**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **Washington,
        D.C. 20549**
  **Form 10-Q**
 þ
              
              **QUARTERLY
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934.**
  **For
        the quarterly period ended August 31, 2005.**
 o
              
              **TRANSITION
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934.**
  **For
        the transition period from __________ to ___________**
  **Commission
        file number: 001-12671**
  **The
        Hartcourt Companies, Inc.**
 *(Exact
        name of registrant as specified in its charter)*
  **Utah**
              
              **87-0400541***(State
                  or other jurisdiction of*
              
              *(IRS
                  Employer**incorporation
                  or organization)*
              
              *Identification
                  No.)*
 
 **306
                  Yong Teng Plaza, 1065 Wuzhong Road****Shanghai,
                  China**
              
              **201103***(Address
                  of principal executive offices)*
              
              *(Zip
                  Code)*
  **(011)
        (86 21) 5152 1577**
 *(Registrant’s
        telephone number including area code)*
  Indicate
        by check mark whether the registrant (1) has filed all reports required
        to
        be filed by Section 13 or 15(d) of the Securities Exchange Act of
        1934
        during the preceding 12 months (or for such shorter period that the
        registrant was required to file such reports), and (2) has been subject
        to
        such filing requirements for the past 90 days. Yes x No o
  Indicate
        by check mark whether the registrant is an accelerated filer (as defined
        in
        Exchange Act Rule 12b-2). Yes o No x
  The
        number of outstanding shares of the registrant’s Common Stock, $0.001 par value,
        was 193,848,137 as of October 5, 2005.
  
 
 
 **TABLE
        OF CONTENTS**
 **PART
                  I: FINANCIAL INFORMATION**Item 1.
              Financial
                  StatementsUnaudited
                  Condensed Consolidated Balance SheetsUnaudited
                  Condensed Consolidated Statements of OperationsUnaudited
                  Condensed Consolidated Statements of Cash FlowsNotes
                  to Unaudited Condensed 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 Procedures**PART
                  II: OTHER INFORMATION**Item 6.
              ExhibitsSignaturesEXHIBIT
                31.1EXHIBIT
                31.2EXHIBIT
                32.1
    
 **PART
        I: FINANCIAL INFORMATION**
 **Item 1.** ***Financial
        Statements***
 **THE
        HARTCOURT COMPANIES, INC. AND SUBSIDIARIES**
 **CONSOLIDATED
        BALANCE SHEET (Unaudited)**
 **August
        31, 2005**
 
 **ASSET**
                
                **August
                      31, 2005****CURRENT
                    ASSETS**Cash
                    and cash equivalents
                
                $
                1,136,464Restricted
                    Cash
                
                
                308,650Accounts
                    receivable, net
                
                
                2,853,652Inventories,
                    net
                
                
                4,342,870Notes
                    receivable, net
                
                
                123,461Advances
                    to suppliers
                
                
                882,508Prepaid
                    expenses and other assets
                
                
                1,860,230Due
                    from related party
                
                
                333,473**TOTAL
                    CURRENT ASSETS**
                
                
                **11,841,308****PROPERTY
                    & EQUIPMENT - NET**
                
                
                **252,991****INVESTMENTS**
                
                
                **61,730****INTANGIBLE
                    ASSET**Goodwill
                
                
                3,239,110**TOTAL
                    ASSETS**
                
                **$**
                **15,395,139****LIABILITIES
                    AND SHAREHOLDERS' EQUITY****CURRENT
                    LIABILITIES**Bank
                    loans
                
                $
                555,570Loan
                    from employees
                
                
                1,043,654Accounts
                    payable
                
                
                930,907Advance
                    from customers
                
                
                3,386,060Accrued
                    expenses and other current liabilities
                
                
                615,823Due
                    to shareholders
                
                
                260,807Due
                    to related party
                
                
                104,910**TOTAL
                    CURRENT LIABILITIES**
                
                
                6,897,731**MINORITY
                    INTERESTS**
                
                
                1,576,510
 
 The
        accompanying notes form an integral part of the unaudited consolidated financial
        statements.
  1
 **THE
        HARTCOURT COMPANIES, INC. AND SUBSIDIARIES**
 **CONSOLIDATED
        BALANCE SHEET**
 **August
        31, 2005 (Unaudited)**
 **(-Continued-)**
  **COMMITMENTS
                  & CONTINGENCIES****SHAREHOLDERS'
                    EQUITY****Preferred
                    Stock:**Original
                      preferred stock, $0.01 par value, 1,000 sharesauthorized,
                      issued and cancelled
                
                
                -Class
                      A preferred stock, 10,000,000 shares authorized, none issued
                      and
                      outstanding
                
                
                -**Common
                    stock**:$0.001
                    par value, 239,999,000 authorized,
                    193,848,137 and 193,738,462 common sharesissued
                    and outstanding as of August 31 and May 31, 2005
                
                
                193,849Additional
                    paid in capital
                
                
                72,833,928Treasury
                    stock, at cost, 48,728 shares
                
                
                (48,728
                )Other
                    comprehensive income
                
                
                1,051,404Accumulated
                    deficit
                
                
                (67,109,555
                )**TOTAL
                    SHAREHOLDERS' EQUITY**
                
                
                6,920,898**TOTAL
                    LIABILITIES AND SHAREHOLDERS' EQUITY**
                
                
                **15,395,139**
  
 The
        accompanying notes form an integral part of the unaudited consolidated financial
        statements.
 
 2
 **THE
        HARTCOURT COMPANIES, INC. AND SUBSIDIARIES**
 **CONSOLIDATED
        STATEMENTS OF OPERATIONS (UNAUDITED)**
 **For
                      the Three Month Periods Ended
                      August 31****2005**
                  
                  **2004**
 Net
                      sales
                  
                  $
                  10,768,764
                  
                  $
                  18,853,877Cost
                      of sales
                  
                  
                  10,395,922
                  
                  
                  18,282,760Gross
                      profit
                  
                  
                  372,842
                  
                  
                  571,117Operating
                      expenses:Selling,
                      general and administrative
                  
                  
                  469,601
                  
                  
                  568,408Depreciation
                      and amortization
                  
                  
                  18,692
                  
                  
                  14,687Total
                      operating expenses
                  
                  
                  488,293
                  
                  
                  583,095Losses
                        from continuing operationsbefore
                        other income/(expenses)
                  
                  
                  (115,451
                  )
                  
                  (11,978
                  )Other
                      income/(expense):Interest
                      expense
                  
                  
                  (38,856
                  )
                  
                  (45,032
                  )Interest
                      income
                  
                  
                  30,736
                  
                  
                  44,628Other
                  
                  
                  353,383
                  
                  
                  68,176Total
                      other income
                  
                  
                  345,263
                  
                  
                  67,772Income
                      from continuing operations
                  
                  
                  229,812
                  
                  
                  55,794Less:
                      Minority Interest
                  
                  
                  168,514
                  
                  
                  190,475Income
                      (loss) before discontinued operations
                  
                  
                  61,298
                  
                  
                  (134,681
                  )Discontinued
                      operations:Gain
                      from discontinued operations
                  
                  
                  -
                  
                  
                  271,379Gain
                      on disposal of discontinued operations
                  
                  
                  -
                  
                  
                  (2,968,687
                  )Income/(losses)
                      before tax
                  
                  
                  61,298
                  
                  
                  (2,831,989
                  )Taxation
                  
                  
                  29,764
                  
                  
                  15,978NET
                      INCOME/(LOSSES)
                  
                  $
                  31,534
                  
                  $
                  (2,847,967
                  )BASIC
                      AND DILUTED EARNINGS/(LOSSES) PER
                      COMMON SHARE:Earnings/(losses)
                      from continuing operations
                  
                  
                  0.000
                  
                  
                  (0.000
                  )Earnings/(losses)
                      from discontinued operations
                  
                  
                  0.000
                  
                  
                  (0.002
                  )Earnings/(losses)
                      per share
                  
                  
                  0.000
                  
                  
                  (0.002
                  )-
                      Basic and fully diluted (weighted average)
                  
                  
                  191,674,122
                  
                  
                  179,095,703
  The
          accompanying notes form an integral part of the unaudited consolidated
          financial
          statements.
 3
 **THE
        HARTCOURT COMPANIES, INC. AND SUBSIDIARIES**
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS (UNAUDITED)**
 
  **For
                    the Three Month Periods Ended
                    August 31****2005**
                
                **2004**
 **CASH
                    FLOWS FROM OPERATING ACTIVITIES:**Net
                    income/(losses)
                
                $
                31,534
                
                $
                (2,847,967
                )Adjustments
                      to reconcile net income/(losses) tonet cash used in operating
                      activities:Gain
                    on disposal of property and equipment
                
                
                (311,495
                )
                
