UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


Washington,
      D.C. 20549





FORM
      10-KSB/A


Amendment
      No. 3








[X]
      ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For
      the
      fiscal year ended: December 31, 2004





[ 
]
      TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF
      1934





Commission
      file number: 001-12671




THE
      HARTCOURT COMPANIES, INC.


(Name
      of
      Small Business Issuer in its Charter)




Utah
                (State
                  or other jurisdiction of incorporation or organization)
              
              87-0400541
                (I.R.S.
                  Employer Identification No.)




Room
      306,
      Yong Teng Plaza, 1065, Wu Zhong Road, Shanghai, China 201103


(Address
      of principal executive offices) (Zip Code)





Issuer's
      telephone number: (011) (86 21) 51521577





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





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





Check
      whether the registrant (1) filed all reports required to be filed by Section
      13
      or 15(d) of the Securities exchange Act of 1934 during the preceding 12 months
      (or for such shorter period that the registrant was required to file such
      reports), and (2) has been subject to such filing requirements for the past
      90
      days. Yes [X] No [  ]





Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-B 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-KSB or any amendment
      to
      this Form 10-KSB. [X]





The
      issuer's revenues for its most recent fiscal year ended December 31, 2004 were
      $74,563,459.





The
      aggregate market value of the voting stock held by non-affiliates computed
      by
      reference to the price at which the stock was sold, or the average bid and
      asked
      prices of such stock, as of April 12, 2005, is $16 million. The number of shares
      of our common stock outstanding as of April 12, 2005 was
      214,165,577.





Transitional
      Small Business Disclosure Format (check one): Yes [ ] No [X]











_________________





This
      Amendment No. 3
      to the Annual Report on Form 10-KSB is being filed to include a restatement
      of
      the Company’s financial statements for the year ended December 31, 2004, revised
      Management's Discussion and Analysis or Plan of Operation and to include revised
      disclosure regarding our internal controls.





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


_________________





Hartcourt
      Companies, Inc





Restatement
      of Financial Statements and


Amended
      Form 10-KSB for the year ended December 31, 2004





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





During
      the year ended December 31, 2003, the Company, via its BVI subsidiaries
      (Hartcourt Capital Inc.), acquired four (4) Chinese companies located and
      operated in China.




The
      Company has restated its financial statements based on the appraisal of the
      fair value of the four (4) companies at the each acquisition date.




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




Accordingly,
      we re-filed Form 10-KSB for the year ended December 31, 2003 with United
      States Securities and Exchange Commission to reflect the changes.




The
      changes have caused adjustments to the financial statements for the year
      ended December 31, 2004 and May 31, 2005. As a result, we re-file Form 10-KSB
      for the year ended December 31, 2004 herein to reflect the
      adjustments.  We have included these adjustments in our Form 10-K for
      the year ended May 31, 2006.











/s/
      Yungeng Hu


Chief
      Financial Officer  & President











THE
      HARTCOURT COMPANIES, INC.





FORM
      10-KSB/A





TABLE
      OF
      CONTENTS











PAGEPART
                  IIItem
                  6.
              Management's
                  Discussion and Analysis or Plan of Operation
              1Item
                  7.
              Financial
                  Statements
              7Item
                  8A
              Internal
                  Controls and Procedures
              7PART
                  IIIItem
                  14.
              Principal
                  Accountant Fees and Services
              7Signature
              
              8CONSOLIDATED
                  FINANCIAL STATEMENTS
              F-1





When
      we use
      the terms "we," "us," "our," "Hartcourt" and "the Company," we mean The
      Hartcourt Companies, Inc., a Utah corporation, and its
      subsidiaries.





The
      information set forth in this Report on Form 10-KSB including, without
      limitation, that contained in Item 6, Management's Discussion and Analysis
      or
      Results of Operation, contains "forward looking statements" within the meaning
      of Section 27A of the Securities Act of 1933, as amended, and Section 21E of
      the
      Securities Exchange Act of 1934, as amended. These statements relate to future
      events or our future financial performance, and involve risks and uncertainties.
      In some cases, you can identify forward-looking statements by terminology such
      as "may," "will," "could," "expect," "plan," "intend," "anticipate," "believe,"
      "estimate," "predict," "potential," or "continue," or the negative of such
      terms
      or other comparable terminology. These statements are only predictions. Actual
      results may materially differ from those projected in the forward-looking
      statements as a result of certain risks and uncertainties set forth in this
      report. Although management believes that the assumptions made and expectations
      reflected in the forward-looking statements are reasonable, there is no
      assurance that the underlying assumptions will, in fact, prove to be correct
      or
      that actual future results will not be different from the expectations expressed
      in this report. In evaluating these statements, you should specifically consider
      various factors, including the risks outlined in the "Risk Factors" section
      below.












**ITEM
      6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
      OPERATION**





THE
      FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR FINANCIAL STATEMENTS
      AND THE NOTES THERETO AND THE OTHER FINANCIAL INFORMATION APPEARING ELSEWHERE
      IN
      THIS DOCUMENT. IN ADDITION TO HISTORICAL INFORMATION, THE FOLLOWING DISCUSSION
      AND OTHER PARTS OF THIS DOCUMENT CONTAIN CERTAIN FORWARD-LOOKING INFORMATION.
      WHEN USED IN THIS DISCUSSION, THE WORDS "BELIEVES," "ANTICIPATES," "EXPECTS,"
      AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS.
      SUCH STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES, WHICH COULD
      CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED DUE TO A NUMBER
      OF FACTORS BEYOND OUR CONTROL. WE DO NOT UNDERTAKE TO PUBLICLY UPDATE OR REVISE
      ANY OF OUR FORWARD-LOOKING STATEMENTS EVEN IF EXPERIENCE OR FUTURE CHANGES
      SHOW
      THAT THE INDICATED RESULTS OR EVENTS WILL NOT BE REALIZED. YOU ARE CAUTIONED
      NOT
      TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH REFLECT
      ONLY
      OUR CURRENT VIEWS OF POSSIBLE FUTURE EVENTS.





PRO
      FORMA
      CONDENSED AND COMBINED FINANCIAL STATEMENTS





Since
      we
      have disposed of all but one of our operating subsidiaries during 2004 a
      comparison of 2004 operating results to our reported 2003 financial results
      would not be meaningful. As such, the following discussion is based on the
      comparison of the full year combined operating results for 2004, with the pro
      forma operating results of the surviving subsidiaries and continued operations
      in 2003.





The
      condensed pro forma financial statements set forth below represent the combined
      financial statements of the surviving subsidiary Huaqing, which we acquired
      in
      February 2003. The combined pro forma financial statements for 2004 accounted
      for the full year's operating results including the profit/loss on disposals
      and
      the results of discontinued operations. The condensed pro forma financial
      statements for 2004 and 2003 are prepared and audited in accordance with the
      U.S. GAAP.





In
      order
      to make the year-on-year comparison as meaningful as possible, the below pro
      forma financial statements are based on the full year operating results of
      the
      Company and surviving subsidiary for 2004. Since the surviving subsidiary was
      itself acquired by us in March 2003, the operating results for 2003 only
      consolidate the surviving subsidiary for the ten-month period following the
      effective date of acquisition. The below information includes a discussion
      of
      the changes in market conditions that affected our operating results and the
      structure and composition of the Group.





The
      exclusion of the four subsidiaries that have either been disposed or are pending
      for sale from our pro forma financial statements reduced our pro forma revenue
      for the 2004 fiscal year by approximately $165 million. The exclusion of revenue
      from these subsidiaries from which the Company derived a profit also led to
      a
      consolidated operating loss of $0.9 million. All of the subsidiaries that have
      been divested or are pending for sale were or are to be sold back to the prior
      owners of the respective businesses.





Due
      to
      the decline of the share price of our common stock between the time of issuance
      (as high as $0.60 per share) pursuant to the transactions in which we acquired
      the four subsidiaries and the unwinding of the acquisitions and return of the
      shares used as consideration to Hartcourt (as low as $0.08 per share), the
      loss
      of share value is over $12 million with respect to these four subsidiaries.
      While this is a largely non-cash, one-time accounting loss, it nevertheless
      reflected a substantial loss in our financial statements.





The
      following table sets forth certain selected consolidated financial data and
      should be read in conjunction with our consolidated financial statements and
      related notes appearing elsewhere in this annual report:





1





**HARTCOURT
                COMPANIES, INC.****PRO
                FORMA INCOME STATEMENT****FOR
                YEARS ENDED ON DECEMBER 31**




**2004**
            
            **2003****TOTAL
                REVENUES**
            
            $
            74,563,459
            
            $
            51,397,117COST
                OF SALES
            
            
            72,847,501
            
            
            48,996,403**GROSS
                PROFIT (LOSS)**
            
            
            **1,715,958**
            
            
            **2,400,714****OPERATING
                EXPENSES**SELLING
                AND G&A EXPENSE
            
            
            1,672,346
            
            
            2,177,755DEPRECIATION
            
            
            57,996
            
            
            66,526IMPAIRMENTS-
                GOODWILL
            
            
            
            
            
            109,525IMPAIRMENTS-INVESTMENT
            
            
            223,816
            
            
            400,000IMPAIRMENTS-NOTES
                RECEIVABLE
            
            
            4,083,876**TOTAL
                OPERATING EXPENSES**
            
            
            **6,038,034**
            
            
            **2,753,806****INCOME(LOSS)
                FROM OPERATIONS**
            
            
            **-4,322,076**
            
            
            **-353,092****OTHER
                INCOME(EXPENSE)**OTHER
                REVENUE
            
            
            215,154INTEREST
                INCOME
            
            
            238,282
            
            
            188,947LOSS
                ON DISPOSAL OF FIXED ASSETS
            
            
            97,888PROVISION
                FOR LAWSUIT
            
            
            -100,000
            
            
            -1,300,000INTEREST
                EXPENSE
            
            
            -552,547
            
            
            -53,120**TOTAL
                OTHER INCOME(EXPENSE)**
            
            
            **-101,223**
            
            
            **-1,164,173****INCOME
                (LOSS) FROM CONTINUING OPERATIONS BEFORE MINORITY INTEREST**
            
            
            **-4,423,299**
            
            
            **-1,517,265**LESS:
                LOSS IN SUBSIDIARY, ATTIBUTED TO MINORITY INTEREST
            
            
            -559,342
            
            
            -73,677INCOME
                (LOSS) FROM CONTINUING OPERATIONS BEFORE
            
            
            -4,982,641
            
            
            -1,590,942**DISCONTINUED
                OPERATION**GAIN/(LOSS)
                FROM DISCONTINUED OPERATIONS
            
            $
            368,715
            
            $
            1,213,559GAIN/(LOSS)
                ON DISPOSAL OF DISCONTINUED OPERATION
            
            
            -2,628,859
            
            
            -130,832PROVISION
                FOR ASSETS PENDING FOR SALE
            
            
            -5,914,848-8,174,992
            
            
            1,082,727GAIN/(LOSS)
                BEFORE INCOME TAX
            
            $
            -13,157,633
            
            $
            -508,215INCOME
                TAX EXPENSES
            
            
            215,579
            
            
            62,674**NET
                INCOME (LOSS)**
            
            **$**
            **-13,373,212**
            
            **$**
            **-570,889**





2


**RESULTS
      OF OPERATIONS**





**NET
      SALES**





The
      combined income statement recorded net sales of $74,563,459 and $51,397,117
      for
      the year ended December 31, 2004 and December 31, 2003, respectively. The
      revenue for our 2004 fiscal year represented product sales revenue derived
      from
      distribution of Samsung monitors and notebooks while revenue for our 2003 fiscal
      year included $916,428 consulting service income, $49,556,089 products sales
      revenue and $924,600 after-sales services derived from distribution of Samsung
      monitors for ten months ended December 31, 2003. The 50.46% increase in Samsung
      product sales is mainly due to the expansion of the sales distribution network
      of Huaqing. In addition, the SARS epidemic, which occurred in the second quarter
      of year 2003, had a negative impact on our sales in 2003 due to declining
      consumer confidence in all markets in China during the period.





