SECURITIES AND EXCHANGE COMMISSION
                                                 Washington, D.C.  20549

                                                       FORM 10-KSB
(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, 1997

                                            Commission file number 001-12671

                                              THE 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
                           562-403-1126
      (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: $4,723,905

         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 8, 1998, $14,027,830.

         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 8, 1998, there were 16,466,103 shares of common stock
 outstanding.

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                                              THE HARTCOURT COMPANIES, INC.

                                             1997 Form 10-KSB Annual Report
                                                    Table of Contents

                                                                                                                              Page
PART I

<S>                                                                                                                      <C>
  Item 1.Description of Business                                                                                         3

  Item 2.Description of Property                                                                                         9

  Item 3.Legal Proceedings                                                                                               11

  Item 4.Submission of Matters to a Vote of Security Holders                                                             11

PART II

  Item 5. Market for Common Equity and Related Stockholder Matters                                                       11

  Item 6.Management's Discussion and Analysis or Plan of Operation                                                       15
  
  Item 7. Consolidated Financial Statements                                                                              20
 
  Item 8. Changes in and Disagreements with Accountants
                 on Accounting and Financial Disclosure                                                                  52


PART III

  Item 9. Directors, Executive Officers, Promoters and Control Persons;
                 Compliance with Section 16(a) of the Exchange Act                                                       52

  Item 10. Executive Compensation                                                                                        54

  Item 11. Security Ownership of Certain Beneficial Owners and
                 Management                                                                                               54

  Item 12. Certain Relationships and Related Transactions                                                                 56


PART IV

  Item 13. Exhibits and Reports on Form 8-K                                                                                57


Signatures                                                                                                               61

</TABLE>


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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").
Pego Systems, Inc. ("Pego") and Electronic Components and Systems, Inc. ("ECS").
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.  Through
1995, the Company conducted certain limited research and development  activities
in the  United  States,  but  has  not  engaged  in any  domestic  manufacturing
activities.

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.   Currently,   the  Company's   primary  objective  is  to  acquire
established  operating  companies with histories of growth and profitability.  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 (562) 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

                                                             3

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operational by July 1995. By July 1996, the plant was operating at approximately
20% of its capacity and employed  approximately  80 people.  It was estimated by
management  that  additional  working  capital  in the  amount of  approximately
$3,000,000  would be  required  to permit the plant to operate at full  capacity
(300,000,000 pens annually).  There was 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  Scripto-Toaki
Corporation ("Anja"),  for the use of five special ball pen assembly machines by
the Xinhui JV. The lease  provided  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 have
ranged from zero, if annual purchases were in excess of $1,000,000, to $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 Xinhui JV to the  Company  and  arrived in January  1997.  The
Company and Anja agreed to terminate the lease upon delivery of the machinery to
Anja and pay  Anja a  termination  fee of  $200,000.  Terms  of the  Termination
Agreement  call for the  Company  to pay  $100,000  in May 1998 and  thereafter,
quarterly payments of $6,414.72, including 10% interest, over five years.

In September 1996, CKES  Acquisitions,  Inc. ("CKES"),  a corporation  organized
under  the laws of the  State of  Nevada in  September  1996,  a  non-affiliate,
acquired  the  Xinhui  JV of the  Company's  wholly-owned  subsidiary  Hartcourt
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.
Ownership in the joint venture was  transferred  to CKES in return for a Secured
Promissory Note in the principal sum of $3,000,000,  payable monthly,  beginning
October 1998, 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  principal  payments of $2,000 with the remaining balance due and
accrued  interest  at 9% per  annum in full on August  15,  1999.  To date,  all
payments have been made pursuant to the settlement agreement.

Pursuant to a Purchase  Contract  dated March 21, 1996,  between the Company and
Exceptional   Specialty   Products,   Inc.,   a   California   corporation   and
non-affiliate,  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,  however,  the
Company is currently seeking overseas importers, primarily in China, to purchase
all 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

                                                             4

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purchase  price  consists of a Convertible  Secured  Promissory  Note granted to
NuOasis,  in the principal  amount of  $12,000,000,  a security  interest in the
property 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  Agreement  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 was
anticipated  by the Company that the project  would 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. As of December 31,
1997, the project is still incomplete  because the developer has elected to wait
a period of time for the  Beijing  real  estate  market to return to  conditions
which existed prior to the recent Asian  financial  crisis.  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 to 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 to this
additional amount.

When it becomes financially feasible, the Company intends to obtain the services
of an independent  geo-survey  company to prepare detailed geo-maps of 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,  $10,000,000,  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

                                                             5

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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, 1997
and 1996 --Notes to Consolidated Financial Statements," Note R. "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.

In July 1997, the Company entered into an agreement with Capital Commerce,  Ltd.
("Capital") (as Isle of Man  Corporation)  whereby Capital agreed to provide the
Company  $6,000,000 in free trading securities for the purchase of Pego Systems,
Inc. and the  formation of  Electronic  Components  and Systems,  Inc., a Nevada
corporation.  In  consideration  for the $6,000,000 in  securities,  the Company
issued to Capital.  $4,000,000  in Series A and  $2,000,000 in Series B, both 9%
convertible   preferred  stock.  See  Part  II,  F/S   "Consolidated   Financial
Statements,  Years  Ended  December  31,  1997 and 1996 - Notes to  Consolidated
Financial  Statements,"  Notes D and T,  "Marketable  Securities"  and  "Capital
Stock, respectively.

In March 1997, the Company entered into an agreement with DanAllen  Investments,
Inc. (DanAllen) to provide investment banking services to the Company.  DanAllen
will make  recommendations  on the Company's merger and acquisition  activities,
especially on financing structure and options.  DanAllen will also assist in the
due diligence and negotiation  process.  The Company issued to DanAllen  100,000
common stock shares, at $1.50 per share, for these services to be performed.

In July 1997,  the  Company  agreed to  purchase a  shopping  center  located in
Perris,  California  called  Freeway Plaza for a total  purchase  price of $6.75
million.  The building complex has 85,000 square feet with 82 percent leased and
an  average  income of  $620,000  per year.  Terms of the  transaction  include,
$25,000 cash down payment, bank financing of $3,725,000, and 34 of the Company's
68 mineral  lease gold lode  claims,  valued at  $3,000,000.  As of December 31,
1997, the transaction is in escrow pending the availability of bank financing.

On  October  3, 1997,  the  Company  purchased  the  outstanding  shares of Pego
Systems,  Inc., a California corporation (Pego) where Pego became a wholly-owned
subsidiary of the Company. Pego, a manufacture's representative organization for
air and gas  handling  equipment,  offers a full  line of value  added  services
including  distribution,  service and  manufacturing of custom process equipment
packages.  The  acquisition  was  accounted  for  using the  purchase  method of
accounting.  In connection with the purchase, the Company paid $500,000 in cash,
issued  450,000  shares of restricted  common stock,  1,500 shares of Series "C"
redeemable preferred stock, and entered into a non-compete agreement with Pego's
majority shareholder and director of the registrant.  Total value of transaction
was  approximately   $2,300,000.See  Part  II,  F/S,   "Consolidated   Financial
Statements,  Years  Ended  December  31,  1997 and 1996 - Notes to  Consolidated
Financial Statements, Notes C and T, "Investments and Business Acquisitions" and
"Capital Stock", respectively.

On October 28, 1997,  the Company  through a wholly-owned  subsidiary,  acquired
Electronic Components and Systems, Inc., an Arizona Corporation (ECS) and Pruzin
Technologies,  Inc.,  an  Arizona  corporation  , a related  entity of ECS.  The
acquisition  was structured as a tax-free  reorganization  and was accounted for
using the purchase method of accounting. In connection with the acquisition, the
Company paid $250,000 in cas,  issued a note payable for $250,000,  issued 3,400
shares of Series "D"  convertible  preferred  stock and  2,500,000 of its common
stock shares. Total value of the transaction was approximately  $9,500,000.  See
Part II, F/S, "Consolidated  Financial Statements,  Years Ended December 3, 1997
and  1996  -  Notes  to  Consolidated  Financial  Statements",  Notes  C and  T,
"Investments and Business Acquisitions" and "Capital Stock", respectively.

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ECS  specializes  in high  technology  contract  manufacturing  and  assembly of
printed circuit boards,  phone and cable wires.  ECS has three  facilities,  and
contracts  with a maquiladora in the free trade zone in Sonora,  Mexico.  Annual
revenues of ECS are approximately $14 million.

Except for limited  operations  involving the  manufacturer  and distribution of
writing  instruments  in the United States  through  Hartcourt Pen and its newly
acquired  manufacturing  businesses,  Pego and ECS, 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  operating  companies  and real property for
potential acquisition. The Company's future business, including expansion of its
current limited  operations and  acquisition  plans requires  additional  equity
and/or  debt  financing,  which  may not be  available  in a timely  manner,  on
commercially reasonable terms, or at all.

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,  Hartcourt Pen, Pego
and ECS.

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

Principal Products, Distribution and Competitive Conditions

The Company  includes three  subsidiaries,  operating three different  unrelated
businesses - ECS specializes in higher  technology  contract  manufacturing  and
assembly of printed  circuit  boards,  phone and cable  wires,  coil winding and
plastic  injection  parts.  ECS is  also a  pioneer  in the  new  technology  of
ball-grid  array  connection  for the  semi-conductor  industry.  ECS  maintains
manufacturing  operations under maquiladora  agreements in Nogales,  Mexico. The
sole owner of the  maquiladora  is also the President of ECS and  shareholder of
the Company. A substantial amount of ECS's cables and electronic  components are
manufactured  and assembled at the Mexico facility by the  maquiladora.  ECS has
smaller  manufacturing  facilities  in  Tucson  and  Chandler,   Arizona  and  a
distribution facility in Nogales, Arizona.

Pego is a manufacturer's representative organization and also offers a full line
of value added services including  distribution,  service, and the manufacturing
of custom process equipment packages. The Company's primary focus is air and gas
handling  equipment.  Key  applications  for the products and services that Pego
Systems sell include pneumatic  conveying,  combustion  process air,  wastewater
secondary treatment applications of aeration and digester gas mixing, bottle and
can drying,  contaminated  soil vapor  extraction,  and landfill  gas  handling.
Pego's  markets  include the  Petro-Chemical  industry  combustion  process air,
wastewater secondary treatment applications of aeration and digester gas mixing,
bottle  can  drying,  contaminated  soil  vapor  extraction,  and  landfill  gas
handling.  Pego's markets include the Petro-Chemical  industry,  most processing
companies,  food  industry,  brewing  industry,  cement  plants and many general
industrial   operations,   as  well  as  waste  water  treatment   plants.   The
environmental  market for pollution  control through vapor  extraction and other
means is emerging as an area of major focus for Pego.

Hartcourt  Pen  distributes a wide range of writing  instruments  from low cost,
popular pens to high-price  luxury pens.  Popular pens include  ball-point pens,
roller  pens,  white board  markers,  water color  markers,  permanent  markers,
highlighters,  and magic ink pens.  Luxury pens include sterling silver fountain
pens,  and a variety of  ball-point  and roller pens made of brass or  stainless
steel.

Management  believes that the materials and equipment  used in the assembly,  of
all 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.


                                                             7

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The Company  believes  that the  markets  for its broad  range of  products  are
relatively  fragmented and highly competitive.  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 and Mexico

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  resulting  changes in the  Chinese  economy,  could  significantly
adversely 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.

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.

Under the maquiladora  program with the Mexican affiliate,  the Company advances
cash to the  affiliate  for  operating  expenses.  The Company  provides the raw
materials,  production machinery and equipment for manufacture and assembly.  It
is reasonably  possible that operations located outside an entity's home country
will be disrupted in the near term, however remote.

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 two full-time employees at its principal executive
offices  in the United  States.  Hartcourt  Pen is located at this  headquarters
location. The executive offices provide corporate  administrative services. Pego
employs thirty-four  full-time people at its two sites located in Long Beach and
Novato, California.

                                                             8

<PAGE>



ECS has sixty total and fifty-seven  full-time  employees at its three locations
in Chandler, Tucson and Nogales, Arizona.

Research and Development

The Company has conducted 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, 1996 and 1997,  $0 and $0,  respectively,  was  expended in
connection with such  activities.  Management does not anticipate  incurring any
significant costs for research and development in the near term.

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. 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.

ECS operates from three facilities  throughout Arizona. The location,  site size
and terms, if leased are as follows:

         Chandler,  Arizona - 6532 W. Flint Street,  Chandler, AZ 85226 - 16,240
         square feet office and production  facility.  Lease payments of $12,000
         per month triple net expiring November 2001.

         Tucson,  Arizona - 2,520 N.  Coyote  Drive,  Tucson,  AZ 85745 - 20,800
         square feet office and production  facility.  Lease payments of $9,547,
         including taxes per month,  with annual  increases of 5%. Lease expires
         March 2001.

