SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB


[X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT OF 1934 For the fiscal year ended August 31, 1997

[ ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF

      For the transition period ____________ to ______________

                         Commission file number: 0-21679

                          Hertz Technology Group, Inc.
             ------------------------------------------------------
                 (NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)

                  Delaware                           13-3896069
      ----------------------------------   --------------------------------
      (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER 
      INCORPORATION OR ORGANIZATION        IDENTIFICATION NO.)

      75 Varick Street.  11th Floor.  New York, NY   10013
--------------------------------------------------   ----------------------
      (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES        (ZIP CODE)

          Issuer's telephone umber, including area code: (212) 634-4000

    Securities registered pursuant to Section 12(b) of the Exchange Act: None

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

                     Common Stock, par value $.001 per share
             ------------------------------------------------------
                                (Title of Class)

                                    Warrants
             -------------------------------------------------------
                                (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 there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of the 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]

      The Registrant's net sales for the fiscal year ended August 31, 1997 were
$10,508,193.

      The aggregate market value of the Common Stock of the registrant held by
non-affiliates of the registrant, based on the average of the high and low
prices on November 10, 1997 was $2,691,813.

      As of November 10, 1997 the registrant had a total of 3,165,000 shares of
Common Stock outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCES
 
      Portions of the Annual Proxy Statement for the year ended August 31, 1997
are incorporated by reference in Part III.


<PAGE>

                                     PART I

            Certain statements in the Letter of the Chairman President and Chief
Executive Officer included in the annual report to stockholders, in the
"Management's Discussion and Analysis" and elsewhere in this Form 10-KSB
constitute "forward-looking statements' within the meaning of Section 21E of the
Securities and Exchange Act of 1934 See "Forward Looking Statements".

ITEM 1.  DESCRIPTION OF BUSINESS.

General

      Hertz Technology Group Inc. (the "Company") was incorporated in the state
of Delaware on June 18, 1996 for the purpose of acquiring all the outstanding
stock of Hertz Computer Corporation ("Hertz Computer") and Hergo Ergonomic
Support 


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<PAGE>

System, Inc. ("Hergo"), two New York corporations formed in 1982 and 1992
respectively, which are now wholly owned subsidiaries of the Company. The
Company's Hertz Computer division custom designs, assembles and sells PCs and
related technology and provides services under the "Hertz" name. The Company's
Hergo division designs, manufactures and sells ergonomically engineered modular
mounting and support structures, technical furniture and workstations ("Modular
Systems") for PCs and related peripherals under the "Hergo" name.

Products and Service

      Hertz Customized Computers And Related Services. The Company designs and
sells customized PCs and provides a broad range of related services, including
system architecture design, consulting, installation, personnel training and
customer support. PCs are assembled in a number of different configurations
using standard component parts. Customization enables the Company to accommodate
customer computer needs with respect to storage capacity, speed, price,
applications, size, configuration and a range of other considerations that can
be accommodated in whole or in part by the selection of appropriate components.
Hertz PCs are currently being used to operate MRI machines, to provide voice
mail services, for use in military radar systems and for use in shopping center
kiosks.

      Most of the PCs sold by the Company are for use in a network
configuration. The Company, as an additional service, will configure the network
for the customer for which it will charge an additional hourly fee. The Company
also provides its customers with continuing support and assistance in the
maintenance and operation of Company purchased products.

      Hergo Modular Systems. The Company's Hergo division designs and
manufactures and sells Modular Systems which serve to conserve space and help
organize and facilitate the accessibility of all types of computer hardware,
communication and electronic devices and other peripherals. Hergo systems are
suitable for use in any size computer room or technical environment. The market
for these Modular Systems was created in large part by the replacement of
mainframe computers by multiple PCs. The Company was one of the first companies
to provide a cohesive, functional and architecturally attractive racking system
that vertically mounts and supports multiple computers, servers and related
peripherals, such as printers, monitors, scanners and modems, used in tandem
with each other, or in juxtaposition with each other and interconnected for
networking functions.

      The Company has designed basic modular components in a variety of colors
that in combination can be used to create limitless mounting and support
structures. The components, made of a heavy-duty steel, are interchangeable so
as to permit the user to easily add new equipment or reconfigure existing
setups. The Modular Systems are suitable for a variety of applications including
multiple LAN file servers and communication control centers, on trading floors,
in testing laboratories, in training 


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<PAGE>

rooms, in multimedia, video and broadcast production centers and in
manufacturing areas as well as for personal workstations.

      The basic charge by the Company for its Modular Systems does not include
shipment or installation. The Company will ship the completed unit by common
carrier at the customer's expense, or if the customer wishes the Company to
install the unit, the Company will deliver the unit in a Company owned van and
arrange for its installation at the customers premises. The charge for these
additional services are usually determined on a percentage of the purchase price
charged for the basic unit.

New Hergo Products

      The Hergo division has in the last several months developed prototypes or
introduced on the market the following new products:

      o     a line of height adjustable assembly workstations that feature an
            electric or manual hydraulic mechanism that enables an operator to
            quietly raise or lower his work surface and shelving system for
            better access, greater comfort and improved production

      o     a new line of welded-steel computer enclosures

      o     a computer desk specifically designed for the small office home
            office ("SOHO") and the education markets

Manufacture and Assembly

      Computers are manufactured at the Company's new manufacturing facilities
in New York City, at 75 Varick Street, which has a capacity to produce
approximately 96 computers a day, an amount more than double the production
capacity at the Company's former manufacturing facility which it vacated in
December 1996. The Modular Systems are manufactured at the Company's Woodside,
Queens facility.

         The Company gives limited warranty coverage for its computers and
Modular Systems for varying time periods depending on several factors including
the component parts affected, during which period the Company will repair or
replace defective products or parts at no cost to the customer. Where product
failure is the result of a defect in a component part, the Company is often
covered through warranty agreements with its vendors. The net cost to the
Company for its warranty service has not been significant to date.

Suppliers


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<PAGE>

      The Company stocks most of the component parts used both in the
manufacture of its computers and in the manufacture of its Modular Systems. The
cost of some components used in the computers, such as central processing units
("CPU's") and memory, can fluctuate from day to day or from one week to the
next, and for this reason, the Company tries not stock these items for use over
a long period of time. It generally seeks to purchase these price sensitive
items within about two weeks advance of use. To date, the Company has not
experienced any difficulty in receiving the needed items on short notice. Most
of the component parts purchased by the Company in connection with the computers
are obtained from a number of different sources. The Company believes that it is
not dependent on any single source, as alternative sources are available. Most
of the heavy duty steel components used in the Modular Systems are made by
Hergo. The Company acquires its raw materials for these components from a number
of different companies and believes that adequate alternative raw material
sources are available if required.

Marketing and Sales

      The Customized Computer And Related Services. Sales to commercial
customers are generally made by unsolicited telephone calls. Salespersons at the
Company are trained to work with the caller and elicit his company's computer
needs and work out the specifications of a computer which best satisfies its
needs. In cases where a large potential sale is involved or where a sale is
regarded as a significant entree into a new market or in other special
situations, senior management may take an active role in sales negotiations
which may also involve a visit or visits to the customer's premises. Government
sales are made through competitive bidding in response to published
specifications, invitations to bid or requests for proposals. The Company is an
approved provider to New York State Office of General Services ("OGS") and to
the Federal Government's General Services Administration ("GSA"), which monitors
all US government procurement of computers and equipment.