**OPERATING
      MARGINS**





The
      operating margin for our 2004 fiscal year was 2.3%, compared with 4.67% for
      our
      2003 fiscal year. Except for the consulting service revenue of $916,428, the
      operating margin for Samsung products sales was 2.94% for our 2003 fiscal year.
      The decrease in our operating margin was mainly due to fierce competition during
      2004 in the IT retail market. The declining gross margin in the China IT
      hardware distribution sector has been a broad and continuing trend in the past
      five years, which we believe will continue over the next several
      years.





**OTHER
      REVENUE**





Other
      revenue totaled $215,154 during our 2004 fiscal year compared with other revenue
      of nil for our 2003 fiscal year. Other revenue mainly represented income from
      warranty services and the government grants. The other revenue in 2004 included
      the receipt of government grants of $58,089 from local authorities.





**SELLING,
      GENERAL AND ADMINISTRATIVE EXPENSES**





Selling,
      general and administrative expenses for our 2004 fiscal year were $1,672,346,
      compared with $2,121,878 for our 2003 fiscal year. The decrease of $0.5 million,
      or 27%, in our selling, general and administrative expenses was mainly due
      to
      the decrease of Huaqing's operating expenses, such as payroll and sales
      commission, marketing expenses, rentals and other.





**DEPRECIATION**





Depreciation
      for our 2004 fiscal year amounted to $57,996, compared with $122,403 for our
      2003 fiscal year, representing a decrease of 53%. The decrease was mainly due
      to
      the disposition by Huaqing of one of its investment properties in 2004, which
      also resulted in a gain on disposal of fixed assets.





**IMPAIRMENT**





The
      Company recorded $4,307,692 impairment chare for year 2004, which included
      $4,083,876 impairment on notes receivable and $223,816 impairment on
      investment.





The
      $4,083,876 impairment charge recorded for our 2004 fiscal year was in part
      the
      result of a 100% provision for loss on notes receivable from Edda of $1,993,742.
      As of December 31, 2004, the outstanding notes receivable due from Edda was
      $1,993,742. Edda has not paid interest or principal on the note since the second
      quarter of 2004 and has informed us that they were unwilling to pay the
      remaining balance due to us. We therefore decided to make a 100% loss provision
      for the remaining balance on the note. The impairment charge also resulted
      from
      the provision for loss of $2,026,234 on notes receivable from Shen Zhen Raiser;
      the notes were received upon the sale of the Company's equity interest in
      Guangdong New HuaSun. Please refer to the section "Discontinued Operations"
      below. The impairment charge also includes a provision for the loss of $63,900
      on notes receivable from Beijing TSS., which did not have any assets to repay
      the notes to Hartcourt.





The
      $223,816 impairment on investment for 2004 was related to the disposal of our
      investment in First information.




3





The
      impairment amount of $509,525 booked in year 2003 consisted of impairment on
      investment in education program $100,000, impairment on eMPACT of $300,000
      and
      impairment of goodwill of $109,525 with respect to the disposal of its former
      subsidiary Sinobull. The Company evaluated its investments and goodwill on
      December 31, 2003 for the impairment test and determined some of the investments
      were of no value resulted from the deterioration in the operating conditions
      of
      the investee entity.





**INTEREST
      EXPENSES**





Interest
      expenses for our 2004 fiscal year totaled $552,547, a 940% increase compared
      with $53,120 for our 2003 fiscal year. The increase in interest expenses was
      mainly attributable to our borrowing of funds to finance the expansion of our
      Samsung distribution business.





**LOCAL
      PRC 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 have conducted annual tax audits of our subsidiaries
      and
      affiliates in China for the 2003 tax year and prior years.




There
      are
      no outstanding tax issues or liabilities at the time of this annual 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.





None
      of
      our income is subject to taxation by any U.S. governmental
      authority.





**LIQUIDITY
      AND CAPITAL RESOURCES**





As
      shown
      in our accompanying financial statements, we had a net loss of US$13.4 million
      for the fiscal year ended December 31, 2004 as compared to a net loss of $0.6
      million for the same periods in 2003. The Company recorded loss of $8.2 million
      from discontinued operations for the fiscal years ended December 31, 2004
      compared with a gain of $1.1 million during same period of year 2003. Our
      current assets exceeded our current liabilities by $2.5 million as of December
      31, 2004.




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.** The net
      cash used in operating activities during our 2004 fiscal year amounted to $7.1
      million, a 58% increase compared to $4.5 million in our 2003 fiscal year. The
      net increase was mainly due to a sharp increase in net loss by $12.6 for year
      2004 compared with year 2003 and other major cash outflow items in year 2004,
      primarily cash outflows resulting from increase in accounts receivable, advance
      to suppliers and inventory.





**INVESTING
      ACTIVITIES.** Cash
      used
      by investing activities in our 2004 fiscal year amounted to $1.7 million, a
      168%
      decrease compared to $2.5 million provided by investing activities in our 2003
      fiscal year. The cash used by investing activities was mainly a result of
      excluding $3.5 million cash from the disposition of our under-performing
      subsidiaries and decrease of $2.3 million in cash acquired from business
      acquisition.





**FINANCING
      ACTIVITIES.** Net
      cash
      provided by financing activities in our 2004 fiscal year amounted to
      $8.1million, an 80% increase compared to $4.5 million in 2003. The increase
      in
      financing activities resulted primarily from increased bank loans by $5.5
      million, increased common stock proceeds by $1.4million and increase by $1.2
      million in proceeds from related parties.





4





**DISCONTINUED
      OPERATIONS**





**Wenzhou
      Zhongnan Group (“Wenzhou”)**





On
      July
      16, 2004, Hartcourt and the minority owners of Wenzhou Zhongnan Group reached
      an
      agreement to rescind the original acquisition agreement entered into on June
      28,
      2003 to purchase a 51% equity ownership of Wenzhou for a total purchase price
      of
      $5,011,352. The acquisition was paid for entirely by the issuance of 8,415,370
      shares of our common stock. Wenzhou's financial results were consolidated under
      our operations beginning in October 2003. All of the shares that we issued
      pursuant to this acquisition have been returned to us and cancelled. Although
      there was no cash loss in this transaction, we lost time and opportunities
      to
      pursue other business acquisitions.





From
      October 2003 to June 2004, Wenzhou's revenue and net income results were 79%
      and
      30%, respectively, of the target revenue and net income provided for under
      the
      acquisition agreement. The significantly lower profit was due to stiff market
      competition in the Chinese IT retail business, leading to the closing of 5
      out
      of 11 Wenzhou retail stores during the period from October 2003 to June 2004.
      Fierce price competition in the wholesale hardware business led to steep gross
      margin erosion and severely impacted our net income.





Based
      on
      nine months of actual operating results, the fair market value of Wenzhou's
      business, using cash flow information and present value in accounting
      measurements as defined by U.S. GAAP, would be approximately $700,000, and
      Hartcourt's 51% equity share would be worth approximately $357,000 compared
      to
      the acquisition price of $5 million. At the end of June 2004, the fair market
      value of 8.4 million Hartcourt shares used as consideration for the Wenzhou
      acquisition was approximately $2.2 million, significantly higher than the
      $357,000 fair market value of the 51% Wenzhou equity.





The
      Wenzhou acquisition agreement contained a contingency clause that
      if Wenzhou failed to attain a certain level of net profit and revenue, we
      could, at our sole and absolute discretion, request Wenzhou to repurchase the
      equity interests and return the Hartcourt shares paid as consideration for
      the
      acquisition. To protect the Company's interest and prevent unnecessary
      shareholder dilution, management in June 2004 elected to exercise the
      contingency clause stipulated in the acquisition agreement that required the
      sellers to repurchase the equity interests and transfer to us all of our shares
      of common stock that had been issued to the sellers as consideration should
      the
      Wenzhou business not achieve its first year guaranteed profit, which at that
      time was highly unlikely.





**Shanghai
      Guowei Science and Technology Ltd (“Guowei”)**





In
      the
      fourth quarter of 2004, the IT retail sector experienced a dramatic downturn
      in
      sales that we believed was a permanent reduction in the size of the IT retail
      market in China. The price of low-end branded desktops declined to that of
      non-branded desktops, taking away a substantial share of market from
      the non-branded desktop segment. In the meantime, the price of notebooks
      continued to drop, making notebooks an attractive alternative to desktop
      computers. As a comparison, GuoWei's 2004 revenue (from January to December
      2004) was 156% of the first year (from July 2003 to June 2004) guaranteed
      turnover as stipulated in the acquisition contract while net income was
      only 33% of the first year guaranteed profit. Based on sales projections
      and cash flow estimates, the fair market value of GuoWei is estimated to be
      $1.03 million and Hartcourt's 50.5% equity share is valued at $519,000.
      Hartcourt acquired 50.5% of GuoWei equity for a total of $3,367,774, by
      issuance of 10,863,788 Hartcourt common shares.





Pursuant
      to the GuoWei acquisition agreement, both the seller and buyer have the
      first right to buy back their respective equities in the event that
      the parties decide not to complete the merge. On March 16, 2005, Hartcourt
      and the minority shareholders of GuoWei reached an agreement to sell the
      50.5% of Hartcourt equity back to its original owners for a total
      consideration of $1,031,496 in a combination of cash and stock transaction
      where GuoWei paid cash consideration of $794,914 and returned 2,951,800
      shares of Hartcourt common stock.




The
      difference of the GuoWei carrying value on Hartcourt books versus
      the disposal consideration is $2.6 million. This is the impairment of
      GuoWei assets pending for sale at the end of 2004. While the loss on GuoWei
      can be seen as significant, the value that we realized in disposing the
      GuoWei assets is still far above the current fair market value of
      GuoWei.








