**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**




**Form 10-Q/A**


**Amendment
      No. 2**




x
            
            **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 a large accelerated filer, an
      accelerated filer or a non-  accelerated
      files. See definition of “accelerated filer and large accelerated filer” in Rule
      12b-2 of the  Exchange
      Act (check one).





Large
                accelerated filer o
            Accelerated
                filer o
            Non-accelerated
                filer x





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




The
      number of outstanding shares of the registrant’s Common Stock, $0.001 par value,
      was 193,848,137 as of October 5, 2005.









_________________





This
      Amendment No. 2 to the Quarterly Report on Form 10-Q is being filed to include
      a
      restatement of the Company’s financial statements for the quarter ended August
      31, 2005, revised Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations and to include revised disclosure regarding our internal controls.




Except
      as
      described above, no other changes have been made to the Form 10-Q, as previously
      amended.


_________________





Hartcourt
      Companies, Inc





Restatement
      of Financial Statements and


Amended
      Form 10-Q for the quarter ended August
      31, 2005





Subsequent
      to the issuance of the Company's financial statements for the year ended
      December 31, 2003, the Company determined that a certain transaction and
      presentation in the financial statements had not been accounted for
      properly in the Company's financial statements.





During
      the year ended December 31, 2003, the Company, through Hartcourt Capital Inc.,
      a
      subsidiary, acquired four Chinese companies located and operated in
      China.




The
      Company has restated its financial statements based on the subsequent
      appraisal of the fair value of the four companies at each acquisition
      date.




Kabani
      & Company Inc., Certified Public Accountants, has audited
      the consolidated financial statements for the year ended December 31,
      2003, after the above-mentioned restatements, and expressed their opinion
      "the financial statements referred to above present fairly, in all material
      respects, the financial position of the Hartcourt Companies, Inc. as of
      December 31, 2003, in conformity with accounting principals generally
      accepted in the United States of America."




Accordingly,
      on August 9, 2006, we filed an amendment to our Form 10-KSB for the year ended
      December 31, 2003 with United States Securities and Exchange Commission to
      reflect the changes.   (See Form 10-KSB/A, filed August 9,
      2006).




The
      changes required corresponding adjustments to the financial statements for
      the year ended December 31, 2004, the transitional period ended May 31, 2005
      and
      subsequently filed reports on Form 10-Q. As a result, on October 10, 2006 we
      amended (a) our annual report on Form 10-KSB for the twelve months ended
      December 31, 2004 (See Form 10-KSB/A-3) and (b) our annual report on Form 10-K
      for the five month transitional period ended May 31, 2005 (see Form 10-K/A)
      and,
      today we are amending our quarterly reports on Form 10-Q for the three months
      ended August 31, 2005, the three and six months ended November 30, 2005, and
      the
      three and nine months ended February 28, 2006. We have included these
      adjustments in our Form 10-K for the year ended May 31, 2006, filed previously
      on September 15, 2006.








/s/
      Yungeng Hu


Chief
      Financial Officer & President







**TABLE
      OF CONTENTS**




**PART
                I: FINANCIAL INFORMATION**Item 1.
            Financial
                Statements
            1Unaudited
                Consolidated Balance Sheets - Restated
            1Unaudited
                Consolidated Statements of Operations
            3Unaudited
                Consolidated Statements of Cash Flows
            4Notes
                to Unaudited Consolidated Financial Statements - Restated
            6Item 2.
            Management’s
                Discussion and Analysis of Financial Conditionand
                Results of Operations
            16Item 4.
            Controls
                and Procedures
            20**PART
                II: OTHER INFORMATION**Item 6.
            Exhibits
            21Signatures
            21EXHIBIT
                31.1EXHIBIT
                31.2EXHIBIT
                32.1EXHIBIT
                32.2



















**PART
      I: FINANCIAL INFORMATION**


**Item 1.** ***Financial
      Statements***


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


**CONSOLIDATED
      BALANCE SHEET (Unaudited) - RESTATED**


**August
      31, 2005**




**ASSET****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
              
              
              **2,990,475****TOTAL
                  ASSETS**
              
              $
              15,146,504**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
              
              
              2,617,379Due
                  to shareholders
              
              
              260,807Due
                  to related party
              
              
              104,910**TOTAL
                  CURRENT LIABILITIES**
              
              
              **8,899,287****MINORITY
                  INTERESTS**
              
              $
              **598,453**




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) - RESTATED**


**(-Continued-)**


**COMMITMENTS
                  & CONTINGENCIES**
              
              $
              -**SHAREHOLDERS'
                  EQUITY****Preferred
                  Stock:**Original
                  preferred stock, $0.01 par value, 1,000 shares authorized, issued
                  and
                  cancelled
              
