UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





Form 10-Q





xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended February 28, 2010





oTRANSITION 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 Employerincorporation or organization)

Identification No.)





Room 503, Jinqiao Building, No. 2077West Yan’an Road, Shanghai, China

200336(Address of principal executive offices)

(Zip Code)





(011) (86 21) 62085908


(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 xNo  o





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





Large accelerated filer o
Accelerated filer oNon-Accelerated filer o
Smaller reporting company x





Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.   Yes oNo x





The number of shares of common stock outstanding as of the latest practicable date, March [10], 2010, was 386,966,816.




















TABLE OF CONTENTS








PART I: FINANCIAL INFORMATIONItem 1.
Financial Statements
3Consolidated Balance Sheet (unaudited) - February 28, 2010 and May 31, 2009
3Consolidated Statements of Operations (unaudited) - Three-month and nine-month periods ended February 28, 2010 and February 28, 2009
4Consolidated Statements of Cash Flows (unaudited) - Nine-month periods ended February 28, 2010 and February 28, 2009
6Notes to unaudited Consolidated Financial Statements
8Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
19Item 3.
Quantitative and Qualitative Disclosures About Market Risk
23Item 4.
Controls and Procedures
23PART II: OTHER INFORMATIONItem 1
Legal Proceedings
24Item 1A
Risk Factors Affecting Future Results
24Item 2
Un Registered Sales of Equity Securities and Use of Proceeds
24Item 3
Defaults Upon Senior Securities
24Item 4
Submission of Matters to a Vote of Security Holders
24Item 5
Other Information
24Item 6.
Exhibits
25Signatures
26










2




PART I   FINANCIAL INFORMATION





Item 1.      Financial Statements THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED BALANCE SHEETS (UNAUDITED)





February 28,

2010


May 31, 2009ASSETSCash and cash equivalents

$
88,185


$
102,085Accounts Receivable


1,597,695



863,244Loans receivable


1,179,159



822,551Prepaid expenses and other assets


37,953



5,792TOTAL CURRENT ASSETS


2,902,992



1,793,672PROPERTY & EQUIPMENT – NET


40,636



57,640INTANGIBLE ASSETS - NET


3,772,150



3,923,356TOTAL ASSETS

$
6,715,778


$
5,774,668LIABILITIES AND SHAREHOLDERS' EQUITYCURRENT LIABILITIESAccounts payable

$
-


$
141,331Accrued expenses and other current liabilities


1,859,267



1,337,571Loan payable


274,429



-Due to related parties


185,162



246,862TOTAL CURRENT LIABILITIES


2,318,858



1,725,764COMMITMENT & CONTINGENCIES





SHAREHOLDERS' EQUITYPreferred Stock:Original preferred stock, $0.01 par value, 1,000 shares authorized, none issued and outstanding


-



-Class A preferred stock, 10,000,000 shares authorized, none issued and outstanding


-



-Common stock:$0.001 par value, 424,999,000 authorized February 28, 2009 and May 31, 2009; 389,015,544 issued 386,816 outstanding


386,967



386,967Additional paid in capital


77,273,161



77,156,131Treasury stock, at cost, 2,048,728 shares


(48,728
)


(48,728
)Other comprehensive loss


(148,123
)


(143,579)
)Noncontrolling interest


467,188



152,261Accumulated deficit


(73,533,545
)


(73,454,148
)TOTAL SHAREHOLDERS' EQUITY


4,396,920



4,048,904TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

$
6,715,778


$
5,774,668





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





3





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


(UNAUDITED)


For the three month

periods endedFebruary 28,


February 28,2010


2009Net revenues

$
343,652


$
922,962Cost of revenues


(113,178
)


(107,065
)Gross profit


230,474



815,897Operating costs and expenses:General and administrative expenses


132,195



306,127Depreciation and amortization


55,062



6,041Total operating expenses


187,257



312,168Income from continued operations


43,217



503,729Other income (expenses)Foreign currency exchange gain (loss)


(178
)

(2,120
)Interest income


29,823



-Total other income (expenses)


29,654


(2,120)Income from continued operations before income taxes and noncontrolling interest


72,871



501,609Provision for income taxes


(46,950
)


(144,088
)Noncontrolling interest, net of taxes


(72,900
)


(251,329
)NET INCOME (LOSS)


(46,979)



106,192OTHE COMPREHENSIVE ITEM:Foreign currency translation gain (loss)


4,019



(1,510
)NET COMPREHENSIVE INCOME (LOSS)

$
(42,960
)

$
104,682BASIC AND DILUTED EARNINGS PER COMMON SHARE:Basic earnings per share:Income/(loss) per share

$
(0.00
)

$
0.00Basic weighted average number of shares outstanding


386,966,816



336,764,249





Diluted earnings per share:Income/(loss) per share

$
(0.00)


$
0.00Diluted weighted average number of shares outstanding


386,966,816



336,764,249





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





4





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


(UNAUDITED)








For the nine month

periods endedFebruary 282010


2009Net revenues

$
1,299,499


$
1,782,925Cost of revenues


(341,077
)


(223,661
)Gross profit


958,422



1,559,264Operating expenses:General and administrative expenses


425,187



726,921Depreciation and amortization


225,044



14,290Total operating expenses


650,231



741,211Income from operations


308,191



818,053Other incomeForeign currency exchange gain


4,871



49,069Interest income


50,830



-Gain on settlement of debt


-



188,848Total other income


55,701



237,917Income from operations before income tax provision and noncontrolling interest


363,892



1,055,970Provision for income taxes


(128,365
)


(241,781
)Noncontrolling interest, net of taxes


(314,925
)


(486,650
)NET INCOME (LOSS)


(79,398
)


327,539OTHER COMPREHENSIVE ITEM:Foreign currency translation gain


(4,544
)


56,023NET COMPREHENSIVE INCOME (LOSS)

$
(83,942
)

$
383,562Basic earnings per share:Income/(loss) per share

$
(0.00
)

$
0.00Basic weighted average number of shares outstanding


386,966,816



288,615,433





Diluted earnings per share:Income/(loss) per share

$
(0.00
)

$
0.00Diluted weighted average number of shares outstanding


386,966,816



288,795,573







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





5





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





For the nine month-periods endedFebruary 28,

2010


February 28,

2009CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)

$
(79,398
)

$
327,539Adjustments to reconcile net income (loss) toNet cash provided by (used in) operating activities:Depreciation and amortization


168,270



127,564Noncontrolling Interest


314,927



486,650Stock options issued for service


117,030



153,804Stock issued for services and compensations


-



81,467Changes in operating assets and liabilities:Accounts receivable


(735,105
)


(779,493
)Inventory


(4,613
)


6,090Prepaid expenses and other receivables


(26,773
)


(703,475
)Accounts payable


(141,331
)


(326,228
)Accrued expenses and other current liabilities


536,926



460,128NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES


149,931



(165,954
)CASH FLOWS FROM INVESTING ACTIVITIES:Loan receivable


(356,214
)


-Cash received on acquisition of Subsidiary


-



6,177NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES


(356,214
)


6,177








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





6







THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)