                -Loss
                  on sale of affiliate
                
                
                -
                
                
                2,968,688Depreciation
                
                
                18,692
                
                
                14,687Unrealized
                    investment gain
                
                
                -
                
                
                (271,379
                )Minority
                    interest
                
                
                168,514
                
                
                190,475Stock
                    issued for services and compensations
                
                
                10,875
                
                
                92,713Changes
                    in operating assets and liabilities:Accounts
                    receivable
                
                
                (77,089
                )
                
                325,008Advances
                    to suppliers
                
                
                722,873
                
                
                (193,469
                )Inventories
                
                
                (611,476
                )
                
                (283,184
                )Prepaid
                    expenses and other receivables
                
                
                207,907
                
                
                119,929Accounts
                    payable
                
                
                (201,742
                )
                
                (55,203
                )Accrued
                    expenses and other current liabilities
                
                
                (826,509
                )
                
                (145,297
                )Advances
                    from customers
                
                
                (49,411
                )
                
                82,138**NET
                    CASH USED IN OPERATING ACTIVITIES**
                
                
                (917,327
                )
                
                (2,861
                )**CASH
                    FLOWS FROM INVESTING ACTIVITIES:**Purchase
                    of property and equipment
                
                
                (14,603
                )
                
                (10,867
                )Proceeds
                    on disposal of property and equipment
                
                
                520,814
                
                
                -Cash
                    paid for investments
                
                
                -
                
                
                (60,412
                )Proceeds
                    on notes receivable, net
                
                
                362,845
                
                
                14,553**NET
                      CASH PROVIDED BY (USED IN)**INVESTING
                      ACTIVITIES
                
                
                869,056
                
                
                (56,726
                )
  The
          accompanying notes form an integral part of the unaudited consolidated
          financial
          statements.
 4
 **THE
        HARTCOURT COMPANIES, INC. AND SUBSIDIARIES**
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
 **(continued)**
 **For
                    the Three month Periods Ended May
                    31****2005**
                
                **2004****CASH
                    FLOWS FROM FINANCING ACTIVITIES**Payments
                    to related parties-net
                
                $
                (157,599
                )
                $
                (340,611
                )Proceeds
                    /(repayment) on loans and lines of credit-net
                
                
                (37,456
                )
                
                -**NET
                    CASH USED IN FINANCING ACTIVITIES**
                
                
                (195,055
                )
                
                (340,611
                )EFFECT
                    OF EXCHANGE RATE ON CASH
                
                
                9,876
                
                
                -**NET
                    DECREASE IN CASH AND CASH EQUIVALENTS**
                
                
                (233,450
                )
                
                (400,198
                )**CASH
                      AND CASH EQUIVALENTS -**BEGINNING
                      OF PERIOD
                
                
                1,369,914
                
                
                1,707,367**CASH
                    AND CASH EQUIVALENTS - END OF PERIOD**
                
                $
                1,136,464
                
                $
                1,307,169
  
 **SUPPLEMENTAL
        DISCLOSURE OF CASH FLOWS**
  The
        Company prepares its statements of cash flows using the indirect method as
        defined under the Financial Accounting Standard No. 95.
 **For
                    the Three Month Periods Ended
                    August 31****2005**
                
                **2004**SUPPLEMENTAL
                    DISCLOSURE OF CASHFLOWSCash
                    paid for interest
                
                $
                4,584
                
                $
                61,805Cash
                    paid for income taxes, net of refund received
                
                $
                67,895
                
                $
                16,326
  The
          accompanying notes form an integral part of the unaudited consolidated
          financial
          statements.
 
 5
 **THE
        HARTCOURT COMPANIES, INC. AND SUBSIDIARIES**
 **NOTES
        TO THE CONSOLIDATED FINANCIAL STATEMENTS**
 **AUGUST
        31, 2005 AND 2004**
 
 
 **Note
        1.**  **General**
  The
          Hartcourt Companies, Inc. ("Hartcourt" or the "Company"), was incorporated
          in
          Utah in 1983. We
          are a distributor of internationally well known brand named IT hardware
          products
          and related services in the People’s Republic of China.
 As
        of
        August 31, 2005, the Company owns 100% of three (3) British Virgin Island
        (“BVI”) incorporated companies: (1) Hartcourt China Inc., (2) Hartcourt Capital
        Inc., and (3) AI-Asia Inc. All three of these BVI subsidiaries are holding
        companies for assets located in China.
  As
        of
        August 31, 2005, the Company owns 51% equity interest in Shanghai Huaqing
        Corporation Development Ltd. Huaqing is located in Shanghai, China. As the
        Chinese laws may prohibit foreign companies directly involved in the
        distribution industry, Hartcourt, through its employees as nominees, holds
        the
        equity of Huaqing.
  As
        of
        August 31, 2005, Hartcourt Capital Inc. owns 90% equity interest in Control
        Tech
        Electronics (Shanghai) Co., Ltd. Control Tech is located in Shanghai,
        China.
  As
        of
        August 31, 2005, Hartcourt Capital Inc. owns 100% of Hartcourt Hi-Tech
        Investment (Shanghai) Inc. Hartcourt Hi-Tech Investment (Shanghai) Inc. through
        its employees as nominees, owns 100% of Shanghai Jiumeng Information Technology
        Co., Ltd. These two companies are located in Shanghai, China.
  As
        of
        August 31,2005, AI-Asia, Inc., the third holding company, owns 100% equity
        of
        AI-Asia (Shanghai) Information Technology, Inc of China (“AI”), located in
        Shanghai, China.
  **Note
        2. Basis of Presentation**
 
 The
        accompanying unaudited condensed consolidated financial statements have been
        prepared in accordance with the rules and regulations of the Securities and
        Exchange Commission for the presentation of financial information, but do
        not
        include all the information and footnotes required by generally accepted
        accounting principles for complete financial statements. The audited
        consolidated financial statements for the transition period ended May 31,
        2005
        were filed on September 13, 2005 with the Securities and Exchange Commission
        and
        were hereby referenced. In the opinion of management, all adjustments considered
        necessary for a fair presentation have been included. Operating results for
        the
        three-month period ended August 31, 2005 are not necessarily indicative of
        the
        results that may be expected for the year ended May 31, 2006.
 
 6
 The
        accounting policies followed by us are set forth in Note A to our financial
        statements as stated in our report on Form 10-K for the transition period
        ended
        May 31, 2005, as filed on September 13, 2005 and incorporated in this Form
        10-Q
        by reference.
  The
        consolidated statements of operations and the
        cash flow for the six month periods ended August 31, 2004 have not been
        reviewed.
 
 **Principles
        of Consolidation**
 
 Our
        financial statements for the three months ended August 31, 2005 are consolidated
        to include the accounts of The Hartcourt Companies Inc., our wholly owned
        subsidiaries Hartcourt China Inc., Hartcourt Capital Inc., Hartcourt Hi-Tech
        Investment (Shanghai) Inc., Ai-Asia Inc and Ai-Asia Information Technology
        Inc,
        90% directly owned Control Tech Electronics (Shanghai) Co., Ltd. Our
        consolidated financial statements also include indirectly, 100% owned
        subsidiary, Shanghai Jiumeng Information Service Co., Ltd. and 51% indirectly
        owned Shanghai HuaQing Corporate Development Co., Ltd. All significant
        inter-company accounts and transactions have been eliminated in consolidation.
 
 Due
        to
        the Chinese government’s restrictions of direct foreign investment in
        Chinese-owned sales and distribution companies, through Shanghai Jiumeng
        Information Service Co., Ltd., we own 51% of the equity of Shanghai Huaqing,
        our
        main operating subsidiary for the Samsung distribution business. Shanghai
        Jiumeng is 90% owned by Mr. Kang Bin, our financial controller, and 10% owned
        by
        Ms. Ni Ting Ting, an employee of the Company, both of whom are People's Republic
        of China, or PRC, citizens. The two employees serve as our nominees. We have
        engaged a PRC law firm to study the latest effective regulations and the
        steps
        we could take to apply for the relevant business license in view of the relaxed
        foreign equity ownership rules in the wholesale sector in regard to our Samsung
        distribution business.
  **Note
        3. Earnings/(losses) per Share**
 
 Three
                  Months
                Ended
                August
                  31, 2005
              
              Three
                  Months
                Ended
                August
                  31, 2004Net
                  income
              
              $
              31,534
              
              $
              (2,847,967
              )Effects
                  of dilutive securities
              
              
              -
              
              
              -Weighted
                  average shares outstanding
              
              
              191,674,122
              
              
              179,095,703Basic
                  and dilutive earnings per share
              
              $
              0.000
              
              $
              (0.002
              )
 
 As
        of
        August 31, 2005, we had 29,010,239 warrants and 28,600,000 options authorized
        and outstanding, each exercisable for one share of our common stock. These
        instruments were not included in the computation of diluted earnings per
        share
        for any of the periods presented, due to their anti-dilutive
        effects.
 