              
              -Class
                  A preferred stock, 10,000,000 shares authorized, none issued and
                  outstanding
              
              
              -**Common
                  stock**:$0.001
                  par value, 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
              
              
              70,314,188Treasury
                  stock, at cost, 48,728 shares
              
              
              (48,728
              )Other
                  comprehensive income
              
              
              32,335Accumulated
                  deficit
              
              
              (64,842,880
              )**TOTAL
                  SHAREHOLDERS' EQUITY**
              
              
              **5,648,764****TOTAL
                  LIABILITIES AND SHAREHOLDERS' EQUITY**
              
              **$**
              **15,146,504**






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 operations before 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) to net 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. In early 2006, however,
      we announced our intention to diversify our business by expanding into the
      vocational/technical training market in China.




As
      of
      August 31, 2005, the Company owned 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 owned 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. owned 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. owned 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, owned 100% equity
      of
      AI-Asia (Shanghai) Information Technology, Inc of China (“AI”), located in
      Shanghai, China.




**NOTE
      2. BASIS OF PRESENTATION**




The
      accompanying unaudited consolidated financial statements have been prepared
      in
      accordance with the rules and regulations of the Securities and Exchange
      Commission for the presentation of financial information, but do not include
      all
      the information and footnotes required by generally accepted accounting
      principles for complete financial statements. The audited consolidated financial
      statements for the transition period ended May 31, 2005 were filed on September
      13, 2005 and were amended and filed on October 10, 2006 with the Securities
      and
      Exchange Commission and are, hereby referenced. In the opinion of management,
      all adjustments considered necessary for a fair presentation have been included.
      Operating results for the three-month period ended August 31, 2005 are not
      necessarily indicative of the results that may be expected for the year ended
      May 31, 2006, as amended.




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 the Form 10-K/A filed on
      October 10, 2006 and incorporated in this Form 10-Q by reference.




**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,
      and our 90% directly owned subsidiary 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 previously 90% owned by Mr. Kang Bin, our financial controller,
      and
      10% owned by Ms. Ni Ting Ting, the employees of the Company, now it is 100%
      owned by Mr. Victor Zhou, the Chief Executive Officer of the Company, all of
      whom are People's Republic of China, or PRC, citizens. Mr. Zhou now serves
      as
      our nominee. We have engaged a PRC law firm to study the latest effective
      regulations and the steps we could take to apply for the relevant business
      license in view of the relaxed foreign equity ownership rules in the wholesale
      sector in regard to our Samsung distribution business.




6




**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
      equaled the fair market value of the stock at issue date.




**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.







7




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
            
            
            0.14





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.




8




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-Scholes option pricing model are as follows:Rick-free
                interest rate
            
            
            3.4%
            
            
            -Expected
                life of options
            
            
            5
                years
            
            
            -Expected
                volatility
            
            
            57.93%
            
            
            -Expected
                dividend yield
            
            
            -
            
            
            -




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
      May
      2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections.”
This statement applies to all voluntary changes in accounting principle and
      requires retrospective application to prior periods ‘financial statements of
      changes in accounting principle, unless this would be impracticable. This
      statement also makes a distinction between “retrospective application” of an
      accounting principle and the “restatement” of financial statements to reflect
      the correction of an error. This statement is effective for accounting changes
      and corrections of errors made in fiscal years beginning after December 15,
      2005. We are evaluating the effect the adoption of this interpretation will
      have
      on its financial position, cash flows and results of operations.




In
      June
      2005, the EITF reached consensus on Issue No. 05-6, Determining the Amortization
      Period for Leasehold Improvements ("EITF 05-6"). EITF 05-6 provides guidance
      on
      determining the amortization period for leasehold improvements acquired in
      a
      business combination or acquired subsequent to lease inception. The guidance
      in
      EITF 05-6 will be applied prospectively and is effective for periods beginning
      after June 29, 2005. EITF 05-6 is not expected to have a material effect on
      the
      Company's consolidated financial position or results of operations.




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




9




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




This
      Statement:





1.
            Requires
                an entity to recognize a servicing asset or servicing liability each
                time
                it undertakes an obligation to service a financial asset by entering
                into
                a servicing contract.2.
            Requires
                all separately recognized servicing assets and servicing liabilities
                to be
                initially measured at fair value, if practicable.3.
            Permits
                an entity to choose "Amortization method" or "Fair value measurement
                method" for each class of separately recognized servicing assets
                and
                servicing liabilities.4.
            At
                its initial adoption, permits a one-time reclassification of
                available-for-sale securities to trading securities by entities with
                recognized servicing rights, without calling into question the treatment
                of other available-for-sale securities under Statement 115, provided
                that
                the available-for-sale securities are identified in some manner as
                offsetting the entity's exposure to changes in fair value of servicing
                assets or servicing liabilities that a servicer elects to subsequently
                measure at fair value.5.
            Requires
                separate presentation of servicing assets and servicing liabilities
                subsequently measured at fair value in the statement of financial
                position
                and additional disclosures for all separately recognized servicing
                assets
                and servicing liabilities.




