**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-K**




[_]
            Annual
                Report pursuant to Section 13 or 15(d) of the Securities Exchange
                Act of
                1934




or





[x]
            Transition
                report pursuant to Section 13 or 15(d) of the Securities Exchange
                Act of
                1934For
                the transition period from January 1, 2005 to May 31,
                2005.




Commission
      File Number 001-12671





**THE
      HARTCOURT COMPANIES, INC.**


(Exact
      name of registrant as specified in its charter)




Utah
            
            87-0400541(State
                of incorporation)
            
            (IRS
                Employer Identification No.)





306
      Yong
      Teng Plaza, 1065 Wuzhong Road, Shanghai, China 201103


(Address
      of principal executive offices, including zip code)





(011)
      (86
      21) 5152 1577


(Registrant's
      telephone number, including area code)







Securities
      registered pursuant to Section 12(b) of the Act: None


Securities
      registered pursuant to Section 12(g) of the Act: Common Stock, US $0.001
      par value




Indicate
      by a 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 __ No [ X ]





Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K is not contained herein, and will not be contained, to the best
      of registrant's knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-K or any amendment to
      this
      Form 10-K. X





Indicate
      by check mark whether the registrant is an accelerated filer (as defined in
      Rule
      12b-2 of the Exchange Act). Yes __ No X





The
      aggregate market value of the outstanding common stock held by non-affiliates
      of
      the registrant as of the last business day of the registrant's most recently
      completed second fiscal quarter (based on the closing price of US $ 0.10 )
      was
      approximately US$18
      million. All executive officers and directors of the registrant and all persons
      filing a Schedule 13D with the Securities and Exchange Commission in
      respect to registrant’s common stock have been deemed, solely for the purpose of
      the foregoing calculation, to be “affiliates” of the registrant. There were 193,848, 137
      shares of voting common stock with a par value of US $0.001
      outstanding at August 25, 2005.


1




THE
      HARTCOURT COMPANIES, INC.


FISCAL
      2004 FORM 10-K





INDEX




Item
            PagePART
                I
            3ITEM
                1: Business
            3ITEM
                2: Properties
            7ITEM
                3: Legal Proceedings
            7ITEM
                4: Submission of Matters to a Vote of Security Holders
            8PART
                IIITEM
                5: Market for Registrant's Common Equity, Related Stockholder
                Mattersand Issuer Purchases of Equity Securities
            8ITEM
                6: Selected Financial Data
            11ITEM
                7: Management's Discussion and Analysis of Financial Conditionand Results of Operations
            11ITEM
                7A:Quantitative and Qualitative Disclosures About Market
                Risk
            20ITEM
                8: Financial Statements and Supplementary Data
            20ITEM
                9: Changes in and Disagreements with Accountants on Accountingand Financial Disclosure
            47ITEM
                9A:Controls and Procedures
            47ITEM
                9B: Other Information
            47PART
                IIIITEM
                10: Directors and Executive Officers of the Registrant
            48ITEM
                11: Executive Compensation
            49ITEM
                12: Security Ownership of Certain Beneficial Owners and
                Managementand Related Stockholder Matters
            52ITEM
                13: Certain Relationships and Related Transactions
            53ITEM
                14: Principal Accountant Fees and Services
            54PART
                IVITEM
                15: Exhibits and Financial Statement Schedules
            56Signatures
            60





**As
      used in this Transition period report on Form 10-K, the terms “we”,
“** **our** **”or
      “us”mean The Hartcourt Companies, Inc., a Utah corporation and
      its** **consolidated** **subsidiaries, unless the context indicates otherwise.**




EXHIBIT
      21.01


EXHIBIT
      23.01


EXHIBIT
      24.01


EXHIBIT
      31.01


EXHIBIT
      31.02


EXHIBIT
      32.01


2


This
      report contains forward-looking statements that involve risks and uncertainties.
      Please see the section entitled "Caution Regarding Forward-Looking Statements"
      in Item 7 of this report for important information to consider when evaluating
      such statements.





**PART
      I**





**ITEM
      1. BUSINESS.**





**General**





The
      Hartcourt Companies, Inc. ,
      was
      incorporated in Utah in 1983. We are a business development company specializing
      in the Chinese Information Technology, or IT, market. We research and identify
      Chinese companies in the IT industry that meet our acquisition criteria. We
      acquire equity ownership or assets in the targeted companies to be part of
      our
      investment portfolio. On an on-going basis, we seek to maximize growth,
      profitability and liquidity of all of our operating subsidiaries under the
      Hartcourt umbrella.





**Change
      in Fiscal Year End**




We
      changed our fiscal year for
      financial reporting purposes from a calendar year to the
      12-month period commencing June 1 and ending May 31.





**Available
      Information**





We
      file
      annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports
      on
      Form 8-K, proxy statements and all other reports, and amendments to these
      reports, required of public companies with the SEC. The public may read and
      copy
      the materials we file with the SEC at the SEC's Public Reference Room at 450
      Fifth Street NW, Washington, DC 20549. The public may obtain information on
      the
      operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
      The
      SEC also maintains a Web site at http://www.sec.gov that contains reports,
      proxy
      and information statements and other information regarding issuers that file
      electronically with the SEC. Through a link to the SEC Web site, we make
      available free of charge on the Investor Relations section of our corporate
      Web
      site all of the reports we file with the SEC as soon as reasonably practicable
      after the reports are filed. Copies of Hartcourt's fiscal 2005 Form 10-K may
      also be obtained without charge by contacting Ms. Ni Ting Ting, The Hartcourt
      Companies, Inc., Suite 306, Yong Teng Plaza, 1065 Wuzhong Road, Shanghai, China
      201103 or by calling (011) (86 21) 5152 1577.





**Business
      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. We also distribute audio and video conference products. Almost
      all
      of our revenue for the last two fiscal years and for the transition period
      ended
      May 31, 2005 was attributed to distribution revenues from sales of IT 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.




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




Our
      sales
      organization is
      divided by product lines, such as the monitor group, notebook group, audio
      group
      and video group. Zhou Jing Jing, our Vice President of Operations,
      who started with the Company in July, 2005, 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.




3




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. Approximately 94%
      of
      our sales for the five month transition period comprised of Samsung products,
      of
      which, monitors accounted for 70% of the revenue and notebooks accounted for
      the
      remaining 30% revenue. 95% of our revenue derived from Sansung monitors in
      2004
      with the remaining from Samsung notebooks.




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
      largest customer in the five month transition period in 2005 for the Samsung
      products was Guowei, a chain store with more than a dozen retail outlets in
      Shanghai accounted for 11.4% of revenue. Our second largest customer was
      Yongle ,
      a mega
      consumer electronic store with over 40 outlets in Shanghai, who made up 8.3%
      of
      our Samsung sales for the five month transitional period. Aiwei, a second tier
      distributor, accounted for 6% of revenue. No other customer or distributor
      made
      up more than 5% of our total sales for the five month transitional period.
      In
      2004, Hangzhou Huaqin made up 15% of our sales while no other customer made
      up
      more than 5% of our revenue.




We
      source
      our products from Samsung. As of May 31, 2005, approximately 77% of our Samsung
      inventory consisted of monitors and the remaining 23% 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
      specializing in this industry for the past 8 years. This portion of
      our
      business accounts for 6% of Hartcourt revenue at the end of May 2005.
      95% of the revenue from the audio/video equipment distribution segment of our
      business was proceeds from our agreement with Radvision which terminated on
      April 1, 2005.





In
      April 2005,
      Radvision informed Control Tech it terminated the distribution agreement. Up
      to
      mid June, Control Tech and Radvision were still engaged in high level management
      discussions of continuing the distributor relationship and placing purchase
      orders for the second quarter of 2005. After careful consideration Control
      Tech
      concluded the conditions offered by Radvision were unfavorable ,
      therefore declined to place more purchase orders with Radvision. Control Tech
      is
      trying to amicably resolve the disputes  with
      Radvision and move on with its future business.





**CORPORATE
      STRUCTURE**





Hartcourt
      is a U.S. registered company that conducts its business solely in China
      through wholly and majority owned subsidiaries and
      indirectly majority owned subsidiary  in
      order
      to comply with China's foreign ownership restrictions.





Through
      Shanghai Jiumeng Information Technology Company Limited, we own 51% of the
      equity of Shanghai Huaqin ,
      our
      main operating subsidiary for the Samsung distribution business. Chinese
      investment regulations do not explicitly allow foreign companies such as
      Hartcourt to own Chinese entities. As such, Hartcourt uses Shanghai
      Jiumeng, a
      Chinese
      legal entity owned by its employees, as the registered owner of a 51% equity
      stake of Shanghai Huaqin in China. Of our 51% shareholdings in Shanghai
      Jiumeng , 90% of
      such
      stake is owned
      by
      Mr. Kang Bin, our financial controller, and 10% of such
      stake is 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. Each
      employee has signed
      nominee agreements to pledge all their rights in Shanghai
      Jiumeng to
      Hartcourt.





We
      have
      entered into a series of contractual agreements with our subsidiary Huaqing,
      its
      shareholders and our nominees. As a result of these contractual agreements,
      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.







4


The
      contractual agreements provide us with substantial ability to control Huaqing.
      Pursuant to these contractual agreements:





·
            our
                nominees have granted an irrevocable proxy and power of attorney
                to us to
                exercise the right to appoint the majority of directors in
                Huaqing;





·
            the
                shareholders of Huaqing may not enter into any transactions that
                may
                materially affect its assets, liabilities, equity or operations without
                our prior written consent by Hartcourt;





·
            any
                dividend or other payment for shareholder benefits received by our
                nominees from Huaqing on our behalf is to be paid to us
                directly;





·
            we
                may purchase or transfer the entire equity interest in, or all the
                assets
                of Huaqin held by our nominees on our behalf for a purchase price
                of the
                lower of RMB 1 or the lowest price permitted under PRC law when and
                if
                such purchase is permitted by PRC law or our nominees cease to be
                directors of Huaqin or employees of
                Hartcourt;





·
            our
                nominees have pledged their equity interest in Huaqing to us to secure
                the
                payment obligations of acquisitions of controlling interests in Huaqing,
                under the sales and purchase agreements between us and the shareholders
                of
                Huaqing;





·
            our
                nominees will not transfer, sell, pledge, dispose of or create any
                encumbrance on their equity interest in Huaqing without our prior
                written
                consent.





Our
      contractual arrangements with Huaqing, its shareholders and our


nominees
      may only be amended with the approval of the audit committee of our


board
      of
      directors.





In
      the
      opinion of the Zhonglun Law Firm (Shanghai), our PRC legal counsel:





·
            the
                ownership structures of our subsidiary are in compliance with existing
                PRC
                laws and regulations;





·
            our
                contractual agreements with Huaqing, its shareholders and our nominees
                are
                valid and binding, and will not result in any violation of PRC laws
                or
                regulations currently in effect;





·
            the
                business operations of our subsidiary are in compliance with existing
                PRC
                laws and regulations in all material aspects;
                and





·
            the
                enforcement of foreign judgments made by courts outside of the PRC
                has no
                direct and automatic affect in the PRC, but these judgments may be
                recognized and enforced by a PRC court in accordance with the bilateral
                or
                international treaties to which the PRC is a party, or subject to
                the
                principles of reciprocity upon finding the judgment does not conflict
                with
                the fundamental principles, sovereignty, security and public interests
                of
                the PRC.





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. If the PRC
      government finds that the agreements that establish the structure for operating
      our China businesses do not comply with PRC government restrictions on foreign
      investment in our industry, we could be compelled to restructure the transaction
      or dispose of a particular subsidiary.





In
      April , 2004,
      the China Ministry of Commerce officially announced that foreign investors
      such
      as the Company, would be allowed to establish wholly or majority foreign-owned wholesale and retail enterprises in the PRC starting from December 11, 2004. We have engaged a PRC
      law firm to study the newly 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.




**Intellectual
      Property**





None.






5


**Employees**





As
      of
      August 9, 2005, we had approximately 80 employees all
      of
      which are located
      in China.  We
      believe our future success and growth will depend on our ability to attract
      and
      retain qualified employees in all areas of our business. We do not currently
      have any collective bargaining agreements with our employees, and we believe
      employee relations are generally good. Although we have employment-related
      agreements with a number of key employees, these agreements do not guarantee
      continued service. We believe we offer reasonable compensation and a good
      working environment. However, we face intense competition for qualified
      employees, and we expect to face continuing challenges in recruiting and
      retention.





**ITEM
      2. PROPERTIES.**





Our
      principal locations, their purposes and the expiration dates for the leases
      on
      facilities at those locations are shown in the table below. We have renewal
      options on many of our leases.





Approximate
            LeaseSquare
            ExpirationLocation
            Purpose
            Meters
            DatesShanghai,
                China
            Principal
                offices and corporate headquarters
            350
            August
                2007





We
      also
      lease warehouse distribution centers and administrative facilities in the
      markets that we serve.


Our
      management believes that our facilities are well-maintained, adequate for our
      current and near-term needs, and that we will be able to locate additional
      facilities as needed. See Note 21 to the financial statements for more
      information about our lease commitments.





**ITEM
      3. LEGAL PROCEEDINGS.**





(1)
      SECURITIES AND EXCHANGE COMMISSION V. THE HARTCOURT COMPANIES, INC., ET AL.,
      CASE NO. CV03-3698LGB(PLAX) (C. D. CAL.)





The
      SEC
      filed a complaint for
      alleged securities violations by Hartcourt. The
      complaint alleged that Hartcourt illegally used a Form S-8 registration
      statement in 1999
      to improperly raise capital, and that false and misleading press releases were
      issued by us from September 9, 1999 through November 18, 1999. The SEC complaint
      sought disgorgement from the Company of approximately US $821,000
      in civil penalties and interest, as well as an injunction against future
      security law violations.





On
      March
      11, 2005, the U.S.
      District Court for the Central District of California entered
      the Final Judgment in this
      case. The court found that in 1999, the Company violated Sections 5 and 17(a)
      of The Securities Act of 1933 and Rule 10b-5 under the Securities Exchange Act of
      1934
      in connection with sales of securities using a Form S-8 Registration Statement.
      The court issued
      an
      order directing that civil penalties be imposed against the Company in the
      amount of US$275,000.
      The court also ordered
      that the amount of US $819,363
      from the stock sales be disgorged and that
      the
      Company be enjoined from
      future violations of the securities
      laws. The Company has fully accrued the amount in the accompanying financial
      statements. As of April 14, 2005, the Company has paid off the entire US$1.1
      million judgment to the SEC .




(2)
      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 US $54,441
      arising out of legal representation of the Company and its co-defendant Alan
      Phan with respect to the SEC litigation. Both parties reached an agreement
      to
      settle the dispute out of court on June 30, 2005 and filed a dismissal of the
      complaint on July 21, 2005. All conditions of the settlement have been
      satisfied.





**ITEM
      4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**





None.


**(a)
      Executive Officers**


The
        following table shows Hartcourt's executive officers as of August 25, 2005 and
        their areas of responsibility. Their biographies follow the table. There
        are no
        family relationships between any director or executive officer and any other
        director or executive officer of Hartcourt. Executive officers serve at the
        discretion of the Board of Directors.
  **Name**
              **Age**
              **Position**
              **Date
                  Held**Carrie
                  Hartwick
              43
              Director
                Chief
                  Executive Officer
                President
                Interim
                  Chief Financial Officer
              Since
                  June 2004
                Since
                  June 2004
                Since
                  November 2003
                Since
                  April 2005Jing
                  Jing Zhou
              43
              Vice
                  President Operation
              Since
                  July 25, 2005
 
 CARRIE
        HARTWICK, President, Chief Executive Officer, and Interim Chief Financial
        Officer, age 43. Ms. Hartwick joined Hartcourt at the end of December 2003
        as
        CFO and President. She became the CEO in June 2004. Prior to her current
        position, she was the finance director of Dell China/HK from May 2000 to
        August
        2003, and before that, served as the finance director of Gillette China and
        held
        various positions within Johnson & Johnson including Finance Controller for
        Johnson & Johnson Shanghai. Ms. Hartwick holds a Bachelor of Accounting
        degree from Rutgers University.
 
 JING
        JING
        ZHOU, Vice President of Operation, age 43. From February 1998 to April 2005,
        Mr.
        Zhou was with Newsky Technology Group, a public listed company in the Shanghai
        Stock Exchange where he was the vice president in charge of software division.
        From 1984 to 1998, Mr. Zhou worked in Nantian Electronic Information Group,
        a
        public listed company in the Shenzhen Stock Exchange. While Mr. Zhou was
        with
        Nantian, he held positions in software development, customer service, sales
        and
        market, and vice general manager. Mr. Zhou received his Bachelor of Science
        degree from Northwest Industrial University in China.




