,646 644,646
Furniture, fixtures and equipment....................................................... 738,872 738,872
---------- ----------
1,383,518 1,383,518
Less accumulated depreciation and amortization.......................................... 179,604 179,604
---------- ----------
1,203,914 1,203,914
Equipment under capital leases............................................................ 15,768 15,768
Reorganization value in excess of amounts allocable to identifiable assets, less
accumulated amortization of $66,023..................................................... 1,582,440 1,582,440
Other, less accumulated amortization of $40,400........................................... 360,100 360,100
---------- ----------
Total assets.............................................................................. $7,314,125 $7,314,125
---------- ----------
---------- ----------

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Trade accounts payable.................................................................. $1,716,755 $1,716,755
Accrued expenses and other current liabilities.......................................... 1,139,918 1,139,918
Obligations relating to Chapter 11 reorganization....................................... 17,500 17,500
Income taxes............................................................................ 30,400 30,400
Current portion of capital lease obligations............................................ 32,542 32,542
---------- ----------
Total current liabilities................................................................. 2,937,115 2,937,115
Long-term liabilities:
Long-term debt.......................................................................... 2,127,851 2,127,851
Cumulative Preferred Stock dividends payable............................................ 70,479 70,479
Other liabilities....................................................................... 157,411 157,411

Capital lease obligations............................................................... 8,583 8,583
8 1/2% Cumulative Convertible Preferred Stock, par value $1,000 per share; authorized
10,000 shares; issued and outstanding 875 shares (aggregate liquidation
preference--$875,000)................................................................ 396,037 --
Shareholders' Equity:
8 1/2% Cumulative Convertible Preferred Stock, par value $1,000 per share; authorized
10,000 shares; issued and outstanding 875 shares (aggregate liquidation
preference--$875,000)................................................................ -- 396,037
Common Stock, par value $.01 per share; authorized 10,000,000 shares; issued and
outstanding 2,257,833 shares......................................................... 22,578 22,578
Additional paid-in capital.............................................................. 3,067,799 3,067,799
Accumulated deficit..................................................................... (1,473,728) (1,473,728)
---------- ----------
Total shareholders' equity................................................................ 1,616,649 2,012,686
---------- ----------
Total liabilities and shareholders' equity................................................ $7,314,125 $7,314,125
---------- ----------
---------- ----------
</TABLE>

See notes to the financial statements.

F-3

<PAGE>
HARVEY ELECTRONICS, INC.
(FORMERLY THE HARVEY GROUP INC. AND SUBSIDIARIES)
STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
----------- -----------------------------
FIFTY-THREE THIRTY-NINE THIRTY-NINE
WEEKS ENDED WEEKS ENDED WEEKS ENDED
NOVEMBER 1, OCTOBER 26, OCTOBER 28,
1997 1996 1995
----------- ----------- --------------
(UNAUDITED)(1)
<S> <C> <C> <C>
Net sales............................................................. $15,398,290 $ 9,263,152 $ 11,107,258
Interest and other income............................................. 72,652 87,657 78,487
----------- ----------- --------------
15,470,942 9,350,809 11,185,745
----------- ----------- --------------
Cost of sales......................................................... 9,764,755 6,094,499 7,312,311
Selling, general and administrative expenses.......................... 6,706,180 4,937,316 5,782,070
Interest expense...................................................... 325,219 355,922 307,015
----------- ----------- --------------
16,796,154 11,387,737 13,401,396
----------- ----------- --------------
Loss before reorganization expenses, fresh start adjustments and
extraordinary item.................................................. (1,325,212) (2,036,928) (2,215,651)
Reorganization expenses............................................... -- (497,206) (520,418)
Reorganization income--sale of lease.................................. -- 250,000 --
----------- ----------- --------------
Loss before fresh start adjustments and extraordinary item............ (1,325,212) (2,284,134) (2,736,069)
Fresh start adjustments............................................... -- 1,857,844 --
----------- ----------- --------------
Loss before extraordinary item........................................ (1,325,212) (426,290) (2,736,069)
Extraordinary gain on forgiveness of debt............................. -- 5,338,852 --
----------- ----------- --------------
Net (loss) income..................................................... (1,325,212) 4,912,562 (2,736,069)
Preferred Stock dividend requirement.................................. (70,479) -- --
Accretion of Preferred Stock.......................................... (78,037) -- --
----------- ----------- --------------
Net (loss) income attributable to Common Stock........................ $(1,473,728) $ 4,912,562 $ (2,736,069)
----------- ----------- --------------
----------- ----------- --------------
Net (loss) per common share........................................... $ (.65)
-----------
-----------
Weighted average number of common and common equivalent shares
outstanding during the period....................................... 2,257,833
-----------
-----------
</TABLE>

(1) Presented for comparison purposes only.

See notes to the financial statements.

F-4

<PAGE>
HARVEY ELECTRONICS, INC.
(FORMERLY THE HARVEY GROUP INC. AND SUBSIDIARIES)
STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK TOTAL
----------------- ------------------------ ADDITIONAL ACCUMULATED TREASURY SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) STOCK EQUITY
------ -------- ---------- ----------- ----------- ------------ --------- -------------

<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 27,
1996 (Predecessor)..... 3,498,968 $ 3,498,968 $ 5,899,010 $(13,174,955) $(865,601) $(4,642,578)

Net income for the
thirty-nine weeks ended
October 26, 1996....... -- -- -- -- -- 4,912,562 -- 4,912,562

Elimination of
accumulated deficit
upon implementation of
fresh start
accounting............. -- -- -- -- -- 8,262,393 -- 8,262,393

Cancellation of Common
Stock and treasury
shares................. -- -- (3,498,968) (3,498,968) (5,899,010) -- 865,601 (8,532,377)

Issuance of common stock
at reorganization
value.................. -- -- 2,257,833 22,578 3,067,799 -- -- 3,090,377
------ -------- ---------- ----------- ----------- ------------ --------- -------------

Balance at October 26,
1996 (Successor)....... -- -- 2,257,833 22,578 3,067,799 -- -- 3,090,377

Net (loss) for the
year................... -- -- -- -- -- (1,325,212) -- (1,325,212)

Cumulative dividends on
Preferred Stock........ -- -- -- -- -- (70,479) -- (70,479)

Accretion of Preferred
Stock.................. -- -- -- -- -- (78,037) -- (78,037)
------ -------- ---------- ----------- ----------- ------------ --------- -------------

Balance at November 1,
1997 (Successor)....... -- -- 2,257,833 $ 22,578 $ 3,067,799 $ (1,473,728) $ -- $ 1,616,649
------ -------- ---------- ----------- ----------- ------------ --------- -------------
------ -------- ---------- ----------- ----------- ------------ --------- -------------

Pro forma balance

(unaudited) at November
1, 1997................ 875 $396,037 2,257,833 $ 22,578 $ 3,067,799 $ (1,473,728) $ -- $ 2,012,686
------ -------- ---------- ----------- ----------- ------------ --------- -------------
------ -------- ---------- ----------- ----------- ------------ --------- -------------
</TABLE>

See notes to the financial statements.

