SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                  FORM 10-KSB/A
                                 Amendment No. 3
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
    OF 1934
    [Fee Required]

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
    OF 1934
    [No Fee Required]
                     For fiscal year ended December 31, 2003

                        Commission file number 001-12671

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

                                      UTAH
                            (State of incorporation)

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

      911 E. Colorado Blvd. Third Floor Pasadena, CA 91106, (626) 844 2437
               (Address, including zip code, and telephone number,
            including area code, of registrant's executive offices)

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

                               Title of each class
                                      None

                    Name of each exchange on which registered
                                      None

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

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

         Check if  disclosure  of  delinquent  filers in response to item 405 of
Regulation  S-B is not  contained  in  this  form,  and no  disclosure  will  be
contained,  to the  best of  registrant's  knowledge,  in  definitive  proxy  or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]

         Issuer's revenues for most recent fiscal year: $ 111,397,742





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         State the aggregate market value of voting stock held by non-affiliates
computed by reference  to the price at which the stock was sold,  or the average
bid and asked  prices of such stock,  as of a specified  date within the past 60
days: As of March 2, 2004, $90,713,265.

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

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















































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                                TABLE OF CONTENTS
                                -----------------

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

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

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


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








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                                     PART I

Item 1.  Description of Business.
         -----------------------
The Hartcourt Companies,  Inc.  ("Hartcourt" or the "company"),  incorporated in
Utah in 1983, is a growth oriented  company in the China's IT  distribution  and
retail sectors.  Through the strategic  acquisition of a controlling interest in
profitable  companies with leadership  positions in regional markets,  Hartcourt
intends to integrate  and  consolidate  businesses to reach economy of scale and
operating efficiency.

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

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

Most  international  and  domestic  manufacturers  of  computer  components  and
computer products in China rely on distributors,  such as Hartcourt,  to augment
their sales and marketing operations.  As a stocking,  marketing,  and financial
intermediary,  the distributor relieves  manufacturers of a portion of the costs
and personnel  associated  with stocking and selling their  products  (including
otherwise   sizable   investments  in  finished  goods   inventories,   accounts
receivables,   and  distribution  networks),   while  providing   geographically
dispersed  selling,  order processing,  and delivery  capabilities.  At the same

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

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

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

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

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

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

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


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

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

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

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

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

Corporate structure

PRC  regulations  currently  limit foreign  ownership of companies  that provide
distribution  and retail services (see  explanation of the  regulations  below),
which includes IT distribution and retail, to less than full equity  investment.
In addition, the PRC regulations limit the size of the foreign direct investment


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

In addition, we have entered into agreements with each of our subsidiaries,  its
shareholders  and our nominees that provide us with the  substantial  ability to
control all of our subsidiaries. Pursuant to these contractual arrangements:
   - our  nominees  have granted an  irrevocable  proxy and power of attorney to
     individuals  designated  by us to  exercise  the right to appoint  majority
     number of directors in any of our subsidiaries;
   - the  shareholders  of  all of our  subsidiaries  may  not  enter  into  any
     transaction that may materially affect its assets,  liabilities,  equity or
     operations without our prior written consent;
   - any dividend or any other payment for shareholder benefits  received by our
     nominees  from  any  of our  subsidiaries on our behalf is to be paid to us
     directly;
   - we may  purchase  or transfer  the entire  equity  interest  in, or all the
     assets of, all of our subsidiaries held by our nominees on our behalf for a
     purchase price of the lower of RMB1 or the lowest price permitted under PRC
     law when and if such purchase is permitted by PRC law or our nominees cease
     to be directors or employees of any of our subsidiaries;
   - our nominees have pledged their equity interest in all of our  subsidiaries
     to us to secure the payment  obligations  of  acquisitions  of  controlling
     interests  in  all  of  our  subsidiaries  under  the  sales  and  purchase
     agreements between us and the shareholders of our subsidiaries; and
   - our nominees of any of our subsidiaries  will not transfer,  sell,  pledge,
     dispose of or create any encumbrance on their equity interest in any of our
     subsidiaries without our prior written consent.

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

In the opinion of Zhonglun Law Firm (Shanghai), our PRC legal counsel,
(1) the  ownership  structures  of  our  subsidiaries,  are  in  compliance with
existing PRC laws and regulations,
(2) our contractual arrangements with each of our subsidiaries, our nominees and
its shareholders are valid and binding,  and will not result in any violation of
PRC laws or regulations  currently in effect; and
(3) the business operations of our subsidiaries, are in compliance with existing
PRC laws and regulations in all material  aspects.
(4) the enforcement of foreign  judgments  made by the courts outside PRC has no
direct and automatic operation in the PRC, but these judgments may be recognized



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<PAGE>
and enforced by a PRC court in accordance  with the bilateral  or  international
treaty  to  which PRC is a party,  or  subject  to the principles of reciprocity
finding the judgment non conflict with the fundamental principles,  sovereignty,
security and public interests of PRC after review of the judgment.

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

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

(1) Commissioned  agent and wholesale in our sector:  Foreign investment will be
allowed not later than  December 11, 2002 and foreign  investors may hold equity
up to 50%.  Foreign  investors will be allowed to hold majority equity not later
than December 11, 2003 and to hold full equity not later than December 11, 2004.
(2) Retails in our sector:  foreign investors  will be allowed to hold equity up
to 50% not later than December  11, 2002 and full equity not later than December
11, 2004.
(3) Franchising, wholesale and retail without fixed location: foreign investment
will be allowed not later than December 11, 2004.

Acquisitions

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

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













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<PAGE>
On February 14, 2003,  Hartcourt  and HuaQing  shareholders  signed a definitive
agreement  ("The  Agreement")  for the  purchase  of a 45%  equity  interest  of
HuaQing,  for a total  consideration of $2,202,545,  of which the purchase price
was solely paid for by the issuance of  15,960,474  shares of  Hartcourt  common
stock,  restricted under the Rule 144 of the US securities laws, at the value of
$0.138 per share.

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

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

On June 30, 2003,  Hartcourt signed a Sale and Purchase Agreement to purchase an
additional 6% equity interest of HuqQing for a total  consideration of $857,891,
of which the  purchase  price was solely paid for by the  issuance of  1,340,455
shares of Hartcourt  common  stock,  restricted  under Rule 144 of US securities
law,  at  a  value  of  $0.64  per  share.  HuaQing's  financial  statement  was
consolidated on a 51% basis under the operations of Hartcourt starting from July
1, 2003.

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

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

On April 24, 2003,  Hartcourt  and  NewHuaSun  shareholders  signed a definitive
agreement  ("The  Agreement")  for the  purchase  of a 45%  equity  interest  of
NewHuaSun, for a total consideration of $3,304,597,  of which the purchase price
was solely paid for by the issuance of  13,769,156  shares of  Hartcourt  common
stock,  restricted under Rule 144 of US securities laws, at a value of $0.24 per
share.  Due to the Chinese  government's  restrictions  over the direct  foreign
investment in the Chinese owned sales and distribution  companies at the time of


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signing the agreement,  Hartcourt  applied the same legal  structure used in the
HuaQing's acquisition for the purchase of NewHuaSun equity.

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

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

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

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

On April  30,  2003,  Hartcourt  and  GuoWei  shareholders  signed a  definitive
agreement  ("The  Agreement") for the purchase of 45% equity interest of GuoWei,
for a total consideration of $4,345,517,  of which the purchase price was solely
paid for by the  issuance  of  10,863,792  shares  of  Hartcourt  common  stock,
restricted  under  Rule 144 of the US  securities  laws,  at a value of $0.4 per
share.  Due  to  the  Chinese  government's  restrictions  over  direct  foreign
investments  in Chinese  owned sales and  distribution  companies at the time of
signing of The Agreement,  Hartcourt adopted the same legal structure as used in
the HuaQing and NewHuaSun acquisition.

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

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

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

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

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<PAGE>
On June 28, 2003,  Hartcourt  signed a  definitive  agreement to purchase 51% of
equity  interest of  ZhongNan,  for a total  consideration  of  $5,011,352.  The
purchase  price was  solely  paid for by the  issuance  of  8,415,370  shares of
Hartcourt  common stock,  restricted  under Rule 144 of US securities laws, at a

value of $0.5955 per share.  ZhongNan's  financial  statements were consolidated
under the operation of Hartcourt starting October, 2003.

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

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

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

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


Subsequent events

Shanghai  Computer  ServiceNet  Co., Ltd  ("ServiceNet")":  On February 6, 2004,
Hartcourt  signed a  definitive  agreement  to  purchase  a 51%  percent  equity
interest in ServiceNet.  The purchase price is RMB 21 Million  (US$2.5  Million)
payable in 3,576,751 restricted shares of Hartcourt common stock,  calculated at
US$0.61  per share,  plus a cash  investment  of RMB 3 Million  (US$364,000)  in
ServiceNet.  Due to legal restructuring needs, the Company has not completed the
acquisition of ServiceNet.

Shanghai  Guowei Science and Technology Ltd.  ("Guowei"):  On February 11, 2004,
Hartcourt signed a definitive agreement to purchase an additional 5.5 percent of

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outstanding shares of Guowei for a total consideration of RMB 3 Million (US$0.36
Million)  in cash  investment  in GuoWei.  Together  with the 45 percent  equity
purchased on April 30th, 2003,  Hartcourt owns 50.5 percent of Guowei.  On March
22, 2004,  the Board of Directors  approved a special  resolution to restructure
GuoWei  by the end of  April  30,  2004 in order to  combine  all of the  retail
operations  in  Shanghai  under our  subsidiaries  into a new  company.  The new
company which will hold all of our retail  operations in Shanghai and its assets
is being registered with the relevant local authorities.

Change of Directors: On February 12, 2004, the Board of Directors of the company
accepted the  resignation of Mr. X.Y. Li, due to his job  relocation.  The Board
appointed  Mr. Victor Wang to replace Mr. Li. Mr. Wang is a partner of AllBright
Law Office  principally  specializing in foreign direct investments and indirect
investments in China.  He was previously an associate with a major US law firm -
Kaye  Scholer,  LLP. Mr. Wang has over 15 years of  experience  in various legal
matters  involved in deal  execution,  acquisitions,  investments,  intellectual
property rights  protection,  China-focused  venture capital fund raising,  IPO,
secondary  offerings and private  placements.  Mr. Wang received his L.L.B. from
Fudan  University,  L.L.M.  from the University of Iowa Law School and J.D. from
the Notre Dame University Law School.

ERP  implementation:  Hartcourt  purchase an ERP software  from E-Tone in March,
2004. The software will be implemented across all Hartcourt subsidiaries. A core
team of dedicated finance and IT staffs for the system implementation was formed
and the  implementation  was underway  with a subsidiary of Challenger in March,
2004.  The ERP system will use the US format on chart of accounts and follow the
US GAAP in compiling  the financial  data.  This system will replace the various
systems  currently in use by the subsidiaries  that Hartcourt  inherited when it
acquired these  companies.  The new ERP system will  standardize  the accounting
activities  and controls  across the board and speed up the financial  reporting
process.  In addition to the financial  transactions,  the  purchase,  warehouse
operation,  sales and  human  resource  activities  are all to be  recorded  and
managed  under  the same ERP  system.  It will take  approximately  18 months to
finish the implementation across all subsidiaries

Funding activities

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

Enlight Corporation ("Enlight"):  On May 9, 2002, Hartcourt and Enlight signed a
Stock Purchase  Agreement whereby Hartcourt agreed to sell 5,000,000  restricted
shares of its common  stock as a block to  Enlight  at the price of eight  cents
($0.08) per share.  However,  as Hartcourt share price kept decreasing,  the two
sides agreed to revise the agreement on October 10, 2002.  Pursuant to the terms
of the new agreement, Enlight will purchase $1,000,000 worth of common shares of
Hartcourt,  restricted under Rule 144 and/or Reg S regulation,  at a discount to
current market price. As of December 31, 2003, Hartcourt has received $1,000,000
from  Enlight and agreed to issue  2,417,520  restricted  shares to Enlight each
month  starting  December  2002.  As of December 31, 2003,  Hartcourt has issued
twelve  installments  (29,010,240  shares)  of  the  restricted  shares,  as  in
accordance with the agreement,  to Enlight and two other entities  instructed by
Enlight:  Xue XiaoHan and Satori Investment (China),  Ltd. In December 2003, all
above entities have agreed to the extension of one more year restriction  period
from the original date of issuance.  Hartcourt also granted  Enlight  29,010,239


                                       11
<PAGE>
warrants to purchase a total of 29,010,239  shares of Hartcourt  common stock at
$0.0586 per share  expiring  October 22, 2005.  We have been informed by Enlight
that all of its  warrants  will not be  exercised  unless  there is a buy-out of
Hartcourt from a third party,  should  Hartcourt agreed to extend the expiration
date for an additional 4 years.

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

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

Warrants relating to funding activities

In connection with facilitating equity line and credit for Hartcourt, on January
26, 2000,  Hartcourt issued to Dunwoode  Brokerage Services warrants to purchase
13,530  shares at $15.52  per share  that  expire on  January  25,  2004.  These
warrants are expired on June 26, 2004.

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

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

In connection with signing a private  placement of Hartcourt shares with Enlight
Corporation  Ltd., on October 23, 2002,  Hartcourt  granted Enlight  warrants to
purchase 29,010,239 shares at $0.0586 per share expiring on October 22, 2005. On
March 11, 2004, Hartcourt have been informed by Enlight that all of its warrants
will not be exercised unless a buy-out of Hartcourt  (either by management or by
third  parties),  should  Hartcourt agree to extend the validity of the warrants
until  October 22, 2009.  As the  warrants  together  with the shares  issued to
Enlight  total  over 20% of the  total  outstanding  shares  of  Hartcourt,  the
warrants are subject to shareholder approval.



                                       12
<PAGE>
Risk factors

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

RISKS RELATING TO OUR BUSINESS

We face  significant  competition  which  could  reduce  our  market  share  and
adversely affect our business, financial condition and results of operations.

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

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

Rapid technological  change and change of our vendor  distribution  relationship
might limit our ability to grow

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

We may not be able to successfully implement out growth strategies,  which would
materially and adversely affect our business, financial condition and results of
operations.



                                       13
<PAGE>
We are pursuing a number of growth strategies,  including leveraging our current
customer  base and sales volume to develop  additional  sources of revenues,  as
well as exploring  opportunities to further expand into the current industry and
service of hardware industry. Some of these strategies relate to new services or
products or new markets for which there are no established  references in China,
or relate to services or products in which we lack experience and expertise.  We
cannot  assure  you that we will be able to  deliver  new  services  or sell new
products on a commercially  viable basis or in a timely manner, or at all. If we
are unable to  successfully  implement  our growth  strategies,  our revenue and
profitability  will  not  grow  as we  expect,  and our  competitiveness  may be
materially and adversely affected.

There are risks  associated  with our  business  strategy  contemplating  growth
through acquisitions and joint ventures.

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

We depend on our key  personnel  and our  business and growth  prospects  may be
severely disrupted if we lose their services.

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

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



                                       14
<PAGE>
retain the key personnel  that we will need to achieve our business  objectives.
Furthermore,  we do not  maintain  key-man  life  insurance  for  any of our key
personnel.

We have a limited operating history, which may make it difficult to evaluate our
business,  and our limited resources may affect our ability to manage the growth
we expect to achieve.

Our IT  distribution  business was  established in February  2003and we began to
acquire  similar  businesses  in  2003,  which  are now our  primary  source  of
revenues.  In addition,  we have  recently  expanded  our business  geographical
coverage.  Furthermore, our senior management and employees have worked together
at our company for only a relatively short period of time. Accordingly,  we have
a limited  operating  history  upon  which you can  evaluate  our  business  and
prospects.  Our growth to date has placed, and our anticipated further expansion
of  our  operations  will  continue  to  place,  a  significant  strain  on  our
management,  systems,  and  resources.  In addition to training and managing our
workforce,  we will need to continue to develop  and improve our  financial  and
management  controls and our reporting systems and procedures.  We cannot assure
you that we will be able to efficiently or effectively  manage the growth of our
operations,  and any failure to do so may limit our future growth and materially
and  adversely  affect  our  business,   financial   condition  and  results  of
operations.

The  discontinuation  of any of the preferential tax treatments or the financial
incentives  currently  available to us in the PRC could materially and adversely
affect our business, financial condition and results of operations.

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

We have limited business insurance coverage in China.

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

Any future  outbreak of severe acute  respiratory  syndrome in China, or similar
adverse  public health  developments  may have a material  adverse effect on our
business operations, financial condition and results of operations.



                                       15
<PAGE>
From December 2002 to June 2003,  China and certain other countries  experienced
an outbreak of a new and highly contagious form of atypical  pneumonia now known
as severe acute respiratory syndrome, or SARS. On July 5, 2003, the World Health
Organization declared that the SARS outbreak had been contained. Since September
2003,  however, a number of isolated new cases of SARS have been reported,  most
recently in  Guangdong  province of the PRC, in January  2004. A new outbreak of
SARS may result in health or other government  authorities requiring the closure
of Internet cafes, which is large customer of ours, or of our retail outlets, or
of our offices. Such closures would severely disrupt our business and operations
and have a material  adverse  effect on our  financial  condition and results of
operations.  Any recurrence of the SARS outbreak,  or a development of a similar
health hazard in China,  may deter people from  congregating  in public  places,
including  our  retail  outlets,  and would  significantly  reduce  our level of
customers and materially and adversely affect our revenues and profitability.
If additional  financing  becomes  necessary,  failure to obtain such  financing
could  limit our  operations  and might cause our  business  to fail.  We may be
unable to obtain additional financing, if required, to complete any acquisitions
or to fund the  operations  and growth of the business  which could compel us to
restructure the transaction or abandon a particular acquisition.


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

We may be unable to enforce our  acquisitions'  material  agreements,  which may
have a material adverse impact on our operations.

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

Because our directors and officers  reside outside of the United States,  it may
be difficult for you to enforce your rights  against them or enforce U.S.  court
judgments again them in the PRC.




                                       16
<PAGE>
Our directors and officers  reside  outside of the United States and,  after the
consummation  of many  acquisitions,  substantially  all of our  assets  will be
located  outside  of the  United  States.  It may  therefore  be  difficult  for
investors in the United States to enforce their legal rights,  to effect service
of process  upon our  directors  or officers or to enforce  judgments  of United
States courts  predicated upon civil  liabilities and criminal  penalties of our
directors and officers under Federal securities laws.  Further, it is unclear if
extradition  treaties now in effect  between the United States and the PRC would
permit  effective  enforcement of criminal  penalties of the Federal  securities
laws.


Our existing  stockholders,  including  our officers  and  directors,  control a
substantial  interest in us and thus may  influence  certain  actions  requiring
stockholder vote.