      Computer sales and servicing revenues in the 1997 fiscal year were
$6,860,000, down from $9,602,000 in the prior year. A significant part of this
revenue loss was accounted for by the closing of the Company's Israel facility
in 1997 because its operations had ceased to be profitable. Consequently, the
total sales of computers to Israel in 1997 were $643,000, down from $1,925,000
in 1996. Another contributing factor to the reduction in 1997 computer sales was
a sharp drop off in sales to federal state and city agencies or government
affiliated organizations including hospitals and schools ("Government
Entities"). Historically, a large portion of the Company's computers sales are
made to Government Entities. This was true, but to a considerable lesser extent
in 1997 when sales to Government Entities accounted for approximately 19% of the
Company's Computers sales and 12% of its total sales as compared to 48% of the
Company's computer sales and 36% of its total sales for the 1996 fiscal year. On
the other hand, sales to commercial customers accounted for a higher percentage
of Hertz Computer sales than in earlier years. Moreover, whereas in the past no


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<PAGE>

commercial customer accounted for as much as 10% of total sales, in the 1997
fiscal year two commercial customers accounted for 17% and 15% respectively, of
total Company sales.

      While the Company has historically concentrated its computer selling to
state agencies, it has not made any significant sales to the Federal Government,
though it has been accredited by it as an approved provider. The Company intends
to focus more on this market in the current year. However, although the Company
intends to expand its position in the governmental market (there being no
assurance that it will be successful), it believes that such markets are
generally more sensitive to budgetary constraints. The Company's principal sales
focus remains on the commercial market and particularly on the Original
Equipment Manufacturers (OEM) market where the gross margins are generally
higher.

      The Company has exhibited its computers at trade shows and has, from time
to time, circulated brochures and articles containing excerpts from favorable
trade press reviews of one or more of its computers. Much of its computer
business is repeat business, and the source of new customers has been largely by
word of mouth and responses from favorable media product reviews. The Company's
small sales staff is primarily occupied with taking and filling orders by
telephone. The Company is now committed to recruiting a full time sales manager
and developing a sales force that will actively solicit new business.

      "Hergo" Modular Systems. The Company constructed and sold Hergo Modular
Systems to approximately 700 customers in the 1997 fiscal year. These customers
included 15 to 20 of the largest and best known corporations in America.
Companies of the size and stature of Citibank, N.A., AT&T, Dow Jones, IBM,
Pitney Bowes, The Federal Reserve Bank, Hewlett Packard, The New York Times and
Bear Sterns, all purchased Hergo Structural Support units in 1997. No single
customer accounted for more than 10% of total Hergo sales in 1997. Sales are
generated in large part through advertising. The Company also deals with
resellers who act as intermediaries for the end user. Hergo products have
recently been approved by the GSA and the Company has begun selling such
products to the federal government. Hergo sales in fiscal 1997 increased by
$1,100,000 or 43% over Hergo 1996 sales. While this increase in dollars was not
as great as the dollar loss in 1997 revenues recorded by the Hertz Computer
division, Hergo's profit margins are considerably higher than the margins
realized by Hertz Computer and as a result the increase in Hergo profits was
sufficient to offset the reduced profits of Hertz Computer.

      The Company has an advertising budget for its "Hergo" Modular Systems. For
the 12 month period ended August 31, 1997, the Company spent approximately
$268,000 on advertising the "Hergo" product line, primarily in trade
publications and in the preparation and circulation of brochures. The Company
currently maintains a staff of 9 Hergo sales and marketing people who are paid
on a base salary plus commission.


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<PAGE>

Competition

      There are many companies selling computers that may be regarded as
competitors of the Hertz Computer Division. Computers are sold directly to
commercial and government entities by manufacturers such as IBM, Hewlett Packard
and Compaq, by large retail outlets such as Comp USA and Staples, by mail order
houses, electronic equipment catalogues and by assemblers and entities like the
Company selling computers under their own names. Many of these companies have
substantially greater financial, sales, marketing, technical and other
competitive resources then those of the Company. As a result, these competitors
may be able to devote greater resources than the Company to the sale and service
of microcomputer products. Some of these companies, by themselves, have the
economic power to control prices and the technical expertise to develop and
bring to market, improved versions of existing products long before they become
available to the Company. As an indication of the price competition that exists
in the retail market Compaq has begun selling computers for below $1,000. The
Company for its part has closed down its low margin business in Israel and is
pursuing the sale of higher margin business both in computers and in the
expansion of its Hergo product line. Many of the computers manufactured by the
Company continue to receive favorable reviews in the trade press. Just
recently, the Company's Pentium 200 Desktop PC was awarded Editors Choice by
Computer Buyer's Guide (Summer 1997). The Company's senior management tries to
keep abreast of changes in the computer technology market with respect to the
claims and limitations of new component parts and accessories. In many cases
they are able to combine this information with their intimate knowledge of their
customers needs to fine tune their selection of component parts to produce
computers which better suit the specific needs of their customers. The Company
believes that management's knowledge of the market, the Company's 15 years in
business and the favorable name recognition that the Hertz computer enjoys are
factors that set the Company apart from many of its competitors. However,
whatever advantage the Company enjoys from these factors can easily be lost if
the Company's pricing and technical features of its products will not be able to
compete with the prices and technology of comparable products from other
suppliers.

      The business of providing functional, architecturally attractive Modular
Systems specifically designed to mount, support and allow easy access to
microcomputers and related equipment is a relatively new business. Nevertheless,
there are a number of companies already in the business, some of whom are
considerably larger and better established than the Company. Moreover, because
of the attractive profit margins in the business and the absence of any serious
barriers to entry, it is likely that a plethora of additional companies might
soon enter the field.

Strategic Growth Plan


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<PAGE>

      The Company's strategic growth plan consists of strengthening both of its
business lines by updating their respective physical facilities and equipment
and then intensifying their respective marketing efforts. The first step in
implementing this plan occurred in December 1997 when the Company moved its
Hertz Computer manufacturing facilities and the Company's executive
administration and sales departments from its Fifth Avenue offices to new and
enlarged facilities at 75 Varick Street in lower Manhattan.

      With respect to the PC business, the Company remains committed to
developing a sales force to enable it to expand its customer base and is
intensifying its efforts to recruit an experienced marketing executive to
develop and head a newly formed sales department. The Company believes it can
enlarge its core business of office computers built to customer specifications
by increasing its capacity to provide computer consulting and related services.
Toward this end the Company is seeking to attract qualified consultants and/or
to acquire consulting and service companies to provide these additional
services. As described earlier in this report, the closing of the Company's
Israeli facility in 1997 and a fall in PC sales to Government Entities resulted
in an overall decline of 29% of PC revenues in the Company's 1997 fiscal year
from that of the previous year. The Albany area contains a number of New York
State agencies and one of the ways the Company has addressed its decline of
government business has been to open an Albany office and staff it with two
experienced sales and technical persons with the expressed purpose of providing
a better and more readily accessible sales and service capability for the
governmental offices in the Albany area.

