SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549



FORM 8-K


Current Report
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934


Date of Report (Date of earliest event reported): October 29, 1997



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



UTAH
(State or other jurisdiction of incorporation)



                  0011-12671                                      87-0400541
              (Commission File No.)        (IRS Employer Identification No.)



               19104 S. Norwalk Boulevard       90701
                       Artesia, California                     (Zip Code)
              (Address of Principal Executive Office)



Registrant's telephone number,
including area code:  (562) 403-1126



N.A.
(Former name or former address, if changed since last report)



<PAGE>



Item 2. Acquisition or Disposition of Assets.

         On October 29, 1997 The Hartcourt  Companies,  Inc., a Utah Corporation
(Registrant),  completed the purchase of all of the issued and outstanding stock
of Electronic Components & Systems, Inc. (ECS) and Pruzin Technology, Inc. (PTI)
for  $11,400,000.  The purchase  price was paid at closing as follows:  $250,000
cash, a promissory  note for $250,000,  $3,169,000  (3,169  shares) of Hartcourt
Cos. Series D Preferred Stock, and $7,731,000  (2,500,000  shares) of restricted
Hartcourt Cos. Common Stock. In addition,  the Company agreed infuse  $2,000,000
of equity capital, in cash and cash equivalence or securities.

         ECS specialized in high technology contract  manufacturing and assembly
of printed  circuit  boards,  phone and cable wires,  coil winding,  and plastic
injection.  PTI is a pioneer in the new technology of ball-grid array connection
for the  semi-conductor  industry.  ECS  operates out of four  facilities,,  the
largest of which is in the maquiladora  free trade zone in Sonora,  Mexico.  The
other three facilities are located in Nogales, Tucson and Chandler, Arizona. The
total work force includes 50 employees in the U.S. and 749 in Mexico.

         ECS has grown steadily since its inception in 1988.  Total revenues for
the fiscal year ending on December  31, 1996 were $12.8  million with net income
of $813,069.  The Company will leave the  management of ECS in place and operate
ECS as a subsidiary of the Company.


Item 7. Financial Statements and Exhibits.

(a) Financial Statements of Business Acquired.

The audited financial  statements of Electronic  Components & Systems,  Inc. for
the year ended  December  31, 1996 and the seven  months ended July 31, 1997 are
filed with this report.

(b) Pro forma Financial Information.

The  unaudited  pro forma  condensed  financial  statements  are filed with this
report.
(c) Exhibits.

The exhibits to this Report are listed in the Exhibit index set forth  elsewhere
herein.



SIGNATURES

Pursuant to the  requirements  of the  Securities  and Exchange Act of 1934, the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned hereunto duly authorized.


THE HARTCOURT COMPANIES, INC.


<PAGE>




Date: November 11, 1997           By:__________________________________
                                                           Dr. Alan Phan
                                                           President








<PAGE>


FINANCIAL STATEMENTS INDEX


     Audited financial statements of Electronic  Components & Systems,  Inc. for
the year ended  December  31,  1996 and the seven  months  ended July 31,  1997.
Unaudited  pro forma  condensed  consolidated  balance sheet of Registrant as of
September  30,  1997 and  December  31,  1996.  Unaudited  pro  forma  condensed
consolidated statements of income for the nine and twelve months ended September
30,  1997  and  December  31,  1996,  respectively.  


Exhibits Index


2. Acqusition of Assets -  Agreement  between Registrant, Electronic Components
 & Systems, Inc.,
Pruzin Technologies, Inc.  and the majority shareholder of Electronic Components
 & Systems, Inc. and Pruzin Technologies, Ic. dated October 28, 1997. 

3. Certificate of Incorporation- Designation for Series D Preferred






                                              INDEPENDENT AUDITORS' REPORT






To the Board of Directors and Shareholders of
ELECTRONIC COMPONENTS AND SYSTEMS, INC.
AND PRUZIN TECHNOLOGIES, INC.:

We  have  audited  the  accompanying   combined  balance  sheets  of  Electronic
Components and Systems,  Inc. (an Arizona  corporation) and Pruzin Technologies,
Inc. (an Arizona corporation) as of July 31, 1997 and December 31, 1996, and the
related combined statements of income,  shareholders'  equity and cash flows for
the seven months and year then ended.  These combined  financial  statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these combined 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 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, the combined financial statements referred to above present 
fairly, in all material respects, the financial
position of Electronic Components and Systems, Inc. and Pruzin Technologies,
Inc. as of July 31, 1997 and December 31,
1996, and the results of its operations and its cash flows for the seven months 
and year then ended, in conformity with
generally accepted accounting principles.
San Diego, California
September 19, 1997


                                                           4

<PAGE>





                                                           5

<PAGE>

<TABLE>
<CAPTION>



                                               ELECTRONIC COMPONENTS AND SYSTEMS, INC.
                                                    AND PRUZIN TECHNOLOGIES, INC.

                                                                  COMBINED BALANCE SHEETS
     ASSETS                                                                           As of
                                                                               As of July 31,      December 31,
CURRENT ASSETS                                                                 1997                    1996
                                                                            ---------------        ----------
<S>                                                                            <C>                <C>       
  Accounts receivable (Note B)                                                 $1,429,012         $1,225,925
  Inventory, net (Note C)                                                       1,921,920          1,784,069
  Shareholder's loan receivable                                                   249,928            304,678
  Employee receivables                                                             20,116             30,896
  Prepaid expenses                                                                 24,860             24,860
                                                                           --------------        -----------

       TOTAL CURRENT ASSETS                                                   3,645,836           3,370,428

PROPERTY AND EQUIPMENT, net (Note D)                                            1,557,993          1,687,230

OTHER ASSETS                                                                          983                983
                                                                          ---------------      -------------

                                                                             $  5,204,812          $5,058,641
                                                                             ============          ==========

     LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES
  Bank overdraft                                                              $    57,538       $     58,298
  Accounts payable                                                              1,211,081          1,411,272
  Accrued expenses (Note E)                                                       270,855            133,398
  Due to factor (Note F)                                                          592,972            535,975
  Notes payable, related party (Note G)                                            60,000             20,000
  Note payable, current portion (Note H)                                           80,893             75,306
  Capital lease obligations, current portion (Note I)                             153,366            125,983
                                                                            -------------       ------------

     TOTAL CURRENT LIABILITIES                                                  2,426,705          2,360,232

NOTE PAYABLE, net of current portion (Note H)                                      81,655            130,044

CAPITAL LEASE OBLIGATIONS, net of current portion (Note I)                        500,078            526,844

MINORITY INTEREST (Note A)                                                        (37,367)            16,925
                                                                           --------------       ------------

                                                                                2,971,071           3,034,045

COMMITMENTS AND CONTINGENCIES (Note I)                                                  -                  -

SHAREHOLDERS' EQUITY (Note J)
  Common stock (Note J)                                                            91,200             91,200
  Additional paid-in-capital                                                      126,800            126,800
  Retained earnings                                                             2,015,741          1,806,596
                                                                            -------------        -----------

     TOTAL SHAREHOLDERS' EQUITY                                                 2,233,741          2,024,596
                                                                            -------------        -----------

                                                                              $  5,204,812          $5,058,641
                                                                             ============          ==========
</TABLE>

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

                                                                 6

<PAGE>
<TABLE>
<CAPTION>


                                              ELECTRONIC COMPONENTS AND SYSTEMS, INC.

                                                    AND PRUZIN TECHNOLOGIES, INC.

                                                    COMBINED STATEMENTS OF INCOME


                                                                         Seven months
                                                                               ended              Year ended
                                                                         July 31, 1997    December 31, 1996

<S>                                                                             <C>              <C>        
NET SALES                                                                       $7,348,593       $12,858,123

COST OF SALES                                                                    5,573,674        10,080,936
                                                                               -----------       -----------

    Gross Profit                                                              1,774,919            2,777,187

OPERATING EXPENSES
    Selling, general and administrative                                       1,441,858            1,885,076
    Depreciation and amortization                                               230,665              257,634
                                                                          ------------        -------------

           TOTAL OPERATING EXPENSES                                          1,672,523            2,142,710
                                                                           -----------         ------------

INCOME FROM OPERATIONS                                                             102,396           634,477

OTHER INCOME (EXPENSES)
    Minority interest in combined companies, net loss                               54,292             8,075
    Interest expense                                                              (137,870)         (143,398)
    Interest income                                                                      -               143
    Other income                                                                   190,327           313,772
                                                                              ------------      ------------

           TOTAL OTHER INCOME                                                   106,749              178,592
                                                                            ------------         ------------

INCOME BEFORE INCOME TAXES                                                         209,145           813,069

    Income taxes (Note A)                                                                -                 -
                                                                          ----------------  ----------------

NET INCOME                                                                  $   209,145           $   813,069
                                                                             ===========           ===========
</TABLE>










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

                                                                 7

<PAGE>



<TABLE>
<CAPTION>


ELECTRONIC COMPONENTS AND SYSTEMS, INC.
AND PRUZIN TECHNOLOGIES, INC.

COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY




                                    Total
                                                                                                Retained     Shareholders' 
                                Common Stock                Additional
                                             Amount       Paid-in-Capital         Earnings         Equity


<S>                                            <C>             <C>            <C>               <C>              <C>
Balance, January 1, 1995                       162             $  16,200       $126,800       $1,236,249        $1,379,249

   Issuance of common stock                    100               100,000                -                 -        100,000

   Minority interest                           (25)               (25,000)              -                 -        (25,000)

   Net income                                          -              -                 -           813,069        813,069

 Distributions to shareholders                        -             -                   -         (242,722)      (242,722)
                                          ------------- -------------     -------------      -----------    -----------

Balance, December 31, 1996                          237                91,200         126,800    1,806,596      2,024,596

 Net income                                           -             -                   -          209,145        209,145
                                          ------------- -------------    --------------     ------------    -----------

Balance, July 31, 1997                              237             $  91,200       $ 126,800   $2,015,741     $2,233,741
                                         

</TABLE>






















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

                                                                 8

<PAGE>


<TABLE>
<CAPTION>


                                               ELECTRONIC COMPONENTS AND SYSTEMS, INC.
                                                    AND PRUZIN TECHNOLOGIES, INC.

                                                  COMBINED STATEMENTS OF CASH FLOWS


                                                                                 Seven months
                                                                                ended              Year ended
                                                                               July 31, 1997    December 31, 1996

CASH FLOWS FROM OPERATING ACTIVITIES
<S>                                                                               <C>              <C>      
 Net income                                                                       $ 209,145        $ 813,069
 Adjustments to reconcile net income to net cash
    provided by operating activities:
        Depreciation and amortization                                               230,665          257,634
        Minority interest in combined companies, net loss                              (54,292)       (8,075)
        Changes in operating assets and liabilities:
          Accounts receivable                                                        (203,087)      (218,211)
          Inventory                                                                    (137,851)     (61,657)
          Employee receivables                                                       10,780          (14,432)
          Prepaid expenses                                                                -          (19,360)
          Other assets                                                                    -             (983)
          Accounts payable                                                         (200,191)        (496,115)
          Accrued expenses                                                               137,457    (375,141)
          Due to factor                                                              56,997          535,975
                                                                                 ----------    -------------

NET CASH PROVIDED BY OPERATING ACTIVITIES                                            49,623          412,704
                                                                                 ----------    -------------

CASH FLOWS FROM INVESTING ACTIVITIES
 Purchases of property and equipment                                                (31,775)        (228,607)
                                                                                 ----------    -------------

NET CASH USED IN INVESTING ACTIVITIES                                               (31,775)        (228,607)
                                                                                  ---------       ----------

CASH FLOWS FROM FINANCING ACTIVITIES
 Payments received on loans to shareholder                                           54,750           42,406
 Net payments on line of credit                                                           -          (96,177)
 Proceeds from note payable, related party                                           40,000           20,000
 Distributions to shareholders                                                               -      (242,722)
 Payments on notes payable                                                          (42,802)         (35,650)
 Payments on capital lease obligations                                              (69,036)         (38,218)
                                                                                  ---------      -----------

NET CASH USED IN FINANCING ACTIVITIES                                               (17,088)        (350,361)
                                                                                  ---------       ----------

NET INCREASE (DECREASE) IN CASH                                                         760         (166,264)

CASH, BEGINNING OF PERIOD                                                           (58,298)         107,966
                                                                                  ---------       ----------

BANK OVERDRAFT, END OF PERIOD                                                     $ (57,538)     $   (58,298)
                                                                                  =========      ===========

</TABLE>




                                         ELECTRONIC COMPONENTS AND SYSTEMS, INC.



                                               AND PRUZIN TECHNOLOGIES, INC.

                                          NOTES TO COMBINED FINANCIAL STATEMENTS

ASummary of Significant Accounting Policies:

    Organization and Nature of Operations

    The  combined  financial  statements  include  the  accounts  of  Electronic
    Components and Systems,  Inc. (ECS), an Arizona corporation  incorporated on
    November  24,  1987,  and Pruzin  Technologies,  Inc.  (Pruzin),  an Arizona
    corporation incorporated on November 20, 1996, (together "the Company"). The
    majority  shareholder of ECS is also the majority shareholder of Pruzin. All
    significant  intercompany  payables and receivables  have been eliminated in
    the combining process.

    The  Company's  principal  operations  are the wholesale  manufacturing  and
    selling of cabling and other electronic  components to the telecommunication
    and computer industries.  ECS operated under the name Electronic  Components
    and Services,  Inc.  until June 13, 1996, at which date the name was changed
    to Electronic Components and Systems, Inc.

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

    Basis of Accounting

    The  Company's  policy is to use the  accrual  method of  accounting  and to
    prepare and present financial statements which conform to generally accepted
    accounting principles. The preparation of 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 disclosure of contingent  assets and liabilities at the date
    of the financial  statements  and reported  amounts of revenues and expenses
    during  the  reporting  periods.  Actual  results  could  differ  from those
    estimates.

    Cash and Equivalents

    For purpose of the statements of cash flows,  all highly liquid  investments
    with  a  maturity  of  three  months  or  less  are  considered  to be  cash
    equivalents.  There were no cash  equivalents  at July 31, 1997 and December
    31, 1996.

    Concentrations

    In the normal course of business,  the Company extends  unsecured  credit to
    customers  principally  in the United States and Mexico.  Credit is extended
    based on an evaluation of the customer's financial condition.  Credit losses
    have  been  within  management's  expectations.   The  Company's  sales  are
    substantially all to two large electronic components  manufacturers,  one of
    which is located in Nogales, Mexico (Note M).

    As mentioned above,  the Company  maintains  manufacturing  operations under
    maquiladora agreements in Nogales, Mexico which includes plant and equipment
    with a net  book  value  estimated  at  $300,000.  It is  always  reasonably
    possible that  operations  located  outside an entity's home country will be
    disrupted in the near term, but management believes it is remote (Note E).

A. Summary of Significant Accounting Policies: (continued)


                                                            10

<PAGE>


                                       ELECTRONIC COMPONENTS AND SYSTEMS, INC.
                                              AND PRUZIN TECHNOLOGIES, INC.

                                          NOTES TO COMBINED FINANCIAL STATEMENTS
                                                        (Continued)



       Inventory

       Inventory is stated at the lower of cost (first-in, first-out) or market.
       Inventory costs include material, labor and manufacturing overhead.

       Property and Equipment

       Property  and  equipment  is  stated  at cost  and  depreciated  using an
       accelerated  depreciation  method over the estimated  useful lives of the
       assets, which range from three to twelve years. Maintenance,  repairs and
       minor renewals are charged to operations as incurred.  Major replacements
       or  betterments  are  capitalized.  When assets are retired or  otherwise
       disposed,  the related cost and accumulated  depreciation  are eliminated
       from  the  respective  accounts  and any gain or loss on  disposition  is
       reflected as income or expense.

