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 February 29,
2008




o
            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
      Employerincorporation
      or organization)
            
            Identification
      No.)





Room
      706, Silver Tower, No.933Zhongshanxi
      Road, Shanghai, China
            
            200051(Address
      of principal executive offices)
            
            (Zip
      Code)




(011)
(86 21) 51113716


(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 o                                                      Non-accelerated
filer 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,
April [10], 2008, was 205,465,117.









TABLE OF
CONTENTS







PART
      I: FINANCIAL INFORMATIONItem 1.
            Financial
      Statements (Unaudited)Consolidated
      Balance Sheet - February 29, 2008 and May 31, 2007Consolidated
      Statements of Operations - Three-month and nine-month periods ended
      February 29, 2008 and February 28, 2007Consolidated
      Statements of Cash Flows - nine-month periods ended February 29, 2008 and
      February 28, 2007Notes
      to Consolidated Financial StatementsItem 2.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      OperationsItem 3.
            Quantitative
      and Qualitative Disclosures About Market RiskItem 4.
            Controls
      and ProceduresPART
      II: OTHER INFORMATIONItem 1
            Legal
      ProceedingsItem
      1A
            Risk
      Factors Affecting Future ResultsItem 2
            Unregistered
      Sales of Equity Securities and Use of ProceedsItem 3
            Defaults
      Upon Senior SecuritiesItem 4
            Submission
      of Matters to a Vote of Security HoldersItem 5
            Other
      InformationItem 6.
            ExhibitsSignatures







2






PART
I FINANCIAL INFORMATION




Item
1.  Financial Statements


THE
HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
 CONSOLIDATED
BALANCE SHEETS
  February
      29, 2008
              
              
              May
      31, 2007Unaudited
              
              
              AuditedASSETSCash
      and cash equivalents
              
              $
              36,234
              
              
              $
              20,611Prepaid
      expenses and other assets
              
              
              19,871
              
              
              
              41,549TOTAL
      CURRENT ASSETS
              
              
              56,105
              
              
              
              62,160PROPERTY
      & EQUIPMENT – NET
              
              
              26,220
              
              
              
              26,423OTHER
      RECEIVABLE
              
              
              57,965
              
              
              
              675,969GOODWILL
              
              
              -
              
              
              
              651,082TOTAL
      ASSETS
              
              $
              140,290
              
              
              $
              1,415,634LIABILITIES
      AND SHAREHOLDERS' EQUITY (DEFICIT)CURRENT
      LIABILITIESAccounts
      payable
              
              $
              411,691
              
              
              $
              510,203Accrued
      expenses and other current liabilities
              
              
              778,051
              
              
              
              572,792Due
      to directors
              
              
              65,488
              
              
              
              136,452TOTAL
      CURRENT LIABILITIES
              
              
              1,255,230
              
              
              
              1,219,447
  SHAREHOLDERS'
      EQUITY (DEFICIT)Preferred
      Stock:Original
      preferred stock, $0.01 par value, 1,000 shares authorized, issued and
      cancelled
                
                $
                -
                
                
                $
                -Class
      A preferred stock, 10,000,000 shares authorized, none issued and
      outstanding
                
                
                -
                
                
                
                -Common
      stock:$0.001
      par value, 424,999,000 authorized February 29, 2008: 207,513,845
      issued  205,465,117 outstanding May 31, 2007: 207,130,725 issued
      205,081,997 outstanding
                
                
                205,465
                
                
                
                205,082Additional
      paid in capital
                
                
                71,732,613
                
                
                
                71,570,246Treasury
      stock, at cost, 2,048,728 shares
                
                
                (48,728
                )
                
                
                (48,728
                )Other
      comprehensive loss
                
                
                (61,665
                )
                
                
                (34,598
                )Accumulated
      deficit
                
                
                (72,942,625
                )
                
                
                (71,495,815
                )TOTAL
      SHAREHOLDERS' EQUITY (DEFICIT)
                
                
                (1,114,940
                )
                
                
                196,187TOTAL
      LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
                
                $
                140,290
                
                
                $
                1,415,634
 The
accompanying notes form an integral part of these unaudited consolidated
financial statements.
 3




THE
HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
 UNAUDITED
CONSOLIDATED STATEMENTS OF OPERATIONS
  For
      the three month periods endedFebruary
      29,
              
              
              February
      28,2008
              
              
              2007Net
      revenue
              
              $
              -
              
              
              $
              -Operating
      expenses:General
      and administrative expenses
              
              
              261,988
              
              
              
              327,237Depreciation
      and amortization
              
              
              3,934
              
              
              
              7,957Total
      operating expenses
              
              
              265,922
              
              
              
              335,194Loss
      from operations
              
              
              (265,922
              )
              
              
              (335,194
              )Other
      income (expenses)Interest
      income (expense)
              
              
              (3,600
              )
              
              
              98Loss
      from continuing operations
              
              
              (269,522
              )
              
              
              (335,096
              )Discontinued
      operations:Loss
      from discontinued operations
              
              
              -
              
              
              
              (1,048,625
              )NET
      LOSS
              
              
              (269,522
              )
              
              
              (1,383,721
              )OTHER
      COMPREHENSIVE ITEM:Foreign
      currency translation gain
              
              
              (35,987
              )
              
              
              325NET
      COMPREHENSIVE LOSS
              
              $
              (305,509
              )
              
              $
              (1,383,396
              )BASIC
      AND DILUTED EARNINGS/(LOSSES)PER
      COMMON SHARE:Loss
      from continuing operations
              
              $
              (0.00
              )
              
              $
              (0.00
              )Loss
      from discontinued operations
              
              $
              -
              
              
              $
              (0.01
              )Loss
      per share
              
              $
              (0.00
              )
              
              $
              (0.01
              )*
      Basic and fully diluted weighted average number of shares
      outstanding
              
              
              205,465,117
              
              
              
              199,262,110
  *
Weighted average number of shares used to compute basic and diluted loss per
share is equivalent as the effect of dilutive securities is
anti-dilutive.
 The
accompanying notes form an integral part of these unaudited consolidated
financial statements.