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





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




a.
            A
                brief description of the provisions of this Statement




b.
            The
                date that adoption is required




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




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





10




**NOTE
      6** **.** **GOING
      CONCERN - RESTATED**




As
      shown
      in the accompanying consolidated financial statements, the Company has suffered
      recurring losses from operations, has an accumulated deficit of $64,842,880
      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.




**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 RELATED PARTY**




Due
      from
      a related party as of August 31, 2005 amounting $333,473 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
      -** **RESTATED**




Goodwill
      resulting from the acquisition amounted to as of August 31, 2005:




Goodwill
                arising from acquisition of Huaqing
            
            $
            1,911,466Goodwill
                arising from acquisition of Control Tech
            
            
            1,079,009Goodwill
            
            $
            2,990,475




**Note
      11.** **DUE
      TO RELATED PARTY**




The
      amount due to a related party as of August 31, 2005 amounting to $104,910
      represents amount due to Control Tech’s (90% owned subsidiary) 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 - RESTATED**




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 - RESTATED**




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.




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.




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




12




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.




d)         
      Legal Proceedings




John
      A.
      Furutani vs. The Hartcourt Companies, Inc.




John
      A.
      Furutani, Hartcourt’s former attorney, filed a complaint against the Company for
      alleged breach of contract in the amount of $54,441 arising out of legal
      representation of the Company and its co-defendant Alan Phan with respect to
      the
      SEC litigation. Both parties had reach out of court settlement and Hartcourt
      had
      fully paid the consideration as agreed on out-of court settlement on July 1,
      2005.




**NOTE
      16. RECLASSIFICATION**




Certain
      prior period amounts have been reclassified to conform to the quarter ended
      August 31, 2005 presentation.




**NOTE
      17. CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS**





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




**NOTE
      18. SUBSEQUENT EVENT**





***Control
      Tech Electronics (Shanghai) Co., Ltd***




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




During
      the quarter ended February 28, 2006, Control Tech Electronics (Shanghai) Co.,
      Ltd. ceased generating any revenue. Based upon its future projected cash flow,
      the Company tested goodwill for impairment as prescribed by SFAS No. 142.
      The Company determined the goodwill to be impaired and recorded an impairment
      charge of $1,079,009.




13




**Employment
      agreement**




Subsequent
      to the year, on May 31, 2006, the Board of Directors of the Company accepted
      the
      resignation of Ms. Carrie Hartwick from CEO and President as well as the
      director, due to her personal reasons.




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





·
              6,000,000
                  stock options with three installments of 2,000,000 options each
                  vested
                  upon each successful new business acquisition of the
                  Company.
  ·
              2,000,000
                  stock options vested upon each full profitable
                  year.


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




On
      September 1, 2006, the Board of Directors of the Company promoted Mr. Victor
      Zhou to be the Chief Executive Officer. The Company signed the new employment
      contract with Mr. Victor Zhou on September 1, 2006. The compensation includes
      an
      annual base salary of $100,000, payable by equal monthly installment of US$8,333
      cash. In addition, Mr. Victor Zhou was granted 11,000,000 stock options with
      excise price of $0.05 according to the following vesting schedule and subject
      to
      number of shares available for option approved by shareholders.




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


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


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




On
      May
      31, 2006, the Board of Directors of the Company appointed Mr. Yungeng Hu to
      be
      the President and the Chief Financial Officer, effective on June 1,
      2006.




Mr.
      Yungeng Hu’s employment agreement was signed on June 1, 2006. The compensation
      includes an annual base salary of $150,000, payable by equal monthly installment
      of US$12,500 cash. In addition, Mr. Yungeng Hu was granted 11,000,000 stock
      options with excise price of $0.04 according to the following vesting schedule
      and subject to number of shares available for option approved by shareholders.




·
              7,500,000
                  stock options vested pro rata over 2 years of the employment contract
                  period.
 ·
              2,000,000
                  stock options vested upon each successful new business acquisition
                  of the
                  Company.
 ·
              1,500,000
                  stock options vested upon each full profitable
                  year


**Common
      Stock Issued for Stock Options**




On
      July
      4, 2006, the Company granted 5 million shares of stock options with exercise
      price of US$0.04 per share to Dr. Billy Wang and US$50,000 per year for his
      service on Chairman of the Board for fiscal year 2007. The options are to be
      vested on Sept 28, 2007 and exercisable within 5 years time after
      vesting.




