**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**









**FORM
      10-K**






[x]
            Annual
                Report pursuant to Section 13 or 15(d) of the Securities Exchange
                Act of
                1934
              for
                the fiscal year ended May 31, 2007.




or




[ ]
            Transition
                report pursuant to Section 13 or 15(d) of the Securities Exchange
                Act of
                1934 .




Commission
      File Number 001-12671




**THE
      HARTCOURT COMPANIES, INC.**


(Exact
      name of registrant as specified in its charter)






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




Room
      1405, China Enterprise Tower Complex, No. 2, Hua Shan Road,


Shanghai,
      China 200040


(Address
      of principal executive offices, including zip code)






(86
      21)
      62723088


(Registrant's
      telephone number, including area code)








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




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




Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities
      Act.  [ ]   Yes    [X]
      No




Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or 15(d) of the Act.  [ ]
      Yes    [X] No




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




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












Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer or a non-accelerated filer. (See definition of “accelerated
      filer and large accelerated filer” in  Rule 12b-2 of the Exchange
      Act).  (Check one):




Large
                accelerated filer [ ]
            Accelerated
                filer [ ]
            Non-Accelerated
                filer [X]





Indicate
      by check mark wither the registrant is a shell company (as defined in Rule
      12b-2
      of the Exchange
      Act).  Yes [ ]    No [X]




The
      aggregate market value of the voting and non-voting common equity held by
      non-affiliates computed by reference to the price at which the common equity
      was
      last sold, or the average bid and asked price of such common equity, as of
      the
      last business day of the registrant’s most recently completed second fiscal
      quarter on November 30, 2006 was US$ 14 million.




The
      number of shares of common stock outstanding as of the latest practicable date,
      September 11, 2007, was 207,440,725.







THE
      HARTCOURT COMPANIES, INC.




FISCAL
      2007 FORM 10-K




INDEX




Item
            PagePART
                IITEM
                1: Business
            5ITEM
                1A:  Risk Factors
            10ITEM
                1B:  Unresolved Staff Comments
            16ITEM
                2: Properties
            16ITEM
                3: Legal Proceedings
            16ITEM
                4: Submission of Matters to a Vote of Security Holders
            16PART
                IIITEM
                5: Market for Registrant's Common Equity, Related Stockholder Matters
                and
                Issuer Purchases of Equity Securities
            17ITEM
                6: Selected Financial Data
            19ITEM
                7: Management's Discussion and Analysis of Financial Condition and
                Results
                of Operations
            20ITEM
                7A:Quantitative and Qualitative Disclosures About Market
                Risk
            29ITEM
                8: Financial Statements and Supplementary Data
            30ITEM
                9: Changes in and Disagreements with Accountants on Accounting and
                Financial Disclosure
            54ITEM
                9A:Controls and Procedures
            54ITEM
                9B: Other Information
            55PART
                IIIITEM
                10: Directors, Executive Officers and Corporate Governance
            55ITEM
                11: Executive Compensation
            58ITEM
                12: Security Ownership of Certain Beneficial Owners and Management
                and
                Related Stockholder Matters
            67ITEM
                13: Certain Relationships and Related Transactions, and Director
                Independence
            69ITEM
                14: Principal Accountant Fees and Services
            69PART
                IVITEM
                15: Exhibits and Financial Statement Schedules
            70Signatures







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




**Special
      Note on Forward-Looking
      Statements**




Certain
      statements contained in this report (including information incorporated by
      reference) are “forward-looking statements” and are intended to be covered by
      the safe harbor provided for under Section 27A of the Securities Act of 1933,
      as
      amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
      Our
      forward-looking statements include our current expectations and projections
      about future results, performance, prospects and opportunities. We have tried
      to
      identify these forward-looking statements by using words such as “may,” “might,”
“will,” “expect,” “anticipate,” “believe,” “could,” “intend,” “plan,” “estimate”
and similar expressions. These forward-looking statements are based on
      information currently available to us and are expressed in good faith and
      believed to have a reasonable basis. However, our forward-looking statements
      are
      subject to a number of risks, uncertainties and other factors that could cause
      our actual results, performance, prospects or opportunities to differ materially
      from those expressed in, or implied by, these forward-looking
      statements.










