<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

(Mark One)

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

                                    For the fiscal year ended: December 31, 2004

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

                                               Commission file number: 001-12671

                          THE HARTCOURT COMPANIES, INC.
         -------------------------------------------------------------
                 (Name of Small Business Issuer in its Charter)

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

         3F, 710 Chang Ping Road
             Shanghai, China                               200040
-----------------------------------------   ------------------------------------
(Address of principal executive offices)                 (Zip Code)

Issuer's telephone number: (011) (86 21) 5213 8810

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

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

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

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

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

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

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

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                          THE HARTCOURT COMPANIES, INC.

                                   FORM 10-KSB

                                TABLE OF CONTENTS


                                                                            PAGE

PART I

Item 1.    Description of Business............................................1
Item 2.    Description of Property...........................................10
Item 3.    Legal Proceedings.................................................11
Item 4.    Submission of Matters to a Vote of Security Holders...............11

PART II

Item 5.    Market for Common Equity and Related Stockholder Matters..........12
Item 6.    Management's Discussion and Analysis or Plan of Operation.........14
Item 7.    Financial Statements..............................................22
Item 8.    Changes in and Disagreements with Accountants on Accounting
           and Financial Disclosure..........................................22

PART III

Item 9.    Directors and Executive Officers..................................23
Item 10.   Executive Compensation............................................25
Item 11.   Security Ownership of Certain Beneficial Owners and Management
and Related Stock Holder Matters.............................................27
Item 12.   Certain Relationships and Related Transactions....................28
Item 13.   Exhibits..........................................................29
Item 14.   Principal Accountant Fees and Services............................32


CONSOLIDATED FINANCIAL STATEMENTS............................................F-1

<PAGE>

                                     PART I

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

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

ITEM 1.  DESCRIPTION OF BUSINESS

      The Hartcourt Companies, Inc. ("Hartcourt" or the "Company"), was
incorporated in Utah in 1983. We are a business development and investment
holding company specializing in the Chinese Information Technology, or IT,
market. We research and identify Chinese companies in the IT industry that meet
our investment objectives and acquisition criteria. It is our policy to acquire
majority equity ownership in the targeted companies that become part of our
investment portfolio. After acquisition, we manage these businesses to ensure
the restructuring, consolidation and merger activities are carried through and
the new business is fully integrated into our business. On an on-going basis, we
seek to maximize the growth, profitability and liquidity of all of our portfolio
companies under the Hartcourt umbrella.

      During 2003 and early 2004 we completed five acquisitions of Chinese
companies engaged in the wholesale distribution of IBM hardware products,
Samsung notebooks and monitors, as well as retail sales of custom-made desktop
computers and a full range of computer peripherals and accessories. The IBM
wholesale business covers Northern China while the Samsung wholesale business
covers Eastern and Southern China. The retail business that we acquired is based
in three major cities: Beijing (Northern China), Shanghai (Eastern China) and
Wenzhou (Eastern China). However, due to adverse market and trading conditions,
in the second half of 2004, we hired a new chief executive officer and made the
strategic decision to exit a number of these businesses. As of December 31,
2004, we disposed of two subsidiaries and were negotiating to sell two other
subsidiaries. These two subsidiaries' assets were placed in the "assets pending
for sale" category on our consolidated financial statements at the end of 2004.
Further disclosure is included in the "Acquisitions and Dispositions" and
"Subsequent Events" Items in Part I of this annual report.

      As at December 31, 2004, only one operating company remains under our
control. The operations of the remaining business are described below.

      We have authorized distribution rights with respect to Samsung monitors,
notebooks and certain digital products covering the consumer and commercial
product distribution channels in the Shanghai and Zhejiang provinces. In 2004,
50% of our sales were to customers located in the Zhejiang province, 45% in the
Shanghai metropolitan area and the remaining 5% in other cities and provinces
outside of our exclusive marketing territories. The authorized distribution
agreements signed between Shanghai Huaqing, a 51% owned subsidiary, and Samsung
have one-year terms and are renewed on an annual basis. In August 2004, we
obtained the right to distribute Samsung notebooks and selected digital devices


                                      -1-
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in the same geographic areas over the same distribution channels. In exchange
for this authorized distribution right, as well as purchase price protection and
reimbursed advertising and promotion expenses from Samsung, we are required to
achieve quarterly purchase targets set by Samsung and perform sales promotion
and advertising activities under Samsung's direction, in addition to meeting
other Samsung operational requirements. Approximately, 95% of our sales for the
year comprised of Samsung monitors, 4% laptops and the remaining 1% in other
Samsung digital devices.

      We sell Samsung monitors, notebooks and digital devices to large regional
retail stores and to second tier distributors who then resell to smaller retail
stores. To promote Samsung's upscale product image, we also manage several
Samsung image stores in Shanghai, selling the full range of Samsung consumer
electronic products in Shanghai's downtown shopping districts in partnership
with Samsung. For the Samsung products for which we have authorized distribution
rights, we provide product warranty services to retail consumers on behalf of
Samsung. In addition, we provide and charge for after-sales repair, maintenance
and service. Our largest customer in 2004 was Hangzhou Huaqing, a second tier
distributor in Hangzhou who made up 15% of our sales for the year. Other than
Hangzhou Huaqing, no single customer or distributor made up more than 5% of our
total sales for the year.

      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 a broad range of customers the convenience of
accessing from a single source with multiple products and rapid or scheduled
deliveries, as well as other value-added services such as after sales service.
The growth of the IT distribution industry in China has been fostered by many
manufacturers who recognize that distributors are essential extensions of their
marketing organizations.

      Most of our customers require delivery of the products they have ordered
on schedules that are generally not available on direct purchases from
manufacturers, and frequently their orders are of insufficient size to be placed
directly with manufacturers. Huaqing's sales team contacts existing as well as
potential customers to determine their needs in notebooks, monitors and other
products distributed by Huaqing. Customers, both current and potential, also
contact Huaqing for price quotes, payment, delivery and other terms related to
sales. Once a sale is agreed upon, a sales order is created in the Company's
computer system, where product availability is checked and discount approval, if
applicable, is requested. Credit, warehouse and delivery teams work according to
the sales flow pre-programmed in the system. Our customers are mostly large IT
retailers and second and third tier city distributors. In general, we do not
grant credit terms to our customers since our vendor Samsung requires prepayment
from all of its distributors such as Huaqing. Credit terms, when granted to a
few large customers, is usually within 7 days. We are responsible for delivering
the products to sites designated by the customers. Upon the signing of the bill
of lading by the customer, the title to the goods are transferred to the
customer.

      We source our products from Samsung. As of December 31, 2004,
approximately 99% of our inventory consisted 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
changes or the manufacturer's 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.
We maintain less than a month's worth of Samsung inventory and management does
not believe that we have any material risk of inventory loss if the manufacturer
elects to terminate the distributor agreement.


                                      -2-
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      Our business is extremely competitive, particularly with respect to
prices, quantity and, in certain instances, product availability. We compete
with numerous regional and local distributors of similar products with different
brand names. However, our financial resources and sales capability are greater
than those of most of our competitors in the markets we serve.

      The Company and our affiliate employed 70 full-time employees in China as
of December 31, 2004, all of whom were located in Shanghai. Of these personnel,
57 were employed by our operating subsidiary with the other 13 employed in our
corporate headquarters.

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

      The Company's principal products and services do not require governmental
or regulatory approval, nor does management believe that there exists any
pending or potential government regulation over these types of products and
services.

      We have not carried on any research and development activities in the past
two years.

      Our business activities do not fall into any environmentally regulated
areas.

CORPORATE STRUCTURE

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

      Through Shanghai Jiumeng Information Technology Company Limited, we own
51% of the equity of Shanghai Huaqing, our main operating subsidiary for the
Samsung distribution business. Shanghai Jiumeng is 90% owned by Mr. Kang Bin,
our financial controller, and 10% owned by Ms. Ni Ting Ting, an employee of the
Company, both of whom are People's Republic of China, or PRC, citizens. The two
employees serve as our nominees.

      We have entered into a series of contractual agreements with our
subsidiary Huaqing, its shareholders and our nominees. As a result of these
contractual agreements, we are considered the majority beneficiary of all of our
subsidiaries and accordingly we consolidate all of our subsidiaries' results of
operations in our financial statements.

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

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

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

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

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


                                      -3-
<PAGE>

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

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

      Our contractual arrangements with Huaqing, its shareholders and our
nominees may only be amended with the approval of the audit committee of our
board of directors.

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

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

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

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

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

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

      In April, 2004, the China Ministry of Commerce officially announced that
foreign investors such as the Company, would be allowed to establish wholly or
majority foreign-owned wholesaling and retailing enterprises in the PRC starting
from December 11, 2004. China is geographically broad and hence local variations
among different areas are not uncommon. Local authorities in different areas
might have different interpretations on the same piece of legislation. We have
engaged a PRC law firm to study the newly effective regulations and the steps we
could take to apply for the relevant business license in view of the relaxed
foreign equity ownership rules in the wholesale sector in regard to our Samsung
distribution business.

ACQUISITIONS AND DISPOSITIONS

      SHANGHAI COMPUTER SERVICENET CO., LTD. (SERVICENET). On February 6, 2004,
we signed a definitive agreement to purchase a 51% percent equity interest in
ServiceNet. The purchase price was RMB 21 Million ($2.5 Million) payable in the
form of 3,576,751 restricted shares of our common stock, calculated at $0.61 per
share, plus a cash investment of RMB 3 Million ($364,000) in ServiceNet. In
August 2004 both parties agreed that the transactions contemplated by the
definitive purchase agreement signed between Hartcourt and ServiceNet would not
be completed. No penalty for not completing the transaction was incurred by
either party.


                                      -4-
<PAGE>

      SHANGHAI PENG YANG COMPUTER CO., LTD. (PENGYANG). On November 21, 2003,
Hartcourt and Huaqing jointly signed an agreement to purchase all of the
interests of Pengyang. The purchase price was RMB 14.85 Million ($1.8 million),
payable in the form of 1,530,000 restricted shares of our 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, we, together with
our subsidiary Shanghai Huaqing, decided not to complete the acquisition of
Pengyang in August 2004. We did not include any of the Pengyang's operating
results into our 2004 financial statements. No penalty for not completing the
transaction was incurred by either party.

      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.

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

      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.

      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.

      In December 2004, our board of directors authorized the sale of our entire
50.5% equity interest in Shanghai GuoWei Science and Technology Ltd. ("GuoWei")
due to adverse market conditions. In April 2003 and February 2004, we signed
definitive agreements with the shareholders of GuoWei to purchase 45% and 5.5%,
respectively, of GuoWei equity for US$4,647,447 in consideration for the
issuance of 10,863,788 shares of our common stock and a cash investment of
US$301,932.

      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). We consolidated Challenger's financial results beginning January,
2004.

      On November 1, 2004, we signed a definitive agreement to purchase a 90%
equity interest in Control Tech Electronics (Shanghai) Co., Ltd. ("Control
Tech") for a total consideration of $1.96 million. Pursuant to the definitive
purchase agreement, the purchase price will be paid by the issuance of 8,516,902
shares of our common stock at a value of 0.23 per share.


                                      -5-
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EXTRAORDINARY ITEMS

      On July 16, 2001, Hartcourt and UAC Trading, by mutual consent, agreed to
rescind the contractual joint venture agreement between the two companies. As
part of this rescission agreement, we agreed to accept a promissory note for the
amount of our net investment in the joint venture entity, UAC Exchange, as of
the date of rescission totaling $2,858,286 in principal amount and bearing
interest at 6% per annum payable over a thirty-nine month period. The parties
mutually agreed to forego all other rights and benefits under the joint venture
agreement in consideration for the rescission of the contract. On September 10,
2001, Edda Limited, a non-affiliated company incorporated in Hong Kong,
expressed an interest in acquiring all of the existing tangible and intangible
assets of UAC Exchange for the amount of our net investment in UAC Exchange, and
signed a promissory note in the amount of $2,858,286 bearing interest at six per
cent per annum, payable in quarterly installments of $50,000 commencing November
1, 2001 with a balloon payment of $2,715,772 due on December 1, 2006. The
promissory note is secured by a security interest in all of the tangible and
intangible property of Edda Limited.

      As of December 31, 2004, the outstanding principal due from Edda Limited
is $1,993,742. Edda Limited has not paid interest or principal since the third
quarter of 2004. Further, Edda Limited has told us that they are unwilling to
pay the remaining balance in the fourth quarter of 2004. Our financial
statements provide for a 100% loss on the outstanding balance of the note. We
are consulting with our legal counsel on our next course of action in the
matter.

SUBSEQUENT EVENTS

      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.

      On March 3, 2005, we entered into agreements with Guangdong New HuaSun and
Shenzhen Raiser, pursuant to which we redeemed 13,769,156 shares of our common
stock held by New HuaSun, New HuaSun redeemed a 45% equity interest, and we
released Shenzhen Raizer of its obligation on a $3,403,150 promissory note
payable to us.

      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.

CHANGE OF OFFICERS

      On January 5, 2005, we appointed Richard Hyland as our Interim Chief
Financial Officer. On April 11, 2005, Richard Hyland resigned from the position
of Interim Chief Financial Officer due to cultural and language barriers working
in China as well as his inability to commit the necessary time in Shanghai, the
location of Hartcourt headquarters.

      Our board of directors appointed Carrie Hartwick as Interim Chief
Financial Officer, effective April 14, 2005, while the Company searches for a
new Chief Financial Officer.


                                      -6-
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                                  RISK FACTORS

      IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS ANNUAL REPORT,
INCLUDING THE REPORTS WE INCORPORATE BY REFERENCE, YOU SHOULD CONSIDER THE
FOLLOWING FACTORS THAT MAY AFFECT OUR FUTURE RESULTS AND FINANCIAL CONDITION
BEFORE INVESTING IN OUR SECURITIES. 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. WE ARE UNDER NO
DUTY TO UPDATE ANY OF THE FORWARD-LOOKING STATEMENTS AFTER THE DATE OF THIS
PROSPECTUS TO CONFORM SUCH STATEMENTS TO ACTUAL RESULTS OR TO CHANGES IN OUR
EXPECTATIONS.

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.

