SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                               
                                  FORM 10-KSB/A
(Mark One) 
[X]     ANNUAL  REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
        EXCHANGE ACT OF 1934 [Fee Required]

[ ]     TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
        ACT OF 1934 [No Fee Required]

                     For fiscal year ended December 31, 1996

                        Commission file number 001-12671
                               
                            HARTCOURT COMPANIES, INC.
             (Exact name of registrant as specified in its charter)

          UTAH                                             87-0400541
(State of incorporation)                    (I.R.S. Employer Identification No.)

                             19104 S. Norwalk Blvd.
                            Artesia, California 90701
                                  310-403-1126
          (Address, including zip code, and telephone number, including
                 area code, of registrant's executive offices)

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

    Title of each class                              Name of each exchange on
                                                         which registered
            None                                               None

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

                          Common Stock $.001 par value
                                (Title of class)

         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  registrant was required to file such reports),  and (2)
has been subject to such filing requirements for the past 90 days. Yes[X]  No[ ]

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

         Issuer's revenues for most recent fiscal year: $510,692

         State the aggregate  market value of voting stock held by nonaffiliates
computed by reference  to the price at which the stock was sold,  or the average
bid and asked  prices of such stock,  as of a specified  date within the past 60
days: As of February 24, 1997, $25,570,999.

         State the number of shares  outstanding of each of the issuer's classes
of common equity,  as of the latest  practicable  date: As of February 24, 1997,
there were 10,687,380 shares of common stock outstanding.
                                       
<PAGE>


                            HARTCOURT COMPANIES, INC.

                        1996 Form 10-KSB/A Annual Report
                                Table of Contents

   
                                                                      Page
PART I

 Item 1.     Description of Business                                    3

 Item 2.     Description of Property                                    9

 Item 3.     Legal Proceedings                                         12

 Item 4.     Submission of Matters to a Vote of Security Holders       12
 

PART II

 Item 5.     Market for Common Equity and Related Stockholder
             Matters                                                   12
 
 Item 6.     Management's Discussion and Analysis or Plan of
             Operation                                                 15
                                                                       
 Item 7.     Consolidated Financial Statements                         22
                                                                       
 Item 8.     Changes in and Disagreements with Accountants
             on Accounting and Financial Disclosure                    44
                                                                       

PART III

 Item 9.     Directors, Executive Officers, Promoters and
             Control Persons; Compliance with Section 16(a)
             of the Exchange Act                                       44
                                                                       
 Item 10.    Executive Compensation                                    46
                                                                       
 Item 11.    Security Ownership of Certain Beneficial Owners
             and Management                                            46
                                                                       
 Item 12.    Certain Relationships and Related Transactions            48
                                                                       

PART IV

 Item 13.    Exhibits and Reports on Form 8-K                          50
                                                                              

Signatures                                                             53
    
                                                                              

                                       2
<PAGE>


Explanatory Note:

         Unless  otherwise  indicated  or the context  otherwise  requires,  all
references herein to the "Company" are to The Hartcourt Companies,  Inc., a Utah
corporation, and its wholly owned subsidiaries,  Harcourt Investments (USA) Inc.
("Harcourt  Investments") and the Hartcourt Pen Factory, Inc. ("Hartcourt Pen").
All  share and per share  information  contained  herein  has been  adjusted  to
reflect a five-for-seven reverse split of the Company's Common Stock effected on
October 6, 1995, and a one-for-five  reverse split of the Company's Common Stock
effected on August 1, 1996.

                                     PART 1

Item 1:  Description of Business.

General

         Stardust,     Inc.-Production-recording-Promotion    ("Stardust"),    a
corporation  organized  under the laws of the State of Utah in  September  1983,
acquired  all of the  outstanding  shares  of  Harcourt  Investments,  a  Nevada
corporation,  for 6,110,337  shares of Stardust  common stock (after taking into
account a reverse stock split and stock  dividend)  pursuant to an Agreement and
Plan of Reorganization  dated November 5, 1994. At the time of this acquisition,
Stardust  was a "shell"  corporation  with no assets,  business  or  operations.
Subsequent to the acquisition of Harcourt Investments, Stardust changed its name
to "The Hartcourt Companies, Inc."

         Harcourt  Investments  was  organized  under  the laws of the  State of
Nevada in April 1993, to engage in the design,  manufacture  and sale of writing
instruments.  Harcourt Investments entered into a Stock Exchange Agreement dated
August 8, 1994 with Eastern  Rocester  Limited's  60% interest in Xinhui  Harchy
Modern Pens,  Ltd. (The "Xinhui  JV"), a joint venture  located in the Guangdong
province of the People's  Republic of China  ("China"),  in exchange for 250,000
shares of Harcourt  Investments  common  stock,  representing  80% of the common
stock of Harcourt Investments  outstanding  immediately  subsequent to the joint
venture  agreement  governing  the Xinhui JV entered into in October  1995,  the
Company's  interest  was  reduced to a 52%  interest  in the Xinhui JV, with the
remaining 48% held by the Xinhui Orient Light Industrial Corp.

         Hartcourt  Pen was  organized  under the laws of the State of Nevada in
October 1993 to engage in the sale of writing instruments. Hartcourt Pen entered
into an  Agreement  and Plan of  Reorganization  dated  December  1,  1994  with
Harcourt Investments, pursuant to which Harcourt Investments acquired all of the
outstanding  shares of Hartcourt  Pen in exchange for 38,625  shares of Harcourt
Investments  common stock. In connection with this transaction,  1,000 shares of
Harcourt  Investments  Original  Preferred Stock were issued to Dr. Alan Phan in
consideration of certain  intangible assets and services rendered by Dr. Phan in
connection with the  establishment of Hartcourt Pen.  Hartcourt Pen currently is
in the business of importing pens,  markers and components from China,  Germany,
Taiwan  and Italy for  assembly  (often by  others)  in the  United  States.  It
conducts  certain  limited  research and  development  activities  in the United
States, but engages in no domestic manufacturing activities.




                                       3
<PAGE>


         The Hartcourt  Companies,  Inc.  commenced limited business  activities
involving the design,  manufacture  and sale of writing  instruments in December
1994. The Company's present  operations involve the assembly and distribution of
writing  instruments.  The  Company's  current  primary  objective is to acquire
operating  companies with related products to maximize the marketing process and
expand the  distribution  of writing  instruments.  A secondary  objective is to
acquire real property  assets and to utilize profits from the development of the
Company's  present  real  property  assets in order to  diversify  and  create a
multi-dimensional  company.  The principal  executive offices of the Company are
located  at 19104  South  Norwalk  Boulevard,  Artesia,  California  90701.  The
Company's telephone number is (310) 403-1126.

         In April 1993, the Xinhui JV commenced construction of a 170,000 square
foot manufacturing plant approximately ten miles north of Xinhui City. The plant
commenced limited  operations in December 1994 and was fully operational by July
1995. By July 1996, the plant was operating at approximately 20% of its capacity
and  employed  approximately  80 people.  It is  estimated  by  management  that
additional  working  capital in the amount of  approximately  $3,000,000 will be
required  to permit  the plant to  operate at full  capacity  (300,000,000  pens
annually).  There is no contractual  obligation on the part of the joint venture
partners to provide this additional financing.

   
         In  April  1994,  the  Company  entered  into a  Lease  Agreement  with
Tokai-Anza-Scripto  Pen Company  ("Anja"),  for the use of five special ball pen
assembly machines by the Xinhui JV. The lease provides for semi-annual  payments
of $25,000 over a ten-year term, subject to adjustment based on future purchases
of  merchandise  by the Company  from the  lessor.  Consequently,  annual  lease
payments could range from zero, if annual purchases are in excess of $1,000,000,
to $100,000,  if annual  purchases  are less than  $100,000.  The  machinery was
delivered  by  Anja in June  1995.  However,  the  machinery  initially  did not
function properly and therefore,  the lease term did not commence until February
1996. In December 1996, the machinery was shipped by vessel back from the Xinhui
JV to the Company and arrived in January 1997.  The Company and Anja have agreed
to terminate  the lease upon  delivery of the  machinery to Anja with no further
obligation  to the  Company.  To date,  there have been no  payments  under this
lease.

         Except for certain  limited  operations  involving the  manufacture and
distribution  of  writing  instruments  in China  through  the Xinhui JV and the
assembly and  distribution  of writing  instruments in the United States through
Hartcourt  Pen, the Company's  activities to date  primarily  have  consisted of
raising  capital,   obtaining  financing,   locating  and  acquiring  equipment,
identifying   prospective  customers  and  suppliers,   installing  and  testing
equipment and administrative  activities  relating to the foregoing,  as well as
identifying  real  property for  potential  acquisition.  The  Company's  future
business,  including  expansion  of its  current  limited  operations,  requires
substantial additional equity and/or debt financing,  which may not be available
in a timely manner, on commercially reasonable terms, or at all.

         In September 1996 Hartcourt Pen was spun-off from Harcourt  Investments
to Hartcourt Companies,  Inc. by Harcourt Investments transferring 100% of stock
ownership in Hartcourt Pen to Hartcourt Companies, Inc. Pursuant to the spin-off
in September 1996 CKES  Acquisitions,  Inc.  ("CKES"),  a corporation  organized
    

                                       4
<PAGE>

   
under  the laws of the  State of  Nevada in  September  1996,  a  non-affiliate,
acquired all of the outstanding shares of the Company's wholly-owned  subsidiary
Harcourt Investments,  pursuant to a Purchase and Sale Agreement dated September
27, 1996,  thus  replacing the Company as a joint venture  partner in the Xinhui
JV.  Title  to the  shares  was  transferred  to CKES in  return  for a  Secured
Promissory  Note in the  principal  sum of  $3,000,000,  payable  monthly,  with
accrued  compound  interest  at six percent  (6%) per annum.  The Company has no
present contractual obligation to the Xinhui JV.

         In January 1996, the Company entered into a Memorandum of Understanding
to acquire Yafa Pen Company ("Yafa"), a California corporation,  with offices in
Los Angeles, California. The purchase price consisted of an initial cash payment
of  $285,000  and 80,000  shares  (valued  at $1.00 per share) of the  Company's
Preferred  Stock.  Pursuant  to the  Memorandum  of  Understanding,  the Company
advanced to Yafa a total of $200,000,  secured by two promissory notes ($100,000
on January 3, 1996 at 1% over prime due July 3, 1996 and $100,000 on February 9,
1996 at 1% over prime due  August 9,  1996),  the  amount of this  advance to be
offset against the purchase price for Yafa.  Various  disputes arose between the
Company and Yafa, and in September 1996 the parties  entered into a confidential
settlement  agreement and agreed to terminate the  Memorandum of  Understanding.
Terms include down payments totaling  $20,924.89,  invoice payments of $4,075.11
and 24 monthly  payments  of $2,000  with the  remaining  balance due in full on
August 15, 1999.

         Pursuant  to a Purchase  Contract  dated  March 21,  1996,  between the
Company and  Exceptional  Specialty  Products,  Inc., a California  corporation,
located in Laguna  Hills,  California,  the Company  acquired a complete line of
cosmetics  valued at  $161,250,  including  creams,  cleansers,  scrubs,  liquid
makeup, eye shadow, accent pencils, mascara, makeup brushes, translucent powder,
makeup bags,  and mirrors,  for 12,000  shares of the  Company's  Common  Stock.
Included in this  purchase is the United States  trademarked  brand name Camille
St. Moritz,  under which the inventory will be marketed,  as well as containers,
labels,  packaging,  stationery and promotional  materials.  The Company had not
sold any of the cosmetic products since the purchase and market and is currently
seeking overseas importers, primarily in China, to purchase the entire inventory
and market the products. The Company does not intend to distribute the cosmetics
other than to importers who will be responsible for their own marketing networks
and money collection.

         In August 1996, The Company  entered into a Purchase and Sale Agreement
with NuOasis International,  Inc. ("NuOasis"),  a corporation incorporated under
the laws of the  Commonwealth of 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 purchase price consists of
a Convertible  Secured  Promissory Note,  granted NuOasis a security interest in
the  property,  in the  principal  amount  of  $12,000,000  and the  greater  of
10,000,000 shares of the Company's Common Stock, or that number of shares of the
Company's  Common Stock having a market value equal to  $10,000,000  immediately
preceding  the closing  date. On August 8, 1996, an Addendum to the Purchase and
Sale  Contract was agreed to by the Company and NuOasis,  by which the Company's
obligation to issue stock to NuOasis was reduced to 4,000,000  shares (valued at
$10,000,000)  of its Common  Stock.  As of  December  31,  1996,  the  apartment
buildings were approximately 35% complete,  and it is anticipated by the Company
    

                                       5
<PAGE>

   
that the project will be completed by August 1997. The Company has no obligation
for construction  costs or any other costs relating to the project's  completion
and may at its option rescind the Purchase and Sale  Agreement,  if construction
is not  completed  by August 1997.  At  completion,  the Company  will  commence
operation of the project.  It is  anticipated  that the Company may sell some of
the  buildings,  or units within the  buildings,  to provide  initial  operating
funds. There can be no assurance, however, as to when, if ever, the Company will
be successful in selling some of the buildings, or units within the buildings to
obtain  operating  funds,  or whether,  or to what  extent,  the project will be
profitable.  See Part 1, Item 2,  "Description  of  Property  - Real  Estate and
Operating Data."