       Minority Interest

       Minority interest  represents the 25%  shareholder's  interest in the net
assets and operations of Pruzin Technologies, Inc.

       Revenue Recognition

       Revenue from product sales is generated  primarily  from the  manufacture
       and  sale  of  cabling  and  other  electronic  components.   Revenue  is
       recognized when the product is shipped.

       Income Taxes

       The Company, with the consent of its shareholders,  has elected under the
       Internal Revenue Code to be an S corporation. In lieu of corporate income
       taxes,   the  shareholders  of  an  S  corporation  are  taxed  on  their
       proportionate  share  of the  Company's  taxable  income.  Therefore,  no
       provision  or  liability  for  federal  or state  income  taxes  has been
       included in the financial statements.

       Fair Value

       The  carrying   amounts   reflected  in  the  balance  sheets  for  cash,
       receivables, loans, accounts payable and accrued expenses approximate the
       respective fair values.

       Reclassifications

       Certain  prior year  balances  have been  reclassified  to conform to the
current year presentation.




                                                            11

<PAGE>


                                         ELECTRONIC COMPONENTS AND SYSTEMS, INC.
                                               AND PRUZIN TECHNOLOGIES, INC.

                                          NOTES TO COMBINED FINANCIAL STATEMENTS
                                                        (Continued)


B.       Accounts Receivable:

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

                                                      July 31     December 31,
                                                              1996

         Accounts receivable, unassigned         $  595,074$  449,315
         Accounts receivable, assigned (Note F)     833,938   776,610

                                                  1,429,012 1,225,925

         Less:  Allowance for doubtful accounts    -                -
                                               ------------------------------

                                                 $1,429,012 $1,225,925
                                                 ========== ==========

         As stated in Note A, the  Company  manufactures  and sells  cabling and
         other  electronic  components  to the  telecommunication  and  computer
         industries.   Sales  are  made  based  upon  customer-specific  orders.
         Therefore,  management believes that all accounts receivable as of July
         31, 1997 and December 31, 1996 were fully collectible, and no allowance
         for doubtful accounts was recorded.

C.       Inventory:

         Inventory  at July 31,  1997 and  December  31, 1996 is  summarized  as
follows:

                                                July 31          December 31,
                                                                      1996

              Raw materials                      $1,772,998           $1,651,294
              Work-in-process                         5,888                    -
              Finished goods                        143,034              132,775
                                                -----------         ------------

                                                  1,921,920            1,784,069
              Less reserve for obsolescence               -                    -
                                               ------------     ----------------

              Inventory, net                     $1,921,920           $1,784,069
                                                  ==========           =========





                                                            12

<PAGE>


                                         ELECTRONIC COMPONENTS AND SYSTEMS, INC.
                                               AND PRUZIN TECHNOLOGIES, INC.

                                          NOTES TO COMBINED FINANCIAL STATEMENTS
                                                        (Continued)


D. Property and Equipment:

      Property  and  equipment  at July  31,  1997  and  December  31,  1996 are
summarized as follows:
<TABLE>
<CAPTION>

                                                             July 31             December 31,
                                                               1997                 1996

<S>                                                           <C>                  <C>       
              Machinery and equipment                         $2,099,046           $2,023,914
              Furniture and fixtures                              92,139               92,139
              Office equipment                                     8,544                    -
              Leasehold improvements                               8,820                8,820
              Vehicles                                            17,752                    -
                                                            ------------      ---------------

                                                               2,226,301            2,124,873
              Less accumulated depreciation and
                amortization                                    (668,308)            (437,643)
                                                             -----------          -----------

              Property and equipment, net                     $1,557,993           $1,687,230
                                                              ==========           ==========
</TABLE>

E. Accrued Expenses:

      Accrued  expenses at July 31, 1997 and December 31, 1996 are summarized as
follows:

                                                         July 31, December 31,
                                                   1997                    1996

              Mexican operating costs            $270,855             $133,398

      The above represents  amounts accrued by management as expenses related to
      Mexican government and traditionally  cultural requirements connected with
      foreign entities doing business in Mexico. The premise for this accrual is
      the possibility of the foreign entity  discontinuing  local operations and
      leaving Mexican workers jobless.

F. Due to Factor:

      On March 13, 1996, the Company entered into a factoring  agreement with an
      unrelated third party for credit administration  purposes. This continuing
      contract is automatically renewable for successive periods of three months
      unless terminated by written notice.

      Under the factoring  agreement,  the factor  purchases  substantially  all
      trade  accounts  receivable,   mainly  for  one  of  the  Company's  major
      customers,  General Instrument, at a price equal to the net face amount of
      the  receivable,  less a discount  of 1.25% if the  account is paid within
      thirty days of the purchase. The Company may take advances of up to 75% of
      the net face amount of the  accounts  sold to the  factor.  The Company is
      contingently  liable to the  factor  for  merchandise  disputes,  customer
      claims, and other chargebacks on eligible receivables.  As collateral, the
      Company has granted a continuing  security  interest in substantially  all
      assets to the factor.


                                                            13

<PAGE>


                                         ELECTRONIC COMPONENTS AND SYSTEMS, INC.
                                               AND PRUZIN TECHNOLOGIES, INC.

                                          NOTES TO COMBINED FINANCIAL STATEMENTS
                                                        (Continued)


F. Due to Factor: (continued)

      The proceeds received from the factor for the seven months ended July 31,
 1997
      and year ended  December,  31, 1996  totaled  $3,631,383  and  $5,751,199,
      respectively.  At July 31, 1997 and December 31, 1996,  the balance due to
      the factor for  advances  taken prior to the  collection  of the  accounts
      receivable was $592,972 and $535,975, respectively.

G. Notes Payable, Related Party:

      Notes  payable,  related  party at July 31,  1997 and  December  31,  1996
consist of the following:
<TABLE>
<CAPTION>

                                                                  July 31,            December 31,
                                                                     1997                     1996
      Unsecured note payable due to an employee of the Company,
  interest at 10%
      per annum, interest only, monthly payments of $166.67
<S>                                                               <C>                       <C>    
      with principal due upon demand                              $20,000                   $20,000

      Unsecured  note payable due to a relative of the president
 of the Company,
      interest at 10% per annum, interest only, monthly payments of
      $333.33 with principal due upon demand                        40,000                         -
                                                                  --------                -----------

                                                                    60,000                     20,000

      Less current portion (60,000)                                (20,000)                  -------- 
                                      -------

                                                              $         -                  $        -
</TABLE>
                                                                 ===========
                ==========
H. Note Payable:

      Note  payable at July 31,  1997 and  December  31,  1996  consists  of the
following:

                              July 31,December 31,
                                    1997 1996
      Note payable due to an unrelated third party,  maturing in June 1999, with
      monthly  installments  of  $  8,038.85,   including  interest  at  12.29%,
      collateralized by equipment and personally guaranteed by the
      shareholders                                 $162,548             $205,350

         Less current portion                       (80,893)            (75,306)
                                                   ---------           ---------

                                                   $  81,655            $130,044
                                                   =========            ========



                                                            14

<PAGE>


                                         ELECTRONIC COMPONENTS AND SYSTEMS, INC.
                                               AND PRUZIN TECHNOLOGIES, INC.

                                          NOTES TO COMBINED FINANCIAL STATEMENTS
                                                        (Continued)


H. Notes Payable: (continued)

      Aggregate maturities of debt at July 31, 1997 are as follows:

                    Period Ending
                         July 31,                                        Amount

                           1998                                       $  80,893
                           1999                                          81,655
                           2000                                                -
                           2001                                                -
                           2002                                                -
                                                                    ------------

                                                                        $162,548

I. Commitments and Contingencies:

      Operating Leases

      The Company leased its Nogales,  Arizona  facility  under a  noncancelable
      operating  lease  from an  unrelated  third  party  through  August  1996.
      Thereafter, the lease has been on a month-to-month basis. During 1996, the
      Company  entered into two five year  noncancelable  operating  leases with
      unrelated  third parties for its Tucson and Chandler,  Arizona  facilities
      which expire  through  November 2001. The Company also leases its vehicles
      under  noncancelable  operating  leases  which  expire  through June 1999.
      Rental expense for the facilities for the seven months ended July 31, 1997
      and  the  year  ended   December  31,  1996  was  $242,527  and  $242,452,
      respectively.

      At July 31,  1997,  minimum  annual rent payable  under the  noncancelable
      leases in each of the next five periods  ending July 31 and thereafter are
      as follows:
<TABLE>
<CAPTION>

                                                                                Rent             Vehicles           Total

<S>                   <C>                                                      <C>                <C>              <C>     
                      1998                                                     $211,649           $23,158          $234,807
                      1999                                                      215,032            15,362           230,394
                      2000                                                      218,584                 -           218,584
                      2001                                                      188,750                 -           188,750
                      2002                                                       48,000                 -            48,000
                         Thereafter                                        -          -                              -
                                                             
                          Total                                                $882,015           $38,520          $920,535
                                                                               ========           =======          ========
</TABLE>

      The  noncancelable  operating  leases for the facilities  provide that the
      Company pays for property  taxes,  insurance and certain  other  operating
      expenses applicable to the leased premises.



                                                            15

<PAGE>


                                         ELECTRONIC COMPONENTS AND SYSTEMS, INC.
                                               AND PRUZIN TECHNOLOGIES, INC.

                                          NOTES TO COMBINED FINANCIAL STATEMENTS
                                                        (Continued)


I. Commitments and Contingencies: (continued)

      Capital Leases

      The Company leases part of its equipment under various capital leases. The
      economic  substance of the capital  lease  agreements  is that the Company
      finances the acquisition of machinery by making monthly payments  totaling
      $18,032 over a period ranging from thirty-six to sixty months through June
      2002, and accordingly, the capital leases are reflected as a capital lease
      obligation  and the assets as a component of property and  equipment.  The
      following is an analysis of the book value of the leased  assets  included
      in property and equipment at July 31, 1997 and December 31, 1996:
                                                         July 31,   December 31,
                                                              1997          1996

                  Cost                                    $760,697      $691,045

                  Less accumulated depreciation           (168,753)     (56,620)

                                                          $591,944      $634,425
                                                          ========      ========

      The future minimum lease payments under capitalized leases and the present
      value of the net minimum lease payments at July 31, 1997 are as follows:

                      1998                                         $ 216,382
                      1999                                           216,382
                    2000                                             161,684
                      2001                                           161,684
                      2002                                            48,742
                                                                  ----------

                                                                     804,874
         Less amount representing interest
                    (151,430)

                                                                      653,444
                    Less current portion of capital lease obligations
                                                                     (153,366)

                                                                      $500,078

      At July 31, 1997,  $539,946 of the total  capital  lease  obligations  was
      personally guaranteed by the principal shareholder of the Company.



                                                            16

<PAGE>


                                         ELECTRONIC COMPONENTS AND SYSTEMS, INC.
                                               AND PRUZIN TECHNOLOGIES, INC.

                                          NOTES TO COMBINED FINANCIAL STATEMENTS
                                                        (Continued)


J. Shareholders' Equity

      Common Stock

      Electronic Components and Systems, Inc. and Pruzin Technologies, Inc. have
      different capital structures which are summarized as follows at July 31, 
1997 and December 31, 1996:

                                                          July 31,  December 31,
      Electronics Components and Systems, Inc.:                1997        1996
      -----------------------------------------             -------------------

      Common stock, $100 par value, 10,000 shares
        authorized, 162 shares issued and outstanding      $16,200     $16,200

      Pruzin Technologies, Inc.:

      Common stock, no par value, 1,000,000 shares authorized, 100 shares issued
         and outstanding, of which 25 shares represent a minority interest
         in the Company                                 75,000           75,000
                          

                                                       $91,200          $91,200
                                                        =======          =======

      S Corporation Distributions

      For the seven  months  ended July 31,  1997 and  December  31,  1996,  the
      Company distributed $ 0 and $242,722,  respectively,  to its shareholders.
      These amounts  represent a portion of the S Corporation  earnings  through
      December 31 of each year.

K. Supplemental Cash Flow Information:

      Supplemental  disclosures  of cash flow  information  for the seven months
      ended July 31, 1997 and year ended  December  31, 1996 are  summarized  as
      follows:
                                                            July 31,December 31,
                                                             1997          1996

         Cash paid for interest and income taxes:
                  Interest                               $137,870       $143,398

         Noncash investing and financing activities:
                  Assets purchased through capital leases$ 69,652       $691,045
                  Assets purchased through note payable-                 241,000
                  Common stock issued for property and
                    equipment contributed by shareholders-               100,000


                                                            17

<PAGE>


                                         ELECTRONIC COMPONENTS AND SYSTEMS, INC.
                                               AND PRUZIN TECHNOLOGIES, INC.

                                          NOTES TO COMBINED FINANCIAL STATEMENTS
                                                        (Continued)



L.     Profit Sharing Plan:

       The Company maintains a defined  contribution plan for its U.S. employees
       (the Plan) 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
       $3,489 and $3,686 for the seven months ended July 31, 1997 and year ended
       December 31,  1996,  respectively.  The Company  pays the  administrative
       costs of the Plan, which approximates $2,000 per year.

M.     Major Customers:

       During the seven months  ended July 31,  1997,  the Company had one major
       customer and during the year ended December 31, 1996, the Company had two
       major  customers,  sales to each of which  exceeded 10% of the  Company's
       total sales. Sales to these customers for the seven months ended July 31,
       1997 and year ended December 31, 1996 totaled $4,912,281 and $10,486,139,
       respectively.

       One of the two major customers is General  Instrument which is located in
       Nogales,  Mexico.  Sales to General Instrument for the seven months ended
       July 31, 1997 and year ended  December  31, 1996 totaled  $4,912,281  and
       $8,505,498,  respectively,  which represents 67% and 66% of net sales for
       the respective period.

N.     Subsequent Events:

       In July 1997 the Company signed a stock purchase agreement with Hartcourt
       Companies,  Inc.  ("Hartcourt") in which all of the Company's outstanding
       stock will be acquired  in exchange  for  Hartcourt  stock and cash.  The
       transaction is expected to close in October 1997.

       Currently,  Jim Pruzin, the majority  shareholder of Pruzin Technologies,
       Inc., is in  negotiations  with the minority  shareholder to purchase the
       minority  shareholder's  25% interest.  The negotiations  center around a
       consulting  and  commission  agreement  signed  at the time  the  Company
       purchased its 75% share of Pruzin  Technologies,  Inc. Under the terms of
       the original agreement, the Company is required to remit $5,000 per month
       in consulting fees plus 5% of total combined  company sales to the former
       owner.  The  proposed  agreement  would  allow for the buy-out of the 25%
       minority interest and terminate all future royalties.











                                                            18

<PAGE>













                                                INDEPENDENT AUDITORS' REPORT




To the Board of Directors and Shareholders of
ELECTRONIC COMPONENTS AND SYSTEMS, INC.:

We have audited the  accompanying  balance  sheets of Electronic  Components and
Systems, Inc. (an Arizona corporation) as of December 31, 1995 and 1994, and the
related statements of income,  shareholders' equity and cash flows for the years
then ended.  These financial  statements are the responsibility of the Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audits.

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,  the financial  statements  referred to above present fairly, in
all material  respects,  the  financial  position of Electronic  Components  and
Systems,  Inc.  as of  December  31,  1995  and  1994,  and the  results  of its
operations  and its cash  flows for the years then  ended,  in  conformity  with
generally accepted accounting principles.