5


**Guangzhou
      NewHuaSun (“NewHuaSun”)**





We
      acquired the equity interest in NewHuasun on April 24, 2003 for a
      total consideration of $3,029,214, paid for entirely by the issuance of
      13,769,156 shares of our common stock. We also obtained 10% equity voting
      rights through proxy statements from one of the NewHuaSun's shareholders.
      The voting rights were returned to the NewHuaSun shareholder at the time of
      sale of NewHuaSun equity interest to Shenzhen
      Riser.





NewHuaSun
      is an authorized distributor of Samsung monitors and is engaged in the sale
      and distribution of Samsung monitors in the Guangdong province. Within
      months of our acquisition, NewHuaSun experienced significant cash
      flow problems that adversely impacted its sales. It also borrowed heavily
      to purchase inventory from Samsung in order to fulfill its obligation as
      an authorized distributor. The interest cost on borrowed funds further
      depressed net income. The unfavorable operating results led us to sell our
      equity interest to a third party.





On
      August
      30, 2004, we sold our 45% equity interest in Guangzhou
      NewHuaSun (NewHuaSun) to ShenZhen Raiser Industrial and Development Co.,
      Ltd. for $3,403,150. The purchase price is being paid to us in twenty-one
      quarterly interest-bearing installments. We acquired our equity interest in
      NewHuasun on April 24, 2003 for a total purchase price of $3,029,214, paid
      for entirely by the issuance of 13,769,156 shares of our common stock. In
      addition, we obtained voting rights over an additional 10% of the equity of
      NewHuaSun through voting proxies from one of NewHuaSun's shareholders.





On
      March
      3, 2005 we entered into agreements with NewHuaSun and Shenzhen Raiser,
      pursuant to which we redeemed 13,769,156 shares of our common stock held by
      NewHuaSun, New HuaSun redeemed a 45% equity interest, and we
      released Shenzhen Raizer of its obligation on a $3,403,150 promissory note
      payable to us. The fair market value of the 13,769,156 shares of common
      stock was $1,376,916, and the difference of $2.1 million represents the
      impairment on the notes receivable at year-end. The loss is due to the fact
      that our common stock was issued at $0.22 per share at the time of
      acquisition and returned to the Company at $0.10 per share at the time of
      disposition of the subsidiaries.





**Disposal
      of Interest in Other Investee Companies**





On
      September 16, 2004, Huaqing signed a definitive agreement to sell all of
      its equity interest in Hangzhou Huaqing to a PRC citizen for $760,870.
      We recorded a profit on the disposition of Hangzhou of $20,670.





On
      June
      30, 2004, Hartcourt, together with the minority shareholder of Hopeful
      Internet Technologies Limited (Hopeful), signed an agreement with
      First Information Technology for the sale of all of our equity interest in
      Hopeful for $464,472, which was paid by the issuance of 2,179 shares of
      common stock of First Information Technology at value of $0.01. As a
      result, we own a 10.5% equity interest in First Information. We recorded a
      loss on sale of Hopeful of $16,185.





In
      December 2004, our board of directors authorized the sale of our entire 51%
      equity interest in Beijing Challenger Group (Challenger) due to
      on-going adverse market conditions and our declining share price. Our
      estimation of the proceeds from the sale of Challenger amounts to
      $1,172,764, including the provision on sale of asset. The difference
      between the carrying value of Challenger on our books and the sale proceeds
      represents the impairment on the pending sale of Challenger at year-end
      2004, which amounts to $3.2 million. The purchase price adjustment clause in
      the
      Challenger acquisition agreement provides that, if upon expiration of the
      one year restricted trading period imposed upon the shares of our common
      stock paid as consideration for the acquisition, the return accrued or
      derived from the shares is less than 41% of our net profit for our 2004
      fiscal year, then the sellers may request the purchaser to either (i)
      repurchase the shares and transfer to the sellers all beneficial and
      equitable interest in the registered capital of the Company or (ii) issue
      and allot to the sellers such total number of additional shares equal to
      the difference of the value of the initial shares paid and at $0.556
      per share.





Due
      to a
      decline in our share price in 2004, Challenger initially notified us that
      it would exercise the option of obtaining additional Hartcourt shares
      to meet the guaranteed purchase price. The share compensation would amount
      to additional 22 million shares based on the 2004 year-end trading price.
      In view of the pending sale of IBM worldwide PC business to Lenovo, the
      dominant Chinese PC maker, and the numerous operating issues faced in
      managing the Challenger business, we concluded that the business will
      likely not be able to generate a favorable return on our investment and
      that we should dispose the Challenger investment. In the meantime,
      Challenger's minority owners concluded that the cost that it must incur to
      be a part of a U.S. publicly listed company was greater than the benefit it
      could reap and notified us that it would exercise the option of requesting
      Hartcourt to repurchase its consideration shares and transfer all the
      Challenger equity back to the original owners.




6


As
      such,
      the estimated Challenger disposal would amount to $1.2 million, including
      the provision on sale of asset. The difference between the acquisition cost
      of $4.4 million and the estimated disposal price of $1.2 million is
      the impairment on the pending sale of Challenger assets at year-end 2004,
      which amounts to $3.2 million. Negotiation with the Challenger minority
      owner is underway as of this filing date.





**ITEM
      7. FINANCIAL STATEMENTS**





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 beginning at page F-1.





**ITEM
      8A. CONTROLS AND PROCEDURES**





Prior
      to
      the conclusion of the period covered by this report, we carried out an
      evaluation, under the supervision and with the participation of
      our management, including our Chief Executive Officer and Interim Chief
      Financial Officer, of the effectiveness of the design and operation of our
      disclosure controls and procedures pursuant to Exchange Act Rule
      13(a)-14(c). Based upon that evaluation, our Chief Executive Officer and
      Interim Chief Financial Officer concluded that our disclosure controls and
      procedures are effective in timely alerting them to material information
      relating to us (including our consolidated subsidiaries) required to be
      included in our periodic SEC filings.




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





There
      have been no significant changes in our internal controls or in other
      factors that could significantly affect internal controls subsequent to the
      date we carried out this evaluation.





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





For
      year
      ended December 31, 2004, Kabani & Company, Inc, our
      independent auditor, billed the Company audit fees totaling $155,000. No
      audit-related fees, tax fees or other fees were incurred by the
      Company.





For
      the
      quarter ended March 31, 2004, Loral International CPA & Advisor LLC
      (Loral), our independent auditor, billed the Company a first
      quarterly review fee of $20,000. For the quarters ended June 30, 2004 and
      September 30, 2004, Loral billed the Company quarterly review fees of
      $10,000 for each quarter and $3,500 for audit related fees.





For
      the
      year ended December 31, 2003, Loral billed the Company audit fees of
      $150,000. No other audit-related fees, tax fees or other fees were
      incurred by the Company in 2003.


7








**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-KSB to be signed on its behalf
      by the undersigned, thereunto duly authorized.







THE
              HARTCOURT
              COMPANIES, INC.Date: October
              10, 2006
            By:
            /s/ Victor
              ZhouVictor
                Zhou
              Chief Executive
                Officer




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





Signature
              
              Title
              
              Date/s/
                  Yungeng Hu
                Yungeng
                  Hu
              
              Chief
                  Financial Officer & President
              
              October
                  10, 2006




**POWER
      OF ATTORNEY**




By
      signing this Form 10-KSB below, I hereby appoint Victor Zhou and Yungeng Hu
      as my attorney-in-fact to sign all amendments to this Form 10-KSB on my behalf,
      and to file this Form 10-KSB (including all exhibits and other documents related
      to the Form 10-KSB) 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/
                VICTOR ZHOU
              Victor
                Zhou
            
            Chief
                Executive Officer
            
            October
                10, 2006/s/
                Yungeng Hu
              Yungeng
                Hu
            
            Chief
                Financial Officer & President
            
            October
                10, 2006/s/
                BILLY Y N WANG
              Billy
                Y N Wang
            
            Chairman
                of the Board of Directors
            
            October
                10, 2006/s/
                Wilson Li
              Wilson
                Li
            
            Director
            
            October
                10,
                2006/s/
                Geoffrey Wei
              Geoffrey
                Wei
            
            Director
            
            October
                10, 2006





8





The
      Hartcourt Companies, Inc.


And
      Subsidiaries











Audited
      Consolidated Financial Statements





For
      the
      Years Ended December 31, 2004 and 2003








Contents
              PagesREPORT
                  OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
              F-1Balance
                  Sheet
              F-2
                  - F-3Statements
                  of Operations
              F-4
                  - F-5Statement
                  of Changes in Stockholders' Equity
              F-6
                  - F-7Statements
                  of Cash Flows
              F-8
                  - F-9Notes
                  to Financial Statements
              F-10-F-37




9






**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 December 31, 2004 and the related
      consolidated statements of operations, consolidated stockholders’ equity and
      comprehensive income and consolidated statements of cash flows for the years
      ended December 31, 2004 and 2003. 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 audits.





We
      conducted our audits 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
      December 31, 2004 and the results of its operations and its cash flows for
      the
      years ended December 31, 2004 and 2003, 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 $64,997,496 including net
      loss
      of $13,373,212 for the year ended December 31, 2004. 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.





As
      discussed in Note 26, the financial statements for the year ended December
      31,
      2004 have been restated.








/s/
      KABANI & COMPANY, INC.


CERTIFIED
      PUBLIC ACCOUNTANTS





Huntington
      Beach, California





April
      2,
      2005 except for note 2, 9, 13, 14, 16, 18, 19, 21, 24 and 26 which are as of
      August 21, 2006





F-1





**THE
                HARTCOURT COMPANIES, INC. AND SUBSIDIARIES****CONSOLIDATED
                BALANCE SHEET (RESTATED)****DECEMBER
                31, 2004**




**ASSETS****CURRENT
                ASSETS**Cash
                and cash equivalents
            
            $
            1,744,852Accounts
                receivable, net
            
            
            5,141,892Inventories,
                net
            
            
            1,229,971Notes
                receivable, net
            
            
            1,376,916Trade
                deposits
            
            
            3,791,927Prepaid
                expenses and other assets
            
            
            1,470,508Assets
                pending for sales, net
            
            
            2,204,260Due
                from related parties
            
            
            436,155**TOTAL
                CURRENT ASSETS**
            
            
            17,396,481**PROPERTY
                & EQUIPMENT - NET**
            
            
            363,849**INVESTMENTS,
                NET**
            
            
            60,412**INTANGIBLE
                ASSET**Goodwill,
                net
            
            
            1,911,466$
            19,732,208**LIABILITIES
                AND SHAREHOLDERS' EQUITY****CURRENT
                LIABILITIES**Accounts
                payable
            
            $
            632,528Deferred
                revenue
            
            
            8,522,065Due
                to shareholders
            
            
            260,807Accrued
                expenses and other current liabilities
            
            
            4,398,812Staffs
                loan
            
            
            1,052,427**TOTAL
                CURRENT LIABILITIES**
            
            
            14,866,639**MINORITY
                INTERESTS**
            
            
            193,722







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


F-2


**THE
        HARTCOURT COMPANIES, INC. AND SUBSIDIARIES**
 **CONSOLIDATED
        BALANCE SHEET (RESTATED)**
 **DECEMBER
        31, 2004**
 **(-Continued-)**
 