4




THE
HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
 UNAUDITED
CONSOLIDATED STATEMENTS OF OPERATIONS
  For
      the nine month periods endedFebruary
      29,
              
              
              February
      28,2008
              
              
              2007Net
      revenue
              
              $
              -
              
              
              $
              -Operating
      expenses:General and administrative expenses
              
              
              799,057
              
              
              
              1,032,602Depreciation and amortization
              
              
              9,767
              
              
              
              19,912Impairment of goodwill
              
              
              666,471
              
              
              
              -Total
      operating expenses
              
              
              1,475,295
              
              
              
              1,052,514Loss
      from operations
              
              
              (1,475,295
              )
              
              
              (1,052,514
              )Other
      incomeInterest income (expense)
              
              
              36,022
              
              
              
              1,253Loss
      from continuing operations
              
              
              (1,439,273
              )
              
              
              (1,051,261
              )Discontinued
      operations:Income/(loss)
      from discontinued operations
              
              
              22,878
              
              
              
              (1,487,180
              )NET
      LOSS
              
              
              (1,416,395
              )
              
              
              (2,538,441
              )OTHER
      COMPREHENSIVE ITEM:Foreign
      currency translation gain
              
              
              (27,067
              )
              
              
              26,589NET
      COMPREHENSIVE LOSS
              
              $
              (1,443,462
              )
              
              $
              (2,511,852
              )BASIC
      AND DILUTED LOSS PER COMMON SHARE:Loss
      from continuing operations
              
              $
              (0.01
              )
              
              $
              (0.00
              )Income
      (loss) from discontinued operations
              
              $
              0.00
              
              
              $
              (0.01
              )Loss
      per share
              
              $
              (0.01
              )
              
              $
              (0.01
              )*
      Basic and fully diluted weighted average number of shares
      outstanding
              
              
              205,397,220
              
              
              
              196,601,703
 
 *
Weighted average number of shares used to compute basic and diluted loss per
share is equivalent as the effect of dilutive securities is
anti-dilutive.
 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
 
  For
      the nine month-periods endedFebruary
      29, 2008
              
              
              February
      28, 2007CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
              
              $
              (1,416,395
              )
              
              $
              (2,538,441
              )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
              
              
              9,767
              
              
              
              19,912Goodwill
      impairment
              
              
              666,471Stock
      options issued for service
              
              
              137,752
              
              
              
              383,403Stock
      issued for services and compensations
              
              
              24,999
              
              
              
              56,535Changes
      in operating assets and liabilities:Prepaid
      expenses and other receivables
              
              
              (8,738
              )
              
              
              (295
              )Accounts
      payable
              
              
              -
              
              
              
              (10,813
              )Accrued
      expenses and other current liabilities
              
              
              130,540
              
              
              
              63,851Other
      Current assets
              
              
              
              
              
              
              137,385NET
      CASH USED IN OPERATING ACTIVITIES OF CONTINUED OPERATIONS
              
              
              (455,604
              )
              
              
              (1,888,463
              )NET
      CASH PROVIDED BY OPERATING ACTIVITIES OF DISCONTINUED
      OPERATIONS
              
              
              -
              
              
              
              1,487,180CASH
      USED IN OPERATING ACTIVITIES
              
              
              (455,604
              )
              
              
              (401,283
              )CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchase
      of property and equipment
              
              
              (9,577
              )
              
              
              (16,383
              )NET
      CASH USED IN INVESTING ACTIVITIES OF CONTINUED OPERATIONS
              
              
              (9,577
              )
              
              
              (16,383
              )NET
      CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES OF DISCONTINUED
      OPERATIONS
              
              
              546,905
              
              
              
              (277,555
              )NET
      CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
              
              
              537,328
              
              
              
              (293,938
              )




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 endedFebruary
      292008
              
              
              2007CASH
      FLOWS FROM FINANCING ACTIVITIESSales
      of treasury stock
              
              
              47,319
              
              
              
              -Proceeds
      on sale of common stock
              
              
              -
              
              
              
              252,372Proceeds
      from (payments to) related parties-net
              
              
              (70,964
              )
              
              
              12,457NET
      CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES OF CONTINUED
      OPERATIONS
              
              
              (23,645
              )
              
              
              264,829NET
      CASH PROVIDED BY FINANCING ACTIVITIES OF DISCONTINUED
      OPERATIONS
              
              
              -
              
              
              
              -NET
      CASH PROVIDED BY (USED IN) FINANCIING ACTIVITIES
              
              
              (23,645
              )
              
              
              264,829EFFECT
      OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALANTS
              
              
              (42,456
              )
              
              
              45,178NET
      INCREASE / (DECREASE) IN CASH AND CASH EQUIVALANTS
              
              
              15,623
              
              
              
              (385,214
              )CASH
      AND CASH EQUIVALENTS - BEGINNING BALANCE
              
              
              20,611
              
              
              
              400,672CASH
      AND CASH EQUIVALENTS – ENDING BALANCE
              
              $
              36,234
              
              
              $
              15,458SUPPLEMENTAL
      DISCLOSURE OF CASH FLOWSCash
      paid for interest
              
              $
              -
              
              
              $
              -Cash
      paid for income taxes
              
              $
              -
              
              
              $
              -






7







THE
HARTCOURT COMPANIES, INC. AND SUBSIDIARIES


NOTES
TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS







NOTE 1    
GENERAL





The
Hartcourt Companies, Inc. ("Hartcourt" “We/Our” or the "Company"), was
incorporated in Utah in 1983.  Previously, we were a distributor of
internationally well known brand named IT hardware products and related services
in the People’s Republic of China. In August 2006, we announced our intention to
change our business by focusing on the vocational/training and education
marketplace in the People’s Republic of China.




On
December 28, 2006, we entered into a definitive agreement to acquire a 51%
equity interest in Taishun Yucai Senior School (“Yucai”), a high school
education and vocational training service provider located in Wenzhou, Zheijiang
PRC. The remaining 49% of the equity interests in Yucai will be held by Yucai’s
current shareholders. Under the terms of the purchase agreement, we agreed to
pay US$2,000,000 and 5,500,000 shares of our restricted common stock in order to
acquire a 51% equity interest in Yucai. Pursuant to the purchase agreement, the
US$2,000,000 will be payable in three installments within one year after closing
of the acquisition and the 5,500,000 shares will be payable upon closing of the
acquisition. The lead selling shareholder and his fellow selling shareholders
together with Yucai have jointly guaranteed that we will receive a minimum of
US$554,487 (RMB 4,325,000) in profit and management fees for each of the three
years following the closing. In the event that the net profit is less than the
guaranteed amount to the Company for a given year, the lead selling shareholder
and his fellow selling shareholders shall make up the discrepancy before
December 31 of each year in respect thereof.  We have guaranteed that
the average three-day closing price of our shares on the days immediately prior
to the one-year anniversary of the closing date will be not less than US$0.50
per share.  In the event that the share price is less than US$0.50, we
shall credit additional cash or issue new restricted shares. The transaction is
subject to government approval. We cannot predict whether or when such approval
will be obtained.




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.  Cash consideration of US$39,180 (RMB300,000)
and a capital infusion of US$274,258 (RMB2,100,000) in China Princely were also
due at closing.  As of the date of this report, by mutual agreement of
the parties, we have not paid these amounts.  The primary current
shareholder of China Princely has personally guaranteed that the net profit of
China Princely will be not less than US$256,000 (RMB2,000,000) for the calendar
year 2007, while we have guaranteed that the average three-day closing price of
our shares on the days immediately prior to the one year anniversary of the
closing date will be not less than US$0.50 per share. In the event that the
share price is less than US$0.50, we shall, at our option, pay additional cash
or issue new restricted shares. After closing, we changed the name of China
Princely to Hartcourt Princely Education Technology Development (Beijing) Co.,
Ltd.




As of
February 29, 2008, 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 29, 2008, 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 February 29, 2008, the
wind-up process was completed.





As of
February 29, 2008, 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.