San Diego, California
September 19, 1997






<PAGE>




<TABLE>
<CAPTION>

                                         ELECTRONIC COMPONENTS AND SYSTEMS, INC.

                                                                  BALANCE SHEETS


     ASSETS
                                                                           As of December 31,
CURRENT ASSETS                                                                   1995                     1994
                                                                            ---------------           --------

<S>                                                                           <C>                  <C>      
  Cash                                                                        $   107,966          $  90,810
  Accounts receivable (Note A)                                                  1,007,714             17,085
  Inventory, net (Note B)                                                       1,722,412                  -
  Shareholder's loan receivable                                                   347,084            326,173
  Employee receivables                                                             16,464             10,688
  Prepaid expenses                                                                  5,500              9,000
                                                                            -------------        -----------

       TOTAL CURRENT ASSETS                                                    3,207,140             453,756

PROPERTY AND EQUIPMENT, net (Note C)                                              684,212             27,025
                                                                             ------------         ----------

                                                                               $3,891,352           $ 480,781
                                                                                ==========           =========

     LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES
  Accounts payable                                                             $1,907,387         $   24,612
  Accrued expenses (Note E)                                                       508,539            381,598
  Line of credit (Note D)                                                          96,177                   -
                                                                             ------------      --------------

     TOTAL CURRENT LIABILITIES                                                  2,512,103            406,210

COMMITMENTS AND CONTINGENCIES (Note F)                                                  -                  -

SHAREHOLDERS' EQUITY (Note H)
  Common stock, $100 par value, 10,000 shares
     authorized; 162 shares issued and outstanding                                 16,200             16,200
  Additional paid-in-capital                                                      126,800            126,800
  Retained earnings (deficit)                                                   1,236,249            (68,429                    )
                                                                              -----------         ----------

     TOTAL SHAREHOLDERS' EQUITY                                                 1,379,249             74,571
                                                                              -----------         ----------

                                                                              $3,891,352           $ 480,781
                                                                              ==========           =========
</TABLE>




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

                                                                 20

<PAGE>



<TABLE>
<CAPTION>


ELECTRONIC COMPONENTS AND SYSTEMS, INC.

                                                        STATEMENTS OF INCOME



                                                                                       Year Ended December 31,
                                                                                1995                  1994

<S>                                                                           <C>                 <C>       
NET SALES                                                                     $11,201,158         $4,204,694

COST OF SALES                                                                   8,489,817          3,411,228
                                                                              -----------         ----------

  Gross Profit                                                                   2,711,341            793,466

OPERATING EXPENSES
  Selling, general and administrative                                            1,359,752            968,691
  Depreciation and amortization                                                    117,579             10,765
                                                                              ------------       ------------

          TOTAL OPERATING EXPENSES                                               1,477,331            979,456
                                                                              -----------       ------------

INCOME (LOSS) FROM OPERATIONS                                                   1,234,010           (185,990)

OTHER INCOME (EXPENSES)
  Interest expense                                                                 (6,384)              (772)
  Interest income                                                                   3,422                382
  Loss on disposal of assets                                                       (7,076)            (2,496)
  Other income                                                                    305,066            307,440
                                                                             ------------       ------------

          TOTAL OTHER INCOME                                                      295,028            304,554
                                                                             ------------       ------------

INCOME BEFORE INCOME TAXES                                                      1,529,038            118,564

  Income taxes (Note A)                                                                 -                  -
                                                                         ----------------   ----------------

NET INCOME                                                                    $ 1,529,038       $    118,564
                                                                              ===========       ============

</TABLE>









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

                                                                 21

<PAGE>


<TABLE>
<CAPTION>



ELECTRONIC COMPONENTS AND SYSTEMS, INC.

STATEMENTS OF SHAREHOLDERS' EQUITY






                                                                                                   Retained         Total
                                                                                                    Earnings    Shareholders'
                                          Common Stock                         Additional
                                                Shares         Amount       Paid-in-Capital        (Deficit)    Equity (Deficit)


<S>                                                 <C>       <C>                 <C>           <C>            <C>         
Balance, January 1, 1994                            162       $16,200             $126,800      $  (186,993)   $   (43,993)

 Net income                                           -             -                    -          118,564        118,564
                                          -------------   -----------         -------------     ------------    -----------

Balance, December 31, 1994                          162        16,200              126,800         (68,429)          74,571

 Net income                                           -             -                 -            1,529,038      1,529,038
 
 Distributions to shareholders                        -             -                 -            (224,360)      (224,360)
                                             -------------   -----------    --------------      -----------    -----------

Balance, December 31, 1995                          162      $ 16,200           $  126,800        $1,236,249       $1,379,249
                                             ===========          ========    ==========        ==========       ==========

</TABLE>























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

                                                                 22

<PAGE>


<TABLE>
<CAPTION>



                                               ELECTRONIC COMPONENTS AND SYSTEMS, INC.

                                                      STATEMENTS OF CASH FLOWS




                                                                                      Year Ended December 31,
                                                                                1995                  1994
                                                                             -------------           -------
CASH FLOWS FROM OPERATING ACTIVITIES
<S>                                                                              <C>               <C>      
 Net income                                                                      $1,529,038        $ 118,564
 Adjustments to reconcile net income to net cash
    provided by operating activities:
        Depreciation and amortization                                               117,579           10,765
        Loss on disposal of assets                                                    7,076            2,496
        Changes in operating assets and liabilities:
          Accounts receivable                                                      (990,629)          65,116
          Inventory                                                              (1,722,412)               -
          Employee receivables                                                       (5,776)            (697)
          Prepaid expenses and other assets                                           3,500           (6,500)
          Accounts payable                                                        1,882,775         (149,372)
          Accrued expenses                                                          126,941          244,311
                                                                               ------------      -----------

NET CASH PROVIDED BY OPERATING ACTIVITIES                                            948,092         284,683
                                                                                ------------     -----------

CASH FLOWS FROM INVESTING ACTIVITIES
 Purchases of property and equipment                                               (781,842)          (7,364)
                                                                               ------------     ------------

NET CASH USED IN INVESTING ACTIVITIES                                              (781,842)          (7,364)
                                                                               ------------     ------------

CASH FLOWS FROM FINANCING ACTIVITIES
 Loans to shareholder                                                               (20,911)        (189,849)
 Net proceeds from line of credit                                                    96,177                -
 Distributions to shareholders                                                     (224,360)               -
                                                                               ------------   --------------

NET CASH USED IN FINANCING ACTIVITIES                                              (149,094)        (189,849)
                                                                               ------------       ----------

NET INCREASE IN CASH                                                                 17,156           87,470

CASH, BEGINNING OF YEAR                                                              90,810            3,340
                                                                               ------------     ------------

CASH, END OF YEAR                                                               $   107,966      $    90,810
                                                                                ===========      ===========

</TABLE>






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

                                                                  23

<PAGE>





                                         ELECTRONIC COMPONENTS AND SYSTEMS, INC.

                                               NOTES TO FINANCIAL STATEMENTS

ASummary of Significant Accounting Policies:

    Organization and Nature of Operations

    Electronic  Components and Systems, Inc. (the "Company") was incorporated on
    November  24,  1987  in  the  state  of  Arizona.  The  Company's  principal
    operations are the wholesale  manufacturing and selling of cabling and other
    electronic components to the telecommunication and computer industries.  The
    Company  operated under the name  Electronic  Components and Services,  Inc.
    until  June  13,  1996,  at  which  date  the  Company  changed  its name to
    Electronic Components and Systems, Inc.

    The Company maintains manufacturing  operations under maquiladora agreements
    in  Nogales,  Mexico.  A  substantial  amount of the  Company's  cables  and
    electronic components are manufactured and assembled at the Mexico facility.
    The Company also has a smaller manufacturing facility in Tucson, Arizona and
    a distribution facility in Nogales, Arizona.

    Basis of Accounting

    The  Company's  policy is to use the  accrual  method of  accounting  and to
    prepare and present financial statements which conform to generally accepted
    accounting principles. The preparation of 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 disclosure of contingent  assets and liabilities at the date
    of the financial  statements  and reported  amounts of revenues and expenses
    during  the  reporting  periods.  Actual  results  could  differ  from those
    estimates.

    Cash and Equivalents

    For purpose of the statements of cash flows,  all highly liquid  investments
    with  a  maturity  of  three  months  or  less  are  considered  to be  cash
    equivalents.  There were no cash  equivalents  as of  December  31, 1995 and
    1994.

    Accounts Receivable

    Management believes that all accounts receivable as of December 31, 1995 and
    1994 were fully collectible.  Therefore,  no allowance for doubtful accounts
    was recorded.

    Concentrations

    In the normal course of business,  the Company extends  unsecured  credit to
    customers  principally  in the United States and Mexico.  Credit is extended
    based on an evaluation of the customer's financial condition.  Credit losses
    have  been  within  management's  expectations.   The  Company's  sales  are
    substantially all to three large electronic components manufacturers located
    in Nogales, Mexico (Note J).

    As mentioned above,  the Company  maintains  manufacturing  operations under
    maquiladora agreements in Nogales, Mexico which includes plant and equipment
    with a net  book  value  estimated  at  $300,000.  It is  always  reasonably
    possible that  operations  located  outside an entity's home country will be
    disrupted in the near term but management believes it is remote (Note E).


                                                            24

<PAGE>




A. Summary of Significant Accounting Policies: (continued)

       Inventory

       Inventory is stated at the lower of cost (first-in, first-out) or market.
       Inventory costs include material, labor and manufacturing overhead.

       Property and Equipment

       Property  and  equipment  is  stated  at cost  and  depreciated  using an
       accelerated  depreciation  method over the estimated  useful lives of the
       assets,  which range from three to five years.  Maintenance,  repairs and
       minor renewals are charged to operations as incurred.  Major replacements
       or  betterments  are  capitalized.  When assets are retired or  otherwise
       disposed,  the related cost and accumulated  depreciation  are eliminated
       from  the  respective  accounts  and any gain or loss on  disposition  is
       reflected as income or expense.

       Revenue Recognition

       Revenue from product sales is generated  primarily  from the  manufacture
       and  sale  of  cabling  and  other  electronic  components.   Revenue  is
       recognized when the product is shipped.

       Income Taxes

       The Company, with the consent of its shareholders,  has elected under the
       Internal Revenue Code to be an S corporation. In lieu of corporate income
       taxes,   the  shareholders  of  an  S  corporation  are  taxed  on  their
       proportionate  share  of the  Company's  taxable  income.  Therefore,  no
       provision  or  liability  for  federal  or state  income  taxes  has been
       included in the financial statements.

       Fair Value

       The  carrying   amounts   reflected  in  the  balance  sheets  for  cash,
       receivables, loans, accounts payable and accrued expenses approximate the
       respective fair values.

       Acquisition

       In July 1995 the  Company  acquired  substantially  all of the  assets of
       Artisoft,  Inc., which  principally  consisted of machinery and equipment
       valued at $500,000.  The  transaction  was completed  through a sales and
       purchase agreement whereby $4.00 per unit on the first 125,000 units sold
       to  Artisoft,  Inc.  was  credited  in the form of a  reduction  in total
       invoice  cost.  As of December 31, 1995 all amounts owed on the sales and
       purchase agreement had been remitted.




                                                            25

<PAGE>


ELECTRONIC COMPONENTS AND SYSTEMS, INC.

                                               NOTES TO FINANCIAL STATEMENTS
                                                        (Continued)


B. Inventory:

       Inventory at December 31, 1995 and 1994 is summarized as follows:

       Prior to 1995 the Company provided fabrication  functions and services on
       consigned materials of the Company's customers.
<TABLE>
<CAPTION>

                                                                                        1995                 1994
                                                                                   -------------           ------

<S>                                                                                   <C>                <C>       
         Raw materials                                                                $1,594,226         $        -
         Finished goods                                                                  128,186                  -
         Less reserve for obsolescence                                                         -                  -
                                                                                ----------------        -----------

              Inventory, net                                                         $ 1,722,412         $        -
                                                                                     ===========         ==========
</TABLE>

C. Property and Equipment:

      Property and  equipment at December  31, 1995 and 1994 are  summarized  as
follows:

<TABLE>
<CAPTION>
                                                                       1995               1994
                                                                      -----------       --------

<S>                                                                  <C>                <C>     
         Machinery and equipment                                     $ 806,405          $ 37,835
         Furniture and fixtures                                         23,223            21,719
         Office equipment                                               25,773            14,004
         Leasehold improvements                                          8,820             8,820
         Vehicles                                                            -            11,057
                                                                --------------         ---------

                                                                      864,221             93,435
         Less accumulated depreciation and
           amortization                                               (180,009)          (66,410)
                                                                     ---------         ---------

              Property and equipment, net                           $ 684,212          $  27,025
                                                                    =========          =========

</TABLE>

D. Line of Credit:

      The Company  has a line of credit  facility  with a bank which  expired on
      April 15,  1996 and was not  renewed.  The line  bears  interest  at prime
      (8.75% at December  31, 1995) plus 9.0%.  The line of credit  provides for
      maximum  borrowings  of  $100,000,  is  secured  by  inventory,   accounts
      receivable  and equipment of the Company and is  personally  guaranteed by
      the principal  shareholders.  At December 31, 1995, the Company had $3,823
      of available credit under the line.



                                                            26

<PAGE>


ELECTRONIC COMPONENTS AND SYSTEMS, INC.

                                               NOTES TO FINANCIAL STATEMENTS
                                                        (Continued)


E. Accrued Expenses:

      Accrued expenses at December 31, 1995 and 1994 are summarized as follows:
<TABLE>
<CAPTION>

                                                                                         1995               1994
                                                                                      ----------        --------

<S>                                                                                     <C>                <C>     
              Mexican operating costs at year-end                                       $508,539           $381,598
</TABLE>

      The above represents  amounts accrued by management as expenses related to
      Mexican government and traditionally  cultural requirements connected with
      foreign entities doing business in Mexico. The premise for this accrual is
      the possibility of the foreign entity  shutting down local  operations and
      leaving Mexican workers jobless.

F. Commitments and Contingencies:

      Operating Leases

      The Company leased its Nogales,  Arizona  facility  under a  noncancelable
      operating  lease  from an  unrelated  third  party  through  August  1996.
      Thereafter,  the lease  has been on a  month-to-month  basis.  On March 1,
      1996, the Company entered into a five year  noncancelable  operating lease
      with an  unrelated  third party for its  Tucson,  Arizona  facility  which
      expires in March 2001.  Rental  expense for the years ended  December  31,
      1995 and 1994 was $172,662 and $87,987, respectively.

      At December 31, 1995,  minimum annual rent payable under the noncancelable
      leases in each of the next five years  ending  December 31 and  thereafter
      are as follows:



                      1996                                              $107,224
                      1997                                                66,269
                      1998                                                69,030
                      1999                                                72,482
                      2000                                                76,106
                         Thereafter                                      12,786

                          Total                                         $403,897


      The  noncancelable  operating  lease  provides  that the Company  pays for
      property taxes,  insurance and certain other operating expenses applicable
      to the leased premises.



                                                            27

<PAGE>


ELECTRONIC COMPONENTS AND SYSTEMS, INC.

                                               NOTES TO FINANCIAL STATEMENTS
                                                        (Continued)


G. Supplemental Cash Flow Information:

      Supplemental  disclosures  of cash flow  information  for the years  ended
      December 31, 1995 and 1994 are summarized as follows:
<TABLE>
<CAPTION>

                                                                 
                                                                                1995                 1994
                                                                            --------            -------

<S>                                                                             <C>             <C>  
         Cash paid for interest and income taxes:
               Interest                                                          $6,384          $    772

         Noncash investing and financing activities:
               Vehicle given by shareholder to Company
                  with corresponding reduction to loan receivable               $       -         $11,056
               Vehicle written-off due to disposal                                7,076             2,496
</TABLE>

H. Shareholders' Equity:

      S Corporation Distributions

      For the years ended  December 31, 1995 and 1994,  the Company  distributed
      $224,360  and  $0,  respectively,  to  its  shareholders.   These  amounts
      represent a portion of the S Corporation  earnings  through December 31 of
      each year.