6


**PART
      II**





**ITEM
      5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES.**





Market
      Information for Common Stock




Our
      common stock is quoted on the NASD's Over-the-Counter Bulletin Board under
      the
      symbol "HRCT.OB". The following table sets forth, for the quarters indicated,
      the range of closing high and low bid prices of our common stock as reported
      by
      the NASD Over-the-Counter Bulletin Board, as adjusted for all previously
      effected stock splits.





COMMON
                STOCKBY
                QUARTER ENDED
            HIGH
            LOWYEAR
                ENDED DECEMBER 31, 2003March
                31, 2003
            US$.10
            US$.05June
                30, 2003
            US$1.12
            US$.08September
                30, 2003
            US$.92
            US$.52December
                31, 2003
            US$.86
            US$.52YEAR
                ENDED DECEMBER 31, 2004March
                31, 2004
            US$0.79
            US$0.47June
                30, 2004
            US$0.58
            US$0.20September
                30, 2004
            US$0.28
            US$0.17December
                31, 2004
            US$0.26
            US$0.14PERIOD
                FROM JAN. 1, 2005 TO MAY 31, 2005March
                31, 2005
            US$0.17
            US$0.08May
                31, 2005
            US$0.14
            US$0.09




The
      last
      reported sale price of our common stock on the OTC Bulletin Board on August 25,
      2005
      was US$0.072. As of August 25, 2005 we
      had approximately 844 shareholders of record. This number does not include shareholders whose shares
      are held in trust by other entities. The actual number of shareholders is
      greater than this number of holders of record.





Although
      our common stock is quoted on the OTC Bulletin Board it trades with limited
      volume. Consequently, the information provided above may not be indicative
      of
      our common stock price under different conditions.




We
      did
      not pay any cash dividends on our common stock for the five month transition
      period ended May 31, 2005 and our years ended December 31, 2003 and December
      31,
      2004. We do not anticipate paying any cash dividends on our common stock in
      the
      foreseeable future. We currently intend to retain future earnings, if any,
      to
      finance operations and the expansion of our business.




*Equity
        Compensation Plans*
 
 The
        information required by this item regarding equity compensation plans is
        incorporated by reference to the information set forth in Item 12 of this
        Annual
        Report on Form 10-K.
  *Recent
      Sales of Unregistered Securities*





The
      following information sets forth the outstanding shares the Company sold without
      registration under the Securities Act of 1933. All transactions were effected
      in
      reliance on various exemptions from registration under the Securities Act of
      1933 for transactions not involving a public offering. There are two primary
      exemptions under Regulation S: Rule 903 relates to offerings of securities
      by
      issuers and Rule 904 relates to secondary offerings of securities. There were
      no
      underwriters in any of these transactions.





On
      January 1, 2005, we issued an
      aggregate of 226,888
      shares of our common stock valued at US$44,384
      to our
      directors and certain of employees in lieu of cash compensation.





On
      February 25, 2005, we issued to the former shareholders of Control Tech an
      aggregate of 19,588,875 shares of our common stock as contemplated by the
      definitive purchase agreement.







7


On
      March
      29, 2005, we entered into a share purchase agreement to issue and sell 8,500,000
      shares of our common stock in an offshore transaction under Regulation S of
      the
      Securities and Exchange Commission to five Chinese investors at US $0.05
      per
      share for total gross proceeds of US $425,000.
      On March 29, 2005, we entered into a share purchase agreement to sell 17,142,857
      shares of our common stock in an offshore transaction under Regulation S to
      Ever
      Growth Holdings Ltd at US $0.035
      per share for total gross proceeds of US$600,000.




Pursuant
      to equity issuances on May 10,
      2005 and May 16, 2005, we issued an
      aggregate of 160,889
      shares of our common stock valued at US $18,921
      to all of our directors and certain of officers and employees in lieu of cash
      compensation.




On
      May
      13, 2005, we issued 5,900 shares of our common stock valued at US $1,491
      to
      a consultant for his consulting services rendered to the Company.




On
      February 28, 2005, related to disposal of Shanghai Guowei Science and Technology
      Co., Ltd., we received 2,951,800 shares of our common stock valued at US $295,180.
      Those shares have been returned and canceled.




WARRANTS





As
      of May
      31, 2005, we
      had a
      warrant outstanding to purchase 29,010,239 shares of our common stock at
      a per
      share purchase price of US$0.058. This warrant was issued in connection with the engagement of Enlight Corporation Ltd., on October 23,
      2002
      with respect to a proposed private placement of our common stock .
      The
      warrant expires on
      October 22, 2005. On March 11, 2004, Enlight pledged not to exercise the
      warrants unless there is a buy-out of the Company either by management or a
      third party if we agreed to extend the term of the warrants October 22, 2009.
      We
      have not yet reached agreement with respect to an extension of the term of
      the
      warrants.




In
      connection with a private placement of Hartcourt shares with PYR Management
      LLC,
      on March 6, 2001, the Company issued a
      warrant
      exercisable for up to 4,000,000 shares of our common stock at a per share
      purchase price of US$0.69375. The warrant expired pursuant to its
      terms on
      January 26, 2005.




*Purchases
      of Equity Securities by the Issuer and Affiliated Purchasers*





None.




We
        have
        not repurchased any of our common stock during the transition period ended
        May
        31, 2005.
 
 On
        May
        31, 2005, related to disposal of Beijing Challenge Group, we received 6,824,748
        shares of our common stock valued at US$682,478. Those shares have been returned
        and canceled.
  On
        May
        31, 2005, related to disposal of Guangdong NewHuaSun Computer Co., Ltd.,
        we
        received 13,769,156 shares of our common stock valued at US$1,376,916. Those
        shares have been returned and canceled.
  **Use
        of proceeds**





During
      the five month period ended May 31, 2005, we issued 25,642,857 shares of our
      common stock in 5 offshore transactions to raise fund of US $1,025,000.
      The proceeds were received and used to pay for the disgorgement and penalty
      to
      SEC.




8




**ITEM
      6. SELECTED FINANCIAL DATA.**





Period
                Ended May 31
            
            Year
                Ended
              December
                312005
            
            2004
            
            2003
            
            2002
            
            2001***Thousands
                of US Dollars, except per share amount*****Statement
                of income Data**Net
                Revenue
            
            
            19,678
            
            
            74,563
            
            
            48,529
            
            
            1,137
            
            
            10,621Operating
                income (losses) from continuing operations
            
            
            345
            
            
            (4,908
            )
            
            1,152
            
            
            (3,934
            )
            
            (7,779
            )Income
                (losses) from continuing operations
            
            
            287
            
            
            (5,449
            )
            
            (552
            )
            
            (4,158
            )
            
            (8,517
            )Net
                income (loss)
            
            
            123
            
            
            (15,452
            )
            
            (758
            )
            
            (2,559
            )
            
            (5,391
            )Basic
                and diluted earnings (losses) per weighted average share
            
            
            0.001
            
            
            (0.088
            )
            
            (0.005
            )
            
            (0.032
            )
            
            (0.078
            )**Balance
                Sheet Data**Cash
                and cash equivalents
            
            
            1,370
            
            
            1,745
            
            
            2,486
            
            
            80
            
            
            282Total
                assets
            
            
            17,414
            
            
            19,981
            
            
            34,271
            
            
            4,472
            
            
            9,267Net
                current assets
            
            
            4,409
            
            
            4,531
            
            
            6,636
            
            
            (2,155
            )
            
            (3,890
            )Net
                assets
            
            
            6,761
            
            
            5,944
            
            
            18,260
            
            
            909
            
            
            5,481Long-term
                debt
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            462**Common
                Stock Data**Shares
                of Common Stock (Year-End)
            
            
            193,739
            
            
            171,659
            
            
            171,157
            
            
            88,518
            
            
            73,886Shares
                of Common Stock (Average)
            
            
            191,504
            
            
            175,646
            
            
            135,565
            
            
            80,416
            
            
            68,880Dividends
                Paid per Share
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --Book
                Value Per Share (Year End)
            
            
            0.03
            
            
            0.03
            
            
            0.11
            
            
            0.01
            
            
            0.07





**ITEM
      7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
      OF
      OPERATIONS.**





We
      begin
      our Management's Discussion and Analysis of Financial Condition and Results
      of
      Operations (MD&A) with a discussion of the Critical Accounting Policies that
      we believe are important to understanding the assumptions and judgments
      underlying our financial statements. This is followed by a discussion of our
      Results of Operations that begins with an Overview followed by a more detailed
      discussion of our revenue and expenses. We then provide an analysis of our
      Liquidity and Capital Resources with a discussion of key aspects of our
      statements of cash flows, changes in our balance sheets, and our financial
      commitments. Following these discussions is the section entitled Risks That
      Could Affect Future Results which details some important factors that may
      significantly impact our future financial performance. You should also note
      that
      this MD&A discussion contains forward-looking statements that involve risks
      and uncertainties. Please see the section entitled "Caution Regarding
      Forward-Looking Statements" at the end of this Item 7 for important information
      to consider when evaluating such statements.





You
      should read this MD&A in conjunction with the Consolidated Financial
      Statements and Related Notes in
      Item 8.





**Critical
      Accounting Policies**





In
      preparing our financial statements, we make estimates, assumptions and judgments
      that can have a significant impact on our net revenue, operating income or
      loss
      and net income or loss, as well as on the value of certain assets and
      liabilities on our balance sheet. We believe that the estimates, assumptions
      and
      judgments involved in the accounting policies described below have the greatest
      potential impact on our financial statements, so we consider these to be our
      critical accounting policies. Senior management has discussed the development
      and selection of these critical accounting policies and their disclosure in
      this
      Report with the Audit Committee of our Board of Directors.







9


**Results
      of Operations**





Our
      operations for the five months period ended May 31, 2005 consisted of operations
      of Huaqing (51% indirect ownership interest), Control Tech (Consolidated from
      March 2005, 90% direct ownership interest), Hartcourt Capital Inc. (100%
      ownership interest), Hartcourt China, Inc. (100% ownership interest), and
      Ai-Asia Inc. (100% ownership interest), and Hartcourt’s investments in other
      entities located in Hong Kong and China. Our restated operations for the five
      months period ended May 31, 2004 consisted of the operations of Huaqing (51%
      indirect ownership interest), Hartcourt China Inc. (100% ownership interest),
      Ai-Asia Inc. (100% ownership interest), and Hartcourt Capital Inc. (100%
      ownership interest) and Hartcourt's investments in other entities located in
      China and Hong Kong.





***Operating
      revenue:***





We
      recorded operating revenue of US $19.7
      million for the five months period ended May 31, 2005, compare to US $29.2
      million for the same period in 2004, or a 33% decrease. Our sales during the
      five months period ended May 31, 2005 mainly represented revenues derived from
      sale of Samsung monitors and notebooks in Shanghai and sales of multimedia
      products in China, while sales revenue during the five months period ended
      May
      31, 2004 mainly represented revenues derived from sales of Samsung monitors
      in
      Zhejiang  and
      Shanghai area.





Samsung
      monitor sales in Zhejiang province did not sell through Huaqin
      Shanghai from the beginning of 2005. Huaqin Shanghai disposed of equity
      interest in Huaqin Hangzhou in August 2004 and Huaqin Hangzhou signed a separate
      distribution agreement with Samsung at the beginning of 2005. Huaqin
      Shanghai sales increased 25% compared to same period last year over the same
      geographic area. The increase comes from the addition of Samsung notebook sales.





Our
      multi-media products sales were consolidated in our financial statements
      beginning March 1, 2005.




Our
      cost
      of sales amounted to US $18.4
      million for the five months period ended May 31, 2005, compare to US $28.6
      million for the same period in 2004, excluding the discontinued operations.
      Cost
      of sales for the five months ended May 31, 2005 represented the cost of Samsung
      products and multimedia products. Cost of sales for the five months ended May
      31, 2004 represented the costs of Samsung monitors.





Gross
      profit was US $1.2
      million, or 6.3%, for the five months period ended May 31, 2005 compared to US $0.6
      million, or 1.9%, for the same period in 2004, an increase of 219%. Overall
      Samsung gross margin doubled, from last year’s 2% to this year’s 4%. Multimedia
      products are a major gross margin contributor, accounted for nearly 40% of
      the
      total gross profit for the five months period ended May 31, 2005.





***Selling,
      general and administrative expenses:***





Our
      selling, general and administrative expenses were US$862
      thousand for the
      five months period ended May 31, 2005 compared to US$985
      thousand for the
      same periods in 2004. a decrease of US$123
      thousand , or 12%, due to lower operating
      expenses.





***Depreciation
      and amortization expenses:***





Our
      depreciation and amortization expenses were US$30
      thousand for
      the
      five months period ended May 31, 2005 compared to US$23
      thousand for the
      same periods in 2004, a 30% increase. The increase was primarily due to our
      acquisition of Control Tech assets.





***Interest
      income:***





Interest
      income was US$47
      thousand and US$89 thousand for
      the
      five month period ended May 31, 2005 and 2004. The US$42
      thousand decrease
      was mainly due to lower cash balances.





***Interest
      expenses*** :





Interest
      expenses were US$200
      thousand and US$195 thousand for
      the
      five months period ended May 31, 2005 and 2004. All the interest expenses were
      incurred by Huaqing, a 51% owned subsidiary, from short term bank loans to
      finance the Samsung distribution business.





***Other
      revenue:*** Other
      revenue for the five month period ended May 31, 2005 were mainly from Samsung
      warranty services while in 2004 were resulted from disposal of a real estate
      property owned by our subsidiary Huaqin.







10


***Income
      from Continuing Operations:***





Income
      from continuing operations for the five months ended May 31, 2005 was US$345
      thousand, compared to a loss of US$443 thousand for the same period a year
      ago, primarily due to addition of our multimedia business, coupled with lower
      operating expenses in the five month period ended May 31, 2005.





***Minority
      interest:***





Minority
      interest represented the profit shared by the minority shareholders of Huaqing
      (49%) and Control Tech (10%).





***Income
      tax:***





Overall,
      our subsidiaries and affiliates are continuing to pay taxes in China that are
      on
      average lower than the statutory rate of 33%. Certain of our subsidiaries and
      affiliates were granted special tax treatment by the local Chinese provincial
      tax authorities and are exempt from income tax.





Chinese
      local tax authorities had not yet conducted annual tax audits of our
      subsidiaries and affiliates in China for the 2004 tax year. Management believes
      that there are no outstanding tax issues or liabilities at the time of this
      transition period report. All tax liabilities, if any, prior to the acquisition
      by us of our various Chinese subsidiaries or affiliates are solely the
      responsibility of the selling shareholders, as stipulated in each acquisition
      agreement.





We
      made
      provision for PRC income taxes of US$78,378 and US $82,670
      for the five months ended May 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 taxation by any U.S.
      governmental authority.





**Liquidity
      and Capital Resources:**





Our
      principal capital requirements during 2005 have been primarily funded by
      issuance of securities and to a lesser extent, Chinese short term bank
      loans .





As
      shown
      in our accompanying financial statements, we had a net income of US $123,082
      for the five months period ended May 31, 2005 as compared to a net income of US $29,262
      for the same periods in 2004, helped by one-time gain from discontinued
      operation in 2004. Our current assets exceeded our current liabilities by US $4,408,610
      as of May 31, 2005.





As
      of May
      31, 2005, we had working capital of US$4,408,610. In addition to our working
      capital on hand, we intend to obtain required capital through a combination
      of
      bank loans, staff loans and
      the
      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 five month period ended May 31, 2005, net cash used in operating activities
      was US$1.3 million,
      compared to net cash provided by operating activities of US $1.6
      million during the same period in 2004. The decrease in cash generated from
      operating activities resulted mainly from decrease of deferred
      revenue.





***Investing
      activities:***





Net
      cash
      provided by investing activities during the five months ended May 31, 2005,
      was US$0.8 million
      compared to net cash used in investing activities US$0.7 million
      for the same period in 2004. The cash provided by investment activities in
      the
      first quarter of 2005 was mostly due to proceeds from disposal of Guowei. The US $0.7
      million cash used in investment activities in 2004 was mainly resulted from
      the
      net effect of (a) the payment of investment in Guowei of US $0.1
      million and (b) payment of 0.6 million for investment in Beijing
      Challenge , (c)
      Huaqing’s payment of dividends to its minority shareholder of US $0.3
      million (d) recovery of notes receivable of US$0.3
      million.