      For the Hergo line, as indicated earlier, this division is introducing new
and innovative products. It is also continuing to enlarge its customers base,
having added in 1997 some new clients to its already impressive customers list.
Hergo is now also selling to Government Entities that historically have been the
mainstay of the Hertz Computer customer base. The Company believes that these
sales will represent an early success in the Company's ongoing efforts to
develop a cross marketing program between its Hertz Computer and Hergo
divisions. The Company also has under consideration the possible acquisition of
a sheet metal fabrication company to add to and supplement the manufacturing and
sales capability of Hergo.

Intellectual Property Rights

      The Company seeks to protect its proprietary rights by obtaining non
disclosure and confidentiality agreements from its employees and consultants.
The Company has trademark registrations for "Hergo" and "Hergonized." It has
applied for registration of the Hertz Computer name, but such registration has
not been issued pending the outcome of a proceeding before the Trademark Trial
and Appeal Board to partially cancel the registration of another party's mark
cited by the Trademark Examiner as a conflicting mark. Neither of the two
principal products of the Company enjoys patent protection.


                                       8
<PAGE>

Employees

      The Company employs 56 persons. In addition to five executives, eight
persons are employed in administration and 12 in sales. Seven persons are
employed in production by the computer division, and 24 in production by Hergo.

ITEM 2.  DESCRIPTION OF PROPERTY

      The Company currently occupies loft space on 75 Varick Street, consisting
of 21,000 square feet for a six year period which began on September 1, 1996, at
an annual rental of $161,871 a year. These facilities are used by the Company
for its executive administrative and sales offices, and for manufacturing
computers. The Company also leases an office in Albany for $14,225 a year under
a lease expiring in June 1998, with an option exercisable by the Company to
renew for an additional two years. The Company also leases an aggregate of
16,000 square feet in Woodside, Queens, New York for its Hergo manufacturing
facility. The lease for this space, which ends on February 28, 2000, provides
for an annual rent of approximately $100,000.

ITEM 3.  LEGAL PROCEEDINGS

      On or about August 9, 1995, Hertz Computer commenced an action against
A.C. Purchasing Securities, Inc. And others in Federal Court in the Southern
District, New York to collect approximately $140,000 for goods sold and
delivered to defendant which was purchasing computers for resale to the
Government of Israel. The defendants have counterclaimed, charging that Hertz
Computer sold computers directly to the Government of Israel, thereby,
tortuously interfering with defendants business arrangement with he Government
of Israel. The Company believes that Hertz Computer has meritorious defenses to
the counterclaim and that notwithstanding defendants large claim for damages,
the maximum amount it could reasonably expect to recover if were successful in
this suit would be the amount of the profits it was deprived of by reason of
Plaintiff's allegedly tortious conduct.

ITEM  4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         Not applicable.

                                     PART II

ITEM  5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

      a) Market Information


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<PAGE>

            The Company's Common Stock is listed and trades on the Nasdaq Small 
Cap Market (Symbol: HERZ). The following table set forth, on a per share basis,
the high and low prices for the Company's Common Stock for the first quarter of
the Company's 1997 fiscal year after the initial public offering of the
Company's Common Stock on November 12, 1996, and for the second, third and
fourth quarters of its 1997 fiscal year.

                                                           Common Stock
                                                           ------------
                                                      High              Low
                                                      ----              ---

November 12, 1996 to November 30, 1996               $8.75             $7.50
December 1, 1996 to February 28, 1997                $6.38             $4.25
March 1, 1997 to May 31, 1997                        $8.25             $4.25
June 1, 1997 to August 31, 1997                      $5.25             $1.31

      On November 14, 1997 the closing sale price for the Common Stock on NASDAQ
was $1.63.

      Effective November 6, 1997 the Company's Board of Directors authorized the
Company to make open market purchases of its Common Stock of up to 250,000
shares during the following three months. As of the close of business on
November 14, 1997 10,500 shares were repurchased by the Company at a total cost
of $18,892.

b)    Holders

      The approximate number of record holders of the Company's Common Stock, as
of November 12, 1997 was 14.

c)    Dividends

      The holders of Common Stock are entitled to receive such dividends as may
be declared by the Company's Board of Directors. The Company has not paid and
does not expect to declare or pay any dividends in the foreseeable future.

d)    Use of Proceeds

      The Company registered Common Stock and Warrants in an initial public
      offering on Form SB-2 which because effective on November 12, 1996. After
      deducting $1,488,778 in expenses incurred in connection with the offering,
      an aggregate of $5,468,721 of net proceeds was realized by the Company.
      The use of these net proceeds was reported on Forms SR filed with the
      Securities and 


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<PAGE>

      Exchange Commission on February 11, 1997 and on August 18, 1997. Updating
      these reports, as of November 1, 1997 the disposition of the proceeds was
      as follows:

         Construction of plant building and facilities              $  360,140
         Purchases and  installation of machinery and equipment     $  386,346
         Repayment of Indebtedness                                  $1,315,058
         S Corporation Distribution                                 $  688,034
         Marketing Plan                                             $  170,070
         To be used to fund marketing plan, acquire 
         equipment, product development and working capital         $2,549,073

ITEM  6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATION


General

      The Company custom designs and assembles PC's and related products and
provides technical services and support under the "Hertz" name through its Hertz
Computer subsidiary. It also designs, manufactures and sells ergonomically
engineered modular support structures and technical furniture for micro
computers and electronic devices under the "Hergo" name through its Hergo
subsidiary.

Year Ended August 31, 1997 compared to Year Ended August 31, 1996

Net Income

Net income for the year ended August 31, 1997 was $573,000 compared to $540,000
for the year ended August 31, 1996, a 6% increase. Increases in net income
during the year were attributed to the elimination of interest expense due to
the repayment of Company loans from the proceeds of the initial public offering
and increased interest income generated thereby.

Net Sales

The Company's net sales for the year ended August 31, 1997 were $10.5 million,
compared to $12.1 million for the year ended August 31, 1996, a 13% decrease.
The Company has sought to discourage low margin sales, and partly as a result,
computer sales and servicing revenues in the 1997 fiscal year were $6,860,000
down from $9,602,000 in the prior year. A significant part of this revenue loss
was accounted for by the closing of the Company's Israel facility in 1997
because its operations had ceased to be profitable. Consequently, the total
sales of computers to Israel in 1997 were $643,000 down from $1,925,000 in 1996.
Another contributing factor to the reduction in 1997 computer sales was a sharp
drop off in sales to federal state and city agencies or government affiliated
organizations including hospitals and schools ("Government Entities").
Historically, a large portion of the Company's computer sales are made to
Government Entities. This was true, but to a considerable lesser extent in 1997
when sales to Government Entities accounted for approximately 19% of the
Company's Computers sales and 12% of its total sales as compared to 48% of the
Company's computer sales and 36% of it's total sales for the 1996 fiscal year.
The Company expects this trend to continue, while it searches for more OEM, and
Value Added Services that traditionally generate better margins. Hergo net sales
increased 43% for the year over the prior year.