As a
result of our business decision to move away from the IT distribution business,
in September 2006, we entered into a definitive sales and purchase agreement to
sell our interest in Besteffort Investments Ltd (“Besteffort”). In October 2006,
the Company completed the transfer of legal ownership of Besteffort to the
purchaser. As of the close of our fiscal quarter ended November 30, 2007, we
have already received US$229,635 in connection with the sale of our IT
distribution business and the remaining balance of US$57,965 is held for assets
receivable. Prior to this sale, Besteffort Investments Ltd indirectly held 90%
equity interest in Shanghai Control Tech, which was a distributor of Radvision
video conference products in China. Shanghai Control Tech had ceased its
operations on January 1, 2006 primarily as a result of Radvision’s
termination of its distribution agreement with Shanghai Control
Tech.  The revenue of Shanghai Control Tech had been derived almost
exclusively from the Radvision business.




8




On
February 26, 2007, the Board of Directors approved a resolution to dispose of
the operations of Shanghai Jiumeng Information Technology Co., Ltd. (“Shanghai
Jiumeng”).  The Hartcourt Companies, Inc. entered into a Sales &
Purchase Agreement with Shanghai Shiheng Architecture Consulting Co., Ltd (the
“Purchaser”) to sell 100% of the equity interests in Shanghai
Jiumeng.  Shanghai Jiumeng holds 51% of the equity interest in
Shanghai Huaqing Corporation Development Ltd. (“Shanghai
Huaqing”).  On June 11, 2007, the Purchaser terminated this Sales
& Purchase Agreement.  The Purchaser refused to consummate the
transaction for the agreed upon purchase price.





On June
13, 2007, the Board of Directors of the Company authorized the disposal of its
51% interest in Shanghai Huaqing to its minority shareholders. The agreement is
subject to the receipt of required third party consents and approvals if
required by applicable law. The contemplated purchase price is US$528,419. In
addition, a shareholder of Huaqing Shanghai will return 997,550 shares of our
common stock to the individual or entity designated by us. During the three
months ended February 29, 2008, RMB 2,000,000 (US$252,949) was received. As of
February 29, 2008, total RMB 4,000,000 (US$516,670) and 997,550 shares of the
Company’s common stock were received.




As of
February 29, 2008, the Company has classified the Shanghai Huaqing business as
discontinued operation. (See note 12)





NOTE 2    SUMMARY 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, 2007 were
filed on September 13, 2007 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 29, 2008 are not necessarily indicative of the
results that may be expected for the year ended May 31, 2008.





b)    Basis
of Consolidation





The
Company’s financial statements for the nine months ended February 29, 2008 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 and Hartcourt Princely Education Technology Development
Company Limited. All significant inter-company accounts and transactions have
been eliminated in consolidation.





c)    Cash
and Cash Equivalents




The
Company considers as cash equivalents all short-term highly liquid investments
that are readily convertible to known amounts of cash and have original
maturities of three months or less. As the Company’s business activities are
located in China, substantial amounts of cash are deposited in foreign banks
located in China, which do not carry deposit insurance similar to banks in the
United States.





d)    Prepaid
expenses




Prepaid
expenses are expenses that are allocated into the period in which they are
incurred and in subsequent periods, and are 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 within one year. If certain prepaid expense item cannot
be amortized, its un-amortized amount is recorded as an expense for the current
period. Prepaid expenses amounted to US$10,438 at February 29, 2008 and are
included in “Prepaid expenses and other assets” in the accompanying financial
statements.





e) Property and
Equipment




Property
and equipment are recorded at cost. Depreciation is computed using the
straight-line method over useful lives of 5 to 40 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. Assets held under capital leases are recorded at the lesser
of the present value of the future minimum lease payments or the fair value of
the leased property. Expenditures for maintenance and repairs are charged to
operations as incurred.




9


f) 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" ("SFAS
144"), 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 29, 2008, there were no significant impairments of its
long-lived assets used in operations.





g) Income Taxes




The
Company utilizes SFAS No. 109, "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.




h) Stock-Based
Compensation




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 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.





i) 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 statement. Gain or loss on financial statement
translation from foreign currency are recorded as a separate component in the
equity section of the balance sheet, as component of comprehensive income. The
functional currencies of the Company are Chinese Renminbi and Hongkong
Dollars.





j)    Basic
and diluted earning per share




Earning
per share is calculated in accordance with the Statement of financial accounting
standards No. 128 (SFAS No. 128), “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.




10


k)    Recently
Issued Accounting Standards





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.





In
September 2006, FASB issued SFAS 158 “Employers’ Accounting for Defined Benefit
Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87,
88, 106, and 132(R)” This Statement requires an employer to recognize the
over-funded or under-funded status of a defined benefit postretirement plan
(other than a multiemployer plan) as an asset or liability in its statement of
financial position and to recognize changes in that funded status in the year in
which the changes occur through comprehensive income of a business entity or
changes in unrestricted net assets of a not-for-profit organization. This
Statement also requires an employer to measure the funded status of a plan as of
the date of its year-end statement of financial position, with limited
exceptions. An employer with publicly traded equity securities is required to
initially recognize the funded status of a defined benefit postretirement plan
and to provide the required disclosures as of the end of the fiscal year ending
after December 15, 2006. An employer without publicly traded equity securities
is required to recognize the funded status of a defined benefit postretirement
plan and to provide the required disclosures as of the end of the fiscal year
ending after June 15, 2007. However, an employer without publicly traded equity
securities is required to disclose the following information in the notes to
financial statements for a fiscal year ending after December 15, 2006, but
before June 16, 2007, unless it has applied the recognition provisions of this
Statement in preparing those financial statements:





1.
            A
      brief description of the provisions of this
  Statement





2.
            The
      date that adoption is required





3.
            The
      date the employer plans to adopt the recognition provisions of this
      Statement, if earlier.





The
requirement to measure plan assets and benefit obligations as of the date of the
employer’s fiscal year-end statement of financial position is effective for
fiscal years ending after December 15, 2008. Management is currently evaluating
the effect of this pronouncement on financial statements.


In
February 2007, FASB issued FASB Statement No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities. FASB 159 is effective for fiscal
years beginning after November 15, 2007. Early adoption is permitted subject to
specific requirements outlined in the new Statement. Therefore, calendar-year
companies may be able to adopt FASB 159 for their first quarter 2007 financial
statements.





The new
Statement allows entities to choose, at specified election dates, to measure
eligible financial assets and liabilities at fair value that are not otherwise
required to be measured at fair value. If a company elects the fair value option
for an eligible item, changes in that item's fair value in subsequent reporting
periods must be recognized in current earnings. FASB 159 also establishes
presentation and disclosure requirements designed to draw comparison between
entities that elect different measurement attributes for similar assets and
liabilities. Management is currently evaluating the effect of this pronouncement
on financial statements.