         In September  1996,  the Company  entered into a Sales  Agreement  with
Mandarin Overseas Investment Co., Ltd.  ("Mandarin"),  an unaffiliated Turks and
Caicos  chartered  company  located in Central Hong Kong,  for its undivided 50%
interest in thirty-four State of Alaska mineral lease gold lode claims, known as
Lodestar claims numbered 35-68, consisting of 160 acres each, all located in the
Melozitna mining district near Tanana, Alaska,  approximately 300 air-kilometers
west of the City of Fairbanks, Alaska. The Company will pay $3,000,000 in shares
of its Common  Stock to Mandarin for its  undivided  50% interest in the mineral
lease gold lode claims,  all shares to be issued pursuant to Regulation "S". The
number of shares are  determined  by the  average  price per share over a 10 day
period  for the 10 days  prior  to the  execution  of  this  agreement.  Certain
maintenance and administrative  costs will be incurred to maintain the claims in
a good standing status with all regulatory  agencies.  The Company has agreed to
pay Mandarin fifty percent (50%) of all such  administrative  costs necessary to
maintain the claims in good  standing,  such costs not expected to exceed $2,500
annually.  At the end of two years from the date of the  Agreement,  the Company
will pay an additional amount  representing  fifty percent (50%) of no less than
twenty-five thousand dollars ($25,000) in  connection  with  the requirements of
regulatory agencies.  There is no maximum of this additional amount.

         In September  1996,  the Company  entered into a Sales  Agreement  with
Promed International Ltd. ("Promed"), an unaffiliated Turks and Caicos chartered
company with offices in the British crown colony of Gibraltar,  for the purchase
of their  undivided 50% interest in  thirty-four  State of Alaska  mineral lease
gold lode claims,  known as Lodestar  claims  numbered  1-34,  consisting of 160
acres each, all located in the Melozitna  mining  district near Tanana,  Alaska,
approximately  300  air-kilometers  west of the City of Fairbanks,  Alaska.  The
Company  will pay  $3,000,000  in shares of its  Common  Stock to Promed for its
undivided 50% interest in the mineral  lease gold lode claims,  all shares to be
issued  pursuant to Regulation  "S." The number of shares are  determined by the
average  price  per  share  over a 10 day  period  for the 10 days  prior to the
execution of this agreement.  Certain maintenance and administrative  costs will
be  incurred  to  maintain  the  claims  in good  standing  with all  regulatory
agencies.  The Company has agreed to pay Promed fifty  percent (50%) of all such
costs, not to exceed $2,500  annually.  At the end of two years from the date of
the  Agreement,  the Company will pay an additional  amount  representing  fifty
percent  (50%)  of no  less  than  twenty-five  thousand  dollars  ($25,000)  in
connection with requirements of regulatory agencies. There is no maximum of this
additional amount.
    




                                       6
<PAGE>

   
         Management intends to obtain the services of an independent  geo-survey
company to prepare  detailed  geo-maps  of the gold lode  claims  acquired  from
Mandarin and Promed,  and to evaluate existing studies,  at an estimated cost of
approximately  $160,000. The possibility of not raising $160,000 will prevent an
accurate  value of the Alaskan  Mines;  however,  if these  studies  confirm the
valuation  that has been  represented,  the  Company  intends  to  complete  the
Purchase  and Sale  Agreement  and  raise  sufficient  capital  to  fulfill  the
requirements  of the mining  project.  Management does not expect this to affect
other  activities  in which the Company is involved.  There can be no assurance,
however,  as to when, if ever, the Company will obtain the necessary  capital to
fulfill the requirements of the mining project,  or whether,  or to what extent,
the  project  will  be  profitable,  should  operations  commence.  See  Item 2.
"Description of Property - Mineral Lease Gold Lode Claims."
    
         During  1996 the  Company  entered  into a  Consulting  Agreement  with
American  Equities,  LLC, a California  Limited Liability  Company.  The Company
intends to acquire,  manage and develop a real estate portfolio through the year
2001. See Part II, F/S, "Consolidated Financial Statements, Years Ended December
31, 1996 and 1995 -- Notes to Financial  Statements,"  Note H.  "Commitments and
Contingencies."

   
         In January 1997 the Company  began  ongoing  negotiations  with Network
Computer,  Inc., a wholly-owned subsidiary of Oracle Company, to develop 500,000
network computer in Southeast Asia.
    

         See Part III, Item 12, "Certain Relationships and Related Transactions"
for information about the interests of certain directors, executive officers and
promoters  of the  Company  in the  formation  and  reorganization  transactions
described above involving Stardust, Harcourt Investments and Hartcourt Pen.

         See Part I, Item 2,  "Description of Property," for  information  about
the Company's facilities.


Principal Products, Distribution and Competitive Conditions

         The Company's present business  activities  consist of the assembly and
distribution  of a broad  range of writing  instruments,  ranging  from the most
commonly used and inexpensive  plastic ballpoint pens to high-priced  luxury and
collectible fountain pens. The Company also distributes special order stationery
items,  such as daily diaries and planners,  organizers  and desk sets and other
desk items, manufactured by others.

         Commonly used and inexpensive  writing  instruments  ("Popular  Items")
assembled  and sold by the  Company  include a broad  range of  ballpoint  pens,
roller pens, cosmetic pens, white board markers, water color markers,  permanent
markers, highlighters, erasable ballpoint pens and magic ink pens. The Company's
Popular  Items are  available  in  various  compositions  and  colors of plastic
barrels and in a variety of ink colors.





                                       7
<PAGE>

   
         Higher priced and luxury writing  instruments  ("Luxury Items") sold by
the Company  include  ballpoint,  roller and fountain pens as well as mechanical
pencils.  The  barrels  of  Luxury  Items  generally  are  composed  of brass or
stainless steel with lacquer or engraved designs and have nibs (the point of the
pen that regulates ink flow) of  German-made  iridium,  as well as  gold-plated
accessories.  Once the pens are produced, they are inspected for quality control
before being available for retail.

         The Company's products are distributed  through  consignment  contracts
and retail activities.  The Company also advertises on airline magazines such as
Frequent Flyer,  Hughes and CFO. The mail order and U.S. domestic operations are
carried out by the help of customer service representatives under supervision of
office managers.  All orders whether  received by phone,  fax, letter or through
the  Company's web site are  documented  and checked for  reliability.  Once the
payment is processed or invoiced,  the shipment  proceeds through the mail order
and Internet service.  The Company has established a large distribution  network
available to customers worldwide.
    
         Management  believes  that  the  materials  and  equipment  used in the
assembly of the Company's products generally are available from multiple sources
on competitive terms. Therefore, the Company does not anticipate any significant
delays in the acquisition, of, or shortages of, either materials or equipment.

         The  Company  believes  that the markets for its broad range of writing
instruments  are relatively  fragmented and highly  competitive.  There are many
local, national and multinational importers of writing instruments in the United
States and elsewhere,  and the Company's 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 successfully in its markets.


Doing Business in China

         GENERAL.  Because the Company's  Peony Gardens  project is in China and
China  is  among  the  possible  markets  targeted  by the  Company  for  future
acquisitions,  as well as a market for the  purchase  of its  cosmetic  products
inventory,  China is  important  to the  Company's  success.  The  operation  of
facilities  in China  involves  certain  risks and  special  considerations  not
typically associated with operations in the United States.

         These risks  generally  related to: (i) social,  economic and political
uncertainty;  (ii) substantial  governmental involvement in and control over the
Chinese economy;  (iii) the possibility that the Chinese  government could elect
to discontinue its support of the economic  reform programs  implemented in 1978
and  return  to a  completely  centrally  planned  economy;  and  (iv)  possible
nationalization or expropriation of assets.  Accordingly,  government actions in
the future could have a significant effect on economic conditions in China. Such
actions, and result changes in the Chinese economy, could significantly aversely
affect, limit or eliminate  opportunities for foreign investment,  the prospects
of private sector enterprises  operating in China and the value of the Company's
investments in China.

                                       8
<PAGE>


         RESTRICTIONS  ON FOREIGN  CURRENCY  EXCHANGE.  In order to meet foreign
currency  obligations  and remit  dividends to foreign  owners,  a joint venture
operating  in China  must  convert  a  portion  of its  funds  from the  Chinese
currency,  the Chinese Renminbi (the "RMB"), to other currencies.  Because China
controls its foreign currency reserves, RMB earnings within China can not freely
be converted into foreign currencies,  except with government  permission and at
rates which are determined in part by supply and demand at authorized  financial
institutions,  such as the  People's  Bank of China  or at  government-regulated
foreign  exchange  swap  centers  established  by the  State  Administration  of
Exchange Control. In the event of shortages of foreign  currencies,  the Company
may be unable to convert  sufficient RMB's into foreign  currencies to enable it
to comply with foreign currency payment  obligations or to make distributions to
equity holders located outside of China.

   
         VOLATILITY OF EXCHANGE RATES. There has not been significant volatility
in the  exchange  rates of RMBs to U.S.  Dollars in the  recent  past but future
exchange rates may experience significant volatility.
    

         ENVIRONMENTAL REGULATION.  The Company's Chinese operations are subject
to central,  provincial and local environmental protection laws and regulations.
The costs and effects of compliance with  environmental  laws and regulations in
the United States (federal, state and local) and China (central,  provincial and
local) have not been material in the past and are not anticipated to be material
in the future.


Employees

         The  Company  currently  employs  four  full-time  and three  part-time
employees at its principal executive offices in the United States. Hartcourt Pen
is located at this  headquarters  location,  which also is the site for  certain
research and development activities. The Company does not expect any significant
changes in the number of employees during the next twelve months.


Research and Development

         The  Company  currently   conducts  limited  research  and  development
activities  involving the creation of ink formulas,  as well as the  engineering
design of pens and  material  used for the  components  of writing  instruments.
During the fiscal  years  ended  December  31,  1993,  1994 and 1995,  $100,650,
$180,440  and  $38,205  respectively,  was  expended  in  connection  with  such
activities.  During the 12 month period  ended  December 31, 1996 no expense was
incurred in connection  with  research and  development  activities.  Management
anticipates  that research and  development  costs as a percentage of sales will
not increase materially from current levels.


Item 2.  Description of Property

Principal Plants and Other Property

         The Company's  principal  executive  offices are located at 19104 South
Norwalk Boulevard,  Artesia,  California 90701. Hartcourt Pen is located at this
headquarters  site,  which  also is the site of  certain  limited  research  and
development  activities.  The  premises,  which are leased from an  unaffiliated
party, consist of 5,200 square feet, approximately 2,000 square feet of which is
used for  warehousing,  approximately  2,000 square feet for assembly of writing
instruments,  and  approximately  1,200 square feet for  executive  and clerical
offices.  Monthly rent is $1,230  until May 31,  1997,  $1,640 from June 1, 1997
through May 31, 1998 and $2,050 for the remainder of the lease term, through May
31,  2001;  provided,  however,  that no rent will be due for the months of June
1999 and June 2000.

         See Part I, Item 1, "Description of Business--General"  for information
about the manufacturing facilities of Xinhui JV.

         The Company  believes  that its property and equipment are adequate for
its present activities.  See Part I, Item 1, "Description of Business--General,"
and  Part  II,  Item  6,  "Management's  Discussion  and  Analysis  or  Plan  of
Operation--Liquidity and Capital Resources."



                                       9
<PAGE>


Investment Policies

         The Company has placed no limitation on the  percentage of assets which
may be  invested  in any one  investment.  This  policy  may be  changed  by the
Company's  Board of  Directors  and  without  a vote of the  Company's  security
holders.  It is the Company's  policy to acquire assets  primarily to add to its
equity base and for income.


Real Estate Investments

         The  Company's  investments  in  real  estate  are  not  restricted  to
developed or  undeveloped  properties,  or  properties  of any specific  type or
location.  It  is  the  present  intent  of  Management  to  acquire  commercial
properties  that can be  operated by outside  management  and do not require the
Company's  hands-on  operation.  With the exception of the Peony Gardens Project
(See Item 1,  "Description of  Business, General"),  it is the present intent of
Management  that real estate will be purchased,  free and clear of any mortgage,
with shares of the Company's Common Stock. Any necessary  management services in
connection with the Peony Gardens Project, and any future acquisitions,  will be
compensated, if possible, through the issuance of the Company's Common Stock.


Real Estate and Operating Data

         On  September  8,  1996,  the  Company  completed  the  purchase  of  a
commercial  real estate  project,  commonly  known as the Peony Gardens  Project
("Peony  Gardens"),  located in mainland China. See Part I, Item 1, "Description
of  Business."  The land use right of the  property  has been granted to Beijing
Grand Canal Real Estate  Development  Co. Ltd., the project's  developer,  for a
term of seventy (70) years,  commencing from May 3, 1994.  NuOasis,  the seller,
holds the Company's  Convertible Secured Promissory Note in the principal amount
of $12,000,000,  granting NuOasis a security interest in the property,  which is
otherwise free of any mortgages, liens or encumbrances.


                                       10
<PAGE>


         Peony Gardens,  upon its anticipated  completion,  will be comprised of
three 5-7 story apartment  buildings  located at the eastern part of Tongxian of
Beijing city. The property is connected to a network of highways and roads,  and
is located in one of the city's  strategic areas for outward  expansion,  with a
relatively good transport system consisting of public buses and taxicabs between
the city center and the development.