 **SHAREHOLDERS'
                  EQUITY****Preferred
                  Stock:**Original
                  preferred stock, $0.01 par value, 1,000 shares authorized, issued
                  and
                  cancelled at December 31, 2004
              
              
              -Class
                  A, 10,000,000 shares authorized, none issued and outstanding at
                  December
                  31, 2004
              
              
              -Series
                  A, $1,000 stated value, 4,000 shares authorized, none issued and
                  outstanding at December 31, 2004
              
              
              -Series
                  B, $1,000 stated value, 2,000 shares authorized, none issued and
                  outstanding at December 31, 2004
              
              
              -Series
                  C, $1,000 stated value, 1,500 shares authorized, none issued and
                  outstanding at December 31, 2004
              
              
              -Series
                  D, $1,000 stated value, 10,000 shares authorized, none issued and
                  outstanding at December 31, 2004
              
              
              -Series
                  AB, $100 stated value, 25,000 shares authorized, none issued and
                  outstanding at December 31, 2004
              
              
              -**Total
                  Preferred Stock**
              
              
              -**Common
                  stock, $0.001 par value, 250,000,000 authorised, 171,658,757 common
                  shares
                  issued and outstanding**
              
              
              171,659**Additional
                  paid in capital**
              
              
              69,631,389**Treasury
                  stock, at cost, 48,728 shares**
              
              
              (48,728
              )**Other
                  comprehensive income**
              
              
              (84,977
              )**Accumulated
                  deficit**
              
              
              (64,997,496
              )**TOTAL
                  SHAREHOLDERS' EQUITY**
              
              
              4,671,847$
              19,732,208
 
 The
        accompanying notes form an integral part of the consolidated financial
        statements.
 F-3
   **THE
          HARTCOURT COMPANIES, INC. AND SUBSIDIARIES**
 **CONSOLIDATED
          STATEMENTS OF OPERATIONS (RESTATED)**
 **For
          the years ended December 31,**
 
 2004
                
                2003**NET
                    SALES**
                
                $
                74,563,459
                
                $
                51,397,117**COST
                    OF SALES**
                
                
                72,847,501
                
                
                48,996,403**GROSS
                    PROFIT**
                
                
                1,715,958
                
                
                2,400,714**OPERATING
                    EXPENSES**Selling,
                    general and administrative
                
                
                1,672,346
                
                
                2,121,878Depreciation
                    and amortization
                
                
                57,996
                
                
                122,403Impairments
                
                
                4,307,692
                
                
                509,525**TOTAL
                    OPERATING EXPENSES**
                
                
                6,038,034
                
                
                2,753,806**LOSS
                    FROM CONTINUING OPERATIONS BEFORE OTHER INCOME (EXPENSES) & MINORITY
                    INTEREST**
                
                
                (4,322,076
                )
                
                (353,092
                )**OTHER
                    INCOME (EXPENSES)**Interest
                    expense
                
                
                (552,547
                )
                
                (53,102
                )Interest
                    income
                
                
                238,282
                
                
                188,947Litigation
                    accrual
                
                
                (100,000
                )
                
                (1,300,000
                )Investment
                    income
                
                
                -
                
                
                -Gain
                    on disposal of property and equipment
                
                
                97,888
                
                
                -Other
                    income
                
                
                215,154
                
                
                -**TOTAL
                    OTHER INCOME (EXPENSES)**
                
                
                (101,223
                )
                
                (1,164,173
                )**LOSS
                    FROM CONTINUING OPERATIONS BEFORE MINORITY
                    INTEREST**
                
                
                (4,423,299
                )
                
                (1,517,265
                )Less:
                    Minority Interest
                
                
                (559,342
                )
                
                (73,677
                )**LOSS
                    BEFORE DISCONTINUED OPERATIONS & INCOME TAX**
                
                
                (4,982,641
                )
                
                (1,590,942
                )
 
  The
          accompanying notes form an integral part of the consolidated financial
          statements.




F-4


**THE
        HARTCOURT COMPANIES, INC. AND SUBSIDIARIES**
 **CONSOLIDATED
        STATEMENTS OF OPERATIONS (RESTATED)**
 **(-Continued-)**
 **For
        the years ended December 31,**
 
 2004
              
              2003**DISCONTINUED
                  OPERATIONS:**Gain
                  (losses) from discontinued operations
              
              
              368,715
              
              
              (130,832
              )Provision
                  for loss on assets pending for sale
              
              
              (5,914,848
              )
              
              -Gain
                  (losses) on disposal of discontinued operations
              
              
              (2,628,859
              )
              
              1,213,559**LOSS
                  BEFORE INCOME TAX**
              
              
              (13,157,633
              )
              
              (508,215
              )Income
                  tax
              
              
              (215,579
              )
              
              (62,674
              )**NET
                  LOSS**
              
              
              (13,373,212
              )
              
              (570,889
              )**OTHER
                  COMPREHENSIVE LOSS**Foreign
                  currency translation loss
              
              
              605
              
              
              (14,488
              )**COMPREHENSIVE
                  LOSS**
              
              $
              (13,372,607
              )
              $
              (585,377
              )**BASIC
                  AND DILUTED LOSS PER COMMON SHARE**Loss
                  from continuing operations
              
              $
              (0.03
              )
              $
              (0.012
              )Loss
                  from discontinued operations
              
              $
              (0.05
              )
              $
              0.008Loss
                  per share
              
              $
              (0.08
              )
              $
              (0.004
              )-
                  basic and diluted (weighted average)
              
              
              175,645,723
              
              
              135,564,580
 
 The
        accompanying notes form an integral part of the consolidated financial
        statements.





F-5




**THE
        HARTCOURT COMPANIES, INC. AND SUBSIDIARIES**
 **CONSOLIDATED
        STATEMENTS OF SHAREHOLDERS' EQUITY (RESTATED)**
 **FOR
        THE YEARS ENDED DECEMBER 31, 2004 AND 2003**
 
 Common
                  Stock
              
              Preferred
                  Stock
              
              Additional
                  Paid-In
              
              Common
                  Stock Subscriptions
              
              Treasury
                  Stock
              
              Other
                  Comprehensive
              
              Accumulated
              
              Total
                  Shareholders’Description
              
              Shares
              
              Amount
              
              Shares
              
              Amount
              
              Capital
              
              Receivable
              
              Shares
              
              Amount
              
              Loss
              
              Deficit
              
              EquityBalance
                  - December 31, 2002
              
              
              88,518,023
              
              $
              88,518
              
              
              1,000
              
              $
              10
              
              $
              55,669,100
              
              $
              -
              
              
              5,610,588
              
              $
              (3,723,928
              )
              $
              (71,094
              )
              $
              (51,053,395
              )
              $
              909,211Shares
                  issued for consulting services
              
              
              2,174,667
              
              
              2,175
              
              
              -
              
              
              -
              
              
              160,246
              
              
              
              
              
              
              
              
              -
              
              
              
              
              
              
              
              
              162,421Shares
                  issued to executive and staffs in lieu of compensation and
                  services
              
              
              1,268,440
              
              
              1,268
              
              
              -
              
              
              -
              
              
              196,127
              
              
              
              
              
              
              
              
              -
              
              
              
              
              
              
              
              
              197,395Shares
                  issued to directors in lieu of compensation & services
              
              
              589,460
              
              
              589
              
              
              
              
              
              
              
              
              64,161
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              64,750Shares
                  issued for executions of cashless option
              
              
              1,000,000
              
              
              1,000
              
              
              -
              
              
              -
              
              
              99,000
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              100,000Cancel
                  of treasury stocks
              
              
              (4,756,058
              )
              
              (4,756
              )
              
              
              
              
              
              
              
              (3,170,444
              )
              
              
              
              
              (4,756,058
              )
              
              3,175,200
              
              
              
              
              
              
              
              
              -Shares
                  issued in connection of acquisition
              
              
              50,349,243
              
              
              50,349
              
              
              -
              
              
              -
              
              
              13,151,814
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              13,202,163Share
                  issued for execution of cashless warrants
              
              
              714,794
              
              
              715
              
              
              -
              
              
              -
              
              
              (715
              )
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Subscriptions
                  receivable
              
              
              31,298,535
              
              
              31,299
              
              
              -
              
              
              -
              
              
              2,620,195
              
              
              (1,842,326
              )
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              809,168Sale
                  of treasury stocks
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (451,187
              )
              
              
              
              
              (805,802
              )
              
              500,000
              
              
              
              
              
              
              
              
              48,813Unralised
                  loss on disposal of FTL
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (14,488
              )
              
              -
              
              
              (14,488
              )Net
                  loss
              
              
              
              
              
              
              
              
              -
              
              
              -
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (570,889
              )
              
              (570,889
              )Balance
                  -December 31, 2003
              
              
              171,157,104
              
              $
              171,157
              
              
              1,000
              
              $
              10
              
              $
              68,338,297
              
              $
              (1,842,326
              )
              
              48,728
              
              $
              (48,728
              )
              $
              (85,582
              )
              $
              (51,624,284
              )
              $
              14,908,544


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





F-6








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


**CONSOLIDATED
      STATEMENTS OF SHAREHOLDERS' EQUITY (RESTATED)**


**FOR
      THE YEARS ENDED DECEMBER 31, 2004 AND 2003**


**(-Continued-)**


Common
                  Stock
              
              Preferred
                  Stock
              
              Additional
                  Paid-In
              
              Common
                  Stock Subscriptions
              
              Treasury
                  Stock
              
              Other
                  Comprehensive
              
              Accumulated
              
              Total
                  Shareholders’Description
              
              Shares
              
              Amount
              
              Shares
              
              Amount
              
              Capital
              
              Receivable
              
              Shares
              
              Amount
              
              Loss
              
              Deficit
              
              EquityBalance
                  - December 31, 2003
              
              
              171,157,104
              
              $
              171,157
              
              
              1,000
              
              $
              10
              
              $
              68,338,297
              
              $
              (1,842,326
              )
              
              48,728
              
              $
              (48,728
              )
              $
              (85,582
              )
              $
              (51,624,284
              )
              $
              14,908,544Shares
                  issued for consulting services
              
              
              249,640
              
              
              250
              
              
              -
              
              
              -
              
              
              91,465
              
              
              
              
              
              
              
              
              -
              
              
              
              
              
              
              
              
              91,715Shares
                  issued for compensation
              
              
              286,156
              
              
              286
              
              
              -
              
              
              -
              
              
              150,964
              
              
              
              
              
              
              
              
              -
              
              
              
              
              
              
              
              
              151,250Shares
                  issued for executions of cashless option
              
              
              696,342
              
              
              696
              
              
              -
              
              
              -
              
              
              (100,696
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (100,000
              )Shares
                  issued for acquisition of Challenger Group
              
              
              6,824,748
              
              
              6,825
              
              
              -
              
              
              -
              
              
              3,787,735
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              3,794,560Share
                  cancelled for rescind acquisition of Zhongnan Group
              
              
              (8,415,370
              )
              
              (8,415
              )
              
              -
              
              
              -
              
              
              (2,179,582
              )
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (2,187,997
              )Subscriptions
                  receivable
              
              
              (1,139,863
              )
              
              (1,140
              )
              
              -
              
              
              -
              
              
              (454,804
              )
              
              1,842,326
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              1,386,382Exchange
                  fluctuation reserve
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              605
              
              
              -
              
              
              605Share
                  issued for conversion of preferred stocks
              
              
              2,000,000
              
              
              2,000
              
              
              (1000
              )
              
              (10
              )
              
              (1,990
              )
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Net
                  loss
              
              
              
              
              
              
              
              
              -
              
              
              -
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (13,373,212
              )
              
              (13,373,212
              )Balance
                  -December 31, 2004
              
              
              171,658,757
              
              $
              171,659
              
              
              -
              
              $
              -
              
              $
              69,631,389
              
              $
              -
              
              
              48,728
              
              $
              (48,728
              )
              $
              (84,977
              )
              $
              (64,997,496
              )
              $
              4,671,847
 
 
 The
        accompanying notes form an integral part of the consolidated financial
        statements.