11


***Financing
      activities:***





Net
      cash
      provided by financing activities during the five months ended May 31, 2005
      equaled to US$46
      thousand compared
      to cash provided by financing activities of US$26
      thousand during
      the same period in 2004. Net cash provided by financing activities was mostly
      due to the net effect of (a) payment of SEC judgment in the amount of US $1.1
      million. Please refer to details of the SEC litigation in the Part I, Item
      3,
      Legal Proceedings of this document, (b) bank loans of US$ 0.2
      million borrowed by Huaqing from local bank and (3) funds raised from private
      offering in the amount of US $1
      million. Cash provided by financing activities during same period 2004 was
      mainly proceeds from sales of our common stock totaling approximately US $1.3
      million, net off by payments to related parties, repayment of notes payables
      and
      bank loans totally US $1.3
      million.




As
      a
      result of the above activities, we experienced a net decrease in cash of US $0.3
      million for the five months ended May 31, 2005.




**Research
        and Development**
 
 Presently
        the company is not undertaking any significant Research and Development
        efforts.
 
 **Off-Balance
        Sheet Arrangements**
 
 During
        the transition period ended May 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.





**IMPORTANT
      FACTORS THAT MAY AFFECT OUR BUSINESS, OUR** **OPERATING** **RESULTS AND OUR STOCK PRICE**





In
      addition to the other information contained in this 5-month transitional report,
      you should carefully read and consider the following risk factors. If any of
      these risks actually occur, our business, financial condition or operating
      results could be materially adversely affected and the trading price of our
      common stock could decline.




**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.**





Over
      90%
      of our revenue in the transition period from January 1, 2005 through May 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 May 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.




Whether
      we can achieve cash flow levels sufficient to support our operations, 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.







12


**IF
      WE ARE UNABLE TO COMPETE SUCCESSFULLY IN THE HIGHLY COMPETITIVE MARKETS FOR
      THE
      NOTEBOOK COMPUTER AND** **PRODUCTS
      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.





**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;





·
            identify
                and acquire or lease suitable premises on competitive
                terms;





·
            maintain
                the supply of IT from IT suppliers;
                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.





**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.







13


**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 OCCUR** **S.**





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.**


Although
      we believe that the current capital structure of the Company will be sufficient
      to allow us to consummate acquisitions, we cannot ascertain the capital
      requirements for any particular transaction. If the current financial resources
      prove to be insufficient, either because of the size of the business acquisition
      or the depletion of the 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 growth of the 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 members of our board of directors,
      particularly to serve on our audit committee.





**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 investment associate, 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.







14


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.





**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 criminal penalties of the Federal
      securities 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 fund the 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 7 under
      the caption " Important
      Factors That May Affect Our
      Business, Our Operating Results and Our
      Stock Price "
      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.





**ITEM
      7A. 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 May 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.







15


Interest
      Rate Risk




Our
      cash
      equivalents are subject to market risk due to changes in interest rates.
      Interest rate movements affect the interest income we earn on cash equivalents,
      and funds held for payroll customers and the value of those investments.





Impact
      of
      Foreign Currency Rate Changes


Since
      we
      translate foreign currencies (primarily Chinese Yuans and Hong Kong Dollars)
      into US dollars
      for financial reporting purposes, currency fluctuations can have an impact
      on
      our financial results. The historical impact of currency fluctuations has
      generally been immaterial. We believe that our exposure to currency exchange
      fluctuation risk is not significant primarily because the stability of the
      exchange rate between Chinese Yuan, Hong Kong Dollars and US dollars. 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 May 31, 2005, we did not engage in foreign currency hedging activities.





**ITEM
      8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.**




The
      consolidated financial statements of The Hartcourt Companies, Inc. and its
      subsidiaries including the notes thereto, together with the report thereon
      of
      Kabani & Company, Inc. are presented b elow.


16





**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**




To
        the
        Stockholders and Board of Directors
 The
        Hartcourt Companies, Inc.
 
 We
        have
        audited the accompanying consolidated balance sheet of The Hartcourt Companies,
        Inc., a Utah Corporation (the “Company”) as of May 31, 2005 and the related
        consolidated statement of operations, consolidated stockholders’ equity and
        comprehensive income and consolidated statement of cash flows for the
        transitional period ended May 31, 2005. These financial statements are the
        responsibility of the Company’s management. Our responsibility is to express an
        opinion on these financial statements based on our audit.
  We
        conducted our audit of these statements in accordance with the standards
        of the
        Public Company Accounting Oversight Board (United States). Those standards
        require that we plan and perform the audit to obtain reasonable assurance
        about
        whether the financial statements are free of material misstatement. An audit
        includes examining, on a test basis, evidence supporting the amounts and
        disclosures in the financial statements. An audit also includes assessing
        the
        accounting principles used and significant estimates made by management,
        as well
        as evaluating the overall financial statement presentation. We believe that
        our
        audit provide a reasonable basis for our opinion.
 
 In
        our
        opinion, the financial statements referred to above present fairly, in all
        material respects, the financial position of The Hartcourt Companies, Inc
        as of
        May 31, 2005 and the results of its operations and its cash flows for the
        transitional period ended May 31, 2005, in conformity with accounting principles
        generally accepted in the United States of America.
 
 The
        Company’s financial statements are prepared using the generally accepted
        accounting principles applicable to a going concern, which contemplates the
        realization of assets and liquidation of liabilities in the normal course
        of
        business. The Company has accumulated deficit of $67,141,089 as of May 31,
        2005
        and negative cash flow from operations amounting $1,256,734 for the transitional
        period ended May 31, 2005. These factors as discussed in Note 2 to the financial
        statements, raises substantial doubt about the Company’s ability to continue as
        a going concern. Management’s plans in regard to these matters are also
        described in Note 2. The financial statements do not include any adjustments
        that might result from the outcome of this uncertainty.
 
 
 KABANI
        & COMPANY, INC.
 CERTIFIED
        PUBLIC ACCOUNTANTS
 
 /s/
        Kabani & Company, Inc.
 Huntington
        Beach, California
 August
        2,
        2005





17





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


**CONSOLIDATED
      BALANCE SHEET**


**May
      31, 2005**








**ASSET****CURRENT
                ASSETS**Cash
                and cash equivalents
            
            $
            1,369,914Restricted
                Cash
            
            
            1,558,630Accounts
                receivable, net
            
            
            2,655,199Inventories,
                net
            
            
            3,638,674Notes
                receivable, net
            
            
            483,793Advances
                to suppliers
            
            
            1,586,540Prepaid
                expenses and other assets
            
            
            2,028,722Due
                from related party
            
            
            331,892**TOTAL
                CURRENT ASSETS**
            
            
            13,653,364**PROPERTY
                & EQUIPMENT - NET**
            
            
            461,041**INVESTMENTS**
            
            
            60,412**INTANGIBLE
                ASSET**Goodwill
            
            
            3,239,110**TOTAL
                ASSETS**
            
            $
            17,413,927**LIABILITIES
                AND SHAREHOLDERS' EQUITY****CURRENT
                LIABILITIES**Bank
                loans
            
            $
            1,900,278Loan
                from employees
            
            
            1,058,828Accounts
                payable
            
            
            1,122,902Advance
                from customers
            
            
            3,363,180Accrued
                expenses and other current liabilities
            
            
            1,433,389Due
                to shareholders
            
            
            260,807Due
                to related party
            
            
            205,370**TOTAL
                CURRENT LIABILITIES**
            
            
            9,244,754**MINORITY
                INTERESTS**
            
            
            1,407,996








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


18


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


**CONSOLIDATED
      BALANCE SHEET**


**May
      31, 2005**


**(-Continued-)**


**SHAREHOLDERS'
                EQUITY**
            
            
            **May
              31, 2005****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, 239,999,000authorized,
                193,738,462 common sharesissued
                and outstanding
            
            
            193,739Additional
                paid in capital
            
            
            72,823,163Treasury
                stock, at cost, 48,728 shares
            
            
            (48,728
            )Other
                comprehensive income
            
            
            934,092Accumulated
                deficit
            
            
            (67,141,089
            )**TOTAL
                SHAREHOLDERS' EQUITY**
            
            
            6,761,177**TOTAL
                LIABILITIES AND SHAREHOLDERS' EQUITY**
            
            $
            17,413,927











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





19


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


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**








**For
                the Five Month Periods Ended May 31**
            ********
            ****
            ****
            **2005**
            ****
            ****
            **2004**(Unaudited)Net
                sales
            
            $
            19,677,794
            
            $
            29,160,027Cost
                of sales
            
            
            18,440,692
            
            
            28,594,633Gross
                profit
            
            
            1,237,102
            
            
            565,394Operating
                expenses:Selling,
                general and administrative
            
            
            862,216
            
            
            984,964Depreciation
                and amortization
            
            
            29,764
            
            
            23,006Total
                operating expenses
            
            
            891,980
            
            
            1,007,970Income/(loss)
                from continuing operationsbefore
                other income/(expenses)
            
            
            345,122
            
            
            (442,576
            )Other
                income/(expense):Interest
                expense
            
            
            (199,566
            )
            
            (194,619
            )Interest
                income
            
            
            46,756
            
            
            89,175Other
            
            
            94,476
            
            
            127,279Total
                other income/(expense)
            
            
            (58,334
            )
            
            21,835Income
                (loss) from continuing operations
            
            
            286,788
            
            
            (420,741
            )Less:
                Minority Interest
            
            
            138,453
            
            
            22,080Income
                (loss) before discontinued operations
            
            
            148,335
            
            
            (442,821
            )Discontinued
                operations:Gain
                from discontinued operations
            
            
            -
            
            
            554,753Gain
                on disposal of discontinued operations
            
            
            53,125
            
            
            -Income
                before tax
            
            
            201,460
            
            
            111,932Taxation
            
            
            78,378
            
            
            82,670NET
                INCOME
            
            $
            123,082
            
            $
            29,262BASIC
                AND DILUTED EARNINGS/(LOSSES)PER
                COMMON SHARE:Earnings/(losses)
                from continuing operations
            
            
            0.001
            
            
            (0.003
            )Earnings
                from discontinued operations
            
            
            0.000
            
            
            0.003Earnings
                per share
            
            
            0.001
            
            
            0.000Basic
                and fully diluted (weighted average)
            
            
            191,503,585
            
            
            175,597,691





20


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


**CONSOLIDATED
      STATEMENTS OF SHAREHOLDERS' EQUITY**


**FOR
      THE FIVE MONTHS PERIOD ENDED May 31, 2005 AND 2004
      (Unaudited)**








****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            **Common**
            ****
            ****
            ****
            ****
            ****
            **Other**
            ****
            ****
            ****
            ****
            ********
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            **Additional**
            ****
            ****
            **Stock**
            ****
            ****
            ****
            ****
            ****
            **Compre-**
            ****
            ****
            ****
            **Total**
            ********
            ****
            ****
            **Common
                Stock**
            ****
            ****
            **Preferred
                Stock**
            ****
            ****
            **Paid
                In**
            ****
            ****
            **Subscriptions**
            ****
            ****
            **Treasury
                Stock**
            ****
            ****
            **hensive**
            ****
            ****
            **Accumulated**
            ****
            ****
            **Shareholders'**
            ******Shares**
            ****
            ****
            **Amount**
            ****
            ****
            **Shares**
            ****
            ****
            **Amount**
            ****
            ****
            **Capital**
            ****
            ****
            **Receivable**
            ****
            ****
            **Shares**
            ****
            ****
            **Amount**
            ****
            ****
            **Loss**
            ****
            ****
            **Deficit**
            ****
            ****
            **Equity**Balance
                - December 31, 2004
            
            
            171,658,757
            
            $
            171,659
            
            
            --
            
            
            --
            
            $
            72,151,129
            
            
            --
            
            
            48,728
            
            $
            (48,728
            )
            $
            934,092
            
            $
            (67,264,171
            )
            $
            5,943,981Share
                issued for consulting services
            
            
            5,900
            
            
            6
            
            
            --
            
            
            --
            
            
            1,485
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            1,491Shares
                issued for compensation
            
            
            387,777
            
            
            388
            
            
            --
            
            
            --
            
            
            62,918
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            63,306Shares
                issued for acquisition of Control Tech
            
            
            19,588,875
            
            
            19,589
            
            
            --
            
            
            --
            
            
            1,939,299
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            1,958,888Shares
                issued for private offering
            
            
            25,642,857
            
            
            25,643
            
            
            --
            
            
            --
            
            
            999,357
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            1,025,000Treasury
                shares received
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            23,545,704
            
            
            (2,354,571
            )
            
            --
            
            
            --
            
            
            (2,354,571
            )Cancellation
                of treasury shares
            
            
            (23,545,704
            )
            
            (23,546
            )
            
            --
            
            
            --
            
            
            (2,331,025
            )
            
            --
            
            
            23,545,704
            )
            
            2,354,57
            
            
            --
            
            
            --
            
            
            --Net
                income
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            123,082
            
            
            123,082Balance
                -May 31,2005
            
            
            193,738,462
            
            $
            193,739
            
            
            --
            
            
            --
            
            $
            72,823,163
            
            
            --
            
            
            48,728
            
            $
            (48,728
            )
            $
            934,092
            
            $
            (67,141,089
            )
            $
            6,761,177








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


21


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


**CONSOLIDATED
      STATEMENTS OF SHAREHOLDERS' EQUITY**


**FOR
      THE FIVE MONTHS PERIOD ENDED MAY 31, 2005 AND 2004
      (Unaudited)**


**(continued)**








****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            **Common**
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ********
            ****
            **Additional**
            ****
            ****
            **Stock**
            ****
            ****
            ****
            ****
            ****
            **Compre-**
            ****
            ****
            ****
            ****
            **Total**
            ******Common
                Stock**
            ****
            ****
            **Preferred
              Stock**
            ****
            ****
            **Paid
              In**
            ****
            ****
            **Subscriptions**
            ****
            ****
            **Treasury
              Stock**
            ****
            ****
            **hensive**
            ****
            ****
            **Accumulated**
            ****
            ****
            **Shareholders'**
            ******Shares**
            
            
            **Amount**
            
            
            **Shares**
            
            
            **Amount**
            
            
            **Capital**
            
            
            **Receivable**
            
            
            **Shares**
            
            
            **Amount**
            
            
            **Loss**
            
            
            **Deficit**
            
            
            **Equity**Balance
                - December 31, 2003
            
            
            171,157,104
            
            $
            171,157
            
            
            1,000
            
            $
            10
            
            $
            70,858,036
            
            $
            (1,842,326
            )
            
            48,728
            
            $
            (48,728
            )
            $
            933,487
            
            $
            (51,811,875
            )
            $
            18,259,761Shares
                issued for consulting services
            
            
            239,200
            
            
            239
            
            
            --
            
            
            --
            
            
            88,761
            
            
            --
            
            
            --
            
            
            -
            
            
            --
            
            
            --
            
            
            89,000Shares
                issued for compensation
            
            
            115,426
            
            
            116
            
            
            --
            
            
            --
            
            
            61,135
            
            
            --
            
            
            --
            
            
            -
            
            
            --
            
            
            --
            
            
            61,251Shares
                issued for executions of cashless option
            
            
            841,270
            
            
            841
            
            
            --
            
            
            --
            
            
            (841
            )
            
            --
            
            
            --
            
            
            -
            
            
            --
            
            
            --
            
            
            --Shares
                issued for acquisition of Challenger Group
            
            
            6,824,748
            
            
            6,825
            
            
            --
            
            
            --
            
            
            3,787,735
            
            
            --
            
            
            --
            
            
            -
            
            
            --
            
            
            --
            
            
            3,794,560Subscriptions
                receivable
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            1,386,382
            
            
            --
            
            
            -
            
            
            --
            
            
            --
            
            
            1,386,382Net
                income
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            -
            
            
            --
            
            
            29,262
            
            
            29,262Balance
                -May 31, 2004 (Unaudited)
            
            
            179,177,748
            
            $
            179,178
            
            
            1,000
            
            $
            10
            
            $
            74,794,826
            
            $
            (455,944
            )
            
            48,728
            
            $
            (48,728
            )
            $
            933,487
            
            $
            (51,782,613
            )
            $
            23,620,216








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








22


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


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**








**For
                the Five Month Periods Ended May 31******
            
            **2005**
            
            **2004******
            
            ****
            
            **(Unaudited)****CASH
              FLOWS FROM OPERATING ACTIVITIES:**Net
                income
            
            $
            123,082
            
            $
            29,262Adjustments
                to reconcile net income tonet
                cash used in operating activities:Gain
                on disposal of assets
            
            
            (53,125
            )
            
            -Gain
                on disposal of property and equipment
            
            
            -
            
            
            (97,925
            )Depreciation
            
            
            29,764
            
            
            23,006Unrealized
                investment gain
            
            
            -
            
            
            (554,753
            )Minority
                interest
            
            
            138,453
            
            
            22,080Stock
                issued for services and compensations
            
            
            64,797
            
            
            150,251Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            2,587,196
            
            
            (187,200
            )Advances
                to suppliers
            
            
            2,205,387
            
            
            (934,341
            )Inventories
            
            
            (556,986
            )
            
            32,233Prepaid
                expenses and other receivables
            
            
            (549,546
            )
            
            (890,084
            )Accounts
                payable
            
            
            (323,725
            )
            
            (20,934
            )Accrued
                expenses and other current liabilities
            
            
            362,356
            
            
            411,417Advances
                from customers
            
            
            (5,284,387
            )
            
            3,656,205**NET
                CASH PROVIDED BY (USED IN)****OPERATING
                ACTIVITIES**
            
            
            (1,256,734
            )
            
            1,639,217**CASH
                FLOWS FROM INVESTING ACTIVITIES:**Purchase
                of property and equipment
            
            
            (13,613
            )
            
            (44,583
            )Proceeds
                on disposal of property and equipment
            
            
            -
            
            
            53,104Proceeds
                on disposal of assets pending for sale
            
            
            789,441
            
            
            -Cash
                acquired in acquisition of a subsidiary
            
            
            59,670
            
            
            -Dividends
                paid to minority investors of a subsidiary
            
            
            -
            
            
            (325,662
            )Cash
                paid for investments
            
            
            -
            
            
            (731,186
            )Proceeds
                on notes receivable, net
            
            
            -
            
            
            339,351**NET
                CASH PROVIDED BY (USED IN)****INVESTING
                ACTIVITIES**
            
            
            835,498
            
            
            (708,976
            )














See
      accompanying notes to consolidated financial statements.