      Many of our competitors, as well as certain potential competitors, have
longer operating histories in the industry, greater name recognition, larger
customer base and significantly greater financial, technical and marketing
resources than ours. Any of our present or future competitors may provide
services with significant performance, price, creativity or other advantages
over those offered by us. We can provide no assurance that we will be able to
compete successfully against our current or future competitors.

      The IT industry is subject to rapid technological changes. We may not be
able to anticipate the emergence of new technologies and its impact on our
existing business. Our products or brands that we sell and market might become
unattractive to our customers, thereby limiting our ability to recover our
initial investment in acquiring these businesses and potentially adversely
affecting our future profitability and growth prospects.

UNLESS WE ARE ABLE TO GENERATE PROFITS AND POSITIVE CASH FLOW ON A CONSISTENT
BASIS WE MAY NOT BE ABLE TO CONTINUE OPERATIONS.

      Our ability to attain a positive cash flow and become profitable depends
on our ability to generate and maintain greater revenue while incurring
reasonable expenses. This, in turn, depends, among other things, on the
development of our business of IT component distribution and related services in
the PRC. We may be unable to achieve and maintain profitability if we fail to do
any of the following:

      o     maintain and improve our current portfolio of products and services
            or acquire the rights to distribute new products or on a timely
            basis;

      o     compete effectively with existing and potential competitors;

      o     further develop our business activities;

      o     manage expanding operations; and

      o     attract and retain qualified personnel.

      The declining gross margin in the China IT hardware distribution sector
has been a broad and continuing trend in the past five years, which we believe
will continue to affect our business over the next several years. If we are
unable to maintain a positive cash flow and profitability, we may be unable to
continue our operations. Even if we do achieve or maintain a positive cash flow
and profitability, we cannot be certain that we will be able to sustain or
increase them on a quarterly or annual basis in the future. Our inability to
achieve or maintain profitability or positive cash flow could result in
disappointing financial results, impede implementation of our growth strategy or
cause the market price of our common stock to decrease.


                                      -7-
<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. However, our ability to
grow through such acquisitions and joint ventures will depend on the
availability of suitable acquisition candidates at an acceptable cost or at all,
our ability to compete effectively to attract and reach agreement with
acquisition candidates or joint venture partners on commercially reasonable
terms, the availability of financing to complete larger acquisitions or joint
ventures. In addition, the benefits of an acquisition or joint venture
transaction may take considerable time to develop and we cannot assure you that
any particular acquisition or joint venture will produce the intended benefits.
Moreover, the identification and completion of these transactions may require us
to expend significant management and other resources.

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.

      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 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 CURRENTLY
AVAILABLE TO US IN THE PRC 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.

      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


                                      -8-
<PAGE>

you that such financing would be available on acceptable terms, if at all. To
the extent that additional financing proves to be unavailable when needed to
consummate an acquisition, we would be compelled to restructure the transaction
or abandon that particular business acquisition and seek an alternative target
business candidate. In addition, if we consummate a business combination, we may
require additional financing to fund the operations or growth of the business.
The failure to secure additional financing could have a material adverse effect
on the continued development or growth of our business. None of our officers,
directors or shareholders is required to provide any financing to us in
connection with or after an acquisition.

      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 government 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 United
States court judgments again them in the PRC. After the consummation of
acquisitions, all of our assets are located outside of the United States. It may
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.

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

      We are a U.S. registered company and we conduct our operations solely in
China through our directly owned subsidiaries and indirectly majority-owned
subsidiary. In order to comply with foreign ownership restrictions, we operate
our business in China through a subsidiary which is majority owned by Kang Bin,
our financial controller, and Ni Ting Ting, our investment associate, both of
whom are PRC citizens (our nominees). We have entered into a series of
contractual arrangements with our indirectly owned subsidiary, its shareholders
and our nominees. As a result of these contractual arrangements, we are
considered the majority beneficiary of all of our subsidiaries and accordingly
we consolidate all of our subsidiaries' results of operations in our financial
statements.

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

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


                                      -9-
<PAGE>

      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:

      o     imposing conditions or requirements with which we may not be able to
            comply;

      o     requiring us to restructure the relevant ownership structure or
            operations;

      o     restricting or prohibiting our use of foreign capital to finance our
            business and operations in China; or

      o     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.

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.

      Chinese law and regulations strictly limit the repatriation of assets of
Chinese companies. Payments to parties outside of the PRC are governed by the
Foreign Exchange Bureau and its Regulation on Foreign Exchange Control. Pursuant
to the Regulation, a Chinese enterprise may make overseas payments from their
foreign exchange account at an authorized foreign exchange bank in the following
limited circumstances within its registered business scope and directly related
to its business in China. Chinese enterprises are prohibited from sending
payment abroad to cover the liabilities incurred by affiliated entities located
overseas.

      The laws governing Chinese joint ventures require each partner to conduct
its business for the benefit of the joint venture and not for the benefit of any
particular partner. As a result, one partner may not withdraw funds from the
joint venture to pay its own liabilities unrelated to the joint venture.

WHERE YOU CAN FIND MORE INFORMATION

      We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission, or the SEC. Our SEC
filings are available to the public over the Internet at the SEC's web site at
http://www.sec.gov. You may also read and copy any document we file at the SEC's
public reference room in Washington, D.C. Please call the SEC at 1-800-SEC-0330
for further information on the public reference rooms.


ITEM 2.  DESCRIPTION OF PROPERTY

      We lease warehouse distribution centers and administrative facilities in
the markets that we serve. Our executive office is located on the 3rd floor, 710
Changping Road, Shanghai, and occupies a 338 square meter space, under a lease
which runs until December 31, 2006. We believe that our facilities are
well-maintained and suitable for our on-going operations.


                                      -10-
<PAGE>

      Our subsidiary, Huaqing, owned one parcel of property, which was
subsequently sold to non-related parties. Our management believes that our
properties are adequately covered by insurance.


ITEM 3.  LEGAL PROCEEDINGS

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

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

      On December 17, 2004, the court granted partial summary judgment to the
SEC. Subsequently, on March 11, 2005, the court entered 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 enjoined the Company from future violations of the
registration and antifraud provisions of the federal securities laws. The court
also issued an order directing that civil penalties be imposed against the
Company in the amount of $275,000 and ordered that the amount of $819,363 from
the stock sales be disgorged and both be paid directly to the SEC. As of April
12, 2005, the Company has satisfied the entire $1.1 million monetary portion of
the judgment.

APOLLO FINANCIAL NETWORK, LLC VS. THE HARTCOURT COMPANIES, INC.

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

JOHN A. FURUTANI VS. THE HARTCOURT COMPANIES, INC.

      John A. Furutani, Hartcourt's former attorney, filed a complaint against
the Company for alleged breach of contract in the amount of $54,441 arising out
of legal representation of the Company and its co-defendant Alan Phan with
respect to the SEC litigation. The Company answer is due on April 28, 2005 and
the Company is considering the options available to it. The liability was
properly recorded on our balance sheet.


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

      None.


                                      -11-
<PAGE>

                                     PART II


ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET INFORMATION

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

                                                  COMMON STOCK
                                                -----------------
        BY QUARTER ENDED                         HIGH        LOW
        ----------------                        -----       -----

        FISCAL 2003
        -----------------------------------
        March 31, 2003.....................      $.10       $.05
        June 30, 2003......................     $1.12       $.08
        September 30, 2003.................      $.92       $.52
        December 31, 2003..................      $.86       $.52

        FISCAL 2004
        -----------------------------------
        March 31, 2004.....................     $0.79       $0.47
        June 30, 2004......................     $0.58       $0.20
        September 30, 2004.................     $0.28       $0.17
        December 31, 2004..................     $0.26       $0.14

        FISCAL 2005
        -----------------------------------
        March 31, 2005.....................     $0.17       $0.08

------------------------

      As of March 31, 2005, there were 214,165,577 shares of our common stock
outstanding held by approximately 9,400 shareholders of record.

      On October 19, 2004, Hartcourt revised the record date for the spin-off of
its subsidiary Financial Telecom Limited (USA) 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, Hartcourt shareholders of record as of October 25, 2004
received 0.087965218 share of FTL common stock for each share of Hartcourt
common stock held by such shareholders.

      We did not pay any cash dividends on our common stock in our 2003 or 2004
fiscal years. We do not anticipate paying any cash dividends on our common stock
in the foreseeable future. We currently intend to retain future earnings, if
any, to finance operations and the expansion of our business.

RECENT SALES OF UNREGISTERED SECURITIES

      The following information sets forth the outstanding shares the Company
sold without registration under the Securities Act of 1933. All transactions
were effected in reliance on various exemptions from registration under the
Securities Act of 1933 for transactions not involving a public offering. There
were no underwriters in any of these transactions.


                                      -12-
<PAGE>

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

      On January 5, 2004, we issued 696,342 restricted shares of our common
stock to Mr. David Chen, Hartcourt's former CEO, pursuant to the exercise of his
stock options in cashless transactions that were granted to him as a part of his
2002 compensation.

      On January 5, 2004 and April 20, 2004, we issued 6,824,748 shares of our
common stock to the minority shareholders of Beijing Challenger pursuant to the
acquisition by us of a 51% equity interest in Beijing Challenger valued at
$3,794,560.

      On January 13, 2004, we issued 4,200 shares of our common stock valued at
$2,500 to a consultant for consulting services.

      On February 9, 2004, we issued 155,000 shares of our common stock valued
at $46,500 for consulting services rendered in prior years.

      On April 1, 2004, we issued 80,000 shares of our common stock valued at
$40,000 to a consultant for consulting services.

      On April 1, 2004 and July 15, 2004, we issued 286,156 shares of our common
stock valued at $151,250 to certain of our officers and all of our directors in
lieu of cash compensation.

      On June 24, 2004, we issued 10,440 of our common stock valued at $2,714 to
a consultant for consulting services.

      On July 14, 2004, we issued 2,000,000 shares of our common stock in
exchange for the conversion of 1,000 shares of preferred stock, granted in 1995,
by Alan Phan, the founder of the Company.

      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.

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

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

      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.

WARRANTS

      As of December 31, 2004, there were a total 33,010,239 warrants
outstanding to purchase 33,010,239 shares of our common stock for purchase
prices ranging from $0.058 to $0.69375 per share.


                                      -13-
<PAGE>

      In connection with the engagement of Enlight Corporation Ltd., on October
23, 2002 with respect to a proposed private placement of our common stock, we
granted Enlight 29,010,239 warrants to purchase 29,010,239 shares of our common
stock at the price doubling the trading price on the issuance date. The warrants
expire on October 22, 2005. On March 11, 2004, Enlight pledged not to exercise
the warrants unless there is a buy-out of the Company either by management or a
third party if we agreed to extend the term of the warrants October 22, 2009. We
have not yet reached agreement with respect to an extension of the term of the
warrants.


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

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

PRO FORMA CONDENSED AND COMBINED FINANCIAL STATEMENTS

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

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

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

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

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


                                      -14-
<PAGE>

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



                                      -15-
<PAGE>

           HARTCOURT'S SURVIVING SUBSIDIARIES AND CONTINUED OPERATIONS
                          PRO FORMA FINANCIAL STATEMENT
                        FOR THE YEARS ENDED 2004 AND 2003


                                                       2004            2003
BALANCE SHEET                                      ------------    ------------
ASSETS
CURRENT ASSETS
   Cash and cash equivalents                          1,744,852         823,639
   Accounts receivable                                5,141,892       1,868,729
   Inventories                                        1,229,971         866,331
   Notes receivable                                   1,376,916         608,573
   Trade deposits                                     3,791,927       1,565,018
   Deposit, prepayment and other receivables          1,470,508         216,939
   Due from related companies                           436,155       1,170,150
   Assets pending for sale                            2,204,260              --
                                                   ------------    ------------
TOTAL CURRENT ASSETS                                 17,396,481       7,119,379
                                                   ------------    ------------
FIXED ASSET-NET                                         363,849         493,163
INVESTMENTS                                              60,412      13,980,520
                                                   ------------    ------------
OTHER ASSETS
   Goodwill                                           2,160,101       2,160,101
   Notes receivable                                          --       1,827,509
                                                   ------------    ------------
TOTAL OTHER ASSETS                                    2,160,101       3,987,610
                                                   ------------    ------------

TOTAL ASSETS                                        $19,980,843     $25,580,672
                                                   ============    ============
LIABILITIES & SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
   Bank loan                                                 --         376,048
   Bill payable                                              --       1,553,038
   Account payables                                     632,528         398,599
   Deferred revenue                                          --              --
   Accrued expenses                                   2,397,256          81,810
   Customers deposit                                  8,522,065              --
   Staff loans                                        1,052,427         671,402
   Due to related parties                                    --       1,084,026
   Due to shareholders                                  260,807         229,936
                                                   ------------    ------------

TOTAL CURRENT LIABILITIES                            12,865,083       4,394,859
                                                   ============    ============
TOTAL LIABILITIES                                   $12,865,083      $4,394,859
MINORITY INTERESTS                                    1,171,779       1,626,052
COMMITMENTS AND CONTINGENCIES                                --       1,300,000
    Preferred stock                                          --              10
   Common stock                                         171,659         171,157
   Additional paid-in Capital                        72,152,129      70,858,036
   Subscription receivables                                  --      (1,842,326)
   Other comprehensive losses                           934,092         933,487
   Treasury stock                                       (48,728)        (48,728)
    (Accumulated losses)                            (67,264,171)    (51,811,875)
                                                   ------------    ------------
TOTAL SHAREHOLDERS' EQUITY                            5,943,981      18,259,761
                                                   ------------    ------------

TOTAL LIABILITIES AND EQUITY                        $19,980,843      25,580,672
                                                   ============    ============


                                      -16-
<PAGE>

          HARTCOURT'S SURVIVING SUBSIDIARIES AND CONTINUING OPERATIONS
                           PRO FORMA INCOME STATEMENT
                        FOR THE YEARS ENDED 2004 AND 2003

                                                         2004           2003
                                                     -----------    -----------

SALES                                                 74,563,459     48,529,401
COST OF SALES                                        (72,847,501)   (45,980,047)
                                                     -----------    -----------
GROSS PROFIT                                           1,715,958      2,549,354

