<PAGE>

                          THE HARTCOURT COMPANIES, INC.
             (Exact name of registrant as specified in its charter)

                                      UTAH
                            (State of incorporation)

                                   87-0400541
                      (I.R.S. Employer Identification No.)

     Room 306, Yong Teng Plaza, 1065, Wu Zhong Road, Shanghai, China 201103
                                0086 21 51521577
               (Address, including zip code, and telephone number,
             including area code, of registrant's executive offices)

           Securities registered pursuant to Section 12(b) of the Act:

                               Title of each class
                                      None

                    Name of each exchange on which registered
                                      None

           Securities registered pursuant to Section 12(g) of the Act:
                          Common Stock $.001 par value
                                (Title of class)

         Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 [ ]

         Check if disclosure of delinquent filers in response to item 405 of
Regulation S-B is not contained in this form, and no disclosure will 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. [ ]

         Issuer's revenues for most recent fiscal year: $ 131,699,218

         State the aggregate market value of 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 a specified date within the past 60
days: As of March 2, 2004, $90,713,265.

         State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: As of Feb 2, 2004, there
were 171,157,104 shares of common stock outstanding.

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

<PAGE>

                            Hartcourt Companies, Inc

                     Restatement of Financial Statements and
            Amended Form 10-KSB for the year ended December 31, 2003

      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 the financial statements for the year ended December 31, 2003,
after the above-mentioned restatements, and express their opinion "the financial
statements referred to the 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-file Form 10-KSB for the year ended December 31, 2003
with United States Securities and Exchange Commission to reflect the changes.

      The changes, however, may cause adjustments to the financial statements
for the year ended December 31, 2004 and May 31, 2005. We will include these
adjustments in our Form 10-KSB for the year ended May 31, 2006.


                                          /s/ Yungeng Hu
                                          Chief Financial Officer


<PAGE>


TABLE OF CONTENTS

PART I
  Item 1.   Description of Business                                           4
  Item 2.   Description of Properties                                         23
  Item 3.   Legal Proceedings                                                 23
  Item 4.   Submission of Matters to a Vote of Security Holders               23

PART II
  Item 5.   Market for Common Equity and Related Stockholders Matters         23
  Item 6.   Management's Discussion and Analysis or Plan of Operation         25
  Item 7.   Financial Statements                                              30
  Item 8.   Changes in and Disagreement with Accountants on Accounting
            and Financial Disclosures                                         30

PART III
  Item 9.   Directors, Executive Officers, Promoters and Control Persons
            Compliance With Section 16(a) of the Exchange Act                 31
  Item 10.  Executive Compensation                                            34
  Item 11.  Security Ownership of Certain Beneficial Owners and Management
            and Related Stockholder Matters                                   37
  Item 12.  Certain Relationships and Related Transactions                    40
  Item 13.  Exhibits and Reports on Form 8-K                                  41
  Item 14.  Principal Accountant Fees and Services                            45


Some of the statements contained in this Form 10-KSB are forward looking
statements, including but not limited to those specifically identified as such,
that involve risks and uncertainties. The statements contained in this Form
10-KSB that are not purely historical are forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act, including, without limitation, statements regarding our expectations,
beliefs, intentions or strategies regarding the future. All forward-looking
statements included in this Form 10-KSB are based on information available to us
on the date hereof, and we assume no obligation to update any such
forward-looking statements. These statements involve known and unknown risks,
uncertainties and other factors, which may cause our actual results to differ
materially from those implied by the forward-looking statements. In some cases,
you can identify forward-looking statements by terminology such as "may,"
"will," "should," "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential," or "continue," or the negative of these terms or other
comparable terminology. Although we believe that the expectations reflected in
the forward-looking statements are reasonable, we cannot guarantee future
results, levels of activity, performance or achievements. Important factors that
may cause actual results to differ from expectations include those discussed in
"Risk Factors".


                                       2

<PAGE>


                                     PART I

ITEM 1 DESCRIPTION OF BUSINESS

The Hartcourt Companies, Inc. ("Hartcourt" or the "company"), incorporated in
Utah in 1983, is a growth oriented company in the China's IT distribution and
retail sectors. Through the strategic acquisition of a controlling interest in
profitable companies with leadership positions in regional markets, Hartcourt
intends to integrate and consolidate businesses to reach economy of scale and
operating efficiency.

The company's China distribution network spans from the fast economic growth
regions of East to the South. It has 33 retail stores in the cities of Shanghai,
Beijing, HangZhou and Wenzhou, primarily engaged in the sales of white box
desktops, PC components, monitors, accessories, peripherals and branded
notebooks. It has three regional sales offices and distribution centers to
service commercial customers. The company's commercial customers are mainly
value-added resellers (VARs), systems integrators (SIs), retail outlets and
enterprise end users. The company provides warranty and repair services to
further enhance customer experience and increase our overall competitiveness in
the market place.

Hartcourt as a whole sells a broad range of white box desktops, branded monitors
and notebooks, PC components and peripherals. About 69% of the consolidated
sales in 2003 are from Samsung monitors, 18% of sales are from PC component and
peripherals and 9% from white box desktops. The higher concentration of Samsung
sales is due to the timing of acquisition of different businesses in the year.
On an annualized basis, Samsung products account for 63% of the company's
consolidated sales. This percentage was further reduced in 2004 as Hartcourt
acquired different lines of businesses. The details can be found in the
"Subsequent Events" section of this 10-KSB.

Most international and domestic manufacturers of computer components and
computer products in China rely on distributors, such as Hartcourt, to augment
their sales and marketing operations. As a stocking, marketing, and financial
intermediary, the distributor relieves manufacturers of a portion of the costs
and personnel associated with stocking and selling their products (including
otherwise sizable investments in finished goods inventories, accounts
receivables, and distribution networks), while providing geographically
dispersed selling, order processing, and delivery capabilities. At the same
time, the distributor offers to a broad range of customers the convenience of
accessing from a single source with multiple products from multiple suppliers
and rapid or scheduled deliveries, as well as other value-added services such as
after sales service, repair, consulting and software programming. The growth of
the IT distribution industry in China has been fostered by many manufacturers
who recognize that distributors are essential extensions of their marketing
organizations.

The company and its affiliates serve over hundreds of thousands of consumers in
a given year and about 500 commercial customers on an annual basis. No single
customer accounted for more than two percent of the company's 2003 sales.

                                       3

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Most of the company's customers require delivery of the products they have
ordered on schedules that are generally not available on direct purchases from
manufacturers, and frequently their orders are of insufficient size to be placed
directly with manufacturers.

The PC and related products are sold in retail stores, by sales representatives
who regularly call on customers in assigned market areas, and by telephone from
the company's selling locations with access to pricing and stocking data
provided by computers. Each of the company's selling locations, warehouses, and
primary distribution centers are electronically linked to the company's central
computer system, which provides online data with respect to inventory levels and
facilitates control of purchasing and shipping.

The company sources from over 300 vendors for over 4,000 different types of PC
related components and products. With the exception of Samsung, the company does
not regard any one supplier to be essential to its operations and believes that
many of the products presently sold by the vendors are available from other
sources at competitive prices. Most of the company's purchases are pursuant to
distributor agreements which are typically cancelable by either party at any
time or on short notice.

Approximately 45 percent of the company's inventory consists of Samsung
monitors. It is the policy of the manufacturer to protect its distributors, such
as the company, against the potential write-down of such inventories due to
technological change or manufacturers' price reductions. Under the terms of the
related distributor agreements, and assuming the distributor complies with
certain conditions, the supplier is required to credit the distributor for
inventory losses incurred through reductions in manufacturers' list prices of
the items. The company maintains less than a month's worth of Samsung inventory
and does not believe it has any risk of inventory loss if the manufacturer
elects to terminate the distributor agreement.

The company's business is extremely competitive, particularly with respect to
prices, quantity, and in certain instances, product availability. The company
competes with numerous regional and local distributors. As one of the leading
regional IT product distributors, the company's financial resources and sales
are greater than most of its competitors in the markets it serves.

The company currently does not have any patents, trademarks, licenses,
franchises, concessions, royalty agreements or labor contracts.

The company's principal products and services do not need government's approval,
nor is there any existing or probable government regulation over this type of
the business.

The company did not carry on any research and development activities in the past
two years.

The company's business activities do not fall into any environmentally regulated
areas.

The company and its affiliates employ over 460 personnel in China as of December
31, 2003.

                                       4

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CORPORATE STRUCTURE

PRC regulations currently limit foreign ownership of companies that provide
distribution and retail services (see explanation of the regulations below),
which includes IT distribution and retail, to less than full equity investment.
In addition, the PRC regulations limit the size of the foreign direct investment
in the distribution and retail sector in general, subject to further approval,
if such investment in China exceeds US$364 million, or its total sales exceeds
US$ 181 million, or its market shares reaches 20% of the local market, or the
total invested enterprises exceeds 15 companies. We are a US registered company
and we conduct our operations solely in China through our directly wholly owned
subsidiaries and indirectly majority owned subsidiary. In order to comply with
foreign ownership restrictions, we operate our businesses in China through
various subsidiaries, which are majority owned by Richard Yan, our financial
controller, and Zhengzheng Li, our president for Huaqing, both of whom are PRC
citizens (our nominees). We have entered into a series of contractual
arrangements with all of our subsidiaries, its shareholders and our nominees. As
a result of these contractual arrangements, we are considered the majority
beneficiary of all of our subsidiaries and accordingly we consolidate all of our
subsidiaries' results of operations in our financial statements.

In addition, we have entered into agreements with each of our subsidiaries, its
shareholders and our nominees that provide us with the substantial ability to
control all of our subsidiaries. Pursuant to these contractual arrangements:

-        our nominees have granted an irrevocable proxy and power of attorney to
         individuals designated by us to exercise the right to appoint majority
         number of directors in any of our subsidiaries;

-        the shareholders of all of our subsidiaries may not enter into any
         transaction that may materially affect its assets, liabilities, equity
         or operations without our prior written consent;

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

-        we may purchase or transfer the entire equity interest in, or all the
         assets of, all of our subsidiaries held by our nominees on our behalf
         for a purchase price of the lower of RMB1 or the lowest price permitted
         under PRC law when and if such purchase is permitted by PRC law or our
         nominees cease to be directors or employees of any of our subsidiaries;

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

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

                                       5

<PAGE>

Our contractual arrangements with each of our subsidiaries, its shareholders,
and our nominees may only be amended with the approval of our audit committee or
another independent body of our board of directors.

In the opinion of Zhonglun Law Firm (Shanghai), our PRC legal counsel,
(1) the ownership structures of our subsidiaries, are in compliance with
existing PRC laws and regulations, (2) our contractual arrangements with each of
our subsidiaries, our nominees and its shareholders are valid and binding, and
will not result in any violation of PRC laws or regulations currently in effect;
and (3) the business operations of our subsidiaries, are in compliance with
existing PRC laws and regulations in all material aspects.
(4) the enforcement of foreign judgments made by the courts outside PRC has no
direct and automatic operation in the PRC, but these judgments may be recognized
and enforced by a PRC court in accordance with the bilateral or international
treaty to which PRC is a party, or subject to the principles of reciprocity
finding the judgment non conflict with the fundamental principles, sovereignty,
security and public interests of PRC after review of the judgment.

There are, however, substantial uncertainties regarding the interpretation and
application of current or future PRC laws and regulations. Accordingly, we
cannot assure you that the PRC regulatory authorities will not ultimately take a
view that is contrary to the opinion of our PRC legal counsel. If the PRC
government finds that the agreements that establish the structure for operating
our China business do not comply with PRC government restrictions on foreign
investment in our industry, we could be compelled to restructure the transaction
or dispose a particular subsidiary.

"Guidance Catalog for Foreign Investment" issued jointly by 3 ministries under
the PRC State Council: PRC State Planning Commission, PRC State Economic and
Trade Commission, PRC Ministry of Foreign Trade and Economic Co-operation, on
March 11, 2002 , in accordance with the government commitment made under
jointing WTO stated that:

(1)      Commissioned agent and wholesale in our sector: Foreign investment will
         be allowed not later than December 11, 2002 and foreign investors may
         hold equity up to 50%. Foreign investors will be allowed to hold
         majority equity not later than December 11, 2003 and to hold full
         equity not later than December 11, 2004.

(2)      Retails in our sector: foreign investors will be allowed to hold equity
         up to 50% not later than December 11, 2002 and full equity not later
         than December 11, 2004.

(3)      Franchising, wholesale and retail without fixed location: foreign
         investment will be allowed not later than December 11, 2004.

ACQUISITIONS

HuaQing Corporation Development Co., Ltd. ("HuaQing"): HuaQing, founded in 1992
in Shanghai, China, specializes in sales and distribution of Samsung monitors
and white box desktops. HuaQing is an authorized distributor of Samsung monitors
in the city of Shanghai and the neighboring province of Zhejiang. In addition to
the wholesale business of Samsung monitors, HuaQing owns and operates 8 retail
stores in Shanghai, selling customized white box desktops, computer components,
accessories and peripherals.

                                       6

<PAGE>

In November of 2002, Hartcourt obtained a 10% irreversible equity voting rights
through proxy statements from two of HuaQing's shareholders, Mr. Li Zhengzheng
and Mr. Zhang Hui. This 10% voting rights proxy covers a period of three years,
from February 1, 2003 to March 31, 2006.

On February 14, 2003, Hartcourt and HuaQing shareholders signed a definitive
agreement ("The Agreement") for the purchase of a 45% equity interest of
HuaQing, for a total consideration of $989,549, of which the purchase price was
solely paid for by the issuance of 15,960,474 shares of Hartcourt common stock,
restricted under the Rule 144 of the US securities laws, at the value of $0.062
per share.

Under Chinese regulations at the time of signing the acquisition agreements,
foreign entities could not directly invest in local Chinese owned sales and
distribution companies. Based on qualified legal advice of PRC attorneys,
Hartcourt nominated Mr. Richard Yan, Financial Controller of Hartcourt, a
Chinese citizen, and Mr. Li ZhengZheng, President and a shareholder of HuaQing,
to hold the equity interest of Huaqing on behalf of Hartcourt, at 30% and 15%
respectively. The two nominees pledged all of their shares, as well as voting
rights, to Hartcourt, enabling Hartcourt to appoint a controlling slate of Board
of Directors of HuaQing. The nomination can be terminated by Hartcourt at its
sole discretion. Hartcourt holds the irrevocable right to take back ownership of
the shares upon request.

On March 6, 2003, HuaQing's shareholders approved The Agreement and accepted the
two nominees of Hartcourt to be the new shareholders of HuaQing. The
shareholders' meeting updated the Article of Association and elected new Board
of Directors to satisfy The Agreement. With 45% equity ownership and 10% proxy
voting rights, Hartcourt management believed that it had effective control of
HuaQing's operations and treated HuaQing as its controlling subsidiary.
HuaQing's financial statements were consolidated under Hartcourt starting in
March, 2003.

On June 30, 2003, Hartcourt signed a Sale and Purchase Agreement to purchase an
additional 6% equity interest of HuqQing for a total consideration of $804,273,
of which the purchase price was solely paid for by the issuance of 1,340,455
shares of Hartcourt common stock, restricted under Rule 144 of US securities
law, at a value of $0.60 per share. HuaQing's financial statement was
consolidated on a 51% basis under the operations of Hartcourt starting from July
1, 2003.

Guangdong NewHuaSun Computer Co, Ltd. ("NewHuaSun"): NewHuaSun was founded in
1998, headquartered in Guangzhou, China. It is an authorized distributor of
Samsung monitors engaged in the sale and distribution of Samsung monitors in the
Guangdong province.

In the December, 2002 NewHuaSun shareholder meeting, Hartcourt obtained a 10%
equity voting rights through proxy statements from one of NewHuaSun's
shareholders, Mr. Kan XiaoMin. Hartcourt also obtained the voting rights from
one of the Board of Directors of NewHuaSun, Mr. Xiao YongLi. The 10% proxy
voting rights cover a period of three years, from March 1, 2003 to April 30,
2006.

                                       7

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On April 24, 2003, Hartcourt and NewHuaSun shareholders signed a definitive
agreement ("The Agreement") for the purchase of a 45% equity interest of
NewHuaSun, for a total consideration of $3,029,214, of which the purchase price
was solely paid for by the issuance of 13,769,156 shares of Hartcourt common
stock, restricted under Rule 144 of US securities laws, at a value of $0.22 per
share. Due to the Chinese government's restrictions over the direct foreign
investment in the Chinese owned sales and distribution companies at the time of
signing the agreement, Hartcourt applied the same legal structure used in the
HuaQing's acquisition for the purchase of NewHuaSun equity.

On April 24, 2003, the NewHuaSun shareholders approved the Share Transferring
Agreement and accepted the two nominees of Hartcourt to be the new shareholders
of NewHuaSun. The shareholders approved the updates to the Article of
Association and elected new directors to satisfy The Agreement.

Hartcourt management believes that the 45% NewHuaSun equity interest and the 10%
proxy right amount to effective management control of NewHuaSun operations. As
such, NewHuaSun was considered as a subsidiary of Hartcourt and its financial
statements were consolidated under Hartcourt starting May, 2003.

Shanghai GuoWei Science and Technology Ltd. ("GuoWei"): Shanghai GuoWei, founded
in April of 1997, is an operator of large PC retail chain stores throughout the
city of Shanghai. The primary products sold through its retail outlets are
customized white box PCs, PC components, accessories and peripherals. In
addition to retail sales, Guowei distributes PC components to other smaller
retailers operating in PC malls throughout Shanghai and wholesalers in the
neighboring provinces.

In January of 2003, Hartcourt obtained 10% equity voting rights through proxy
statements from one of GuoWei's shareholders, Mr. Zhou Jian. The 10% voting
rights cover a period of three years from April 1, 2003 to June 30, 2006.

On April 30, 2003, Hartcourt and GuoWei shareholders signed a definitive
agreement ("The Agreement") for the purchase of 45% equity interest of GuoWei,
for a total consideration of $3,367,774, of which the purchase price was solely
paid for by the issuance of 10,863,792 shares of Hartcourt common stock,
restricted under Rule 144 of the US securities laws, at a value of $0.31 per
share. Due to the Chinese government's restrictions over direct foreign
investments in Chinese owned sales and distribution companies at the time of
signing of The Agreement, Hartcourt adopted the same legal structure as used in
the HuaQing and NewHuaSun acquisition.

On April 30, 2003, the shareholders of GuoWei approved The Agreement and
accepted the two nominees from Hartcourt to be the new shareholders of GuoWei.
The shareholder meeting updated the Article of Association and elected new
directors to satisfy The Agreement.

Hartcourt management believes that the ownership of 45% GuoWei equity plus the
10% proxy voting right amount to an effective management control of GuoWei's
operations. As such, Hartcourt treated GuoWei as its controlling subsidiary and
consolidated its financial statements from May of 2003.

                                       8

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On February 11, 2004, Hartcourt signed a purchase agreement to purchase an
additional 5.5 percent of outstanding shares of GuoWei for a total consideration
of $363,636, paid in cash. Together with the 45 percent equity interests
purchased on April 30, 2003, Hartcourt owns a 50.5 percent of equity interests
of GuoWei as of February 11, 2004.

WenZhou ZhongNan Group. ("ZhongNan"): This is a group of companies incorporated
in Wenzhou, China. Founded in 1996, ZhongNan owns and operates 11 stores in the
Wenzhou area and provides IT consulting services to local governments and
commercial enterprises. It also develops and sells customized software program
used by local retail pharmaceutical outlets.

On June 28, 2003, Hartcourt signed a definitive agreement to purchase 51% of
equity interest of ZhongNan, for a total consideration of $5,011,352. The
purchase price was solely paid for by the issuance of 8,415,370 shares of
Hartcourt common stock, restricted under Rule 144 of US securities laws, at a
value of $0.5955 per share. ZhongNan's financial statements were consolidated
under the operation of Hartcourt starting October, 2003.

Shanghai Peng Yang Computer Co., Ltd. ("PengYang"): Pengyang owns and operates
12 retail stores in Shanghai, selling branded notebooks. On November 21, 2003,
Hartcourt and Huaqing jointly signed an agreement to purchase all of the
interests of Pengyang. The purchase price is RMB 14.85 Million (US$1.8Mil)
payable in 1,530,000 restricted shares of Hartcourt common stock, calculated at
$0.60 per share and a small percentage of interest in Huaqing. Due to various
outstanding legal and financial performance issues, the company has not
completed the acquisition of Pengyang. The company did not include any of the
Pengyang's operating results into its 2003 financial statements.

Beijing Challenger Group. ("Challenger"): Challenger is a group of companies
incorporated in China, mainly engaged in the distribution of IBM products in the
Northern China. On December 16, 2003, Hartcourt signed a definitive agreement
with the shareholders of Challenger to purchase 51 percent of Challenger,
comprised of four wholly owned subsidiaries located in Beijing and one located
in Shanghai. The purchase price for 51 percent of Challenger is RMB 31.3 Million
(US$3.8 Million) payable in 6,324,748 restricted shares of Hartcourt common
stock, calculated at US$0.60 a share, plus a cash investment of RMB 5 Million
(US$610,000). Hartcourt did not consolidate any of Challenger's financial
results in its 2003 operating results since many of the legal transactions were
not fully executed.

