<PAGE>
 
                   U. S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, DC 20549


                                  FORM 10-QSB



  [X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
       AND EXCHANGE ACT OF 1934

               FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
                                              ------------------

                                        
  [ ]  QUARTERLY REPORT PURSUANT TO SECTION 13 0R 15(d) OF THE SECURITIES
       AND EXCHANGE ACT OF 1934


        FOR THE TRANSITION PERIOD FROM ______________ TO _______________

                       COMMISSION FILE NUMBER: 001-12671
                                               ---------


                         THE HARTCOURT COMPANIES, INC.
       (Exact name of small business issuer as specified in its charter)

               Utah                                   87-0400541
(State or other jurisdiction of           (IRS Employer Identification No.)
 incorporation or organization)



       2049 Century Park East, Suite 3760, Los Angeles, California 90067
                    (Address of principal executive offices)


                                 (310) 788-2634
                          (Issuer's telephone number)



Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months  (or for such shorter
period that the restraint was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days:    Yes [X]   No [ ].



As of September 30, 1998, The Hartcourt Companies, Inc. had 19,754,381 shares of
Common Stock Outstanding.

Transitional Small Business Disclosure Format (check one):

      Yes [ ]                 No [X]

                                       1
<PAGE>
 
                               TABLE OF CONTENTS
                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES

                             Report on Form 10-QSB
                               For quarter ended
                               September 30, 1998


<TABLE> 
<CAPTION> 
                                                                                   Page
                                                                                   ----
<S>                                                                             <C> 
PART I            FINANCIAL INFORMATION

       Item 1.  Financial Statements (Unaudited)

                Consolidated Balance Sheets - September 30, 1998 and
                  December 31, 1997                                                3 - 4

                Consolidated Statements of Operations - Quarters ended
                  September 30, 1998 and 1997 and the nine months ended
                  September 30, 1998 and 1997                                          5

                Consolidated Statements of Shareholders' Equity - Nine
                  Months ended September 30, 1998                                      6

                Consolidated Statements of Cash Flows - nine months ended
                  September 30, 1998 and 1997                                          7

                Notes to the Consolidated Financial Statements                    8 - 11

       Item 2.  Management's Discussion and Analysis of Financial Condition
                And results of Operations                                        12 - 15


PART II           OTHER INFORMATION


       Item 1.  Legal Proceedings                                                     15

       Item 2.  Changes in Securities                                                 15

       Item 3.  Defaults upon Senior Securities                                       15

       Item 4.  Submission of Matters to Vote of Security Holders                     15

       Item 5.  Other Information                                                     15

       Item 6.  Exhibits and Reports on Form 8-K                                      16

       Signatures                                                                     16
</TABLE> 

                                       2
<PAGE>
 
PART I           THE HARTCOURT COMPAMIES INC. AND SUBSIDIARIES
ITEM 1.                   CONSOLIDATED BALANCE SHEETS


<TABLE> 
<CAPTION> 
                                                                   September 30,   December 31,
                                                                       1998            1997
                                                                   -------------   ------------
                                                                    (Unaudited)       
<S>                                                                  <C>           <C>
  ASSETS

CURRENT ASSETS
 Cash                                                                $   527,098   $    77,688
 Marketable Securities (Note 3)                                        4,951,063     5,474,966
 Accounts receivable, net of allowance for doubtful accounts of
 $76,477, in 1998 and 1997, respectively                               3,606,092     2,332,977
 Trade dollar receivable                                                  21,000        22,670
 Notes receivable, current portion                                       113,523       293,673
 Inventory                                                             3,284,980     3,541,321
 Prepaid expenses                                                        159,423       130,554
 Prepaid consulting fees                                                 664,770       664,770
 Due from related parties                                                218,122       131,398
                                                                     -----------   -----------
 
  TOTAL CURRENT ASSETS                                                13,546,071    12,670,017
 
PROPERTY AND EQUIPMENT, net                                            4,095,795     3,568,507
 
INVESTMENTS                                                           17,906,520    17,906,520

NOTES RECEIVABLE, net of current portion                               1,072,805     1,058,267

OTHER ASSETS                                                             566,881       552,289

INTANGIBLES, net                                                      10,467,580     9,365,000
                                                                     -----------   -----------
  TOTAL ASSETS                                                       $47,655,652   $45,120,600
                                                                     ===========   ===========
 
   LIABILITIES AND SHAREHOLDERS' EQUITY
 
CURRENT LIABILITIES
 
 Accounts payable                                                      2,865,050     2,824,419
 Accrued expenses and other current liabilities                          262,160     1,046,881
 Payable to Mexican affiliate                                            335,041       352,942
 Line of credit                                                        2,883,834       200,000
 Notes payable, related parties-current portion                          337,799       295,000
 Notes payable-current portion                                           530,155       205,245
 Capital lease obligation-current portion                                152,430       200,222
 Debentures                                                               50,000        50,000
 Subscription deposits received                                                -        15,000
                                                                     -----------   -----------
    TOTAL CURRENT LIABILITIES                                          7,416,469     5,189,709
 
</TABLE>

                                       3
<PAGE>
 
ITEM  1.        THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
(CONT.)                   CONSOLIDATED BALANCE SHEETS
                                  (CONTINUED)

<TABLE> 
<CAPTION> 
                                                                                 September 30,     December 31,
                                                                                     1998              1997
                                                                                 ------------      -----------
                                                                                  (Unaudited)
<S>                                                                              <C>              <C> 
    LIABILITIES AND SHAREHOLDERS' EQUITY (CONT.)
 