23


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


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**(continued)**











**For
                the Five Month Periods Ended May 31******
            
            **2005**
            
            **2004******
            
            ****
            
            **(Unaudited)****CASH
              FLOWS FROM FINANCING ACTIVITIES**Payments
                to related parties-net
            
            $
            (118,216
            )
            $
            (397,907
            )Proceeds
                on sale of common stock
            
            
            1,025,000
            
            
            -Proceeds
                on stock subscriptions
            
            
            -
            
            
            1,386,382Proceeds
                /(repayment) on loans and lines of credit-net
            
            
            248,049
            
            
            (134,400
            )Proceeds
                (payments) on notes payable-net
            
            
            -
            
            
            (828,094
            )Payment
                of SEC disgorgement
            
            
            (1,108,535
            )
            
            -**NET
                CASH PROVIDED BY FINANCING ACTIVITIES**
            
            
            46,298
            
            
            25,981**NET
                (DECREASE)/INCREASE IN CASH**
            
            
            (374,938
            )
            
            956,222**CASH
                AND CASH EQUIVALENTS -****BEGINNING
                OF PERIOD**
            
            
            1,744,852
            
            
            823,639**CASH
                AND CASH EQUIVALENTS - END OF PERIOD**
            
            $
            1,369,914
            
            $
            1,779,861








**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 Five Month Periods Ended May 31******
            
            **2005**
            
            **2004******
            
            ****
            
            **(Unaudited)**SUPPLEMENTAL
              DISCLOSURE OF CASHFLOWSCash
                paid for interest
            
            $
            128,500
            
            $
            100,938Cash
                paid for income taxes, net of refund received
            
            
            40,837
            
            
            34,240SUPPLEMENTAL
                DISCLOSURE OFNON-CASH
                INVESTING AND FINANCING ACTIVITIESIn
                Conjunction with acquisition of subsidiariesFair
                value of net assets acquired
            
            
            879,879
            
            
            --Cash
                paid for acquisitions (net of cash acquired)
            
            
            (59,670
            )
            
            --Fair
                value of shares issued for acquisition
            
            
            1,958,888
            
            
            --


See
      accompanying notes to consolidated financial statements.








24


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


**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS**


**MAY
      31, 2005 AND 2004**







**NOTE
      1**  **GENERAL**





The
      Hartcourt Companies, Inc. ("Hartcourt" or "the Company") is incorporated in
      the
      State of Utah in September 1983. It was originally known as Stardust, Inc.
      ("Stardust"). Stardust acquired all of the outstanding shares of Hartcourt
      Investments, a Nevada corporation, for 6,110,337 shares of Stardust common
      stock
      in a reverse merger which occurred on November 5, 1994. Subsequent to the
      acquisition, Stardust changed its name to The Hartcourt Companies, Inc.





The
      Company is a business development company specializing in the Chinese
      Information Technology market.





As
      of May
      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 May
      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 involved in the distribution industry, Hartcourt,
      uses its employees, as nominee to hold the shares of Huaqing.





As
      of May
      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 May
      31, 2005, Hartcourt Capital Inc. owns 100% of Hartcourt Hi-Tech Investment
      (Shanghai) Inc. while Hartcourt Hi-Tech Investment (Shanghai) Inc., use its
      employees as nominees, owns 100% of Shanghai Jiumeng Information Technology
      Co.,
      Ltd. These two companies are located in Shanghai, China.





As
      of May
      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.





During
      the five months period ended May 31, 2005, the Company acquired 90% equity
      interest in Control Tech Electronics (Shanghai) Co., Ltd. (See Note #3,
      Acquisition and Investments).





During
      the five months period ended May 31, 2005, the Company disposed of two (2)
      subsidiaries, Beijing Challenge Group and Shanghai Guowei Science and Technology
      Ltd. (See Note # 14, Discontinued Operations).





The
      Company changed its fiscal year end for financial reporting purposes from a
      calendar year end to the twelve months period commencing June 1 and ending
      May
      31.








25


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


**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS**


**MAY
      31, 2005 AND 2004**





**NOTE
      2**  **SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES**





a)  Basis
      of
      Consolidation





Per
      Statement of Financial Accounting Standard (SFAS) #141, all business
      combinations will be accounted for by the purchase method. Acquisitions were
      recorded as purchases in accordance with Accounting Principles Board Opinion
      No.
      16 (APB #16), “Business Combinations”, as modified, and the purchase prices were
      allocated to the assets acquired, and liabilities assumed based upon their
      estimated fair value at the purchase date. The excess purchase price over the
      net asset value has been recorded as goodwill and is included in intangibles
      in
      the accompanying balance sheet. The operating results of the acquired entities
      are included in the Company’s consolidated financial statements from the dates
      of acquisition.





All
      material inter-company balances and transactions have been eliminated in
      consolidation.





b)  Use
      of
      Estimates





The
      preparation of the consolidated financial statements in conformity with
      generally accepted accounting principles requires management to make estimates
      and assumptions that affect the reported amounts of assets and liabilities and
      disclosures of contingent assets and liabilities at the date of the consolidated
      financial statements, and the reported amounts of revenues and expenses during
      the reporting period. Actual results could differ from those
      estimates.





c)  Cash
      and
      Cash Equivalents





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





d)  Accounts
      Receivable





The
      Company maintains reserves for potential credit losses on accounts receivable.
      Management reviews the composition of accounts receivable and analyzes
      historical bad debts, customer concentrations, customer credit worthiness,
      current economic trends and changes in customer payment patterns to evaluate
      the
      adequacy of these reserves. Reserves are recorded primarily on a specific
      identification basis.





e)  Advances
      to suppliers





The
      Company advances to certain vendors for purchase of its material. The advances
      to suppliers are interest free and unsecured.





f)  Inventories





Inventories
      are valued at the lower of cost (determined on a weighted average basis) or
      market. The Management compares the cost of inventories with the market value
      and allowance is made for writing down the inventories to there market value,
      if
      lower.


26





g)  Property
      and Equipment





Property
      and equipment are recorded at cost. Depreciation is computed using the
      straight-line method over useful lives of 5 to 40 years. The cost of assets
      sold
      or retired and the related amounts of accumulated depreciation are removed
      from
      the accounts in the year of disposal. Any resulting gain or loss is reflected
      in
      current operations. Assets held under capital leases are recorded at the lesser
      of the present value of the future minimum lease payments or the fair value
      of
      the leased property. Expenditures for maintenance and repairs are charged to
      operations as incurred.





h)  Intangible
      Assets





The
      Company evaluates intangible assets for impairment, at least on an annual basis
      and whenever events or changes in circumstances indicate that the carrying
      value
      may not be recoverable from its estimated future cash flows. Recoverability
      of
      intangible assets, other long-lived assets and, goodwill is measured by
      comparing their net book value to the related projected undiscounted cash flows
      from these assets, considering a number of factors including past operating
      results, budgets, economic projections, market trends and product development
      cycles. If the net book value of the asset exceeds the related undiscounted
      cash
      flows, the asset is considered impaired, and a second test is performed to
      measure the amount of impairment loss.





i)  Impairment
      of Long-Lived Assets





Effective
      January 1, 2002, the Company adopted Statement of Financial Accounting Standards
      No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
      144"), which addresses financial accounting and reporting for the impairment
      or
      disposal of long-lived assets and supersedes SFAS No. 121, "Accounting for
      the
      Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
      and the accounting and reporting provisions of APB Opinion No. 30, "Reporting
      the Results of Operations for a Disposal of a Segment of a Business." The
      Company periodically evaluates the carrying value of long-lived assets to be
      held and used in accordance with SFAS 144. SFAS 144 requires impairment losses
      to be recorded on long-lived assets used in operations when indicators of
      impairment are present and the undiscounted cash flows estimated to be generated
      by those assets are less than the assets' carrying amounts. In that event,
      a
      loss is recognized based on the amount by which the carrying amount exceeds
      the
      fair market value of the long-lived assets. Loss on long-lived assets to be
      disposed of is determined in a similar manner, except that fair market values
      are reduced for the cost of disposal. Based on its review, the Company believes
      that, as of May 31, 2005, there were no significant impairments of its
      long-lived assets used in operations.


27








j)  Revenue
      Recognition





The
      Company's revenue recognition policies are in compliance with Staff accounting
      bulletin (SAB) 104. Revenue is recognized at the date of shipment to customers
      or service have been rendered when a formal arrangement exists, the price is
      fixed or determinable, the delivery is completed, no other significant
      obligations of the Company exist and collectibility is reasonably assured.
      Payments received before all of the relevant criteria for revenue recognition
      are satisfied are recorded as advances from customers.




k)  Income
      Taxes




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





l)  Stock-Based
      Compensation





The
      Company accounts for stock-based compensation plans under Statement of Financial
      Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
      123). SFAS No. 123 prescribes accounting and reporting standards for all
      stock-based compensation plans, including employee stock options, restricted
      stock, employee stock purchase plans and stock appreciation rights. SFAS No.
      123
      requires compensation expense to be recorded (i) using the new fair value method
      or (ii) using the existing accounting rules prescribed by Accounting Principles
      Board Opinion No. 25, “Accounting for stock issued to employees” (APB 25) and
      related interpretations with pro forma disclosure of what net income and
      earnings per share would have been had the Company adopted the new fair value
      method. The company uses the intrinsic value method prescribed by APB25 and
      has
      opted for the disclosure provisions of SFAS No.123.





m)  Foreign
      Currencies Translation





Assets
      and liabilities in foreign currency are recorded at the balance sheet date
      at
      the rate prevailing on that date. Items of income statement are recorded at
      the
      average exchange rate. Gain or loss on foreign currency transactions are
      reflected on the income statement. Gain or loss on financial statement
      translation from foreign currency are recorded as a separate component in the
      equity section of the balance sheet, as component of comprehensive income.
      The
      functional currency of the Company is Chinese Renminbi.


28





n)  Fair
      Value of Financial Instruments





Statement
      of financial accounting standard No. 107, Disclosures about fair value of
      financial instruments, requires that the Company disclose estimated fair values
      of financial instruments. The carrying amounts reported in the statements of
      financial position for current assets and current liabilities qualifying as
      financial instruments are a reasonable estimate of fair value.





The
      Company’s financial instruments consists of primarily cash, accounts receivable,
      notes and other receivables, investments, advances, accounts payable and accrued
      expenses, notes payable and loans payable, and other current liabilities which
      approximates fair value because of the relatively short maturity of those
      instruments.





o)  Basic
      and
      diluted earning per share





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





p)  Statement
      of Cash Flows





In
      accordance with Statement of Financial Accounting Standards No. 95, "Statement
      of Cash Flows," cash flows from the Company's operations is calculated based
      upon the local currencies. As a result, amounts related to assets and
      liabilities reported on the statement of cash flows will not necessarily agree
      with changes in the corresponding balances on the balance sheet.





q)  Segment
      Reporting





Statement
      of Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosure about
      Segments of an Enterprise and Related Information" requires use of the
      "management approach" model for segment reporting. The management approach
      model
      is based on the way a company's management organizes segments within the company
      for making operating decisions and assessing performance. Reportable segments
      are based on products and services, geography, legal structure, management
      structure, or any other manner in which management disaggregates a company.
      SFAS
      131 has no effect on the Company’s consolidated financial statements as the
      Company consists of one reportable business segment. All revenue is from
      customers in People's Republic of China. All of the Company’s assets are located
      in People's Republic of China.


29





r)  Going
      Concern





As
      shown
      in the accompanying consolidated financial statements, the Company incurred
      accumulated losses of $67,141,089 and $67,264,171 as of May 31, 2005 and
      December 31, 2004, respectively. Negative cash flows from the operations of
      $1,256,734 and $7,119,947 were noted for the five months period ended May 31,
      2005 and years ended December 31, 2004, respectively. These matters raise
      substantial doubt about the Company’s ability to continue as a going
      concern.





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.





The
      Company has taken certain restructuring steps to provide the necessary capital
      to continue its operations. These steps included: 1) acquire profitable
      operations through issuance of equity instruments, 2) disposal of unprofitable
      or unfavourable return-on-investment operations, 3) the settlement of certain
      matters of litigation and/or disputes. The Company has planned to continue
      actively seeking additional funding and restructure the acquired subsidiaries
      to
      increase profits and minimize the liabilities.


30





s)  Recently
      Issued Accounting Standards





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 first quarter of fiscal 2006.
      The Company is in process of evaluating if the adoption of this standard will
      have any material impact on its financial statements.





In
      December 2004, the FASB issued SFAS Statement No. 153, "Exchanges of Nonmonetary
      Assets." The Statement is an amendment of APB Opinion No. 29 to eliminate the
      exception for nonmonetary exchanges of similar productive assets and replaces
      it
      with a general exception for exchanges of nonmonetary 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
      March
      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 an 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.





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.


31







**NOTE
      3**  **ACQUISITION
      AND INVESTMENTS**





**Acquisition**





During
      the five months 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.





A
      summary
      of Control Tech assets acquired, liabilities assumed and consideration for
      is as
      follows:





AmountCurrent
                assets
            
            $
            2,416,288Good
                will
            
            
            1,079,009Property
                & equipment
            
            
            113,343Current
                liabilities
            
            
            (1,551,988
            )Minority
                Interest
            
            
            (97,764
            )$
            1,958,888Consideration
                paid:Common
                Stock
            
            $
            1,958,888


Pro
      forma
      income statements for the Company in relate to the acquisition of Control Tech
      for five month periods ended May 31, 2005 and May 31, 2004 are as
      follows:








**For
              the Five Month Periods Ended May 31**
            ********
            ****
            ****
            **2005**
            ****
            ****
            **2004**Net
                sales
            
            $
            19,971,240
            
            $
            31,003,714Cost
                of sales
            
            
            18,578,626
            
            
            29,904,905Gross
                profit
            
            
            1,392,614
            
            
            1,098,805Operating
                expenses
            
            
            1,097,368
            
            
            1,291,175Total
                operating income
            
            
            295,246
            
            
            (192,370
            )Other
                income/(expenses)
            
            
            (56,208
            )
            
            21,835Income
                (loss) from continuing operations
            
            
            239,038
            
            
            (170,535
            )Less:
                Minority Interest
            
            
            133,678
            
            
            45,313Income
                (loss) before discontinued operations
            
            
            105,360
            
            
            (215,848
            )Gain
                on disposal of discontinued operations
            
            
            53,125
            
            
            554,753Income
                before tax
            
            
            158,485
            
            
            338,905Tax
            
            
            78,378
            
            
            100,555Net
                income
            
            $
            80,107
            
            $
            238,350





32





Pursuant
      to the agreement, the consideration shares will be released within three years
      by installment, based on the performance results of Control Tech.