In addition, under the definitive agreement, we have the right to increase our
equity interest in Challenger proportionally to the purchase price, should the
financial performance fail to meet the preset revenue and profit targets agreed
by all parties within the first 12 months from the date of the signing of
definitive agreement. Subsequently, the shareholders of Challenger have the
right to receive additional consideration in our common stock should the
financial performance of Challenger exceed the preset revenue and profit targets
agreed by all parties within the first 12 months from the date of the signing of
the definitive agreement.

                                       9

<PAGE>

The management believes that Hartcourt's current ownership structure of these
Chinese incorporated entities complies with all existing PRC laws, rules and
regulations, according to the legal opinion provided by our PRC attorneys.

SUBSEQUENT EVENTS

INVESTMENT AND ACQUISITION:

o        The Company acquired additional 5.1% interest of Newhuasun via
         memorandum of understanding, instead of sales and purchases agreement.

o        In February 2004, the Company acquired 5.5% interest of Guowei via a
         sales agreement. In same month, the Company entered into a conditional
         sales and purchase agreement to obtained 51% interest of Shanghai
         Computer ServiceNet Co. ("ServiceNet"), Ltd to strengthen the Company's
         future growth. The purchase price for 51% interest of ServiceNet is
         US$2.5millions payable in 3,576,751 restricted common shares of
         Hartcourt, at US$0.61 per share, and an investment of US$364,000 into
         ServiceNet.

o        During the year ended 2003, the Company entered into a conditional
         agreement for acquiring 51% ownership interest of Beijing Challenger
         Group ("Challenger"). The purchase price is US$3.8 millions payables in
         6,324,748 restrict common shares of Hartcourt with a promise to invest
         additional $610,000 into one of Challenger subsidiaries. The effect of
         this agreement will appear in the year of 2004, therefore Challenger
         was not consolidated into the 2003 financial statements.

o        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:

o        On June 30, 2004, we, 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 for 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.

o        On July 16, 2004, Hartcourt and the minority owners of Wenzhou Zhongnan
         Group (Wenzhou) reached an agreement to rescind the original
         acquisition contract entered into on June 28, 2003 to purchase a 51%
         equity ownership of Wenzhou for a total consideration 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 with ours from October 2003 to June 2004. All of the
         shares issued pursuant to this acquisition have been returned and
         cancelled. On September 30, 2004, we cancelled 8,417,350 shares of our
         common stock valued at $2,187,996 in connection with the rescission of
         our acquisition agreement with Wenzhou Zhongnan Group.

                                       10

<PAGE>

o        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.

o        On October 19, 2004, we revised the record date for the spin-off of
         Financial Telecom Limited (USA) ("FTL") from October 17, 2003 to
         October 25, 2004 pursuant to a Rule 10b-17 notice filed with NASDAQ in
         order to comply with the notice period for the setting of the record
         date as required by NASDAQ. In the spin-off, our shareholders of record
         as of October 25, 2004 received 0.087965218 share of FTL common stock
         for each share of our common stock held by such shareholders.

o        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.

o        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.

o        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.

RAISE FUNDS:

o        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


                                       11

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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.

FUNDING ACTIVITIES

The following entities have provided substantial capital and cash flows to the
Company.

Enlight Corporation ("Enlight"): On May 9, 2002, Hartcourt and Enlight signed a
Stock Purchase Agreement whereby Hartcourt agreed to sell 5,000,000 restricted
shares of its common stock as a block to Enlight at the price of eight cents
($0.08) per share. However, as Hartcourt share price kept decreasing, the two
sides agreed to revise the agreement on October 10, 2002. Pursuant to the terms
of the new agreement, Enlight will purchase $1,000,000 worth of common shares of
Hartcourt, restricted under Rule 144 and/or Reg S regulation, at a discount to
current market price. As of December 31, 2003, Hartcourt has received $1,000,000
from Enlight and agreed to issue 2,417,520 restricted shares to Enlight each
month starting December 2002. As of December 31, 2003, Hartcourt has issued
twelve installments (29,010,240 shares) of the restricted shares, as in
accordance with the agreement, to Enlight and two other entities instructed by
Enlight: Xue XiaoHan and Satori Investment (China), Ltd. In December 2003, all
above entities have agreed to the extension of one more year restriction period
from the original date of issuance. Hartcourt also granted Enlight 29,010,239
warrants to purchase a total of 29,010,239 shares of Hartcourt common stock at
$0.0586 per share expiring October 22, 2005. We have been informed by Enlight
that all of its warrants will not be exercised unless there is a buy-out of
Hartcourt from a third party, should Hartcourt agreed to extend the expiration
date for an additional 4 years.

Chateau D'orly, Ltd. ("Chateau"): On February 1, 2003, Hartcourt and Chateau
signed a Stock Purchase Agreement whereby Hartcourt agreed to sell to Chateau
2,000,000 shares of its common stock restricted under Rule 144 and /or Reg S
regulation, at 50% discount off the 5-day trading average closing price of
Hartcourt, preceding the date when funds are actually received by the company.
As of December 31, 2003, Hartcourt has received from Chateau $80,000 for 280,348
shares and no shares have been issued to Chateau.

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<PAGE>

A group of Chinese citizens ("Group"): On December 25, 2003, Hartcourt and a
group of Chinese citizens signed a Stock Purchase Agreement whereby Hartcourt
agreed to sell to the Group 4,605,816 shares of its common stock restricted
under Rule 144 and/or Regulation S, at $0.40 per share. The Chinese citizens are
Guan Xue Fang, Li Zheng Zheng, Xu HuiZhen, Zhang Hui, Liu Jianqiang and Qiu
Jiaqi. As of December 31, 2003, Hartcourt has issued 4,605,816 shares to such
investors and has not received any cash. The receivable of $1,842,326.4 was
booked as subscription receivable in the accompanied financial statements. As of
March 15, 2004, $1,386,381 has been received.

Warrants relating to funding activities

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. These
warrants are expired on June 26, 2004.

In connection with completion of a private placement of Hartcourt shares with
PYR Management LLC, on March 6, 2001, Hartcourt issued in total 2,509,802 of
Class I warrants and 1,035,308 of Class II warrants exercisable at $0.69375 per
share of common stock and expiring on January 26, 2005.

In connection with signing an investment agreement with Swartz Private Equity,
LLC, on January 26, 2000, Hartcourt issued to Swartz warrants to purchase
400,000 shares at $13.10 per share that expire on January 25, 2004. The
exercised price renewed each half year to the market price. The 400,000 warrants
were split into 800,000 warrants with stock split on September 14, 2000. The
warrants were issued at the fair market value and therefore, no expense was
recorded. During 2003, the 800,000 warrants were converted into 714,764 common
shares of Hartcourt through cashless exercise.

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 $0.0586 per share expiring on October 22, 2005. On
March 11, 2004, Hartcourt have been informed by Enlight that all of its warrants
will not be exercised unless a buy-out of Hartcourt (either by management or by
third parties), should Hartcourt agree to extend the validity of the warrants
until October 22, 2009. As the warrants together with the shares issued to
Enlight total over 20% of the total outstanding shares of Hartcourt, the
warrants are subject to shareholder approval.

RISK FACTORS

In addition to other information in this report, you should carefully consider
the following risks and the other information in evaluating our business. Our
business, financial condition and results of operations could be materially and
adversely affected by each of these risks. Such an adverse effect could cause
the market price of our common stock to decline, and you could lose all or part
of your investment.

RISKS RELATING TO OUR BUSINESS

WE FACE SIGNIFICANT COMPETITION WHICH COULD REDUCE OUR MARKET SHARE AND
ADVERSELY AFFECT OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

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The China IT hardware distribution industry is characterized by a large number
of players in the market place because start-up costs are fairly low. Many of
our competitors, as well as certain potential competitors, have longer operating
histories in the Industry, greater name recognition, larger customer bases and
significantly greater financial, technical and marketing resources than ours.
Any of our present or future competitors may provide services with significant
performance, price, creativity or other advantages over those offered by us. We
can provide no assurance that we will be able to compete successfully against
our current or future competitors.

Furthermore, any of our current or future competitors may be acquired by,
receive investments from or enter into other commercial relationships with
larger, well-established and well-financed companies and therefore obtain
significantly greater financial, marketing and technical resources than we have.
In addition, increased competition in the IT distribution industry in China
could make it difficult for us to retain existing customers and attract new
customers, and could reduce the average gross margin or cause us to reduce our
selling price. If we are unable to compete effectively in the IT distribution
market in China, our business, financial condition and results of operations
could be materially and adversely affected.

RAPID TECHNOLOGICAL CHANGE AND CHANGE OF OUR VENDOR DISTRIBUTION RELATIONSHIP
MIGHT LIMIT OUR ABILITY TO GROW.

The IT equipment manufacturers may choose to reduce the numerous layers of
distributors through changing certain trade and distribution policies. This
distribution channel "flattening" effect can lead to further industry
consolidation. Whether or not we will be able to compete successfully depends on
the speed of future acquisitions, the quality of businesses that we acquire, as
well as our ability to integrate these acquired companies to reach economics of
scale and operating efficiencies. In addition, the IT industry is subject to
rapid technological change. We need to anticipate the emergence of new
technologies and its impact on hardware sales. New products or brands that we
sell and market in the future might be unattractive to our customers, thereby
limiting our ability to recover our initial development costs and potentially
adversely affecting our future profitability and growth prospects.

WE MAY NOT BE ABLE TO SUCCESSFULLY IMPLEMENT OUT GROWTH STRATEGIES, WHICH WOULD
MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.

We are pursuing a number of growth strategies, including leveraging our current
customer base and sales volume to develop additional sources of revenues, as
well as exploring opportunities to further expand into the current industry and
service of hardware industry. Some of these strategies relate to new services or
products or new markets for which there are no established references in China,
or relate to services or products in which we lack experience and expertise. We
cannot assure you that we will be able to deliver new services or sell new
products on a commercially viable basis or in a timely manner, or at all. If we
are unable to successfully implement our growth strategies, our revenue and
profitability will not grow as we expect, and our competitiveness may be
materially and adversely affected.

                                       14

<PAGE>

THERE ARE RISKS ASSOCIATED WITH OUR BUSINESS STRATEGY CONTEMPLATING GROWTH
THROUGH ACQUISITIONS AND JOINT VENTURES.

As a component of our growth strategy, we intend to continue to enhance our
business development, by acquiring other businesses that complement our current
distribution business or that we believe may benefit us in terms of customer
base or product or service offering, and by entering into strategic joint
ventures with selected industry players. However, our ability to grow through
such acquisitions and joint ventures will depend on the availability of suitable
acquisition candidates at an acceptable cost or at all, our ability to compete
effectively to attract and reach agreement with acquisition candidates or joint
venture partners on commercially reasonable terms, the availability of financing
to complete larger acquisitions or joint ventures as well as our ability to
obtain any required governmental approvals. We lack experience in identifying,
financing and completing large acquisition or joint venture transactions. In
addition, the benefits of an acquisition or joint venture transaction may take
considerable time to develop and we cannot assure you that any particular
acquisition or joint venture will produce the intended benefits. Moreover, the
identification and completion of these transactions may require us to expend
significant management and other resources.

WE DEPEND ON OUR KEY PERSONNEL AND OUR BUSINESS AND GROWTH PROSPECTS MAY BE
SEVERELY DISRUPTED IF WE LOSE THEIR SERVICES.

Our future success is heavily dependent upon the continued service of our key
executives and other key employees. In particular, we rely on the expertise and
experience of our senior executives, founders, controlling shareholders and
other executive officers, in our business operations, and rely on their personal
relationships with our other significant shareholder, employees, the relevant
regulatory authorities, our vendors and customers. In addition, as we expect to
focus increasingly on the development of our IT distribution and after sales
services, we will need to continue attracting and retaining skilled and
experienced management to maintain our competitiveness.

If one or more of our key personnel are unable or unwilling to continue in their
present positions, we may not be able to easily replace them and may incur
additional expenses to recruit and train new personnel, our business could be
severely disrupted, and our financial condition and results of operations could
be materially and adversely affected. Furthermore, since our industry is
characterized by high demand and intense competition for talent, we may need to
offer higher compensation and other benefits in order to attract and retain key
personnel in the future. We cannot assure you that we will be able to attract or
retain the key personnel that we will need to achieve our business objectives.
Furthermore, we do not maintain key-man life insurance for any of our key
personnel.

WE HAVE A LIMITED OPERATING HISTORY, WHICH MAY MAKE IT DIFFICULT TO EVALUATE OUR
BUSINESS, AND OUR LIMITED RESOURCES MAY AFFECT OUR ABILITY TO MANAGE THE GROWTH
WE EXPECT TO ACHIEVE.

Our IT distribution business was established in February 2003and we began to
acquire similar businesses in 2003, which are now our primary source of
revenues. In addition, we have recently expanded our business geographical
coverage. Furthermore, our senior management and employees have worked together
at our company for only a relatively short period of time. Accordingly, we have
a limited operating history upon which you can evaluate our business and


                                       15

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prospects. Our growth to date has placed, and our anticipated further expansion
of our operations will continue to place, a significant strain on our
management, systems, and resources. In addition to training and managing our
workforce, we will need to continue to develop and improve our financial and
management controls and our reporting systems and procedures. We cannot assure
you that we will be able to efficiently or effectively manage the growth of our
operations, and any failure to do so may limit our future growth and materially
and adversely affect our business, financial condition and results of
operations.

THE DISCONTINUATION OF ANY OF THE PREFERENTIAL TAX TREATMENTS OR THE FINANCIAL
INCENTIVES CURRENTLY AVAILABLE TO US IN THE PRC COULD MATERIALLY AND ADVERSELY
AFFECT OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Certain of our PRC companies enjoy preferential tax treatments, in the form of
reduced tax rates or tax holidays, provided by the PRC government or its local
agencies or bureaus. As a result of these preferential tax treatments, our
effective income tax rate for 2003 was 11%. We must continue to meet a number of
financial and non-financial criteria to qualify for its current tax exemption
and future tax holidays. Moreover, the central government or municipal
government could determine at any time to immediately eliminate or reduce these
tax treatments, generally with prospective effect. If we had not received these
tax treatments in 2003, our net income would have been lower from the reported
amount. We cannot assure you that we will continue to enjoy these preferential
tax treatments in the future. The discontinuation of these preferential tax
treatments or financial incentives could materially and adversely affect our
business, financial condition and results of operations.

WE HAVE LIMITED BUSINESS INSURANCE COVERAGE IN CHINA.

The insurance industry in China is still at an early stage of development. In
particular, PRC insurance companies offer limited business insurance products.
As a result, we do not have any business liability or disruption insurance
coverage for our operations in China. Any business disruption, litigation or
natural disaster might result in our incurring substantial costs and the
diversion of resources.

ANY FUTURE OUTBREAK OF SEVERE ACUTE RESPIRATORY SYNDROME IN CHINA, OR SIMILAR
ADVERSE PUBLIC HEALTH DEVELOPMENTS MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR
BUSINESS OPERATIONS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

From December 2002 to June 2003, China and certain other countries experienced
an outbreak of a new and highly contagious form of atypical pneumonia now known
as severe acute respiratory syndrome, or SARS. On July 5, 2003, the World Health
Organization declared that the SARS outbreak had been contained. Since September
2003, however, a number of isolated new cases of SARS have been reported, most
recently in Guangdong province of the PRC, in January 2004. A new outbreak of
SARS may result in health or other government authorities requiring the closure
of Internet cafes, which is large customer of ours, or of our retail outlets, or
of our offices. Such closures would severely disrupt our business and operations
and have a material adverse effect on our financial condition and results of


                                       16

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operations. Any recurrence of the SARS outbreak, or a development of a similar
health hazard in China, may deter people from congregating in public places,
including our retail outlets, and would significantly reduce our level of
customers and materially and adversely affect our revenues and profitability. If
additional financing becomes necessary, failure to obtain such financing could
limit our operations and might cause our business to fail. We may be unable to
obtain additional financing, if required, to complete any acquisitions or to
fund the operations and growth of the business which could compel us to
restructure the transaction or abandon a particular acquisition.

Although we believe that the current capital structure of the company will be
sufficient to allow us to consummate acquisitions, we cannot ascertain the
capital requirements for any particular transaction. If the current financial
resources prove to be insufficient, either because of the size of the business
acquisition or the depletion of the available financial resources in search of
acquisitions, we will be required to seek additional financing. We cannot assure
you that such financing would be available on acceptable terms, if at all. To
the extent that additional financing proves to be unavailable when needed to
consummate an acquisition, we would be compelled to restructure the transaction
or abandon that particular business acquisition and seek an alternative target
business candidate. In addition, if we consummate a business combination, we may
require additional financing to fund the operations or growth of the business.
The failure to secure additional financing could have a material adverse effect
on the continued development or growth of our business. None of our officers,
directors or stockholders is required to provide any financing to us in
connection with or after an acquisition.

WE MAY BE UNABLE TO ENFORCE OUR ACQUISITIONS' MATERIAL AGREEMENTS, WHICH MAY
HAVE A MATERIAL ADVERSE IMPACT ON OUR OPERATIONS.

Chinese law will govern almost all of our acquisitions' material agreements,
many of which may be with Chinese governmental agencies. We cannot assure you
that the target business will be able to enforce any of its material agreements
or that remedies will be available outside of the PRC. The Chinese judiciary is
relatively inexperienced in enforcing corporate and commercial law, leading to a
higher than usual degree of uncertainty as to the outcome of any litigation. The
inability to enforce or obtain a remedy under any of our future agreements may
have a material adverse impact on our operations.

BECAUSE OUR DIRECTORS AND OFFICERS RESIDE OUTSIDE OF THE UNITED STATES, IT MAY
BE DIFFICULT FOR YOU TO ENFORCE YOUR RIGHTS AGAINST THEM OR ENFORCE U.S. COURT
JUDGMENTS AGAIN THEM IN THE PRC.

Our directors and officers reside outside of the United States and, after the
consummation of many acquisitions, substantially all of our assets will be
located outside of the United States. It may therefore be difficult for
investors in the United States to enforce their legal rights, to effect service
of process upon our directors or officers or to enforce judgments of United
States courts predicated upon civil liabilities and criminal penalties of our
directors and officers under Federal securities laws. Further, it is unclear if
extradition treaties now in effect between the United States and the PRC would
permit effective enforcement of criminal penalties of the Federal securities
laws.

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OUR EXISTING STOCKHOLDERS, INCLUDING OUR OFFICERS AND DIRECTORS, CONTROL A
SUBSTANTIAL INTEREST IN US AND THUS MAY INFLUENCE CERTAIN ACTIONS REQUIRING
STOCKHOLDER VOTE.

Our existing stockholders control a special class of preferred shares which
gives them the right to elect three fifth of all directors of the board. If
there is an annual meeting, as a consequence of our capital structure, only a
minority of the board of directors will be considered for election and our
existing stockholders, because of their ownership position, will have
considerable influence regarding the outcome. Accordingly our existing
stockholders will continue to exert control at least until such preferred shares
are converted to common stock.

RISKS RELATING TO REGULATION OF INVESTMENT IN OUR INDUSTRY AND TO OUR STRUCTURE

IF THE PRC GOVERNMENT FINDS THAT THE STRUCTURE FOR OPERATING OUR CHINA BUSINESS
DOES NOT COMPLY WITH PRC GOVERNMENT RESTRICTIONS ON FOREIGN INVESTMENT IN THE IT
DISTRIBUTION INDUSTRY, WE COULD BE COMPELLED TO RESTRUCTURE OUR INVESTMENT OR
ABANDON OUR INVESTMENT.

PRC regulations currently limit foreign ownership of companies that provide
distribution and retail services (see explanation of the regulations below),
which includes IT distribution and retail, to less than full equity investment.
In addition, the PRC regulations limit the size of the foreign direct investment
in the distribution and retail sector in general, subject to further approval,
if such investment in China exceeds 3 billion RMB, its total sales exceeds 1.5
billion RMB, its market shares reaches 20% of the local market, or the total
invested enterprises exceeds 15 companies. We are a US registered company and we
conduct our operations solely in China through our directly wholly owned
subsidiaries and indirectly majority owned subsidiary. In order to comply with
foreign ownership restrictions, we operate our businesses in China through
various subsidiaries, which is majority owned by Richard Yan, our financial
controller, and Zhengzheng Li, our president for Huaqing, both of whom are PRC
citizens (our nominees). We have entered into a series of contractual
arrangements with each of our subsidiaries, its shareholders and our nominees.
As a result of these contractual arrangements, we are considered the majority
beneficiary of all of our subsidiaries and accordingly we consolidate all of our
subsidiaries' results of operations in our financial statements.

In addition, we have entered into agreements with each of our subsidiaries, its
shareholders and our nominees that provide us with the substantial ability to
control all of our subsidiaries. For a description of these contractual
arrangements, see "Our Corporate Structure" and "Related Party Transactions".

In the opinion of Zhonglun Law Firm (Shanghai), our PRC legal counsel: (1) the
ownership structures of our subsidiariesis in compliance with existing PRC laws
and regulations; (2) our contractual arrangements with each of our subsidiaries,
our nominees and its shareholders are valid and binding, and will not result in
any violation of PRC laws or regulations currently in effect; (3) the business
operations of our subsidiaries are in compliance with existing PRC laws and
regulations in all material aspects and (4) the enforcement of foreign judgments
made by courts outside PRC has no direct and automatic operation in the PRC, but
these judgments may be recognized and enforced by a PRC court in accordance with
a bilateral or international treaty to which PRC is a party, or subject to the
principles of reciprocity upon a finding that the judgment does not conflict
with fundamental principles, sovereignty, security and public interests of PRC
after review of the judgment.