I. Profit Sharing Plan:

      The Company maintains a defined  contribution plan for its U.S.  employees
      (the Plan) 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
      $1,287  and  $0  for  the  years  ended   December   31,  1995  and  1994,
      respectively. The Company pays the administrative costs of the Plan, which
      approximates $2,000 per year.

J. Major Customers:

      During the year ended  December  31,  1995,  the  Company  had three major
      customers,  sales to each of which  exceeded  10% of the  Company's  total
      sales.  During  the year  ended  December  31,  1994,  there was one major
      customer.  Sales to these  customers for the years ended December 31, 1995
      and 1994 totaled $10,073,587 and $3,901,106, respectively.

K. Subsequent Events:

      In July 1997 the Company signed a stock purchase  agreement with Hartcourt
      Companies,  Inc.  ("Hartcourt") in which all of the Company's  outstanding
      stock will be acquired in exchange for Hartcourt stock and cash.
      The transaction is expected to close in October 1997.



<TABLE>
<CAPTION>

                                                 PRO FORMA FINANCIAL INFORMATION

                                  THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                        PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1996
                                                    (UNAUDITED)




                                                                                  Pro Forma
                                                                                  djustments
                                                                                        Elimination
                                                            Historical         ECS          Entries                 Pro Forma

         ASSETS

CURRENT ASSETS
<S>                                                  <C>                                <C>                       <C>              
    Cash and cash equivalents                        $            822$                 -$                -        $        822
    Accounts receivable                                          91,088          1,225,925                   -       1,317,013
    Inventories                                               311,424        1,784,069               -               2,095,493
    Prepaid consulting fees                                   900,000                -               -                 900,000
    Note receivables-current                                  133,764                -               -                 133,764
    Amount due from shareholder                                32,356          304,678               -                 337,034
         Interest receivable                                   3,877                           -               -         3,877
    Other current assets                   -                                    55,756               -                  55,756
                        --------------------          -----------------------------------        ----------------

         TOTAL CURRENT ASSETS                               1,473,331        3,370,428                   -             4,843,759
                                                        -------------    ---------------------------------        --------------

Property, plant, and equipment, net                            44,809        1,716,064               -               1,760,873
Investments                                                17,906,520                -               -              17,906,520
Note receivables                                            1,190,795                -        -                       1,190,795
Goodwill, net                                                       -        9,965,641               -               9,965,641
Investment in subsidiary                                  11,400,000                   -       11,400,000   (a)-
Other assets                                                    7,550               983                    -              8,533
                                                     ------------------------------------------------------  -----------------

         TOTAL ASSETS                                      $32,023,005        $15,053,116    $  11,400,000       $ 35,676,121
                                                           ===========         -----------    =============       ============

(a) To eliminate Hartcourt Companies investment in Subsidiary.


</TABLE>

                                                 See   accompanying   notes   to
                                                 proforma consolidated financial
                                                 statements.

                                                                 4

<PAGE>


<TABLE>
<CAPTION>

                                                   PRO FORMA FINANCIAL INFORMATION

                                           THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                                 PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1996
                                                             (UNAUDITED)
                                                             (Continued)

                                                                                  Pro Forma
                                                                                      Adjustments
                                                                                        Elimination
                                                            Historical         ECS          Entries          Pro Forma


    LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
<S>                                                     <C>             <C>                               <C>           
    Notes payable - current                             $      56,396   $       75,306$               -   $      131,702
    Due to Factor         -                                                    535,975                -          535,975
    Capital Lease Obligation                                        -          125,983                -          125,983
    Accrued Expenses - Mexico                                       -          133,398                -          133,398
    Note Payable, Related Party                                     -           20,000                -           20,000
    Accounts payable - trade                                  148,569        1,411,272                -        1,559,841
    Accrued expenses                                          133,747          519,000                -          652,747
    Overdraft                                                   5,691           58,298                -           63,989
    Subscription                                               45,000              -                  -         45,000
                                                       --------------             -------------------------------------------------

         TOTAL CURRENT LIABILITIES                            389,403        2,879,232                -        3,268,635

Capital Lease - Long Term -                                                    526,844                -          526,844
Long-term debt                                                774,369          130,044                  -        904,413
                  -------------                         -------------------------------- --------------

         TOTAL LIABILITIES                                  1,163,772        3,536,120                -        4,699,892

Preferred Stock D                                           3,169,000                -                -        3,169,000
Preferred Stock                                                    10                -                -               10
Common Stock                                                    16,185          11,400           11,400        (a)16,185
APIC                                                       31,179,635       11,388,600     11,388,600  (a)    31,179,635
Treasury Stock                                               (279,928)               -                -         (279,928)
Retained deficit                                           (3,225,669)         116,996                  -     (3,108,673)
                  -------------                         --------------------------------  -------------

         TOTAL STOCKHOLDERS' EQUITY                        30,859,233       11,516,996       11,400,000       30,976,229
                                                         ------------      -----------      -----------     ------------

         TOTAL LIABILITIES AND
             STOCKHOLDERS' EQUITY                         $32,023,005      $15,053,116      $11,400,000      $35,676,121
                                                          ===========      ===========      ===========      ===========
</TABLE>

(a) To eliminate Hartcourt Companies investment in Subsidiary.

                                                 See   accompanying   notes   to
                                                 proforma consolidated financial
                                                 statements.


                                                                 5

<PAGE>


<TABLE>
<CAPTION>



                                                   PRO FORMA FINANCIAL INFORMATION

                                           THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                            PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS AT DECEMBER 31, 1996
                                                             (UNAUDITED)


                                                                                    Pro Forma
                                                                                       Adjustments
                                                                                           Elimination
                                                            Historical         ECS             Entries       Pro Forma

<S>                                                      <C>               <C>                               <C>        
SALES                                                    $    510,692      $13,171,895$               -      $13,682,587
                                                         ------------      ----------------------------      -----------

                       
COST OF SALES                                                 797,667       10,080,936                 -      10,878,603
                                        
GROSS PROFIT                                                 (286,975)       3,090,959                -        2,803,984

OPERATING EXPENSES
    Depreciation & amortization                               671,982          940,632                -        1,612,614
    General and administrative                                570,774        1,890,076                 -       2,460,850
                                                        -------------     ------------------------------    ------------

    TOTAL OPERATING EXPENSES                                1,242,756        2,830,708                 -       4,073,464
                                                         ------------     ------------------------------    ------------

LOSS FROM OPERATIONS                                       (1,529,731)         260,251                -       (1,269,480)

OTHER INCOME (EXPENSES)
    Interest income                                            10,100              143                -           10,243
    Relief of debt                                            384,735                -                -          384,735
    Interest expense, net                                    (443,042)        (143,398)                 -       (586,440)
                                                              -------------   ---------- ------------------ --------------

TOTAL OTHER INCOME (EXPENSES)                                 (48,207)        (143,255)                 -       (191,462)
                                                       --------------    ------------- ------------------ --------------

NET LOSS BEFORE INCOME TAXES                               (1,577,938)         116,996                -       (1,460,942)

    Taxes on earnings                                           1,800                  -                 -          1,800
                                                      -------------------------------------------------------------------

NET LOSS                                                  $(1,579,738)    $    116,996$               -      $(1,462,742)
                                                          ===========     =============================      ============

Weighted Average Shares Outstanding
    Including Common Stock Equivalents                      4,814,303                                          7,314,303

NET LOSS PER COMMON SHARE                            $           (.33)                                  $           (.20)
                                                     ================                                   ================

</TABLE>

                                                 See   accompanying   notes   to
                                                 proforma consolidated financial
                                                 statements.

                                                                 6

<PAGE>

<TABLE>
<CAPTION>



                                                   PRO FORMA FINANCIAL INFORMATION

                                           THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                                PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 1997
                                                             (UNAUDITED)




                                                                                  Pro Forma
                                                                                      Adjustments
                                                                                        Elimination
                                                            Historical         ECS          Entries                  Pro Forma

         ASSETS

CURRENT ASSETS
<S>                                                     <C>            <C>            <C>                      <C>           
    Cash and cash equivalents                           $     144,790  $        6,602 $                  -     $      151,392
    Accounts receivable                                        38,651       1,832,722                -              1,871,373
    Inventories                                               128,591        1,813,839                  -           1,942,430
    Marketable Securities                                   5,874,966                -                -             5,874,966
    Employee Receivables  -                                                     17,350                -                17,350
    Prepaid consulting fees                                   900,000                -                  -             900,000
    Prepaid expenses                                          328,736           24,860                  -             353,596
    Note receivables-current                                  193,103                -                  -             193,103
    Amount due from shareholder                                74,985          263,319                  -             338,304
    Interest receivable                                        14,760                    -                    -        14,760
                                                      ------------------------------------------------------------------------

         TOTAL CURRENT ASSETS                               7,698,582        3,958,692                    -        11,657,274
                                                        -------------    ----------------------------------      ------------

Property, plant, and equipment, net                            31,992        1,640,031                  -           1,672,023
Investments                                                17,906,520                -                  -          17,906,520
Note receivables                                            1,346,278                -                -             1,346,278
Goodwill, net                                                       -        9,431,767                  -           9,431,767
Investment in subsidiary                                   11,516,996                -       11,516,996(a)                     -
Other assets                                                   51,951              983                    -            52,934
                                                      -----------------------------------------------------   ---------------

         TOTAL ASSETS                                     $38,552,319      $15,031,473      $11,516,996        $42,066,796
                                                         ===========       -----------      ===========        ===========

</TABLE>

(a) To eliminate Hartcourt Companies investment in Subsidiary.

                                                 See   accompanying   notes   to
                                                 proforma consolidated financial
                                                 statements.


                                                                 1

<PAGE>

<TABLE>
<CAPTION>


                                                   PRO FORMA FINANCIAL INFORMATION

                                           THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                                PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 1997
                                                             (UNAUDITED)
                                                             (Continued)

                                                                                  Pro Forma
                                                                                      Adjustments
                                                                                        Elimination
                                                            Historical         ECS          Entries          Pro Forma


    LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
<S>                                                     <C>               <C>          <C>                  <C>          
    Notes payable - current                             $      51,586     $     82,564 $              -     $     134,150
    Accounts payable - trade                                  232,610        1,298,758                -         1,531,368
    Capital Lease Obligation                                        -          156,232                -           156,232
    Due to factor         -                                                    796,061                -          796,061
    Note payable - related party                                    -           60,000                -            60,000
    Accrued expenses                                            4,960          514,000                -           518,960
    Accrued Expenses - Mexico                                       -          270,855                  -         270 855
                                                   ------------------      ------------------------------   -------------

         TOTAL CURRENT LIABILITIES                            289,156        3,178,470                -         3,467,626

Capital Lease Obligation - Long Term                                -          472,818                -           472,818
Long-term debt                                                826,615           67,182                  -        893,797
                  -------------                          -------------------------------  -------------

         TOTAL LIABILITIES                                  1,115,771        3,718,470                -         4,834,241

Preferred Stock D                                           3,169,000                -                -         3,169,000
Preferred Stock A                                           4,000,000                -                -         4,000,000
Preferred Stock B                                           2,000,000                -                -         2,000,000
Preferred Stock                                                    10                -                -                10
Common Stock                                                   17,731           11,400           11,400(a)          17,731
APIC                                                       32,070,933       11,388,600       11,388,600(a)     32,070,933
Treasury Stock                                               (279,928)               -                -          (279,928)
Stock Subscription Receivables                               (276,000)               -                -          (276,000)
Retained deficit                                           (3,265,198)          (86,997)         116,996  (a)   (3,469,191)
                                                         -------------     -------------    -------------      -------------

         TOTAL STOCKHOLDERS' EQUITY                        37,436,548       11,313,003       11,516,996        37,232,555
                                                         ------------      -----------      -----------      ------------

         TOTAL LIABILITIES AND
             STOCKHOLDERS' EQUITY                         $38,552,319      $15,031,473      $11,516,996       $42,066,796
                                                          ===========      ===========      ===========       ===========
</TABLE>

(a) To eliminate Hartcourt Companies investment in Subsidiary.

                                                 See   accompanying   notes   to
                                                 proforma consolidated financial
                                                 statements.


                                                                 2

<PAGE>


<TABLE>
<CAPTION>

                                                   PRO FORMA FINANCIAL INFORMATION

                                           THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                           PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS AT SEPTEMBER 30, 1997
                                                             (UNAUDITED)


                                                                                    Pro Forma
                                                                                       Adjustments
                                                                                           Elimination
                                                            Historical         ECS             Entries       Pro Forma

<S>                                                      <C>                <C>        <C>                    <C>        
SALES                                                    $    316,706       $9,847,294$               -       $10,164,000
                                                         ------------       ---------------------------       -----------

                   
COST OF SALES                                                  213,727       7,242,591                 -       7,456,318
                                                        -------------     ----------------------------      ----------

GROSS PROFIT                                                   102,979       2,604,703                -        2,707,682

OPERATING EXPENSES
    Depreciation & amortization                                10,792          714,724                -           725,516
    General and administrative                                271,448        1,917,874                 -        2,189,322
                                                        -------------       ----------------------------       ----------

    TOTAL OPERATING EXPENSES                                  282,240        2,632,598                 -        2,914,838
                                                        -------------       ----------------------------       ----------

LOSS FROM OPERATIONS                                         (179,261)         (27,895)               -          (207,156)

OTHER INCOME (EXPENSES)
    Interest income                                            21,885                -                -            21,885
    Relief of debt        -                                         -                -                -
    Other income                                               25,556                 -                -           25,556
    Interest expense, net                                     (22,305)         (181,098)                 -       (203,403)
                                                          --------------     ------------------------------    -----------

TOTAL OTHER INCOME (EXPENSES)                                  25,136         (181,098)               -          (155,962)

NET LOSS BEFORE INCOME TAXES                                 (154,125)        (208,993)               -          (363,118)

    Taxes on earnings                                           2,400                -                 -            2,400
                                                      --------------------------------------------------   --------------

NET EARNINGS (LOSS)$                                         (156,525)      $ (208,993)$               -      $ (365,518)
                                                         =============        ========== =================      ==========

Weighted Average Shares Outstanding
    Including Common Stock Equivalents                     12,029,029                                          14,529,029

NET LOSS PER COMMON SHARE                             $         (.013)                                     $        (.025)
                                                      ===============                                      ==============
</TABLE>



                                                 See   accompanying   notes   to
                                                 proforma consolidated financial
                                                 statements.

                                                                 3

<PAGE>



                                             THE HARTCOURT COMPANIES, INC.
                                      NOTES TO UNAUDITED CONSOLIDATED PRO FORMA
                                                    FINANCIAL DATA



A.       Organization:

         The accompanying unaudited condensed consolidated pro forma financial 

statements include the
         accounts of the Hartcourt Companies, Inc. (Hartcourt) a Utah 
corporation, Electronic Components
         and Systems, Inc. and Pruzin Technologies, Inc. (collectively ECS),
both Arizona corporations.  All
         significant intercompany payables and receivables have been eliminated
 in the consolidating
         process.