         Nogales,  Arizona - 137 E. Baffert  Drive,  Nogales,  AZ 85621 - 37,000
         square feet office and warehouse facility. Lease is month to month with
         monthly payments of $9,113 including insurance and taxes.

Pego operates out of two  facilities.  The principal  manufacturing  building is
located  at 1196 E.  Willow  Street,  Long  Beach,  California.  The Long  Beach
building  has  23,000  square  feet  and was  purchased  by  Pego  in  1995  for
$1,250,000. Pego owes $1,200,000 on the first mortgage which is payable monthly,
$9,543 principal and interest over 20 years.  Additionally,  Pego leases a 2,700
square  foot  office/warehouse   facility  at  42  Digital  Drive,  #1,  Novato,
California.  The terms include  monthly  payments of $1,800 per month,  adjusted
annually for cost of living, expiring May 2003.

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  entered  into an  agreement  to purchase 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.

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  1997,  the  project is still  uncompleted  at the option of the
developer  due to the current real estate market  conditions  caused by the Asia
financial crisis.  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.  Presently,  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.  Presently,  the property is not
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."




                                                            10

<PAGE>



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.

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 are 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,
$10,000,000,  the Company  intends to complete the  transaction  to purchase the
gold lode claims and 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, 1997 and 1996:



                                                            11

<PAGE>
<TABLE>
<CAPTION>



------------------------------------------------------------------------------------------------------------------------------
                                   High Bid               Low Bid                High Asked             Low Asked
------------------------------------------------------------------------------------------------------------------------------
<S>   <C> <C>                              <C>                   <C>                   <C>                     <C> 
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
------------------------------------------------------------------------------------------------------------------------------
March 31, 1997                             3.00                  1.50                  4.00                    3.00
------------------------------------------------------------------------------------------------------------------------------
June 30, 1997                              3.125                 2.25                  3.375                   2.6875
------------------------------------------------------------------------------------------------------------------------------
September 30, 1997                         2.375                  .6875                2.6875                   .875
------------------------------------------------------------------------------------------------------------------------------
December 31,1997                           3.125                  .875                 3.375                  1.00
------------------------------------------------------------------------------------------------------------------------------
</TABLE>

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, 1997, 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  450,000 and 170,000  outstanding  Rule 144 shares  exist at
December 31, 1997 and 1996 held by principal and directors, respectively.

As of December 31, 1997 and 1996 there were 421 and 428 holders of the Company's
common stock,  respectively.  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.

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

                                                            12

<PAGE>



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 Xinhui
and to expedite completion of molds.

On June 3, 1996,  the Company issued a total of 1,267 shares of its common stock
for the  purchase  of  inventory  valued at $30,145  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 94 shares of the Company's  common stock to
Idea International, Inc. in settlement of $2,813 in accounts payable.

Pursuant to a Sales  Agreement  dated  September 17, 1996, the Company agreed to
contingently  acquire 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 agreed to
contingently  acquire 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.

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.

                                                            13

<PAGE>




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.

On January 29, 1997,  the Company  issued 18,672 shares of the Company's  common
stock to various vendors in settlement of $40,225 in accounts payable.

Pursuant to an investment banking services agreement with DanAllen  Investments,
Inc.  dated February 1997, the Company issued 100,000 shares of its common stock
at a value of $1.50 per share for investment banking services.  See Part I, Item
1  "Description  of  Business"  for details  regarding  the  investment  banking
agreement.

On March 17, 1997 and May 7, 1997,  the  Company  issued  1,000,000  and 138,000
shares, respectively,  of the Company's common stock, pursuant to Regulation "S"
to Pacific Rim Capital for $569,000 in cash.  Cash was used for working  capital
and acquisition of Pego Systems, Inc.

On April 7, 1997 and October 4, 1997,  the Company  issued  289,000  shares at a
value  of  $.50/share  and  50,000  shares,  at a value  of  $1.00/share  of the
Company's  common  stock to various  officers,  directors  and  employees of the
Company as follows:

                  Dr. Alan Phan     200,000 shares
                  Directors           35,000 shares
                  Employees         104,000 shares

Pursuant to an agreement with Capital  Commerce  Ltd.,  dated July 31, 1997, the
Company issued to Mercantile  Investment  Trust,  Ltd.  685,715 shares of common
stock valued at $600,000 for  services as  intermediary,  broker and finder with
respect to this agreement.

Pursuant to an agreement with Capital  Commerce,  Ltd., dated July 31, 1997, the
Company issued 4,000 shares of Series A 9% Convertible Preferred Stock and 2,000
shares of Series B 9% Convertible  Preferred  Stock.  Dividends are declared and
paid  monthly.  See Part I, Item 1,  "Description  of Business"  for  additional
details of the marketable securities agreement.

In connection with the acquisition of Pego Systems, Inc., dated October 3, 1997,
the Company  issued 1,500  shares,  stated  value  $1,000 per share,  redeemable
preferred stock to Michael  Caruana,  along with 200,000 shares of the Company's
common stock.  Additionally,  250,000  shares of the Company's  common stock was
issued to Simerco  Trading,  Ltd., a British Virgin Island Company.  See Part I,
Item 1, "Description of Business" for additional details.

On November 30, 1997, the Company issued 650,000 shares of the Company's  common
stock  to  Mandarin  Overseas  Investment  Co.,  Ltd.  (Mandarin);  pursuant  to
Regulation S for $520,000 in cash.  Cash was used in part for the acquisition of
Electronic Components and Systems, Inc.

On October 28,  1997,  pursuant  to the  reorganization  agreement,  the Company
issued 3,400 shares of 9% Convertible  Preferred Stock,  stated value $1,000 per
share, and 2,500,000 shares of the Company's common stock in connection with the
acquisition  of  Electronic  Components  and  Systems,  Inc. See Part I, Item 1,
"Description of Business" for additional details.



                                                            14

<PAGE>



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

Overview

The  Company's  primary  business has been the assembly and importing of writing
instruments  for  sale  in the  U.S.  and  the  establishment  of a real  estate
portfolio which would include office,  commercial,  industrial,  residential and
raw land.  As previously  discussed,  management  hired a  consultant,  American
Equities,  LLC, to provide  consultation  and assistance in finding,  acquiring,
managing and developing such a portfolio.

During  the third  quarter  of 1996,  the  Company  acquired  Peony  Gardens,  a
commercial  real estate project in the eastern part of Tougxian 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. See Part 1,
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.  See Part 1, Item 2,  "Description of
Property - Mineral Lease Gold Lode Claims."

Early in 1996,  the  Company  began  exploring  new  business  opportunities  in
unrelated  fields.  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  continues  to seek  overseas
importer, 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."

In the fourth quarter of 1996, the Company, through its wholly-owned subsidiary,
Harcourt Investments,  sold its 52% interest 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  at 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.

During  the first and  second  quarters  of 1997,  the  Company  actively  began
negotiations  with two operating  companies,  Pego Systems,  Inc. and Electronic
Components and Systems,  Inc. Both companies were acquired by the Company during
the fourth quarter of 1997.

On October 3, 1997, the Company purchased Pego Systems, Inc. (Pego) from Michael
Caruana and a Company  owned by Michael  Caruana and Simerco  Trading,  Ltd.,  a
British Virgin Island company for Company common stock and cash. Mr. Caruana was
and  still  is a  director  of  the  Hartcourt  Companies,  Inc.  See  Part  F/S
"Consolidated  Financial  Statements,  Years ended  December 31, 1997 and 1996 -
Notes to Consolidated Financial
Statements", Note C, "Investments and Business Acquisitions."

On October 28, 1997,  the Company  acquired  Electronic  Components and Systems,
Inc.  (ECS) and a entity  related to ECS from Mr. Jim Pruzin for Company  stock,
cash and a promissory note. See Part F/S,  "Consolidated  Financial  Statements,
Years  Ended  December  31,  1997  and 1996 - Notes  to  Consolidated  Financial
Statements", Note C, "Investments and Business Acquisitions." and Part 1, Item 1
"Description of Business, General" for additional details.





                                                            15

<PAGE>



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.  Subsequently,
the Company sold its joint venture interest in the Chinese facilities during the
third quarter of 1996.

In 1997 and 1996,  as discussed  previously,  the Company made some  fundamental
changes, including the engagement of a investment consultants, American Equities
and  DanAllen  and the  acquisitions  of Pego and ECS.  Because of the nature of
activities in 1997 and 1996, a comparison of one given year to the previous year
is not relevant.  Thus,  the following  discussion  relates to the twelve months
ended  December 31, 1997,  followed by a discussion  of the twelve  months ended
December 31, 1996.

1997

During 1997, the Company's domestic writing  instrument  operations were limited
due to the continued lack of a comprehensive marketing program and the Company's
refocus of overall objective and corporate direction. Domestic sales for writing
instruments  was $156,336 for the year. In addition the Company's total revenues
consist of $1,881,159 of revenue from three months of operations  from Pego, and
$2,686,410  of  revenue  from two  months of  operations  from ECS.  Total  1997
revenues  from  these  three  sources  amounted  to  $4,723,905.  The  Company's
subsidiary,  ECS,  has one major  customer,  Next  Level  Systems,  Inc.,  which
provided $1,493,686 in revenue or 32% of the Company's total revenue.

Components of cost of sales were as follows:  writing instruments $65,032, Pego,
$1,204,657,  64% as a percent of Pego's  sales;  and ECS,  $2,418,753,  90% as a
percent of ECS's sales. Total cost of sales,  $3,688,442 is 78% of total product
revenues.

Components of gross profit were as follows: writing instruments,  $91,304, Pego,
$675,002, 36% as a percent of Pego sales; and ECS, $267,159, 10% as a percent of
ECS's sales.  Total gross profit,  $1,035,463 is 22% of total product  revenues.
Gross profit as a percent of total revenues  should improve over the next twelve
months  following  the effects of certain  accounting  treatment of the acquired
inventory in the Pego and ECS acquisitions.

Gross  profits,  as a  percent  of total  revenues,  for both  Pego and ECS were
negatively  impacted for the year ended  December 31, 1997 due to the effects of
Accounting  Principles Board pronouncement number 16 (APB 16), which states that
the  inventory  of a  company  being  acquired  using  the  purchase  method  of
accounting,  must  be  stated  as fair  value  at the  time of the  acquisition.
However, with respect to the inventories,  the accounting treatment is to record
beginning  inventories at selling prices,  less any cost to complete and cost to
sell (including  selling profit) for inventories.  The result of this accounting
treatment  was to  increase  beginning  inventories  for  both  Pego and ECS and
increase cost of sales for the year ended December 31, 1997.

Components  of selling,  general and  administrative  expenses  were as follows:
corporate,  $202,048,  writing instruments,  $573,711,  Pego $417,332,  and ECS,
$524,339.  Total selling,  general and administrative expenses for corporate and
writing  instruments,  $775,759 for 1997,  compared to $1,242,756 during 1996, a
decrease of 38%. This decrease reflects a continued effort by the Company to cut
cost  and also due to the sale of the  Xinhui  JV in 1996.  Management  believes
selling,  general and  administrative  expenses as a percent of total  revenues,
36%, should hold relatively constant over the next twelve months.

Goodwill  related to the Pego and ECS  acquisition  is being  amortized  over 25
years.  Amortization  costs of $71,390  were  recorded  in  calendar  year 1997.
Management  believes the two  acquisitions  will generate  operating income that
will significantly exceed the goodwill amortization.

During 1997, the Company  recorded  $376,615 in other income for the forgiveness
of debt with respect to the Anja lease agreement.  The Company has agreed to pay
Anja $200,000 over five years. In return Anja has agreed to

                                                            16

<PAGE>



terminate the lease agreement for the five ball point pen assembly machines. The
Company  incurred  interest  expense of $113,000  during 1997 in connection with
mortgages,  notes and lines of credit,  $68,000;  capital  leases,  $17,000  and
factoring agreement, $28,000.

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 1996  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
turn around accordingly.

Selling,  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
selling,  general and administrative  expense of the Xinhui JV were not included
during the fourth  quarter  of 1996.  Further,  the  Company  incurred  interest
expenses of $360,744 from the Xinhui JV's indebtedness. This expense from Xinhui
JV will not occur in 1997 since the Company has sold its interest.


Liquidity and Capital Resources

The Company's  principal capital  requirements during 1997 and 1996 were to fund
the acquisitions of real estate,  mineral rights and operating  businesses.  The
Company has historically satisfied its cash requirements through the issuance of
the Company's preferred and common stock. See Part 1, Item 5, "Market for Common
Equity and Related  Stockholder  Matters" for additional details regarding stock
transactions.