OTHER REVENUE                                            215,154         83,771

ADMINISTRATIVE AND SELLING EXPENSES
    Selling, general & administrative expenses         2,698,159      1,414,160
    Depreciation                                          57,996         66,526
    Impairment on notes receivable                     4,083,876             --
                                                     -----------    -----------

TOTAL ADMINISTRATIVE AND SELLING EXPENSES              6,840,031      1,480,686
                                                     -----------    -----------

INCOME(LOSS) FROM OPERATIONS                          (4,908,919)     1,152,439

OTHER INCOME/(EXPENSE)
    Interest income                                      238,282        188,945
    Interest expenses                                   (552,547)       (84,480)
    Gain on disposal of fixed assets                      97,888             --
    Provision for investments                           (223,816)      (509,294)
    Litigation accruals                                 (100,000)    (1,300,000)
                                                     -----------    -----------
TOTAL OTHER INCOME/(EXPENSES)                           (540,193)    (1,704,829)

TOTAL LOSS FROM CONTINUING OPERATIONS                 (5,449,112)      (552,390)

LESS: MINORITY INTEREST                                  (50,288)      (582,731)
                                                     -----------    -----------
LOSS BEFORE DISCONTINUED OPERATIONS                   (5,499,400)    (1,135,121)

DISCONTINUED OPERATIONS:
 GAIN/(LOSS) FROM DISCONTINUED OPERATIONS                368,715        364,677
 GAIN/(LOSS) ON DISPOSAL OF DISCONTINUED OPERATION    (2,968,693)       173,911
 PROVISION FOR ASSETS PENDING FOR SALE                (7,137,339)            --
                                                     -----------    -----------
LOSS BEFORE TAX                                      (15,236,717)      (596,533)

INCOME TAX EXPENSE                                      (215,579)      (161,947)
                                                     -----------    -----------
NET LOSS                                             (15,452,296)      (758,480)
                                                     ===========    ===========


RESULTS OF OPERATIONS
NET SALES

      The combined income statement recorded net sales of $74,563,459 and
$48,529,401 for the year ended December 31, 2004 and December 31, 2003 (2003
fiscal year), respectively. The revenue for our 2004 fiscal year represented
product sales revenue derived from distribution of Samsung monitors and
notebooks while revenue for our 2003 fiscal year included $857,286 consulting
service income and $47,672,115 products sales revenue derived from distribution
of Samsung monitors for ten months ended December 31, 2003. The 56% increase in
Samsung product sales is mainly due to the expansion of the sales distribution
network of Huaqing. In addition, the SARS epidemic which occurred in the second
quarter of 2003 had a negative impact on sales in 2003 due to the impact on
consumer confidence in all markets in China during the period.


                                      -17-
<PAGE>

OPERATING MARGINS

      The operating margin for our 2004 fiscal year was 2.3%, compared with 5.3%
for our 2003 fiscal year. Except for the consulting service revenue of $857,286,
the operating margin for Samsung products sales was 3.5% for our 2003 fiscal
year. The decrease in our operating margin was mainly due to fierce competition
during 2004 in the IT retail market. The declining gross margin in the China IT
hardware distribution sector has been a broad and continuing trend in the past
five years, which we believe will continue over the next several years.

OTHER REVENUE

      Other revenue totaled $215,154 during our 2004 fiscal year, a 157%
increase compared with other revenue of $83,771 for our 2003 fiscal year. Other
revenue mainly represented income from warranty services and other after sales
services and the government grants. The increase was mainly due to (1) the
receipt of government grants of $58,089 from local authorities and (2) increases
in warranty and after-sales service revenue, which was in line with an increase
in our sales revenue.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

      Selling, general and administrative expenses for our 2004 fiscal year were
$2,698,159, compared with $1,414,160 for our 2003 fiscal year. The increase of
$1.2 million, or 90%, in our selling, general and administrative expenses was
mainly due to the increase of Huaqing's operating expenses, such as payroll and
sales commission, marketing expenses, rentals and other items totaling $0.5
million, which was in line with the increase in sales revenue. We incurred
additional audit and consulting fees of $350,000, legal fees of $200,000 and
other office expenditures of $150,000 with respect to the implementation of our
new business strategies and internal control system.

DEPRECIATION

      Depreciation for our 2004 fiscal year amounted to $57,996, compared with
$66,526 for our 2003 fiscal year, representing a decrease of 13%. The decrease
was mainly due to the disposition by Huaqing of one of its investment properties
in 2004, which also resulted in a gain on disposal of fixed assets.

IMPAIRMENT

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

INTEREST EXPENSES

      Interest expenses for our 2004 fiscal year totaled $552,547, a 554%
increase compared with $84,480 for our 2003 fiscal year. The increase in
interest expenses was mainly attributable to our borrowing of funds to finance
the expansion of our Samsung distribution business.


                                      -18-
<PAGE>

PROVISION FOR INVESTMENTS

      Provision for investments was $223,816 for our 2004 fiscal year, a 56%
decrease compared to provision for investments totaling $509,294 for our 2003
fiscal year. The provision for investments for 2004 was related to our
investment in First information. The decrease in provision for investments was
primarily due to having made full provision on two investments in our 2003
fiscal year.

LOCAL PRC INCOME TAX

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

      Chinese local tax authorities have conducted annual tax audits of our
subsidiaries and affiliates in China for the 2003 tax year and prior years.
There are no outstanding tax issues or liabilities at the time of this annual
report. All tax liabilities, if any, prior to the acquisition by us of our
various Chinese subsidiaries or affiliates are solely the responsibility of the
selling shareholders, as stipulated in each acquisition agreement.

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

LIQUIDITY AND CAPITAL RESOURCES

      OPERATING ACTIVITIES. The net cash used in operating activities during our
2004 fiscal year amounted to $7.1 million, a 58% increase compared to $4.5
million in our 2003 fiscal year. The net increase was mainly due to an increase
in operating funds used by certain of our discontinued operations, including
NewHuaSun, GuoWei, Challenger and the funds used in expanding our Samsung
distribution business. The funds were primarily used to finance the inventories
and receivables.

      INVESTING ACTIVITIES. Cash used by investing activities in our 2004 fiscal
year amounted to $1.7 million, a 141% decrease compared to $2.4 million provided
by investing activities in our 2003 fiscal year. The cash used by investing
activities was mainly as a result of excluding $3.5 million cash from the
disposition of our under-performing subsidiaries. The $2.4 million cash provided
by investing activities in 2003 was mainly derived from consolidation of cash
from newly acquired businesses.

      FINANCING ACTIVITIES. Net cash provided by financing activities in our
2004 fiscal year amounted to $8 million, an 82% increase compared to $4.4
million in 2003. The increase in financing activities resulted primarily from
loans obtained from banks, unrelated parties and employees of Challenger,
NewHuaSun and GuoWei. We received $1.4 million in proceeds in 2004 from the sale
of our common stock on December 31, 2003 to a group of PRC investors.

DISCONTINUED OPERATIONS

      On July 16, 2004, Hartcourt and the minority owners of Wenzhou Zhongnan
Group reached an agreement to rescind the original acquisition agreement entered
into on June 28, 2003 to purchase a 51% equity ownership of Wenzhou for a total
purchase price of $5,011,352. The acquisition was paid for entirely by the
issuance of 8,415,370 shares of our common stock. Wenzhou's financial results
were consolidated under our operations beginning in October 2003. All of the
shares that we issued pursuant to this acquisition have been returned to us and
cancelled. We recorded a $2,907,510 loss on the disposition of Wenzhou of
$2,854,835, due to our share price decline from $0.5955 per share on the
issuance date to $0.25 per share on the cancellation date. Although there was no
cash loss in this transaction, we lost time and opportunities to pursue other
business acquisitions.


                                      -19-
<PAGE>

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

      Based on nine months of actual operating results, the fair market value of
Wenzhou's business, using cash flow information and present value in accounting
measurements as defined by U.S. GAAP, would be approximately $700,000, and
Hartcourt's 51% equity share would be worth approximately $350,000 compared to
the acquisition price of $5 million. At the end of June 2004, the fair market
value of 8.4 million Hartcourt shares used as consideration for the Wenzhou
acquisition was approximately $2.2 million, significantly higher than the
$357,000 fair market value of the 51% Wenzhou equity.

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

      In the fourth quarter of 2004, the IT retail sector experienced a dramatic
downturn in sales that we believed was a permanent reduction in the size of the
IT retail market in China. The price of low-end branded desktops declined to
that of non-branded desktops, taking away a substantial share of market from the
non-branded desktop segment. In the meantime, the price of notebooks continued
to drop, making notebooks an attractive alternative to desktop computers. As a
comparison, GuoWei's 2004 revenue (from January to December 2004) was 156% of
the first year (from July 2003 to June 2004) guaranteed turnover as stipulated
in the acquisition contract while net income was only 33% of the first year
guaranteed profit. Based on sales projections and cash flow estimates, the fair
market value of GuoWei is estimated to be $1.03 million and Hartcourt's 50.5%
equity share is valued at $519,000. Hartcourt acquired 50.5% of GuoWei equity
for a total of $4,647,447, by issuance of 10,863,788 Hartcourt common shares and
a cash investment of $301,932

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

      The difference of the GuoWei carrying value on Hartcourt books versus the
disposal consideration is $3.9 million. This is the impairment of GuoWei assets
pending for sale at the end of 2004. While the loss on GuoWei can be seen as
significant, the value that we realized in disposing the GuoWei assets is still
far above the current fair market value of GuoWei.

      We acquired the equity interest in NewHuasun on April 24, 2003 for a total
consideration of $3,304,597, paid for entirely by the issuance of 13,769,156
shares of our common stock. We also obtained 10% equity voting rights through
proxy statements from one of the NewHuaSun's shareholders. The voting rights
were returned to the NewHuaSun shareholder at the time of sell of NewHuaSun
equity interest to Shenzhen Riser.


                                      -20-
<PAGE>

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

      On August 30, 2004, we sold our 45% equity interest in Guangzhou NewHuaSun
(NewHuaSun) to ShenZhen Raiser Industrial and Development Co., Ltd. for
$3,403,150. The purchase price is being paid to us in twenty-one quarterly
interest-bearing installments. We acquired our equity interest in NewHuasun on
April 24, 2003 for a total purchase price of $3,304,597, paid for entirely by
the issuance of 13,769,156 shares of our common stock. In addition, we obtained
voting rights over an additional 10% of the equity of NewHuaSun through voting
proxies from one of NewHuaSun's shareholders. We recorded a loss on disposition
of NewHuaSun of $118,343.

      On March 3, 2005 we entered into agreements with NewHuaSun and Shenzhen
Raiser, pursuant to which we redeemed 13,769,156 shares of our common stock held
by NewHuaSun, New HuaSun redeemed a 45% equity interest, and we released
Shenzhen Raizer of its obligation on a $3,403,150 promissory note payable to us.
The fair market value of the 13,769,156 shares of common stock was $1,376,916,
and the difference of $2.1 million represents the impairment on the notes
receivable at year end. The loss is due to the fact that our common stock was
issued at $0.24 per share at the time of acquisition and returned to the Company
at $0.10 per share at the time of disposition of the subsidiaries.

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

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

      In December 2004, our board of directors authorized the sale of our entire
51% equity interest in Beijing Challenger Group (Challenger) due to on-going
adverse market conditions and our declining share price. Our estimation of the
proceeds from the sale of Challenger amounts to $1,172,764, including the
provision on sale of asset. The difference between the carrying value of
Challenger on our books and the sale proceeds represents the impairment on the
pending sale of Challenger at year-end 2004, which amounts to $3.2 million.

      The purchase price adjustment clause in the Challenger acquisition
agreement provides that, if upon expiration of the one year restricted trading
period imposed upon the shares of our common stock paid as consideration for the
acquisition, the return accrued or derived from the shares is less than 41% of
our net profit for our 2004 fiscal year, then the sellers may request the
purchaser to either (i) repurchase the shares and transfer to the sellers all
beneficial and equitable interest in the registered capital of the Company or
(ii) issue and allot to the sellers such total number of additional shares equal
to the difference of the value of the initial shares paid and at $0.556 per
share.


                                      -21-
<PAGE>

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

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


CHANGES IN ACCOUNTING PRINCIPLES

None.


ITEM 7.  FINANCIAL STATEMENTS

      The consolidated financial statements of The Hartcourt Companies, Inc. and
its subsidiaries including the notes thereto, together with the report thereon
of Kabani & Company, Inc. are presented beginning at page F-1.


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

      On December 30, 2004, the audit committee of our board of directors
appointed Kabani & Company, Inc. (Kabani) as the Company's registered
independent public accounting firm.

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

      On December 29, 2004, Loral International Certified Public Accountants
(Loral) informed us that it was resigning as our independent public auditor
effective immediately.

      Loral was appointed as our independent public auditors on August 15, 2003.
The decision to appoint Loral was approved by our board of directors.

      Loral served as our independent auditor for the years ended December 31,
2003 and 2002. Loral's audit reports on our consolidated financial statements
for the years ended December 31, 2003 and 2002 did not contain an adverse
opinion or disclaimer of opinion and were not qualified or modified as to
uncertainty, audit scope or accounting principles except that (1) both audit
reports were modified to include an explanatory paragraph expressing substantial
doubt about the Company's ability to continue as a going concern, and (2)
Loral's 2003 audit report contained the following disclaimer:


                                      -22-
<PAGE>

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

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

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

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


ITEM 8A. CONTROLS AND PROCEDURES

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

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


ITEM 8B. OTHER INFORMATION

      None.


