SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB
(Mark One)
[X]       ANNUAL REPORT PUR SUANT 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, 1998

                        Commission file number 001-12671

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

                                      UTAH
                            (State of incorporation)

                                   87-0400541
                      (I.R.S. Employer Identification No.)

       2049 Century Park East, Los Angeles, California 90067, 310-788-2634
    (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
                                      None

                    Name of each exchange on which registered
                                      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: $23,282,000

         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 March 1, 1999, $8,643,000.

         State the number of shares  outstanding of each of the issuer's classes
of common equity, as of the latest  practicable date: As of March 1, 1999, there
were 20,225,746 shares of common stock outstanding.

                                       1

<PAGE>

                          THE HARTCOURT COMPANIES, INC.

                         1998 Form 10-KSB Annual Report
                                Table of Contents

                                                                            Page

                                     PART I

Item 1.   Description of Business .........................................3

Item 2.   Description of Property .........................................11

Item 3.   Legal Proceedings......................... ......................12

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

                                     PART II

Item 5.   Market for Common Equity and Related Stockholder Matters.........13

Item 6.   Management's Discussion and Analysis or Plan of Operation........16

Item 7.   Consolidated Financial Statements................................22

Item 8.   Changes in and Disagreements with Accountants on Accounting
          and Financial Disclosure                                         22

                                    PART III

Item 9.   Directors, Executive Officers, Promoters and Control Persons;
          Compliance with Section 16(a) of the Exchange Act................23

Item 10.  Executive Compensation...........................................25

Item 11.  Security Ownership of Certain Beneficial Owners and Management...26

Item 12.  Certain Relationships and Related Transactions...................27

                                     PART IV

Item 13.  Exhibits and Reports on Form 8-K.................................29

          Signatures.......................................................32

                                                                 2

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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.  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.
Through January 1999 the Company's  operations  relating to writing  instruments
involved the assembly and distribution of writing instruments.  In January, 1999
the Company discontinued the operations of Hartcourt Pen and disposed of all its
pen related assets in the United States.

                                                         3

<PAGE>

In April 1993,  the Xinhui JV commenced  construction  of a 170,000  square foot
manufacturing  plant  approximately  ten miles north of Xinhui  City.  The plant
commenced limited  operations in December 1994 and was fully operational by July
1995. By July 1996, the plant was operating at approximately 20% of its capacity
and  employed  approximately  80 people.  It 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.  The machinery  that was delivered did not function
properly and the Company and Anja agreed to terminate the lease upon the Company
agreeing to pay Anja a  termination  fee of $200,000.  During 1998,  the Company
paid $100,000 on the note.  During 1999,  the  remaining  balance was reduced to
$10,000 which was paid.

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. To
date,  no payments  have been  received on the note.  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.
Yafa made all required payments  according to the settlement  agreement with the
final payment being paid in July 1998.

In August 1996,  the Company  entered into a Purchase  and Sale  Agreement  with
NuOasis International,  Inc. ("NuOasis"),  a corporation  incorporated under the
laws of the  Commonwealth  of Bahamas,  for the  purchase of a  commercial  real
estate  project,  consisting of three 5-7 story  apartment  buildings,  commonly
known as the Peony Gardens  Property,  ("Peony  Gardens") located in the eastern
part of Tongxian in Beijing city, mainland China. The purchase price consists of
a  Convertible  Secured  Promissory  Note granted 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

                                                         4

<PAGE>

December 31, 1998,  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.  In March
1999,  the Company  exchanged its interest in the Peony Gardens  Project for $10
million of investment securities. See Part 1, Item 1 - Subsequent events and 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 paid $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 were issued pursuant to Regulation "S". The number
of shares were  determined  by the average  price per share over a 10 day period
for the 10 days prior to the execution of this agreement.

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  paid  $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 were
issued  pursuant to Regulation  "S." The number of shares were determined by the
average  price  per  share  over a 10 day  period  for the 10 days  prior to the
execution of this agreement.

In July 1998,  the Company  filed  notice upon  Mandarin  and Promed  requesting
recission of the purchase of the Alaska gold mine mineral  leases as the sellers
failed to provide the  Company  with the  required  geological  evaluations.  In
March,  1999 the Company  entered into a recission  agreement  with the sellers,
returning the claims and receiving  back  1,298,700  shares of Hartcourt  common
stock. See Part 1, Item 1 - Subsequent Events.

During  1996,  the Company  entered into a Consulting  Agreement  with  American
Equities,  LLC, a California Limited Liability Company.  The Company intended to
acquire,  manage and develop a real estate portfolio  through the year 2001. See
Part I, Item 1 -  Subsequent  Events and Part II, F/S,  "Consolidated  Financial
Statements,  Years Ended  December  31,  1998 and 1997 -- Notes to  Consolidated
Financial Statements," Note L. "Commitments and Contingencies."

In July 1997, the Company entered into an agreement with Capital Commerce,  Ltd.
("Capital") (an Isle of Man  Corporation)  whereby Capital agreed to provide the
Company  $6,000,000 in free trading securities for the purchase of Pego Systems,
Inc. and the  formation of  Electronic  Components  and Systems,  Inc., a Nevada
corporation.  In  consideration  for the $6,000,000 in  securities,  the Company
issued to Capital  $4,000,000  in Series A and  $2,000,000  in Series B, both 9%
convertible preferred stock. See Part I, Item 1 - Subsequent Events and Part II,
F/S "Consolidated  Financial Statements,  Years Ended December 31, 1998 and 1997
Notes to Consolidated  Financial  Statements,"  Notes C and R,  "Investments and
Business Acquisitions" and "Capital Stock, respectively.

                                                         5

<PAGE>

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. The
agreement expired and no services were performed in 1998 for the Company.

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,
1998, the transaction had been cancelled and the Company was receiving  periodic
payments for return of the escrow deposit.

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,  1998 and 1997 - Notes to  Consolidated
Financial Statements, Notes C and R, "Investments and Business Acquisitions" and
"Capital Stock", respectively.

On August 6, 1998, Pego acquired 100% percent of the outstanding common stock of
Pacific Pneumatics,  Inc. (PPI),  located in Rancho Cucamonga,  California.  The
purchase  price of $215,000 was paid in the form of $200,000 in cash and $15,000
value of The Hartcourt Companies common shares (9,796 shares).  PPI manufactures
pneumatic   conveying,   industrial  dust  collection  and  industrial   process
electrical controls.  PPI has been manufacturing and selling it components under
the  trademark  names  "Pore Poly,  "Posit  Dust  Collectors  and  Filters"  and
"Pow-Air" for over 20 years.

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 cash, 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 I,  Item 1 -  Subsequent  Events,  Part II,  F/S,  "Consolidated  Financial
Statements,  Years  Ended  December  31,  1998 and 1997 - Notes to  Consolidated
Financial  Statements",  Notes C and R, "Investments and Business  Acquisitions"
and "Capital Stock", respectively.

ECS  specializes  in high  technology  contract  manufacturing  and  assembly of
printed  circuit  boards,  phone and cable  wires.  ECS has three  manufacturing
facilities,  and contracts  with a maquiladora in the free trade zone in Sonora,
Mexico. Annual revenues of ECS are approximately $16.7 million.

                                                         6

<PAGE>

On August 24, 1998, the Company and ECS executed an agreement and plan of merger
with Elan  Manufacturing,  Inc.  (Elan) a contract  manufacturer  of  electronic
components  similar to ECS, located in the Silicon Valley.  Under the agreement,
Elan was merged into and with the Company, thereby ceasing Elan's existence. The
merger was effective  September 1, 1998,  and the purchase  price of $616,240.63
was paid by the  Company  issuing  724,990  common  shares to the three  selling
shareholders based at a value of $0.85 per share.

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.

Currently,  the Company's primary objective is to acquire established  operating
companies with histories of growth and profitability,  in order to diversify and
create a  multi-dimensional  company.  The  principal  executive  offices of the
Company are located at 2049 Century Park East, Los Angeles, California 90067.
The Company's telephone number is (310) 788-2634.

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 Fremont,  California 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.

                                                         7

<PAGE>

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. In January, 1999 the Company discontinued the operations of Hartcourt Pen
and disposed of all its pen related assets in the United States.

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.

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.  The Company's  Peony Gardens  project is in China and 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.

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.  The  Mexican  affiliate
operates  under  Mexican  law,  which may or may not be  similar to those in the
United States.  Additionally,  operations under the maquiladora  program require
that  transactions  be at arms  length  and that the  affiliate  must  realize a
minimum 5% profit per year. During 1998, the tax structure in Mexico was changed
to encourage more high  technology  industry by lowering the tax on maquiladoras
in the electronics industry to zero.

Volatility of Exchange Rates.  There has not been significant  volatility in the
exchange  rates of RMBs to U.S.  Dollars in the recent past but future  exchange
rates may experience significant volatility.

Environmental Regulation. The Company's United States and Mexican operations are
subject to various  governmental laws and regulations.  The costs and effects of
compliance  with  environmental  laws  and  regulations  in  the  United  States
(federal, state and local) and Mexico have not been material in the past and are
not anticipated to be material in the future.

                                                         8

<PAGE>

Employees

The Company currently employs two full-time employees at its principal executive
offices in the United  States.  The  operations of Hartcourt Pen were located at
this   headquarters   location.   The  executive   offices   provide   corporate
administrative services. Pego employs thirty-three full-time people at its three
sites located in Long Beach,  Rancho Cucamonga and Novato,  California.  ECS had
seventy three full-time  employees at its four locations:  Chandler,  Tucson and
Nogales in Arizona and Fremont in California.

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, 1998 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.

Subsequent Events

In March, 1999, the Company restructured certain assets and successfully settled
certain  litigation  matters,  as well  as  certain  claims  and  disputes.  The
following is a summary of the restructuring and settlements reached:

1)   During  1998,  the Company had been  unsuccessful  in its attempts to raise
     required   working  capital  and  acquisition  cash  through  the  sale  of
     marketable  securities  provided by Capital  Commerce  in exchange  for the
     Series A & B Preferred  Stock. As part of the overall  settlement,  Capital
     Commerce  returned all of the outstanding  Series A and B Preferred  Stock,
     plus the AB Preferred Stock issued by the Company as dividends, the Company
     returned  to Capital  Commerce  all unsold  marketable  securities,  and as
     consideration  for the  marketable  securities  sold,  the  Company  issued
     1,900,000  shares  of common  stock,  plus a 7.35%  interest  in ECS to the
     authorized agent of Capital Commerce.

2)   In July,  1998, the Company served notice of the sellers of certain mineral
     rights leases in Alaska  goldmines that it intended to rescind the contract
     as certain  required  appraisals  had not been  provided as  required.  The
     company  originally  paid  1,298,700  shares of the common  stock for these
     rights.  Upon return of 1,298,700  shares the  companies  relinquished  all
     rights to the leases and rescinded the transaction.

3)   On October  21,  1998,  Mr.  James  Pruzin,  the  selling  shareholder  and
     president of  Electronic  Components  and  Systems,  Inc.  (ECS),  formally
     requested a  rescission  of the October  28, 1997  acquisition  whereby the
     Company,  through  a  wholly  owned  subsidiary,  acquired  ECS and  Pruzin
     Technologies,  Inc. (Pruzin).  Mr. Pruzin has alleged that he is authorized
     to  request  rescission  based  on an  alleged  breach  of the  acquisition
     agreement by the Company,  which the company denied . However,  on November
     10,1998 entered into a memorandum of understanding whereby Mr. Pruzin could
     reacquire  ECS from the  Company  by  returning  all  Hartcourt  Common and
     Preferred Stock received,  payment to Hartcourt of $1,850,000  during 1999,
     negotiating  the  return  of  Hartcourt  Common  Shares  issued in the Elan
     transaction  and a  $400,000  fully  amortized  5 year  note  with  monthly
     payments beginning in 2000.

                                                         9

<PAGE>

     Subsequently,  Mr.  Pruzin was  unable to meet the terms of the  repurchase
     agreement and entered into new negotiations  with the Company.  As a result
     of these  negotiations,  in  exchange  for his return of  2,000,000  common
     shares of the company and 3,400 Series D Preferred Shares, the Company sold
     Mr. Pruzin a 30% interest in ECS.

4)   On September 3, 1998,  American Equities filed suit against the Company for
     breach of  contract.  The Company  denied that it had breached any contract
     with  American  Equities  and  filed  a   cross-complaint   for  fraud  and
     non-performance against American Equities and additional  cross-defendants.
     As settlement of these  matters,  the parties  agreed that all fees paid to
     American  Equities  were  earned and to provide  American  Equities  with a
     27.65%  interest  in  ECS  and  no  payments  were  due  to  either  party.
     Additionally, American Equities agreed to provide working capital for ECS.

5)   The Company had a subscription receivable for 600,000 common shares sold by
     an  investment  banker and not paid for.  In the  settlements,  the Company
     received 600,000 shares back and cancelled both the subscription receivable
     and common shares.

6)   On March 15, 1999, the Company entered into an Exchange  Agreement pursuant
     to which the Company  agreed to assign its rights  under the  Purchase  and
     Sale Agreement  dated August 8, 1996 and any and all of its interest in the
     Peony  Gardens  development  located in a suburb of Bejing City,  China for
     investment  securities  valued at $10 million.  Due to  restrictions on the
     ability  to trade the  investment  securities  received,  the  Company  has
     recorded an impairment of $5,000,000 as of December 31, 1998.