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<PAGE>

Gross Profit

Gross profit was $3.83 million (36% of net sales) for the year ended August 31,
1997, compared to $3.82 million (31% of net sales) for the previous year.
Increased gross profit percentages were generated due to a favorable sales mix
between Hertz and Hergo, which offset the reduction in sales for the year. Also
impacting favorably on the gross profit percentages was the closing of the Hertz
Israel division, which historically operated at a lower gross margin.

Selling General and Administrative Expenses

Selling, general and administrative expenses decreased slightly for the year
ended August 31, 1997 as compared to the preceding year. For the year ended
August 31, 1997 there were decreased expenses due to the reduction of
operational expenditures in Hertz Israel brought about by the closing of the
Israel subsidiary. Offsetting this were increased expenses related to the
public corporate structure, increases in professional fees and increased
advertising expenses. Additionally, expenses were incurred in connection with
the relocation of the corporate offices and the computer production facility.

Other Income and Expenses

Other Expense increased by $60,200 due to a loss incurred in the sale of
marketable securities of $102,000 that was offset, in part, by a special
litigation reserve of $50,000 in the previous year. The reserve had been
established in the year ended August 31, 1996 for the resolution of litigation,
which was settled and paid in the current year.

The overall increase of interest, net of income expense increased, for the year,
by $230,000. This increase was comprised of two components. Interest income
increased by $188,000 for the year ended August 31, 1997 as compared to the
preceding year. This increase is the result of interest income generated by
funds from the public offering. Interest Expense decreased by $42,000 for the
year due to the repayments of the Company's outstanding loans and lines
of credits using the proceeds from the IPO.

Provision for Closing Costs of Hertz-Israel

During the year, the Company recorded a provision of $201,774 for the closing
costs of Hertz-Israel. This represents a provision for write downs of property
and equipment, goodwill and other closure related costs. The Company completed
the closing of Hertz-Israel and the liquidation of its access by August 31,
1997.


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<PAGE>

Provision for Income Taxes

From September 1, 1996 through November 12, 1996 Hergo was classified as a
subchapter "S" corporation and incurred no federal corporation tax. The tax
provision from November 13, 1996 through August 31, 1997 was calculated at a
blended rate between Hertz Computer as a "C" corporation for the full period and
Hergo as a "C" corporation from November 13, 1996 through August 31, 1997. The
tax provision for the year ended August 31, 1997 was $233,000 compared to
$289,000 for the previous year was calculated with Hertz Computer as a "C"
corporation and Hergo as a subchapter "S" corporation. As a result of
management's decision to discontinue Hertz Israel's operations during the
quarter ended February 28, 1997 the accumulated losses recorded for financial
statement purposes will be recognized in the current year for tax purposes.

Liquidity and Capital Resources

During the current fiscal year ended August 31, 1997 the Company completed an
IPO of common stock and warrants, which became effective November 12, 1996. The
proceeds from the IPO net of underwriting commissions and expenses totaled
$6,957,499. In completing its IPO, the Company incurred additional expenses of
$1,488,778. As previously planned, the Company used $1,126,000 of the IPO
proceeds to repay its lines of credit and an additional $189,000 in payment of
other loans. Additionally, prior to the IPO, loans of $58,000 were repaid.

As of August 31, 1997 the Company has $3,897,000 in cash and marketable
securities as compared to $276,000 in the prior year. The Company has no
long-term debt.

For the year ended August 31, 1997, the Company generated a positive cash flow
from operation of $686,000 as compared to $453,000 for the previous year. The
positive cash flow was due to the reductions in inventory, accounts receivable
and prepaid expenses offset in part by reductions in accounts payable and income
taxes payable.

Net purchases of fixed assets for the year ended August 31, 1997 were $473,000
as compared to $113,000 for the previous year. The increase was largely due to
expenditures related to the relocation of the corporate offices and computer
production facility.

Concurrent with the effective date of the IPO, as described above, Hergo's
status has been changed from a subchapter "S" corporation for federal income tax
purposes, to a "C" corporation. In connection with this change Hergo has made
subchapter "S" cumulative distributions of $688,000.

New Accounting Standards

      The Company will adopt SFAS No. 128, "Earning Per Share" during fiscal
1998 as required. This statement establishes standards for computing and
presenting earnings per share ("EPS"), replacing the presentation of currently
required primary EPS with a presentation of basic EPS. The pro forma effect of
this statement for the year ended August 31, 1997 is immaterial. When adopted,
the Company will be required to restate its EPS data for all prior periods
presented. The Company does not expect the impact of the adoption of this
statement to be material to previously reported EPS amounts


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<PAGE>

         Forward Looking Statements

      Certain statements under the caption "Management's Discussion and
Analysis" and elsewhere in this Form 10-K and in the letter of the Chairman,
President and Chief Executive Officer in the Company's Annual Report to
Stockholders, constitute "forward looking statements" within the meaning of
Section 21E of the Securities and Exchange Act of 1934. Words "believe",
"expect" "future" "intend" "plan" and similar expressions as they relate to the
Company or the Company's management identify forward looking statements. Such
forward looking statements involve known and unknown risks, uncertainties, and
other factors which may cause the actual results, performance or achievements of
the Company to be materially different from any future results, performance or
achievements expressed or implied by such forward looking statements. Such
factors include, among others, the following: general economic and business
conditions, competition, success of new product development, effect of
advertising and promotional efforts, brand awareness, the existence of or
adherence to development schedules, continued patronage by existing customers,
the ability to attract qualified managerial personnel, the existence or absence
of adverse publicity, changes in business strategy or development plans, quality
of management and terms and deployment of capital, business abilities and
judgment of personnel and success in acquiring businesses.


                                       14
<PAGE>

ITEM  7. FINANCIAL STATEMENTS 

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders of
Hertz Technology Group, Inc.:

We have audited the accompanying consolidated balance sheets of Hertz Technology
Group, Inc. (a New York corporation) and Subsidiaries as of August 31, 1997 and
1996, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the two years in the period ended August 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the financial statements of
Hertz Computers Information System (1985) Ltd. ("Hertz-Israel"), which
statements reflect total assets and revenues of 19% and 15%, respectively, in
1996 of the consolidated totals. Those statements were audited by other auditors
whose report has been furnished to us and our opinion, insofar as it relates to
the amounts included for this entity, is based solely on the report of the other
auditors.

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

In our opinion, based on our audits and the report of the other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of Hertz Technology Group, Inc. and Subsidiaries as of
August 31, 1997 and 1996, and the results of its operations and its cash flows
for each of the two years in the period ended August 31, 1997, in conformity
with generally accepted accounting principles.


