**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**Form 10-Q**





[X]
            
            **QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934.**
              **For
                the quarterly period ended August 31,
                2006**




[
                 ]
            
            **TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934.**





**Commission
      file number: 001-12671**




**The
      Hartcourt Companies, Inc.**


*(Exact
      name of registrant as specified in its charter)*




**Utah**
            
            **87-0400541***(State
                or other jurisdiction of*
            
            *(IRS
                Employer**incorporation
                or organization)*
            
            *Identification
                No.)*





**306
                Yong Teng Plaza, 1065 Wuzhong Road****Shanghai,
                China**
            
            **201103***(Address
                of principal executive offices)*
            
            *(Zip
                Code)*




**(011)
      (86 21) 5152 1577**


*(Registrant’s
      telephone number including area code)*




Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
      during the preceding 12 months (or for such shorter period that the
      registrant was required to file such reports), and (2) has been subject to
      such filing requirements for the past 90 days. Yes x No o




Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer or a non-accelerated files. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (check
      one).





Large
                accelerated filer [  ]
            Accelerated
                filer [  ]
            Non-accelerated
                filerx




Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Change Act. Yes [  ]    No x


The
      number of outstanding shares of the registrant’s Common Stock, $0.001 par value,
      was 195,276,535 as of September 20, 2006.











**TABLE
      OF CONTENTS**





**PART
                I: FINANCIAL INFORMATION**Item 1.
            Financial
                Statements
            3Unaudited
                Consolidated Balance Sheets
            3Unaudited
                Consolidated Statements of Operations
            4Unaudited
                Consolidated Statements of Cash Flows
            5Notes
                to Unaudited Consolidated Financial Statements
            6Item 2.
            Management’s
                Discussion and Analysis of Financial Condition and Results of Operations
            16Item 3.
            Quantitative
                and Qualitative Disclosures About Market Risk
            22Item 4.
            Controls
                and Procedures
            22**PART
                II: OTHER INFORMATION**Item 6.
            Exhibits
            23Signatures
            23EXHIBIT
                31.1EXHIBIT
                31.2EXHIBIT
                32.1EXHIBIT
                32.2









2




**PART
      I. FINANCIAL INFORMATION**




Item
      1.  Financial
      Statements




**THE
      HARTCOURT COMPANIES, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEET (Unaudited)**


**August
      31, 2006**


**ASSET****CURRENT
                ASSETS**Cash
                and cash equivalents
            
            $
            321,181Accounts
                receivable, net
            
            
            1,629,570Inventories,
                net
            
            
            1,356,984Assets
                pending for sale
            
            
            300,000Advances
                to suppliers
            
            
            1,640,840Prepaid
                expenses and other assets
            
            
            28,886Other
                assets
            
            
            157,393**TOTAL
                CURRENT ASSETS**
            
            
            **5,434,854****PROPERTY
                & EQUIPMENT - NET**
            
            
            102,107**INVESTMENTS**
            
            
            62,826**INTANGIBLE
                ASSET**Goodwill
            
            
            1,911,466**TOTAL
                ASSETS**
            
            **$**
            **7,511,253****LIABILITIES
                AND SHAREHOLDERS' EQUITY****CURRENT
                LIABILITIES**Accounts
                payable
            
            $
            546,272Loan
                from employees
            
            
            1,502,970Bank
                loans
            
            
            251,304Due
                to directors
            
            
            62,211Accrued
                expenses and other current liabilities
            
            
            1,304,090**TOTAL
                CURRENT LIABILITIES**
            
            
            **3,666,847****MINORITY
                INTERESTS**
            
            
            931,616**SHAREHOLDERS'
                EQUITY****Preferred
                Stock:**Class
                A preferred stock, 10,000,000 shares authorized,none
                issued and outstanding
            
            
            -**Common
                stock**:$0.001
                par value, 424,999,000authorized,
                195,276,535 common sharesissued
                and outstanding
            
            
            195,278Additional
                paid in capital
            
            
            70,524,504Treasury
                stock, at cost, 48,728 shares
            
            
            (48,728
            )Other
                comprehensive income
            
            
            77,850Accumulated
                deficit
            
            
            (67,836,114
            )**TOTAL
                SHAREHOLDERS' EQUITY**
            
            
            **2,912,790****TOTAL
                LIABILITIES AND SHAREHOLDERS' EQUITY**
            
            **$**
            **7,511,253**




The
      accompanying notes form an integral part of the consolidated financial
      statements.


3


**THE
      HARTCOURT COMPANIES, INC. AND SUBSIDIARIES**




**CONSOLIDATED
      STATEMENTS OF OPERATIONS (Unaudited)**


**For
                  the Three Month Periods****Ended
                  August 31****2006**
              
              **2005**Net
                  sales
              
              $
              12,450,282
              
              $
              10,768,764Cost
                  of sales
              
              
              11,879,434
              
              
              10,395,922Gross
                  profit
              
              
              570,848
              
              
              372,842Operating
                  expenses:Selling,
                  general and administrative
              
              
              462,449
              
              
              469,601Depreciation
                  and amortization
              
              
              13,059
              
              
              18,692Total
                  operating expenses
              
              
              475,508
              
              
              488,293Income(loss)
                  before other income/(expenses),minority
                  interest & income tax
              
              
              95,340
              
              
              (115,451
              )Other
                  income/(expenses):Interest
                  expense
              
              
              (55,115
              )
              
              (38,856
              )Interest
                  income
              
              
              26,037
              
              
              30,736Other
              
              
              (363
              )
              
              353,383Total
                  other income/(expenses)
              
              
              (29,441
              )
              
              345,263Income
                  before minority interest
              
              
              65,899
              
              
              229,812Less:
                  Minority Interest
              
              
              (192,639
              )
              
              (168,514
              )Income
                  (loss) before income tax
              
              
              (126,740
              )
              
              61,298Income
                  tax
              
              
              -
              
              
              29,764NET
                  INCOME(LOSS)
              
              $
              (126,740
              )
              $
              31,534OTHER
                  COMPREHENSIVE INCOMEForeign
                  currency translation income
              
              
              163,258COMPREHENSIVE
                  INCOME
              
              $
              36,518
              
              $
              31,534BASIC
                  AND DILUTED EARNINGS/(LOSSES)PER
                  COMMON SHARE:Earnings/(losses)
                  per share
              
              $
              (0.001
              )
              $
              0.000Basic
                  and diluted weighted average number of shares
              
              
              195,144,796
              
              
              191,674,122




Weighted
        average number of shares for dilutive securities has not been calculated
        because
        the effect of dilutive securities is anti-dilutive.