For the nine month periods ended

February 282010


2009CASH FLOWS FROM FINANCING ACTIVITIESDue to related parties


(61,651)



-Loan payable


274,429



-Issuance of shares for cash


-



400,000Proceeds from (payments to) related parties-net


-



1,858NET CASH PROVIDED BY FINANCING ACTIVITIES


212,778



401,858EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS


(20,395
)


(56,219
)NET INCREASE / (DECREASE) IN CASH AND CASH EQUIVALENTS


(13,900
)


185,862CASH AND CASH EQUIVALENTS -BEGINNING BALANCE


102,085



4,907CASH AND CASH EQUIVALENTS – ENDING BALANCE

$
88,185


$
190,769SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATIONCash paid during the periodInterest

$
-


$
-Income taxes

$
-


$
-SUPPLEMENTAL DISCLOSURE OF NON CASH TRANSACTIONSShares issued to acquire subsidiaries

$
-


$
4,250,000





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








7








THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES


NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS








NOTE 1GENERAL





The Hartcourt Companies, Inc. ("Hartcourt" “We/Our” or the "Company"), was incorporated in Utah in 1983.  In August 2006, we change our business by focusing on the vocational/training and education marketplace in the People’s Republic of China.





On May 15, 2007, we completed the purchase of 100% of the equity interests in China Princely Education Technology Development Company Limited (“China Princely”), an authorized accrediting organization for China vocational education located in Beijing, PRC. Under the terms of the purchase agreement, we paid to the shareholders of China Princely 5,400,000 shares of our restricted common stock at closing.  After closing, we changed the name of China Princely to Hartcourt Princely Education Technology Development (Beijing) Co., Ltd.





On June 13, 2008, The Hartcourt Companies, Inc. (the “Company”) entered into a definitive agreement to purchase 60% of the equity interests in Beijing Yanyuan Rapido Education Company (“Beijing Yanyuan”), a well-known training institution in China. Under the terms of the definitive agreement executed between Beijing Yanyuan and the Company, the purchase price that the Company agreed to pay to the shareholders of Beijing Yanyuan 69 million shares of the Company’s restricted common stock, which, pursuant to the purchase agreement, will be payable upon closing of the acquisition. Hartcourt has the right to waive the following commitment of profitability; Beijing Yanyuan committed that its net profit would exceed RMB 6 million (US$827,000) for the seven months of calendar year 2008, RMB10 million (US$1.379 million) for the calendar year 2009, and RMB14 million (US$1.931 million) for the calendar year 2010.





On July 23, 2008, The Hartcourt Companies (the “Company”) completed the acquisition of 60 percent of the outstanding equity interests of Beijing Yanyuan Rapido Education Company (“Beijing Yanyuan”) pursuant to the terms of the definitive agreement entered into between the two parties. Subject to the definitive agreement between the Company and Beijing Yanyuan, the purchase price paid by the Company in connection with its acquisition of a controlling interest in Beijing Yanyuan was 69 million shares of the Company’s restricted common stock.





On October 18, 2008, the Company entered into a definitive agreement to purchase 60% of the outstanding equity interests of China Arts and Science Academy. Under the terms of the definitive agreement executed between China Arts and Science Academy and Hartcourt; Hartcourt has the right to waive the following commitment of profitabilitiy; China Arts and Science Academy committed that its net profit would exceed RMB5 million (US$735,294) for the first year (November 1, 2008 to October 31, 2009) in which its results are consolidated with Hartcourt’s, RMB7.5 million (US$1.103 million) for the second year (November 1, 2009 to October 31, 2010) in which its results are consolidated with Hartcourt’s, and RMB10 million (US$1.471 million) for the third year (November 1, 2010 to October 31, 2011) in which its results are consolidated with Hartcourt’s. The restricted common shares issued by Hartcourt for the acquisition will be released to those shareholders of China Arts and Science Academy whose equity interests were purchased by Hartcourt in three installments based on the profit realized by China Arts and Science Academy over the three-year period beginning on the date of Hartcourt’s purchase of 60% of the outstanding equity interests of China Arts and Science Academy.





On October 31, 2008, The Hartcourt Companies Inc. (the “Company”) completed the acquisition of 60 percent of the outstanding equity interests of China E & I Development Co. Ltd., which does business as the China Arts and Science Academy (“China Arts and Science Academy”), pursuant to the terms of the definitive agreement entered into between the two parties.  Under the agreement between the Company and China Arts and Science Academy, the purchase price paid by the Company in connection with its acquisition of a controlling interest in China Arts and Science Academy was 40 million shares of the Company’s restricted common stock.





As of February 28, 2010, 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 February 28, 2010, Hartcourt Capital Inc. owns 100% of the equity interest of Hartcourt Hi-Tech Investment (Shanghai) Inc. while Hartcourt Hi-Tech Investment (Shanghai) Inc., through nominee shareholder, owns 100% of the equity interest of Shanghai Jiumeng Information Technology Co., Ltd. These two companies are located in Shanghai, China. In April 2007, the Company decided to wind up Hartcourt Hi-Tech Investment (Shanghai) Inc. As of May 31, 2008, the wind-up process was completed. Shanghai Jiumeng Information Technology Co., Ltd owns 60% of the equity interest of Beijing Yanyuan Rapido Education Company.





As of February 28, 2010, AI-Asia, Inc., the third holding company, owns 100% of the equity interest of Hartcourt Education Investment Management Consulting (Shanghai) Co., Ltd (former name is AI-Asia (Shanghai) Information Technology, Inc), located in Shanghai, China, and owns 100% of the equity interest of Hartcourt Princely. AI-Asia, Inc owns 60% of the equity interest of China Arts and Science Academy.





8





NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





a)   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 accounting principles generally accepted in the United States for complete financial statements. The audited consolidated financial statements for the fiscal year ended May 31, 2009 were filed on September 14, 2009 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 February 28, 2010 are not necessarily indicative of the results that may be expected for the year ended May 31, 2010.





b)    Basis of Consolidation





The Company’s financial statements for the three months ended February 28, 2010 are consolidated to include the accounts of The Hartcourt Companies Inc., the wholly owned subsidiaries Hartcourt China Inc., Hartcourt Capital Inc., Hartcourt Hi-Tech Investment (Shanghai) Inc., Ai-Asia Inc., Hartcourt Education Investment Management Consulting (Shanghai) Co., Ltd., Shanghai Jiumeng Information Technology Co., Ltd, Hartcourt Princely Education Technology Development Company Limited, 60 percent owned Beijing Yanyuan Rapido Education Company and 60 percent owned China Arts and Science Academy from the date of acquisition. All significant inter-company accounts and transactions have been eliminated in consolidation.





c)    Cash and Cash Equivalents





The Company considers all short-term highly liquid investments that are readily convertible to known amounts of cash and have original maturities of three months or less to be cash equivalents. As Hartcourt’s business activities are located in China, substantial amounts of cash are deposited in foreign banks located in China, which do not have the protection programs similar to that of the US (FDIC).