Pursuant
      to the agreement, the vendors provide guarantees to the Company that if they
      are
      unable to meet the revenue and net profit target during the three years after
      acquisition, the purchase consideration shall be adjusted proportionally.





Pursuant
      to the agreement, the Company provides guarantees to the vendors that if the
      average closing price of Hartcourt shares for the 20 trading days immediately
      prior to the expiry of the First Restricted Year, the Second Restricted Year
      and
      the Third Restricted Year respectively is below US$0.10, then the Vendors have
      the right to request the Purchaser to procure the Company to issue and allot
      to
      the Vendors additional new Hartcourt Shares.





**Other
      investments**





The
      following is a summary of investments under the cost method as of May 31,
      2005:





Investment
                in First Information
            
            $
            223,816Investment
                in Shanghai Jin’an Fuhuaqi
            
            
            60,412Total
                investment
            
            
            284,228Provision
                on other investment
            
            
            (223,816
            )Investments,
                net
            
            
            60,412





**a)
      Investment in First information Technology Inc. (“First
      information”)**





During
      year 2004, Hartcourt China, Inc disposed its 58.53% owned subsidiary, Hopeful
      Internet Technology Limited in exchange for the 10.5% (1,050 shares at value
      of
      $0.001 each, amounted to US$223,816) interest in First information Technology
      Inc., a BVI company. A 100% provision was proposed based on the review of its
      carrying value and its fair value.





**b)
      Investment in Shanghai Jin’an Fuhuaqi**





During
      year 2004, Huaqing, a 51% owned subsidiary, invested US$60,412 to a local
      enterprise for 10% equity interest. No provision was made for such
      investment.





**NOTE
      4**  **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.







33


**NOTE
      5**  **RESTRICTED
      CASH**





Cash
      of
      US$1,558,630 were pledged to the bank as collateral for bank bills of
      US$1,558,630 as of May 31, 2005.





**NOTE
      6**  **ACCOUNTS
      RECEIVABLE**




Accounts
      receivable as of May 31, 2005 consisted of the following:





AmountAccounts
                receivables
            
            
            2,798,109Less:
                allowance for doubtful accounts
            
            
            (142,910
            )Net
            
            
            2,655,199





Three
      major customers accounted for 24% and 46% of the net revenue for the five month
      period ended May 31, 2005 and May 31, 2004, respectively. At May 31, 2005,
      the
      total receivable balance due from these three customers was $305,870.





**NOTE** **7
      NOTES RECEIVABLE**




Notes
      receivables as of May 31, 2005 are summarized as follows:




AmountNotes
                receivable from Beijing Challenge Group, non-interest bearing, 4
                installment payments, secured by one shareholder of Beijing Challenge
                Group (see Note 13, Discontinued Operations)
            
            $
            610,289Less:
                provisions
            
            
            (126,496
            )Notes
                receivables, net
            
            
            483,793Summary
                of notes receivable:Current
                portion
            
            
            483,793Non-current
                portion
            
            
            --Total
            
            $
            483,793





34





**NOTE
      8**  **INVENTORIES**




Inventories
      as of May 31, 2005 consisted of the following:


AmountMonitors
            
            $
            1,281,475Laptops
            
            
            385,573Video-conferences
            
            
            1,806,422Audio-conferences
            
            
            117,345Others
            
            
            54,497Less:
                provisions for obsolete inventories
            
            
            (6,638
            )Net
            
            $
            3,638,674





**NOTE
      9** **ADVANCES
      TO SUPPLIERS**





This
      amount represents the advances paid by Huaqing a 51% owned subsidiary to Samsung
      of $1,586,540 .





Samsung,
      the Company’s key vendor supplied 92% and 98% of the Company’s purchase for the
      five month period ended May 31, 2005 and 31 May 2004, respectively. The Company
      made prepayments to Samsung to purchase inventory as required by Samsung. The
      prepayment balance was $1,586,540 at May 31, 2005.




**NOTE
      10 RECEIVABLES FROM A RELATED PARTY**





Receivables
      from related parties as of May 31, 2005 represent amount due from Huaqing (51%
      owned subsidiary)’s minority shareholders pursuant to business transactions in
      the ordinary course. . All the balances are unsecured, interest free and payable
      on demand.





**NOTE
      11**   **RELATED
      PARTY TRANSACTIONS**




Following
      related parties transactions incurred in five months period ended May 31, 2005:





a)
            During
                the five months period ended May 31, 2005, Huaqing, a 51% owned subsidiary
                of the Company, sold $594,049 monitors and laptops to its minority
                shareholder (Shanghai
                Chengqing Electronics Co., Ltd., formerly known as Shanghai Huaqing
                Economic Development Co., Ltd).


b)
            During
                the five months period ended May 31, 2005, Control Tech, a 90% owned
                subsidiary of the Company, purchased $81,946 video and audio conferences
                accessories from its minority shareholder (Beijing Control Tech Co.,
                Ltd.)
                pursuant to business transactions in the ordinary
                course.


c)
            During
                the five months period ended May 31, 2005, Hartcourt issued 387,777
                shares
                of our common stock valued at $63,305 to its officers, employees
                and all
                directors in lieu of cash compensation.







35


**NOTE
      12**   **PROPERTIES
      AND EOUIPMENT**





The
      balances of Company property and equipment as of May 31, 2005 are summarized
      as
      follows:





AmountBuilding
            
            $
            236,612Office
                equipment and computers
            
            
            139,394Furniture
                and fixtures
            
            
            2,254Vehicle
            
            
            234,453612,713Less:
                accumulated depreciation
            
            
            (151,672
            )Property
                and equipment, net
            
            $
            461,041





36





**NOTE
      13**   **INTANGIBLES**





Goodwill
      resulting from the acquisition amounted to as per follows, as of May 31,
      2005:





Goodwill
                Arising from acquisition of Huaqing
            
            $
            2,160,101Goodwill
                Arising from acquisition of Control Tech
            
            
            1,079,009Total
            
            $
            3,239,110





**NOTE
      14**    **DISCONTINUED
      OPERATIONS**





1)  Beijing
      Challenge Group





In
      December 2004, the Board of Directors of Hartcourt authorized the sale of entire
      51% equity interest in Beijing Challenger Group ("Challenger") due to adverse
      market environment and the declining Hartcourt share price. We reached
      agreements with the minority shareholders of Challenge that Hartcourt will
      not
      have any control in Challenge effective from January 1, 2005 by sale the 51%
      Hartcourt equity back to its original owners in a combination of cash and stock
      transaction where Challenge shareholders will return 6,824,748 shares of
      Hartcourt common stock and notes with net value of 490,289. As of May 31, 2005,
      Hartcourt had received all consideration shares and the notes. The consideration
      shares had been returned for cancellation.





2)
      Shanghai Guowei Science and Technology Ltd.





In
      December 2004, the Board of Directors of Hartcourt authorized the sale of entire
      50.5% equity interest in Shanghai Guowei Science and Technology Ltd. due to
      adverse market environment. We reached agreements with the minority shareholders
      of GuoWei that Hartcourt will not have any control in Guowei effective from
      January 1, 2005 by sale the 50.5% of Hartcourt equity back to its original
      owners in a combination of cash and stock transaction where GuoWei shareholders
      paid cash consideration of $789,441 and returned 2,951,800 shares of Hartcourt
      common stock. As of May 31, 2005, we had received the share and all cash
      consideration. The consideration shares had been returned for
      cancellation.




37


Gain
      on
      disposal of discontinued operations




Guowei
              
              Challenge
              
              TotalNet
                  book value
              
              $
              1,031,496
              
              $
              1,172,764
              
              $
              2,204,260Less:
                  disposal consideration
              
              
              (1,084,621
              )
              
              (1,172,764
              )
              
              (2,151,135
              )Gain
                  on disposal of discontinued operations
              
              $
              53,125
              
              $
              --
              
              $
              53,125





**NOTE
      15**  **BANK LOANS**





AmountShort-term
                loan from local bank, interest rate of 6.696% per annum, maturity
                at
                February 8, 2006, secured by a third party
            
            $
            241,648Notes
                payable to local bank, interest free, maturity on various dates from
                June
                21 to June 28, 2006, fully secured by cash deposit of
                US$1,558,630
            
            
            1,558,630Total
            
            $
            1,800,278





**NOTE
      16**  **LOAN FROM EMPLOYEES**





Huaqing,
      a 51% owned subsidiary of the Company, issued short-term bond to its employees
      to raise additional working capital. The bond is 8% interest bearing and payable
      at December 31, 2005.





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





Accrued
      expenses and other current liabilities as of May 31, 2005 are summarized as
      follows:





AmountAccrued
                officers and employees compensations
            
            $
            221,147Accrued
                directors’ compensations
            
            
            9,583Accrued
                interest
            
            
            138,079Accrued
                professional fees
            
            
            439,117Other
                current liabilities
            
            
            625,463Total
            
            $
            1,433,389





**NOTE
      18**  **DUE TO SHAREHOLDERS**





AmountDue
                to Alan Phan, former CEO (a)
            $
                30,871Due
                to Enlight (b)
            150,000Due
                to Chateau D’orly (b)
            79,936Total
            $260,807





38





(a)  Alan
      Phan
      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, respectively. 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
      19**  **DUE TO A RELATED PARTY**





The
      amount due to a related party as of May 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.





**NOTE
      20**  **MINORITY INTEREST**





The
      amount represents the minority shareholders' interest in Huaqing, a 51%
      subsidiary, and Control Tech, a 90% subsidiary.





**NOTE
      21 COMMITMENTS AND CONTINGENCIES**





a)
      Employment Agreements





The
      current senior management consists of a Chief Executive Officer (“CEO”) and an
      interim Chief Financial Officer (“CFO”). Each of the Company’s executive
      employment agreements stipulate that senior executives, CEO and interim 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.




Effective
      from June 1, 2004, Carrie Hartwick was added to her responsibilities as
      President and CFO the responsibility of CEO. The new employment agreement was
      signed on March 9 2005. The compensation is US$150,000 payable in equal monthly
      installment of US$12,500 cash. During the five months period ended May 31,
      2005,
      Ms Carrie Hartwick received $25,000 cash for her compensation and the remaining
      $37,500 had not yet paid to Ms Hartwick.





Ms
      Hartwick was granted an option to purchase 15 million shares of common stock
      at
      0.09 per share.





On
      January 5, 2005, the Company appointed Mr. Richard Hyland as Interim Chief
      Financial Officer, Ms. Carrie Hartwick, Chief Executive Officer relinquished
      her
      duties as CFO on the same date. Mr. Richard Hyland’s Employment Agreement
      includes an annual base salary of $20,000, payable by equal monthly installment
      of US$833 cash and US$833 worth of the Company’s common shares on the first day
      of each month. The average 20 days trading price of the Company’s common shares
      prior to the first day of each month will be used to calculate this compensation
      amount. In addition, Mr. Hyland was granted 100,000 stock options at $0.15
      per
      share.





On
      April
      11, 2005, Mr. Hyland resigned from the position of Interim Chief Financial
      Officer due to cultural and language barriers working in China as well as his
      inability to commit the necessary time in Shanghai, the location of Hartcourt
      headquarters. The Board of Directors appointed Carrie Hartwick as Interim Chief
      Financial Officer, effective April 14, 2005. Mr. Richard Hyland received $2,765
      cash and 21,509 shares of Hartcourt common stock valued at $2,765 for his
      compensation up to April 11, 2005.





b)
      Operating Leases





The
      Company leases its offices and facilities under long-term, non-cancelable lease
      agreements expiring at various dates through May 31, 2005. 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 five months ended May 31, 2005 and 2004 were $60,194 and
      $34,865, respectively.





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





Year
                Ending May 31
            
            Payments2006
            
            $
            226,8632007
            
            
            166,1282008
            
            
            80,974Total
                future lease payments
            
            $
            473,965




39


c)
      Legal
      Proceedings





**Securities
      and Exchange Commission v. The Hartcourt Companies, Inc., et al., United States
      District Court for the Central District of California Case
      No. CV03-3698LGB(PLAX)**





The
      SEC
      filed a complaint for alleged securities violations by Hartcourt. The complaint
      alleges that Hartcourt illegally used a SEC Form S-8 Registration Statement
      in
      1999 to improperly raise capital, and that false and misleading press releases
      were issued by us from September 9, 1999 through November 18, 1999. The SEC
      was
      initially seeking disgorgement from the Company of approximately $821,000 in
      civil penalties and interest, as well as an injunction against future security
      law violations.





On
      March
      11, 2005, the U.S. District Court for the Central District of California entered
      the Final Judgment in this case. The court found that in 1999, the Company
      violated Sections 5 and 17(a) of The Securities Act of 1933 and Rule 10b-5
      under
      the Securities Exchange Act of 1934 in connection with sales of securities
      using
      a Form S-8 Registration Statement. The court issued an order directing that
      civil penalties be imposed against the Company in the amount of $275,000. The
      court also ordered that the amount of $819,363 from the stock sales be disgorged
      and that the Company be enjoined from future violations of the securities laws.
      The Company has fully accrued the amount in the accompanying financial
      statements. As of April 14, 2005, the Company has paid off the entire $1.1
      million judgment to the SEC.





**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. As of May 31, 2005, 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.





d)
      Guarantee




Huaqing,
        a 51% owned subsidiary, provides guarantee to Hangzhou Huaqing Monitor
        Technology Co., Ltd. for bank loan of US$6,449,275 as of May 31, 2005. Of
        which,
        US$2,536,231 are pledged by the inventories of Huaqing. As of May 31, 2005,
        Huaqing had a balance due to Hangzhou Huaqing Monitor Technology Co., Ltd.
        of
        US$3,228,949. The bank loan will mature on various date from December 05,
        2005
        to April 06, 2006. Huaqing’s
        bank guarantee will expire upon the repayment of the loan by Hangzhou Huaqing
        Monitor Technology Co., Ltd.





**NOTE
      22**  **SHAREHOLDERS’
      EQUITY**





a)
      Capitalization




The
      total
      number of shares of stock which the Company has the authority to issue is
      250,000,000 consisting of 239,999,000 shares of common stock, $0.001 par value,
      1,000 shares of original preferred stock, $0.01 par value (the Original
      Preferred Stock), and 10,000,000 shares of Class A preferred stock. The total
      number of shares of the Company’s common stock issued and outstanding as of May
      31, 2005 and May 31, 2004 are 193,738,462 and 179,177,748 respectively.





b)
      Original Preferred Stock





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





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





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





On
      July,
      14, 2004, the founder of Hartcourt, Dr. Alan V Phan, converted his 1,000 shares
      of Original Preferred Stock into 2,000,000 shares of Hartcourt common stock.
      After the conversion, no Original Preferred Stock was outstanding as of May
      31,
      2005.





c)
      Class
      A Preferred Stock





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





40


d)
      Common
      Stock Issued for Cash





On
      March
      29, 2005, the Company entered into a share purchase agreement to issue and
      sell
      8,500,000 shares of common stock in an offshore transaction under Regulation
      S
      of the Securities and Exchange Commission to five Chinese investors at $0.05
      per
      share for total gross proceeds of $425,000. Total proceeds of $425,000 had
      been
      fully received as of April 30, 2005 .