7)   Effective  February 1, 1999,  pursuant to a Share Purchase  Agreement,  the
     Company  acquired one (1) share of common stock of Enova  Holdings  Inc., a
     Nevada  corporation  ("Enova")  representing  100% of the total  issued and
     outstanding capital stock of Enova, making Enova a wholly-owned subsidiary.

8)   Effective  March 1,  1999,  the  Company  and Enova  executed  an  Exchange
     Agreement (the "Enova Agreement")  whereby the Company exchanged all of its
     ownership in two wholly-owned subsidiaries,  Pego Systems Inc. ("Pego") and
     Electronic  and  Component   Systems  Inc.   ("ECS"),   collectively,   the
     "subsidiaries", for 5,213,594 additional shares of common stock of Enova.

9)   On March 24,  1999,  the  Company  entered  into a  Distribution  Agreement
     pursuant to which the Company agreed to distribute to all  shareholders  of
     record on March 31,  1999 all of the  5,213,595  shares of common  stock of
     Enova  and to file,  within a  reasonable  period  of time  following  such
     distribution,   a  Registration  Statement  on  Form  10-SB  to  cause  the
     distributed shares of Enova to be registered under the Securities  Exchange
     Act of 1934.

As a result  of the  Share  Purchase  Agreement,  the  Enova  Agreement  and the
Distribution  Agreement,  each shareholder of record of the Company on March 31,
1999 will  receive one (1) share of Enova for every four (4) shares owned of the
Company.  Following  the  distribution  of the Enova shares both the Company and
Enova  will  continue  to  operate  as  separate  companies.  See Part  II,  F/S
"Consolidated  Financial  Statements,  Years Ended  December 31, 1998 and 1997 -
Notes to Consolidated Financial Statements," Note Z.

                                                        10

<PAGE>

Item 2.  Description of Property

Principal Plants and Other Property

The Company's principal executive offices are located at 2049 Century Park East,
Los  Angeles,  California  90067.  The  premises,  which are  subleased  from an
unaffiliated  party,  consist of 1,600 square feet of office,  and shared use of
approximately  3,000 square feet of  conference  room,  reception  and file room
facilities.  Monthly  rent is $9,500  through  June 30,  1999.  The  Company  is
currently in  negotiation  with the landlord to sublease its former Pen Showroom
and Headquarter facility at 19104 South Norwalk Boulevard,  Artesia,  California
90701.  The premises,  which are leased from an unaffiliated  party,  consist of
5,200  square  feet,  approximately  2,000  square  feet of  which  was 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 four facilities:  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 - 2,410 N. Huachuca Drive, Tucson, AZ 85745 - 3,000 square feet
office and production  facility.  Lease payments of $2,950,  including taxes per
month, with annual increases of 5%. Lease expires June 2000.

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.

Fremont,  California - 200 Hammond Avenue,  Fremont,  California  94539,  15,000
square feet office and production facility. Lease payments of $12,000 per month.
Lease expires April 1999.

Pego operates out of three 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.

Rancho Cucamonga, California - 8576 Red Oak Street, Rancho Cucamonga, California
91730,  11,300 square feet office and  production  facility.  Lease  payments of
$4,425 per month. Lease expires April 2000.

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

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

                                                        11

<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.  Any
necessary  management services in connection with the Peony Gardens Project 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" and "Subsequent Events."

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.  See  Part I,  Item 1,
"Description of Business" and "Subsequent Events."

Item 3.  Legal Proceedings

At March 31, 1999, 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. At December 31, 1998,
the Company was party to certain litigation and other claims, which were settled
in March, 1999. See Part I, Item 1 - Subsequent Events.

Item 4.  Submission of Matters of Security Holders

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

                                                        12

<PAGE>

                                    PART II

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 three
most recent calendar years ended December 31, 1998, 1997 and 1996:

<TABLE>
<CAPTION>

                                  High Bid              Low Bid               High Asked            Low Asked
--------------------------------  --------------------  --------------------  --------------------- ---------------------
<S>                               <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
--------------------------------  --------------------  --------------------  --------------------- ---------------------

March 31, 1998                          1.922                 1.00                1.922                   1.00
--------------------------------  --------------------  --------------------  --------------------- ---------------------

June 30, 1998                            1.797                .797                 1.797                   .797
--------------------------------  --------------------  --------------------  --------------------- ---------------------

September 30, 1998                       1.938                  .25                 1.938                  .25
--------------------------------  --------------------  --------------------  --------------------- ---------------------

December 31,1998                         .563                  .25                 .563                   .25
--------------------------------  --------------------  --------------------  --------------------- ---------------------
</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, 1998, 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  495,000 and 450,000 outstanding Rule 144 shares exist at December
31, 1998 and 1997 held by principal and directors, respectively.

The Company does not anticipate  payment of any other stock or cash dividends in
the foreseeable future.

                                                        13

<PAGE>

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

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

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.

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.

                                                        14

<PAGE>

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.

During the second  quarter of 1998,  the Company  sold  2,000,000  shares of its
common stock pursuant to regulation S. The Company  raised  $825,000 of cash and
recorded  $301,000 in subscriptions.  As part of settlement  agreements in March
1999, 600,000 shares of the Company's common stock was returned in settlement of
the subscriptions receivable. See Part1, Item 1 - Subsequent Events.

                                                        15

<PAGE>

On June 4, 1998 and July 13, 1998, the Company issued 332,857 and 45,000 shares,
respectively  at a value of $.50/share of the Company's  common stock to various
officers, directors and employees of the Company as follows:

         Dr. Alan Phan              240,571 shares
         Directors                  101,000 shares
         Employees                   36,286 shares

On August 6, 1998, Pego acquired 100% percent of the outstanding common stock of
Pacific Pneumatics,  Inc. (PPI),  located in Rancho Cucamonga,  California.  The
purchase  price of $215,000 was paid in the form of $200,000 in cash and $15,000
value of The  Hartcourt  Companies  common  shares  (9,796  shares).  Under  the
acquisition  agreement Pego caused PPI to prepay $35,000 of its notes payable to
a selling shareholder.  PPI manufactures  pneumatic  conveying,  industrial dust
collection   and  industrial   process   electrical   controls.   PPI  has  been
manufacturing  and selling it components  under the trademark  names "Pore Poly,
"Posit Dust Collectors and Filters" and "Pow-Air" for over 20 years.

On August 24, 1998, the Company and ECS executed an agreement and plan of merger
with Elan  Manufacturing,  Inc.  (Elan a  contract  manufacturer  of  electronic
components  similar to ECS, located in the Silicon Valley.  Under the agreement,
Elan was merged into and with the Company, thereby ceasing Elan's existence. The
merger was effective  September 1, 1998,  and the purchase  price of $616,240.63
was paid by the  Company  issuing  724,989  common  shares to the three  selling
shareholders  based at a value of $0.85  per  share.  The  Company  and ECS have
guaranteed to the three selling shareholders that the value of such shares shall
be no less than $.85 per share on September 1, 1999.  If the value of the shares
does not equal $.85 per share on  September  1, 1999,  the Company and ECS shall
make up any shortfall by issuing  additional  free trading shares or cash to the
selling shareholders.

On December  28,  1998,  the Company  sold  200,000  shares of its common  stock
pursuant to Rule 144, raising $25,000 in cash.  Another 203,000 shares were sold
on January 4, 1999 for $24,500.

Subsequent to year end, the Board of Directors  issued  410,000 shares of Common
Stock at a value of $.25 per share to various officers, directors, and employees
of the Company and as compensation to unaffiliated parties for services rendered
as follows:

         Dr. Alan Phan              100,000 shares
         Directors                  100,000 shares
         Employees                     5,000 shares
         Unaffiliated parties       205,000 shares

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

Overview

Prior to 1997,  the  Company's  primary  business  had  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. During 1997 and 1998, the Company actively implemented
a plan to acquire operating companies that are in established  industries with a
history of growth.

                                                        16

<PAGE>

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 I,
Item 2,  "Description  of Property - Real Estate and Operating Data" and Part I,
Item 1 - "Subsequent Events."

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." In July,  1998,  the Company  served
notice to the  sellers  that it  intended  to rescind  the  contract  as certain
required  appraisals had not been provided as required.  The company  originally
paid 1,298,700 shares of the common stock for these rights. In March, 1998, upon
return of 1,298,700  shares,  the Company  relinquished all rights to the leases
and rescinded the transaction. See Part I, Item 1 - "Subsequent Events."

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.  To date, no payments have been made on the note. The note is secured by
all assets of CKES, Inc.

In October 1997, the Company purchased Pego Systems, Inc. (Pego) from a director
of the Company for common stock and cash. See Part F/S  "Consolidated  Financial
Statements,  Years  ended  December  31,  1998 and 1997 - Notes to  Consolidated
Financial Statements", Note C, "Investments and Business Acquisitions."

In October 1997, the Company acquired  Electronic  Components and Systems,  Inc.
(ECS) and an entity  related to ECS for  Company  stock,  cash and a  promissory
note. See Part F/S, "Consolidated Financial Statements, Years Ended December 31,
1998  and  1997  -  Notes  to  Consolidated  Financial   Statements",   Note  C,
"Investments  and Business  Acquisitions."  and Part 1, Item 1  "Description  of
Business,  General" and Part I, Item 1 -  "Subsequent  Events",  for  additional
details.

During 1998,  the Company's  subsidiaries  Pego and ECS, each acquired a smaller
operating  company  to garner  greater  market  share.  Pego,  acquired  Pacific
Pneumatics,  Inc in August 1998 and ECS  acquired  Elan  Manufacturing,  Inc. in
September 1998.

During most of 1998,  but primarily  during the second half of 1998, the Company
had been  attempting  to raise  cash by the  sale of the  marketable  securities
received from Capital Commerce, Ltd.("Capital") in exchange for the Series A and
B preferred stock. Due to declining market values and other factors, to date the
Company has only been successful in selling securities for cash in the amount of
$1.1 million and on October 7, 1998, the Company  demanded that Capital  perform
under its  guarantee  and  provide the Company  either cash or  additional  free
trading marketable  securities to reach the $6 million minimum cash availability
under the agreement.

This  inability to raise  needed cash,  plus the  significant  operating  losses
experienced  by ECS in the 4th  quarter of 1998,  placed  severe  strains on the
Company's  operations,  resulting in the going concern qualification as noted in
Part II, Item 7 Consolidated Financial Statements, Note AA.

In March,  1999,  the Company  settled its dispute  with  Capital  Commerce  and
others. (See Part I, Item 1 "Subsequent Events".

                                                       17

<PAGE>

Results of Operations

Beginning in 1996, as discussed  previously,  the Company made some  fundamental
changes in its business  direction  including the 1997  acquisitions of Pego and
ECS. The following  discussion  relates to the twelve months ended  December 31,
1998, followed by a discussion of the twelve months ended December 31, 1997.

1998

During  1998,  the  Company's  domestic  writing   instrument   operations  were
discontinued and sales were minimal due to the continued lack of a comprehensive
marketing  program and the Company's  refocus of overall objective and corporate
direction.  The  Company's  subsidiary,  ECS,  has one major  customer,  General
Instrument  Corporation,  which provided  $10,107,494 in revenue or 43.4% of the
Company's total revenue.

Components of cost of sales were as follows: writing instruments $239,549, Pego,
$4,763,677,  72% as a percent of Pego's sales;  and ECS,  $13,127,069,  79% as a
percent of ECS's sales. Total cost of sales, $18,130,295 is 78% of total product
revenues.

Components  of gross profit were as follows:  writing  instruments,  $(189,466),
Pego, $1,872,643,  28% as a percent of Pego sales; and ECS, $3,458,980, 21% as a
percent of ECS's sales.  Total gross profit,  $5,152,157 is 22% of total product
revenues.  Gross profit as a percent of total revenues did not improve over 1997
because of both ECS and Pego  experienced  reduced  orders in the 4th quarter of
1998.  In 1997,  the margins  were  negatively  impacted,  due to effects of the
required  accounting  treatment for the inventory  acquired in both the Pego and
ECS acquisitions.

Components  of selling,  general and  administrative  expenses  were as follows:
Pego,  $1,741,278,  for 1998  compared to $376,774  for 1997 and ECS  $3,979,855
compared  to  $524,339  with  the  increases  due to full  year  reporting  on a
consolidated  basis for both  entities and increased  sales at ECS.  General and
administrative  expenses for corporate and writing  instruments  was $1,539,141,
for 1998,  compared to $816,317 with the increase due entirely to a full year of
holding  company  operations.  Impairments of $17,083,239  were recorded on both
investments and investments in subsidiaries in 1998.

At year end 1998, as a result of the losses at ECS, the Company  determined that
the goodwill at ECS had been  impaired and in  accordance  with FASB 121 reduced
the goodwill  carrying value to the amount of the common and preferred shares to
be  returned  by Mr.  James  Pruzin  in  exchange  for a 30%  interest  in  ECS.
Additionally,  as a result of the return of the marketable securities to Capital
Commerce,  the Company determined that Pego's goodwill should be impaired by the
amount of the  receivable  due Pego by the  Company.  The  remaining  unimpaired
goodwill  related to the Pego and ECS  acquisitions  is being  amortized over 25
years.  Amortization  costs of $411,928  were  recorded  in calendar  year 1998.
Although  goodwill  has  been  impaired,   management  still  believes  the  two
acquisitions should generate operating income that will significantly exceed the
goodwill amortization.