The amount of accounts receivable as of February 28, 2010 and May 31, 2009 were $ 1,597,695 and $863,244, respectively.





e)    Prepaid expenses





Prepaid expenses are expenses that are allocated into the period in which they are incurred and in subsequent periods, and be amortized within one year (inclusive). They include amortization of low-valued consumables, prepaid insurance expenses, lump-sum payment for stamps in large amount that need to be amortized.





Prepaid expenses generally will be amortized in equal installments and charged as costs or expenses of periods benefiting within one year. If certain prepaid expense items do not have future benefit the Company any more, its un-amortized amount is recorded as an expense for the current period. Prepaid expenses amounted to $37,953 and $5,792 at February 28, 2010 and May 31, 2009 respectively and is included in “Prepaid expenses and other current assets” in the accompanying financial statements.





f) Property and Equipment





Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over useful lives of 3 to 10 years. The cost of assets sold or retired and the related amounts of accumulated depreciation are removed from the accounts in the year of disposal. Any resulting gain or loss is reflected in current operations. Expenditures for maintenance and repairs are charged to operations as incurred.





g) Impairment of Long-Lived Assets





Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (ASC 360-10), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations for a Disposal of a Segment of a Business." The Company periodically evaluates the carrying value of long-lived assets to be held and used in accordance with SFAS 144. SFAS 144 requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amounts. In that event, a loss is recognized based on the amount by which the carrying amount exceeds the fair market value of the long-lived assets. Loss on long-lived assets to be disposed of is determined in a similar manner, except that fair market values are reduced for the cost of disposal. Based on its review, the Company believes that, as of February 28, 2010, there was no impairments of its long-lived assets used in operations.





h) Income Taxes





The Company utilizes SFAS No. 109 (ASC 740), "Accounting for Income Taxes," which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.




9





i) Stock-Based Compensation





The Company adopted SFAS No. 123 (Revised 2004), Share Based Payment (ASC 275), 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 prescribed 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 the Company’s stock option plans using the intrinsic value method in accordance with the provisions of APB Opinion No. 25 and related interpretations.





j) Foreign Currencies Translation





Assets and liabilities in foreign currency are recorded at the balance sheet date at the rate prevailing on that date. Items of income statement are recorded at the average exchange rate. Gain or loss on foreign currency transactions are reflected on the income statements. Gain or loss on financial statement translation from foreign currency are recorded as a separate component in the equity section of the balance sheets, as component of comprehensive income (loss). The functional currencies of the Company are Chinese Renminbi and Hong Kong Dollars. The following companies are using Chinese Renminbi: Hartcourt Princely, Hartcourt Education Investment Management Consulting (Shanghai) Co., Ltd, Beijing Yanyuan Rapido Education Company, China Arts and Science Academy, Hartcourt Hi-Tech Investment (Shanghai) Inc., and Shanghai Jiumeng Information Technology Co., Ltd. The following companies are using Hongkong Dollars: Al-Asia Inc., Hartcourt China Inc. and Hartcourt Capital.





k)    Basic and diluted earning per share





Earning per share is calculated in accordance with the Statement of financial accounting standards No. 128 (ASC 260), “Earnings per share”. SFAS No. 128 superseded Accounting Principles Board Opinion No.15 (APB 15). Net earning per share for all periods presented has been restated to reflect the adoption of SFAS No. 128. Basic net loss per share is based upon the weighted average number of common shares outstanding. Diluted net earning per share is based on the assumption that all dilutive convertible shares and stock options were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period.








The Company recognizes its revenue in accordance with the Securities and Exchange Commissions (“SEC”) Staff Accounting Bulletin N0. 104 “Revenue Recognition in Financial Statements” (“SAB 104”). SAB 104 revises or rescinds portions of the interpretive guidance included in Topic 13 of the codification of staff accounting bulletins in order to make this interpretive guidance consistent with current authoritative accounting and auditing guidance and SEC rules and regulations. Revenue is recognized upon  (i) the services are performed, (ii) collectability is probable and (iii) such revenues are contractually nonrefundable.







10


m)    Recently Issued Accounting Standards





In January 2010, FASB issued ASU No. 2010-06 – Improving Disclosures about Fair Value Measurements. This update provides amendments to Subtopic 820-10 that requires new disclosure as follows: 1) Transfers in and out of Levels 1 and 2. A reporting entity should disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers. 2) Activity in Level 3 fair value measurements. In the reconciliation for fair value measurements using significant unobservable inputs (Level 3), a reporting entity should present separately information about purchases, sales, issuances, and settlements (that is, on a gross basis rather than as one net number). This update provides amendments to Subtopic 820-10 that clarifies existing disclosures as follows: 1) Level of disaggregation. A reporting entity should provide fair value measurement disclosures for each class of assets and liabilities. A class is often a subset of assets or liabilities within a line item in the statement of financial position. A reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities. 2) Disclosures about inputs and valuation techniques. A reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. Those disclosures are required for fair value measurements that fall in either Level 2 or Level 3. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. These disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The Company is currently evaluating the impact of this ASU, however, the Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.





In February 2010, FASB issued ASU No. 2010-9 –Amendments to Certain Recognition and Disclosure Requirements. This update addresses certain implementation issues related to an entity’s requirement to perform and disclose subsequent-events procedures, removes the requirement that public companies disclose the date of their financial statements in both issued and revised financial statements. According to the FASB, the revised statements include those that have been changed to correct an error or conform to a retrospective application of U.S. GAAP. The amendment is effective for interim and annual reporting periods in fiscal year ending after June 15, 2010. The Company does not expect the adoption of this ASU to have a material impact on the Company’s consolidated financial statements.





In March 2010, FASB issued ASU No. 2010-10 –Amendments for Certain Investment Funds. This update defers the effective date of the amendments to the consolidation requirements made by FASB Statement 167 to a reporting entity’s interest in certain types of entities. The deferral will mainly impact the evaluation of reporting enterprises’ interests in mutual funds, private equity funds, hedge funds, real estate investment entities that measure their investment at fair value, real estate investment trusts, and venture capital funds. The ASU also clarifies guidance in Statement 167 that addresses whether fee arrangements represent a variable interest for all service providers and decision makers. The ASU is effective for interim and annual reporting periods in fiscal year beginning after November 15, 2009. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.





In March 2010, FASB issued ASU No. 2010-11 –Scope Exception Related to Embedded Credit Derivatives. Embedded credit-derivative features related only to the transfer of credit risk in the form of subordination of one financial instrument to another are not subject to potential bifurcation and separate accounting as clarified by recently issued FASB guidance. Other embedded credit-derivative features are required to be analyzed to determine whether they must be accounted for separately. This update provides guidance on whether embedded credit-derivative features in financial instruments issued by structures such as collateralized debt obligations (CDOs) and synthetic CDOs are subject to bifurcation and separate accounting. The guidance is effective at the beginning of a company’s first fiscal quarter beginning after June 15, 2010. The Company does not expect the adoption of this ASU to have a material impact on the Company’s consolidated financial statements.