F-5

<PAGE>
HARVEY ELECTRONICS, INC.
(FORMERLY THE HARVEY GROUP INC. AND SUBSIDIARIES)
STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
------------ ------------
FIFTY-THREE THIRTY-NINE
WEEKS ENDED WEEKS ENDED
NOVEMBER 1, OCTOBER 26,
1997 1996
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income................................................................ $(1,325,212) $ 4,912,562
Adjustments to reconcile net (loss) income to net cash used in operating
activities
Extraordinary gain............................................................ -- (5,338,852)
Fresh start adjustments....................................................... -- (1,857,844)
Reorganization expenses....................................................... -- 428,989
Depreciation and amortization................................................. 371,434 293,278
Credit for losses on accounts receivable...................................... (5,000) (5,000)
Provisions for sales tax and warranty reserves................................ -- 39,000
Write-off of other assets..................................................... 32,164 --
Straight-line impact of rent escalations...................................... 61,055 1,235
Miscellaneous................................................................. (10,000) (22,401)
Changes in operating assets and liabilities:
Accounts receivable........................................................... 38,360 43,412
Inventories................................................................... (550,940) (147,850)
Prepaid expenses and other current assets..................................... 143,795 (11,718)
Trade accounts payable........................................................ 390,937 1,121,362
Accrued expenses, other current liabilities and income taxes.................. 303,407 (27,717)
------------ ------------
Net cash used in operating activities.............................................. (550,000) (571,544)
------------ ------------
INVESTING ACTIVITIES:
Proceeds from note receivable from former officer/shareholder.................... -- 125,000
Net book value of deletions...................................................... 37,254 --
Purchases of property and equipment.............................................. (629,618) (64,707)
Increase in other assets......................................................... (70,879) (125,303)
------------ ------------
Net cash used in investing activities.............................................. (663,243) (65,010)
------------ ------------
FINANCING ACTIVITIES:
Proceeds from note payable....................................................... 350,000 --
Public offering costs............................................................ (126,665) --
Costs relating to refinancing.................................................... (67,532) --
Debtor-in-possession financing................................................... 605,000 717,500
Payments relating to Chapter 11 reorganization................................... (456,913) --
Net proceeds from revolving line of credit facility.............................. 999,634 23,547
Principal payments on long-term debt............................................. -- (90,010)
Principal payments on capital lease obligations.................................. (83,627) (39,896)

------------ ------------
Net cash provided by financing activities.......................................... 1,219,897 611,141
------------ ------------
Increase (decrease) in cash and cash equivalents................................... 6,654 (25,413)
Cash and cash equivalents at beginning of period................................... 3,379 28,792
------------ ------------
Cash and cash equivalents at end of period......................................... $ 10,033 $ 3,379
------------ ------------
------------ ------------
</TABLE>

See notes to the financial statements.

F-6

<PAGE>
HARVEY ELECTRONICS, INC.
(FORMERLY THE HARVEY GROUP INC. AND SUBSIDIARIES)
NOTES TO THE FINANCIAL STATEMENTS
NOVEMBER 1, 1997

1. BASIS OF PRESENTATION, PLAN OF REORGANIZATION AND FRESH START REPORTING

BASIS OF PRESENTATION

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company, which emerged from
reorganization under Chapter 11 of the Bankruptcy Code after confirmation of its
Reorganization Plan on November 13, 1996, has incurred recurring losses and
negative cash flows from operations for each of the periods presented. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters principally include
raising additional equity through a proposed public offering (see Note 5) and a
refinancing of the Company's existing credit facility (see Note 4). If the
Company is successful in the proposed Offering, it will seek to utilize the net
proceeds to open or acquire additional retail facilities. If the Company is
unable to accomplish these objectives or otherwise generate sufficient levels of
cash flows from operations, the Company may not be able to continue as a going
concern. The financial statements do not include any adjustments that may result
from the possible inability of the Company to continue as a going concern.

PLAN OF REORGANIZATION

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

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

Prior to the Reorganization Date, all of the Company's old shares of common
and preferred stock were canceled. The Company simultaneously amended its
Certificate of Incorporation and is authorized to issue 10,010,000 shares

consisting of 10,000 shares of 8.5% Cumulative Convertible Preferred Stock (see
Note 6) with a par value of $1,000 per share (the 'Preferred Stock') and
10,000,000 shares of Common Stock with a par value of $.01 per share (the
'Common Stock').

The Reorganization Plan provided for the following:

a. Redistribution of Common Stock

F-7
<PAGE>
HARVEY ELECTRONICS, INC.
(FORMERLY THE HARVEY GROUP INC. AND SUBSIDIARIES)
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)

NOVEMBER 1, 1997

1. BASIS OF PRESENTATION, PLAN OF REORGANIZATION AND FRESH START
REPORTING -- (CONTINUED)

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

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

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

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

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

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

b. Issuance of Preferred Stock (see Note 6)

c. Convenience Claims/Miscellaneous

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

d. Agreement and Plan of Merger

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

e. Change in Fiscal Year

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

f. Stock Option Plan

The Company's Board of Directors approved the Harvey Electronics, Inc.
Stock Option Plan ('Stock Option Plan'). The Stock Option Plan provides for the
granting of options to purchase up to 1,000,000 shares of Common Stock of the
Company (see Note 6).

g. Prepetition Liabilities Subject to Compromise

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

F-8
<PAGE>
HARVEY ELECTRONICS, INC.
(FORMERLY THE HARVEY GROUP INC. AND SUBSIDIARIES)
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)

NOVEMBER 1, 1997

1. BASIS OF PRESENTATION, PLAN OF REORGANIZATION AND FRESH START
REPORTING -- (CONTINUED)

As a result of the operational restructuring, the Company recorded
reorganization expenses for the thirty-nine weeks ended October 26, 1996 of $
$497,206. Such charges consisted of costs associated with professional fees, and
the write-off of property, equipment, other assets and certain receivables.
Additionally, the Company recorded income from the sale of a lease during the
thirty-nine weeks ended October 26, 1996 in the amount of $250,000.