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

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

If the PRC government  finds that the structure for operating our China business
does not comply with PRC Government restrictions on Foreign Investment in the IT
distribution  Industry,  we could be compelled to restructure  our investment or
abandon our investment.

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

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


                                       17
<PAGE>
In the opinion of Zhonglun Law Firm (Shanghai),  our PRC legal counsel:  (1) the
ownership  structures of our subsidiariesis in compliance with existing PRC laws
and regulations; (2) our contractual arrangements with each of our subsidiaries,
our nominees and its shareholders are valid and binding,  and will not result in
any violation of PRC laws or regulations  currently in effect;  (3) the business
operations  of our  subsidiaries  are in  compliance  with existing PRC laws and
regulations in all material aspects and (4) the enforcement of foreign judgments
made by courts outside PRC has no direct and automatic operation in the PRC, but
these judgments may be recognized and enforced by a PRC court in accordance with
a bilateral or  international  treaty to which PRC is a party, or subject to the
principles  of  reciprocity  upon a finding that the judgment  does not conflict
with fundamental principles,  sovereignty,  security and public interests of PRC
after review of the judgment.

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

If we are  found  to be in  violation  of any  existing  or  future  PRC laws or
regulations,  the relevant regulatory authorities would have broad discretion in

dealing with such violations, including:
   - imposing  conditions  or  requirements  with  which  we  may not be able to
     comply;
   - requiring us to restructure the relevant ownership structure or operations;
   - restricting  or  prohibiting  our  use  of  foreign  capital to finance our
     business and operations in China; or
   - taking other regulatory or enforcement actions,  including  levying  fines,
     that could be harmful to our business.

Any of these actions could cause our business,  financial  condition and results
of operations to suffer and the price of our stock to decline.

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

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

These  contractual  arrangements  are  governed  by PRC law and  provide for the
resolution  of disputes  through  either  arbitration  or litigation in the PRC.
Accordingly, these contracts would be interpreted in accordance with PRC law and
any disputes would be resolved in accordance with PRC legal  procedures.  If any
of our  subsidiaries  fails to perform its obligations  under these  contractual
arrangements,  we may have to rely on legal  remedies  under PRC law,  including
seeking specific  performance or injunctive relief, and claiming damages,  which


                                       18
<PAGE>
we cannot be sure would be effective. The legal environment in the PRC is not as
developed as in other  jurisdictions,  such as the United  States.  As a result,
uncertainties  in the PRC legal system could limit our ability to enforce  these
contractual arrangements.

We rely  principally on dividends and other  distributions on equity paid by our
majority-owned  operating subsidiary to fund any cash and financing requirements
we may have

We are a  holding  company,  and we rely  principally  on  dividends  and  other
distributions  on equity  paid by our  subsidiaries  for our cash  requirements,
including the funds  necessary to service any debt we may incur, or financing we
may need for  operations  other than  through  our  subsidiaries.  If any of our
subsidiaries  incur  debt on its  own  behalf  in the  future,  the  instruments
governing  the debt may  restrict  its  ability to pay  dividends  or make other
distributions  to the  intermediate  holding company and thus to us. We generate
substantially  all of our  profit  through  contractual  arrangements  with  our
nominees. However, PRC tax authorities may require us to amend these contractual
arrangements in a manner that would  materially and adversely affect its ability
to  pay  dividends  and  other  distributions  to  us.  Furthermore,  PRC  legal
restrictions  permit payments of dividends by our  subsidiaries  only out of its
net income, if any,  determined in accordance with PRC accounting  standards and
regulations.  Under PRC law, our  subsidiaries  are also required to set aside a
portion  of its net  income  each  year to fund  certain  reserve  funds.  These
reserves are not distributable as cash dividends.

RISKS RELATING TO THE PEOPLE'S REPUBLIC OF CHINA

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

The PRC's  economic,  political  and social  conditions,  as well as  government
policies, could affect our business.

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

The  PRC  economy  has  been  transitioning  from a  planned  economy  to a more
market-oriented  economy.  Although the PRC government has implemented  measures
since the late 1970s  emphasizing  the utilization of market forces for economic
reform,   the  reduction  of  state  ownership  of  productive  assets  and  the
establishment  of  sound  corporate  governance  in  business   enterprises,   a
substantial  portion  of  productive  assets in China is still  owned by the PRC
government. In addition, the PRC government continues to play a significant role


                                       19
<PAGE>
in regulating  industry  development by imposing  industrial  policies.  The PRC
government  also  exercises  significant  control over China's  economic  growth
through the allocation of resources,  controlling  payment of foreign  currency-
denominated  obligations,  setting  monetary  policy and providing  preferential
treatment to particular industries or companies.

The PRC  legal  system  embodies  uncertainties  which  could  limit  the  legal
protections available to you and us.

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

Restrictions and currency exchange may limit our ability to utilize our revenues
effectively.

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

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

Foreign  exchange   transactions  under  the  capital  account  are  subject  to
limitations  and  require  registration  with or approval  by the  relevant  PRC
governmental authorities. In particular, if we finance our acquisitions by means
of foreign  currency loans,  those loans cannot exceed certain  statutory limits


                                       20
<PAGE>
and must be registered with the State  Administration for Foreign Exchange,  and
if we finance our  business  by means of capital  contributions,  those  capital
contributions  must be approved by the Ministry of Commerce.  Our ability to use
the U.S.  dollar to  finance  our  business  activities  conducted  through  our
subsidiaries   will  depend  on  our  ability  to  obtain   these   governmental
registrations  or  approvals.  In  addition,  because of the  regulatory  issues
related to foreign  currency loans to, and foreign  investment in,  domestic PRC
enterprises, we may not be able to finance our subsidiaries or its operations by
loans or capital  contributions.  We cannot  assure you that we can obtain these
governmental registrations or approvals on a timely basis, if at all.

Fluctuations in exchange rates could result in foreign currency exchange losses.

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

Our operations after  successful  acquisitions in the PRC may not develop in the
same  way or at the  same  rate as might be  expected  if the PRC  economy  were
similar to the market-oriented economics of OECD member countries.

The economy of the PRC has historically been a nationalistic, "planned economy",
meaning it functions and produces  according to  governmental  plans and pre-set
targets or quotas. In certain aspects,  the PRC's economy has been transitioning
to a more  market-oriented  economy.  However,  we  cannot  predict  the  future
direction of these economic  reforms or the effects these measures may have. The
PRC economy also differs from the economies of most  countries  belonging to the
Organization for Economic  Cooperation and Development,  and international group
of member  countries  sharing a commitment to democratic  government  and market
economy. For instance:
o The level of state-owned enterprises in the PRC is greater than in most of the
  countries belonging to the OECD;
o The  level  of  capital  reinvestment  is  lower  in the PRC than in the other
  countries that are members of the OECD; and
o The PRC has various  impediments  in place that make it difficult  for foreign
  firms to obtain local currency, as opposed to other countries belonging to the
  OECD where exchange of currencies generally free from restriction.
As a result of these differences,  our operations after successful  acquisitions
may not  develop in the same way or at the same rate as might be expected if the
PRC  economy  were  similar to those of the OECD  member  countries.

If the PRC continues to enact  regulations in our industry or proposed  industry
segment  which  forbid our  restricted  foreign  investment,  our  stability  to
consummate acquisitions could be severely impaired.



                                       21
<PAGE>
We intend to focus our search for  acquisitions  in the PRC that are  engaged in
the IT  distribution  and  services  industry  segments.  Many of the  rules and
regulations that we would face are not explicitly  communicated,  but arise from
the fact that  distribution and retail are sensitive areas of the economy of the
PRC. There are also substantial  uncertainties  regarding the  interpretation of
current Chinese laws and regulations.  Under the current  commitment made by the
PRC under WTO, this industry is open for foreign  investment post December 2002,
allow foreign ownership  controlling interests post December 2003, and allow for
wholly owned foreign investment post December 2004. If these commitments are not
carried out, they could severely impair our acquisitions.  Additionally,  if the
relevant  Chinese  authorities find us or our acquisitions to be in violation of
any  existing  or future  Chinese  laws or  regulations,  they  would have broad
discretion in dealing with such a violation, including, without limitation:
   o  Levying fines;
   o  Revoking our business and other licenses;
   o  Requiring that we restructure our ownership or operations; and
   o  Requiring  that  we  discontinue  any  portion or all of our  distribution
      related business.
Further, the PRC has restricted foreign direct investment in our sector with the
enactment of the "Temporary Regulations for the Administration of Acquisition of
Domestic  Enterprises  by  Foreign  Enterprises".  Under  the  Regulations,  the
acquirer might need further approval from relevant Chinese  government  agencies
if the  acquirer's  total  investment  in China exceeds 3 billion RMB, its total
sales  exceeds  1.5  billion  RMB,  its market  shares  reaches 20% of the local
market,  and  the  total  invested   enterprises  exceeds  15.  Based  on  these
regulations  and similar  future  regulations in other  industries,  our capital
structure  and  ownership  requirement  many  significantly  limit the number of
potential target  businesses in our proposed industry segments with which we may
complete an  acquisition.  Any of these  actions  could have a material  adverse
impact on our business and financial  condition.

If political  relations  between the U.S.  weaken,  operations  may be adversely
affected

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

Available Information

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



                                       22
<PAGE>
Item 2.  Properties.
         -----------
The  company  owns  and  leases  sales  offices,   distribution   centers,   and
administrative  facilities  in the markets it serves.  The  company's  executive
office is located on 3rd floor,  710 Changping  Road,  Shanghai,  and occupies a
1,500  square  foot  space.  This space is expanded to double the size in April,
2004,  under the same  lease  agreement.  The  company  is under  various  lease
agreements  for the 33 retail store and 12 additional  locations in the East and
South regions of China.  The company believes its facilities are well maintained
and suitable for its on going operations.

Item 3.  Legal Proceedings.
         ------------------
Securities  and Exchange  Commission v. The Hartcourt  Companies,  Inc., et al.,
United States  District  Court for the Central  District of California  Case No.
CV03-3698LGB(PLAx):

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

resolved  at  mediation,   the  Court  has  scheduled  a  post-mediation  status
conference for June 1, 2004, at which time a trial date is expected to be set by
the Court. The company has made a provision of $1,300,000  against its income at
the end of 2003 for this litigation.

Item 4.  Submission of Matters to a Vote of Security Holders.
         ----------------------------------------------------
None.

PART II

Item 5.  Market for Common Equity and Related Stockholder Matters
         --------------------------------------------------------

Market Information

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

--------------------------------- ------------- ------------
                                   High ($)      Low ($)
--------------------------------- ------------- ------------
Quarter ended March 31, 2002       0.41          0.16
--------------------------------- ------------- ------------
Quarter ended June 30, 2002        0.25          0.05
--------------------------------- ------------- ------------

                                       23
<PAGE>
Quarter ended September 30, 2002   0.10          0.05
--------------------------------- ------------- ------------
Quarter ended December 31, 2002    0.10          0.05
--------------------------------- ------------- ------------
Quarter ended March 31, 2003       0.10          0.05
--------------------------------- ------------- ------------
Quarter ended June 30, 2003        1.12          0.08
--------------------------------- ------------- ------------
Quarter ended September 30, 2003   0.92          0.52
--------------------------------- ------------- ------------
Quarter ended December 31, 2003    0.86          0.52
--------------------------------- ------------- ------------

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

Holders

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

Dividends

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

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

Equity transactions during the fiscal year


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

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

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


                                       24
<PAGE>
During  2002,  Hartcourt  issued  3,774,513  shares  of common  stock  valued at
$534,400  to  officers  and  directors  in lieu of  compensation  and  services,
including  1,245,793  shares  issued  to Dr.  Alan  Phan  in  lieu  of his  2001
compensation of $250,000.

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

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

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

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

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

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

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

During 2003, David Y. Chen,  exercised his 1 million stock options and the Board
of  Directors  agreed to extend one more year of his  remaining 1 million  stock
options granted in June 2003, with an expiration date of May 31, 2004.

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

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

Item 6.  Management's Discussion and Analysis or Plan of Operation
         ---------------------------------------------------------
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations

Since  ninety  nine  percent  of the sales  generated  in 2003  were from  newly
acquired  businesses  in  2003,  a  comparison  of  2003  operating  results  to

Hartcourt's  reported 2002 financial  results would not be meaningful.  As such,
the  discussion is based on the  comparison of the full year combined  operating
results of the four subsidiaries in 2003 and 2002 respectively.

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

Pro forma condensed and combined financial statements

Important notice:

The condensed pro forma financial  statements  represent the combined  financial
statements of the four subsidiaries,  HuaQing, GuoWei,  NewHuaSun, and ZhongNan,
which Hartcourt  acquired in 2003. The combined pro forma  financial  statements
for 2003 accounted for the full year's operating  results and are prepared under

                                       25
<PAGE>
the US GAAP and audited in accordance  with the US GAAP.  The combined pro forma
financial  statements for the full year 2002 are prepared under PRC GAAP for tax
reporting purpose and are not audited according to the US GAAP.

There are differences  between US GAAP and PRC GAAP, as well as the PRC GAAP vs.
the PRC tax rules. The material differences are the accrue based US GAAP vs. the
cash based PRC tax accounting,  accounting  period cut off for calendar year vs.
the cut off of  value-added-tax  receipts,  their  taxability and  deductibility
within certain  periods,  minimum tax rate, and certain income and  expenditures
occurred  during the normal course of the business  with proper  support but not
the government issued receipts.

The individual companies of the Hartcourt  subsidiaries as the tax payers of the
PRC legal entity  continue to prepare tax filings  according to the PRC tax laws
and requirements. The local Chinese tax authorities of various regions where the
Hartcourt subsidiaries are incorporated have performed regular tax audits on the
respective  Hartcourt  subsidiaries  and  to the  best  knowledge  of  Hartcourt
management,  there are no  outstanding  tax issues or liabilities at the time of
writing this report.

The  2003  consolidated  pro  forma  financial  statements  include  assets  and
liabilities  adjustments that represent  certain assets and liabilities of these
individual companies Hartcourt did not acquire because they were not part of the
core business or necessary  investments and therefore were  restructured  and/or
stripped at the time of acquisition.  These corresponding  adjustments were made
in the  opening  balance  of the 2003  financial  statements  of the  respective
companies prior to the Hartcourt acquisition.

In order to make the  year-on-year  comparison as  meaningful  as possible,  the
below comments are based on the full year operating results of the combined four
individual  companies in 2003 and 2002, with the 2003 financial statements being
audited  according  to US GAAP and the 2002  being the  un-audited  PRC GAAP tax
filings.  The below commentary is related to the changes in business environment
and activities, in addition to the above mentioned accounting base differences.

Hartcourt's new acquired subsidiaries
Proforma financial statement
For the year ended 2003 and 2002

BALANCE SHEET                                           2003        2002

ASSETS
CURRENT ASSETS
     Cash and cash equivalents                      2,440,326    1,580,927
     Accounts receivable                            3,385,335    3,746,090
     Inventories                                    4,285,538    7,596,578
     Trade deposits                                 2,619,030      223,302
     Deposit, prepayment and other receivables      1,337,916    2,139,089
     Due from related companies                     1,934,794            -
                                                ------------- ------------
TOTAL CURRENT ASSETS                              16,002,939   15,285,986
                                                ------------- ------------
FIXED ASSET-NET                                       667,068      146,736




                                       26
<PAGE>
INVESTMENTS                                         1,095,673      736,875
                                                ------------- ------------
TOTAL ASSETS                                       18,282,320   16,169,597
                                                ============= ============
LIABILITIES & SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
     Bank Loan                                      1,583,973      809,345
     Short-term loan                                1,612,977    1,522,801
     Bill payable                                   1,553,038    2,130,201
     Account payables                               1,799,612    8,719,321
     Accrued expenses                                 193,287      576,241
     Customers deposit                                 81,808      142,303
     Tax payable                                            -   (3,049,594)
     Staff loans                                      671,403            -
     Due to related parties                         2,788,393            -
                                                ------------- ------------
     TOTAL CURRENT LIABILITIES                     10,284,491   10,850,618
                                                ------------- ------------
                                                ------------- ------------
TOTAL LIABILITIES                                  10,801,131   10,850,618
                                                ============= ============
     Common stocks                                  5,435,946    4,831,948
     Retained earning/(accumulated losses)          2,045,243      487,030
                                                ------------- ------------
 TOTAL SHAREHOLDERS EQUITY                          7,481,189    5,318,978
                                                ------------- ------------
                                                ------------- ------------
TOTAL LIABILITIES AND EQUITY                       18,282,320   16,169,596
                                                ============= ============
Hartcourt's new acquired subsidiaries
Proforma income statement
For the year ended 2003 and 2002

                                                    2003          2002

                                                    Total         Total
                                                ------------- -------------
SALES                                             154,244,948   112,333,326
COST OF SALES                                    (147,931,635) (109,322,068)
                                                ------------- -------------
GROSS PROFIT                                        6,313,313     3,011,259

OTHER REVENUE                                         229,340         2,559

ADMINISTRATIVE AND SELLING EXPENSES
    General & Administrative expenses               4,150,586     2,644,055
    Depreciation                                       90,918         7,854
                                                ------------- -------------
TOTAL ADMINISTRATIVE AND SELLING EXPENSES           4,241,504     2,651,909
                                                ------------- -------------
INCOME(LOSS) FROM OPERATIONS                        2,301,149       361,909






                                       27
<PAGE>
FINANCE COST
    Interest income                                    22,329         3,724
    Interest expenses                                (438,803)      (59,556)
    Investment income                                 197,833             0
                                                ------------- -------------
TOTAL OTHER INCOME                                   (218,641)      (55,832)

INCOME BEFORE TAX                                   2,082,508       306,077

INCOME TAX EXPENSE                                   (234,770)      (99,919)
                                                ------------- -------------
INCOME AFTER TAX                                    1,847,738       206,158
                                                ============= =============

Results of operations

Net sales

The combined income  statement  recorded net sales of $154,244,948 in year 2003,
compared  with  $112,333,326  in  2002.  The 37%  increase  is  mainly  from the
expansion of the sales distribution network of HuaQing and Wenzhou Group and the
higher revenue per retail outlet of the Guowei DIY business. NewHuaSun's revenue
increased less than expected due to cash flow constrains.

All of HuaQing's and  NewHuaSun's  business is Samsung monitor related while one
third of the Wenzhou Group's sales came from monitor business  (various brands).
Samsung product accounted for 63% of the total year sales.  Guowei's business is
the retail and  wholesale  of  do-it-yourself  desktops and related PC component
sales.