NOTES PAYABLE, RELATED PARTIES, net of current portion                                      -          125,000
 
NOTES PAYABLE, net of current portion                                               1,291,578        1,334,327
 
CAPITAL LEASE OBLIGATIONS, net of current portion                                     659,350          612,477
                                                                                  -----------      -----------
      TOTAL LIABILITIES                                                             9,367,397        7,261,513
 
COMMITMENT AND CONTINGENCIES                                                                                 -
 
SHAREHOLDERS' EQUITY
 Preferred Stock
  Original preferred stock, $0.01 par value, 1,000 shares                                  10               10
     authorized, issued and outstanding
  Series A, $1,000 stated value, 4,000 shares authorized,
     issued and outstanding                                                         4,000,000        4,000,000
  Series B, $1,000 stated value, 2,000 shares authorized,
     issued and outstanding                                                         2,000,000        2,000,000
  Series C, $1,000 par value, 1,500 shares authorized,
     issued and outstanding                                                                 -        1,500,000
  Series D, $1,000 stated value, 10,000 shares authorized,
     3,400 shares issued and outstanding                                            3,400,000        3,400,000
  Series AB, $1,000 stated value, 25,000 shares authorized,
     405 shares issued and outstanding                                                405,000                -
  Class A, no par, 10,000,000 shares authorized,
     none issued and outstanding                                                            -                -
                                                                                  -----------      -----------
      TOTAL PREFERRED STOCK                                                         9,805,010       10,900,010
 
   Common stock, $0.01 par value, 50,000,000 shares
     authorized; 19,754,381 and 16,441,739 shares issued
     and outstanding at September 30, 1998 and December 31, 1997                       19,755           16,442
   Stock subscription receivable                                                     (301,000)         (26,000)
   Treasury stock, at cost (24,364 shares in 1998 and 1997)                          (279,928)        (279,928)
   Additional paid-in capital                                                      33,233,036       31,083,604
   Accumulated deficit                                                             (4,188,618)      (3,835,041)
                                                                                  -----------      -----------
      TOTAL SHAREHOLDERS' EQUITY                                                   38,288,255       37,859,087
 
          TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                              $47,655,652      $45,120,600
                                                                                  ===========      ===========
</TABLE>

                                       4
<PAGE>
 
ITEM 1.         THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
(CONT.)              CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (UNAUDITED)


<TABLE> 
<CAPTION> 

                                                       Quarter ended              Nine months ended
                                                        September 30                 September 30
                                                     1998          1997           1998          1997
                                                  -----------------------     -------------------------
<S>                                               <C>          <C>            <C>            <C>
REVENUES
 
   Product Sales                                  $5,165,548   $   45,206     $ 12,714,313   $  316,706
   Services and Labor Sales                        1,743,499            -        4,867,636            -
                                                  ----------   ----------     ------------   ----------
         TOTAL REVENUE                             6,909,047       45,206       17,581,949      316,706
                                                                                             
COST OF SALES                                      4,842,185       18,402       12,590,585      213,727
                                                  ----------   ----------     ------------   ----------
                                                                                             
   Gross profit                                    2,066,862       26,804        4,991,364      102,979
                                                                                             
OPERATING EXPENSES                                                                           
   Selling, general and administrative             1,744,477      127,115        4,374,189      271,405
   Depreciation and amortization                     168,280        5,647          537,675       10,792
                                                  ----------   ----------     ------------   ----------
         TOTAL OPERATING EXPENSES                  1,912,757      132,762        4,911,864      282,197
                                                  ----------   ----------     ------------   ----------
INCOME (LOSS) FROM OPERATIONS                        154,105     (105,958)          79,500     (179,218)
                                                                                             
OTHER INCOME (EXPENSES)                                                                       
   Interest expense                                 (100,089)       4,095         (240,193)     (22,305)
   Interest income                                     4,500        6,410           36,306       21,885
   Miscellaneous Income                               12,740            -           42,148       25,556
                                                  ----------   ----------     ------------   ----------
         TOTAL OTHER INCOME (EXPENSE)                (82,849)      10,505         (161,739)      25,136
                                                  ----------   ----------     ------------   ----------
NET INCOME (LOSS) BEFORE TAXES                        71,256      (95,453)         (82,239)    (154,082)
   Income taxes                                           63        1,402            1,338        2,443
                                                  ----------   ----------     ------------   ----------
NET LOSS                                          $   71,193   $  (96,855)    $    (83,577)  $ (156,525)
                                                  ==========   ==========     ============   ==========
                                                                                             
BASIC AND FULLY DILUTED INCOME (LOSS)                                                         
PER SHARE                                         $     .004   $   (0.008)    $      (.005)  $    (.013)
WEIGHTED AVERAGE NUMBER OF SHARE                                                             
   OUTSTANDING                                    19,056,990   11,654,153       17,683,807   11,654,153
</TABLE> 

                                       5
<PAGE>
 
ITEM 1.         THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
(CONT.)          CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
                  FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1998
                                  (UNAUDITED)


<TABLE>
<CAPTION>
                                                                                              Common
                                                                              Additional       Stock                           
                                     Common Stock           Preferred            Paid       Subscription      Treasury Stock   
                                  Shares     Amount    Shares     Amount        Capital      Receivable     Shares     Amount   
                                --------------------   -------------------   -----------    ------------   --------------------
<S>                             <C>         <C>        <C>     <C>           <C>            <C>             <C>          <C>   
BALANCE, DECEMBER 31, 1997      16,441,739   $16,442   11,900  $10,900,010   $31,083,604    $ (26,000)      24,364   $(279,928)