F-7








**THE
                HARTCOURT COMPANIES, INC. AND SUBSIDIARIES****CONSOLIDATED
                STATEMENTS OF CASH FLOWS (RESTATED)****FOR
                THE YEARS ENDED DECEMBER 31,**




2004
            
            2003**CASH
                FLOWS FROM OPERATING ACTIVITIES:**Net
                loss
            
            $
            (13,373,212
            )
            $
            (748,980
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Gain
                on disposal of property and equipment
            
            
            (97,888
            )
            
            0Impairment
                of notes receivables
            
            
            4,083,876
            
            
            101,186Impairment
                of investment
            
            
            223,816
            
            
            400,000Loss/(gain)
                on disposal of discontinued operations
            
            
            2,628,859
            
            
            (173,911
            )Depreciation
            
            
            57,996
            
            
            215,178Provision
                for loss on assets pending for sale
            
            
            5,914,848
            
            
            0Litigation
                accruals
            
            
            100,000
            
            
            1,300,000Unrealized
                investment gain
            
            
            -
            
            
            (197,833
            )Minority
                interest
            
            
            559,342
            
            
            864,920Stock
                issued for services and compensations
            
            
            242,965
            
            
            424,566Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            (8,950,308
            )
            
            545,783Trade
                deposit
            
            
            (9,538,092
            )
            
            (1,873,328
            )Inventory
            
            
            (2,630,143
            )
            
            553,424Prepaid
                expenses and other receivables
            
            
            (736,091
            )
            
            (86,455
            )Accounts
                payable and accrued expenses
            
            
            5,205,941
            
            
            (5,614,367
            )Deferred
                revenue
            
            
            9,188,144
            
            
            (229,567
            )**NET
                CASH USED IN OPERATING ACTIVITIES**
            
            
            (7,119,947
            )
            
            (4,519,384
            )




**CASH
                FLOWS FROM INVESTING ACTIVITIES:**Acquisition
                of property and equipment
            
            
            (18,734
            )
            $
            -Arising
                from acquisition of a subsidiary
            
            
            1,872,337
            
            
            2,366,560Dividends
                paid to minority shareholders
            
            
            (326,267
            )
            
            -Proceeds
                from disposal of property, plant and equipment
            
            
            312,561
            
            
            -Cash
                decreased due to disposal of subsidiaries
            
            
            (3,486,008
            )
            
            (32,337
            )Proceeds
                on notes receivable, net
            
            
            378,440
            
            
            100,000Investments
            
            
            (455,374
            )
            
            30,000**NET
                CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES**
            
            
            (1,723,045
            )
            
            2,464,223





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


F-8


**THE
                HARTCOURT COMPANIES, INC. AND SUBSIDIARIES****CONSOLIDATED
                STATEMENTS OF CASH FLOWS (RESTATED)****FOR
                THE YEARS ENDED DECEMBER 31,**
              **(-Continued-)**




2004
            
            2003**CASH
                FLOWS FROM FINANCING ACTIVITIES**Proceeds
                due to related parties
            
            
            1,167,842
            
            
            2,691,620Proceeds
                from issuance of common stock
            
            
            1,386,382
            
            
            130,000Proceeds
                from sale of treasury stock
            
            
            -
            
            
            48,813Proceed
                on note payables
            
            
            -
            
            
            1,432,245Proceeds
                on debt
            
            
            5,546,867
            
            
            168,243**NET
                CASH PROVIDED BY FINANCING ACTIVITIES**
            
            $
            8,101,091
            
            $
            4,470,921**FOREIGN
                CURRENCY TRANSLATION**
            
            
            650
            
            
            (9,500
            )**NET
                (DECREASE)/INCREASE IN CASH & CASH
                EQUIVALENTS**
            
            
            (741,251
            )
            
            2,406,260**CASH
                AND CASH EQUIVALENTS - BEGINNING OF YEAR**
            
            
            2,486,103
            
            
            79,843**CASH
                AND CASH EQUIVALENTS - END OF YEAR**
            
            $
            1,744,852
            
            $
            2,486,103**SUPPLEMENTAL
                DISCLOSURE OF CASH FLOW INFORMATION:**Cash
                paid during the year for the interest
            
            $
            552,547
            
            $
            376,513The
                accompanying notes form an integral part of the consolidated financial
                statements.








F-9


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


**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS**


**DECEMBER
      31, 2004 AND 2003**




**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 and investment holding company specializing
      in
      the Chinese Information Technology market.





As
      of
      December 31, 2004, the Company owns 100% of three (3) British Virgin Island
      (“BVI”) incorporated companies: (1) Hartcourt China Inc (formerly know as
      Hartcourt Companies Ltd.), (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
      December 31, 2004, 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 agents under its employees’ name, as nominee to
      hold the shares of the acquired subsidiaries.





As
      of
      December 31, 2004, Hartcourt Capital Inc. owns 100% of Hartcourt Hi-Tech
      Investment (Shanghai) Inc. while Hartcourt Hi-Tech Investment (Shanghai) Inc.
      owns 100% of Shanghai Jiumeng Information Technology Co., Ltd. These two
      companies are located in Shanghai, China.





As
      of
      December 31, 2004, 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 year ended December 31, 2004, the Company acquired 51% equity interest
      in
      Beijing Challenge Group. (see Note 3, Acquisition and Investments).





During
      the year ended December 31, 2004, the Company disposed of two (2) subsidiaries,
      Wenzhou ZhongNan Group, Guangdong NewHuaSun Computer Co., Ltd., In addition,
      during 2004 the Company’s board of directors authorized the disposition of two
      (2) more subsidiaries, they are Beijing Challenge Group and Shanghai Guowei
      Science and Technology Ltd. These two dispositions remain pending. (See Note
      #
      14, Discontinued Operations).




F-10





During
      the year ended December 31, 2004, Hartcourt China, Inc, together with the
      minority shareholder, also disposed of one (1) subsidiary, Hopeful Internet
      Technology Limited. (See Note # 14, Discontinued Operations)





During
      the year ended December 31, 2004, Shanghai Huaqing Corporation Development
      Co.,
      Ltd. a 51% owned subsidiary of the Company, disposed of one (1) subsidiary,
      Hangzhou Huaqing Monitoring Technology Co., Ltd. (See Note # 14, Discontinued
      Operations)





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





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.




F-11


e)  Inventory





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.





f)  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.





g)  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.





h)  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 December 31, 2004 there were no significant impairments of its
      long-lived assets used in
      operations. Provisions of US$5,914,848 were proposed as of December 31, 2004
      for
      its long-lived assets to be dispose of.





F-12


i)
      Revenue Recognition





The
      Company's revenue recognition policies are in compliance with Staff accounting
      bulletin (SAB) 104. Sales revenue is recognized at the date of shipment to
      customers 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 deferred revenue.





j)  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.





k)  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.





l)  Foreign
      Currencies Translation





Accounting
      principles generally require that recognized revenue, expenses, gains and losses
      be included in net income. Certain statements, however, require entities to
      report specific changes in assets and liabilities, such as gain or loss on
      foreign currency translation, as a separate component of the equity section
      of
      the balance sheet. Such items, along with net income, are components of
      comprehensive income. The functional currency of the Company is Chinese
      Renminbi.




F-13





m)  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.





n)  Basic
      and
      diluted net loss per share





Net
      loss
      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 loss 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 loss 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.





o)  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.





p)  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.





F-14





q)  Going
      Concern





As
      shown
      in the accompanying consolidated financial statements, the Company incurred
      a
      net loss from its operations of $13,373,212 and $570,889 **** for
      the
      years ended on December 31 of 2004 and 2003. Negative cash flows from the
      operations of $7,119,947 and $4,519,384 were noted for the years ended December
      31, 2004 and 2003. 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 via the stock exchanges transactions, 2) disposals of unprofitable
      operations, 3) the settlement of certain matters of litigation or/and disputes.
      The Company has planned to continue actively seeking additional funding and
      restructure the acquired subsidiaries to increase profits and minimize the
      liabilities.





r)  Recently
      Issued Accounting Standards





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
      December 2004, the FASB issued FASB Statement No. 123R, "Share-Based Payment,
      an
      Amendment of FASB Statement No. 123" ("FAS No. 123R"). FAS No. 123R requires
      companies to recognize in the statement of operations the grant- date fair
      value
      of stock options and other equity-based compensation issued to employees. FAS
      No. 123R is effective beginning in the Company's second quarter of fiscal 2006.
      The Company is in process of evaluating if the adoption of this standard will
      have any material impact on its financial statements.







F-15


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





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





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





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





F-16


This
      Statement:





1.
            Requires
                an entity to recognize a servicing asset or servicing liability each
                time
                it undertakes an obligation to service a financial asset by entering
                into
                a servicing contract.





2.
            Requires
                all separately recognized servicing assets and servicing liabilities
                to be
                initially measured at fair value, if
                practicable.





3.
            Permits
                an entity to choose "Amortization method" or "Fair value measurement
                method" for each class of separately recognized servicing assets
                and
                servicing liabilities.





4.
            At
                its initial adoption, permits a one-time reclassification of
                available-for-sale securities to trading securities by entities with
                recognized servicing rights, without calling into question the treatment
                of other available-for-sale securities under Statement 115, provided
                that
                the available-for-sale securities are identified in some manner as
                offsetting the entity's exposure to changes in fair value of servicing
                assets or servicing liabilities that a servicer elects to subsequently
                measure at fair value.





5.
            Requires
                separate presentation of servicing assets and servicing liabilities
                subsequently measured at fair value in the statement of financial
                position
                and additional disclosures for all separately recognized servicing
                assets
                and servicing liabilities.





This
      Statement is effective as of the beginning of the Company's first fiscal year
      that begins after September 15, 2006. Management believes that this statement
      will not have a significant impact on the financial statements.