11





NOTE 3   LOAN RECEIVABLE





As at February 28, 2010, the loans comprised of the following:





1

Loan to individual, 10% interest, secured and amount due March 31, 2010

$
183,0992

Loan to individual, 10% interest, secured and amount due April 15, 2010


219,7193

Loan to individual, 10% interest, secured and amount due November 30, 2010


292,9594

Loan to individual, 10% interest, secured and amount due November 30, 2010


190,4235

Loan to individual, 10% interest, secured and amount due December 30, 2010


292,959$
1,179,159





As at May 31, 2009, the loans comprised of the following:





1

Loan to sales agent, interest free, secured and amount due January 15, 2010

$
175,6342

Loan to sales agent, interest free, secured and amount due February 15, 2010


190,2703

Loan to sales agent, interest free, secured and amount due February 28, 2010


175,6344

Loan to individual, 10% interest, secured and amount due March 31, 2010


105,3805

Loan to individual, 10% interest, secured and amount due April 15, 2010


175,633$
822,551








During the three months period ended February 28, 2010 and 2009, the Company has interest income of $29,832 and $0, respectively.





NOTE 4     PROPERTIES AND EQUIPMENT





The Company’s property and equipment as of February 28, 2010 and May 31, 2009 are summarized as follows:





February 28, 2010

Unaudited


May 31,

2009Office equipment and computers

$
124,670


$
126,739Less: accumulated depreciation


(84,034
)


(69,099
)Property and equipment, net

$
40,636


$
57,640





NOTE 5   INTANGIBLE ASSETS




The Company accounts for its intangible assets under the applicable guidelines of SFAS 142 (ASC 350) “goodwill and other intangible assets” and SFAS 144 (ASC 360) “accounting for the impairment or disposal of long lived assets”.  Where intangible assets have finite lives, they are amortized over their useful life unless factors exist to indicate that the asset has been impaired.  The Company evaluates if the assets are impaired annually or on an interim basis if an event occurs or circumstances change to suggest that the assets value has diminished.  Under SFAS 142 intangible assets with indefinite useful lives are required to be tested annually for impairment or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  Recoverability of assets is measured by a comparison of the carrying amount of the assets to future net cash flows expected to be generated by the assets.  If the assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount exceeds the fair value of the assets.  During three months periods ended February 28, 2010, the Company recognized no impairment.





At February 28, 2010 and May 31, 2009, intangibles consist of the following:





February 28, 2010


May 31, 2009Student enrollment

$
4,088,158


$
4,088,158Accumulated Amortization


(316,008
)


(164,802
)3,772,150



3,923,356











12


Life of intangible assets is twenty years. Amortization expense from continuing operation included cost of revenue for the year ended February 28, 2010 and 2009 were $151,206 and $14,290 respectively.  We expect amortization expense for the next five years to be as follows:





Period ending February 28, 2010:2010

$
405,4562011


405,4562012


405,4562013


405,4562014


405,456Thereafter


1,744,871$
3,772,150





NOTE 6     DUE TO RELATED PARTIES





The amount due to directors as of February 28, 2010 and May 31, 2009 were $ 185,162and $246,862, respectively. This amount represents director fee due to the Company’s directors. The amount due to directors is interest free, unsecured and due on demand.





NOTE 7     ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES





Accrued expenses and other current liabilities as of February 28, 2010 and May 31, 2009 are summarized as follows:





Amount


AmountFebruary 28, 2010

Unaudited


May 31,

2009Accrued professional fees

$
89,741


$
51,583Payroll payable


719,459



681,306Welfare


10,081



10,073Income tax payable


523,908



293,166Other payable


516,078



301,443Total

$
1,859,267


$
1,337,571





NOTE 8     LOAN PAYABLE





Company has loan from third party for financing resource. As at February 28, 2010 and May 31, 2009, the Company has loan payable $274,429 and $0, respectively. This loan is interest free, unsecured and amount due on demand.





NOTE 9     EARNINGS / (LOSSES) PER SHARE





Basic and diluted (loss) income per common share is computed as follows for the nine months ended:





February 28,

2010


February 28,

2009Net Income (loss)

$
(79,398)


$
327,539Effects of dilutive securities






-Basic - weighted average shares outstanding


386,966,816



288,615,433Diluted - weighted average shares outstanding


386,966,816



288,795,573Basic earnings (loss) per share

$
(0.00)


$
0.00Diluted earnings (loss) per share

$
(0.00)


$
0.00





As of February 28, 2010, the Company had 28,200,000 options 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 because the Company has retained loss as of February 28, 2010.




13





NOTE 10     SHAREHOLDERS’ EQUITY





a) Capitalization





The Company is authorized to issue 434,999,000 shares of stock, consisting of 424,999,000 shares of common stock, US$0.001 par value and 10,000,000 shares of Class A Preferred Stock. The total number of shares of the Company’s Common Stock outstanding as of February 28, 2010 and May 31, 2009 are 386,966,816.  No shares of the Company’s Class A Preferred Stock were outstanding as of February 28, 2010 and May 31, 2009.





b) Original Preferred Stock





On July, 14, 2004, the founder of Hartcourt, Dr. Alan V. Phan, converted his 1,000 shares of Original Preferred Stock into 2,000,000 shares of Hartcourt Common Stock. After the conversion, no Original Preferred Stock was outstanding as of February 28, 2010.





c) Class A Preferred Stock





The 10,000,000 shares of authorized and unissued Class A Preferred Stock may be split with such designations, power, preferences and other rights and qualifications, limitations and restrictions thereof as the Company’s Board of Directors elects for a given series. No shares have been issued.





d) Equity Transactions





There is no equity transaction during the six month period ended February 28, 2010.





Stock Option Plan





In November 2005, the Company adopted a stock option 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 “2005 Plan”). The 2005 Plan provides for the issuance of stock options, stock appreciation rights, 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 that terminates 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, or (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 Plan was approved on November 23, 2005 during the annual shareholders meeting.





The number of shares of common stock reserved and available under the 2005 Plan was increased from 35,000,000 to 70,000,000 at the annual meeting of shareholders on February 24, 2007.





On September 1, 2008, the Company granted Victor Zhou CEO of the Company, an option to purchase the Company’s common stock at exercise price of $0.03 according to the following vesting schedule and based on the 2005 Plan.




-
7,500,000 stock options vested pro rata over 2 years of the employment contract period.-
3,000,000 stock options vested upon each successful new business acquisition of the Company.-
3,000,000 stock options vested upon each full profitable year.





The following assumptions were used to calculate the fair value of the options granted:




Risk-free interest rate
4.92%Weighted average expected life of the options
6.25 yearsExpected volatility
127.39%Expected dividend yield
0





On September 11 2008, the Company granted Wilson Li, Chairman of the Board, an option to purchase 5,000,000 shares of the Company’s common stock at exercise price of $0.03. The option will vest on September 11, 2010 and is exercisable within five years time after vesting.




14





The following assumptions were used to calculate the fair value of the options granted:




Risk-free interest rate
4.92%Weighted average expected life of the options
7.00 yearsExpected volatility
127.39%Expected dividend yield
0





On September 11 2008, the Company granted George Xu, independent director of the Company, an option to purchase 1,000,000 shares of the Company’s common stock at exercise price of $0.03. Each option will vest on September 11, 2010 and is exercisable within five years time after vesting.