 Preferred Stock Issued                                   270      270,000                                                     

 Preferred Stock Redeemed                                (250)    (250,000)                                                    

 Preferred Stock Dividend                                                                                                      

 Stock Subscription Received                                                                   25,000                          

 Net Loss                                                                                                                      

                                ----------   -------   ------  -----------   -----------    ---------       ------   ---------
BALANCE, MARCH 31, 1998         16,441,739   $16,442   11,920  $10,920,010   $31,083,604    $  (1,000)      24,364   $(279,928)

 Sale of shares under                                                                                                          
 Regulation S                    2,000,000     2,000                           1,123,002     (300,000)                         

 Shares issued to employees                                                                                                    
 and Board of Directors            332,857       333                             166,095                                       

 Preferred Stock Redeemed                                (250)    (250,000)                                                    

 Preferred Stock Issued                                   135      135,000                                                     

 Preferred Stock Dividend                                                                                                      

 Net Loss                                                                                                                      

                                ----------   -------   ------  -----------   -----------    ---------       ------   ---------
BALANCE, JUNE 30, 1998          18,774,596   $18,775   11,805  $10,805,010   $32,372,701    $(301,000)      24,364   $(279,928)

 Shares issued to employees                                                                                                    
 and Board of Directors             45,000        45                              30,029                                       

 Shares issued for purchase                                                                                                    
 of Pacific Pneumatics               9,796        10                              14,990                                       

 Shares issued for purchase                                                                                                    
 Of Elan Manufacturing             724,989       725                             615,516                                       

 Preferred Stock Redeemed                                                                                                      
   for cash                                              (800)    (800,000)     

 Preferred Stock exchanged                                                                                                     
   for common                      200,000       200     (200)    (200,000)      199,800                                       

 Net Income                                                                                                                    

                                ----------   -------   ------  -----------   -----------    ---------       ------   ---------
BALANCE, SEPT. 30, 1998         19,754,381   $19,755   10,805  $ 9,805,010   $33,233,036    $(301,000)      24,364   $(279,928)
<CAPTION>
                                                    Total
                                  Accumulated    Shareholders'
                                    Deficit         Equity
                                  -----------    -------------
<S>                               <C>            <C> 
BALANCE, DECEMBER 31, 1997        $(3,835,041)   $37,859,087

 Preferred Stock Issued                              270,000

 Preferred Stock Redeemed                           (250,000)

 Preferred Stock Dividend            (135,000)      (135,000)

 Stock Subscription Received                          25,000

 Net Loss                             (75,228)       (75,228)

                                  -----------    -----------
BALANCE, MARCH 31, 1998           $(4,045,269)   $37,693,859

 Sale of shares under           
 Regulation S                                        825,002

 Shares issued to employees     
 and Board of Directors                              166,428

 Preferred Stock Redeemed                           (250,000)

 Preferred Stock Issued                              135,000

 Preferred Stock Dividend            (135,000)      (135,000)

 Net Loss                             (79,542)       (79,542)

                                  -----------    -----------
BALANCE, JUNE 30, 1998            $(4,259,811)   $38,355,747

 Shares issued to employees     
 and Board of Directors                               30,074

 Shares issued for purchase     
 of Pacific Pneumatics                                15,000

 Shares issued for purchase     
 Of Elan Manufacturing                               616,241

 Preferred Stock Redeemed       
   for cash                                         (800,000)

 Preferred Stock exchanged      
   for common                   

 Net Income                            71,193         71,193

                                  -----------    -----------
BALANCE, SEPT. 30, 1998           $(4,188,618)   $38,288,255
</TABLE> 

                                       6
<PAGE>
 
ITEM 1.         THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
(CONT.)               CONSOLIDATED STATEMENT OF CASH FLOW
                                  (UNAUDITED)

<TABLE> 
<CAPTION> 
                                                                  Nine months ended
                                                                     September 30,
                                                              1998                  1997
                                                         -----------------------------------
<S>                                                      <C>                     <C> 
CASH FLOWS FROM OPERATING ACTIVITIES
 Net Loss                                                $   (83,577)             $(156,525)
 Adjustments to reconcile net loss to net cash
   used in operating activities:
     Stock issued for services                               195,502                294,500
     Write-off of bad debts                                        -                (12,463)
     Accrued interest income                                       -                (10,883)
     Depreciation and amortization                           571,650                 10,792
     Changes in operating assets and liabilities:
      (Increase) decrease in:
        Accounts receivable                               (1,271,445)                64,900
        Inventory                                            256,341                182,833
        Notes receivable                                     165,612               (214,822)
        Prepaid expenses and other                           (28,869)              (328,736)
        Other Assets                                         (14,592)               (46,776)
       Increase (decrease) in:
        Accounts payable and accrued expenses               (626,449)               (15,402)
        Due from related party                               (86,721)               (42,629)
        Payable to Mexican affiliate                         (17,901)                     -
        Other liabilities                                   (110,202)               125,034
                                                         -----------              ---------
NET CASH USED IN OPERATING ACTIVITES                      (1,050,651)              (150,177)