F-17




**NOTE
      3**  **Acquisition
      and Investments**





**Acquisition**





During
      the year ended December 31, 2004, the Company, via its BVI subsidiary (Hartcourt
      Capital Inc), acquired Beijing Challenge Group, located and operated in China. Challenger
      is engaged in the distribution of IBM products in Northern China and the greater
      Shanghai region. On December 9, 2003, Hartcourt
      Capital Inc signed a
      definitive agreement with the shareholders of Challenger to purchase 51 percent
      of Challenger for RMB 31.3 million (US$3.8 million) payable in form of shares
      of
      Hartcourt common stock, plus a cash investment of RMB 5 million (US$610,000).




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




AmountCurrent
                  assets
              
              $
              10,047,149Good
                  will
              
              
              2,923,175Property
                  & equipment
              
              
              237,757Current
                  liabilities
              
              
              (7,237,092
              )Minority
                  Interest
              
              
              (1,566,110
              )$
              4,404,879Consideration
                  paidCash
              
              $
              610,289Common
                  Stock
              
              
              3,794,560$
              4,404,879
 **Other
        investments**
 
 The
        following is a summary of investments under the cost method as of December
        31:
 
 2004Investment
                  in Education Program
              
              $
              100,000Investment
                  in eMPACT
              
              
              300,000Investment
                  in GTI (see 3a)
              
              
              -Investment
                  in First information (see 3a)
              
              
              223,816Investment
                  in Guowei Digital
              
              
              -Investment
                  in HZ Huaqing (see note 13)
              
              
              -Investmnet
                  in Shanghai Jin’an Fuhuaqi
              
              
              60,412Total
                  investment
              
              
              684,228Provision
                  on other investment
              
              
              (623,816
              )Investments,
                  net
              
              $
              60,412


F-18





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





Hartcourt
      China, Inc, via its 58.53% owned subsidiary. Hopeful Internet Technology
      Limited, owned 17% equity interest in Genius Technology International Limited
      (“GTI”). During year 2004, Hartcourt China, Inc disposed off 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 resulting in a loss of $16,185.





**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.





**NOTE
      5** **ACCOUNTS
      RECEIVABLE**




Accounts
      receivable as of December 31, 2004 consisted of the following:





Accounts
                receivable
            
            $
            5,240,865Less:
                allowance for doubtful accounts
            
            
            (98,973
            )$
            5,141,892





**NOTE
      6**  **INVENTORIES**




Inventories
      as of December 31, 2004 consisted of the following:





Monitors
            
            $
            1,234,068Others
            
            
            4,537Less:
                provisions
            
            
            (8,634
            )$
            1,229,971




F-19





**NOTE
      7**  **TRADE
      DEPOSIT**





This
      amount represents the advances paid by Huaqing a 51% owned subsidiary to Samsung
      of $3,785,024 and $6,903 to other miscellaneous suppliers.








**NOTE
      8 RECEIVABLES FROM RELATED PARTIES**





Receivables
      from related parties as of December 31, 2004 are summarized as
      follows:




Due
                from a minority shareholder (Note 1)
            
            $
            375,
                717Due
                from a related company (Note 2)
            
            
            60,438Total
                receivables
            
            $
            436,155





Note
              1
            The
                amount was due to Huaqing’s minority shareholder (51% owned subsidiary of
                the Company) pursuant to business transactions in the ordinary
                course.


Note
              2
            The
                amount was due to Guowei, a subsidiary pending for sale as of December
                31,
                2004 pursuant to business transactions in the ordinary
                course.





All
      the
      above balances are unsecured, interest free and repayable on
      demand.





**NOTE
      9 ASSETS PENDING FOR SALES - RESTATED**





Assets
      pending for sale as of December 31, 2004 are summarized as follows:




Guowei
                assets pending for sales (note 13(6))
            
            $
            3,684,562Challenge
                assets pending for sales (note 13(5))
            
            
            4,434,5468,119,108Less:
                Provision for loss on assets pending for sale
            
            
            (5,914,848
            )$
            2,204,260







F-20


**NOTE** **10**  **NOTES
      RECEIVABLE**





Notes
      receivable as of December 31, 2004 consist of the following:





Note
                  receivable from Edda Ltd., interest at 6% per annum, quarterly
                  payments of
                  50,000 plus interest with a balloon payment of $2,715,772 due December
                  1,
                  2006, secured by the tangible and intangible assets of Edda,
                  Ltd.(note 10a)
              
              $
              1,993,742Loan
                  receivable from Beijing Total Solutions System, Ltd., non-interest
                  bearing, due on demand, convertible by the company into 5% of the
                  outstanding common stock, unsecured
              
              
              63,900Note
                  receivable from Shenzhen Raiser, interest at 2.5% per annum,
                  21 instalment payments due December 31, 2009. secured by a non-related
                  party (Note 10b)
              
              
              3,403,150Total
              
              
              5,460,792Less:
                  Provision for doubtful receivables
              
              
              4,083,876Notes
                  receivables, net
              
              $
              1,376,916Summary
                  of notes receivable:Current
                  portion
              
              $
              1,376,916Non-current
                  portion
              
              
              -Total
              
              $
              1,376,916


(a)
      Notes
      receivable from EDDA





On
      July
      16, 2001, Hartcourt and UAC Trading, by mutual consent, agreed to rescind the
      contractual joint venture agreement between the two companies. As part of this
      rescission agreement, we agreed to accept a promissory note for the amount
      of
      our net investment in the joint venture entity, UAC Exchange, as of the date
      of
      rescission totaling $2,858,286 in principal amount and bearing interest at
      six
      per cent per annum payable over a thirty-nine month period. The parties mutually
      agreed to forego all other rights and benefits under the joint venture agreement
      in consideration for the rescission of the contract. On September 10, 2001,
      Edda
      Limited, a non-affiliated company incorporated in Hong Kong, expressed an
      interest in acquiring allof the existing tangible and intangible assets of
      UAC
      Exchange for the amount of our net investment in UAC Exchange, and signed a
      promissory note in the amount of $2,858,286 bearing interest at six per cent
      per
      anum, payable in quarterly installments of $50,000 commencing November 1, 2001
      with a balloon payment of $2,715,772 due on December 1, 2006. The promissory
      note is secured by a security interest in all of the tangible and intangible
      property of Edda Limited.





As
      of
      December 31, 2004, the outstanding principal due from Edda Limited is
      US$1,993,742. Edda Limited has not paid either interest nor principal since
      quarter 3, 2004. A 100% allowance for doubtful debt was provided on the
      outstanding balance of the note.




F-21




(b)
            Notes
                receivable from Shen Zhen Raiser





On
      August
      30, 2004, Hartcourt sold 45% equity interest in Guangzhou NewHuaSun to ShenZhen
      Raiser Industrial and Development Co., Ltd. for US$3,403,150. The purchase
      price
      was to be paid in 21 quarterly interest bearing installments.





On
      March
      3, 2005, the Company entered into agreements with Guangdong New HuaSun and
      Shenzhen Raiser, pursuant to which the Company redeemed 13,769,156 shares of
      its
      common stock held by New HuaSun, valued at $1,376,916 by reference to the
      current market share price. New HuaSun redeemed a 45% equity interest, and
      the
      Company released Shenzhen Raizer of its obligation on a $3,403,150 promissory
      note payable.





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




There
      are
      numerous related parties transactions incurred in the years ended December
      2004.





a)
            During
                the year, Huaqing, a 51% owned subsidiary of the Company, sold $2,310,490
                monitors to its minority shareholder (Shanghai Huaqing Economic
                Development Co., Ltd) under normal commercial
                terms.


b)
            During
                the year, Huaqing, a 51% owned subsidiary of the Company, sold $3,275,076
                monitors to Guowei, a subsidiary pending for sale as of December
                31, 2004,pursuant
                to business transactions in the ordinary course.


c)
            During
                2004, Hartcourt issued 696,342 restricted shares of common stock
                to Mr.
                David Chen, Harcourt’s former CEO, pursuant to the exercise of his 2
                million stock options in cashless transactions that Hartcourt granted
                to
                him as a part of his 2002
                compensation.


d)
            During
                2004, Hartcourt issued 286,156 shares of our common stock valued
                at
                $151,250 to certain of its officers and all directors in lieu of
                cash
                compensation.


e)
            On
                December 25, 2003, Hartcourt and a group of Chinese citizens entered
                into
                a stock purchase agreement pursuant to which we agreed to sell to
                the
                group 4,605,816 shares of our common stock pursuant to an offshore
                transaction under Regulation S, at $0.40 per share, of which US$1,386,382
                was paid and of which US$455,945 was to be paid on June 30, 2004.
                The
                Chinese investors did not pay the last installment of $455,945 and,
                as a
                result, have agreed to return 1,139,863 shares of our common stock
                for
                cancellation by the Company to satisfy their outstanding obligation.
                All
                of the Chinese citizens are the minority shareholders or relatives
                of our
                subsidiaries, who are Guan Xue Fang, Li ZhengZheng, Xu HuiZhen, Zhang
                Hui,
                Liu Jianqiang and Qiu Jiaqi.








F-22


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





The
      balances of Company property and equipment as of December 31, 2004 are
      summarized as follows:




Building
              
              $
              236,612Office
                  equipment and computers
              
              
              38,491Furniture
                  and fixtures
              
              
              2,254Leasehold
                  improvements
              
              
              2,553Vehicle
              
              
              202,779482,689Less:
                  accumulated depreciation
              
              
              (118,840
              )Property
                  and equipment, net
              
              $
              363,849
  Depreciation
      expenses for the years ended December 31, 2004 and 2003 are $57,996 and $91,068
      respectively.





**NOTE
      13**  **INTANGIBLES
      - RESTATED**





Goodwill
      resulting from the acquisition amounted to as per follows, as of December 31,
      2004:


Goodwill
                  Arising from acquisition of Huaqing
              
              $
              1,911,466
  **NOTE
      14**   **DISCONTINUED
      OPERATIONS - RESTATED**





(1)
      Wenzhou Zhongnan Group





On
      July
      16, 2004, Hartcourt and the minority owners of Wenzhou Zhongnan Group reached
      agreements to rescind the original acquisition contract entered into on June
      28,
      2003 to purchase 51% equity ownership of the group for total consideration
      of
      $5,011,352. The acquisition was paid for entirely by the issuance of 8,415,370
      shares of the Company’s common stock. Zhongnan’s financial results were
      consolidated the Company begining October 2003. All of the shares that Hartcourt
      issued pursuant to this acquisition have been returned to the Company and
      cancelled. Hartcourt recorded a loss on disposal of Wenzhou Zhongnan of
      US$2,897,353, due to share price decline from the issuance date to the
      cancellation date.





(2)
      Guangzhou NewHuaSun Computer Co., Ltd.