On
      July
      25, 2006, we granted total 1,000,000 stock options to our ex-vice president
      Zhou
      Jingjing at excise price of US$0.10 based on our employee compensation plan,
      of
      which 500,000 options vest on July 25, 2006 and the rest 500,000 options vest
      on
      July 25, 2007 subject to his continuing service to the Company. Mr. Zhou
      resigned from the Company on June 9, 2006. Based on his employment contract,
      the
      1,000,000 stock options have been terminated upon his
      resignation.




In
      August
      2006, the Company granted 1 million shares of stock options to each independent
      Director for the compensation of their services with exercise price of US$0.05
      per share, 1 year vesting period and exercisable within 5 years time after
      vesting.




14




**NOTE
      19. RESTATEMENT**




Subsequent
      to the issuance of the Company's financial statements for the year ended
      December 31, 2003, the Company determined that a certain transaction and
      presentation in the financial statements had not been accounted for properly
      in
      the Company's financial statements.




During
      the year ended December 31, 2003, the Company acquired four (4) Chinese
      companies located and operated in China. The Company has restated its financial
      statements based on the fair value of the (4) companies at the acquisition
      date.
      Thus, the adjusted carrying amount of the restated items affected the
      subsequently issued financial statements. As a result, the Company restated
      the
      financial statements for the quarter ended August 31, 2005.




The
      effect of the restatement is as follows:




**BALANCE
      SHEET**   ****


**As
      of August 31, 2005**




AS
                  PREVIOUSLY
                REPORTED
              
              AS
                RESTATEDTOTAL
                  ASSETS
              
              $
              15,395,139
              
              $
              15,146,504TOTAL
                  CURRENT LIABILITIES
              
              $
              6,897,731
              
              $
              8,899,287MINORITY
                  INTEREST
              
              $
              1,576,510
              
              $
              598,453TOTAL
                  SHAREHOLDERS’ EQUITY
              
              $
              6,920,898
              
              $
              5,648,764TOTAL
                  LIABILITIES AND SHAREHOLDERS’EQUITY
              
              $
              15,395,139
              
              $
              15,146,504







15




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




**Forward-looking
      Statements**




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




**Overview**




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
      settlement discussions 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 to 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 that
      recognize that distributors are essential extensions of their marketing
      organizations. Most of our customers require delivery of the products they
      have
      ordered on schedules that are generally not available on direct purchases from
      manufacturers, and frequently their orders are of insufficient size to be placed
      directly with manufacturers.




Our
      sales
      organization is divided into two product lines: the monitor group and the
      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 a one-year term
      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 revenues for the quarter ended August 31, 2005
      were comprised of Samsung products, of which monitors accounted for 77% of
      revenue and notebooks accounted for 20% of revenue. Approximately 99% of our
      revenue was derived from Sansung monitor sales in fiscal 2004.




Excluding
      the Zhejiang Samsung market which we no longer service as June 1, 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




16




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.




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 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.




17




**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
            )




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
            
            
            100.00
            %
            
            100.00
            %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
            %




18


***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 discontinued
      operations. Lower sales are due to our exit of the 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 our 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.




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 the financial results from this product line
      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 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.




19




**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 $2,942,021 as of August
      31, 2005.




As
      of
      August 31, 2005, we had working capital of US$2,942,021. 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 did 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/A for the 5-month transition period ended May 31, 2005. There
      have been no changes in our critical accounting policies since May 31,
      2005.




**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 as of the quarter ended August 31, 2005.




We
      have
      considered the effectiveness of our disclosure controls and procedures as of
      December 31, 2003, December 31, 2004, May 31, 2005 and August 31, 2005 in light
      of the restatement. We believe our current disclosure controls and procedures
      are adequate to ensure that material information relating to the registrant,
      including its consolidated subsidiaries, is made known to us by others within
      those entities.







20




**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.




**PART
      II: OTHER INFORMATION**




**Item 6.** ***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 Officer32.2
            
            Section
                1350 Certification of Principal Financial
                Officer











**SIGNATURES**




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




The
                Hartcourt Companies, Inc.
              RegistrantDate:
                November 13, 2006
            By:
                /s/ Victor ZhouVictor
                Zhou*Chief
                Executive Officer*Date:
                November 13, 2006
            By:
                /s/ Yungeng HuYungeng
                Hu*Chief
                Financial Officer and President*









21







**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 Officer32.2
            
            Section
                1350 Certification of Principal Financial
                Officer






22