In
December 2007, FASB issued FASB Statement No. 160, Noncontrolling Interests in
Consolidated Financial Statements—an amendment of ARB No. 51. This Statement
applies to all entities that prepare consolidated financial statements, except
not-for-profit organizations, but will affect only those entities that have an
outstanding noncontrolling interest in one or more subsidiaries or that
deconsolidate a subsidiary. Not-for-profit organizations should continue to
apply the guidance in Accounting Research Bulletin No. 51, Consolidated
Financial Statements, before the amendments made by this Statement, and any
other applicable standards, until the Board issues interpretative guidance. This
Statement is effective for fiscal years, and interim periods within those fiscal
years, beginning on or after December 15, 2008 (that is, January 1, 2009, for
entities with calendar year-ends). Earlier adoption is prohibited. The effective
date of this Statement is the same as that of the related Statement 141(R). This
Statement shall be applied prospectively as of the beginning of the fiscal year
in which this Statement is initially applied, except for the presentation and
disclosure requirements. The presentation and disclosure requirements shall be
applied retrospectively for all periods presented.





In March
19, 2008, FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities. The new standard is intended to improve financial reporting
about derivative instruments and hedging activities by requiring
enhanced disclosures to enable investors to better understand their effects on
an entity's financial position, financial performance, and cash flows. It is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008, with early application encouraged. Currently
the Company does not carry any derivative instruments and the adoption of this
statement may not have any effect on the financial statements.





In
December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business
Combinations”. The objective of this statement will significantly change the
accounting for business combinations. Under Statement 141R, an acquiring entity
will be required to recognize all the assets acquired and liabilities assumed in
a transaction at the acquisition –date fair value with limited exceptions.
Statement 141 applies prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. The Company does not expect the
adoption of SFAS No. 141R to have a material impact on the consolidated
financial statements





11





NOTE
3     EARNINGS / (LOSSES) PER SHARE





Basic and
diluted (loss) income per common share is computed as follows:




February
      29,
              2008
            
            
            February
      28,
              2007Net
      loss
            
            $
            (1,416,395
            )
            
            $
            (2,538,441
            )Effects
      of dilutive securities
            
            
            -
            
            
            
            -Weighted
      average shares outstanding
            
            
            205,397,220
            
            
            
            196,601,703Basic
      and dilutive loss per share
            
            $
            (0.01
            )
            
            $
            (0.01
            )





As of
February 29, 2008, the Company had 34,600,000 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; due to the Company has retained loss as of February 29,
2008.


NOTE 4    
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 29, 2008 and February 28, 2007 are 205,465,117
and 199,530,745, respectively.  No shares of the Company’s Class A
Preferred Stock were outstanding as of February 29, 2008 and February 28,
2007.





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
29, 2008.





Until
December 31, 2010, with respect to the election of directors, holders of
Original Preferred Stock are entitled to elect the number of directors which
constitutes three-fifths of the authorized number of members of the Board of
Directors and, if such three-fifths is not a whole number, then the holders of
Original Preferred Stock are entitled to elect the nearest higher whole number
of directors.





The
holders of Original Preferred Stock are entitled to convert each share of
Original Preferred Stock into 1,000 shares of paid and non-assessable common
stock. The original preferred shares are owned by the Former Chief Executive
Officer of the Company.





In the
event of liquidation, dissolution, or winding up of the affairs of the Company
whether voluntary or involuntary, the holders of record are entitled to be paid
the full par value of Original Preferred Stock. The holders of shares of
Original Preferred Stock are not entitled to receive any dividends.





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





On June
13, 2007, following the signing the definitive sales and purchase agreement,
997,550 shares of our common stock were returned from Shanghai Huaqing to the
Company. These shares were valued at US$69,829 which was approximately equal to
the fair market value of the stock at the return date.





On July
1, 2007, the Company issued 310,000 unregistered shares of common stock valued
at US$22,102 in lieu of cash payment for director service compensation, which
were approximately equal to the fair market value of the stock at issue
date.





On July
9, 2007, the Company agreed to sale 997,550 unregistered shares of our common
stock (received on June 13, 2007 on disposal of a subsidiary) in an offshore
transaction under Regulation S to Yuying Lu for proposed gross proceeds of
US$49,878 which is subject to signing agreement.




12




On
October 1, 2007, we issued 73,120 unregistered shares of our common stock to
Geoffrey Wei and Wilson Li valued at US$2,824 as of the date of issuance in lieu
of cash compensation for director service.




Stock
Option Plan





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





In
November 2005, the Company adopted a new 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 May
31, 2006, the Board of Directors of the Company appointed Mr. Victor Zhou to be
the acting Chief Executive Officer, effective June 1, 2006. Mr. Victor Zhou’s
employment agreement was signed on June 1, 2006. The compensation includes a
monthly salary of US$8,333. In addition, Mr. Victor Zhou was granted an option
to purchase 10,000,000 shares of our common stock with exercise price of
US$0.04. The stock option vesting schedule is as follows:




-
            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; and-
            Option
      to purchase 2,000,000 shares of our common stock to be vested upon each
      full profitable year.





On June
1, 2006, the Company granted Yungeng Hu, CFO & President of the Company, an
option to purchase total 11,000,000 shares of the Company’s common stock at
exercise price of US$0.04 according to the following vesting schedule and based
on the 2005 Plan.





-
            7,500,000
      stock options vest pro rata over the two years of the employment contract
      period in equal installments of every six months.-
            2,000,000
      stock options vest upon each successful new business acquisition of the
      Company.-
            1,500,000
      stock options vest 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
            57.93%Expected
      dividend yield
            0




13


On July
4, 2006, the Company granted Billy Wang, Chairman of the Board, an option to
purchase 5,000,000 shares of the Company’s common stock at exercise price of
US$0.05. The option vested on September 28, 2007 and is exercisable within five
years time after vesting.





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
            5.00
      yearsExpected
      volatility
            57.93%Expected
      dividend yield
            0





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 the Company’s
common stock at exercise price of US$0.05. Each option vested on August 23, 2007
and is exercisable within five years time after vesting.





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


Risk-free
      interest rate
            4.92%Expected
      life of the options
            6.00
      yearsExpected
      volatility
            57.93%Expected
      dividend yield
            0





On
September 1, 2006, the Board of Directors made Victor Zhou the permanent CEO of
the Company and, as a result, granted to Mr. Zhou options to purchase a total of
11,000,000 shares of the Company’s common stock at exercise price of US$0.05
according to the following vesting schedule and based on the 2005 Plan. These
options replace the options that were granted on May 31, 2006, which compensated
Mr. Zhou for his service as Acting Chief Executive Officer. None of the options
vested during the term when Mr. Zhou was acting CEO of the
Company.




-
            7,500,000
      stock options vested pro rata over 2 years of the employment contract
      period.-
            2,000,000
      stock options vested upon each successful new business acquisition of the
      Company.-
            1,500,000
      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
            57.93%Expected
      dividend yield
            0





The stock
option granted to ex-CEO Carrie Hartwick to purchase total 15,000,000 shares of
the Company’s common stock was terminated 90 days after 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 the Company’s common stock was terminated
90 days after his departure on June 9, 2006 from the Company.