   
         As of December 1996, the development is approximately 35% complete, and
it is  anticipated  that it will be fully  developed by August 1997. The Company
has no obligation  for  construction  costs,  or any other costs relating to the
project's completion,  and will not assume operating costs until full completion
of the  project.  It is the opinion of the  Company's  management  that  present
insurance coverage is adequate. Upon completion of the project, it is the intent
of the Company to acquire,  if  possible,  the services of an  independent  real
estate  management  company  for the  properties  through  the  issuance  of the
Company's Common Stock. At present, real estate management company fees in China
are 4% of total rents  collected.  It is estimated  that the total annual rental
income, after completion of the project's three residential apartment buildings,
will  be  $5,764,000  at 70%  occupancy.  Management  estimates  expenses  to be
approximately $1,441,000 annually.  Depreciation is based on twenty years, which
is standard  depreciation for apartment buildings.  Real estate and governmental
taxes in connection  with the Peony Gardens  purchase are the  obligation of the
developer and were included in the purchase price. All rental taxes will be paid
by the tenants included in their monthly rent.  Management estimates that leases
will be for a minimum period of two years,  which is the standard lease term for
the area.  The  property is not, at  present,  subject to the usual  competitive
conditions  associated  with rental or leased  residential  apartment  property,
since the apartment  buildings have been mandated by the Chinese government as a
special  project  for the use of  foreigners.  However,  should  the  government
rescind that mandate,  or should  conditions occur which would cause the Chinese
government to expel  foreigners,  the  apartments  would be subject to extremely
competitive  lease  and  sale  pricing.  See  Part I,  Item 1,  "Description  of
Business--Doing Business in China."
    

Mineral Lease Gold Lode Claims

   
         In September  1996, the Company,  through  separate  transactions  with
Mandarin Overseas  Investment Co., Ltd.  ("Mandarin") and Promed  International,
Ltd.  ("Promed"),  acquired an undivided  50% interest in a total of 68 (34 from
each transaction) mineral lease gold lode claims,  consisting of 160 acres each,
all located in the  Melozitna  mining  district  near Tanana,  Alaska,  some 300
air-kilometers  west of the City of Fairbanks,  Alaska.  A gravel  landing strip
near Golden Creek,  about 12 kilometers north of the Yukon River, can be used to
access and service the area during snow-free months.  Aircraft up to the size of
DC-3 can land on this strip to supply fuel and other supplies to mining camps in
the area.  Scheduled  passenger  flights from Fairbanks west to points along the
Yukon  River can be used to  provide  passenger  service  to and from the Golden
Creek landing strip.  Larger equipment and fuel supplies can be barged down from
the Yukon  River to several  points  where  tractor  roads lead into the mineral
lease area.
    


                                       11
<PAGE>

   
         Certain  maintenance and  administrative  costs will be incurred by the
Company to maintain  the claims in a good  standing  status with all  regulatory
agencies.  Pursuant to the Sales  Agreements,  with  Mandarin  and  Promed,  the
Company has agreed to pay fifty percent (50%) of all such  administrative  costs
necessary  to maintain the claims in good  standing,  such costs not expected to
exceed a total of $5,000  annually,  which are payable to Mandarin and Promed in
the amount of $2,500 each,  respectively.  At the end of two years from the date
of the Agreements,  the Company will pay an additional amount representing fifty
percent  (50%)  of no  less  than  twenty-five  thousand  dollars  ($25,000)  to
Mandarin,  and an additional amount  representing fifty percent (50%) of no less
than twenty-five  thousand dollars  ($25,000) to Promed,  in connection with the
requirements  of  regulatory  agencies.  See Part I,  Item 1.,  "Description  of
Business--General."
    
         Recent  exploration  activity  in  Alaska  has been  stimulated  by the
discovery  of  low-grade  bulk  tonnage  gold  mineralization  at the Fort  Knox
deposit,  near  Fairbanks.  The gold is associated with high  concentrations  of
tungsten and bismuth.  Other  unaffiliated  companies,  with gold lode claims in
areas  adjacent to the  Company's  gold lode claims,  commenced  field work on a
portion of the adjacent area in July and August 1996. However,  the Company does
not expect to enter into any mining  operations  on its gold lode  claims  until
such time as detailed  geo-maps and  evaluation of existing  studies of the gold
lode claims are obtained from an independent geo-survey company, at an estimated
cost of  $160,000.  If  these  studies  confirm  the  valuation  that  has  been
represented,  the  Company  intends to raise  sufficient  capital to fulfill the
requirements of the mining project.  There can be no assurance,  however,  as to
when,  if ever,  the company  will obtain the  necessary  capital to fulfill the
requirements of the mining project,  or whether,  or to what extent, the project
will be profitable, should operations commence.


Item 3.  Legal Proceedings

         Neither the Company nor any of its  subsidiaries  currently  is a party
to, or owns  property  subject to, any pending or threatened  legal  proceedings
which,  in the  opinion of  management,  are  likely to have a material  adverse
impact on the financial condition of the Company.


Item 4.  Submission of Matters of Security Holders

         None


Item 5.  Market for Common Equity and Related Stockholder Matters

         The Common  Stock is quoted on the  bulletin  board  maintained  by the
National Association of Securities Dealers,  Inc. The following table sets forth
the range of high and low bid and asked  quotations  for the Common stock during
the two most recent calendar years ended December 31, 1996 and 1995:






                                       12
<PAGE>


                         High Bid       Low Bid       High Asked     Low Asked
                      -------------- -------------- -------------- -------------

March 31, 1995             5.00           3.00           8.00           3.62

June 30, 1995              3.62           3.50           4.25           3.87

September 30, 1995         3.75           3.62           4.37           4.00

December 31, 1995          5.75           3.50           7.12           4.25

March 31, 1996             5.75           4.25           6.37           5.00

June 30, 1996              5.75           4.62           6.50           5.12

September 30, 1996         7.50           3.00          12.25           5.00

December 31,1996           5.00           1.50           6.00           2.75

         The above prices were obtained from the National Quotation Bureau, Inc.
The prices shown in the above table represent  inter-dealer  quotations  without
retail  mark-up,  mark-down or  commission,  and may not  necessarily  represent
actual transactions.  On December 31, 1996, there were broker-dealers publishing
quotes for the Common Stock.

   
         All of the Company's  issued stock has been issued pursuant to Rule 144
of the  Securities  Act and could come into any market  which  exists under Rule
144.  Approximately  800,000  outstanding  144 shares exist at December 31, 1996
held by principal and directors.
    

         As of December 31, 1996 there were 428 holders of the Company's  Common
Stock. The Company believes there are numerous  additional  beneficial owners of
the Common Stock whose shares are held in "street name".

         In  September  1995 the  Company  declared a 3% stock  dividend  on its
Common  Stock.  Certain  holders  of shares of the Common  Stock of the  Company
waived their rights to receive this dividend.  As a result, on October 31, 1995,
the Company  issued a dividend of an aggregate of 21,753  shares of Common Stock
to holders of 713,010 shares of the Company's Common Stock.

         In May 1996,  the  Company  declared  3% stock  dividend  on its Common
Stock.  As a  result,  on May 3,  1996,  the  Company  issued a  dividend  of an
aggregate of 83,574 shares of Common Stock to holders of 2,785,813 shares of the
Company's Common Stock.

         In June 1996,  the Company  declared a 3% stock  dividend on its Common
Stock.  As a result,  on July 31,  1996,  the  Company  issued a dividend  of an
aggregate of 86,277 shares of Common Stock to holders of 2,875,906 shares of the
Company's  Common Stock.  The Company does not  anticipate  payment of any other
stock or cash dividends in the foreseeable future.




                                       13
<PAGE>


         The  following  information  sets  forth  certain  information  for all
securities  the Company  sold during the past three years  without  registration
under the Securities Act of 1933 (the "Securities  Act"). All transactions  were
effected in reliance on the exemption  from  registration  afforded by Section 4
(2) of the  Securities  Act for  transactions  not involving a public  offering.
There were no underwriters in any of these transactions.

   
         All the  transaction  hereunder were between the Company and accredited
investors  as  defined  in  Section  4(2)  of  the  Securities  Act of  1933  or
sophisticated  investors that possessed  sufficient  knowledge and experience in
financial  and  business  matters to be able to evaluate the merits and risks of
the investment and were allowed access to the books and records of the Company.

         Pursuant to a Stock Exchange Agreement,  dated August 8, 1994, Harcourt
Investments  issued 250,000 shares of its common stock  (representing 80% of its
common stock outstanding  immediately  subsequent to the transaction) to Eastern
Rocester Limited, a Hong Kong corporation, in exchange for a 60% interest in the
Xinhui JV. After the transaction,  Harcourt  Investments was 80% held by Eastern
Rocester  Limited,  2% by Dr.  Alan Phan,  a  director,  executive  officer  and
promoter of the Company,  and 18% by Pacific Rim Capital. All of the outstanding
common  stock  of  Eastern  Rocester  Limited  subsequently  was  sold to  Tiana
Corporation, of which Dr. Phan beneficially owns 20% of its common stock.
    

         Dr. Phan acquired ten Harcourt Investments shares in April 1993 for
nominal consideration.

         The Company acquired all of the outstanding Harcourt Investments shares
for 6,110,337  shares of the Company's Common Stock pursuant to an Agreement and
Plan of Reorganization dated November 5, 1994. Dr. Phan received 291,500 of such
shares in exchange for his Harcourt Investments shares.

         Pursuant to an Agreement and Plan of  Reorganization  dated December 1,
1994, the Company  acquired all of the  outstanding  shares of Harcourt Pen from
Dr. Phan for 38,625 shares of the Company's Common Stock and 1,000 shares of its
Original Preferred Stock.

   
         On February 28, 1996, the Company issued 27,000 shares of its Common
Stock to former  attorney Kevin Quinn for $466,560.
    

         On March 27, 1996,  the Company  acquired a complete line of cosmetics,
including  inventory,  valued at $161,250 and marketed  under a brand name,  for
12,000 shares of the Company's Common Stock.

   
         On June 3, 1996,  the  Company  issued  5,000  shares of the  Company's
Common Stock to Cavaform,  Inc. for  outstanding  liabilities,  in the amount of
$106,775, on behalf of Xinhui JV. These payments were to increase our investment
in Xin Hui and to expedite completion of molds.
    



                                       14
<PAGE>

   
         On June 3,  1996,  the  Company  issued a total of 1,267  shares of its
Common  Stock for the  purchase  of  inventory  valued  at  $30,164  to  Kenneth
Johnson/Marvin  Lieberman  and Edmund Murray in the amount of 667 shares and 600
shares, respectively. Inventory consists primarily of beauty
products and pen accessories.
    

         On June 11, 1996, the Company issued 112 shares of the Company's Common
Stock to Idea International, Inc. in settlement of $2,814 in accounts payable.

         Pursuant to a Sales  Agreement  dated  September  17,1996,  the Company
acquired a fifty percent (50%) interest in thirty four gold lode claims,  valued
at approximately  $3,000,000 from Promed International,  Ltd. for 649,350 shares
of the Company's Common Stock.

         Pursuant to a Sales  Agreement  dated  September 17, 1996,  the Company
acquired a fifty percent (50%) interest in thirty four gold lode claims,  valued
at  approximately  $3,000,000  from Mandarin  Overseas  Investment Co., Ltd. for
649,350 shares of the Company's Common Stock.

         Pursuant to a Purchase and Sales  Agreement,  dated September 27, 1996,
CKES Acquisitions,  Inc., a Nevada corporation,  acquired all of the outstanding
25,000 shares of the Company's wholly-owned  subsidiary Harcourt Investments for
a Secured  Promissory  Note in the  principal  sum of  $3,000,000,  with accrued
compound interest at six percent (6%) per annum.

   
         On  September  30, 1996,  pursuant to a purchase  and Sales  Agreement,
dated July 8, 1996, and its Addendum, dated August 8, 1996, the Company acquired
a commercial real estate project,  commonly known as the Peony Gardens Property,
located  in  mainland  China,  for  4,000,000  shares  at $2.50 per share of the
Company's Common Stock, and a Convertible  Secured Promissory Note. On September
30, 1996,  Pacific Rim Capital received 400,000 shares at $5.00 per share of the
Company's  Common Stock and Philip Cavana  received  200,000 shares at $5.00 per
share  of the  Company's  Common  Stock  for  $3,000,000  in  brokerage  fees in
connection with this purchase.

         On September 30, 1996,  pursuant to a Resolution of the Company's Board
of  Directors,  the  Company  issued  425,000  shares  at $0.50 per share of the
Company's  Common  Stock to Pacific Rim Capital on account of funds  advanced in
the  amount of  $271,395  for  working  capital  during  the  January 1, 1996 to
September 30, 1996 period.
    


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

   
         The Company  assembles and imports writing  instruments for sale in the
U.S.  During 1995 and 1996,  the Company  entered  into  negotiations  involving
various transactions intended to increase the Company's inventory and ability to
manufacture, assemble and import writing instruments. None of these transactions
were  completed.   See  Part  FINANCIAL   STATEMENT,   "Consolidated   Financial
Statements, Years Ended December 31, 1996 and 1995 -- Notes to Financial
Statements," Item H. "Commitments and Contingencies."
    
                                       15
<PAGE>

   
         During the first quarter of 1996, the Company  acquired a complete line
of cosmetics and the United States  trademarked  name Camille St. Moritz,  under
which the cosmetics will be marketed.  The Company does not intend to market the
products in the United  States,  and is currently  seeking  overseas  importers,
primarily in China,  to purchase the inventory  and market the  products.  There
have been no sales of the cosmetic products since the Company acquired the line,
and there can be no assurance  that the Company will find  importers to purchase
its  cosmetic  product  inventory.  See  Item 1.  "Description  of  Business  --
General."