B.       Basis of Presentation:

         The unaudited pro forma condensed  consolidated  balance sheets present
         the financial position of Hartcourt and ECS as of December 31, 1996 and
         September 30, 1997, assuming that the merger had occurred as of January
         1, 1996. The unaudited  condensed  consolidated  pro forma statement of
         operations give the effect to the merger by  consolidating  the results
         of condensed  operations  of the  respective  companies  for the twelve
         months ended December 31, 1996 and the nine months ended  September 30,
         1997  assuming  that the proposed  merger had occurred as of January 1,
         1996.

         The unaudited  condensed  consolidated  pro forma financial  statements
         should be read in conjunction  with  Hartcourt's  and ECS's  historical
         consolidated and combined financial statements and the notes thereto as
         of  December  31,  1996 and  July 31,  1997,  respectively.  Pro  forma
         adjustments are based upon current  estimates,  historical  information
         and  certain   assumptions  that  management  deems  appropriate.   The
         unaudited  condensed  consolidated  pro forma  financial data presented
         herein are not  necessarily  indicative  of the results that would have
         been reported had such events actually occurred on January 1, 1996, nor
         are they necessarily  indicative of the future results of Hartcourt and
         ECS.

                                                          7

<PAGE>
























<PAGE>
[{"type": "8-K", "sequence": "1", "description": "ACQUISITION OF ECS", "secsgml_size_bytes": 106783}]
{"company-data": {"conformed-name": "HARTCOURT COMPANIES INC", "cik": "0000949427", "assigned-sic": "3950", "irs-number": "870400541", "state-of-incorporation": "UT", "fiscal-year-end": "1231"}, "filing-values": {"form-type": "8-K", "act": "34", "file-number": "001-12671", "film-number": "97715149"}, "business-address": {"street1": "19104 S. NORWALK BLVD.", "city": "ARTESIA", "state": "CA", "zip": "90701", "phone": "3104031126"}, "mail-address": {"street1": "19104 S. NORWALK BLVD.", "city": "ARTESIA", "state": "CA", "zip": "90701"}}
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 8-K

Current Report
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): October 29, 1997

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

UTAH
(State or other jurisdiction of incorporation)

                  0011-12671                                      87-0400541
              (Commission File No.)        (IRS Employer Identification No.)

               19104 S. Norwalk Boulevard       90701
                       Artesia, California                     (Zip Code)
              (Address of Principal Executive Office)

Registrant's telephone number,
including area code:  (562) 403-1126

N.A.
(Former name or former address, if changed since last report)
Item 2. Acquisition or Disposition of Assets.

         On October 29, 1997 The Hartcourt  Companies,  Inc., a Utah Corporation
(Registrant),  completed the purchase of all of the issued and outstanding stock
of Electronic Components & Systems, Inc. (ECS) and Pruzin Technology, Inc. (PTI)
for  $11,400,000.  The purchase  price was paid at closing as follows:  $250,000
cash, a promissory  note for $250,000,  $3,169,000  (3,169  shares) of Hartcourt
Cos. Series D Preferred Stock, and $7,731,000  (2,500,000  shares) of restricted
Hartcourt Cos. Common Stock. In addition,  the Company agreed infuse  $2,000,000
of equity capital, in cash and cash equivalence or securities.

         ECS specialized in high technology contract  manufacturing and assembly
of printed  circuit  boards,  phone and cable wires,  coil winding,  and plastic
injection.  PTI is a pioneer in the new technology of ball-grid array connection
for the  semi-conductor  industry.  ECS  operates out of four  facilities,,  the
largest of which is in the maquiladora  free trade zone in Sonora,  Mexico.  The
other three facilities are located in Nogales, Tucson and Chandler, Arizona. The
total work force includes 50 employees in the U.S. and 749 in Mexico.

         ECS has grown steadily since its inception in 1988.  Total revenues for
the fiscal year ending on December  31, 1996 were $12.8  million with net income
of $813,069.  The Company will leave the  management of ECS in place and operate
ECS as a subsidiary of the Company.

Item 7. Financial Statements and Exhibits.

(a) Financial Statements of Business Acquired.

The audited financial  statements of Electronic  Components & Systems,  Inc. for
the year ended  December  31, 1996 and the seven  months ended July 31, 1997 are
filed with this report.

(b) Pro forma Financial Information.

The  unaudited  pro forma  condensed  financial  statements  are filed with this
report.
(c) Exhibits.

The exhibits to this Report are listed in the Exhibit index set forth  elsewhere
herein.

SIGNATURES

Pursuant to the  requirements  of the  Securities  and Exchange Act of 1934, the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned hereunto duly authorized.

THE HARTCOURT COMPANIES, INC.
Date: November 11, 1997           By:__________________________________
                                                           Dr. Alan Phan
                                                           President
FINANCIAL STATEMENTS INDEX

     Audited financial statements of Electronic  Components & Systems,  Inc. for
the year ended  December  31,  1996 and the seven  months  ended July 31,  1997.
Unaudited  pro forma  condensed  consolidated  balance sheet of Registrant as of
September  30,  1997 and  December  31,  1996.  Unaudited  pro  forma  condensed
consolidated statements of income for the nine and twelve months ended September
30,  1997  and  December  31,  1996,  respectively.  

Exhibits Index

2. Acqusition of Assets -  Agreement  between Registrant, Electronic Components
 & Systems, Inc.,
Pruzin Technologies, Inc.  and the majority shareholder of Electronic Components
 & Systems, Inc. and Pruzin Technologies, Ic. dated October 28, 1997. 

3. Certificate of Incorporation- Designation for Series D Preferred

                                              INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Shareholders of
ELECTRONIC COMPONENTS AND SYSTEMS, INC.
AND PRUZIN TECHNOLOGIES, INC.:

We  have  audited  the  accompanying   combined  balance  sheets  of  Electronic
Components and Systems,  Inc. (an Arizona  corporation) and Pruzin Technologies,
Inc. (an Arizona corporation) as of July 31, 1997 and December 31, 1996, and the
related combined statements of income,  shareholders'  equity and cash flows for
the seven months and year then ended.  These combined  financial  statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these combined 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 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, the combined financial statements referred to above present 
fairly, in all material respects, the financial
position of Electronic Components and Systems, Inc. and Pruzin Technologies,
Inc. as of July 31, 1997 and December 31,
1996, and the results of its operations and its cash flows for the seven months 
and year then ended, in conformity with
generally accepted accounting principles.
San Diego, California
September 19, 1997

                                                           4
5
ELECTRONIC COMPONENTS AND SYSTEMS, INC.
                                                    AND PRUZIN TECHNOLOGIES, INC.

                                                                  COMBINED BALANCE SHEETS
     ASSETS                                                                           As of
                                                                               As of July 31,      December 31,
CURRENT ASSETS                                                                 1997                    1996
                                                                            ---------------        ----------
Accounts receivable (Note B)                                                 $1,429,012         $1,225,925
  Inventory, net (Note C)                                                       1,921,920          1,784,069
  Shareholder's loan receivable                                                   249,928            304,678
  Employee receivables                                                             20,116             30,896
  Prepaid expenses                                                                 24,860             24,860
                                                                           --------------        -----------

       TOTAL CURRENT ASSETS                                                   3,645,836           3,370,428

PROPERTY AND EQUIPMENT, net (Note D)                                            1,557,993          1,687,230

OTHER ASSETS                                                                          983                983
                                                                          ---------------      -------------

                                                                             $  5,204,812          $5,058,641
                                                                             ============          ==========

     LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES
  Bank overdraft                                                              $    57,538       $     58,298
  Accounts payable                                                              1,211,081          1,411,272
  Accrued expenses (Note E)                                                       270,855            133,398
  Due to factor (Note F)                                                          592,972            535,975
  Notes payable, related party (Note G)                                            60,000             20,000
  Note payable, current portion (Note H)                                           80,893             75,306
  Capital lease obligations, current portion (Note I)                             153,366            125,983
                                                                            -------------       ------------

     TOTAL CURRENT LIABILITIES                                                  2,426,705          2,360,232

NOTE PAYABLE, net of current portion (Note H)                                      81,655            130,044

CAPITAL LEASE OBLIGATIONS, net of current portion (Note I)                        500,078            526,844

MINORITY INTEREST (Note A)                                                        (37,367)            16,925
                                                                           --------------       ------------

                                                                                2,971,071           3,034,045

COMMITMENTS AND CONTINGENCIES (Note I)                                                  -                  -

SHAREHOLDERS' EQUITY (Note J)
  Common stock (Note J)                                                            91,200             91,200
  Additional paid-in-capital                                                      126,800            126,800
  Retained earnings                                                             2,015,741          1,806,596
                                                                            -------------        -----------

     TOTAL SHAREHOLDERS' EQUITY                                                 2,233,741          2,024,596
                                                                            -------------        -----------

                                                                              $  5,204,812          $5,058,641
                                                                             ============          ==========
The  accompanying  notes  are an  integral  part of
these financial statements.

                                                                 6
ELECTRONIC COMPONENTS AND SYSTEMS, INC.

                                                    AND PRUZIN TECHNOLOGIES, INC.

                                                    COMBINED STATEMENTS OF INCOME

                                                                         Seven months
                                                                               ended              Year ended
                                                                         July 31, 1997    December 31, 1996
NET SALES                                                                       $7,348,593       $12,858,123

COST OF SALES                                                                    5,573,674        10,080,936
                                                                               -----------       -----------

    Gross Profit                                                              1,774,919            2,777,187

OPERATING EXPENSES
    Selling, general and administrative                                       1,441,858            1,885,076
    Depreciation and amortization                                               230,665              257,634
                                                                          ------------        -------------

           TOTAL OPERATING EXPENSES                                          1,672,523            2,142,710
                                                                           -----------         ------------

INCOME FROM OPERATIONS                                                             102,396           634,477

OTHER INCOME (EXPENSES)
    Minority interest in combined companies, net loss                               54,292             8,075
    Interest expense                                                              (137,870)         (143,398)
    Interest income                                                                      -               143
    Other income                                                                   190,327           313,772
                                                                              ------------      ------------

           TOTAL OTHER INCOME                                                   106,749              178,592
                                                                            ------------         ------------

INCOME BEFORE INCOME TAXES                                                         209,145           813,069

    Income taxes (Note A)                                                                -                 -
                                                                          ----------------  ----------------

NET INCOME                                                                  $   209,145           $   813,069
                                                                             ===========           ===========
The  accompanying  notes  are an  integral  part of
these financial statements.

                                                                 7
ELECTRONIC COMPONENTS AND SYSTEMS, INC.
AND PRUZIN TECHNOLOGIES, INC.

COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY

                                    Total
                                                                                                Retained     Shareholders' 
                                Common Stock                Additional
                                             Amount       Paid-in-Capital         Earnings         Equity
Balance, January 1, 1995                       162             $  16,200       $126,800       $1,236,249        $1,379,249

   Issuance of common stock                    100               100,000                -                 -        100,000

   Minority interest                           (25)               (25,000)              -                 -        (25,000)

   Net income                                          -              -                 -           813,069        813,069

 Distributions to shareholders                        -             -                   -         (242,722)      (242,722)
                                          ------------- -------------     -------------      -----------    -----------

Balance, December 31, 1996                          237                91,200         126,800    1,806,596      2,024,596

 Net income                                           -             -                   -          209,145        209,145
                                          ------------- -------------    --------------     ------------    -----------

Balance, July 31, 1997                              237             $  91,200       $ 126,800   $2,015,741     $2,233,741
The  accompanying  notes  are an  integral  part of
these financial statements.

                                                                 8
ELECTRONIC COMPONENTS AND SYSTEMS, INC.
                                                    AND PRUZIN TECHNOLOGIES, INC.

                                                  COMBINED STATEMENTS OF CASH FLOWS

                                                                                 Seven months
                                                                                ended              Year ended
                                                                               July 31, 1997    December 31, 1996

CASH FLOWS FROM OPERATING ACTIVITIES
Net income                                                                       $ 209,145        $ 813,069
 Adjustments to reconcile net income to net cash
    provided by operating activities:
        Depreciation and amortization                                               230,665          257,634
        Minority interest in combined companies, net loss                              (54,292)       (8,075)
        Changes in operating assets and liabilities:
          Accounts receivable                                                        (203,087)      (218,211)
          Inventory                                                                    (137,851)     (61,657)
          Employee receivables                                                       10,780          (14,432)
          Prepaid expenses                                                                -          (19,360)
          Other assets                                                                    -             (983)
          Accounts payable                                                         (200,191)        (496,115)
          Accrued expenses                                                               137,457    (375,141)
          Due to factor                                                              56,997          535,975
                                                                                 ----------    -------------

NET CASH PROVIDED BY OPERATING ACTIVITIES                                            49,623          412,704
                                                                                 ----------    -------------

CASH FLOWS FROM INVESTING ACTIVITIES
 Purchases of property and equipment                                                (31,775)        (228,607)
                                                                                 ----------    -------------

NET CASH USED IN INVESTING ACTIVITIES                                               (31,775)        (228,607)
                                                                                  ---------       ----------

CASH FLOWS FROM FINANCING ACTIVITIES
 Payments received on loans to shareholder                                           54,750           42,406
 Net payments on line of credit                                                           -          (96,177)
 Proceeds from note payable, related party                                           40,000           20,000
 Distributions to shareholders                                                               -      (242,722)
 Payments on notes payable                                                          (42,802)         (35,650)
 Payments on capital lease obligations                                              (69,036)         (38,218)
                                                                                  ---------      -----------

NET CASH USED IN FINANCING ACTIVITIES                                               (17,088)        (350,361)
                                                                                  ---------       ----------

NET INCREASE (DECREASE) IN CASH                                                         760         (166,264)

CASH, BEGINNING OF PERIOD                                                           (58,298)         107,966
                                                                                  ---------       ----------

BANK OVERDRAFT, END OF PERIOD                                                     $ (57,538)     $   (58,298)
                                                                                  =========      ===========
ELECTRONIC COMPONENTS AND SYSTEMS, INC.

                                               AND PRUZIN TECHNOLOGIES, INC.

                                          NOTES TO COMBINED FINANCIAL STATEMENTS

ASummary of Significant Accounting Policies:

    Organization and Nature of Operations

    The  combined  financial  statements  include  the  accounts  of  Electronic
    Components and Systems,  Inc. (ECS), an Arizona corporation  incorporated on
    November  24,  1987,  and Pruzin  Technologies,  Inc.  (Pruzin),  an Arizona
    corporation incorporated on November 20, 1996, (together "the Company"). The
    majority  shareholder of ECS is also the majority shareholder of Pruzin. All
    significant  intercompany  payables and receivables  have been eliminated in
    the combining process.

    The  Company's  principal  operations  are the wholesale  manufacturing  and
    selling of cabling and other electronic  components to the telecommunication
    and computer industries.  ECS operated under the name Electronic  Components
    and Services,  Inc.  until June 13, 1996, at which date the name was changed
    to Electronic Components and Systems, Inc.

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

    Basis of Accounting

    The  Company's  policy is to use the  accrual  method of  accounting  and to
    prepare and present financial statements which conform to generally accepted
    accounting principles. The preparation of 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 disclosure of contingent  assets and liabilities at the date
    of the financial  statements  and reported  amounts of revenues and expenses
    during  the  reporting  periods.  Actual  results  could  differ  from those
    estimates.

    Cash and Equivalents

    For purpose of the statements of cash flows,  all highly liquid  investments
    with  a  maturity  of  three  months  or  less  are  considered  to be  cash
    equivalents.  There were no cash  equivalents  at July 31, 1997 and December
    31, 1996.