FRESH START REPORTING

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

Fresh Start Reporting has resulted in changes to the balance sheet,
including valuation of assets and liabilities at fair market value and valuation
of equity based on the reorganization value of the ongoing business, and
accordingly, the financial statements for periods prior (referred to as
'Predecessor') and subsequent (referred to as 'Successor' or 'Company') to the
adoption of Fresh Start accounting are not comparable.

The reorganization value of the Company was determined based on the
consideration received from HAC to obtain its ownership in the Company. A
carrying value of $318,000 was assigned to the Preferred Stock (see Note 6).
Subsequent to the Reorganization Date, the Company issued an additional 51,565
shares of Common Stock to InterEquity, as authorized by the Court, for an
approved finders fee. The excess of the reorganization value over the fair value
of net assets and liabilities ($1,582,440 at November 1, 1997) is reported as
'Reorganization value in excess of amounts allocable to identifiable assets' and
is being amortized over a twenty-five year period. Amortization expense of
$66,023 was recorded for fiscal year 1997.

The revaluation of the Company's assets and liabilities resulted in the
following Fresh Start adjustments for the thirty-nine weeks ended October 26,
1996:

<TABLE>
<S> <C>
Increase in property and equipment (based on appraisal)...................................... $ 292,236
Decrease in other assets..................................................................... (32,462)
Increase in other liabilities................................................................ (52,500)
Reorganization value in excess of amounts allocable to identifiable assets................... 1,650,570
----------
$1,857,844
----------
----------
</TABLE>

The accumulated deficit of $8,262,393 at October 26, 1996, which included
the effects of the Fresh Start adjustments, was reclassified to additional paid
in capital.

In March 1995, the Financial Accounting Standards Board ('FASB') issued

Statement of Financial Accounting Standards ('SFAS') No. 121, 'Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of,' which requires impairment losses to be recorded on long-lived assets used
in operations

F-9
<PAGE>
HARVEY ELECTRONICS, INC.
(FORMERLY THE HARVEY GROUP INC. AND SUBSIDIARIES)
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)

NOVEMBER 1, 1997

1. BASIS OF PRESENTATION, PLAN OF REORGANIZATION AND FRESH START
REPORTING -- (CONTINUED)

when indicators of impairment are present and the undiscounted cash flows
estimated to be generated by those assets are less than the assets' carrying
amount. SFAS No. 121 also addresses the accounting for long-lived assets that
are expected to be disposed of. Operating losses subsequent to the Company's
emergence from Chapter 11 indicate that the reorganization value in excess of
amounts allocable to identifiable assets might be impaired. However, the
Company's estimate of undiscounted cash flows indicate that such carrying
amounts are expected to be recovered.

The statements of operations and cash flows presented for the thirty-nine
weeks ended October 26, 1996 represent the Debtor-in-Possession operations of
the Company, prior to the Reorganization Date.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS

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

ACCOUNTING ESTIMATES

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

UNAUDITED FINANCIAL STATEMENTS

The unaudited statement of operations for the thirty-nine weeks ended
October 28, 1995 is presented for comparison purposes only, and in the opinion
of management, include all adjustments (consisting of normal recurring accruals)
necessary for the fair presentation of such financial statements.

STOCK OPTIONS

In October 1995, the FASB issued SFAS No. 123, 'Accounting for Stock-Based
Compensation.' SFAS No. 123 defines a fair value method of accounting for the
issuance of stock options and other equity instruments. Under the fair value
method, compensation cost is measured at the grant date based on the fair value
of the award and is recognized over the service period, which is usually the
vesting period. Pursuant to SFAS No. 123, companies are encouraged, but are not
required, to adopt the fair value method of accounting for employee stock-based
transactions. Companies are also permitted to continue to account for such
transactions under Accounting Principles Board Opinion No. 25, as the Company
has elected to do, but are required to disclose in the financial statement
footnotes, pro-forma net income and per share amounts as if the Company had
applied the new method of accounting for all grants made since 1996. SFAS No.
123 also requires increased disclosures for stock-based compensation
arrangements. The Company has adopted the disclosure requirements of SFAS No.
123.

F-10
<PAGE>
HARVEY ELECTRONICS, INC.
(FORMERLY THE HARVEY GROUP INC. AND SUBSIDIARIES)
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)

NOVEMBER 1, 1997

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
INVENTORIES

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

INVESTMENTS

The Company has classified its investment in a certificate of deposit as
available-for-sale. The certificate of deposit is stated at cost, which
approximates fair value. In January 1998, the certificate of deposit was
redeemed. There were no unrealized gains or losses on this investment for the
periods presented.

DEPRECIATION AND AMORTIZATION

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

LOSS PER SHARE

The loss per common share for the fifty-three weeks ended November 1, 1997
was computed based on the weighted average number of common shares outstanding.
Common equivalent shares were not considered for the fifty-three weeks ended
November 1, 1997 since their inclusion would have been antidilutive. Income
(loss) per share is not presented for the pre-bankruptcy periods because such

amounts are not comparable to the post-bankruptcy period.

In February 1997, the FASB issued SFAS No. 128, 'Earnings Per Share,' which
is effective for both interim and annual financial statements for periods ending
after December 15, 1997. At such time, the Company will be required to change
the method currently used to compute earnings per share and restate all periods.
Under the new requirements for calculating basic earnings per share, the
dilutive effect of stock options, warrants, and convertible securities will be
excluded. The impact of adopting SFAS No. 128 is not expected to be material.

STATEMENT OF CASH FLOWS

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

Total interest paid for the fifty-three weeks ended November 1, 1997 and
for the thirty-nine weeks ended October 26, 1996 was approximately $282,000 and
$269,000, respectively.