The following table summarizes the activity of stock options:





WeightedAverage


AggregateNumber of


Exercise


IntrinsicOptions


Price


ValueShares under options at May 31, 2008


34,600,000


$
0.06


$
690,000Granted


20,500,000



-Exercised


-



-Expired


-



-Cancelled


25,900,000



-Shares under options at May 31, 2009


29,200,000


$
0.06


$
-Granted


-



-Exercised


-



-Expired


-



-Cancelled


1,000,000



-Shares under options at February 28, 2010


28,200,000


$
0.06


$
-





Additional information relating to stock options outstanding and exercisable at February 28, 2010 summarized by the exercise price is as follows:





WeightedNumber of

Average

Weighted

Number

WeightedRange of

Outstanding at

Remaining

Average

Exercisable at

AverageExercise

November 30,

Contractual

Exercise

November 30,

ExercisePrice

2009

Life

Price

2009

Price$0.03 - $0.05

28,000,000

4.09 Year

$0.04

828,000

$0.04$0.09

200,000

1.02 Year

$0.09

200,000

$0.09





During the nine months period ended February 28, 2010, no options vested and the Company recorded $117,030 amortization in stock based compensation expense.





Additional information relating to stock options outstanding and exercisable at February 28, 2009 summarized by the exercise price is as follows:





WeightedNumber of

Average

Weighted

Number

WeightedRange of

Outstanding at

Remaining

Average

Exercisable at

AverageExercise

February 28,

Contractual

Exercise

February 28,

ExercisePrice

2010

Life

Price

2010

Price$0.03 - $0.05

29,000,000

5.09 Year

$0.04

8,700,000

$0.04$0.09

200,000

2.01 Year

$0.09

200,000

$0.09





During the nine months period ended February 28, 2010, no options vested and the Company recorded $153,804 amortization in stock based compensation expense.





b) Warrants





None




15


NOTE 11    COMMITMENTS AND CONTINGENCIES


a)  Employment Agreements





None





b)  Operating Leases





The Company leases its offices and facilities under long-term, non-cancelable lease agreements expiring at various dates through January 27, 2010. 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 three months ended February 28, 2010 and 2009 were $25,312 and $28,696, respectively.





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





Year Ending May 31,

Payments2010

$
3,947





c) Legal Proceedings





Legal Proceedings:





Hartcourt Hi-Tech Investment (Shanghai) Inc. filed a complaint against Beijing Yi Zhi He Lian Information Technology Co., for returning RMB 1,000,000 which it owed the Company. On December 19, 2006, Beijing Shi Jing Shan District Court entered the judgment in this case. The court found that Hartcourt Hi-Tech Investment (Shanghai) Inc. has no rights to file the complaint against Beijing Yi Zhi He Lian Information Technology Co., Ltd. unless designated by Hartcourt Capital Inc. which signed and was bound by the acquisition agreement. The court issued an order overruling the complaint from Hartcourt Hi-Tech Investment (Shanghai), Inc. as the plaintiff.





On August 10, 2007, Hartcourt Capital Inc. filed a lawsuit in the Beijing No. 1 Intermediate People’s Court against Beijing Yi Zhi He Lian Information Technology Co., Ltd. to return the RMB 1,000,000 which it owed to the Company. Beijing No. 1 Intermediate People’s Court issued the civil ruling No. (2007)10077, overruling the complaint from Hartcourt Capital Inc. with the reason that Hartcourt Capital Inc. has no rights to lodge the lawsuit as the plaintiff. Hartcourt Capital Inc. then appealed to Beijing Senior People’s Court against the civil ruling No. 10077. Beijing Senior People’s Court found that Hartcourt Capital Inc. shall have the rights to lodge the lawsuit as the plaintiff. On December 10, 2008, the Beijing Senior People’s Court issued ruling No. (2008) 740. By this ruling, the court withdrew the civil ruling No. 10077 of the Beijing No. 1 Intermediate People’s Court and remanded the case to Beijing No. 1 Intermediate People’s Court for a retrial.





On December 18, 2009, the Beijing No.1 Intermediate People’s Court issued the civil verdict No. 5149. According to the verdict, Beijing Yi Zhi He Lian Information Technology Co., Ltd. shall repay the RMB 1,000,000 to Hartcourt Capital Inc. within 10 days after the verdict comes into effect, and its general manager Mr. Ming Song shall be jointly liable for performing the obligation of repaying the RMB 1,000,000. However, Beijing Yi Zhi He Lian Information Technology Co., Ltd. has appealed to the Beijing Senior People’s Court against the verdict No. 5149 on December 29, 2009. Now Hartcourt is waiting for the trial of secondary instance by the Beijing Senior People’s Court and the final outcome of this lawsuit is not known yet.





NOTE 12  ACQUISITION OF BEIJING YANYUAN





On June 13, 2008, the Company entered into a definitive agreement to purchase 60% of the outstanding equity interests of Beijing Yanyuan. Under the terms of the agreement between Beijing Yanyuan and the Company; Hartcourt has the right to waive the following commitment of profitability; Beijing Yanyuan commitment that its net profit would exceed RMB 6 million (US $827,000) for the seven months of calendar year 2008, RMB 10 million (US $1.379 million) for the calendar year 2009, and RMB 14 million (US $1.931 million) for the calendar year 2010. In connection with the acquisition, the Company issued 69 million common shares issued to the former shareholder of Beijing Yanyuan. As per the agreement the restriction on the shares will be released in three installment based on the realization of profit over the thirty-one months period from 2008 to 2010. If the profit realized by Beijing Yanyuan in any of the three years in the period from 2008 to 2010 is less than the profit target committed by Beijing Yanyuan for such calendar year, then the number of shares will be recalculated and equal to the shares issuable time the percentage of profit realized divided by the profit target. The Company has the right to take back the rest of the shares for free.





On July 23, 2008, The Hartcourt Companies (the “Company”) completed the acquisition of 60 percent of the outstanding equity interests of Beijing Yanyuan Rapido Education Company (“Beijing Yanyuan”) pursuant to the terms of the definitive agreement entered into between the two parties. Subject to the definitive agreement between the Company and Beijing Yanyuan, the purchase price paid by the Company in connection with its acquisition of a controlling interest in Beijing Yanyuan was 69 million shares of the Company’s restricted common stock.




16





The purchase price was determined using fair market value at the closing date of the transaction. The purchase price per share of the Company’s common stock was $0.05. Each share of common stock was valued at $0.05 resulting in a purchase price of $3,450,000. The assets acquired in this acquisition include course material. A summary of the Beijing Yanyuan assets acquired and the consideration for such assets is as follows:





Estimated Fair ValuesCurrent Assets, including cash $1,505

$
105,754Property & equipment


38,786Net Assets Acquired


144,540Percentage of acquisition


60%Total Assets Acquired


86,724Shares issued as consideration


3,450,000Student enrollment

$
3,363,276





The operating results of Beijing Yanyuan have been consolidated with those of the Company beginning July 23, 2008. No pro-forma financial information has been presented as the operations of Beijing Yanyuan before the acquisition, were insignificant.