CASH FLOWS FROM INVESTING ACTIVITIES
  Purchase of property and equipment                        (805,076)                     -
  Deposits                                                         -               (500,000)
  Proceeds on sale of marketable securities                  523,903                      -
  Payments on acquisitions                                   200,000                      -
  Sale of equipment                                                -                  4,400
                                                         -----------              ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES          (81,173)              (495,600)

CASH FLOWS FROM FINANCING ACTIVITIES
   Sale of common stock                                    1,125,002                569,000
   Common stock subscription receivable                     (275,000)               179,000
   Bank overdrafts                                                 -                 (5,691)
   Other Loans and lines of credit                         1,483,834                 47,436
   Payments on related party payable                          (2,096)                     -
   Issuance of Long Term Debt                              1,200,000                      -
   Payments on long term-debt                               (249,209)                     -
   Payments on capital lease obligation                     (201,297)                     -
   Redemption of preferred stock                          (1,500,000)                     -
                                                         -----------              ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES                  1,581,234                789,745
                                                         -----------              ---------
NET INCREASE IN CASH                                         449,410                143,968

CASH, BEGINNING OF PERIOD                                     77,688                    822
                                                         -----------              ---------
CASH, END OF PERIOD                                      $   527,098              $ 144,790
                                                         ===========              =========
</TABLE>

                                       7
<PAGE>
 
ITEM 1.         THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
(CONT.)           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)


NOTE 1.  ORGANIZATION AND NATURE OF OPERATIONS:


         Harcourt Investments (USA), Inc., (Harcourt Investments ) was
         incorporated on April 23, 1993. Principal business activities are the
         design, manufacture and sale of writing instruments. During its first
         two years of operations, Harcourt Nevada used foreign contract
         manufacturers to produce various types of pens and markers, which were
         then imported for sale in the U. S. market. In August 1994, Harcourt
         Investments acquired a 60% interest in the Xinhui Harchy Modern Pens,
         Ltd. Joint Venture (Xinhui JV) owned by a Hong Kong corporation for
         common stock valued at $2,149,200. The Xinhui JV is located in the
         Guangdong Province of China. Pursuant to an amendment to the joint
         venture agreement governing the Xinhui JV entered into in October 1995,
         Harcourt Investments interest was reduced to a 52% interest in the
         Xinhui JV. In September 1996, Harcourt Investments sold its investment
         in Xinhui JV to CKES, Inc. of Sunnyvale, California.

         In November 1994, Stardust, Inc., Production-Recording-Promotion
         (Stardust) acquired 100% of the outstanding shares of Harcourt
         Investments for 8,280,000 shares of its common stock in a transaction
         accounted for as a recapitalization of Harcourt Investments with
         Harcourt Investments as the acquirer (reverse acquisition). Therefore,
         the historic cost of assets and liabilities were carried forward to the
         consolidated entity. In 1995 and 1996, reverse stock splits changed the
         number of shares issued and outstanding to 6,110,337, then to
         2,735,952. The consolidated financial statements were restated to
         reflect this capital stock transaction. Stardust's name was changed to
         the "The Hartcourt Companies, Inc."

         Hartcourt Pen Factory, Inc. (Hartcourt Pen) was incorporated in October
         1993. Principal business activities are the sale of writing
         instruments. In December 1994, Harcourt Investments acquired 100% of
         the outstanding shares of the common stock of Harcourt Pen for 52,500
         shares of its common stock and 1,000 shares of its original preferred
         stock in a transaction accounted for similar to a pooling of interest.
         In 1995, stock dividends and reverse stock split changed the number of
         shares issued to 38,625 to acquire Harcourt Pen. The consolidated
         financial statements were restated to reflect these capital stock
         transactions.

         In August 1996, The Hartcourt Companies, Inc. (Company) entered into a
         purchase and sale agreement with NuOasis International, Inc. (NuOasis),
         a corporation incorporated under the laws of the Commonwealth of the
         Bahamas, for the purchase of a commercial real estate project,
         consisting of three 5-7 story apartment buildings, commonly known as
         the Peony Gardens Property (Peony Gardens), located in the eastern part
         of Tongxian in Beijing City, mainland China. The Company issued
         4,000,000 shares of its common stock with respect to this purchase.

         In September 1996, the Company entered into a sales agreement with
         Mandarin Overseas Investment Co., Ltd. (Mandarin) and Promed
         International Ltd. (Promed), both unaffiliated Turks and Caicos
         chartered companies, for the purchase of their 50% interest in sixty-
         eight mineral lease gold lode claims in the state of Alaska, known as
         Lodestar claims 1-68 and consisting of 320 acres. All claims are
         located in the Melozitna mining district near Tanana, Alaska. The
         Company issued 1,298,700 shares of its common stock with respect to
         this purchase.

                                       8
<PAGE>
 
 ITEM 1.        THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
 (CONT.)         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)


 Note 1. Organization and Nature of Operations (cont.):
 

         In October 1997, the Company purchased the outstanding shares of Pego
         Systems, Inc. (Pego) whereby Pego became a wholly owned subsidiary of
         the Company. Pego, a manufacturer's representative organization for air
         and gas handling equipment, offers a full line of value added services
         including distribution, service and the manufacturing of custom process
         equipment packages. In connection with the purchase, the Company paid
         $500,000 in cash, issued 450,000 shares of common stock, 1,500 shares
         of series C redeemable preferred stock, and entered into a non-compete
         agreement with Pego's majority shareholders.