During 1998, the Company  recorded  $127,626 in other income for the forgiveness
of debt with respect to the Scripto-Tokai agreement.

                                                        18

<PAGE>

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,
$676,502, 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 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.

                                                        19

<PAGE>

Liquidity and Capital Resources

The Company's  principal capital  requirements during 1998 and 1997 were to fund
the acquisitions of real estate, mineral rights and operating businesses and the
losses at ECS.  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.

1998

The  Company's  current  ratio at December  31, 1998 was 1.7  compared to 2.4 at
December  31,1997,  however if the value of the marketable  securities  received
from  Capital  Commerce  was excluded  from the  calculation  the ratio would be
reduced  to  1.1.  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  a  decrease  in  working  capital  of
approximately  $3,472,000  from $7,480,000 at December 31, 1997 to $4,008,000 at
December 31, 1998.  The decrease in working  capital is primarily  due to losses
experienced  at ECS during  1998 and the  increase  in  borrowed  funds used for
retirement of Preferred Stock and investing activities.

The Company's operating activities consumed cash of approximately $1,408,746 for
the year ended December  31,1998.  In 1998, the Company had an operating loss of
approximately $1.5 million,  excluding the effects of impairments,  settlements,
depreciation,  amortization and reserve for bad debts. In addition, increases in
accounts  receivable were offset by decreases  inventory and current liabilities
including  accounts  payable and other short term  liabilities,  which increased
cash by approximately $307,000.

Cash  provided by  investing  activities  for the year ended  December  31, 1998
totaled $13,082.  This amount  represents  $595,573 in proceeds from the sale of
marketable securities,  $206,622 of proceeds from notes receivable less $329,570
used for purchaes of property and equipment and $462,543 paid on acquisitions.

Cash provided by financing activities was $1,702,429 for the year ended December
31, 1998.  Funds were  provided by the issuance of the  Company's  common stock,
$875,002,  proceeds  from  line of  credit,  $1,302,609  and  from  issuance  of
long-term  debt  $1,792,579.  Funds were used  redemption  of  Preferred  Stock,
$1,300,000,  payments on long term debt,  $617,207,  payments  on capital  lease
obligations, and payments on shareholder loans of $209,509.

As a result of the above,  the  Company  experienced  an  increase  in cash from
$78,000 as of  December  31, 1997 to $384,000  for the year ended  December  31,
1998.

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.

                                                        20

<PAGE>

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.

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.

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 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 the  modifications it has made to existing software and conversions to
new software it has eliminated  any  significant  operational  problems from the
year 2000 issue.

The Company has  initiated  communications  with its  significant  suppliers and
major  customers and determined  that it should have  experience any significant
operational  problems  from any third  party's  failure to remedy their own Year
2000 issues.

The Company has utilized  both  internal and external  resources to modify,  and
replace software for Year 2000 compliance.  The Company is currently testing the
modifications and new software and anticipates  completing the Year 2000 project
testing  by May 31,  1999,  which  is  prior to any  anticipated  impact  on its
operating systems.

The  costs of the  project  have not been  material,  and the date on which  the
Company  believes it will complete Year 2000  modification  testing are based on
management's  best  estimates.  However,  there can be no  guarantee  that these
estimates will be achieved and actual results could materially differ from those
anticipated.

                                                       21

<PAGE>

Effect of Recently Issued Accounting Standards

In June 1997,  the  Financial  Accounting  Standards  Board issued  Statement of
Financial  Accounting  Standards  No.  131,  "Disclosures  about  Segments of an
Enterprise and Related  Information"  ("SFAS 131"). The Company adopted SFAS 131
in  its  reporting  for  the  Year  Ended   December  31,  1998.  See  Part  F/S
"Consolidated  Financial  Statements,  Years ended  December 31, 1998 and 1997 -
Notes to Consolidated  Financial  Statements",  Note V. No other recently issued
Accounting Standards had an impact on the Company.

Item 7.   Consolidated Financial Statements

Financial  Statements  are  referred  to in Item  13(a),  listed in the Index to
Financial  statements and filed and included  elsewhere herein as a part of this
Annual Report on Form 10-KSB.

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

          None

                                                        22

<PAGE>

                                    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         53        Chairman of the Board,
                                   President,  and Chief
                                   Executive Officer

Leonard J. Roman(1)      49        Executive Vice
                                   President, Chief
                                   Financial Officer and
                                   Director

Frederic Cohn(1)         59        Secretary, Treasurer and
                                   Director

(1)  As part of a restructuring of The Hartcourt Companies,  Inc., Mr. Roman and
     Mr.  Cohn  resigned  their  positions  as  Officers  and  Directors  of The
     Hartcourt  Companies,  Inc., remaining as Officers and Directors in similar
     capacities of Enova Corporation. See Part I, Item 1 - "Subsequent Events".

     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  Philippines
     (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).

     Leonard J. Roman has been a director since  September 1998 and has 28 years
     of diversified public and private business management experience. From 1991
     to 1994,  he was  General  Manager  and Chief  Financial  Officer of Cosmar
     Corporation,  from 1995 to 1997 he was President of Trumpets Holdings, Inc.
     and was Executive Vice President,  Chief Financial  Officer of W-C Designs,
     Inc. He ia a CPA with a B.S. degree from St. John's University.

     Frederic Cohn has been a director and Secretary  since November 1993.  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).

                                                        23

<PAGE>

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.

Rights and Preferences of Preferred Stock

Original Prefered Stock

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.

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.  In connection with settlement of certain  litigation
and other claims,  all  outstanding  shares of the Series A Preferred  Stock was
returned to the Company and cancelled. See Part I, Item 1 - Subsequent Events.

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.  In connection  with  settlement of certain
litigation and other claims,  all  outstanding  shares of the Series B Preferred
Stock was returned to the Company and cancelled. See Part I, Item 1 - Subsequent
Events.

                                                       24

<PAGE>

Series AB 9% Convertible Preferred Stock

Non-voting  convertible  preferred stock, 25,000 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 AB  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 AB  convertible
preferred stock may convert their shares into fully paid  non-assessable  common
stock of the Company.  In connection with  settlement of certain  litigation and
other  claims,  all  outstanding  shares of the  Series AB  Preferred  Stock was
returned to the Company and cancelled. See Part I, Item 1 - Subsequent Events.

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.  The Series D
Preferred  Stock was retired in March 1999, in connection with the sale of a 30%
interest  in ECS to the  President,  Mr.  James  Pruzin.  See  Part I,  Item 1 -
Subsequent Events.

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,  required to be paid pursuant to an employment agreement
during  each of the three  years ended  December  31,1998,  1997 and 1996 to the
person serving as the Company's Chief Executive Officer:

Name and Principal Position        Fiscal Year                Annual Salary
---------------------------        -----------               --------------

Dr. Alan V. Phan,
Chief Executive Officer            1998                      $200,000
                                   1997                      $175,000
                                   1996                      $100,000

The Company has an employment  agreement with its chief executive officer,  Alan
Phan.  During the years ended December 31, 1997 and 1996, Dr. Phan received 100%
of his salary in additional  shares of common stock of the Company.  As Dr. Phan
received no cash  payments as  compensation  for his services  during 1998,  the
Company expects to issue additional common shares to Dr. Phan in 1999.

                                                        25

<PAGE>

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, 1998 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.

<TABLE>
<CAPTION>

Name and Address of                     Amount and Nature of               Percent of
Beneficial Owner                        Beneficial Ownership (1) (2)       Common stock
--------------------------------------  ----------------------------       ------------
<S>                                     <C>                                <C>

Dr. Alan V. Phan                        2,891,520(3)                       14.3%
19104 South Norwalk Boulevard
Artesia, California 90701

Frederic Cohn                           100,000                            *
19104 South Norwalk Boulevard
Artesia, CA 90701

James Pruzin and Antoinette Pruzin J/T
931 E. Calle Mariposa
Tucson, AZ 85718                        2,500,000(6)                       12.4%

Dragon King Investment Services, Ltd.
c/o Fred Luke
4521 Campus Drive
Irvine, CA 92512                        880,000(7)                         4.4%

C0DE & Co.                              6,807,670(5)                       33.7%
55 Water Street 2SL
New York, NY 10041

NuOasis International, Inc.             1,300,000(4)                       6.4%
2 Park Plaza, Suite 470
Irvine, California 92714

All officers and directors
as a group                              2,991,520                          14.8%

</TABLE>

*Less than 1%

                                                        26

<PAGE>

(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.

(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 103,000
     shares held by two sons who reside with Dr. Phan when not attending college
     and law school,  respectively.  As the sole holder of the 1,000 outstanding
     shares of Original  Preferred  Stock,  Dr. Phan is entitled to elect 3/5 of
     the number of members of the Company's Board of Directors.

(4)  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. See Part I, Item 1 - Subsequent Events.

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

(6)  James Pruzin and his wife, Antoinette,  jointly owned the former Electronic
     Components and Systems,  Inc. ("ECS"),  Arizona Corp. which was acquired by
     the Company on October 28, 1997.  In March,  1999,  Mr. Pruzin and his wife
     exchanged  2,000,000  of their  common  shares and 3,400 of their  Series D
     Preferred Shares for a 30% interest in ECS. See Part I, Item 1 - Subsequent
     Events.

(7)  Subsidiary of NuOasis International, Inc.

Other than the arrangements disclosed in Part I, Item 1 - Subsequent Events, 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.

                                                        27

<PAGE>

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

During 1994 and 1995,  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, 1998 and 1997. See Part I, Item 1
- Subsequent Events.

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,  a director of the Company.
See Part II, F/S, "Consolidated  Financial Statements,  Years Ended December 31,
1998  and  1997  -  Notes  to  Consolidated   Financial   Statements,   Note  A.
"Organization and Summary of Significant Accounting Policies".

At December 31, 1998 and 1997, the Company had outstanding  advances to Dr. Alan
Phan, a director,  executive officer and promoter of the Company,  in the amount
of $142,522 and $96,691, respectively.

At December 31, 1998 and 1997, ECS had outstanding non interest bearing advances
from its President in the amount of $124,206 and $110,000, respectively.

                                                        28

<PAGE>

                                                     PART IV.

Item 13.  Exhibits and Reports on Form 8-K

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

Exhibit No.                                            Description of Document

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

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

2.03 Agreement between The Hartcourt Companies, Inc. and the shareholder of Pego
     Systems, Inc., "Stock Purchase Agreement", dated June 29, 1997 (4)

2.04 Agreement and Plan of  Reorganization,  dated October 28, 1997, between The
     Hartcourt  Companies,  Inc.,  Electronic  Component and Systems,  Inc., and
     Pruzin Technologies, Inc. (5)

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.

10.01Lease   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)

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

                                                        29

<PAGE>

10.04  1995 Stock Option Plan. (1)

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

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

10.07Convertible  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)

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

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

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

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

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

10.13Consulting  Agreement,  dated  December  30,  1996,  between The  Hartcourt
     Companies,  Inc. and American Equities LLC, a California  limited liability
     company. (3)

10.14Investment  Banking  Agreement,  dated  March 1998,  between The  Hartcourt
     Companies, Inc. and DanAllen Investment Group. (2)

10.16Marketable  Securities   Agreement,   dated  July  31,  1997,  between  The
     Hartcourt Companies, Inc. and Capital Commerce, Ltd. (2)

10.17Lease  Termination  Agreement,  dated  March 24,  1998,  between  Hartcourt
     Investment (USA) Corporation and Scripto-Tokai Corporation. (2)

21.01  Subsidiaries of the Company.

23.01 Consent of Independent Certified Public Accountants.

27.01Financial  Data  Schedule.  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.

                                                        30

<PAGE>

(2)  Previously  filed as an exhibit to the  Company's  10-KSB,  dated April 13,
     1998, File No. 98592254 and incorporated herein by reference.

(3)  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.

(4)  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.

(5)  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

     None.

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.

                                                        31

<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 15, 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 V. Phan             Chairman of the Board,        April 15, 1999
     ------------------------ President and Chief Executive
     Alan V. Phan             Officer

/s/  Fred Luke                Secretary, and Director       April 15, 1999
     ------------------------
     Fred Luke

/s/  Jon Lawver               Chief Financial Officer and   April 15, 1999
     ------------------------ Director
     Jon Lawver          

<PAGE>

                  THE HARTCOURT COMPANIES INC. AND SUBSIDIARIES

                          Index to Financial Statements

                                                                            PAGE

INDEPENDENT AUDITOR'S REPORT ............................................F-1

CONSOLIDATED FINANCIAL STATEMENTS:

   Consolidated balance sheets as of December 31, 1998 and 1997..........F-2-F-3

   Consolidated statements of operations for the years ended
      December 31, 1998 and 1997.........................................F-4

   Consolidated statements of changes in shareholders' equity for the years
      ended December 31, 1998 and 1997...................................F-5-F-6

   Consolidated statements of cash flows for the years ended
      December 31, 1998 and 1997.........................................F-7

   Notes to consolidated financial statements...........................F-8-F-37

<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, 1998
and 1997,  and the related  consolidated  statements of  operations,  changes in
shareholders'  equity,  and cash flows for the years ended December 31, 1998 and
1997. These  consolidated  financial  statements are the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
consolidated financial statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable  assurance about whether the  consolidated  financial  statements are
free of material  misstatement.  An audit includes  examining,  on a test basis,
evidence  supporting the amounts and disclosures in the  consolidated  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  these  audits  provide 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, 1998 and 1997,  and the
results  of their  operations  and their  cash flows for the years then ended in
conformity with generally accepted accounting principles.