1997

The  Company's  current  ratio at December  31, 1997 was 2.4  compared to 3.8 at
December  31,1996.  The  decrease is  primarily  attributable  to the  Company's
assumption of  liabilities in connection  with the  acquisition of Pego and ECS.
Concurrently,  the  Company  experienced  an  increase  in  working  capital  of
approximately  $6,396,000  from $1,084,000 at December 31, 1996 to $7,480,000 at
December 31,  1997.  The  increase in working  capital is  primarily  due to the
marketable  securities  agreement entered into with Capital  Commerce,  Ltd. The
increase in working  capital will provide funds for  operations  and capital for
additional acquisitions.

The Company's operating  activities consumed cash of approximately  $800,000 for
the year ended  December  31,1997.  For the year ended 1997,  the Company had an
operating loss of approximately $620,000, excluding the effects of depreciation,
amortization  and  reserve for bad debts.  In  addition,  increases  in accounts
receivable  and  inventory,  offset by increases in accounts  payable,  consumed
additional cash of approximately $180,000.

Cash used for investing  activities for the year ended December 31, 1997 totaled
$281,000.  This amount represents  $750,000 paid in connection with the Pego and
ECS  acquisitions  and the purchase of property and equipment of $59,000.  These
cash outlays were offset by the sale of marketable securities of $525,000.


                                                            17

<PAGE>



Cash provided by financing activities was $1,161,000 for the year ended December
31,  1997,  consisting  primarily  of the  proceeds  from  the  issuance  of the
Company's common stock, $1,063,000, shareholder loans, $110,000, line of credit,
$100,000,  and offset by payments on  long-term  debt,  $21,394 and  payments on
capital leases of $26,800, and payments with respect to the shareholder loans of
ECS, $84,300.

As a result of the above, the Company  experienced an increase in cash from $800
as of December 31,996 to $78,000 for the year ended December 31, 1997.

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 selling,  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.  The Company has 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 $137,641 of notes receivable,  totaling
$1,328,436,  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  Xinhui 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
purchased  for the Xinhui JV. The Company has worked out a settlement  that will
cancel the capital lease and result in a substantial  forgiveness  of debt.  See
Item 6, "Results of Operations, 1997" for additional details.

The Company believes that, with the sale of the interest in the Xinhui JV, the
 settlement of the note and capital lease
with Anja Engineering, and the acquisitions of Pego and ECS, the Company is well
 positioned in 1998 to pursue the
planned investment program of sound real estate projects and profitable, cash
producing businesses.  The Company

                                                            18

<PAGE>



anticipates that additional capital will be required in the near term to finance
additional  acquisitions and working capital needs. The sources for this funding
will come from a combination  of the sale of the Company's  common and preferred
stock and issuance of debt.

Impact of Year 2000

The Year 2000 Issue is the result of computer  programs  being written using two
digits  rather than four to define the  applicable  year.  Any of the  Company's
computer programs that have  time-sensitive  software may recognize a date using
"00" as the year 1900 rather than the year 2000.  This could  result in a system
failure or miscalculations causing disruption of normal business activities.

Based on a recent and ongoing  assessment,  the Company has  determined  that it
will be required to modify or replace portions of its software and software that
has been sold to customers so that computer systems will function  properly with
respect to dates in the year 2000 and thereafter. The Company presently believes
that with modifications to existing software or conversions to new software, the
Year 2000  Issue will not pose  significant  operational  problems  and will not
materially affect future financial results.

The Company has  initiated  communications  with its  significant  suppliers and
major  customers to determine  the extent to which the Company is  vulnerable to
any third party's failure to remedy their own Year 2000 issues.

The Company  will utilize both  internal  and external  resources to modify,  or
replace,  and test  software  for Year 2000  compliance.  The Company  currently
anticipates completing the Year 2000 project within one year, but not later than
March  31,  1999,  which is prior to any  anticipated  impact  on its  operating
systems.

The costs of the  project,  which at the current  time are  projected  to not be
material,  and the date on which the Company believes it will complete Year 2000
modifications  are based on  management's  best  estimates,  which were  derived
utilizing  numerous  assumptions  of  future  events,  including  the  continued
availability  of certain  resources,  third party  modification  plans and other
factors.  However,  there  can be no  guarantee  that  these  estimates  will be
achieved and actual results could materially differ from those anticipated.

Recently Issued Accounting Standards

In June 1997,  the  Financial  Accounting  Standards  Board issued  Statement of
Financial Accounting Standards No. 130, "Reporting  Comprehensive Income" ("SFAS
130"),  and Statement of Financial  Accounting  Standards No. 131,  "Disclosures
about Segments of an Enterprise and Related  Information" ("SFAS 131"). SFAS 130
establishes  standards for reporting and display of comprehensive income and its
components  (revenues,  expenses,  gains and  losses)  in a full set of  general
purpose financial  statements.  SFAS 131 establishes  standards for the way that
public business  enterprises  report  information  about  operating  segments in
annual financial  statements and requires that those enterprises report selected
information  about  operating  segments in interim  financial  reports.  It also
establishes  standards  for related  disclosures  about  products and  services,
geographic areas and major customers. Both standards must be adopted in 1998 and
are not expected to have a significant impact on the Company's disclosures.

                                                            19

<PAGE>



Item 7.    Consolidated Financial Statements








                                                      C O N T E N T S


<TABLE>
<CAPTION>

                                                                                                                           PAGE

<S>                                                                                                                          <C>
INDEPENDENT AUDITOR'S REPORT......................................................................                           1

CONSOLIDATED FINANCIAL STATEMENTS:

   Consolidated balance sheets as of December 31, 1997 and 1996..........................................                     2 -3

   Consolidated statements of operations for the years ended
      December 31, 1997, 1996 and 1995........................................................................                4

   Consolidated statements of changes in shareholders' equity for the years ended
      December 31, 1997, 1996 and 1995......................................................................                  5 - 6

   Consolidated statements of cash flows for the years ended
      December 31, 1997, 1996 and 1995..........................................................................              7

   Notes to consolidated financial statements.....................................................................         .. 8 - 31
</TABLE>














                                                            20

<PAGE>








                                             INDEPENDENT AUDITOR'S 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, 1997
and 1996,  and the related  consolidated  statements of  operations,  changes in
shareholders'  equity,  and cash flows for the years ended December 31, 1997 and
1996.  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, 1997 and 1996,  and the
results of their  operations  and their cash flows for the years ended  December
31, 1997 and 1996 in conformity with generally accepted accounting principles.


Harlan & Boettger, LLP

San Diego, California
February 10, 1998








                                                          21

<PAGE>
<TABLE>
<CAPTION>



                                           THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                                                     CONSOLIDATED BALANCE SHEETS


                                                                                December 31,        December 31,
                                                                                1997                     1996
       ASSETS

CURRENT ASSETS
<S>                                                                          <C>                <C>           
    Cash                                                                     $      77,688      $          822
    Marketable securities (Note D)                                               5,474,966                   -
    Accounts receivable, net (Note B)                                            2,332,977              19,034
    Trade dollar receivables                                                        22,670              72,054
    Notes receivable, current portion (Note F)                                     293,673             137,641
    Inventory (Note E)                                                           3,541,321             311,424
    Prepaid expenses                                                               130,554             150,000
    Prepaid consulting fees (Note R)                                               664,770             750,000
    Due from related parties (Note G)                                              131,398              32,356

         TOTAL CURRENT ASSETS                                                   12,670,017           1,473,331

PROPERTY AND EQUIPMENT, net (Note H)                                             3,568,507              44,809

INVESTMENTS (Note C)                                                            17,906,520          17,906,520

NOTES RECEIVABLE, net of current portion (Note F)                                1,058,267           1,190,795

OTHER ASSETS                                                                       552,289               7,550

INTANGIBLES, net (Note I)                                                        9,365,000                   -


                                                                               $45,120,600         $20,623,005


</TABLE>


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


                                                                 22

<PAGE>

<TABLE>
<CAPTION>


                                           THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                                                     CONSOLIDATED BALANCE SHEETS
                                                             (Continued)

                                                                              December 31,        December 31,
                                                                                    1997                     1996
       LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES
<S>                                                                           <C>                <C>          
    Accounts payable                                                          $  2,824,419       $     154,260
    Accrued expenses and other current liabilities (Note P)                      1,046,881             133,747
    Payables to Mexican affiliate (Note K)                                         352,942                   -
    Line of credit (Note O)                                                        200,000                   -
    Notes payable, related parties - current portion (Note N)                      295,000                   -
    Notes payable - current portion (Note M)                                       205,245              56,396
    Capital lease obligations - current portion (Note R)                           200,222                   -
    Debentures (Note L)                                                             50,000                   -
    Subscription deposits received (Note X)                                         15,000              45,000

       TOTAL CURRENT LIABILITIES                                                 5,189,709             389,403

NOTES PAYABLE, RELATED PARTIES, net of current portion (Note N)                    125,000                   -

NOTES PAYABLE, net of current portion (Note M)                                   1,334,327             524,369

CAPITAL LEASE OBLIGATIONS, net of current portion (Note R)                         612,477                   -

       TOTAL LIABILITIES                                                         7,261,513             913,772

COMMITMENTS AND CONTINGENCIES (Notes J and R)                                            -                   -

SHAREHOLDERS' EQUITY Preferred Stock:
     Original preferred stock, $0.01 par value, 1,000 shares
       authorized, issued and outstanding                                               10                  10
     Series A, $1,000 stated value, 4,000 shares authorized,
       issued and outstanding                                                    4,000,000                   -
     Series B, $1,000 stated value, 2,000 shares authorized,
       issued and outstanding                                                    2,000,000                   -
     Series C, $1,000 par value, 1,500 shares authorized,
       issued and outstanding                                                    1,500,000                   -
     Series D, $1,000 stated value, 10,000 shares authorized,
       3,400 shares issued and outstanding                                       3,400,000                   -
     Class A, no par, 10,000,000 shares authorized,
       none issued and outstanding                                                       -                   -

       TOTAL PREFERRED STOCK                                                     10,900,010                  10

     Common stock, $0.001 par value, 50,000,000
       shares authorized; 16,441,739 shares issued and outstanding at
       December 31, 1997 and 10,560,352 shares issued and outstanding at
       December 31, 1996                                                            16,442              10,560
     Stock subscription receivable                                                 (26,000)                  -
     Treasury stock, at cost (24,364 shares in 1997 and 1996)                     (279,928)           (279,928)
     Additional paid-in capital                                                 31,083,604          23,204,260
     Accumulated deficit                                                        (3,835,041)         (3,225,669)

       TOTAL SHAREHOLDERS' EQUITY                                               37,859,087          19,709,233

                                                                               $45,120,600         $20,623,005
</TABLE>

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


                                                                 23

<PAGE>


<TABLE>
<CAPTION>


                                           THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                                                CONSOLIDATED STATEMENTS OF OPERATIONS



                                                  For the years ended December 31,
                                                     1997                             1996                1995

 REVENUES
<S>                                             <C>                                <C>              <C>         
    Product sales                               $4,723,905                         $    510,692     $    353,674

         TOTAL REVENUES                          4,723,905                              510,692           353,674

COST OF SALES                                    3,688,442                              797,667          159,797

    Gross profit (loss)                          1,035,463                             (286,975)         193,877

OPERATING EXPENSES
    Selling, general and administrative          1,717,430                              570,774        1,006,828
    Depreciation and amortization                   97,154                              671,982          551,428

         TOTAL OPERATING EXPENSES                1,814,584                           1,242,756         1,558,256

LOSS FROM OPERATIONS                              (779,121)                          (1,529,731)      (1,364,379)


OTHER INCOME (EXPENSES)
    Minority interest                                    -                                    -          564,261
    Interest expense                              (113,026)                            (443,042)        (851,076)
    Forgiveness of debt (Note Z)                   376,615                              384,735                -
    Interest income                                 28,184                               10,100            2,351
    Exchange gain                                   14,676                                    -           54,952

         TOTAL OTHER INCOME (EXPENSE)              306,449                              (48,207)         (229,512)

NET LOSS BEFORE INCOME TAXES                      (472,672)                          (1,577,938)      (1,593,891)

    Income taxes (Note Q)                            1,700                                1,800                -

NET LOSS                                       $  (474,372)                         $(1,579,738)     $(1,593,891)

BASIC AND FULLY DILUTED LOSS PER SHARE (Note Y)$      (.05)                      $         (.33)  $         (.55)
WEIGHTED AVERAGE NUMBER OF SHARES
    OUTSTANDING                                 12,550,337                            4,814,303        2,915,655




</TABLE>



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


                                                                 24

<PAGE>

<TABLE>
<CAPTION>




                                           THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                                     CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