 **Note
        4**  **Equity
        transactions during the period**
 
 On
        August
        15, 2005, we issued 109,675 shares of our common stock valued at $10,875
        to all
        of our independent directors in lieu of cash compensation, which approximately
        equal to the fair market value of the stock at issue date.
 
 7
 **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 stock option plan adopted in year 1995 expired in August
        2005
        pursuant to its terms.
 
 The
        board
        of directors has proposed a new stock option plan in year 2005 to attract
        and
        retain qualified persons for positions of substantial responsibility as
        officers, directors, consultants, legal counsel, and other positions of
        significance to the Company. The 2005 plan provides for the issuance of for
        the
        grant 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,
        and (y)
        the approval of an increase in the number of shares reserved under the 2005
        plan
        by our Board of Directors (contingent upon such increase being approved by
        our
        shareholders) and (2) such time as no shares of our common stock remain
        available for issuance under the 2005 plan and we have no further rights
        or
        obligations with respect to outstanding awards under the 2005 plan. Options
        granted under the Plan are restricted as to sale or transfer.
 
 The
        2005
        stock option plan is pending for 2005 shareholders meeting
        approvals.
 
 The
        following table summarizes the activity of stock options:
 
 WeightedAverageNumber
                  of
              
              ExerciseShares
              
              PriceShares
                  under option at May 31, 2005
              
              
              27,600,000
              
              
              0.14Granted
              
              
              1,000,000
              
              
              0.09Exercised
              
              
              -
              
              
              -Expired
              
              
              -
              
              
              -Canceled
              
              
              -
              
              
              -Shares
                  under option at August 31, 2005
              
              
              28,600,000
              
              
              0.138
 
 8
 As
        a part
        of employment agreement, Mr. Zhou Jingjing, vice president of operation,
        was
        granted an option to purchase up to 1 million shares of our common stock
        at a
        price of $0.09 per share for a period of five years from the date of grant.
        The
        market price of the common stock at the grant date was $0.09 per
        share.
 
 **Warrants**
 
 As
        of
        August 31, 2005, there were 29,010,239 outstanding warrants to purchase
        29,010,239 shares of common stock at $0.001 par value at $0.058 per share
        in
        connection with signing a private placement of Hartcourt shares with Enlight
        Corporation Ltd., on October 23, 2002.
 
 **Note
        5. Recent Pronouncements**
 
 In
        December 2002, the FASB issued SFAS No. 148 "Accounting for Stock Based
        Compensation-Transition and Disclosure". SFAS No. 148 amends SFAS No. 123,
        "Accounting for Stock Based Compensation", to provide alternative methods
        of
        transition for a voluntary change to the fair value based method of accounting
        for stock-based employee compensation. In addition, this Statement amends
        the
        disclosure requirements of Statement 123 to require prominent disclosures
        in
        both annual and financial statements about the method of accounting for
        stock-based employee compensation and the effect of the method used, on reported
        results. The Statement is effective for the Companies' reporting period ending
        January 31, 2003.
 
 In
        compliance with FAS No. 148, the Company has elected to continue to follow
        the
        intrinsic value method in accounting for its stock-based employee compensation
        plan as defined by APB No. 25 and has made the applicable disclosures
        below.
 
 Had
        the
        Company determined employee stock based compensation cost based on a fair
        value
        model at the grant date for its stock options under SFAS 123, the Company's
        net
        earnings per share would have been adjusted to the pro forma amounts for
        the
        three month period ended August 31, 2005, as follows ($ in thousands, except
        per
        share amounts) :
  2005
                
                2004(in
                    thousands $)Net
                    income (losses) - as reported
                
                $
                32
                
                
                (2,848
                )Stock-Based
                    employee compensation expense included in reported net income,
                    net of tax
                
                
                -
                
                
                -Total
                    stock-based employee compensation expense determined under
                    fair-value-based
                  method
                    for all rewards, net of tax
                
                
                (47
                )
                
                -Pro
                    forma net profit (loss)
                
                $
                (15
                )
                
                (2,848
                )The
                    assumptions used in calculating the fair value of options granted
                    using
                    the Black-Scholesoption
                    pricing model are as follows:Rick-free
                    interest rate
                
                
                3.4%
                
                
                -Expected
                    life of options
                
                
                5
                    years
                
                
                -Expected
                    volatility
                
                
                57.93%
                
                
                -Expected
                    dividend yield
                
                
                -
                
                
                -
   9
 
 In
        December 2004, the FASB issued FASB Statement No. 123R, "Share-Based Payment,
        an
        Amendment of FASB Statement No. 123" ("FAS No. 123R"). FAS No. 123R requires
        companies to recognize in the statement of operations the grant date fair
        value
        of stock options and other equity-based compensation issued to employees.
        FAS
        No. 123R is effective beginning in the Company's second quarter of fiscal
        2006.
        The Company is evaluating the impact of the adoption of this standard on
        its
        financial statements.
 
 In
        December 2004, the FASB issued SFAS Statement No. 153, "Exchanges of
        Non-monetary Assets." The Statement is an amendment of APB Opinion No. 29
        to
        eliminate the exception for non-monetary exchanges of similar productive
        assets
        and replaces it with a general exception for exchanges of non-monetary assets
        that do not have commercial substance. The Company believes that the adoption
        of
        this standard will have no material impact on its financial
        statements.
 
 In
        August
        2004, the Emerging Issues Task Force ("EITF") reached a consensus on Issue
        No.
        03-1, "The Meaning of Other-Than-Temporary Impairment and its Application
        to
        Certain Investments." The EITF reached a consensus about the criteria that
        should be used to determine when an investment is considered impaired, whether
        that impairment is other-than-temporary, and the measurement of an impairment
        loss and how that criteria should be applied to investments accounted for
        under
        SFAS No. 115, "ACCOUNTING IN CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES."
        EITF 03-01 also included accounting considerations subsequent to the recognition
        of other-than-temporary impairment and requires certain disclosures about
        unrealized losses that have not been recognized as other-than-temporary
        impairments. Additionally, EITF 03-01 includes new disclosure requirements
        for
        investments that are deemed to be temporarily impaired. In September 2004,
        the
        Financial Accounting Standards Board (FASB) delayed the accounting provisions
        of
        EITF 03-01; however the disclosure requirements remain effective for annual
        reports ending after June 15, 2004. The Company will evaluate the impact
        of EITF
        03-01 once final guidance is issued.
 
 **Note
        6. Going concern**
 
 As
        shown
        in the accompanying consolidated financial statements, the Company has suffered
        recurring losses from operations, has an accumulated deficit of $67,109,555
        as
        of August 31, 2005. 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 meet its obligations
        and
        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, obtain financing, 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.
  10
 **NOTE
        7. Notes receivable**
  Notes
        receivables as of August 31, 2005 are summarized as follows:
  Notes
                    receivable from Beijing Challenge Group, non-interest bearing,
                    2
                    installment payments,
                  secured
                    by one shareholder of Beijing Challenge Group,
                
                $
                243,461Less:
                    provisions
                
                
                (120,000
                )Notes
                    receivables, net
                
                $
                123,461Summary
                    of notes receivable:Current
                    portion
                
                $
                123,461Non-current
                    portion
                
                
                -Total
                
                $
                123,461
  **NOTE
        8. Due from a related party**
  Due
        from
        a related party as of August 31, 2005 amounting $104,910 represents amount
        due
        from Huaqing (51% owned subsidiary)’s minority shareholder pursuant to business
        transactions in the ordinary course. The receivable from a related party
        is
        unsecured, interest free and repayable on demand.
  **NOTE
        9. Related party transactions**
  During
        the quarter ended August 31, 2005, Hartcourt issued 109,875 shares of our
        common
        stock valued at $10,875 to its independent directors in lieu of cash
        compensation, which approximately equal to the fair market value of the stock
        at
        issue date.
  **NOTE
        10. Intangibles**
  Goodwill
          resulting from the acquisition amounted to as of August 31,
          2005:
  Goodwill
                    arising from acquisition of Huaqing
                
                $
                2,160,101Goodwill
                    arising from acquisition of Control Tech
                
                
                1,079,009Goodwill
                
                $
                3,239,110
  **Note
        11. Due to a related party**
 
 The
        amount due to a related party as of August 31, 2005 represents amount due
        to
        Control Tech (90% owned subsidiary)’s minority shareholder pursuant to business
        transactions in the ordinary course. Payable to a related party is unsecured,
        interest free and with no fixed term of repayment.
  11
 **NOTE
        12. Due to Shareholders**
  Due
                    to Alan Phan, the founder (a)
                
                $
                30,871Due
                    to Enlight (b)
                
                
                150,000Due
                    to Chateau D'orly (b)
                