                                       18

<PAGE>

There are, however, substantial uncertainties regarding the interpretation and
application of current or future PRC laws and regulations. Accordingly, we
cannot assure you that the PRC regulatory authorities will not ultimately take a
view that is contrary to the opinion of our PRC legal counsel.

If we are found to be in violation of any existing or future PRC laws or
regulations, the relevant regulatory authorities would have broad discretion in
dealing with such violations, including: - imposing conditions or requirements
with which we may not be able to comply; - requiring us to restructure the
relevant ownership structure or operations; - restricting or prohibiting our use
of foreign capital to finance our business and operations in China; or - taking
other regulatory or enforcement actions, including levying fines, that could be
harmful to our business.

ANY OF THESE ACTIONS COULD CAUSE OUR BUSINESS, FINANCIAL CONDITION AND RESULTS
OF OPERATIONS TO SUFFER AND THE PRICE OF OUR STOCK TO DECLINE.

Our contractual arrangements with our nominees and the shareholders of our
subsidiaries may not be as effective in providing operational control as direct
ownership. In addition, these arrangements may be difficult to enforce, create a
double layer of taxation and may be subject to scrutiny by the PRC tax
authorities.

We conduct substantially all of our operations, and generate substantially all
of our revenues, through contractual arrangements with the shareholders of our
majority owned subsidiaries and our nominees that provide us with the
substantial ability to control our subsidiaries. Although we have been advised
by our PRC legal counsel that these contractual arrangements are valid, binding
and enforceable under current PRC laws and regulations, these contractual
arrangements may not be as effective in providing us with control over our
subsidiaries as direct ownership.

These contractual arrangements are governed by PRC law and provide for the
resolution of disputes through either arbitration or litigation in the PRC.
Accordingly, these contracts would be interpreted in accordance with PRC law and
any disputes would be resolved in accordance with PRC legal procedures. If any
of our subsidiaries fails to perform its obligations under these contractual
arrangements, we may have to rely on legal remedies under PRC law, including
seeking specific performance or injunctive relief, and claiming damages, which
we cannot be sure would be effective. The legal environment in the PRC is not as
developed as in other jurisdictions, such as the United States. As a result,
uncertainties in the PRC legal system could limit our ability to enforce these
contractual arrangements.

WE RELY PRINCIPALLY ON DIVIDENDS AND OTHER DISTRIBUTIONS ON EQUITY PAID BY OUR
MAJORITY-OWNED OPERATING SUBSIDIARY TO FUND ANY CASH AND FINANCING REQUIREMENTS
WE MAY HAVE.

We are a holding company, and we rely principally on dividends and other
distributions on equity paid by our subsidiaries for our cash requirements,
including the funds necessary to service any debt we may incur, or financing we
may need for operations other than through our subsidiaries. If any of our
subsidiaries incur debt on its own behalf in the future, the instruments
governing the debt may restrict its ability to pay dividends or make other
distributions to the intermediate holding company and thus to us. We generate


                                       19

<PAGE>

substantially all of our profit through contractual arrangements with our
nominees. However, PRC tax authorities may require us to amend these contractual
arrangements in a manner that would materially and adversely affect its ability
to pay dividends and other distributions to us. Furthermore, PRC legal
restrictions permit payments of dividends by our subsidiaries only out of its
net income, if any, determined in accordance with PRC accounting standards and
regulations. Under PRC law, our subsidiaries are also required to set aside a
portion of its net income each year to fund certain reserve funds. These
reserves are not distributable as cash dividends.

RISKS RELATING TO THE PEOPLE'S REPUBLIC OF CHINA

Substantially all of our assets are located in China and substantially all of
our revenues are derived from our operations in China. Accordingly, our
business, financial condition, results of operations and prospects are subject,
to a significant extent, to economic, political and legal developments in China.

THE PRC'S ECONOMIC, POLITICAL AND SOCIAL CONDITIONS, AS WELL AS GOVERNMENT
POLICIES, COULD AFFECT OUR BUSINESS.

The PRC economy differs from the economies of most developed countries in many
respects, including amount of government involvement, level of development,
growth rate, control of foreign exchange and allocation of resources. While the
PRC economy has experienced significant growth in the past twenty years, growth
has been uneven, both geographically and among various sectors of the economy.
The PRC government has implemented various measures to encourage economic growth
and guide the allocation of resources. Some of these measures benefit the
overall PRC economy, but may also have a negative effect on us. For example, our
financial condition and results of operations may be adversely affected by
government control over capital investments or changes in tax regulations that
are applicable to us.

The PRC economy has been transitioning from a planned economy to a more
market-oriented economy. Although the PRC government has implemented measures
since the late 1970s emphasizing the utilization of market forces for economic
reform, the reduction of state ownership of productive assets and the
establishment of sound corporate governance in business enterprises, a
substantial portion of productive assets in China is still owned by the PRC
government. In addition, the PRC government continues to play a significant role
in regulating industry development by imposing industrial policies. The PRC
government also exercises significant control over China's economic growth
through the allocation of resources, controlling payment of foreign currency-
denominated obligations, setting monetary policy and providing preferential
treatment to particular industries or companies.

THE PRC LEGAL SYSTEM EMBODIES UNCERTAINTIES WHICH COULD LIMIT THE LEGAL
PROTECTIONS AVAILABLE TO YOU AND US.

                                       20

<PAGE>

The PRC legal system is a civil law system based on written statutes. Unlike
common law systems, it is a system in which decided legal cases have little
presidential value. In 1979, the PRC government began to promulgate a
comprehensive system of laws and regulations governing economic matters in
general. The overall effect of legislation over the past 25 years has
significantly enhanced the protections afforded to various forms of foreign
investment in mainland China. Some of our PRC operating subsidiaries are a WFOE,
which is an enterprise incorporated in mainland China and wholly-owned by
foreign investors. It is subject to laws and regulations applicable to foreign
investment in mainland China in general and laws and regulations applicable to
WFOEs in particular. However, these laws, regulations and legal requirements are
constantly changing, and their interpretation and enforcement involve
uncertainties. These uncertainties could limit the legal protections available
to us and other foreign investors, including you. In addition, we cannot predict
the effect of future developments in the PRC legal system, particularly with
regard to the distribution business, including the promulgation of new laws,
changes to existing laws or the interpretation or enforcement thereof, or the
preemption of local regulations by national laws.

RESTRICTIONS AND CURRENCY EXCHANGE MAY LIMIT OUR ABILITY TO UTILIZE OUR REVENUES
EFFECTIVELY.

Substantially all of our revenues and operating expenses are denominated in
Renminbi. The Renminbi is currently freely convertible under the "current
account", which includes dividends, trade and service-related foreign exchange
transactions, but not under the "capital account", which includes foreign direct
investment and loans. Currently, some of our subsidiaries may purchase foreign
exchange for settlement of "current account transactions", including payment of
dividends to us and payment of services to foreign game licensors, without the
approval of the State Administration for Foreign Exchange. We may also retain
foreign exchange in our current account, subject to a ceiling approved by the
State Administration for Foreign Exchange, to satisfy foreign exchange
liabilities or to pay dividends. However, we cannot assure you hat the relevant
PRC governmental authorities will not limit or eliminate our ability to purchase
and retain foreign currencies in the future.

Since a significant amount of our future revenues will be denominated in
Renminbi, the existing and any future restrictions on currency exchange may
limit our ability to utilize revenues generated in Renminbi to fund our business
activities outside China, if any, or expenditures denominated in foreign
currencies.

Foreign exchange transactions under the capital account are subject to
limitations and require registration with or approval by the relevant PRC
governmental authorities. In particular, if we finance our acquisitions by means
of foreign currency loans, those loans cannot exceed certain statutory limits
and must be registered with the State Administration for Foreign Exchange, and
if we finance our business by means of capital contributions, those capital
contributions must be approved by the Ministry of Commerce. Our ability to use
the U.S. dollar to finance our business activities conducted through our
subsidiaries will depend on our ability to obtain these governmental
registrations or approvals. In addition, because of the regulatory issues
related to foreign currency loans to, and foreign investment in, domestic PRC
enterprises, we may not be able to finance our subsidiaries or its operations by
loans or capital contributions. We cannot assure you that we can obtain these
governmental registrations or approvals on a timely basis, if at all.

                                       21


<PAGE>

FLUCTUATIONS IN EXCHANGE RATES COULD RESULT IN FOREIGN CURRENCY EXCHANGE LOSSES.

Substantially all of our revenues are denominated in Renminbi, while a portion
of our expenditures are denominated in foreign currencies, primarily the U.S.
dollar. Fluctuations in exchange rates, primarily those involving the U.S.
dollar and the Renminbi, may affect our costs and operating margins. In
addition, these fluctuations could result in exchange losses and increased costs
in Renminbi terms. Very limited hedging transactions are available in China to
reduce our exposure to exchange rate fluctuations. To date, we have not entered
into any hedging transactions in an effort to reduce our exposure to foreign
currency exchange risk. While we may decide to enter into hedging transactions
in the future, the availability and effectiveness of these hedges may be limited
and we may not be able to successfully hedge our exposure at all. In addition,
our currency exchange losses may be magnified by PRC exchange control
regulations that restrict our ability to convert Renminbi into U.S. dollars.

OUR OPERATIONS AFTER SUCCESSFUL ACQUISITIONS IN THE PRC MAY NOT DEVELOP IN THE
SAME WAY OR AT THE SAME RATE AS MIGHT BE EXPECTED IF THE PRC ECONOMY WERE
SIMILAR TO THE MARKET-ORIENTED ECONOMICS OF OECD MEMBER COUNTRIES.

The economy of the PRC has historically been a nationalistic, "planned economy",
meaning it functions and produces according to governmental plans and pre-set
targets or quotas. In certain aspects, the PRC's economy has been transitioning
to a more market-oriented economy. However, we cannot predict the future
direction of these economic reforms or the effects these measures may have. The
PRC economy also differs from the economies of most countries belonging to the
Organization for Economic Cooperation and Development, and international group
of member countries sharing a commitment to democratic government and market
economy. For instance:

o The level of state-owned enterprises in the PRC is greater than in most of the
countries belonging to the OECD; o The level of capital reinvestment is lower in
the PRC than in the other countries that are members of the OECD; and

o    The PRC has various impediments in place that make it difficult for foreign
     firms to obtain local currency, as opposed to other countries belonging to
     the OECD where exchange of currencies generally free from restriction.

As a result of these differences, our operations after successful acquisitions
may not develop in the same way or at the same rate as might be expected if the
PRC economy were similar to those of the OECD member countries.

IF THE PRC CONTINUES TO ENACT REGULATIONS IN OUR INDUSTRY OR PROPOSED INDUSTRY
SEGMENT WHICH FORBID OUR RESTRICTED FOREIGN INVESTMENT, OUR STABILITY TO
CONSUMMATE ACQUISITIONS COULD BE SEVERELY IMPAIRED.

We intend to focus our search for acquisitions in the PRC that are engaged in
the IT distribution and services industry segments. Many of the rules and
regulations that we would face are not explicitly communicated, but arise from
the fact that distribution and retail are sensitive areas of the economy of the
PRC. There are also substantial uncertainties regarding the interpretation of
current Chinese laws and regulations. Under the current commitment made by the
PRC under WTO, this industry is open for foreign investment post December 2002,
allow foreign ownership controlling interests post December 2003, and allow for
wholly owned foreign investment post December 2004. If these commitments are not
carried out, they could severely impair our acquisitions. Additionally, if the
relevant Chinese authorities find us or our acquisitions to be in violation of
any existing or future Chinese laws or regulations, they would have broad
discretion in dealing with such a violation, including, without limitation: o
Levying fines; o Revoking our business and other licenses; o Requiring that we
restructure our ownership or operations; and o Requiring that we discontinue any
portion or all of our distribution related business.

                                       22

<PAGE>

Further, the PRC has restricted foreign direct investment in our sector with the
enactment of the "Temporary Regulations for the Administration of Acquisition of
Domestic Enterprises by Foreign Enterprises". Under the Regulations, the
acquirer might need further approval from relevant Chinese government agencies
if the acquirer's total investment in China exceeds 3 billion RMB, its total
sales exceeds 1.5 billion RMB, its market shares reaches 20% of the local
market, and the total invested enterprises exceeds 15. Based on these
regulations and similar future regulations in other industries, our capital
structure and ownership requirement many significantly limit the number of
potential target businesses in our proposed industry segments with which we may
complete an acquisition. Any of these actions could have a material adverse
impact on our business and financial condition.

IF POLITICAL RELATIONS BETWEEN THE U.S. WEAKEN, OPERATIONS MAY BE ADVERSELY
AFFECTED

The relationship between the U.S and the PRC is subject to sudden fluctuation
and periodic tension. Changes in political conditions in the PRC and changes in
the state of PRC-U.S. relations are difficult to predict and could adversely
effect our operations or cause our businesses or their goods and services to
become less attractive. Any weakening of relations between the U.S. and the PRC
could have a material adverse effect on our operations and our acquisitions.

AVAILABLE INFORMATION

The company makes the annual report on Form 10-KSB, quarterly reports on Form
10-QSB, and any current reports on Form 8-K, and amendments to any of these
reports available through its Internet site (http://www.hartcourt.com) as soon
as reasonably practicable after the company files such material with the
Securities and Exchange Commission ("SEC"). The information posted on the
company's Internet site is not incorporated into this annual report on Form
10-K. In addition, the SEC maintains an Internet site (http://www.sec.gov) that
contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC.

ITEM 2. PROPERTIES.

The company owns and leases sales offices, distribution centers, and
administrative facilities in the markets it serves. The company's executive
office is located on 3rd floor, 710 Changping Road, Shanghai, and occupies a
1,500 square foot space. This space is expanded to double the size in April,
2004, under the same lease agreement. The company is under various lease
agreements for the 33 retail store and 12 additional locations in the East and
South regions of China. The company believes its facilities are well maintained
and suitable for its on going operations.

ITEM 3. 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):

                                       23

<PAGE>

The Securities and Exchange Commission has filed a complaint against the company
for alleged securities violations. The complaint alleges that the company
illegally used an S-8 registration statement in 1999 to improperly raise
capital, and that false and misleading press releases were issued by the company
from September 9, 1999 through November 18, 1999. The SEC is seeking
disgorgement from the company of approximately $800,000.00, civil penalties and
interest, as well as an injunction against future securities law violations. The
company denies any wrong doing and plans to vigorously contest these
allegations. The company filed a Motion to Dismiss on August 5, 2003 and the
Court has taken the matter under submission. The Court has ordered the parties
to mediation. Mediation has been set for April 22, 2004. If the case is not
resolved at mediation, the Court has scheduled a post-mediation status
conference for June 1, 2004, at which time a trial date is expected to be set by
the Court. The company has made a provision of $1,300,000 against its income at
the end of 2003 for this litigation.

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

None.


                                       24




<PAGE>

                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET INFORMATION

The common stock is quoted on the bulletin board maintained by the National
Association of Securities Dealers, Inc. The following table sets forth the range
of high and low market price for the common stock during the three most recent
years by the calendar quarters ended December 31, 2003 and 2002:


                                                High ($)   Low ($)
------------------------------------------ ------------- ------------
Quarter ended March 31, 2002                    0.41        0.16
------------------------------------------ ------------- ------------
Quarter ended June 30, 2002                     0.25        0.05
------------------------------------------ ------------- ------------
Quarter ended September 30, 2002                0.10        0.05
------------------------------------------ ------------- ------------
Quarter ended December 31, 2002                 0.10        0.05
------------------------------------------ ------------- ------------
Quarter ended March 31, 2003                    0.10        0.05
------------------------------------------ ------------- ------------
Quarter ended June 30, 2003                     1.12        0.08
------------------------------------------ ------------- ------------
Quarter ended September 30, 2003                0.92        0.52
------------------------------------------ ------------- ------------
Quarter ended December 31, 2003                 0.86        0.52
------------------------------------------ ------------- ------------

The above prices were obtained from Yahoo.com. The prices shown in the above
table represent inter-dealer quotations without retail mark-up, mark-down or
commission, and may not necessarily represent actual transactions.

HOLDERS

As of December 31, 2003, there were 851 holders of record of Hartcourt's common
stocks based on the record provided by Signature Stock Transfer Company. One
holder, CEDE & Co, holds the shares of approximately 9,300 shareholders in
street name.

Dividends

The company did not pay cash dividend in the last two years.

As Hartcourt's ownership of the Chinese subsidiaries are through nominees
structure, any dividend declared by the subsidiaries and paid to the Hartcourt
nominees are subject to 20% income tax. After the dividend is transferred to
Hartcourt's China legal entity, it may face China's foreign exchange control
restriction on converting this amount into foreign currency to be remitted
outside of China for dividend payment to the common shareholders. The management
is not aware of any similar case that was either approved or denied by the
Chinese foreign exchange control in the past.

                                       25

<PAGE>

EQUITY TRANSACTIONS DURING THE FISCAL YEAR

As of December 31, 2003, there were 33,023,769 outstanding warrants to purchase
33,023,769 shares of the company's common stock at $.001 par value, ranging from
$0.058 - $15.52 per share. During 2003, 800,000 warrants were converted into
714,794 shares of common stock through cashless exercise.

The following information sets forth the outstanding shares the Company sold
without registration under the Securities Act of 1933 (the "Securities Act").
All transactions were effected in reliance on the exemption from registration
afforded by Section 4 (2) of the Securities Act for transactions not involving a
public offering. There were no underwriters in any of these transactions.

All the transaction hereunder were entered between Hartcourt and accredited
investors as defined in Section 4(2) of the Securities Act or sophisticated
investors that possessed sufficient knowledge and experience in financial and
business matters to be able to evaluate the merits and risks of the investment
and who were allowed access to the books and records of Hartcourt.

During 2002, Hartcourt issued 3,774,513 shares of common stock valued at
$534,400 to officers and directors in lieu of compensation and services,
including 1,245,793 shares issued to Dr. Alan Phan in lieu of his 2001
compensation of $250,000.

On October 23, 2002, Hartcourt agreed to issue 12 installments of 2,417,520
shares each month to Enlight valued at $850,000 to raise working capital.
Hartcourt also granted Enlight 29,010,239 warrants to purchase a total of
29,010,239 shares of Hartcourt common stock at $0.0586 per share. Enlight agreed
not to exercise these warrants unless there is a buy-out of Hartcourt from a
third party should Hartcourt agreed to extend the expiration date for an
additional 4 years. During 2003, Hartcourt issued 11 installments of 2,417,520
shares to Enlight according to the funding agreement.

During 2003, Hartcourt issued 2,174,667 shares of common stock valued at
$162,421 to various consultants for their professional and legal services.

During 2003, Hartcourt issued 1,857,900 shares of common stock valued at
$262,145.8 to staff, officers, former officers and directors in lieu of
compensation and services.

During 2003, Hartcourt issued 50,349,243 shares of common stock in connection
with the acquisition of Huaqing, GuoWei, NewHuaSun and ZhongNan.

On 13 June 2003, Hartcourt issued 100,000 shares to DongQian to raise $30,000
for working capital.

On 25 December 2003, Hartcourt issued 4,605,815 shares to a group of Chinese
citizens to raise $1,842,326.4 for working capital purposes.

On 30 December 2003, Hartcourt cancelled 4,756,058 shares collected from
Elephant Talk Limited.

                                       26

<PAGE>

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 2003, with an expiration date of May 31, 2004.

In 2003, Swartz Private Equity, LLC exercised its 800,000 warrants through
cashless exercise and converted into 714,794 shares of Hartcourt common stocks.

The company did not make any repurchase of its stock within the fiscal year.

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

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

GENERAL

The following is a summary of certain information contained in this Report and
is qualified in its entirety by the detailed information and financial
statements that appear elsewhere herein. Except for the historical information
contained herein, the matters set forth in this Report include forward-looking
statements within the meaning of the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995. These forward-looking statements are
subject to risks and uncertainties that may cause actual results to differ
materially. These risks and uncertainties are detailed throughout the Report and
will be further discussed from time to time in Hartcourt's periodic reports
filed with the Commission. The forward-looking statements included in the Report
speak only as of the date hereof.

PLAN OF OPERATION

The Hartcourt Companies, Inc. ("Hartcourt" or the "company") is a growth
oriented company in the China's IT distribution and retail sectors. The
company's China distribution network spans from the fast economic growth regions
of East to the South. It has 33 retail stores in the cities of Shanghai,
Beijing, HangZhou and Wenzhou, primarily engaged in the sales of white box
desktops, PC components, monitors, accessories, peripherals and branded
notebooks. It has three regional sales offices and distribution centers to
service commercial customers. The company's commercial customers are mainly
value-added resellers (VARs), systems integrators ("Sis"), retail outlets and
enterprise end users. The company provides warranty and repair services to
further enhance customer experience and increase our overall competitiveness in
the market place.

Through the strategic acquisition of a controlling interest in profitable
companies with leadership positions in regional markets, Hartcourt intends to
integrate and consolidate businesses to reach economy of scale and operating
efficiency. Hartcourt, through a combination of expertly managed internal
expansion and accretive strategic acquisitions, is executing plans to provide a
sustainable, growing, diversified and profitable revenue base throughout its
operations. The company is aggressively identifying and pursuing the best
business opportunities available. Through a continued refinement of operational
efficiencies, and increasing revenue margins, the Company is providing a clear
path to profitability for its current and future businesses.