The accompanying  consolidated  financial statements have been prepared assuming
that the Company will  continue as a going  concern.  As discussed in Note AA to
the consolidated financial statements, the Company has suffered recurring losses
from operations that raises substantial doubt about its ability to continue as a
going  concern.  The  consolidated  financial  statements  do  not  include  any
adjustments that might result from the outcome of this uncertainty.

/s/ Harlan & Boettger, LLP


San Diego, California March 6, 1999,
except for Note Z, as to which, the date is
March 23, 1999

                                                        F-1

<PAGE>

<TABLE>
<CAPTION>

                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

                                                                                                  December 31,       December 31,
                                                                                                    1998               1997
                                                                                                --------------      -------------
<S>                                                                                             <C>                 <C>

           ASSETS

CURRENT ASSETS
   Cash                                                                                          $     384,453      $      77,688
   Accounts receivable, net (Note B)                                                                 3,175,305          2,355,647
   Inventory (Note D)                                                                                2,613,560          3,541,321
   Notes receivable, current portion (Note E)                                                          101,523            293,673
   Prepaid expenses and other                                                                          113,068            130,554
   Prepaid consulting fees (Note L)                                                                          -            664,770
   Due from related parties (Note F)                                                                   175,907            131,398
                                                                                                 -------------      -------------

       TOTAL CURRENT ASSETS                                                                          6,563,816          7,195,051

PROPERTY AND EQUIPMENT, net (Note G)                                                                 4,262,120          3,568,507

INVESTMENTS (Note C)                                                                                11,030,000         23,381,486

NOTES RECEIVABLE, net of current portion (Note E)                                                            -          1,058,267

OTHER ASSETS                                                                                            18,423            552,289

INTANGIBLES, net (Note H)                                                                            5,198,033          9,365,000
                                                                                                 -------------       ------------

       TOTAL ASSETS                                                                                $27,072,392        $45,120,600
                                                                                                   ===========        ===========

           LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES
   Accounts payable                                                                                $ 2,745,796       $  2,824,419
   Lines of credit (Note J)                                                                          1,502,609            200,000
   Notes payable - current portion (Note K)                                                          1,631,199            205,245
   Capital lease obligations - current portion (Note L)                                                290,204            200,222
   Accrued expenses and other current liabilities (Note M)                                             478,356          1,061,881
   Debentures (Note N)                                                                                  50,000             50,000
   Payables to Mexican affiliate (Note O)                                                              483,572            352,942
   Notes payable, related parties - current portion (Note P)                                           145,000            185,000
   Advances from officer (Note F)                                                                      124,206            110,000
                                                                                                  ------------      -------------

       TOTAL CURRENT LIABILITIES                                                                     7,450,942          5,189,709

NOTES PAYABLE, net of current portion (Note K)                                                       1,739,512          1,334,327

CAPITAL LEASE OBLIGATIONS, net of current portion (Note L)                                             780,760            612,477

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

       TOTAL LIABILITIES                                                                             9,971,214          7,261,513
                                                                                                  ------------       ------------

COMMITMENTS AND CONTINGENCIES (Notes I, L, and AA)                                                           -                  -

</TABLE>

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

                                                                    F-2

<PAGE>

<TABLE>
<CAPTION>

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

                                                                                                  December 31,       December 31,
                                                                                                    1998               1997
                                                                                          --------------------       ------------
<S>                                                                                       <C>                        <C>

 
SHAREHOLDERS' EQUITY
   Preferred Stock:
   Original preferred stock, $0.01 par value, 1,000 shares
       authorized, issued and outstanding (Note R)                                                          10                 10
   Series A, $1,000 stated value, 4,000 shares authorized,
       issued and outstanding (Note R)                                                               4,000,000          4,000,000
   Series B, $1,000 stated value, 2,000 shares authorized,
       issued and outstanding (Note R)                                                               2,000,000          2,000,000
   Series C, $1,000 par value, 1,500 shares authorized, 0
       and 1,500 shares issued and outstanding at December
       31, 1998 and 1997, respectively (Note R)                                                              -          1,500,000
   Series D, $1,000 stated value, 10,000 shares authorized,
       3,400 shares issued and outstanding (Note R)                                                  3,400,000          3,400,000
   Series AB, $100 stated value, 25,000 shares authorized,
       4,050 and 0 shares issued and outstanding at December
       31, 1998 and 1997, respectively (Note R)                                                        405,000                  -
   Class A, no par, 10,000,000 shares authorized,
       none issued and outstanding                                                                           -                  -
                                                                                             -----------------  -----------------

       TOTAL PREFERRED STOCK                                                                         9,805,010         10,900,010

   Common stock, $0.001 par value, 50,000,000
       shares authorized; 19,954,382 shares issued and outstanding at
       December 31, 1998 and 16,441,739 shares issued and outstanding at
       December 31, 1997                                                                                19,955             16,442
   Stock subscription receivable                                                                      (301,000)           (26,000)
   Treasury stock, at cost (24,364 shares in 1998 and 1997)                                           (279,928)          (279,928)
   Additional paid-in capital                                                                       33,257,835         31,083,604
   Accumulated deficit                                                                             (25,400,694)        (3,835,041)
                                                                                                 -------------       ------------

       TOTAL SHAREHOLDERS' EQUITY                                                                   17,101,178         37,859,087
                                                                                                 -------------       ------------

       TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                                 $ 27,072,392        $45,120,600
                                                                                                  ============        ===========

</TABLE>

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

                                                                    F-3

<PAGE>

<TABLE>
<CAPTION>

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

                                                                                               For the years ended December 31,
                                                                                                 1998                   1997
                                                                                               -------------           ----------
<S>                                                                                            <C>                      <C>

NET SALES                                                                                      $ 23,282,452            $4,723,905

COST OF SALES                                                                                    18,130,295             3,688,442
                                                                                              -------------           -----------

   Gross profit                                                                                   5,152,157             1,035,463
                                                                                              -------------           -----------

OPERATING EXPENSES
   Selling, general and administrative                                                            7,260,274             1,717,430
   Depreciation and amortization                                                                    477,527                97,154

   Impairments (Notes C and H)                                                                   17,231,138                     -

   Settlements                                                                                    1,212,327                     -
                                                                                             --------------      ----------------

           TOTAL OPERATING EXPENSES                                                              26,181,266             1,814,584
                                                                                              -------------           -----------

LOSS FROM OPERATIONS                                                                            (21,029,109)             (779,121)
                                                                                              -------------          ------------


OTHER INCOME (EXPENSES)
   Other income                                                                                      50,374                     -
   Interest expense                                                                                (380,023)             (113,026)
   Forgiveness of debt (Note X)                                                                     127,626               376,615
   Interest income                                                                                   42,236                28,184
   Exchange gain                                                                                          -                14,676
   Loss on disposal of property and equipment                                                       (70,419)                    -
                                                                                            ---------------      ----------------

           TOTAL OTHER INCOME (EXPENSE)                                                            (230,206)              306,449
                                                                                             --------------          ------------

NET LOSS BEFORE INCOME TAXES                                                                    (21,259,315)             (472,672)

   Income taxes (Note Q)                                                                             36,338                 1,700
                                                                                            ---------------         -------------

NET LOSS                                                                                       $(21,295,653)          $  (474,372)
                                                                                               ============           ===========

BASIC AND FULLY DILUTED LOSS PER SHARE (Note T)                                             $         (1.19)       $         (.05)
                                                                                            ===============        ==============
WEIGHTED AVERAGE NUMBER OF SHARES
   OUTSTANDING                                                                                   18,061,430            12,550,337
                                                                                              =============           ===========

</TABLE>

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

                                                                    F-4

<PAGE>

<TABLE>
<CAPTION>

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

                                                                                                                Common
                                                                                               Additional      Stock                
                                                           Common Stock          Preferred Stock    Paid-in    Subscription         
                                             Shares       Amount      Shares       Amount       Capital       Receivable     Shares 
<S>                                         <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 

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

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

  Sale of shares under Regulation S          1,788,000      1,788          -              -       1,087,212       (26,000)         -

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

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

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

  Shares issued in connection with
     Pego acquisition                          450,000        450      1,500      1,500,000         211,051             -          -

  Shares issued in connection with ECS
     acquisition                             2,500,000      2,500      3,400      3,400,000       5,597,500             -          -

  Dividends on preferred stock                       -          -          -              -               -             -          -

  Net loss                                           -          -          -              -                -           -         -  
                                      ---------------------------  -----------------------------------------------------------------

Balance, December 31, 1997                  16,441,739    $16,442     11,900    $10,900,010     $31,083,604      $(26,000)    24,364

</TABLE>

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

                                                                    F-5

<PAGE>

<TABLE>
<CAPTION>

                                                                               Total
                                                  Treasury Stock  Accumulated Shareholders'
                                                  Amount          Deficit         Equity
<S>                                               <C>           <C>             <C>

Balance, December 31, 1996                      $(279,928)     $ (3,225,669)    $19,709,233

  Shares issued for settlement
     of payables                                  -               -          40,225

  Shares issued for consulting
     agreement                                    -               -         150,000

  Sale of shares under Regulation S               -               -       1,063,000

  Shares issued to employees                      -               -         194,500

  Shares issued for broker/finder fees            -               -         600,000

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

  Shares issued in connection with
     Pego acquisition                             -               -       1,711,501

  Shares issued in connection with ECS
     acquisition                                  -               -       9,000,000

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

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

Balance, December 31, 1997                    $(279,928)    $(3,835,041)    $37,859,087

</TABLE>


                                     F-5(a)

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

<PAGE>

<TABLE>
<CAPTION>

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

                                                                                                                Common
                                                                                               Additional       Stock        
                                                          Common Stock   referred Stock        Paid-in          Subscription 
                                            Shares        Amount      Shares         Amount    Capital          Receivable   
<S>                                         <C>           <C>         <C>       <C>             <C>             <C>               


Balance, December 31, 1997                  16,441,739    $16,442     11,900    $10,900,010     $31,083,604     $ (26,000)   

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

  Stock subscription received                        -          -          -              -               -        25,000    

  Shares issued to employees and
     Board of Directors                        377,857        378          -              -         196,123             -   

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

  Shares issued for purchase of Elan
     Manufacturing                             724,990        725          -              -         615,516             -   

  Preferred stock redeemed for cash                  -          -     (1,300)    (1,300,000)              -             -   

  Preferred stock exchanged for common
     stock                                     200,000        200       (200)      (200,000)        199,800             -   

  Shares issued to investors                   200,000        200          -              -          24,800             -   

  Preferred stock dividend                           -          -      4,050        405,000               -             -   

  Net loss                                           -          -           -                -                -           - 
                                           ---------------------------  ----------------------------------------------------

Balance, December 31, 1998                      19,954,382    $19,955     14,450     $9,805,010     $33,257,835     $(301,000)
                                                ===========    =======    =======     ==========     ===========     =========

                                     F-5(c)

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

</TABLE>

<PAGE>

<TABLE>
<CAPTION>

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

                                      
                                                                                Total
                                              Treasury Stock      Accumulated   Shareholders'
                                           Shares     Amount       Deficit         Equity
<S>                                        <C>        <C>          <C>          <C>


Balance, December 31, 1997                 24,364$    (279,928)$   (3,835,041)  $37,859,087

  Sale of shares under Regulation S         -           -               -           825,002

  Stock subscription received               -           -               -            25,000

  Shares issued to employees and
     Board of Directors                     -           -               -           196,501

  Shares issued for purchase of Pacific
     Pneumatics, Inc.                       -           -               -            15,000

  Shares issued for purchase of Elan
     Manufacturing                          -           -               -           616,241

  Preferred stock redeemed for cash         -           -               -        (1,300,000)

  Preferred stock exchanged for common
     stock                                  -           -               -                 0

  Shares issued to investors                -           -               -            25,000

  Preferred stock dividend                  -           -            (270,000)       135,000

  Net loss                                  -             -        (21,295,653)   (21,295,653)
                                        ----------------------------------         -------------

Balance, December 31, 1998                  24,364   $(279,928)   $(25,400,694)   $ 17,101,178
                                        ===========  ==========   =============   =============

</TABLE>

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


                                                                    F-6

<PAGE>

<TABLE>
<CAPTION>

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

                                                                                       For the years ended December 31,
                                                                                         1998                    1997
                                                                                       ------------            ------------
<S>                                                                                    <C>                     <C>