The
      accompanying notes form an integral part of these consolidated financial
      statements.  4


**THE
      HARTCOURT COMPANIES, INC. AND SUBSIDIARIES**




**CONSOLIDATED
      STATEMENTS OF CASH FLOWS (Unaudited)**




**For
                  the Three Month Periods****Ended
                  August 31****2006**
              
              **2005****CASH
                  FLOWS FROM OPERATING ACTIVITIES:**Net
                  income (loss)
              
              $
              (126,740
              )
              $
              31,534Adjustments
                  to reconcile net income (loss) tonet
                  cash used in operating activities:Gain
                  on disposal of property and equipment
              
              
              -
              
              
              (311,495
              )Depreciation
              
              
              13,059
              
              
              18,692Minority
                  interest
              
              
              192,639
              
              
              168,514Stock
                  issued for services and compensations
              
              
              15,875
              
              
              10,875Stock
                  option costs
              
              
              106,625
              
              
              -Changes
                  in operating assets and liabilities:Accounts
                  receivable
              
              
              74,070
              
              
              (77,089
              )Advances
                  to suppliers
              
              
              (927,219
              )
              
              722,873Inventories
              
              
              374,589
              
              
              (611,476
              )Prepaid
                  expenses and other receivables
              
              
              (126,914
              )
              
              207,907Accounts
                  payable
              
              
              (11,869
              )
              
              (201,742
              )Accrued
                  expenses and other current liabilities
              
              
              15,499
              
              
              (826,509
              )Advances
                  from customers
              
              
              -
              
              
              (49,411
              )**NET
                  CASH USED IN OPERATING ACTIVITIES**
              
              
              (400,386
              )
              
              (917,327
              )**CASH
                  FLOWS FROM INVESTING ACTIVITIES:**Purchase
                  of property and equipment
              
              
              -
              
              
              (14,603
              )Proceeds
                  on disposal of property and equipment
              
              
              -
              
              
              520,814Proceeds
                  on notes receivable, net
              
              $
              -
              
              $
              362,845**NET
                  CASH PROVIDED BY NVESTING ACTIVITIES**
              
              $
              -
              
              $
              869,056**CASH
                  FLOWS FROM FINANCING ACTIVITIES**Proceeds
                  from (payments to) related parties-net
              
              
              12,342
              
              
              (157,599
              )Proceeds
                  /(repayment) on loans and lines of credit-net
              
              
              257,551
              
              
              (37,456
              )**NET
                  CASH PROVIDED BY (USED IN)****FINANCING****ACTIVITIES**
              
              
              269,893
              
              
              (195,055
              )Foreign
                  currency translation
              
              
              51,002
              
              
              9,876**NET
                  DECREASE IN CASH & CASH EQUIVALENTS**
              
              
              (79,491
              )
              
              (233,450
              )**CASH
                  AND CASH EQUIVALENTS -****BEGINNING
                  OF PERIOD**
              
              
              400,672
              
              
              1,369,914**CASH
                  AND CASH EQUIVALENTS - END OF PERIOD**
              
              $
              321,181
              
              $
              1,136,464


The
        Company prepares its statements of cash flows using the indirect method as
        defined under the Financial Accounting Standard No. 95
 **SUPPLEMENTAL
                    DISCLOSURE OF CASH FLOWS**SUPPLEMENTAL
                    DISCLOSURE OF CASHFLOWSCash
                    paid for interest
                
                $
                6,693
                
                $
                4,584Cash
                    paid for income taxes, net of refund received
                
                $
                -
                
                $
                67,895




The
        accompanying notes form an integral part of the consolidated financial
        statements.




5


**THE
      HARTCOURT COMPANIES, INC. AND SUBSIDIARIES**




**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS**


**AUGUST
      31, 2006 AND 2005**








**NOTE
      1** **GENERAL**





The
      Hartcourt Companies, Inc. ("Hartcourt" or the "Company"), was incorporated
      in
      Utah in 1983. We
      are a distributor of internationally well known brand named IT hardware products
      and related services in the People’s Republic of China.




As
      of
      August 31, 2006, the Company owns 100% of three (3) British Virgin Island
      (“BVI”) incorporated companies: (1) Hartcourt China Inc., (2) Hartcourt Capital
      Inc., and (3) AI-Asia Inc. All three of these BVI subsidiaries are holding
      companies for assets located in China.




As
      of
      August 31, 2006, the Company owns a 51% equity interest in Shanghai Huaqing
      Corporation Development Ltd. Huaqing is located in Shanghai, China. As the
      Chinese laws may prohibit foreign companies directly involved in the
      distribution industry, Hartcourt, through its employees as nominees, holds
      the
      equity interest in Huaqing.




As
      of
      August 31, 2006, Hartcourt Capital Inc. owns 90% equity interest in Control
      Tech
      Electronics (Shanghai) Co., Ltd. Control Tech is located in Shanghai,
      China.




As
      of
      August 31, 2006, Hartcourt Capital Inc. owns 100% of Hartcourt Hi-Tech
      Investment (Shanghai) Inc. Hartcourt Hi-Tech Investment (Shanghai) Inc., through
      its employees as nominees, owns 100% of Shanghai Jiumeng Information Technology
      Co., Ltd. These two companies are located in Shanghai, China.




As
      of
      August 31, 2006, AI-Asia, Inc., the third holding company, owns 100% equity
      of
      AI-Asia (Shanghai) Information Technology, Inc of China (“AI”), located in
      Shanghai, China.




**NOTE
      2** **BASIS
      OF PRESENTATION**





The
      accompanying unaudited consolidated financial statements have been prepared
      in
      accordance with the rules and regulations of the Securities and Exchange
      Commission for the presentation of financial information, but do not include
      all
      the information and footnotes required by generally accepted accounting
      principles for complete financial statements. The audited consolidated financial
      statements for the fiscal year ended May 31, 2006 were filed on September 15,
      2006 with the Securities and Exchange Commission and are hereby referenced.
      In
      the opinion of management, all adjustments considered necessary for a fair
      presentation have been included. Operating results for the three-month period
      ended August 31, 2006 are not necessarily indicative of the results that may
      be
      expected for the year ended May 31, 2007.





The
      accounting policies followed by us are set forth in Note A to our financial
      statements as stated in our report on Form 10-K for the fiscal year ended May
      31, 2006, as filed on September 15, 2005 and incorporated into this Form 10-Q
      by
      reference.




6




**Principles
      of Consolidation**





Our
      financial statements for the three months ended August 31, 2006 are consolidated
      to include the accounts of The Hartcourt Companies Inc., our wholly owned
      subsidiaries Hartcourt China Inc., Hartcourt Capital Inc., Hartcourt Hi-Tech
      Investment (Shanghai) Inc., Ai-Asia Inc and Ai-Asia Information Technology
      Inc.
      Our consolidated financial statements also include indirectly, our 100% owned
      subsidiary, Shanghai Jiumeng Information Service Co., Ltd. And our 51%
      indirectly owned Shanghai HuaQing Corporate Development Co., Ltd. All
      significant inter-company accounts and transactions have been eliminated in
      consolidation.





Due
      to
      the Chinese government’s restrictions of direct foreign investment in
      Chinese-owned sales and distribution companies, through Shanghai Jiumeng
      Information Service Co., Ltd., we own 51% of the equity of Shanghai Huaqing,
      our
      main operating subsidiary for the Samsung distribution business. Shanghai
      Jiumeng is 90% owned by Mr. Victor Zhou, the Chief Executive Officer of the
      Company, who is a citizen of the People's Republic of China(“PRC”). Mr. Victor
      Zhou serves as our nominee. We have engaged a PRC law firm to study the latest
      effective regulations and the steps we could take to apply for the relevant
      business license in view of the relaxed foreign equity ownership rules in the
      wholesale sector in regard to our Samsung distribution business.




**Minority
      interest**





The
      amount represents the minority shareholders' interest in Huaqing, a 51%
      subsidiary of the Company.