    Concentrations

    In the normal course of business,  the Company extends  unsecured  credit to
    customers  principally  in the United States and Mexico.  Credit is extended
    based on an evaluation of the customer's financial condition.  Credit losses
    have  been  within  management's  expectations.   The  Company's  sales  are
    substantially all to two large electronic components  manufacturers,  one of
    which is located in Nogales, Mexico (Note M).

    As mentioned above,  the Company  maintains  manufacturing  operations under
    maquiladora agreements in Nogales, Mexico which includes plant and equipment
    with a net  book  value  estimated  at  $300,000.  It is  always  reasonably
    possible that  operations  located  outside an entity's home country will be
    disrupted in the near term, but management believes it is remote (Note E).

A. Summary of Significant Accounting Policies: (continued)

                                                            10
ELECTRONIC COMPONENTS AND SYSTEMS, INC.
                                              AND PRUZIN TECHNOLOGIES, INC.

                                          NOTES TO COMBINED FINANCIAL STATEMENTS
                                                        (Continued)

       Inventory

       Inventory is stated at the lower of cost (first-in, first-out) or market.
       Inventory costs include material, labor and manufacturing overhead.

       Property and Equipment

       Property  and  equipment  is  stated  at cost  and  depreciated  using an
       accelerated  depreciation  method over the estimated  useful lives of the
       assets, which range from three to twelve years. Maintenance,  repairs and
       minor renewals are charged to operations as incurred.  Major replacements
       or  betterments  are  capitalized.  When assets are retired or  otherwise
       disposed,  the related cost and accumulated  depreciation  are eliminated
       from  the  respective  accounts  and any gain or loss on  disposition  is
       reflected as income or expense.

       Minority Interest

       Minority interest  represents the 25%  shareholder's  interest in the net
assets and operations of Pruzin Technologies, Inc.

       Revenue Recognition

       Revenue from product sales is generated  primarily  from the  manufacture
       and  sale  of  cabling  and  other  electronic  components.   Revenue  is
       recognized when the product is shipped.

       Income Taxes

       The Company, with the consent of its shareholders,  has elected under the
       Internal Revenue Code to be an S corporation. In lieu of corporate income
       taxes,   the  shareholders  of  an  S  corporation  are  taxed  on  their
       proportionate  share  of the  Company's  taxable  income.  Therefore,  no
       provision  or  liability  for  federal  or state  income  taxes  has been
       included in the financial statements.

       Fair Value

       The  carrying   amounts   reflected  in  the  balance  sheets  for  cash,
       receivables, loans, accounts payable and accrued expenses approximate the
       respective fair values.

       Reclassifications

       Certain  prior year  balances  have been  reclassified  to conform to the
current year presentation.

                                                            11
ELECTRONIC COMPONENTS AND SYSTEMS, INC.
                                               AND PRUZIN TECHNOLOGIES, INC.

                                          NOTES TO COMBINED FINANCIAL STATEMENTS
                                                        (Continued)

B.       Accounts Receivable:

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

                                                      July 31     December 31,
                                                              1996

         Accounts receivable, unassigned         $  595,074$  449,315
         Accounts receivable, assigned (Note F)     833,938   776,610

                                                  1,429,012 1,225,925

         Less:  Allowance for doubtful accounts    -                -
                                               ------------------------------

                                                 $1,429,012 $1,225,925
                                                 ========== ==========

         As stated in Note A, the  Company  manufactures  and sells  cabling and
         other  electronic  components  to the  telecommunication  and  computer
         industries.   Sales  are  made  based  upon  customer-specific  orders.
         Therefore,  management believes that all accounts receivable as of July
         31, 1997 and December 31, 1996 were fully collectible, and no allowance
         for doubtful accounts was recorded.

C.       Inventory:

         Inventory  at July 31,  1997 and  December  31, 1996 is  summarized  as
follows:

                                                July 31          December 31,
                                                                      1996

              Raw materials                      $1,772,998           $1,651,294
              Work-in-process                         5,888                    -
              Finished goods                        143,034              132,775
                                                -----------         ------------

                                                  1,921,920            1,784,069
              Less reserve for obsolescence               -                    -
                                               ------------     ----------------

              Inventory, net                     $1,921,920           $1,784,069
                                                  ==========           =========

                                                            12
ELECTRONIC COMPONENTS AND SYSTEMS, INC.
                                               AND PRUZIN TECHNOLOGIES, INC.

                                          NOTES TO COMBINED FINANCIAL STATEMENTS
                                                        (Continued)

D. Property and Equipment:

      Property  and  equipment  at July  31,  1997  and  December  31,  1996 are
summarized as follows:
July 31             December 31,
                                                               1997                 1996
Machinery and equipment                         $2,099,046           $2,023,914
              Furniture and fixtures                              92,139               92,139
              Office equipment                                     8,544                    -
              Leasehold improvements                               8,820                8,820
              Vehicles                                            17,752                    -
                                                            ------------      ---------------

                                                               2,226,301            2,124,873
              Less accumulated depreciation and
                amortization                                    (668,308)            (437,643)
                                                             -----------          -----------

              Property and equipment, net                     $1,557,993           $1,687,230
                                                              ==========           ==========
E. Accrued Expenses:

      Accrued  expenses at July 31, 1997 and December 31, 1996 are summarized as
follows:

                                                         July 31, December 31,
                                                   1997                    1996

              Mexican operating costs            $270,855             $133,398

      The above represents  amounts accrued by management as expenses related to
      Mexican government and traditionally  cultural requirements connected with
      foreign entities doing business in Mexico. The premise for this accrual is
      the possibility of the foreign entity  discontinuing  local operations and
      leaving Mexican workers jobless.

F. Due to Factor:

      On March 13, 1996, the Company entered into a factoring  agreement with an
      unrelated third party for credit administration  purposes. This continuing
      contract is automatically renewable for successive periods of three months
      unless terminated by written notice.

      Under the factoring  agreement,  the factor  purchases  substantially  all
      trade  accounts  receivable,   mainly  for  one  of  the  Company's  major
      customers,  General Instrument, at a price equal to the net face amount of
      the  receivable,  less a discount  of 1.25% if the  account is paid within
      thirty days of the purchase. The Company may take advances of up to 75% of
      the net face amount of the  accounts  sold to the  factor.  The Company is
      contingently  liable to the  factor  for  merchandise  disputes,  customer
      claims, and other chargebacks on eligible receivables.  As collateral, the
      Company has granted a continuing  security  interest in substantially  all
      assets to the factor.

                                                            13
ELECTRONIC COMPONENTS AND SYSTEMS, INC.
                                               AND PRUZIN TECHNOLOGIES, INC.

                                          NOTES TO COMBINED FINANCIAL STATEMENTS
                                                        (Continued)

F. Due to Factor: (continued)

      The proceeds received from the factor for the seven months ended July 31,
 1997
      and year ended  December,  31, 1996  totaled  $3,631,383  and  $5,751,199,
      respectively.  At July 31, 1997 and December 31, 1996,  the balance due to
      the factor for  advances  taken prior to the  collection  of the  accounts
      receivable was $592,972 and $535,975, respectively.

G. Notes Payable, Related Party:

      Notes  payable,  related  party at July 31,  1997 and  December  31,  1996
consist of the following:
July 31,            December 31,
                                                                     1997                     1996
      Unsecured note payable due to an employee of the Company,
  interest at 10%
      per annum, interest only, monthly payments of $166.67
with principal due upon demand                              $20,000                   $20,000

      Unsecured  note payable due to a relative of the president
 of the Company,
      interest at 10% per annum, interest only, monthly payments of
      $333.33 with principal due upon demand                        40,000                         -
                                                                  --------                -----------

                                                                    60,000                     20,000

      Less current portion (60,000)                                (20,000)                  -------- 
                                      -------

                                                              $         -                  $        -
===========
                ==========
H. Note Payable:

      Note  payable at July 31,  1997 and  December  31,  1996  consists  of the
following:

                              July 31,December 31,
                                    1997 1996
      Note payable due to an unrelated third party,  maturing in June 1999, with
      monthly  installments  of  $  8,038.85,   including  interest  at  12.29%,
      collateralized by equipment and personally guaranteed by the
      shareholders                                 $162,548             $205,350

         Less current portion                       (80,893)            (75,306)
                                                   ---------           ---------

                                                   $  81,655            $130,044
                                                   =========            ========

                                                            14
ELECTRONIC COMPONENTS AND SYSTEMS, INC.
                                               AND PRUZIN TECHNOLOGIES, INC.

                                          NOTES TO COMBINED FINANCIAL STATEMENTS
                                                        (Continued)

H. Notes Payable: (continued)

      Aggregate maturities of debt at July 31, 1997 are as follows:

                    Period Ending
                         July 31,                                        Amount

                           1998                                       $  80,893
                           1999                                          81,655
                           2000                                                -
                           2001                                                -
                           2002                                                -
                                                                    ------------

                                                                        $162,548

I. Commitments and Contingencies:

      Operating Leases

      The Company leased its Nogales,  Arizona  facility  under a  noncancelable
      operating  lease  from an  unrelated  third  party  through  August  1996.
      Thereafter, the lease has been on a month-to-month basis. During 1996, the
      Company  entered into two five year  noncancelable  operating  leases with
      unrelated  third parties for its Tucson and Chandler,  Arizona  facilities
      which expire  through  November 2001. The Company also leases its vehicles
      under  noncancelable  operating  leases  which  expire  through June 1999.
      Rental expense for the facilities for the seven months ended July 31, 1997
      and  the  year  ended   December  31,  1996  was  $242,527  and  $242,452,
      respectively.

      At July 31,  1997,  minimum  annual rent payable  under the  noncancelable
      leases in each of the next five periods  ending July 31 and thereafter are
      as follows:
Rent             Vehicles           Total
1998                                                     $211,649           $23,158          $234,807
                      1999                                                      215,032            15,362           230,394
                      2000                                                      218,584                 -           218,584
                      2001                                                      188,750                 -           188,750
                      2002                                                       48,000                 -            48,000
                         Thereafter                                        -          -                              -
                                                             
                          Total                                                $882,015           $38,520          $920,535
                                                                               ========           =======          ========
The  noncancelable  operating  leases for the facilities  provide that the
      Company pays for property  taxes,  insurance and certain  other  operating
      expenses applicable to the leased premises.

                                                            15
ELECTRONIC COMPONENTS AND SYSTEMS, INC.
                                               AND PRUZIN TECHNOLOGIES, INC.

                                          NOTES TO COMBINED FINANCIAL STATEMENTS
                                                        (Continued)

I. Commitments and Contingencies: (continued)

      Capital Leases

      The Company leases part of its equipment under various capital leases. The
      economic  substance of the capital  lease  agreements  is that the Company
      finances the acquisition of machinery by making monthly payments  totaling
      $18,032 over a period ranging from thirty-six to sixty months through June
      2002, and accordingly, the capital leases are reflected as a capital lease
      obligation  and the assets as a component of property and  equipment.  The
      following is an analysis of the book value of the leased  assets  included
      in property and equipment at July 31, 1997 and December 31, 1996:
                                                         July 31,   December 31,
                                                              1997          1996

                  Cost                                    $760,697      $691,045

                  Less accumulated depreciation           (168,753)     (56,620)

                                                          $591,944      $634,425
                                                          ========      ========

      The future minimum lease payments under capitalized leases and the present
      value of the net minimum lease payments at July 31, 1997 are as follows:

                      1998                                         $ 216,382
                      1999                                           216,382
                    2000                                             161,684
                      2001                                           161,684
                      2002                                            48,742
                                                                  ----------

                                                                     804,874
         Less amount representing interest
                    (151,430)

                                                                      653,444
                    Less current portion of capital lease obligations
                                                                     (153,366)

                                                                      $500,078

      At July 31, 1997,  $539,946 of the total  capital  lease  obligations  was
      personally guaranteed by the principal shareholder of the Company.

                                                            16
ELECTRONIC COMPONENTS AND SYSTEMS, INC.
                                               AND PRUZIN TECHNOLOGIES, INC.

                                          NOTES TO COMBINED FINANCIAL STATEMENTS
                                                        (Continued)

J. Shareholders' Equity

      Common Stock

      Electronic Components and Systems, Inc. and Pruzin Technologies, Inc. have
      different capital structures which are summarized as follows at July 31, 
1997 and December 31, 1996:

                                                          July 31,  December 31,
      Electronics Components and Systems, Inc.:                1997        1996
      -----------------------------------------             -------------------

      Common stock, $100 par value, 10,000 shares
        authorized, 162 shares issued and outstanding      $16,200     $16,200

      Pruzin Technologies, Inc.:

      Common stock, no par value, 1,000,000 shares authorized, 100 shares issued
         and outstanding, of which 25 shares represent a minority interest
         in the Company                                 75,000           75,000
                          

                                                       $91,200          $91,200
                                                        =======          =======

      S Corporation Distributions

      For the seven  months  ended July 31,  1997 and  December  31,  1996,  the
      Company distributed $ 0 and $242,722,  respectively,  to its shareholders.
      These amounts  represent a portion of the S Corporation  earnings  through
      December 31 of each year.

K. Supplemental Cash Flow Information:

      Supplemental  disclosures  of cash flow  information  for the seven months
      ended July 31, 1997 and year ended  December  31, 1996 are  summarized  as
      follows:
                                                            July 31,December 31,
                                                             1997          1996

         Cash paid for interest and income taxes:
                  Interest                               $137,870       $143,398

         Noncash investing and financing activities:
                  Assets purchased through capital leases$ 69,652       $691,045
                  Assets purchased through note payable-                 241,000
                  Common stock issued for property and
                    equipment contributed by shareholders-               100,000

                                                            17
ELECTRONIC COMPONENTS AND SYSTEMS, INC.
                                               AND PRUZIN TECHNOLOGIES, INC.

                                          NOTES TO COMBINED FINANCIAL STATEMENTS
                                                        (Continued)

L.     Profit Sharing Plan:

       The Company maintains a defined  contribution plan for its U.S. employees
       (the Plan) 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
       $3,489 and $3,686 for the seven months ended July 31, 1997 and year ended
       December 31,  1996,  respectively.  The Company  pays the  administrative
       costs of the Plan, which approximates $2,000 per year.

M.     Major Customers:

       During the seven months  ended July 31,  1997,  the Company had one major
       customer and during the year ended December 31, 1996, the Company had two
       major  customers,  sales to each of which  exceeded 10% of the  Company's
       total sales. Sales to these customers for the seven months ended July 31,
       1997 and year ended December 31, 1996 totaled $4,912,281 and $10,486,139,
       respectively.

       One of the two major customers is General  Instrument which is located in
       Nogales,  Mexico.  Sales to General Instrument for the seven months ended
       July 31, 1997 and year ended  December  31, 1996 totaled  $4,912,281  and
       $8,505,498,  respectively,  which represents 67% and 66% of net sales for
       the respective period.

N.     Subsequent Events:

       In July 1997 the Company signed a stock purchase agreement with Hartcourt
       Companies,  Inc.  ("Hartcourt") in which all of the Company's outstanding
       stock will be acquired  in exchange  for  Hartcourt  stock and cash.  The
       transaction is expected to close in October 1997.

       Currently,  Jim Pruzin, the majority  shareholder of Pruzin Technologies,
       Inc., is in  negotiations  with the minority  shareholder to purchase the
       minority  shareholder's  25% interest.  The negotiations  center around a
       consulting  and  commission  agreement  signed  at the time  the  Company
       purchased its 75% share of Pruzin  Technologies,  Inc. Under the terms of
       the original agreement, the Company is required to remit $5,000 per month
       in consulting fees plus 5% of total combined  company sales to the former
       owner.  The  proposed  agreement  would  allow for the buy-out of the 25%
       minority interest and terminate all future royalties.