Operating margins

The gross margin increased from 2.7% in 2002 to 4.1% in 2003.  Favorable product
line mix is a major  contributor.  Sales of the high end monitor  LCD  increased
dramatically  in 2003 due to popular  consumer  demands in the market place.  In
addition,  retail sales management put equal weight on revenue growth as well as
profitability and the gross margin of that segment improved accordingly.

Selling and general administrative expenses

The  combined  income  statements  recorded  selling and general  administrative
expenses of $4,241,504  in 2003 compared to $2,651,909 in 2002.  The bulk of the
increase is due to higher  spending in trade  promotion,  in-store  promotion as
well as increased selling expenditures.

Interest expenses

The interest expenses  increased from $59,556 in 2002 to $438,803 in 2003. About
63% of the combined 2003 sales were from Samsung  monitor related  business.  In
March of 2003,  Samsung  changed its China trade  credit  policy from  extending
credits to its  distributors to total  prepayment from the time the distributors
placed an order with the factory.  This  tightening of credit policy resulted in
the  distributors  having to inject  additional  cash  equivalent  to 45 days of
sales.  While the distributors such as HuaQing and NewHuaSun had tightened trade
credits granted to their customers and better managed the inventory on hand, the
bulk of the additional cash needs were borrowed from the banks and therefore the
substantial increase in interest expenses.

                                       28
<PAGE>
Investment income

The investment  income in 2003  represented  an investment  income from Hangzhou
Huaqing,  a  subsidiary  of  Shanghai  Huaqing.  The  investment  income was not
recorded in the 2002's  un-audited  financial  statements  prepared  for PRC tax
purpose.

Local PRC Income tax

Overall, the individual entities are still paying taxes lower than the statutory
rate. Certain legal entities were granted special tax treatment by the local tax
authorities and were exempt from the income tax.

Chinese local tax authorities have conducted annual tax audits of the respective
subsidiaries  for the tax years 2002 and  prior.  There are no  outstanding  tax
issues or liabilities at the time of presenting this report.  All tax liability,
if any, prior to the Hartcourt acquisition dates is solely the responsibility of
the selling shareholders, as stipulated in each Sales and Purchase Agreement.

There is no income subject to US tax.

Liquidity and capital resources

Operating  activities.  The net cash  provided by operating  activities  in 2003
amounted to $732,724,  compared to $3,582,151  used in 2002. The net increase in
operating  activities  resulted  primarily  from  the net  gain  of  $1,847,738,
depreciation  of $90,918,  netting off the  investment  income of $197,833,  the
increasing  of  current  assets  of  $374,194,  and the  decreasing  of  current
liabilities of $633,905.

Investing  activities.  Cash used by investing  activities  in 2003  amounted to
$160,965,  compared to $68,318  provided  in 2002.  The  decrease  in  investing
activities resulted from the increase of equity investment of $160,965.

Financing activities. Net cash provided by financing activities in 2003 amounted
to  $287,641,  compared  to  $3,012,715  in  2002.  The  increase  in  financing
activities  resulted from the net cash  obtained from bank loans and  short-term
loans of $864,804,  by netting off the  repayment of short term notes payable of
$577,163.

Discontinued Operations

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

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




                                       29
<PAGE>
On June 26th, 2003, Hartcourt signed a definitive agreement to sell 100 ordinary
shares of  LogicSpace  Asia Ltd.  ("LS") to Yee,  for a total  consideration  of
US$11. The above three companies provide comprehensive real-time audio and video
delivery  (Streaming  Media)  solutions  along with Internet  consulting and web
application development for businesses, professionals,  organizations, web sites
and content publishers.

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

In  order  to  strengthen  the  competitiveness  in  the  financial  information
provision  sectors,   Sinobull   Information  Company  Limited  was  sold  to  a
non-related company,  Genius Technology  International Limited ("GTI"), a leader
in this field, on May 7, 2003, for a total  consideration of $410,163,  of which
the amount was paid by an issuance of  57,826,793  shares of common stock of GTI
at value of $0.0071 each.

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

Extraordinary Item

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

Change in Accounting Principle

None.

Item 7  Financial Statements
        --------------------
The financial statements of the company, together with the independent auditors'
report thereon begin on page F-i of this report.

Item 8 Changes In and Disagreements With Accountants on Accounting and Financial
       -------------------------------------------------------------------------
Disclosure
----------

The company's current outside  independent  accountant was engaged in the audits
as of August 15, 2002.

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

                                       30
<PAGE>
Hartcourt  dismissed  Weinberg  &  Company,  P.A.  ("Weinberg)  as its  auditors
effective August 15, 2002. Weinberg served as Hartcourt's  independent  auditors
for the  company's  fiscal years ended  December  31, 2001 and 2000.  Weinberg's
report on Hartcourt's  consolidated  financial statements for Hartcourt's fiscal
year ended December 31, 2001 and 2000 (the "Reports") did not contain an adverse
opinion or  disclaimer  of opinion  and were not  qualified  or  modified  as to
uncertainty,  audit scope or accounting principles,  however, they were modified
to include an explanatory paragraph wherein they express substantial doubt about
Hartcourt's ability to continue as a going concern.  During the company's fiscal
years ended  December  31, 2001 and 2000,  and during the period from January 1,
2002 until  Weinberg's  dismissal,  there were no  disagreements  with  Weinberg
within the  meaning of Item 304 of  Regulation  S-B or any matter of  accounting
principles or practices,  financial disclosure,  or auditing scope or procedure,
which  disagreements  if not  resolved to  Weinberg's  satisfaction,  would have
caused Weinberg to make reference to the subject matter of the  disagreements in
connection with its reports.

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

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

Hartcourt has requested that Weinberg review the disclosure contained herein and
has  provided  Weinberg  the  opportunity  to furnish the company  with a letter
addressed to the Commission containing any new information, clarification of the

company's expression of Weinberg's views, or the respects in which Weinberg does
not agree with the statements contained herein.

Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act

Directors and Executive Officers

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

-------------------- ---- ----------------------- ------ ----------------------
Name                 Age  Position                Term   Date Held
-------------------- ---- ----------------------- ------ ----------------------
Stephen Tang         51   Director                1 year Since July 2001
-------------------- ---- ----------------------- ------ ----------------------
Dr. Alan V. Phan     58   Founder                 N/A    Since November 1993
-------------------- ---- ----------------------- ------ ----------------------
Mr. David Y. Chen    35   Chairman                1 year Since September 2003
                          Chief Executive Officer        Since August 2002
-------------------- ---- ----------------------- ------ ----------------------
Dr. Billy Y N Wang   39   Director                1 year Since October 2002
-------------------- ---- ----------------------- ------ ----------------------

                                       31
<PAGE>
Mr. Geoffrey Wei,    36   Director                1 year Since March 2003
-------------------- ---- ----------------------- ------ ----------------------
Mr. Victor Wang      41   Director                1 year Since January 2004
-------------------- ---- ----------------------- ------ ----------------------
Ms. Carrie Hartwick  42   President and CFO       1 year Since December 2003
-------------------- ---- ----------------------- ------ ----------------------
Mr. Richard Yan      30   Financial Controller    1 year Since September 2002
-------------------- ---- ----------------------- ------ ----------------------

Directors

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

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

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

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

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




                                       32
<PAGE>
Directors serve for a term of one year or until their successors are elected and
qualified.  Directors  do not receive any cash  compensation  for serving on the
Board.  For attending the Board  meetings,  Hartcourt  compensates its directors
$7,000 each year and $500 for each meeting  through the  issuance of  restricted
shares of common stock at the closing  market price of the common  shares valued
on first day of the calendar quarter.

Executive Officers

David Chen, Chairman and CEO, aged 36.

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

Carrie Hartwick, President and CFO, aged 42

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

Richard Yan, Financial Controller, aged 30

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

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




                                       33
<PAGE>
Audit committee

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

Section 16(a) Beneficial Ownership Compliance

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

Code of Ethics

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


                                    PART III

Item 10. Executive Compensation
         ----------------------
A. The following table shows the  compensation  earned by (a) the individual who
served as the Company's Chief Executive Officer during Calendar 2003 and (b) the
other  individual  who  served as an  executive  officer of the  Company  during
Calendar 2003 (collectively the "Named Executive Officers"). Information is also
provided for the fiscal years ended December 31 2002 and 2001.

                           Summary Compensation Table
                                                         Long-Term
                                                        Compensation
                                  Annual Compensation      Awards
                             --------------------------  Securities
Name and Principal                         Other Annual  Underlying   All Other
Position             Year    Salary  Bonus Compensation   Options   Compensation
                              ($)     ($)      ($)          (#)         ($)
                     ------- ------- ----- ------------ ----------- ------------
David Y. Chen        2003(1) 150,000    -             -   3,000,000            -
Chief Executive
Officer and          2002(2) 120,000    -             -   2,000,000            -
Chairman
Carrie Hartwick      2003(3) 100,000    -             -   1,000,000            -
President and Chief
Financial Officer
Alan Phan
Chief Executive
Officer and Chairman 2001(4) 250,000    -             -           -            -
   -------------------

(1)  On May 7, 2003,  Hartcourt entered into an employment  agreement with David
     Y. Chen,  Chief Executive  Officer,  regarding the terms of his employment.
     This  agreement  has a one-year  term starting from June 1, 2003 to May 31,
     2004. The agreement provides for an annual salary of $150,000 plus issuance
     of an option to purchase 3 million  shares of  Hartcourt  common stock at a

                                       34
<PAGE>
     price of 48 cents a share  applicable  for a 12 months period from the date
     of issuance if he  completes  one-year  assignment  term on a  satisfactory
     valuation by the Board of  Directors.  Fifty  percent  (50%) of Mr.  Chen's
     annual  salary is payable  in cash and the  balance is payable in shares of
     Hartcourt  common stock. The conversion price is the average 20-day trading
     price prior to the first of each month for the salary owed that month.

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

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


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


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





                                       35
<PAGE>
                     Options/SAR Grants in Last Fiscal Year
                                Individual Grants
<TABLE>
<S>            <C>          <C>          <C>      <C>          <C>          <C>       <C>
                                                                  Potential Options (1)
Name              Number of   % of total Exercise   Expiration    Number of Exercise    Expiration
                 Securities Options/SARs  or Base         Date   Securities  or Base          Date
                 underlying   Granted to    Price                underlying    Price
                   Options/ Employees in                       Options/SARS
               SARs Granted  Fiscal Year                            Granted
David Chen
  CEO             2,000,000          40%     0.10 May 31, 2004    3,000,000     0.48  May 31, 2005
Alan Phan
  Founder         3,000,000          60%     0.06 Dec 31, 2005
Carrie Hartwick
  CFO                                                             1,000,000     0.65  Nov 30, 2005
</TABLE>

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

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

                    Options/SAR Exercises in Last Fiscal Year
                          And FY-end Option/SAR Values

                                   Number of Securities   Value of Unexercised
                                   Underlying Unexercised in-the-Money
                Shares             Options/SARs           Options/SARs
                Acquired           at FY-End              at FY-End
                on        Value    Exercisable/           Exercisable/
                                   Unexercisable          Unexercisable
Name            Exercise  Realized (1)                    (2)
--------------- --------- -------- ---------------------- --------------------
David Chen      1,000,000 100,000  1,000,000/3,000,000    490,000/330,000
  CEO
Carrie Hartwick                    none/1,000,000         none
  CFO
Alan Phan                          6,000,000/none         2,220,000/none
  Founder

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

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



                                       36
<PAGE>
Item 11.  Security  Ownership of Certain  Beneficial  Owners and  Management and
          ----------------------------------------------------------------------
Related Stockholder Matters
---------------------------

Equity Compensation Plan Information

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

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

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

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

Total                          7,300,000              0.219           4,000,000

Stock Option Plan

In April 1995,  the company  adopted a stock option plan (the "Plan") to attract
and retain  qualified  persons for positions of  substantial  responsibility  as
officers,  directors,   consultants,  legal  counsel,  and  other  positions  of
significance  to the  company.  The  Plan  provides  for  the  issuance  of both
Incentive  Stock Options and  Non-Qualified  Stock Options.  The Plan,  which is
administered  by the Board of Directors,  provides for the issuance of a maximum
of  2,000,000  options to purchase  shares of common  stock at the market  price
thereof on the date of grant.  Such options are generally  exercisable over a 10
year  period  from the date of  grant.  Each  option  lapses  90 days  after the
optionee has terminated his continuous activity with the company, except that if

his continuous activity with the company terminates by reason of his death, such
option of the deceased optionee may be exercised within one year after the death
of such  optionee.  Options  granted under the Plan are restricted as to sale or
transfer.  All options were granted at no less than the fair market value at the
date of grant and have terms of 10 years.  In February 1999, the company's board
of  directors  adopted a stock plan for its  employees  and others  entitled the
Plan.  Pursuant to the Plan,  the board can  authorize  the issuance of up to an
aggregate of One Million shares of Common Stock of the company over a maximum of
a one year  period,  although  the board may shorten  this  period.  A new stock
option  plan will be put forth for  shareholders'  approval  at our 2004  annual
shareholders meeting.





                                       37
<PAGE>
All stock options  issued to employees  have an exercise price not less than the
fair market value of the  company's  common  stock on the date of grant,  and in
accordance  with the accounting for such options  utilizing the intrinsic  value
method  there is no  related  compensation  expense  recorded  in the  company's
financial  statements.  Had compensation cost for stock-based  compensation been
determined  based on the fair value at the grant  dates in  accordance  with the
method  delineated in Statement of  Accounting  standards No. 123, the company's
net income and income per share for the year ended  December  31, 2003 would not
have been changed.

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


                               Outstanding          Exercisable
                          --------------------- -------------------
   Exercise Price                Weighted                  Weighted
                                 Average                   Average
                          ---------------------            -------
   Per Share     Shares   Life (Years) Exercise   Shares   Exercise
                                        Price               Price
-------------- ---------- ------------ -------- ---------- --------
$0.06 to $1.00 11,300,000  0.5 to 4.5   $0.34   11,300,000    $0.34


Security Ownership of Certain Beneficial Owners and Management

(a)  Security ownership of certain beneficial owners

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

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

------------------ ------------------------ ------------------------ ----------
Common stock       Dr. Alan V. Phan         2,520,721                1.5%
                   Room  701,  Building  4,
                   No.  777
                   MeiHua Road,
                   Pudong, Shanghai,
                   China, 201204
------------------ ------------------------ ------------------------ ----------
------------------ ------------------------ ------------------------ ----------
Original Preferred Dr. Alan V. Phan         1,000 (2)                100%
stock
------------------ ------------------------ ------------------------ ----------
------------------ ------------------------ ------------------------ ----------
Common stock       Enlight Corporation Ltd. 16,922,640 (3)           9.9%
                   19/F Rite Plaza
                   122 Austin Road
                   Kowloon, Hong Kong
------------------ ------------------------ ------------------------ ----------
------------------ ------------------------ ------------------------ ----------
                                       38
<PAGE>
(1) Except as otherwise  indicated,  each of the parties  listed has sole voting
and  investment  power  with  respect  to all  of the  shares  of  common  stock
indicated.  Beneficial ownership is calculated in accordance with Rule 13-d-3(d)
under the Securities Exchange Act of 1934, as amended.
(2) Dr. Alan V. Phan holds  1,000  shares of Original  Preferred  Stocks,  which
accounts for 100% of the ownership.  An aggregate of 1,000,000  shares of common
stock are issuable upon conversion of 1,000 shares of Original  Preferred Stock.
As the sole holder of the 1,000 outstanding  shares of Original Preferred Stock,
Dr. Phan is entitled to elect 3/5 of the number of members of Hartcourt's  Board
of Directors.
(3) In previous  acquisition  and  funding  transactions,  Hartcourt  issued the
following restricted shares in respect of each transaction:
   Enlight transaction: 29,010,240,
   NewHuaSun transaction: 13,769,156
   HuaQing transaction: 17,300,929
   GuoWei transation: 10,863,792
   ZhongNan transaction: 8,415,371

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

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

(b)  Security ownership of management

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

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

-------------- ------------------ ------------------------ -------------------
Common stock   Carrie Hartwick                       7,893                   *
-------------- ------------------ ------------------------ -------------------
Common stock   Stephen Tang                        150,704                   *
-------------- ------------------ ------------------------ -------------------
Common stock   Billy Wang                          112,133                   *
-------------- ------------------ ------------------------ -------------------
Common stock   Geoffrey Wei                         27,724                   *
-------------- ------------------ ------------------------ -------------------
Common stock   X Y Li                               27,724                   *
-------------- ------------------ ------------------------ -------------------



                                       39
<PAGE>
Common stock   Richard Yan                           8,000                   *
-------------- ------------------ ------------------------ -------------------
               Total                             1,446,311                0.8%
-------------- ------------------ ------------------------ -------------------

*     Less than 0.1%.

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

Item 12: Certain Relationships and Related Transactions
         ----------------------------------------------
During 2003,  Hartcourt  provided  management  services to GuoWei, its 45% owned
subsidiary,  with  service fee of  US$181,221.

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

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

During  2002,  Hartcourt  issued  3,774,513  shares  of common  stock  valued at
$534,400  to  officers  and  directors  in lieu of  compensation  and  services,
included in which,  1,245,793 shares issued to Dr. Alan Phan in lieu of his 2001
compensation of $250,000.
------------------ -------------------- ------------------------ ---------------
Name of related    Relationship         Transaction nature       Amount
party
------------------ -------------------- ------------------------ ---------------
GuoWei             45% owned            During 2003, Hartcourt   $181,221
                   subsidiary           provided management
                                        services to GuoWei
---------------- ---------------------- ------------------------ ---------------
David Chen,        CEO                  During 2003, Hartcourt    1,857,900
Carrie  Hartwick,  CFO                  issued shares to these    shares valued
Richard Yan,       Financial Controller persons in lieu of        at $262,155.8
Manu Ohri,         Former CFO           compensation and
XY Li              Director             services
Stephen Tang       Director
Billy Wang         Director
Geoffrey Wei       Director
Alan Phan          Director
Zhang LanYun,      Employee
Liang WeiHong,     Employee
Cui XiaoYan,       Employee
Huang Jin, Mao Li, Employee
Liu ChangAn        Employee
------------------ -------------------- ------------------------ ---------------




                                       40
<PAGE>
Guan Xue Fang      Wife of an           On December 25, 2003,    $1,842,326.4
                   employee             Hartcourt and a group
                   of Huaqing, a        of Chinese citizens
                   subsidiary of        signed a Stock Purchase
                   Hartcourt            Agreement whereby
                                        Hartcourt agreed to sell
Li ZhengZheng      President of         to the Group 4,605,816
                   Huaqing              shares of its common stock
                                        restricted under the
Xu HuiZhen         Wife of employee     Rule 144 and/or
                   of Huaqing           Regulation S, at $0.40
                                        per share.
ZhangHui           Director of Huaqing

Liu Jianqing       Employee of Huaqing

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


                                     PART IV

Item 13. Exhibits and Reports on Form 8-K
         --------------------------------
a) The following list describes the exhibits filed as part of this Annual Report
on Form 10-KSB.