14


The
following table summarizes the activity of stock options:




Weighted
              
              
              AggregateAverage
              
              
              IntrinsicNumber
      of
              
              
              Exercise
              
              
              ValueOptions
              
              
              PriceShares
      under options at May 31, 2006
              
              
              24,600,000
              
              
              $
              0.127
              
              
              $
              0Granted
              
              
              29,000,000
              
              
              $
              0.05Exercised
              
              
              -
              
              
              
              -Expired
              
              
              3,000,000
              
              
              $
              0.30Cancelled
              
              
              16,000,000
              
              
              $
              0.09Shares
      under options at May 31, 2007
              
              
              34,600,000
              
              
              $
              0.06
              
              
              $
              690,000Granted
              
              
              -
              
              
              
              -Exercised
              
              
              -
              
              
              
              -Expired
              
              
              -
              
              
              
              -Cancelled
              
              
              -
              
              
              
              -Shares
      under options at February 29, 2008
              
              
              34,600,000
              
              
              $
              0.06
              
              
              $
              0
 Additional
information relating to stock options outstanding and exercisable at February
29, 2008 summarized by the exercise price is as follows:





WeightedNumber
      of
            
            Average
            
            Weighted
            
            Number
            
            WeightedRange
      of
            
            Outstanding
      at
            
            Remaining
            
            Average
            
            Exercisable
      at
            
            AverageExercise
            
            February
      29,
            
            Contractual
            
            Exercise
            
            February
      29,
            
            ExercisePrice
            
            2008
            
            Life
            
            Price
            
            2008
            
            Price$0.04
      - $0.05
            
            29,000,000
            
            4.75
      Year
            
            $0.05
            
            16,375,000
            
            $0.05$0.09
            
            5,300,000
            
            3.23
      Year
            
            $0.09
            
            5,300,000
            
            $0.09$1.00
            
            300,000
            
            0.46
      Year
            
            $1.00
            
            300,000
            
            $1.00





During
the three months period ended February 29, 2008, a total of 1,875,000 options
vested and the Company recorded US$22,868 amortization in stock based
compensation expense. For the nine month period ended February 29, 2008 the
Company recorded $137,752 in stock based compensation expense.





NOTE
5     GOING CONCERN





As shown
in the accompanying consolidated financial statements, the Company has suffered
recurring losses from operations and has an accumulated deficit of US$72,942,625
as of February 29, 2008. 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 unfavorable return-on-investment operations, and 3) continue actively seeking
additional funding through offshore private placement to satisfy working capital
requirements.





15


NOTE
6     PREPAID EXPENSES AND OTHER ASSETS





Prepaid
expenses and other assets as of February 29, 2008 and May 31, 2007 are
summarized as follows:





February
      29, 2008
              Unaudited
            
            
            May
      31, 2007
              AuditedPrepaid
      service expenses
            
            $
            10,438
            
            
            $
            496Miscellaneous
      deposits
            
            
            9,433
            
            
            
            41,053Total
            
            $
            19,871
            
            
            $
            41,549




NOTE
7     OTHER RECEIVABLE




Other
receivable as of February 29, 2008 and May 31, 2007 are summarized as
follows:





February
      29, 2008
              Unaudited
            
            
            May
      31, 2007
              AuditedProceeds
      receivable from disposal of Huaqing
            
            $
            -
            
            
            $
            651,082Proceeds
      receivable from disposal of Control Tech
            
            
            57,965
            
            
            
            100,600Total
            
            $
            57,965
            
            
            $
            675,969


NOTE
8     ACCRUED EXPENSES AND OTHER CURRENT
LIABILITIES





Accrued
expenses and other current liabilities as of February 29, 2008 and May 31, 2007
are summarized as follows:





Amount
            
            
            AmountFebruary
      29, 2008
              Unaudited
            
            
            May
      31, 2007
              AuditedAccrued
      directors’ compensations
            
            $
            109,500
            
            
            $
            196,500Accrued
      professional fees
            
            
            45,500
            
            
            
            83,235Payroll
      payable
            
            
            375,619
            
            
            
            21,690Welfare
            
            
            11,325
            
            
            
            9,588Accrued
      other expenses
            
            
            986
            
            
            
            38,947Other
      payable
            
            
            235,121
            
            
            
            222,832Total
            
            $
            778,051
            
            
            $
            572,792





NOTE
9     PROPERTIES AND EQUIPMENT





The
Company’s property and equipment as of February 29, 2008 and May 31, 2007 are
summarized as follows:





February
      29, 2008
              Unaudited
            
            
            May
      31, 2007
              AuditedOffice
      equipment and computers
            
            
            $
            70,749
            
            
            $
            61,172Less:
      accumulated depreciation
            
            
            
            (44,529
            )
            
            
            (34,749
            )Property
      and equipment, net
            
            
            $
            26,220
            
            
            $
            26,423




16





NOTE
10     DUE TO DIRECTORS




The
amount due to directors as of February 29, 2008 and May 31, 2007 represents
director fee due to the Company’s directors. The amount due to directors is
interest free, unsecured and due on demand.




NOTE
11     RELATED PARTY TRANSACTION





During
the quarter ended August 31, 2007, the Company issued 310,000 unregistered
shares of common stock to its directors, including 182,330 shares of common
stock valued at US$13,000 for services rendered and 127,670 shares valued at
US$9,103 were over issued to them. The stock was valued at the average market
price for the period for which services were provided. The over issued common
shares are recorded as Advance compensation to Directors.




During
the quarter ended August 31, 2007, the company received 997,550 shares of the
Company’s common stock from a shareholder of Shanghai Huaqing pursuant to the
Sales and Purchase Agreement. These shares were valued at US$69,829 which was
approximately equal to the fair market value of the stock at the return
date.





During
the quarter ended November 30, 2007, the Company issued 73,120 unregistered
shares of common stock to its directors for their service on Board after
adjusting the over-issued stock. The stock was valued at US$2,824 after
adjusting the over-issued stock which was approximately equal to the fair market
value of the stock at the return date.




NOTE 12IMPAIRMENT OF
GOODWILL





The
Company evaluates intangible assets and other long-lived assets for impairment,
at a minimum, on an annual basis and whenever events or changes in circumstances
indicate that the carrying value may not be recoverable from its estimated
future cash flows. Recoverability of intangible assets, other long-lived assets
and goodwill is measured by comparing their net book value to the related
projected undiscounted cash flows from these assets, considering a number of
factors including past operating results, budgets, economic projections, market
trends and product development cycles. If the net book value of the asset
exceeds the related undiscounted cash flows, the asset is considered impaired,
and a second test is performed to measure the amount of impairment loss. The
Company assessed the carrying value of goodwill in accordance with the
requirements of SFAS #142 "Goodwill and Other Intangible Assets".  Based on
its assessment, the Company determined that goodwill resulting from the
acquisition of China Princely amounted to US$666,471 is fully impaired as of
February 29, 2008.




NOTE
13     DISCONTINUED OPERATIONS





Control
Tech Electronics (Shanghai) Co., Ltd.





During
the transition period ended May 31, 2005, the Company, via its BVI subsidiary,
Hartcourt Capital, Inc., acquired Control Tech, located and operated in China.
Control Tech is the distributor of video and audio conference products in
mainland China. On November 1, 2004, the Company signed a definitive agreement
to purchase a 90% equity interest in Control Tech for a total consideration of
US$1.96 million. Pursuant to the definitive purchase agreement, the purchase
price was to be paid by the issuance of 8,516,902 shares of the Company’s common
stock at a value of US$0.23 per share. On February 25, 2005, the Company
completed all legal procedures to acquire 90% of the capital stock of Control
Tech. Due to Company’s share price decline, the purchase price was revised as
US$1.96 million payable in 19,588,875 shares of Company’s common
stock.