                                                                 Common                                   Foreign
                                                                 Stock                                    Currency          Total
                  Common Stock     Preferred Stock  Paid-in    Subscription   Treasury Stock   Accumulated  TranslationShareholders'
                 Shares    Amount    Shares Amount  Capital    Receivable      Shares  Amount   Deficit      Adjustment    Equity

<S>              <C>        <C>        <C>    <C>   <C>          <C>          <C>     <C>           <C>        <C>       <C>
Balance, 
December 31,
 1994            2,735,952  $   2,736  1,000  $ 10  $ 3,289,672  $ (700,000)  $ -            -  $   (542,001) $    (915) $2,049,502

Shares issued
 to attorney
 for legal fees      9,851         10     -      -       64,990            -      -          -            -            -     65,000

 Capital
 contribution
 - officer's
     compensation        -          -     -       -      70,000            -      -          -             -           -     70,000

 Cash paid on
 common stock
 subscription            -          -     -        -          -       700,000     -          -             -           -    700,000

  Foreign currency 
  translation
  adjustment             -          -     -        -           -            -     -          -             -      114,259   114,259

  Net loss               -          -     -        -           -            -     -          -    (1,593,891)            (1,593,891)

Balance, December
 31, 1995        2,745,803   $  2,746 1,000   $   10 $ 3,424,662    $       -     -    $     -   $(2,135,892)    $113,344$1,404,870

Shares issued
 to attorne         27,000         27     -        -    466,533             -     -          -            -             -   466,560

Shares issued
for Xinhui JV        5,000          5     -        -    106,770             -     -          -            -             -   106,775

Shares issued
 for inventory      13,267         13     -        -    191,382             -     -          -            -             -   191,395

Shares issued
 for settlement of
 payables               94         -      -        -      2,813             -     -          -            -             -     2,813

Shares issued 
for Peony Gardens
    deposit      4,600,000     4,600      -        - 11,927,900             -     -          -            -             -11,932,500

Shares issued
 for consulting
 agreement       1,300,000     1,300      -        -    898,700             -     -          -            -            -    900,000

Shares issued for
 Alaska land     1,298,700     1,299      -        -  5,972,721             -     -          -            -            -  5,974,020

Shares issued to
convert debt to
equity             425,000       425      -        -    212,075             -     -          -            -            -    212,500

Stock dividends    169,852       170      -        -        679             -     -          -         (849)           -          -

Treasury stock 
acquired           (24,364)      (25)     -        -         25             - 24,364  (279,928)           -            -   (279,928)

Sale of Xinhui 
joint venture-           -         -      -        -          -             -      -          -     490,810     (113,344)   377,466

  Net loss               -         -      -        -          -             -      -          -  (1,579,738)           - (1,579,738)

Balance, December
 31, 1996       10,560,352  $ 10,560  1,000   $   10 $23,204,260$           - 24,364  $(279,928) $(3,225,669)$         -$19,709,233
</TABLE>

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


                                                                 25

<PAGE>

<TABLE>
<CAPTION>


                                           THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                                     CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
                                                             (Continued)

                                                                Common                                     Foreign
                                                   Additional   Stock                                      Currency          Total 
                 Common Stock     Preferred Stock  Paid-in    Subscription  Treasury Stock  Accumulated Translation Shareholders'
                 Shares    Amount  Shares Amount  Capital    Receivable     Shares  Amount  Deficit     Adjustment    Equity

<S>              <C>        <C>     <C>    <C>      <C>          <C>       <C>     <C>       <C>         <C>           <C>
Balance, December
 31, 1996        10,560,352 $10,560 1,000  $     10 $23,204,260 $    -     24,364  $(279,928)$(3,225,669)$             $19,709,233

 Shares issued
 for settlement
 of payables         18,672      19     -         -      40,206      -          -          -           -            -       40,225

 Shares issued
 for consulting
 agreement          100,000     100     -         -     149,900      -          -          -           -            -      150,000

 Shares issued
 for Reg. S Sale  1,788,000   1,788     -         -   1,087,212 (26,000)        -          -           -            -    1,063,000

 Shares issued to
 employees          339,000     339     -         -    194,161        -         -          -           -            -      194,500

 Shares issued
 for broker/finder
 fees               685,715     686     -         -   599,314         -         -          -           -            -      600,000

 Shares issued
 for marketable
 securities               -       -  6,000 6,000,000         -        -         -          -           -            -    6,000,000

 Shares issued
 in connection with
 Pego acquisition   450,000     450 1,500  1,500,000  211,051         -         -          -          -            -    1,711,501
 
Shares issued in
 connection with ECS
 acquisition      2,500,000   2,500 3,400  3,400,000 5,597,500        -         -          -          -            -    9,000,000

 Dividends on
 preferred stock          -       -      -         -         -        -         -          -   (135,000)           -     (135,000)


 Net loss                -        -      -         -         -        -         -          -   (474,372)          -      (474,372)

Balance, December 
31, 1997         16,441,739 $16,442 11,900$10,900,010$31,083,604$(26,000   24,364  $(279,928) $(3,835,041)$        -   $37,859,087


</TABLE>

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


                                                                 26

<PAGE>

<TABLE>
<CAPTION>


                                           THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                                                CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                                       For the years ended December 31,
                                                                        1997             1996             1995
CASH FLOWS FROM OPERATING ACTIVITIES
<S>                                                                <C>              <C>              <C>         
   Net loss                                                        $ (474,372)      $(1,579,738)     $(1,593,891)
   Adjustments to reconcile net loss 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                                145,003           671,982          551,428
         Allowance for doubtful accounts                               57,443           (97,456)         116,490
         Forgiveness of debt                                         (376,615)         (384,735)               -
         Accrued interest income                                      (26,494)           (8,871)               -
         Stock dividends                                                    -               849                -
         Sale of Xinhui joint venture                                       -           489,961                -
         Changes in operating assets and liabilities:
              Accounts receivable                                    (275,772)          132,342         (175,958)
              Inventory                                              (413,340)         647,256          (293,697)
              Prepaid expenses and other                              110,790          (10,437)           90,661
              Payables to Mexican affiliate                          (112,001)               -                 -
              Accounts payable and accrued expenses                   562,858          347,603         1,363,056

NET CASH USED IN OPERATING ACTIVITIES                                (802,500)        (432,430)        (506,172)

CASH FLOWS FROM INVESTING ACTIVITIES
   Purchases of property and equipment                                (59,239)        (427,454)         (259,919)
   Construction in progress                                                 -                 -       (2,169,550)
   Proceeds on sale of marketable securities                          525,034                 -                -
   Proceeds on notes receivable                                        37,990                 -          603,159
   Payments on notes receivable                                       (35,000)         (347,824)               -
   Payments on acquisitions                                          (750,000)               -                -

NET CASH USED IN INVESTING ACTIVITIES                                (281,215)         (775,278)      (1,826,310)

CASH FLOWS FROM FINANCING ACTIVITIES
   Common stock subscriptions                                         (30,000)           45,000          200,000
   Proceeds on loan from Bank of China                                      -           507,801          849,535
   Proceeds on loans from shareholders                                110,000           177,485          205,984
   Proceeds from issuance of common stock                           1,063,000           186,632          835,000
   Net proceeds from line of credit                                   100,000                 -                -
   Payments on loans from shareholders                                (84,258)                -                -
   Payments on capital lease obligations                              (26,767)                -                -
   Payments on long-term debt                                         (21,394)                -                -
   Proceeds on loans                                                        -           149,565          171,806
   Proceeds on debentures                                              50,000                 -                -
   Additional contributions by foreign partner               -                -          15,634

NET CASH PROVIDED BY FINANCING ACTIVITIES                           1,160,581         1,066,483        2,277,959

NET INCREASE (DECREASE) IN CASH                                        76,866          (141,225)         (54,523)

CASH, BEGINNING OF YEAR                                                   822           142,047          196,570

CASH, END OF YEAR                                                 $    77,688    $          822    $     142,047

</TABLE>

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


                                                                   27

<PAGE>



                      THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


A. Summary of Significant Accounting Policies:

        Organization and Nature of Operations

        Harcourt   Investments   (USA),   Inc.,   (Harcourt   Investments)   was
        incorporated on April 23, 1993.  Principal  business  activities are the
        design,  manufacture and sale of writing  instruments.  During its first
        two  years  of  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 September 1996, Harcourt Investments sold its investment in Xinhui JV
        to CKES, Inc. of Sunnyvale, California (Notes C and F).

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

        Hartcourt Pen Factory,  Inc. (Hartcourt Pen) was incorporated in October
        1993. Principal business activities are the sale of writing instruments.
        In December 1994, Harcourt  Investments acquired 100% of the outstanding
        shares of the common  stock of  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, The Hartcourt  Companies,  Inc. (Company) entered into a
        purchase and sale agreement with NuOasis International,  Inc. (NuOasis),
        a corporation  incorporated  under the laws of the  Commonwealth  of the
        Bahamas,   for  the  purchase  of  a  commercial  real  estate  project,
        consisting of three 5-7 story apartment buildings, commonly known as the
        Peony Gardens Property (Peony  Gardens),  located in the eastern part of
        Tongxian in Beijing city,  mainland China.  The Company issued 4,000,000
        shares of its common stock with respect to this purchase (Note C).

        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 C).

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


                                                             28

<PAGE>


                            THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



A. Summary of Significant Accounting Policies: (continued)

        Organization and Nature of Operations (continued)

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

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

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

        In 1997,  the Company's  total  revenue  amounted to  $4,723,905,  which
        consists  of twelve  months of  domestic  sales of writing  instruments,
        $156,336 from Hartcourt Pen,  three months of revenue,  $1,881,159  from
        Pego and two months of revenue, $2,686,410 from ECS.

        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 and Cash Equivalents

        For purposes of the Statement of Cash Flows,  the Company  considers all
        highly liquid  investments  purchased with an initial  maturity of three
        months or less to be cash equivalents.

        Accounts Receivable

        In the normal course of business,  the Company extends  unsecured credit
        to customers  located in North  America.  Credit is extended based on an
        evaluation  of the  customer's  financial  condition.  The allowance for
        doubtful  accounts is based on  management's  evaluation of  outstanding
        accounts receivable at the end of the period. The allowance for doubtful
        accounts  was  $76,477  and  $19,034  at  December  31,  1997 and  1996,
        respectively.  It is reasonably  possible that the Company's estimate of
        allowance for doubtful accounts will change.


                                                             29

<PAGE>


                           THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                         (Continued)


A. Summary of Significant Accounting Policies: (continued)

        Inventory

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

        Property and Equipment

        Plant and equipment are stated at cost or estimated fair market value on
        the date of  acquisition.  Depreciation  is provided  over the estimated
        useful lives of the respective assets on the straight-line basis ranging
        from five to twenty  years.  The  Company's  policy is to  evaluate  the
        remaining lives and recoverability in light of current conditions. It is
        reasonably  possible that the Company's estimate to recover the carrying
        amount of property and equipment will change.

        Advertising Costs

        Advertising  costs  are  generally  expensed  as  incurred.  Advertising
        expense included in selling,  general and  administrative  expenses were
        $84,573, $14,182 and $26,134 for 1997, 1996 and 1995, respectively.

        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 Hartcourt Pen, Pego
        Systems,  Inc., and Electronic Components and Systems, Inc. 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.  All assets,  liabilities  and  operations  of Xinhui JV are
        reflected in the consolidated financial statements.  The interest of the
        joint  venture  partner in the assets and net loss of the joint  venture
        are reported as "Minority Interest".

        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.
        Translation 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.



                                                             30

<PAGE>


                           THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                        (Continued)



A. Summary of Significant Accounting Policies: (continued)

        Accounting for Business Combinations

        The   acquisitions   were  recorded  as  purchases  in  accordance  with
        Accounting  Principle  Board  Opinion  No.  16 (APB  No.  16)  "Business
        Combinations",  and the  purchase  prices were  allocated  to the assets
        acquired, (except for finished goods and work-in-process inventory), and
        liabilities  assumed  based  upon  their  estimated  fair  value  at the
        purchase  date.  The  finished  goods  and   work-in-process   inventory
        (percentage  completed) at the purchase  date was valued,  in accordance
        with APB No. 16, at the "sales price" less reasonable  profit allowances
        for selling  effort  consisting of sales profit and selling  costs.  The
        operating results of the acquired entities are included in the Company's
        consolidated financial statements from the dates of acquisition.

        Income Taxes

        Income taxes are provided for using the  liability  method of accounting
        in accordance with Statement of Financial  Accounting  Standards No. 109
        (SFAS No. 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.  The
        components  of the deferred  tax asset and  liability  are  individually
        classified as current and non-current based on their characteristics.