Exhibit No.                                       Description of Document

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

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

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

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



                                       41
<PAGE>
2.09    Agreement  for Sale and Purchase of Certain  Interest in the  Registered
Capital of Zhangnan  Group  ("Zhongnan")  dated June 25, 2003 between  Hartcourt
Capital, Inc. and Zhongnan shareholders

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

2.11    Agreement for Sale and Purchase of Shanghai  PengYang Computer Co., Ltd.
dated   November  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 Challenger  Wanzhong Info Tech Co., LTD ("Challenger")  dated
December 9, 2003 between Hartcourt Capital, Inc. and Challenger shareholders

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

3.02    Bylaws of Hartcourt. (1)

3.03    Amendment to the Bylaws of Hartcourt. (1)

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

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

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

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

10.04   1995 Stock Option Plan. (1)

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

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

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

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

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

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

                                       42
<PAGE>
10.11   Purchase and Sale  Agreement,  dated  September  27,  1996,  between The
Hartcourt Companies, Inc. and CKES Acquisitions, Inc. (1)

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

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

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

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

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

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

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

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

10.20   Agreement with GoCall.com (8)

10.21   FTL Stock Purchase Agreement (8)

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

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

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

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

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

14.01   Code of Ethics

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.


                                       43
<PAGE>
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.

(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.



b)       Reports on Form 8-K

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

                                       44
<PAGE>
On April 25, 2003,  Hartcourt's  changes in Board of Directors.  SEC File Number
001-12671; File Number 03663461.

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

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

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

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

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

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

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

Item 14: Principal Accounting Fees and Services
         --------------------------------------
For year ended December 31, 2003 and 2002 respectively,  Loral International CPA
& Advisor LLC, our independent auditor, billed the fees set forth below.

                                           2003        2002
Audit Fees                   (1)         70,000      46,000
Audit-Related Fees                            -           -
Tax Fees                                      -           -
All Other Fees                                -           -

The auditor is trying to bill Hartcourt  additional $95,000 for their audit work
of 2003, which was considered over their initial estimate.  The additional audit
fee is still in the process of approval of our audit committee.













                                       45
<PAGE>
                                   SIGNATURES

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

                                                  THE HARTCOURT COMPANIES, INC.



Date:  March 30, 2004                             By: /s/ David Y. Chen
                                                  ----------------------
                                                    David Y. Chen
                                            Chairman and Chief Executive Officer




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


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

/s/ Carrie Hartwick        President &                           March 30, 2004
-----------------          Chief Financial Officer
Carrie Hartwick





























                                       46
<PAGE>
                        POWER OF ATTORNEY AND SIGNATURES
      KNOW ALL  PERSONS BY THESE  PRESENTS,  that each  person  whose  signature
appears below  constitutes and appoints David Chen and Carrie Hartwick,  jointly
and severally,  as his  attorneys-in-fact,  each with the power of substitution,
for him in any and all capacities, to sign any amendments to this Report on Form
10-KSB  and to file the same,  with  exhibits  thereto  and other  documents  in
connection  therewith  with  the  Securities  and  Exchange  Commission,  hereby
ratifying  and  confirming  all  that  each  of said  attorneys-in-fact,  or his
substitute or substitutes may do or cause to be done by virtue hereof.

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


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

    /s/ David Chen       Chief Executive Officer and Chairman  March 30, 2004
   ---------------------
   David Chen


   /s/ Carrie Hartwick   President and Chief Financial Officer March 30, 2004
   ---------------------
   Carrie Hartwick


   /s/ Billy Wang        Director                              March 30, 2004
   ---------------------
   Billy Wang


   /s/ Stephen Tang      Director                              March 30, 2004
   ---------------------
   Stephen Tang


   /s/ Geoffrey Wei      Director                              March 30, 2004
   ---------------------
   Geoffrey Wei

   /s/ Victor Wang       Director                              March 30, 2004
   ---------------------
   Victor Wang










                                       47
<PAGE>




                    LORAL INTERNATIONAL CPA & ADVISOR, L.L.C.
                    -----------------------------------------
                           Member of PCAOB United States

Main Address      : 234 Hudson Ave., #2882 Albany, New York 12210
                            Telephone: (518) 472-1789       Fax: (518) 472-1544
Seattle Address   : 720 Third Avenue, Suite 1611, Seattle, WA 98104
                            Telephone: (206) 264-8065       Fax: (206) 264-7971
China Address     : Suite 2503, United Plaza, Shenzhen, China
                            Telephone: (755) 8291-0062      Fax: (755) 8291-0389







                       Report on the Financial Statements

                                       Of

                          The Hartcourt Companies, Inc.
                                And Subsidiaries





























                                      F-i

<PAGE>







                          The Hartcourt Companies, Inc.
                                And Subsidiaries



                    Audited Consolidated Financial Statements

                 For the Years Ended December 31, 2003 and 2002


Contents                                                             Pages

Independent Auditor's Report.......................................   F-1-2

Balance Sheet......................................................   F-3-5

Statement of Operations............................................   F-6-7

Changes in Stockholders' Equity....................................   F-8-9

Statement of Cash Flows............................................ F-10-11

Notes to Financial Statements...................................... F-12-53



























                                      F-ii

<PAGE>



                    LORAL INTERNATIONAL CPA & ADVISOR, L.L.C.
                        Member of PCAOB of United States
---------------------------------------------------------------------------
Main Address   :  234 Hudson Ave., #2882 Albany, New York 12210
                       Telephone: (518) 472-1789       Fax: (518) 472-1544
Seattle Address:  720 Third Avenue, Suite 1611, Seattle, WA 98104
                       Telephone: (206) 264-8065       Fax: (206) 264-7971
China Address  :  Suite# 2503, United Plaza, ShenZhen, China
                       Telephone: (86-755) 8291-0062   Fax: (86-755) 8291-0389
--------------------------------------------------------------------------

                          Independent Auditor's Report

To     The Board of Directors of
       The Hartcourt Companies, Inc.
       911 E. Colorado Blvd. Third Floor
       Pasadena, CA 91106

We have audited the  accompanying  consolidated  balance sheets of The Hartcourt
Companies,  Inc. and its foreign  subsidiaries  (See Note # 3,  Acquisitions and
Investments)  as of  December  31,  2003 and 2002 and the  related  consolidated
statements of operations, changes in stockholders' equity and cash flows for the
years then ended. These consolidated financial statements are the responsibility
of the  Company's  management.  Our  responsibility  is to express an opinion on
these consolidated financial statements based on our audit.

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

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 our opinion,  except for the effects  mentioned in the above  paragraph,  the
financial statements referred to in the first paragraph above, present fairly in
all material respects,  the financial position of the Company as of December 31,
2003 and 2002,  and the  results  of its  operations  and its cash flows for the
years then ended in conformity with accounting  principles generally accepted in
the United States of America.

The  accompanying  financial  statements  have been  prepared  assuming that the


                                       F-1

<PAGE>




Company  will  continue  as a going  concern.  As  discussed  in  Note # 6,  Net
Operating Loss, to the financial statements,  the Company has suffered recurring
losses and negative cash flows from  operations  that raise  substantial  doubts
about  its  ability  to  continue  as  a  going  concern.  Management  has  held
discussions to improve the  operational  profitability  and to raise  additional
working capital (See Note # 2p, Going Concern).  The financial statements do not
include any adjustment that might result from the outcome of this uncertainty.









Loral International CPA & Advisor, LLC.
Albany, New York
April 13, 2004


































                                       F-2

<PAGE>
                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 2003 AND 2002
ASSET                                                   2003             2002
                                                    -----------     ------------
CURRENT ASSETS
Cash and cash equivalents                           $ 2,486,103      $    79,845
Accounts receivable, net of allowance                 4,017,087          260,306
Inventory                                             4,285,538           16,464

Notes receivable                                        608,573          709,759
Trade deposits                                        2,619,030                0
Prepaid expenses and other assets                     1,373,656           49,449
Due from related companies                            1,934,794                0
                                                    -----------      -----------
TOTAL CURRENT ASSETS                                 17,324,781        1,115,823
                                                    -----------      -----------

PROPERTY & EQUIPMENT - NET                              686,436          474,521
                                                    -----------      -----------

INVESTMENTS                                           1,505,836          430,000
                                                    -----------      -----------
OTHER ASSETS
Goodwill, net                                        12,926,782          624,689
Intangibles, net                                              0          340,767
Notes receivable                                      1,827,509        1,756,012
                                                    -----------      -----------
TOTAL OTHER ASSETS                                   14,754,291        2,721,468
                                                    -----------      -----------
                                                    -----------      -----------
TOTAL  ASSETS                                       $34,271,344      $ 4,741,812
                                                    ===========      ===========
LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES
Bank loans                                          $ 1,583,973      $         0
Short term loans                                      2,096,536                0
                                                                       1,341,924
Accounts payable                                      2,062,511          209,333
Deferred revenue                                         81,808                0

Bills payables                                        1,553,038                0

Notes payable - current portion                               0           18,988

Due to shareholders                                     229,936                0

Accrued expenses and other current
    liabilities                                         274,875          357,625
Staffs loan                                             671,402                0
Due to related parties                                2,135,671        1,343,011
                                                    -----------      -----------
TOTAL CURRENT LIABILITIES                            10,689,750        3,270,881
                                                    -----------      -----------
The  accompanying  notes form an  integral  part of the  consolidated  financial
statements.
                                       F-3

<PAGE>



   THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 2003 AND 2002
                                  (-Continued-)


LONG-TERM LIABILITIES
Notes payables                                                   0             0
Capital lease liability                                          0             0
                                                       -----------   -----------
                                                       -----------   -----------
TOTAL LONG-TERM LIABILITIES
                                                                 0             0
                                                       -----------   -----------
                                                       -----------   -----------

TOTAL LIABILITIES                                      $10,689,750   $ 3,270,881
                                                       -----------   -----------

MINORITY INTERESTS                                       4,021,833       561,720

COMMITMENTS AND CONTINGENCIES                            1,300,000
                                                                               0

SHAREHOLDERS' EQUITY
Preferred Stock:
Original preferred stock, $0.01 par value, 1,000
   shares authorized, issued and outstanding                    10            10
Class A, 10,000,000 shares authorized, none
   issued and outstanding at December 31, 2003
and 2002 , respectively                                          0             0
Series A, $1,000 stated value, 4,000 shares
   authorized, issued and outstanding at December
   31, 2003 and 2002 respectively                                0             0
Series B, $1,000 stated value, 2,000 shares
   authorized, none issued and outstanding at
   December 31, 2003 and 2002, respectively                      0             0
Series C, $1,000 stated value, 1,500 shares
   authorized, none issued and outstanding at
   December 31, 2003 and 2002, respectively                      0             0
Series D, $1,000 stated value, 10,000 shares
   authorized, none issued and outstanding at
   December 31, 2003 and 2002, respectively                      0             0
Series AB, $100 stated  value, 25,000 shares
   authorized, none issued and outstanding at
    December 31, 2003 and 2002, respectively                     0             0
Total Preferred Stock                                           10            10
Common stock, $0.001 par value, 250,000,000 and
Authorized 171,157,104 and
88,518,023 common shares issued and outstanding,
respectively in 2003 and 2002                              171,157        88,518


The  accompanying  notes form an  integral  part of the  consolidated  financial
  statements.
                                       F-4

<PAGE>


                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

                           DECEMBER 31, 2003 AND 2002
                                  (-Continued-)

                                                        2003             2002

Stock subscription receivable                        (1,842,326)              0
Additional paid in capital                           70,858,036      55,669,100
Treasury stock, at cost, 48,728 and 5,610,588           (48,728)     (3,723,928)
    shares at December 31, 2003 and 2002,
    respectively
Other comprehensive income/(loss)                       933,487         (71,094)
Accumulated deficit                                 (51,811,875)    (51,053,395)

                                                   ------------    ------------
TOTAL SHAREHOLDERS' EQUITY                           18,259,761         909,211
                                                   ------------    ------------

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
                                                   $ 34,271,344    $  4,741,812
                                                   ============    ============



























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



                                       F-5

<PAGE>

                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                           DECEMBER 31, 2003 AND 2002

                                                     2003               2002
                                               ----------------  ---------------

NET SALES                                        $ 111,397,742    $   1,137,011

COST OF SALES                                      106,082,763          362,382
                                                 -------------    -------------

GROSS PROFIT                                         5,314,979          774,629
                                                 -------------    -------------

OPERATING EXPENSES
 Selling, general and administrative                 3,348,060        2,774,011
 Depreciation and amortization                          91,068          371,779
 Impairments                                           509,294        1,563,040
                                                                  -------------
TOTAL OPERATING EXPENSES                             3,948,422        4,708,830
                                                 -------------    -------------

INCOME/(LOSS) FROM CONTINUING OPERATIONS BEFORE
        OTHER INCOME (EXPENSES)                      1,366,557       (3,934,201)
                                                 -------------    -------------

OTHER INCOME (EXPENSES)
 Interest expense                                     (376,513)         (50,197)
 Interest income                                       188,945           94,299
 Provision for lawsuit                              (1,300,000)               0
 Investment income                                     197,833                0
 Loss on disposal of property and equipment                  0         (295,564)
 Other income                                          109,807           26,961
                                                                  -------------
                                                                  -------------
TOTAL OTHER INCOME (EXPENSES)                       (1,179,928)        (224,501)
                                                 -------------    -------------

INCOME/(LOSS) FROM CONTINUING OPERATIONS BEFORE
        MINORITY INTEREST
                                                       186,629       (4,158,702)

Less: Gain/(loss) in subsidiaries attributed to
        minority interests
                                                       864,920         (685,251)

LOSS BEFORE DISCONTINUED OPERATIONS                   (678,291)      (3,473,451)
                                                 -------------    -------------

DISCONTINUED OPERATIONS:
 Loss from discontinued operations                     (46,796)      (1,020,252)
 Gain on disposal of discontinued operations     $     173,911    $   1,943,701
                                                 -------------    -------------
 The accompanying notes form an integral part of the consolidated financial
statements
                                       F-6

<PAGE>




                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                           DECEMBER 31, 2003 AND 2002

                                  - Continued -

                                               2003             2002
                                          --------------   --------------

LOSS BEFORE TAX                           $    (551,176)   $  (2,550,002)
 Taxation                                      (197,804)               0
                                          -------------    -------------
NNET LOSS                                      (748,980)      (2,550,002)

OTHER COMPREHENSIVE LOSS
 Foreign currency translation loss               (9,500)          (9,407)
                                          -------------    -------------

COMPREHENSIVE LOSS                        $    (758,480)   $  (2,559,409)
                                          =============    =============

BASIC AND DILUTED LOSS PER COMMON SHARE

  Loss from continuing operations         $      (0.005)   $      (0.004)
 Gain from discontinued operations                0.000             0.01
                                          -------------    -------------
 Loss per share                           $      (0.005)   $       (0.03)
                                          =============    =============
 - basic and diluted (weighted average)     135,564,580       80,415,882
                                          =============    =============



















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


                                       F-7

<PAGE>







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

<TABLE>
<CAPTION>
                                                           Common
                                                           Stock    Additional                      Other Total
                              Preferred        Common   Subscriptions Paid In     Treasury Stock   Comprehensive Accum. Shareholders
        Description         Shares Amount  Shares Amount  Receivable  Capital    Shares      Amount    Loss      Deficit    Equity
------------------------------------------------------------------------------------------------------------------------------------
<S>                           <C>    <C><C>        <C>    <C>      <C>         <C>        <C>        <C>      <C>         <C>
Balance - January 1, 2002     1,000  10 73,885,656 73,886 (139,865)55,774,225  2,418,367  (1,662,233)(61,687) (48,503,393)5,480,943

Shares issued for consulting
   services                      --  --  3,440,334  3,440       --    356,370        --          --      --           --    359,810

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

Shares issued to directors in
 lieu of compensation & services --  --  3,774,513  3,774       --    530,626        --          --      --           --    534,400

Sale of treasury stock           --  --         --     --       --   (180,082) (563,837)    263,305      --           --     83,223

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

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

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

Shares issued for subscription
 receivable                      --  --  7,417,520  7,418 (473,181)   663,416        --          --      --           --    197,653

Other comprehensive gain         --  --         --     --       --         --        --          --  (9,407)          --     (9,407)

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

                             -------------------------------------------------------------------------------------------------------
Balance - Dec 31, 2002        1,000  10 88,518,023 88,518       -- 55,669,100 5,610,588  (3,723,928)(71,094) (51,053,395)   909,211
                             =======================================================================================================
</TABLE>
The  accompanying  notes form an  integral  part of the  consolidated  financial
statements.