                                                            18
INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Shareholders of
ELECTRONIC COMPONENTS AND SYSTEMS, INC.:

We have audited the  accompanying  balance  sheets of Electronic  Components and
Systems, Inc. (an Arizona corporation) as of December 31, 1995 and 1994, and the
related statements of income,  shareholders' equity and cash flows for the years
then ended.  These financial  statements are the responsibility of the Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audits.

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,  the financial  statements  referred to above present fairly, in
all material  respects,  the  financial  position of Electronic  Components  and
Systems,  Inc.  as of  December  31,  1995  and  1994,  and the  results  of its
operations  and its cash  flows for the years then  ended,  in  conformity  with
generally accepted accounting principles.

San Diego, California
September 19, 1997
ELECTRONIC COMPONENTS AND SYSTEMS, INC.

                                                                  BALANCE SHEETS

     ASSETS
                                                                           As of December 31,
CURRENT ASSETS                                                                   1995                     1994
                                                                            ---------------           --------
Cash                                                                        $   107,966          $  90,810
  Accounts receivable (Note A)                                                  1,007,714             17,085
  Inventory, net (Note B)                                                       1,722,412                  -
  Shareholder's loan receivable                                                   347,084            326,173
  Employee receivables                                                             16,464             10,688
  Prepaid expenses                                                                  5,500              9,000
                                                                            -------------        -----------

       TOTAL CURRENT ASSETS                                                    3,207,140             453,756

PROPERTY AND EQUIPMENT, net (Note C)                                              684,212             27,025
                                                                             ------------         ----------

                                                                               $3,891,352           $ 480,781
                                                                                ==========           =========

     LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES
  Accounts payable                                                             $1,907,387         $   24,612
  Accrued expenses (Note E)                                                       508,539            381,598
  Line of credit (Note D)                                                          96,177                   -
                                                                             ------------      --------------

     TOTAL CURRENT LIABILITIES                                                  2,512,103            406,210

COMMITMENTS AND CONTINGENCIES (Note F)                                                  -                  -

SHAREHOLDERS' EQUITY (Note H)
  Common stock, $100 par value, 10,000 shares
     authorized; 162 shares issued and outstanding                                 16,200             16,200
  Additional paid-in-capital                                                      126,800            126,800
  Retained earnings (deficit)                                                   1,236,249            (68,429                    )
                                                                              -----------         ----------

     TOTAL SHAREHOLDERS' EQUITY                                                 1,379,249             74,571
                                                                              -----------         ----------

                                                                              $3,891,352           $ 480,781
                                                                              ==========           =========
The  accompanying  notes  are an  integral  part of
these financial statements.

                                                                 20
ELECTRONIC COMPONENTS AND SYSTEMS, INC.

                                                        STATEMENTS OF INCOME

                                                                                       Year Ended December 31,
                                                                                1995                  1994
NET SALES                                                                     $11,201,158         $4,204,694

COST OF SALES                                                                   8,489,817          3,411,228
                                                                              -----------         ----------

  Gross Profit                                                                   2,711,341            793,466

OPERATING EXPENSES
  Selling, general and administrative                                            1,359,752            968,691
  Depreciation and amortization                                                    117,579             10,765
                                                                              ------------       ------------

          TOTAL OPERATING EXPENSES                                               1,477,331            979,456
                                                                              -----------       ------------

INCOME (LOSS) FROM OPERATIONS                                                   1,234,010           (185,990)

OTHER INCOME (EXPENSES)
  Interest expense                                                                 (6,384)              (772)
  Interest income                                                                   3,422                382
  Loss on disposal of assets                                                       (7,076)            (2,496)
  Other income                                                                    305,066            307,440
                                                                             ------------       ------------

          TOTAL OTHER INCOME                                                      295,028            304,554
                                                                             ------------       ------------

INCOME BEFORE INCOME TAXES                                                      1,529,038            118,564

  Income taxes (Note A)                                                                 -                  -
                                                                         ----------------   ----------------

NET INCOME                                                                    $ 1,529,038       $    118,564
                                                                              ===========       ============
The  accompanying  notes  are an  integral  part of
these financial statements.

                                                                 21
ELECTRONIC COMPONENTS AND SYSTEMS, INC.

STATEMENTS OF SHAREHOLDERS' EQUITY

                                                                                                   Retained         Total
                                                                                                    Earnings    Shareholders'
                                          Common Stock                         Additional
                                                Shares         Amount       Paid-in-Capital        (Deficit)    Equity (Deficit)
Balance, January 1, 1994                            162       $16,200             $126,800      $  (186,993)   $   (43,993)

 Net income                                           -             -                    -          118,564        118,564
                                          -------------   -----------         -------------     ------------    -----------

Balance, December 31, 1994                          162        16,200              126,800         (68,429)          74,571

 Net income                                           -             -                 -            1,529,038      1,529,038
 
 Distributions to shareholders                        -             -                 -            (224,360)      (224,360)
                                             -------------   -----------    --------------      -----------    -----------

Balance, December 31, 1995                          162      $ 16,200           $  126,800        $1,236,249       $1,379,249
                                             ===========          ========    ==========        ==========       ==========
The  accompanying  notes  are an  integral  part of
these financial statements.

                                                                 22
ELECTRONIC COMPONENTS AND SYSTEMS, INC.

                                                      STATEMENTS OF CASH FLOWS

                                                                                      Year Ended December 31,
                                                                                1995                  1994
                                                                             -------------           -------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income                                                                      $1,529,038        $ 118,564
 Adjustments to reconcile net income to net cash
    provided by operating activities:
        Depreciation and amortization                                               117,579           10,765
        Loss on disposal of assets                                                    7,076            2,496
        Changes in operating assets and liabilities:
          Accounts receivable                                                      (990,629)          65,116
          Inventory                                                              (1,722,412)               -
          Employee receivables                                                       (5,776)            (697)
          Prepaid expenses and other assets                                           3,500           (6,500)
          Accounts payable                                                        1,882,775         (149,372)
          Accrued expenses                                                          126,941          244,311
                                                                               ------------      -----------

NET CASH PROVIDED BY OPERATING ACTIVITIES                                            948,092         284,683
                                                                                ------------     -----------

CASH FLOWS FROM INVESTING ACTIVITIES
 Purchases of property and equipment                                               (781,842)          (7,364)
                                                                               ------------     ------------

NET CASH USED IN INVESTING ACTIVITIES                                              (781,842)          (7,364)
                                                                               ------------     ------------

CASH FLOWS FROM FINANCING ACTIVITIES
 Loans to shareholder                                                               (20,911)        (189,849)
 Net proceeds from line of credit                                                    96,177                -
 Distributions to shareholders                                                     (224,360)               -
                                                                               ------------   --------------

NET CASH USED IN FINANCING ACTIVITIES                                              (149,094)        (189,849)
                                                                               ------------       ----------

NET INCREASE IN CASH                                                                 17,156           87,470

CASH, BEGINNING OF YEAR                                                              90,810            3,340
                                                                               ------------     ------------

CASH, END OF YEAR                                                               $   107,966      $    90,810
                                                                                ===========      ===========
The  accompanying  notes are an  integral  part of
these financial statements.

                                                                  23
ELECTRONIC COMPONENTS AND SYSTEMS, INC.

                                               NOTES TO FINANCIAL STATEMENTS

ASummary of Significant Accounting Policies:

    Organization and Nature of Operations

    Electronic  Components and Systems, Inc. (the "Company") was incorporated on
    November  24,  1987  in  the  state  of  Arizona.  The  Company's  principal
    operations are the wholesale  manufacturing and selling of cabling and other
    electronic components to the telecommunication and computer industries.  The
    Company  operated under the name  Electronic  Components and Services,  Inc.
    until  June  13,  1996,  at  which  date  the  Company  changed  its name to
    Electronic Components and Systems, Inc.

    The Company maintains manufacturing  operations under maquiladora agreements
    in  Nogales,  Mexico.  A  substantial  amount of the  Company's  cables  and
    electronic components are manufactured and assembled at the Mexico facility.
    The Company also has a smaller manufacturing facility in Tucson, Arizona and
    a distribution facility in Nogales, Arizona.

    Basis of Accounting

    The  Company's  policy is to use the  accrual  method of  accounting  and to
    prepare and present financial statements which conform to generally accepted
    accounting principles. The preparation of 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 disclosure of contingent  assets and liabilities at the date
    of the financial  statements  and reported  amounts of revenues and expenses
    during  the  reporting  periods.  Actual  results  could  differ  from those
    estimates.

    Cash and Equivalents

    For purpose of the statements of cash flows,  all highly liquid  investments
    with  a  maturity  of  three  months  or  less  are  considered  to be  cash
    equivalents.  There were no cash  equivalents  as of  December  31, 1995 and
    1994.

    Accounts Receivable

    Management believes that all accounts receivable as of December 31, 1995 and
    1994 were fully collectible.  Therefore,  no allowance for doubtful accounts
    was recorded.

    Concentrations

    In the normal course of business,  the Company extends  unsecured  credit to
    customers  principally  in the United States and Mexico.  Credit is extended
    based on an evaluation of the customer's financial condition.  Credit losses
    have  been  within  management's  expectations.   The  Company's  sales  are
    substantially all to three large electronic components manufacturers located
    in Nogales, Mexico (Note J).

    As mentioned above,  the Company  maintains  manufacturing  operations under
    maquiladora agreements in Nogales, Mexico which includes plant and equipment
    with a net  book  value  estimated  at  $300,000.  It is  always  reasonably
    possible that  operations  located  outside an entity's home country will be
    disrupted in the near term but management believes it is remote (Note E).

                                                            24
A. Summary of Significant Accounting Policies: (continued)

       Inventory

       Inventory is stated at the lower of cost (first-in, first-out) or market.
       Inventory costs include material, labor and manufacturing overhead.

       Property and Equipment

       Property  and  equipment  is  stated  at cost  and  depreciated  using an
       accelerated  depreciation  method over the estimated  useful lives of the
       assets,  which range from three to five years.  Maintenance,  repairs and
       minor renewals are charged to operations as incurred.  Major replacements
       or  betterments  are  capitalized.  When assets are retired or  otherwise
       disposed,  the related cost and accumulated  depreciation  are eliminated
       from  the  respective  accounts  and any gain or loss on  disposition  is
       reflected as income or expense.

       Revenue Recognition

       Revenue from product sales is generated  primarily  from the  manufacture
       and  sale  of  cabling  and  other  electronic  components.   Revenue  is
       recognized when the product is shipped.

       Income Taxes

       The Company, with the consent of its shareholders,  has elected under the
       Internal Revenue Code to be an S corporation. In lieu of corporate income
       taxes,   the  shareholders  of  an  S  corporation  are  taxed  on  their
       proportionate  share  of the  Company's  taxable  income.  Therefore,  no
       provision  or  liability  for  federal  or state  income  taxes  has been
       included in the financial statements.

       Fair Value

       The  carrying   amounts   reflected  in  the  balance  sheets  for  cash,
       receivables, loans, accounts payable and accrued expenses approximate the
       respective fair values.

       Acquisition

       In July 1995 the  Company  acquired  substantially  all of the  assets of
       Artisoft,  Inc., which  principally  consisted of machinery and equipment
       valued at $500,000.  The  transaction  was completed  through a sales and
       purchase agreement whereby $4.00 per unit on the first 125,000 units sold
       to  Artisoft,  Inc.  was  credited  in the form of a  reduction  in total
       invoice  cost.  As of December 31, 1995 all amounts owed on the sales and
       purchase agreement had been remitted.

                                                            25
ELECTRONIC COMPONENTS AND SYSTEMS, INC.

                                               NOTES TO FINANCIAL STATEMENTS
                                                        (Continued)

B. Inventory:

       Inventory at December 31, 1995 and 1994 is summarized as follows:

       Prior to 1995 the Company provided fabrication  functions and services on
       consigned materials of the Company's customers.
1995                 1994
                                                                                   -------------           ------
Raw materials                                                                $1,594,226         $        -
         Finished goods                                                                  128,186                  -
         Less reserve for obsolescence                                                         -                  -
                                                                                ----------------        -----------

              Inventory, net                                                         $ 1,722,412         $        -
                                                                                     ===========         ==========
C. Property and Equipment:

      Property and  equipment at December  31, 1995 and 1994 are  summarized  as
follows:
1995               1994
                                                                      -----------       --------
Machinery and equipment                                     $ 806,405          $ 37,835
         Furniture and fixtures                                         23,223            21,719
         Office equipment                                               25,773            14,004
         Leasehold improvements                                          8,820             8,820
         Vehicles                                                            -            11,057
                                                                --------------         ---------

                                                                      864,221             93,435
         Less accumulated depreciation and
           amortization                                               (180,009)          (66,410)
                                                                     ---------         ---------

              Property and equipment, net                           $ 684,212          $  27,025
                                                                    =========          =========
D. Line of Credit:

      The Company  has a line of credit  facility  with a bank which  expired on
      April 15,  1996 and was not  renewed.  The line  bears  interest  at prime
      (8.75% at December  31, 1995) plus 9.0%.  The line of credit  provides for
      maximum  borrowings  of  $100,000,  is  secured  by  inventory,   accounts
      receivable  and equipment of the Company and is  personally  guaranteed by
      the principal  shareholders.  At December 31, 1995, the Company had $3,823
      of available credit under the line.

                                                            26
ELECTRONIC COMPONENTS AND SYSTEMS, INC.

                                               NOTES TO FINANCIAL STATEMENTS
                                                        (Continued)

E. Accrued Expenses:

      Accrued expenses at December 31, 1995 and 1994 are summarized as follows:
1995               1994
                                                                                      ----------        --------
Mexican operating costs at year-end                                       $508,539           $381,598
The above represents  amounts accrued by management as expenses related to
      Mexican government and traditionally  cultural requirements connected with
      foreign entities doing business in Mexico. The premise for this accrual is
      the possibility of the foreign entity  shutting down local  operations and
      leaving Mexican workers jobless.

F. Commitments and Contingencies:

      Operating Leases

      The Company leased its Nogales,  Arizona  facility  under a  noncancelable
      operating  lease  from an  unrelated  third  party  through  August  1996.
      Thereafter,  the lease  has been on a  month-to-month  basis.  On March 1,
      1996, the Company entered into a five year  noncancelable  operating lease
      with an  unrelated  third party for its  Tucson,  Arizona  facility  which
      expires in March 2001.  Rental  expense for the years ended  December  31,
      1995 and 1994 was $172,662 and $87,987, respectively.

      At December 31, 1995,  minimum annual rent payable under the noncancelable
      leases in each of the next five years  ending  December 31 and  thereafter
      are as follows:

                      1996                                              $107,224
                      1997                                                66,269
                      1998                                                69,030
                      1999                                                72,482
                      2000                                                76,106
                         Thereafter                                      12,786

                          Total                                         $403,897

      The  noncancelable  operating  lease  provides  that the Company  pays for
      property taxes,  insurance and certain other operating expenses applicable
      to the leased premises.

                                                            27
ELECTRONIC COMPONENTS AND SYSTEMS, INC.

                                               NOTES TO FINANCIAL STATEMENTS
                                                        (Continued)

G. Supplemental Cash Flow Information:

      Supplemental  disclosures  of cash flow  information  for the years  ended
      December 31, 1995 and 1994 are summarized as follows:
1995                 1994
                                                                            --------            -------
Cash paid for interest and income taxes:
               Interest                                                          $6,384          $    772

         Noncash investing and financing activities:
               Vehicle given by shareholder to Company
                  with corresponding reduction to loan receivable               $       -         $11,056
               Vehicle written-off due to disposal                                7,076             2,496
H. Shareholders' Equity:

      S Corporation Distributions

      For the years ended  December 31, 1995 and 1994,  the Company  distributed
      $224,360  and  $0,  respectively,  to  its  shareholders.   These  amounts
      represent a portion of the S Corporation  earnings  through December 31 of
      each year.