CASH FLOWS FROM OPERATING ACTIVITIES
  Net loss                                                                             $(21,295,653)           $  (474,372)
  Adjustments to reconcile net loss to net cash used in operating activities:
     Loss on sale of equipment                                                               70,419                      -
     Write down on note receivable                                                        1,043,795                      -
     Depreciation                                                                           405,481                 73,613
     Amortization                                                                           411,928                 71,390
     Allowance for doubtful accounts                                                        (27,003)                57,443
     Impairments                                                                         17,231,138                      -
     Forgiveness of debt                                                                    (90,000)              (376,615)
     Accrued interest income                                                                      -                (26,494)
     Stock issued for services                                                              196,501                      -
     Inventory valuation                                                                     50,000                      -
     Settlements                                                                          1,212,327                      -
     Changes in operating assets and liabilities:
         Accounts receivable                                                               (731,054)              (275,772)
         Inventory                                                                          923,046               (413,340)
         Prepaid expenses and other                                                          13,938                110,790
         Accounts payable and accrued expenses                                             (758,243)               562,858
         Payables to Mexican affiliate                                                      130,630               (112,001)
         Other liabilities                                                                  (95,996)                     -
                                                                                     --------------       ----------------

NET CASH USED IN OPERATING ACTIVITIES                                                    (1,308,746)              (802,500)
                                                                                      -------------           ------------

CASH FLOWS FROM INVESTING ACTIVITIES
  Purchases of property and equipment                                                      (329,570)               (59,239)
  Proceeds on sale of equipment                                                               3,000                      -
  Proceeds on sale of marketable securities                                                 595,573                525,034
  Proceeds on notes receivable                                                              206,622                 37,990
  Payments on notes receivable                                                                    -                (35,000)
  Payments on acquisitions                                                                 (462,543)              (750,000)
                                                                                      -------------           ------------

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES                                          13,082               (281,215)
                                                                                     --------------           ------------

CASH FLOWS FROM FINANCING ACTIVITIES
  Common stock subscriptions                                                                (15,000)               (30,000)
  Proceeds on loans from shareholders                                                             -                110,000
  Proceeds from issuance of common stock                                                    875,002              1,063,000
  Net proceeds from line of credit                                                        1,302,609                100,000
  Payments on loans from shareholders                                                      (209,509)               (84,258)
  Payments on capital lease obligations                                                    (226,045)               (26,767)
  Payments on long-term debt                                                               (617,207)               (21,394)
  Proceeds from issuance of long-term debt                                                1,792,579                      -
  Proceeds on debentures                                                                          -                 50,000
  Redeemed preferred stock                                                               (1,300,000)                     -
                                                                                     --------------       ----------------

NET CASH PROVIDED BY FINANCING ACTIVITIES                                                 1,602,429              1,160,581
                                                                                     --------------            -----------

NET INCREASE IN CASH                                                                        306,765                 76,866

CASH, BEGINNING OF YEAR                                                                      77,688                    822
                                                                                    ---------------         --------------

CASH, END OF YEAR                                                                    $      384,453            $    77,688
                                                                                     ==============            ===========
</TABLE>

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

                                                             F-7

<PAGE>

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

A.      Organization and Summary of Significant Accounting Policies:

        Organization and Nature of Operations

        Hartcourt   Investments   (USA),  Inc.,   (Hartcourt   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,   Hartcourt   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,  Hartcourt
        Investments  acquired a 60% interest in Xinhui Harchy Modern Pens,  Ltd.
        Joint Venture  (Xinhui JV) owned by a Hong Kong  corporation  for common
        stock  valued at  $2,149,200.  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 Xinhui  JV. In
        September 1996,  Hartcourt  Investments sold its investment in Xinhui JV
        to CKES, Inc. of Sunnyvale, California (Notes C and E).

        In  November  1994,   Stardust,   Inc.,   Production-Recording-Promotion
        (Stardust)   acquired  100%  of  the  outstanding  shares  of  Hartcourt
        Investments  for  8,280,000  shares of its common stock in a transaction
        accounted  for  as a  recapitalization  of  Hartcourt  Investments  with
        Hartcourt Investments as the acquiree (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, Hartcourt 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).

                                                        F-8

<PAGE>

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


A.      Organization and 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 one in  California  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 P).

        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.

        Principles of Consolidation

        The accompanying  consolidated financial statements include the accounts
        of The  Hartcourt  Companies,  Inc. and its  wholly-owned  subsidiaries;
        Hartcourt  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.

        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.

                                                       F-9

<PAGE>

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

A.      Organization and Summary of Significant Accounting Policies: (continued)

        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  $49,474  and  $76,477  at  December  31,  1998 and  1997,
        respectively.  It is reasonably  possible that the Company's estimate of
        allowance  for doubtful  accounts  will  change.  Such a change could be
        material to the consolidated financial statements.

        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

        Property 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.

        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  is 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).

        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. The
        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.  Such a change could be material
        to the consolidated financial statements.

                                                     F-10

<PAGE>

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

A.      Organization and Summary of Significant Accounting Policies: (continued)

        Advertising Costs

        Advertising  costs  are  generally  expensed  as  incurred.  Advertising
        expense included in selling,  general and  administrative  expenses were
        $62,745 and $84,573 for 1998 and 1997, respectively.

        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.

        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 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  1997  amounts  have been  reclassified  to  conform to the 1998
        consolidated financial statement  presentation.  These reclassifications
        have no effect on previously reported net loss.

                                                       F-11

<PAGE>

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

A.      Organization and 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.

        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 (SFAS 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 S).

        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 and disclosures of contingent  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.

        Impairment of Long-Lived Assets

        The Company has adopted Statement of Financial  Accounting Standards No.
        121 ("SFAS 121") Accounting for the Impairment of Long-Lived  Assets and
        for  Long-Lived  Assets to be Disposed Of. Under the  provisions of this
        statement, the Company has evaluated its long-lived assets for financial
        impairment,  and will  continue to evaluate them as events or changes in
        circumstances  indicate that the carrying  amount of such assets may not
        be fully recoverable.

        The Company  evaluates the  recoverability of long-lived assets not held
        for sale by  measuring  the  carrying  amount of the assets  against the
        estimated  undiscounted  future cash flows  associated with them. At the
        time such  flows of certain  long-lived  assets  are not  sufficient  to
        recover the carrying  value of such  assets,  the assets are adjusted to
        their fair values. Accordingly,  based on these evaluations,  management
        has  adjusted  the carrying  value of  investments  and goodwill in 1998
        (Notes C and H).

                                                       F-12

<PAGE>

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

A.      Organization and Summary of Significant Accounting Policies: (continued)

        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.

        Marketable securities:  For marketable securities,  the carrying amounts
        approximate the remaining guaranteed value.

        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,
                                                                                  1998               1997
                                                                                ------------        ------------
<S>                                                                             <C>                  <C>

           Accounts receivable, unassigned                                      $3,224,779           $2,239,065
           Accounts receivable, assigned (Note I)                                        -              193,059
                                                                          ----------------          -----------

                                                                                 3,224,779            2,432,124

           Less allowance for doubtful accounts                                    (49,474)             (76,477)
                                                                              ------------         ------------

                                                                                $3,175,305           $2,355,647
                                                                                ==========           ==========

</TABLE>

                                                      F-13

<PAGE>

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

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. Hartcourt 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 E).

        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 was 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  reserved
        $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.  At
        December 31, 1998, the impairment was increased $1,043,795 to reduce the
        carrying value of the note to zero.

        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 4.6 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  was  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,
        1998 and 1997. 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. In March 1999, the Company
        exchanged the property for marketable securities (Note Z).

        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,  1998 and 1997  pending a formal
        geological survey of the land. In March 1999, the Company entered into a
        settlement agreement whereby, the property was disposed of (Note Z).

                                                       F-14

<PAGE>

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

C.      Investments and Business Acquisitions: (continued)

        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 H).  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 H). In 1999,  the  Company  redeemed  the  Series C
        Preferred Stock.

        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 H).  During  March  1999,  the
        Company  issued  65% of the  common  stock in ECS as part of  settlement
        agreements  (Note  Z).  As part of  these  transactions,  The  Hartcourt
        Companies will be surrendering  control of ECS, and therefore,  ECS will
        not be consolidated with Hartcourt subsequent to the consummation of the
        agreements.

        Purchase of Elan Manufacturing, Inc

        On August 24, 1998, the Company  through its ECS  subsidiary,  purchased
        all outstanding shares of Elan Manufacturing, Inc. (Elan). Payment terms
        of the  transaction  include  issuance  of 693,224  shares of  Hartcourt
        common  stock with a  guaranteed  value of $.85 per share for a total of
        $559,241.  The  Company  guarantees  that the value of the common  stock
        issued shall be no less than $.85 per share on September 1, 1999. Should
        the stock  price be below  $.85 per share,  the  Company  shall,  at the
        option of the shareholders,  either issue additional unrestricted common
        shares or pay the difference in cash. The excess purchase price over the
        fair value of the net assets  which  totaled  $892,642  was  recorded as
        goodwill (Note H). The activity of Elan  represents less than 10% of all
        activity of the Company.

        Purchase of Pacific Pneumatics, Inc.

        On August 6, 1998, the Company  through its Pego  subsidiary,  purchased
        all outstanding shares of Pacific Pneumatics,  Inc.  (Pacific).  Payment
        terms of the  transaction  include  $235,000 of cash and 9,796 shares of
        Company  common  stock  valued at $15,000.  Included in the  acquisition
        price is a covenant  not-to compete (Note H). The excess  purchase price
        over the  fair  value  of the net  assets  which  totaled  $442,543  was
        recorded as goodwill (Note H). The activity of Pacific  represents  less
        than 10% of all activity of the Company.

                                                      F-15

<PAGE>

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

C.      Investments and Business Acquisitions: (continued)

        Purchase of Assets of SM Technology, Inc.

        On December 17, 1998, the Company through its ECS subsidiary,  purchased
        a book of business from SM Technology, Inc. (SM) in exchange for cash in
        the amount of $10,001 and a note payable due to the majority shareholder
        of SM in the amount of $350,000.  The value of the intangible  assets at
        the  acquisition  date was $10,001.  The excess  purchase price over the
        fair value of the assets which totaled $350,000 was recorded as goodwill
        (Note H). Due to certain misunderstanding involving the transaction, the
        Company is currently renegotiating the purchase price.

        Marketable Securities

        In July  1997,  the  Company  entered  into an  agreement  with  Capital
        Commerce,  Ltd.  (Capital) (an Isle of Man Corporation)  whereby Capital
        agreed to provide the Company  $6,000,000 in free trading securities for
        the  purchase of Pego  Systems,  Inc. and the  formation  of  Electronic
        Components  and  Systems,  Inc.,  a Nevada  Corporation.  The  agreement
        stipulates  that  should the value of the stock  received by the Company
        decrease,  Capital shall  compensate  the Company 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 R).  Dividends are declared and paid
        monthly at 9% per  annum.  Terms of this  agreement  are over a ten year
        period.  Included in accrued  expenses  at December  31, 1997 is accrued
        dividends  of  $135,000  associated  with  this  agreement.   Marketable
        securities  are  recorded  at  the  remaining  guaranteed  value  of the
        agreement at December 31, 1998 and 1997. Due to the Company's  inability
        to sell the marketable securities, in March 1999, the Company reached an
        agreement to return the remaining  securities it had received to Capital
        (Note Z).

        The following is a summary of  investments at December 31, 1998 and 1997
        and the result of agreements reached (Note Z):

<TABLE>
<CAPTION>

                                                                              December 31,         December 31,
                                                                                1998                 1997
                                                                             -------------         ------------
<S>                                                                          <C>                   <C>

           Marketable securities                                             $   4,894,393         $  5,474,966
           Peony gardens                                                        11,932,500           11,932,500
           Alaskan gold mines                                                    5,974,020            5,974,020
                                                                             -------------         ------------

               Balance                                                          22,800,913          $23,381,486
                                                                              ------------          ===========

           1998 Impairments (Note Z):

           Peony Gardens                                                        (6,932,500)
           Alaskan goldmines                                                    (4,838,413)

           Total impairments                                                   (11,770,913)

           Balance at December 31, 1998                                         11,030,000

           1999 Adjustments for return of company stock (Note Z)                (6,030,000)
                                                                            --------------

           Balance of assets in March 1999 (Note Z)                          $   5,000,000
                                                                             =============

</TABLE>

                                                      F-16

<PAGE>

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

D.      Inventory:

<TABLE>
<CAPTION>

        Inventory consists of the following:

                                                                              December 31,         December 31,
                                                                                1998                 1997
                                                                              ------------          -----------
<S>                                                                           <C>                   <C>

               Raw materials                                                    $2,308,807          $2,756, 923
               Work-in-process                                                     158,388              378,602
               Finished goods                                                      196,365              405,796
                                                                               -----------         ------------

                                                                                 2,663,560            3,541,321

                  Less: valuation allowance                                        (50,000)                   -
                                                                              ------------     ----------------

                                                                                $2,613,560           $3,541,321
                                                                                ==========           ==========

</TABLE>

E.      Notes Receivable:

<TABLE>
<CAPTION>

        Notes receivable consist of the following:
                                                                                     December 31,        December 31,
                                                                                     1998                1997
                                                                                     ------------        -------------
<S>                                                                                  <C>                 <C>

        Note  receivable  from former  attorney Kevin Quinn,  interest at 9% per
        annum; due on demand; secured by real estate. Included in the balance is
        accrued interest of $8,871 at December 31, 1998 and 1997.                    $   91,523              $111,523

        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.                                                                        10,000               30,510

        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 has been fully impaired. (Note C)                                  -                  1,043,795

</TABLE>



                                                       F-17

<PAGE>

<TABLE>
<CAPTION>

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

E.      Notes Receivable: (continued)
                                                                                     December 31,        December 31,
                                                                                     1998                1997
<S>                                                                                  <C>                 <C>

        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 $0 and $18,113 at December 31, 1998 and 1997, respectively.