                                       27

<PAGE>

RESULTS OF OPERATIONS

COMPARISON OF THE FISCAL YEARS ENDED DECEMBER 31, 2003 AND DECEMBER 31, 2002.

During 2003, Hartcourt continued its previously implemented plan to acquire
profitable companies that were in established industries with a history of
growth, meanwhile disposed of its unprofitable business. The Company believes
its targeted acquisitions and business restructuring will significantly increase
revenue and profits eventually.

The operations of Hartcourt for 2003 primarily consisted of operations of
Huaqing (51% ownership interest), Guowei (45% ownership interest), Xin Hunsun
(45% ownership interest), Zhongnan (51% ownership interest), AI-Asia
(wholly-owned subsidiary) and Hartcourt Capital, Inc. (wholly-owned subsidiary).
The operations of Hartcourt for 2002 primarily consisted of operations of FTL
(58.53% ownership interest), StreamingAsia (85% ownership interest), Sinobull
(wholly-owned subsidiary), AI-Asia (wholly-owned subsidiary) and Hartcourt
Capital, Inc. (wholly-owned subsidiary) and its investments and advances to
entities in China, Hong Kong and US. The Company disposed of FTL, StreamingAsia
and Sinobull in 2003.

NET SALES AND COST OF SALES

The Company recorded net sales $131,699,218 in year 2003, compared with
$1,137,011 in 2002. The big increase is driven by the acquisition of the
business of HuaQing, Guowei, NewHuaSun and Zhongnan. All of HuaQing's and
NewHuaSun's business is distribution of Samsung monitors while one third of the
Wenzhou Group's sales came from monitor business (various brands). Samsung
product accounted for 63% of the total year sales. Guowei's business is the
retail and wholesale of do-it-yourself desktops and related PC component sales.
The cost of sales is $126,609,193 in year 2003 compared with $362,382 in year
2002, and the gross margin for year 2003 and 2002 is $5,090,025 and $774,629
respectively. The decrease of margin ration is mainly due to the business
diversification.

SELLING AND GENERAL ADMINISTRATIVE EXPENSES

SG&A expenses amounted to $4,535,762 in 2003 compared to $2,774,011 in 2002. The
SG&A for newly acquired business is $3,573,702 the bulk of which is spending in
trade promotion, in-store promotion as well selling expenditures.

IMPAIRMENTS

Impairments in year 2003 amounted to $509,525 compared to $1,563,040 in the year
2002. The impairment amounts of year 2003 comprise impairment on goodwill
$195,525 and impairment on investment $400,000. In year 2003 the impairment on
investments consisted of impairment on investment in education program $100,000
and impairment on eMPACT of $300,000, and as of 31 December 2002, Hartcourt
wrote-off all the goodwill on acquisition of subsidiaries except for Sinobull
Group.

                                       28

<PAGE>

INTEREST EXPENSES

The interest expenses increased from $50,197 in 2002 to $327,423 in 2003 and the
interest expenses of newly acquired business is $326,895. The sales from the
newly acquired business in year 2003 were chiefly from Samsung monitor related
business. In March of 2003, Samsung changed its China trade credit policy from
extending credits to its distributors to total prepayment from the time the
distributors placed an order with the factory. This tightening of credit policy
resulted in the distributors having to inject additional cash equivalent to 45
days of sales. While the distributors such as HuaQing and NewHuaSun had
tightened trade credits granted to their customers and better managed the
inventory on hand, the bulk of the additional cash needs were borrowed from the
banks and therefore the substantial increase in interest expenses.

Provision for SEC lawsuit

The Company made a provision of $1,300,000 to cover the potential financial loss
from the SEC lawsuit.

GAIN ON DISPOSAL OF DISCONTINUED OPERATIONS.

Gain on disposal of discontinued operations in 2003 consist of the realized gain
of $1,010,188 for disposal of FTL, and the gain of $203,371 for disposal of
StreamingAsia, LogicSpace Asia, TianDi Hulian, HRCT Capital Ltd and HRCT Capital
Asia FTL. Gain on disposal of discontinued operations in 2002 is $1,943,701.

LOSS FROM DISCONTINUED OPERATIONS

Loss from discontinued operations is $70,360 in 2003 while the figure is
$1,020,252 in 2002.

LIQUIDITY AND CAPITAL RESOURCES

OPERATING ACTIVITIES

The net cash used by operating activities in 2003 amounted to $1,547,035
compared to $1,852,669 in 2002. Although net cash used by operating activities
is not significantly changed, the cash flow is affected chiefly by the increase
or decrease of accounts receivable, advance from customers, inventory, accounts
payable and accrued expenses of the acquired subsidiaries compared to last
year's figures.

INVESTING ACTIVITIES

Net cash obtained in investing activities amounted to $4,276,174 during 2003
compared to net cash obtained $2,538,962 during 2002. Net cash flow in during
2003 primarily resulted from acquisition of the subsidiaries $4,180,284, while
net cash flow in 2002 primarily resulted from the proceeds on notes receivable
of $1,039,389 and the proceeds from disposal of investment of $1,597,450.

                                       29

<PAGE>

FINANCING ACTIVITIES.

Net cash obtained by financing activities amounted to $997,590 in 2003 compared
to net cash used by financing activities of $878,554 during 2002. During year
2003 the Company obtained $909,167, $48,813 & $2,224,679 from proceeds on sale
of common stock, proceeds on sale of treasury stock and proceeds on loan
respectively, paid $907,847 to related parties and made payment of $1,277,222 on
loan payable. In year 2002, Hartcourt paid $7,986 for the loans due to related
parties, paid $265,691 in net from issuance of common stock and adjustment of
share price, proceeds from shareholders' loan $139,865, made payments on factor
$198,205, made payments on long-term debt of $433,299, and made payments on
capital lease of $113,238.

Discontinued Operations

On June 26th, 2003, Hartcourt signed a definitive agreement to sell all of its
interest in SyndicateAsia Ltd. ("SA") to Yee Fu Laser Company Limited ("Yee"), a
Hong Kong company, for a total consideration of US$20. In addition, Hartcourt
was granted an option to purchase up to 49 percent of Yee for a total price of
US$10. The option is valid for 36 months from the date of this Agreement.

On June 26th, 2003, Hartcourt signed a definitive agreement to sell all of its
interests in StreamingAsia Ltd. to Yee, for a total consideration of US$10. In
addition, Hartcourt was granted an option to purchase up to 49 percent of Yee
for a total price of US$10. The option is valid for 36 months from the date of
this Agreement.

On June 26th, 2003, Hartcourt signed a definitive agreement to sell 100 ordinary
shares of LogicSpace Asia Ltd. ("LS") to Yee, for a total consideration of
US$10.The above three companies provide comprehensive real-time audio and video
delivery (Streaming Media) solutions along with Internet consulting and web
application development for businesses, professionals, organizations, web sites
and content publishers.

On September 10, 2003, Hartcourt sold all of its shares in Fintel Telecom Ltd.
("FTL HK") to Fintel Telecom limited (USA), Inc (FTL), a wholly-owned subsidiary
of Hartcourt in exchange for the 15 million FTL shares. On October 9, 2003,
Hartcourt filed a Schedule14C with SEC to distribute all of its shares in FTL to
all of the records holders of Hartcourt's common stock as of October 17, 2003.
Each record holder of Hartcourt common stock as of the close of business on
October 17, 2003, will receive 0.09232471 share of the $0.001 par value common
stock of FTL.

In order to strengthen the competitiveness in the financial information
provision sectors, Sinobull Information Company Limited was sold to a
non-related company, Genius Technology International Limited ("GTI"), a leader
in this field, on May 7, 2003, for a total consideration of $411,936, of which
the amount was paid by an issuance of 57,826,793 shares of common stock of GTI
at value of $0.0071 each.

Hartcourt dissolved Tiandi HuLian, Hartcourt Capital Ltd. and Hartcourt Capital
Asia Ltd., in April, October, and November of 2003 respectively.

                                       30

<PAGE>

Extraordinary Item

The company made $1,300,000 of legal provision at year end for the pending SEC
litigation based upon legal advice. The company denies wrong doing and plans to
vigorously contest these allegations. For the purpose of financial prudence, the
company made the above provision to cover legal expense and court fees.

Change in Accounting Principle

None

ITEM 7. FINANCIAL STATEMENTS

The restated financial statements of the company for the year ended 31 December
2003, together with the independent auditors' report thereon begin on page F-1
of this report.

The financial statements of the company for the year ended 31 December 2002,
together with the independent auditors' report thereon begin on page F-2 of this
report.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL

DISCLOSURE

On August 15, 2003, Hartcourt engaged Loral International ("Loral") Certified
Public Accounts as Hartcourt's independent accountants to report on the
company's consolidated balance sheets as of December 31, 2002, and the related
consolidated statements of income, stockholder's equity and cash flows for the
year then ended. The decision to appoint Loral was approved by Hartcourt's Board
of Directors.

Hartcourt dismissed Weinberg & Company, P.A. ("Weinberg) as its auditors
effective August 15, 2002. Weinberg served as Hartcourt's independent auditors
for the company's fiscal years ended December 31, 2001 and 2000. Weinberg's
report on Hartcourt's consolidated financial statements for Hartcourt's fiscal
year ended December 31, 2001 and 2000 (the "Reports") did not contain an adverse
opinion or disclaimer of opinion and were not qualified or modified as to
uncertainty, audit scope or accounting principles, however, they were modified
to include an explanatory paragraph wherein they express substantial doubt about
Hartcourt's ability to continue as a going concern. During the company's fiscal
years ended December 31, 2001 and 2000, and during the period from January 1,
2002 until Weinberg's dismissal, there were no disagreements with Weinberg
within the meaning of Item 304 of Regulation S-B or any matter of accounting
principles or practices, financial disclosure, or auditing scope or procedure,
which disagreements if not resolved to Weinberg's satisfaction, would have
caused Weinberg to make reference to the subject matter of the disagreements in
connection with its reports.

                                       31

<PAGE>

During the company's fiscal years ended December 31, 2001 and 2000, and during
the period from January 1, 2002 until Weinberg's dismissal, there were no
"reportable events" (as such term is defined in Item 304(a)(1)(iv)(B) of
Regulation S-B).

During Hartcourt's two most recent fiscal years and any subsequent interim
periods prior to the engagement of Loral, neither Hartcourt nor anyone on the
company's behalf consulted with Loral regarding either (i) the application of
accounting principles to a specified transaction, either contemplated or
proposed, or the type of audit opinion that might be rendered on the company's
financial statements or (ii) any matter that was either the subject of a
"disagreement" or a "reportable event."

Hartcourt has requested that Weinberg review the disclosure contained herein and
has provided Weinberg the opportunity to furnish the company with a letter
addressed to the Commission containing any new information, clarification of the
company's expression of Weinberg's views, or the respects in which Weinberg does
not agree with the statements contained herein.

The restated financial statements for the year ended 31 December 2003 was
audited by Kabani & Company, Inc. ("Kabani"), our current auditor. Kabani was
engaged as our independent auditor since January 2005.

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT

DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth certain information about the directors and
executive officers of Hartcourt:

<TABLE>
<S>                            <C>
Name                           Age     Position                    Term         Date Held
---------------------------- ------ --------------------------- --------- --------------------------
Stephen Tang                    51    Director                    1 year       Since July 2001
---------------------------- ------ --------------------------- ---------- -------------------------
Dr.  Alan V. Phan               58    Founder                       N/A        Since November 1993
---------------------------- ------ --------------------------- ---------- -------------------------
Mr. David Y. Chen               35    Chairman                    1 year       Since September 2003
                                      Chief Executive Officer                  Since August 2002
---------------------------- ------ --------------------------- --------- --------------------------
Dr. Billy Y N Wang              39    Director                    1 year       Since October 2002
---------------------------- ------ --------------------------- --------- --------------------------
Mr. Geoffrey Wei                36    Director                    1 year       Since March 2003
---------------------------- ------ --------------------------- --------- --------------------------
Mr. Victor Wang                 41    Director                    1 year       Since January 2004
---------------------------- ------ --------------------------- --------- --------------------------
Ms. Carrie Hartwick             42    President and CFO           1 year       Since December 2003
---------------------------- ------ --------------------------- --------- --------------------------
Mr. Richard Yan                 30    Financial Controller        1 year       Since September 2002
---------------------------- ------ --------------------------- --------- --------------------------
</TABLE>

                                       32

<PAGE>

DIRECTORS

Mr. Stephen Tang, aged 51: Mr. Stephen Tang is the founder of Financial Telecom
Limited (FTL) and has been involved in the development and implementation of
consumer technologies for over 20 years. From 1985 to present, Mr. Tang held the
position of Chief Executive Officer of FTL. Mr. Tang was involved in the
development of new and innovative products and creation of strategic alliances
in China, Taiwan, Korea and USA. Mr. Tang holds a degree in Business
Administration from AIM-Asia Institute of Management in Manila.

Dr. Billy Y N Wang, aged 40: Dr. Billy Y N Wang is currently President of NCH
Corp China, a multi-national chemical company with more than 10 subsidiaries in
China. From 1994 to 1997, Dr. Wang was the President of Xibic Enterprises Ltd
and Senior Consultant at WCE specializing in international business development
and technology transfer. From 1991 to 1997, Dr. Wang served as the Advisor for
Office of International Trade of Washington DC. Dr. Wang obtained his Masters
and Doctorate degrees in Chemical Engineering from University of Virginia in
1990, and Bachelors degree from University of Massachusetts in 1986.

Mr. Geoffrey Wei, CICPA, aged 37: Mr. Wei is an independent financial advisor as
well as the CFO of GreenWare Technologies Ltd. He was previously the interim
CFO, Vice president and Chief Accountant for Netease.com Inc (NasdaqNM: NTES).
He also worked in audit, tax and business advisory divisions at
PriceWaterhouseCoopers and KPMG for an extensive period of time both in China
and abroad. Mr. Wei received his Bachelor of Arts degree from Beijing
Polytechnic University.

Mr. Victor Wang, aged 41: Mr. Wang is a partner at AllBright Law Office
principally specializing in foreign direct investments and indirect investments
in China. He was previously an associate with a major US law firm - Kaye
Scholer, LLP. Mr. Wang has over 15 years of experiences in various legal matters
involved in deal execution, acquisitions, investments, intellectual property
rights protection, China-focused venture capital funds raising, IPOs, secondary
offerings and private placements. Mr. Wang received his L.L.B. from Fudan
University, L.L.M. from the University of Iowa Law School and J.D. from the
Notre Dame University Law School.

Mr. David Chen, aged 36: Chairman and CEO of Hartcourt. Mr. Chen joined
Hartcourt in 2001 and served as the President of Hartcourt Capital. He has over
12 years of general management, sales and marketing experiences in media,
investment, and internet. Prior to Hartcourt, Mr. Chen was the CEO of V2
Technology Inc. and also served as the Director for Greater China at HelloAsia
Corp. Prior to that experience, he was the regional marketing director for Asia
CNN International and sales director at Turner Broadcasting System.

Directors serve for a term of one year or until their successors are elected and
qualified. Directors do not receive any cash compensation for serving on the
Board. For attending the Board meetings, Hartcourt compensates its directors
$7,000 each year and $500 for each meeting through the issuance of restricted
shares of common stock at the closing market price of the common shares valued
on first day of the calendar quarter.

                                       33

<PAGE>

Executive Officers
------------------

David Chen, Chairman and CEO, aged 36.

Mr. Chen joined Hartcourt in 2001 and served as the President of Hartcourt
Capital. He has over 12 years of general management, sales and marketing
experiences in media, investment, and internet. Prior to Hartcourt, Mr. Chen was
the CEO of V2 Technology Inc. and also served as the Managing Director for
Greater China at HelloAsia Corp. Prior to that experience, he was the regional
marketing director for Asia CNN International and sales director at Turner
Broadcasting System.

Carrie Hartwick, President and CFO, aged 42

Ms. Hartwick joined Hartcourt at the end of 2003. Prior to her current position,
she was the finance director of Dell China/HK since 2000 and before that, served
as the finance director of Gillette China and held various positions within
Johnson & Johnson including Finance Controller for Johnson & Johnson Shanghai.
Ms Hartwick holds a Bachelor of Accounting degree from Rutgers University.

Richard Yan, Financial Controller, aged 30

Mr. Yan joined Hartcourt in 2002 as the finance controller. Prior to Hartcourt,
Mr. Yan worked for KPMG in Shanghai for 5 years. He received his bachelor degree
in accounting and MBA from Shanghai JiaoTong University. Executive officers are
appointed by and serve at the will of the Board of Directors. There are no
family relationships between among any of the directors or executive officers of
Hartcourt. None of the above directors and executives are involved in any legal
proceedings.

Dr. Alan Phan, aged 58: Dr. Alan V. Phan is the founder of Hartcourt and has
been Chairman since November 1993. Dr. Phan held the positions of President and
Chief Executive Officer of Hartcourt at various times until December 2001.He is
also the founder of Hartcourt Investments and Hartcourt Pen. From 1986 to 1993,
Dr. Phan was the owner of Hartcourt Consulting, an engineer, equipment and
technology exporter to Asia and South America. From 1981 to 1986, Dr. Phan
served as Executive Vice President of EM Kay Group, which is an international
aircraft leasing company, as well as owner of Village Bank of New Jersey and
Magic Marker Industries. From 1975 to 1981, Dr. Phan was the owner of Alpha
Development, a California real estate development company; and UBI Business
Brokers of Orange County, a real estate and business brokerage office. From 1970
to 1975, Dr. Phan was Area Manager for Eisenberg Group, an Israeli conglomerate,
specialized in trading and manufacturing of industrial and consumer products.
Dr. Phan received his academic training and degrees in Environmental Engineering
from Pennsylvania State University in 1967, and Sussex College of Technology in
1975.


                                       34
<PAGE>

AUDIT COMMITTEE

Hartcourt has two members of audit committee. They are Geoffrey Wei and Billy
Wang. Mr. Wei is the chairman of the committee and qualified as an independent
director and an audit committee financial expert, as defined by Item 401(e)(2)
of Regulation S-B.

Section 16(a) Beneficial Ownership Compliance
---------------------------------------------

In June 2003, Hartcourt issued shares to Enlight Corporation Ltd., which caused
Enlight to be the beneficial owner of 11.5% of the common stock of the company.
Enlight failed to file any forms required by Section 16(a) of the Exchange Act
in connection with these transactions.

Code of Ethics
--------------

The company's code of ethics, which is applicable to its principal officers, is
filed as an exhibit to this Form 10-KSB.


                                       35

<PAGE>

                                    PART III

ITEM 10. EXECUTIVE COMPENSATION

A. The following table shows the compensation earned by (a) the individual who
served as the Company's Chief Executive Officer during Calendar 2003 and (b) the
other individual who served as an executive officer of the Company during
Calendar 2003 (collectively the "Named Executive Officers"). Information is also
provided for the fiscal years ended December 31 2002 and 2001.


<TABLE>

                           SUMMARY COMPENSATION TABLE

                                                                                                       LONG-TERM
                                                                                                     COMPENSATION
                                                        ANNUAL COMPENSATION                             AWARDS
                                                  ---------------------------------------------        SECURITIES
                                                                                  OTHER ANNUAL         UNDERLYING      ALL OTHER
NAME AND PRINCIPAL POSITION            YEAR         SALARY($)      BONUS($)      COMPENSATION($)       OPTIONS(#)    COMPENSATION($)
------------------------------------------------------------------------------------------------------------------------------------
<S>                                  <C>
 David Y. Chen                       2003 (1)      150,000             -                -               3,000,000           -
   Chief Executive Officer           2002 (2)      120,000             -                -               2,000,000           -
   and Chairman
 Carrie Hartwick                     2003 (3)      100,000             -                -               1,000,000           -
   President and Chief
   Financial Officer
 Alan Phan                           2001 (4)      250,000             -                -                       -           -
   Chief Executive Officer
   and Chairman
</TABLE>

(1)   On May 7, 2003, Hartcourt entered into an employment agreement with David
      Y. Chen, Chief Executive Officer, regarding the terms of his employment.
      This agreement has a one-year term starting from June 1, 2003 to May 31,
      2004. The agreement provides for an annual salary of $150,000 plus
      issuance of an option to purchase 3 million shares of Hartcourt common
      stock at a price of 48 cents a share applicable for a 12 months period
      from the date of issuance if he completes one-year assignment term on a
      satisfactory valuation by the Board of Directors. Fifty percent (50%) of
      Mr. Chen's annual salary is payable in cash and the balance is payable in
      shares of Hartcourt common stock. The conversion price is the average
      20-day trading price prior to the first of each month for the salary owed
      that month.

(2)   On June 1, 2002, Hartcourt entered into an employment agreement with David
      Y. Chen, Acting Executive Officer, regarding the terms of his employment.
      This agreement had a one-year term ending May 31, 2003. The agreement
      provided for an annual salary of $120,000 plus issuance of an option to
      purchase 2 million shares of Hartcourt common stock at a price of 10 cents
      per share, applicable for a 12 months period from the date of issuance if
      he completes one-year assignment term on a satisfactory valuation by the
      Board of Directors. Fifty percent of Mr. Chen's annual salary was payable
      in cash and the balance was payable in shares of Hartcourt common stock.
      The conversion price was the average 20-day market price on the first day
      of each month for the salary owed on that month.