        Deferred tax assets are reduced by a valuation  allowance  when,  in the
        opinion of  management,  it is more likely than not that some portion or
        all of the deferred tax assets will not be realized. Deferred tax assets
        and  liabilities are adjusted for the effects of changes in tax laws and
        rates on the date of enactment.

        Reclassification

        Certain 1996 and 1995 amounts have been  reclassified  to conform to the
        1997    consolidated    financial    statement    presentation.    These
        reclassifications have no effect on previously reported net loss.

        Investments

        Investments  are provided for using the deposit  method of accounting in
        accordance with Statement of Financial Accounting Standards No. 66 (SFAS
        No. 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  $10,000,000
        (Note C).



                                                             31

<PAGE>


                          THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                         (Continued)


A. Summary of Significant Accounting Policies: (continued)

        Loss Per Share

        Net loss per share is provided in accordance with Statement of Financial
        Accounting  Standard No. 128 (SFAS No. 128) "Earnings Per Share".  Basic
        earnings per share are computed by dividing earnings available to common
        shareholders by the weighted average number of common shares outstanding
        during the period.  Diluted earnings per share reflect per share amounts
        that would have resulted if dilutive  common stock  equivalents had been
        converted to common stock. The net loss per share  calculations  reflect
        the effect of stock dividends and stock splits.  As required by SFAS No.
        128, prior year earnings per share amounts have been restated.  Earnings
        per share for the years ended  December 31, 1996 and 1995 increased $.00
        and $.07, respectively, as a result of this restatement.

        Stock Option Plan

        Effective January 1, 1996, the Company adopted a method of accounting
 for stock-based compensation plans
        as required by Statement of Financial Accounting Standard No. 123 (SFA
 No. 123) "Accounting for Stock-
        Based Compensation".  SFAS No. 123 allows for two methods of valuating 
stock-based compensation.  The
        first method allows for the continuing application of Accounting 
Principle Board Opinion No. 25 (APB No.
        25) in measuring stock-based compensation, while complying with the 
disclosure requirements of SFAS No.
        123.  The second method uses an option pricing model to value stock
compensation and record as such within
        the consolidated financial statements.  The Company will continue to 
apply APB No. 25, while complying
        with SFAS No. 123 disclosure requirements (Note U).

        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 consolidated financial statements and the
        reported  amounts of revenues and expenses during the reporting  period.
        Actual results could differ from those estimates.

        Intangibles

        Goodwill and other intangible  assets are amortized on the straight-line
        basis over the estimated  future periods to be benefitted (not exceeding
        25 years). Goodwill, the excess of the Company's purchase price over the
        fair  value of the net  assets  acquired,  is  amortized  over 25 years.
        Covenant not to compete is  amortized  on the  straight  line basis over
        five years. It is reasonably possible that the Company's estimate of the
        recoverability of goodwill will change.

        Fair Value of Financial Instruments

        The  following  methods  and  assumptions  were used by the  Company  to
        estimate the fair values of financial instruments as disclosed herein:

        Cash and cash equivalents:  The carrying amount  approximates fair value
        because of the short period to maturity of the instruments.

                                                             32

<PAGE>


                             THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                         (Continued)




A. Summary of Significant Accounting Policies: (continued)

        Fair Value of Financial Instruments (continued)

        Marketable securities:  For marketable securities,  the carrying amounts
        approximate fair value,  which is based on prices  guaranteed by Capital
        Commerce, Ltd.

        Notes receivable:  The fair value of notes receivable is estimated based
        on discounted cash flows using a current risk-weighted interest rate and
        on the  current  rates  offered  by the  Company  for  notes of the same
        remaining maturities.

        Short-term borrowings: The carrying amount approximates fair value since
        the interest rate fluctuates with the lending banks' prime rate.

        Long-term  debt: The fair value of long-term debt is estimated  based on
        interest  rates for the same or  similar  debt  offered  to the  Company
        having  the  same  or  similar   remaining   maturities  and  collateral
        requirements.

B. Accounts Receivable:
<TABLE>
<CAPTION>

        Accounts receivable consists of the following:
                                                                 December 31,     December 31,
                                                                    1997            1996

<S>                                                                <C>               <C>      
              Accounts receivable, unassigned                      $2,216,395        $  38,068
              Accounts receivable, assigned (Note J)                  193,059                -

                                                                     2,409,454          38,068

              Less allowance for doubtful accounts                    (76,477)         (19,034)

                                                                    $2,332,977        $ 19,034
</TABLE>

C. Investments and Business Acquisitions:

        Sale of Xinhui Joint Venture

        In September 1996, the Company sold its Xinhui joint venture interest to
        CKES, Inc. located in Sunnyvale,  California. Harcourt Investments owned
        a 52% interest in Xinhui Harcy Modern Pens, Ltd., a joint venture in the
        Peoples  Republic of China. The joint venture interest was 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  and
        allows the  Company to have a security  interest  in  substantially  all
        assets of CKES, Inc. (Note F).



                                                             33

<PAGE>


                                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                         (Continued)




C. Investments and Business Acquisitions: (continued)

        Sale of Xinhui Joint Venture (continued)

        Generally  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 the  Xinhui  plant and the length of time  before  payment
        begins by CKES,  Inc.  At December  31,  1996,  the  Company  decided to
        reserve $1,202,220 of the receivable due to payments being deferred to a
        later  period.  At December  31,  1997,  the  impairment  was  increased
        $364,110 to a balance of  $1,584,330 to offset the  amortization  of the
        discounts.

        Investment in Peony Gardens

        In August 1996, the Company  purchased an apartment complex located near
        Beijing,  China  for  $22  million  from  NuOasis  International,   Inc.
        (NuOasis).  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  upon  completion  of
        construction  and the date the  certificate  of  occupancy  is received.
        Under the deposit  method of accounting in accordance  with SFAS No. 66,
        the promissory  note for  $12,000,000 is currently  being deferred until
        the complete consummation of the Peony Gardens sale. Additionally, the 4
        million shares of common stock was recorded as a deposit at December 31,
        1997 and 1996. At December 31, 1997, the construction of the complex has
        been halted due to the downturn in the economy in Asia.  The Company has
        the  unilateral  option  of  extending  the date for  completion  of the
        contract or rescinding the purchase contract.  The Company's  management
        believes  the  contract  will  be  completed  as  originally   intended.
        Therefore,  no  adjustments  have been  made to  assets  or  liabilities
        associated with this contract.

        Investment in Alaskan Gold Claims

        In  September  1996,  the Company  purchased  a 50%  interest in 68 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 SFAS No. 66, the  1,298,700  shares of common stock was
        recorded  as a deposit at December  31,  1997 and 1996  pending a formal
        geological  survey of the land.  Management  believes there have been no
        changes  in the  value in the land  from  the date of  acquisition.  The
        Company may rescind the purchase if the  probable  valuation of the land
        is below $10,000,000.

        Purchase of Pego Systems, Inc.

        On October 3, 1997, the Company purchased all the outstanding  shares of
        Pego Systems,  Inc. (Pego).  Payment terms of the transaction  include a
        cash payment of $500,000,  the issuance of $450,000 of restricted common
        stock and 1,500 shares or  $1,500,000  of Series C Redeemable  Preferred
        Stock.  Included in the  acquisition  price is a covenant not-to compete
        (Note I).  The  excess  purchase  price  over the fair  value of the net
        assets of  $1,326,083  was recorded as goodwill  and is being  amortized
        over 25 years (Note I).


                                                             34

<PAGE>


                                  THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                         (Continued)




C. Investments and Business Acquisitions: (continued)

        Purchase of Electronic Components and Systems, Inc. and Pruzin 
Technologies, Inc.

        On October 28, 1997,  the Company  acquired  Electronic  Components  and
        Systems,   Inc.  and  Pruzin  Technologies,   Inc.  through  a  tax-free
        reorganization.  The Company  paid  $250,000 in cash,  issued a note for
        $250,000, issued 3,400 shares of Series D 9% Convertible Preferred Stock
        and 2,500,000 shares of common stock. The excess purchase price over the
        fair value of the net assets of $8,010,307  was recorded as goodwill and
        is being amortized over 25 years (Note I).

        The  following  unaudited  proforma  consolidated  results of operations
        assume that the above purchases occurred on January 1, 1996:
<TABLE>
<CAPTION>

                                                                      December 31,December 31,
                                                                       19                1996

<S>                                                               <C>           <C>        
              Total revenues                                      $20,688,930   $19,912,309
                Loss before taxes                                    (36         (1,024,227)
                Net loss                                             (364,587)   (1,026,027)
              Basic and fully diluted loss per share                    (0.03)        (0.21)
</TABLE>

        The proforma data gives effect to actual operating  results prior to the
        acquisition and adjustments to interest expense,  goodwill  amortization
        and income taxes. These proforma results of operations do not purport to
        be indicative of the results which would actually have been obtained had
        the purchases  occurred on the dates  indicated or which may be obtained
        in the future.

D. Marketable Securities:

        In July  1997,  the  Company  entered  into an  agreement  with  Capital
        Commerce,  Ltd.  (Capital) (as Isle of Man Corporation)  whereby Capital
        agreed to provide the Company  $6,000,000 in free trading securities for
        the  purchase of Pego  Systems,  Inc. and the  formation  of  Electronic
        Components  and  Systems,  Inc.,  a Nevada  Corporation.  The  Agreement
        stipulates  that  should the value of the stock  received by the Company
        decrease,  Capital  shall  compensate  for  such  reduction  by  issuing
        additional shares to equate the total value of
                $6,000,000.  In consideration  for the $6,000,000 in securities,
                the  Company  issued  to  Capital  $4,000,000  in  Series  A and
                $2,000,000  in  Series B, both 9%  convertible  preferred  stock
                (Note T).  Dividends  are  declared  and paid  monthly at 9% per
                annum.  Terms of this  agreement  are  over a ten  year  period.
                Included in accrued  expenses is accrued  dividends  of $135,000
                associated with this agreement.

        As of December  31,  1997,  the Company had sold  $525,034  worth of its
        securities,  and has available  $5,474,966.  Marketable  securities  are
        reported at the guaranteed value of the contract.







                                                             35

<PAGE>


                                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                         (Continued)




E. Inventory:

        Inventory consists of the following:
<TABLE>
<CAPTION>
                                                               December 31,       December 31,
                                                                   1997              1996

<S>                                                               <C>         <C>          
              Raw materials                                       $2,756,923 $           -
              Work-in-process                                         378,602             -
              Finished goods                                          405,796       311,424

                                                                   $3,541,321      $311,424
</TABLE>

F. Notes Receivable:
<TABLE>
<CAPTION>

        Notes receivable consist of the following:
                                                                                 December 31,        December 31,
                                                                                    1997              1996

<S>                                                                             <C>               <C>
        Note receivable from CKES  Acquisitions,  Inc.,  $3,000,000 face amount,
        interest  at 6% per annum,  due in  monthly  principal  installments  of
        $50,000 beginning  October 1, 1998,  secured by substantially all assets
        of CKES,  interest  and unpaid  principal  due and payable on October 1,
        2003. The note is reported less unamortized discount of $753,985,  based
        on 12% imputed interest, and $1,584,330 and $1,202,220 of loan
        impairment for 1997 and 1996, respectively (Note C).                     $1,043,795       $1,043,795

        Note  receivable  from former  attorney Kevin Quinn,  interest at 9% per
        annum, due on demand and secured by real estate. Included in the balance
        is accrued interest of $6,753 and $8,871 at December 31, 1997
        and 1996, respectively.                                                     111,523          113,641

        Note  receivable  from Yafa,  Inc.,  interest  at 9% per  annum,  due in
        monthly  principal  installments of $2,000,  accrued interest and unpaid
        principal  due and  payable  on or before  August 15,  1999,  secured by
        common stock of Yafa, Inc.  Included in the balance is accrued  interest
        of $18,113 and $3,878 at December 31, 1997
        and 1996, respectively.                                                     164,112          171,000

        Note receivable from individual, principal and interest at 5% per annum,
        due in  fourteen  monthly  installments  of  $300,  then  fifty  monthly
        installments of $622, with
        the final payment due February 1, 2003, unsecured.                           30,510                -



</TABLE>


                                                             36

<PAGE>


                                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                         (Continued)




F. Notes Receivable: (continued)

<TABLE>
<CAPTION>
                                                                December 31,       December 31,
                                                                   1997             1996

<S>                                                              <C>          <C>             
        Other                                                    $      2,000  $             -

              Total                                                 1,351,940     1,328,436

              Less current portion                                    293,673       137,641

              Notes receivable, net of current portion             $1,058,267    $1,190,795
</TABLE>

G. Due from Related Parties:
<TABLE>
<CAPTION>

        Related party loans consist of the following:
                                                                  December 31,       December 31,
                                                                   1997             1996

<S>                                                                 <C>            <C> 
        Loan to officer of Hartcourt, unsecured,
        non-interest bearing, due on demand.                        $  96,691       $32,356

        Loan to officer of ECS, unsecured,
        non-interest bearing, due on demand.                           31,009             -

        Loan to officer of ECS, unsecured,
        non-interest bearing, due on demand.                            3,698             -

              Total related party loans                               131,398        32,356

              Less current portion                                   (131,398)      (32,356)

                                                                 $           -      $
</TABLE>

H. Property and Equipment:

        Property and equipment are summarized as follows:
                                                 December 31,       December 31,
                                                     1997             1996

              Building                            $1,213,571$            -
              Machinery and equipment              2,166,792         36,426
              Furniture and fixtures                 109,706         28,600
              Computer equipment                     104,028              -
              Vehicles                                46,656           -
              Leasehold improvements                  27,781          6,197
 

                                                   3,668,534         71,223

              Less accumulated depreciation
   and amortization                                 (100,027)       (26,414  )
       Property and equipment, net                $3,568,507        $44,809
                                                            37

<PAGE>


                                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                         (Continued)

       
I.      Intangibles:

        Intangibles are summarized as follows:
                                               December 31,       December 31,
                                                   1997              1996

              Goodwill                            $9,336,390 $         -
              Non-compete agreement                  100,000          -

                                                    9,436,390           -

              Less accumulated amortization          (71,390)          -

              Intangibles, net                    $9,365,000 $         -

        Goodwill consists of amounts paid in excess of the fair value of the net
        assets in the  acquisitions of Pego and ECS. The covenant not-to compete
        agreement is with the former  shareholder of Pego and is in effect for a
        five year period.