Mr. Zhenyu Hu, was the former owner of Beijing Yanyuan and currently the officer of Beijing Yanyuan, guaranteed, as per the terms of the agreement, if Beijing Yanyuan will not achieve 75% of the profit target for the following three years starting 2008 to 2010, Mr. Hu will compensate Hartcourt in cash equivalent to the amount of profit target not achieved. In addition, as per the terms of the agreement, if Beijing Yanyuan can not achieve 60% of the profit target for any year starting 2008 to 2010, Hartcourt has the right to receive the entire 69 million shares from Beijing Yanyuan which were paid as part of purchase consideration.





NOTE 13    ACQUISITION OF CHINA ARTS & SCIENCE ACADEMY





On October 18, 2008, the Company entered into a definitive agreement to purchase 60% of the outstanding equity of China Arts and Science Academy. Under the terms of the definitive agreement executed between China Arts and Science Academy and Hartcourt; Hartcourt has the right to waive the following commitment of profitability; China Arts and Science Academy committed that its net profit would exceed RMB5 million (US$735,294) for the first year (November 1, 2008 to October 31, 2009) in which its results are consolidated with Hartcourt’s, RMB7.5 million (US$1.103 million) for the second year (November 1, 2009 to October 31, 2010) in which its results are consolidated with Hartcourt’s, and RMB10 million (US$1.471 million) for the third year (November 1, 2010 to October 31, 2011) in which its results are consolidated with Hartcourt’s. The restricted common shares issued by Hartcourt for the acquisition will be released to those shareholders of China Arts and Science Academy whose equity interests were purchased by Hartcourt in three installments based on the profit realized by China Arts and Science Academy over the three-year period beginning on the date of Hartcourt’s purchase of 60% of the outstanding equity interests of China Arts and Science Academy.  If the profit realized by China Arts and Science Academy in any of the three one-year periods is less than the profit target committed to by China Arts and Science Academy for such one-year period, then the number of shares issuable by the Company equal to the shares issuable time the percentage of profit realized divided by the profit target. The Company has the right to take back the rest of the shares for free.





On October 31, 2008, The Hartcourt Companies Inc. (the “Company”) completed the acquisition of 60 percent of the outstanding equity interests of China E & I Development Co. Ltd., which does business as the China Arts and Science Academy (“China Arts and Science Academy”), pursuant to the terms of the definitive agreement entered into between the two parties.  Under the agreement between the Company and China Arts and Science Academy, the purchase price paid by the Company in connection with its acquisition of a controlling interest in China Arts and Science Academy was 40 million shares of the Company’s restricted common stock.





The purchase price was determined using fair market value at the closing date of the transaction. The purchase price per share of the Company’s common stock was $0.02. Each share of common stock was valued at $0.02 resulting in a purchase price of $800,000. The assets acquired in this acquisition include course software. A summary of the China Arts & Science Academy assets acquired and the consideration for such assets is as follows:





Estimated Fair ValuesCurrent Assets, including cash $4,672

$
109,862Property & equipment


15,335Net Assets Acquired


125,197Percentage of acquisition


60%Total Assets Acquired


75,118Shares issued as consideration


800,000Course Software

$
724,882





The operating results of China Arts and Science Academy have been consolidated with those of the Company beginning November 1, 2008. No pro-forma financial information has been presented as the operations of China Arts and Science Academy before the acquisition, were insignificant.




17


NOTE 14    CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS
 
 The following is a reconciliation of the income tax rate to the income taxes reflected in the Statement of Operations:




February 28, 2010


February 28, 2009Income tax expense (credit) at statutory rate-federal

$
(870,000
)

$
(901,000
)State tax expense (credit) net of federal tax


(209,000
)


(152,000
)Valuation allowance


1,079,000



1,053,000Foreign income tax


128,365



241,781Income tax expense

$
128,365


$
241,781




Income tax expense for the year ended February 28, 2010 is $128,365, consists of tax on income of the Company’s subsidiaries in China, for the year ended February 28, 2009 was $241,781.




NOTE 15    CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS





The Company's operations are carried out in the PRC. Accordingly, the Company's business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC, and by the general state of the PRC's economy. The Company's business may be influenced by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other factors.





NOTE 16    SUBSEQUENT EVENTS




No significant subsequent to this report date.


18








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 1933, 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





China’s Education Markets





In 1986, the PRC government implemented a system of compulsory education that requires each child to have at least nine years of formal education. Chinese culture has historically placed a strong emphasis on education. Because of the “one child” policy of the PRC government, Chinese families are generally willing to invest a substantial amount of their financial resources in their only child’s education. According to the Economist Intelligence Unit, the Chinese disposable income per capita increased at a compound annual growth rate, or CAGR, of 6.7% from 2002 to 2006 and will probably increase at a CAGR of 8.3% from 2007 to 2011. With greater amounts of disposable income, Chinese families are spending an even higher percentage of their disposable income on their children’s education. Education expenditure as a percentage of GDP potentially will grow from 4.0% in 2005 to 4.5% in 2010, according to the China Education Human Resources Report of 2003.





China’s education market is large and growing rapidly because of favorable demographic, consumer spending trends and the increased importance placed on higher and professional education.





According to the Ministry of Education (MOE), 29 million students will reach college age in the next 5 years, a 40% increase and a US$36 billion market. While MOE-controlled universities and colleges still maintain dominant market share, the field is now open for private and foreign investment capital. In addition, MOE has set a timeline to privatize all vocational schools and educational institutions that offer degrees lower than Bachelor by 2010.





According to the China Statistical Yearbook (2007), in 2006, approximately 686 million people in China were between the ages of 5 and 39. Ongoing urbanization has increased the proportion of China’s population living in urban areas from 36.2% in 2000 to 43.9% in 2006, as stated in the China Statistical Yearbook (2007), and potentially will continue to increase. According to the National Bureau of Statistics of China, average per capita annual consumption expenditures in urban areas in China have increased, from approximately RMB4,998 ($712.8) in 2000 to approximately RMB8,697 ($1,240.3) in 2006. Consumption expenditure on education, cultural and recreational services accounted for 13.8% of total annual consumption expenditures per capita in urban households in 2006, the second largest category after food. We believe these demographic and consumer trends are making people in China increasingly willing to invest in higher and professional education.





China has one of the fastest growing economies in the world. As China’s economy continues to develop, its service industries are playing an increasingly important role. We believe this will increase opportunities in the education markets as people continue to seek advanced skills and professional licenses and certifications.





In August 2006, after reviewing our business condition, competitive position, and opportunities in China, we decided to change our business by focusing on the education market in China to take advantage of the substantial market demand for education services. We plan to not only acquire certain schools we have targeted, but also to run these schools actively by putting together strong faculty teams, incentive plans and strategic expansion programs.





On May 15, 2007, we completed the purchase of 100% of the equity interests in China Princely Education Technology Development Company Limited (“China Princely”), an authorized accrediting organization for China vocational education located in Beijing, PRC. Under the terms of the purchase agreement, we paid to the shareholders of China Princely 5,400,000 shares of our restricted common stock at closing. After closing, we changed the name of China Princely to Hartcourt Princely Education Technology Development (Beijing) Co., Ltd.