                
                79,936Total
                
                $
                260,807
  (a)
              Alan
                  Phan claimed he incurred expenses of $30,871 on behalf of Hartcourt
                  during
                  2003 while acted as a consultant to the
                  Company
 (b)
              The
                  Company signed stock purchase agreements with Enlight Corporation
                  Ltd.
                  ("Enlight") and Chateau D'orly Ltd. ("Chateau") to raise working
                  capital
                  for its operation in the years 2002 and 2003. There is $150,000
                  of dispute
                  between Hartcourt and Englight with respect to the agreement. The
                  stock
                  purchase contract with Chateau is not fully executed and there
                  is $79,936
                  outstanding.
  **NOTE
        13. MINORITY INTEREST**
  The
        amount represents the minority shareholders' interest in Huaqing, a 51%
        subsidiary, and Control Tech, a 90% subsidiary.
  **NOTE
          14. OTHER REVENUE**
  Other
          revenue mainly consists of gain from disposal
          of property owned by Huaqing of $311,495. The remaining $42,088 is derived
          from
          warranty services and other after-sales services.
  **NOTE
        15. COMMITMENTS AND CONTINGENCIES**
  A)
              Employment
                  Agreements
  The
        current senior management consisting of Chief Executive Officer (“CEO”) and
        Chief Financial Officer (“CFO”). The Company’s executive employment agreements
        stipulate that senior executives, CEO and CFO of the Company, can be terminated
        without causes with a written notice of 90 days or less. This clause can
        be a
        potential contingency to the Company in light of the fact that the Company
        is a
        public trading company and may be required for higher standards of corporate
        governance.
  B)
              Operating
                  Leases
  The
        Company leases its offices and facilities under long-term, non-cancelable
        lease
        agreements expiring at various dates through October 2007. The non-cancelable
        operating lease agreements provide that the Company pays certain operating
        expenses applicable to the leased premises according to the Chinese Law.
        Rental
        expense for the quarter ended August 31, 2005 and 2004 were $47,935 and $35,952,
        respectively.
   12
 The
        future minimum annual lease payments required under the operating leases
        are as
        follows:
  Year
                  Ending May 31
              
              Payments2006
              
              $
              110,9002007
              
              
              71,6502008
              
              
              9,994Total
                  future lease payments
              
              $
              192,544
   c)
              Other
                  Obligations
 
 Huaqing,
        a 51% owned subsidiary, provides guarantee to Hangzhou Huaqing Monitoring
        Technology Co., Ltd. for bank loan of US$6,449,275 as of August 31, 2005.
        Of
        which, US$2,536,231 are pledged by the inventories of Huaqing. The bank loan
        will mature on various dates from December 05, 2005 to April 06,
        2006.
 
  **NOTE
        16. RECLASSIFICATION**
  Certain
        prior period amounts have been reclassified to conform to the quarter ended
        August 31, 2005 presentation.
   13
 **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**
 
 We
        are a
        distributor of internationally well known brand named IT hardware products
        and
        related software and services. The main products are Samsung branded notebooks
        and monitors. Almost all of our revenue for the last two fiscal years and
        since
        the transition period ended May 31, 2005 was attributed to distribution revenues
        from sales of Samsung products in China. Our Samsung distribution business
        began
        in March 2003, through the acquisition of a Chinese company named Huaqin
        Shanghai, who was the distributor of Samsung monitors in the Eastern part
        of
        China. In August 2004, Huaqin Shanghai obtained additional distribution rights
        from Samsung for its notebook product line in the same geographic area. In
        February 2005, we acquired major assets from a Chinese company named Beijing
        Control Tech, who was the distributor of ClearOne audio products and
        Radvision video conference products and services in China. Control
        Tech’s
        agreement with Radvision terminated on April 1, 2005. We have ceased
        distribution of Radvision Products during the current quarter, pending to
        reach
        a settlement with Radvision to resolve the distributorship dispute.
  Most
        international and domestic manufacturers of IT products in China rely on
        distributors, such as Hartcourt, to augment their sales and marketing
        operations. As a stocking, marketing, and financial intermediary, the
        distributor relieves manufacturers of a portion of the costs and personnel
        associated with stocking and selling their products (including otherwise
        sizable
        investments in finished goods inventories, accounts receivables and distribution
        networks), while providing geographically dispersed selling, order processing,
        and delivery capabilities. At the same time, the distributor offers a broad
        range of customers the convenience of accessing from a single source with
        multiple products and rapid or scheduled deliveries, as well as other
        value-added services such as after sales service. The growth of the IT
        distribution industry in China has been fostered by many manufacturers who
        recognize that distributors are essential extensions of their marketing
        organizations. Most of our customers require delivery of the products they
        have
        ordered on schedules that are generally not available on direct purchases
        from
        manufacturers, and frequently their orders are of insufficient size to be
        placed
        directly with manufacturers.
  14
 Our
        sales
        organization is divided by product lines, such as the monitor group and notebook
        group. Zhou Jing Jing, our Vice President of Operations, who joined
        Hartcourt during the first quarter of fiscal 2006, is responsible
        for our
        sales organization. We have a centralized online Enterprise Resources
        Planning (ERP) system to support the daily operations, connecting order taking,
        inventory management, distribution, credit, accounting and other related
        functions.
  We
        have
        authorized distribution rights with respect to Samsung monitors, notebooks
        and
        certain digital products covering the consumer and commercial product
        distribution channels in Shanghai, a metropolitan city with a population
        of 20
        million people. The authorized distribution agreement signed between
        Huaqing Shanghai, a 51% owned subsidiary, and Samsung has one-year
        terms
        and is renewed on an annual basis. In exchange for this authorized distribution
        right, as well as purchase price protection and reimbursed advertising and
        promotion expenses from Samsung, we are required to achieve quarterly purchase
        targets set by Samsung and perform sales promotion and advertising activities
        under Samsung's direction, in addition to meeting other Samsung operational
        requirements. Almost all of our sales for the quarter ended August 31, 2005
        comprised of Samsung products, of which, monitors accounted for 77% of the
        revenue and notebooks accounted for 20% of revenue. Approximately 99% of
        our
        revenue derived from Sansung monitor sales in fiscal 2004. We expect that
        sales
        of Samsung products will continue to account for substantially all of our
        sales
        revenue for the foreseeable future.
 
 Excluding
        the Zhejiang Samsung market which we no longer service as of the
        beginning of 2005, our Samsung sales in Shanghai grew 25% compared to a year
        ago
        same period.
  The
        markets in which we compete are dynamic and highly competitive. We expect
        competition to intensify in the future. Our current and potential competitors
        include the local distributors of Philip and LG monitors in the Shanghai
        region,
        as well as other distributors of notebooks made by multinational and leading
        Chinese notebook manufacturers
 
 The
        principal competitive factors that affect the market for our business are
        available working capital to finance the revenue growth in terms of inventory
        and trade receivable; the ability to contain operating costs, as well as
        adding
        new product lines to our distribution list.
 
 Although
        Huaqin Shanghai has been the exclusive distributor for select Samsung IT
        products in the Shanghai region for the last 5 years, much of the services
        we
        provide can be performed by our competitors. In addition, there is a risk
        that
        Samsung may allow our competitors or new entrants to the market to take a
        portion of our Samsung distributor business which would have an adverse impact
        on our business and revenues.
  We
        sell
        Samsung monitors, notebooks and digital devices to large regional retail
        stores
        and to second tier distributors who then resell to smaller retail stores.
        To
        promote Samsung's upscale product image, we also manage several Samsung image
        stores in Shanghai, selling a full range of Samsung consumer electronic products
        in Shanghai's downtown shopping districts in partnership with Samsung. For
        the
        Samsung products for which we have authorized distribution rights, we provide
        product warranty services to retail consumers on behalf of Samsung. In addition,
        we provide and charge for after-sales repair, maintenance and service. Our
        top
        customers for the quarter ended August 31, 2005 were Guowei, a major retailer
        and a distributor in Shanghai which accounted for approximately 25%
        of our
        revenue; Aiwei, a second tier distributor which accounted for approximately
        9% of our revenue; Hongtou Sanbao, a mega consumer electronic chain store
        which accounted for approximately 7% of our revenue; and, Zhanqi,
        a
        distributor which accounted for approximately 6% of our
        revenue. During the quarter ended August 31, 2005 no other
        customer or
        distributor made up more than approximately 5% of our total sales. In fiscal
        2004, Hangzhou Huaqin, a distributor in Zhejiang province, accounted for
        30% of
        our revenue, Wenzhou Huaqin, another Zhejiang distributor, accounted for
        10% of
        our revenue, while Chenqin, a Shanghai distributor, accounted for
        approximately 8% of our revenue and Ninbo KaiKai, a Zhejiang distributor,
        accounted for approximately 6% of the revenue. No other customers or
        distributors accounted for more than approximately 5% of our revenue for
        the
        quarter ended August 31, 2005.
  15
 We
        source
        our products from Samsung. As of August 31, 2005, approximately 88% of our
        Samsung inventory consisted of monitors and approximately 11% consisted of
        notebooks. It is the current practice of Samsung to protect its distributors,
        such as the Company, against the potential write-down of such inventories
        due to
        technological changes or Samsung's price reductions. Under the terms of the
        distributor agreement, and assuming the distributor complies with certain
        conditions, Samsung is required to credit us for inventory losses incurred
        through reductions in manufacturers' list prices of the items.  Because
        most of our business is on an as-needed basis and varies slightly, we have
        no
        customer orders extending more than a week into the future.
  We
        added
        audio/video equipment distribution business in March 2005, after acquiring
        major
        assets from Control Tech, a Chinese distribution company. This portion
        of
        our business accounts for approximately 3% of Hartcourt revenue for the quarter
        ended August 31, 2005. Our distribution agreement with Radvision was terminated
        on April 1, 2005. Sales of Radvision products ceased during the quarter while
        other audio product sales continued. Control Tech is trying to amicably resolve
        the disputes with Radvision.
  **Results
        of Operations**
  The
        following table sets forth the consolidated statements of operations and
        the
        percentage change for the three months ended August 31, 2005, with the
        comparable reporting period in the preceding year.
  **Three
                  Months Ended****August
                  31,**
              