                                    PART III


ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS

DIRECTORS AND EXECUTIVE OFFICERS

      The following table sets forth certain information about our directors and
executive officers:


                                      -23-
<PAGE>

<TABLE>
NAME                 AGE   POSITION                          TERM     DATE HELD
-------------------------------------------------------------------------------------------------
<S>                  <C>   <C>                               <C>      <C>
Billy Y N Wang       40    Chairman                          1 year   Since October 2002
Carrie Hartwick      43    Director                          1 year   Since June 2004
                           Chief Executive Officer                    Since June 2004
                           President                                  Since November 2003
Geoffrey Wei         37    Director                          1 year   Since March 2003
Wilson Li            42    Director                          1 year   Since September 2004
Victor Zhou          36    Director                          1 year   Since December 2004

David Chen           37    Former Chairman                   1 year   Since September 2003
                                                                      Not re-elected August 2004
                           Former Chief Executive Officer    1 year   Since August 2002
                                                                      Resigned June 2004
Stephen Tang         52    Former Director                   1 year   Since July 2001
                                                                      Resigned August 2004
Victor Wang          42    Former Director                   1 year   Since January 2004
                                                                      Resigned December 2004
</TABLE>

DIRECTORS

      BILLY Y N WANG, age 41. Dr. Billy Y N Wang has been the Country Manager of
NCH Corp China, a multi-national chemical company with more than three
subsidiaries in China, since 1997. From 1994 to 1997, Dr. Wang was the President
of Xibic Enterprises Ltd. and Senior Consultant at WCE, specializing in
international business development and technology transfer. From 1991 to 1997,
Dr. Wang served as the Advisor for the Office of International Trade of
Washington DC. Dr. Wang obtained his Masters and Doctorate degrees in Chemical
Engineering from the University of Virginia in 1990, and Bachelors degree from
the University of Massachusetts in 1986.

      GEOFFREY WEI, CICPA, age 37. Mr. Wei is a partner of WHCD Joint CPAs. From
September 2002 to September 2004, Mr. Wei was the CFO of GreenWare Technologies
Ltd. Mr. Wei was the interim CFO, Vice president and Chief Accountant for
Netease.com Inc (Nasdaq NM: NTES) from 2000 to 2002. 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.

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

      WILSON LI, age 42. Dr. Li has been the First Vice President of Shenzhen
Capital Group, the largest Chinese investment holding Company, since August
1999. Prior to that, he served in Shenzhen Planning Bureau. Dr. Li has extensive
experience in fund management, risk control, investment & international
business. Dr. Li received his Master degree in Social Science from Zhongshan
University, PhD in Management Science from Xian Jiaotong University and PhD in
Public Administration & Government Policy from Chinese Academy of Social
Science.

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

      Our 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 board meetings, we compensate our 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.


                                      -24-
<PAGE>

EXECUTIVE OFFICER

      CARRIE HARTWICK, President and Chief Executive Officer, Interim Chief
Financial Officer, age 43. Please see Ms. Hartwick's biography above.

AUDIT COMMITTEE

      Two members of our board of directors serve on our Audit Committee. Until
March 8, 2005, Geoffrey Wei and Billy Wang served as members of our Audit
Committee. 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. On March 8, 2005, Billy Wang relinquished his
duties as a member of the Audit Committee and was replaced by another board
member, Victor Zhou.

COMPENSATION COMMITTEE

      Two members of our board of directors serve on our Compensation Committee.
They are Billy Wang and Geoffrey Wei. Mr. Wang is the chairman of the
Compensation Committee.

NOMINATION COMMITTEE

      Two members of our board of directors serve on our Nominating Committee.
They are Billy Wang and Carrie Hartwick. Mr. Wang is the chairman of the
Nominating Committee.

SECTION 16(A) BENEFICIAL OWNERSHIP COMPLIANCE

      Section 16(a) of the Securities Exchange Act of 1934 requires our
officers, directors and certain other shareholders to file reports of ownership
and changes in ownership with the SEC. Officers, directors and certain other
shareholders are required by regulation to furnish us with copies of all Section
16(a) forms they file. To the best of our knowledge (based solely upon a review
of the Forms 3, 4 and 5 filed), during 2004, no individual or entity was late
with any Form 3, 4 or 5 filings.

CODE OF ETHICS

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


ITEM 10. EXECUTIVE COMPENSATION

      The following table shows the compensation paid or awarded to all
individuals serving as our executive officers during our 2003 and 2004 fiscal
years and those officers or key employees who were employed during the year
ended December 31, 2004 whose total annual salary and bonus during that year
exceeded $100,000:


                                      -25-
<PAGE>

<TABLE>
                                                        ANNUAL COMPENSATION
                                                                                           COMPENSATION
                                                                       OTHER               AWARDS SECURITIES      ALL
NAME AND                                                               ANNUAL              UNDERLYING OPTIONS     OTHER
PRINCIPAL POSITION             YEAR            SALARY ($)  BONUS ($)   COMPENSATION ($)    (#)                    COMPENSATION ($)
----------------------------------------------------------------------------------------------------------------------------------
<S>                            <C>                <C>      <C>         <C>                 <C>                    <C>
Carrie Hartwick,               2004(1)            137,500  30,000      -                   -                      -
CHIEF EXECUTIVE OFFICER AND    2003(2)             10,000  -           -                   1,000,000              -
CHIEF FINANCE OFFICER          2002                   N/A  N/A         N/A                                        N/A

David Y Chen,                  2004                75,000              -                                          -
CHIEF EXECUTIVE OFFICER AND    2003(3)            137,500                                  3,000,000
CHAIRMAN                       2002(4)             70,000                                  2,000,000
</TABLE>

(1)   On March 9, 2005 , we entered into an employment agreement with Ms.
      Hartwick, retroactive to June 3, 2004, the date she became Chief Executive
      Officer.. The agreement provides for annual salary of $150,000 in cash,
      plus the grant of an option to purchase up to 15 million shares of our
      common stock at a price of $0.09 per share for a period of five years from
      the date of grant.

(2)   On December 1, 2003, the date on which Ms. Hartwick's employment began, we
      entered into an employment agreement with her. This agreement had a
      one-year term, from December 1, 2003 to November 30, 2004. The agreement
      provides for an annual salary of $120,000, plus the grant of an option to
      purchase up to 1 million shares of our common stock at a price of $0.65 a
      share for a 12-month period from the date of grant and upon completion of
      her one-year term. Fifty percent (50%) of Ms Hartwick's annual salary is
      payable in cash and the balance is payable in shares of our 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.

(3)   On May 7, 2003, we 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 from June 1, 2003 to May 31, 2004. The
      agreement provides for an annual salary of $150,000, plus the grant of an
      option to purchase up to 3 million shares of our common stock at a price
      of $0.48 a share over a 12-month term from the date of grant. Fifty
      percent (50%) of Mr. Chen's annual salary was payable in cash and the
      balance was payable in shares of our 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.

      On June 3, 2004, our board of directors granted Mr. Chen an option to
      purchase up to 3 million shares of our common stock at a price of $0.30
      per share for a two year period from the date of grant as severance
      package. On the same date, Mr. Chen voluntarily gave up the right to
      exercise his 3 million options granted to him as a part of his 2003-2004
      employment contract.

(4)   On June 1, 2002, we 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 from June 1, 2002 to May 31, 2003. The
      agreement provided for an annual salary of $120,000, plus the grant of an
      option to purchase up to 2 million shares of our common stock at a price
      of 10 cents per share, applicable for a 12-month period from the date of
      grant upon completion of his one-year term to the satisfaction of our
      board of directors. Fifty percent (50%) of Mr. Chen's annual salary was
      payable in cash and the balance was payable in shares of our 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.

      On December 31, 2003 and January 5, 2004, Mr. Chen exercised options to
      purchase a total of 1,696,342 shares of our common stock through a
      cashless exercise transaction.


      The following table sets forth certain information for the twelve-month
period ended December 31, 2004 with respect to grants of stock options to each
person who served as an executive officer during 2004. No stock appreciation
rights were granted to any of our Named Executive Officers during 2004. We
granted options to purchase our common stock totaling 4,000,000 shares during
2004. Options were granted at an exercise price above or equal to the fair
market value of our common stock on the date of issuance.

      The following table provides certain information with respect to stock
options exercised by the Named Executive Officers during the twelve-month period
that ended on December 31, 2004. The table also provides the number of shares
covered by stock options as of December 31, 2004 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, 2004. No stock appreciation rights were outstanding
during the last year.


                                      -26-
<PAGE>

<TABLE>
                                     OPTIONS/SAR EXERCISES IN THE 2004 FISCAL YEAR
                                         AND FISCAL YEAR-END OPTION/SAR VALUES

                                                        NUMBER OF SECURITIES             VALUE OF UNEXERCISED
                         SHARES                         UNDERLYING UNEXERCISED           IN-THE-MONEY OPTIONS/SARS AT
                         ACQUIRED     VALUE             OPTIONS/SARS AT FY-END           FY-END
                         ON EXERCISE  REALIZED          EXERCISABLE/UNEXERCISABLE        EXERCISABLE/UNEXERCISABLE
NAME                     (#)          ($)               (#)                              ($)
---------------------------------------------------------------------------------------------------------------------
<S>                      <C>          <C>               <C>                              <C>
Carrie Hartwick,         -            -                 1,000,000/None                   None/None
CHIEF EXECUTIVE
OFFICER

David Chen,              1,000,000    $100,000          3,000,000/None                   None/None
FORMER CHIEF EXECUTIVE
OFFICER AND CHAIRMAN
</TABLE>


COMPENSATION OF DIRECTORS

      Our Bylaws provide that the Company's directors may be paid their expenses
and a fixed sum for attendance at meetings of the board of directors and may be
paid a stated salary as a director, and no such payment shall preclude any
director from serving the Company in any other capacity and receiving
compensation therefor. Currently each independent director is be paid $7,000 per
year and $500 for his or her attendance at each regular board meeting. The
compensation was paid through the issuance of restricted shares of our common
stock at the closing market price of our common stock on the first trading day
of each quarter.


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

      The following table sets forth information as of March 31, 2005, the
number and percentage of our 214,165,577 outstanding shares of common stock that
were beneficially owned by (i) each person who is currently a director, (ii)
each executive officer, (iii) all current directors and executive officers as a
group and (iv) each person who, to our knowledge is the beneficial owner of more
than 5% of our outstanding common stock.

<TABLE>
NAME AND ADDRESS OF BENEFICIAL OWNER(1)                 AMOUNT AND NATURE OF       PERCENT OF
                                                      BENEFICIAL OWNERSHIP(2)      CLASS
---------------------------------------------------------------------------------------------
<S>                                                           <C>                  <C>
Billy Wang                                                    158,733              0.07%
Carrie Hartwick                                               112,973              0.05%
Geoffrey Wei                                                   75,144              0.04%
Victor Zhou                                                     5,702              0.00%
Wilson Li                                                      24,070              0.01%

All officers and directors as a Group (5 persons):            376,622              0.17%
</TABLE>

---------------------
      (1)   Unless otherwise indicated, the address for each beneficial owner
            listed above is c/o The Hartcourt Companies, Inc., 3/F, No. 710
            ChangPing Road, Shanghai 200040, China.
      (2)   Unless otherwise indicated, the persons listed above have sole
            voting and investment powers with respect to all such shares. Under
            the applicable SEC rules, a person is deemed to be the "beneficial
            owner" of a security with regard to which the person, directly or
            indirectly, has or shares (a) the voting power, which includes the
            power to vote or direct the voting of the security, or (b) the
            investment power, which includes the power to dispose or direct the
            disposition, of the security, in each case irrespective of the
            person's economic interest in the security. Under SEC rules, a
            person is deemed to beneficially own securities which the person has
            the right to acquire within 60 days (x) through the exercise of any
            option or warrant or (y) through the conversion of another security.


                                      -27-
<PAGE>

EQUITY COMPENSATION PLAN INFORMATION

      The following table gives information about our common stock that may be
issued upon the exercise of options, warrants and rights under all of our
existing equity compensation plans as of December 31, 2004, including the 1995
Stock Plan.

<TABLE>
PLAN CATEGORY                  NUMBER OF SECURITIES TO BE
                               ISSUED UPON EXERCISE OF          WEIGHTED AVERAGE EXERCISE       NUMBER OF SECURITIES REMAINING
                               OUTSTANDING OPTIONS, WARRANTS    PRICE OF OUTSTANDING OPTIONS,   AVAILABLE FOR FUTURE ISSUANCE UNDER
                               AND RIGHTS                       WARRANTS AND RIGHTS             EQUITY COMPENSATION PLAN
-----------------------------------------------------------------------------------------------------------------------------------
<S>                            <C>                                  <C>                         <C>
Equity compensation plans      300,000                              $1.00                       N/A
approved by securities
holders

Equity compensation plans      7,000,000                            $0.247                      N/A
not approved by security
holders

Total                          7,300,000                            $0.278                      N/A
</TABLE>


ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      During 2004, we provided management services to Huaqing, our 51% owned
subsidiary, with service fee of $342,879.

      During 2004, Huaqing, a 51% owned subsidiary of the Company, sold
$2,310,490 monitors to its minority shareholder (Shanghai Huaqing Economic
Development Co., Ltd) under normal commercial terms. During 2004, Huaqing also
sold $3,275,076 monitors to GuoWei, a subsidiary that is currently pending for
sale, under normal commercial terms.

      During 2004, we issued 286,156 restricted shares of common stock valued at
$151,250 to directors, officers, former directors and officers, employees in
lieu of compensation and services.

      During 2004, we issued 1,696,342 shares of our common stock to Mr. David
Chen, our former CEO, pursuant to the exercise of stock options that were
granted to him as a part of his 2002 compensation in a cashless transaction.

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

2004 RELATED PARTY TRANSACTIONS

<TABLE>
NAME OF RELATED
PARTIES                    RELATIONSHIP                        TRANSACTION NATURE             AMOUNT
--------------------------------------------------------------------------------------------------------------------------
<S>                        <C>                                 <C>                            <C>
Shanghai Guowei Science    A subsidiary pending for sales as   Sales of products              $3,275,076
and Technology Co., Ltd.   of December 31, 2004
Shanghai Huaqing           Minority shareholder of Huaqing     Sales of products              $2,310,490
Economic Development
Co., Ltd
</TABLE>


                                      -28-
<PAGE>

<TABLE>
NAME OF RELATED
PARTIES                    RELATIONSHIP                        TRANSACTION NATURE             AMOUNT
--------------------------------------------------------------------------------------------------------------------------
<S>                        <C>                                 <C>                            <C>
Carrie Hartwick            CEO and CFO                         During 2004, we issued         286,156 shares valued at of
David Chen                 Former CEO                          restricted shares of common    $151,250
Alan Phan                  Former Chairman                     stock to directors,
Billy Wang                 Chairman                            officers, former directors
Geoffrey Wei               Director                            and officers in lieu of
Stephen Tang               Former Director                     compensation and services.
XY Li                      Former Director
Victor Wang                Former Director
TingTing Ni                Employee

David Chen                 Former Chairman and CEO             During 2004, we issued         841,270 restricted shares
                                                               restricted shares of common    valued at $0 for were issued
                                                               stock for cashless exercise    in exchange for 1 million
                                                               of stock option                stock option shares. The
                                                                                              144,928 stock option shares,
                                                                                              valued at $100,000, were
                                                                                              returned to the Plan.

