The former couple, who ended their five-year romance Jan 2009, chatted all night at a mutual friend's private bash.
"It was great to see them together," the Sun quoted an onlooker as saying.
"They are clearly great friends and spent much of the evening locked in conversation.
"Chelsy was on top form. She was wearing a sexy black dress which was so low cut it left little to the imagination."
"And it was obvious that Harry couldn't take his eyes off her," the onlooker added.
Prince Harry and Chelsy were present at Jake Warren's bash near Newbury, Berks, last weekend.
Warren's sister Susanna is dating Harry's best pal Guy Pelly.
However, sources said that Harry, had a long way to go to win her back.
"Chelsy's been flat out with her law finals and he's been busy on his flying course. However, the fact they enjoyed an evening together is a big step," said a friend.