CONCENTRATION OF CREDIT RISK

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

F-11
<PAGE>
HARVEY ELECTRONICS, INC.
(FORMERLY THE HARVEY GROUP INC. AND SUBSIDIARIES)
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)

NOVEMBER 1, 1997

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
ADVERTISING EXPENSE

Advertising expense, net of cooperative advertising allowances, is charged
to operations when the advertising takes place. Advertising expense for the
fifty-three weeks ended November 1, 1997 and for the thirty-nine weeks ended
October 26, 1996 was approximately $401,000 and $358,000, respectively. Prepaid
advertising for print advertisements not run at November 1, 1997 and October 26,
1996 was approximately $15,000 and $183,000, respectively.

3. DEBTOR-IN-POSSESSION FINANCING

On October 24, 1995, in connection with the Reorganization Plan, the
Company entered into a Security Loan Agreement ('Loan Agreement') with HAC,
enabling the Company to borrow up to $1,500,000 in debtor-in-possession
financing. The Loan Agreement bore interest at 2% over the prime rate at
Citibank, N.A. and was subordinate only to the Company's primary lender,
Congress Financial Corporation ('Congress'), as evidenced by an intercreditor

agreement between HAC and Congress (see Note 4).

The proceeds ($1,500,000) received in installments from HAC coupled with
credit support from the Company's vendors and bank primarily were used to build
inventory levels. On May 6, 1996, the Company received an additional $50,000
from HAC to be used for general operating purposes. In September 1996, the Loan
Agreement was amended, enabling the Company to borrow up to $3,000,000. As a
result of the amendment, additional proceeds of $1,272,500 were received from
HAC ($605,000 of such proceeds were received during fiscal 1997), for a total
aggregating $2,822,500. The proceeds were used for capital expenditures, to
build a new retail store in Greenwich, Connecticut, advertising, professional
fees and for working capital purposes. This debtor-in-possession financing was
converted into 2,000,000 shares of the Common Stock of the reorganized Company
in accordance with the Plan of Reorganization (see Note 1).

Under the Loan Agreement, the Company paid $5,000 per month representing a
loan servicing fee to HAC. Such amounts aggregated $45,000 for the thirty-nine
weeks ended October 26, 1996.

Subsequent to the Reorganization Date, an individual who is a member of HAC
and a holder of Preferred Stock, provided an additional $350,000 of financing to
the Company, to be used for working capital purposes. This amount is payable in
full on December 31, 1998 with interest at 12% per annum, and may be prepaid
without penalty. Interest expense and amount payable to this member of HAC was
$28,000 as of and for the year ended November 1, 1997.

4. REVOLVING LINES OF CREDIT FACILITIES

On November 5, 1997, the Company entered into a three-year revolving line
of credit facility with Paragon Capital L.L.C. ('Paragon') whereby the Company
may borrow up to $3,300,000 based upon a lending formula (as defined) calculated
on eligible inventory. Proceeds from Paragon were used to pay down and cancel
the existing credit facility with Congress, reduce trade payables and pay
related costs of the refinancing. The Paragon facility provides an improved
advance rate on the Company's inventory, which resulted in additional net
financing of approximately $750,000 (after expenses) compared to the Company's
previous facility with Congress, as discussed below. The interest rate on
borrowings up to $2,500,000 is 1% over the prime rate. The rate charged on
outstanding balances over $2,500,000 is 1.75% above the prime rate. A commitment
fee of $49,500 (to be amortized over three years) was paid by the Company at
closing and a facility fee of three-quarters of one percent (.75%) of the
maximum credit line will be charged each year. Monthly maintenance charges and a
termination fee also exist under the line of credit.

F-12
<PAGE>
HARVEY ELECTRONICS, INC.
(FORMERLY THE HARVEY GROUP INC. AND SUBSIDIARIES)
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)

NOVEMBER 1, 1997

4. REVOLVING LINES OF CREDIT FACILITIES -- (CONTINUED)

Paragon also received a warrant to purchase 125,000 shares of common stock,
subject to adjustment, which is currently exercisable at a price of $5.50 per
share and expires April 3, 2001. The Company will record a charge over three
years, beginning with the first quarter of fiscal 1998, based upon the estimated
fair value of such warrant.

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

In fiscal 1995, the Company entered into a three-year revolving line of
credit facility with Congress, whereby the Company could borrow up to
$3,000,000, based upon a lending formula (as defined) calculated on eligible
inventory. Amendments to the Congress revolving line of credit facility were
completed on January 7, 1997 and March 31, 1997, primarily extending the
facility through January 6, 2000, instituting a net worth covenant (as defined)
and increasing available borrowings by approximately $250,000, by amending the
lending formula (as defined). The interest rate per annum on this credit
facility was the prime rate (8.5% at October 26, 1996) plus 2%. An unused line
fee of one-quarter of one percent per annum and a prescribed early termination
fee also existed under the line of credit facility. At closing, $200,000 was
required to be placed in escrow in a certificate of deposit as additional
collateral for Congress. The Company had $1,777,851 outstanding under the
Congress credit facility at November 1, 1997. As mentioned above, this credit
facility was canceled and replaced by a new revolving credit facility with
Paragon. As a result, the Company paid an early termination fee of $30,000 to
Congress.

5. PROPOSED PUBLIC OFFERING

On September 15, 1997, the Company signed a letter of intent with an
underwriter to sell common stock and warrants to purchase common stock in a
public offering (the 'Offering') . The underwriter proposes to co-manage and
underwrite an offering of 1,200,000 shares of the Company's common stock of
which 1,025,000 shares would be sold by the Company and 175,000 shares would be
sold by HAC, and 1,830,000 of warrants ('Warrants') to acquire additional shares
of Common Stock. The net proceeds from the Offering will be used for retail
store expansion and working capital purposes.

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

At the underwriter's election, it may underwrite an additional 180,000
shares and or 274,500 Warrants if market conditions permit. All shares would be
sold by HAC with the proceeds to be received by HAC.

The Offering is subject to certain conditions, as defined in the letter of

intent. There can be no assurance that this proposed transaction will be
completed.

In late November 1997, HAC transferred 85,000 shares of Common Stock to
certain employees and directors of the Company and an individual who is a
preferred shareholder and a member of HAC. Such transfer is to be treated for
accounting purposes as if such shares were issued by the Company as compensation
to such persons. The Company will record compensation expense equal to the fair
market value of the shares over the two-year period during which the shares are
subject to forfeiture by the transferees.