                                                                                     -                   164,112
                Other                                                                -                     2,000
                                                                                     ------------        -------------

                Total                                                                101,523             1,351,940

                Less current portion                                                 (101,523)           (293,673)
                                                                                     ----------          ------------

                Notes receivable, net of current portion                             $     -             $1,058,267
                                                                                     ===========         ===========

</TABLE>

<TABLE>
<CAPTION>

F.      Related Party Transactions:

        Related party loans receivable consist of the following:

                                                                                December 31,        December 31,
                                                                                1998                1997
                                                                                -----------         -----------
<S>                                                                             <C>                 <C>

        Loan to officer of Hartcourt, unsecured;
        non-interest bearing; due on demand.                                     $ 142,522          $   96,691

        Loan to officer of ECS, unsecured;
        non-interest bearing; due on demand.                                        33,385              31,009

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

                Total related party loans receivable                               175,907             131,398

                Less current portion                                              (175,907)           (131,398)
                                                                                ----------          ----------

                                                                                $        -          $        -
                                                                                =============       =============
</TABLE>

        At December 31, 1998 and 1997,  the Company has  $124,206 and  $110,000,
        respectively, of advances from the President of ECS which are unsecured,
        non interest bearing and due on demand.
        The terms were re-negotiated in 1999 (Note Z).

        During 1998, the Company issued 377,857 shares of common stock valued at
        $196,501 to employees  and the Board of  Directors  of the Company.  The
        common  stock was valued at the market price of the stock on the date of
        issuance.  Additionally,  in February  1999,  the Company issued 205,000
        shares of common stock to employees of the Company.

                                                       F-18

<PAGE>

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

G.      Property and Equipment:

<TABLE>
<CAPTION>

        Property and equipment are summarized as follows:                     December 31,        December 31,
                                                                               1998                1997
                                                                             --------------        -------------  
<S>                                                                          <C>                   <C>
          
                Machinery and equipment                                         $3,125,935          $2,166,792
                Building                                                         1,213,571           1,213,571
                Furniture and fixtures                                              95,727             109,706
                Office equipment and computers                                     245,227             104,028
                Vehicles                                                            52,109              46,656
                Leasehold improvements                                              35,058              27,781
                                                                             -------------        ------------

                                                                                 4,767,627           3,668,534

                Less accumulated depreciation and amortization                    (505,507)           (100,027)
                                                                              ------------        ------------

                Property and equipment, net                                     $4,262,120          $3,568,507
                                                                                ==========          ==========
</TABLE>

H.      Intangibles:

<TABLE>
<CAPTION>

        Intangibles are summarized as follows:                                December 31,       December 31,
                                                                               1998                1997
                                                                              -------------      --------------  
<S>                                                                           <C>                <C>

                Goodwill                                                       $11,021,575          $9,336,390
                Covenant not to compete                                            110,000             100,000
                Other                                                               10,001                   -
                                                                              ---------------    ----------------

                                                                                11,141,576           9,436,390

                Less accumulated amortization                                     (483,318)            (71,390)
                                                                              --------------        ------------

                                                                                10,658,258           9,365,000

                Impairment of goodwill                                          (5,460,225)                  -
                                                                              ------------    ----------------

                Intangibles, net                                               $ 5,198,033          $9,365,000
                                                                               ===========          ==========

</TABLE>

        Goodwill consists of amounts paid in excess of the fair value of the net
        assets in the  acquisitions.  In accordance  with Statement of Financial
        Accounting   Standards  No.  121,  (SFAS  No.121)  "Accounting  for  the
        Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
        of",  management has evaluated the  recoverability of intangible assets.
        Based on the  reduction in the Company's  ownership  interest of ECS and
        losses  from  operations,  the Company has  recorded  an  impairment  of
        $4,469,144 to the goodwill of ECS for the year ended  December 31, 1998.
        The  resulting  fair  value  will be  reduced  to zero in 1999  upon the
        recording of the James Pruzin agreement (Note Z).  Additionally,  due to
        losses from  operations of Pego,  the Company has recorded an impairment
        of $991,081  to the  goodwill  of Pego for the year ended  December  31,
        1998. The impairments of goodwill are included in operating  expenses in
        the accompanying consolidated statements of operations.

        The covenant not-to compete agreement is with the former  shareholder of
        Pego and is in effect for a five year period.

                                                       F-19

<PAGE>

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

I.      Assigned Accounts Receivable:

        ECS had a factoring  agreement  with a finance  company  with a limit of
        $1,500,000 which expired on May 10, 1998. Under the factoring agreement,
        the factor purchased substantially all trade accounts receivable for one
        of ECS's major customers,  Next Level Systems, Inc. ECS was contingently
        liable to the factor for  merchandise  disputes,  customer  claims,  and
        other chargebacks on eligible  receivables.  As collateral,  the Company
        granted a continuing  security  interest in substantially  all assets of
        ECS. The proceeds  received from the factor for the year ended  December
        31, 1998 and 1997 totaled $2,411,329 and $1,694,313, respectively.

J.      Lines of Credit:

        The  Company  has a line of credit  agreement  with a bank with a credit
        limit of the lessor of $2,000,000 or 80% of eligible accounts receivable
        of ECS.  Borrowings  are at the discretion of the bank and bear interest
        at the  bank's  prime rate plus 1.5% per annum,  9.25% at  December  31,
        1998.  The agreement is secured by a UCC-1 filing on  substantially  all
        assets of ECS. The agreement  shall remain in place until  terminated by
        30 day notice by either party. The agreement requires the maintenance of
        financial  covenants  which  include;  tangible  net worth not less than
        $2,400,000, a ratio of current assets to current liabilities of not less
        than 1.0 to 1.0, a ratio of total  liabilities  to tangible net worth of
        not less than 2.5 to 1.0, a ratio of cash flows to fixed charges of 1.25
        to 1.0, and a limit on annual capital  expenditures.  The Company was in
        violation of certain  covenants at December 31, 1998.  Accordingly,  the
        bank may terminate the agreement  without notice.  At December 31, 1998,
        $1,452,609 was outstanding under this agreement.

        The  Company  has a line of credit  agreement  with a bank with a credit
        limit of $50,000.  Borrowings are at the discretion of the bank and bear
        interest  at the  bank's  prime  rate  plus  5.5% per  annum,  13.25% at
        December 31, 1998. The line of credit is due on demand and is unsecured.
        At December 31, 1998, $50,000 was outstanding under this agreement.

        The Company  has a secured  line of credit  agreement  with a bank which
        provides  that it may borrow up to $300,000 at the bank's  prime rate of
        interest,  9% at  December  31,  1998.  The line of credit is secured by
        inventory,  equipment,  and  accounts  receivable  of Pego.  The line of
        credit is due on demand.  At December 31, 1998,  $300,000 was  available
        under this agreement.

K.      Notes Payable:

<TABLE>
<CAPTION>

        Notes payable are summarized as follows:
                                                                                     December 31,   December 31,
                                                                                     1998           1997
<S>                                                                                  <C>            <C>
                                                                                     
        Note payable,  individual,  monthly  principal and interest  payments of
        $9,544 including  interest at 8.5% per annum; due November 2024; secured
        by land and building.                                                        $1,197,345     $1,209,528

</TABLE>

                                                       F-20

<PAGE>

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

<TABLE>
<CAPTION>

K.      Notes Payable: (continued)
                                                                                     December 31,   December 31,
                                                                                     1998           1997
<S>                                                                                  <C>            <C>
                                                                                     
        Note payable, bank, monthly installments of $34,306 plus interest at the
        bank's prime rate plus 2% per annum, 10.5% at December 31, 1998; secured
        by  substantially  all assets of Pego; all unpaid principal and interest
        due in full on June 5,  2001.  The  agreement  requires  maintenance  of
        financial  covenants on a quarterly  basis which  include:  tangible net
        worth not less than $1,400,000,  quick assets to current liabilities not
        less than 1.75 to 1, cash flow  coverage  of not less than 1.3 to 1, and
        other restrictions of certain assets of the parent company.  The Company
        was in  violation  of the  restriction  provisions  of the  agreement at
        December 31, 1998. Accordingly, the bank may demand payment in full.         1,097,776      -

        Note  payable,  former  owner  of  Pacific  Pneumatics,   Inc.,  monthly
        principal and interest payments of $3,146 including interest at 6.5% per
        annum; due May 2010; unsecured.                                              300,830        -

        Notes  payable,  former  owner  of  Pacific  Pneumatics,  Inc.,  monthly
        principal  and interest  payments of $780  including  interest at 6% per
        annum; due June 2005; unsecured.                                             49,724         -

        Note payable,  former owner of SM Technologies,  Inc., monthly principal
        payments of $10,000 until paid in full; non-interest bearing; secured by
        certain accounts receivable and machinery of ECS.                            350,000        -

        Note payable,  bank,  monthly interest  payments at the bank's base rate
        plus 2%, 9.75% at December 31, 1998; secured by substantially all assets
        of the Company; unpaid principal due March 5, 1999.                          150,000        -

        Note payable,  unrelated  third party,  monthly  installments  of $4,000
        including  interest at 12% per annum;  unsecured;  unpaid  principal and
        interest due June 1999.                                                      22,000         -

        Note  payable,  former owner of Elan  Manufacturing,  Inc.,  interest at
        10.3% per annum;  unsecured;  unpaid principal and interest due April 1,
        1999.                                                                        92,008         -

        Note payable, former owner of Elan Manufacturing,  Inc., interest at 10%
        per annum; unsecured; unpaid principal and  interest due upon demand.        16,195         -

</TABLE>


                                                       F-21

<PAGE>

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


                                                       F-22

<PAGE>


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

<TABLE>
<CAPTION>

K.      Notes Payable: (continued)

                                                                                     December 31,   December 31,
                                                                                     1998           1997
<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.
        (Note X)                                                                     10,000         200,000

        Note  payable,   financial  institution,   monthly  payments  of  $8,039
        including  interest at 12.29%;  collateralized  by  equipment of ECS and
        personally  guaranteed  by the  President of ECS; due June 1999.  During
        1998,  certain  machinery  securing the note was sold which violated the
        covenants  pursuant to the note agreement.  As a result,  the lender may
        call the note at any time.                                                   59,833         130,044

                 Other                                                               25,000         -
                                                                                     ------------   --------

                 Total                                                               3,370,711      1,539,572

                 Less current portion                                                (1,631,199)    (205,245)
                                                                                     ------------   ------------

                 Notes payable, net of current portion                               $ 1,739,512    $1,334,327
                                                                                     ===========    ==========

</TABLE>

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

             Year ending December 31,

                         1999           $1,631,199
                         2000           161,217
                         2001           154,262
                         2002           47,534
                         2003           51,056
                         Thereafter     1,325,443
                                        -----------
                         Total          $3,370,711

L.      Commitments and Contingencies:

        Operating Leases

        The Company leases its facilities under long-term,  non-cancelable lease
        agreements   expiring  at  various   dates   through   June  2004.   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, 1998
        and  1997  was  $596,531  and  $68,023,  respectively.  The Company also
        leases vehicles and equipment under various long-term agreements.

                                                       F-22

<PAGE>

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

L.      Commitments and Contingencies: (continued)

        The future minimum  annual lease  payments  required under the operating
leases are as follows:

<TABLE>
<CAPTION>

                  Year ending
                 December 31,                             Vehicles      Facilities        Equipment       Total
                 ------------                             --------    --------------      ---------    -----------
<S>              <C>                                      <C>         <C>                 <C>          <C>

                   1999                                    $22,874          $285,509      $  55,206       $365,588
                   2000                                     15,478           193,200         55,206        265,884
                   2001                                     12,536           153,600         55,206        223,343
                   2002                                          -            21,600         55,206         78,808
                   2003                                          -            21,600         18,402         42,005
                   Thereafter                                    -            10,800              -         10,800
                                                       -----------         ---------  -------------      ---------

                 Total future lease payments               $50,888          $686,309       $239,226       $986,428
                                                           =======          ========       ========       ========

</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,
        1998:

                 Cost                        $1,467,977
                 Accumulated depreciation    (140,017)

                                             $1,327,960

        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, 1998:

                      Year ending
                     December 31,

                         1999                          $  379,670
                         2000                             336,289
                         2001                             303,092
                         2002                             189,176
                         2003                              62,157
                                                       ----------

                 Total future capital lease payments   1,270,384

                 Less amount representing interest     (199,420)

                 Net present value of minimum lease
                 payments                              1,070,964

                 Less current portion of capital
                 lease obligations                      (290,204)
                                                        -----------

                 Capital lease obligations, net of
                 current portion                       $  780,760
                                                       ==========

                                                       F-23

<PAGE>

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

        At December 31, 1998,  $1,016,273 of the total capital lease obligations
        was personally guaranteed by the President of ECS.