On
      March
      29, 2005, we entered into a share purchase agreement to sell 17,142,857 shares
      of our common stock in an offshore transaction under Regulation S to Ever Growth
      Holdings Ltd. at $0.035 per share for total gross proceeds of $600,000. Total
      proceeds of $425,000 had been fully received as of April 30, 2005.





e)
      Common
      Stock Issued for Services





During
      the five months period ended May 31, 2005, Hartcourt issued 5,900 shares of
      common stock valued at $1,491 to a consultant for consulting services rendered
      in 2004.





f)
      Common
      Stock Issued for compensation





During
      the five months period ended May 31, 2005, Hartcourt issued 387,777 shares
      of
      our common stock valued at $63,306 to our officers, employees and directors
      in
      lieu of cash compensation.





g)
      Common
      Stock Issued for Warrants





During
      five months period ended May 31, 2005, no common stock was issued for
      warrants.





h)
      Common
      Stock Issued for Stock Options





During
      the five months period ended May 31, 2005, no common stock was issued for stock
      options.





i)
      Common
      stocks issued for investment and acquisition





During
      the five months period ended May 31, 2005, Hartcourt issued 19,588,875 shares
      of
      our common stock in connection with the acquisition of Control
      Tech.




j)
      Cancellation of shares





During
      the five months period ended May 31, 2005, Hartcourt entered into agreements
      with Guangdong New HuaSun and Shenzhen Raiser, pursuant to which we redeemed
      13,769,156 shares of Harcourt’s common stock held by New HuaSun, New HuaSun
      redeemed a 45% equity interest, and Hartcourt released Shenzhen Raizer of its
      obligation on a $3,403,150 promissory note payable to Hartcourt. Hartcourt
      received and cancelled 13,769,156 shares of our common stock in connection
      with
      the rescission of acquisition agreement with Wenzhou Zhongnan
      Group.





During
      the five months period ended May 31, 2005, Hartcourt received and cancelled
      6,824,748 shares of our common stock in connection with the rescission of
      acquisition agreement with Beijing Challenge Group.





During
      the five months period ended May 31, 2005, Hartcourt received and cancelled
      2,951,800 shares of our common stock in connection with the disposal of Shanghai
      Guowei Science and Technology Co., Ltd.


**NOTE
      2** **3**  **INCOME TAXES**


41





At
      May
      31, 2005, the Company had net operating losses for tax purposes of approximately
      $5,397,903. The net operating loss carry forward may be used to reduce taxable
      income through the year 2019.





The
      gross
      deferred tax asset balance as of May 31, 2005 was $2,159,161. A 100% valuation
      allowance has been established against the deferred tax assets, as the
      utilization of the loss carry forward cannot reasonably be assured. Components
      of deferred tax asset are as follows:




May
                31, 2005Net
                operating loss
            
            $
            2,159,161Less:
                valuation allowance
            
            
            (2,159,161
            )$
            --





The
      following is a reconciliation of the provision for income taxes at the U.S.
      federal income tax rate to the income taxes reflected in the Statement of
      Operations:





December
                31, 2004Tax
                expense (credit) at statutory rate-federal
            (34)%State
                tax expense net of federal tax
            (6)Changes
                in valuation allowance
            40Foreign
                income tax
            33Tax
                expense at actual rate
            33%





I ncome
      tax
      expense for the five months period ended May 31, 2005 is $78,378, consists
      of
      tax on income of the Company’s subsidiary in China.





**NOTE
      2** **4**  **STOCK OPTION PLAN AND WARRANTS**





a)
      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 March 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.





42


The
      following table summarizes the activity of stock options:




WeightedAverageNumber
                of
            
            ExerciseShares
            
            PriceShares
                under option at December 31, 2003
            
            
            11,300,000
            
            
            0.34Granted
            
            
            -
            
            
            -Exercised
            
            
            1,000,000
            
            
            0.10Expired
            
            
            -
            
            
            -Cancelled
            
            
            -
            
            
            -Shares
                under option at May 31, 2004
            
            
            10,300,000
            
            
            0.31Granted
            
            
            3,000,000
            
            
            0.3Exercised
            
            
            -
            
            
            -Expired
            
            
            3,000,000
            
            
            0.38Cancelled
            
            
            3,000,000
            
            
            0.48Shares
                under option at December 31, 2004
            
            
            7,300,000
            
            
            0.28Granted
            
            
            20,300,000
            
            
            0.09Exercised
            
            
            -
            
            
            -Expired
            
            
            -
            
            
            -Cancelled
            
            
            -
            
            
            -Shares
                under option at May 31, 2005
            
            
            27,600,000
            
            
            0.14





All
      stock
      options issued to employees have an exercise price not less than the market
      value of the Company’s common stock on the date of grant, and in accordance with
      the accounting for such options utilizing the intrinsic value method there
      is no
      related compensation expense recorded in the Company’s financial statements.





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
      five months period ended May 31, 2005, as follows ($ in thousands, except per
      share amounts) :





Five
                months period ended2005
            
            2004(in
                thousands $)Net
                income - as reported
            
            $
            123
            
            $
            29Stock-Based
                employee compensationexpense
                included in reported netincome,
                net of tax
            
            
            --
            
            
            --Total
                stock-based employeecompensation
                expense determinedunder
                fair-value-based method for allrewards,
                net of tax
            
            
            (969
            )
            
            --Pro
                forma net profit (loss)
            
            $
            (846
            )
            $
            29







43


The
      assumptions used in calculating the fair value of options granted using the
      Black-Scholes option- pricing model are as follows:





Risk-free
                interest rate
            
            
            ***2.8***
            ***%***
            
            ***-***Expected
                life of the options
            
            
            5
                years
            
            
            -Expected
                volatility
            
            
            57.93
            %
            
            -Expected
                dividend yield
            
            
            -
            
            
            -





Additional
      information relating to stock options outstanding and exercisable at May 31,
      2005 summarized by exercise price is as follows:




WeightedNumber
                  of
              
              Average
              
              Weighted
              
              Number
              
              WeightedRange
                  of
              
              Outstanding
                  at
              
              Remaining
              
              Average
              
              Exercisable
                  at
              
              AverageExercise
              
              May
                  31,
              
              Contractual
              
              Exercise
              
              May
                  31,
              
              ExercisePrice
              
              2005
              
              Life
              
              Price
              
              2005
              
              Price$0.06
                  - 0.65
              
              27,600,000
              
              0.5
                  - 4.8 Year
              
              $0.14
              
              17,300,000
              
              $0.17


On
      March 9, 2005, the Company entered into an employment agreement with Ms.
      Hartwick, retroactive to June 3, 2004, the date she became Chief Executive
      officer.. The agreement provides for annual salary of $150,000 in cash, plus
      the
      grant of an option to purchase up to 15 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
      options were issued at the fair market value on the date of issuance as required
      by SFAS #123.





On
      March
      9, 2005, the board of directors approved the compensation for Chairman of the
      Board $50,000 cash compensation per year, retroactive from October 1, 2004,
      when
      he became the Chairman of the Board, plus the grant of an option to purchase
      up
      to 5 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 options were issued at the
      fair
      market value on the date of issuance as required by SFAS #123.





On
      March
      9, 2005, the board of directors approved an option pool for each director
      excluding the Chairman of the Board and management director, to purchase up
      to
      100,000 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 options were issued at the fair market
      value on the date of issuance as required by SFAS #123.





b)
      Warrants





As
      of May
      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 completion of a private placement of Hartcourt shares with
      PYR
      Management LLC, on March 6, 2001, the Company issued in total 4,000,000 of
      Class
      II warrants exercisable at $0.69375 per share of common stock and expired on
      January 26, 2005. The warrants were issued at fair value at the fair market
      value on the date of issuance. The value of the warrants is a direct offering
      expense and accordingly, has been charged to equity in 2001.





In
      connection with signing a private placement of Hartcourt shares with Enlight
      Corporation Ltd., on October 23, 2002, Hartcourt granted Enlight warrants to
      purchase 29,010,239 shares at the price doubling the trading price on the
      issuance date. The warrants expire on October 22, 2005. On March 11, 2004,
      Hartcourt have been informed by Enlight that all of its warrants will not be
      exercised unless a buy-out of Hartcourt (either by management or by third
      parties), should Hartcourt agree to extend the validity of the warrants until
      October 22, 2009.


**NOTE
      25 SEGMENT AND BUSINESS RELATED INFORMATION**





The
      Company has only one reportable segment (computer hardware trading) for the
      five
      months period ended May 31, 2005 and 2004, as other segment of business are
      not
      material to the consolidated financial statements of the Company.




**NOTE
      26 RECLASSIFICATIONS**





Certain
      prior period amounts have been reclassified to conform to the five months period
      ended May 31, 2005 presentation.


44





**ITEM
      9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE.**





On
      December 30, 2004, the audit committee of our Board of Directors appointed
      Kabani & Company, Inc. (Kabani) as the Company's registered independent
      public accounting firm. During our two most recent fiscal years and the period
      from the end of the most recent fiscal year to the date of the appointment
      of
      Kabani, neither we nor anyone acting on our behalf consulted with Kabani with
      respect to either (i) the application of accounting principles to a specified
      transaction, either completed or proposed; or the type of audit opinion that
      might be rendered on our financial statements, or (ii) any matter that was
      the
      subject of a disagreement, as that term is defined in Item 304(a)(1)(iv) of
      Regulation S-K and the related instructions to Item 304 of Regulation S-K,
      or a
      reportable event, as that term is defined in Item 304(a)(1)(v) of Regulation
      S-K.





On
      December 29, 2004, Loral International Certified Public Accountants (Loral)
      informed us that it was resigning as our independent public auditor effective
      immediately. Loral was appointed as our independent public auditors on August
      15, 2003. The decision to appoint Loral was approved by our Board of Directors.
      Loral served as our independent auditor for the years ended December 31, 2003
      and 2002. Loral's audit reports on our consolidated financial statements for
      the
      years ended December 31, 2003 and 2002 contained qualified opinions expressing
      substantial doubt about the Company's ability to continue as a going concern.
      Additionally, Loral's 2003 audit report contained the following
      disclaimer:





"During
      the year ended December 31, 2003, the Company acquired four (4) foreign
      subsidiaries located in China. All the acquired companies were privately held
      by
      foreign owners without the US accounting knowledge. Consequently, different
      sets
      of accounting records were noted. As of December 31, 2003, Hartcourt does not
      file its US federal and state tax returns for the year ended December 31, 2002.
      We have not audited Hartcourt foreign tax liabilities of China, for the years
      ended December 31, 2003 and 2002 (See Note # 23, Income Taxes)."





In
      connection with the audits of our most recent two years ended December 31,
      2003
      and 2002 and during the period from January 1, 2004 until Loral's resignation,
      there were no disagreements between Loral and the Company on any matter of
      accounting principles or practices, financial statement disclosure, or auditing
      scope and procedures, that, if not resolved to the satisfaction of Loral, would
      have caused Loral to make reference to the subject matter of the disagreement
      in
      connection with its reports on our financial statements for such
      years.





We
      requested that Loral furnish a letter addressed to the SEC stating whether
      or
      not Loral agrees with the statements made above and, if not, stating the
      respects in which it does not agree. A copy of this letter, dated December
      29,
      2004, is incorporated by reference to our Current Report on Form 8-K filed
      with
      the SEC on January 6, 2005. A copy of Loral’s response to such letter, dated
      December 29, 2004, is incorporated by reference to our Current Report on Form
      8-K filed with the SEC on January 20, 2005.





We
      have
      authorized Loral to respond fully to all inquiries of the Company's successor
      accountants concerning the explanatory paragraph in Loral's 2002 and 2003 audit
      reports and the disclaimer in its 2003 audit report.






45


**ITEM
      9A. CONTROLS AND PROCEDURES.**




None.




**Evaluation
      of disclosure controls and procedures**




Our
      management evaluated, with the participation of our Chief Executive Officer
      ("CEO") and our Interim Chief Financial Officer ("CFO"), the effectiveness
      of
      our disclosure controls and procedures as of the end of the period covered
      by
      this Transitional Period Report on Form 10- K. Based on
      this
      evaluation, our Chief Executive Officer and our Interim Chief Financial Officer
      have concluded that our disclosure controls and procedures are effective
      as
      of the transition period ended May 31, 2005.




**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 Annual Report on Form 10-K that has materially
      affected, or is reasonably likely to materially affect, our internal control
      over financial reporting.




**ITEM
      9B. OTHER INFORMATION.**





None.





46





**PART
      III**





**ITEM
      10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.**





**(a)
      Board of Directors**





The
      following table sets forth certain information regarding our Board of Directors
      as of September 12, 2005, and their ages as of such date:




Director
                Name
            Age
            Position
            SinceBilly
                Y N Wang
            41
            Director
            2002Geoffrey
                Wei
            38
            Director
            2002Victor
                Zhou
            36
            Director
            2004Carrie
                Hartwick
            43
            Director
            2004Wilson
                W. S. Li
            43
            Director
            2004





Set
      forth
      below is the biographical information on all directors other than Carrie
      Hartwick. Ms. Hartwick is also an officer of the Company and her biographical
      information may be found in the section entitled “Executive Officers”
      above.





47


BILLY
      Y N
      WANG, age 41. Dr. Billy Y N Wang has been the Country Manager of NCH Corp China,
      a multi-national chemical company with more than three subsidiaries in China,
      since 1997. From 1994 to 1997, Dr. Wang was the President of Xibic Enterprises
      Ltd. and Senior Consultant at WCE, specializing in international business
      development and technology transfer. From 1991 to 1997, Dr. Wang served as
      the
      Advisor for the Office of International Trade of Washington D.C. Dr. Wang
      obtained his Masters and Doctorate degrees in Chemical Engineering
      from the University of Virginia, and Bachelors degree from the University of
      Massachusetts.





GEOFFREY
      WEI, CICPA, age 38. Mr. Wei is a principle partner of WHCD, a Chinese CPA firm.
      From September 2002 to September 2004, Mr. Wei was the CFO of GreenWare
      Technologies, A Chinese company. Mr. Wei was the interim CFO, Vice president
      and
      Chief Accountant for Netease.com Inc (Nasdaq NM: NTES) from February 2000 to
      September 2001. He also worked in audit, tax, and business advisory divisions
      of
      PriceWaterhouseCoopers and KPMG, both in China and abroad. Mr. Wei received
      his
      Bachelors degree from Beijing Polytechnic University.





CARRIE
      HARTWICK, President, Chief Executive Officer, Interim
      Chief Financial Officer and
      Director ,
      age 43. Ms.
      Hartwick joined Hartcourt at the end of December 2003 as CFO and President.
      She
      became the CEO in June 2004. Prior to her current position, she was the finance
      director of Dell China/HK from May 2000 to August 2003, and before that, served
      as the finance director of Gillette China and held various positions within
      Johnson & Johnson including Finance Controller for Johnson & Johnson
      Shanghai. Ms. Hartwick holds a Bachelor of Accounting degree from Rutgers
      University.





WILSON
      LI, age 43. Dr. Li has been the First Vice President of Shenzhen Capital Group,
      the largest Chinese investment holding Company, since August 1999. Prior to
      that, he served in Shenzhen Planning Bureau. Dr. Li has extensive experience
      in
      fund management, risk control, investment, and international business. Dr.
      Li
      received his Masters degree in Social Science from Zhongshan University, Ph.D.
      in Management Science from Xian Jiaotong University and Ph.D. in Public
      Administration & Government Policy from the Chinese Academy of
      Social


Science.





VICTOR
      ZHOU, age 36. Mr. Zhou has been the President of Fixed Assets Investment of
      Huatai Securities, one of the top ten securities firms in China, since November
      2003. He has been with Huatai Securities since 1997 and served in other senior
      management positions with increasing responsibilities. Before joining Huatai
      Securities, Mr. Zhou was the General Manager with Jiangsu Securities from 1993
      until 1997. Mr. Zhou has extensive experiences in securities trading, private
      equity investment, and asset management. Mr. Zhou received his Bachelors degree
      in Economics from Hunan University and EMBA degree from China Europe
      International Business School





**(b)
      Family Relationships**





None.





**(c)
      Disclosure re Audit Committee and Audit Committee Financial
      Expert**





Our
      Audit
      Committee is comprised of two members of our board of directors: Geoffrey Wei
      and Victor Zhou. Our Board of Directors has determined that Geoffrey Wei is
      an
“audit committee financial expert,” as defined in the rules of the Securities
      and Exchange Commission. Our Board of Directors has determined that Geoffrey
      Wei
      and Victor Zhou are “independent,” pursuant to the listing requirements of The
      NASDAQ National Market. Geoffrey Wei serves as chairman of our Audit Committee.





**(d)
      Changes to Security Holder Recommendation Procedures for Nominees to Board
      of
      Directors**





None.





48


**(e)
      Section 16(a) Beneficial Ownership Reporting Compliance**




Section
      16(a) of the Securities Exchange Act of 1934 requires our officers, directors
      and certain other shareholders to file reports of ownership and changes in
      ownership with the SEC. Officers, directors and certain other shareholders
      are
      required by regulation to furnish us with copies of all Section 16(a) forms
      they
      file. To the best of our knowledge (based solely upon a review of the Forms
      3, 4
      and 5 filed), during 2005, no
      individual or entity was late with any Form 3, 4 or 5 filings.