**NOTE
      3** **ACCOUNTS
      RECEIVABLE**




Accounts
      receivable as of August 31, 2006 consisted of the following:





Accounts
                receivable
            
            $
            1,699,928Less:
                allowance for doubtful accounts
            
            
            (70,358
            )$
            1,629,570




**NOTE
      4** **INVENTORIES**




Inventories
      as of August 31, 2006 consisted of the following:


AmountMonitors
              
              $
              1,118,196Laptops
              
              
              37,540Others
              
              
              208,272Less:
                  provisions for obsolete inventories
              
              
              (7,024
              )Net
              
              $
              1,356,984






7




**NOTE
      5** **ADVANCES
      TO SUPPLIERS**




The
      Company made prepayments to Samsung to purchase inventory as required by
      Samsung. This amount represents the advances paid by Huaqing, a 51% owned
      subsidiary to Samsung of $1,640,840 at August 31, 2006.







**NOTE
      6** **PROPERTIES
      AND EOUIPMENT**




The
      Company’s property and equipment as of August 31, 2006 are summarized as
      follows:




AmountOffice
                  equipment and computers
              
              $
              50,676Vehicle
              
              
              219,765270,441Less:
                  accumulated depreciation
              
              
              (168,334
              )Property
                  and equipment, net
              
              $
              102,107






**NOTE
      7** **LOAN
      FROM EMPLOYEES**




Huaqing,
      a 51% owned subsidiary of the Company, issued short-term bond to its employees
      to raise additional working capital. The bond is 8% interest bearing and payable
      at December 31, 2006.






**NOTE
      8** **ACCRUED
      EXPENSES AND OTHER CURRENT LIABILITIES**




Accrued
      expenses and other current liabilities as of August 31, 2006 are summarized
      as
      follows:




AmountAccrued
                  directors’ compensations
              
              $
              20,375Accrued
                  interest
              
              
              242,062Accrued
                  professional fees
              
              
              112,746Accrued
                  employees compensations
              
              
              85,033Accrued
                  tax payable
              
              
              202,669Other
                  current liabilities
              
              
              641,208Total
              
              $
              1,304,093


8




**NOTE
      9** **EARNINGS/(LOSSES)
      PER SHARE**




Three
                  Months
                Ended
                August
                  31, 2006
              
              Three
                  Months
                Ended
                August
                  31, 2005Net
                  income
              
              $
              (126,740
              )
              $
              31,534Effects
                  of dilutive securities
              
              
              -
              
              
              -Weighted
                  average shares outstanding
              
              
              195,144,796
              
              
              191,674,122Basic
                  and dilutive earnings/(losses) per share
              
              $
              (0.001
              )
              $
              0.000
  As
      of
      August 31, 2006, we had 23,600,000 options authorized and outstanding, each
      exercisable for one share of our common stock. These instruments were not
      included in the computation of diluted earnings per share for any of the periods
      presented, due to their anti-dilutive effects.







**NOTE
      10** **EQUITY
      TRANSACTIONS DURING THE PERIOD**





On
      June
      20, 2006, we issued 200,000 shares of our common stock valued at $6,000 in
      lieu
      of cash payment for consulting services, which were approximately equal to
      the
      fair market value of the stock at issue date.





On
      July
      5, 2006, we issued 232,000 shares of our common stock valued at $9,875 to all
      of
      our independent directors in lieu of cash compensation for their services,
      which
      were approximately equal to the fair market value of the stock at issue
      date.





**Stock
      Option Plan**




The
      Company adopted SFAS No. 123 (Revised 2004), Share Based Payment (“SFAS
      No. 123R”), under the modified-prospective transition method on June 1,
      2006. SFAS No. 123R requires companies to measure and recognize the cost of
      employee services received in exchange for an award of equity instruments based
      on the grant-date fair value. Share-based compensation recognized under the
      modified-prospective transition method of SFAS No. 123R includes
      share-based compensation based on the grant-date fair value determined in
      accordance with the original provisions of SFAS No. 123, Accounting for
      Stock-Based Compensation, for all share-based payments granted prior to and
      not
      yet vested as of June 1, 2006 and share-based compensation based on the
      grant-date fair-value determined in accordance with SFAS No. 123R for all
      share-based payments granted after June 1, 2006. SFAS No. 123R eliminates
      the ability to account for the award of these instruments under the intrinsic
      value method proscribed by Accounting Principles Board (“APB”) Opinion
      No. 25, Accounting for Stock Issued to Employees, and allowed under the
      original provisions of SFAS No. 123. Prior to the adoption of SFAS
      No. 123R, the Company accounted for our stock option plans using the
      intrinsic value method in accordance with the provisions of APB Opinion
      No. 25 and related interpretations.





Primarily
      as a result of adopting SFAS No. 123R, the Company recognized $106,625 in
      share-based compensation expense for the three months ended August 31, 2006.
      The
      impact of this share-based compensation expense on the Company’s basic and
      diluted earnings per share was ($0.001) per share. The fair value of our stock
      options was estimated using the Black-Scholes option pricing model.




9





For
      periods presented prior to the adoption of SFAS No. 123R, pro forma
      information regarding net income and earnings per share as required by SFAS
      No. 123R has been determined as if we had accounted for our employee stock
      options under the original provisions of SFAS No. 123. The fair value of
      these options was estimated using the Black-Scholes option pricing model. For
      purposes of pro forma disclosure, the estimated fair value of the options is
      amortized to expense over the option’s vesting period.




In
      April
      1995, the Company adopted a stock option plan (the “April 1995 Plan”) to attract
      and retain qualified persons for positions of substantial responsibility as
      officers, directors, consultants, legal counsel, and other positions of
      significance to the Company, the April 1995 Plan provided for the issuance
      of
      both Incentive Stock Options and Non-Qualified Stock Options. The April 1995
      Plan, was administered by the Board of Directors and provided for the issuance
      of a maximum of 2,000,000 options to purchase shares of common stock at the
      market price thereof on the date of grant. Such options were generally
      exercisable over a 10-year period from the date of grant. Each option lapsed
      90
      days after the optionee terminated his continuous activity with the Company,
      except that if such continuous activity with the Company terminates by reason
      of
      death, such option of the deceased optionee was exercisable within one year
      after the death of such optionee. Options granted under the Plan were restricted
      as to sale or transfer. All options were granted at not less than fair value
      at
      the date of grant and had terms of 10 years. The April 1995 Plan expired in
      March 2005 pursuant to its terms. As of August 31, 2006, 300,000 options
      remained outstanding under the April 1995 Plan.




In
      2005,
      The board of directors adopted a new stock option plan (the “2005 Plan”) to
      replace the April 1995 Plan in order to attract and retain qualified persons
      for
      positions of substantial responsibility as officers, directors, consultants,
      legal counsel, and other positions of significance to the Company. The 2005
      Plan
      provides for the grant of stock options and stock appreciation rights, and
      the
      issuance of restricted stock, stock units, bonus stock, dividend equivalents,
      other stock-related awards and performance awards that may be settled in cash,
      stock, or other property. The total number of shares of our common stock that
      may be subject to awards under the 2005 Plan is equal to 35,000,000 shares,
      plus
      (i) the number of shares with respect to which awards previously granted under
      the 2005 Plan terminate without the issuance of the shares or where the shares
      are forfeited or repurchased; (ii) with respect to awards granted under the
      2005
      Plan, the number of shares which are not issued as a result of the award being
      settled for cash or otherwise not issued in connection with the exercise or
      payment of the award and (iii) the number of shares that are surrendered or
      withheld in payment of the exercise price of any award or any tax withholding
      requirements in connection with any award granted under the 2005 Plan. Unless
      earlier terminated by our Board of Directors, the 2005 Plan will terminate
      on
      the earlier of (1) ten years after the later of (x) its adoption by our Board
      of
      Directors, and (y) the approval of an increase in the number of shares reserved
      under the 2005 plan by our Board of Directors (contingent upon such increase
      being approved by our shareholders) and (2) such time as no shares of our common
      stock remain available for issuance under the 2005 Plan and we have no further
      rights or obligations with respect to outstanding awards under the 2005 plan.
      Options granted under the 2005 Plan are restricted as to sale or
      transfer.