I. Profit Sharing Plan:

      The Company maintains a defined  contribution plan for its U.S.  employees
      (the Plan) 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
      $1,287  and  $0  for  the  years  ended   December   31,  1995  and  1994,
      respectively. The Company pays the administrative costs of the Plan, which
      approximates $2,000 per year.

J. Major Customers:

      During the year ended  December  31,  1995,  the  Company  had three major
      customers,  sales to each of which  exceeded  10% of the  Company's  total
      sales.  During  the year  ended  December  31,  1994,  there was one major
      customer.  Sales to these  customers for the years ended December 31, 1995
      and 1994 totaled $10,073,587 and $3,901,106, respectively.

K. Subsequent Events:

      In July 1997 the Company signed a stock purchase  agreement with Hartcourt
      Companies,  Inc.  ("Hartcourt") in which all of the Company's  outstanding
      stock will be acquired in exchange for Hartcourt stock and cash.
      The transaction is expected to close in October 1997.
PRO FORMA FINANCIAL INFORMATION

                                  THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                        PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1996
                                                    (UNAUDITED)

                                                                                  Pro Forma
                                                                                  djustments
                                                                                        Elimination
                                                            Historical         ECS          Entries                 Pro Forma

         ASSETS

CURRENT ASSETS
Cash and cash equivalents                        $            822$                 -$                -        $        822
    Accounts receivable                                          91,088          1,225,925                   -       1,317,013
    Inventories                                               311,424        1,784,069               -               2,095,493
    Prepaid consulting fees                                   900,000                -               -                 900,000
    Note receivables-current                                  133,764                -               -                 133,764
    Amount due from shareholder                                32,356          304,678               -                 337,034
         Interest receivable                                   3,877                           -               -         3,877
    Other current assets                   -                                    55,756               -                  55,756
                        --------------------          -----------------------------------        ----------------

         TOTAL CURRENT ASSETS                               1,473,331        3,370,428                   -             4,843,759
                                                        -------------    ---------------------------------        --------------

Property, plant, and equipment, net                            44,809        1,716,064               -               1,760,873
Investments                                                17,906,520                -               -              17,906,520
Note receivables                                            1,190,795                -        -                       1,190,795
Goodwill, net                                                       -        9,965,641               -               9,965,641
Investment in subsidiary                                  11,400,000                   -       11,400,000   (a)-
Other assets                                                    7,550               983                    -              8,533
                                                     ------------------------------------------------------  -----------------

         TOTAL ASSETS                                      $32,023,005        $15,053,116    $  11,400,000       $ 35,676,121
                                                           ===========         -----------    =============       ============

(a) To eliminate Hartcourt Companies investment in Subsidiary.
See   accompanying   notes   to
                                                 proforma consolidated financial
                                                 statements.

                                                                 4
PRO FORMA FINANCIAL INFORMATION

                                           THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                                 PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1996
                                                             (UNAUDITED)
                                                             (Continued)

                                                                                  Pro Forma
                                                                                      Adjustments
                                                                                        Elimination
                                                            Historical         ECS          Entries          Pro Forma

    LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
Notes payable - current                             $      56,396   $       75,306$               -   $      131,702
    Due to Factor         -                                                    535,975                -          535,975
    Capital Lease Obligation                                        -          125,983                -          125,983
    Accrued Expenses - Mexico                                       -          133,398                -          133,398
    Note Payable, Related Party                                     -           20,000                -           20,000
    Accounts payable - trade                                  148,569        1,411,272                -        1,559,841
    Accrued expenses                                          133,747          519,000                -          652,747
    Overdraft                                                   5,691           58,298                -           63,989
    Subscription                                               45,000              -                  -         45,000
                                                       --------------             -------------------------------------------------

         TOTAL CURRENT LIABILITIES                            389,403        2,879,232                -        3,268,635

Capital Lease - Long Term -                                                    526,844                -          526,844
Long-term debt                                                774,369          130,044                  -        904,413
                  -------------                         -------------------------------- --------------

         TOTAL LIABILITIES                                  1,163,772        3,536,120                -        4,699,892

Preferred Stock D                                           3,169,000                -                -        3,169,000
Preferred Stock                                                    10                -                -               10
Common Stock                                                    16,185          11,400           11,400        (a)16,185
APIC                                                       31,179,635       11,388,600     11,388,600  (a)    31,179,635
Treasury Stock                                               (279,928)               -                -         (279,928)
Retained deficit                                           (3,225,669)         116,996                  -     (3,108,673)
                  -------------                         --------------------------------  -------------

         TOTAL STOCKHOLDERS' EQUITY                        30,859,233       11,516,996       11,400,000       30,976,229
                                                         ------------      -----------      -----------     ------------

         TOTAL LIABILITIES AND
             STOCKHOLDERS' EQUITY                         $32,023,005      $15,053,116      $11,400,000      $35,676,121
                                                          ===========      ===========      ===========      ===========
(a) To eliminate Hartcourt Companies investment in Subsidiary.

                                                 See   accompanying   notes   to
                                                 proforma consolidated financial
                                                 statements.

                                                                 5
PRO FORMA FINANCIAL INFORMATION

                                           THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                            PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS AT DECEMBER 31, 1996
                                                             (UNAUDITED)

                                                                                    Pro Forma
                                                                                       Adjustments
                                                                                           Elimination
                                                            Historical         ECS             Entries       Pro Forma
SALES                                                    $    510,692      $13,171,895$               -      $13,682,587
                                                         ------------      ----------------------------      -----------

                       
COST OF SALES                                                 797,667       10,080,936                 -      10,878,603
                                        
GROSS PROFIT                                                 (286,975)       3,090,959                -        2,803,984

OPERATING EXPENSES
    Depreciation & amortization                               671,982          940,632                -        1,612,614
    General and administrative                                570,774        1,890,076                 -       2,460,850
                                                        -------------     ------------------------------    ------------

    TOTAL OPERATING EXPENSES                                1,242,756        2,830,708                 -       4,073,464
                                                         ------------     ------------------------------    ------------

LOSS FROM OPERATIONS                                       (1,529,731)         260,251                -       (1,269,480)

OTHER INCOME (EXPENSES)
    Interest income                                            10,100              143                -           10,243
    Relief of debt                                            384,735                -                -          384,735
    Interest expense, net                                    (443,042)        (143,398)                 -       (586,440)
                                                              -------------   ---------- ------------------ --------------

TOTAL OTHER INCOME (EXPENSES)                                 (48,207)        (143,255)                 -       (191,462)
                                                       --------------    ------------- ------------------ --------------

NET LOSS BEFORE INCOME TAXES                               (1,577,938)         116,996                -       (1,460,942)

    Taxes on earnings                                           1,800                  -                 -          1,800
                                                      -------------------------------------------------------------------

NET LOSS                                                  $(1,579,738)    $    116,996$               -      $(1,462,742)
                                                          ===========     =============================      ============

Weighted Average Shares Outstanding
    Including Common Stock Equivalents                      4,814,303                                          7,314,303

NET LOSS PER COMMON SHARE                            $           (.33)                                  $           (.20)
                                                     ================                                   ================
See   accompanying   notes   to
                                                 proforma consolidated financial
                                                 statements.

                                                                 6
PRO FORMA FINANCIAL INFORMATION

                                           THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                                PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 1997
                                                             (UNAUDITED)

                                                                                  Pro Forma
                                                                                      Adjustments
                                                                                        Elimination
                                                            Historical         ECS          Entries                  Pro Forma

         ASSETS

CURRENT ASSETS
Cash and cash equivalents                           $     144,790  $        6,602 $                  -     $      151,392
    Accounts receivable                                        38,651       1,832,722                -              1,871,373
    Inventories                                               128,591        1,813,839                  -           1,942,430
    Marketable Securities                                   5,874,966                -                -             5,874,966
    Employee Receivables  -                                                     17,350                -                17,350
    Prepaid consulting fees                                   900,000                -                  -             900,000
    Prepaid expenses                                          328,736           24,860                  -             353,596
    Note receivables-current                                  193,103                -                  -             193,103
    Amount due from shareholder                                74,985          263,319                  -             338,304
    Interest receivable                                        14,760                    -                    -        14,760
                                                      ------------------------------------------------------------------------

         TOTAL CURRENT ASSETS                               7,698,582        3,958,692                    -        11,657,274
                                                        -------------    ----------------------------------      ------------

Property, plant, and equipment, net                            31,992        1,640,031                  -           1,672,023
Investments                                                17,906,520                -                  -          17,906,520
Note receivables                                            1,346,278                -                -             1,346,278
Goodwill, net                                                       -        9,431,767                  -           9,431,767
Investment in subsidiary                                   11,516,996                -       11,516,996(a)                     -
Other assets                                                   51,951              983                    -            52,934
                                                      -----------------------------------------------------   ---------------

         TOTAL ASSETS                                     $38,552,319      $15,031,473      $11,516,996        $42,066,796
                                                         ===========       -----------      ===========        ===========
(a) To eliminate Hartcourt Companies investment in Subsidiary.

                                                 See   accompanying   notes   to
                                                 proforma consolidated financial
                                                 statements.

                                                                 1
PRO FORMA FINANCIAL INFORMATION

                                           THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                                PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 1997
                                                             (UNAUDITED)
                                                             (Continued)

                                                                                  Pro Forma
                                                                                      Adjustments
                                                                                        Elimination
                                                            Historical         ECS          Entries          Pro Forma

    LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
Notes payable - current                             $      51,586     $     82,564 $              -     $     134,150
    Accounts payable - trade                                  232,610        1,298,758                -         1,531,368
    Capital Lease Obligation                                        -          156,232                -           156,232
    Due to factor         -                                                    796,061                -          796,061
    Note payable - related party                                    -           60,000                -            60,000
    Accrued expenses                                            4,960          514,000                -           518,960
    Accrued Expenses - Mexico                                       -          270,855                  -         270 855
                                                   ------------------      ------------------------------   -------------

         TOTAL CURRENT LIABILITIES                            289,156        3,178,470                -         3,467,626

Capital Lease Obligation - Long Term                                -          472,818                -           472,818
Long-term debt                                                826,615           67,182                  -        893,797
                  -------------                          -------------------------------  -------------

         TOTAL LIABILITIES                                  1,115,771        3,718,470                -         4,834,241

Preferred Stock D                                           3,169,000                -                -         3,169,000
Preferred Stock A                                           4,000,000                -                -         4,000,000
Preferred Stock B                                           2,000,000                -                -         2,000,000
Preferred Stock                                                    10                -                -                10
Common Stock                                                   17,731           11,400           11,400(a)          17,731
APIC                                                       32,070,933       11,388,600       11,388,600(a)     32,070,933
Treasury Stock                                               (279,928)               -                -          (279,928)
Stock Subscription Receivables                               (276,000)               -                -          (276,000)
Retained deficit                                           (3,265,198)          (86,997)         116,996  (a)   (3,469,191)
                                                         -------------     -------------    -------------      -------------

         TOTAL STOCKHOLDERS' EQUITY                        37,436,548       11,313,003       11,516,996        37,232,555
                                                         ------------      -----------      -----------      ------------

         TOTAL LIABILITIES AND
             STOCKHOLDERS' EQUITY                         $38,552,319      $15,031,473      $11,516,996       $42,066,796
                                                          ===========      ===========      ===========       ===========
(a) To eliminate Hartcourt Companies investment in Subsidiary.

                                                 See   accompanying   notes   to
                                                 proforma consolidated financial
                                                 statements.

                                                                 2
PRO FORMA FINANCIAL INFORMATION

                                           THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                           PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS AT SEPTEMBER 30, 1997
                                                             (UNAUDITED)

                                                                                    Pro Forma
                                                                                       Adjustments
                                                                                           Elimination
                                                            Historical         ECS             Entries       Pro Forma
SALES                                                    $    316,706       $9,847,294$               -       $10,164,000
                                                         ------------       ---------------------------       -----------

                   
COST OF SALES                                                  213,727       7,242,591                 -       7,456,318
                                                        -------------     ----------------------------      ----------

GROSS PROFIT                                                   102,979       2,604,703                -        2,707,682

OPERATING EXPENSES
    Depreciation & amortization                                10,792          714,724                -           725,516
    General and administrative                                271,448        1,917,874                 -        2,189,322
                                                        -------------       ----------------------------       ----------

    TOTAL OPERATING EXPENSES                                  282,240        2,632,598                 -        2,914,838
                                                        -------------       ----------------------------       ----------

LOSS FROM OPERATIONS                                         (179,261)         (27,895)               -          (207,156)

OTHER INCOME (EXPENSES)
    Interest income                                            21,885                -                -            21,885
    Relief of debt        -                                         -                -                -
    Other income                                               25,556                 -                -           25,556
    Interest expense, net                                     (22,305)         (181,098)                 -       (203,403)
                                                          --------------     ------------------------------    -----------

TOTAL OTHER INCOME (EXPENSES)                                  25,136         (181,098)               -          (155,962)

NET LOSS BEFORE INCOME TAXES                                 (154,125)        (208,993)               -          (363,118)

    Taxes on earnings                                           2,400                -                 -            2,400
                                                      --------------------------------------------------   --------------

NET EARNINGS (LOSS)$                                         (156,525)      $ (208,993)$               -      $ (365,518)
                                                         =============        ========== =================      ==========

Weighted Average Shares Outstanding
    Including Common Stock Equivalents                     12,029,029                                          14,529,029

NET LOSS PER COMMON SHARE                             $         (.013)                                     $        (.025)
                                                      ===============                                      ==============
See   accompanying   notes   to
                                                 proforma consolidated financial
                                                 statements.

                                                                 3
THE HARTCOURT COMPANIES, INC.
                                      NOTES TO UNAUDITED CONSOLIDATED PRO FORMA
                                                    FINANCIAL DATA

A.       Organization:

         The accompanying unaudited condensed consolidated pro forma financial 

statements include the
         accounts of the Hartcourt Companies, Inc. (Hartcourt) a Utah 
corporation, Electronic Components
         and Systems, Inc. and Pruzin Technologies, Inc. (collectively ECS),
both Arizona corporations.  All
         significant intercompany payables and receivables have been eliminated
 in the consolidating
         process.

B.       Basis of Presentation:

         The unaudited pro forma condensed  consolidated  balance sheets present
         the financial position of Hartcourt and ECS as of December 31, 1996 and
         September 30, 1997, assuming that the merger had occurred as of January
         1, 1996. The unaudited  condensed  consolidated  pro forma statement of
         operations give the effect to the merger by  consolidating  the results
         of condensed  operations  of the  respective  companies  for the twelve
         months ended December 31, 1996 and the nine months ended  September 30,
         1997  assuming  that the proposed  merger had occurred as of January 1,
         1996.

         The unaudited  condensed  consolidated  pro forma financial  statements
         should be read in conjunction  with  Hartcourt's  and ECS's  historical
         consolidated and combined financial statements and the notes thereto as
         of  December  31,  1996 and  July 31,  1997,  respectively.  Pro  forma
         adjustments are based upon current  estimates,  historical  information
         and  certain   assumptions  that  management  deems  appropriate.   The
         unaudited  condensed  consolidated  pro forma  financial data presented
         herein are not  necessarily  indicative  of the results that would have
         been reported had such events actually occurred on January 1, 1996, nor
         are they necessarily  indicative of the future results of Hartcourt and
         ECS.

                                                          7