         During the third quarter of 1996, the Company acquired Peony Gardens, a
commercial  real estate project in the eastern part of Tongxian in Beijing city,
mainland China, commonly known as the Peony Gardens property.  The project, when
completed,  will be  comprised  of three  5-7  story  apartment  buildings.  The
buildings are scheduled for completion in the third quarter of 1997. The Company
has no obligation for construction costs, or any costs relating to the project's
completion  and will  not assume  operating  costs until full  completion of the
project.  Upon  the  full  completion  of  the  project,  it is  anticipated  by
Management that the Company may sell some of the buildings,  or units within the
buildings,  to  provide  initial  operating  funds.  Any  sale or  lease  of the
buildings,  or of units within the buildings, by real estate brokers in China is
subject to a 5%  commission.  It is the Company's  intent to have the properties
managed by a real estate management  company,  local to the area, whose services
will be compensated,  if possible,  through the issuance of the Company's common
Stock.  Real estate company  management  fees for the area are 4% of total rents
collected.  There can be no  assurance  as to when,  if ever,  the Company  will
obtain these initial, or future, operating funds, or whether, or to what extent,
the project  will be  profitable.  See Item 2.  "Description  of Property - Real
Estate and Operating Data."

         During  the  third  quarter  of 1996,  the  Company  purchased,  in two
separate transactions,  an undivided 50% interest in a total of 68 mineral lease
gold  lode  claims,  34  from  each  transaction  respectively,  located  in the
Melozitna mining district near Tanana, in southern Alaska. Until such time as an
independent  geo-survey  company has prepared detailed geo-maps of the area, and
an  evaluation of existing  studies has been  performed on the  properties,  the
Company does not intend to enter into any mining activities on these claims. The
Company estimates that the cost for the geo-survey service will be approximately
$160,000. Management is establishing a program to finance the administrative and
developmental needs of the gold claims.  There can be no assurance,  however, as
to when, if ever,  the Company will obtain the necessary  capital to fulfill the
requirements of the mining project,  or whether,  or to what extent, the project
will be profitable,  should  operations  commence.  See Item 2.  "Description of
Property -- Mineral Lease Gold Lode Claims."

         In the fourth quarter of 1996,  the Company sold Harcourt  Investments,
its wholly-owned  subsidiary and owner of 52% of the Xinhui JV, to CKES Inc. for
$3,000,000.  The Company received a $3,000,000  promissory note which is payable
in  installments  of $50,000 per month for 60 months  starting  October 1, 1998.
Interest  accrues a 6% per annum and is  payable  in full at the end of the loan
period. The note is secured by all assets of CKES, Inc.
    




                                       16
<PAGE>

   
         Also  in  the  fourth  quarter  of  1996  the  Company  entered  into a
consulting agreement with American Equities, LLC, a California limited liability
company to provide consultation and assistance in finding,  acquiring,  managing
and developing a real estate  portfolio which will include  office,  commercial,
industrial, residential and raw land. As a minimum the consultant is expected to
increase  assets  and/or  market  capitalization  of  the  Company  by at  least
$50,000,000 by the end of 1997.


RESULTS OF OPERATIONS

         The Company's  domestic U.S.  sales  activity  commenced,  on a limited
basis,  during the fourth  quarter of 1994 and its Chinese  facilities  were not
completed  and in full  operation  until the  beginning of the third  quarter of
1995.  In 1996,  as  discussed  previously  the  Company  made some  fundamental
changes,  including  the sale of its  interest in the Xinhui JV.  Because of the
nature of activities in 1996 as compared to 1995 it is not relevant to attempt a
comparison. The following discussion relates to the twelve months ended December
31, 1996 followed by a discussion of the twelve months ended December 31, 1995.


1996

         During 1996, the Company's domestic  operations were limited due to the
lack of a comprehensive  marketing program and the refocus of Company objectives
and direction.  Domestic sales during the year were approximately $272,000 which
included the sale,  at auction,  of outdated  pen  inventory  for  approximately
$92,000.  Other  domestic sales were primarily from mail order and some over the
counter retail sales.  Total revenues of $511,000  include the sales activity of
the  Xinhui  JV for the  first  nine  months  of l996  which  was  approximately
$238,000. This is an improvement over 1995 due to an increase in their marketing
efforts,  however, sales continued to lag behind projections which is reflective
of the slow economic climate in China at this time.

         Cost of sales  for the  year  ended  December  31,  1996  was  $797,667
compared to $159,797 for 1995,  representing an increase of 499% over 1995. Cost
of sales for 1996 was very  high due the  liquidation  at  auction  of  outdated
inventory items received from the Xinhui JV. The Company received  approximately
30 cents on the dollar.  The total loss from this liquidation was  approximately
$320,000.  This is, of course, a one-time occurrence and the Company expects the
gross margin to be around 50% in the future.

         General  and  administrative  expenses  were  $1,242,756  during  1996,
compared to $1,558,256  in 1995, a decrease of 25%.  This  decrease  reflects an
effort by the  Company to cut costs  extensively,  and also due to the fact that
general and  administrative  expenses of the Xin Hui JV were not included during
the fourth quarter of 1996.  Further,  the Company incurred interest expenses of
$360,744 from the Xin Hui JV's  indebtedness.  This expense from Xin Hui JV will
not occur in 1997 since the Company has sold its interest.
    






                                       17
<PAGE>

   
1995

         During the 12 months ended December 31, 1995,  consolidated  sales were
$354,000,  compared to $475,000 for 1994, representing a decrease of 25% in 1995
from 1994,  due to a decrease  in the mail order  market.  The  Company's  sales
during the 12 months ended December 31, 1995 consisted of $250,000 by the Xinhui
JV to customers  within China and $104,000 from domestic  U.S.  sales.  Sales in
1994 were exclusively from U.S. domestic  operations,  which consisted primarily
of mail order activities.

         Cost of sales for the year  ended  December  31,  1995,  was  $160,000,
compared to $32,000 for 1994,  representing  an increase of 400% over 1994. This
increase was primarily due to the Company's  increased  sales of  low cost pens,
resulting in a lower profit margin.

         The gross profit margin for the year ended December 31, 1995 was 54.8%,
compared  to 57.3%  for 1994.  The  reduction  in gross  profit  during  1995 is
attributable to competitive  pressures to lower prices and pricing  decisions by
management intended to increase the Company's market share.

         General  and  administrative  expenses  were  $1,558,000  during  1995,
compared to $429,000 in 1994, an increase of 263%. This substantial increase was
due to expansion of the Company's  marketing  efforts both  domestically  and in
China,  through the  addition of  personnel  and related  costs.  Administrative
expenses of the Xinhui JV increased  substantially  during 1995, as construction
activities were completed and manufacturing operations commenced. In particular,
the commencement of manufacturing  operations  required the hiring of additional
sales  and  administrative  personnel.  In  addition,  during  1995 the  Company
incurred  interest expense in the amount of $851,000 in connection with loans in
the aggregate amount $4,900,152, of which $1,227,325 was obtained during 1995 to
finance equipment for the Xinhui IV factory.


Foreign Currency

         The Xinhui JV reports its operating results and financial  condition in
the local currency,  the Chinese Renminbi (the "RMB").  The effect of changes in
foreign  currency  exchange  rates had  minimal  effect on the sales and cost of
sales of the Xinhui JV during the period in which the Company was joint  venture
partner,  since it  operates  almost  exclusively  within  China and  engages in
minimal importing or exporting  activities.  For the  international  operations,
assets and  liabilities are translated  into U.S.  dollars at year-end  exchange
rates and  revenues  and  expenses  are  translated  at average  exchange  rates
prevailing during the year. Translation adjustments, resulting from fluctuations
in exchange rates, are recorded as a separate component of shareholder's equity.
    










                                       18
<PAGE>


   
Liquidity and Capital Resources

1996
         The Company's current ratio improved significantly,  at the end of 1996
over 1995 due to the sale of the Company's  interest in the Xinhui JV because of
the heavy debt incurred by the Joint Venture. Despite the sale of the Xinhui JV,
total assets almost  doubled at the end of 1996 over 1995.  This was due to the
various  investments  made by the  Company  during  1996 as has been  previously
discussed.  These  investments were financed  primarily from the issuance of the
Company's common stock.

         During  1996 the  Company  experienced  a deficit  in cash  flows  from
operations due primarily to the sale of the Company's  interest in the Xinhui JV
and because the Joint Venture had an extremely  high overhead  compared to sales
and was unable to generate  sufficient sales to cover general and administrative
costs.  With the sale of the Company's  interest in the Xinhui JV cash flows are
expected to improve.  The cash flow  deficiency  from US operations  was minimal
and, with the projected  increase in sales,  the Company  should have a positive
cash flow from operations in the future.

         In December  1996 the Company  retained the services of a consultant to
develop a $50 million real estate  portfolio  for the Company.  It is planned to
finance the purchase of this  portfolio  through a  combination  of debt and the
issuance of the Company's common stock. The real estate portfolio is expected to
produce cash flow for the Company. As part of the agreement with the consultant,
the Company  advanced to the  consultant  $1,500,000  for  consulting  fees plus
another  $150,000 for  expenses.  The Company paid these  amounts by issuing the
consultant  shares of the Company's common stock. One million shares were issued
at $1.50 per share and 300,000 shares at $0.50 per share.

         The  Company  also  has a stock  subscription  agreement  with  foreign
investors  that will provide the Company with up to $20,000 per month during the
twelve month period beginning November 1996. The Agreement provides for the sale
of up to  480,000  shares of  the  Company's  common  stock for $0.50 per share,
however,  the Company is not obligated to sell any of the shares and in its sole
discretion can determine the amount sold.

         Prepaid  expenses  increased  by  $828,000  or  1,115% to  $900,000  on
December 31, 1996 from $72,000 on December 31, 1995.  The primary reason was the
consulting fees to American  Equities to develop a real estate portfolio for the
Company.  In  addition,  there  was a  current  portion  of  $133,764  of  notes
receivable,  totaling  $2,526,779,   resulting  from  various  loans  giving  to
companies and private parties.

         Property, plant and equipment decreased by $8,985,692,  or 99.5% as the
Company sold its interest in the Xin Hui JV company. On December 31, 1996, total
property,  plant and equipment  was only  $44,809.  The decrease in property and
equipment  is due to the sale of the  Company's  interest  in the Xinhui JV. The
sale of the  interest was also the reason why current  liabilities  decreased by
$6,176,578,  or 94% to $388,503 on December 31, 1996  comparing to $6,565,081 on
December  31, 1995.  At December  31, 1996 the Company had a capital  lease with
Anja Engineering,  in the amount of $576,615, that relates to equipment that was
    


                                       19
<PAGE>

   
purchased  for the Xinhui JV. The  Company  is  currently  in dispute  with Anja
Engineering  over the amount of the note because the equipment has not performed
in accordance  with  expectations.  The Company expects to work out a settlement
that will cancel the capital  lease and result in a substantial  forgiveness  of
debt.

         The Company  believes that, with the sale of the interest in the Xinhui
JV and the  anticipated  settlement  of the Note and  capital  lease  with  Anja
Engineering,  the Company will be well  positioned in 1997 to pursue the planned
investment program of sound real estate projects and profitable,  cash producing
businesses.


1995

         Changes in cash flows resulting from the Company's operating activities
for the year ended  December  31, 1995 as compared to the prior year were due to
the commencement of full operations of the Xinhui JV during the third quarter of
1995. Accounts receivable  increased by $59,000, or 616%, to $69,000 at December
31,  1995 from  $10,000 at December  31,  1994,  and  inventories  increased  by
$294,000,  or 40.8%,  to  approximately  $1,011,000  at  December  31, 1995 from
$718,000  at December  31, 1994  primarily  as a result of the  commencement  of
operations by the Xinhui JV. Domestic operations also showed modest increases in
accounts receivable and inventories for the same reasons.

         At  December  31, 1995 the Company was  experiencing  a  deficiency  in
operating cash flow.  This deficiency was primarily the result of the operations
of the Xinhui JV and, to a lesser extent, to U.S. domestic operations. In China,
it is customary commercial practice to provide customers purchasing "on account'
with substantially more liberal payment terms than are generally  available with
the U.S., with terms of net 120 or even 180 days commonplace.

         Prepaid  expenses  decreased  by  $128,000,  or 63.9%.  to  $72,000  at
December  31, 1995 from  $200,000 at December  31,1994,  due to the  transfer of
amounts from prepaid  expenses and  construction in progress to property,  plant
and equipment during 1995. In addition,  Common Stock  subscriptions  receivable
decreased in recognition of receipt,  by the Company,  of the proceeds of Common
Stock subscription agreements fulfilled prior to December 31, 1995.

         Property,  plant and equipment  increased by $1,906,000,  or 26.8%,  to
$9,031,000  at  December  31, 1995 from  $7,125,000  at  December  31,1994,  and
deposits  and other  assets  decreased  by  $595,000,  or 96.3%,  to  $23,000 at
December  31,  1995 from  $618,000  at  December  31,  1994,  as a result of the
transfer of certain amounts to property,  plant and equipment from  construction
in  progress  in  connection  with  completion  of the  Xinhui JV plant and from
deposits in connection  with equipment on order at the end of 1994 and delivered
during 1995.

         Current liabilities increased by $3,092,000, or 82.6%, to $6,837,000 at
December 31, 1995 from $3,745,000 at December 31, 1994,  because of the transfer
of long-term debt to current debt and due to additional  borrowing by the Xinhui
JV to meet cash flow needs for completion of construction  of the  manufacturing
facilities  and to finance  operations  while sales and  marketing  programs are
implemented within China. Long-term debt decreased by approximately $480,000, or
    

                                       20
<PAGE>

48.9%, to approximately  $502,000 at December 31, 1995 from $982,000 at December
31, 1994, due to transfer of a portion thereof to current debt.

         At December 31, 1995,  $773,000 of the Company's debt was  attributable
to 12 loans from  various  banks and  companies  within  China to the Xinhui JV.
These loans have various maturity dates during calendar year 1996, and currently
bear interest at various rates ranging from 11.7% to 22.8%.  One of these loans,
in the principal amount of $682,600, is secured by machinery and equipment,  and
the remaining amounts are unsecured.