/s/ Arthur Andersen LLP

New York, New York
October 31, 1997


                                       15
<PAGE>

                  HERTZ TECHNOLOGY GROUP, INC. AND SUBSIDIARIES


                           CONSOLIDATED BALANCE SHEETS

                            AUGUST 31, 1997 AND 1996


                        ASSETS                             1997         1996
                        ------                          ----------  ----------

CURRENT ASSETS:

    Cash                                                $  326,121  $  275,529
    Marketable securities                                3,570,799        --
    Accounts receivable, less allowance for              1,185,258   1,756,454
       doubtful accounts of $151,818 in 1997 and
       $123,869 in 1996
    Inventories, net                                       997,766     999,273
    Prepaid expenses and other current assets              192,219     482,440
                                                        ----------  ----------
            Total current assets                         6,272,163   3,513,696

PROPERTY AND EQUIPMENT, net                                617,501     231,422

GOODWILL, net                                                 --        39,604

OTHER ASSETS                                               100,387      28,612
                                                        ----------  ----------
            Total assets                                $6,990,051  $3,813,334
                                                        ==========  ==========

              LIABILITIES AND STOCKHOLDERS' EQUITY
              ------------------------------------

CURRENT LIABILITIES:
    Accounts payable                                    $  179,289  $  122,973
    Notes payable                                             --     1,126,372
    Accrued expenses - other current payables              163,389     770,598
    Income taxes payable                                      --       247,327
    Distribution payable to stockholders                      --       390,648
    Note payable to stockholder                               --       246,686
                                                        ----------  ----------
                                                           342,678   2,904,604
                                                        ----------  ----------

NONCURRENT LIABILITIES:
    Notes payable to banks and others                       12,573      17,962
                                                        ----------  ----------

COMMITMENTS AND CONTINGENCIES (Note 6)

STOCKHOLDERS' EQUITY:
    Common stock, $.001 par value: 25,000,000 shares
       authorized, 3,165,000 shares issued and
       outstanding as of August 31, 1997 and
       1,900,000 as of August 31, 1996                       3,165       1,900
    Additional paid-in capital                           5,591,556     124,100
    Retained earnings                                    1,040,079     764,768
                                                        ----------  ----------
            Total stockholders' equity                   6,634,800     890,768
                                                        ----------  ----------
            Total liabilities and stockholders' equity  $6,990,051  $3,813,334
                                                        ==========  ==========

      The accompanying notes are an integral part of these balance sheets.


                                       16
<PAGE>

                  HERTZ TECHNOLOGY GROUP, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                  FOR THE YEARS ENDED AUGUST 31, 1997 AND 1996



                                                      1997              1996
                                                  ------------    ------------

NET SALES                                         $ 10,508,193    $ 12,159,534

COST OF GOODS SOLD                                   6,680,139       8,336,963
                                                  ------------    ------------
            Gross profit                             3,828,054       3,822,571

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:        2,790,025       2,791,325
    Provision for closing costs of Hertz Israel        201,774            --
                                                  ------------    ------------
                                                     2,991,799       2,791,325
                                                  ------------    ------------
            Operating income                           836,255       1,031,246

OTHER INCOME (EXPENSE):
    Other income (expense), net                        (98,307)        (38,088)
    Interest, net for interest expense of
       $122,069 for 1997 and  interest
       income of $4,175 for 1996                        67,443        (163,327)
                                                  ------------    ------------
            Income before provision for                805,391         829,831
              income taxes

PROVISION FOR INCOME TAXES                             232,692         289,381
                                                  ------------    ------------
            Net income                            $    572,699    $    540,450
                                                  ============    ============

NET INCOME PER SHARE                              $       0.20    $       --
                                                  ============    ============

HISTORICAL INCOME BEFORE PROVISION FOR            $    805,391    $    829,831
    INCOME TAXES

UNAUDITED PRO FORMA PROVISION FOR INCOME TAXES         316,031         478,294
                                                  ------------    ------------
            Pro forma net income                  $    489,360    $    351,537
                                                  ============    ============

PRO FORMA NET INCOME PER SHARE                    $       0.17    $       0.19
                                                  ============    ============

WEIGHTED AVERAGE NUMBER OF COMMON
    SHARES OUTSTANDING                               2,919,411       1,900,000
                                                  ============    ============

SUPPLEMENTARY NET INCOME PER SHARE                $       0.17    $       0.20
                                                  ============    ============

        The accompanying notes are an integral part of these statements.


                                       17
<PAGE>

                  HERTZ TECHNOLOGY GROUP, INC. AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                  FOR THE YEARS ENDED AUGUST 31, 1997 AND 1996

<TABLE>
<CAPTION>
                                                    Additional
                                       Common         Paid-in       Retained
                                        Stock         Capital       Earnings        Total
                                     -----------    -----------    -----------    ---------
<S>                                  <C>           <C>           <C>            <C>        
BALANCE, August 31, 1995             $     1,900   $   124,100   $   614,966    $   740,966

    Net income                              --            --         540,450        540,450

    S corporation distributions
      to stockholders                       --            --        (390,648)      (390,648)
                                     -----------   -----------   -----------    -----------

BALANCE, August 31, 1996                   1,900       124,100       764,768        890,768

    Net income                              --            --         572,699        572,699

    Issuance of common stock and
      warrants in  connection with
      initial public offering, net
      of expenses of $1,488,778            1,265     5,467,456          --        5,468,721

    S corporation distributions
      to stockholders                       --            --        (297,388)      (297,388)
                                     -----------   -----------   -----------    -----------

BALANCE, August 31, 1997             $     3,165   $ 5,591,556   $ 1,040,079    $ 6,634,800
                                     ===========   ===========   ===========    ===========
</TABLE>

        The accompanying notes are an integral part of these statements.


                                       18
<PAGE>

                  HERTZ TECHNOLOGY GROUP, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                  FOR THE YEARS ENDED AUGUST 31, 1997 AND 1996



                                                          1997           1996
                                                      -----------    -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income                                         $   572,699    $   540,450
  Adjustments to reconcile net income to net
    cash provided by operating activities-
      Depreciation and amortization                      152,604        103,413
      Bad debt expense                                    27,949        101,869
      Changes in operating assets and liabilities-
          Accounts receivable                            543,247         73,525
          Inventories                                      1,507        (41,064)
          Due from related parties                          --           17,276
          Prepaid expenses and other assets              290,221       (435,733)
          Other assets                                   (71,775)          --
          Accounts payable and accrued expenses         (550,893)      (144,929)
          Income taxes payable                          (247,327)       235,950
          Other liabilities                               (5,389)         2,345
                                                     -----------    -----------
             Net cash provided by operating
                activities                               712,843        453,102
                                                     -----------    -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Expenditures for property and equipment               (499,079)      (112,818)
  Purchase of marketable securities                   (3,570,799)          --
                                                     -----------    -----------
             Net cash used in investing
                activities                            (4,069,878)      (112,818)
                                                     -----------    -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Principal payments under notes payable
    to banks                                                --          (29,012)
  Borrowings under notes payable to banks             (1,126,372)       117,240
  Proceeds from issuance of common stock
    and warrants, net of underwriting expense
    and registration costs                             5,468,721           --
  Payments under note payable to stockholder            (246,686)      (274,912)
  Sub S distribution to stockholder                     (688,036)          --
                                                     -----------    -----------
             Net cash provided by (used
                in) financing activities               3,407,627       (186,684)
                                                     -----------    -----------
             Net increase in cash                         50,592        153,600

CASH, beginning of year                                  275,529        121,929
                                                     -----------    -----------

CASH, end of year                                    $   326,121    $   275,529
                                                     ===========    ===========

SUPPLEMENTAL CASH FLOW INFORMATION:
  Interest paid                                      $    21,683    $   109,554
  Income taxes paid                                      523,650         93,974

        The accompanying notes are an integral part of these statements.