              **Percentage**
              
              **August
                  31,****2005**
              
              **Change**
              
              **2004**Net
                  revenue
              
              $
              10,768,764
              
              
              -42.88
              %
              $
              18,853,877Cost
                  of revenue:Cost
                  of revenue
              
              
              10,395,922
              
              
              -43.14
              
              
              18,282,760Total
                  cost of revenue
              
              
              10,395,922
              
              
              -43.14
              
              
              18,282,760Gross
                  profit
              
              
              372,842
              
              
              -34.72
              
              
              571,117Operating
                  expenses:Sales
                  and marketing
              
              
              50,777
              
              
              -54.18
              
              
              110,817General
                  and administrative
              
              
              437,516
              
              
              -7.36
              
              
              472,278Total
                  operating expenses
              
              
              488,293
              
              
              -16.26
              
              
              583,095Interest
                  income
              
              
              (8,120
              )
              
              1909.90
              
              
              (404
              )Other
                  expense, net
              
              
              (353,383
              )
              
              418.34
              
              
              (68,176
              )Minority
                  Interest expense
              
              
              168,514
              
              
              -11.53
              
              
              190,475Discontinued
                  operations expenses, net
              
              
              
              
              
              
              
              
              2,697,308Income
                  before income taxes
              
              
              61,298
              
              
              4,700
              
              
              (2,831,989
              )Provision
                  for income taxes
              
              
              29,764
              
              
              86.28
              
              
              15,978Net
                  income
              
              $
              31,534
              
              
              9131
              %
              $
              (2,847,967
              )
  16
 The
        following table sets forth the condensed consolidated statements of operations,
        expressed as a percentage of net revenue, for the periods indicated:
  **Three
                  Months Ended****August
                  31,**
              
              **August
                  31,****2005**
              
              **2004**Net
                  revenue
              
              
              
              %
              
              
              %Cost
                  of revenue
              
              
              96.54
              
              
              96.97Gross
                  margin
              
              
              3.46
              
              
              3.03Operating
                  expenses:Sales
                  and marketing
              
              
              0.47
              
              
              0.59General
                  and administrative
              
              
              4.06
              
              
              2.50Total
                  operating expenses
              
              
              4.53
              
              
              3.09Interest
                  income
              
              
              -0.08
              
              
              -0.002Other
                  expense, net
              
              
              -3.28
              
              
              -0.36Income
                  before income taxes
              
              
              0.57
              
              
              -15.02Provision
                  for income taxes
              
              
              0.28
              
              
              0.08Net
                  income
              
              
              0.29
              %
              
              -15.11
              %
  ***Quarter
        Ended August 31, 2005 Compared to Quarter Ended August 31,
        2004.***
  ***Net
        Revenue***
  We
        recorded net sales of US$10,768,764 for the three months ended August 31,
        2005,
        compared to US$18,853,877 for the same period in 2004, excluding the
        discontinued operations. Lower sales is due to our exit of Zhejiang province
        market on the Samsung product as a result of Samsung distribution channel
        re-arrangement. Our sales during the three months ended August 31, 2005
        represented revenues derived from sale of Samsung products in Shanghai and
        sales
        of multimedia products in China. 97% of total revenue came from sales of
        Samsung
        products in Shanghai and the remaining products from multimedia products
        in
        China. Compared to a year ago, for the three-month period ended August 31,
        2004,
        99% of our sales were derived from Samsung products.
  17
  We
        obtained authorized distribution rights with respect to Samsung notebook
        computers beginning in August 2004. We acquired our multi-media products
        business in February 2005 and its financial results were consolidated in
        our
        financial statements beginning March 1, 2005.
  ***Cost
        of Revenue and Gross Margin***
  Cost
        of
        Goods Sold amounted to $10,395,922 for the three months ended August 31,
        2005,
        compared to $18,282,760 for the same period in 2004, excluding the discontinued
        operations. Cost of sales for the three months ended August 31, 2005 represented
        the cost of Samsung products and multimedia products. Cost of sales for the
        three months ended August 31, 2004 represented the costs of Samsung
        products.
  Gross
        margin was $372,846, or 3.46%, for the three months ended August 31, 2005
        compared to $571,117, or 3.03%, for the same period in 2004, an increase
        of 14%.
        Although the revenue of multimedia products accounted for 3% of sales for
        the
        three months ended August 31, 2005, it contributed approximately 28% of total
        gross profit.
  ***Selling,
        general and administrative expenses*** :
        Our
        selling, general and administrative expenses were $469,601 for the three
        months
        ended August 31, 2005 compared to $568,408 for the same period in 2004,
        representing a decrease of $98,807, or 21%, due to lower legal and consulting
        expenses.
 
 ***Depreciation
        and amortization expenses:*** Our
        depreciation and amortization expenses were $18,692 for the three months
        ended
        August 31, 2005 compared to $14,687 for the same periods in 2004. The increase
        was primarily due to our acquisition of Control Tech.
 
 ***Interest
        income:*** Interest
        income was $30,736 and $44,628 for the three ended August 31, 2005 and 2004.
        The
        decrease was due to less interest income from third party borrowing incurred
        in
        this quarter.
 
 ***Interest
        expenses*** :
        Interest expenses were $38,856 and $45,032 for the three months August 31,
        2005
        and 2004. The decrease of $6,176, or 14%, was primarily due to the exclusion
        from our consolidated financial statements of the financial results of Hangzhou
        Huaqin, which we disposed of in June 2004.
 
 ***Other
        revenue:*** Other
        revenue mainly represented income from disposal of properties owned by Huaqing
        of $311,495. The remaining amount of $42,088 is derived from warranty
        services and other after-sales services.
 
 ***Income
        from Continuing Operations:*** Income
        from continuing operations for the three months ended August 31, 2005 was
        $61,298, compared to a loss of $134,681 a year ago, primarily as the result
        of
        gain from disposal of properties, coupled with lower operating expenses in
        the
        first quarter of 2006.
 
 ***Minority
        interest:*** Minority
        interest represented the profit shared by the minority shareholders of Huaqing
        (49%) and Control Tech (10%).
 
 ***Income
        tax:*** We
        made
        provision for PRC income taxes of $29,764 and $15,978 for the three months
        ended
        August 31, 2005 and 2004, respectively. This provision for taxes relates
        to the
        estimated amount of taxes that would be imposed by tax authorities in the
        PRC.
        None of our income is subject to U.S. taxes.
 
 18
 **Liquidity
        and Capital Resources:**
 
 Our
        principal capital requirements during the quarter ended on August 31, 2005
        have
        been primarily funded by Chinese short term bank loans.
 
 As
        shown
        in our accompanying financial statements, we had a net income of $31,534
        for the
        three months ended August 31, 2005 as compared to a net loss of $2,847,967
        for
        the same period in 2004, caused by one-time losses from discontinued operation.
        Our current assets exceeded our current liabilities by $4,943,577 as of August
        31, 2005.
 
 As
        of
        August 31, 2005, we had working capital of US$4,943,577. In addition to our
        working capital on hand, we intend to obtain needed capital through a
        combination of bank loans and sale of our equity securities. However, there
        are
        no commitments or agreements on the part of anyone at this time to provide
        us
        with additional bank financing or purchase of securities. If we are unable
        to
        raise the necessary additional working capital, our operations and financial
        condition may be adversely affected.
 