         The Company's  indebtedness  at December 31, 1995, made up of primarily
Xinhui JV debt, included several loans that were in default and therefore,  were
classified as due with one year for financial statement reporting purposes.












































                                       21
<PAGE>

Item 7.  Financial Statements


                          INDEPENDENT AUDITORS' REPORT


To the Board of Directors and Shareholders of
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES:

We have audited the  accompanying  consolidated  balance sheets of The Hartcourt
Companies,  Inc. (a Utah  corporation) and Subsidiaries as of December 31, 1996,
and the related consolidated statements of operations, shareholders' equity, and
cash  flows  for  the  year  then  ended.  These  financial  statements  are the
responsibility of the Company's management.  Our responsibility is to express an
opinion  on these  financial  statements  based on our audit.  The  consolidated
financial  statements of the Hartcourt  Companies,  Inc. and  Subsidiaries as of
December 31,  1995,  were  audited by other  auditors  whose report dated May 6,
1996, expressed an unqualified opinion on those statements.

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

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all  material  respects,  the  financial  position of The  Hartcourt
Companies,  Inc. and  Subsidiaries  as of December 31, 1996,  and the results of
their operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.




Harlan & Boettger LLP
San Diego, California
March 18, 1997


                                       














                                       22
<PAGE>


                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS



                                                December 31,       December 31,
                                                    1996               1995
                                                -----------        -----------


     ASSETS

CURRENT ASSETS
Cash                                            $       822        $   142,047
Accounts receivable net of allowance for
   doubtful accounts of $19,034 and $116,490
   in 1996 and 1995, respectively                    19,034             69,119
Trade dollar receivables                             72,054                  -
Accrued interest receivable                           3,877                  -
Note receivable, current portion (Note F)           133,764                  -
Inventory, net                                      311,424          1,011,332
Prepaid expense                                     150,000             72,051
Prepaid consulting fees (Note H)                    750,000                  -
Due from related party                               32,356            168,575
                                                -----------        -----------

     TOTAL CURRENT ASSETS                         1,473,331          1,463,124

PROPERTY AND EQUIPMENT, net (Note D)                 44,809          9,030,501

INVESTMENTS (Note B)                             17,906,520                  -

NOTES RECEIVABLE, net (Note F)                    1,190,795                  -

DEPOSITS AND OTHER ASSETS                             7,550             23,181

INTANGIBLE ASSETS                                         -            715,658
                                                -----------        -----------

                                                $20,623,005        $11,232,464


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


                                       









                                       23
<PAGE>

                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                                   (Continued)

                                                  December 31,   December 31,
                                                      1996           1995
                                                  ------------   -----------

     LIABILITIES AND SHAREHOLDERS' EQUITY             

CURRENT LIABILITIES
Accounts payable                                  $    148,569   $   502,653
Accrued expenses                                       133,747     1,539,012
Bank overdrafts                                          5,691             -
Other loans                                                  -     2,468,302
Notes payable - current portion (Note E)                56,396     1,930,114
Capital lease obligations - current portion                  -       125,000
Subscription deposits received (Note N)                 45,000             -
                                                  ------------   -----------
     TOTAL CURRENT LIABILITIES                         389,403     6,565,081

RELATED PARTY PAYABLE                                        -       272,416

MINORITY INTEREST                                            -     1,913,361

NOTES PAYABLE, net of current portion (Note E)         524,369       501,736

CAPITAL LEASE OBLIGATIONS,
   net of current portion                                    -       575,000
                                                  ------------   -----------
     TOTAL LIABILITIES                                 913,772     9,827,594

COMMITMENTS AND CONTINGENCIES (Note H)                       -             -

SHAREHOLDERS' EQUITY
Original preferred stock, $0.01 par value
   1,000 shares authorized, issued and
   outstanding                                              10            10
Common stock, $0.001 par value, 50,000,000                                   
   (10,000,000  in  1995)  shares  authorized;             
   10,560,352  shares  outstanding  at                                        
   December 31, 1996, and 2,745,803 shares                  
   issued and outstanding at December 31, 1995          10,560         2,746
Treasury stock, at cost (24,364 shares in 1996)       (279,928)            -
Additional paid-in capital                          23,204,260     3,424,662
Retained deficit                                    (3,225,669)   (2,135,892)
Foreign currency translation adjustment                      -       113,344
                                                  ------------   -----------
     TOTAL SHAREHOLDERS' EQUITY                     19,709,233     1,404,870
                                                  ------------   -----------
                                                   $20,623,005   $11,232,464


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


                                       24
<PAGE>


                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                                                   Year ended December 31,
                                                   1996             1995
                                               -----------      -----------
    REVENUES
    Product sales                              $   510,692      $   353,674
                                               -----------      -----------
         TOTAL REVENUES                            510,692          353,674

    COST OF SALES                                  797,667          159,797
                                               -----------      -----------
    Gross profit (loss)                           (286,975)         193,877

    OPERATING EXPENSES
    General and administrative                     570,774        1,006,828
    Depreciation and amortization                  671,982          551,428
                                               -----------      -----------
         TOTAL OPERATING EXPENSES                1,242,756        1,558,256
                                               -----------      -----------
    LOSS FROM OPERATIONS                        (1,529,731)      (1,364,379)

    SALE OF SUBSIDIARY (Note B)                          -                -

    OTHER INCOME (EXPENSES)
    Minority interest                                    -          564,261
    Interest expense                              (443,042)        (851,076)
    Forgiveness of debt (Note O)                   384,735             --
    Interest income                                 10,100            2,351
    Exchange gain (loss)                                 -           54,952
                                               -----------      -----------
         TOTAL OTHER INCOME (EXPENSE)              (48,207)        (229,512)
                                               -----------      -----------
    NET LOSS BEFORE INCOME TAXES                (1,577,938)      (1,593,891)

    Income taxes (Note G)                            1,800                -
                                               -----------      -----------
    NET LOSS                                   $(1,579,738)     $(1,593,891)
                                               ===========      ===========
    NET LOSS PER COMMON SHARE                  $      (.33)     $      (.62)
                                               ===========      ===========
    WEIGHTED AVERAGE NUMBER OF SHARES
       OUTSTANDING                               4,814,303        2,565,098
                                               ===========      ===========

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


                                       





                                       25
<PAGE>


                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>                                                                         
<CAPTION>
                                                                                                                               
                                           Common Stock               Preferred Stock         Additional   Common Stock 
                                    --------------------------    -------------------------     Paid-in    Subscription 
                                       Shares        Amount         Shares        Amount        Capital     Receivable   
                                    -----------    -----------    -----------   -----------   -----------   ----------    
<S>                                  <C>               <C>              <C>             <C>    <C>            <C>       
Balance, December 31, 1994            2,735,952         $2,736          1,000           $10    $3,289,672     $(700,000)
  Shares issued to attorney
  for legal fees                          9,851             10             --            --        64,990            -- 
  Capital contribution -
     officer's compensation                  --             --             --            --        70,000            -- 
  Cash paid on common stock
     subscription                            --             --             --            --            --       700,000
  Foreign currency translation
     adjustment                              --             --             --            --            --            -- 
  Net loss                                   --             --             --            --            -- 
                                    -----------    -----------    -----------   -----------   -----------   -----------
Balance, December 31, 1995            2,745,803         $2,746          1,000           $10    $3,424,662           $--
                                    ===========    ===========    ===========   ===========   ===========   ===========             
  Shares issued to attorney              27,000             27             --            --       466,533            -- 
  Shares issued for Xin Hui               5,000              5             --            --       106,770            -- 
  Shares issued for inventory            13,267             13             --            --       191,382            -- 
  Shares issued for settlement
    of payables                              94             --             --            --         2,813            -- 
  Shares issued for Peony
    Gardens deposit                   4,600,000          4,600             --            --    11,927,900            -- 
  Shares issued for consulting
    agreement                         1,300,000          1,300             --            --       898,700            -- 
  Shares issued for Alaska mines      1,298,700          1,299             --            --     5,972,721            -- 
  Shares issued to convert debt
    to equity                           425,000            425             --            --       212,075            -- 
  Stock dividends                       169,852            170             --            --           679            -- 
  Treasury stock acquired               (24,364)           (25)            --            --            25            -- 
  Sale of Harcourt Investments               --             --             --            --            --            -- 
  Net loss                                   --             --             --            --            --            -- 
                                    -----------    -----------    -----------   -----------   -----------   -----------
Balance, December 31, 1996           10,560,352        $10,560          1,000           $10   $23,204,260           $--
                                    ===========    ===========    ===========   ===========   ===========   ===========
</TABLE>

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


                                       






                                       26
<PAGE>


                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                                  (continued)
<TABLE>                                                                         
<CAPTION>
                                                                                    Foreign
                                         Treasury Stock                             Currency         Total          
                                   ---------------------------      Retained      Translation     Shareholders'    
                                      Shares         Amount          Deficit       Adjustment        Equity
                                   ------------   ------------    ------------    ------------    ------------
<S>                                      <C>          <C>           <C>               <C>           <C>       
Balance, December 31, 1994                   --             --       $(542,001)          $(915)     $2,049,502
  Shares issued to attorney
  for legal fees                             --             --              --              --          65,000
  Capital contribution -
     officer's compensation                  --             --              --              --          70,000
  Cash paid on common stock
     subscription                            --             --              --              --         700,000
  Foreign currency translation
     adjustment                              --             --              --         114,259         114,259
  Net loss                                   --             --      (1,593,891              --      (1,593,891)
                                   ------------   ------------    ------------    ------------    ------------
Balance, December 31, 1995                   --             --     $(2,135,892)       $113,344      $1,404,870
                                   ============   ============    ============    ============    ============
  Shares issued to attorney                  --             --              --              --         466,560
  Shares issued for Xin Hui                  --             --              --              --         106,775
  Shares issued for inventory                --             --              --              --         191,395
  Shares issued for settlement
    of payables                              --             --              --              --           2,813
  Shares issued for Peony
    Gardens deposit                          --             --              --              --      11,932,500
  Shares issued for consulting
    agreement                                --             --              --              --         900,000
  Shares issued for Alaska mines             --             --              --              --       5,974,020
  Shares issued to convert debt
    to equity                                --             --              --              --         212,500
  Stock dividends                            --             --            (849)             --              --
  Treasury stock acquired                24,364       (279,928)             --              --        (279,928)
  Sale of Harcourt Investments               --             --         490,810        (113,344)        377,466
  Net loss                                   --             --      (1,579,738)             --      (1,579,738)
                                   ------------   ------------    ------------    ------------    ------------
Balance, December 31, 1996               24,364      $(279,928)    $(3,225,669)             --     $19,709,233
                                   ============   ============    ============    ============    ============
</TABLE>

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

                                       







                                       27
<PAGE>


                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                    Year ended December 31,
                                                     1996            1995
                                                 -----------     -----------
CASH FLOWS FROM OPERATING ACTIVITIES     
Net loss                                         $(1,579,738)    $(1,593,891)
Adjustments to reconcile net income
   to net cash
used in operating activities:
Minority interest in loss of joint venture         (1,339,225)       (564,261)
Write off of intangible assets                       698,039            --
Depreciation and amortization                        671,982         551,428
Allowance for doubtful accounts                      (97,456)        116,490
Forgiveness of debt                                 (384,735)              -
Accrued interest income                               (8,871)              -
Stock dividends                                          849               -
Sale of Harcourt Investments                         489,961               -
Changes in operating assets and liabilities:
   Increase in:
     Accounts receivable                             132,342        (175,958)
     Inventory                                       647,256        (293,697)
     Prepaid expenses                                 (9,863)        127,512
     Note receivables and other receivables         (347,824)        603,159
     Accounts payable and accrued expenses           341,912       1,363,056
                                                 -----------     -----------

NET CASH PROVIDED BY (USED IN)
   OPERATING ACTIVITIES                             (785,371)        133,838
                                                 -----------     -----------

CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment                 (427,454)       (259,919)
Construction in progress                                   -      (2,169,550)
Purchase of other assets                                (574)        (36,851)
                                                 -----------     -----------

NET CASH USED IN INVESTING ACTIVITIES               (428,028)     (2,466,320)
                                                 -----------     -----------


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












                                       28
<PAGE>


                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (Continued)

                                                    Year ended December 31,
                                                     1996            1995
                                                 -----------     -----------

CASH FLOWS FROM FINANCING ACTIVITIES
Bank overdraft                                         5,691               -
Common stock subscriptions                            45,000         200,000
Loan from Bank of China                              507,801         849,535
Loans from shareholders                              177,485         205,984
Issuance of common stock                             186,632         835,000
Other loans                                          149,565         171,806
Additional contributions by foreign partner                -          15,634
                                                 -----------     -----------

NET CASH PROVIDED BY FINANCING ACTIVITIES          1,072,174       2,277,959
                                                 -----------     -----------

NET DECREASE IN CASH                                (141,225)        (54,523)

CASH, BEGINNING OF PERIOD                            142,047         196,570
                                                 -----------     -----------

CASH, END OF PERIOD                              $       822     $   142,047
                                                 ===========     ===========



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























                                       29
<PAGE>


                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


A. Summary of Significant Accounting Policies:

        Organization and Nature of Operations

        Hartcourt   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  operation,   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,
        the Company's interest was reduced to a 52% interest in the Xinhui JV.

        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 1996, a reverse stock split changed the number
        of  shares  issued  and  outstanding  to  2,735,952.   The  consolidated
        financial  statements  were  restated  to  reflect  this  capital  stock
        transaction.  Stardust's  name was changed to 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  Hartcourt  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  interests.  In 1995,
        stock  dividends  and a reverse stock split changed the number of shares
        issued to 38,625 to acquire  Hartcourt Pen. The  consolidated  financial
        statements were restated to reflect these capital stock transactions.