F-13
<PAGE>
HARVEY ELECTRONICS, INC.
(FORMERLY THE HARVEY GROUP INC. AND SUBSIDIARIES)
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
NOVEMBER 1, 1997

6. STOCK OPTION PLAN AND PREFERRED STOCK

STOCK OPTION PLAN

In conjunction with the Reorganization Plan, the Company's Board of
Directors approved the Harvey Electronics, Inc. Stock Option Plan ('Stock Option
Plan'). The Stock Option Plan is subject to shareholder approval and provides
for the granting of up to 1,000,000 shares of incentive and non-qualified common
stock options and stock appreciation rights to directors, officers and
employees. The Company's previous stock option plan was canceled in connection
with the Reorganization Plan. On December 5, 1997, the Company's Compensation
and Stock Option Committee of the Board of Directors approved a grant, as of the
effective date of the Offering, of 70,000 incentive stock options to many of the
Company's employees to purchase the Company's Common Stock exercisable as to
one-third of such shares at an exercise price of $5.00 per share commencing one
year from the effective date; one-third of such shares at an exercise price of
$5.50 per share commencing two years from the effective date and the remaining
one-third of such shares at $6.00 per share commencing three years from the
effective date.

8.5% CUMULATIVE CONVERTIBLE PREFERRED STOCK

The Company's Preferred Stock has no voting rights and is redeemable at the
option of the Company's Board of Directors in whole or in part at face value
plus any accrued dividends. The Fresh Start carrying value of the Preferred
Stock was estimated to be $318,000 at October 26, 1996.

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

The Preferred Stock may be converted into shares of Common Stock until
December 31, 2000 at the option of the holder, in whole or in part, as follows:
(i) the first 50% of the Preferred Stock can be converted at $6.00 per share,
and (ii the balance is convertible at $7.50 per share. Beginning on January 1,
2001, the Preferred Stock is convertible at the average closing price, as
defined, of the Company's Common Stock for the preceding 45 day period.

The Preferred Stock also contained a redemption feature whereby each share
would be redeemed on December 31, 2000. In December 1997, the redemption feature
was eliminated and the holders of the Preferred Stock received 36,458 Warrants
with terms equivalent to the Warrants in the Offering (see Note 5). The pro
forma balance sheet (unaudited) at November 1, 1997 has been presented to
reflect the Preferred Stock in stockholder's equity as though the removal of the
redemption feature had taken place on such date.

Accumulated Preferred Stock dividends payable of $70,479 are outstanding
and were recorded as a long-term liability at November 1, 1997. Such dividends,
along with the accretion on the redeemable Preferred Stock, were recorded as a
reduction of retained earnings at November 1, 1997.

7. INCOME TAXES

At November 1, 1997, the Company has available net operating loss
carryforwards of approximately $9,400,000 which expire in various years through
fiscal 2012. Of this amount, approximately $8,100,000 relates to

F-14
<PAGE>
HARVEY ELECTRONICS, INC.
(FORMERLY THE HARVEY GROUP INC. AND SUBSIDIARIES)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

NOVEMBER 1, 1997

7. INCOME TAXES -- (CONTINUED)

pre-reorganization net operating loss carryforwards. As a result of the
Company's Reorganization Plan and significant ownership change, under Section
382 of the IRS Code, it is estimated that the pre-reorganization net operating
loss carryforward and other pre-reorganization tax attributes will be limited to
approximately $150,000 per year over the next fifteen years.

At October 26, 1996 and November 1, 1997, the Company had deferred tax
assets of approximately $765,000 and $1,207,000, respectively, arising primarily
from the future availability of the above tax attributes. Such amounts have been
offset in full by a valuation allowance in each year.

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

8. PENSION AND PROFIT SHARING PLAN

The Harvey Group Inc. Savings and Investment Plan (the 'Plan') includes
profit sharing, defined contribution and 401(k) provisions and is available to
all eligible employees of the Company. There were no contributions to the Plan
for the fifty-three weeks ended November 1, 1997 and for the thirty-nine weeks
ended October 26, 1996. Effective January 1, 1995, the Company's Board of
Directors temporarily elected to eliminate the employer 401(k) match on employee
contributions. Subsequent to the Effective Date, the Plan's name was amended and
changed to Harvey Electronics, Inc. Savings and Investment Plan.

9. COMMITMENTS AND CONTINGENCIES

COMMITMENTS

The Company's financial statements reflect the accounting for equipment
leases as capital leases by recording the asset and liability for the lease
obligation. Additional capital leases for the fifty-three weeks ended November
1, 1997 total $11,000. Future minimum rental commitments, by year and in the
aggregate, under the capital leases and noncancelable operating leases with
initial or remaining terms of one year or more consisted of the following at
November 1, 1997:

<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
---------- -------
<S> <C> <C>
Fiscal 1998....................................................................... $ 956,000 $35,000
Fiscal 1999....................................................................... 992,000 4,000
Fiscal 2000....................................................................... 1,018,000 4,000
Fiscal 2001....................................................................... 1,027,000 2,000
Fiscal 2002....................................................................... 98,900 --
Thereafter........................................................................ 2,348,000 --
---------- -------
Total minimum lease payments...................................................... $7,330,000 45,000
----------
----------
Less amount representing interest................................................. 4,000
-------
Present value of net minimum lease payments....................................... 41,000
Less current portion.............................................................. 32,000
-------
$ 9,000
-------
-------
</TABLE>

F-15
<PAGE>
HARVEY ELECTRONICS, INC.
(FORMERLY THE HARVEY GROUP INC. AND SUBSIDIARIES)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

NOVEMBER 1, 1997

9. COMMITMENTS AND CONTINGENCIES -- (CONTINUED)

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

Total rental expense for operating leases was approximately $1,517,000 and
$1,234,000, for the fifty-three weeks ended November 1, 1997 and for the
thirty-nine weeks ended October 26, 1996, respectively. Certain leases provide
for the payment of insurance, maintenance charges and taxes and contain renewal
options.

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

CONTINGENCIES

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

The Company had available standby letters of credit outstanding at November
1, 1997, aggregating $100,000.