L.      Commitments and Contingencies: (continued)

        Consulting Agreements

        On December 30, 1996,  the Company  entered into a consulting  agreement
        with American Equities,  LLC (American  Equities),  a California Limited
        Liability  Company which  expires on December 31, 2001.  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.  In March 1999, the Company  reached an agreement with
        American Equities,  whereby, it was determined that all fees were earned
        (Note Z).  Accordingly,  the  balance  of prepaid  consulting  fees were
        written off to  operating  expenses  during the year ended  December 31,
        1998.

        In February 1997, the Company  entered into a consulting  agreement with
        Dan  Allen  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 Dan Allen  Investment
        Corporation for future acquisitions. This transaction was discounted due
        to the restriction on the shares issued.  The agreement  expired in 1998
        and no services were received.

M.      Accrued Expenses and Other Current Liabilities:

        Accrued  expenses  and  other  current  liabilities  are  summarized  as
follows:

<TABLE>
<CAPTION>

                                                                                 December 31,         December 31,
                                                                                  1998                 1997
<S>                                                                              <C>                <C>

                 Accrued wages                                                   $163,143           $   175,000
                 Accrued commissions                                              105,951                42,003
                 Prepaid credits                                                   84,163               110,202
                 Accrued sales taxes                                               23,127                46,488
                 Accrued dividends (Note R)                                             -               135,000
                 Accrued brokers fees                                                   -               437,000
                 Other current liabilities                                        101,972               116,188
                                                                                ---------          ------------

                                                                                 $478,356            $1,061,881
                                                                                 ========            ==========
</TABLE>

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

                                                       F-24

<PAGE>

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

N.      Debentures:

<TABLE>
<CAPTION>

        Debentures consist of the following:

                                                                                     December 31,        December 31,
                                                                                     1998                1997
<S>                                                                                  <C>                 <C>

        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.            $ 50,000            $  50,000
                                                                                     ---------             ---------
             Total Debentures                                                          50,000               50,000

             Less current portion                                                     (50,000)             (50,000)
                                                                                     ---------             ---------

                                                                                     $      -            $       -
                                                                                     =========           ============

</TABLE>

O.      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.

        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,  1998 and  1997  was  $4,032,781  and
        $800,516, respectively.

        At December 31, 1998 and 1997, the unsecured,  non-interest bearing, due
        upon demand  balance  payable to the Mexican  affiliate was $483,572 and
        $352,942,  respectively.  Additionally,  at December 31, 1998,  the book
        value of the  production  machinery  and  equipment and the value of the
        inventory  provided to the  affiliate  was  $1,956,145  and  $1,798,658,
        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.

                                                      F-25

<PAGE>

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

P.      Notes Payable, Related Parties:

<TABLE>
<CAPTION>

        Notes payable, related parties consist of the following:
                                                                                     December 31,      December 31,
                                                                                     1998              1997
<S>                                                                                  <C>               <C>

        Note payable,  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.  In March 1999, the parties
        agreed to amend the terms of the note. (Note Z)                              $ 125,000        $ 250,000

        Note  payable,  employee,  interest at 10% per annum,  monthly  interest
        payments of $167; due on demand; unsecured.                                     20,000           20,000

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

                Total                                                                   145,000          310,000

                Less current portion                                                   (145,000)        (185,000)
                                                                                      ----------       ----------

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

Q.      Income Taxes:

<TABLE>
<CAPTION>

        Provisions for income taxes are summarized as follows:
                                                                                            Year ended
                                                                                     December 31,     December 31,
                                                                                     1998             1997
<S>                                                                                  <C>              <C>

               Current income taxes                                                   $36,338         $1,700
                                                                                      -------         ------

               Provision for income taxes                                             $36,338         $1,700
                                                                                      =======         ======

        The Company  has  deferred  tax assets for the tax effects of  temporary
        differences  between  financial  and tax  reporting  for the years ended
        December 31, 1998 and 1997 as follows:

                                                                                     1998              1997
                                                                                     --------------    ---------
               Deferred tax assets:
               Net operating losses                                                  $  2,202,000      $  792,000
               Impairment of investments                                                4,120,000               -
               Impairment of goodwill                                                   1,911,000               -
               Other                                                                       49,000          49,000
                                                                                     --------------     -----------

                                                                                        8,282,000         841,000

</TABLE>

                                                       F-26

<PAGE>

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

<TABLE>
<CAPTION>
<S>                                                                                  <C>                 <C>

               Valuation allowance                                                   (8,282,000)         (841,000)
                                                                                     ------------        ----------

               Net deferred tax assets                                               $         -         $      -
                                                                                     ============        ==========
</TABLE>

Q.      Income Taxes: (continued)

        Impairment of  investments  and goodwill are not  deductible in 1998 for
        income tax purposes.  Losses on investments  for income tax purposes may
        be taken in the year the respective transactions are completed. Goodwill
        is  amortized  over  fifteen  years for income tax purposes or until the
        Company  has  disposed  of its  ownership  in the  entity  in which  the
        goodwill  relates.  The valuation  allowance  increased  $7,441,000  and
        $271,408 for the years ended  December 31, 1998 and 1997,  respectively.
        It is reasonably  possible that the Company's  estimate of the valuation
        allowance will change.

        The  Company  has net  operating  loss  carryforwards  of  approximately
        $6,291,000.  The regular net  operating  loss  carryforwards,  which are
        approximately the same as the alternative minimum tax net operating loss
        carryforwards,  if not utilized,  will expire in varying amounts through
        2018.  The  realization  of any  future  income  tax  benefits  from the
        utilization  of net operating  losses may be limited.  Federal and state
        tax laws  provide  that when a more than 50%  change in  ownership  of a
        company  occurs within a three year period,  the net  operating  loss is
        limited.

R.      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).

        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.

        In September  and October 1997,  the Company's  Articles were amended to
        authorize  the  issuance  of A, B,  C, D,  and AB  preferred  stock.  As
        amended,  the  Articles  provide  that the  total  number  of  shares of
        preferred  series  A, B, C, D, and AB stock  are  4,000,  2,000,  1,500,
        10,000, and 25,000, respectively.

        Original Preferred Stock

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

        The holders of 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.

                                                       F-27

<PAGE>

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

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

R.      Capital Stock: (continued)

        Class A Preferred Stock

        The 10,000,000 shares of authorized and unissued Class A Preferred Stock
        may be split  with  such  designations,  powers,  preferences  and other
        rights and qualifications,  limitations and restrictions  thereof as the
        Company's Board of Directors  elects for a given series.  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 .0075%  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. During  1998,  Series AB  preferred
        stock was issued as payment of accrued  dividends.  In March  1999,  the
        Series A convertible preferred stock was returned and canceled (Note Z).

        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. During 1998, Series AB preferred stock was issued
        as  payment  for  accrued  dividends.   In  March  1999,  the  Series  B
        convertible preferred stock was returned and canceled (Note Z).

        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  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. During 1998, the Company redeemed the stock for

                                                       F-28

<PAGE>

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

        $1,300,000 in cash and 200,000  shares of Company common stock valued at
$1 per share.

R.      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
        into 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.  In
        March 1999,  the Series D convertible  preferred  stock was returned and
        canceled (Note Z).

        Series AB Convertible Preferred Stock

        Non-voting  convertible preferred stock, 25,000 shares authorized with a
        stated value of $100 per share. Series AB convertible preferred stock is
        subject to redemption  at any time,  at the option of the Company,  at a
        redemption  price  equal to $100 per share  plus  accrued  interest  and
        unpaid  dividends  to the  date of  redemption.  Holders  of  Series  AB
        convertible  preferred  stock may convert  their  preferred  shares into
        common stock.  During 1998, the Company issued 4,050 shares of Series AB
        convertible  preferred  stock in payment of dividends for Series A and B
        convertible  preferred  stock.  In  March  1999,  certain  shares  of AB
        preferred stock were returned and canceled (Note Z).

S.      Stock Option Plan and Warrants:

        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, 1998 and 1997.


                                                       F-29

<PAGE>

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

        Warrants

        As of December 31, 1998 and 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, 1998.

T.      Loss Per Share:

        The following  reconciles  amounts reported in the financial  statements
        for the years ended December 31, 1998 and 1997, respectively:

<TABLE>
<CAPTION>

                                                                                     1998
                                                                  Income (loss)        Shares           Per-share
                                                                    (Numerator)       (Denominator)       Amount
                                                            -------------------      --------------      ----------
<S>                                                         <C>                      <C>                 <C>


           Income (loss) from continuous operations               $(21,295,653)                  -        $      -
           Less preferred stock dividends                             (270,000)                  -               -
                                                                --------------

           Income (loss) available to common stock-
           holders - basic earnings per share                      (21,565,653)         18,061,430          $(1.19)
                                                                                                            ======

           Effect of dilutive securities                                     -                   -
                                                            ------------------    ----------------

           Income (loss) available to common stock-
           holders - diluted earnings per share                   $(21,565,653)         18,061,430          $(1.19)
                                                                  ============          ==========          ======

                                                                                     1997
                                                                  Income (loss)        Shares           Per-share
                                                                    (Numerator)       (Denominator)       Amount

           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)
                                                                     =========          ==========          ======

</TABLE>

        During 1998 and 1997,  the Company had 2,000,000  warrants  outstanding,
        each  convertible  into one share of common stock.  In addition,  during
        1998 and 1997 the Company had convertible  preferred  stock  outstanding
        (Note R), 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.

U.      Concentrations of Credit Risk:

                                                       F-30
<PAGE>

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


        The  Company  maintains  its cash in bank  deposit  accounts  at various
        financial  institutions.  The balances,  at times,  may exceed federally
        insured  limits.  The  Company  has not  experienced  any losses in such
        accounts and believe they are not exposed to any significant credit risk
        on cash and cash equivalents.

U.      Concentrations of Credit Risk: (continued)

        Accounts are  guaranteed by the Federal  Deposit  Insurance  Corporation
        (FDIC) up to $100,000.  A summary of total  insured and  uninsured  cash
        balances as of December 31, 1998 is as follows:

                  Total cash in bank deposit accounts  $ 700,293
                  Portion insured by FDIC               (290,017)

                      Uninsured Cash Balances          $ 410,276
                                                       =========

V.      Segment and Related Information:

        Segments

        During the year ended December 31, 1998, the Company  adopted  Financial
        Accounting Standards No. 131 (SFAS No. 131), "Disclosures About Segments
        of an Enterprise  and Related  Information."  The  Company's  reportable
        business  segments are  strategic  business  units that offer  different
        products and services.  Each segment is managed  separately because they
        require  different  technologies  and  market  to  distinct  classes  of
        customers.  The  Company has three  segments  with  separate  management
        groups which are as follows; a) ECS which specializes in high technology
        contract  manufacturing of printed circuit boards, phone and cable wire;
        b) Pego which is a  manufacturer's  representative  organization for air
        and  gas  handling  equipment;   c)  Hartcourt  which  has  limited  pen
        operations,  investments,  and runs  corporate  matters.  The  segments'
        accounting  policies  are the same as those  described in the summary of
        significant  accounting  policies.  The  following  is a summary  of the
        segments operations:

<TABLE>
<CAPTION>

                                                  ECS              Pego            Hartcourt         Total
                  1998
<S>     <C>                                    <C>                <C>           <C>                 <C>
        
        Revenues                                $16,596,049       $6,636,320    $       50,083      $ 23,282,452
        Interest income                                   -           42,236                 -            42,236
        Interest expense                           (241,005)        (129,832)           (9,186)         (380,023)
        Depreciation and
           amortization                            (367,726)        (109,801)                -          (477,527)
        Impairments                              (4,469,144)        (991,081)      (11,770,913)      (17,231,138)
        Segment profit (loss)                    (5,589,910)      (1,092,913)      (14,612,830)      (21,295,653)
        Total assets                             11,589,288        5,042,109        10,440,995        27,072,392
        Capital expenditures                        248,643           80,927                 -           329,570

</TABLE>

                                                       F-31

<PAGE>

<TABLE>
<CAPTION>

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

                  1997
<S>     <C>                                    <C>                <C>           <C>                 <C>

        Revenues                               $  2,686,410       $1,881,159     $     156,336      $  4,723,905
        Interest income                                 427                -            27,757            28,184
        Interest expense                            (43,781)          (41,109)         (28,136)         (113,026)
        Depreciation and
           amortization                             (59,033)         (25,132)          (12,989)          (97,154)
        Segment profit (loss)                      (359,069)         232,687          (347,990)         (474,372)
        Total assets                             13,997,311        4,663,883        26,459,406        45,120,600
        Capital expenditures                         59,178               61                 -            59,239

</TABLE>

        See Note W for segment non-cash activities.

V.      Segment and Related Information (continued)

        Foreign Operations

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

<TABLE>
<CAPTION>

                                                                  (Unaudited)                 (Unaudited)
                                                                 December 31, 1998          December 31, 1997
                                                                ------------------          -----------------
<S>                                                           <C>                         <C>


                  Revenues                                    $             -             $             -

                  Operating loss                              $             -             $             -

                  Total assets                                     $3,754,803                  $3,004,740
</TABLE>

        Significant Customers

        During  the  years  ended  December  31,  1998  and  1997,  ECS  had one
        significant customer,  General Instrument Corporation (formerly known as
        Next Level Systems,  Inc.) Revenue from General  Instrument  Corporation
        for the years ended December 31, 1998 and 1997 totaled  $10,107,494  and
        $1,493,686,  which represents 43% and 32% of net revenue,  respectively.
        Accounts  receivable  from this  customer  amounted to  $1,229,065 as of
        December 31, 1998.