 ***Operating
        activities:*** During
        the three months ended August 31, 2005, net cash used in operating activities
        increased to $917,327, compared to $2,861 during the same period in 2004.
        The
        increase in cash used in operating activities resulted mainly from clearance
        of
        other liabilities of Huaqing.
 
 ***Investing
        activities:*** Net cash
        provided by investing activities during the three months ended August 31,
        2005,
        was $869,056 compared to cash used in investing activities of $56,726 for
        the
        same period in 2004. The cash provided by investment activities in the first
        quarter of 2006 was mostly due to $520,814 proceeds from disposed property
        and
        recovery of notes from disposed subsidiary Challenger in the amount of $362,845.
 
 ***Financing
        activities:*** Net cash
        used in financing activities during the three months ended August 31, 2005
        equaled to $195,055 compared to $340,611 during the same period in 2004.
        Net
        cash used in financing activities in the quarter ended August 31, 2005 and
        2004
        mainly represents the repayment of balance due to related parties.
 
 As
        a
        result of the above activities, we experienced a net decrease in cash of
        $233,450 for the three months ended August 31, 2005.
 
 **Contractual
        Obligations**
 
 During
        the quarter ended August 31, 2005, we do not have any contractual obligation
        other than the facility leases described in Note 14(b) of financial
        statements.
 
 **Off-Balance
        Sheet Arrangements**
 
 During
        the quarter ended August 31, 2005, the Company did not engage in any off-balance
        sheet arrangements as defined in Item 303(a)(4) of the SEC's Regulation
        S-K.
 
 **Critical
        Accounting Policies and Estimates**
 
 For
        a
        description of what we believe to be the critical accounting policies that
        affect our more significant judgments and estimates used in the preparation
        of
        our condensed consolidated financial statements, refer to our Annual Report
        on
        Form 10-K for the 5-month transition period ended May 31, 2005. There
        have
        been no changes in our critical accounting policies since May 31,
        2005.
 
 19
 **Risk
        Factors Affecting Future Results**
 
 *Investing
        in our common stock involves a high degree of risk. In addition to the other
        information contained in this quarterly report, you should carefully read
        and
        consider the following risk factors.*  *The
        risks described below are not exhaustive of the risks that might affect our
        business. Other risks, including those we currently deem immaterial, may
        also
        impact our business. If any of these risks actually occur, our business,
        financial condition or operating results could be materially adversely affected
        and could result in a complete loss of your investment or a sever reduction
        in
        the trading price of our common stock.*
  **WE
        DEPEND SUBSTANTIALLY ON CARRIE HARTWICK TO MANAGE THE ON-GOING BUSINESS.
        OUR BUSINESS AND GROWTH PROSPECTS MAY BE SEVERELY DISRUPTED IF WE LOSE HER
        SERVICES. OUR FUTURE SUCCESS IS HEAVILY DEPENDENT UPON THE CONTINUED SERVICE
        OF
        MS. HARTWICK.**
  Ms.
        Hartwick serves as our Chief Executive Officer, President and Interim Chief
        Financial Officer. Our only other executive officer is Mr. Zhou Jing Jing
        who
        recently joined Hartcourt as our Vice President of Operations managing the
        sales
        operation. If Ms. Hartwick is unable or unwilling to continue in her present
        positions, we will not be able to easily replace her and will incur additional
        expenses to recruit and train new personnel and may not be able to efficiently
        and effectively operate our business in the meantime. Our business could
        be
        severely disrupted and our financial condition and results of operations
        could
        be materially and adversely affected. Furthermore, since our industry is
        characterized by high demand and intense competition for talent, we may need
        to
        offer higher compensation and other benefits in order to attract and retain
        key
        personnel in the future. We cannot assure you that we will be able to attract
        or
        retain the key personnel that we will need to achieve our business objectives.
        Furthermore, we do not maintain key-man life insurance on Ms Hartwick or
        any of
        our other personnel.
 
 **IF
        WE CANNOT MAINTAIN DISTRIBUTION AGREEMENTS WITH OUR KEY VENDORS, OUR ON-GOING
        BUSINESS WILL BE SEVERELY IMPACTED OR FAIL.**
 
 Approximately
        97% of our revenue in the quarter ended August 31, 2005, was generated from
        sales of Samsung products. We sign an annual distribution contract with Samsung.
        There is no guarantee the distribution contract will be renewed. If our
        relationship with Samsung is severed, we will experience major revenue or
        profit
        decline.
 
 **WE
        HAVE INCURRED SIGNIFICANT LOSSES IN THE PAST AND HAVE A HISTORY OF NEGATIVE
        CASH
        FLOW FOR OPERATIONS AND MAY NOT ACHIEVE OR SUSTAIN CONSISTENT PROFITABILITY,
        WHICH COULD RESULT IN A DECLINE IN THE VALUE OF OUR COMMON STOCK OR OUR
        INABILITY TO SUPPORT OUR OPERATIONS OR FUTURE CAPITAL
        REQUIREMENTS.**
 
 We
        have
        received a report from our independent auditors containing an explanatory
        paragraph that describes doubt about our ability to continue as a going concern
        due to our historical operating losses and recurring negative working capital.
        We have incurred net losses and experienced negative cash flows from operations
        in the last 5 years. As of August 31, 2005, we had an accumulated deficit
        of
        approximately US$67 million. As we shift our business from volume driven
        computer hardware products to more profitable market segments with products
        low
        in volume and revenue but high in profit, our revenue will decrease in the
        near
        future.
  20
 Whether
        we can achieve cash flow levels sufficient to support our operations for
        at
        least the next twelve months, and whether we will then be able to maintain
        positive cash flow, cannot be accurately predicted. Unless such cash flow
        levels
        are achieved, we will need to borrow additional funds or sell debt or equity
        security, or some combination thereof, to provide funding for our operations.
        There can be no assurances that any additional debt or equity financing will
        be
        available to us on acceptable terms, if at all. The inability to obtain debt
        or
        equity financing could have a material adverse effect on our operating results,
        and as a result we could be required to cease or significantly reduce our
        operations, seek a merger partner or sell additional securities on terms
        that
        may be disadvantageous to shareholders. In addition, irrespective of our
        revenue, we may not achieve or sustain profitability in future periods as
        a
        result of our operating expenses.
 
 **IF
        WE ARE UNABLE TO COMPETE SUCCESSFULLY IN THE HIGHLY COMPETITIVE MARKETS FOR
        COMPUTER MONITORS AND THE NOTEBOOK COMPUTER FOR ANY REASON, INCLUDING CURRENT
        OR
        POTENTIAL COMPETITORS GAIN COMPETITIVE ADVANTAGE THROUGH PARTNERING OR
        ACQUISITION, OUR BUSINESS WILL FAIL.**
 
 Our
        business is extremely competitive, particularly with respect to prices, quantity
        and in certain instances, customer relationship. We compete with numerous
        regional and local distributors of similar products with different brand
        names.
        Many of our competitors, as well as certain potential competitors, have longer
        operating histories in the industry, greater name recognition, larger customer
        base and significantly greater financial, technical and marketing resources
        than
        ours. Any of our present or future competitors may provide services with
        significant performance, price, creativity or other advantages over those
        offered by us. We can provide no assurance that we will be able to compete
        successfully against our current or future competitors.
 
 **IF
        WE ARE UNABLE TO ANTICIPATE THE EVER CHANGING OF TECHNOLOGY TRENDS AND CUSTOMER
        NEEDS, OUR BUSINESS MAY BECOME OBSOLETE AND IRRELEVANT AND WE WILL
        FAIL.**
 
 The
        IT
        industry is subject to rapid technological changes. We may not be able to
        anticipate the emergence of new technologies and its impact on our existing
        business. Our products or brands that we sell and market might become
        unattractive to our customers, thereby limiting our ability to recover our
        initial investment in acquiring these businesses and potentially adversely
        affecting our future profitability and growth prospects.
  **THERE
        ARE RISKS ASSOCIATED WITH OUR BUSINESS STRATEGY CONTEMPLATING GROWTH THROUGH
        ACQUISITIONS AND JOINT VENTURES.**
  As
        a
        component of our growth strategy, we intend to continue to enhance our business
        development by acquiring other businesses. However, our ability to grow through
        such acquisitions and joint ventures will depend on the availability of suitable
        acquisition candidates at an acceptable cost or at all, our ability to compete
        effectively to attract and reach agreement with acquisition candidates or
        joint
        venture partners on commercially reasonable terms, the availability of financing
        to complete larger acquisitions or joint ventures. In addition, the benefits
        of
        an acquisition or joint venture transaction may take considerable time to
        develop and we cannot assure you that any particular acquisition or joint
        venture will produce the intended benefits. Moreover, the identification
        and
        completion of these transactions may require us to expend significant management
        and other resources.
 