The
      2005
      stock option plan was approved on Nov 23, 2005 during the annual shareholders
      meeting.




On
      June
      1, 2006, the Company granted Billy Wang, Chairman of the Board, an option to
      purchase 5,000,000 shares of our common stock at excise price of US$0.04. The
      option is to be vested on Sept 28, 2007 and exercisable within 5 years time
      after vesting.




10




On
      May
      31, 2006, the Board of Directors of the Company appointed Mr. Victor Zhou to
      be
      the acting Chief Executive Officer, effective on June 1, 2006. Mr. Victor Zhou’s
      employment agreement was signed on June 1, 2006. The compensation includes
      a
      monthly salary of $8,333. In addition, Mr. Victor Zhou was granted an option
      to
      purchase 10,000,000 shares of our common stock with excise price of $0.04.
      The
      stock option vesting schedule is as following:




·
              Option
                  to purchase 6,000,000 shares of our common stock to be vested with
                  three
                  installments of 2,000,000 each upon each successful new business
                  acquisition of the Company.
  ·
              Option
                  to purchase 2,000,000 shares of our common stock to be vested upon
                  each
                  full profitable year.


During
      the three months period ended Aug 31, 2006 when Mr. Victor Zhou serving as
      the
      acting Chief Executive Officer, none of the above options was
      vested.




On
      June
      1, 2006, the Company granted Yungeng Hu, CFO & President of the Company, an
      option to purchase total 11,000,000 shares of our common stock at excise price
      of US$0.04 according to the following vesting schedule and based on our employee
      compensation plan.




n
            7,500,000
                stock options vested pro rata over 2 years of theemployment contract period.




n
            2,000,000
                stock options vested upon each successful new business acquisition
                of the
                Company.




n
            1,500,000
                stock options vested upon each full profitable
                year




On
      September 1, 2006, the Company granted Victor Zhou, CEO of the Company, an
      option to purchase total 11,000,000 shares of our common stock at excise price
      of US$0.05 according to the following vesting schedule and based on our employee
      compensation plan. These options replace the options that were granted on June
      1, 2006 which compensates Mr. Zhou for his serves as Acting Chief Executive
      Officer.




n
            7,500,000
                stock options vested pro rata over 2 years of the employment contract
                period.




n
            2,000,000
                stock options vested upon each successful new business acquisition
                of the
                Company.




n
            1,500,000
                stock options vested upon each full profitable
                year.




On
      August
      23, 2006, the Company granted Geoffrey Wei and Wilson Li, independent directors
      of the Company each an option to purchase 1,000,000 shares of our common stock
      at excise price of US$0.05. The option is to be vested on August 23, 2007 and
      exercisable within 5 years time after vesting.




The
      stock
      option granted to ex-CEO Carrie Hartwick to purchase total 15,000,000 shares
      of
      our common stock was terminated after 90 days of her departure on June 1, 2006
      from the company. The stock option granted to ex-Vice President Zhou Jing Jing
      to purchase 1,000,000 shares of our common stock was terminated after 90 days
      of
      his departure on June 9, 2006 from the Company.




11




The
      following table summarizes the activity of stock options:





WeightedAverage
            
            AggregateNumber
                of
            
            Exercise
            
            IntrinsicShares
            
            Price
            
            ValueShares
                under option at May 31, 2006
            
            24,600,000
            
            
            0.127
            
            $0Granted
            
            18,000,000
            
            
            0.041Exercised
            
            -
            
            
            -Expired
            
            3,000,000
            
            
            0.300Canceled
            
            16,000,000
            
            
            0.091Shares
                under option at August 31, 2006
            
            23,600,000
            
            
            0.064
            
            $340,000





Following
      is a summary of the status of options outstanding at August 31, 2006:




Range
                of
              Exercise
                Prices
            
            Total
              Options
              Outstanding
            
            Weighted
              Average
              Remaining
                Life
              (Years)
            
            Total
              Weighted
              Average
              Exercise
                Price
            
            Options
              Exercisable
            
            Weighted
              Average
              Exercise
                Price$0.04
            
            3,500,000
            
            N.A
            
            $0.04
            
            -
            
            $0.04$0.04
                - $0.05
            
            14,500,000
            
            6.16
            
            $0.041
            
            -
            
            $0.041$0.09
            
            5,300,000
            
            4.57
            
            $0.09
            
            5,300,000
            
            $0.09$1.00
            
            300,000
            
            1.79
            
            $1.00
            
            300,000
            
            $1.00$0.04-$1.00
            
            23,600,000
            
            5.67
            
            $0.06
            
            5,600,000
            
            $0.06





No
      options were vested during the three months ended August 31, 2006.





The
      assumptions used in calculating the fair value of options granted during the
      three months ended August 31, 2006 using the Black-Scholes option- pricing
      model
      are as follows:




Risk-free
                interest rate
            4.92%Expected
                life of the options
            5.00
                years after vestingExpected
                volatility
            57.93%Expected
                dividend yield
            0




**Warrants**




There
      are
      no warrants outstanding as of August 31 2006.




12




**NOTE
      11** **RECENT
      PRONOUNCEMENTS**




In
      February 2006, FASB issued SFAS No. 155, "Accounting for Certain Hybrid
      Financial Instruments". SFAS No. 155 amends SFAS No 133, "Accounting for
      Derivative Instruments and Hedging Activities", and SFAF No. 140, "Accounting
      for Transfers and Servicing of Financial Assets and Extinguishments of
      Liabilities". SFAS No. 155, permits fair value remeasurement for any hybrid
      financial instrument that contains an embedded derivative that otherwise would
      require bifurcation, clarifies which interest-only strips and principal-only
      strips are not subject to the requirements of SFAS No. 133, establishes a
      requirement to evaluate interest in securitized financial assets to identify
      interests that are freestanding derivatives or that are hybrid financial
      instruments that contain an embedded derivative requiring bifurcation, clarifies
      that concentrations of credit risk in the form of subordination are not embedded
      derivatives, and amends SFAS No. 140 to eliminate the prohibition on the
      qualifying special-purpose entity from holding a derivative financial instrument
      that pertains to a beneficial interest other than another derivative financial
      instrument. This statement is effective for all financial instruments acquired
      or issued after the beginning of the Company's first fiscal year that begins
      after September 15, 2006.




In
      March
      2006, FASB issued SFAS 156 "Accounting for Servicing of Financial Assets" this
      Statement amends FASB Statement No. 140, ACCOUNTING FOR TRANSFERS AND SERVICING
      OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES, with respect to the
      accounting for separately recognized servicing assets and servicing
      liabilities.