Li ZhengZheng              President of Huaqing, a             During 2004, this group of     1,139,863 shares valued at
                           subsidiary of Hartcourt             Chinese citizens returned      $455,945
Zhang Hui                  Director of Huaqing                 shares of common
Liu Jianqiang              Employee of Huaqing                 stock that had
Guan Xuefang               Relative of an employee of Huaqing  been issued to
Xu Hui Zheng               Relative of an employee of Huaqing  them in exchange
Qiu Jiaqi                  President of former subsidiary of   for cancellation
                           Huaqing                             of their
                                                               outstanding debt
                                                               to Hartcourt.
</TABLE>

ITEM 13.   EXHIBITS

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

<TABLE>
--------------------------------------------------------------------------------------------------------------------------------
     EXHIBIT NO.                                            DESCRIPTION                                        PREVIOUSLY FILED
--------------------------------------------------------------------------------------------------------------------------------
<S>                  <C>                                                                                             <C>
        2.05         Agreement for Sale and Purchase of Certain Interest in the Registered Capital of HuaQing        (13)
                     Corporation Development Co Ltd ("HuaQing") dated February 14, 2003 between Hartcourt
                     Capital, Inc. and HuaQing shareholders
--------------------------------------------------------------------------------------------------------------------------------
        2.06         Agreement for Sale and Purchase of Certain Interest in the Registered Capital of                (13)
                     Guandgdong NewHauSun Computer Co. Ltd. ("NewHauSun") dated April 24, 2003 between
                     Hartcourt Capital, Inc. and NewHauSun shareholders.
--------------------------------------------------------------------------------------------------------------------------------
        2.07         Agreement for Sale and Purchase of Certain Interest in the Registered Capital of                (13)
                     Shanghai GuoWei Science and Technology Ltd ("GuoWei") dated April 30, 2003 between
                     Hartcourt Capital, Inc. and GuoWei shareholders.
--------------------------------------------------------------------------------------------------------------------------------
        2.08         Agreement for the Sale and Purchase of Equity Capital in Shanghai Sinobull Information          (13)
                     Corporation Limited dated May 20, 2003 between Hopeful Internet Technologies Limited and
                     Genius Technology Inc.
--------------------------------------------------------------------------------------------------------------------------------
        2.09         Agreement for Sale and Purchase of Certain Interest in the Registered Capital of                (13)
                     Zhongnan Group ("Zhongnan") dated June 25, 2003 between Hartcourt Capital, Inc. and
                     Zhongnan shareholders.
--------------------------------------------------------------------------------------------------------------------------------
        2.10         Agreement for Sale and Purchase of Certain Interest in the Registered Capital of                (14)
                     Shanghai HuaQing Corporation Development Co Ltd ("Shanghai HuaQing") dated June 30, 2003
                     between Hartcourt Capital, Inc. and Shanghai HuaQing shareholders.
--------------------------------------------------------------------------------------------------------------------------------
        2.11         Agreement for Sale and Purchase of Shanghai PengYang Computer Co., Ltd. dated November          (14)
                     21, 2003 between Hartcourt Capital, Inc and PengYang shareholders.
--------------------------------------------------------------------------------------------------------------------------------
        2.12         Agreement for Sale and Purchase of Certain Interest in the Registered Capital of Beijing        (14)
                     Challenger Wanzhong Info Tech Co., LTD ("Challenger") dated December 9, 2003 between
                     Hartcourt Capital, Inc. and Challenger shareholders.
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>


                                      -29-
<PAGE>

<TABLE>
--------------------------------------------------------------------------------------------------------------------------------
     EXHIBIT NO.                                            DESCRIPTION                                        PREVIOUSLY FILED
--------------------------------------------------------------------------------------------------------------------------------
<S>                  <C>                                                                                             <C>
        2.13         Agreement for Sale and Purchase of the Entire Issued Share Capital of Bestefort                 (18)
                     Investments Limited, dated November 1, 2004
--------------------------------------------------------------------------------------------------------------------------------
        2.14         Agreement for Sale and Purchase of Certain Interest in the Registered Capital of
                     Guangdong NewHuaSun Computer Co., Ltd. ("NewHuaSun") dated August 30, 2004 between
                     Hartcourt Capital, Inc and ShenZhen Raiser Industrial and Development Co., Ltd.
--------------------------------------------------------------------------------------------------------------------------------
        2.15         Agreement for Sale and Purchase of Certain Interest in the Registered Capital of Hopeful
                     Internet Technologies Ltd. ("Hopeful") dated June 29, 2004 between Hartcourt China Inc,
                     Mr. Lee Lu Ping and First Information Technology Ltd.
--------------------------------------------------------------------------------------------------------------------------------
        3.01         Articles of Incorporation of Hartcourt, as amended.                                             (1)
--------------------------------------------------------------------------------------------------------------------------------
        3.02         Bylaws of Hartcourt.                                                                            (1)
--------------------------------------------------------------------------------------------------------------------------------
        3.03         Amendment to the Bylaws of Hartcourt.                                                           (1)
--------------------------------------------------------------------------------------------------------------------------------
        3.04         Amendment to the Articles of Incorporation of Hartcourt.                                        (6)
--------------------------------------------------------------------------------------------------------------------------------
        10.01        Lease between Hartcourt and Larry M. Mitobe for Hartcourt's headquarters facility, dated        (1)
                     April 9, 1996.
--------------------------------------------------------------------------------------------------------------------------------
        10.02        Equipment Lease between Hartcourt USA and Anja Engineering Corporation, dated April 4,          (1)
                     1994.
--------------------------------------------------------------------------------------------------------------------------------
        10.03        Stock Exchange Agreement between Hartcourt USA and Eastern Rochester, dated August 8,           (1)
                     1994.
--------------------------------------------------------------------------------------------------------------------------------
        10.04        1995 Stock Option Plan.                                                                         (1)
--------------------------------------------------------------------------------------------------------------------------------
        10.05        Purchase Contract between The Hartcourt Companies, Inc. and Exceptional Specialty               (1)
                     Products, Inc., dated March 21, 1996.
--------------------------------------------------------------------------------------------------------------------------------
        10.06        Purchase and Sale Agreement, dated August 8, 1996, between The Hartcourt Companies, Inc.        (1)
                     and NuOasis International, Inc., and Addendum to Purchase and Sale Contract.
--------------------------------------------------------------------------------------------------------------------------------
        10.07        Convertible Secured Promissory Note, dated August 8, 1996, in connection with Purchase          (1)
                     and Sale Agreement, dated August 8, 1996 between The Hartcourt Companies, Inc. and
                     NuOasis International, Inc.
--------------------------------------------------------------------------------------------------------------------------------
        10.08        Convertible Secured Promissory Note, dated August 8, 1996, in connection with Purchase          (1)
                     and Sale Agreement, dated August 8, 1996 between The Hartcourt Companies, Inc. and
                     NuOasis International, Inc., as amended.
--------------------------------------------------------------------------------------------------------------------------------
        10.09        Sales Agreement, dated September 17, 1996, between The Hartcourt Companies, Inc. and            (1)
                     Promed International, Ltd.
--------------------------------------------------------------------------------------------------------------------------------
        10.10        Sales Agreement, dated September 17, 1996, between The Hartcourt Companies, Inc. and            (1)
                     Mandarin Overseas Investment Co., Ltd.
--------------------------------------------------------------------------------------------------------------------------------
        10.11        Purchase and Sale Agreement, dated September 27, 1996, between The Hartcourt Companies,         (1)
                     Inc. and CKES Acquisitions, Inc.
--------------------------------------------------------------------------------------------------------------------------------
        10.12        Secured Promissory Note, dated September 27, 1996, in connection with Purchase and Sale         (1)
                     Agreement between The Hartcourt Companies, Inc. and CKES Acquisitions, Inc.
--------------------------------------------------------------------------------------------------------------------------------
        10.13        Consulting Agreement, dated December 30, 1996, between The Hartcourt Companies, Inc. and        (3)
                     American Equities LLC, a California limited liability company.
--------------------------------------------------------------------------------------------------------------------------------
        10.14        Investment Banking Agreement, dated March 1998, between The Hartcourt Companies, Inc.           (2)
                     and DanAllen Investment Group.
--------------------------------------------------------------------------------------------------------------------------------
        10.16        Marketable Securities Agreement, dated July 31, 1997, between The Hartcourt Companies,          (2)
                     Inc. and Capital Commerce, Ltd.
--------------------------------------------------------------------------------------------------------------------------------


                                                               -30-
</TABLE>
<PAGE>

<TABLE>
--------------------------------------------------------------------------------------------------------------------------------
     EXHIBIT NO.                                            DESCRIPTION                                        PREVIOUSLY FILED
--------------------------------------------------------------------------------------------------------------------------------
<S>                  <C>                                                                                             <C>
        10.17        Lease Termination Agreement, dated March 24, 1998, between Hartcourt Investment (USA)           (2)
                     Corporation and Scripto-Tokai Corporation.
--------------------------------------------------------------------------------------------------------------------------------
        10.18        Share Purchase Agreement with Enova Holdings, Inc., dated February 1, 1999, Exchange            (7)
                     Agreement , dated March 23, 1999, and Distribution
                     Agreement, dated March 24, 1999, File # 99579493.
--------------------------------------------------------------------------------------------------------------------------------
        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        (8)
                     October 18, 1999 (date of inception) to December 31, 1999.
--------------------------------------------------------------------------------------------------------------------------------
        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            (9)
                     March 18, 1999, File No. 333-74933.
--------------------------------------------------------------------------------------------------------------------------------
        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          (11)
                     of Fred Luke and Jon L. Lawver Directors and Officers, File No. 99770546.
--------------------------------------------------------------------------------------------------------------------------------
        10.26        February 4, 2000, Hartcourt completed a private placement of 227,445 Units and a                (12)
                     class II Warrants to PYR Management LLC for $3,000,000 pursuant to a regulation D
                     Subscription Agreement, File No. 524390.
--------------------------------------------------------------------------------------------------------------------------------
        10.27        Interim CFO Employment Agreement, dated January 5, 2005                                         (17)
--------------------------------------------------------------------------------------------------------------------------------
        10.28        CEO Employment Agreement, dated March 9, 2005
--------------------------------------------------------------------------------------------------------------------------------
        14.01        Code of Ethics                                                                                  (13)
--------------------------------------------------------------------------------------------------------------------------------
        16.01        Letter from Loral International CPA & Advisor, LLC, to the Company resigning as                 (15)
                     independent auditor, dated December 29, 2004.
--------------------------------------------------------------------------------------------------------------------------------
        16.02        Letter from Loral International CPA & Advisor, LLC, to the Company indicating                   (16)
                     disagreement with the Company's Form 8-K filing regarding Loral's resignation, dated
                     January 3, 2005.
--------------------------------------------------------------------------------------------------------------------------------
        21.01        Subsidiaries of the registrant
--------------------------------------------------------------------------------------------------------------------------------
        27.01        Financial Data Schedule. Pursuant to Rule 12b-32 under Securities and Exchange Act of
                     1934, as amended.
--------------------------------------------------------------------------------------------------------------------------------
        31.01        Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of
                     the Sarbanes-Oxley Act of 2002
--------------------------------------------------------------------------------------------------------------------------------
        31.02        Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of
                     the Sarbanes-Oxley Act of 2002
--------------------------------------------------------------------------------------------------------------------------------
        32.01        Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
                     the Sarbanes-Oxley Act of 2002
--------------------------------------------------------------------------------------------------------------------------------

------------

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

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

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

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


                                                              -31-
</TABLE>
<PAGE>

(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
15, 2004, incorporated herein by reference.

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

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

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

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

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


ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES

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

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

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


                                      -32-
<PAGE>

                                   SIGNATURES

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

By:  /s/ Carrie Hartwick                                   Date: April 15, 2005
   ---------------------------------------------
     Carrie Hartwick, Chief Executive Officer
     and Interim Chief Financial Officer


      In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the date stated.

By:  /s/ Billy Y. N. Wang                                  Date: April 15, 2005
   ---------------------------------------------
      Billy Y. N. Wang, Director

By:  /s/ Geoffrey Wei                                      Date: April 15, 2005
   ---------------------------------------------
     Geoffrey Wei, Director

By:  /s/ Wilson W. S. Li                                   Date: April 15, 2005
   ---------------------------------------------
     Wilson W. S. Li, Director

By:  /s/ Victor Zhou                                       Date: April 15, 2005
   ---------------------------------------------
     Victor Zhou, Director

<PAGE>


                       Report on the Financial Statements

                                       Of

                          The Hartcourt Companies, Inc.
                                And Subsidiaries


<PAGE>


                          The Hartcourt Companies, Inc.
                                And Subsidiaries



                    Audited Consolidated Financial Statements

                 For the Years Ended December 31, 2004 and 2003


Contents                                                         Pages
--------                                                         -----

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM            F-1

Balance Sheet                                                F-2 - F-4

Statements of Operations                                     F-4 - F-5

Statement of Changes in Stockholders' Equity                 F-6 - F-7

Statements of Cash Flows                                     F-8 - F-9

Notes to Financial Statements                              F-10 - F-37


<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, 2004 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, 2004. 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, 2004 and the results of its operations and its cash flows for
the year ended December 31, 2004, in conformity with accounting principles
generally accepted in the United States of America.

The Company's financial statements are prepared using the generally accepted
accounting principles applicable to a going concern, which contemplates the
realization of assets and liquidation of liabilities in the normal course of
business. The Company has accumulated deficit of $67,264,171 including net loss
of $15,452,296 for the year ended December 31, 2004. These factors as discussed
in Note 2 to the financial statements, raises substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 2. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.