        In August  1996,  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 (Note B).



                                       30
<PAGE>


                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


A.      Summary of Significant Accounting Policies (continued):

        In September 1996  Hartcourt Pen was spun-off from Harcourt  Investments
        to Hartcourt Companies,  Inc. by Harcourt Investments  transferring 100%
        of  stock  ownership  in  Hartcourt  Pen to  Hartcourt  Companies,  Inc.
        Pursuant to the  spin-off in September  1996 the Company  sold  Harcourt
        Investments to CKES, Inc. of Sunnyvale, California (Note B).

        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 (Note B).

        Basis of Accounting

        The Company's  policy is to use the accrual  method of accounting and to
        prepare and present  financial  statements  which  conform to  generally
        accepted accounting principles.

        Cash

        Cash includes cash on hand and cash in checking and savings accounts.

        Inventory

        Inventory  is  stated  at the  lower  of  cost  or  market,  cost  being
        determined on the first-in, first-out (FIFO) method.

        Plant and Equipment

        Plant and equipment are stated at cost, and  substantially  all balances
        relate to Xinhui JV in 1995. Depreciation is provided over the estimated
        useful lives of the respective assets on the straight-line basis ranging
        from five to twenty years.

        All  direct  and  attributable  costs  relating  to the  acquisition  or
        construction  of the plant  facilities,  machinery and molds  (including
        interest  and  exchange  differences  on related  borrowings  during the
        construction  period)  were  capitalized  as   construction-in-progress.
        Construction-in-progress was reclassified to property and equipment upon
        completion in 1995.



                                       31
<PAGE>


                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


A. Summary of Significant Accounting Policies (continued):


        Chinese Joint Venture

        Xinhui JV is a joint  venture  between  Xin Hui Orient  Light  Industry,
        Ltd.,  a  Chinese  government-owned  company  with  an  anticipated  48%
        interest, and Harcourt Investments with an anticipated 52% interest. The
        ownership  interest of each investor has not been  finalized.  Xinhui JV
        was incorporated in November 1992 as a limited liability Chinese-foreign
        equity joint venture. No material transactions occurred until April 1993
        when construction began on the plant facilities.  Limited  manufacturing
        commenced in December 1994; and by July 1995 the manufacturing plant was
        fully operational. All sales are domestic in China in 1995 and 1994. The
        joint venture had approximately $40,000 of export sales in 1996.

        Principles of Consolidation

        The accompanying  consolidated financial statements include the accounts
        of The  Hartcourt  Companies,  Inc. and its  wholly-owned  subsidiaries:
        Harcourt  Investments,  which  includes the  accounts of  majority-owned
        Xinhui  JV  and  Hartcourt  Pen.  For  purposes  of  these  consolidated
        financial statements, the Hartcourt Companies, Inc. and its subsidiaries
        will  be  referred  to  collectively  as  "the  Company."  All  material
        intercompany   transactions  and  balances  have  been  eliminated.   In
        accordance with generally  accepted  accounting  principles,  all of the
        assets,  liabilities  and  operations  of Xinhui JV are reflected on the
        consolidated  financial  statements.  The interest of the joint  venture
        partner in the net assets and net loss of the joint venture are reported
        as "Minority Interest" on the consolidated balance sheets and statements
        of operations.

        Foreign Currencies (Xinhui JV)

        Assets and liabilities  denominated in foreign currencies are translated
        into the  currency  of U.S.  dollars  using  the  exchange  rates at the
        balance sheet date. For revenues and expenses, the average exchange rate
        during the year was used to  translate  China  (RMB) into U.S.  dollars.
        Transaction gains and losses resulting from changes in the exchange rate
        are  included  in the  determination  of the net  loss  for the  period.
        Translation   gains  and  losses  are  excluded  from  the  consolidated
        statements  of  operations  and are  credited  or charged  directly to a
        separate component of shareholders' equity.







                                       32
<PAGE>


                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


A. Summary of Significant Accounting Policies (continued):

        Income Taxes

        Income taxes,  are provided for using the liability method of accounting
        in accordance with Statement of Financial  Accounting  Standards No. 109
        (SFAS  109),  "Accounting  for Income  Taxes." A  deferred  tax asset or
        liability is recorded for all temporary  differences  between  financial
        and tax reporting.  Deferred tax expense  (benefit) results from the net
        change during the year of deferred tax assets and liabilities.

        Investments

        Investments  are provided for using the deposit  method of accounting in
        accordance with Statement of Financial Accounting Standards No. 66 (SFAS
        66),  "Accounting  for  Sales of Real  Estate."  The  deposit  method of
        accounting   shall  be  used   until  a  sale   has  been   consummated.
        "Consummation" usually requires that all conditions precedent to closing
        have been performed,  including that the buildings, in the Peony Gardens
        acquisition,  be certified for occupancy and that the geological  survey
        of the  Lodestar  claims in Alaska  have a minimum  value of  $6,000,000
        (Note B).

        Loss Per Share

        Net loss per share has been calculated by dividing the net loss for each
        period presented by the average number of common shares  outstanding for
        the respective period.  Common stock equivalents,  such as the preferred
        stock  outstanding,  have not been considered in the  calculation  since
        their effect would be anti-dilutive.  The number of common shares issued
        under the stock  subscription  agreement as well as the number of shares
        issued to the  Company's  attorney  for legal fees were  included in the
        calculation since these shares were issued in July 1995.

        Use of Estimates

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

        Fair Value

        The Company has cash,  receivables  and  accounts  payable for which the
        carrying value  approximates  fair value due to the short-term nature of
        these instruments.


                                       33
<PAGE>


                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


B. Investments:

        Sale of Harcourt Investments, Inc.

        In September 1996 the Company sold its wholly-owned subsidiary, Harcourt
        Investments (USA), Inc., (Harcourt Investments) to CKES, Inc. located in
        Sunnyvale,  California. Harcourt Investments owned a 52% interest in Xin
        Hui Harcy Modern Pens,  Ltd., a joint venture in the Peoples Republic of
        China. All of the outstanding  shares of Harcourt  Investments were sold
        for a $3 million  dollar  note  receivable  which is payable in 60 equal
        monthly  installments  of  $50,000  each,  beginning  October  1,  1998.
        Interest  accrues  at 6% per annum and is  payable in full at the end of
        the loan period. The note receivable is secured by a security agreement.
        This  agreement  allows the  Company to have a security  interest in all
        assets of CKES, Inc.

        General accepted accounting principles require the recording of the note
        receivable  at its fair value when the face amount  does not  reasonably
        represent  the  value  of  consideration   received.   Under  Accounting
        Principles Board No. 21 the note receivable is discounted  ($753,985) to
        its  approximate   fair  value  at  December  31,  1996.  Per  Financial
        Accounting Standards No.114, the note receivable was considered impaired
        at December 31, 1996 due to the present  operating  condition of Xin Hui
        plant and the length of time before  payment  begins by CKES,  Inc.  The
        Company has decided to reserve a substantial portion ($1,202,220) of the
        receivable due to payments being deferred to a later period.

        Investment in Peony Gardens

        In August 1996 the Company  purchased an apartment  complex located near
        Beijing,  China for $22 million  from  NuOasis  International,  Inc. The
        purchase  price  included  the  issuance  of 4 million  shares of common
        stock,  valued at $10 million,  and a promissory note to NuOasis for $12
        million.  The  Note is due  and  payable  on  August  17,  1997  or,  if
        construction is not complete,  then the note is extended to the date the
        certificate  of  occupancy  is  received.  Under the  deposit  method of
        accounting in accordance with Financial  Accounting Standards No. 66 the
        promissory  note for  $12,000,000 is currently  being deferred until the
        complete  consummation  of the Peony  Gardens  sale.  Also the 4 million
        shares of common stock is recorded as a deposit at December 31, 1996.









                                       34
<PAGE>


                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


B. Investments: (continued)

        Investment in Alaskan Gold Claims

        In  September  1996 the Company  purchased  several  gold mining  claims
        encompassing  320 acres of land in the state of Alaska  for $6  million.
        The  purchase  was made by  issuing  1,298,700  shares of the  Company's
        common stock.  Under the deposit method of accounting in accordance with
        Financial  Accounting  Standards No. 66, the 1,298,700  shares of common
        stock is recorded as a deposit at December 31, 1996.

C. Inventories:

        Inventories consist of the following:

                                            December 31,     December 31,
                                                1996             1995
                                              ---------       ----------
                Raw materials                 $       -       $  265,847
                Work in process                       -           30,693
                Finished goods                  311,424          714,792
                                              ---------       ----------

                                              $ 311,424       $1,011,332
                                              =========       ==========

        The majority of inventory in 1995 is related to the Xin Hui JV, thus the
        sale of Xin Hui JV has  significantly  reduced inventory at December 31,
        1996.





















                                       35
<PAGE>


                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)



 D.     Property and Equipment:

        Property and equipment are summarized as follows:
                                              
                                                 December 31,   December 31,
                                                     1996           1995
                                                    -------      ----------
              Furniture and fixtures                $28,600      $3,479,275
              Leasehold improvements                  6,197         264,108
              Office equipment                       34,926       5,520,301
              Lab equipment                           1,500          68,987
              Vehicles                                    -         123,791
                                                    -------      ----------

                                                     71,223       9,456,462

              Less accumulated depreciation          26,414         425,961
                                                    -------      ----------

              Property and equipment, net           $44,809      $9,030,501
                                                    =======      ==========
                           
        The majority of property and equipment in 1995 is related to the Xin Hui
        JV, thus the sale of Xin Hui JV has  significantly  reduced property and
        equipment at December 31, 1996.

E. Notes Payable:

        Notes payable are summarized as follows:
                                                    December 31,    December 31,
                                                        1996            1995
                                                    -----------     -----------

        Loan payable, Bank of China, maturity in
           March 1997 with interest at a floating
           rate (17.3% at December 31, 1995) and
           repayment terms specified by the Bank
           of China.                                $         -     $1,901,265










                                       
                                       36
<PAGE>


                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


E.      Notes Payable: (continued)                      
                                                      December 31,  December 31,
                                                         1996           1995    
                                                      ----------     ---------- 
        Loan payable, vendor, with interest at 12%                              
           and monthly payments of principal and                                
           interest of $15,253 through March 1998              -        429,585 
                                                                                
        Loan payable, shareholder, with interest                                
           at 6% and monthly payments of principal                              
           and interest of $4,000 through Mid 1995             -         40,000 
                                                               
        Loan payable, vendor, with interest at 10%                              
           and monthly payments of principal of                                 
           $5,000 through November 1996. The                                    
           $4,150 balance was paid in full in 1997         4,150         61,000 
                                                                                
        Loan payable, Anja Engineering, with                
           interest at 8.5% and monthly principal                               
           and interest payments of $12,075                                     
           beginning May 1, 1997 through April                                  
           2002.                                         576,615              - 
                                                      ----------     ---------- 
                                                                                
                                                         580,765      2,431,850 
                                                                                
            Less current portion                          56,396      1,930,114 
                                                      ----------     ---------- 
                                                      $  524,369     $  501,736 
                                                      ==========     ========== 
                                                     
        The Company is currently negotiating with Anja Engineering to settle the
        loan payable with regards to the cancellation of the capital lease.

















                                       37
<PAGE>


                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


E.      Notes Payable: (continued)

        The following is a summary of principal maturities of long-term debt:

                       Year ending December 31,
                       -----------------------
                                1997                          $ 56,396
                                1998                           104,329
                                1999                           113,551
                                2000                           123,588
                                2001                           134,512
                               Thereafter                       48,389
                                                              --------
                               Total                          $580,765
                                                              ========

F.      Notes Receivable:

        Notes  receivable  at  December  31,  1996 and  1995,  consisted  of the
        following:
                                                        1996         1995
                                                     ----------   ----------
        Note  receivable  from  former  attorney
           Kevin  Quinn,  interest at 8%,
           balance due December 31, 1997,
           secured by real estate                    $ 109,764      $      -

        Note receivable from CKES, Inc., $3,000,000
           face amount, 6% interest per annum,  due
           in  monthly  installments  of  principal
           only  of  $50,000 beginning October 1,
           1998, interest and unpaid principal due
           and payable on October 1, 2003,  (less 
           unamortized  discount  based on 12%
           imputed interest of $753,985 and
           $1,202,220 of loan impairment)            $1,043,795            -














                                       38
<PAGE>


                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


F.      Notes Receivable: (continued)

                                                        1996         1995
                                                     ----------   ----------
        Note receivable from Yafa,  Inc., 9%
           interest per annum,  due in monthly
           installments of $2,000,  accrued
           interest and unpaid  principal due
           and payable on or before August 15,
           1999.                                        171,000            -
                                                     ----------   ----------

        Total                                         1,324,559            -

        Less current portion                            133,764            -
                                                     ----------   ----------
                                                     $1,190,795   $        -
                                                     ==========   ==========

G.      Income Taxes:

        As  discussed  in Note A,  the  Company  accounts  for  income  taxes in
        accordance  with SFAS 109. The  provision  for income taxes for the year
        ended  December  31,  1996  consists  of  the  $800  minimum  California
        franchise tax and $100 minimum Utah tax for both 1996 and 1995.