On July 23, 2008, we completed the acquisition of 60 percent of the outstanding equity of Beijing Yanyuan Rapido Education Company (“Beijing Yanyuan”) pursuant to the terms of the definitive agreement entered into between the two parties, a well-known training institution in China. Subject to the definitive agreement between the Company and Beijing Yanyuan, the purchase price paid by the Company in connection with its acquisition of a controlling interest in Beijing Yanyuan was 69 million shares of the Company’s restricted common stock.





On October 31, 2008, The Hartcourt Companies Inc. (the “Company”) completed the acquisition of 60 percent of the outstanding equity interests of China E & I Development Co. Ltd., which does business as the China Arts and Science Academy (“China Arts and Science Academy”), pursuant to the terms of the definitive agreement entered into between the two parties.  Under the agreement between the Company and China Arts and Science Academy, the purchase price paid by the Company in connection with its acquisition of a controlling interest in China Arts and Science Academy was 40 million shares of the Company’s restricted common stock.





19





Results of Operations





The following table sets forth the consolidated statements of operations for the three months ended February 28, 2010, with the comparable reporting period in the preceding year.




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


For the three month

periods endedFebruary28,


February 28,2010


2009Net revenues

$
343,652


$
922,962Cost of revenues


(113,178
)


(107,065
)Gross profit


230,474



815,897Operating costs and expenses:General and administrative expenses


132,195



306,127Depreciation and amortization


55,062



6,041Total operating expenses


187,257



312,168Income from continued operations


43,217



503,729Other income (expenses)Foreign currency exchange gain


(178
)

(2,120
)Interest income


29,832



-Total other income (expense)


29,654


(2,120)Income from continued operations before income taxes and noncontrolling interest


71,871



501,609Provision for income taxes


(46,950
)


(144,088
)Noncontrolling interest, net of taxes


(72,900
)


(251,329
)NET INCOME (LOSS)


(46,979)



106,192OTHE COMPREHENSIVE ITEM:Foreign currency translation gain (loss)


4,019



(1,510
)NET COMPREHENSIVE INCOME (LOSS)

$
(42,960
)

$
104,682





Three months ended February 28, 2010 compared to three months ended February 28, 2009.





Net Revenue:





Revenues were $ 343,652 for the three months ended February 28, 2010 compared to $922,962 for the same period in 2009. The revenues were primarily due to revenue generated by Beijing Yanyuan and China Arts & Science Academy. We currently derive revenues from the following sources:





●
educational programs and services, which accounted for 90% of our total net revenues as of February 28, 2010; and





●
books and others, which accounted for 10% of our total net revenues as of February 28, 2010.





Cost of revenue:





Cost of revenues were $113,178 for the three months ended February 28, 2010 compared to $107,065 for the same period in 2009. The increased cost of revenue was primarily due to costs of revenue attributable to the operations of Beijing Yanyuan and China Arts & Science Academy during the three months ended February 28, 2010. Cost of revenue consisted primarily of printing costs of books and other materials and relevant business tax for income.





General and administrative expenses:





General and administrative expenses were $132,195 for the three months ended February 28, 2010 compared to $306,127 for the same period in 2009, an decrease of $ 173,932or 57% compared to the three months ended February 28, 2009.





20






Depreciation and amortization expenses:





Depreciation and amortization expenses were $ 55,062 for the three months ended February 28, 2010 compared to $6,041 for the same period in 2009. The increase was primarily due to the acquisitions of Beijing Yanyuan and China Arts & Science Academy.





Foreign currency exchange loss:





Foreign currency exchange loss was $ 178for the three months ended February 28, 2010 compared to $2,120 for the same period in 2009.





Income (loss) from Continuing Operations:





Loss from continuing operations for the three months ended February 28, 2010 was $46,979, compared to income of $106,192 for the same period in 2009.





The following table sets forth the consolidated statements of operations for the nine months ended February 28, 2010, with the comparable reporting period in the preceding year.




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





For the nine month

periods endedFebruary28,


February 28,2010


2009Net revenues

$
1,299,499


$
1,782,925Cost of revenues


(341,077
)


(223,661
)Gross profit


958,422



1,559,264Operating costs and expenses:General and administrative expenses


425,187



726,921Depreciation and amortization


225,044



14,290Total operating expenses


650,231



741,211Income from continued operations


308,191



818,053Other income (expenses)Foreign currency exchange gain


4,871


49,069Interest income


50,830



-Gain on settlement of debt


-


188,848Total other income


55,701


237,917Income from continued operations before income taxes and noncontrolling interest


363,892



1,055,970Provision for income taxes


(128,365
)


(241,781
)Noncontrolling interest, net of taxes


(314,925
)


(486,650
)NET INCOME (LOSS)


(79,398
)


327,539OTHE COMPREHENSIVE ITEM:Foreign currency translation gain (loss)


(4,544
)


56,023NET COMPREHENSIVE INCOME (LOSS)

$
(83,942
)

$
383,562











21


Nine months ended February 28, 2010 compared to three months ended February 28, 2009.





Net Revenue:





Revenues were $ 1,299,499 for the nine months ended February 28, 2010 compared to $1,782,925 for the same period in 2009. The revenues were primarily due to revenue generated by Beijing Yanyuan and China Arts & Science Academy. We currently derive revenues from the following sources:





●
educational programs and services, which accounted for 90% of our total net revenues as of February 28, 2010; and





●
books and others, which accounted for 10% of our total net revenues as of February 28, 2010.





Cost of revenue:





Cost of revenues were $341,077 for the nine months ended February 28, 2010 compared to $223,661 for the same period in 2009. The increased cost of revenue was primarily due to costs of revenue attributable to the operations of Beijing Yanyuan and China Arts & Science Academy during the three months ended February 28, 2010. Cost of revenue consisted primarily of printing costs of books and other materials and relevant business tax for income.





General and administrative expenses:





General and administrative expenses were $425,187 for the nine months ended February 28, 2010 compared to $726,921 for the same period in 2009, an decrease of $ 301,734or 42% compared to the nine months ended February 28, 2009.





Depreciation and amortization expenses:





Depreciation and amortization expenses were $ 225,044 for the nine months ended February 28, 2010 compared to $14,290 for the same period in 2009. The increase was primarily due to the acquisitions of Beijing Yanyuan and China Arts & Science Academy.





Foreign currency exchange gain (loss):





Foreign currency exchange gain was $ 4,871 for the nine months ended February 28, 2010 compared to $49,069 for the same period in 2009.





Income (loss) from Continuing Operations:





Loss from continuing operations for the nine months ended February 28, 2010 was $83,942, compared to income of $383,562 for the same period in 2009.





Liquidity and Capital Resources:





As shown in our accompanying financial statements, we had a net loss of $ 79,398 for the nine months ended February 28, 2010, as compared to income of $ 327,539 for the same period in 2009.





The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. This basis of accounting contemplates the recovery of the Company’s assets and the satisfaction of liabilities in the normal course of business.