                                       F-8

<PAGE>





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

<TABLE>
<CAPTION>
                                                           Common
                                                            Stock     Additional                       Other                Total
                             Preferred        Common     Subscriptions Paid In     Treasury Stock Comprehensive  Accum. Shareholders
         Description      Shares Amount  Shares    Amount  Receivable  Capital    Shares    Amount     Loss      Deficit   Equity
------------------------------------------------------------------------------------------------------------------------------------

<S>                          <C>   <C> <C>          <C>   <C>        <C>        <C>      <C>         <C>     <C>            <C>
Balance - December 31, 2002  1,000 10  88,518,023   88,518        -- 55,669,100 5,610,588(3,723,928) (71,094)(51,053,395)   909,211

Shares issued for consulting
     services                   -- --   2,174,667    2,175        --    160,246        --        --       --          --    162,421
Shares issued to executive and
staffs in
 Of compensation and services   -- --   1,268,440    1,268   196,127    197,395
Stock subscriptions, received   -- --  31,298,535   31,299(1,842,326) 2,620,195        --        --       --          --    809,168
Shares issued to directors
     in lieu of compensation
     & services                 -- --     589,460      589        --     64,161        --        --       --          --     64,750
Shares issued for execution of
stock option                                     1,000,000     1,000     99,000   100,000
Cancel of treasury stocks                       (4,756,058)   (4,756)(3,170,444)(4,756,058)3,175,200      --

Sale of treasury stock          -- --          --      --         --   (451,187) (805,802)  500,000       --          --     48,813

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

Shares issued in connection of
acquisition                     -- --  50,349,243      -- 15,671,553         --        --        --       --  15,721,902

Unrealized loss on disposal Of FTL
                                                                                                   1,004,581              1,004,581
Net Loss                        -- --          --      --         --         --        --        --       --    (758,480)  (758,480)
                             -------------------------------------------------------------------------------------------------------
Balance - Dec 31, 2003       1,000 10 171,157,104 171,157 (1,842,326)70,858,036    48,728   (48,728) 933,487 (51,811,875)18,259,761
                             =======================================================================================================
</TABLE>

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










                                       F-9

<PAGE>




                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                           DECEMBER 31, 2003 AND 2002

                                                       2003           2002
                                                 -------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss                                         $   (748,980)  $ (2,550,002)

Adjustments  to reconcile  net loss to net cash
provided by (used in) operating activities:
 Loss on disposal of property and equipment                 0        295,564
 Provision for un-collectable note receivable         101,186              0
 Provision for investment                             400,000              0
 Gain on disposed debt                                      0              0
 Depreciation                                         215,178        342,147
 Amortization                                               0         29,632
 Allowance for doubtful accounts                            0      1,115,963
 Accrual for contingent liabilities                 1,300,000              0
 Unrealized investment gain                          (197,833)             0
 Impairments - goodwill and intangible software             0      1,563,040
 Minority interest in loss of subsidiaries and
    equity in earnings of affiliate, net              864,920       (685,251)
 Stock issued for services                            424,566        889,211
Changes in operating assets and liabilities:
 Accounts receivable                                  545,783      1,183,367
 Trade deposit                                     (1,873,328)             0
 Inventory                                            553,424           (582)
 Prepaid expenses and other receivables               (86,455)     2,179,879
 Cash overdraft                                             0
                                                                     (82,030)
 Accounts payable and accrued expenses             (5,614,367)    (4,706,434)
 Deferred revenue                                    (229,567)      (406,921)
                                                  -----------    -----------
Net cash used in continuing operations             (4,345,473)      (832,417)
Net cash used in discontinued operations             (173,911)    (1,020,252)
                                                  -----------    -----------
NET CASH USED IN OPERATING ACTIVITIES             $(4,519,384)   $(1,852,669)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment                $         0    $   (97,877)
Acquisition of subsidiaries                         2,366,560              0
Cash decreased due to disposal of subsidiaries        (32,337)             0
Payments on notes receivable, net                     100,000      1,039,389
Investments                                            30,000      1,597,450
                                                  -----------    -----------
NET CASH PROVIDED BY INVESTING ACTIVITIES         $ 2,464,223    $ 2,538,962
                                                  -----------    -----------



The accompanying notes form an integral part of the consolidated financial
statement.
                                      F-10

<PAGE>




                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                           DECEMBER 31, 2003 AND 2002
                                  (-Continued-)
                                                        2003           2002
                                                   -------------  --------------

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds/(payments) due to related parties          $ 2,691,620    $  (7,986)
Proceeds from issuance of common stock                  130,000     (265,691)
Proceeds from issuance of treasury stock                 48,813            0
Shareholder loans                                             0      139,865
Due to factor                                                 0     (198,205)
Proceed on note payables                              1,432,245            0
Proceeds (Payments) on debt                             168,242     (433,299)
Payments on capital lease                                     0     (113,238)
                                                      ---------    ---------
NET CASH (USED IN)/PROVIDED BY FINANCING
   ACTIVITIES                                       $ 4,470,920    $(878,554)
                                                      ---------    ---------

FOREIGN CURRENCY TRANSLATION                             (9,500)      (9,407)
                                                      ---------    ---------

NET (DECREASE)/INCREASE IN CASH                       2,406,259     (201,668)
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR            79,845      281,513
                                                      ---------    ---------
CASH AND CASH EQUIVALENTS - END OF YEAR             $ 2,486,104    $  79,845
                                                      =========    =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for the interest          $   376,513    $  50,197
                                                      =========    =========











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




                                      F-11

<PAGE>


                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2003 AND 2002

1)   GENERAL

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

The  Company  is  in  a  process  of  transforming  its  business  by  disposing
non-productive  subsidiaries  and acquiring  foreign  entities with  significant
income,  to provide more value to its shareholders (See Note # 3, Acquisitions &
Investments,  and Note # 13, Discontinued  Operations).  The Company focuses its
activities  to grow business in China.  The  Company's  shares are traded in the
OTC-Bulletin  Board in the United States with trading  symbol HRCT.  The trading
price of the  Company's  shares  ranges  from $0.05 to $1.12  with thin  trading
volume  during the year of 2003.  As of  December  31,  2003,  the  Company  has
171,157,104 common shares issued and outstanding.  (See Note # 22, Shareholders'
Equity).

As of  December  31,  2003,  the Company  owns 100% of three (3) British  Virgin
Island ("BVI")  incorporated  companies.  The names of those three companies are
Hartcourt  Companies Ltd.,  Hartcourt  Capital Inc., and AI-Asia Inc. All of the
three  subsidiaries  hold China assets.  The three BVI  subsidiaries are holding
companies,  of which Hartcourt Capital Inc, through its four China  subsidiaries
carry  out  the  core  business  of  the  Company.   While  the  other  two  BVI
subsidiaries,  via its China  subsidiaries,  operate other non core business and
contribute less than 1% of total sales of the Company.

During the current  year ended  December  31,  2003,  Hartcourt  Companies  Ltd.
disposed  off  three  (3)   subsidiaries,   StreamingAsia   Ltd,  Tiandi  Hulian
Technologies  Ltd,  and  SyndicateAsia   Ltd.  (See  Note  #  13,   Discontinued
Operations).  Hartcourt  Companies  Ltd  also  owns  51%  interest  of  Sinobull
Information Co., Ltd ("Sinobull"),  with little actual value, as of December 31,
2003.  During the year of 2003,  Hartcourt  sold all its interest in Sinobull to
GTI. As a result,  it obtains a 17% interest on GTI as of December 31, 2003. The
exchange transaction has little or no market value, as of December 31, 2003.

Hartcourt Capital Inc. owns 100% of Hartcourt Investment  Management  (Shanghai)
Co., Ltd., located in Shanghai of China.  During the year of 2003, the Hartcourt
Capital  Inc.,  disposed  off  two  subsidiaries,  Hartcourt  Capital  Ltd.  and
Hartcourt Capital Asia Ltd. (See Note # 13, Discontinued Operations).









                                      F-12

<PAGE>




                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2003 AND 2002

During the current year ended December 31, 2003,  the Company  acquired four (4)
substantial  foreign  subsidiaries,  located and operated in China. As a result,
the Company owns 45% equity interest and 10% proxy right of Guangzhou  Newhuasun
Computer Co., Ltd ("Newhuasun",  located in GuangZhou City,  China),  51% equity
interest of Hauqing Corporation Development Ltd ("Huaqing",  located at Shanghai
City,  China),  45% equity  interest  with 10% proxy  right of  Shanghai  Guowei
Science & Technology Ltd ("Guowei",  located in Shanghai, China), and 51% equity
interest of ZhongNan Group  ("ZhongNan",  located in WenZhou,  of China,),  (See
Note # 3,  Acquisitions  and  Investments  and  Note # 26,  Subsequent  Event on
disposal of Guowei in 2004).

AI-Asia,  Inc.  (AA),  the third  holding  company,  owns 100% equity of AI-Asia
(Shanghai)  Information  Technology,  Inc of China  ("AI"),  with  insignificant
value. During the year of 2003, AA disposed off Logicspace Asia Ltd of Hong Kong
("LA") (See note # 13, Discontinued Operations).

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

During the year of 2003, the Company's principal activities are conducted by the
four (4) newly acquired  foreign  subsidiaries  (see Note # 3,  Acquisitions and
Investments). Other subsidiaries have little business activities and no material
impact to the  Company's  2003  operations.  All the four (4)  subsidiaries  are
operated  in  China.  They are in the sale and  distribution  of  computers  and
monitors  in a  foreign  country,  under  fierce  competition.  (See  Note  # 3,
Acquisitions & investments).

2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

                a)  Calendar year ending December 31

                The Company  adopts an  accounting  calendar  year which ends on
                December 31 of the same year.




                                      F-13

<PAGE>
                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2003 AND 2002

                b)  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.

                For purposes of these  consolidated  financial  statements,  the
                Hartcourt  Companies,  Inc. and its subsidiaries are referred to
                collectively as the "Company" or "Hartcourt".  The  accompanying
                2003 and 2002 consolidated  financial statements for the Company
                includes the accounts  balances of its wholly own  subsidiaries.
                For the year ended December 31, 2003, the Company  acquired four
                (4) foreign  subsidiaries,  for the long-term  purposes,  in the
                computer  distribution  industry  located and  operated in China
                (See  Note  # 3,  Acquisitions  and  Investments).  The  Company
                demonstrated  its  control of these  companies  operations.  The
                accompanying   consolidated  financial  statements  include  the
                accounts of these four (4) subsidiaries (i.e. Huaqing, ZhongNan,
                Newhuasun and Guowei).  Huaqing and ZhongNan are consolidated by
                the Company based on its 51% ownership  acquired.  Newhuasun and
                Guowei are  consolidated  by the Company because it demonstrates
                control and influence over these two acquired entities, based on
                its 45% equity  interest  acquired and 10% voting right obtained
                via  proxy   statements.   While  in  the  year  of  2002,   the
                accompanying  consolidated  financial  statements  for the  year
                ended on December 31, 2002 include the accounts  balances of The
                Hartcourt Companies,  Inc, its 58.35% owned subsidiary Financial
                Telecom  Limited  (FTL),  its 100%  owned  subsidiary  Hartcourt
                Companies Ltd., its 85% owned  subsidiary  StreamingAsia,  Ltd.,
                its 100% owned subsidiary  Hartcourt Capital,  Inc. and its 100%
                owned   subsidiary   AI-Asia,   Inc.  The  2002  operations  are
                comparative  insignificant,  as the company's  subsidiaries have
                inactive operation in 2002.

                In an attempt to refocus  these new  businesses  of acquired new
                subsidiaries,  the  Company  divested  and/or  closed down seven
                inactive (7)  subsidiaries  in the year of 2003. (See Note # 13,
                Discontinued  Operations).  All material  inter-company balances
                and transactions have been eliminated in consolidation.

                c)  Use of Estimates
                  The preparation of the  consolidated  financial  statements in
                  conformity with

                                      F-14

<PAGE>



                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2003 AND 2002


                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.

                d)  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.  It should be noted  that the  Chinese
                banks may operate under different banking rules in China, and do
                not have the  protection  programs  similar to that  of  the  US
                (FDIC).

                e)  Accounts Receivable

                The Company may, from time to time,  extend  unsecured credit to
                customers.  Credit is  extended  based on an  evaluation  of the
                customer's  financial  conditions.  The  allowance  for doubtful
                accounts  is based on  management's  evaluation  of  outstanding
                accounts  receivable  at the end of the  reporting  period.  The
                total accounts  receivable of the Company amounted to $4,017,087
                as of December 31, 2003,  while the accounts  receivable  of the
                Company amounted to $260,306 as of December 31, 2002.

                The  significant   increase  in  the  balances  of  the  account
                receivables is a result of increase of sales volume  incurred in
                the current year due to its newly  acquired  four  subsidiaries.
                See the accompanying income statements. As of December 31, 2003,
                the account receivables balances are aged less than 6 months and
                therefore do not subject to additional bad debts reserve.

                f)  Inventory

                Inventory is stated at the lower of cost or market  value,  cost
                being  determined on the weighted  average method.  The physical
                inventory  counts  on the  dates  of  acquisitions  of the  four
                foreign subsidiaries were not performed.  Auditors supervise the
                2003 year ended physical  inventory  count and  ascertained  the
                ending inventory balances as of December 31, 2003.



                                      F-15

<PAGE>




                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2003 AND 2002

                g)  Property and Equipment

                The Company's  property and equipment are stated at the lower of
                cost or estimated fair market value on the date of  acquisition.
                Majority of the  properties and equipment are located in foreign
                country in China.  Depreciation  is provided  over the estimated
                useful lives of the respective assets on the straight-line basis
                ranging from five to forty  years.  The  Company's  policy is to
                evaluate the remaining lives and  recoverability in light of the
                current market conditions.  Leasehold improvements are amortized
                over  the  term  of  the  lease  (See  Note # 11,  Property  and
                Equipment).

                h)  Intangibles

                Per  Statement of  Financial  Accounting  Standard  (SFAS) #142,
                goodwill  and  other   intangible   assets  of  Hartcourt   with
                indefinite useful life will not be amortized, but rather will be
                tested at least annually for impairment.  Intangible assets that
                have finite  useful  lives will  continue to be  amortized  over
                their useful lives,  but without the  constraint of an arbitrary
                ceiling (See Note # 12, Intangibles).

                i)  Impairment of Long-Lived Assets

                Per SFAS #144,  impairment of  long-lived  assets is assessed by
                the Company  whenever  there is an indication  that the carrying
                amount  of the  asset may not be  recovered.  Recoverability  of
                these  assets  is  determined   by  comparing   the   forecasted
                undiscounted cash flows generated by those assets to the assets'
                net carrying  value.  The amount of impairment  loss, if any, is
                measured  as the  difference  between  the net book value of the
                assets and the estimated fair value of the related assets.

                The Company  evaluates the  recoverability  of long-lived assets
                during the year by measuring  the carrying  amount of the assets
                against the estimated  undiscounted future cash flows associated
                with them. At the time such flows of certain  long-lived  assets
                are not sufficient to recover the carrying value of such assets,
                the assets are adjusted to their fair values.









                                      F-16

<PAGE>




                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2003 AND 2002

                j)  Revenue Recognition

                Revenue  from sales of computer  related  products  and hardware
                from the newly acquired four  subsidiaries  are recognized  upon
                delivery of goods.  Cash payments  received  before  delivery of
                goods are recorded as trade deposit.

                k)  Income Taxes

                Hartcourt  is an US  company,  doing  business  through its four
                subsidiaries  located in China.  As of December  31,  2003,  the
                Company  has not  filed  its  2002  US  corporate  tax  returns.
                Management  justify its actions by claiming that it does not owe
                any US corporate taxes,  because Hartcourt has recurring losses.
                It believes  that  Hartcourt's  potential  liability is minimal.
                Auditor  takes an exception to the  Management  claim.  (See the
                Independent  Audit  Report,  and Note #23,  Income  Taxes.)  The
                Company  should provide for income taxes based on the provisions
                of  Statement  of Financial  Accounting  Standards  (SFAS) #109,
                "Accounting  for  Income  Taxes",   which  among  other  things,
                requires that  recognition of deferred  income taxes be measured
                by the  provisions  of enacted tax laws in effect at the date of
                financial  statements.  A  deferred  tax asset or  liability  is
                recorded for all temporary differences between financial and tax
                reporting.

                Deferred  tax  expense  (benefit)  results  from the net  change
                during the year of deferred tax assets and liabilities.

                Deferred tax assets are reduced by a valuation  allowance  when,
                in the  opinion of  management,  it is more likely than not that
                some  portion  or all of the  deferred  tax  assets  will not be
                realized.  Deferred tax assets and  liabilities are adjusted for
                the  effects  of  changes  in tax laws and  rates on the date of
                enactment.

                l)  Stock-Based Compensation

                The Company has adopted a method of accounting  for  stock-based
                compensation  plans as  required  by SFAS #123  "Accounting  for
                Stock-Based  Compensation".  SFAS #123 allows for two methods of
                valuing  stock-based  compensation.  The first method allows for
                the continuing application of Accounting Principle Board Opinion
                # 25 (APB # 25) in measuring stock-based





                                      F-17

<PAGE>





                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2003 AND 2002

                compensation,  while complying with the disclosure  requirements
                of SFAS #123.  The second method uses an option pricing model to
                value  stock   compensation   and  record  as  such  within  the
                consolidated   financial   statements.   Under   both   methods,
                compensation  cost for stock  options is measured as the excess,
                if any, of the fair market price of the  Company's  stock at the
                date of grant  over the amount an  employee  must pay to acquire
                the  stock.  Such cost is  charged to  operations.  The  company
                recorded its stocks based  compensation under APB # 25, and will
                continue  to apply  APB # 25,  while  complying  with  SFAS #123
                disclosure requirements.

                m)  Foreign Currencies Translation

                The  Company's  operating  entities  are  located  in a  foreign
                country.   Foreign   subsidiaries   maintain   their   financial
                statements in the local currency Reminbi ("RMB"), which has been
                determined to be the  functional  currency.  Substantially,  all
                operations   of  Hartcourt   are  conducted  in  China  and  the
                functional  currency is RMB. Assets and liabilities  denominated
                in the foreign  currency are translated into U.S. dollars at the
                rates in effect at the balance sheet date.

                Revenues and expenses are  translated  at average  rates for the
                year. Related translation adjustments are reported as a separate
                component of  stockholders'  equity,  whereas,  gains and losses
                resulting from foreign currency transactions are included in the
                results of operations.  For the year ended December 31, 2003 and
                2002, the foreign exchange loss is $9,500 and $9,407.

                n)  Fair Value of Financial Instruments

                SFAS  #  107,   "Disclosures   about  Fair  Value  of  Financial
                Instruments", requires disclosures of information about the fair
                value  of  certain   financial   instruments  for  which  it  is
                practicable  to  estimate  that  value.  For  purposes  of` this
                disclosure,  the fair  value of a  financial  instrument  is the
                amount at which the  instrument  could be exchanged in a current
                transaction between willing parties, other than in a forced sale
                or liquidation.

                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.

                                      F-18

<PAGE>




                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2003 AND 2002

                o)  Loss per Common Share

                Per SFAS #128,  "Earnings per Share", the Company is required to
                provide  the  calculation  of Basic  and  Diluted  earnings  per
                shares.  Basic earnings  (losses) per share includes no dilution
                and is computed by dividing income (or loss) available to common
                shareholders  by the weighted  average  number of common  shares
                outstanding for the period.  Diluted earnings (losses) per share
                reflect the potential dilution of securities that could share in
                the earnings of the entity. Since the Company incurred losses in
                2003 and 2002,  basic and diluted per share  amounts are treated
                as basically  the same.  If the  outstanding  stock  options and
                warrants were included, the effect would be anti-dilutive.

                p)  Going Concern

                As shown in the accompanying  consolidated financial statements,
                the Company  incurred a net loss from its operations of $758,480
                and  $2,559,409  for the years  ended on December 31 of 2003 and
                2002.  Negative cash flows from the operations of $4,519,384 and
                $1,852,669  were noted for the years ended December 31, 2003 and
                2002. These matters raise  substantial doubt about the Company's
                ability to continue as a going concern.

                The Company, despite the significant increase of its 2003 income
                and business activities,  has taken certain  restructuring steps
                to provide the  necessary  capital to continue  its  operations.
                These steps included:  1) acquire profitable  operations via the
                stock  exchanges  transactions,  2)  disposals  of  unprofitable
                operations,  3) the settlement of certain  matters of litigation
                or/and  disputes.  The Company has planned to continue  actively
                seeking   additional   funding  and   restructure  the  acquired
                subsidiaries to increase profits and minimize the liabilities.

                q)  Recently Issued Accounting Standards

                In July 2002, the FASB issued SFAS # 146,  "Accounting for Costs
                Associated  with Exit or  Disposal  Activities".  This  Standard
                requires costs associated with exit or disposal activities to be
                recognized  when they are  incurred.  The Company  estimates the
                impact of adopting these new rules will not be material.