         On October 28, 1997, the Company, through a wholly owned subsidiary,
         acquired Electronic Components and Systems, Inc. (ECS) and Pruzin
         Technologies, Inc. (Pruzin) a related entity of ECS. ECS and Pruzin
         specialize in high technology contract manufacturing and assembly of
         printed circuit boards, phone and cable wires. ECS has three facilities
         in Arizona and has a service contract with a maquiladora in the free
         trade zone in Sonora, Mexico. The Company issued 3,400 shares of Series
         D convertible preferred stock, 2,500,000 shares of the Company's common
         stock, $250,000 in cash and a $250,000 promissory note.

         ECS maintains manufacturing operations under maquiladora agreements in
         Nogales, Mexico. The 100% shareholder of the maquiladora is also the
         President of ECS. A substantial amount of ECS's cables and electronic
         components are manufactured and assembled at the Mexico facility. ECS
         also has smaller manufacturing facilities in Tucson and Chandler,
         Arizona and a distribution facility in Nogales, Arizona.

         On August 6, 1998, Pego acquired 100% percent of the outstanding common
         stock of Pacific Pneumatics, Inc. (PPI), located in Rancho Cucamonga,
         California. The purchase price of $215,000 was paid in the form of
         $200,000 in cash and $15,000 of The Hartcourt Companies common shares.
         Under the acquisition agreement Pego caused PPI to prepay $35,000 of
         its notes payable to a selling shareholder. PPI manufactures pneumatic
         conveying, industrial dust collection and industrial process electrical
         controls. PPI has been manufacturing and selling it components under
         the trademark names "Pore Ploy, "Posit Dust Collectors and Filters" and
         "Pow-Air" for over 20 years.

         On August 24, 1998, the Company and ECS executed an agreement and plan
         of merger with Elan Manufacturing, Inc. (Elan). Elan is a contract
         manufacturer of electronic components similar to ECS, located in the
         Silicon Valley. Under the agreement, Elan will be merged into and with
         the Company, thereby ceasing Elan's existence. By September 1, 1998,
         substantially all of the requirements of the agreement were
         accomplished, and the Company began operating Elan as a division of the
         Company. On September 1, 1998, the Company advanced significant sums in
         order that Elan could continue its operations and complete in-process
         sales.

         The agreement called for a purchase value of $616,240.63, for which the
         Company would issue common shares to the three selling shareholders
         based on the average selling price for the Company's shares for the ten
         days prior to the acquisition. However, minor items necessary to close
         the transaction were not completed as of the September 1, 1998
         scheduled closing date, including the refusal by a lender to Elan to
         allow ECS to assume a promissory note in the amount of $266,964.04.
         Therefore, a first amended agreement was entered on September 23, 1998
         whereby the parties agreed that the number of the Company's common
         shares to be issued to the three selling shareholders would be based
         upon a price of $.85 per share. The Company issued 724,989 shares of
         the Company's common stock, currently held in escrow. The Company and
         ECS have guaranteed to the three selling 

                                       9
<PAGE>
 
ITEM 1.          THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
(CONT.)           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)


         shareholders that the value of such shares shall be no less than $.85
         per share on September 1, 1999. If the value of the shares does not
         equal $.85 per share on September 1, 1999, the Company and ECS shall
         make up any shortfall by issuing additional free trading shares or cash
         to the selling shareholders.

         Management of the Company and ECS, as well as the selling shareholders
         of Elan, are working diligently to complete the remaining items, and
         the parties, for all intents and purposes, have agreed that the closing
         date will be effective as of September 1, 1998 and have documented the
         same.

NOTE 2.  BASIS OF PRESENTATION:

         The accompanying unaudited financial statements have been prepared in
         accordance with generally accepted accounting principles for interim
         financial information and with the instructions to form 10-QSB.
         Accordingly, they do not include all of the information and footnotes
         required by generally accepted accounting principles for complete
         financial statements and related notes included in the Company's 1997
         Form 10-KSB.

         In the opinion of management, the accompanying unaudited financial
         statements contain all adjustments (which include only normal recurring
         adjustments) necessary to present fairly the balance sheet of The
         Hartcourt Companies, Inc. and Subsidiaries as of SEPTEMBER 30,1998 and
         the results of their operations and their cash flows for the NINE
         months ended SEPTEMBER 30, 1998 and 1997, respectively. The financial
         statements are consolidated to include the accounts of The Hartcourt
         Companies and its subsidiaries Harcourt Investments, USA, including the
         accounts of Hartcourt Pen, Pego Systems, Inc. and Electronic Components
         and Systems, Inc. (together "the Company").

         Certain 1997 amounts have been reclassified to conform to current
         period presentation. These reclassifications have no effect on
         previously reported net income.

         The accounting policies followed by the Company are set forth in Note
         A. to the Company's financial statements as stated in its report on
         Form 10-KSB for the fiscal year ended December 31, 1997.


NOTE 3.  MARKETABLE SECURITIES:

         In July 1997, the Company entered into an agreement with Capital
         Commerce, Ltd. (Capital) (an Isle of man Corporation) whereby Capital
         agreed to provide the Company $6,000,000 in free trading securities for
         the purchase of Pego Systems, Inc. and the formation of Electronic
         Components and Systems, Inc., a Nevada corporation. In consideration
         for the $6,000,000 in securities, the Company issued to Capital
         $4,000,000 in Series A and $2,000,000 in Series B, both 9% convertible
         preferred stock. Dividends are declared and paid monthly at 9% per
         annum. The Company pays the dividends through the issuance of Series AB
         convertible preferred stock (Note 5).