This
      Statement:




1.  Requires
      an entity to recognize a servicing asset or servicing liability each time it
      undertakes an obligation to service a financial asset by entering into a
      servicing contract.




2.  Requires
      all separately recognized servicing assets and servicing liabilities to be
      initially measured at fair value, if practicable.




3.  Permits
      an entity to choose "Amortization method" or "Fair value measurement method"
      for
      each class of separately recognized servicing assets and servicing
      liabilities.




4.  At
      its
      initial adoption, permits a one-time reclassification of available-for-sale
      securities to trading securities by entities with recognized servicing rights,
      without calling into question the treatment of other available-for-sale
      securities under Statement 115, provided that the available-for-sale securities
      are identified in some manner as offsetting the entity's exposure to changes
      in
      fair value of servicing assets or servicing liabilities that a servicer elects
      to subsequently measure at fair value.




5.  Requires
      separate presentation of servicing assets and servicing liabilities subsequently
      measured at fair value in the statement of financial position and additional
      disclosures for all separately recognized servicing assets and servicing
      liabilities.




This
      Statement is effective as of the beginning of the Company's first fiscal year
      that begins after September 15, 2006. Management believes that this statement
      will not have a significant impact on the financial statements.




In
      September 2006, FASB issued SFAS 157 ‘Fair Value Measurements’. This Statement
      defines fair value, establishes a framework for measuring fair value in
      generally accepted accounting principles (GAAP), and expands disclosures about
      fair value measurements. This Statement applies under other accounting
      pronouncements that require or permit fair value measurements, the Board having
      previously concluded in those accounting pronouncements that fair value is
      the
      relevant measurement attribute. Accordingly, this Statement does not require
      any
      new fair value measurements. However, for some entities, the application of
      this
      Statement will change current practice. This Statement is effective for
      financial statements issued for fiscal years beginning after November 15, 2007,
      and interim periods within those fiscal years. Management is currently
      evaluating the effect of this pronouncement on financial
      statements.






13




**NOTE
      12** **GOING
      CONCERN**





As
      shown
      in the accompanying consolidated financial statements, the Company has suffered
      recurring losses from operations and has an accumulated deficit of  $67,836,114  as
      of
      August 31, 2006. These factors, among others, raise substantial doubt about
      the
      Company’s ability to continue as a going concern. The Company’s need for working
      capital is a key issue for management and necessary for the Company to meet
      its
      goals and objectives. The Company continues to pursue additional capitalization
      opportunities. There is no assurance, however, that the Company will be
      successful in meeting its goals and objectives in the future.





In
      view
      of the matters described in the preceding paragraph, recoverability of a major
      portion of the recorded asset amounts shown in the accompanying balance sheet
      is
      dependent upon continued operations of the Company, which in turn is dependent
      upon the Company’s ability to raise additional capital, and to succeed in its
      future operations. The financial statements do not include any adjustments
      relating to the recoverability and classification of recorded asset amounts
      or
      amounts and classification of liabilities that might be necessary should the
      Company be unable to continue as a going concern.





The
      Company has taken certain restructuring steps to provide the necessary capital
      to continue its operations. These steps included: 1) acquire profitable
      operations through issuance of equity instruments, 2) disposal of unprofitable
      or unfavourable return-on-investment operations, 3) focusing on creating
      shareholder value by seeking higher margin business, initially in the Chinese
      vocational training marketplace. The Company has planned to continue actively
      seeking additional funding and restructure the acquired subsidiaries to increase
      profits and minimize the liabilities.







**NOTE
      13** **RELATED
      PARTY TRANSACTIONS**




During
      the quarter ended August 31, 2006, Hartcourt issued 232,000 shares of our common
      stock valued at $9,875 to its independent directors in lieu of cash compensation
      for services rendered, which approximately equaled the fair market value of
      the
      stock at issue date.






**NOTE
      14** **COMMITMENTS
      AND CONTINGENCIES**




A)
      Employment Agreements




The
      current senior management consists of a Chief Executive Officer (“CEO”) and
      Chief Financial Officer & President (“CFO & President”). Each of the
      Company’s executive employment agreements stipulate that senior executives, CEO
      and CFO & President of the Company, can be terminated without causes upon
      written notice of 90 days or less.




On
      May
      31, 2006, the Board of Directors of the Company appointed Mr. Victor Zhou to
      be
      the acting Chief Executive Officer, effective on June 1, 2006. The compensation
      includes a monthly salary of $8,333. In addition, Mr. Victor Zhou was granted
      an
      option to purchase 10,000,000 shares of our common stock with excise price
      of
      $0.04. The stock option vesting schedule is as following:


·
              Option
                  to purchase 6,000,000 shares of our common stock to be vested with
                  three
                  installments of 2,000,000 each upon each successful new business
                  acquisition of the Company.
  ·
              Option
                  to purchase 2,000,000 shares of our common stock to be vested upon
                  each
                  full profitable year.




14




During
      the three months period ended Aug 31, 2006 when Mr. Victor Zhou serving as
      the
      acting Chief Executive Officer, none of the above options was
      vested.




On
      September 1, 2006, the Board of Directors of the Company promoted Mr. Victor
      Zhou to be the Chief Executive Officer. The compensation includes an annual
      base
      salary of $100,000, payable by equal monthly installment of US$8,333 cash.
      In
      addition, Mr. Victor Zhou was granted an option to purchase 11,000,000 shares
      of
      our common stock with excise price of $0.05 according to the following vesting
      schedule and subject to number of shares available for option approved by
      shareholders. These options replace the options that were granted on June 1,
      2006 which compensates Mr. Zhou for his serves as Acting Chief Executive
      Officer.




·
              Option
                  to purchase 7,500,000 shares of our common stock to be vested pro
                  rata
                  over 2 years of the employment contract
                  period.
  ·
              Option
                  to purchase 2,000,000 shares of our common stock to be vested upon
                  each
                  successful new business acquisition of the
                  Company.
  ·
              Option
                  to purchase 1,500,000 shares of our common stock to be vested upon
                  each
                  full profitable year.


On
      May
      31, 2006, the Board of Directors of the Company appointed Mr. Yungeng Hu to
      be
      the President and the Chief Financial Officer, effective on June 1, 2006. The
      compensation includes an annual base salary of $150,000, payable by equal
      monthly installment of US$12,500 cash. In addition, Mr. Yungeng Hu was granted
      an option to purchase 11,000,000 shares of our common stock with excise price of
      $0.04 according to the following vesting schedule and subject to number of
      shares available for option approved by shareholders.




·
              Option
                  to purchase 7,500,000 shares of our common stock to be vested pro
                  rata
                  over 2 years of the employment contract
                  period.
  ·
              Option
                  to purchase 2,000,000 shares of our common stock to be vested upon
                  each
                  successful new business acquisition of the
                  Company.
  ·
              Option
                  to purchase 1,500,000 shares of our common stock to be vested upon
                  each
                  full profitable year


B)
            Operating
                Leases




The
      Company leases its offices and facilities under long-term, non-cancelable lease
      agreements expiring at various dates through August 4, 2007. The non-cancelable
      operating lease agreements provide that the Company pays certain operating
      expenses applicable to the leased premises according to the Chinese Law. Rental
      expense for the quarter ended August 31, 2006 and 2005 were $24,669 and $47,935,
      respectively.