                                       36

<PAGE>

(3)   On December 1, 2003, Hartcourt entered into an employment agreement with
      Carrie Hartwick, Chief Financial Officer, regarding the terms of her
      employment. This agreement has a one-year term starting from December 1,
      2003 to November 30, 2004. The agreement provides for an annual salary of
      $100,000 plus issuance of an option to purchase 1 million shares of
      Hartcourt common stock at a price of 65 cents a share applicable for a 12
      months period from the date of issuance if she completes one-year
      assignment term on a satisfactory valuation by the Board of Directors.
      Fifty percent (50%) of Ms. Hartwick's annual salary is payable in cash and
      the balance is payable in shares of Hartcourt common stock. The conversion
      price is the average 20-day trading price prior to the first of each month
      for the salary owed that month.

(4)   On September 10, 2002, Hartcourt entered into a consulting agreement with
      Dr. Alan Phan, regarding the terms of his consulting service. This
      agreement has a three-year term from January 1, 2002 to December 31, 2004.
      This agreement provides cash compensation of $1 for each year of service
      plus an option to purchase 3 million shares of Hartcourt common stocks at
      the closing price of the first day of each year. In September of 2003, Dr.
      Alan Phan notified company for the early termination of his consultant
      contract effective December 31, 2003. Dr. Alan V. Phan is the founder of
      Hartcourt and served as the Chairman of Hartcourt from November 1993 to
      August 2003. Dr. Phan held the positions of President and Chief Executive
      Officer of Hartcourt at various times until December 2001.

B. The following table sets forth certain information for the twelve-month
period ended December 31, 2003 with respect to grants of stock options to each
of the Named Executive Officers. No stock appreciation rights were granted to
the Named Executive Officers during Calendar 2003. We granted options to
purchase ordinary shares equal to a total of 5,000,000 shares during Calendar
2003. Options were granted at an exercise price over or equal to the fair market
value of our ordinary shares.

<TABLE>
                                      Options/SAR Grants in Last Fiscal Year
                                                Individual Grants
                                                                                             Potential Options (1)
                      Number of        % of total                                 Number of
                      Securities       Options/SARs                               Securities
                      underlying        Granted to     Exercise                   underlying     Exercise
                     Options/SARs      Employees in    or Base    Expiration      Options/SA     or Base        Expiration
Name                   Granted         Fiscal Year      Price        Date         RS Granted      Price            Date
--------------------------------------------------------------------------------------------------------------------------------
<S>                   <C>
David Chen            2,000,000             40%         0.10     May 31, 2004      3,000,000       0.48        May 31, 2005
       CEO
Alan Phan             3,000,000             60%         0.06     Dec 31, 2005
       Foundrer
Carrie Hartwick                                                                    1,000,000       0.65        Nov 30, 2005
       CFO
</TABLE>

                                       37


<PAGE>

(1) These listed options are subject to their completion of one year assignment
term on a satisfactory valuation by the Board of Directors.

C. The following table provides certain information with respect to stock
options exercised by the Named Executive Officers or important consultant during
the twelve-month period that ended on December 31, 2003. The table also provides
the number of shares covered by stock options as of December 31, 2003, and the
value of "in-the-money" stock options, which represents the positive difference
between the exercise price of a stock option and the market price of the shares
subject to such option on December 31, 2003. No stock appreciation rights were
outstanding during the last year.

<TABLE>
<S>       <C>
                               OPTIONS/SAR EXERCISES IN LAST FISCAL YEAR
                                      AND FY-END OPTION/SAR VALUES
                                                 Number of Securities           Value of Unexercised
                                                Underlying Unexercised               in-the-Money
                                                Options/SARs at FY-End         Options/SARs at FY-End
                      Shares
                     Acquired       Value      Exercisable/Unexercisable    Exercisable/Unexercisable
Name               on Exercise     Realized              (1)                           (2)
------------------ -------------- ---------- ---------------------------    ----------------------------
David Chen         1,000,000      100,000       1,000,000/3,000,000               490,000/330,000
      CEO
Carrie Hartwick                                    none/1,000,000                      none
      CFO
Alan Phan                                          6,000,000/none                 2,220,000/none
      Founder
</TABLE>

(1) Included the shares granted but subject to completing one year assignment
term on a satisfactory valuation by the Board of Directors.

(2) Based on the $0.59 per share closing price of our ordinary shares on The
Nasdaq Stock Market on December 31, 2003 less the exercise price of the options

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

EQUITY COMPENSATION PLAN INFORMATION

The following table gives information about our ordinary shares that may be
issued upon the exercise of options, warrants and rights under all of our
existing equity compensation plans as of December 31, 2003, including the 1995
Stock Plan.

<TABLE>
<S>                           <C>
Plan category                 Number of securities        Weighted average        Number of securities
                                to be issued upon        exercise price of      remaining available for
                                   exercise of          outstanding options,     future issuance under
                              outstanding options,      warrants and rights     equity compensation plan
                               warrants and rights


Equity  compensation  plans                  300,000                         1                       N/A
approved by security
holders

Equity compensation plans                  7,000,000                      0.19                 4,000,000
not approved by security
holders

Total                                      7,300,000                     0.219                 4,000,000
</TABLE>

                                       38


<PAGE>

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 were granted at no less than the fair market value at the
date of grant and have terms of 10 years. In February 1999, the company's board
of directors adopted a stock plan for its employees and others entitled the
Plan. Pursuant to the Plan, the board can authorize the issuance of up to an
aggregate of One Million shares of Common Stock of the company over a maximum of
a one year period, although the board may shorten this period. A new stock
option plan will be put forth for shareholders' approval at our 2004 annual
shareholders meeting.

All stock options issued to employees have an exercise price not less than the
fair 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 Statement of Accounting standards No. 123, the company's
net income and income per share for the year ended December 31, 2003 would not
have been changed.

Additional information relating to stock options outstanding and exercisable on
December 31, 2003 summarized by exercise price is as follows:

<TABLE>
<S>            <C>
                                            Outstanding                        Exercisable
                                 ----------------------------------   --------------------------------
 Exercise Price                                   Weighted Average                 Weighted Average
   Per Share          Shares       Life (Years)     Exercise Price      Shares      Exercise Price
-----------------  ------------- -----------------  ---------------   ----------- --------------------

$0.06 to $1.00     11,300,000       0.5 to 4.5          $0.34         11,300,000         $0.34



                                       39

<PAGE>

Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------

(a) Security ownership of certain beneficial owners

The following table sets forth information as of December 31, 2003 with respect
to persons known to Hartcourt to be the beneficial owners of more than 5% of its
voting securities and with respect to the beneficial ownership of such
securities by each director of Hartcourt.

Title of Class       Name & Address of                  Amount and Nature of Percent
                     Beneficial Owner                   Beneficial Ownership (1)

-------------------- ---------------------------------- ---------------------------- -------------------
Common stock         Dr. Alan V. Phan                   2,520,721                    1.5%
                     Room 701, Building 4, No. 777
                     MeiHua Road,
                     Pudong, Shanghai,
                     China, 201204
-------------------- ---------------------------------- ---------------------------- -------------------
Original Preferred   Dr. Alan V. Phan                   1,000 (2)                    100%
stock
-------------------- ---------------------------------- ---------------------------- -------------------
Common stock         Enlight Corporation Ltd.           16,922,640 (3)               9.9%
                     19/F Rite Plaza
                     122 Austin Road
                     Kowloon, Hong Kong
</TABLE>


(1) Except as otherwise indicated, each of the parties listed has sole voting
and investment power with respect to all of the shares of common stock
indicated. Beneficial ownership is calculated in accordance with Rule 13-d-3(d)
under the Securities Exchange Act of 1934, as amended.

(2) Dr. Alan V. Phan holds 1,000 shares of Original Preferred Stocks, which
accounts for 100% of the ownership. An aggregate of 1,000,000 shares of common
stock are issuable upon conversion of 1,000 shares of Original Preferred Stock.
As the sole holder of the 1,000 outstanding shares of Original Preferred Stock,
Dr. Phan is entitled to elect 3/5 of the number of members of Hartcourt's Board
of Directors.

(3) In previous acquisition and funding transactions, Hartcourt issued the
following restricted shares in respect of each transaction:

  Enlight transaction: 29,010,240,
  NewHuaSun transaction: 13,769,156
  HuaQing transaction: 17,300,929
  GuoWei transation: 10,863,792
  ZhongNan transaction: 8,415,371

We were instructed to issue these shares to a large number of shareholders in
each transaction whose individual holdings are less than 5% of the outstanding
shares of Hartcourt, except those share holdings issued under Enlight which
exceeds 5% as indicated above. We were informed that none of these shareholders
have any common beneficiary interest and that they will not act together for the
purpose of voting, acquiring, holding or disposing such holdings as a group. The
restriction period for 55 million shares of these combine holdings were mutually
agreed with the company verbally to extend to a 2 year period.

                                       40

<PAGE>

The Company is not aware of any other beneficial owners of more than 5% of its
voting securities based on all currently available information.

(b) Security ownership of management

The following table sets forth information as of December 31, 2003 with respect
to the beneficial ownership of such securities by each director and executive
officers of Hartcourt.

<TABLE>
<S>            <C>
Title of Class          Name & Address of      Amount and Nature of          Percent
                        Beneficial Owner       Beneficial Ownership (1)
----------------------- ---------------------- -------------------------   -----------
Common stock            David Chen                     1,112,133              0.6%

Common stock            Carrie Hartwick                    7,893                 *

Common stock            Stephen Tang                     150,704                 *

Common stock            Billy Wang                       112,133                 *

Common stock            Geoffrey Wei                      27,724                 *

Common stock            X Y Li                            27,724                 *
Common stock            Richard Yan                        8,000                 *

                        Total                          1,446,311              0.8%
</TABLE>

*   Less than 0.1%.

Unless otherwise indicated, the address for each owner is c/o The Hartcourt
Companies, Inc. 3/F, No. 710 ChangPing Road, Shanghai, China, 200040.

ITEM 12: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

During 2003, Hartcourt provided management services to GuoWei, its 45% owned
subsidiary, with service fee of US$181,221.

During 2003, Hartcourt issued 1,857,900 shares of common stock valued at
$262,145.8 to staff, officers, former officers and directors in lieu of
compensation and services.

On December 25, 2003, Hartcourt and a group of Chinese citizens signed a Stock
Purchase Agreement whereby Hartcourt agreed to sell to the Group 4,605,816
shares of its common stock restricted under the Rule 144 and/or Regulation S, at
$0.40 per share. All of the Chinese citizens are the shareholders or relatives
of our subsidiaries, who are Guan Xue Fang, Li ZhengZheng, Xu HuiZhen, Zhang
Hui, Liu Jianqiang and Qiu Jiaqi.

                                       41

<PAGE>

During 2002, Hartcourt issued 3,774,513 shares of common stock valued at
$534,400 to officers and directors in lieu of compensation and services,
included in which, 1,245,793 shares issued to Dr. Alan Phan in lieu of his 2001
compensation of $250,000.

<TABLE>
<S>                      <C>
Name of related party    relationship                 Transaction nature                   Amount
------------------------ ---------------------------- ------------------------------ --------------------
GuoWei                   45% owned subsidiary         During 2003, Hartcourt provided      $181,221
                                                      management services to GuoWei
------------------------ ---------------------------- ------------------------------ --------------------
David Chen,              CEO                          During 2003, Hartcourt              1,857,900 shares
Carrie Hartwick,         CFO                          issued shares to these              valued at
Richard Yan,             Financial Controller         persons in lieu of                  $262,155.8
Manu Ohri,               Former CFO                   compensation and services
XY Li                    Director
Stephen Tang             Director
Billy Wang               Director
Geoffrey Wei             Director
Alan Phan                Director
Zhang LanYun, Liang      Employee
WeiHong, Cui XiaoYan,    Employee
Huang Jin, Mao Li, Liu   Employee
ChangAn                  Employee
                         Employee
------------------------ ---------------------------- ------------------------------ --------------------
Guan Xue Fang            Wife of an employee of       On December 25, 2003,               $1,842,326.4
                         Huaqing, a subsidiary of     Hartcourt and a group of
                         Hartcourt                    Chinese citizens signed a
                                                      Stock Purchase Agreement
Li ZhengZheng            President of Huaqing         whereby Hartcourt agreed to
                                                      sell to the Group 4,605,816
Xu HuiZhen               Wife of employee of Huaqing  shares of its common stock
                                                      restricted under the Rule
                                                      144 and/or Regulation S, at
ZhangHui                 Director of Huaqing          $0.40 per share.

Liu Jianqing             Employee of Huaqing

Qiu Jiaqi                President of subsidiary of
                         Huaqing
------------------------ ---------------------------- ------------------------------ --------------------
Alan Phan                Chairman                     During 2002, Hartcourt              3,774,513 shares
David Chen               CEO                          issued 3,774,513 shares of          valued at $534,400
Manu Ohri                CFO                          common stock valued at
Stephen Tang             Director                     $534,400 to officers and
Jimmy Lui                Director                     directors in lieu of
                                                      compensation and services
------------------------ ---------------------------- ------------------------------ --------------------
</TABLE>

                                       42

<PAGE>

                                     PART IV

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K

a) The following list describes the exhibits filed as part of this Annual Report
on Form 10-KSB.

Exhibit No.   Description of Document

2.05     Agreement for Sale and Purchase of Certain Interest in the Registered
         Capital of HuaQing Corporation Development Co Ltd ("HuaQing") dated
         February 14, 2003 between Hartcourt Capital, Inc. and HuaQing
         shareholders. (13)

2.06     Agreement for Sale and Purchase of Certain Interest in the Registered
         Capital of Guandgdong NewHauSun Computer Co, Ltd. ("NewHauSun") dated
         April 24, 2003 between Hartcourt Capital, Inc. and NewHauSun
         shareholders. (13)

2.07     Agreement for Sale and Purchase of Certain Interest in the Registered
         Capital of Shanghai GuoWei Science and Technology Ltd ("GuoWei") dated
         April 30, 2003 between Hartcourt Capital, Inc. and GuoWei shareholders.
         (13)

2.08     Agreement for the Sale and Purchase of Equity Capital in Shanghai
         Sinobull Information Corporation Limited dated May 20, 2003 between
         Hopeful Internet Technologies Limited and Genius Technology Inc. (13)

2.09     Agreement for Sale and Purchase of Certain Interest in the Registered
         Capital of Zhangnan Group ("Zhongnan") dated June 25, 2003 between
         Hartcourt Capital, Inc. and Zhongnan shareholders. (13)

2.10     Agreement for Sale and Purchase of Certain Interest in the Registered
         Capital of Shanghai HuaQing Corporation Development Co Ltd ("Shanghai
         HuaQing") dated June 30, 2003 between Hartcourt Capital, Inc. and
         Shanghai HuaQing shareholders. (13)

2.11     Agreement for Sale and Purchase of Shanghai PengYang Computer Co., Ltd.
         dated November 21, 2003 between Hartcourt Capital, Inc and PengYang
         shareholders. (13)

2.12     Agreement for Sale and Purchase of Certain Interest in the Registered
         Capital of Beijing Challenger Wanzhong Info Tech Co., LTD
         ("Challenger") dated December 9, 2003 between Hartcourt Capital, Inc.
         and Challenger shareholders. (13)

3.01     Articles of Incorporation of Hartcourt, as amended. (1)

3.02     Bylaws of Hartcourt. (1)

3.03     Amendment to the Bylaws of Hartcourt. (1)

                                       43

<PAGE>

3.04     Amendment to the Articles of Incorporation of Hartcourt. (6)

10.01    Lease between Hartcourt and Larry M. Mitobe for Hartcourt's
         headquarters facility, dated April 9, 1996. (1)

10.02    Equipment Lease between Hartcourt USA and Anja Engineering Corporation,
         dated April 4, 1994. (1)

10.03    Stock Exchange Agreement between Hartcourt USA and Eastern Rochester,
         dated August 8, 1994. (1)

10.04    1995 Stock Option Plan. (1)

10.05    Purchase Contract between The Hartcourt Companies, Inc. and Exceptional
         Specialty Products, Inc., dated March 21, 1996. (1)

10.06    Purchase and Sale Agreement, dated August 8, 1996, between The
         Hartcourt Companies, Inc. and NuOasis International, Inc., and Addendum
         to Purchase and Sale Contract. (1)

10.07    Convertible Secured Promissory Note, dated August 8, 1996, in
         connection with Purchase and Sale Agreement, dated August 8, 1996
         between The Hartcourt Companies, Inc. and NuOasis International, Inc.
         (1)

10.08    Convertible Secured Promissory Note, dated August 8, 1996, in
         connection with Purchase and Sale Agreement, dated August 8, 1996
         between The Hartcourt Companies, Inc. and NuOasis International, Inc.,
         as amended. (1)

10.09    Sales Agreement, dated September 17, 1996, between The Hartcourt
         Companies, Inc. and Promed International, Ltd. (1)

10.10    Sales Agreement, dated September 17, 1996, between The Hartcourt
         Companies, Inc. and Mandarin Overseas Investment Co., Ltd. (1)

10.11    Purchase and Sale Agreement, dated September 27, 1996, between The
         Hartcourt Companies, Inc. and CKES Acquisitions, Inc. (1)

10.12    Secured Promissory Note, dated September 27, 1996, in connection with
         Purchase and Sale Agreement between The Hartcourt Companies, Inc. and
         CKES Acquisitions, Inc. (1)

10.13    Consulting Agreement, dated December 30, 1996, between The Hartcourt
         Companies, Inc. and American Equities LLC, a California limited
         liability company. (3)

10.14    Investment Banking Agreement, dated March 1998, between The Hartcourt
         Companies, Inc. and DanAllen Investment Group. (2)

10.16    Marketable Securities Agreement, dated July 31, 1997, between The
         Hartcourt Companies, Inc. and Capital Commerce, Ltd. (2)

                                       44

<PAGE>

10.17    Lease Termination Agreement, dated March 24, 1998, between Hartcourt
         Investment (USA) Corporation and Scripto-Tokai Corporation. (2)

10.18    Share Purchase Agreement with Enova Holdings, Inc., dated February 1,
         1999, Exchange Agreement , dated March 23, 1999, and Distribution
         Agreement, dated March 24, 1999, File # 99579493. (7)

10.19    1999 Agreement with Beijing UAC Stock Trading Online Co. Ltd. (8)

10.19    A Financial Statements of Beijing UAC Stock Exchange Online Co, Ltd.
         For the period from October 18, 1999 (date of inception) to December
         31, 1999. (8)

10.20    Agreement with GoCall.com (8)

10.21    FTL Stock Purchase Agreement (8)

10.22    Advisory Agreement and 1999 Stock Plan with NuVen Advisors, Inc. and
         Hartcourt dated March 18, 1999, File No. 333-74933. (9)

10.23    Consulting Agreement with Fred G. Luke, dba NuVen Advisors, File No.
         99768860. (10)

10.24    Consulting Agreement with Archer & Weed, File No. 99768860. (10)

10.25    On December 8, 1999, Hartcourt filed a report on Form 8-K to disclose
         the resignations of Fred Luke and Jon L. Lawver Directors and Officers,
         File No. 99770546. (11)

10.26    February 4, 2000, Hartcourt completed a private placement of 227,445
         Units and a class II Warrants to PYR Management LLC for $3,000,000
         pursuant to a regulation D Subscription Agreement, File No.524390. (12)

14.01    Code of Ethics (13)

21.01    Subsidiaries of the registrant (13)

31.01    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
         to Section 302 of the Sarbanes-Oxley Act of 2002 (14)

31.02    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
         to Section 302 of the Sarbanes-Oxley Act of 2002 (14)

32.01    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
         to Section 906 of the Sarbanes-Oxley Act of 2002 (14)

32.02    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
         to Section 906 of the Sarbanes-Oxley Act of 2002 (14)

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

                                       45


<PAGE>

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

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

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

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

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

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

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

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

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

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

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

(13) Previously filed as an exhibit to Hartcourt's Form 10-KSB/A, dated April
20, 2004, incorporated herein by reference.

(14) Filed herewith

b) Reports on Form 8-K

On February 25, 2003, Hartcourt's acquisition of 45% of ownership interest in
Shanghai HuaQing Corporation Development Co., Ltd. SEC File Number 001-12671;
File Number 03578843.

On April 25, 2003, Hartcourt's changes in Board of Directors. SEC File Number
001-12671; File Number 03663461.

                                       46

<PAGE>

On May 12, 2003, Hartcourt's acquisition of 45% of ownership interest in
GuangDong NewHuaSun Computer Co., Ltd. SEC File Number 001-12671; File Number
03691622.

On May 20, 2003, Hartcourt's acquisition of 45% of ownership interest in
Shanghai GuoWei Science and Technology Co., Ltd. SEC File Number 001-12671; File
Number 03711558.

On June 4, 2003, Sinobull Information Co., Ltd, one of the subsidiary of
Hartcourt, merged with Genius Technology International Ltd. SEC File Number
001-12671; File Number 03732871.

On June 20, 2003, Hartcourt's changes of certified public accountants. SEC File
Number 001-12671; File Number 03752052.

On August 13, 2003, Hartcourt's acquisition of 51% of ownership interest in
WenZhou ZhongNan Group. SEC File Number 001-12671; File Number 03838826. On
August 13, 2003, Hartcourt's disposal of StreamingAsia Limited, SyndicateAsia
Limited and LogicspaceAsia Limited. SEC File Number 001-12671; File Number
03838830.