         As of September 30, 1998, the Company had sold $1,048,937 worth of its
         securities, and has available $4,951,063. Marketable Securities are
         reported at the guaranteed value of the contract. The Company has been
         unsuccessful in selling additional amounts of these securities and has
         demanded that Capital provide additional free trading shares under the
         guarantee (Note 7). Pending a response from Capital on the demand made,
         the Company's Board has elected to delay payment of the 3rd quarter
         dividend on the Series A and B Preferred Stock.

                                       10
<PAGE>
 
ITEM 1.         THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
(CONT.)           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)


NOTE 4.  SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
<TABLE>
<CAPTION>
 
 
                                                   NINE MONTHS ENDED     NINE MONTHS ENDED
                                                  SEPTEMBER 30, 1998    SEPTEMBER 30, 1997
                                                 -------------------    -------------------
                                                      (unaudited)           (unaudited)
<S>                                               <C>                   <C>
Cash paid for interest and income taxes:
  Interest                                                  $240,193               $22,305
  Taxes                                                        1,338                 2,443
 
Non-cash investing and financing activities:
 Preferred stock issued for dividends                       $270,000                     -
 Preferred stock issued for accrued
 Liabilities                                                $135,000                     -
 
</TABLE>

NOTE 5.  CAPITAL STOCK:


         In October 1997, the Company's Articles were amended to authorize the
         issuance of AB preferred stock. As amended, the Articles provide that
         the total number of shares of Series AB preferred are 25,000 with a
         stated value of $1,000 per share. The Series AB preferred shares may be
         redeemed by the Company at any time at a redemption value equal to
         $1,000 per share plus any accrued and unpaid dividends to the date of
         redemption. In addition, at the option of the holder of the Series AB
         preferred shares, the shares may be converted into 1,334 shares of the
         Company's common stock (conversion rate). During 1998, the Company has
         issued 405 shares of Series AB preferred shares, as dividends on its
         Series A and B Preferred Stock and payment of accrued liabilities (Note
         3 and 7).
         
         During the first half of 1998, the Company redeemed $500,000 (500
         shares) of the Company's Series C redeemable preferred stock, pursuant
         to the Pego Stock Purchase Agreement, dated October 3, 1997. On August
         18, 1998, the Company redeemed the remaining 1,000 shares of its Series
         C Redeemable Preferred stock, valued at $1 million, ahead of schedule.
         In the redemption, the Company made an $800,000 cash payment and issued
         200,000 of its restricted common shares to the selling shareholders of
         Pego.


NOTE 6.  INCOME (LOSS) PER SHARE:
<TABLE>
<CAPTION>
 
 
                                         Quarter Ended        Quarter Ended     Nine Months Ended    Nine Months Ended
                                       September 30,1998    Sepember 30,1997    SeptembeR 30,1998     Sepember 30,1997
                                       ------------------   -----------------   ------------------   ------------------
<S>                                    <C>                  <C>                 <C>                  <C>
Income (Loss) from continuous
Operation                                 $    71,193         $   (96,855)         $   (83,577)         $  (156,525)
Less preferred stock dividends               (135,000)                  -             (270,000)                   -
                                          -----------         -----------          -----------          -----------
Income (Loss) available to
common shareholders                           (63,807)            (96,855)            (353,577)            (156,525)
 
Effects of dilutive securities                      -                   -                    -                    -

Weighted average shares outstanding        19,056,990          11,654,153           17,683,807           11,654,153
 
Basic and dilutive earnings per share     $     0.004         $    (0.008)         $    (0.005)         $     (.013)
</TABLE> 

                                       11
<PAGE>
 
ITEM 1.         THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
(CONT.)           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)


         During 1998 and 1997, the Company had 2,000,000 warrants outstanding,
         each convertible into one share of common stock. In addition, during
         1998 and 1997, the company had convertible preferred stock outstanding,
         each share convertible into common stock. These instruments were not
         included in the computation of diluted earnings per share for any of
         the periods presented, due to their antidilutive effects based on the
         net loss reported for each period.

NOTE 7.  MATERIAL AND SUBSEQUENT EVENTS:

         On July 6,1998, the Company entered into a preliminary stock purchase
         agreement with Mr. Mordecai Kraselnik, officer and owner of MK
         Aviation, S.A. of the Republic of Panama. The Company intends to
         acquire all outstanding shares of MK Aviation, S.A. Due to the decline
         in the market value of the Company's Common Stock in the third quarter,
         both parties have agreed to postpone the negotiations as well as the
         preliminary stock purchase agreement.

         On July 28, 1998, the Company elected to rescind the sale-purchase
         agreement of the gold mining rights in the State of Alaska, pursuant to
         the terms of the September 17, 1996 agreement. The Company has
         requested that the 1,298,700 common shares issued on September 17,
         1996, with respect to the sale-purchase agreement be returned
         immediately. To date, the Company has received no response to its
         demands and filed a lawsuit on October 7, 1998 to obtain return of the
         shares.

         On August 18, 1998, the Company redeemed 1,000 shares of its Series C
         Redeemable Preferred stock, valued at $1 million, ahead of schedule. In
         the redemption, the Company made an $800,000 cash payment and issued
         200,000 of its restricted common shares.