KABANI & COMPANY, INC.
CERTIFIED PUBLIC ACCOUNTANTS

Huntington Beach, California
April 2, 2005


                                      F-1
<PAGE>

                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEET
                                DECEMBER 31, 2004

                                                             December 31, 2004
ASSET                                                     --------------------
CURRENT ASSETS
Cash and cash equivalents                                 $          1,744,852
Accounts receivable, net                                             5,141,892
Inventories, net                                                     1,229,971
Notes receivable, net                                                1,376,916
Trade deposits                                                       3,791,927
Prepaid expenses and other assets                                    1,470,508
Assets pending for sales                                             2,204,260
Due from related parties                                               436,155
                                                          --------------------
TOTAL CURRENT ASSETS                                                17,396,481
                                                          --------------------

PROPERTY & EQUIPMENT - NET                                             363,849
                                                          --------------------

INVESTMENTS                                                             60,412
                                                          --------------------

INTANGIBLE ASSET
Goodwill, net                                                        2,160,101
                                                          --------------------
TOTAL OTHER ASSETS                                                   2,160,101
                                                          --------------------
TOTAL ASSETS                                              $         19,980,843
                                                          ====================

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES
Accounts payable                                                       632,528
Deferred revenue                                                     8,522,065
Due to shareholders                                                    260,807
Accrued expenses and other current liabilities                       2,397,256
Staffs loan                                                          1,052,427
                                                          --------------------
TOTAL CURRENT LIABILITIES                                 $         12,865,083
                                                          --------------------


TOTAL LIABILITIES                                         $         12,865,083
                                                          --------------------

MINORITY INTERESTS                                                   1,171,779


                                      F-2
<PAGE>

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

                                                             December 31, 2004
                                                          --------------------
SHAREHOLDERS' EQUITY
PREFERRED STOCK:
Original preferred stock, $0.01 par value, 1,000
shares authorized, issued and cancelled at
December 31, 2004                                                            -
Class A, 10,000,000 shares authorized, none issued
and outstanding at December 31, 2004                                         -
Series A, $1,000 stated value, 4,000 shares
authorized, none issued and outstanding at
December 31, 2004                                                            -
Series B, $1,000 stated value, 2,000 shares
authorized, none issued and outstanding at
December 31, 2004                                                            -
Series C, $1,000 stated value, 1,500 shares
authorized, none issued and outstanding at
December 31, 2004                                                            -
Series D, $1,000 stated value, 10,000 shares
authorized, none issued and outstanding at
December 31, 2004                                                            -
Series AB, $100 stated value, 25,000 shares
authorized, none issued and outstanding at
December 31, 2004                                                            -

TOTAL PREFERRED STOCK                                                        -

COMMON STOCK, $0.001 PAR VALUE, 250,000,000
AUTHORISED, 171,658,757 COMMON SHARES ISSUED
AND OUTSTANDING                                                        171,659
ADDITIONAL PAID IN CAPITAL                                          72,151,129
TREASURY STOCK, AT COST, 48,728 SHARES                                 (48,728)
OTHER COMPREHENSIVE INCOME                                             934,092
ACCUMULATED DEFICIT
                                                                   (67,264,171)

TOTAL SHAREHOLDERS' EQUITY                                           5,943,981
                                                          --------------------

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                $         19,980,843
                                                          ====================


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


                                      F-3
<PAGE>

                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                  FOR THE YEAR ENDED DECEMBER 31, 2004 AND 2003

                                                      2004             2003
                                                 -------------    -------------

NET SALES                                        $  74,563,459    $  48,529,401

COST OF SALES                                       72,847,501       45,980,047
                                                 -------------    -------------

GROSS PROFIT                                         1,715,958        2,549,354
                                                 -------------    -------------

OPERATING EXPENSES
 Selling, general and administrative                 2,698,159        1,404,660
 Depreciation and amortization                          57,996           66,526
 Impairments                                         4,307,692          509,294
                                                 -------------    -------------
TOTAL OPERATING EXPENSES                             7,063,847        1,980,480
                                                 -------------    -------------

INCOME/(LOSS) FROM CONTINUING OPERATIONS
BEFORE OTHER INCOME (EXPENSES)                      (5,347,889)         568,874
                                                 -------------    -------------

OTHER INCOME (EXPENSES)
 Interest expense                                     (552,547)         (84,480)
 Interest income                                       238,282          188,945
 Litigation accrual                                   (100,000)      (1,300,000)
 Investment income                                           -                -
 Gain on disposal of property and equipment             97,888                0
 Other income                                          215,154           83,771
                                                 -------------    -------------
TOTAL OTHER INCOME (EXPENSES)                         (101,223)      (1,111,764)
                                                 -------------    -------------

INCOME/(LOSS) FROM CONTINUING OPERATIONS
BEFORE MINORITY INTEREST                         $  (5,449,112)   $    (542,890)

Less: Minority Interest                                 50,288          582,731
                                                 -------------    -------------

LOSS BEFORE DISCONTINUED OPERATIONS                 (5,499,400)      (1,125,621)

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


                                      F-4
<PAGE>

<TABLE>
                      THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                           CONSOLIDATED STATEMENTS OF OPERATIONS
                      FFOR THE YEAR ENDED DECEMBER 31, 2004 AND 2003
                                       - CONTINUED -

                                                                2004             2003
                                                           -------------    -------------
<S>                                                        <C>              <C>
DISCONTINUED OPERATIONS:
 Gain (losses) from discontinued operations                      368,715          364,677
PProvision for loss on assets pending for sale                (7,137,339)               -
 Gain (losses) on disposal of discontinued operations         (2,968,693)         173,911
                                                           -------------    -------------

LOSS BEFORE TAX                                              (15,236,717)        (587,033)
 Taxation                                                       (215,579)        (161,947)
                                                           -------------    -------------
NNET LOSS                                                    (15,452,296)        (748,980)

OTHER COMPREHENSIVE LOSS
 Foreign currency translation loss                                     -           (9,500)
                                                           -------------    -------------

COMPREHENSIVE LOSS                                         $ (15,452,296)   $    (758,480)
                                                           =============    =============

BASIC AND DILUTED LOSS PER COMMON SHARE
 Loss from continuing operations                           $       (0.03)   $      (0.005)
 Loss from discontinued operations                                 (0.06)           0.000
                                                           -------------    -------------
 Loss per share                                            $       (0.09)   $      (0.005)
                                                           =============    =============
 - basic and diluted (weighted average)                      175,645,723      135,564,580
                                                           =============    =============

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


                                           F-5
</TABLE>
<PAGE>

<TABLE>
                                           THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                                           CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                                           FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003


                                                                                                                      Common
                                           Common Stock                   Preferred Stock           Additional         Stock
                                    ----------------------------    ----------------------------      Paid-In      Subscriptions
           Description                  Shares         Amount          Shares          Amount         Capital        Receivable
--------------------------------    ------------    ------------    ------------    ------------    ------------    ------------
<S>                                  <C>            <C>                    <C>      <C>             <C>             <C>
Balance - December 31, 2002           88,518,023    $     88,518           1,000    $         10    $ 55,669,100    $          -

Shares issued for consulting
  services                             2,174,667           2,175               -               -         160,246
Shares issued for compensation         1,857,900           1,858               -               -         260,288
Shares issued for executions of
  cashless option                      1,000,000           1,000               -               -          99,000
Shares issued in connection of
  acquisition                         50,349,243          50,349               -               -      15,671,553               -
Share issued for execution of
  cashless warrants                      714,794             715               -               -            (715)              -
Subscriptions receivable              31,298,535          31,299               -               -       2,620,195      (1,842,326)
Sale of treasury stocks                        -               -               -               -        (451,187)       (805,802)
Unralised loss on disposal of FTL              -               -               -               -               -               -
Net loss                                                                       -               -
                                    ------------    ------------    ------------    ------------    ------------    ------------

Balance -December 31, 2003           171,157,104    $    171,157           1,000    $         10    $ 70,858,036    $ (1,842,326)
                                    ============    ============    ============    ============    ============    ============

<CAPTION>
                                          Treasury Stock               Other                          Total
                                    ---------------------------    Comprehensive    Accumulated    Shareholders'
           Description                 Shares         Amount           Loss           Deficit         Equity
--------------------------------    ------------   ------------    ------------    ------------    ------------
<S>                                       <C>      <C>             <C>             <C>             <C>
Balance - December 31, 2002            5,610,588   $ (3,723,928)   $    (71,094)   $(51,053,395)   $    909,211

Shares issued for consulting
  services                                                    -                                         162,421
Shares issued for compensation                                -                                         262,145
Shares issued for executions of
  cashless option                                                                                       100,000
Shares issued in connection of
  acquisition                                  -              -               -               -      15,721,902
Share issued for execution of
  cashless warrants                            -              -               -               -               -
Subscriptions receivable                       -              -               -               -         809,168
Sale of treasury stocks                  500,000                                                         48,813
Unralised loss on disposal of FTL              -              -       1,004,581               -       1,004,581
Net loss                                                                               (758,480)       (758,480)
                                    ------------   ------------    ------------    ------------    ------------

Balance -December 31, 2003                48,728   $    (48,728)   $    933,487    $(51,811,875)   $ 18,259,761
                                    ============   ============    ============    ============    ============


                                                                F-6
</TABLE>
<PAGE>

<TABLE>
                                           THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                                           CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                                           FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
                                                            (CONTINUED)

                                                                                                                      Common
                                           Common Stock                   Preferred Stock           Additional         Stock
                                    ----------------------------    ----------------------------      Paid-In      Subscriptions
           Description                  Shares         Amount          Shares          Amount         Capital        Receivable
--------------------------------    ------------    ------------    ------------    ------------    ------------    ------------
<S>                                  <C>            <C>                    <C>      <C>             <C>             <C>
Balance - December 31, 2003          171,157,104    $    171,157           1,000    $         10    $ 70,858,036    $ (1,842,326)

Shares issued for consulting
  services                               249,640             250               -               -          91,465
Shares issued for compensation           286,156             286               -               -         150,964
Shares issued for executions of
  cashless option                        696,342             696               -               -        (100,696)
Shares issued for acquisition of
  Challenger Group                     6,824,748           6,825               -               -       3,787,735               -
Share cancelled for rescind
  acquisition of Zhongnan Group       (8,415,370)         (8,415)              -               -      (2,179,581)              -
Subscriptions receivable              (1,139,863)         (1,140)              -               -        (454,804)      1,842,326
Exchange fluctuation reserve                   -               -               -               -               -               -
Share issued for conversion of
  preferred stocks                     2,000,000           2,000           (1000)            (10)         (1,990)              -
Net loss                                                                       -               -
                                    ------------    ------------    ------------    ------------    ------------    ------------

Balance -December 31, 2004           171,658,757    $    171,659               -    $          -    $ 72,151,129    $          -
                                    ============    ============    ============    ============    ============    ============

<CAPTION>

                                          Treasury Stock               Other                          Total
                                    ---------------------------    Comprehensive    Accumulated    Shareholders'
           Description                 Shares         Amount           Loss           Deficit         Equity
--------------------------------    ------------   ------------    ------------    ------------    ------------
<S>                                       <C>      <C>             <C>             <C>             <C>
Balance - December 31, 2003               48,728   $    (48,728)   $    933,487    $(51,811,875)   $ 18,259,761

Shares issued for consulting
  services                                                    -                                          91,715
Shares issued for compensation                                -                                         151,250
Shares issued for executions of
  cashless option                                                                                      (100,000)
Shares issued for acquisition of
  Challenger Group                             -              -               -               -       3,794,560
Share cancelled for rescind
  acquisition of Zhongnan Group                -              -               -               -      (2,187,996)
Subscriptions receivable                       -              -               -               -       1,386,382
Exchange fluctuation reserve                   -              -             605               -             605
Share issued for conversion of
  preferred stocks                             -              -               -               -               -
Net loss                                                                            (15,542,296)    (15,542,296)
                                    ------------   ------------    ------------    ------------    ------------

Balance -December 31, 2004                48,728   $    (48,728)   $    934,092    $(67,264,171)   $  5,943,981
                                    ============   ============    ============    ============    ============

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


                                                                F-7
</TABLE>
<PAGE>

<TABLE>
                       THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                           CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 DECEMBER 31, 2004 AND 2003

                                                                   2004            2003
                                                               ------------    ------------
<S>                                                            <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss                                                       $(15,452,296)   $   (748,980)
Adjustments to reconcile net loss to net cash used in
operating activities:
 Gain on disposal of property and equipment                         (97,888)              0
 Impairment of notes receivables                                  4,083,876         101,186
 Impairment of investment                                           223,816         400,000
 Loss/(gain) on disposal of discontinued operations               2,968,693        (173,911)
 Depreciation                                                        57,996         215,178
 Provision for loss on assets pending for sale                    7,137,339               0
 Litigation accruals                                                100,000       1,300,000
 Unrealized investment gain                                               -        (197,833)
 Minority interest                                                   50,288         864,920
 Stock issued for services and compensations                        242,965         424,566
Changes in operating assets and liabilities:
    Accounts receivable                                          (8,950,308)        545,783
    Trade deposit                                                (9,538,092)     (1,873,328)
    Inventory                                                    (2,630,143)        553,424
    Prepaid expenses and other receivables                         (736,091)        (86,455)
    Accounts payable and accrued expenses                         6,231,754      (5,614,367)
    Deferred revenue                                              9,188,144        (229,567)
                                                               ------------    ------------
NET CASH USED IN OPERATING ACTIVITIES                          $ (7,119,947)   $ (4,519,384)


                                            F-8
</TABLE>
<PAGE>

<TABLE>
                       THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                           CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 DECEMBER 31, 2004 AND 2003
                                       (-CONTINUED-)

                                                                   2004            2003
                                                               ------------    ------------
<S>                                                            <C>             <C>
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment                             $    (18,734)   $          -
Arising from acquisition of a subsidiary                          1,872,337       2,366,560
Dividends paid to minority shareholders                            (326,267)              -
Proceeds from disposal of property, plant and equipment             312,561               -
Cash decreased due to disposal of subsidiaries                   (3,486,008)        (32,337)
Proceeds on notes receivable, net                                   378,440         100,000
Investments                                                        (455,374)         30,000
                                                               ------------    ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES            $ (1,723,045)   $  2,464,223
                                                               ------------    ------------

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds due to related parties                                $  1,228,325    $  2,691,620
Proceeds from issuance of common stock                            1,386,382         130,000
Proceeds from sale of treasury stock                                      -          48,813
Proceed on note payables                                                  -       1,432,245
Proceeds on debt                                                  5,546,867         168,243
                                                               ------------    ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES                      $  8,161,574    $  4,470,921
                                                               ------------    ------------

FOREIGN CURRENCY TRANSLATION                                            650          (9,500)
                                                               ------------    ------------

NET (DECREASE)/INCREASE IN CASH                                    (741,251)      2,406,260
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR                     2,486,103          79,843
                                                               ------------    ------------
CASH AND CASH EQUIVALENTS - END OF YEAR                        $  1,744,852    $  2,486,103
                                                               ============    ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for the interest                     $    552,547    $    376,513
                                                               ============    ============


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


                                            F-9
</TABLE>
<PAGE>

THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003

--------------------------------------------------------------------------------

NOTE 1  GENERAL

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

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

As of December 31, 2004, the Company owns 100% of three (3) British Virgin
Island ("BVI") incorporated companies: (1) Hartcourt China Inc (formerly know as
Hartcourt Companies Ltd.), (2) Hartcourt Capital Inc., and (3) AI-Asia Inc. All
three of these BVI subsidiaries are holding companies for assets located in
China.