 21
 **IF
        WE ARE ABLE TO EXPAND OUR OPERATIONS PURSUANT TO OUR ACQUISITION STRATEGY,
        OUR
        FAILURE TO MANAGE GROWTH COULD HARM OUR BUSINESS AND ADVERSELY AFFECT OUR
        RESULTS OF OPERATIONS AND FINANCIAL CONDITION.**
 
 Our
        ability to manage growth will not only be dependent on our ability to
        successfully integrate newly acquired IT businesses, but also on our ability
        to:
 
 ·
              hire,
                  train and manage additional qualified
                  personnel;
 
 ·
              establish
                  new relationships or expand existing relationships with IT
                  suppliers;
 
 ·
              secure
                  adequate capital; and
 
 ·
              compete
                  successfully in the Chinese IT
                  sector.
 
 Our
        inability to control or manage these growth factors effectively could have
        a
        material adverse effect on our results of operations and financial
        condition.
 
 **OUR
        COMMON STOCK MAY NOT REMAIN ELIGIBLE FOR QUOTATION ON THE OTC BULLETIN
        BOARD.**
 
 Our
        common stock is quoted on the OTC Bulletin Board which requires compliance
        with certain filing requirements as set forth in NASD Rules 6530 and 6540
        in
        order to remain eligible for quotation. Hartcourt currently in not in compliance
        with such NASD Rules because we have not remained current in our reporting
        obligations to the Securities and Exchange Commission under Section 13 or
        15(d)
        of the Securities Exchange Act of 1934, which requires certain issuers of
        registrable securities to file periodic reports. Specifically, Hartcourt
        has not
        filed a complete Form 10-KSB for the fiscal year ended December 31, 2003
        due to
        the fact that our Form 10-KSB was filed with an audit opinion that was qualified
        as to scope. We are working with our auditors and pursuing other available
        options to remedy this matter but are at risk of having all quotations
        of our securities on the OTCBB being deleted. If our securities
        were
        deleted from quotation on the OTCBB, our common stock would trade in
        the
        "pink sheets" maintained by the National Quotation Bureau, Inc. which
        is
        generally considered to be a less efficient market.  Our stock
        price,
        as well as the liquidity of our common stock, may be adversely impacted as
        a
        result.
 
 **THE
        LIQUIDITY OF OUR COMMON STOCK IS AFFECTED BY ITS LIMITED TRADING
        ABILITY.**
 
 Shares
        of
        our common stock are traded on the OTC Bulletin Board under the symbol
        "HRCT.OB". There is currently no broadly followed established trading market
        for
        our common stock. An "established trading market" may never develop or be
        maintained. Active trading markets generally result in lower price volatility
        and more efficient execution of buy and sell orders. The absence of an active
        trading market reduces the liquidity of our shares. The trading volume of
        our
        common stock historically has been limited and sporadic. As a result of this
        trading inactivity and the exchange, the quoted price for our common stock
        on
        the OTC Bulletin Board is not necessarily a reliable indicator of its fair
        market value. Further, if we cease to be quoted, holders would find it more
        difficult to dispose of, or obtain accurate quotations as to the market value
        of
        our common stock, and the market value of our common stock would likely
        decline.
 
 22
 **THE
        LACK OF BUSINESS INSURANCE COVERAGE IN CHINA COULD MATERIALLY AND ADVERSELY
        AFFECT OUR BUSINESS, FINAL CONDITION AND RESULTS OF OPERATION SHOULD ANY
        MAJOR
        CATASTROPHIC DISASTER OCCURS.**
 
 We
        have
        limited business insurance coverage in China. The insurance industry in China
        is
        still at an early stage of development. In particular, PRC insurance companies
        offer limited business insurance products. As a result, we do not have any
        business liability or disruption insurance coverage for our operations in
        China.
        Any business disruption, litigation or natural disaster might result in our
        incurring substantial costs and the diversion of resources.
 
 **OUR
        CURRENT CAPITAL STRUCTURE MAY NOT BE SUFFICIENT FOR US TO ACQUIRE NEW BUSINESS
        OR MAINTAIN ON GOING OPERATIONS.**
 
 If
        our
        current financial resources are insufficient either because of the
        size of
        any business acquisition or the depletion of available financial resources
        in
        search of acquisitions, we will be required to seek additional financing.
        We
        cannot assure you that such financing would be available on acceptable terms,
        if
        at all. To the extent that additional financing proves to be unavailable
        when
        needed to consummate an acquisition, we would be compelled to restructure
        the
        transaction or abandon that particular business acquisition and seek an
        alternative target business candidate. In addition, if we consummate a business
        combination, we may require additional financing to fund the operations or
        the
        growth of business. The failure to secure additional financing could have
        a
        material adverse effect on the continued development or growth of our business.
        None of our officers, directors or shareholders is required to provide any
        financing to us in connection with or after an acquisition.
 
 **COMPLIANCE
        WITH NEW RULES AND REGULATIONS CONCERNING CORPORATE GOVERNANCE MAY BE COSTLY
        AND
        TIME CONSUMING.**
 
 The
        Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley, requires, among other things,
        that companies adopt new corporate governance measures and imposes comprehensive
        reporting and disclosure requirements, sets stricter independence and financial
        expertise standards for board and audit committee members and imposes increased
        civil and criminal penalties for companies, their chief executive officers
        and
        chief financial officers for securities law violations. These laws, rules
        and
        regulations will increase the scope, complexity and cost of our corporate
        governance, reporting and disclosure practices, which could harm our results
        of
        operations and divert management's attention from business operations. These
        new
        rules and regulations may also make it more difficult and more expensive
        for us
        to obtain director and officer liability insurance and make it more difficult
        for us to attract and retain qualified persons to serve as members of our
        board
        of directors, particularly to serve on our audit committee, or as executive
        officers.
 
 23
 **WHILE
        WE BELIEVE THAT WE CURRENTLY HAVE ADEQUATE INTERNAL CONTROL PROCEDURES IN
        PLACE,
        WE ARE STILL EXPOSED TO POTENTIAL RISKS FROM RECENT LEGISLATION REQUIRING
        COMPANIES TO EVALUATE INTERNAL CONTROLS UNDER SECTION 404 OF THE
        SARBANES-OXLEY.**
 
 We
        are
        evaluating our internal controls systems in order to allow management to
        report
        on, and our independent auditors to attest to, the effectiveness of our internal
        controls over financial reporting, as required by this legislation. We will
        be
        performing the system and process evaluation and testing (and any necessary
        remediation) required in an effort to allow our management to assess the
        effectiveness of our system of internal control as of the end of the transition
        period ended May 31, 2005, the end of our current fiscal year. Our independent
        auditors must then attest to and report on that assessment by our management
        to
        comply with the management certification and auditor attestation requirements
        of
        Section 404 of Sarbanes-Oxley (Section 404). As a result, we have and expect
        to
        continue to incur significant additional expenses and diversion of management's
        time. We may fail to timely complete our evaluation, testing and remediation
        actions in order to allow for this assessment by our management or our
        independent auditors may not be able to timely attest to our management's
        assessment. If we are not able to implement the requirements of Section 404
        in a
        timely manner or with adequate compliance, we might be subject to sanctions
        or
        investigation by regulatory authorities, such as the Securities Exchange
        Commission. Further, if our independent auditors are not satisfied with our
        internal control over financial reporting or with the level at which it is
        documented, designed, operated or reviewed, they may decline to attest to
        management's assessment or may issue a qualified report identifying a material
        weakness in our internal controls. Any such action could adversely affect
        our
        financial results and could cause our stock price to decline.
  **IF
        THE PRC GOVERNMENT FINDS THAT THE STRUCTURE FOR OPERATING OUR CHINA BUSINESS
        DOES NOT COMPLY WITH PRC GOVERNMENT RESTRICTIONS ON FOREIGN INVESTMENT IN
        THE IT
        DISTRIBUTION INDUSTRY, WE COULD BE COMPELLED TO RESTRUCTURE OUR INVESTMENT
        OR
        ABANDON OUR INVESTMENT.**
 
 We
        are a
        U.S. registered company and we conduct our operations solely in China through
        our directly owned subsidiaries and indirectly majority-owned subsidiary.
        In
        order to comply with foreign ownership restrictions, we operate our business
        in
        China through a subsidiary which is majority owned by Kang Bin, our financial
        controller, and Ni Ting Ting, our employee, both of whom are PRC citizens
        (our
        nominees). We have entered into a series of contractual arrangements with
        our
        indirectly owned subsidiary, its shareholders and our nominees. As a result
        of
        these contractual arrangements, we are considered the majority beneficiary
        of
        all of our subsidiaries and accordingly we consolidate all of our subsidiaries'
        results of operations in our financial statements.
 