10. OTHER INFORMATION

ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

<TABLE>
<CAPTION>
NOVEMBER 1,
1997
-----------
<S> <C>
Payroll and payroll related items.................................................. $ 144,074
Accrued professional fees.......................................................... 403,213
Customer layaways.................................................................. 298,704
Accrued interest................................................................... 99,855
Sales taxes........................................................................ 77,297
Other.............................................................................. 116,775
-----------
$ 1,139,918
-----------
-----------
</TABLE>

OTHER LONG-TERM LIABILITIES

<TABLE>
<CAPTION>
NOVEMBER 1,

1997
-----------
<S> <C>
Straight-line impact of lease escalations.......................................... $ 136,411
-----------
Other.............................................................................. 21,000
-----------
$ 157,411
-----------
-----------
</TABLE>

OTHER

The financial statement caption 'Interest and other income' for the
thirty-nine weeks ended October 26, 1996, includes $45,605 of interest and other
income relating to proceeds of a division of the Predecessor in a previous year.

F-16
<PAGE>
HARVEY ELECTRONICS, INC.
(FORMERLY THE HARVEY GROUP INC. AND SUBSIDIARIES)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

NOVEMBER 1, 1997

10. OTHER INFORMATION -- (CONTINUED)

Interest expense relating to the HAC debtor-in-possession financing was
approximately $35,000 and $149,000 for the fifty-three weeks ended November 1,
1997 and for the thirty-nine weeks ended October 26, 1996, respectively.
Interest payable to HAC at November 1, 1997 was approximately $66,000.

Management fees of $30,000 relating to a Company affiliated with the
Company's Chairman, were expensed for the fifty-three weeks ended November 1,
1997. Approximately $24,000 of loan servicing fees and other miscellaneous
amounts were payable to this Company at November 1, 1997.

F-17

<PAGE>
HARVEY ELECTRONICS, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)

<TABLE>
<CAPTION>
THIRTEEN WEEKS FOURTEEN WEEKS
ENDED ENDED
JANUARY 31, FEBRUARY 1,
1998 1997
-------------- --------------
<S> <C> <C>
REVENUES
Net sales......................................................................... $4,869,816 $4,567,020
Interest and other income......................................................... 15,542 8,250
-------------- --------------
4,885,358 4,575,270
-------------- --------------

COST AND EXPENSES
Cost of sales..................................................................... 2,996,320 2,915,865
Selling, general and administrative expenses...................................... 1,667,521 1,769,739
Interest expense.................................................................. 91,300 114,725
-------------- --------------
4,755,141 4,800,329
-------------- --------------
Income (loss) before income taxes................................................... 130,217 (225,059)
Income taxes........................................................................ -- --
-------------- --------------
Net income (loss)................................................................... 130,217 (225,059)
Preferred Stock dividend requirement................................................ (18,500) (17,620)
Accretion of Preferred Stock........................................................ (6,000) (19,509)
-------------- --------------
Net income (loss) attributable to common stock...................................... $ 105,717 $ (262,188)
-------------- --------------
-------------- --------------
Basic and diluted earnings (loss) per share......................................... $ .05 $ (.12)
-------------- --------------
-------------- --------------
Weighted average number of common shares outstanding during the period.............. 2,257,833 2,257,833
-------------- --------------
</TABLE>

See accompanying notes.

F-18

<PAGE>
HARVEY ELECTRONICS, INC.
BALANCE SHEET
JANUARY 31, 1998
(UNAUDITED)

<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................................................ $ 63,742
Accounts receivables, less allowance of $20,000...................................................... 408,498
Certificate of deposit............................................................................... --
Inventories.......................................................................................... 3,524,725
Prepaid expenses and other current assets............................................................ 160,618
-----------
Total current assets................................................................................... 4,157,583
Property and equipment:
Leasehold improvements............................................................................... 646,211
Furniture, fixtures & equipment...................................................................... 751,778
-----------
1,397,989
Less accumulated depreciation & amortization......................................................... 237,504
-----------
1,160,485
Equipment under capital leases......................................................................... 9,768
Reorganization value in excess of amounts allocable to identifiable assets, less accumulated
amortization of $82,523.............................................................................. 1,565,940
Other, less accumulated amortization of $68,011........................................................ 532,705
-----------
Total assets........................................................................................... $ 7,426,481
-----------
-----------
</TABLE>

See accompanying notes.

F-19

<PAGE>
HARVEY ELECTRONICS, INC.
BALANCE SHEET--(CONTINUED)
JANUARY 31, 1998
(UNAUDITED)

<TABLE>
<S> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable............................................................................... $ 1,547,887
Accrued expenses and other current liabilities....................................................... 938,710
Obligations relating to Chapter 11 reorganization.................................................... 17,500
Income taxes......................................................................................... 16,619
Current portion of long-term liabilities............................................................. 85,943
Current portion of capital lease obligations......................................................... 22,958
-----------
Total current liabilities.............................................................................. 2,629,617
Long-term liabilities:
Long-term debt....................................................................................... 2,355,538
Cumulative dividends payable......................................................................... 88,979
Other liabilities.................................................................................... 167,853
Capital lease obligations............................................................................ 8,091
-----------
2,620,461
Shareholders' equity:
8 1/2% Cumulative Convertible Preferred Stock, par value $1,000 per share; authorized 10,000 shares;
issued and outstanding 875 shares (aggregate liquidation preference--$875,000).................... 402,037
Common stock, par value $.01 per share; authorized 10,000,000 shares; issued and outstanding
2,257,833 shares.................................................................................. 22,578
Additional paid-in capital........................................................................... 3,377,799
Deferred compensation................................................................................ (258,000)
Accumulated deficit.................................................................................. (1,368,011)
-----------
Total shareholders' equity............................................................................. 2,176,403
-----------
Total liabilities and shareholders' equity............................................................. $ 7,426,481
-----------
-----------
</TABLE>

See accompanying notes.