                In October 2002,  the FASB issued SFAS # 147,  "Acquisitions  of
                Certain Financial Institutions." SFAS # 147 is effective October
                1,  2002.  The  adoption  of SFAS # 147 did not have a  material
                effect on the Company's financial statements.



                                      F-19

<PAGE>



                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2003 AND 2002


                In November  2002,  the FASB issued  FASB  Interpretation  # 45,
                "Guarantor's   Accounting   and  Disclosure   Requirements   for
                Guarantees,  Including  Indirect  Guarantees of  Indebtedness of
                Others" (FIN # 45). FIN # 45 clarifies  the  requirements  for a
                guarantor's  accounting for and disclosure of certain guarantees
                issued and  outstanding.  The  initial  recognition  and initial
                measurement  provisions of FIN # 45 are applicable to guarantees
                issued or modified  after  December  31,  2002.  The  disclosure
                requirements of FIN # 45 are effective for financial  statements
                for periods  ending after December 15, 2002. The adoption of FIN
                # 45  did  not  have  a  significant  impact  on  the  Company's
                financial statements.

NOTE 3         ACQUISITIONS AND INVESTMENTS
                  During the year ended December 31, 2003, the Company,  via its
                  BVI  subsidiary  (Hartcourt  Capital  Inc.)  acquired four (4)
                  Chinese  companies  located  and  operated  in  China.   These
                  companies  are in the  sale  and  distribution  of  computers,
                  monitors,  and other IT accessories  with relatively high unit
                  selling  prices  (ranging  somewhere  between  $100 and $900),
                  trading   volumes  and  low  gross  margins.   These  acquired
                  companies  do not  manufacture  any of  the IT  products.  All
                  products are purchased from other parties,  or  manufacturers,
                  and then resell the hardware to  customers.  As a result,  the
                  computers  distributions  entities do not require  significant
                  capital  and most of the  assets  were trade  receivables  and
                  inventories.
                  The Company  decided to  restructure  Guowei in 2004 (see Note
                  #26,  Subsequent Events)  Restructure of Guowei after the year
                  ended on December 31,  2003,  may incur  unexpected  costs and
                  expenses,  which will be included in the financial  statements
                  of 2004, when these expenses incurred.
                  The  entities  in the sale and  distribution  of IT  industry,
                  normally  with  limited  capital,  are  subject  fierce  price
                  competition. Each of the acquisitions was conducted through an
                  exchange  of  equity  shares  between  the  common  stocks  of
                  Hartcourt and that of  subsidiaries.  The aggregated  value of
                  the four  acquisitions is of $15,721,903.  As the Chinese laws
                  may  prohibit  foreign  companies  involved  in  the  computer
                  distribution  industry,  Hartcourt after  consulting its legal
                  advisors,  uses its  agents of  Chinese  citizens  to hold the
                  shares of the acquired subsidiaries.

                  The   share    exchanges   are    complicated    multinational
                  transactions. The execution of the four acquisition agreements
                  are  based on the  laws of Hong  Kong  Special  Administrative
                  Region (HKSAR) of China.  The legal  ownership of the acquired
                  four companies is held by the Chinese agents of Hartcourt.

                                      F-20

<PAGE>




                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2003 AND 2002

                  The sellers are the Chinese  citizens  who are still  minority
                  owners and involved in the  operations  of the four  different
                  entities, located at Shanghai city, Guangzhou city and Wenzhou
                  City of China.  The  management has engaged both Chinese legal
                  advisor and America  Attorney to ensure the  validity of these
                  agreements.   All  of  the  four  acquisition  agreements  are
                  exercised  in  China.   In  addition,   the  share   exchanges
                  information are updated at the Chinese Business Administrative
                  Bureau; a governmental registrar.

                  As the four (4) acquired foreign companies were privately held
                  by  foreign  owners,  who  did  not  have  the  US  accounting
                  knowledge,   nor  followed  American  corporate  practices  to
                  operate these foreign  entities.  It was noted that  different
                  sets of  accounting  records  were  maintained,  which are not
                  compatible to the US accounting  practice.  The  management of
                  Hartcourt  after   acquisitions,   selected  the  conservative
                  records  (when in  doubts,  using  lesser  amounts  of assets,
                  income and larger amounts of  liabilities,  expenditures)  and
                  re-constructed the financial  positions of the subsidiaries on
                  the acquisition dates. These reconstructed figures are used as
                  the beginning balances to operate the four subsidiaries during
                  the year of 2003.  Management  believes that the tax liability
                  inherited from the four acquired  entities is not  significant
                  as of December 31, 2003.

               a) Acquisition  of  Huaqing   Corporate   Development   Co.,  Ltd
                  ("Huaqing") in China

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

               The  consideration  for the  acquisition  was solely  paid by the
               issuance  of  15,960,474  and  1,340,455  common  shares  of  the
               Company,  restricted  under Rule of 144 of the  securities  laws,
               with the value of $0.138 and $0.64 per share respectively  (total
               consideration  equivalent to US$3,060,436)  for this acquisition.
               Under the  agreement,  Huaqing  is  promised  to  generate  a net
               operating profit of $540,000  (RMB4.5  millions) and an income of
               $48  millions  (RMB 4 billions)  for the year ended  December 31,
               2003.






                                      F-21

<PAGE>
                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2003 AND 2002

  Huaqing
  Condensed balance sheet
  As of the acquisition date, March 31, 2003
   CURRENT ASSETS
  Cash and cash equivalent                      $  713,235
  Account receivables                            2,695,813
  Inventories                                    1,081,498
  Due from related parties                         429,893
                                                ----------
TOTAL CURRENT ASSETS                             4,920,439
                                                ----------

  Properties & equipment, net                      456,646
  Other investment                                 475,043
                                                ----------
                                                   931,689
                                                ----------
                                                ----------
 TOTAL ASSETS                                    5,852,128
                                                ==========
 LIABILITIES & SHAREHOLDERS' EQUITY
 CURRENT LIABILITIES:
   Bank loan                                     2,330,793
   Account payables                              1,143,254
   Accrual and other payables                      398,033
   Due to related parties                          214,685
                                                ----------
 TOTAL CURRENT LIABILITIES                       4,086,765
                                                ----------
 SHAREHOLDERS EQUITY
   Common stock                                    853,224
   Accumulated profit                              912,138
                                                ----------
 TOTAL SHAREHOLDERS EQUITIES                     1,765,362
                                                ----------
 TOTAL LIABILITIES AND SHAREHODLERS' EQUITIES   $5,852,128
                                                ==========
              In addition, the following disclosures were made to better reflect
              the financial position of Huaqing as of December 31, 2003

                Note      1 Bank loans are secured by the  Huaqing's  properties
                          with a  Hauqing  director's  personal  guarantee,  and
                          corporate guarantee of an affiliate, Guowei.
                Note      2 A shareholder  (Shanghai Huaqing Economy Development
                          Co.,  Ltd)  issued  two  six-month  post-dated  checks
                          amounted to $1,553,038 (RMB13 million) to the Huaqing.
                          These two checks  were  discounted  at around 2% to 3%
                          for cash.  Cash is used as additional  working capital
                          for Huaqing.
                Note      3 Huaqing  Capital per tax filing  report in China was
                          larger than that of the management accounting records.
                          The management  accounting  record reflects the actual
                          cash invested by the shareholders.
                                      F-22

<PAGE>
                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2003 AND 2002

                 Note       4 The 2003 beginning retained earning does not agree
                            with  2002  closing  retained  earning.  During  the
                            audit,  it was noted that there were  different sets
                            of  accounting  records  and the  records  cannot be
                            fully reconciled.

               b)Acquisition   of   Guangzhou   Newhuasun   Computer   Co.,  Ltd
                 ("Newhuasun") in China

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

               The  total  consideration  for  the  acquisition  was  valued  at
               $3,304,597,  paid by the issuance of 13,769,156  common shares at
               value of $0.24 per share of  Hartcourt,  the newly issued  common
               shares are restricted  under Rule of 144 of the securities  laws.
               Under the  agreement,  Newhuasun  guaranteed  to  generate  a net
               operating  profit of $543,596  (RMB 4.5  millions)  and income of
               $48.3  millions  (RMB 4  billion)  for  the  current  year  ended
               December 31, 2003.  The Company has the right to cancel the sales
               agreement,  if  Newhuasun  cannot  meet  the  profit  and  income
               promised.
  Newhuasun
  Condensed balance sheet
  As of acquisition date April 30, 2003
CURRENT ASSETS
  Cash and cash equivalent                     $   515,648
  Account receivables                               11,242
  Inventories                                      945,235
  Prepayment, deposit & others                     307,722
  Due from related parties                       1,338,357
                                               -----------
TOTAL CURRENT ASSETS                             3,118,204
                                               -----------
   Properties & equipment, net                      (5,813)
                                               -----------
TOTAL ASSETS                                     3,112,391
                                               ===========
LIABILITIES & SHAREHOLDERS' EQUITIES
CURRENT LIABILITIES:
   Short term loan                                 613,779
   Accrual and other payables                    1,028,482
                                               -----------
TOTAL CURRENT LIABILITIES                        1,642,261
                                               -----------
SHAREHOLDERS EQUITIES
   Common stock                                $   241,598
   Accumulated profit                            1,228,532
                                               -----------
TOTAL SHAREHOLDERS' EQUITIES                     1,470,130
                                               -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITIES   $ 3,112,391
                                               ===========
                                      F-23
<PAGE>

                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2003 AND 2002

           Guangdong Newhuasun has experienced tight cash flow conditions,  with
           little  capitalization.  This company incurred losses and thus may be
           considered  as a going  concern,  after the year ended  December  31,
           2003.  The  financial  statements  do not include any  adjustment  or
           accrual to reflect the facts (see Note 2p, Going Concerns)

           Note 1  Banks  loans  are  secured  by  NewHuaSun's  fixed  deposits,
           inventories  and  directors'  personal  guarantee.  Note  2 The  2003
           beginning  retained  earning  did not  agree  with  the  2002  ending
           balance. During the audit, it was
                           noted that there were different sets of records which
                           cannot be reconciled nor  restructured to meet the US
                           standards.

               c)Acquisition  of  Shanghai  Guowei  Science and  Technology  Ltd
                 ("Guowei") in China
                 ---------------------------------------------------------------

               The Company acquired 45% equity interest of Guowei via its wholly
               owned  BVI  subsidiary,  HRCT,  on  April  30,  2003.  The  total
               consideration  for the acquisition was $4,345,517  which was paid
               by with the issuance of 10,863,792  common shares of the Company,
               restricted  under Rule of 144 of the securities laws, at value of
               $0.4 each (equivalent to $4,345,517). Under the agreement, Guowei
               is  guaranteed  to  generate  a net  profit of  $422,797  (RMB3.5
               millions) and turnover of $36.2  millions  (RMB300  millions) for
               the year  ended.  HRCT has the  right to  cancel  the  sales  and
               purchase agreement if Guowei cannot meet the requirements.

      Guowei
      Condensed balance sheet
      As of acquisition date April 30, 2003
       CURRENT ASSETS
 Cash and cash equivalent       $1,000,653
 Account receivables               627,012
 Inventories                     1,529,786
 Prepayment, deposit & others      536,934
 Due from related parties          733,752
                                ----------
TOTAL CURRENT ASSETS             4,428,137
                                ----------

 Properties & equipment, net       160,221
 Other investment                  422,797
                                ----------
                                   583,019
                                ----------
                                ----------
 TOTAL ASSETS                    5,011,156



                                      F-24

<PAGE>

                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2003 AND 2002

   LIABILITIES & SHAREHOLDERS' EQUITY
   CURRENT LIABILITIES:
  Bank loan                                        362,398
  Account payables                               2,942,283
  Accrual and other payables                       685,027
                                               -----------
TOTAL CURRENT LIABILITIES                        3,989,708
                                               -----------

SHAREHOLDERS EQUITIES
  Common stock                                   1,328,791

  Accumulated profit (loss)                       (307,343)
                                               -----------
TOTAL SHAREHOLDERS' EQUITIES                     1,021,448
                                               -----------

                                               -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITIES   $ 5,011,156
                                               ===========


               The following  facts are  disclosed  for the  GuoWei's  financial
                 position as of December 31, 2003

                Note 1 Banks loans are secured by GuoWei director's property and
                corporate guarantee of an affiliate,  Huaqing. Note 2 During the
                audit, it was noted that the company's China tax invoices cannot
                be reconciled during the year
                           of 2003.
                Note       3 The total amount of share  capital as stated in the
                           report  solely for the tax filing  purpose was larger
                           than that of the  amount as stated in the  management
                           accounting records. The management accounting records
                           reflect the actual cash invested by the  shareholders
                           while the tax filing  report only records the nominal
                           amount  of  share  capital  of the  company  so as in
                           compliance with the China regulation.
                Note       4 The 2003 beginning  retained  profit does not agree
                           with 2002 ending retained  profit.  During our audit,
                           it was  noted  that  there  were  different  sets  of
                           accounting  records and those records cannot be fully
                           reconciled nor restructured to meet the US standards.









                                      F-25

<PAGE>
                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2003 AND 2002

     d) Acquisition of Wenzhou ZhongNan Computer Group of Companies ("ZhongNan")
------------------------------------------------------------------------

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

     Restricted  under Rule of 144 of the securities  laws, under the agreement,
ZhongNan  promised to generate a net profit of $326,158  (RMB2.7  millions)  and
income of $24.16  millions  (RMB200  millions) for the year ended 2003. HRCT has
the right to cancel the sales  agreement  and  divested  ZhongNan,  if  ZhongNan
cannot meet the requirements performance.
--------------------------------------------------------------
ZhongNan
--------------------------------------------------------------
Condensed balance sheet
--------------------------------------------------------------
As of acquisition date April 30, 2003
--------------------------------------------------------------
CURRENT ASSETS
--------------------------------------------------------------
Cash and cash equivalent                          $    137,075
--------------------------------------------------------------
Account receivables                                  1,262,530
--------------------------------------------------------------
Inventories                                          1,281,993
--------------------------------------------------------------
Prepayment, deposit & others                         1,152,190
--------------------------------------------------------------
TOTAL CURRENT ASSETS                                 3,833,788
--------------------------------------------------------------
Properties & equipment, net                              9,602
--------------------------------------------------------------
TOTAL ASSETS                                         3,843,390
--------------------------------------------------------------
LIABILITIES & SHAREHOLDERS' EQUITY
--------------------------------------------------------------
CURRENT LIABILITIES:
--------------------------------------------------------------
Bank loan                                              205,359
--------------------------------------------------------------
Bill payables                                          120,799
--------------------------------------------------------------
Account payables                                        87,183
--------------------------------------------------------------
Accrual and other payables                           1,913,051
--------------------------------------------------------------
TOTAL CURRENT LIABILITIES                            2,326,392
--------------------------------------------------------------
SHAREHOLDERS EQUITIES


                                      F-26

<PAGE>

                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2003 AND 2002



--------------------------------------------------------------
Common stock                                         1,449,591
--------------------------------------------------------------
Accumulated profit                                      67,407
--------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITIES                         1,516,998
--------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITIES      $  3,843,390
--------------------------------------------------------------

     In addition, the following notes were made to better disclose the financial
position of ZhongNan as of December 31, 2003

     Note 1 Banks loans are secured by ZhongNan's fixed deposits.


THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002

     e) Investment in Genius Technology International Limited ("GTI")

     During the year of 2003,  the  Company  via its wholly  own BVI  subsidiary
      disposed off Sinobull  Information Co., Ltd to a non-related company (GTI)
      in exchange for the approx 17% (57,826,793 shares at value of 0.0071 each,
      amounted to $410,163) interest of GTI.

     f)  Investment  in Guowei  Digital  Science  and  Technology  Ltd  ("Guowei
      Digital")

     Guowei Digital is a 70% owned subsidiary of Guowei. With the acquisition of
      Guowei via the HRCT, the Company  ultimately owns 31.5% equity interest of
      Guowei  Digital.  During  the year ended  December  31 2003,  the  Company
      recorded a total investment amount of $422,797 in Guowei Digital.

     g)  Investment  in HangZhou  Huaqing  Corporate  Development  Co., Ltd ("HZ
      Huaqing")

     HZ Huaqing is a 55% owned  subsidiary of Huaqing.  With the  acquisition of
      Huaqing via the HRCT, the Company  ultimately  owns 28.05% equity interest
      of HZ  Huaqing.  During  the year  ended  December  31 2003,  the  Company
      recorded a total investment amount of $672,876 in HZ Huaqing.

     h) Investments-Under Cost method

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



                                      F-27

<PAGE>

                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2003 AND 2002


                                                             2003          2002
                                                          ----------    --------

Investment in Education Program                            $100,000     $100,000
Investment in Haike Caijin                                        0       30,000
eMPACT                                                      300,000      300,000
Investment in GTI (see 3e)                                  410,163            0
Investment in Guowei Digital (see 3f)                       422,797            0
Investment in HZ Huaqing (see 3g)                           672,876            0
                                                         ----------    ---------
Total investment                                          1,905,836      430,000
Provision on other investment                             (400,000)            0
Total                                                    $1,505,836     $430,000
                                                         ----------    ---------
     Hartcourt  consolidated  loss included the investment  income ($197,833) of
Hanzhou Huaqing Corp  Development  Co.("Hanzhou  Huaqing") and the  consolidated
balance sheet included the investment of Guowei Digital Science & Technology Ltd
and Hanzhou Hauqing were $422,797 and $672,876, respectively in 2003.

NOTE 4  FOREIGN OPERATING RISKS

               The main business and the  operations of Hartcourt are located in
               China as of December  31,  2003.  The income  generated  in China
               represents  the majority  income of Hartcourt  for the year 2003,
               ended on December 31.

               Operating  business  in  a  foreign  country  such  as  China  is
               different that of United States. The Chinese business environment
               uses different  languages,  and has different  business  culture,
               management  practice  as well as legal  practices,  which are not
               normally  accustomed  to that of the  United  States.  A  special
               attention is needed to evaluate the foreign risk contingency.  No
               special liabilities reserve is made in the accompanying financial
               statements  for the years ended on December  31, 2003 and 2002 to
               reflect  these foreign  operating  risks.  This foreign  business
               risks and  contingencies  should call for a special  attention to
               the readers of Independent Auditors Report.