As of December 31, 2004, the Company owns 51% equity interest in Shanghai
Huaqing Corporation Development Ltd. Huaqing is located in Shanghai, China. As
the Chinese laws may prohibit foreign companies involved in the distribution
industry, Hartcourt, uses its agents under its employees' name, as nominee to
hold the shares of the acquired subsidiaries.

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

As of December 31, 2004, AI-Asia, Inc., the third holding company, owns 100%
equity of AI-Asia (Shanghai) Information Technology, Inc of China ("AI"),
located in Shanghai, China.

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

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

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

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


                                      F-10
<PAGE>

THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003

--------------------------------------------------------------------------------

NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

a)    Basis of Consolidation

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

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

b)    Use of Estimates

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

c)    Cash and Cash Equivalents

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

d)    Accounts Receivable

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


                                      F-11
<PAGE>

THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003

--------------------------------------------------------------------------------

NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

e)    Inventory

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

f)    Property and Equipment

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

g)    Intangible Assets

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

h)    Impairment of Long-Lived Assets

      Effective January 1, 2002, the Company adopted Statement of Financial
      Accounting Standards No. 144, "Accounting for the Impairment or Disposal
      of Long-Lived Assets" ("SFAS 144"), which addresses financial accounting
      and reporting for the impairment or disposal of long-lived assets and
      supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived
      Assets and for Long-Lived Assets to be Disposed Of," and the accounting
      and reporting provisions of APB Opinion No. 30, "Reporting the Results of
      Operations for a Disposal of a Segment of a Business." The Company
      periodically evaluates the carrying value of long-lived assets to be held
      and used in accordance with SFAS 144. SFAS 144 requires impairment losses
      to be recorded on long-lived assets used in operations when indicators of
      impairment are present and the undiscounted cash flows estimated to be
      generated by those assets are less than the assets' carrying amounts. In
      that event, a loss is recognized based on the amount by which the carrying
      amount exceeds the fair market value of the long-lived assets. Loss on
      long-lived assets to be disposed of is determined in a similar manner,
      except that fair market values are reduced for the cost of disposal. Based
      on its review, the Company believes that, as of December 31, 2004 there
      were no significant impairments of its long-lived assets used in
      operations. Provisions of US$7,137,339 were proposed as of December 31,
      2004 for its long-lived assets to be dispose of.


                                      F-12
<PAGE>

THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003

--------------------------------------------------------------------------------

NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

i)    Revenue Recognition

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

j)    Income Taxes

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

k)    Stock-Based Compensation

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

l)    Foreign Currencies Translation

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


                                      F-13
<PAGE>

THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003

--------------------------------------------------------------------------------

NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

m)    Fair Value of Financial Instruments

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

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

n)    Basic and diluted net loss per share

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

o)    Statement of Cash Flows

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

p)    Segment Reporting

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


                                      F-14
<PAGE>

THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003

--------------------------------------------------------------------------------

NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

q)    Going Concern

      As shown in the accompanying consolidated financial statements, the
      Company incurred a net loss from its operations of $15,452,296 and
      $758,480 for the years ended on December 31 of 2004 and 2003. Negative
      cash flows from the operations of $7,119,947 and $4,519,384 were noted for
      the years ended December 31, 2004 and 2003. These matters raise
      substantial doubt about the Company's ability to continue as a going
      concern.

      In view of the matters described in the preceding paragraph,
      recoverability of a major portion of the recorded asset amounts shown in
      the accompanying balance sheet is dependent upon continued operations of
      the Company, which in turn is dependent upon the Company's ability to
      raise additional capital, obtain financing and to succeed in its future
      operations. The financial statements do not include any adjustments
      relating to the recoverability and classification of recorded asset
      amounts or amounts and classification of liabilities that might be
      necessary should the Company be unable to continue as a going concern.

      The Company has taken certain restructuring steps to provide the necessary
      capital to continue its operations. These steps included: 1) acquire
      profitable operations via the stock exchanges transactions, 2) disposals
      of unprofitable operations, 3) the settlement of certain matters of
      litigation or/and disputes. The Company has planned to continue actively
      seeking additional funding and restructure the acquired subsidiaries to
      increase profits and minimize the liabilities.



                                      F-15
<PAGE>

THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003

--------------------------------------------------------------------------------

NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

r)    Recently Issued Accounting Standards

      In December 2004, the FASB issued FASB Statement No. 123R, "Share-Based
      Payment, an Amendment of FASB Statement No. 123" ("FAS No. 123R"). FAS No.
      123R requires companies to recognize in the statement of operations the
      grant- date fair value of stock options and other equity-based
      compensation issued to employees. FAS No. 123R is effective beginning in
      the Company's 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 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-16
<PAGE>

THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003

--------------------------------------------------------------------------------

NOTE 3  ACQUISITION AND INVESTMENTS

ACQUISITION

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

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

                                                                    Amount
     Current assets                                           $ 10,047,149
     Good will                                                   2,923,175
     Property & equipment                                          237,757
     Current liabilities                                        (7,237,092)
     Minority Interest                                          (1,566,110)
                                                              ------------

                                                              $  4,404,879

     Consideration paid
     Cash                                                     $    610,289
     Common Stock                                                3,794,560
                                                              ------------

                                                              $  4,404,879


      OTHER INVESTMENTS

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

                                                                      2004

     Investment in Education Program                          $    100,000
     Investment in eMPACT                                          300,000
     Investment in GTI (see 3a)                                          -
     Investment in First information (see 3a)                      223,816
     Investment in Guowei Digital
     Investment in HZ Huaqing (see note 13)
     Investmnet in Shanghai Jin'an Fuhuaqi                          60,412
                                                              ------------

     Total investment                                              684,228

     Provision on other investment                                (623,816)
                                                              ------------

     Investments, net                                               60,412
                                                              ============


                                      F-17
<PAGE>

THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003

--------------------------------------------------------------------------------

NOTE 3  ACQUISITION AND INVESTMENTS (CONTINUED)

A) INVESTMENT IN FIRST INFORMATION TECHNOLOGY INC. ("FIRST INFORMATION")
   ---------------------------------------------------------------------

Hartcourt China, Inc, via its 58.53% owned subsidiary. Hopeful Internet
Technology Limited, owned 17% equity interest in Genius Technology International
Limited ("GTI"). During year 2004, Hartcourt China, Inc disposed of Hopeful
Internet Technology Limited in exchange for the 10.5% (1,050 shares at value of
$0.001 each, amounted to US$223,816) interest in First information Technology
Inc., a BVI company resulting in a loss of $16,185.

NOTE 4  CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS

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


NOTE 5  ACCOUNTS RECEIVABLE

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

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


NOTE 6  INVENTORIES

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

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


NOTE 7  TRADE DEPOSIT

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


                                      F-18
<PAGE>

THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003

--------------------------------------------------------------------------------

NOTE 8  RECEIVABLES FROM RELATED PARTIES

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

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

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

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

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

NOTE 9  ASSETS PENDING FOR SALES

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

          Guowei assets pending for sales (note 13(6))            $ 4,907,053
          Challenge assets pending for sales (note 13(5))           4,434,546
                                                                  -----------
                                                                  $ 9,341,599
          Less: Provision for loss on assets pending for sale      (7,137,339)
                                                                  -----------
                                                                  $ 2,204,260
                                                                  ===========


                                      F-19
<PAGE>

THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003

--------------------------------------------------------------------------------

NOTE 10  NOTES RECEIVABLE

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

Note receivable from Edda Ltd., interest at 6% per annum,
quarterly payments of 50,000 plus interest with a balloon
payment of $2,715,772 due December 1, 2006, secured by the
tangible and intangible assets of Edda, Ltd. (note 10a)            $1,993,742

Loan receivable from Beijing Total Solutions System, Ltd.,
non-interest bearing, due on demand, convertible by the
company into 5% of the outstanding common stock, unsecured            $63,900

Note receivable from Shenzhen Raiser, interest at 2.5% per
annum, 21 instalment payments due December 31, 2009. secured
by a non-related party (Note 10b)                                  $3,403,150
                                                                -------------

Total                                                              $5,460,792

Less: Provision for doubtful receivables                            4,083,876
                                                                -------------

Notes receivables, net                                              1,376,916
                                                                =============

Summary of notes receivable:

Current portion                                                    $1,376,916
 Non-current portion                                                        -
                                                                -------------

 Total                                                             $1,376,916
                                                                =============


                                      F-20
<PAGE>

THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003

--------------------------------------------------------------------------------

NOTE 10  NOTES RECEIVABLE (CONTINUED)

(a) Notes receivable from EDDA

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

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

(b) Notes receivable from Shen Zhen Raiser

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

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


                                      F-21
<PAGE>

THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003

--------------------------------------------------------------------------------

NOTE 11  RELATED PARTY TRANSACTIONS

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

a)    During the year, Huaqing, a 51% owned subsidiary of the Company, sold
      $2,310,490 monitors to its minority shareholder (Shanghai Huaqing Economic
      Development Co., Ltd) under normal commercial terms.
b)    During the year, Huaqing, a 51% owned subsidiary of the Company, sold
      $3,275,076 monitors to Guowei, a subsidiary pending for sale as of
      December 31, 2004, pursuant to business transactions in the ordinary
      course.
c)    During 2004, Hartcourt issued 696,342 restricted shares of common stock to
      Mr. David Chen, Harcourt's former CEO, pursuant to the exercise of his 2
      million stock options in cashless transactions that Hartcourt granted to
      him as a part of his 2002 compensation.
d)    During 2004, Hartcourt issued 286,156 shares of our common stock valued at
      $151,250 to certain of its officers and all directors in lieu of cash
      compensation.
e)    On December 25, 2003, Hartcourt and a group of Chinese citizens entered
      into a stock purchase agreement pursuant to which we agreed to sell to the
      group 4,605,816 shares of our common stock pursuant to an offshore
      transaction under Regulation S, at $0.40 per share, of which US$1,386,382
      was paid and of which US$455,945 was to be paid on June 30, 2004. The
      Chinese investors did not pay the last installment of $455,945 and, as a
      result, have agreed to return 1,139,863 shares of our common stock for
      cancellation by the Company to satisfy their outstanding obligation. All
      of the Chinese citizens are the minority shareholders or relatives of our
      subsidiaries, who are Guan Xue Fang, Li ZhengZheng, Xu HuiZhen, Zhang Hui,
      Liu Jianqiang and Qiu Jiaqi.


NOTE 12  PROPERTIES AND EOUIPMENT

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

      Building                                            236,612
      Office equipment and computers                       38,491
      Furniture and fixtures                                2,254
      Leasehold improvements                                2,553
      Vehicle                                             202,779
                                                         --------

                                                          482,689

      Less: accumulated depreciation                     (118,840)
                                                         --------

      Property and equipment, net                        $363,849
                                                         ========

      Depreciation expenses for the years ended December 31, 2004 and 2003 are
$57,996 and $91,068 respectively.


                                      F-22
<PAGE>

THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003

--------------------------------------------------------------------------------

NOTE 13  INTANGIBLES

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


      Goodwill Arising from acquisition of Huaqing             2,160,101


NOTE 14  DISCONTINUED OPERATIONS

(1) Wenzhou Zhongnan Group

On July 16, 2004, Hartcourt and the minority owners of Wenzhou Zhongnan Group
reached agreements to rescind the original acquisition contract entered into on
June 28, 2003 to purchase 51% equity ownership of the group for total
consideration of $5,011,352. The acquisition was paid for entirely by the
issuance of 8,415,370 shares of the Company's common stock. Zhongnan's financial
results were consolidated the Company begining October 2003. All of the shares
that Hartcourt issued pursuant to this acquisition have been returned to the
Company and cancelled. Hartcourt recorded a loss on disposal of Wenzhou Zhongnan
of US$2,854,835, due to share price decline from the issuance date to the
cancellation date.

(2) Guangzhou NewHuaSun Computer Co., Ltd.

On August 30, 2004, Hartcourt sold our 45% equity interest in Guangzhou
NewHuaSun to ShenZhen Raiser Industrial and Development Co., Ltd. for
US$3,403,150. The purchase price will be paid to the Company in 21 quarterly
interest bearing installments. Hartcourt acquired the equity interest in
NewHuasun on April 24, 2003 for a total consideration of $3,304,597, paid for
entirely by the issuance of 13,769,156 shares of common stock. In addition,
Hartcourt obtained 10% equity voting rights through a voting proxy granted by
one of NewHuaSun's shareholder. Hartcourt recorded a loss on disposal of
Guangzhou NewHuaSun of US$118,343.

On March 3, 2005 Hartcourt entered into agreements with Guangdong New HuaSun and
Shenzhen Raiser, pursuant to which Hartcourt redeemed 13,769,156 shares of its
common stock held by New HuaSun, New HuaSun redeemed a 45% equity interest, and
Hartcourt released Shenzhen Raizer of its obligation on a $3,403,150 promissory
note payable to Hartcourt. The fair value of the 13,769,156 shares of common
stock was $1,376,916 and the difference of US$2.1 million is recorded as the
impairment on the pending sale in 2004.