On
      August
      30, 2004, Hartcourt sold our 45% equity interest in Guangzhou NewHuaSun to
      ShenZhen Raiser Industrial and Development Co., Ltd. for US$3,403,150. The
      purchase price will be paid to the Company in 21 quarterly interest bearing
      installments. Hartcourt acquired the equity interest in NewHuasun on April
      24,
      2003 for a total consideration of $3,029,214, paid for entirely by the issuance
      of 13,769,156 shares of common stock. In addition, Hartcourt obtained 10% equity
      voting rights through a
      voting
      proxy granted by one of NewHuaSun’s shareholder. Hartcourt recorded a gain on
      disposal of Guangzhou NewHuaSun of US$264,009.







F-23


On
      March
      3, 2005 Hartcourt entered into agreements with Guangdong New HuaSun and Shenzhen
      Raiser, pursuant to which Hartcourt redeemed 13,769,156 shares of its 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. The fair value of the 13,769,156 shares of common
      stock was $1,376,916 and the difference of US$2.1 million is recorded as the
      impairment on the pending sale in 2004.




(3) Hangzhou
      Huaqing Monitoring Technology Co., Ltd.





On
      September 16, 2004, Huaqing signed a definitive agreement to sell all of its
      equity interest in Hangzhou Huaqing to a PRC citizen for $760,870. Hartcourt
      recorded a profit on disposal of Hangzhou of US$20,670.





(4)  Hopeful
      Internet Technologies Limited.





On
      June
      30, 2004, Hartcourt, together with the minority shareholder of Hopeful Internet
      Technologies Limited (Hopeful), signed an agreement with First Information
      Technology for the sale of all of the equity interest in Hopeful for $464,472,
      which was paid by the issuance of 2,179 shares of common stock of First
      Information Technology at value of 0.01. As a result, Hartcourt own 10.5% equity
      interest in First Information. Hartcourt recorded a loss on sale of Hopeful
      of
      US$16,185.





(5)  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. The estimated
      Challenger disposal would amount to $1,172,764, including the provision on
      sale
      of asset. The difference of the Challenge carrying value on Hartcourt books
      and
      the disposal consideration is recorded as the impairment on the pending sale
      of
      Challenger assets in 2004, amounting to $3.2 million.





(6) 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. On April 11, 2005, Hartcourt and the minority
      shareholders of Guowei reached an agreement to sell the 50.5% of Hartcourt
      equity back to its original owners for a total consideration of $1,031,496
      in a
      combination of cash and stock transaction where Guowei paid a cash of $794,914
      and returned 2,951,800 shares of Hartcourt common stocks.





The
      difference of the Guowei carrying value on Hartcourt books and the disposal
      consideration amoutning $2.6 million has been recorded as the impairment of
      Guowei assets pending for sales at the end of 2004.








F-24





Information
      relating to the operations of the subsidiaries up to the periods of disposal
      during the year ended on December 31, 2004 is as follows:





Gain
      on
      discontinued operations




Wenzhou
                  Zhongnan
              
              NewHuaSun
              
              Challenge
              
              Guowei
              
              Hopeful
              
              Hangzhou
                  Huaqing
              
              TotalRevenue
              
              $
              3,843,879
              
              $
              17,825,567
              
              $
              70,505,715
              
              
              57,031,475
              
              $
              -
              
              $
              14,437,578
              
              $
              163,644,214Less:
                  Expenses
              
              
              (3,836,389
              )
              
              (17,699,799
              )
              
              (70,475,988
              )
              
              (56,893,234
              
              
              -
              
              
              (14,370,089
              )
              
              (163,275,499$
              7,490
              
              $
              125,768
              
              $
              29,727
              
              $
              138,241
              
              $
              -
              
              $
              67,489
              
              $
              368,715




Loss
      on
      disposal of discontinued operations


Wenzhou
                  Zhongnan
              
              NewHuaSun
              
              Hopeful
              
              Hangzhou
                  Huaqing
              
              TotalNet
                  book value
              
              $
              5,085,349
              
              $
              3,139,141
              
              $
              240,001
              
              $
              740,200
              
              $
              9,204,691Less:
                  disposal consideration
              
              
              (2,187,996
              )
              
              (3,403,150
              )
              
              (223,816
              )
              
              (760,870
              )
              
              (6,575,832
              )Loss/(gain)
                  on disposal of subsidiary
              
              $
              2,897,353
              
              $
              (264,009
              )
              $
              16,185
              
              $
              (20,670
              )
              $
              2,628,859




**NOTE
      15**  **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 the end of the year. As of December 31, 2004 the amount was not settled.




F-25





**NOTE
      1** **6**  **ACCRUED
      EXPENSES AND OTHER CURRENT LIABILITIES - RESTATED**





Accrued
      expenses and other current liabilities as of December 31, 2004 are summarized
      as
      follows:





Accrued
                officers and staffs compensation
            
            $
            84,532Accrued
                director's fee
            
            
            25,361Accrued
                taxes
            
            
            634,048Accrued
                legal settlement
            
            
            1,400,000Accrued
                professional fees
            
            
            155,000Payable
                to employees
            
            
            1,798,887Other
                current liabilities
            
            
            300,984Total
            
            $
            4,398,812





**NOTE
      17 DUE TO SHAREHOLDERS**





Due
                to Alan Phan, the founder
            
            $
            30,871Due
                to Enlight (a)
            
            
            150,000Due
                to Chateau D’orly (a)
            
            
            79,936Total
            
            $
            260,807





(a)
      The
      Company had signed stock purchase agreement with its shareholder Enlight
      Corporation Ltd (“Enlight”) and Chateau D’orly Ltd (“Chateau”), to raise
      additional working capital for its operations in year 2002 and 2003. There
      are
      $150,000 and $79,936 payables due to Enlight and Chateau respectively as of
      December 31, 2004. These amounts will be settled by the issuance of the
      Company’s common shares at a discount, based on the market price at the time of
      signing of the contract to these two shareholders.





**NOTE
      18 MINORITY INTEREST - RESTATED**





The
      amount represents the minority shareholders’ interest in Huaqing, a 51%
      subsidiary.




**NOTE
      19 COMMITMENTS AND CONTINGENCIES - RESTATED**





A)
      Employment Agreements




The
      current senior management consisting 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.




On
      December 1, 2003, the Company appointed Ms. Carrie Hartwick as its President
      & CFO to provide salary, shares option, and other fringe benefits through
      November 30, 2004. Minimum salary payments under the contract amounted to
      $100,000 per year. Payments to the CFO will be made in equal monthly
      installments of $5,000 cash and $5,000 worth of the Company’s common shares on
      the first day of each month. The average 20 days trading price of the Company
      prior to the first day of each month will be used to calculate this compensation
      amount. The option for the employment contract will only be granted upon
      satisfactory fulfillment of the contract by Ms C. Hartwick. From January 2004
      to
      May 2004, as president and CFO, , Ms. Hartwick received $25,000 cash and 45,080
      shares of common stock of Hartcourt (valued at US$25,000) for her compensation.




F-26





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. Ms Carrie Hartwick received $35,000 cash for her compensation and the
      remaining $52,500 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. On April
      11,
      2005, Richard 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.





B)
      Operating Leases





The
      Company leases its offices and facilities under long-term, non-cancelable lease
      agreements expiring at various dates through December, 2006.
      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 years ended December 31, 2004 and 2003 were $133,937
      and $611,161, respectively.





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





Year
                  Ending December 31
              
              Payments2005
              
              $
              115,6272006
              
              $
              38,647Total
                  future lease payments
              
              $
              154,274




(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.




F-27





On
      March
      11, 2005, the U.S. District Court for the Central District of California entered
      the Amended 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.




**Apollo
      Financial Network, LLC vs. The Hartcourt Companies, Inc.**





Apollo
      Financial Network filed an action for alleged breach of contract arising out
      of
      a consulting agreement with us which was canceled in January 1999. Hartcourt
      accepted an offer to compromise which included the entry of judgment in the
      amount of $11,500, which represents an amount less than the projected costs
      of
      defense. Judgment in such amount was entered against the Company on November
      20,
      2002. Hartcourt have not yet made the payment to the plaintiff and the liability
      with respect to the judgment has been accrued on the balance sheet.





**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. The court date is set for April 14, 2005 and the Company is
      considering the options available to it. The Company has fully accrued the
      amount in the accompanying financial statements. 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.





**NOTE
      20**  **SHAREHOLDERS’
      EQUITY**





(A)  Capitalization




The
      total
      number of shares of stock which the Company has the authority to issue is
      260,001,000 consisting of 250,000,000 shares of common stock, $0.01 par value,
      1,000 shares of original preferred stock, $0.01 par value (the Original
      Preferred Stock), and preferred series A, B, C, D, and AB stock are 4,000,
      2,000, 1,500, 10,000 and 25,000 respectively. The total number of shares of
      the
      Company’s common stock issued and outstanding as of December 31, 2004 and
      December 31, 2003 are 171,658,758 and 171,157,104 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.




F-28





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 December
      31, 2004.





(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.





(D) Series
      A
      9% Convertible Preferred Stock





Non-voting
      convertible preferred stock, 4,000 shares authorized with a stated value of
      $1,000 per share. Holders of shares shall be entitled to receive cumulative
      dividends at a rate equal to 9% per annum. Series A convertible preferred stock
      is subject to redemption at any time, at the option of the Company, at a
      redemption price equal to $1,000 per share plus accrued and unpaid dividends
      to
      the date of redemption. No Series convertible preferred stocks were issued
      and
      outstanding as of December 31, 2004.





(E)  Series
      B
      9% Convertible Preferred Stock





Non-voting
      convertible preferred stock, 2,000 shares authorized with a stated value of
      $1,000 per share. Holder of shares shall be entitled to receive cumulative
      dividends at a rate equal to 9% per annum. Series B convertible preferred stock
      is subject to redemption at any time, at the option of the Company, at a
      redemption price equal to $1,000 per share, plus accrued and unpaid dividends
      to
      the date of redemption. No Series B convertible preferred stocks were issued
      and
      outstanding, as of December 31, 2004.





(F)  Series
      C
      Redeemable Preferred Stock





Non-voting,
      non-participating redeemable preferred stock, 1,500 authorized, with a par
      value
      of $1,000 per share. Series C preferred stock is junior to the original
      preferred stock and any other class or series of capital stock of the Company
      which are specifically ranked senior (senior securities). Series C preferred
      stock is redeemable at any time, at the discretion of the Company, at a
      redemption price of $1,000 per share. No Series C redeemable preferred stocks
      were issued and outstanding, as of December 31, 2004.




F-29





(G)  Series
      D
      Convertible Preferred Stock





Voting
      convertible preferred stock, 10,000 shares authorized with a stated value of
      $1,000 per share. Holders of Series D Convertible Preferred Stock shall be
      entitled to receive, when declared by the Board of Directors, dividends at
      par
      with holders of the Company’s common stock, as if the Series D Convertible
      Preferred Stock had been converted into common stock on the record date for
      the
      payment of dividend. Each outstanding share of Series D Convertible Preferred
      Stock shall be convertible, at the option of its bolder, at any time, into
      a
      number of shares of common stock of the Company at a conversion rate equal
      to
      $1,000 divided by the market price of the Company’s common stock. No Series D
      convertible preferred stocks were issued and outstanding, as of December 31,
      2004.