Note 5  COST OF GOODS SOLD

               As mentioned  previously,  the Management after acquired the four
               subsidiaries  has constructed  the inventory  figures for each of
               the four  entities  acquired  before the year ended  December 31,
               2003. The inventory balances together with the detailed purchases
               of  inventories  and  sales  records  were  used  to  serve  as a
               reasonable basis for the computation of Cost of Good Solds during
               the  years  2003  and  2002,   as   $106,082,763   and   $362,382
               respectively.



                                      F-28

<PAGE>

                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2003 AND 2002


NOTE 6  NET OPERATING LOSS

               The  company  has  incurred  losses as  result of its  continuing
               operations  for the years ended December 31, 2003 and 2002 in the
               amount of $678,291 and $3,473,451, respectively.


NOTE 7 ACCOUNTS RECEIVABLE

               Accounts receivable as of December 31, 2003 and 2002 consisted of
               the following:

                                                  2003                   2002
                                           ---------------         -------------
     Accounts receivable                      $ 4,017,087            $ 1,376,269
     Less: allowance for doubtful accounts              0            (1,115,963)
                                           ---------------         -------------
                                              $ 4,017,087               $260,306
                                           ===============         =============

              There were  $4,017,087  and $260,306  accounts  receivable for the
              years ended December 31, 2003 and 2002  respectively.  Of the 2003
              account  receivables of $4,017,087,  $3,385,335 was related to the
              receivables  of the  four  foreign  subsidiaries  acquired  in the
              current  year.   Proper   doubtful   debts  were  written  off  on
              conservative  basis  in the  year of 2002,  therefore  no  further
              provisions are needed.

NOTE 8   RECEIVABLES FROM RELATED PARTIES

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

                                                          2003            2002
                                                      ----------     -----------
   Due from a minority shareholder (Note 1)           $  472,089     $         0
   Due from the directors of the subsidiaries (Note 2)   840,870               0
   Due from a related company (Note 3)                   621,835               0
                                                      ----------     -----------
   Total receivables                                  $1,934,794     $         0
--------------------------------------------------------------- ----------------








                                      F-29

<PAGE>

                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2003 AND 2002

             Note  1      The amount was due to Huaqing (51% owned subsidiary of
                          the  Company,  a  related  party)  by its  shareholder
                          through business transactions.
             Note  2      Of the  $840,870,  the amount of  $367,416  was due to
                          Guowei (45% owned  subsidiary  of the  Company) by its
                          director,  and  $473,454  was  due to  Guowei  Digital
                          (31.5%  owned  associated  company of the  Company,  a
                          related  party)  by  its  director   through  business
                          transactions.
             Note  3      The amount was due to Newhuasun (45% owned  subsidiary
                          of  the  Company)  by  its  related   company  through
                          business transactions.

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

NOTE 9   NOTES RECEIVABLE
Notes  receivable  as of December  31, 2003  and  2002 consist of the following:

                                                        2003          2002
                                                       ------        ------

     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.                  $2,027,509   $1,956,012

     Note   receivable   from   Shanghai  Wind
     Information   Co.,   Ltd.,  non  interest
     bearing, non-secured and due on demand              338,573      439,759

     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                              70,000       70,000
                                                      ----------   ----------
     Total                                            $2,436,082   $2,465,771

     Summary of notes receivable:

     Current portion                                  $  608,573   $  709,759
     Non-current portion                               1,827,509    1,756,012
                                                     -----------  -----------
     Total                                            $2,436,082   $2,465,771
                                                     ===========  ===========

     The Company  recorded a provision for doubtful  accounts of the above notes
     receivable  $101,876 and $0 for the years ended  December 31, 2003 and 2002
     respectively.

                                      F-30

<PAGE>

                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2003 AND 2002


NOTE 10  RELATED PARTY TRANSACTIONS

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

     a)  Huaqing,  a 51% owned subsidiary of the Company,  sold $19,154,916 (RMB
         158,568,227)  computer monitors to its minority  shareholder  (Shanghai
         Huaqing  Economic  Development  Co.,  Ltd) at a small profit during the
         year of 2003.

         Huaqing   sold   $10,248,626   (or   RMB84,840,180)   monitors  to  its
         unconsolidated subsidiary at a small profit as of December 31, 2003.

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

         A shareholder  of Huaqing  issued two (2)  post-dated  checks of amount
         $1,553,038  (or  RMB13  million)  to  Huaqing,  the  checks  were  then
         discounted  for cash by a bank as working  capital  to finance  Huaqing
         operation.

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

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

     d)  Other related party transactions are disclosed on Note # 8, Receivables
         From Related Parties



















                                      F-31

<PAGE>
                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2003 AND 2002

NOTE 11  PROPERTIES AND EOUIPMENT

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

                                                    2003              2002
                                                 -------------    --------------
     Computer and transmission equipment            $       0         $ 974,241
     Building                                         357,463                 0
     Office equipment and computers                   209,103           402,502
     Furniture and fixtures                            27,875           183,225
     Leasehold improvements                                 0            21,236
     Vehicles                                         315,712            13,090
     Computer equipment held under capital lease            0                 0
                                                 -------------    --------------
                                                      910,153         1,594,294
     Less: accumulated depreciation                  (223,717)       (1,119,773)
                                                 -------------    --------------
     Properties and equipment, net                  $ 686,436        $  474,521
                                                 =============    ==============

     Depreciation  expenses  for the years ended  December 31, 2003 and 2002 are
     $91,068 and $342,147 respectively.

NOTE 12  INTANGIBLES

     Goodwill  of  12,926,782  (net  of  disposals)   resulting  from  the  2003
     acquisitions  of subsidiaries is recorded under this account as of December
     31, 2003. The balance consists of the following activities:

     a) Goodwill from the acquisition of HuaQing is summarized as follows:

                                                                         2003
                                                                    ------------
        Goodwill                                                    $  2,160,101
        Less: Disposal of subsidiaries                                         0
                                                                    ------------
        Goodwill, net                                               $  2,160,101
                                                                    ============

     b) Goodwill from the acquisition of NewHuaSun is summarized as follows:

                                                                         2003
                                                                    ------------
        Goodwill                                                    $  2,643,094
        Less: Disposal of subsidiaries                                         0
                                                                    ------------
        Goodwill, net                                               $  2,643,094
                                                                    ============



                                      F-33
<PAGE>


                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                           DECEMBER 31, 2003 AND 2002


c) Goodwill from the acquisition of GuoWei is summarized as follows:

                                                                         2003
                                                                    ------------
        Goodwill                                                    $  3,885,865
        Less: Disposal of subsidiaries                                         0
                                                                    ------------
        Goodwill, net                                               $  3,885,865
                                                                    ============

d) Goodwill from the  acquisition  of ZhongNan as of December 31, are summarized
as follows:

                                                                         2003
                                                                    ------------
        Goodwill                                                    $  4,237,722
        Less: Impairment                                                       0
                                                                    ------------
        Goodwill, net                                               $  4,237,722
                                                                    ============

     Goodwill from the acquisition of Hartcourt  Companies Ltd., incurred during
     2002, has been written down. The  reconciliation of the $1,562,788 with the
     remaining  net amount of $ 624,689 as of December 31, 2002 was written down
     to $0 in 2003 as follows:

                                                        2003            2002
                                                   ------------    ------------
        Goodwill                                   $  1,562,788    $  1,562,788
        Less: Impairment                             (1,484,106)       (859,417)
        Less: Accumulated depreciation                  (78,682)        (78,682)
                                                   ------------    ------------
        Goodwill, net                              $          0    $    624,689
                                                   ============    ============

NOTE 13  DISCONTINUED OPERATIONS

In April of 2003,  Hopeful  Internet  Technology  Limited  ("HIT"),  a 51% owned
subsidiary  of the Company,  disposed off its wholly owned  foreign  subsidiary,
Shanghai Sinobull  Information Corp. Ltd. to a non-related  party.  According to
the sales agreement, HIT received 57,826,793 common shares (or equivalent to 17%
ownership)  of the buyer.  The company  recorded a loss of $69,123 in connection
with the disposal.







                                      F-34

<PAGE>


                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2003 AND 2002



In June of 2003, AI Aisa Inc ("AI"),  a wholly owned  subsidiary of the Company,
disposed off all its 85% interest in  Logicspace  Asia Ltd  ("Logicspace")  to a
non-related party.  According to the sales and purchase  agreement,  AI received
cash of $10 together with an option to purchase up to 49% equity interest of the
buyer for $10.  The  Company  recorded a loss of $4,440 in  connection  with the
disposal. As of December 31, 2003, the Company did not exercise the option.

In June of 2003,  Hartcourt  Company Ltd ("HRCT"),  a wholly owned subsidiary of
the Company,  entered into two (2) sales  agreements  to dispose off all its 85%
interest in StreamingAsia Ltd ("Streaming") and SyndicateAsia Ltd ("Syndicate").
According to each sale agreement,  HRCT received a cash of US$10,  together with
an option to purchase up to 49% equity interest of the buyer. As of December 31,
2003, the company did not exercise the option. The company recorded a total gain
of $472,518 in connection with these disposals.

In November of 2003,  Tiandi Hulian  Technologies  Ltd  ("Tiandi"),  a 51% owned
subsidiary  of the  Company,  was stroke off in Hong Kong and a loss of $234,179
was recorded.

Hartcourt  Capital Ltd ("HRCT  Capital") and  Hartcourt  Capital Asia Ltd ("HRCT
Asia"), two wholly owned subsidiaries of the Company,  were being stroked off in
Hong Kong in August of 2003 and in February of 2004 respectively. As a result of
these closed down,  losses of $4,550 and $4,585 were  recorded for the disposals
respectively.

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














                                      F-35

<PAGE>
                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2003 AND 2002

Information  relating to the operations of the subsidiaries up to the periods of
disposal during the year ended on December 31, 2003 is as follows:

Loss on discontinued operation
             Sinobull                    FTL           Others              Total
----------------------- -------------------- ---------------- ------------------
Revenue      $ 91,268              258,528                 0          $ 349,796
----------------------- -------------------- ---------------- ------------------
 Less:
Expenses      140,778              255,814                 0            396,592
----------------------- -------------------- ---------------- ------------------
             $(49,510)               2,714                 0            (46,796)
----------------------- -------------------- ---------------- ------------------

NOTE 14   BANK LOANS

As of December 31, 2003,  there are 4 bank loans,  secured,  and with interests.
The summary of this loans is as follows:

<TABLE>
                             Interest
                               rate
Subsidiaries   Amount          (Per    Due Date
Name                          annual)                   Secured By
------------- ------------ ----------- -------- ----------------------------------------
<S>           <C>            <C>       <C>       <C>
Wenzhou       $ 120,793      4.00%     2/2004    Fixed deposit amounting to RMB 1 million
ZhongNam

Huaqing       $ 376,048      4.80%     10/'2004  Properties & subsidiaries Director
                                                 Personal Guarantee

Guowei        $ 362,398      4.86%     9/2004    Corporate & Director Guarantees
                                                 Personal properties

Newhuasun     $ 724,734      5.00%     10/2004   Subsidiaries Director / Financial
                                                 controller
                                                 of Hartcourt personal guarantee
              ------------
              $ 1,583,973
              ============
</TABLE>

The loan for the current and prior years ended  December 31, 2003 and 2002 is as
follows:

                                                             2003           2002
                                                       ----------     ----------
                      Current portion                  $1,583,973     $        0
                      Non current portion                       0              0
                                                       ----------     ----------
                      Total Bank loan                  $1,583,973     $        0
                                                       ==========     ==========
                                      F-36
<PAGE>





                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2003 AND 2002


NOTE 15   SHORT-TERM LOANS

     As of December 31, 2003, there is 2,096,536 of short term loan outstanding,
     as follows:

                                                   2003                 2002
                                            -----------------    ---------------
        Current portion                     $       2,096,536    $             0
        Non current portion                                 0                  0
                                            -----------------    ---------------
        Total Short-term loans              $       2,096,536    $             0
                                            =================    ===============



     Of the  $2,096,536  short-term  loan,  $1,612,977 was borrowed by NewHuaSun
     from its three (3)  non-related  companies,  with 1% and 3% interest  rates
     bearing per annum, and $4,831 (RMB40,000) interest per month. The remaining
     balance of  $483,559  short term loan was  borrowed  by  ZhongNan  from its
     related parties, which is unsecured, interest free and repayable on demand.


NOTE 16  LOAN FROM STAFF

     Huaqing,  a 51% owned subsidiary of the Company,  issued short-term bond to
     its staff and employees to raise additional  working  capital.  The bond is
     with 10 % interest  per annum and payable at the end  of  the  year.  As of
     December 31, 2003 the amount was not settled.

NOTE 17  NOTES PAYABLE

     Notes payable are summarized as follows:

                                                       2003            2002
                                                 ---------------- --------------
        Current-portion                                     $   0      $  18,988
        Non-current portion                                     0              0
                                                 ---------------- --------------
        Total                                               $   0      $  18,988
                                                 ================ ==============



                                      F-37

<PAGE>
                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                  (Continued)
                           DECEMBER 31, 2003 AND 2002

NOTE 18  PAYABLES TO RELATED PARTIES

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

                                                     2003               2002
                                                 --------------  ---------------
Payable to shareholders                          $      685,370  $     1,343,011
Payable to affiliated companies (Note 1)              1,450,301                0
                                                 --------------  ---------------
                                                 $    2,135,671  $     1,343,011
                                                 ==============  ===============

     Note 1 Guowei  Digital  Science and  Technology  Ltd and  HangZhou  Hauqing
     Corporation Development Ltd are 31.5% and 28% owned affiliated companies of
     Hartcourt,   with  the   overdue   payable  of  $378,311   and   $1,071,990
     respectively, as of December 31, 2003.

NOTE 19  ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

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

                                                  2003                2002
                                                ------------         -----------
Accrued officer's salaries                      $   73,971           $    81,632
Accrued director's fee                              21,000                48,000
Accrued taxes                                       46,217                     0
Accrued legal settlement                                 0               100,000
Accrued professional fees                           30,000                30,000
Other current liabilities                          103,687                97,633
                                                ------------         -----------
Total                                           $  274,875           $   357,265
                                                ============         ===========

     The additional $1.3 million legal provision is recorded under Commitments &
     Contingencies, of the current liability section of balance sheet.

NOTE 20   DUE TO SHAREHOLDERS

     The Company  has signed  stock sales  agreement  with its two  shareholders
     Enlight Corporation Ltd ("Enlight") and Chateau D'orly Ltd ("Chateau"),  to
     raise additional working capital for its operations. There are $150,000 and
     $79,936  payables due to Enlight and Chateau  respectively,  as of December
     31, 2003.  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.  Enlight  is a major
     shareholder of Hartcourt which owns  16,922,640  common shares of Hartcourt
     (or  equivalent  to 9.8% of the  total  issued  and  outstanding  Hartcourt
     shares),  based on the stocks  transfer agent  records,  as of December 31,
     2003.


                                      F-38

<PAGE>






                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2003 AND 2002


NOTE 21  COMMITMENTS AND CONTINGENCIES

     A) Employment Agreements

     The  founder,  Former CEO of the  Company,  Mr. Alan Phan  retired from the
     position of CEO in 2002, and from Chairman in 2003.  Mr. Manui,  former CFO
     resigned in 2002. As a result, the current senior management including both
     CEO and CFO,  are  recruited  to the key  management  positions in 2002 and
     2003. The employment  agreements stipulate that senior executives,  CEO and
     CFO of the Company,  can be terminated without causes with a written notice
     of 90 days or less.  This  clause  can be a  potential  contingency  to the
     Company in light of the fact that the Company is a public company which may
     require higher standards of corporate governance.

     On June 1, 2003,  the Company  renewed  his  employment  contract  with its
     Chairman and CEO,  Mr. David Chen to provide  salary,  shares  option,  and
     other fringe benefits  through May 31, 2004.  Minimum salary payments under
     the  contract  amounted to $150,000  per year.  Payments to the CEO will be
     made in equal monthly  installments  of $6,250 cash and $6,250 worth of the
     Company's  common  shares  at fair  market  value 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.
     During  the year of 2003,  Mr.  Chen  received  112,133  shares  (valued at
     $11,750)  and $68,750 cash for his  compensation.  As of December 31, 2003,
     there is no long-term  employment agreement for Mr. Chen as of December 31,
     2003. As a result, Mr. Chen's employment contract will be expired on May 31
     2004.

     On  December 1, 2003,  the Company  recruited  Ms.  Carrie  Hartwick as its
     President & CFO. The contract  provides  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.  During the year of 2003, Ms.
     Hartwick  received  $5,000  cash  for  her   compensation.   Ms  Hartwick's
     employment  will be  expired  in  November  of 2004.  One  year  employment
     contract  may  not  attract  and  retain  qualified  persons for the senior
     positions, thus can be a potential contingency to Hartcourt.






                                      F-39

<PAGE>




                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2003 AND 2002

     B) Operating Leases

     The   Company   leases  its  offices  and   facilities   under   long-term,
     non-cancelable lease agreements expiring at various dates through December,
     2004.  The  non-cancelable  operating  lease  agreements  require  that the
     Company pays certain operating  expenses  applicable to the leased premises
     according to the Chinese Laws. Rental expenses for the years ended December
     31, 2003 and 2002 were $611,161 and $162,006, respectively.

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

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

     (C) Consulting Agreement

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

     (D) Legal Proceedings

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

                                      F-41

<PAGE>



                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2003 AND 2002


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

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

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

     e) The Company Is Also A Party Possibly Subject To Various Claims And Legal
     ---------------------------------------------------------------------------
     Proceedings arising out of the normal course of its business.  These claims
     -----------
     and legal  proceedings  relate to contractual  rights and  obligations  and
     employment  matters.  While  there  can be no  assurance  that  an  adverse
     determination  of any such matters could not have a material adverse impact
     in any future period,

                                      F-42

<PAGE>


                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2003 AND 2002

     management does not believe,  based upon information  known to it, that the
     final  resolution  of any of these  matters  will have a  material  adverse
     effect  upon the  Company's  consolidated  financial  position  and  annual
     results of operations and cash flows.