**(f)
      Code of Ethics and Complaint Procedures**




We
      have
      adopted a corporate code of ethics, which is applicable to our principal
      officers. A copy of the code of ethics is filed as an exhibit to this annual
      report. We believe that our code of ethics is reasonably designed to deter
      wrongdoing and promote honest and ethical conduct; provide full, fair, accurate,
      timely and understandable disclosure in public reports; comply with applicable
      laws; ensure prompt internal reporting of violations of our code of ethics;
      and
      provide accountability for adherence to our code of ethics.





**ITEM
      11.**  **EXECUTIVE
      COMPENSATION.**





**Executive
      Compensation and Related Information**





The
      following table provides information concerning the compensation received for
      services rendered to our company in all capacities during the five month
      transition period ended May 31, 2005, and the years ended December 31, 2004,
      December 31, 2003, December 31, 2002 by each person who served as Chief
      Executive Officer during the period ended May 31, 2005 and by each of our other
      most highly compensated executive officers whose aggregate compensation exceeded US $100,000
      during the period ended May 31, 2005. This table is based on earned
      compensation. All option grants during the fiscal years
      listed were
      made under our 1995 Stock Option Plan.





**SUMMARY
                  COMPENSATION TABLE**
  Name
                and Principal Position
              Year
              Salary
                  (US$)
              Bonus
                  (US$)
              Other
                  Annual Compensation (US$)(1)
              Compensation 
                    Securities
                  Options
                    (#)
              Awards
                UnderlyingCarrie
                  Hartwick, Chief Executive
              2005(2)
              62,500(3)
              --
              --
              15,000,000Officer,
                President and Interim
              2004(4)
              137,500(5)
              --
              --
              60,000(6)Chief
                  Financial Officer
              2003(7)
              10,000
              --
              --
              1,000,0002002
              N/A
              N/A
              N/A
              N/A





(1) **** Excludes
      certain perquisites and other amounts that, for any executive officer, in the
      aggregate did not exceed the lesser of US $50,000
      or 10% of the total annual salary and bonus for such executive
      officer.


(2)  Covers
      the five month transition period from January 1, 2005 through May 31, 2005.


(3)  Total
      salary payment consists of US $31,250 in backpay owed for
      services provided in
      2005 .


( 4 )  On
      March
      9, 2005, we entered into an employment agreement with Ms. Hartwick. The
      agreement provides for annual salary of US$150,000 in cash, effective as of
      June
      3, 2004, plus the grant of an option to purchase up to 15,000,000 shares of
      our
      common stock at a price of US$0.09 per share. Pursuant to the terms of the
      15,000,000 share option grant to Ms. Hartwick, (i) options to purchase 7,500,000
      shares of our common stock vested on April 3, 2005, (ii) options to purchase
      6,000,000 shares of our common stock vest in two equal installments of 3,000,000
      options each upon each new business acquisition of the Company, and (iv) options
      to purchase 1,500,000 shares of our common stock vest upon a full profitable
      year of the Company. The 15,000,000 share option grant to Ms. Hartwick expires
      on March 9, 2010.


( 5 )
      Compensation includes (i) cash payments of US$60,000, (ii) restricted stock
      grant of 45,080 shares of our common stock valued at US$25,000 at the date
      of
      issuance, and (iii) is owed back pay of US $52,500.




49


( 6 )  On
      April
      1, 2004, Ms. Hartwick was issued 60,000 shares of our common stock, valued
      at
      US$0.50 per share, as her bonus for 2004.


( 7 )
      On
      December 1, 2003, the date on which Ms. Hartwick’s employment began, we entered
      into an employment agreement with her. This agreement had a one-year term,
      from
      December 1, 2003 to November 30, 2004. The agreement provides for an annual
      salary of US$120,000, plus the grant of an option to purchase up to 1 million
      shares of our common stock at a price of US$0.65 a share exercisable for a
      12-month period from the date of grant and upon completion of her one-year
      term.
      Fifty percent of Ms. Hartwick’s annual salary is payable in cash and the balance
      is payable in shares of our common stock. The value assigned to shares of common
      stock payable to Ms. Hartwick in connection with her annual salary is the
      average 20-day trading price prior to the first of each month for the salary
      owed that month.





**Option
      Grants During the Five Month Transition Period Ended May 31,
      2005**





The
      following table shows all grants of stock options to the executive
      officers listed in the Summary Compensation Table during
      the five month transition period ended May 31, 2005. These grants are options
      to
      purchase the common stock of the Company.





**OPTION
      GRANTS IN LAST FISCAL YEAR**


**(INDIVIDUAL
      GRANTS)**





**Name**
            **Number
                of**
              **Securities**
              **Underlying**
              **Options**
              **Granted**
            **Percent
                of**
              **Total
                Options**
              **Granted
                to**
              **Employees
                in**
              **Year
                Ended**
              **May
                31, 2005 (1)**
            **Exercise**
              **or
                Base**
              **Price
                (2)**
            **Expiration**
              **Date**
            **Potential
                Realizable Value At**
              **Assumed
                Annual Rates Of**
              **Stock
                Price Appreciation for**
              **Option
                Term**5%(US$)
            10%(US$)Carrie
                Hartwick
            15,000,000(3)
            54.3%
            US$0.09
            March
                9, 2010


(1)
              Based
                  on an aggregate of 27,600,000options
                  granted by us in the year ended May 31, 2005 to our employees,
                  employee
                  directors and consultants, includingthe
                  executive officers and highly compensated employees listed in the
                  Summary
                  Compensation Table.


(2)
            Options
                were granted at an exercise price equal to the fair market value
                on the
                date of grant as determined pursuant to the closing price of our
                common
                stock on the OTCBB on the day immediately preceding the date of grant.


(3)
            This
                option was granted on March 9, 2005 and (i) options to purchase 7,500,000
                shares of our common stock vested on April 3, 2005, (ii) options
                to
                purchase 6,000,000 shares of our common stock vest in two equal
                installments of 3,000,000 options each upon each new business acquisition
                of the Company, and (iii) options to purchase 1,500,000 shares of
                our
                common stock vest upon a full profitable year of the Company. Ms.
                Hartwick
                did not exercise any options as of May 31, 2005.





No
      options were exercised during the five month transition period ended May 31,
      2005 and the exercisable and unexercisable options held as of the five month
      transition period ended May 31, 2005, by the executive officers and highly
      compensated employees listed in the Summary Compensation Table : .





50


**Aggregated
      Option Exercises During the Five Month Transition Period Ended May 31, 2005
      and
      May 31, 2005 Option Values**


**Name**
              **Number
                  of Shares**
                **Acquired
                  on Exercise**
              **Value**
                **Realized**
              **Number
                  of Securities Underlying**
                **Unexercised****Options at****5/31/05**
              **Value
                  of Unexercised In-the-**
                **Money
                  Options at****5/31/05
                  (1)****Exercisable**
              **Unexercisable**
              **Exercisable**
              **Unexercisable**Carrie
                  Hartwick
              -
              -
              8,500,000
              7,500,000
              75,000
              75,000


**Compensation
      of Directors**





Currently,
      our directors serve for a term of one year or until their earlier resignation
      or
      removal. In fiscal 2004, for attending Board meetings, we compensated our
      non-employee directors US$7,000 each year and US$500 for each meeting through
      the issuance of restricted shares of common stock at the closing market price
      of
      the common shares valued on first day of the calendar quarter. Additionally,
      we
      issued our former Chairman of the Board and Chief Executive Officer, David
      Chen,
      10,008 shares of our common stock for his service on our Board.





As
      of
      October 1, 2004, we compensate Dr. Wang, our Chairman of the Board, US$50,000
      each year for service on our Board pro rated on an annual basis. As of May
      31,
      2005, Dr. Wang was owed US $33,333
      for his services from October 1, 2004 to May 31, 2005. Additionally, as of
      March
      8, 2005, the Board granted Dr. Wang an option exercisable for 5,000,000 shares
      of our common stock at an exercise price of US$0.09 per share, of which
      2,500,000 shares vest on September 28, 2005 and the remaining shares vest on
      September 28, 2006, subject to Dr. Wang’s continuing to provide services to the
      Company on such vesting dates. As of January 1, 2005 we compensate our other
      non-employee directors US$7,000 each year and an additional US$3,500 each year
      for each committee that a non-employee director serves on. Additionally, we
      compensate each non-employee director US$500 for each meeting through the
      issuance of restricted shares of common stock at the average closing market
      price of the common shares valued each month and issued on the first day of
      the
      calendar quarter. On March 9, 2005, each non-employee director, excluding the
      Chairman of the Board, was granted 100,000 stock options at exercise price
      US$0.09. The options granted to the non-employee directors vest on the one
      year
      anniversary of the date of grant. Annual compensation for Board and committee
      service by our non-employee directors, including the Chairman of the Board,
      was
      pro rated for the five-month transition period ended May 31, 2005.




Ms.
      Hartwick is our only employee director. We do not pay any additional
      compensation to Ms. Hartwick for her service on our Board or a committee of
      our
      Board.





**ITEM
      12.**  **SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
      MATTERS.**





The
      following table shows shares of our common stock that we believe are owned
      as of
      August 25, 2005 by:




•
            Each
                shareholder owning 5% or more of our common stock,•
            Each
                Named Executive Officer,•
            Each
                director, and•
            All
                current directors and executive officers as a group.




We
      calculated the “Percent of Class” based on 193,738,462  shares
      of
      common stock outstanding on August 25, 2005.
      Shares of common stock subject to options that are currently exercisable or
      exercisable within 60 days of August 25, 2005 are
      deemed to be outstanding and to be beneficially owned by the person holding
      such
      option for the purpose of computing the number of shares of common stock
      beneficially owned by that person, as well as the percentage ownership of that
      person, but they are not treated as outstanding for the purpose of computing
      the
      percentage ownership of any other person.




51


**Name
                  & Address of**
                **Beneficial
                  Owner(1)**
              **Amount
                  and Nature of Beneficial Ownership(2)**
              **Percent
                  of Class**Ever
                  Growth Holdings Ltd.(3)
              17,142,857
              8.8%Billy
                  Wang
              193,440
              *Carrie
                  Hartwick
              15,112,973(4)
              7.2%Geoffrey
                  Wei
              109,851
              *Victor
                  Zhou
              32,860
              *Wilson
                  Li
              43,678
              *All
                  Executive Officers and Directors as a Group (5 persons)
              15,492,802(5)
              7.4%
  *
              Indicates
                  ownership of less than 1%.


(1)
      Unless otherwise indicated, the address for each beneficial owner listed above
      is c/o The Hartcourt Companies, Inc., 306 Yong Teng Plaza, 1065 Wuzhong Road,
      Shanghai, China.


(2)
      Unless indicated in the notes, each shareholder has sole voting and investment
      power for all shares shown, subject to community property laws that may apply
      to
      create shared voting and investment power.


(3)
      Principal address is 12F, Tower B, Neptune Mansion, Nan You Road, Nan Shan
      District, Shen Zhen 518054, China.


(4)
      Shares beneficially owned by Ms. Hartwick include (a) 112,973 shares of common
      stock held by Ms. Hartwick and (a) options to purchase 15,000,000 shares of
      our
      common stock exercisable within 60 days of June 15, 2005, of which (i) 7,500,000
      options were fully vested as of April 3, 2005, (ii) 6,000,000 options vest
      in
      two equal installments of 3,000,000 options each upon each new business
      acquisition of the Company, and (iii) 1,500,000 options vest upon a full
      profitable year of the Company.


(5)
      Includes options to purchase 15,000,000 shares of our common stock issued
      to Ms. Hartwick, as described in note (4) above.




**Equity
      Compensation Plans**





The
      following table gives information about our common stock that may be issued
      upon
      the exercise of options, warrants and rights under all of our existing equity
      compensation plans as of the five month transition period ended May 31, 2005 ,
      including the 2005 Stock Plan.




52




**EQUITY
                COMPENSATION PLAN INFORMATION**Number
                of securities to be issued
              upon
                exercise of outstanding
              options,
                warrants and rights (a)
            Weighted
                average exercise
              price
                of outstanding options,
              warrants
                and rights (b)
            Number
                of securities remaining
              available
                for future issuance
              under
                equity compensation
              plans
                (excluding securities
              reflected
                in column (a)) (c)Equity
                compensation plans
              approved
                by security holders (1)
            300,000
            1.00
            N/AEquity
                compensation plans not
              approved
                by security holders
            [27,300,000]
            0.13
            N/ATotal
            27,600,000
            0.14
            N/A




(1)
      Our
      1995 Stock Option Plan expired pursuant to its terms in March , 2005.
      The referenced plan is our 2005 Stock Option Plan which is pending for approval
      by our shareholders at our annual meeting of shareholders to be scheduled in
      2005.




**ITEM
      13.**  **CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS.**





On
      March
      9, 2005, we entered into an employment agreement with Ms. Hartwick. The
      agreement provides for annual salary of US$150,000 in cash, plus the grant
      of an
      option to purchase up to 15 million shares of our common stock at a price of
      US$0.09 per share. Pursuant to the terms of the 15,000,000 share option grant
      to
      Ms. Hartwick, (i) options to purchase 7,500,000 shares of our common stock
      vested on April 3, 2005, (ii) options to purchase 6,000,000 shares of our common
      stock vest in two equal installments of 3,000,000 options each upon each new
      business acquisition of the Company, and (iv) options to purchase 1,500,000
      shares of our common stock vest upon a full profitable year of the Company.
      The
      15,000,000 share option grant to Ms. Hartwick expires on March 9,
      2010.





On
      March
      8, 2005, the Board approved a new compensation package for the Chairman of
      the
      Board, Dr. Billy Wang. The compensation package includes an annual payment
      of
      US$50,000 effective as of October 1, 2004, the date Mr. Wang became Chairman
      of
      the Board, and an option exercisable for 5,000,000 shares of our common stock,
      of which 2,500,000 shares vest on September 28, 2005 and the remaining shares
      vest on September 28, 2006, subject to Dr. Wang’s continuing to provide services
      to the Company on such vesting dates. Mr. Wang’s annual compensation for service
      as our Chairman of the Board was pro rated for the five-month transition period
      beginning January 1, 2005 and ending May 31, 2005.





During
      the five months period ended May 31, 2005, Huaqing, a 51% owned subsidiary
      of
      the Company, sold US $594,049
      monitors and laptops to its minority shareholder (Shanghai Chengqing Electronics
      Co., Ltd., formerly known as Shanghai Huaqing Economic Development Co., Ltd)
      under normal commercial terms.





During
      the five months period ended May 31, 2005, Control Tech, a 90% owned subsidiary
      of the Company, purchased US $81,946
      video and audio conferences accessories from its minority shareholder (Beijing
      Control Tech Co., Ltd.) pursuant to business transactions in the ordinary
      course.





During
      the five months period ended May 31, 2005, Hartcourt issued an
      aggregate of 387,777
      shares of our common stock valued at US $63,306
      to its officers, employees and all directors in lieu of cash compensation.





53


**ITEM
      14.**  **PRINCIPAL
      ACCOUNTANT FEES AND SERVICES.**





The
      following table is a summary of the fees billed to us by Kabani & Company,
      Inc. for professional services for the five month transition period ended May
      31, 2005, and the years ended December 31, 2004 and December 31, 2003 (Kabani
      & Company, Inc. was selected as our independent auditor on December 30, 2004
      upon the resignation of our former accountants, Loral International LLP):




**FY
                2005**
            **FY
                2004**
            **FY
                2003****Audit
                Fees**
            US$90,000
            US$165,000
            -**Audit-Related
                Fees**
            -
            -
            -**Tax
                Fees**
            -
            -
            -**All
                Other Fees**
            -
            -
            -**Total**
            US$90,000
            US$165,000
            -




The
      following table is a summary of the fees billed to us by Loral International
      LLP, our former auditors, for professional services for the five month
      transition period ended May 31, 2005 and the years ended December 31, 2004
      and
      December 31, 2003 (Loral International LLP resigned as our independent auditor
      on December 29, 2004):




**FY
                2005**
            **FY
                2004**
            **FY
                2003****Audit
                Fees**
            -
            US$40,000
            US$150,000**Audit-Related
                Fees**
            -
            US$3,500
            -**Tax
                Fees**
            -
            -
            -**All
                Other Fees**
            -
            -
            -**Total**
            -
            US$43,500
            US$150,000




*Audit
      Fees* .
      Consists of fees billed for professional services rendered for the audit of
      our
      consolidated financial statements and review of our quarterly interim
      consolidated financial statements, as well as services that are normally
      provided by Kabani & Company, Inc. in connection with statutory and
      regulatory filings or engagements.