Since
January 1, 2006, the Company decided to cease the operation of Control Tech due
to the unsatisfied operating results.





The
Company has made a provision for the future disposal of Control Tech of
US$1,827,990 during the fiscal year ended May 31, 2006.





Loss from
the discontinued operation of Control Tech during the fiscal year ended May 31,
2006 was US$596,352.





The
investment in Control Tech US$300,000 has been classified as assets pending for
sale on the consolidated balance sheet as of May 31, 2006.





In
September 2006, the Company entered into a definitive sales & purchase
agreement to sell its interest in Control Tech. During the fiscal year ended May
31, 2007, US$199,400 was collected, and the remaining balance of $100,600 has
been reclassified to other receivable.





During
the nine-month period ended February 29, 2008, US$30,235 was collected and the
remaining balance of US$57,965 is part of other receivable.




17




Shanghai
Huaqing Corporation Development Co., Ltd.





On
February 26, 2007, the Board of Directors agreed to dispose off the operations
of Shanghai Jiumeng and entered into a definitive agreement with Shanghai
Shiheng Architecture Consulting Co., Ltd (the “Purchaser”) to sell its 100%
equity interests in Shanghai Jiumeng, which holds 51% equity interest in
Shanghai Huaqing.





On June
11, 2007, the Purchaser terminated the Sales & Purchase Agreement described
above it had entered into with the Company.  The Purchaser refused to
consummate the transaction for the agreed upon purchase
price.





On June
13, 2007, the Board of Directors of the Company authorized the disposal of its
51% interest in Shanghai Huaqing to its minority shareholders. As per the terms
of sale and purchase agreement the Company will receive RMB 4,000,000. In
addition, a shareholder of Shanghai Huaqing agreed to return 997,550 shares of
our common stock to an individual or entity as per the discretion of the
Company.





During
the three months ended February 29, 2008, RMB 2,000,000 (US$252,949) was
received. As of February 29, 2008, total RMB 4,000,000 (US$516,670) and 997,550
shares of the Company’s common stock had been received by the
Company.





NOTE
14     COMMITMENTS AND CONTINGENCIES





a)
Employment Agreements





On May
31, 2006, the Board of Directors of the Company appointed Mr. Victor Zhou to be
the acting Chief Executive Officer, effective June 1, 2006. Mr. Victor Zhou’s
employment agreement was signed on June 1, 2006. The compensation included a
monthly salary of US$8,333. In addition, Mr. Victor Zhou was granted 10,000,000
stock options with exercise price of US$0.04. The stock option vesting schedule
was as follows:




-
            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; and


-
            Option
      to purchase 2,000,000 shares of our common stock to be vested upon each
      full profitable year.




On
September 1, 2006, the Board of Directors of the Company promoted Mr. Victor
Zhou to be the Company’s permanent Chief Executive Officer. The Company signed
the new employment contract with Mr. Zhou on September 1, 2006. The compensation
includes an annual base salary of US$100,000, payable by equal monthly
installment of US$8,333 cash. In addition, Mr. Victor Zhou was granted
11,000,000 stock options with exercise price of US$0.05. The stock option
vesting schedule is as following. These options replace the options that were
granted on June 1, 2006:




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


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


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





On
December 5, 2006, the Compensation Committee increased Mr. Zhou’s annual base
salary to US$150,000 effective September 1, 2006. The options remain
unchanged.





On May
31, 2006, the Board of Directors of the Company appointed Mr. Yungeng Hu to be
the President & Chief Financial Officer, effective on June 1, 2006. Mr.
Yungeng Hu’s employment agreement was signed on June 1, 2006. The compensation
includes an annual base salary of US$150,000, payable by equal monthly
installments of US$12,500 cash. In addition, Mr. Yungeng Hu was granted
11,000,000 stock options with exercise price of US$0.04. The stock option
vesting schedule is as follows:




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


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


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




18





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 29, 2008 and 2007 were
US$18,265and US$9,313, respectively.





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




Year
      ended May 31
            
            Payments2008
            
            $
            51,0002009
            
            $
            207,400





c) Legal
Proceedings




Hartcourt
Hi-Tech Investment (Shanghai) Inc. filed a compliant against Beijing Yi Zhi He
Lian Information Technology Co., Ltd 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 compliant 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. The plaintiff can appeal to Beijing No. 1 Intermediate
People’s Court if objecting to the rule. The Company has prepared additional
lawsuit material and lodged the petition to appeal to Beijing No. 1 Intermediate
People’s Court.





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 owes the Company. The
lawsuit is in the initial stage and the outcome cannot be estimated as of
February 29, 2008.





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, 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 things.







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




Vocational
and Technical Education Business




In 2006
we conducted a feasibility study before deciding to enter into the Chinese
vocational and training marketplace.  As a result of the feasibility
study, we believe that vocational schools in China, which have over US$10
billion in annual revenues, provide a good investment opportunity.




In China,
when students graduate from secondary schools (grade 9), they have two
educational options: (a) high schools or (b) middle vocational
schools.  In 2005, there were 21 million secondary school graduates,
of which 8.8 million chose to go to high schools and 6.6 million chose to go to
middle vocational schools. In 2005, the total number of middle vocational school
students was about 16 million.




19




High
school graduates also have two educational options: (a) bachelor degree colleges
and (b) higher vocational schools. Middle vocational school students are allowed
to be admitted to higher vocational schools if they pass the required
tests.  Higher vocational school students are allowed to be admitted
to bachelor degree colleges if they pass the required tests. In 2005, there were
6.7 million high school graduates and 7 million high vocational school
students.




The
Chinese government believes that in order for the healthy growth of China’s
economy to be sustained there will need to be more vocational schools and
vocational school graduates than degree colleges and degree college graduates.
All levels of government are required to speed up the development of vocational
education.  The goal of the Chinese government is to recruit 8 million
middle vocational students by 2010 in order to achieve the projected number of
middle vocational students and high school students. In addition, the goal of
the Chinese government is to have more high vocational students than college
students by that same year.




In August
2006, after reviewing our business condition, competitive position, and
opportunities in China, we decided to change our business by focusing on the
post-secondary education market in China to take advantage of the ongoing demand
for skilled workers and growing post-secondary age population. 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.




Following
our change in strategic direction, we entered into memorandums of understanding
with several  vocational education providers in 2006, and we have
signed definitive agreements with Yucai (as defined below) and China Princely
(as defined below). On May 15, 2007, the acquisition of China Princely
closed.




In June
2007, the Company entered into a Memorandum of understanding with Chongqing
Zhengda Software Group Co., Ltd relating to the acquisition of 100% of its
equity interests in its two subsidiaries: Chongqing Zhengda Education Group and
Chongqing Zhengda Hengling Co., Ltd. We have conducted due diligence for the
proposed acquisition. A proxy statement for this transaction will be filed with
the SEC and sent to our shareholders in connection with the special shareholders
meeting to be held in future.