The Company has taken certain restructuring steps to provide the necessary capital to continue its operations. These steps included:





●
Look for growth opportunities through acquisitions of profitable education businesses;●
Raise additional capital through public offerings or private placements; and


●
Take measures to control costs and operating expenses.





Operating activities: During the nine months ended February 28, 2010, net cash provided by operating activities was $ 149,931, compared to net cash $(165,954) used in operating activities during the same period in 2009. The cash provided by operating activities in the nine months ended February 28, 2010 resulted mainly from loss of $(79,398), and an increase of Depreciation and amortization of $168,270, and decrease of account receivable of $(735,105), and an increase of accrued expenses and other current liabilities of $536,926, and an decrease of accounts payable of $141,331, and minority interest of $314,925. The cash used in operating activities in the nine months ended February 28, 2009 resulted mainly from Net Income of $327,539, and an decrease of account payable of $ (326,228), and decrease of prepaid expenses and other receivables of $ (703,475) and an increase of accrued expenses and other current liabilities of $ 460,128, and increased of accounts receivable of $(779,493).







22


Investing activities: Net cash used in investing activities during the nine months ended February 28, 2010 was $356,214, compared to cash provided by investing activities was $6,177 during the same period in 2009. The cash used in investing activities in the nine months period ended February 28, 2010 was due to the loan receivable of $(356,214).





Financing activities: Net cash provided by financing activities during the nine months ended February 28, 2010 was $212,778 compared to $401,858 provided by the same period in 2009. Net cash provided by financing activities in the nine months ended February 28, 2010 was decrease due to officer of $(61,651), and increase loan payable of $274,429. Net cash provided by financing activities in the nine months ended February 28, 2009 was issuance of shares of cash of $400,000.





Contractual Obligations





During the three months ended February 28, 2010, we did not have any contractual obligation other than the facility leases described in Note 11(b) of financial statements.





Off-Balance Sheet Arrangements





During the three months ended February 28, 2010, 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, please refer to our Annual Report on Form 10-K for the year ended May 31, 2009. There have been no changes in our critical accounting policies since May 31, 2009.





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 February 28, 2010, 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 0.81% to 1.71% per annum.





Interest Rate Risk





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.





Impact of Foreign Currency Rate Changes





Because we translate foreign currencies (primarily Chinese Yuans and Hong Kong Dollars) 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. 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 February 28, 2010, we did not engage in foreign currency hedging activities.





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.





23


PART II: OTHER INFORMATION





Item 1. Legal Proceedings.





Legal Proceedings:





Hartcourt Hi-Tech Investment (Shanghai) Inc. filed a complaint against Beijing Yi Zhi He Lian Information Technology Co., for returning RMB 1,000,000 which it owed the Company. On December 19, 2006, Beijing Shi Jing Shan District Court entered the judgment in this case. The court found that Hartcourt Hi-Tech Investment (Shanghai) Inc. has no rights to file the complaint against Beijing Yi Zhi He Lian Information Technology Co., Ltd. unless designated by Hartcourt Capital Inc. , which signed and was bound by the acquisition agreement. The court issued an order overruling the complaint from Hartcourt Hi-Tech Investment (Shanghai), Inc. as the plaintiff.





On August 10, 2007, Hartcourt Capital Inc. filed a lawsuit in the Beijing No. 1 Intermediate People’s Court against Beijing Yi Zhi He Lian Information Technology Co., Ltd. to return the RMB 1,000,000 which it owed to the Company. Beijing No. 1 Intermediate People’s Court issued the civil ruling No. (2007)10077, overruling the complaint from Hartcourt Capital Inc. with the reason that Hartcourt Capital Inc. has no rights to lodge the lawsuit as the plaintiff. Hartcourt Capital Inc. then appealed to Beijing Senior People’s Court against the civil ruling No. 10077. Beijing Senior People’s Court found that Hartcourt Capital Inc. shall have the rights to lodge the lawsuit as the plaintiff. On December 10, 2008, the Beijing Senior People’s Court issued ruling No. (2008) 740. By this ruling, the court withdrew the civil ruling No. 10077 of the Beijing No. 1 Intermediate People’s Court and remanded the case to Beijing No. 1 Intermediate People’s Court for a retrial.





On December 18, 2009, the Beijing No.1 Intermediate People’s Court issued the civil verdict No. 5149. According to the verdict, Beijing Yi Zhi He Lian Information Technology Co., Ltd. shall repay the RMB 1,000,000 to Hartcourt Capital Inc. within 10 days after the verdict comes into effect, and its general manager Mr. Ming Song shall be jointly liable for performing the obligation of repaying the RMB 1,000,000. However, Beijing Yi Zhi He Lian Information Technology Co., Ltd. has appealed to the Beijing Senior People’s Court against the verdict No. 5149 on December 29, 2009. Now Hartcourt is waiting for the trial of secondary instance by the Beijing Senior People’s Court and the final outcome of this lawsuit is not known as of February 28, 2010.





Item 1A. Risk Factors





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, 2009.





Item 2. Unregistered Sales of Equity Securities and Use of Proceeds





None





Item 3. Defaults Upon Senior Securities





None





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





None.





Item 5. Other Information





None.








24


Item 6. Exhibits





Exhibit


Previously

FiledNumber

Description3.1

Articles of Incorporation of Hartcourt, dated September 6, 1983
(1)3.2

Bylaws of Hartcourt
(1)3.3

Amendment to the Bylaws of Hartcourt, dated December 2, 1996
(2)3.4

Amendment to the Bylaws of Hartcourt, dated October 25, 2004
(6)3.5

Amendments to the Articles of Incorporation of Hartcourt, dated November 21, 1994
(2)3.6

Amendments to the Articles of Incorporation of Hartcourt, dated March 23, 1995
(1)3.7

Amendment to the Articles of Incorporation of Hartcourt, dated October 1997
(3)3.8

Amendment to the Articles of Incorporation of Hartcourt, dated March 13, 2003
(4)3.9

Amendment to the Articles of Incorporation of Hartcourt, dated November 24, 2005
(5)31.1

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002





(1) Previously filed as an exhibit to Hartcourt’s Form 10SB12G/A, dated July 3, 1997 and incorporated herein by reference.


(2) Previously filed as an exhibit to Hartcourt’s Form 10SB12B, dated January 21, 1997 and incorporated herein by reference.


(3) Previously filed as an exhibit to Hartcourt’s Form 10KSB, dated April 13, 1998 and incorporated herein by reference.


(4) Previously filed as an exhibit to Hartcourt’s Form 10KSB/A, dated April 25, 2003 and incorporated herein by reference.


(5) Previously filed as an exhibit to Hartcourt’s Form 10-Q, dated April 23, 2007, as amended by Hartcourt’s Form 10-Q/A, dated April 24, 2007, incorporated herein by reference.


(6) Previously filed as an exhibit to Hartcourt’s Form 10-K, dated September 15, 2007 and incorporated herein by reference.





25





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: May 18, 2010
By:/s/ VICTOR ZHOUVictor ZhouChief Executive OfficerDated: May 18, 2010
By: /s/ Rachel ZhangRachel ZhangChief Financial Officer