        Provisions for income taxes are summarized as follows:
                                          
                                                      Year ended
                                              --------------------------
                                              December 31,   December 31,
                                                  1996           1995
                                              -----------    -----------
               Current income taxes              $1,800         $    -
               Deferred income taxes                  -              -
                                                 ------         ------

               Provision for income taxes        $1,800         $    -
                                                 ======         ======











                                       39
<PAGE>


                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

G.    Income Taxes (continued):

      As a result of adopting SFAS 109, the Company has recognized  deferred tax
      assets for the tax effects of  temporary  differences  for the years ended
      December 31, 1996 and 1995 as follows:

                                                   1996            1995
                                                ---------       ---------
      Deferred tax assets:
         Net operating losses                   $ 569,592       $ 248,000
                                                ---------       ---------

         Gross deferred tax assets                569,592         248,000
         Valuation adjustment                    (569,592)       (248,000)
                                                ---------      ----------

               Net deferred tax assets          $       -       $       -
                                                =========       =========

      The  Company  has  net   operating   loss   carryforwards   remaining   of
      approximately  $2,344,000.  The regular net operating loss  carryforwards,
      which are  approximately  the same as the  alternative  net operating loss
      carryforwards,  if not utilized,  will expire in varying  amounts  through
      2011.

H.    Commitments and Contingencies:

      Operating Leases

      The Company leases its facilities  under an operating lease agreement from
      Larry M. Mitobe which expires in May,  2001.  Rental  expense for the year
      ended December 31, 1996 was $27,732.

      Minimum future rental payments under the operating lease are as follows:

                      December 31,                          Amount
                      ------------                         --------
                          1997                             $ 17,220
                          1998                               22,140
                          1999                               24,600
                          2000                               24,600
                          2001                               10,250
                                                           --------

                          Total future rental payments      $98,810
                                                           ========             





                                       40
<PAGE>


                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


H.      Commitments and Contingencies:(continued)

        Consulting Agreement

        On December 30, 1996 the Company has entered into a consulting agreement
        with American Equities,  LLC (American  Equities),  a California Limited
        Liability Company. The Company intends to acquire,  manage and develop a
        real  estate  portfolio   including  office,   retail,   industrial  and
        multi-family  properties and raw land. The consulting  period expires on
        December  31,  2001.  The  minimum   performance   requirements  of  the
        consulting  agreement will increase assets and/or market  capitalization
        of Harcourt  Companies,  Inc. by at least  $50,000,000  by December  31,
        1997.

        Pursuant  to the terms of the  agreement  the Company  issued  1,000,000
        shares at $1.50 per share as an advance against future fees to be earned
        by American Equities.  The Company also advanced 300,000 shares at $0.50
        per share to  American  Equities  for future  operating  expenses.  Both
        transactions  have been  discounted due to the restriction on the shares
        issued.

I.      Supplemental Cash Flow Information:
                                                            1996       1995
                                                        ----------  ---------
          Cash paid for interest and income
          taxes:       

               Interest                                 $        -   $  9,524
               Income taxes                             $      900   $      -

          Noncash investing and financing
          activities:

               Common stock issued for inventory        $  191,414          -
               Common stock issued for interest
                  in gold claims                        $5,974,020          -
               Treasury stock acquired                  $  418,618          -
               Common stock issued to settle
                 liabilities                            $  109,589          -
               Common stock issued for purchase of
                  Peony Gardens                         $9,920,000          - 
               Common stock issued for brokerage fees   $2,012,500          -
               Common stock issued for converting
                  debt to equity                        $  212,500          -
               Common stock issued for prepayment of
                  Consulting fees                       $  900,000          -
               Note received for sale of subsidiary     $1,043,795          -



                                       41
<PAGE>


                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


J.      Capital Stock:

        In April 1995, the Company's  Articles of Incorporation  (Articles) were
        amended to authorize the issuance of preferred  stock.  As amended,  the
        Articles  provide  that the total  number  of shares of stock  which the
        Company shall have the authority to issue is  60,001,000,  consisting of
        50,000,000  shares of Common  Stock,  $0.001 par value;  1,000 shares of
        original  preferred  stock  having a par value of $0.01  per share  (the
        Original  Preferred  Stock);  and 10,000,000  shares of Preferred Stock,
        having a par value of $0.01 per share (the Class A Preferred Stock).

        Original Preferred Stock

        Until  December  31, 2010,  with  respect to the election of  directors,
        holders of  Original  Preferred  Stock  shall be  entitled to elect that
        number of  directors  which  constitutes  three-fifths  (3/5ths)  of the
        authorized  number of members  of the Board of  Directors  and,  if such
        three-fifths  (3/5ths)  is not a  whole  number,  then  the  holders  of
        Original  Preferred  Stock shall be entitled to elect the nearest higher
        whole number of directors  that is at least  three-  fifths  (3/5ths) of
        such membership.

        The holders of shares of Original  Preferred Stock shall not be entitled
        to receive any dividends.

        The holders of record of shares of Original  Preferred  Stock shall,  at
        their  option,  be entitled to convert each share of Original  Preferred
        Stock into 1,000 shares of fully paid and  non-assessable  Common Stock.
        Such shares are owned by the President of the Company.

        In the event of liquidation,  dissolution,  or winding up of the affairs
        of the Company whether  voluntary of involuntary,  the holders of record
        shall be entitled  to be paid the full par value of  Original  Preferred
        Stock, and no more.

J.      Capital Stock: (continued)

        Class A Preferred Stock

        The 10,000,000 shares of authorized and unissued Class A Preferred Stock
        may be split  with  such  designations,  powers,  preferences  and other
        rights and qualifications,  limitations and restrictions  thereof as the
        Company's  Board of Directors  elects for a given series.  To date, only
        one series  has been  authorized  with  defined  rights  and  privileges
        (Series B Preferred Stock). No shares have been issued.

        On August 2, 1996 the Company  effectuated  a one for five (1:5) reverse
        stock split. The effect of this event has been restated retroactively on
        the statement of stockholders' equity.

                                       42
<PAGE>


                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


K.      Stock Option Plan:

        In April  1995,  the Company  adopted a stock  option plan (the Plan) to
        attract  and retain  qualified  persons  for  positions  of  substantial
        responsibility as officers, directors,  consultants,  legal counsel, and
        other positions of  significance  to the Company.  The Plan provides for
        the issuance of both Incentive  Stock Options and Non - Qualified  Stock
        Options.  The Plan,  which is  administered  by the Board of  Directors,
        provides for the issuance of a maximum of 2,000,000  options to purchase
        shares of common stock at the market price thereof on the date of grant.
        Such options are  generally  exercisable  over a 10 year period from the
        date of grant.  Each  option  lapses  90 days  after  the  optionee  has
        terminated his continuous activity with the Company,  except that if his
        continuous  activity with the Company terminates by reason of his death,
        such option of the deceased  optionee  may be exercised  within one year
        after the death of such  optionee.  Options  granted  under the Plan are
        restricted  as to sale or transfer.  No options have been granted  under
        this plan as of December  31, 1995.  One million  shares of common stock
        options were granted to an officer of Hartcourt Companies,  at $0.50 per
        share as of December 31, 1996.
        These options expire December 31, 2004.

L.      Warrants:

        As of December  31,  1996 there are  2,000,000  outstanding  warrants to
        purchase  2,000,000  shares of $.001 par value  common  stock at $0.30 -
        $2.10 per share.  No warrants  have been  exercised  as of December  31,
        1996.

M.      Foreign Operations:

        Selected  financial  data for the  Company's  foreign  operations  is as
        follows:

                                  September 27, 1996     December 31, 1995
                                  ------------------     -----------------

               Revenues              $   458,236            $    249,784

               Operating loss        $(2,132,168)           $ (1,499,598)

               Total assets          $ 9,228,255            $ 10,366,707

N.      Stock Subscription Agreements:

        In  October  1996  the  Company  entered  into  two  stock  subscription
        agreements.  Terms of the  agreement  include that the  subscribers  can
        purchase up to 20,000  common  shares of Hartcourt  Companies,  Inc. per
        month for 12 months at $0.50 per share.

                                       43
<PAGE>


                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


O.      Forgiveness of Debt:

        During 1996 the Company recognized debt forgiveness of $367,983 relating
        to several notes owed to three  vendors and $16,752 in accounts  payable
        owed to one additional vendor, which were forgiven.

P.      Subsequent Events:

        On April 8, 1997 the Company  entered into a preliminary  stock purchase
        agreement  with Michael V.  Caruana,  officer and owner of Pego Systems,
        Inc.  The  Company  intends to acquire  all  outstanding  shares of Pego
        Systems,  Inc. The parties are negotiating final terms of this agreement
        and estimates completion of the transaction mid - year 1997.



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

         None

                                    PART III

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

The  following  table sets forth  certain  information  about the  directors and
executive officers of the Company.

Name                         Age                        Position
----                         ---                        --------
Dr. Alan V. Phan              51               Chairman of the Board, President,
                                               Chief Executive Officer
                                               and Chief Financial Officer

Frederic Cohn                 57               Secretary, Treasurer and Director

Kenneth Silva                 70               Vice-President, Marketing
                                               and Sales and Director

Michael L. Caruana            53               Director

James De Rosa                 65               Director

Dr. Alan V. Phan is the founder of the Company and has been Chairman, President,
Chief Executive Officer and Chief Financial Officer since November 1993. He also
is the founder of Harcourt  Investments  and Hartcourt  Pen. See Part I, Item 1,
"Description of Business--General."  From 1986 to October 1993, Dr. Phan was the


                                       44
<PAGE>


owner of Hartcourt Consulting, an export management firm and, from 1980 to 1986,
he was the  Executive  Vice  President of EM Kay Group (which owned Magic Marker
Industries).  In addition to his activities in the export and writing instrument
business,  Dr. Phan has been involved in gold mining  operations,  as manager in
the  Phillippines  (1971-1972) for Eisenberg Group, a company located in Israel.
He was active in the real estate industry from 1976 until 1982 as owner of Alpha
Development,  a California real estate  company.  Dr. Phan received his academic
training and degrees at Pennsylvania State University (1967), and Sussex College
of Technology, Sussex England (1975).

Frederic  Cohn has been a director and  Secretary  since  November  1993.  He is
responsible  for  all  financial,   tax,   accounting,   personnel,   management
information system and administrative functions. From 1990 to 1993, Mr. Cohn was
the  President  and Chief  Executive  Officer of Aladdin  Enterprises,  Inc., an
entertainment equipment leasing firm, located in Santa Monica,  California.  Mr.
Cohn is a graduate of New York Law School (1978).

Kenneth Silva has been Vice President, Sales and Marketing and a director, since
January 1996. Prior to joining the Company, Mr. Silva was a Vice President and a
Manager for a number of banks, including Capital National Bank (two years), Bank
of Downey (four years),  Interstate Bank (10 years), and 22 years at Wells Fargo
Bank where he served as Vice President of Business Development.  Mr. Silva holds
a B.A. degree in accounting and banking from Armstrong College in San Francisco,
California  (1964),  and  attended  graduate  courses at American  Institute  of
Banking.

Michael L.  Caruana  has been a  director  since  June  1994.  Mr.  Caruana is a
graduate of  California  State  University at Long Beach (1972) with a degree in
engineering. He currently is the President, Chief Executive Officer and majority
owner  of  Pego  Systems,   Inc.,  an  engineering   and  industrial   equipment
manufacturing  company, and has held various positions with Pego since 1975. See
Part I,  Item 1,  "Description  of  Business--General"  and Part  III,  Item 12,
"Certain Relationships and Related Transactions."

James De Rosa  has been a  director  of the  Company  since  September  1996.  A
graduate of Tufts College (1960), and Suffolk Law School, Boston,  Massachusetts
(1963),  Mr. De Rosa is a Real Estate investor and developer and has been active
in the real estate  business  since 1974.  Mr. De Rosa is  President  of De Rosa
Properties, Inc.

Directors serve for a term of one year or until their successors are elected and
qualified.  Directors do not receive any cash  compensation for serving as such,
although  the Company is  contemplating  the  adoption  of a plan to  compensate
directors  through the issuance of shares of Common  Stock.  The terms of such a
plan currently are under consideration and there can be no assurance as to when,
if ever, it will be implemented.

Executive  officers  are  appointed  by and  serve at the  will of the  Board of
Directors.  There  are no  family  relationships  between  or  among  any of the
directors or executive officers of the Company.






                                       45
<PAGE>


As the sole holder of the 1,000 outstanding  shares of Original Preferred Stock,
Dr.  Phan is  entitled  to elect 3/5 of the number of  members of the  Company's
Board of  Directors,  whereas  the holders of the  outstanding  shares of Common
Stock are entitled to elect 2/5 of that number. See Part I, Item 8, "Description
of Securities" for more information about the rights of the Common, and Original
Preferred stockholders.

By virtue of his activities in founding and  organizing the Company,  as well as
his beneficial ownership of its voting securities,  Dr. Phan may be deemed to be
a "promoter" of the Company.

Item 10.  Executive Compensation.

The  following  summary   compensation  table  sets  forth  certain  information
regarding compensation paid during each of the three fiscal years ended December
31,1996,  1995 and 1994 to the person serving as the Company's  Chief  Executive
Officer  during the years ended  December 31, 1996.  No annual  compensation  in
excess  of  $100,000  was  awarded  to,  earned  by or paid to any  director  or
executive officer of the Company for services  rendered in any/all  capacity/ies
in any of the fiscal years indicated.


Name and Principal Position                  Fiscal Year    Annual Salary
---------------------------                  -----------    -------------
Dr. Alan V. Phan, Chief Executive Officer       1996            $100,000
                                                1995            $ 70,000
                                                1994            $ 35,000


There is no  employment  agreement  with any  executive  officer.  There  are no
salary,  bonus  or  incentive  plans  covering  cash or  securities  except  the
Company's  1995 Stock Option Plan (the  "Plan").  Under the Plan,  incentive and
non-qualified  stock  options  may be granted  to  directors,  officers  and key
employees to purchase up to 2,000,000  shares of Common Stock at an option price
not less  than the fair  market  value of the  stock at the time the  option  is
granted;  the option  period  shall not exceed ten years from the date of grant.
Except  in the case of the  death or  disability  of an  option  holder,  vested
options lapse 90 days  following  termination  of  continuous  employment by the
Company.  Vested  options  lapse one year  after the death or  disability  of an
option holder. No options have been granted under the Plan.