On
December 28, 2006, we entered into a definitive agreement to acquire a 51%
equity interest in Taishun Yucai Senior School (“Yucai”), a high school
education and vocational training service provider located in Wenzhou, Zheijiang
PRC. The remaining 49% of the equity interests in Yucai will be held by Yucai’s
current shareholders. Under the terms of the purchase agreement, we agreed to
pay US$2,000,000 and 5,500,000 shares of our restricted common stock in order to
acquire a 51% equity interest in Yucai. Pursuant to the purchase agreement, the
US$2,000,000 will be payable in three installments within one year after closing
of the acquisition and the 5,500,000 shares will be payable upon closing of the
acquisition. The lead selling shareholder and his fellow selling shareholders
together with Yucai have jointly guaranteed that we will receive a minimum of
US$554,487 (RMB 4,325,000) in profit and management fees for each of the three
years following the closing. In the event that the net profit is less than the
guaranteed amount to the Company for a given year, the lead selling shareholder
and his fellow selling shareholders shall make up the discrepancy before
December 31 of each year in respect thereof. We have guaranteed that the average
three-day closing price of our shares on the days immediately prior to the
one-year anniversary of the closing date will be not less than US$0.50 per
share.  In the event that the share price is less than US$0.50, we
shall credit additional cash or issue new restricted shares. The transaction is
subject to government approval. We cannot predict whether or when such approval
will be obtained.




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.  Cash consideration of US$39,180 (RMB300,000)
and a capital infusion of US$274,258 (RMB2,100,000) in China Princely were also
due at closing.  As of the date of this report, by mutual agreement of
the parties, we have not paid these amounts.  The primary current
shareholder of China Princely has personally guaranteed that the net profit of
China Princely will be not less than US$256,000 (RMB2,000,000) for the calendar
year 2007, while we have guaranteed that the average three-day closing price of
our shares on the days immediately prior to the one-year anniversary of the
closing date will be not less than US$0.50 per share. In the event that the
share price is less than US$0.50, we shall, at our option, pay additional cash
or issue new restricted shares. After closing, we changed the name of China
Princely to Hartcourt Princely Education Technology Development (Beijing) Co.,
Ltd.




IT
Distribution Business




Historically,
through our subsidiaries, Shanghai Huaqing Enterprise Development Co., Ltd
(“Huaqing Shanghai”) and Shanghai Control Tech, we have been a distributor of
internationally well-known IT hardware products and related software and
services. The main products distributed were Samsung-branded notebooks and
monitors. We also provided audio and video conference products and related
services. Almost all of our revenue for the last two fiscal years was attributed
to distribution revenues from sales of IT products in China.




20




As a
result of our business decision to move away from the IT distribution business,
in September 2006, we entered into a definitive sales and purchase agreement to
sell our interest in Besteffort Investments Ltd (“Besteffort”). In October 2006,
the Company completed the transfer of legal ownership of Besteffort to the
purchaser. As of the close of our fiscal quarter ended February 29, 2008, we
have already received US$229,635 in connection with the sale of our IT
distribution business and the remaining balance of US$69,713 is held for assets
receivable. Prior to this sale, Besteffort Investments Ltd indirectly held a 90%
equity interest in Shanghai Control Tech, which was a distributor of Radvision
video conference products in China. Shanghai Control Tech had ceased its
operations on January 1, 2006 primarily as a result of Radvision’s
termination of its distribution agreement with Shanghai Control
Tech.  The revenue of Shanghai Control Tech had been derived almost
exclusively from the Radvision business.




We have
entered into a definitive sale and purchase agreement to sell our 51% interest
in Shanghai Huaqing Corporation Development Co., Ltd to its minority
shareholders.  The agreement is subject to the receipt of required
third party consents and approvals if required by applicable law.  The
contemplated purchase price is US$528,419. In addition, a shareholder of Huaqing
Shanghai agreed to return 997,550 shares of our common stock to the individual
or entity designated by us. During the three months ended February 29, 2008, RMB
2,000,000 (US$252,949) was received. As of February 29, 2008, total RMB
4,000,000 (US$516,670) and 997,550 shares of the Company’s common stock had been
received by the Company.




Results of
Operations




The
following table sets forth the consolidated statements of operations for the
three months ended February 29, 2008, with the comparable reporting period in
the preceding year. We used the pro forma numbers for the three months ended
February 28, 2007.


THE
HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF OPERATIONS
  Three
      Months ended
              
              
              Three
      Months endedFebruary
      29
              
              
              February
      282008
              
              
              2007Net
      revenue
              
              $
              -
              
              
              $
              -Operating
      expenses:General
      and administrative expenses
              
              
              261,988
              
              
              
              327,237Depreciation
      and amortization
              
              
              3,934
              
              
              
              7,957Impairment
      of goodwill
              
              
              -
              
              
              
              -Total
      operating expenses
              
              
              265,922
              
              
              
              335,194Loss
      from operations
              
              
              (265,922
              )
              
              
              (335,194
              )Other
      income (expenses)Interest
      income (expense)
              
              
              3,600
              
              
              
              98Loss
      from continuing operations
              
              
              (269,522
              )
              
              
              (335,096
              )Discontinued
      operations:Loss
      from discontinued operations
              
              
              -
              
              
              
              (1,048,625
              )NET
      LOSS
              
              
              (269,522
              )
              
              
              (1,383,721
              )OTHER
      COMPREHENSIVE ITEM:Foreign
      currency translation gain
              
              
              (35,987
              )
              
              
              325NET
      COMPREHENSIVE LOSS
              
              $
              (305,509
              )
              
              $
              (1,383,396
              )
 
 Three months
ended February 29, 2008 compared to three months ended February 28,
2007.




Net
Revenue:





There was
no revenue during the three months ended February 29, 2008 and February 28,
2007, because the Company entered into a definitive agreement to sell the IT
distribution business and therefore the sales from the IT distribution business
have been classified into discontinued operations for the three months ended
February 29, 2008 and the comparable period in the preceding year.




21




General and
administrative expenses:




General
and administrative expenses were US$261,988 for the three months ended February
29, 2008 compared to US$327,237 for the same period in 2007, a decrease of
US$65,249 or 20% compared to the three months ended February 28, 2007. The
decrease of expenses for the three months ended February 29, 2008 was primarily
due to the decrease in professional expenses compared to the same period in
2007.




Depreciation
and amortization expenses:




Depreciation
and amortization expenses were US$3,934 for the three months ended February 29,
2008 compared to US$7,957 for the same period in 2007 or a US$4,023 decrease.
The decrease was primarily due to the disposal of fixed assets during the three
months ended February 29, 2008 than the three months ended February 28,
2007.




Interest
income:




Interest
expense was US$3,600 for the three months ended February 29, 2008 compared to
interest income of US$98 for the same period in 2007. The US$3,698 decrease was
mainly due to lower average cash balances in our accounts.




Loss from
Continuing Operations:




Loss from
continuing operations for the three months ended February 29, 2008 was
US$269,522, compared to US$335,096 for the same period in 2007. The decrease was
mainly due to the reduction of general and administrative expenses in the three
months ended February 29, 2008.