The
      future minimum lease payments for the next nine month period ending May 31,
      2007
      will be $45,933 and for the two month period ending July 30, 2007 will be
      $16,446.




C)
            Other
                Obligations




None




**NOTE
      15** **RECLASSIFICATION**




Certain
      prior period amounts have been reclassified to conform to the quarter ended
      August 31, 2006 presentation.






15




**Item 2.** ***Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations***




**Forward-looking
      Statements**





*This
      report contains forward-looking statements within the meaning of
      Section 27A of the Securities Act of 1933, as amended, and Section 21E
      of the Securities Exchange Act of 1934, as amended. Such statements are based
      upon current expectations that involve risks and uncertainties. Any statements
      contained herein that are not statements of historical fact may be deemed to
      be
      forward-looking statements. For example, the words
“believes,” "anticipates,” “plans,” “expects,” “intends” and similar
      expressions are intended to identify forward-looking statements. Our actual
      results and the timing of certain events may differ significantly from the
      results discussed in the forward-looking statements. Factors that might cause
      such a discrepancy include, but are not limited to, those discussed in “Risk
      Factors Affecting Future Results” and “Liquidity and Capital Resources” below.
      All forward-looking statements in this document are based on information
      available to us as of the date hereof and we assume no obligation to update
      any
      such forward-looking statements. The following discussion should be read in
      conjunction with our unaudited condensed consolidated financial statements
      and
      the accompanying notes contained in this quarterly report. Unless expressly
      stated or the context otherwise requires, the terms “we,” “our,” “us” and
“Hartcourt” refer to The Hartcourt Companies, Inc. and its
      subsidiaries*





**Overview**




Historically,
      we have been a distributor of internationally well known brand named IT hardware
      products and related software and services. The main products are Samsung
      branded notebooks and monitors. Almost all of our revenue for the last fiscal
      years was attributed to distribution revenues from sales of Samsung products
      in
      China.





Our
      Samsung distribution business began in March 2003, through the acquisition
      of a
      Chinese company named Huaqin Shanghai, who was the distributor of Samsung
      monitors in the Eastern part of China. In August 2004, Huaqin Shanghai obtained
      additional distribution rights from Samsung for its notebook product line in
      the
      same geographic area. In February 2005, we acquired major assets from a
      Chinese company named Beijing Control Tech, which was the distributor of
      ClearOne audio products and Radvision video conference products and
      services in China. Effective January 1, 2006, Control Tech ceased its
      operations.





Most
      international and domestic manufacturers of IT products in China rely on
      distributors, such as Hartcourt, to augment their sales and marketing
      operations. As a stocking, marketing, and financial intermediary, the
      distributor relieves manufacturers of a portion of the costs and personnel
      associated with stocking and selling their products (including otherwise sizable
      investments in finished goods inventories, accounts receivables and distribution
      networks), while providing geographically dispersed selling, order processing,
      and delivery capabilities. At the same time, the distributor offers a broad
      range of customers the convenience of accessing from a single source with
      multiple products and rapid or scheduled deliveries, as well as other
      value-added services such as after sales service. The growth of the IT
      distribution industry in China has been fostered by many manufacturers who
      recognize that distributors are essential extensions of their marketing
      organizations. Most of our customers require delivery of the products they
      have
      ordered on schedules that are generally not available on direct purchases from
      manufacturers, and frequently their orders are of insufficient size to be placed
      directly with manufacturers.




Our
      sales
      organization is divided by product lines, such as the monitor group and notebook
      group. We have a centralized online Enterprise Resources Planning (ERP) system
      to support the daily operations, connecting order taking, inventory management,
      distribution, credit, accounting and other related functions.




We
      have
      authorized distribution rights with respect to Samsung monitors, notebooks
      and
      certain digital products covering the consumer and commercial product
      distribution channels in Shanghai, a metropolitan city with a population of
      20
      million people. The authorized distribution agreement signed between
      Huaqing Shanghai, a 51% owned subsidiary, and Samsung has one-year terms
      and is renewed on an annual basis. In exchange for this authorized distribution
      right, as well as purchase price protection and reimbursed advertising and
      promotion expenses from Samsung, we are required to achieve quarterly purchase
      targets set by Samsung and perform sales promotion and advertising activities
      under Samsung's direction, in addition to meeting other Samsung operational
      requirements. Almost all of our sales for the quarter ended August 31, 2006
      comprised of Samsung products, of which, monitors accounted for 90% of the
      revenue and notebooks accounted for 6% of revenue. Our Samsung sales in Shanghai
      grew 16% compared to a year ago same period.




16




The
      IT
      markets in which we compete are dynamic and highly competitive. We expect
      competition to intensify in the future. Our current and potential competitors
      include the local distributors of Philip and LG monitors in the Shanghai region,
      as well as other distributors of notebooks made by multinational and leading
      Chinese notebook manufacturers





The
      principal competitive factors that affect the market for our business are
      available working capital to finance the revenue growth in terms of inventory
      and trade receivable; the ability to contain operating costs, as well as adding
      new product lines to our distribution list.





Although
      Huaqin Shanghai has been the exclusive distributor for select Samsung IT
      products in the Shanghai region for the last 5 years, much of the services
      we
      provide can be performed by our competitors. In addition, there is a risk that
      Samsung may allow our competitors or new entrants to the market to take a
      portion of our Samsung distributor business which would have an adverse impact
      on our business and revenues.




We
      sell
      Samsung monitors, notebooks and digital devices to large regional retail stores
      and to second tier distributors who then resell to smaller retail stores. To
      promote Samsung's upscale product image, we also manage several Samsung image
      stores in Shanghai, selling a full range of Samsung consumer electronic products
      in Shanghai's downtown shopping districts in partnership with Samsung. For
      the
      Samsung products for which we have authorized distribution rights, we provide
      product warranty services to retail consumers on behalf of Samsung. In addition,
      we provide and charge for after-sales repair, maintenance and service. Our
      top
      customers for the quarter ended August 31, 2006 were Guowei, a major retailer
      and a distributor in Shanghai which accounted for approximately 16% of our
      revenue; Huahai computer, a second tier distributor which accounted for
      approximately 13% of our revenue; Aiwei, a tier distributor which accounted
      for approximately 12% of our revenue. During the quarter ended August 31,
      2006 no other customer or distributor made up more than approximately 5% of
      our total sales. Our top customers for the quarter ended August 31, 2005 were
      Guowei, a major retailer and a distributor in Shanghai which accounted for
      approximately 25% of our revenue; Aiwei, a second tier distributor
      which accounted for approximately 9% of our revenue; Hongtu Sanbao, a mega
      consumer electronic chain store which accounted for approximately 7% of our
      revenue; and Zhanqi, a distributor which accounted for approximately 6% of
      our revenue. During the quarter ended August 31, 2005 no other
      customer or distributor made up more than approximately 5% of our total sales.
      No other customers or distributors accounted for more than approximately 5%
      of
      our revenue for the quarter ended August 31, 2005.




We
      source
      our products from Samsung. As of August 31, 2006, approximately 82% of our
      Samsung inventory consisted of monitors and approximately 3% consisted of
      notebooks. It is the current practice of Samsung to protect its distributors,
      such as the Company, against the potential write-down of such inventories due
      to
      technological changes or Samsung's price reductions. Under the terms of the
      distributor agreement, and assuming the distributor complies with certain
      conditions, Samsung is required to credit us for inventory losses incurred
      through reductions in manufacturers' list prices of the items.  Because
      most of our business is on an as-needed basis and varies slightly, we have
      no
      customer orders extending more than a week into the future.