                                       19
<PAGE>

                  HERTZ TECHNOLOGY GROUP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                            AUGUST 31, 1997 AND 1996


1.  COMPANY BACKGROUND AND
    SIGNIFICANT ACCOUNTING POLICIES

Recapitalization

The Hertz Technology Group, Inc. (the "Company") was formed on June 18, 1996.
Effective November 12, 1996, on the date of the initial public offering ("IPO")
(Note 11), Hertz Computer Corporation ("Hertz Computer") and Hergo Ergonomic
Support Systems, Inc. ("Hergo"), two entities under common control, were
acquired by the Company (which is owned by the same shareholders) and became
wholly owned subsidiaries. Accordingly, the financial statements are presented
as consolidated. Hertz Computer owns 100% of Hertz Computers Information System
(1985) Ltd. ("Hertz-Israel"). During fiscal 1997, Hertz Israel ceased
operations. At August 31, 1997, all balances were immaterial to the consolidated
totals.

Nature of Business

Hertz Computer and Hergo are both located in New York City. Hertz Computer
assembles and sells personal computers in the United States primarily within the
New York Metropolitan area and also exports to customers in Israel. Hergo
manufactures and sells space saving modular racks and technical furniture to
help organize all types of computer hardware, communication and electronic
equipment.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries, Hertz Computer and Hergo. All intercompany
transactions have been eliminated in consolidation.

Marketable Securities

The Company's marketable securities are comprised of equity and debt securities,
all classified as trading securities, which are carried at their fair value
based upon quoted market prices of those investments at August 31, 1997.
Accordingly, net realized and unrealized gains and losses are included in net
earnings. For the year ended August 31, 1997, these amounts were immaterial.


                                       20
<PAGE>

Revenue Recognition

Sales are recognized when the products are shipped. Payments received for
products not yet shipped are recorded as a current liability. The provision for
warranties is not material as all components are warranted to the Company by the
manufacturers.

Inventories

Inventories, which consist primarily of finished goods, raw material,
components, and work in process, are valued at the lower of cost or market on
the first-in, first-out (FIFO) basis.

Inventories as of August 31, consist of:

                                           1997                1996
                                         --------            --------

               Components                $424,544            $437,322
               Raw materials               80,453              61,822
               Work in process             25,742              82,161
               Finished goods             467,027             417,968
                                         --------            --------
                                         $997,766            $999,273
                                         ========            ========

Property and Equipment

Property and equipment are stated at cost. Depreciation is computed under the
straight-line method over estimated useful lives ranging from 5 to 10 years.
Leasehold improvements are amortized over the shorter of the lease term or the
estimated useful lives of the assets.

In 1996, the Company, as required, adopted Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of." SFAS 121 establishes financial
accounting and reporting standards for the impairment of long-lived assets,
certain identifiable assets and goodwill, and requires, among other things, that
assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amounts of the assets may not be reasonable. The
adoption of SFAS 121 did not have a material effect on the Company.

Goodwill

Goodwill, which arose in 1991 in connection with the acquisition of
Hertz-Israel, is amortized on a straight-line basis over a period of 10 years.
During the second quarter of 1997, the goodwill was written off in connection
with the closing of Hertz Israel.

Translation of Foreign Currency

The functional currency of Hertz-Israel is the U.S. dollar. The accounts of
Hertz-Israel have been translated in accordance with Statement of Financial
Accounting Standards No. 52. The financial statements of Hertz-Israel have been
remeasured into U.S. dollars as follows: at rates prevailing during the year for
revenue and expense items (except depreciation and amortization); at year-end
rates for assets and liabilities except for equipment and leasehold
improvements, which are translated at the rate in effect at the time of their
acquisition. Depreciation and amortization are 


                                       21
<PAGE>

remeasured based on the historical dollar cost of underlying assets. The effect
of translation has been reflected currently in the consolidated statements of
operations and it is not material.

Income Taxes

The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes," which requires accounting for deferred income
taxes under the asset and liability method. Deferred income taxes are recognized
for the tax consequences of temporary differences by applying enacted statutory
tax rates applicable in future years to differences between the financial
statement carrying amounts and the tax basis of existing assets and liabilities.

Prior to the Company's IPO, Hergo, with the consent of its stockholders, elected
to be treated as an S corporation for federal and state tax purposes, which
provides that, in lieu of Hergo paying income taxes, the stockholders separately
account for their pro rata shares of Hergo's items of income, deductions,
losses, and credits. As such, prior to the IPO, Hergo did not incur federal
income tax expense, although it does incur state and local tax expense.
Effective November 12, 1996, the date of the Company's IPO, Hergo's S
corporation status was terminated and, effective November 13, 1996, Hergo is a C
corporation which is subject to federal income tax expense. Hertz Computer is a
C corporation which incurs federal, state and local income tax expense.

Net Income Per Share

Net income per share is calculated by dividing net income by the weighted
average number of shares of common stock outstanding during the period. Common
stock equivalents were included in the calculation to the effect they are
dilutive.

The Company will adopt SFAS No. 128, "Earnings Per Share" during fiscal 1998 as
required. This statement establishes standards for computing and presenting
earnings per share ("EPS"), replacing the presentation of currently required
primary EPS with a presentation of basic EPS. The pro forma effect of this
statement for the year ended August 31, 1997 is immaterial. When adopted, the
Company will be required to restate its EPS data for all prior periods
presented. The Company does not expect the impact of the adoption of this
statement to be material to previously reported EPS amounts.

Pro Forma Net Income Per Share

Pro forma net income per share is calculated as if Hergo was a C corporation for
tax filing purposes during the years ended August 31, 1997 and 1996. As such, an
effective tax rate of 42% and 46% was used in calculating Hergo's pro forma net
income tax provision, for 1997 and 1996, respectively.

Pro forma net income per share has been computed by dividing pro forma net
income by the weighted average number of shares of common stock outstanding
during the period as if the Company were recapitalized on September 1, 1997 and
1996.

Supplementary Net Income Per Share

Supplementary net income per share is calculated for the years ended August 31,
1997 and 1996. For August 31, 1997 and 1996, respectively, supplementary net
income per share is computed as if $1,126,372 and $246,686 of interest-bearing
debt obligations were repaid from the net proceeds of 


                                       22
<PAGE>

the IPO as of September 1, 1996 and 1995, respectively, and assuming that (i)
274,612 of common shares were issued as of September 1, 1996 and 1995,
respectively, to repay the interest-bearing debt obligations; (ii) $27,253 and
$90,451 of interest expense, net of income tax expense, were eliminated as a
result of such payment for the twelve months ended August 31, 1997 and 1996,
respectively.

Use of Estimates

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

Stock Option Plan

In August 1996, the Company adopted its 1996 Stock Option Plan ("Option Plan")
(see Note 12 for further description). The Company's policy is to account for
stock option grants in accordance with APB Opinion No. 25, Accounting for Stock
Issued to Employees.