Discontinued
operations:




During
the three months ended February 29, 2008 and February 28, 2007, the discontinued
operations represent the operating results of Shanghai Huaqing in these
three-month periods and a loss on disposal of Shanghai Huaqing.


THE
HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF OPERATIONS
  Nine
      Months ended
                February
      29
                2008
              
              
              Nine
      Months ended
                February
      28
                2007Net
      revenue
              
              $
              -
              
              
              $
              -Operating
      expenses:General
      and administrative expenses
              
              
              799,057
              
              
              
              1,032,602Depreciation
      and amortization
              
              
              9,767
              
              
              
              19,912Impairment
      of goodwill
              
              
              666,471
              
              
              
              -Total
      operating expenses
              
              
              1,475,295
              
              
              
              1,052,514Loss
      from continuing operations before other income
              
              
              (1,475,295
              )
              
              
              (1,052,514
              )Other
      incomeInterest
      income (expense)
              
              
              36,022
              
              
              
              1,253Loss
      from continuing operations
              
              
              (1,439,273
              )
              
              
              (1,051,261
              )Discontinued
      operations:Income/(loss)
      from discontinued operations
              
              
              22,878
              
              
              
              (1,487,180
              )NET
      LOSS
              
              
              (1,416,395
              )
              
              
              (2,538,441
              )OTHER
      COMPREHENSIVE ITEM:Foreign
      currency translation gain
              
              
              (27,067
              )
              
              
              26,589NET
      COMPREHENSIVE LOSS
              
              $
              (1,443,462
              )
              
              $
              (2,511,852
              )
 
 22


Nine months ended
February 29, 2008 compared to nine months ended February 28,
2007.




Net
Revenue:





There was
no revenue during the nine months ended February 29, 2008 and February 28, 2007,
because the Company entered into a definitive agreement to sell the IT
distribution business and therefore the sales from the IT distribution business
have been classified into discontinued operations for the nine months ended
February 29, 2008 and the comparable period in the preceding year.




General and
administrative expenses:




General
and administrative expenses were US$799,057 for the nine months ended February
29, 2008 compared to US$1,032,602 for the same period in 2007, a decrease of
US$233,545 or 23% compared to the nine months ended February 28, 2007. The
decrease of expenses for the nine months ended February 29, 2008 was primarily
due to the decrease in professional expenses compared to the same period in
2007.




Depreciation
and amortization expenses:




Depreciation
and amortization expenses were US$9,767 for the nine months ended February 29,
2008 compared to US$19,912 for the same period in 2007 or a 51%
decrease.  The decrease was primarily due to the disposal of fixed
assets during the nine months ended February 29, 2008.




Interest
income:




Interest
income was US$36,022 for the nine months ended February 29, 2008 compared to
US$1,253 for the same period in 2007. The US$34,769 increase was mainly due to a
higher average cash balances in our accounts.




Loss from
Continuing Operations:




Loss from
continuing operations for the nine months ended February 29, 2008 was
US$1,439,273, compared to US$1,051,261 for the same period in 2007. The increase
was mainly due to goodwill impairment charges in the nine months ended February
29, 2008.




Discontinued
operations:




During
the nine months ended February 29, 2008 and February 28, 2007, the discontinued
operations represent the operating results of Shanghai Huaqing in these
nine-month periods and a loss on disposal of Shanghai Huaqing.




Liquidity
and Capital Resources:





As shown
in our accompanying financial statements, we had a net loss of US$1,416,395 for
the nine months ended February 29, 2008, as compared to a net loss of
US$2,538,441 for the same period in 2007.





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 and mergers with profitable
      education businesses;
 ·
              Raise
      additional capital through public offering or private placement;
      and
 ·
              Take
      measures to control costs and operating
expenses




Operating
activities: During the nine months ended February 29, 2008, net cash used
in operating activities was US$455,604, compared to US$401,283 during the same
period in 2007. The cash used in operating activities in the nine months ended
February 29, 2008 resulted mainly from loss of US$1,416,395 and an increase of
accrued expenses and other current liabilities of US$130,540 and goodwill
impairment of US$666,471 and increase of stock option expense of US$137,752. The
cash used in operating activities in the nine months ended February 28, 2007
resulted mainly from loss of US$2,538,441, and an increase of stock option
expense of US$383,403, and net cash provided by operating activities of
discontinued operations of US$1,487,180. The increase of accrued expenses for
the quarter ended February 29, 2008 is related to the payroll payable to the
management team.




23





Investing
activities: Net cash provided by investing activities during the nine
months ended February 29, 2008 was US$537,328, compared to cash used in
investing activities of US$293,938 during the same period in 2007. The cash
provided by investing activities in the nine months period ended February 29,
2008 was due to the cash received upon disposal of assets of US$546,905 and cash
decrease due to purchase of property and equipment of US$9,577.





Financing
activities: Net cash used in financing activities during the nine months
ended February 29, 2008 was US$23,645 compared to US$264,829 provided by the
same period in 2007. Net cash used in financing activities in the nine months
ended February 29, 2008 was due to payments of US$70,964 to related parties. Net
cash provided by financing activities in the nine months ended February 29, 2008
was due to sales of treasury stock of US$47,319. The cash provided by financing
activities in the same period in 2007 was due to proceeds of US$12,457 from
related parties and US$252,372 of sales of common stock.





Contractual
Obligations





During
the three months ended February 29, 2008, we did not have any contractual
obligation other than the facility leases described in Note 13(b) of financial
statements.





Off-Balance Sheet
Arrangements





During
the three months ended February 29, 2008, 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, 2007. There have been no
changes in our critical accounting policies since May 31,
2007.





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 29,
2008, 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




Since 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 29,
2008, 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.




24





PART II: OTHER
INFORMATION





Item
1. Legal Proceedings.




In 2005,
following the termination of the acquisition of a 51% equity interest in Beijing
Ying Zhi He Lian Information Technology Co., Ltd, (YZHL), YZHL returned to us
RMB4,000,000 out of the RMB5,000,000 cash consideration we previously paid to
them.  The remaining RMB1,000,000 is still unpaid as of the date of
filing this quarterly report.  In 2006, Hartcourt Hi-Tech Investment
(Shanghai) Inc. filed a compliant against YZHL for the return of the remaining
RMB 1,000,000 (US$131,844)owed to us. 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. had no
right to file the compliant against YZHL unless such complaint was made by
Hartcourt Capital, Inc., which signed the purchase agreement to acquire the 51%
equity interest in YZHL in 2004. After reviewing the case with our attorney,
Hartcourt Capital, Inc., as the plaintiff, has appealed to Beijing People’s
court on August 10, 2007against YZHL to return
to us the remaining RMB1,000,000 that is owed to us.




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, 2007.





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.




25





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.




26


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:
      April 10, 2008
              By:
              /s/ VICTOR
      ZHOUVictor
      ZhouChief
      Executive Officer




Dated:
      April 10, 2008
              By:
              /s/ YUNGENG
      HUYungeng
      HuChief
      Financial Officer & President