J. Assigned Accounts Receivable:

        ECS has a factoring  agreement  with a finance  company  with a limit of
        $1,500,000.  This  contract is in effect until May 10, 1998 and shall be
        automatically  renewable  for  successive  periods of six months  unless
        terminated by thirty day written notice by either party.

        Under the factoring  agreement,  the factor purchases  substantially all
        trade accounts  receivable for one of ECS's major customers,  Next Level
        Systems,  Inc.,  at a  price  equal  to  the  net  face  amount  of  the
        receivable,  less a discount of 1.25%, 1.75% and 2.25% if the account is
        paid within thirty days,  thirty to forty-five  days,  and forty-five to
        sixty days of the purchase,  respectively. For accounts paid after sixty
        days,  an  additional  .50% will be charged for each fifteen day period.
        ECS  may  take  advances  of up to 75% of the  net  face  amount  of the
        accounts sold to the factor.  ECS is  contingently  liable to the factor
        for merchandise  disputes,  customer  claims,  and other  chargebacks on
        eligible  receivables.  Accounts not  collected  within  ninety days are
        required  to be  repurchased  by ECS.  As  collateral,  the  Company has
        granted a continuing  security  interest in substantially  all assets of
        ECS.

        The proceeds  received  from the factor for the year ended  December 31,
        1997 totaled  $1,694,313.  At December 31, 1997, the balance of assigned
        accounts receivable and the contingent  liability was $772,236,  and the
        balance due to the factor for advances  taken prior to the collection of
        the accounts receivable was $579,177.

K. Payables to Mexican Affiliate:

        ECS maintains  manufacturing  operations under a maquiladora  program in
        Nogales,  Mexico.  The maquiladora  company (the  "affiliate") is wholly
        owned by the President of ECS.




                                                             38

<PAGE>


                                  THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                         (Continued)




K. Payables to Mexican Affiliate: (continued)

        Under the  maquiladora  program,  ECS advances cash to the affiliate for
        operating expenses. ECS provides the raw materials, production machinery
        and  equipment  for  manufacture  and  assembly.  Upon  completion,  the
        finished goods are purchased by ECS. Total  purchases from the affiliate
        for the year ended December 31, 1997 were $800,516.

        At December 31, 1997,  the  unsecured,  non-interest  bearing,  due upon
        demand   balance   payable  to  the  Mexican   affiliate  was  $352,942.
        Additionally,  at December  31, 1997,  the book value of the  production
        machinery and  equipment and the value of the inventory  provided to the
        affiliate was $1,036,359 and $1,968,381,  respectively. It is reasonably
        possible that  operations  located outside an entity's home country will
        be  disrupted  in the near  term,  however,  management  believes  it is
        remote.

L. Debentures:

        Debentures consist of the following:
<TABLE>
<CAPTION>

                                                                                         December 31,    December 31,
                                                                                                1997            1996

        Eighteen-month Series "A" Convertible Debentures, principal due November
        1998,  interest  at 10% per annum  and paid at the end of each  quarter.
        Interest  payments  can be either  cash or shares  of  Hartcourt  common
        stock, at the holder's option. Debentures were discounted 35% to $32,500
        for  cash  proceeds  held  in  escrow,  $17,500  of  interest  has  been
        capitalized  and will be amortized over the eighteen  month period.  The
        Company has recorded  $6,805 of interest  expense  associated with these
        debentures
<S>                                                                                     <C>                       
        for the year ended December 31, 1997.                                           $  50,000$               -


                                                                  
              Total Debentures                                                             50,000                 -

              Less current portion                                                        (50,000)                -

                                                                                         $          -$           -
</TABLE>

M. Notes Payable:
<TABLE>
<CAPTION>

        Notes payable are summarized as follows:
                                                                                         December 31,December 31,
                                                                                                1997            1996

<S>                                                                                       <C>  
        Note payable, individual, interest at 8.5% per annum, due November 2024,
        monthly principal and interest payments of $9,544,
        secured by land and building.                                                       $1,209,528$             -
</TABLE>

                                                             39

<PAGE>


                                THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                         (Continued)


M. Notes Payable: (continued)
<TABLE>
<CAPTION>
                                                                                         December 31,December 31,
                                                                                                1997            1996

<S>                                                                                  <C>                 <C>
        Note payable,  Anja Engineering,  interest at 10% per annum,  payment of
        $100,000 due May 15, 1998, thereafter,  quarterly principal and interest
        payments of $6,415 beginning
        August 1998 through May 2003, unsecured.                                     $    200,000        $576,615

        Note  payable,  financial  institution,  due  June  1999,  with  monthly
        installments  of  $8,039   including   interest  at  12.29%  per  annum,
        collateralized by equipment and personally
        guaranteed by the President of ECS.                                                130,044              -

        Other                                                                                    -          4,150
 
              Total                                                                      1,539,572        580,765

              Less current portion                                                        (205,245)    (56,396)

              Notes payable, net of current portion                                      $1,334,327      $524,369
</TABLE>

        The following is a summary of principal maturities of notes payable:

              Year ending December 31,

                       1998                                  $   205,245
                       1999                                       75,248
                       2000                                       33,284
                       2001                                       36,517
                       2002                                       40,065
                       Thereafter                              1,149,213

                       Total                                  $1,539,572












                                                             40

<PAGE>


                                  THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                         (Continued)



N. Notes Payable, Related Parties:

        Notes payable, related parties consist of the following:
<TABLE>
<CAPTION>

                                                                                         December 31,December 31,
                                                                                                1997            1996

<S>                                                                                       <C>                 <C>
        Note payable due to the President of ECS and shareholder of the Company,
        interest at 7% per annum, principal of $125,000 plus accrued interest is
        due on July 31, 1998 and
        July 31, 1999, unsecured.                                                          $250,000$          -

        Note payable due to the President of ECS and shareholder of the Company,
        interest at 10% per annum, monthly interest payments
        of $917, due on demand, unsecured.                                                 110,000               -

        Note payable due to an employee of the Company,
        interest at 10% per annum, monthly interest
        payments of $167, due on demand, unsecured.                                           20,000             -

        Note payable due to a relative of the President of
        ECS, interest at 10% per annum, monthly interest
        payments of $333, due on demand, unsecured.                                           40,000            -

               Total                                                                         420,000              -

               Less current portion                                                         (295,000)            -

               Notes payable, related parties, net of current portion                      $ 125,000 $          -
</TABLE>

        The  following is a summary of  principal  maturities  of related  party
notes payable:

               Year ending December 31,

                       1998                                      $295,000
                       1999                                       125,000

                       Total                                     $420,000

O. Line of Credit:

        The Company  has a secured  line of credit  agreement  with a bank which
        provides  that it may borrow up to $500,000 at the bank's  prime rate of
        interest  (9% at December  31,  1997).  The line of credit is secured by
        inventory,  equipment and accounts receivable of Pego Systems,  Inc. The
        line of credit is due on demand.
        At December 31, 1997, $300,000 was available under this agreement.

                                                             41

<PAGE>


                                THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                         (Continued)



P. Accrued Expenses and Other Current Liabilities:

        Accrued  expenses  and  other  current  liabilities  are  summarized  as
follows:

<TABLE>
<CAPTION>
                                                                           December 31,           December 31,
                                                                                 1997            1996

            
<S>                                                                           <C>                 <C>     
             Accrued brokers fees                                             $   437,000$            -
             Accrued wages                                                        175,000           129,500
             Accrued dividends (Note T)                                           135,000                 -
             Prepaid credits                                                      110,202                 -
             Accrued sales taxes                                                   46,488                 -
             Accrued commissions                                                   42,003                 -
             Other current liabilities                                            101,188             4,247

                                                                               $1,046,881          $133,747
</TABLE>

        Accrued broker fees represent  amounts payable for services provided for
    
the acquisition of ECS (Note C).

Q. Income Taxes:

        Provisions for income taxes are summarized as follows:

                                                      Year ended
                                      December 31,   December 31,  December 31,
                                          1997               1996         1995

             Current income taxes          $1,700           $1,800  $         -

             Provision for income taxes    $1,700           $1,800  $         -

        The Company  has  deferred  tax assets for the tax effects of  temporary
        differences  between  financial  and tax  reporting  for the years ended
        December 31, 1997 and 1996 as follows:
<TABLE>
<CAPTION>

                                                                  1997               1996

<S>                                                              <C>                 <C>  
             Deferred tax assets:
             Net operating losses                                  $792,000          $ 569,592
             Other                                                   49,000                  -

                                                                    841,000            569,592

             Valuation allowance                                   (841,000)          (569,592)

             Net deferred tax assets                         $            -     $            -

</TABLE>


                                                             42

<PAGE>


                                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                         (Continued)



Q. Income Taxes: (continued)

        The  Company  has  net  operating   loss   carryforwards   remaining  of
        approximately $2,266,000.  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
        2012. The valuation allowance  increased $271,408,  and $321,592 for the
        years ended December 31, 1997 and 1996,  respectively.  It is reasonably
        possible that the Company's  estimate of the  valuation  allowance  will
        change.

R. Commitments and Contingencies:

        Operating Leases

        The Company leases its facilities under long-term,  non-cancelable lease
        agreements   expiring  at  various   dates   through   June  2003.   The
        noncancelable  operating lease agreements  provide that the Company pays
        property taxes,  insurance and certain operating expenses  applicable to
        the leased premises. Rent expense for the years ended December 31, 1997,
        1996  and 1995 was  $68,023,  $27,732  and  $36,745,  respectively.  The
        Company  also leases  vehicles and  equipment  under  various  long-term
        agreements.

        The future minimum  annual lease  payments  required under the operating
leases are as follows:
<TABLE>
<CAPTION>

                Year ending
             December 31,                          Facilities        Vehicles           Total

<S>                <C>                              <C>                 <C>          <C>        
                   1998                             $  285,710          $30,357      $   316,067
                   1999                                313,226            9,391          322,617
                   2000                                316,850                -          316,850
                   2001                                187,110                -          187,110
                   2002                                 21,600                -           21,600
                   Thereafter                           32,400                -           32,400

               Total future lease payments           $1,156,896         $39,748       $1,196,644
</TABLE>

        Capital Leases

        Pego and ECS lease  machinery,  equipment  and  vehicles  under  capital
        leases.  The  economic  substance  of the leases is that the  Company is
        financing  the  acquisition  of the  machinery,  equipment  and vehicles
        through the leases, and, accordingly, they are recorded in the Company's
        assets and  liabilities.  The following is an analysis of the book value
        of the leased assets  included in property and equipment at December 31,
        1997:

               Machinery and equipment                $936,060
               Vehicles                                 20,107
               Accumulated depreciation                (21,326)

                                                       $934,841





                                                             43

<PAGE>


                                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                         (Continued)


R. Commitments and Contingencies: (continued)

        Capital Leases (continued)

        The following is a schedule by year of the future minimum lease payments
        required  under capital  leases  together with their present value as of
        December 31, 1997:

               Year ending
               December 31,

                   1998                                              $  272,891
                   1999                                                 250,069
                   2000                                                 215,049
                   2001                                                 181,852
                   2002                                                  67,936

             Total future capital lease payments                        987,797

             Less amount representing interest                         (175,098)

             Net present value of minimum lease payments                812,699

             Less current portion of capital lease obligations        (200,222)

             Capital lease obligations, net of current portion$         612,477

        At December 31, 1997,  $708,272 of the total capital  lease  obligations
        was personally guaranteed by the President of ECS.