On December 30, 2003, Hartcourt's acquisition of 51% of ownership interest in
Shanghai PengYang Co., Ltd. SEC File Number 001-12671; File Number 031077995.

On December 30, 2003, Hartcourt's appointment of Carrie Hartwick as the
President. SEC File Number 001-12671; File Number 031078020.

ITEM 14: PRINCIPAL ACCOUNTING FEES AND SERVICES
     --------------------------------------
For year ended December 31, 2003 and 2002 respectively, Loral International CPA
& Advisor LLC, our independent auditor, billed the fees set forth below.

                                      2003                      2002
                                      ----                      ----
Audit Fees                           70,000                    46,000
Audit-Related Fees                       --                        --
Tax Fees                                 --                        --
All Other Fees                           --                        --



                                       47




<PAGE>


SIGNATURES

In accordance with Section 13 or 15 (d) of the Securities Exchange Act of
1934,the registrant has duly caused this registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                        THE HARTCOURT COMPANIES, INC.



Date: August 1, 2006                    By: /s/ Victor Zhou
                                            -----------------------------------
                                            Victor 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                Chief Financial Officer             August 1, 2006
------------------------
Yungeng Hu


                        POWER OF ATTORNEY AND SIGNATURES

         KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Victor Zhou and Yungeng Hu, jointly
and severally, as his attorneys-in-fact, each with the power of substitution,
for him in any and all capacities, to sign any amendments to this Report on Form
10-KSB and to file the same, with exhibits thereto and other documents in
connection therewith with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes may do or cause to be done by virtue hereof.

         Pursuant to the requirements of the Securities Exchange Act of 1934,
this Form 10-KSB has been signed by the following persons in the capacities and
on the dates indicated:

Signature                            Title                             Date
---------                            -----                             ----

/s/ Victor Zhou              Chief Executive Officer              August 1, 2006
---------------------
Victor Zhou


/s/ Yungeng Hu               Chief Financial Officer              August 1, 2006
---------------------
Yungeng Hu


/s/ Billy Wang                Chairman                            August 1, 2006
---------------------
Billy Wang


/s/ Wilson Li                 Director                            August 1, 2006
---------------------
Wilson Li


/s/ Geoffrey Wei              Director                            August 1, 2006
---------------------
Geoffrey Wei

                                       48


<PAGE>


             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, 2003 and
the related consolidated statements of operations, consolidated stockholders'
equity and comprehensive income and consolidated statements of cash flows for
the year ended December 31, 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 audit.


We conducted our audit of these statements in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Hartcourt Companies, Inc as
of December 31, 2003 and the results of its operations and its cash flows for
the year ended December 31, 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 $51,624,284 including net loss
of $570,889 for the year ended December 31, 2003. 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 21, the financial statements for the year ended December
31, 2003 have been restated.

/s/ Kabani & Company Inc.

KABANI & COMPANY, INC.
CERTIFIED PUBLIC ACCOUNTANTS

Los Angeles, California
August 1, 2006




                                      F-1

<PAGE>

                    LORAL INTERNATIONAL CPA & ADVISOR, L.L.C.
                   Member of the American SEC Practice Section
--------------------------------------------------------------------------------
Main Address            : 234 Hudson Ave., #2882 Albany, New York 12210
                          Telephone: (518) 472-1789   Fax: (518) 472-1544
Hong Kong Address       : Suite# 908, Wing On Center,
                          111 Connaught Road, Central, Hong Kong
                          Telephone: (852) 2882-5699 Fax: (852) 2504-5336
--------------------------------------------------------------------------------
                          Independent Auditor's Report

To:  The Board of Directors of
     The Hartcourt Companies, Inc.
     19222 Pioneer Blvd., Suite 100
     Cerritos, California 90703

We have audited the accompanying consolidated balance sheets of The Hartcourt
Companies, Inc. and Subsidiaries as of December 31, 2002 and 2001 and the
related consolidated statements of loss and retained earnings, changes in
stockholders' equity and cash flows for the years then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 provides a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements refer to above present
fairly in all material respects, the financial position of The Hartcourt
Companies, Inc. and Subsidiaries as of December 31, 2002 and 2001 and the
results of their operations and their cash flows for the years then ended in
2002 and 2001 in conformity with accounting principles generally accepted in the
United States of America.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note # 2-q to the
financial statements, the Company has suffered recurring losses and negative
cash flow from operations that raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note # 2-q. The financial statements do not include any
adjustment that might result from the outcome of this uncertainty.

/s/ Loral International CPA & Advisor, LLC
------------------------------------
Loral International CPA & Advisor, LLC
New York, New York
May 14, 2003


                                      F-1b


<PAGE>


THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET

                                                                    DEC 31, 2003
                                 ASSETS                              (Restated)
CURRENT ASSETS
 CASH AND CASH EQUIVALENTS                                         $  3,792,086
 ACCOUNTS RECEIVABLE                                                  3,872,313
 INVENTORIES, NET                                                     4,360,719
 ADVANCE TO SUPLIERS                                                  3,979,225
 DEPOSITS, OTHER DEBTORS AND PREPAID EXPENSES                         1,537,377
 DUE FROM RELATED PARTIES                                               594,361
 NOTE RECEIVABLE (CURRENT)                                              608,573
                                                                   ------------
 TOTAL CURRENT ASSETS                                                18,744,654
                                                                   ------------
 PROPERTY & EQUIPMENT                                                   823,342
 INTANGIBLE ASSETS
 NOTE RECEIVABLES                                                     1,827,509
 GOODWILL                                                            12,000,710
 INVESTMENT                                                             411,936
                                                                   ------------
TOTAL ASSETS                                                       $ 33,808,151
                                                                   ============


                   LIABILITIES & SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
 ACCOUNTS PAYABLE                                                  $  3,442,423
 NOTE PAYABLE                                                           120,821
 SHORT TERM LOAN                                                      4,000,749
 OTHER PAYABLE                                                        4,146,152
 ACCRUED EXPENSES                                                     1,739,083
 ADVANCE FROM CUSTOMERS                                               1,977,585
 DUE TO RELATED PARTIES                                                 276,832
                                                                   ------------
 TOTAL CURRENT LIABILITIES                                           15,703,645
                                                                   ------------

MINORITY INTEREST                                                     1,895,962

COMMITMENTS & CONTINGENCIES                                           1,300,000

SHAREHOLDERS EQUITY (DEFICIT)
 Preferred Stock:
 Original preferred stock, $0.01 par value, 1,000                            10
    shares authorized, issued and outstanding
 Class A, 10,000,000 shares authorized, none                                  0
    issued and outstanding at December 31, 2003
    and 2002 , respectively
 Series A, $1,000 stated value, 4,000 shares                                  0
    authorized, issued and outstanding at December
    31, 2003 and 2002 respectively
 Series B, $1,000 stated value, 2,000 shares                                  0
    authorized, none issued and outstanding at
    December 31, 2003 and 2002, respectively
 Series C, $1,000 stated value, 1,500 shares                                  0
    authorized, none issued and outstanding at
    December 31, 2003 and 2002, respectively
 Series D, $1,000 stated value, 10,000 shares                                 0
    authorized, none issued and outstanding at
    December 31, 2003 and 2002, respectively
 Series AB, $100 stated  value, 25,000 shares                                 0
    authorized, none issued and outstanding at
     December 31, 2003 and 2002, respectively
 Total Preferred Stock                                                       10
 Common stock, $0.001 par value, 250,000,000
 Authorized 171,157,104 and 88,518,023 common
 shares issued and outstanding,
 respectively in 2003 and 2002                                          171,157
 Stock subscription receivable                                       (1,842,326)
 Additional paid in capital                                          68,338,297
 Treasury stock, at cost, 48,728 and 5,610,588                          (48,728)
     shares at December 31, 2003 and 2002,
     Respectively
 Other comprehensive loss                                               (85,582)
 Accumulated deficit                                                (51,624,284)
                                                                   ------------
TOTAL SHAREHOLERS EQUITY                                             14,908,544
                                                                   ------------
TOTAL LIABILITY. AND EQUITY                                        $ 33,808,151
                                                                   ============

  The accompanying notes form an integral part of these consolidated financial
                                   statements



                                      F-2




<PAGE>
<TABLE>

HARTCOURT COMPANIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR YEARS ENDED ON DECEMBER 31
                                                                         2003               2002
                                                                      (Restated)
                                                                     -------------     -------------
<S>                                                                  <C>               <C>
TOTAL REVENUES                                                       $ 131,699,218     $   1,137,011
COST OF SALES                                                          126,609,193           362,382
                                                                     -------------     -------------
GROSS PROFIT                                                             5,090,025           774,629
                                                                     -------------     -------------

OPERATING EXPENSES
      SELLING AND G&A EXPENSE                                            4,535,726         2,774,011
      DEPRECIATION AND AMORTIZATION                                        137,219           371,779
      IMPAIRMENTS- GOODWILL                                                109,525         1,563,040
      IMPAIRMENTS-INVESTMENT                                               400,000                --
                                                                     -------------     -------------

TOTAL OPERATING EXPENSES                                                 5,182,470         4,708,830
                                                                     -------------     -------------

LOSS FROM OPERATIONS                                                       (92,445)       (3,934,201)

OTHER INCOME(EXPENSE)
      OTHER REVENUE                                                         31,593            26,961
      INTEREST INCOME                                                      234,838            94,299
      LOSS ON DISPOSAL OF FIXED ASSETS                                          --          (295,564)
      PROVISION FOR SEC LAWSUIT                                         (1,300,000)               --
      INTEREST EXPENSE                                                    (327,423)          (50,197)
                                                                     -------------     -------------
TOTAL OTHER EXPENSES                                                    (1,360,992)         (224,501)
                                                                     -------------     -------------


INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE MINORITY INTEREST       (1,453,437)       (4,158,702)


LESS: LOSS IN SUBSIDIARY, ATTIBUTED TO MINORITY INTEREST                    24,297           685,251
                                                                     -------------     -------------
LOSS FROM CONTINUING OPERATIONS BEFORE
 INCOME TAXES                                                           (1,429,140)       (3,473,451)
                                                                     -------------     -------------

DISCONTINUED OPERATION
     GAIN ON DISPOSAL OF SUBSIDIARIES                                    1,213,559         1,943,701
     DISCONTINUED OPERATION LOSS                                           (70,360)       (1,020,252)
                                                                     -------------     -------------
                                                                         1,143,199           923,449
                                                                     -------------     -------------

LOSS BEFORE INCOME TAX                                                    (285,941)       (2,550,002)


INCOME TAX EXPENSES                                                        284,948                --
                                                                     -------------     -------------
NET LOSS                                                             $    (570,889)    $  (2,550,002)

OTHER COMPREHENSIVE LOSS
Foreign currency translation loss                                          (14,488)           (9,407)
                                                                     -------------     -------------
COMPREHENSIVE LOSS                                                   $    (585,377)    $  (2,559,409)
                                                                     =============     =============

BASIC AND DILUTED LOSS PER COMMON SHARE
  LOSS FROM CONTINUING OPERATIONS                                    $      (0.012)    $       (0.04)
  GAIN FROM DISCONTINUED OPERATIONS                                          0.008              0.01
                                                                     -------------     -------------
  LOSS PER SHARE                                                     $      (0.004)    $       (0.03)
                                                                     =============     =============
    - BASIC AND DILUTED (WEIGHTED AVERAGE)                             135,564,580        80,415,882
                                                                     =============     =============


       The accompanying notes form an integral part of these consolidated financial statements


                                                 F-3
</TABLE>




<PAGE>
<TABLE>

                               THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                              CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                         FOR THE YEARS ENDED DECEMBER 31, 2003 (Restated) AND 2002

<S>                 <C>
                                                                                  Common
                                                                                   Stock      Additional
                                     Preferred              Common             Subscriptions   Paid In
    Description                   Shares  Amount     Shares        Amount       Receivable     Capital
-------------------------------------------------------------------------------------------------------------

Balance - January 1, 2002          1,000  $   10    73,885,656  $     73,886  $   (139,865)  $ 55,774,225

Shares issued for
consulting services                   --      --     3,440,334         3,440            --        356,370


Stock subscriptions
received                              --      --            --            --       613,046             --

Shares issued to directors
in lieu of compensation &
services                              --      --     3,774,513         3,774            --        530,626


Sale of treasury stock                --      --            --            --            --       (180,082)

Shares return
in-connection with
disposal of ETCI                      --      --            --            --            --             --


Share price adjusted                  --      --            --            --            --     (1,225,455)


Dividend                              --      --            --            --            --       (250,000)

Shares issued for
subscription receivable               --      --     7,417,520         7,418      (473,181)       663,416


Foreign currency
translation loss                      --      --            --            --            --             --


Net Loss                              --      --            --            --            --             --

                            ---------------------------------------------------------------------------------
Balance - Dec 31, 2002             1,000  $   10    88,518,023  $     88,518  $          0   $ 55,669,100
                            =================================================================================


               The accompanying notes form an integral part of these consolidated financial statements

                                                   F-4a




<PAGE>
continued from above
                               THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                              CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                          FOR THE YEARS ENDED DECEMBER 31, 2003 (Restated) AND 2002


                                                                   Other                           Total
                                         Treasury Stock        Comprehensive       Accum.      Shareholders
    Description                       Shares        Amount         Loss           Deficit         Equity
-----------------------------------------------------------------------------------------------------------

Balance - January 1, 2002            2,418,367   $ (1,662,233)  $    (61,687)  $(48,503,393)  $  5,480,943

Shares issued for
consulting services                         --             --             --             --        359,810


Stock subscriptions
received                                    --             --             --             --        613,046

Shares issued to directors
in lieu of compensation &
services                                    --             --             --             --        534,400


Sale of treasury stock                (563,837)       263,305             --             --         83,223

Shares return
in-connection with
disposal of ETCI                     3,756,058     (2,325,000)            --             --     (2,325,000)


Share price adjusted                        --             --             --             --     (1,225,455)


Dividend                                    --             --             --             --       (250,000)

Shares issued for
subscription receivable                     --             --             --             --        197,653


Foreign currency
translation loss                            --             --         (9,407)            --         (9,407)


Net Loss                                    --             --             --     (2,550,002)    (2,550,002)

                            ------------------------------------------------------------------------------
Balance - Dec 31, 2002               5,610,588   $ (3,723,928)  $    (71,094)  $(51,053,395)  $    909,211
                            ==============================================================================

               The accompanying notes form an integral part of these consolidated financial statements

                                                   F-4b





<PAGE>


                                      THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                                      CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                                 FOR THE YEARS ENDED DECEMBER 31, 2003 (Restated) AND 2002

                                                                                           Common
                                                                                            Stock       Additional
                                       Preferred                     Common             Subscriptions    Paid In
        Description                Shares     Amount         Shares         Amount        Receivable     Capital
-------------------------------------------------------------------------------------------------------------------------
Balance - January 1, 2003          1,000   $         10     88,518,023   $     88,518             --   $ 55,669,100


Shares issued for
consulting services                   --             --      2,174,667          2,175             --        160,246


Shares issued to executive
and staffs in lieu of
compensation and services             --             --      1,268,440          1,268        196,127        197,395


Stock subscriptions
received                              --             --     31,298,535         31,299     (1,842,326)     2,620,195


Shares issued to directors
in lieu of compensation &
services                              --             --        589,460            589             --         64,161


Shares issued for
execution of stock option      1,000,000          1,000         99,000        100,000


Cancel of treasury stocks     (4,756,058)        (4,756)    (3,170,444)    (4,756,058)     3,175,200             --


Sale of treasury stock                --             --             --             --             --       (451,187)


Shares issued for
execution of cashless
warrants                              --             --        714,794            715             --           (715)


Shares issued in
connection of acquisition             --             --     50,349,243         50,349             --     13,151,814


Foreign currency
translation loss                 (14,488)       (14,488)


Net Loss                              --             --             --             --             --             --
                              -------------------------------------------------------------------------------------------
Balance - Dec 31, 2003             1,000   $         10    171,157,104   $    171,157   $ (1,842,326)  $ 68,338,297
                              ===========================================================================================


               The accompanying notes form an integral part of these consolidated financial statements

                                                           F-5a




<PAGE>


                              THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                             CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                         FOR THE YEARS ENDED DECEMBER 31, 2003 (Restated) AND 2002


                                                                  Other                          Total
                                         Treasury Stock       Comprehensive     Accum.       Shareholders
        Description                  Shares         Amount         Loss         Deficit         Equity
---------------------------------------------------------------------------------------------------------
Balance - January 1, 2003           5,610,588   $ (3,723,928)  $    (71,094)  $(51,053,395)  $    909,211


Shares issued for
consulting services                        --             --             --             --        162,421


Shares issued to executive
and staffs in lieu of
compensation and services


Stock subscriptions
received                                   --             --             --             --        809,168


Shares issued to directors
in lieu of compensation &
services                                   --             --             --             --         64,750


Shares issued for
execution of stock option


Cancel of treasury stocks


Sale of treasury stock               (805,802)       500,000             --             --         48,813


Shares issued for
execution of cashless
warrants                                   --             --             --             --             --


Shares issued in
connection of acquisition                  --             --             --             --     13,202,163


Foreign currency
translation loss


Net Loss                                   --             --             --       (570,889)      (570,889)
                              ---------------------------------------------------------------------------
Balance - Dec 31, 2003                 48,728   $    (48,728)  $    (85,582)  $(51,624,284)  $ 14,908,544
                              ===========================================================================

               The accompanying notes form an integral part of these consolidated financial statements

                                                  F-5b




<PAGE>


HARTCOURT COMPANIES, INC.
CONSOLIDATED CASH FLOW
FOR YEARS ENDED ON DECEMBER 31
                                                                          2003                  2002
                                                                       (Restated)
                                                                       ------------         ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss                                                               $   (570,889)        $ (2,550,002)
 Adjustments to reconcile net loss to net cash
 used in operating activities:
  Loss on abandonment of property and equipment                                  --              295,564
  Provision on doubtful receivables                                         101,186            1,115,963
  Accrual for contingent liability                                        1,300,000
  Depreciation, amortization and impairments                                646,744            1,934,819
  Gain on sale of affiliate                                              (1,143,199)          (1,020,252)
  Minority interest in loss/(gain) of subsidiaries                          (24,297)            (685,251)
  Shares issued in lieu of compensation and services                        424,566              889,211
Changes in operating assets and liabilities:
 (Increase) decrease in:
    Accounts receivable                                                     436,075            1,183,367
    Advances to suppliers                                                 2,507,989
    Inventory                                                             4,516,107                 (582)
    Prepaid expenses and other                                            2,144,455            2,179,879
  (Decrease) Increase in:
    Cash overdraft                                                               --              (82,030)
    Accounts payable                                                     (9,662,267)          (4,706,434)
    Accrued expenses and other current liabilities                       (1,228,052)
    Trade deposits                                                         (995,454)            (406,921)
                                                                       ------------         ------------
NET CASH USED IN OPERATING ACTIVITIES                                    (1,547,035)          (1,852,669)
                                                                       ------------         ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
 Proceeds on notes receivable-net                                           100,000            1,039,389
 Proceeds on return of investment                                            30,000                   --
 Cash decreased due to disposal of subs                                     (34,110)                  --
 Cash paid for investments                                                       --            1,597,450
 Cash acquired due to acquisitions                                        4,180,284                   --
 Purchase of property and equipment                                              --              (97,877)
                                                                       ------------         ------------
NET CASH PROVIDED BY INVESTING ACTIVITIES                                 4,276,174            2,538,962
                                                                       ------------         ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
 Proceeds on sale of common stock                                           909,167             (265,691)
 Proceeds on sale of treasury stock                                          48,813
 Proceeds on loans and lines of credit-net                                2,224,679
 Payments to related parties-net                                           (907,847)              (7,986)
 Payments on notes payable-net                                           (1,277,222)
 Shareholders' loan                                                              --              139,865
 Due to factor                                                                   --             (198,205)
  ayment on long-term debt
 P                                                                               --             (433,299)
  ayments on capital leases
 P                                                                               --             (113,238)
                                                                       ------------         ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES                         997,590             (878,554)
                                                                       ------------         ------------
Foreign currency translation                                                (14,488)              (9,407)
NET INCREASE (DECREASE) IN CASH                                           3,712,241             (201,668)
Cash and cash equivalents, beginning of period                               79,845              281,513
                                                                       ------------         ------------
Cash and cash equivalents, end of period                               $  3,792,086         $     79,845
                                                                       ============         ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid                                                          $    327,423         $     50,197
                                                                       ============         ============
Shares issued as part of acquisitions                                  $ 13,202,163         $         --
                                                                       ============         ============



         The accompanying notes form an integral part of these consolidated financial statements



                                                   F-6
</TABLE>

<PAGE>


THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003

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 incurred on November 5, 1994. Subsequent to the acquisition,
Stardust changed its name to The Hartcourt Companies, Inc.

As of December 31, 2003, the Company owns 100% of three (3) British Virgin
Island ("BVI") incorporated companies. The names of those three companies are
Hartcourt Companies Ltd., Hartcourt Capital Inc., and AI-Asia Inc. All of the
three BVI subsidiaries are holing companies for China assets.