The Company does not intend to adopt the measurement requirements of SFAS No.
123, "Accounting for Stock-Based Compensation" for stock option grants to
employees and, accordingly, the Company will be required to disclose the pro
forma net income and per share amounts in the notes to the financial statements
using the fair value based method. As of August 31, 1997, there were no stock
options granted.

2.  PROPERTY AND EQUIPMENT

Property and equipment consist of the following at August 31:

                                                           1997          1996
                                                        ---------     ---------

     Furniture, fixtures and equipment                  $ 237,697     $ 111,700
     Warehouse equipment                                  149,391        96,961
     Leasehold improvements                               388,818        64,503
     Vehicles                                              74,431       158,829
                                                        ---------     ---------
                                                          850,337       431,993
     Less- Accumulated depreciation and 
           amortization                                  (232,836)     (200,571)
                                                        ---------     ---------
                   Property and equipment, net          $ 617,501     $ 231,422
                                                        =========     =========

3.  NOTES PAYABLE TO BANKS

Line of Credit

In June 1995, Hertz Computer entered into a Revolving Line of Credit
("Agreement") with a bank ("Bank") under which the Company could borrow up to
$1,000,000 with interest accruing on any outstanding balance at the base rate of
the Bank, plus 1% (effective rate at August 31, 1996 was 9.25%). Repayment of
the borrowings was secured by a general security interest in substantially all
personal property of the Company and was personally guaranteed by the
stockholders. As of August 31, 1996, the balance outstanding under this
Agreement was $895,000. During the fiscal year


                                       23
<PAGE>

ended August 31, 1997, the total borrowed on the line of credit was repaid and
the Agreement was terminated.

In February 1996, Hertz-Israel entered into a line of credit agreement with a
bank for $300,000 with an interest rate equal to the six-month LIBOR rate plus
1.25% (effective rate at August 31, 1996 was 7.02%) which is effective through
March 9, 1997. Two short-term loans totaling $206,168 at August 31, 1996 were
outstanding against this line of credit. These loans were originally due on
September 9, 1996, but were extended six months and were due on March 9, 1997.
The interest rate for the extension period is the six-month LIBOR rate plus
1.0%. As of August 31, 1997, all amounts under the line of credit were repaid in
full.

4.  RELATED PARTY TRANSACTIONS

Notes Payable to Stockholder - Short-Term

Hertz Technology Group had two notes payable at 9.25%, due on demand to two
stockholders in the amount of $211,966 and $34,720, respectively. The notes were
collateralized by the Company's assets and subordinated to the notes payable to
bank described in Note 3. During fiscal 1997, the loans were repaid in full.
Interest expense for both notes for the years ended August 31, 1997 and 1996 was
$3,745 and $36,369, respectively.

5.  LIFE INSURANCE

Hertz Computer is the beneficiary of a life insurance policy in the amount of
$1,000,000 on the life of an officer of Hertz Computer. The policy's related
cash surrender value is included in other assets in the accompanying
consolidated balance sheets and amounted to $31,893 and $29,034 as of August 31,
1997 and 1996, respectively.

6.  COMMITMENTS AND CONTINGENCIES

Operating Leases

The Company currently occupies loft space on 75 Varick Street, consisting of
21,000 square feet, for a six-year period which began on September 1, 1996, at
an annual rental of $161,871. These facilities are used by the Company for its
executive administrative and sales offices and for manufacturing computers. The
Company also leases an office in Albany for $14,225 a year under a lease
expiring in June 1998, with an option exercisable by the Company to renew for an
additional two years. The Company also leases an aggregate of 16,000 square feet
in Woodside, Queens, New York for its Hergo manufacturing facility. The lease
for this space, which ends on February 28, 2000, provides for an annual rent of
approximately $100,000.


                                       24
<PAGE>

The future minimum lease payments of all operating leases as of August 31, 1997
for the Company are as follows:

                          Fiscal year:
                              1998                           $    283,706
                              1999                                265,923
                              2000                                213,789
                              2001                                161,871
                              2002                                 53,952
                                                             ------------
                                                             $    979,241
                                                             ============

Total rent expense related to the Company's premises for the years ended August
31, 1997 and 1996 was $232,338 and $213,361, respectively.

Litigation

In December 1996, the Company settled its litigation regarding tradedress and
copyright infringement. Such settlement terms were not material to the results
of operations for the year ended August 31, 1996.

Hertz Computer commenced an action against A.C. Purchasing Securities, Inc. and
others in Federal Court in the Southern District, New York to collect
approximately $140,000 for goods sold and delivered to defendant which was
purchasing computers for resale to the Government of Israel. The defendants have
counterclaimed, charging that Hertz Computer sold computers directly to the
Government of Israel, thereby, tortiously interfering with defendants' business
arrangement with the Government of Israel. The Company believes that Hertz
Computer has meritorious defenses to the counterclaim and that notwithstanding
defendants' large claim for damages, the maximum amount it could reasonably
expect to recover if it were successful in this suit would be the amount of the
profits it was deprived of by reason of Plaintiff's allegedly tortious conduct.
While the ultimate result of this matter cannot be determined, management does
not expect that it will have a material adverse effect on the Company's results
of operations or financial position.

7.  PROFIT SHARING PLAN

Hertz Computer has a profit sharing plan covering all eligible employees. For
the years ended August 31, 1997 and 1996, the Company did not contribute to this
plan.

8.  INCOME TAXES

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The most significant
component primarily relates to the allowances for doubtful accounts. Included in
prepaid expenses and other current assets at August 31, 1997 and 1996 are a
deferred tax asset balance of $56,793 and $54,800, respectively.


                                       25
<PAGE>

Historical income tax expense consists of the following:

                                                     1997                1996
                                                  ---------           ---------
             Current:
                 Federal                          $ 118,688           $ 169,624
                 State and local                    115,997             161,265
                                                  ---------           ---------
                       Subtotal                     234,685             330,889
                                                  ---------           ---------
             
             Deferred:
                 Federal                             (1,016)            (21,682)
                 State and local                       (977)            (19,826)
                                                  ---------           ---------
                       Subtotal                      (1,993)            (41,508)
                                                  ---------           ---------
                       Total                      $ 232,692           $ 289,381
                                                  =========           =========

A reconciliation between the federal tax rate (34%) and the historical effective
tax rate for the years ended August 31, 1997 and 1996 is as follows:

                                                               1997        1996
                                                               ----        ----

       Statutory federal income tax rate                        34%         34%
       State and local taxes, net of federal benefit            10          11
       Hertz-Israel bad debt                                   (10)          8
       S Corporation (benefit) provision                        (8)        (19)
       Other                                                     2           1
                                                               ---         ---
                 Effective tax rate                            28%         35%
                                                               ===         ===

9.  SEGMENT OPERATIONS

The operating results of significant segments of the consolidated company at
August 31, 1997 are as follows:

<TABLE>
<CAPTION>
                                   Hertz           Hertz         Hertz-
                                 Technology       Computer      Israel         Hergo      Consolidated
                                 ----------       --------      ------         -----      ------------
<S>                             <C>            <C>           <C>            <C>           <C>        
Sales (unaffiliated)            $      --      $ 6,216,529   $   643,510    $ 3,648,154   $10,508,193