        Consulting Agreements

        On December 30, 1996,  the Company  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 The Hartcourt Companies, Inc. by at least $50,000,000 by December 31,
        1997. The Company is currently  renegotiating the minimum performance of
        the market capitalization.

        Pursuant to the terms of the  agreement,  the Company  issued  1,000,000
        common shares at $1.50 per share as an advance against future fees to be
        earned by American  Equities.  The Company also advanced  300,000 common
        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.  During 1997,  the Company  expensed to operations
        $385,230 of consulting fees from the following: $150,000 (300,000 shares
        at $0.50 per share) of prepaid expenses,  $45,230 of prepaid  consulting
        fees from a 2% financial restructuring fee for the Pego acquisition, and
        $190,000 of prepaid  consulting  fees from a 2% financial  restructuring
        fee for the ECS acquisition.


                                                             44

<PAGE>


                                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                         (Continued)

R. Commitments and Contingencies: (continued)

        Consulting Agreements (continued)

        In February 1997, the Company  entered into a consulting  agreement with
        DanAllen  Investment   Corporation.   Terms  of  the  agreement  include
        providing consulting services to the Company for locating and purchasing
        companies for a one year period.  The Company  issued  100,000 shares of
        common  stock at $1.50 per share as a retainer  to  DanAllen  Investment
        Corporation for future acquisitions. This transaction was discounted due
        to the restriction on the shares issued.

S. Supplemental Cash Flow Information:
 <TABLE>
<CAPTION> 
                                                                       1997       1996         1995
          Cash paid for interest and income taxes:



<S>                                                                 <C>         <C>            <C>   
               Interest                                             $113,026$             -     $9,524
               Income taxes                                        $  37,400$         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         $    40,225$   109,589      $       -
               Common stock issued for purchase of
                    Peony Gardens                            $             - $9,920,000      $       -
               Common stock issued for brokerage fees            $   600,000 $2,012,500      $       -
               Common stock issued for converting debt to equity$             -$   212,500   $       -
               Common stock issued for prepayment of
                    consulting fees                              $   150,000$   900,000      $       -
               Note received for sale of subsidiary          $             - $1,043,795      $       -
               Preferred stock issued for marketable securities   $6,000,000$             -  $       -
               Assets purchased through capital leases           $   211,041$             -  $       -
               Stock subscription receivable                    $     26,000$             -  $       -

        Allocation  of common  and  preferred  stock  issued  for the assets and
        liabilities of Pego during 1997 was as follows:

               Accounts receivable                                          $    924,452
               Inventory                                             423,016
               Other assets                                                      11,223
               Property and equipment                                         1,309,042
               Goodwill                                              826,083
               Non-compete agreement                                            100,000
               Checks drawn in excess of available bank balance                (130,348)
               Accounts payable                                                (308,548)
               Line of credit                                                  (100,000)
               Accrued expenses                                                 (72,876)
               Capital lease obligations                                        (11,741)
               Note payable                                                   (1,213,571)

                                                                                           $ 1,756,732
</TABLE>

                                                             45

<PAGE>


                             THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                         (Continued)


S. Supplemental Cash Flow Information: (continued)

        Allocation  of common  and  preferred  stock  issued  for the assets and
        liabilities of ECS during 1997 was as follows:

               Accounts receivable                               $1,121,778
               Inventory                                           2,393,541
               Other assets                                           39,644
               Property and equipment                              2,017,989
               Goodwill                                            8,010,307
               Checks drawn in excess of available bank balance     (538,701)
               Accounts payable                                   (1,555,686)
               Notes payable, related parties                       (310,000)
               Accrued expenses                                     (514,000)
               Payable to Mexican affiliate                         (464,943)
               Capital lease obligations                            (616,684)
               Note payable                                         (143,245)

                                 
                                                                  $9,440,000

T. 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).

        In September  and October 1997,  the Company's  Articles were amended to
        authorize the issuance of A, B, C and D preferred stock. As amended, the
        Articles  provide that the total number of shares of preferred series A,
        B, C and D stock are 4,000, 2,000, 1,500 and 10,000, respectively,  each
        having a stated value of $1,000 per share.

        On October 5, 1995 and August 2, 1996 the Company effectuated a five for
        seven (5:7) and a one for five (1:5) reverse stock splits, respectively.
        The  effect of these  events  have been  restated  retroactively  on the
        Statement of Shareholders' Equity.

        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.



                                                             46

<PAGE>


                                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                         (Continued)



T. Capital Stock: (continued)

        Original Preferred Stock (continued)

        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 or involuntary,  the holders of record
        shall be entitled  to be paid the full par value of  Original  Preferred
        Stock, and no more.

        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.  No shares have
        been issued.

        Series A 9% Convertible Preferred Stock

        Non-voting  convertible  preferred stock, 4,000 shares authorized with a
        stated value of $1,000 per share. Holders of shares shall be entitled to
        receive cumulative  dividends at a rate equal to 9% per annum.  Series A
        convertible preferred stock is subject to redemption at any time, at the
        option of the Company,  at a redemption  price equal to $1,000 per share
        plus accrued and unpaid dividends to the date of redemption.  Holders of
        Series A  Convertible  Preferred  Stock may  convert  their  shares into
        either  (A) a number of shares of fully paid and  non-assessable  common
        stock of  Electronic  Components  Systems,  Inc., a Nevada  Corporation,
        equal to .0015%  of total  outstanding  shares  of ECS or (B)  shares of
        fully paid and non-assessable common stock of the Company. Dividends are
        to be declared and paid monthly. Dividends totaling $90,000 were accrued
        at December 31, 1997 for Series A.

        Series B 9% Convertible Preferred Stock

        Non-voting  convertible  preferred stock, 2,000 shares authorized with a
        stated value of $1,000 per share.  Holder of shares shall be entitled to
        receive cumulative  dividends at a rate equal to 9% per annum.  Series B
        convertible preferred stock is subject to redemption at any time, at the
        option of the Company,  at a redemption price equal to $1,000 per share,
        plus accrued and unpaid dividends to the date of redemption.  Holders of
        Series B  convertible  preferred  stock may  convert  their  shares into
        either (A) a number of shares of fully paid and non-assessable shares of
        common stock of Pego Systems, Inc., a California  Corporation,  equal to
        .015% of total  outstanding  shares of Pego or, (B) shares of fully paid
        non-assessable common stock of the Company. Dividends are to be declared
        and paid monthly.  Dividends  totaling  $45,000 were accrued at December
        31, 1997 for Series B.

        Series C Redeemable Preferred Stock

        Non-voting,   non-participating   redeemable   preferred  stock,   1,500
        authorized,  with a par value of $1,000  per share.  Series C  preferred
        stock is junior to the original  preferred  stock and any other class or
        series of capital

                                                             47

<PAGE>


                                THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                         (Continued)

        stock of the  Company  which  are  specifically  ranked  senior  (senior
        securities).  Series C preferred stock is redeemable at any time, at the
        discretion of the Company, at a redemption price of $1,000 per share.

T. Capital Stock: (continued)

        Series D Convertible Preferred Stock

        Voting  convertible  preferred  stock,  10,000 shares  authorized with a
        stated  value of $1,000  per  share.  Holders  of  Series D  Convertible
        Preferred Stock shall be entitled to receive, when declared by the Board
        of Directors,  dividends at a par with holders of the  Company's  common
        stock, as if the Series D Convertible Preferred Stock had been converted
        in common  stock on the record  date for the payment of  dividend.  Each
        outstanding  share of  Series D  Convertible  Preferred  Stock  shall be
        convertible,  at the option of its holder, at any time, into a number of
        shares of common  stock of the  Company  at a  conversion  rate equal to
        $1,000 divided by the market price of the Company's common stock.

U. 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, 1997, 1996 and 1995.

V. Warrants:

        As of December  31, 1997 there were  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,
        1997.

W. Foreign Operations:

        Selected  financial  data for the  Company's  foreign  operations  is as
follows:
<TABLE>
<CAPTION>

                                                      (Unaudited)    (Unaudited)                     (Unaudited)
                                            December 31, 1997      September 27, 1996        December 31, 1995

<S>                                          <C>                 <C>                                  <C>          
               Revenues                      $             -     $    458,236                         $     249,784

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

               Total assets                  $3,004,740       $ 9,228,255                               $10,366,707

</TABLE>


                                                             48

<PAGE>


                                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                         (Continued)





X. Stock Subscription Agreements:

        In  October  1996,  the  Company  entered  into two  stock  subscription
        agreements.  Terms of the agreements  include that the  subscribers  can
        purchase up to 20,000 common shares of The Hartcourt Companies, Inc. per
        month for 12 months at $0.50 per share.  The  Company  has  $15,000  and
        $45,000 on deposit at December 31, 1997 and 1996, respectively.

Y. Loss Per Share:

        The following  reconciles  amounts reported in the financial  statements
        for the years ended December 31, 1997, 1996 and 1995, respectively:
                                                         
<TABLE>
<CAPTION>
                                                                                 1997
                                                                    Income (loss)     Shares        Per-share
                                                                     (Numerator) (Denominator)   Amount

<S>                                                              <C>                          <C>     
          Income (loss) from continuous operations               $(474,372)           -       $      -
          Less preferred stock dividends                          (135,000)           -              -

          Income (loss) available to common stock-
          holders - basic earnings per share                      (609,372)   12,550,337         $(0.05)

          Effect of dilutive securities                              -                  -

          Income (loss) available to common stock-
          holders - diluted earnings per share                   $(609,372)      12,550,337         $(0.05)

                                                                                          1996
                                                                    Income (loss)     Shares        Per-share
                                                                     (Numerator) (Denominator)   Amount

          Income (loss) from continuous operations            $ (1,579,738)        -       $      -
          Less preferred stock dividends                 -             -              -

          Income (loss) available to common stock-
          holders - basic earnings per share                   (1,579,738)        4,814,303         $(0.33)

          Effect of dilutive securities                                 -                -

          Income (loss) available to common stock-
          holders - diluted earnings per shar                 $(1,579,738)        4,814,303         $(0.33)
</TABLE>

                                                             49

<PAGE>


                               THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                         (Continued)


Y. Loss Per Share: (continued)
<TABLE>
<CAPTION>
                                                                                           1995
                                                                    Income (loss)     Shares        Per-share
                                                                     (Numerator) (Denominator)   Amount

<S>                                                                   <C>           <C>            <C>     
          Income (loss) from continuous operations                    $ (1,593,891)        -       $      -
          Less preferred stock dividends                                         -         -              -

          Income (loss) available to common stock-
          holders - basic earnings per share                            (1,593,891) 2,915,655         $(0.55)

          Effect of dilutive securities                                           -        -
               
          Income (loss) available to common stock-
          holders - diluted earnings per share                        $(1,593,891)  2,915,655         $(0.55)
</TABLE>

        During 1997 and 1996,  the Company had 2,000,000  warrants  outstanding,
        each  convertible  into one share of common stock.  In addition,  during
        1997,  1996,  and 1995,  the Company  had  convertible  preferred  stock
        outstanding  (Note T), each share  convertible into common stock.  These
        instruments were not included in the computation of diluted earnings per
        share for any of the years presented,  due to their antidilutive effects
        based on the net loss reported each year.

Z. Forgiveness of Debt:

        During  1997 and  1996,  the  Company  recognized  debt  forgiveness  of
        $376,615  and  $384,735,  respectively.  The  1997  forgiveness  relates
        specifically to the Anja  settlement.  The 1996  forgiveness  relates to
        several notes and accounts payable owned to several vendors.

AA.Profit Sharing Plans:

        ECS  maintains  a  defined  contribution  plan  (the  Plan) for its U.S.
        employees  that provides for tax deferred  benefits under Section 401(K)
        of the  Internal  Revenue  Code.  The  Plan  allows  employees  to  make
        contributions,  25% of which will be matched by the Company, up to 5% of
        an employee's gross salary or the amount allowed by law, as defined. The
        Company has made  matching  contributions  to the Plan of  approximately
        $510  for the  year  ended  December  31,  1997.  The  Company  pays the
        administrative costs of the Plan, which approximates $2,000 per year.

        Pego has a contributory  profit sharing plan (the Plan) as defined under
        Sections 401(a) and 501(a) of the Internal Revenue Code. Under the Plan,
        employees  may  contribute  1% to  15%  of  their  compensation.  At the
        discretion  of the  Board  of  Directors,  the  Company  may  contribute
        additional  amounts  to  the  Plan  on  behalf  of  those  who  actively
        participate.  Company  contributions will vest over a six-year period as
        established in the Plan. No employer matching contributions were made to
        the Plan for the year ended December 31, 1997.