During the year ended December 31, 2003, Hartcourt Companies Ltd. disposed off
three (3) subsidiaries, StreamingAsia Ltd, Tiandi Hulian Technologies Ltd, and
SyndicateAsia Ltd. (See Note # 11, Discontinued Operations). Hartcourt Companies
Ltd also owns 51% interest of Sinobull Information Co., Ltd ("Sinobull"), with
no operations, as of December 31, 2003. During the year of 2003, Hartcourt sold
all its interest in Sinobull to GTI. As a result, it obtains a 17% interest on
GTI as of December 31, 2003. The exchange transaction has no market value, as of
December 31, 2003.

Hartcourt Capital Inc. owns 100% of Hartcourt Investment Management (Shanghai)
Co., Ltd., located in Shanghai of China. During the year of 2003, the Hartcourt
Capital Inc., disposed off two subsidiaries, Hartcourt Capital Ltd. and
Hartcourt Capital Asia Ltd. (See Note # 11, Discontinued Operations).

During the current year ended December 31, 2003, the Company acquired four (4)
substantial foreign subsidiaries, located and operated in China. As a result,
the Company owns 45% equity interest and 10% proxy right of Guangzhou Newhuasun
Computer Co., Ltd ("Newhuasun", located in GuangZhou City, China), 51% equity
interest of Hauqing Corporation Development Ltd ("Huaqing", located at Shanghai
City, China), 45% equity interest with 10% proxy right of Shanghai Guowei
Science & Technology Ltd ("Guowei", located in Shanghai, China), and 51% equity
interest of ZhongNam Group ("ZhongNan", located in WenZhou, of China,), (See
Note # 3, Acquisitions and Investments and Note # 22, Subsequent Event on
disposal of Guowei in 2004).

AI-Asia, Inc. (AA), the third holding company, owns 100% equity of AI-Asia
(Shanghai) Information Technology, Inc of China ("AI"), with insignificant
value. During the year of 2003, AA disposed off Logicspace Asia Ltd of Hong Kong
("LA") (See note # 11, Discontinued Operations).

                                      F-7

<PAGE>

During the year ended December 31, 2003, the Company exchanged all its shares
(58.53%) in Financial Telecom Limited ("FTL", a Hong Kong incorporated company)
with a related parties, Financial Telecom Limited (USA) Inc. ("FTL NV", a Nevada
incorporated company), in exchange for the 15.1 million FTL NV shares. As the
FTL has incurred recurring losses with negative assets, the shares of FTL is of
no value. On October 9, 2003, the Company filed a Schedule 14C with SEC to
distribute all FTL NV shares to the Company's shareholders (on record date of
October 17, 2003,). As of December 31 2003, the procedures for the above share
distribution have not been completed, as the conditional distribution has not
been met. (See Note#10 , Related Party Transactions.)

During the year of 2003, the Company's principal activities are conducted by the
four (4) newly acquired foreign subsidiaries (see Note # 3, Acquisitions and
Investments). Other subsidiaries have little business activities and no material
impact to the Company's 2003 operations. All the four (4) subsidiaries are
operated in China..

2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A summary of the Company's significant accounting policies applied in the
preparation of the accompanying consolidated financial statements are as
follows:

a) Basis of Consolidation

         Per Statement of Financial Accounting Standard (SFAS) #141, all
         business combinations have been 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.

         For purposes of these consolidated financial statements, the Hartcourt
         Companies, Inc. and its subsidiaries are referred to collectively as
         the "Company" or "Hartcourt". The accompanying 2003 consolidated
         financial statements of the Company includes the accounts balances of
         its majority owned or controlled subsidiaries i.e., Huaqing, ZhongNan,
         Newhuasun and Guoweiand its 100% owned subsidiary Hartcourt Capital,
         Inc. and its 100% owned subsidiary AI-Asia, Inc. While for the year
         2002, the consolidated Financial statements include the accounts
         balances of The Hartcourt Companies, Inc, its 58.35% owned subsidiary
         Financial Telecom Limited (FTL), its 100% owned subsidiary Hartcourt
         Companies Ltd., its 85% owned subsidiary StreamingAsia, Ltd., its 100%
         owned subsidiary Hartcourt Capital, Inc. and its 100% owned subsidiary
         AI-Asia, Inc. F-8




<PAGE>

         The Company divested and/or closed down seven inactive (7) subsidiaries
         in the year of 2003. (See Note # 11, Discontinued Operations). All
         material inter-company balances and transactions have been eliminated
         in consolidation.

b) Use of Estimates

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

c) Cash and Cash Equivalents

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

d) Accounts Receivable

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

e) Advances to suppliers

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

f) 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.

         Inventories as of December 31, 2003 consisted of the following:


         Monitors                                  $  1,263,005
         Others IT products                           3,097,714
                                                   ------------
                                                   $  4,360,719
                                                   ============

                                      F-9

<PAGE>

g) Property and Equipment

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

h) Intangibles

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

i) Impairment of Long-Lived Assets

         Effective January 1, 2002, the Company adopted Statement of Financial
         Accounting Standards No. 144, "Accounting for the Impairment or
         Disposal of Long-Lived Assets" ("SFAS 144"), which addresses financial
         accounting and reporting for the impairment or disposal of long-lived
         assets and supersedes SFAS No. 121, "Accounting for the Impairment of
         Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and the
         accounting and reporting provisions of APB Opinion No. 30, "Reporting
         the Results of Operations for a Disposal of a Segment of a Business."
         The Company periodically evaluates the carrying value of long-lived
         assets to be held and used in accordance with SFAS 144. SFAS 144
         requires impairment losses to be recorded on long-lived assets used in
         operations when indicators of impairment are present and the
         undiscounted cash flows estimated to be generated by those assets are
         less than the assets' carrying amounts. In that event, a loss is
         recognized based on the amount by which the carrying amount exceeds the
         fair market value of the long-lived assets. Loss on long-lived assets
         to be disposed of is determined in a similar manner, except that fair
         market values are reduced for the cost of disposal. Based on its
         review, the Company believes that, as of December 31, 2003 there were
         no significant impairments of its long-lived assets used in operations.

j) Advances from Customers

         The Company receives advances from certain customers for sales of its
         product. The advances from customers are interest free and unsecured.

                                      F-10

<PAGE>

k) Minority Interest

         The amount represents the minority shareholders' interest in Huaqing, a
         51% subsidiary, the minority shareholders' interest in Guowei, a 45%
         subsidiary, the minority shareholders' interest in Newhuasun, a 45%
         subsidiary, the minority shareholders' interest in Zhongnan, a 51%
         subsidiary, the minority shareholders interest in Hangzhou Huaqing, a
         55% subsidiary of Huaqing, and the minority shareholders interest in
         Guowei Digital, a 70% subsidiary of Guowei.

l) 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.

m) 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.

n) 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.

o) Foreign Currencies Translation

                                      F-11

<PAGE>

         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.

p) 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.

q) 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.

r) 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.

                                      F-12

<PAGE>

s) 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.

t) Going Concern

         As shown in the accompanying consolidated financial statements, the
         Company incurred a net loss from its operations of $570,889 and
         $2,550,002 for the years ended on December 31 of 2003 and 2002.
         Negative cash flows from the operations of $1,547,035 and $1,852,669
         were noted for the years ended December 31, 2003 and 2002 and
         accumulated deficit of $51,624,284 for the year ended December 31,
         2003. These matters raise substantial doubt about the Company's ability
         to continue as a going concern.

         The Company, despite the significant increase of its 2003 income and
         business activities, 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.

u) 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.

                                      F-13

<PAGE>

         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.

         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


                                      F-14

<PAGE>

         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.

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 service 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.

NOTE 3. ACQUISITIONS AND INVESTMENTS

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

                                      F-15

<PAGE>

Each of the acquisitions was conducted through an exchange of equity shares
between the common stocks of Hartcourt and that of subsidiaries. The aggregated
value of the four acquisitions is of $13,202,163. As the Chinese laws may
prohibit foreign companies involved in the computer distribution industry,
Hartcourt, uses its agents of Chinese citizens to hold the shares of the
acquired subsidiaries.

A) ACQUISITION OF HUAQING CORPORATE DEVELOPMENT CO., LTD ("HUAQING") IN CHINA

As discussed in Note # 1, General, the Company, via its wholly owned subsidiary
(HRCT) entered into two conditional agreements to acquire 45% and 6% of equity
interest of Hauqing in February of 2003 and June of 2003 respectively.

The consideration for the acquisition was solely paid by the issuance of
15,960,474 and 1,340,455 common shares of the Company, with the value of $0.062
and $0.6 per share respectively (total consideration equivalent to US$1,793,822)
for this acquisition. Under the agreement, Huaqing is promised to generate a net
operating profit of $540,000 (RMB4.5 millions) and an income of $48 millions
(RMB 4 billions) for the year ended December 31, 2003. The Company has the right
to cancel the sales agreement, if Huaqing cannot meet the profit and income
promised.

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

Amount ($)

     Current assets                                                   6,500,853
         Properties & equipment, net                                    560,084
         Current liabilities                                         (7,028,276)
         Minority interest                                             (150,305)
         Goodwill                                                     1,911,466
         Consideration paid: Common stock                             1,793,822

B) ACQUISITION OF GUANGZHOU NEWHUASUN COMPUTER CO., LTD ("NEWHUASUN") IN CHINA

The Company acquired 45% equity interest with 10% proxy right of Newhuasun via
its wholly owned BVI subsidiary, HRCT, on April 24, 2003.

The total consideration for the acquisition was valued at $3,029,214, paid by
the issuance of 13,769,156 common shares at value of $0.22 per share of
Hartcourt. Under the agreement, Newhuasun guaranteed to generate a net operating
profit of $543,596 (RMB 4.5 millions) and income of $48.3 millions (RMB 4
billion) for the current year ended December 31, 2003. The Company has the right
to cancel the sales agreement, if Newhuasun cannot meet the profit and income
promised.

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

                                      F-16

<PAGE>

NEW HUASUN
CONDENSED BALANCE SHEET
AS OF THE ACQUISITION DATE, APR 30, 2003
                                                                 Amount ($)

    Current assets                                               10,067,811
    Properties & equipment, net                                      58,719
    Current liabilities                                          (9,888,250)
    Minority interest                                              (131,054)
    Goodwill                                                      2,921,988
    Consideration paid: Common stock                              3,029,214

C) ACQUISITION OF SHANGHAI GUOWEI SCIENCE AND TECHNOLOGY LTD ("GUOWEI") IN CHINA

The Company acquired 45% equity interest of Guowei via its wholly owned BVI
subsidiary, HRCT, on April 30, 2003. The total consideration for the acquisition
was $3,367,774 which was paid by with the issuance of 10,863,792 common shares
of the Company at value of $0.31 each. . Under the agreement, Guowei is
guaranteed to generate a net profit of $422,797 (RMB3.5millions) and turnover of
$36.2millions (RMB300millions) for the year ended. HRCT has the right to cancel
the sales and purchase agreement if Guowei cannot meet the requirements.

    Guowei
    CONDENSED BALANCE SHEET
    AS OF THE ACQUISITION DATE, APR 30, 2003

                                                                   Amount ($)

    Current assets                                                  5,858,727
    Properties & equipment, net                                       146,337
    Current liabilities                                            (4,826,184)
    Minority interests                                               (728,350)
    Goodwill                                                        2,917,245
    Consideration paid: Common stock                                3,367,774


D) ACQUISITION OF WENZHOU ZHONGNAN COMPUTER GROUP OF COMPANIES ("ZHONGNAN")

The Company acquired 51% equity interest of ZhongNan via its wholly owned BVI
subsidiary, HRCT, on June 28, 2003. The total consideration for the acquisition
was $5,011,353 millions, which was paid by the issuance of 8,415,370 common
shares of the Company at value of $0.5955 each.

Under the agreement, ZhongNan is promised to generate a net profit of $326,158
(RMB2.7millions) and income of $24.16millions (RMB200millions) for the year
ended 2003. HRCT has the right to cancel the sales agreement and divested
ZhongNan, if ZhongNan cannot meet the requirements performance.


                                      F-17

<PAGE>

    ZHONGNAN
    CONDENSED BALANCE SHEET
    AS OF THE ACQUISITION DATE, JUNE 30, 2003
                                                                   Amount ($)

    Current assets                                                 2,469,154
    Properties & equipment, net                                        8,733
    Other investment                                                  57,743
    Deferred assets                                                      695
    Current liabilities                                           (1,043,500)
    Minority interest                                               (731,485)
    Goodwill                                                       4,250,011

    Consideration paid: Common stock                               5,011,353


E) INVESTMENT IN GENIUS TECHNOLOGY INTERNATIONAL LIMITED ("GTI")

During the year of 2003, the Company via its wholly own subsidiary disposed off
Sinobull Information Co., Ltd to a non-related company (GTI) in exchange for the
17% (57,826,793 shares at value of 0.0071 each, amounted to $411,936) interest
of GTI.

H) OTHER INVESTMENTS

The following is a summary of investments under the cost method as of December
31:

                                                                         2003
                                                                      ---------
    Investment in Education Program                                   $ 100,000
    eMPACT                                                              300,000
    Investment in GTI                                                   411,936
                                                                      ---------
    Total investment                                                    811,936
    Impairement of other investments                                   (400,000)
                                                                      ---------
    Net                                                                 411,936
                                                                      =========

The Company evaluated its investments on December 31, 2003 for the impairment
and determined some of the investments were of no value. Therefore, the Company
recorded an impairment loss of $400,000 of its other investments.

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.

                                      F-18

<PAGE>

NOTE 5 ACCOUNTS RECEIVABLE

Accounts receivable as of December 31, 2003 consisted of the following:


       Accounts receivable                                         $ 3,872,313
       Less: allowance for doubtful accounts                                --
                                                                   -----------
                                                                   $ 3,872,313

NOTE 6 RECEIVABLES FROM RELATED PARTIES



Receivables from related parties as of December 31, 2003 are summarized as
follows:


     Due from a minority shareholder (Note 1)                           $120,821
     Due from the directors of the subsidiaries (Note 2)                 473,540
                                                                        --------
     Total receivables                                                  $594,361
                                                                        ========


     Note 1       The amount was due to Huaqing (51% owned subsidiary of the
                  Company) by its shareholder under business transactions.

     Note 2       The amount was due to Guowei (45% owned subsidiary of the
                  Company) by its director under business transactions.

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


NOTE 7 NOTES RECEIVABLE

Notes receivable as of December 31, 2003 consist of the following:


         Note receivable from Edda Ltd.,  interest at 6%
         per annum,  quarterly  payments  of 50,000 plus        $2,027,509
         interest  with a balloon  payment of $2,715,772
         due  December 1, 2006,  secured by the tangible
         and intangible assets of Edda, Ltd
         Note receivable from Shanghai Wind  Information           338,573
         Co.,  Ltd., non interest  bearing,  non secured
         and due on demand
         Loan  receivable  from Beijing Total  Solutions            70,000
         System,  Ltd.,  non-interest  bearing,  due  on
         demand,  convertible  by the company into 5% of
         the outstanding common stock, unsecured
                                                                -----------

                                                                $2,436,082
                                                                ===========

                                      F-19

<PAGE>

         Summary of notes receivable:

                                                                       2003
         Current portion                                        $   608,573
         Non-current portion                                      1,827,509
                                                                -----------
         Total                                                  $ 2,436,082
                                                                ===========

NOTE 8 RELATED PARTY TRANSACTIONS

There are numerous related parties transactions incurred in the years ended
December 2003 and 2002:

    a) Huaqing sold $10,248,626 (or RMB 84,840,180) monitors to its
    unconsolidated subsidiary as of December 31, 2003.

    Huaqing, a 51% owned subsidiary of the Company, sold $19,154,916 (RMB
    158,568,227) computer monitors to its minority shareholder (Shanghai Huaqing
    Economic Development Co., Ltd).

    Huaqing collected rental income and interest income amounted to $10,147 (or
    RMB84,000) and $11,925 (or RMB98,720) respectively from an associated
    company as of December 31, 2003.

    A shareholder of Huaqing issued two (2) checks of amount $1,553,038 (or
    RMB13 million) to Huaqing, as working capital to finance Huaqing operation.

    b) Newhuasun, a 45% owned subsidiary of the Company, sold $10,248,626 (or
    RMB84,840,180) monitors to its related company as of December 31, 2003.

    c) Guowei, a 45% owned subsidiary of the Company, purchased $590,629 (or
    RMB4,889,341) computer accessories from its subsidiary as of December 31,
    2003.

NOTE 9 PROPERTIES AND EQUIPMENT

Following is the summary of the Company's property and equipment as of December
31, 2003:


    Building                                                        $   562,359
    Office equipment and computers                                      117,073
    Furniture and fixtures                                               23,842
    Leasehold improvements                                                   --
    Vehicle                                                             307,049
                                                                    -----------
                                                                      1,010,359
    Less: accumulated depreciation                                     (187,017)
                                                                    -----------
    Property and equipment, net                                     $   823,342
                                                                    ===========


                                      F-20

<PAGE>

Depreciation expenses for the years ended December 31, 2003 and 2002 are
$122,403 and $342,147 respectively.


NOTE 10 INTANGIBLES

Goodwill resulting from the acquisitions of subsidiaries as of December 31, 2003
are as follows.

    a) Goodwill from the acquisition of HuaQing $1,911,466

    b) Goodwill from the acquisition of NewHuaSun $2,921,988

    c) Goodwill from the acquisition of GuoWei $2,917,245

    d) Goodwill from the acquisition of ZhongNan $4,250,011


NOTE 11 DISCONTINUED OPERATIONS

In April of 2003, Hopeful Internet Technology Limited ("HIT"), a 51% owned
subsidiary of the Company, disposed off its wholly owned foreign subsidiary,
Shanghai Sinobull Information Corp. Ltd. to a non-related party. According to
the sales agreement, HIT received 57,826,793 common shares (or equivalent to 17%
ownership) of the buyer.

In June of 2003, AI Aisa Inc ("AI"), a wholly owned subsidiary of the Company,
disposed off all its 85% interest in Logicspace Asia Ltd ("Logicspace") to a
non-related party. According to the sales and purchase agreement, AI received
cash of $10 together with an option to purchase up to 49% equity interest of the
buyer for $10. The Company recorded a loss of $3,371 in connection with the
disposal. As of December 31, 2003, the Company did not exercise the option.

In June of 2003, Hartcourt Company Ltd ("HRCT"), a wholly owned subsidiary of
the Company, entered into two (2) sales agreements to dispose off all its 85%
interest in StreamingAsia Ltd ("Streaming") and SyndicateAsia Ltd ("Syndicate").
According to each sale agreement, HRCT received a cash of US$10, together with
an option to purchase up to 49% equity interest of the buyer. As of December 31,
2003, the company did not exercise the option. The company recorded a total gain
of $512,305 in connection with these disposals.

In November of 2003, Tiandi Hulian Technologies Ltd ("Tiandi"), a 51% owned
subsidiary of the Company, was stroke off in Hong Kong and a loss of $303,160
was recorded.

Hartcourt Capital Ltd ("HRCT Capital") and Hartcourt Capital Asia Ltd ("HRCT
Asia"), two wholly owned subsidiaries of the Company, were being stroked off in
Hong Kong in August of 2003 and in February of 2004 respectively. As a result of
these closed down, losses of $6,780 and gain of $4,777 were recorded for the
disposals respectively.

                                      F-21

<PAGE>

During the year of 2003, the Company signed an agreement to sell all its 58.53%
equity interest in Financial Telecom Limited ("FTL"), a subsidiary with
operating losses in the past two year and negative retained earning, to
Financial Telecom Limited (USA) Inc. ("FLT NV", a related company) in exchange
for 15 millions of FTL NV shares. On October 9, 2003 and October 14, 2003, the
Company filed two preliminary information (Schedule 14C) with SEC to distribute
all of its shares in FTL NV to the Company's shareholders recorded on October
17, 2003. The Company has not distributed the 15.1 millions shares of FTL NV to
the specific shareholders as of December 31, 2003, instead shares were capped by
the Company in trust.


Discontinued operation gain and loss on disposal of discontinued operations are
summarized as follows:

<TABLE>
<S>     <C>

----------------- ----------- ------------- ----------- ----------- ----------- ------------ ------------- -----------
                  Logic       Streaming     HRCT        HRCT        Sinobull    Tiandi       FTL           Total
                  Space       Asia          Capital     Capital     Info
                                            Ltd         Asia
----------------- ----------- ------------- ----------- ----------- ----------- ------------ ------------- -----------
Net book value         3,781      (512,285)      6,780      (4,777)    411,936      303,160    (1,010,188)   (801,593)
----------------- ----------- ------------- ----------- ----------- ----------- ------------ ------------- -----------
Disposal                  10            20           -           -     411,936            -             -     411,966
consideration
----------------- ----------- ------------- ----------- ----------- ----------- ------------ ------------- -----------
Gain/(loss) on        (3,771)      512,305      (6,780)      4,777           -     (303,160)    1,010,188   1,213,559
disposal
----------------- ----------- ------------- ----------- ----------- ----------- ------------ ------------- -----------
Gain/(loss) on        (1,044)      (22,387)          -           -     (49,502)        (141)        2,714     (70,360)
discontinued
operations
----------------- ----------- ------------- ----------- ----------- ----------- ------------ ------------- -----------
</TABLE>


NOTE 12   SHORT-TERM LOANS

During 2003 the bank loans are listed as follows:

                                      F-22

<PAGE>

<TABLE>
<S>     <C>
                                         Interest rate
Subsidiaries Name       Amount            (Per annum)       Due Date       Secured by

                                                                           Properties & subsidiaries director
Huaqing                 $ 2,792,538            4.80%        Oct '2004      personal guarantee

                                                                           Corporate guarantee & director
Guowei                  $   362,463       5.84-6.37%        Sep '2004      personal properties

Wenzhou ZhongNan        $   724,927            5.04%        Feb '2004      Fixed deposit amount to RMB1million

                                                                           Subsidiaries Director / Financial
                                                                           controller of Hartcourt personal
Newhuasun               $   120,821       5.84-6.05%        Oct 2004       guarantee
                        -----------
                        $ 4,000,749
</TABLE>

                                                                        2003
                                                                      ----------
    Current portion                                                   $4,000,749
    Non current portion                                                       --
                                                                      ----------
    Total Bank loan                                                   $4,000,749
                                                                      ==========

NOTE 13 OTHER PAYABLE

Other payable includes a loans from employees of Huaqing amounting $617,396 in
exchange of short-term bond issued to its employees to raise additional working
capital. The bond is 10 % interest bearing and payable at the end of the year.
As of December 31, 2003 the amount was not settled.