After
      reviewing Hartcourt's current business condition, its competitive edge, and
      opportunities in China, the new management team has submitted to the Board
      of
      Directors a two-year business plan. Going forward, the Company plans diversify
      its business by focusing on the post-secondary education market in China to
      take
      advantage of the on-going demand of skilled workers and growing post-secondary
      age population. The Company has not made any investment in this new business
      for
      the quarter ended August 31, 2006.




17




The
      following discussion and analysis are based on the historical figures and
      information and reflect only our IT business. The Company plans to add to its
      traditional IT business by entering the growing Chinese vocational training
      marketplace. The business transformation from relying solely on the IT industry
      to include the education industry likely will materially change the Company’s
      business operation, the operating revenue, selling, general and administrative
      expenses, the cash flows and other financial information in the future. As
      a
      result, any predictions of the future financial trends based on the discussion
      and analysis below are risky and the readers of this report shall caution about
      this factor.




**Results
      of Operations**




The
      following table sets forth the consolidated statements of operations and the
      percentage change for the three months ended August 31, 2006 and 2005, with
      the
      comparable reporting period in the preceding year.


**For
                  the Three Month Periods Ended August 31****2006**
              
              Percentage
                change
              
              **2005**Net
                  sales
              
              $
              12,450,282
              
              
              16%
              
              $
              10,768,764Cost
                  of sales
              
              
              11,879,434
              
              
              14%
              
              
              10,395,922Gross
                  profit
              
              
              570,848
              
              
              53%
              
              
              372,842Operating
                  expenses:Selling,
                  general and administrative
              
              
              462,449
              
              
              -2%
              
              
              469,601Depreciation
                  and amortization
              
              
              13,059
              
              
              -30%
              
              
              18,692Total
                  operating expenses
              
              
              475,508
              
              
              -3%
              
              
              488,293Income/(loss)
                  from continuing operationsbefore
                  other income/(expenses) & minority interest
              
              
              95,340
              
              
              183%
              
              
              -115,451Other
                  income/(expense):Interest
                  expense
              
              
              -55,115
              
              
              42%
              
              
              -38,856Interest
                  income
              
              
              26,037
              
              
              -15%
              
              
              30,736Other
              
              
              -363
              
              
              -100%
              
              
              353,383Total
                  other income/(expense)
              
              
              -29,441
              
              
              -109%
              
              
              345,263Income
                  (loss) from continuing operations before minority interest
              
              
              65,899
              
              
              -71%
              
              
              229,812Less:
                  Minority Interest
              
              
              192,639
              
              
              14%
              
              
              168,514Income
                  before income tax
              
              
              -126,740
              
              
              -307%
              
              
              61,298Taxation
              
              
              -
              
              
              
              
              
              29,764NET
                  INCOME
              
              $
              -126,740
              
              
              -502%
              
              $
              31,534





18




The
      following table sets forth the consolidated statements of operations, expressed
      as a percentage of net revenue, for the periods indicated:




**Three
                  Months Ended****August
                  31,**
              
              **August
                  31,****2006**
              
              **2005**Net
                  revenue
              
              
              100%
              
              
              100%Cost
                  of revenue
              
              
              95.41
              
              
              96.54Gross
                  margin
              
              
              4.59
              
              
              3.46Operating
                  expenses:Sales
                  and marketing
              
              
              0.34
              
              
              0.47General
                  and administrative
              
              
              3.37
              
              
              4.06Total
                  operating expenses
              
              
              3.82
              
              
              4.53Interest
                  income
              
              
              -0.21
              
              
              -0.08Other
                  expense, net
              
              
              
              
              
              -3.28Income
                  before income taxes
              
              
              -1.02
              
              
              0.57Provision
                  for income taxes
              
              
              
              
              
              0.28Net
                  income
              
              
              -1.02%
              
              
              0.29%




***Quarter
      Ended August 31, 2006 Compared to Quarter Ended August 31,
      2005.***




***Net
      Revenue***




We
      recorded net sales of US$12,450,282 for the three months ended August 31, 2006,
      compared to US$10,768,764 for the same period in 2005, excluding the
      discontinued operations. Higher sales is due to our market expansion. Our sales
      during the three months ended August 31, 2006 represented revenues derived
      from
      sale of Samsung products in Shanghai.




***Cost
      of Revenue and Gross Margin***




Cost
      of
      Goods Sold amounted to $11,879,434 for the three months ended August 31, 2006,
      compared to $10,395,922 for the same period in 2005, excluding the discontinued
      operations. Cost of sales for the three months ended August 31, 2006 and 2005
      represented the cost of Samsung products.





Gross
      margin was $570,848, or 4.59%, for the three months ended August 31, 2006
      compared to $372,842, or 3.46%, for the same period in 2005, an increase of
      53%.
      The higher gross margin is due to our reduced cost.




19





***Selling,
      general and administrative expenses*** :
      Our
      selling, general and administrative expenses were $462,449 for the three months
      ended August 31, 2006 compared to $469,601 for the same period in 2005,
      representing a decrease of $7,152, or 2%, due to lower advertising and promotion
      expenses as well as legal expenses.





***Depreciation
      and amortization expenses:*** Our
      depreciation and amortization expenses were $13,059 for the three months ended
      August 31, 2006 compared to $18,692 for the same periods in 2005. The decrease
      was primarily due to our disposal of Control Tech in the last fiscal
      year.





***Interest
      income:*** Interest
      income was $26,037 and $30,736 for the three months ended August 31, 2006 and
      2005. The decrease was due to less interest income from third party borrowing
      incurred in this quarter.





***Interest
      expenses*** :
      Interest expenses were $55,115 and $38,856 for the three months August 31,
      2006
      and 2005 respectively. The increase was primarily due to the increase in the
      borrowing for sales expansion.





***Income
      from Continuing Operations:*** Loss
      from
      continuing operations for the three months ended August 31, 2006 was $126,740,
      compared to income of $61,298 a year ago, primarily as the result of stock
      option expenses recognized for period ended August 31, 2006 and gain from
      disposal of properties, coupled with revenue from warranty services and other
      after-sales services in the same period of last year.





***Minority
      interest:*** Minority
      interest represented the profit shared by the minority shareholders of Huaqing
      (49%).





***Income
      tax:*** We
      made
      no provision for PRC income taxes and $29,764 for the three months ended August
      31, 2006 and 2005, respectively. This provision for taxes relates to the
      estimated amount of taxes that would be imposed by tax authorities in the PRC.
      None of our income is subject to U.S. taxes.





**Liquidity
      and Capital Resources:**





Our
      principal capital requirements during the quarter ended on August 31, 2006
      have
      been primarily funded by Chinese short term bank loans.





As
      shown
      in our accompanying financial statements, we had a net loss of $126,740 for
      the
      three months ended August 31, 2006 as compared to a net income of $31,534 for
      the same period in 2005, caused by stock option expenses recognized in the
      period ended August 31, 2006 and one-time income from disposal of properties
      in
      the same period of last year. Our current assets exceeded our current
      liabilities by $1,768,007 as of August 31, 2006.