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

     g) Potential Liabilities Relating To the Tax Liabilities to US Taxing
     ---------------------------------------------------------------------
     Authoritiesand Foreign Taxing Agents
     ------------------------------------

     As  mentioned in the  Independent  Audit  Report,  that  Hartcourt  has not
     prepared its US Federal and state  corporate tax filings for its operations
     ended  December  31,  2002  which is  overdue,  as of  December  31,  2003.
     Hartcourt  management  believes that  Hartcourt  incurs losses in the past,
     thus is late for the  preparation  of its 2002 US tax  returns.  Management
     also  indicated  that the Chinese sales tax returns were filed on a monthly
     basis to the local Chinese taxing authorities.  Hartcourt's tax liabilities
     in China are limited,  because the acquisition  agreements contain a clause
     that the Chinese  original owners of the acquired  entities are to bear all
     tax liabilities prior to Hartcourt's acquisitions.  As mention in Note # 3,
     Acquisition and Investments,  the records of the four acquired subsidiaries
     were not being  reconstructed to determine the tax  liabilities,  which may
     due to the Chinese taxing authorities. (See Note #23, Income Tax)

NOTE 22  SHAREHOLDERS' EQUITY

     (A)  Capitalization The total number of equity shares which the Company has
     the authority to issue is 260,001,000.  It consist of 250,000,000 shares of
     common stock,  $0.001 par value,  1,000 shares of original preferred stock,
     $0.01 par value (the Original  Preferred Stock), and preferred series A, B,
     C, D, and AB stock are 4,000, 2,000, 1,500, 10,000 and 25,000 respectively.
     The total  common  shares  of the  company  issued  and  outstanding  as of
     December  31, 2003 and December 31, 2002 are  171,157,104  and  88,518,023,
     respectively.

                                      F-43

<PAGE>

                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2003 AND 2002


     (B) Original Preferred Stock

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

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

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

     (C) Class A Preferred Stock

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

     (D)  Series  A  9%  Convertible  Preferred  Stock  Non-voting   convertible
     preferred stock,  4,000 shares authorized with a stated value of $1,000 per
     share.  Holders of shares shall be entitled to receive cumulative dividends
     at a rate equal to 9% per annum.  Series A convertible  preferred  stock is
     subject  to  redemption  at any time,  at the option of the  Company,  at a
     redemption  price  equal to  $1,000  per  share  plus  accrued  and  unpaid
     dividends to the date of redemption. No Series convertible preferred stocks
     were issued and outstanding as of December 31, 2003.

     (E) Series B 9% Convertible Preferred Stock

     Non-voting  convertible  preferred  stock,  2,000 shares  authorized with a
     stated  value of $1,000 per share.  Holder of shares  shall be  entitled to
     receive  cumulative  dividends  at a rate equal to 9% per  annum.  Series B
     convertible  preferred  stock is subject to  redemption at any time, at the
     option of the  Company,  at a  redemption  price equal to $1,000 per share,
     plus accrued and unpaid  dividends to the date of  redemption.  No Series B
     convertible  preferred stocks were issued and  outstanding,  as of December
     31, 2003.




                                      F-44

<PAGE>

                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2003 AND 2002


     (F) Series C Redeemable Preferred Stock

     Non-voting, non-participating redeemable preferred stock, 1,500 authorized,
     with a par value of $1,000 per share. Series C preferred stock is junior to
     the original preferred stock and any other class or series of capital stock
     of the Company which are  specifically  ranked senior (senior  securities).
     Series C preferred  stock is redeemable  at any time, at the  discretion of
     the  Company,  at a  redemption  price of  $1,000  per  share.  No Series C
     redeemable preferred stocks were issued and outstanding, as of December 31,
     2003.

     (G) Series D Convertible Preferred Stock

     Voting convertible  preferred stock, 10,000 shares authorized with a stated
     value of $1,000 per share. Holders of Series D Convertible  Preferred Stock
     shall be  entitled  to receive,  when  declared by the Board of  Directors,
     dividends  at par with holders of the  Company's  common  stock,  as if the
     Series D Convertible  Preferred  Stock had been converted into common stock
     on the record date for the payment of dividend.  Each outstanding  share of
     Series D Convertible Preferred Stock shall be convertible, at the option of
     its  bolder,  at any time,  into a number of shares of common  stock of the
     Company at a conversion rate equal to $1,000 divided by the market price of
     the Company's  common stock. No Series D convertible  preferred stocks were
     issued and outstanding, as of December 31, 2003.

     (H) Series AB Convertible Preferred Stock

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

     (I) Common Stock Issued for Cash

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










                                      F-45
<PAGE>




                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2003 AND 2002


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

     (J) Common Stock Issued for Services

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

     Of the total shares issued  589,460  shares of common stock for services to
     four  Directors  of the  Board,  and two Member of Audit  Committee  of the
     Company with a fair value of $64,750.  The Company issued  3,443,107 shares
     of common  stock to Hartcourt  CEO and CFO,  and a consultant  (who was the
     Chairman, founder of the Company) in lieu of compensation for services with
     a fair value of $359,816.

     During 2003,  Hartcourt  issued  1,857,900 shares of common stock valued at
     $262,145 to staff,  officers,  former  officers  and  directors  in lieu of
     compensation and services.

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

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

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

     (K) Common Stock Issued for Warrants

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










                                      F-46

<PAGE>



                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2003 AND 2002


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

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

     (L) Common Stock Issued for Stock Options

     During 2003,  David Y. Chen,  exercised his 1 million stock options and the
     Board of  Directors  agreed to  extend  one more  year of his  remaining  1
     million  stock options  granted in June 2002,  which was expired on May 31,
     2003.

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

     (M) Common stocks issued for investment and acquisition

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

     (N) Cancellation of shares

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

NOTE 23      INCOME TAXES


             Hartcourt,  a US company, is doing business mainly through its four
             foreign  subsidiaries  located in China for the year ended December
             31,  2003.  The Company is subject to both US taxes and China taxes
             for its overseas  operations.  As of December 31, 2003, the Company
             has not filed its US Federal  corporate  tax  returns  for the year
             ended on December 31, 2002 and 2003.  Management claims it does not
             have tax liabilities to the US government in 2002 and 2003, because
             Hartcourt has recurring losses in the past years.  Auditor takes an
             exception  to the  claim.  As noted in Note#  21,  Commitments  and
             Contingencies,  that auditors were not provided enough  information
             to verify the tax records of the Hartcourt  operations  both in the
             US and overseas.  The management agrees to take an exception on the
             tax  issues.  As a  result,  we  disclose  that we were  unable  to
             reconcile  the  tax  records  of  Hartcourt's  operations  and  the
             accompanying financial statements does not include any provision to
             this potential tax liabilities to different taxing authorities thus
             qualify these tax issues. (See the Independent Auditor Report).





                                      F-47

<PAGE>


                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2003 AND 2002


             The Company  should have deferred tax assets for the tax effects of
             temporary  differences  between  financial and tax reporting  years
             ended  December 31, 2003 and 2002.  The deferred tax assets  should
             consist  primarily  of net  operating  losses  and  impairments  of
             investments  and  goodwill.  The  Company  should  be  eligible  to
             establish  a 100%  valuation  allowance  against the  deferred  tax
             assets at December 31, 2003 and 2002,  because management is unable
             to determine if it is more likely than not that these net operating
             losses  and   impairments  of  investments  and  goodwill  will  be
             realized.

             Impairment of  investments  and goodwill may not deductible in 2003
             or 2002 for income tax purposes.  Losses on investments  for income
             tax purposes may be taken in the year the  respective  transactions
             are  completed.  Goodwill can be amortized  over fifteen  years for
             income  tax  purposes  or until the  Company  has  disposed  of its
             ownership in the entity in which the goodwill relates.  Due to lack
             of sufficient tax  information,  the following  analysis  cannot be
             performed to reconcile the tax differences.

                Current:                         2003                  2002
                                          ----------------   -------------------
                Federal                   $           N/A    $            N/A
                State                                 N/A                 N/A
                Deferred-Federal and State            N/A                 N/A
                Change in Valuation Allowance         N/A                 N/A
                Income tax expense (benefit)          N/A                 N/A
                                          ----------------   -------------------
                                          $           N/A   $             N/A
                                          ================   ===================



             The Company's tax expense  differs from the  "expected" tax expense
             for the years ended  December  31, 2003 and 2002,  is  estimated as
             follows:
                                                           2003        2002
                                                        ---------  -----------

             U.S. Federal income tax provision benefit  $    N/A   $ (196,138)
             Effect of net operating loss carry-forward      N/A      196,138
                                                        ---------  -----------
                                                        $    N/A   $        0
                                                        =========  ===========






                                      F-48

<PAGE>




                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2003 AND 2002


             Auditors  make a disclosure  on these  potential  tax  liabilities,
             possibly  due to both the US and  foreign  tax  authorities  in the
             accompanying  financial  statements.  (See  the  Independent  Audit
             Report) The tax effects of temporary  differences that gave rise to
             significant  portions of  deferred  tax assets and  liabilities  at
             December 31 are as follows:

                                                   2003                2002
                                             -----------------   ---------------
        Deferred tax assets:
        Net operating loss carry-forward     $           N/A     $  4,554,438
        Total gross deferred tax assets                  N/A        4,554,438
        Less valuation allowance                         N/A       (4,554,438)
                                             -----------------   ---------------
        Net deferred tax assets              $           N/A      $          0
                                             =================   ===============


             The Company may have the US Federal  and State net  operating  loss
             carry-forwards.  The regular  net  operating  loss  carry-forwards,
             which are approximately the same as the alternative minimum tax net
             operating  loss  carry-forwards,  if not  utilized,  will expire in
             varying  amounts from 2004 through 2024,  respectively  for Federal
             and State.  The  realization of any future income tax benefits from
             the utilization of net operating losses may be limited. Federal and
             state  tax  laws  provide  that  when a more  than  50%  change  in
             ownership of a company occurs within a three-year  period.  The net
             operating loss may be limited.  It has not been  determined if such
             change has occurred.

             The  valuation  allowance  at January 1, 2003 and the net change in
             the valuation allowance during the year ended December 31, 2003 has
             not been determined at this time.















                                      F-49

<PAGE>



                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2003 AND 2002

NOTE 24       STOCK OPTION PLAN AND WARRANTS

             (A)  Stock Option Plan

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

             The following table summarizes the activity in the plan:

                                                                       Weighted
                                                                        Average
                                                          Number of    Exercise
                                                            Shares       Price

Shares under option at December 31, 2001                    320,000       1.30
Granted                                                   5,000,000       0.27
                                                      ---------------  ---------
Shares under option at December 31, 2002                  5,320,000       0.33

Granted                                                   8,000,000       0.29
Exercised                                                 1,000,000       0
Expired                                                      20,000       0
Canceled                                                  1,000,000       0
                                                      ---------------  ---------
Shares under option at December 31, 2003                 11,300,000       0.34
                                                      ===============  =========








                                      F-50

<PAGE>


                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2003 AND 2002

             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 SFAB # 123, the  Company's net loss
             and loss per share for the year ended  December  31,  2003 and 2002
             would not have changed.

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

             Additional  information  relating to stock options  outstanding and
             exercisable at December 31, 2002 summarized by exercise price is as
             follows:

                          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          2003            Life         Price        2003         Price

--------------------------------------------------------------------------------
$0.10 - 0.65     11,300,000     0.3 - 4.5 Year  $0.34     11,300,000      $0.34



              In connection with a fee agreement for introduction  services with
              two  individuals,  (collectively  referred  to as  "Introducers"),
              Hartcourt  agreed to grant the Introducers  options to purchase up
              to 2,500,000  shares of Hartcourt common stock at a price of $5.50
              per share. On May 4, 2000, the Introducers  exercised their option
              to acquire  2,500,000  shares of  Hartcourt  common  stock.  As of
              December  31,  2001,  Hartcourt  received  $2,275,000  towards the
              exercise  price of 500,000  options  into shares  exercised by the
              Introducers.  The remaining 2,000,000 options and the subscription
              receivable  balance of  $11,000,000  were cancelled in 2001 due to
              non-payment.







                                      F-51

<PAGE>

                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2003 AND 2002

             In connection with providing consulting services, on July 21, 2000,
             Hartcourt granted to a consultant options to purchase 20,000 shares
             of  Hartcourt  stock at a price of $5.75  per  share.  The  options
             expire on July 20, 2003.  The options were issued at the fair value
             on the date of issuance as required by SFAS #123.  The value of the
             options was not material.

             In connection  with providing  consulting  services,  on January 1,
             2002, Hartcourt granted to Alan Phan, options to purchase 3,000,000
             shares  of  Hartcourt  stock  at a price of $0.38  per  share.  The
             options  expired on December 31,  2004.  The options were issued at
             the fair value on the date of  issuance  as  required by SFAS #123.
             The value of the options was not material.

             To attract  qualified  persons  as  substantial  responsibility  of
             officers, on June 1, 2002, Hartcourt granted to Mr. D. Chen, Acting
             Chief Executive  Officer,  options to purchase  2,000,000 shares of
             Hartcourt stock at a price of $0.10 per share.  The options expired
             on May 31,  2003.  The options were issued at the fair market value
             on the date of issuance therefore, no expense was recorded.

             Employment  contract with Mr. D. Chen,  Acting  Chairman & CEO, was
             renewed and on June 1, 2003,  options to purchase  3,000,000 shares
             of Hartcourt  stock at a price of $0.48 per share was  granted.  On
             December 1, 2003,  Hartcourt  granted to Ms. Carrie Hartwick,  CFO,
             options to purchase  1,000,000 shares of Hartcourt stock at a price
             of $0.65 per  shares.  The  options  were issued at the fair market
             value on the date of issuance therefore, no expenses was recorded.

             (B) Warrants

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

             On October 23, 2002, the Company agreed to issue 12 installments of
             2,417,520  shares  each month to  Enlight  valued at  $850,000  for
             raising   working   capital.   The  Company  also  granted  Enlight
             29,010,239 warrants to purchase total of 29,010,239 common stock at
             $0.0586 per share.  However,  Enlight  agreed to not exercise these
             warrants  unless  there is a buy out of the Company  from any third
             party.

             In  connection  with  facilitating  an equity  line of  credit  for
             Hartcourt,  on January 26, 2000, the Company issued to a broker for
             brokerage  services  warrants to purchase  13,530  common shares at
             $15.52 per share that  expires on January 25,  2004.  The  warrants
             were issued at fair value at the fair value on the date of issuance
             as required by SFAS# 123. The warrants were not material.

                                      F-52

<PAGE>


                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2003 AND 2002

             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 expires on January 26, 2005.
             The  warrants  were  issued at fair  value at the fair value on the
             date of  issuance  as  required  by  SFAS#  123.  The  value of the
             warrants is a direct  offering  expense and  accordingly,  has been
             charged to equity in 2001.

             In  connection  with signing an  investment  agreement  with Swartz
             Private  Equity,  LLC, on January  26,  2000,  Hartcourt  issued to
             Swartz warrants to purchase 400,000 shares at $13,10 per share that
             expire on January 25, 2004.  The warrants were issued at fair value
             at the fair value on the date of  issuance as required by SFAS 123.
             The  value  of  the  warrants  is a  direct  offering  expense  and
             accordingly, charged to equity in 2000.

             During 2003, the  warrant-holders  converted to purchase  1,000,000
             shares of common stock at prices ranging from $0.0488 to $0.049 for
             a total consideration of $38,070.

             During 2000,  the  warrant-holders  converted  to purchase  407,000
             shares of common stock at prices  ranging from $2.50 to $2.80 for a
             total consideration of $101,870.

NOTE 25  SEGMENT AND BUSINESS RELATED INFORMATION

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

             Each  segment is a  strategic  business  that the  Company  manages
             separately  because each business  develops and sells products to a
             specific market. The four reportable segments available in 2002 are
             Computer hardware,  trading and wholesaling of computer components,
             Financial Services, and wireless access systems. During the current
             year of 2003, the company  included a substantial  investments  and
             acquisitions.  The principal  market for the Company's  products is
             China. Foreign sales,  primarily in China amounted to approximately
             $111,397,742 in 2003. The Chinese operations with assets of approx,
             $34,079,543,  account for  majority of the  Company's  consolidated
             assets in 2003.  The  accounting  policies of the  segments are the
             same  as  described  in  the  summary  of  significant   accounting
             policies. The Company evaluates segment performance based on income
             from  prospective  operations.  As  a  result,  the  components  of
             operating  loss for one  segment may not be  comparable  to another
             segment. Segment results for 2003 and 2002 are as follows:

                                      F-53

<PAGE>

                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2003 AND 2002

                      Computer    Financial   Streaming
                      hardware     services     Media      Others      Total
                -------------------------------------------------------------
2003
Net sales          $110,540,456 $         0   $     0   $  857,286 $111,397,742
Loss from
operations            4,461,147           0         0      853,832    5,314,979
Depreciation
and amortization         78,290           0         0       12,778       91,068
Assets               30,229,864     801,865   112,379    3,127,236   34,271,344
Capital expenditures          0           0         0            0            0

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

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

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



NOTE 26       SUBSEQUENT EVENTS (un-audited)

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

                       o In February 2004, the Company acquired 5.5% interest of
                         Guowei via a sales agreement.

                       o In February 2004, the Board of Directors of the Company
                         resolved to accept the  resignation of a director,  Mr.
                         X.Y Li, and appoint Mr. Victor Wang to replace Mr. Li.

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




                                      F-54

<PAGE>

                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2003 AND 2002

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

                       o The Management of the Company has properly executed its
                         certification  to  Hartcourt  financial  statements  in
                         accordance with section 302 of The  Sarbanes-Oxley  Act
                         of 2002,  and believes that it has adopted the relevant
                         sections of The Sarbanes-Oxley Act of 2002.  Management
                         also  believes  that  Section  404 will be  complied by
                         Harcourt, when the section becomes applicable in 2005.

                       o To  standardize  and upgrade it operation  and internal
                         controls,  Hartcourt is  centralizing  its  accoutering
                         operations  and purchase an ERP software from E-Tone in
                         March,  2004. The software will be implemented  for all
                         Hartcourt subsidiaries. A team of finance and IT staffs
                         for  the  system  implementation  was  formed  and  the
                         implementation   was  underway  with  a  subsidiary  of
                         Challenger in March,  2004. The ERP system will use the
                         US format on chart of  accounts  and follow the US GAAP
                         in  compiling  the  financial  data.  This  system will
                         replace the  various  systems  currently  in use by the
                         subsidiaries that Hartcourt  inherited when it acquired
                         these  companies.  The new ERP system will  standardize
                         the accounting activities and controls across the board
                         and  speed  up  the  financial  reporting  process.  In
                         addition to the financial  transactions,  the purchase,
                         warehouse   operation,   sales   and   human   resource
                         activities are all to be recorded and managed under the
                         same ERP system.  It will take  approximately 18 months
                         to finish the implementation across all subsidiaries

                       o In March of 2004, the Company  started its procedure to
                         restructure   its   subsidiary,   Guowei   Science  and
                         Technology  Ltd.  It is  intended  to dispose  Guowei's
                         shares while maintaining the assets of this subsidiary.
                         Its  objective  is to form a new  company.  Guowei  was
                         acquired on a long term basis,  by  Hartcourt  in April
                         2003. The restructure is scheduled to complete in 2004.
                         Details will be disclosed when occurred in 2004.


                                      #####


                                      F-55