(H)  Series
      AB
      Convertible Preferred Stock





Non-voting
      convertible preferred stock, 25,000 shares authorized with a stated value of
      $100 per shared. Series AB convertible preferred stock is subject to redemption
      at any time, at the option of the Company, at a redemption price equal to $1,000
      per share plus accrued interest and unpaid dividends to the date of redemption.
      Holders of Series AB convertible preferred stock may convert their preferred
      shares into common stock. During 1998, the Company issued 4,050 shares of Series
      AB convertible preferred stock in payment of dividends for Series A and B
      convertible preferred stock. In March 1999, certain shares of AB preferred
      stock
      were returned and canceled.





(I)  Common
      Stock Issued for Cash





During
      2004, the Company did not issue any shares of common stock for
      cash.





(J)  Common
      Stock Issued for Services





During
      2004, Hartcourt issued 155,000 shares of common stock valued at $46,500 for
      consulting services rendered in prior years and 94,640 shares of common stock
      valued at $45,215 to consultants for consulting services.





During
      2004, Hartcourt issued 286,156 shares of our common stock valued at $151,250
      to
      certain of our officers and all directors in lieu of cash
      compensation.





(K)  Common
      Stock Issued for Warrants





During
      the year of 2004 and 2003, no common stock was issued for warrants.




F-30





(L)  Common
      Stock Issued for Stock Options





During
      2004, David Y. Chen, exercised his 1 million stock options through cashless
      exercise and converted into 841,270 common stocks.





During
      2003, David Y. Chen, exercised his 1 million stock options and the Board of
      Directors agreed to extend one more year of his remaining 1 million stock
      options granted in June 2002, which was expired on May 31, 2003. In 2004, David
      Y Chen returned 144,928 common shares for shares over issued to him under his
      cashless execution of the 1 million option.





(M)  Common
      stocks issued for investment and acquisition





During
      2004, the Company issued 6,824,748 shares of common stock in connection with
      the
      acquisition of Challenge.





(N)  Cancellation
      of shares





During
      2004, the Company cancelled 8,415,370 shares of common stock valued in
      connection with the rescission of acquisition agreement with Wenzhou Zhongnan
      Group.





On
      December 30, 2003, Hartcourt issued 4,605,816 shares of common stock to certain
      Chinese investors for the aggregate purchase price of US$1,842,326, of which
      US$1,386,382 was paid and of which US$455,945 was to be paid on June 30, 2004.
      The Chinese investors did not pay the last installment of $455,945 and, as
      a
      result, have returned 1,139,863 shares of common stock for cancellation by
      the
      Company to satisfy their outstanding obligation.


F-31







**NOTE
      2** **1**  **INCOME
      TAXES - RESTATED**





In
      the
      year ended December 31, 2004, the Company incurred net operating losses for
      tax
      purposes of approximately $6,922,000. 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 December 31, 2004 was $4,635,000. A 100%
      valuation allowance has been established against the deferred tax assets, as
      the
      utilization of the loss carry forward cannot reasonably be assured.





The
      components of the net deferred tax asset are summarized below:




Deferred
                  tax asset
              
              December
                  31,
                2004Net
                  operating losses
              
              
              4,635,000Less:
                  valuation allowance
              
              
              (4,635,000
              )$
              -
 
 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
              
              
              40Tax
                  expense at actual rate
              
              $
              -
 
 Income
        tax expense consisted of the following for the year ended December 31,
        2004:
 
 Current
                  tax expense:Federal
              
              $
              -State
              
              
              800Total
                  Current
              
              
              800Deferred
                  tax credit:Federal
              
              
              605,000State
              
              
              173,000Total
                  deferred
              
              
              778,000Less:
                  valuation allowance
              
              
              (778,000
              )Net
                  Deferred tax credit
              
              
              -Tax
                  expense
              
              $
              800





F-32




**NOTE
      2** **2**  **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
      following table summarizes the activity of stock options:




WeightedAverageNumber
                  of
              
              ExerciseShares
              
              PriceShares
                  under option at December 31, 2002
              
              
              5,320,000
              
              $
              0.33Granted
              
              
              8,000,000
              
              $
              0.29Exercised
              
              
              1,000,000
              
              
              0Expired
              
              
              20,000
              
              
              0Canceled
              
              
              1,000,000
              
              
              0Shares
                  under option at December 31, 2003
              
              
              11,300,000
              
              $
              0.34Granted
              
              
              3,000,000
              
              $
              0.3Exercised
              
              
              1,000,000
              
              $
              0.10Expired
              
              
              3,000,000
              
              $
              0.38Cancelled
              
              
              3,000,000
              
              $
              0.48Shares
                  under option at December 31, 2004
              
              
              7,300,000
              
              $
              0.28




F-33


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
      compensation cost for stock-based compensation been determined based on the
      fair
      value at the grant dates in accordance with the method delineated in Revised
      Statement of Accounting Standards No. 123, the Company’s net loss and loss per
      share for the year ended December 31, 2004 would increase US$294,078 or US$
      0.0017 per share.





During
      2004, the Company issued to David Chen, its former Chief Executive Officer,
      696,342 shares of Hartcourt common stock through the cashless exercise of
      options granted to Mr. Chen.





Additional
      information relating to stock options outstanding and exercisable at December
      31, 2004 summarized by exercise price is as follows:





Options
                outstanding
            
            Option
                ExercisableWeightedNumber
                of
            
            Average
            
            Weighted
            
            Number
            
            WeightedRange
                of
            
            Outstanding
                at
            
            Remaining
            
            Average
            
            Exercisable
                at
            
            AverageExercise
            
            December
                31,
            
            Contractual
            
            Exercise
            
            December
                31,
            
            ExercisePrice
            
            2004
            
            Life
            
            Price
            
            2004
            
            Price$0.06
                - $0.65
            
            7,300,000
            
            0.9
                - 3.5 Year
            
            $0.28
            
            7,300,000
            
            $0.28





In
      connection with Mr. Chen’s severance package, on June 3, 2004, Hartcourt granted
      to Mr. Chen options to purchase 3,000,000 shares of Hartcourt common stock
      at a
      price of $0.30 per share. The options expired on June 3, 2006. The options
      were
      issued at the fair market value on the date of issuance as required by SFAS
      #123.





(B)
      Warrants





As
      of
      December 31, 2004, there were 33,010,239 outstanding warrants to purchase
      33,010,239 shares of common stock at $0.001 par value, ranging from $0.058
      -
      $0.69 per share.





In
      connection with facilitating equity line and credit for Hartcourt, on January
      26, 2000, Hartcourt issued to Dunwoode Brokerage Services warrants to purchase
      13,530 shares at $15.52 per share that expire on January 25, 2004. The warrants
      were issued at the fair market value on the date of issuance and no expenses
      were recorded.





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.




F-34





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 current trading price
      on
      the issuance date. expired 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 while the validity of the warrants were
      extended to October 22, 2009.




**NOTE
      23 SEGMENT AND BUSINESS RELATED INFORMATION**





The
      Company has only one reportable segment (computer hardware trading) in the
      year
      2004 and 2003, as other segment of business are not material to the consolidated
      financial statements of the Company.





**NOTE
      24 SUBSEQUENT EVENTS - RESTATED**





Investment
      and acquisition:





n
            On
                February 25, 2005, we completed all legal procedures to acquire 90%
                of the
                capital stock of Control Tech. Due to the recent decline of our share
                price, the purchase price was revised as $1.96 million payable in
                19,588,875 shares of our common
                stock.





Disposal:





n
            On
                September 16, 2004, Huaqing, a 51% Hartcourt owned subsidiary signed
                a
                definitive agreement to sell all of its 55% equity interest in Hangzhou
                Huaqing to a PRC citizen for
                $760,870.





n
            In
                December 2004, our board of directors authorized the sale of the
                entire
                51% equity interest in Beijing Challenger Group ("Challenger") due
                to
                adverse market conditions and the declining Hartcourt share price.
                On
                December 9, 2003, we signed a definitive agreement with the shareholders
                of Challenger to purchase 51% of Challenger for RMB 31.3 million
                ($3.8
                million) payable in 6,824,748 restricted shares of our common stock,
                plus
                a cash investment of RMB 5 million ($610,000). 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.





n
            On
                March 15, 2005, we reached an agreement with the minority shareholders
                of
                GuoWei to sell the 50.5% of Hartcourt equity back to its original
                owners
                for a total consideration of $1,036,816 in a combination of cash
                and stock
                transaction where GuoWei paid cash consideration of $795,352 and
                returned
                2,951,800 shares of Hartcourt common
                stock.





n
            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.




F-35





Raise
      funds:





n
            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 $0.05 per share for total gross proceeds of $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 $0.035 per share for
                total
                gross proceeds of $600,000.





Law
      Suit:





(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.





**NOTE
      25 RECLASSIFICATIONS**





Certain
      prior period amounts have been reclassified to conform to the year ended
      December 31, 2004 presentation.




F-36





**NOTE
      26 RESTATEMENT**





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





During
      the year ended December 31, 2003, the Company acquired four (4) Chinese
      companies located and operated in China. The Company has restated its financial
      statements based on the fair value of the (4) companies at the acquisition
      date.
      Thus, the adjusted carrying amount of the restated items affected the 2004
      issued financial statements. As a result, the Company restated the financial
      statements for the year ended December 31, 2004.





The
      effect of the restatement is as follows:





**BALANCE
      SHEET**   ****


**As
      of December 31, 2004**





AS
                  PREVIOUSLY
                REPORTED
              
              AS
                RESTATEDNONCURRENT
                  ASSETS
              
              $
              2,584,362
              
              $
              2,335,727TOTAL
                  ASSETS
              
              $
              19,980,843
              
              $
              19,732,208TOTAL
                  CURRENT LIABILITIES
              
              $
              12,865,083
              
              $
              14,866,639MINORITY
                  INTEREST
              
              $
              1,171,779
              
              $
              193,722TOTAL
                  SHAREHOLDERS’ EQUITY
              
              $
              5,943,981
              
              $
              4,671,847TOTAL
                  LIABILITIES AND SHAREHOLDERS’EQUITY
              
              $
              19,980,843
              
              $
              19,732,208INCOME
                  STATEMENT:For
                  the year ended December 31, 2004:Net
                  loss
              
              $
              (15,452,296
              )
              $
              (13,373,212
              )Comprehensive
                  loss
              
              $
              (15,452,296
              )
              $
              (13,372,607
              )Basic
                  and diluted net loss per share
              
              $
              (0.09
              )
              $
              (0.08
              )CASHFLOW
                  STATEMENT:For
                  the year ended December 31, 2004:Net
                  loss
              
              $
              (15,452,296
              )
              $
              (13,373,212
              )Adjustments
                  to reconcile net loss tonet
                  cash used in operating activities
              
              $
              14,767,085
              
              $
              13,713,814Changes
                  in working capital
              
              $
              (6,434,736
              )
              $
              (7,460,549
              )
 
  F-37