As
      of
      August 31, 2006, we had working capital of US$1,768,007. In addition to our
      working capital on hand, we intend to obtain needed capital through a
      combination of bank loans and sale of our equity securities. However, there
      are
      no commitments or agreements on the part of anyone at this time to provide
      us
      with additional bank financing or purchase of securities. If we are unable
      to
      raise the necessary additional working capital, our operations and financial
      condition may be adversely affected.




20





***Operating
      activities:*** During
      the three months ended August 31, 2006, net cash used in operating activities
      decreased to $400,386, compared to $917,327 during the same period in 2005.
      The
      increase in cash used in operating activities resulted mainly from higher
      inventories and increase of other liabilities of Huaqing.





***Investing
      activities:*** Net cash
      provided by investing activities during the three months ended August 31, 2006,
      was zero compared to cash provided by investing activities of $869,056 for
      the
      same period in 2005. The cash provided by investment activities in the same
      period of last year was mostly due to $520,814 proceeds from disposed property
      and recovery of notes from disposed subsidiary Challenger in the amount of
      $362,845.





***Financing
      activities:*** Net cash
      provided by financing activities during the three months ended August 31, 2006
      equaled to $269,893 compared to $195,055 used in during the same period in
      2005.
      Net cash provided by financing activities in the quarter ended August 31, 2006
      mainly represents the amount due to related parties and short term loan, those
      for the quarter ended August 31, 2005 mainly represents the repayment of balance
      due to related parties.





As
      a
      result of the above activities, we experienced a net decrease in cash of $79,491
      for the three months ended August 31, 2006.





**Contractual
      Obligations**





During
      the quarter ended August 31, 2006, we do not have any contractual obligation
      other than the facility leases described in Note 14(b) of financial
      statements.





**Off-Balance
      Sheet Arrangements**





During
      the quarter ended August 31, 2006, the Company did not engage in any off-balance
      sheet arrangements as defined in Item 303(a)(4) of the SEC's Regulation
      S-K.





**Critical
      Accounting Policies and Estimates**





For
      a
      description of what we believe to be the critical accounting policies that
      affect our more significant judgments and estimates used in the preparation
      of
      our condensed consolidated financial statements, refer to our Annual Report
      on
      Form 10-K for the year ended May 31, 2006. There have been no changes in
      our critical accounting policies since May 31, 2006.





**Risk
      Factors Affecting Future Results**





The
      risk
      factors facing the Company have not changed in any material way from those
      Risk
      Factors discussed on the Company’s Annual Report on Form 10-K for the fiscal
      year ended May 31, 2006.





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**Item 3.** ***Quantitative
      and Qualitative Disclosures About Market Risk***





**Short-Term
      Investment Portfolio**




We
      do not
      hold derivative financial instruments in our portfolio of short-term
      investments. Our short-term investments consist of instruments that meet quality
      standards consistent with our investment policy. This policy specifies that,
      except for direct obligations of the United States government, securities issued
      by agencies of the United States government, and money market or cash management
      funds, we diversify our holdings by limiting our short-term investments and
      funds held for payroll customers with any individual issuer. As of August 31,
      2006, all our cash equivalents represent cash on hand and cash deposit in PRC
      banks, the interest rate earned on our money market accounts ranged from 0.72%
      to 1.62% per annum. Our cash equivalents are subject to market risk due to
      changes in interest rates. Interest rate movements affect the interest income
      we
      earn on cash equivalents, and funds held for payroll customers and the value
      of
      those investments. We attempt to limit this exposure by investing primarily
      in
      short-term securities. Due to the short duration and conservative nature of
      our
      investment portfolio a movement of 10% by market interest rates would not have
      a
      material impact on our operating results and the total value of the portfolio
      over the next fiscal year.





**Impact
      of Foreign Currency Rate Changes**





We
      are
      exposed to risks associated with foreign exchange rate fluctuations due to
      our
      international sales activities. Since we translate foreign currencies (primarily
      Chinese Yuans) into US dollars for financial reporting purposes, currency
      fluctuations can have an impact on our financial results. The historical impact
      of currency fluctuations has generally been immaterial. We believe that our
      exposure to currency exchange fluctuation risk is not significant primarily
      because the stability of the exchange rate between Chinese Yuan and US dollar.
      Although the impact of currency fluctuations on our financial results has
      generally been immaterial in the past and we believe that for the reasons cited
      above currency fluctuations will not be significant in the future, there can
      be
      no guarantee that the impact of currency fluctuations will not be material
      in
      the future. As of August 31, 2006, we did not engage in foreign currency hedging
      activities. A movement of 10% in foreign currency exchange rates would not
      have
      a material impact on our operating results.




**Item 4.** ***Controls
      and Procedures***





**Evaluation
      of disclosure controls and procedures** *.* Our
      management evaluated, with the participation of our chief executive officer
      and
      our chief financial officer, the effectiveness of our disclosure controls and
      procedures as of the end of the period covered by this Quarterly Report on
      Form
      10-Q. Based on this evaluation, our chief executive officer and our chief
      financial officer have concluded that our disclosure controls and procedures
      are
      effective to ensure that information we are required to disclose in reports
      that
      we file or submit under the Securities Exchange Act of 1934 is recorded,
      processed, summarized and reported within the time periods specified in
      Securities and Exchange Commission rules and forms.





**Changes
      in internal control over financial reporting** *.* There
      was
      no change in our internal control over financial reporting that occurred during
      the period covered by this Quarterly Report on Form 10-Q that has materially
      affected, or is reasonably likely to materially affect, our internal control
      over financial reporting. We are aware that any system of controls, however
      well
      designed and operated, can only provide reasonable, and not absolute, assurance
      that the objectives of the system are met, and that maintenance of disclosure
      controls and procedures is an ongoing process that may change over time.




22





**PART
      II: OTHER INFORMATION**


**Item 6.** ***Exhibits.***








**Exhibit****Number**
            
            **Description**10.1
            
            Acting
                CEO Employment Agreement, dated May 31, 200610.2
            
            CFO
                & President Employment Agreement, dated May 31,
                200610.3
            
            CEO
                Employment Agreement, dated August 30, 200631.1
            
            Rule 13a-14(a)/15d-14(a)
                Certification of Principal Executive Officer31.2
            
            Rule 13a-14(a)/15d-14(a)
                Certification of Principal Financial Officer32.1
            
            Section 1350
                Certification of Principal Executive Officer32.2
            
            Section
                1350 Certification of Principal Financial
                Officer




**SIGNATURES**




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


THE
                HARTCOURT COMPANIES, INC.Dated:
                September 28, 2006
            By:/s/
                VICTOR
                ZHOUVictor
                ZhouChief
                Executive OfficerDated:
                September 28, 2006
            By:/s/
                YUNGENG
                HUYungeng
                HuChief
                Financial Officer & President




23





**Exhibit Index**


**Exhibit****Number**
            
            **Description**10.1
            
            Acting
                CEO Employment Agreement, dated May 31, 200610.2
            
            CFO
                & President Employment Agreement, dated May 31,
                200610.3
            
            CEO
                Employment Agreement, dated August 30, 200631.1
            
            Rule 13a-14(a)/15d-14(a)
                Certification of Principal Executive Officer31.2
            
            Rule 13a-14(a)/15d-14(a)
                Certification of Principal Financial Officer32.1
            
            Section 1350
                Certification of Principal Executive Officer32.2
            
            Section
                1350 Certification of Principal Financial
                Officer






24