                                      F-23
<PAGE>

THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003

--------------------------------------------------------------------------------

NOTE 14  DISCONTINUED OPERATIONS

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

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

(4) Hopeful Internet Technologies Limited.

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

(5) Beijing Challenge Group

In December 2004, the Board of Directors of Hartcourt authorized the sale of
entire 51% equity interest in Beijing Challenger Group ("Challenger") due to
adverse market environment and the declining Hartcourt share price. The
estimated Challenger disposal would amount to $1,172,764, including the
provision on sale of asset. The difference of the Challenge carrying value on
Hartcourt books and the disposal consideration is recorded as the impairment on
the pending sale of Challenger assets in 2004, amounting to $3.2 million.

(6) Shanghai Guowei Science and Technology Ltd.

In December 2004, the Board of Directors of Hartcourt authorized the sale of
entire 50.5% equity interest in Shanghai Guowei Science and Technology Ltd. due
to adverse market environment. On April 11, 2005, Hartcourt and the minority
shareholders of Guowei reached an agreement to sell the 50.5% of Hartcourt
equity back to its original owners for a total consideration of $1,031,496 in a
combination of cash and stock transaction where Guowei paid a cash of $794,914
and returned 2,951,800 shares of Hartcourt common stocks.

The difference of the Guowei carrying value on Hartcourt books and the disposal
consideration amoutning $3.8 million has been recorded as the impairment of
Guowei assets pending for sales at the end of 2004.


                                      F-24
<PAGE>

THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003

--------------------------------------------------------------------------------

NOTE 14  DISCONTINUED OPERATIONS

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

Gain on discontinued operations

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

Loss on disposal of discontinued operations

<TABLE>
                           Wenzhou                                    Hangzhou
                           Zhongnan     NewHuaSun       Hopeful        Huaqing       Total
                         --------------------------------------------------------------------
<S>                       <C>           <C>             <C>           <C>         <C>
Net book value             5,042,831     3,521,493       240,001       740,200     9,544,525
Less: disposal
consideration             (2,187,996)   (3,403,150)     (223,816)     (760,870)   (6,575,832)
                         --------------------------------------------------------------------
Loss/(gain) on disposal
of subsidiary              2,854,835       118,343        16,185       (20,670)    2,968,693
                         --------------------------------------------------------------------
</TABLE>


NOTE 15  LOAN FROM EMPLOYEES

Huaqing, a 51% owned subsidiary of the Company, issued short-term bond to its
employees to raise additional working capital. The bond is 8% interest bearing
and payable at the end of the year. As of December 31, 2004 the amount was not
settled.


                                      F-25
<PAGE>

THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003

--------------------------------------------------------------------------------

NOTE 16  ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

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

        Accrued officers and staffs compensation          $     84,532
        Accrued director's fee                                  25,361
        Accrued taxes                                          431,379
        Accrued legal settlement                             1,400,000
        Accrued professional fees                              155,000
        Other current liabilities                              300,984
                                                           -----------
        Total                                             $  2,397,256
                                                           ===========


NOTE 17  DUE TO SHAREHOLDERS

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

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


NOTE 18  MINORITY INTEREST

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


                                      F-26
<PAGE>

THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003

--------------------------------------------------------------------------------

NOTE 19  COMMITMENTS AND CONTINGENCIES

A) Employment Agreements

The current senior management consisting of a Chief Executive Officer ("CEO")
and an interim Chief Financial Officer ("CFO"). Each of the Company's executive
employment agreements stipulate that senior executives, CEO and interim CFO of
the Company, can be terminated without causes with a written notice of 90 days
or less. This clause can be a potential contingency to the Company in light of
the fact that the Company is a public trading company and may be required for
higher standards of corporate governance.

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

Effective from June 1, 2004, Carrie Hartwick was added to her responsibilities
as President and CFO the responsibility of CEO. The new employment agreement was
signed on March 9 2005. The compensation is US$150,000 payable in equal monthly
installment of US$12,500 cash. Ms Carrie Hartwick received $35,000 cash for her
compensation and the remaining $52,500 had not yet paid to Ms Hartwick.

Ms Hartwick was granted an option to purchase 15 million shares of common stock
at 0.09 per share. On January 5, 2005, the Company appointed Mr. Richard Hyland
as Interim Chief Financial Officer, Ms. Carrie Hartwick, Chief Executive Officer
relinquished her duties as CFO on the same date. On April 11, 2005, Richard
Hyland resigned from the position of Interim Chief Financial Officer due to
cultural and language barriers working in China as well as his inability to
commit the necessary time in Shanghai, the location of Hartcourt headquarters.
The Board of Directors appointed Carrie Hartwick as Interim Chief Financial
Officer, effective April 14, 2005.


                                      F-27
<PAGE>

THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003

--------------------------------------------------------------------------------

NOTE 19  COMMITMENTS AND CONTINGENCIES

B) Operating Leases

The Company leases its offices and facilities under long-term, non-cancelable
lease agreements expiring at various dates through December, 2006. The
non-cancelable operating lease agreements provide that the Company pays certain
operating expenses applicable to the leased premises according to the Chinese
Law. Rental expense for the years ended December 31, 2004 and 2003 were $133,937
and $611,161, respectively.

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

Year Ending December 31                                   Payments
-----------------------                                   --------

2005                                                      $115,627
2006                                                       $38,647
                                                          --------
Total future lease payments                               $154,274
                                                          ========


(c) Legal Proceedings

SECURITIES AND EXCHANGE COMMISSION V. THE HARTCOURT COMPANIES, INC., ET AL.,
UNITED STATES DISTRICT COURT FOR THE CENTRAL DISTRICT OF CALIFORNIA CASE NO.
CV03-3698LGB(PLAX)

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

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


                                      F-28
<PAGE>

THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003

--------------------------------------------------------------------------------

NOTE 19  COMMITMENTS AND CONTINGENCIES

APOLLO FINANCIAL NETWORK, LLC VS. THE HARTCOURT COMPANIES, INC.

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

JOHN A. FURUTANI VS. THE HARTCOURT COMPANIES, INC.

John A. Furutani, Hartcourt's former attorney, filed a complaint against the
Company for alleged breach of contract in the amount of $54,441 arising out of
legal representation of the Company and its co-defendant Alan Phan with respect
to the SEC litigation. The court date is set for April 14, 2005 and the Company
is considering the options available to it. The Company has fully accrued the
amount in the accompanying financial statements.


NOTE 20  SHAREHOLDERS' EQUITY

(A)   Capitalization

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


                                      F-29
<PAGE>

THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003

--------------------------------------------------------------------------------

NOTE 20  SHAREHOLDERS' EQUITY (continued)

(B)   Original Preferred Stock

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

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

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

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

(C)   Class A Preferred Stock

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

(D)   Series A 9% Convertible Preferred Stock

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

(E)   Series B 9% Convertible Preferred Stock

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


                                      F-30
<PAGE>

THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003

--------------------------------------------------------------------------------

NOTE 20  SHAREHOLDERS' EQUITY (continued)

(F)   Series C Redeemable Preferred Stock

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

(G)   Series D Convertible Preferred Stock

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

(H)   Series AB Convertible Preferred Stock

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

(I)   Common Stock Issued for Cash

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


                                      F-31
<PAGE>

THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003

--------------------------------------------------------------------------------

NOTE 20  SHAREHOLDERS' EQUITY (continued)

(J)   Common Stock Issued for Services

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

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

(K)   Common Stock Issued for Warrants

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

(L)   Common Stock Issued for Stock Options

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

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

(M)   Common stocks issued for investment and acquisition

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

(N)   Cancellation of shares

During 2004, the Company cancelled 8,417,350 shares of common stock valued in
connection with the rescission of acquisition agreement with Wenzhou Zhongnan
Group.

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


                                      F-32
<PAGE>

THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003

--------------------------------------------------------------------------------

NOTE 21  INCOME TAXES

In the year ended December 31, 2004, the Company incurred net operating losses
for tax purposes of approximately $5,894,378. 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, 2004 was $4,353,702. 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, 2004

     Balance carry forward Dec 31st, 2003            $ 1,995,950
     Net operating losses for 2004                     2,357,752
                                                     -----------
     Total Deferred Asset                            $ 4,353,702
     Less: valuation allowance                        (4,353,702)
                                                     -----------
                                                     $         -
                                                     ===========

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, 2004
                                               -----------------

     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,
2004:


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

           Deferred tax credit:
           Federal                                 2,004,089
           State                                     353,663
                                                ------------
           Total deferred                          2,357,752
           Less: valuation allowance              (2,357,752)
                                                ------------
           Net Deferred tax credit                         -

                                                ------------
           Tax expense                         $         800
                                                ============


                                      F-33
<PAGE>

THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003

--------------------------------------------------------------------------------

NOTE 22  STOCK OPTION PLAN AND WARRANTS

(A) Stock Option Plan

In April 1995, the Company adopted a stock option plan (the Plan) to attract and
retain qualified persons for positions of substantial responsibility as
officers, directors, consultants, legal counsel, and other positions of
significance to the Company, the Plan provides for the issuance of both
Incentive Stock Options and Non-Qualified Stock Options. The Plan, which is
administered by the Board of Directors, provides for the issuance of a maximum
of 2,000,000 options to purchase shares of common stock at the market price
thereof on the date of grant. Such options are generally exercisable over a
10-year period from the date of grant. Each option lapses 90 days after the
optionee has terminated his continuous activity with the Company, except that if
his continuous activity with the Company terminates by reason of his death, such
option of the deceased optionee may be exercised within one year after the death
of such optionee. Options granted under the Plan are restricted as to sale or
transfer. All options granted at not less than fair value at the date of grant
and have terms of 10 years.

The following table summarizes the activity of stock options:

                                                                      Weighted
                                                                       Average
                                                        Number of     Exercise
                                                         Shares        Price
                                                      ------------- -----------
        Shares under option at December 31, 2002         5,320,000        0.33
        Granted                                          8,000,000        0.29
        Exercised                                        1,000,000           0
        Expired                                             20,000           0
        Canceled                                         1,000,000           0
                                                      ------------  ----------
        Shares under option at December 31, 2003        11,300,000        0.34
                                                      ============  ==========
        Granted                                          3,000,000         0.3
                                                      ============  ==========
        Exercised                                        1,000,000        0.10
                                                      ============  ==========
        Expired                                          3,000,000        0.38
                                                      ============  ==========
        Cancelled                                        3,000,000        0.48
                                                      ============  ==========
        Shares under option at December 31, 2004         7,300,000        0.28
                                                      ============  ==========

All stock options issued to employees have an exercise price not less than the
market value of the Company's common stock on the date of grant, and in
accordance with the accounting for such options utilizing the intrinsic value
method there is no related compensation expense recorded in the Company's
financial statements. Had compensation cost for stock-based compensation been
determined based on the fair value at the grant dates in accordance with the
method delineated in Revised Statement of Accounting Standards No. 123, the
Company's net loss and loss per share for the year ended December 31, 2004 would
increase US$294,078 or US$ 0.0017 per share.


                                      F-34
<PAGE>

THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003

--------------------------------------------------------------------------------

NOTE 22  STOCK OPTION PLAN AND WARRANTS (CONTINUED)

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

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

<TABLE>
                                       Options outstanding            Option Exercisable
      -------------------------------------------------------------------------------------------------
                                            Weighted
                         Number of           Average         Weighted         Number         Weighted
       Range of       Outstanding at        Remaining        Average      Exercisable at      Average
       Exercise        December 31,        Contractual       Exercise      December 31,      Exercise
         Price             2004               Life            Price            2004            Price
      -------------------------------------------------------------------------------------------------
<S>                     <C>               <C>                 <C>           <C>                <C>
      $0.06 - 0.65      7,300,000         0.9 - 3.5 Year      $0.28         7,300,000          $0.28
</TABLE>


In connection with Mr. Chen's severance package, on June 3, 2004, Hartcourt
granted to Mr. Chen options to purchase 3,000,000 shares of Hartcourt common
stock at a price of $0.30 per share. The options expired on June 3, 2006, 2005.
The options were issued at the fair market value on the date of issuance as
required by SFAS #123.

(B) Warrants

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

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

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

In connection with signing a private placement of Hartcourt shares with Enlight
Corporation Ltd., on October 23, 2002, Hartcourt granted Enlight warrants to
purchase 29,010,239 shares at the price doubling the current trading price on
the issuance date. expired on October 22, 2005. On March 11, 2004, Enlight
pledged not to exercise the warrants unless there is a buy-out of the Company
either by management or a third party while the validity of the warrants were
extended to October 22, 2009.


                                      F-35
<PAGE>

THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003

--------------------------------------------------------------------------------

NOTE 23  SEGMENT AND BUSINESS RELATED INFORMATION

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

NOTE 24  SUBSEQUENT EVENTS

On January 5, 2005, we appointed Richard Hyland as our Interim Chief Financial
Officer. On April 11, 2005, Richard Hyland resigned from the position of Interim
Chief Financial Officer due to cultural and language barriers working in China
as well as his inability to commit the necessary time in Shanghai, the location
of Hartcourt headquarters. The Board of Directors appointed Carrie Hartwick as
Interim Chief Financial Officer, effective April 14, 2005

On February 25, 2005, the Company completed all legal procedure to acquire 90%
of the capital stock of Control Tech Electronics (Shanghai) Co., Ltd. ("Control
Tech"). Due to the recent decline of Hartcourt share price, the purchase
consideration was revised as US$1.96 million payable in 19,588,875 shares of
restricted common stock of the Company.

On February 25, 2005, the Company issued to the former shareholder of Control
Tech an aggregate of 19,588,875 shares of Common Stock as contemplated by the
definitive purchase agreement.

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

On April 11, 2005, Hartcourt and the minority shareholders of Guowei reached an
agreement to sell the 50.5% of Hartcourt equity back to its original owners for
a total consideration of $1,090,094 in a combination of cash and stock
transaction where Guowei paid a cash of $794,914 and returned 2,951,800 shares
of Hartcourt common stocks.

NOTE 25  RECLASSIFICATIONS

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


                                      F-36