         During most of 1998, the Company had been attempting to raise cash by
         the sale of the marketable securities received from Capital Commerce,
         Ltd.("Capital") in exchange for the Series A and B preferred stock. Due
         to declining market values and other factors, to date the Company has
         only been successful in selling securities for cash in the amount of
         $1,048,937. The Company on October 7, 1998 demanded that Capital
         perform under its guarantee and provide the Company either cash or
         additional free trading marketable securities to reach the $6 million
         minimum cash availability under the agreement. The Company's Board of
         Directors elected not to declare a dividend for the third quarter until
         this matter is resolved. The Company has not received a response to
         date from Capital.

         On October 21, 1988, Mr. James Pruzin, the selling shareholder and
         president of Electronic Components and Systems, Inc. (ECS), formally
         requested a rescission of the October 28, 1997 acquisition whereby the
         Company, through a wholly owned subsidiary, acquired ECS and Pruzin
         Technologies, Inc. (Pruzin). Mr. Pruzin has alleged that he is
         authorized to request rescission based on an alleged breach of the
         acquisition agreement by the Company. The Company denies any breach of
         the acquisition agreement and believes that the request for recission
         was defective and invalid. Mr. Pruzin had offered to return all shares
         he received in the initial transaction and to execute a note for the
         cash received in the initial transaction.

         The Company initially rejected Mr. Pruzin's proposition, but on
         November 10, 1988 entered into a memorandum of understanding whereby
         Mr. Pruzin could reacquire ECS from the Company by returning all
         Hartcourt Common and Preferred Stock received, payment to Hartcourt of
         $1,850,000 during 1999, negotiating the return of Hartcourt Common
         Shares issued in the Elan transaction and a $400,000 fully amortized 5
         year note with monthly payments beginning in 2000. Mr. Pruzin has until
         November 30, 1998 to meet the first requirements of the agreement.

                                       12
<PAGE>
 
PART I
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS:

         As discussed in the Company's annual report filed on Form 10-KSB,
         during 1997 the Company actively implemented a plan to acquire
         operating companies that are in established industries with a history
         of growth. The Company successfully completed two acquisitions during
         the fourth quarter of 1997. Pego Systems, Inc. was acquired October 3,
         1997 and the assets and liabilities and Electronic Components and
         Systems, Inc. along with the assets and liabilities of Pruzin
         Technologies, Inc., a related entity, were acquired on October 27,
         1997. Thus, comparing income and expenses between the THIRD QUARTER and
         first nine months of 1998 and the third quarter and first first nine of
         1997 is not meaningful.

         RESULTS OF OPERATIONS:

         The Company's revenue for the THIRD QUARTER of 1998 was $6,914,000.
         Domestic writing instrument operations had minimal activity as the
         Company continues to liquidate the pen inventory and seeks new business
         opportunities. The Company's subsidiaries Pego Systems, Inc. (Pego) and
         Electronic Components and Systems, Inc. (ECS) again represented over
         99% of total revenues for the quarter. Pego's revenues were $1,748,000
         and ECS's revenues were $5,162,000. Revenues for the THIRD QUARTER were
         at management's expectations as both Pego and ECS rebounded from delays
         experienced in the first half in obtaining various anticipated contract
         and orders. While, management does expect those contracts and orders to
         continue indications are that revenues for the FOURTH QUARTER of this
         year will be below that experienced in the third quarter. As a result
         of meeting the expectations for the third quarter, the Company earned
         $71,000 for the three months ended September 30, 1998, but lost $97,000
         for the nine months ended September 30, 1998.

         Components of cost of sales for the THIRD QUARTER were as follows: Pego
         $1,171,000, 67% as a percent of Pego's revenue; and ECS, $3,672,500,
         71% as a percent of ECS's revenue. Consolidated cost of sales,
         $4,067,500 is 70% of consolidated revenue. Consolidated cost of sales
         as a percent of consolidated revenue is at management's expectations
         and is consistent with the Company's first half results.

         Components of selling, general and administrative (SGA) expenses were
         as follows: corporate- $155,000, Pego- $515,000 and ECS-$1,242,000. SGA
         expenses as a percent of consolidated revenues (25%) were, as in the
         first half, better than anticipated by management. The better than
         expected results were attributable to on going efforts to eliminate
         unprofitable operations and management's ability to control costs.

         Goodwill related to the Pego and ECS acquisition is being amortized
         over 25 years. Amortization costs of $95,000 were recorded for the
         THIRD QUARTER of 1998. Depreciation expense of $73,000 was incurred
         during the same period.

         Interest expense incurred for facilities mortgages, notes and short-
         term lines of credit, capital lease obligations and factoring agreement
         was $100,000 for the three months ended September 30,1998.

         LIQUIDITY AND CAPITAL RESOURCES:

         During the THIRD QUARTER of 1998, Pego borrowed $1,200,000 under a term
         loan which was used by the Company to redeem the Series C preferred
         stock and for the cash portion of the acquisition of Pacific
         Pneumatics. Also during the THIRD QUARTER, the Company issued
         approximately 45,000 restricted common shares to employees and
         directors for services rendered during the preceding year; issued
         734,785 common shares for acquisitions and 200,000 common shares along
         with cash described above to redeem the Series C preferred stock. The
         Company contemplates selling or issuing additional common and preferred
         shares over the next twelve months for any additional working capital
         requirements, capital expenditures and future acquisitions that may
         occur.

                                       13
<PAGE>
 
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
(CONT.)  RESULTS OF OPERATIONS:


         LIQUIDITY AND CAPITAL RESOURCES: CONT.