F-20

<PAGE>
HARVEY ELECTRONICS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)

<TABLE>
<CAPTION>
THIRTEEN WEEKS FOURTEEN WEEKS
ENDED ENDED
JANUARY 31, 1998 FEBRUARY 1, 1997
---------------- ----------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss)................................................................ $ 130,217 $ (225,059)
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Depreciation and amortization.................................................. 108,011 57,329
Deferred compensation.......................................................... 22,000 --
Straight-line impact of rent escalations....................................... 10,442 26,796
Changes in operating assets and liabilities:
Accounts receivable......................................................... (136,062) (10,562)
Inventories................................................................. 35,053 (540,837)
Prepaid expenses and other current assets................................... 34,981 89,830
Accounts payable............................................................ (168,868) (7,564)
Accrued expenses, other current liabilities and income taxes................ (214,989) 19,860
---------------- ----------------
Net cash used in operating activities............................................ (179,215) (590,207)
---------------- ----------------

INVESTING ACTIVITIES
Certificate of deposit........................................................... 200,000 --
Purchases of property and equipment.............................................. (14,471) (516,522)
Increase in other assets......................................................... (2,500) (70,044)
---------------- ----------------
Net cash provided by (used in) investing activities.............................. 183,029 (586,566)
---------------- ----------------

FINANCING ACTIVITIES
Debtor-in-possession financing................................................... -- 605,000
Costs of new line of credit facility............................................. (82,178) --
Proposed initial public offering costs........................................... (85,538) --
Net (repayments) borrowings of old revolving line of credit facility............. (1,777,851) 889,550
Net proceeds from new revolving line of credit facility.......................... 2,005,538 --
Payments relating to Chapter 11 reorganization................................... -- (294,269)
Principal payments on capital lease obligations.................................. (10,076) (21,772)
---------------- ----------------
Net cash provided by financing activities........................................ 49,895 1,178,509
---------------- ----------------
Increase in cash and cash equivalents............................................ 53,709 1,736
Cash and cash equivalents at beginning of period................................. 10,033 3,379
---------------- ----------------
Cash and cash equivalents at end of period....................................... $ 63,742 $ 5,115
---------------- ----------------
---------------- ----------------

Supplemental cash flow information
Taxes paid..................................................................... 13,000 --
Interest paid.................................................................. 81,000 112,000
</TABLE>

See accompanying notes.

F-21

<PAGE>
HARVEY ELECTRONICS, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
---------------- ------------------
SHARES AMOUNT SHARES AMOUNT
------ -------- --------- -------
<S> <C> <C> <C> <C>
Balance at November 1, 1997... -- -- 2,257,833 $22,578
Net income for the thirteen
weeks ended January 31,
1998........................ -- -- -- --
Transfer of Common Stock from
HAC to employees, directors
and a member of HAC......... -- -- -- --
Accretion of Preferred
Stock....................... -- -- -- --
Reclassify Preferred Stock to
shareholders' equity upon
removal of redemption
feature..................... 875 $402,037 -- --
Cumulative dividends on
Preferred Stock............. -- -- -- --
Amortization of deferred
compensation................ -- -- -- --
Record value of Common
Stock Warrants.............. -- -- -- --
------ -------- --------- -------
Balance at January 31, 1998... 875 $402,037 2,257,833 $22,578
------ -------- --------- -------
------ -------- --------- -------

<CAPTION>
ADDITIONAL TOTAL
PAID-IN DEFERRED ACCUMULATED SHAREHOLDERS'
CAPITAL COMPENSATION (DEFICIT) EQUITY
---------- ------------ ----------- -------------
<S> <C> <C> <C> <C>
Balance at November 1, 1997... $3,067,799 -- $(1,473,728) $ 1,616,649
Net income for the thirteen
weeks ended January 31,
1998........................ -- -- 130,217 130,217
Transfer of Common Stock from
HAC to employees, directors
and a member of HAC......... 280,000 $ (280,000) -- --
Accretion of Preferred
Stock....................... -- -- (6,000) (6,000)
Reclassify Preferred Stock to
shareholders' equity upon
removal of redemption
feature..................... -- -- -- 402,037
Cumulative dividends on

Preferred Stock............. -- -- (18,500) (18,500)
Amortization of deferred
compensation................ -- 22,000 -- 22,000
Record value of Common
Stock Warrants.............. 30,000 -- -- 30,000
---------- ------------ ----------- -------------
Balance at January 31, 1998... $3,377,799 $ (258,000) $(1,368,011) $ 2,176,403
---------- ------------ ----------- -------------
---------- ------------ ----------- -------------
</TABLE>

See accompanying notes.

F-22

<PAGE>
HARVEY ELECTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 1998

(UNAUDITED)

1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS

BASIS OF PRESENTATION

The accompanying unaudited financial statements of Harvey Electronics, Inc.
(the 'Company') have been prepared in accordance with generally accepted
accounting principles for interim financial reporting. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included.

The accompanying financial statements have also been prepared assuming that
the Company will continue as a going concern. The Company, which emerged from
reorganization under Chapter 11 of the Bankruptcy Code after confirmation of its
reorganization plan (the 'Reorganization Plan') on November 13, 1996, had
incurred recurring losses and negative cash flows from operations through
November 1, 1997. Management's plan in regard to these matters principally
include raising additional equity through a proposed public offering (see Note
3) and a refinancing of the Company's existing credit facility (see Note 2). If
the Company is successful in the proposed Offering, it will seek to utilize the
net proceeds to open or acquire additional retail facilities and for working
capital purposes. Despite net income in the first quarter of fiscal 1998,
management can not predict whether this trend will continue, or whether the
proposed public offering will be consummated, and therefore whether the Company
will be able to continue as a going concern. The financial statements do not
include any adjustments that may result from the possible inability of the
Company to continue as a going concern.

DESCRIPTION OF BUSINESS

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

Operating results for the three-month period ended January 31, 1998 are not
necessarily indicative of the results that may be expected for the year ended
October 31, 1998. For further information, refer to the financial statements and
footnotes thereto included in the Company's annual report on Form 10-KSB for the
year ended November 1, 1997.

2. NEW REVOLVING LINE OF CREDIT FACILITY

On November 5, 1997, the Company entered into a three-year revolving line
of credit facility with Paragon Capital L.L.C. ('Paragon') whereby the Company

may borrow up to $3,300,000 based upon a lending formula (as defined) calculated
on eligible inventory.