 In
        the
        opinion of Zhonglun Law Firm (Shanghai), our PRC legal counsel: (1) the
        ownership structures of our subsidiaries is in compliance with existing PRC
        laws
        and regulations; (2) our contractual arrangements with each of our subsidiaries,
        our nominees and its shareholders are valid and binding, and will not result
        in
        any violation of PRC laws or regulations currently in effect; (3) the business
        operations of our subsidiaries are in compliance with existing PRC laws and
        regulations in all material aspects and (4) the enforcement of foreign judgments
        made by courts outside the PRC has no direct and automatic operation in the
        PRC,
        but these judgments may be recognized and enforced by a PRC court in accordance
        with a bilateral or international treaty to which PRC is a party, or subject
        to
        the principles of reciprocity upon a finding that the judgment does not conflict
        with fundamental principles, sovereignty, security and public interests of
        the
        PRC after review of the judgment.
 
 There
        are, however, substantial uncertainties regarding the interpretation and
        application of current or future PRC laws and regulations. Accordingly, we
        cannot assure you that the PRC regulatory authorities will not ultimately
        take a
        view that is contrary to the opinion of our PRC legal counsel.
 
 24
 **RISKS
        RELATING TO THE PEOPLE'S REPUBLIC OF CHINA**
 
 **SUBSTANTIALLY
        ALL OF OUR ASSETS ARE LOCATED IN CHINA AND SUBSTANTIALLY ALL OF OUR REVENUES
        ARE
        DERIVED FROM OUR OPERATIONS IN CHINA. ACCORDINGLY, THE CHINESE LAWS, RULES
        AND
        REGULATIONS WHICH CAN BE DIFFERENT FROM THE US LAWS, ARE PREVALENT IN GOVERNING
        OUR BUSINESS ACTIVITIES IN CHINA.**
 
 Chinese
        law and regulations strictly limit the repatriation of assets of Chinese
        companies. Payments to parties outside of the PRC are governed by the Foreign
        Exchange Bureau and its Regulation on Foreign Exchange Control. Pursuant
        to the
        Regulation, a Chinese enterprise may make overseas payments from their foreign
        exchange account at an authorized foreign exchange bank in the following
        limited
        circumstances within its registered business scope and directly related to
        its
        business in China. Chinese enterprises are prohibited from sending payment
        abroad to cover the liabilities incurred by affiliated entities located
        overseas.
 
 The
        laws
        governing Chinese joint ventures require each partner to conduct its business
        for the benefit of the joint venture and not for the benefit of any particular
        partner. As a result, one partner may not withdraw funds from the joint venture
        to pay its own liabilities unrelated to the joint venture.
 
 Because
        our directors and officers reside outside of the United States, it may be
        difficult for you to enforce your rights against them or enforce United States
        court judgments again them in the PRC. After the consummation of acquisitions,
        all of our assets are located outside of the United States. It may be difficult
        for investors in the United States to enforce their legal rights, to effect
        service of process upon our directors or officers or to enforce judgments
        of
        United States courts predicated upon civil liabilities and criminal penalties
        of
        our directors and officers under Federal securities laws. Further, it is
        unclear
        if extradition treaties now in effect between the United States and the PRC
        would permit effective enforcement of US security laws.
 
 Caution
        Regarding Forward-Looking Statements
 
 This
        Report contains forward-looking statements. These forward-looking statements
        include our statements regarding the following: our belief that we can deliver
        expected revenue and profit growth; our expectations regarding our ability
        to
        acquire suitable companies for future growth; assumptions underlying our
        Critical Accounting Policies, and our expectation that we will be able to
        raise
        sufficient cash for acquisition and working capital needs for the next 12
        months.
 
 We
        caution investors that forward-looking statements are only predictions based
        on
        our current expectations about future events and are not guarantees of future
        performance. Our actual results, performance or achievements could differ
        materially from those expressed or implied by the forward-looking statements
        due
        to risks, uncertainties and assumptions that are difficult to predict. These
        risks and uncertainties include the following: the impact of intense competition
        in our business; difficulty in acquiring new businesses; difficulties with
        suppliers and distribution channels; significant impairment charges due to
        past
        acquisitions. In addition, the risks and uncertainties that are discussed
        in
        this Item 2 under the caption "Risk Factors Affecting Future Results" may
        also
        impact these forward-looking statements. We encourage you to read that section
        carefully along with the other information provided in this Report and in
        our
        other filings with the SEC before deciding to invest in our stock or to maintain
        or change your investment. We undertake no obligation to revise or update
        any
        forward-looking statement for any reason, except as required by law.
 
 25
 **Item 3.** ***Quantitative
        and Qualitative Disclosures About Market Risk***
 
 **Short-Term
        Investment Portfolio**
  We
        do not
        hold derivative financial instruments in our portfolio of short-term
        investments. Our short-term investments consist of instruments that meet
        quality
        standards consistent with our investment policy. This policy specifies that,
        except for direct obligations of the United States government, securities
        issued
        by agencies of the United States government, and money market or cash management
        funds, we diversify our holdings by limiting our short-term investments and
        funds held for payroll customers with any individual issuer. As of August
        31,
        2005, all our cash equivalents represent cash on hand and cash deposit in
        PRC
        banks, the interest rate earned on our money market accounts ranged from
        0.72%
        to 1.62% per annum. Our cash equivalents are subject to market risk due to
        changes in interest rates. Interest rate movements affect the interest income
        we
        earn on cash equivalents, and funds held for payroll customers and the value
        of
        those investments. We attempt to limit this exposure by investing primarily
        in
        short-term securities. Due to the short duration and conservative nature
        of our
        investment portfolio a movement of 10% by market interest rates would not
        have a
        material impact on our operating results and the total value of the portfolio
        over the next fiscal year.
 
 **Impact
        of Foreign Currency Rate Changes**
 
 We
        are
        exposed to risks associated with foreign exchange rate fluctuations due to
        our
        international sales activities. Since we translate foreign currencies (primarily
        Chinese Yuans) into US dollars for financial reporting purposes, currency
        fluctuations can have an impact on our financial results. The historical
        impact
        of currency fluctuations has generally been immaterial. We believe that our
        exposure to currency exchange fluctuation risk is not significant primarily
        because the stability of the exchange rate between Chinese Yuan and US dollar.
        Although the impact of currency fluctuations on our financial results has
        generally been immaterial in the past and we believe that for the reasons
        cited
        above currency fluctuations will not be significant in the future, there
        can be
        no guarantee that the impact of currency fluctuations will not be material
        in
        the future. As of August 31, 2005, we did not engage in foreign currency
        hedging
        activities. A movement of 10% in foreign currency exchange rates would not
        have
        a material impact on our operating results.
  **Item 4.** ***Controls
        and Procedures***
 
 **Evaluation
        of disclosure controls and procedures** *.* Our
        management evaluated, with the participation of our chief executive officer
        and
        our chief financial officer, the effectiveness of our disclosure controls
        and
        procedures as of the end of the period covered by this Quarterly Report on
        Form
        10-Q. Based on this evaluation, our chief executive officer and our chief
        financial officer have concluded that our disclosure controls and procedures
        are
        effective to ensure that information we are required to disclose in reports
        that
        we file or submit under the Securities Exchange Act of 1934 is recorded,
        processed, summarized and reported within the time periods specified in
        Securities and Exchange Commission rules and forms.
 
 **Changes
        in internal control over financial reporting** *.* There
        was
        no change in our internal control over financial reporting that occurred
        during
        the period covered by this Quarterly Report on Form 10-Q that has materially
        affected, or is reasonably likely to materially affect, our internal control
        over financial reporting. We are aware that any system of controls, however
        well
        designed and operated, can only provide reasonable, and not absolute, assurance
        that the objectives of the system are met, and that maintenance of disclosure
        controls and procedures is an ongoing process that may change over time.
 
 26
 **PART
        II: OTHER INFORMATION**
 **Item 1.** ***Exhibits.***
 
 
 **Exhibit****Number**
              
              **Description**31.1
              
              Rule 13a-14(a)/15d-14(a)
                  Certification of Principal Executive Officer31.2
              
              Rule 13a-14(a)/15d-14(a)
                  Certification of Principal Financial Officer32.1
              
              Section 1350
                  Certification of Principal Executive Officer and Principal Financial
                  Officer
   27
 **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.
                Registrant/s/
                  Carrie HartwickCarrie
                  Hartwick*Chief
                  Executive Officer and Chief Financial Officer*
                (Principal
                  Executive and Principal Financial Officer)
 Date:
        October 15, 2005
   28
 **Exhibit Index**
 **Exhibit****Number**
              
              **Description**31.1
              
              Rule 13a-14(a)/15d-14(a)
                  Certification of Principal Executive Officer31.2
              
              Rule 13a-14(a)/15d-14(a)
                  Certification of Principal Financial Officer32.1
              
              Section 1350
                  Certification of Principal Executive Officer and Principal Financial
                  Officer
   29