                                                             50

<PAGE>


                                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                         (Continued)



AB.Major Customers:

        During  the  year  ended  December  31,  1997,  ECS had one  significant
        customer, Next Level Systems, Inc. Revenue from Next Level Systems, Inc.
        for  the  year  ended  December  31,  1997  totaled  $1,493,686,   which
        represents 32% of net revenue.

AC.Subsequent Events:

        In July 1997,  the  Company  entered  into an  agreement  to  purchase a
        shopping  center  located  in Perris,  California  for  $6,750,000.  The
        building  complex  has  85,000  square  feet and has  average  income of
        $620,000 per year. Terms of the transaction  include a $25,000 cash down
        payment,  bank  financing  of  $3,725,000,  and 34 of the  Company's  68
        mineral lease gold lode claims valued at $3,000,000.  As of December 31,
        1997, the  transaction  was in escrow pending the  availability  of bank
        financing.

        In January  1998,  ECS entered  into a capital  lease  agreement  with a
        financial institution for machinery.  The cost of machinery was $186,690
        with monthly payments of $3,893 over five years,  including  interest at
        8.8% per annum.



                                                             51

<PAGE>



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                    52        Chairman of the Board, President,
                                            Chief Executive Officer and Chief
                                                       Financial Officer

Frederic Cohn                       58      Secretary, Treasurer and Director

Kenneth Silva                       71      Vice-President, Marketing and Sales 
                                        and Director

Michael L. Caruana                 54                    Director

James De Rosa                       66                        Director

James Pruzin                        48                        Officer

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
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 of the
Company's subsidiary, Pego, an engineering and industrial equipment
 manufacturing company, and has held various

                                                             52

<PAGE>



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.

James Pruzin became involved in the Company upon the acquisition of ECS. He is a
graduate of Indiana University (1972) with a degree in business  administration.
Prior to the ECS acquisition,  Mr. Pruzin was the president and sole shareholder
of  Electronic  Components  and Systems,  Inc.,  an Arizona  corporation.  He is
currently President and Chief Executive Officer of the Company's ECS subsidiary.

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.

As the sole holder of the 1,000 outstanding shares of Company 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.

Rights and Preferences of Preferred Stock

Series A 9% Convertible Preferred Stock

Non-voting  convertible  preferred stock,  4,000 shares authorized with a stated
value of $1,000  per  share.  Holders  of shares  shall be  entitled  to receive
cumulative  dividends  at a rate  equal to 9% per  annum.  Series A  convertible
preferred  stock is  subject  to  redemption  at any time,  at the option of the
Company, at a redemption price equal to $1,000 per share plus accrued and unpaid
dividends to the date of redemption.  Holders of Series A Convertible  Preferred
Stock may convert  their shares into either (A) a number of shares of fully paid
and non-assessable common stock of Electronic Components Systems, Inc., a Nevada
Corporation, equal to .0015% of total outstanding shares of ECS or (B) shares of
fully paid and non-assessable  common stock of the Company.  Dividends are to be
declared and paid monthly.  Dividends  totaling $90,000 were accrued at December
31, 1997 for Series A.

Series B 9% Convertible Preferred Stock

Non-voting  convertible  preferred stock,  2,000 shares authorized with a stated
value of $1,000  per  share.  Holder  of shares  shall be  entitled  to  receive
cumulative  dividends  at a rate  equal to 9% per  annum.  Series B  convertible
preferred  stock is  subject  to  redemption  at any time,  at the option of the
Company,  at a  redemption  price  equal to $1,000 per share,  plus  accrued and
unpaid  dividends  to the date of  redemption.  Holders of Series B  convertible
preferred  stock may convert  their shares into either (A) a number of shares of
fully paid and  non-assessable  shares of common stock of Pego Systems,  Inc., a
California  Corporation,  equal to .015% of total outstanding shares of Pego or,
(B) shares of fully paid non-assessable  common stock of the Company.  Dividends
are to be declared and paid monthly.  Dividends totaling $45,000 were accrued at
December 31, 1997 for Series B.




Series C Redeemable Preferred Stock

                                                             53

<PAGE>




Non-voting, non-participating redeemable preferred stock, 1,500 authorized, with
a par value of  $1,000  per  share.  Series C  preferred  stock is junior to the
original  preferred  stock and any other class or series of capital stock of the
Company which are  specifically  ranked  senior  (senior  securities).  Series C
preferred stock is redeemable at any time, at the discretion of the Company,  at
a redemption price of $1,000 per share.

Series D Convertible Preferred Stock

Voting convertible preferred stock, 10,000 shares authorized with a stated value
of $1,000 per share.  Holders of Series D Convertible  Preferred  Stock shall be
entitled to receive, when declared by the Board of Directors, dividends at a par
with  holders of the  Company's  common  stock,  as if the Series D  Convertible
Preferred  Stock had been  converted  in common stock on the record date for the
payment of dividend.  Each outstanding  share of Series D Convertible  Preferred
Stock shall be  convertible,  at the option of its holder,  at any time,  into a
number of shares of common  stock of the Company at a  conversion  rate equal to
$1,000 divided by the market price of the Company's common stock.

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
31,1997,  1996 and 1995 to the person serving as the Company's  Chief  Executive
Officer during the years ended December 31, 1996.

Name and Principal Position                 Fiscal Year       Annual Salary

Dr. Alan V. Phan, Chief Executive Officer                   1997      $175,000
                                                          1996        $100,000
                                                          1995        $ 70,000

The Company has an employment  agreement with its chief executive officer,  Alan
Phan.  There are no salary,  bonus or incentive  plans  covering cash or Company
stock 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, 1997 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.




Name and Address oAmount and Nature Percent of
Beneficial Owner           Beneficial OwnersCommon stock


                                                             54

<PAGE>



Dr. Alan V. Phan 1,396,718                                  (3)      14.0%
19104 South Norwalk Boulevard
Artesia, California 90701

Frederic Cohn7,609                                                    *
19104 South Norwalk Boulevard
Artesia, CA 90701

Michael L. Caruana210,000                                            13.0%
19104 South Norwalk Boulevard
Artesia, CA 90701

James De Rosa7,609                                                    *
19104 South Norwalk Boulevard
Artesia, CA 90701

Jim Pruzin and Antoinette Pruzin J/T
931 E. Calle Mariposa
Tucson, AZ 857182,500,000                                   (8)      15.2%

Dragon King Investment Services, Ltd.
c/o Fred Luke
4521 Campus Drive
Irvine, CA 92512880,000                                     (9)       5.3%


CEDE & Co.4,573,596                                         (7)      27.8%
55 Water Street 2SL
New York, NY 10041

Tiana Corporation1,767,664                              (4) (5)      10.7%
Kai Tak Commercial Building
Room 704A
317 Des Voeux Road Central
Hong Kong, China

NuOasis International, Inc.1,300,000                        (6)       7.98%
2 Park Plaza, Suite 470
Irvine, California 92714

All officers and directors
as a group1,621,936                                                   9.9%


*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.


                                                             55

<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
         occupance is received. NuOasis is a non-affiliate of the Company.

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

(8)      Jim Pruzin and his wife, Antoinette, jointly owned the former 
Electronic Components and Systems, Inc.,
         Arizona Corp. which was acquired by the Company on October 28, 1997.

(9)      Subsidiary of NuOasis International, Inc.

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."

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."


                                                             56

<PAGE>



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 August 1996, the Company purchased an apartment complex located near Beijing,
China $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 occupance
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, 1997 and 1996.

On  October  3, 1997,  the  Company  purchased  the  outstanding  shares of Pego
Systems, Inc. (Pego) where Pego became a wholly-owned subsidiary of the Company.
Pego,  a  manufacturer's  representative  organization  for air and gas handling
equipment,  offers a full line of value added services  including  distribution,
service and  manufacturing of custom process equipment  packages.  In connection
with the purchase,  the Company paid $500,000 in cash,  issued 450,000 shares of
restricted common stock, 1,500 shares of Series "C" redeemable  preferred stock,
and entered  into a  non-compete  agreement  with Pego's  majority  shareholder,
Michael Caruana,  who was prior to the acquisition,  and still is, a director of
the Company. See Part II, F/S, "Consolidated  Financial Statements,  Years Ended
December 31, 1997 and 1996 - Notes to Consolidated Financial Statements, Note B.
"Investments and Business Acquisitions".

During  1997,  the  Company  advanced to Dr.  Alan Phan,  a director,  executive
officer and promoter of the Company, $96,691.

During 1997, a director of the Company  loaned the Company  $110,000 for working
capital.


                                                          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.
<TABLE>
<CAPTION>

Exhibit No.       Description of Document

<S>                          <C>                                                                   
                                       
     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)

     2.03                                                     Agreement between The Hartcourt Companies, Inc. and the
                             shareholder of Pego Systems, Inc., "Stock Purchase Agreement",
                             dated June 29, 1997 (3)

     2.04                                                     Agreement and Plan of Reorganization, dated October 28, 1997,

                                                             57

<PAGE>



                             between The Hartcourt Companies, Inc., Electronic Component
                             and Systems, Inc., and Pruzin Technologies, Inc. (4)

     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)

     4.02                                                     Articles of Amendment of the Articles of Incorporation of The
                             Hartcourt Companies, Inc., Designating Series A 9% Preferred Stock.

     4.03                                                     Articles of Amendment of Articles of Incorporation of The
                             Hartcourt Companies, Inc. Designating Series B 9% Preferred Stock.

     4.04                                                     Certificate of Amendment of the Articles of Incorporation of The
                             Hartcourt Companies, Inc. Designating Series C Preferred Stock.

     4.05                                                     Articles of Amendment of the Articles of Incorporation of The
                             Hartcourt Companies, Inc. Designating Series D Preferred Stock.

    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)

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,

                                                             58

<PAGE>



                             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 The Hartcourt
                             Companies, Inc. and American Equities LLC, a California limited
                             liability company. (2)

10.14             Investment Banking Agreement, dated March 1998, between The Hartcourt
                             Companies, Inc. and DanAllen Investment Group.

10.16             Marketable Securities Agreement, dated July 31, 1997, between The Hartcourt
                             Companies, Inc. and Capital Commerce, Ltd.

10.17             Lease Termination Agreement, dated March 24, 1998, between Hartcourt
                             Investment (USA) Corporation and Scripto-Tokai Corporation.

21.01             Subsidiaries of the Company.

23.01             Consent of Independent Certified Public Accountants.

27.01             Financial Data Schedule.
</TABLE>

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

(1)   Previously filed as an exhibit to the Company's Form 10SB, File No. 
97636406 and incorporated herein by
      reference.

(2)   Previously filed as an exhibit to the Company's 10-KSB, dated April 15,
 1997, File No. 97581142 and as
      amended by the Company's Form 10-KSB40/A, dated July 3, 1997, File No.
 97636294.  Incorporate herein
      by reference.

(3)   Previously filed as an exhibit to the Company's Form 8-K, dated October
 21, 1997, file No. 97698732 and as
      amended by the Company's Form 8-K/A, dated October 27, 1997, File No. 
97701302.  Incorporated herein
      by reference.


                                                             59

<PAGE>



(4)   Previously filed as exhibit to the Company's Form 8-K, dated November 12,
 1997, File No. 97715149.
      Incorporated herein by reference.

b.    Reports on Form 8-K

(1)   Company's Form 8-K dated October 21, 1997, File No. 97698732 and as
 amended by the Company's form 8-
      K/A, dated October 27, 1997, File No. 97701302.

      Acquisition of Pego Systems, Inc., including audited financial statements
 of Pego Systems, Inc. for the years
      ended June 30, 1997 and 1996.

(2)   Company Form 8-K, dated November 12, 1997, File No. 97715149.

      Agreement and Plan of Reorganization, dated October 28, 1997, between The
 Hartcourt Companies, Inc.,
      Electronic Components and Systems, Inc. and Pruzin Technologies, Inc. 
including audited financial statements
      of Electronic Components and Systems, Inc. and Pruzin Technologies, Inc.
 for the year ended December
      31,1996 and the seven months ended July 31, 1997.

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.

                                                             60

<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:    April 8, 1998       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 Chairman April 8, 1998
Alan V. Phan                 President, Chief Executive
                                              Officer and Chief Financial
                                              Officer

/s/ FredeSecretaryApril 8, 1998nd
Frederic Cohn                Director

/s/ KenneVice PresApril 8, 1998ing
Kenneth Silva                and Sales and Director

/s/ MichaDirectoraApril 8, 1998
Michael Caruana

/s/ JamesDirector April 8, 1998
James De Rosa



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