*Audit-Related
      Fees* .
      Consists of fees billed for assurance and related services that are reasonably
      related to the performance of the audit or review of our financial statements
      that are not reported under “Audit Fees.”




*Tax
      Fees* .
      Consists of fees billed for professional services including assistance regarding
      federal, state and international tax compliance and related
      services.




*All
      Other Fees* .
      Consists of fees billed for special investigation services requested by the
      Board of Directors concerning management and accounting practices.




**Policy
      on Audit Committee Pre-Approval of Services Performed by the Independent
      Registered Public Accounting Firm**




It
      is the
      policy of the Audit Committee to pre-approve at the beginning of each fiscal
      year all audit and permissible non-audit services to be provided by the
      independent registered public accounting firm during that fiscal year. The
      Audit
      Committee authorizes specific projects within categories of services, subject
      to
      a budget for each category. The Audit Committee may also pre-approve particular
      services on a case-by-case basis. The independent auditor and management report
      to the Audit Committee actual fees versus the budget periodically throughout
      the
      fiscal year. The Audit Committee pre-approved 100% of the audit and non-audit
      services performed by Kabani & Company, Inc. for Hartcourt as disclosed
      above.


54




**PART
      IV**





**ITEM
      15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.**





1.
      Financial Statements -
      See
      Index to Consolidated Financial Statements in Part II, Item 8.


2.  Financial
      Statement Schedules - See
      Index to Consolidated Financial Statements in Part II, Item 8.


3.
      Exhibits




The
      following list describes the exhibits filed as part of this Transition period
      report on Form 10-K:





**Exhibit
                  No.**
              **Description**
              **Previously**
                **Filed**
 2.05
              Agreement
                  for Sale and Purchase of Certain Interest in the Registered Capital
                  of
                  HuaQing Corporation Development Co Ltd (“HuaQing”) dated February 14,
                  2003 between Hartcourt Capital, Inc. and HuaQing
                  shareholders
              (13)2.06
              Agreement
                  for Sale and Purchase of Certain Interest in the Registered Capital
                  of
                  Guandgdong NewHauSun Computer Co. Ltd. (“NewHauSun”) dated April 24,
                  2003 between Hartcourt Capital, Inc. and NewHauSun
                  shareholders.
              (13)2.07
              Agreement
                  for Sale and Purchase of Certain Interest in the Registered Capital
                  of
                  Shanghai GuoWei Science and Technology Ltd (“GuoWei”) dated April 30,
                  2003 between Hartcourt Capital, Inc. and GuoWei
                  shareholders.
              (13)2.08
              Agreement
                  for the Sale and Purchase of Equity Capital in Shanghai Sinobull
                  Information Corporation Limited dated May 20, 2003 between Hopeful
                  Internet Technologies Limited and Genius Technology Inc.
              (13)2.09
              Agreement
                  for Sale and Purchase of Certain Interest in the Registered Capital
                  of
                  Zhongnan Group (“Zhongnan”) dated June 25, 2003 between Hartcourt Capital,
                  Inc. and Zhongnan shareholders.
              (13)2.10
              Agreement
                  for Sale and Purchase of Certain Interest in the Registered Capital
                  of
                  Shanghai HuaQing Corporation Development Co Ltd (“Shanghai HuaQing”) dated
                  June 30, 2003 between Hartcourt Capital, Inc. and Shanghai HuaQing
                  shareholders.
              (14)2.11
              Agreement
                  for Sale and Purchase of Shanghai PengYang Computer Co., Ltd. dated
                  November 21, 2003 between Hartcourt Capital, Inc and PengYang
                  shareholders.
              (14)2.12
              Agreement
                  for Sale and Purchase of Certain Interest in the Registered Capital
                  of
                  Beijing Challenger Wanzhong Info Tech Co., LTD (“Challenger”) dated
                  December 9, 2003 between Hartcourt Capital, Inc. and Challenger
                  shareholders.
              (14)2.13
              Agreement
                  for Sale and Purchase of the Entire Issued Share Capital of Besteffort
                  Investments Limited, dated November 1, 2004
              (18)2.14
              Agreement
                  for Sale and Purchase of Certain Interest in the Registered Capital
                  of
                  Guangdong NewHuaSun Computer Co., Ltd. ("NewHuaSun") dated August
                  30, 2004
                  between Hartcourt Capital, Inc and ShenZhen Raiser Industrial and
                  Development Co., Ltd.
              (19)2.15
              Agreement
                  for Sale and Purchase of Certain Interest in the Registered Capital
                  of
                  Hopeful Internet Technologies Ltd. ("Hopeful") dated June 29, 2004
                  between
                  Hartcourt China Inc, Mr. Lee Lu Ping and First Information Technology
                  Ltd.
              (19)
 55
  **Exhibit
                    No.**
                **Description**
                **Previously**
                  **Filed**3.01
                Articles
                    of Incorporation of Hartcourt, as amended.
                (1)3.02
                Bylaws
                    of Hartcourt.
                (1)3.03
                Amendment
                    to the Bylaws of Hartcourt.
                (1)3.04
                Amendment
                    to the Articles of Incorporation of Hartcourt.
                (6)10.01
                Lease
                    between Hartcourt and Larry M. Mitobe for Hartcourt’s headquarters
                    facility, dated April 9, 1996.
                (1)10.02
                Equipment
                    Lease between Hartcourt USA and Anja Engineering Corporation,
                    dated
                    April 4, 1994.
                (1)10.03
                Stock
                    Exchange Agreement between Hartcourt USA and Eastern Rochester,
                    dated
                    August 8, 1994.
                (1)10.04
                1995
                    Stock Option Plan.
                (1)10.05
                Purchase
                    Contract between The Hartcourt Companies, Inc. and Exceptional
                    Specialty
                    Products, Inc., dated March 21, 1996.
                (1)10.06
                Purchase
                    and Sale Agreement, dated August 8, 1996, between The Hartcourt
                    Companies,
                    Inc. and NuOasis International, Inc., and Addendum to Purchase
                    and Sale
                    Contract.
                (1)10.07
                Convertible
                    Secured Promissory Note, dated August 8, 1996, in connection
                    with Purchase
                    and Sale Agreement, dated August 8, 1996 between The Hartcourt
                    Companies,
                    Inc. and NuOasis International, Inc.
                (1)10.08
                Convertible
                    Secured Promissory Note, dated August 8, 1996, in connection
                    with Purchase
                    and Sale Agreement, dated August 8, 1996 between The Hartcourt
                    Companies,
                    Inc. and NuOasis International, Inc., as amended.
                (1)10.09
                Sales
                    Agreement, dated September 17, 1996, between The Hartcourt Companies,
                    Inc.
                    and Promed International, Ltd.
                (1)10.10
                Sales
                    Agreement, dated September 17, 1996, between The Hartcourt Companies,
                    Inc.
                    and Mandarin Overseas Investment Co., Ltd.
                (1)10.11
                Purchase
                    and Sale Agreement, dated September 27, 1996, between The Hartcourt
                    Companies, Inc. and CKES Acquisitions, Inc.
                (1)10.12
                Secured
                    Promissory Note, dated September 27, 1996, in connection with
                    Purchase and
                    Sale Agreement between The Hartcourt Companies, Inc. and CKES
                    Acquisitions, Inc.
                (1)10.13
                Consulting
                    Agreement, dated December 30, 1996, between The Hartcourt Companies,
                    Inc.
                    and American Equities LLC, a California limited liability company.
                (3)10.14
                Investment
                    Banking Agreement, dated March 1998, between The Hartcourt Companies,
                    Inc.
                    and DanAllen Investment Group.
                (2)10.16
                Marketable
                    Securities Agreement, dated July 31, 1997, between The Hartcourt
                    Companies, Inc. and Capital Commerce, Ltd.
                (2)10.17
                Lease
                    Termination Agreement, dated March 24, 1998, between Hartcourt
                    Investment
                    (USA) Corporation and Scripto-Tokai Corporation.
                (2)10.18
                Share
                    Purchase Agreement with Enova Holdings, Inc., dated February 1,
                    1999,
                    Exchange Agreement , dated March 23, 1999, and Distribution Agreement,
                    dated March 24, 1999, File # 99579493.
                (7)10.19
                1999
                    Agreement with Beijing UAC Stock Trading Online Co. Ltd.
                (8)10.19
                A
                    Financial Statements of Beijing UAC Stock Exchange Online Co.
                    Ltd. for the
                    period from October 18, 1999 (date of inception) to December
                    31, 1999.
                (8)10.20
                Agreement
                    with GoCall.com
                (8)10.21
                FTL
                    Stock Purchase Agreement
                (8)
  56
 
  **Exhibit
                        No.**
                    **Description**
                    **Previously**
                      **Filed**
 10.22
                Advisory
                    Agreement and 1999 Stock Plan with NuVen Advisors, Inc. and Hartcourt
                    dated March 18, 1999, File No. 333-74933.
                (9)10.23
                Consulting
                    Agreement with Fred G. Luke, dba NuVen Advisors, File No. 99768860.
                (10)10.24
                Consulting
                    Agreement with Archer & Weed, File No. 99768860.
                (10)10.25
                On
                    December 8, 1999, Hartcourt filed a report on Form 8-K
                    to disclose
                    the resignations of Fred Luke and Jon L. Lawver Directors and
                    Officers,
                    File No. 99770546.
                (11)10.26
                February 4,
                    2000, Hartcourt completed a private placement of 227,445 Units
                    and a
                    class II Warrants to PYR Management LLC forUS$3,000,000
                    pursuant to a regulation D Subscription Agreement, File
                    No. 524390.
                (12)10.27
                Interim
                    CFO Employment Agreement, dated January 5, 2005
                (17)10.28
                CEO
                    Employment Agreement, dated March 9, 2005
                (19)14.01
                Code
                    of Ethics
                (13)16.01
                Letter
                    from Loral International CPA & Advisor, LLC, to the Company resigning
                    as independent auditor, dated December 29, 2004.
                (15)16.02
                Letter
                    from Loral International CPA & Advisor, LLC, to the Company indicating
                    disagreement with the Company’s Form 8-K filing regarding Loral’s
                    resignation, dated January 3, 2005.
                (16)21.01
                Subsidiaries
                    of the registrant23.01
                Consent
                    of Kabani & Company, Inc. - Independent Registered Accounting
                    Firm24.01
                Power
                    of Attorney (See signature page)27.01
                Financial
                    Data Schedule. Pursuant to Rule 12b-32 under Securities and Exchange
                    Act
                    of 1934, as amended.31.01
                Certification
                    pursuant to 18 U.S.C. Section 1350, as adopted pursuant
                    to
                    Section 302 of the Sarbanes-Oxley Act of 200231.02
                Certification
                    pursuant to 18 U.S.C. Section 1350, as adopted pursuant
                    to
                    Section 302 of the Sarbanes-Oxley Act of 200232.01
                Certification
                    pursuant to 18 U.S.C. Section 1350, as adopted pursuant
                    to
                    Section 906 of the Sarbanes-Oxley Act of 2002




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




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




(3)  Previously
      filed as an exhibit to Hartcourt’s 10-KSB, dated April 15, 1997, and as
      amended by Hartcourt’s Form 10-KSB40/A, dated July 3, 1997, incorporate
      herein by reference.




(4)  Previously
      filed as an exhibit to Hartcourt’s Form 8-K, dated October 21, 1997, and as
      amended by Hartcourt’s Form 8-K/A, dated October 27, 1997, incorporated
      herein by reference.




(5)  Previously
      filed as exhibit to Hartcourt’s Form 8-K, dated November 12, 1997,
      incorporated herein by reference.




(6)  Previously
      filed as an exhibit to Hartcourt’s Form 10-KSB, dated April 15, 2003,
      as amended by Hartcourt’s Form 10-KSB/A, dated April 25, 2003,
      incorporated herein by reference.




(7)  Previously
      filed as an exhibit to Hartcourt’s Form 8-K, dated March 31, 1999,
      incorporated herein by reference.




57


(8)  Previously
      filed as an exhibit to Hartcourt’s Form 10-KSB, dated April 14, 1999,
      incorporated herein by reference.




(9)  Previously
      filed as an exhibit to Hartcourt’s Form S-8, dated March 24, 1999,
      incorporated herein by reference.




(10)  Previously
      filed as an exhibit to Hartcourt’s Form S-8, dated December 3, 1999,
      incorporated herein by reference.




(11)  Previously
      filed as an exhibit to Hartcourt’s Form 8-K, dated December 8, 1999,
      incorporated herein by reference.




(12)  Previously
      filed as an exhibit to Hartcourt’s Form 8-K, dated February 4, 2000,
      incorporated herein by reference.




(13)  Previously
      filed as an exhibit to Hartcourt’s Form 10-KSB/A, dated April 15, 2004,
      incorporated herein by reference.




(14)  Previously
      filed as an exhibit to Hartcourt’s Form 10-KSB/A, dated April 19, 2004,
      incorporated herein by reference.




(15)  Previously
      filed as an exhibit to Hartcourt’s Form 8-K, dated January 6, 2005,
      incorporated herein by reference.




(16)  Previously
      filed as an exhibit to Hartcourt’s Form 8-K, dated January 20, 2005,
      incorporated herein by reference.




(17)  Previously
      filed as an exhibit to Hartcourt’s Form 8-K, dated January 12, 2005,
      incorporated herein by reference.




(18)  Previously
      filed as an exhibit to Hartcourt’s Form 8-K, dated February 28, 2005,
      incorporated herein by reference.




(19)
      Previously filed as an exhibit to Hartcourt’s Form 10KSB/A, dated April 15,
      2005, incorporated herein by reference.







(b)
            Report
                on Form 8-K





On
      January 5, 2005, the Company appointed Mr. Richard Hyland as Interim Chief
      Financial Officer, effective immediately. File number 05524580. Incorporated
      here in by reference.





On
      February 21, 2005, the Company completed the acquisition in Control Tech
      Electronics (Shanghai) Co., Ltd. file number 05646850. Incorporated herein
      by
      reference.





On
      March
      29, 2005, the Company entered into share purchase agreement with a group of
      PRC
      investors for private offering. File number 05727692. Incorporated herein by
      reference.





On
      April
      11, 2005, the Company accepted the resignation of Richard Hyland as Interim
      Chief Financial Officer. The Company appointed Carrie Hartwick as Interim Chief
      Financial Officer effective April 14, 2005. File number 05756511. Incorporated
      herein by reference.





On
      May
      31, 2005, the board of directors approved a change in the Company's current
      fiscal year end from December 31 to a May 31. File number 05875856. Incorporated herein
      by reference.




58




**SIGNATURES**





Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
      1934, the Registrant has duly caused this Form 10-K to be signed on its behalf
      by the undersigned, thereunto duly authorized.








THE
                HARTCOURT COMPANIES, INC.Dated:
                September 12, 2005
            By:
                /s/ CARRIE HARTWICKCarrie
                HartwickChief
                Executive Officer, President and Chief Financial
                Officer(Principal
                Executive Officer and Principal Financial
                Officer)








**POWER
      OF ATTORNEY**





By
      signing this Form 10-K below, I hereby appoint Carrie Hartwick as
      my
      attorney-in-fact to sign all amendments to this Form 10-K on my behalf, and
      to
      file this Form 10-K (including all exhibits and other documents related to
      the
      Form 10-K) with the Securities and Exchange Commission. I authorize each of
      my
      attorneys-in-fact to (1) appoint a substitute attorney-in-fact for himself
      and
      (2) perform any actions that he believes are necessary or appropriate to carry
      out the intention and purpose of this Power of Attorney. I ratify and confirm
      all lawful actions taken directly or indirectly by my attorneys-in-fact and
      by
      any properly appointed substitute attorneys-in-fact.





Pursuant
      to the requirements of the Securities Exchange Act of 1934, this report has
      been
      signed by the following persons on behalf of the Registrant and in the
      capacities and on the dates indicated.




Name
            Title
            Date/s/WILSON
                W. S. LI
              Wilson
                W. S. Li
            Director
            September
                12, 2005/s/BILLY
                Y N WANG
              Billy
                Y N Wang
            Chairman
                of the Board of Directors
            September
                12, 2005/s/GEOFFREY
                WEI
              Geoffrey
                Wei
            Director
            September
                12, 2005/s/VICTOR
                ZHOU
              Victor
                Zhou
            Director
            September
                12, 2005




59