Proceeds from Paragon were used to pay down and cancel the existing credit
facility with Congress Financial Corporation ('Congress'), reduce trade payables
and pay related costs of the refinancing. The Paragon facility provides an
improved advance rate of the Company's inventory which resulted in additional
net financing of approximately $750,000 (after expenses) compared to the
Company's previous facility with Congress. The interest rate on borrowings up to
$2,500,000 is 1% over the prime rate. The rate charged on outstanding balances
over $2,500,000 is 1.75% above the prime rate. A commitment fee of $49,500 was
paid by the Company at closing and a facility fee of three-quarters of one
percent (.75%) of the maximum credit line will be charged in each year. Monthly
maintenance charges and a termination fee also exist under the line of credit.

F-23
<PAGE>
HARVEY ELECTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

JANUARY 31, 1998
(UNAUDITED)

2. NEW REVOLVING LINE OF CREDIT FACILITY--(CONTINUED)

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

3. PROPOSED PUBLIC OFFERING

On September 15, 1997, the Company signed a letter of intent with an
underwriter to sell common stock and warrants to purchase common stock in a
public offering (the 'Offering') . The underwriter proposes to co-manage and
underwrite an offering of 1,200,000 shares of the Company's common stock of
which 1,025,000 shares would be sold by the Company and 175,000 shares would be
sold by Harvey Acquisition Company, LLC ('HAC'), the selling majority
shareholder and 1,830,000 of warrants ('Warrants') to acquire additional shares
of Common Stock. The net proceeds from the proposed Offering will be used for
the expansion or acquisition of additional retail stores and for working capital
purposes.

Each Warrant shall be exerisable for one share of common stock at 110% of
the public offering price, for a period of three years commencing two years from
the effective date of the Offering. The Warrants are also redeemable, (at a

prescribed price) at the Company's option, two years after the effective date of
the Offering if the closing bid price of the common stock for 20 consecutive
trading days exceeds 150% of the public offering price per share.

At the underwriter's election, it may underwrite an additional 180,000
shares and or 274,500 Warrants if market conditions permit. The common shares
would be sold by HAC, with the net proceeds to be received by HAC.

The Offering is subject to certain conditions, as defined in the letter of
intent. There can be no assurance that this proposed transaction will be
completed.

In late November 1997, HAC transferred 85,000 shares of Common Stock to
certain employees and directors of the Company and an individual who is a
preferred shareholder and a member of HAC. Such transfer is to be treated for
accounting purposes as if such shares were issued by the Company as compensation
to such persons. The Company has recorded deferred compensation equal to the
fair market value of the shares and will amortize this balance over the two-year
period during which the shares are subject to forfeiture by the transferees. The
Company recorded stock compensation expense of $22,000 for the thirteen weeks
ended January 31, 1998.

4. STOCK OPTION PLAN AND PREFERRED STOCK

STOCK OPTION PLAN

F-24
<PAGE>
HARVEY ELECTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

JANUARY 31, 1998
(UNAUDITED)

4. STOCK OPTION PLAN AND PREFERRED STOCK--(CONTINUED)

Stock exercisable as to one-third of such shares at an exercise price of $5.00
per share commencing one year from the effective date; one-third of such shares
at an exercise price $5.50 per share commencing two years from the effective
date and the remaining one-third of such shares at $6.00 per share commencing
three years from the effective date.

8.5% CUMULATIVE CONVERTIBLE PREFERRED STOCK

The Company's Preferred Stock has no voting rights and is redeemable at the
option of the Company's Board of Directors in whole or in part at face value
plus any accrued dividends. The carrying value of the Preferred Stock was
estimated to be $402,037 at January 31, 1998, with an aggregate liquidation
preference of $875,000.

The Preferred Stock may be converted at the option of the holder, in whole
or in part, as follows: (i) the first 50% of the Preferred Stock can be
converted at $6.00 per share, and (ii) the balance is convertible at $7.50 per
share. Beginning January 1, 2001, the Preferred Stock is convertible at the
average closing price, as defined, of the Company's Common Stock for the
preceding 45 day period.

The Preferred Stock also contained a redemption feature whereby such shares
would be redeemed on December 31, 2000. In December 1997, the redemption feature
was eliminated and the holders of the Preferred Stock received 36,458 Warrants
(valued at approximately $6,000) with terms equivalent to the Warrants in the
Offering, (see Note 3). The unaudited balance sheet at January 31, 1998 has been
presented to reflect the Preferred Stock in shareholder's equity, as a result of
the removal of the redemption feature.

Accumulated Preferred Stock dividends payable of $88,979 are outstanding
and were recorded as a long-term liability at January 31, 1998. Such dividends,
along with the accretion of the redeemable Preferred Stock, were recorded as a
reduction of retained earnings at January 31, 1998.

5. STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 128, EARNINGS PER SHARE

In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earning per Share ('FASB No. 128'). FASB
No. 128 replaced the previously reported primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary earning per
share, basic earnings per share excludes any dilutive effects of options,
warrants, and convertible securities. Diluted earnings per share is very similar
to the previously reported fully diluted earnings per share. The Company adopted
FASB No. 128 in the first quarter of fiscal 1998 and as a result, all earnings
per share amounts for all periods have been presented, and where necessary,
restated to conform to the FASB No. 128 requirements.

6. INVENTORIES

Inventories have been valued based upon gross profit percentages applied to
sales.

F-25

<PAGE>
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NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED HEREBY, NOR DOES
IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS
UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCE CREATE ANY
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE
SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF
THE COMPANY SINCE SUCH DATE.

------------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 8
Use of Proceeds................................ 14
Dividend Policy................................ 14
Capitalization................................. 15
Dilution....................................... 16
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 17
Business....................................... 24
Management..................................... 31
Securities Ownership of Certain Beneficial
Owners and Management........................ 36
Selling Securityholder......................... 37
Certain Transactions........................... 38
Description of Securities...................... 39
Underwriting................................... 42
Legal Matters.................................. 44
Experts........................................ 44
Additional Information......................... 44
Index to Financial Statements.................. F-1
</TABLE>

UNTIL APRIL 27, 1998 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING),
ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER

A PROSPECTUS WHEN ACTING AS UNDERWRITER AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.

HARVEY
(Registered)

1,200,000 SHARES OF COMMON STOCK
AND
1,830,000
REDEEMABLE COMMON STOCK
PURCHASE WARRANTS

HARVEY ELECTRONICS, INC.

------------------------
PROSPECTUS
------------------------

THE THORNWATER COMPANY, L.P.

MARCH 31, 1998

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