Item 11.  Security Ownership of Certain Beneficial Owners and Management

The following table sets forth  information as of December 31, 1996 with respect
to persons known to the Company to be the  beneficial  owners of more than 5% of
its voting  securities  and with  respect to the  beneficial  ownership  of such
securities  by each  director of the Company and by all  directors and executive
officers of the Company as a group.








                                       46
<PAGE>

   
Name and Address of                 Amount and Nature of          Percent of
Beneficial Owner                 Beneficial Ownership (1) (2)    Common Stock
-------------------              ----------------------------    ------------
Dr. Alan V. Phan                       1,478,878     (3)             14.0%
19104 South Norwalk Boulevard
Artesia, California 90701

Frederic Cohn                              1,609                         *
19104 South Norwalk Boulevard
Artesia, CA 90701

Michael L. Caruana                         1,609                         *
19104 South Norwalk Boulevard
Artesia, CA 90701

James De Rosa                              1,609                         *
19104 South Norwalk Boulevard
Artesia, CA 90701

Philadep & Co.                           617,989     (8)              5.8%
P.O. Box 15891
Philadelphia, PA 19103-0891

CEDE & Co.                               536,351     (7)              5.1%
55 Water Street 2SL
New York, NY 10041

Tiana Corporation                      1,022,949     (4) (5)          9.7%
Kai Tak Commercial Building
Room 704A
317 Des Voeux Road Central
Hong Kong, China

NuOasis International, Inc.            4,000,000     (6)             37.8%
                                                  
2 Park Plaza, Suite 470


Irvine, California 92714

All officers and directors
as a group                             1,483,705                     14.1%
    
___________________
*Less than 1%

(1)      Except as  otherwise  indicated,  each of the  parties  listed has sole
         voting and investment  power with respect to all shares of Common Stock
         indicated.  Beneficial  ownership is calculated in accordance with Rule
         13-d-3(d) under the Securities Exchange Act of 1934, as amended.

(2)      Except as otherwise indicated, shares held are Common Stock.


                                       47
<PAGE>


(3)      Includes (i) an aggregate of 1,000,000  shares issuable upon conversion
         of 1,000  shares of Original  Preferred  Stock and (ii) an aggregate of
         171,718  shares  held by two sons who  reside  with Dr.  Phan  when not
         attending college and law school, respectively.  the sole holder of the
         1,000  outstanding  shares of  Original  Preferred  Stock,  Dr. Phan is
         entitled to elect 3/5 of the number of members of the  Company's  Board
         of Directors.

(4)      As the owner of 20,000 shares of stock in Tiana  corporation, Dr. Alan
         V. Phan's son, Art Phan, holds a 20% interest in Tiana  Corporation. 
         Dr. Phan disclaims any beneficial ownership in these shares.

   
(5)      Tiana  Corporation  is a British  Virgin Islands  corporation  owned
         20% by Art Phan, 80% by Tan Geok Ser in Singapore and various Asian
         business  groups  located  in   Hong  Kong,  Singapore,  Malaysia,  and
         Indonesia.

(6)      In August 1996 the Company  purchased an apartment complex located near
         Beijing,  China for $22 million  from  NuOasis  International,  Inc. (a
         wholly owned  subsidiary  of Nona  Morelli's  II).  The purchase  price
         included the issuance of 4 million  shares of common  stock,  valued at
         $10 million, and a promissory note to NuOasis for $12 million. The Note
         is due and  payable  on  August  17,  1997 or, if  construction  is not
         complete,  then the note is  extended  to the date the  certificate  of
         occupancy is received. NuOasis is a non-affiliate of the Company.

(7)      CEDE & Co. Is a deposit trust corporation (stock brokerage company).

(8)      Philadep  &  Co.  is  a  deposit  trust  corporation  (stock  brokerage
         company).
    

The Company is not aware of any  arrangement  which might  result in a change in
control in the future.

Item 12: Certain Relationships and Related Transactions

   
Dr.  Alan Phan,  a director,  executive  officer  and  promoter of the  Company,
acquired ten shares of Hartcourt  Investments for nominal consideration upon its
organization in April 1993.  Pursuant to a stock exchange agreement dated August
8, 1994 with Eastern Rocester Limited, Harcourt Investments acquired a 60%
interest in the Xinhui JV in exchange for 250,000 shares of Harcourt Investments
common  stock,  representing  80% of the common  stock of  Harcourt  Investments
outstanding  immediately  subsequent to the transaction.  After giving effect to
this transaction, Harcourt Investments was held 80% by Eastern Rocester Limited,
3% by Dr. Phan and 18% by Pacific Rim Capital.  See Part I, Item I, "Description
of  Business--General"  and Part III, Item 9,  "Directors,  Executive  Officers,
Promoters and Control Persons."
    





                                       48
<PAGE>


The Company  acquired all of the outstanding  shares of Harcourt  Investments in
exchange for  6,110,337  shares of the  Company's  Common  Stock  pursuant to an
Agreement and Plan of Reorganization  dated November 5, 1994. In connection with
this transaction,  Dr. Phan received 38,625 of such shares. Michael Caruana, who
currently serves as a director of the Company, was Vice President of the Company
at  the  time  of  this  transaction.  See  Part  I,  Item  1,  "Description  of
business--General"  and  Part  III,  Item  9,  "Directors,  Executive  Officers,
Promoters and Control Persons.

Dr. Phan acquired ten shares of Hartcourt Pen for nominal consideration upon its
organization  in October 1993.  All of the  outstanding  shares of Hartcourt Pen
were acquired by the Company pursuant to an Agreement and Plan of Reorganization
dated  December 1, 1994.  As the sole  stockholder  of  Hartcourt  Pen, Dr. Phan
received  all 38,625  shares of the  Company's  Common Stock and 1,000 shares of
Original  Preferred  Stock  issued  by  the  Company  in  connection  with  this
transaction.  See Part I, Item 1,  "Description of  Business--General"  and Part
III, Item 9, "Directors, Executive Officers, Promoters, and Control Persons."

   
During 1994 and 1995,  the Company  made  advances  in the  aggregate  amount of
$168,575 to the Company's  joint venture  partner in the Xinhui JV. All of these
advances  are  non-interest  bearing  and due on  demand.  These  advances  were
additional monies lent to Xin Hui which were converted to capital contributions.

During 1994 and 1995,  Pacific Rim Capital  ("Pacific  Rim"),  a  non-affiliated
financier  for the  Company  advanced a total of $272,416  to the  Company.  The
advance was unsecured, bearing interest at the rate of 24% per annum and subject
to no fixed  repayment  terms.  On  September  30,  1996,  Pacific Rim agreed to
convert this loan for 425,000 shares at $0.50 per share of the Company's  Common
Stock.

In June 1995, the Company  entered into an Agreement and Plan of  Reorganization
with Pego Systems,  Inc. to acquire all of the outstanding shares of Pego common
stock in exchange for 1,500,000 shares of the Company's Class A Preferred Stock.
The  transaction  was  terminated  prior to its  completion.  The owner of Pego,
Michael L. Caruana is a current director of the Company.  See Part II, Financial
Statements,  "Consolidated  Financial Statements,  years ended December 31, 1996
and  1995  -  Notes  to  Financial   Statements,   "Item  H"   Commitments   and
Contingencies".

In August 1996 the Company  purchased an apartment complex located near Beijing,
China $22 million from NuOasis International, Inc. (a wholly owned subsidiary of
Nona Morell's II). The purchase  price included the issuance of 4 million shares
of common stock, valued at $10 million, and a promissory note to Nuoasis for $12
million.  The Note is due and payable on August 17, 1997 or, if  construction is
not complete, then the note is extended to the date the certificate of occupancy
is received. NuOasis is a non-affiliate of the Company. Under the deposit method
of accounting  in  accordance  with  Financial  Accounting  Standards No. 66 the
promissory  note for  $12,000,000 is currently being deferred until the complete
consummation  of the Peony  Gardens  sale.  Also the 4 million  shares of common
stock is recorded as a deposit at December 31, 1996.
    




                                       49
<PAGE>


                                    PART IV.

Item 13.  Exhibits and Reports on Form 8-K

The following  list  describes the exhibits  filed as part of this Annual Report
Form 10-KSB.

Exhibit No.         Description of Document
-----------         -----------------------

2.01              Agreement and Plan of Reorganization, dated November
                  5, 1994 among Stardust,
                  Inc.-Production-Recording-Promotion, Harcourt
                  Investments (USA) Inc. ("Harcourt USA") and the
                  shareholders of Harcourt USA. (1)

2.02              Agreement and Plan or Reorganization dated December
                  1, 1994 Among Harcourt USA. The Hartcourt Pen
                  Factory, Inc. ("Hartcourt Pen") and the Hartcourt
                  Pen shareholder. (1)

3.01              Articles of Incorporation of the Company, as
                  amended. (1)

3.02              Bylaws of the Company. (1)

3.03              Amendment to the Bylaws of the Company. (1)

4.01              Articles of Amendment to Articles of Incorporation
                  of the Company regarding the Creation of Preferred
                  Stock and the Statement of Rights and Preferences of
                  Common Stock, Original Preferred Stock and Class A
                  Preferred Stock. (1)

10.01             Lease between the Company and Larry M. Mitobe for
                  the Company's headquarters facility, dated April 9,
                  1996. (1)

10.02             Equipment Lease between Harcourt USA and Anja
                  Engineering Corporation, dated April 4, 1994. (1)

10.03             Stock Exchange Agreement between Harcourt USA and
                  Eastern Rocester, dated August 8, 1994. (1)

10.04             1995 Stock Option Plan. (1)

10.05             Purchase Contract between The Hartcourt Companies,
                  Inc. and Exceptional Specialty Products, Inc., dated
                  March 21, 1996. (1)

10.06             Purchase and Sale Agreement, dated August 8, 1996,
                  between The Hartcourt Companies, Inc. and NuOasis
                  International, Inc., and Addendum to Purchase and
                  Sale Contract. (1)


                                       50
<PAGE>


10.07             Convertible Secured Promissory Note, dated August 8,
                  1996, in connection with Purchase and Sale
                  Agreement, dated August 8, 1996 between The
                  Hartcourt Companies, Inc. and NuOasis International,
                  Inc. (1)

10.08             Convertible Secured Promissory Note, dated August 8,
                  1996, in connection with Purchase and Sale
                  Agreement, dated August 8, 1996 between The
                  Hartcourt Companies, Inc. and NuOasis International,
                  Inc., as amended. (1)

10.09             Sales Agreement, dated September 17, 1996, between
                  The Hartcourt Companies, Inc. and Promed
                  International, Ltd. (1)

10.10             Sales Agreement, dated September 17, 1996, between
                  The Hartcourt Companies, Inc. and Mandarin Overseas
                  Investment Co., Ltd. (1)

10.11             Purchase and Sale Agreement, dated September 27,
                  1996, between The Harcourt Companies, Inc. and CKES
                  Acquisitions, Inc. (1)

10.12             Secured Promissory Note, dated September 27, 1996,
                  in connection with Purchase and Sale Agreement
                  between The Hartcourt Companies, Inc. and CKES
                  Acquisitions, Inc. (1)

10.13             Consulting Agreement, dated December 30, 1996,
                  between Hartcourt Companies, Inc. and American
                  Equities LLC, a California limited liability
                  company.

21.01             Subsidiaries of the Company. (1)

23.01             Consent of Independent Certified Public Accountants.

27.01             Financial Data Schedule.

Pursuant to Rule 12b-32 under Securities and Exchange Act of 1934, as amended.

(1) Incorporated  by reference to the  Registrant's  Registration  Statement  on
    Form 10 and  exhibits thereto, as filed  with  the  Securities and  Exchange
    Commission, Registration Number  001-12671 and which was declared  effective
    on March 24, 1997.

(b) Reports on Form 8-K - none


                                       





                                       51
<PAGE>


SUPPLEMENTAL  INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
SECTION 12 OF THE ACT.

The  Registrant  did not send an Annual  Report  covering the fiscal year ending
December 31, 1996 nor did it send proxy materials to security  holders.  If such
report and proxy materials are mailed to security holders,  the Registrant shall
furnish to the Commission,  for its  information,  four (4) copies of the Annual
Report to security holders and four (4) copies of the proxy materials.















































                                       52
<PAGE>


                                   SIGNATURES

In accordance with Section 13 or 15 (d) of the Securities  Exchange Act of 1934,
the registrant has duly caused this  registration  statement to be signed on its
behalf by the undersigned, thereunto duly authorized.



                          THE HARTCOURT COMPANIES, INC.




Date:  June 24, 1997                              By:/s/ Alan V. Phan
                                                     -----------------------
                                                     Alan V. Phan, President


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


Signature                     Title                              Date

/s/ Alan V. Phan              Chairman of the Board,             June 24, 1997
------------------            President, Chief Executive
Alan V. Phan                  Officer and Chief Financial
                              Officer
                              
/s/ Frederick Cohn            Secretary, Treasurer and           June 24, 1997
-------------------           Director
Frederic Cohn                 

/s/ Kenneth Silva             Vice President, Marketing          June 24, 1997
-------------------           and Sales and Director
Kenneth Silva                 

/s/ Michael Caruana           Director                           June 24, 1997
Michael Caruana

/s/ James De Rosa             Director                           June 24, 1997
-------------------
James De Rosa












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