<TABLE>
<CAPTION>

W.      Supplemental Cash Flow Information:
                                                                                       1998            1997
                                                                                   ------------   ---------------

<S>                                                                                <C>            <C>

           Cash paid for interest and income taxes:

               Interest                                                                $380,022      $   113,026
               Income taxes                                                                 943           37,400

           Noncash investing and financing activities:

           Hartcourt

               Common stock issued for the purchase of Pacific
                  Pneumatics, Inc.                                                       15,000                -
               Common stock issued to settle liabilities                                      -           40,225
               Common stock issued for brokerage fees                                         -          600,000
               Common stock issued for prepayment of
                  consulting fees                                                             -          150,000
               Preferred stock issued for dividends                                     270,000                -
               Preferred stock issued for accrued expenses                              135,000                -
               Preferred stock converted into common stock                              200,000                -
               Preferred stock issued for marketable securities                               -        6,000,000
               Stock subscription receivable                                            275,000           26,000

</TABLE>

                                                       F-32

<PAGE>

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

        Common stock issued for assets and  liabilities  of Elan during 1998 was
as follows:

<TABLE>
<CAPTION>
<S>            <C>                                                                                   <C>

               Accounts receivable                                                                    $   61,599
               Inventory                                                                                  45,286
               Prepaid expenses                                                                           10,144
               Property and equipment                                                                    358,633
               Goodwill                                                                                  892,642
               Accounts payable                                                                         (179,975)
               Accrued expenses                                                                         (176,321)
               Notes payable                                                                            (395,767)
                                                                                                      ----------
                                                                                                       $ 616,241
W.      Supplemental Cash Flow Information: (continued)

        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

        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

           ECS                                                                          1998              1997
                                                                                     ----------        -------
           Assets purchased through capital leases                                      484,310          211,041
           Notes payable issued for intangible assets                                   350,000                -
</TABLE>


                                                       F-33

<PAGE>

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

X.      Forgiveness of Debt:

        During  1998 and  1997,  the  Company  recognized  debt  forgiveness  of
        $127,626 and $376,615, respectively.  Included in forgiveness of debt is
        $90,000 at December 31, 1998 and $376,615 at December 31, 1997  relating
        to a note payable with Anja.

Y.      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
        $1,834  and  $510 for the  years  ended  December  31,  1998  and  1997,
        respectively.  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, 1998 and 1997.

Z.      Subsequent Events:

        In March  1999,  the Company  entered  into a series of  agreements  and
        transactions  that in the  aggregate  were  designed to  streamline  and
        restructure the Company while  dissolving the Company of inactive assets
        and settle outstanding litigation. The restructuring included settlement
        of certain litigation,  settlement of certain agreements, and a spin-off
        to  shareholders of the United States based assets of the Company into a
        newly formed public company as further described below. The following is
        a summary of the agreements reached in March 1999:

           Capital Commerce, Ltd.

           In July 1997,  the Company  entered  into an  agreement  with Capital
           Commerce,  Ltd.  (Capital)  whereby,  Capital  agreed to provide  the
           Company  $6,000,000  in  free  trading  securities  in  exchange  for
           $4,000,000  of  Series  A and  $2,000,000  of  Series  B  convertible
           preferred  stock (Note C). As a result of the  settlement  agreement,
           Capital   returned  all  $4,000,000  of  outstanding   Series  A  and
           $2,000,000  of  Series B  convertible  preferred  stock,  plus the AB
           preferred  stock  issued by the  Company  in 1998 as  dividends.  The
           Company assigned to Capital all unsold  marketable  securities with a
           book value of $4,894,393,  a 7.35% ownership interest in ECS, and 1.9
           million shares of Company common stock. Simultaneously,  Capital then
           assigned its rights to the common stock to its authorized  agent, who
           then  assigned  1.3 million  shares of the common  stock  received to
           Mandarin  Overseas  Investment  Co.,  Inc.  ("Mandarin")  and  Promed
           International  Ltd.  ("Promed")  and returned  600,000  shares to the
           Company in settlement of a subscriptions receivable balance.

                                                       F-34

<PAGE>

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

           In  September  1996,  the Company  purchased 68 gold lode claims from
           Mandarin and Promed in exchange for  approximately 1.3 million shares
           of the Company's common stock (Note C). In conjunction with the above
           transaction,   the  Company  elected  to  rescind  the  sale-purchase
           agreement of the gold mining  rights in the state of Alaska  pursuant
           to the terms of the  agreement.  In March 1999,  Mandarin  and Promed
           returned  to the Company  the 1.3  million  shares of Company  common
           stock they  received  from the agent of Capital in  settlement of the
           rescission request.

           The remaining balance of prepaid  commissions in conjunction with the
           original securities exchange totaling $547,557,  has been written off
           to operating  expenses for the year ended  December 31, 1998. The net
           result of the  above  transaction  results  in an  impairment  to the
           assets held at December 31, 1998 for the impending loss of $4,838,413
           for the year ended December 31, 1998.

           James Pruzin

           On October  21,  1998,  James  Pruzin,  the selling  shareholder  and
           President of Electronic  Components and Systems, Inc. (ECS), formally
           requested a rescission of the October 28, 1997 acquisition,  whereby,
           the  Company,  through a wholly  owned  subsidiary,  acquired ECS and
           Pruzin Technologies,  Inc. (Note C) Mr. Pruzin has alleged that he is
           authorized to request rescission of the original transaction based on
           an alleged breach of the  acquisition  agreement by the Company which
           the Company denied.  On November 10, 1998, the Company and Mr. Pruzin
           entered  into  a  memorandum  of  understanding,  whereby,  he  could
           reacquire  ECS from the Company by returning  all Company  common and
           preferred  stock   originally   issued  to  him,  making  payment  of
           $1,850,000  to the  Company  during  1999,  negotiate  the  return of
           Company common stock issued in the acquisition of Elan Manufacturing,
           Inc.  (Note  C),  and  issue to the  Company  a  promissory  note for
           $400,000 amortized over five years with monthly payments beginning in
           2000.

           Subsequently,  Mr.  Pruzin  was  unable  to  meet  the  terms  of the
           memorandum of understanding  and entered into new  negotiations  with
           the  Company.  The Company and Mr.  Pruzin have  reached an agreement
           whereby  Mr.  Pruzin  has agreed to return to the  Company  2,000,000
           shares  of  Company  common  stock  representing  80% of  the  amount
           originally  issued, and 3,400 shares of Series D preferred stock. The
           Company has agreed to assign to Mr. Pruzin a 30%  ownership  interest
           in ECS and has a right to purchase  500,000  shares of Company common
           stock  held  by  Mr.  Pruzin  at $1 per  share.  As a  result  of the
           transaction,  the  Company  will  reduce  Series  D  preferred  stock
           $3,400,000 and common stock for $1,000,000 in 1999. Additionally,  as
           part of the  agreement,  the payment  terms for the note  payable and
           advances were changed to thirty-six  monthly  payments of $7,083 with
           no interest until paid in full.

           American Equities

           On  September  3, 1998,  American  Equities  filed suit  against  the
Company for breach of contract.

                                                       F-35

<PAGE>

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

           The Company  denied that it had breached any contract  with  American
           Equities and filed a  cross-complaint  for fraud and  non-performance
           against  American  Equities  and  additional  cross-  defendants.  As
           settlement of these matters, the parties agreed that all fees paid to
           American Equities were earned and American Equities receives a 27.65%
           interest in ECS.  Additionally,  American Equities agreed to loan ECS
           up to $500,000.  Accordingly,  prepaid expenses amounting to $664,770
           has  been  written-off  to  operating  expenses  for the  year  ended
           December 31, 1998.

           Dragon King

           On March 15, 1999,  the Company  entered  into an Exchange  Agreement
           pursuant to which the Company  agreed to assign its rights  under the
           Purchase and Sale  Agreement  dated August 8, 1996 and any and all of
           its interest in the Peony Gardens  development located in a suburb of
           Bejing City, China (Note C) for marketable securities. The marketable
           securities have subsequently been valued at $5,000,000.  Accordingly,
           the Company has recorded an impairment to the assets held at December
           31,  1998 for the  impending  loss of  $6,932,500  for the year ended
           December 31, 1998.

           Enova Holdings, Inc.

           Effective February 1, 1999,  pursuant to a Share Purchase  Agreement,
           the Company  acquired one (1) share of common stock of Enova Holdings
           Inc., a Nevada  corporation  (Enova)  representing  100% of the total
           issued  and  outstanding  capital  stock  of  Enova,  making  Enova a
           wholly-owned  subsidiary.  Effective  March 1, 1999,  the Company and
           Enova executed an Exchange Agreement (the "Enova Agreement")  whereby
           the Company exchanged all of its ownership in two subsidiaries,  Pego
           Systems Inc. (Pego) and Electronic and Component  Systems Inc. (ECS),
           collectively, the "subsidiaries",  for 5,213,594 additional shares of
           common stock of Enova.  On March 24, 1999, the Company entered into a
           Distribution  Agreement  pursuant  to which  the  Company  agreed  to
           distribute to all shareholders of record of The Hartcourt  Companies,
           Inc. on March 31, 1999,  all of the 5,213,595  shares of common stock
           of Enova and to file,  within a reasonable  period of time  following
           such  distribution,  a Registration  Statement on Form 10-SB to cause
           the distributed shares of Enova to be registered under the Securities
           Exchange Act of 1934.  As a result of the Share  Purchase  Agreement,
           the Enova Agreement and the Distribution Agreement,  each shareholder
           of record of the Company on March 31, 1999 will receive one (1) share
           of Enova for every four (4) shares  owned of the  Company.  Following
           the distribution of the Enova shares, both the Company and Enova will
           continue to operate as separate companies.

        The  following  table  presents  on a  proforma  basis the effect of the
        restructuring  and  settlements  on the  consolidated  balance sheet and
        statement of operations of the Company and Enova at December 31, 1998:

                                                       F-36

<PAGE>

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

<TABLE>
<CAPTION>

                                     December 31,     Proforma        Proforma               Allocation
                                       1998           Adjustments       Total           Enova         Hartourt
                                ------------------   ---------------------------------------------------------
<S>                             <C>                  <C>             <C>             <C>             <C>
                                
           Total assets               $ 27,072,392    $(17,376,726)  $   9,695,666   $  4,293,763    $   5,401,903
           Total liabilities             9,971,214      (6,182,026)      3,789,188      3,630,603          158,585
           Total equity                 17,101,178     (11,194,700)      5,906,478        663,160        5,243,318
           Net sales                    23,282,452               -      23,282,452     23,232,369           50,083
           Impairments                 (17,231,138)              -     (17,231,138)    (5,460,225)     (11,770,913)
           Net loss                    (21,295,653)              -     (21,295,653)    (6,682,823)     (14,612,830)
           Earnings per share                (1.19)              -           (1.19)          (.38)            (.81)

</TABLE>

AA.     Going Concern:

        As shown in the accompanying financial statements,  the Company incurred
        net losses of $21,295,653  and $474,672 for the years ended December 31,
        1998  and  1997,  respectively.   Additionally,  the  Company's  current
        liabilities  exceeded  its current  assets by  $887,126 at December  31,
        1998.  Those  factors,  as well as the  uncertain  conditions  about the
        Company's restructuring plans, negative cash flows from operations,  and
        ability  to meet  debt  obligations,  create  an  uncertainty  about the
        Company's ability to continue as a going concern.

        As  discussed  in Note Z, the  Company has taken  certain  restructuring
        steps,  which in the opinion of  management,  will provide the necessary
        capital  to  continue  its  operations.  These  steps  included;  1) the
        settlement of certain matters of litigation and disputes; 2) creation of
        Enova,  a subsidiary to own and operate the U.S. based  subsidiaries  of
        Pego  and  the  remaining  35%  ownership  in  ECS;  3) as  part  of the
        settlement  agreements,  the Company  obtained a commitment  for interim
        working  capital  funding for ECS; 4) exchange of its interests in Peony
        Gardens for investment securities.  Additionally, the Company is seeking
        either subordinated debt or equity investments for Pego.

        The ability of the Company to continue as a going  concern is  dependent
        on its success in fulfilling its plan.  The financial  statements do not
        include any adjustments that might be necessary if the Company is unable
        to continue as a going concern.

                                                       F-37

<PAGE>

                                  Exhibit 21.01

                           SUBSIDIARIES OF THE COMPANY

(1)     Harcourt  Investment  (USA),  Inc. a Nevada  Corporation.  including the
        accounts of Hartcourt Pen Factory, Inc., a Nevada Corporation.

(2)     Pego Systems, Inc., a California Corporation.

(3)     Electronic Components and Systems, Inc., a Nevada Corporation.

<PAGE>

                                  Exhibit 23.01

               CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

              We consent to the  inclusion in this Annual  Report Form 10-KSB of
      our  report  dated  March  6,  1998,  on our  audits  of the  consolidated
      financial  statements  and  schedules  of  Hartcourt  Companies,  Inc. and
      Subsidiaries ("The Company").

      /s/  Harlan & Boettger, LLP

      San Diego, California
      April 15, 1999