Inventory transfers from/(to)          --          332,128      (335,628)         3,500          --

Gross profit                           --        1,550,489        48,317      2,229,248     3,828,054

Operating income                   (198,793)       286,460      (169,643)       918,231       836,255

Assets                            3,572,857      2,155,590        11,050      1,250,554     6,990,051
</TABLE>


                                       26
<PAGE>

The operating results of significant segments of the consolidated company at
August 31, 1996 are as follows:

<TABLE>
<CAPTION>
                                    Hertz        Hertz-
                                  Computer       Israel         Hergo      Consolidated
                                  --------       ------         -----      ------------
<S>                             <C>           <C>            <C>           <C>        
Sales (unaffiliated)            $ 7,676,989   $ 1,925,654    $ 2,556,891   $12,159,534

Inventory transfers from/(to)       781,288      (794,821)        13,533          --

Gross profit                      1,979,234       340,018      1,503,319     3,822,571

Operating income                    514,125       (98,284)       615,405     1,031,246

Assets                            2,155,602       715,131        942,601     3,813,334
</TABLE>

10.  GEOGRAPHIC AND CUSTOMER CONCENTRATION

The Company has a concentration of its sales in the New York Metropolitan area
of approximately 72% and 69% for the years ended August 31, 1997 and 1996,
respectively. Approximately 12% and 36% for the years ended August 31, 1997 and
1996, respectively, of its sales were to federal, state and city agencies or
government-affiliated organizations, including hospitals and schools.

In addition, the Company had sales of approximately 17% and 15% to two
individual customers.

11.  INITIAL PUBLIC OFFERING

On November 12, 1996, the Company registered 1,100,000 units, each unit
consisting of one share of common stock, $.001 par value per share and two Class
A warrants at an IPO price of $5.50 per unit. The warrants are exercisable one
year from the effective date of the IPO and each warrant is convertible into one
share of common stock at a price of $5.50. Shortly thereafter, in November 1996,
the underwriter of the IPO exercised its over-allotment option to purchase
165,000 units from the Company (165,000 shares and 330,000 warrants) at $5.50
per unit. The Company realized proceeds from the sale of common stock and
warrants of $5,468,721 net of commissions and offering expenses of $1,488,778.
To date no warrants have been exercised.

In November 1996, the Company utilized the proceeds from the IPO to pay
approximately $245,000 of notes payable to the current stockholders and the
entire balance of $895,000 of the current revolving credit line with the Bank as
of that date.

12.  STOCK OPTION PLAN

On August 7, 1996, in order to attract and retain persons necessary for the
success of the Company, the Company adopted its 1996 Stock Option Plan ("Option
Plan") covering up to 750,000 of its shares of its common stock ("Shares"),
pursuant to which officers, directors and key employees of the Company and
consultants to the Company are eligible to receive incentive and/or nonincentive
stock options. The Option Plan, which expires on August 6, 2006, will be
administered by the Company's Board of Directors or a committee designated by
such group. The selection of participants, allotment of shares, determination of
price and other conditions relating to the purchase of options will be
determined by the Board of Directors, or a committee thereof, in


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<PAGE>

its sole discretion. Incentive stock options granted under the Option Plan are
exercisable for a period of up to 10 years from the date of grant at an exercise
price which is not less than the fair market value of the Shares on the date of
the grant, except that the term of an incentive stock option granted under the
Option Plan to a shareholder owning more than 10% of the outstanding Shares may
not exceed five years and its exercise price may not be less than 110% of the
Fair market value of the Shares on the date of the grant. As of August 31, 1997,
no options have been granted under the Option Plan.

13.  DISCRETIONARY SHARE BONUS AWARDS

The Company has reserved 100,000 shares for issuance to employees as a reward
for past performance or as an incentive for future performance. The
determination of the persons to receive Share Bonus Awards, the amount of shares
for each recipient and the time of vesting shall be determined by the Board of
Directors or by a committee to be designated by the Board of Directors. Shares
may be awarded with immediate vesting or with deferred vesting. No share awards
have been made as of August 31, 1997.



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<PAGE>

ITEM  8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING FINANCIAL
         DISCLOSURE

         None
                                    PART III

      Item 9 through 12 inclusive are omitted per General Instruction E. The
information required by Part III shall be incorporated by reference from the
Registrant's definitive proxy statement pursuant to Regulation 14A for the
fiscal year ended August 31, 1997.

ITEM  13. EXHIBITS, AND REPORTS ON FORM 8K

      Unless otherwise indicated, the following exhibits are incorporated by
reference from the Company's Registration Statement on Form SB-2 (SEC File
Number 333-9783 referencing the exhibit number used in such Registration
Statement).

3.1A  Certificate of Incorporation of the Company

3.1B  Certificate of Amendment of Certificate of Incorporation of the Company

3.2   By-Laws of the Company

4.1   Specimen Stock Certificate

4.2   Form of Redeemable Warrant

4.3   Underwriter's Purchase Option

4.4   Warrant Agreement

10.1  1996 Stock Option Plan

10.2  Form of Employment Agreement between the Company and Eli E. Hertz


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<PAGE>

10.3  Form of Employment Agreement between the Company and I. Marilyn Hertz

10.7  Agreement of Lease between Simon Trakinski and William Trakinski and Hergo
      Ergonomic Support Systems, Inc. For 26-58 Borough Place, Woodside, NY
      11377.

10.8  Agreement of Lease between Simon Trakinski and William Trakinski and Hergo
      Ergonomic Support Systems, Inc. For 60-01 27th Avenue, Woodside, NY.

10.9  Agreement of Lease between The Rector, Church-Wardens and Vestrymen of
      Trinity Church in the City of New York and Hertz Computer Corporation for
      75 Varick Street.

21    Subsidiaries of the Registrant.

23.   Consent of Shlomo Ziv & Co. Certified Public Accountants*

27.1  Financial Data Schedule*

*Filed herewith

(b) No Reports on Form 8-K have been filed during the last quarter covered by
this Report.


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<PAGE>


                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the "Exchange Act" the Registrant has duly caused this
Report to be signed on its behalf by the undersigned, thereunto duly authorized.

                                    Hertz Technology Group Inc.


                                    By: /s/ Eli E. Hertz
                                        ------------------------------
                                        Eli E. Hertz
                                        Chairman, President and Chief 
                                        Executive Officer

Date:  November 21, 1997

In accordance with the Exchange Act, 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                  Date             Title


/s/ Eli E. Hertz
-------------------------      11/21/97              Chairman, President and
Eli E. Hertz                                         Chief Executive Officer


/s/ I. Marilyn Hertz
-------------------------      11/21/97              Vice Chairperson and
I. Marilyn Hertz                                     Director


/s/ Barry J. Goldsammler
-------------------------      11/21/97              Senior Vice President
Barry J. Goldsammler                                 Chief Financial and
                                                     Accounting Officer and
                                                     Director


/s/ Beryl Ackerman
-----------------------        11/21/97              Director
Beryl Ackerman                  



/s/ Bruce Borner
-----------------------        11/21/97              Director
Bruce Borner                    


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