NOTE 14  NOTES PAYABLE

The Note payable amounting $120,821 is issued by ZhongNan (a subsidiary of the
Company) and secured by Industrial and Commercial Bank of China Wenzhou branch.
It is a 6-month interest free note with maturity date of Feb 13, 2004.

Notes payable are summarized as follows:


                                                                   2003
              Current portion                                   $ 120,821
              Non-current portion                                      --
              Total                                             $ 120,821
                                                                =========


                                      F-23

<PAGE>

NOTE 15  PAYABLES TO RELATED PARTIES

Payables to related parties as of December 31, 2003 are summarized as follows:



     Payable to shareholders                                    $   92,015
     Payable to an invested companies                                5,385
     Payable to Directors                                           25,747
     Payable to a Minority shareholder                             153,685
                                                                -----------
                                                                $  276,832
                                                                ===========

The payables are due on demand, interest free and unsecured.

NOTE 16  ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities as of December 31, 2003 are
summarized as follows:

    Accrued director's fee                                            $   21,000
    Accrued taxes                                                      1,448,214
    Accrued legal settlement                                                   0
    Accrued professional fees                                             30,000
    Other current liabilities                                            239,869
                                                                      ----------
    Total                                                             $1,739,083
                                                                      ==========

NOTE 17  COMMITMENTS AND CONTINGENCIES

A) Operating Leases

The Company leases its offices and facilities under long-term, non-cancelable
lease agreements expiring at various dates through December, 2004. 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, 2003 and 2002 were $611,161
and $162,006, respectively.

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

                        Year Ending December 31                         Payments
                         2004                                           $596,565
                         2005                                            255,043
                                                                         -------
                        Total future lease payments                     $851,608
                                                                        ========

                                      F-24

<PAGE>

(B) Consulting Agreement

The Company has entered a consulting agreement with a major controlling
shareholder to provide consulting services, who had been employed by the Company
as its Chairman & CEO before January 1, 2002, to provide salary and shares
option through December 31, 2004. Minimum salary payments under the contract
currently amounted to $1 per year and an option to purchase three (3) million
common shares of the Company at the closing price of the Company on the first
day of each year. As the consulting service is imperative to the operations of
the Company, a possible loss of this experienced consultant may be a potential
risk to the Company.

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 were 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 were used to calculate this compensation amount.

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 was US$150,000 payable in equal monthly
installment of US$12,500 cash. Ms Carrie Hartwick received $35,000 cash for her
compensation.

(C) Legal Proceedings

     a) In Securities and Exchange Commission vs. The Hartcourt Companies, Inc

     United States District Court for the Central District of California Case
     No. CV03-3698LGB (PLAx), the Securities and Exchange Commission has filed a
     complaint for the alleged securities violations. The complaint alleges that
     the company illegally used an S8 registration statement in 1999 to
     improperly raise capital, and that false and misleading press releases were
     issued by the Company from September 9, 1999 through November 18, 1999 and
     the SEC is seeking disgorgement from the company of approximately $800,000
     civil penalties and interest, as well as an injunction against future
     securities law violation. The Company's maximum potential liability is
     approximately $1,300,000. The Company denies the allegation and plans on
     vigorously contesting this litigation. During the year of 2003, a provision
     of $1.3 millions was made to cover this potential legal risk.

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. As of April 14, 2005, the
Company has paid off the entire US$1.1 million judgment to the SEC.

     b) Apollo Financial Network, LLC vs. Hartcourt

     Apollo Financial Network filed an action for breach of contract arising out
     of a consulting agreement which was canceled in January of 1999. The matter
     was settled when the Company stipulated to enter of judgment against it in
     the amount of $11,500, which represented an amount less than the projected
     costs of defense. Judgment in such an amount was entered against the
     Company on November 20, 2002.

                                      F-25

<PAGE>

     c) Charles Hogue vs. The Hartcourt Companies Inc.

     Charles Hogue claimed a finder's fee for introducing The Hartcourt
     Companies, Inc to a potential acquisition target. The Hartcourt Companies,
     Inc, sent a check to Mr. Hogue in the amount of $40,500 for such finder's
     fee, but Mr. Hogue demanded that he be paid in shares of The Hartcourt
     Companies, Inc., which the amount of shares are in dispute. The Hartcourt
     Companies, Inc's Florida counsel failed to timely file an answer to the
     complaint, and a default judgment in the amount of $2,901,752 was entered
     on January 31, 2001. The Hartcourt Companies, Inc. brought a motion to set
     aside the default, which was denied, and for which The Hartcourt Companies,
     Inc. appealed. The appellate Court ruled in favor the Company and reversed
     the verdict as well as dismissed the complaint for lack of jurisdiction.
     Mr. Hogue has until the middle of the year of 2005 to bring an action in
     California, against the company. The probable legal liability for The
     Hartcourt Companies, Inc. is approximately $32,000.

     d) Comerica Bank - California vs. Pego Systems, Inc

     The Hartcourt Companies, Inc., was named as a co-defendant as a guarantor
     of a promissory note, along with co-guarantor Enova Holdings, executed by a
     former subsidiary, Pego Systems, Inc. The parties executed a stipulation
     for entry of judgment to enforce a settlement agreement, which stipulation
     calls for certain payments and transfers of funds by Pego Systems, Inc. As
     co-guarantor, the Company liabilities could be approximately $600,000 or
     less, with the amount decreasing upon payment by Pego Systems, Inc., and
     Enova Holdings. In addition, certain assets of Enova Holdings have been
     held in trust for the benefit of Commerica only, which should be sufficient
     to accomplish a global resolution and settlement of the Commerica judgment
     without the need for any contribution by the Company.

     e) The Company Is Also A Party Possibly Subject To Various Claims And Legal
     Proceedings arising out of the normal course of its business. These claims
     and legal proceedings relate to contractual rights and obligations and
     employment matters. While there can be no assurance that an adverse
     determination of any such matters could not have a material adverse impact
     in any future period, management does not believe, based upon information
     known to it, that the final resolution of any of these matters will have a
     material adverse effect upon the Company's consolidated financial position
     and annual results of operations and cash flows.

     f) Potential Liabilities Relating To the Ceased Subsidiaries.

     As mention in Note # 1, General, that the Company ceased the operations of
     many subsidiaries, during the year of 2003. Some of these companies not
     being legally dissolved are still legal entities as of December 31, 2003.
     The Company with its subsidiaries located in various geographic locations
     in Hong Kong, China, US, and BVI, are subject to different legal
     jurisdictions and laws. Each of the entities may subject to potential
     claims, or has un-fulfilled obligations or/and litigations due to the
     cessations of operations and/or dismissals of prior employees. No risk
     exposure study was performed to identify the related financial risks and
     potential liabilities to the Company as of December 31, 2003. The Company
     management and its legal advisor were unable to provide an estimate of the
     potential risks.

                                      F-26

<PAGE>

NOTE 18 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 common shares of the
company issued and outstanding as of December 31, 2003 and December 31, 2002 are
171,157,104 and 88,518,023 respectively.

(B) Original Preferred Stock

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

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

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

(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, powers, 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, 2003.

(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, 2003.

                                      F-27

<PAGE>

(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, 2003.

(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,
2003.

(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 2003, the Company issued 31,298,535 shares of common stocks for cash of
$809,168 for working capital.

During 2002, the Company issued 7,417,520 shares of common stock to individuals
for cash of $670,833.

(J) Common Stock Issued for Services The Company issued its stock for services
to various services providers. The stocks were valued at the average fair market
value of the freely trading shares of the Company as quoted on OTCBB on the date
of issuance.

During 2003, Hartcourt issued 2,174,667 shares of common stock valued at
$162,421 to various consultants for their professional and legal services.

                                      F-28

<PAGE>

During 2003, Hartcourt issued 589,460 shares of common stock for services to
four Directors of the Board, and two Member of Audit Committee of the Company
with a fair value of $64,750.

During 2003, Hartcourt issued 1,268,440 shares of common stock valued at
$197,395 to staff, officers, former officers and directors in lieu of
compensation and services.

During the year of 2002, the Company issued 1,280,364 shares of common stock to
Directors for services rendered having a fair value of $144,000. During the year
of 2001, the Company issued 295,206 shares of common stock to directors for
services rendered having a fair value of $118,240.

During 2002, the Company issued 2,494,149 shares of common stock to officers for
services rendered having a fair value of $390,400. During 2001, the Company
issued 511,764 shares of common stock to officers for services rendered having a
fair value of $221,600.

During 2002, the Company issued 3,440,334 shares of common stock to consultants
for services rendered having a fair value of $359,810. During 2001, the Company
issued 1,136,054 shares of common stock to consultants for services rendered
having a fair value of $374,173.


(K) Common Stock Issued for Warrants

During the year of 2003, 714,794 common stocks were issued for warrant.

During the year of 2002, no common stock was issued for warrants.

Swartz Private Equity, LLC exercised its 800,000 warrants through cashless
exercise and converted into 714,794 common stocks.


(L) Common Stock Issued for Stock Options

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.

During the year of 2002, no common stock was issued for stock options.

(M) Common stocks issued for investment and acquisition

During 2003, the Company issued 50,349,243 shares of common stock valued at
$13,202,163 in connection with the acquisition of Huaqing, GuoWei, NewHuaSun and
ZhongNan.

(N) Cancellation and Issuance of Treasury Stocks

On December 30, 2003, Hartcourt cancelled 4,756,058 shares collected from
Elephant Talk.

                                      F-29

<PAGE>

During 2003 the Company issued 805,802 treasury stocks valued at $48,813.

NOTE 19 INCOME TAXES

In the year ended December 31, 2003, the Company incurred net operating losses
for tax purposes of approximately $373,194. The net operating loss carry forward
may be used to reduce taxable income through the year 2019.

The gross defefrred tax asset balance as of December 31, 2003 was $1,704,412. 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,
                                                                        2003
                                                                    ------------

      Federal
         Balance carry forward Dec 31, 2002                         $ 1,554,898
         Net operating losses for 2003                                  126,886
                                                                    -----------
                                                                    $ 1,681,784
     State
         Balance carry forward Dec 31, 2002                         $    22,629
         Net operating losses for 2003                                       --
                                                                    -----------
                                                                    $    22,629

     Total Deferred Asset                                           $ 1,704,413
     Less: valuation allowance                                       (1,704,413)
                                                                    ===========

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,
                                                                        2003
                                                                    ------------

     Tax expense (credit) at statutory rate-federal                        (34)%
     State tax expense net of federal tax                                   (6)
     Changes in valuation allowance                                         40
     Tax expense at actual rate                                             --


Income tax expense consisted of the following for the year ended December 31,
2003:

                                      F-30

<PAGE>

    Current tax expense:
    Federal                                                           $      --
    State                                                                   800
    Total Current                                                     $     800

    Deferred tax credit:
    Federal                                                             126,886
    State                                                                22,629
    Total deferred                                                      149,515
    Less: valuation allowance                                          (149,515)
    Net Deferred tax credit                                                  --
                                                                      ---------
    Tax expense                                                       $     800

NOTE 20  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 were granted at not less than fair value at the date of
grant and have terms of 10 years.

The following table summarizes the activity in the plan:

                                                                       Weighted
                                                                        Average
                                                        Number of      Exercise
                                                          Shares         Price
    Shares under option at December 31, 2001              320,000         1.30
    Granted                                             5,000,000         0.27
                                                      -----------         ----
    Shares under option at December 31, 2002            5,320,000         0.33
    Granted                                             8,000,000         0.29
    Exercised                                          (1,000,000)          --
    Expired                                               (20,000)          --
    Canceled                                           (1,000,000)          --
                                                      -----------         ----
    Shares under option at December 31, 2003           11,300,000         0.34
                                                      ===========         ====

                                      F-31

<PAGE>

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.

The following table presents pro forma disclosures required by SFAS No. 148 of
net income (loss) and basic and diluted earnings (loss) per share as if
stock-based employee compensation had been recognized during the year ended
December 31, 2003. The compensation expense for these periods has been
determined under the fair value method using the Black-Scholes pricing model.

                                                                         2003
                                                                    -----------
Net income (losses) - as reported                                   $  (570,889)
Stock-Based employee compensation expense included
  in reported net income, net of tax                                         --
Total stock-based employee compensation expense determined
  under fair-value-based method for all rewards, net of tax            (646,825)
                                                                    -----------
Pro forma net profit (loss)                                         $(1,217,714)
Loss per share basic & diluted - as reported                        $    (0.004)
Loss per share basic & diluted - proforma                           $    (0.009)

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

Rick-free interest rate                                                   3.75%
Expected life of options                                              1-3 years
Expected volatility                                                      12.65%
Expected dividend yield                                                     --


During the year of 2003, the Executive of the Company, exercised his 1 million
stock options, and the Board of Directors resolved to extend his remaining 1
million stock options granted in June of 2002, to May 31, 2004.

Additional information relating to stock options outstanding and exercisable at
December 31, 2003 summarized by exercise price is as follows:

<TABLE>
<S>     <C>
                                         Options outstanding               Option Exercisable
-----------------------------------------------------------------------------------------------------
                                        Weighted
                      Number            Average         Weighted         Number         Weighted
       Range of   Outstanding at       Remaining        Average      Exercisable at     Average
       Exercise    December 31,       Contractual       Exercise      December 31,      Exercise
        Price          2003               Life           Price            2003           Price
-----------------------------------------------------------------------------------------------------
$0.10 - 0.65        11,300,000      0.3 - 4.5 Year       $0.34         11,300,000         $0.34
</TABLE>



In connection with providing consulting services, on July 21, 2000, Hartcourt
granted to a consultant options to purchase 20,000 shares of Hartcourt stock at
a price of $5.75 per share. The options expired on July 20, 2003. The options
were issued at the fair value on the date of issuance as required by SFAS #123.


                                      F-32

<PAGE>


Employment contract with Mr. D. Chen, Acting Chairman & CEO, was renewed and on
June 1, 2003, options to purchase 3,000,000 shares of Hartcourt stock at a price
of $0.48 per share was granted. On December 1, 2003, Hartcourt granted to Ms.
Carrie Hartwick, CFO, options to purchase 1,000,000 shares of Hartcourt stock at
a price of $0.65 per shares. The options were issued at the exercise price not
less than fair market value on the date of issuance therefore, no expenses was
recorded.

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

Rick-free interest rate                                                   3.75%
Expected life of options                                                 1 year
Expected volatility                                                      12.65%
Expected dividend yield                                                     --


(B) Warrants

As of December 31, 2003, there were 800,000 outstanding warrants to purchase
33,023,769 shares of common stock at $0.001 par value, ranging from $0.058 -
$15.52 per share. During 2003, 800,000 warrants were converted into 714,794
shares of common stock through cashless exercise.


                                      F-33

<PAGE>

NOTE 21 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, via its BVI subsidiary
(Hartcourt Capital Inc.), acquired four (4) Chinese companies located and
operated in China. (SEE NOTE 3 ACQUISITIONS AND INVESTMENTS).


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

The effect of the appraisal is as follows:

BALANCE SHEET
As of December 31, 2003

                                         AS PREVIOUSLY       AS
                                            REPORTED       RESTATED

CURRENT ASSETS                           $ 17,324,781    $ 18,744,654
NONCURRENT ASSETS                        $ 16,946,563    $ 15,063,497
TOTAL ASSETS                             $ 34,271,344    $ 33,808,151
TOTAL CURRENT LIABILITIES                $ 10,689,750    $ 15,703,645
MINORITY INTEREST                        $  4,021,833    $  1,895,962
SHAREHOLDER'S DEFICIT
  Accumulated deficit:                   $(51,811,875)   $(51,624,284)
  Total stockholders' equity             $ 18,259,761    $ 14,908,544

INCOME STATEMENT:
For the year ended December 31, 2003:

   Net loss                              $   (748,980)   $   (570,889)
   Comprehensive loss                    $   (758,480)   $   (585,377)
  Basic and diluted net loss per share   $     (0.005)   $     (0.004)


NOTE 22  SEGMENT AND BUSINESS RELATED INFORMATION

The Company has only one reportable segment (computer hardware trading) in the
current year of 2003, as the other three segment of business are not material to
the consolidated financial statements of the Company. While in the 2002, there
are four reportable segments. Please see the 2003 vs. 2002 comparative table
below, for details.

Each segment is a strategic business that the Company manages separately because
each business develops and sells products to a specific market. The four
reportable segments available in 2002 are Computer hardware, trading and
wholesaling of computer components, Financial Services, and wireless access
systems. During the year, the company included a substantial investment and
acquisition. The principal market for the Company's products is China. Foreign


                                      F-34

<PAGE>

sales, primarily in China amounted to approximately $130,782,790 in 2003. The
Chinese operations with assets of approx, $22,147,749, account for majority of
the Company's consolidated assets in 2003. The accounting policies of the
segments are the same as described in the summary of significant accounting
policies. The Company evaluates segment performance based on income from
prospective operations. As a result, the components of operating loss for one
segment may not be comparable to another segment. Segment results for 2003 and
2002 are as follows:

<TABLE>
<S>     <C>
                          Computer       Financial        Streaming
                          hardware       services           Media           Others            Total
                       -------------   -------------    -------------    -------------    -------------
2003
Net sales              $ 129,643,816   $           0    $           0    $   2,025,402    $ 131,669,218
Loss from operations          40,908               0                0          529,981          570,889
Depreciation and
amortization                 109,525               0                0           12,778          122,303
Assets                    22,147,749         801,865          112,379       18,540,879       41,602,872

2002
Net sales              $           0   $     929,567    $      99,352    $     108,092    $   1,137,011
Loss from operations               0      (1,660,724)        (414,692)        (474,586)      (2,550,002)
Depreciation and
amortization                       0         338,424           21,606           11,749          371,779
Assets                             0       2,838,016          151,360        1,752,436        4,741,812
</TABLE>


NOTE 23 SUBSEQUENT EVENTS (un-audited)

Investment and acquisition:

|X|   The Company acquired additional 5.1% interest of Newhuasun via memorandum
      of understanding, instead of sales and purchases agreement.

|X|   In February 2004, the Company acquired 5.5% interest of Guowei via a sales
      agreement. In same month, the Company entered into a conditional sales and
      purchase agreement to obtained 51% interest of Shanghai Computer
      ServiceNet Co. ("ServiceNet"), Ltd to strengthen the Company's future
      growth. The purchase price for 51% interest of ServiceNet is
      US$2.5millions payable in 3,576,751 restricted common shares of Hartcourt,
      at US$0.61 per share, and an investment of US$364,000 into ServiceNet.

|X|   During the year ended 2003, the Company entered into a conditional
      agreement for acquiring 51% ownership interest of Beijing Challenger Group
      ("Challenger"). The purchase price is US$3.8 millions payables in
      6,324,748 restrict common shares of Hartcourt with a promise to invest
      additional $610,000 into one of Challenger subsidiaries. The effect of
      this agreement will appear in the year of 2004, therefore Challenger was
      not consolidated into the 2003 financial statements.

                                      F-35

<PAGE>

|X|   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:

|X|   On June 30, 2004, we, 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 for 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.

|X|   On July 16, 2004, Hartcourt and the minority owners of Wenzhou Zhongnan
      Group (Wenzhou) reached an agreement to rescind the original acquisition
      contract entered into on June 28, 2003 to purchase a 51% equity ownership
      of Wenzhou for a total consideration 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 with ours from October 2003
      to June 2004. All of the shares issued pursuant to this acquisition have
      been returned and cancelled. On September 30, 2004, we cancelled 8,417,350
      shares of our common stock valued at $2,187,996 in connection with the
      rescission of our acquisition agreement with Wenzhou Zhongnan Group.

|X|   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.

|X|   On October 19, 2004, we revised the record date for the spin-off of
      Financial Telecom Limited (USA) ("FTL") from October 17, 2003 to October
      25, 2004 pursuant to a Rule 10b-17 notice filed with NASDAQ in order to
      comply with the notice period for the setting of the record date as
      required by NASDAQ. In the spin-off, our shareholders of record as of
      October 25, 2004 received 0.087965218 share of FTL common stock for each
      share of our common stock held by such shareholders.

|X|   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.

|X|   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.

                                      F-36

<PAGE>

|X|   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.

Raise funds:

|X|   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.

                                      F-37




<PAGE>


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.


                                      F-38