         The Company's current ratio and working capital decreased from June 30,
         1998 to September 30, 1998, due to debt incurred to redeem the
         preferred stock as well as acquisitions. The current ratio at September
         30,1998 was 1.8% compared to 2.9% at June 30, 1998. Working capital was
         $6,130,000 at September 30, 1998 and $8,006,300 at June 30, 1998.

         The Company's operating activities used cash of approximately
         $1,051,000 for the nine months ended September 30, 1998. The Company
         had operating income, before depreciation and amortization of
         approximately $617,000. Concurrently, decreases in inventories of
         $256,000 offset by changes in accounts receivable, due from related
         party, accounts payable and accrued expenses used an additional
         $1,732,000. Included in the decrease in accrued expenses was the
         payment of a $400,000 broker commission, a non-recurring expense, which
         was incurred in connection with the sale-purchase agreement of ECS,
         dated October 27,1997.

         Cash used by investing activities for the nine months-ended September
         30,1998 was approximately $81,000. The Company sold $525,000 in
         marketable securities, purchased of property and equipment of $805,000
         and paid cash of $200,000 for acquisitions.

         Financing activities provided approximately $1,581,500 during the first
         nine months of 1998. The sale of the Company's common stock, as
         previously mentioned, and borrowings on bank provided lines of credit
         were used to redeem the Series C redeemable preferred stock and pay
         down on various short and long-term liabilities.

         As a result of the above activities, the company experienced an
         increase in cash of $449,410 for the first nine months of 1998.

         BUSINESS RISKS:

         As discussed previously, the Company intends to acquire additional
         profitable operating businesses. At this time, the Company is in
         negotiations with several potential acquisition candidates and
         successfully completed 2 acquisitions during the 3rd quarter of 1998.
         However with respect to other acquisitions, no definitive agreements
         have been reached. If any additional acquisition agreements are reached
         in the near term, the Company can make no assurances that it will be
         able to obtain the financing necessary to complete any of these
         transactions.

         COMPETITION:

         The Company does not have any direct across the board competitors, but
         does have competition within the industries its subsidiaries operate.
         The Company believes that these markets are relatively fragmented and
         highly competitive. The Company ability to compete successfully will be
         dependent upon numerous factors, including its ability to obtain
         necessary financing in a timely manner and on commercially acceptable
         terms, as well as upon the design, quality and price of its products
         and its customer service. Many of the Company's competitors have
         greater experience and far greater financial and other resources than
         the Company. There can be no assurance that the Company will be able to
         compete in its markets.

                                       14
<PAGE>
 
PART I
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS:

         MANAGEMENT OF GROWTH:
         If the Company is successful in implementing its growth strategy, the
         Company believes it could undergo a period of rapid growth that could
         place a significant strain on its management, financial and other
         resources. The Company's ability to manage its growth will require it
         to continue to improve its operational and financial systems and to
         motivate and effectively manage its employees. If the Company grows it
         will have to implement new financial, budgeting, management information
         and internal control systems. The Company's success will depend upon
         its ability to attract and retain highly skilled personnel. There can
         be no assurance that the Company will be successful in attracting and
         retaining key management, technical, marketing and sales personnel. Its
         failure to do so would materially and adversely affect the Company's
         business and results of operations.

 
                           PART II OTHER INFORMATION


         ITEM 1.  LEGAL PROCEEDINGS
 
         On September 3, 1998, American Equities filed suit against the Company
         for breach of contract. The Company denies that it has breached any
         contract with American Equities. The Company has filed a cross-
         complaint for fraud and non-performance against American Equities and
         additional cross-defendants. The Company and its legal counsel are of
         the belief that it will prevail under the counter claim. The American
         Equities consulting agreement has been previously noted in Note R of
         the financial statements of the Company's Form 10k for the year ended
         December 31, 1997.

         On July 28, 1998, the Company elected to rescind the sale-purchase
         agreement of the gold mining rights in the State of Alaska, pursuant to
         the terms of the September 17, 1996 agreement. The Company has
         requested that the 1,298,700 common shares issued on September 17,
         1996, with respect to the sale-purchase agreement be returned
         immediately. To date, the Company has received no response to its
         demands and filed a lawsuit on October 7, 1998 to obtain return of the
         shares.



         ITEM 2.  CHANGES IN SECURITIES

                  None

         ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

                  Not applicable

         ITEM 4.  SUBMISSION OF MATTERS TO VOTE OF SECURITIES HOLDERS

         At the annual meeting of shareholders held September 16, 1998, the
         security holders elected Mr. Michael Caruana and Mr. James Pruzin to
         the Board of Directors, approved the appointment of Harlan & Boettger,
         LLP as the Company's independent accountants for the year ended
         December 31, 1998 and authorized the Board of Directors to change the
         domicile of the Company from Utah to Nevada.

         ITEM 5.  OTHER INFORMATION

                  None

                                       15
<PAGE>
 
PART II

          ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

                   (a)     Exhibits - EX-27 Financial Data Schedule

                   (b)     Reports on Form 8-K - None






                          PART II  OTHER INFORMATION



                                  SIGNATURES


          In accordance with the requirements of the Exchange Act, the
          registrant has caused this report to be signed on its behalf by the
          undersigned, thereunto duly authorized.


                                         THE HARTCOURT COMPANIES, INC.

          Date:  November 16, 1998       By: /s/  Alan V. Phan  
                                             -----------------   
                                             Dr. Alan V. Phan
                                             President

                                       16