These
      risks, uncertainties and other factors include, but are not limited to, those
      set forth under Item 1A Risk Factors. Given these risks and uncertainties,
      readers are cautioned not to place undue reliance on our forward-looking
      statements. All subsequent written and oral forward-looking statements
      attributable to The Hartcourt Companies, Inc. or to persons acting on our behalf
      are expressly qualified in their entirety by these cautionary statements. Except
      as required by federal securities laws, we do not intend to update or revise
      any
      forward-looking statements, whether as a result of new information, future
      events or otherwise**.**



























**PART
      I**







**ITEM
      1. BUSINESS.**




**General**




We
      were
      incorporated in Utah in 1983. Historically, we have been in the business of
      selling information technology products in the People’s Republic of China (the
“PRC”).  However, in August of 2006 we decided to move away from that
      business and instead enter the business of vocational/training and education
      services in the PRC.  On June 13, 2007, we entered into an memorandum
      of understanding to sell our historic IT distribution and sales
      business.  We are in the process of obtaining necessary third party
      approvals to consummate this sale.




**Available
      Information**




We
      file
      annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports
      on
      Form 8-K, proxy statements and all other reports, and amendments to these
      reports, required of public companies with the SEC. The public may read and
      copy
      the materials we file with the SEC at the SEC's Public Reference Room at 100
      F
      Street NE, Washington, DC 20549. The public may obtain information on the
      operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
      The
      SEC also maintains a website at http://www.sec.gov that contains reports, proxy
      and information statements and other information regarding issuers that file
      electronically with the SEC. We make available free of charge on the Investor
      Relations section of our corporate website all of the reports we file with
      the
      SEC as soon as reasonably practicable after the reports are filed. Copies of
      our
      fiscal 2007 Form 10-K may also be obtained without charge by accessing a link
      to
      the SEC website on our website or contacting Ms. Ni Tingting, The Hartcourt
      Companies, Inc., Room 1405, China Enterprise Tower Complex, No. 2, Hua Shan
      Road, Shanghai, China 200040 or by calling  (86 21)
      62723088.




**Business
      Overview**




*Vocational
      and Technical Education Business*




Before
      deciding to enter into the Chinese vocational and training marketplace, we
      conducted a feasibility study. We believe that vocational schools in China,
      which have over US$10 billion annual revenues, provide a good investment
      opportunity.




In
      China,
      when students graduate from secondary schools (grade 9), they have two
      educational options: (a) high schools or (b) middle vocational schools. In
      2005,
      there were 21 million secondary school graduates, of which 8.8 million chose
      to
      go to high schools and 6.6 million chose to go to middle vocational schools.
      In
      2005, the total number of middle vocational school students was about 16
      million.




High
      school graduates also have two educational options: (a) bachelor degree colleges
      and (b) higher vocational schools. Middle vocational school students are allowed
      to be admitted by higher vocational schools if they pass the required
      tests.  Higher vocational school students are to be admitted to
      bachelor degree colleges if they pass the required tests. In 2005, there were
      6.7 million high school graduates and 7 million high vocational school
      students.




5







The
      Chinese government believes that there should be more vocational schools and
      graduates than degree colleges and graduates for the healthy development of
      China’s economy. All levels of government are required to speed up the
      development of vocational education.  The goal of the Chinese
      government is, by 2010, to recruit 8 million middle vocational students, the
      same size as the number of high school students, and more high vocational
      students than college students.




In
      August
      2006, after reviewing our business condition, its competitive position, and
      opportunities in China, we decided to change our business by focusing on the
      post-secondary education market in China to take advantage of the on-going
      demand for skilled workers and growing post-secondary age population. We plan
      to
      not only acquire the target schools, but also to run these schools actively
      by
      putting together strong faculty teams, incentive plans and strategic expansion
      programs.




Following
      the change of strategic direction, we have entered into memorandums of
      understanding with several target vocational education providers in 2006, and
      we
      have signed definitive agreements with Yucai (as defined below) and China
      Princely (as defined below). On May 15, 2007, the acquisition of China Princely
      closed.




In
      June
      2007, the Company entered into a MOU with Chongqing Zhengda Software Group
      Co.,
      Ltd to acquire a 100% equity interests in its two subsidiaries: Chongqing
      Zhengda Education Group and Chongqing Zhengda Hengling Co., Ltd. We have
      conducted due diligence for the proposed acquisition and a proxy statement
      for
      this transaction will be sent out to the selling shareholders for
      approval.




On
      December 28, 2006, we entered into a definitive agreement to acquire a 51%
      equity interest in Taishun Yucai Senior School in Zhejiang Province China
      (“Yucai”), a high school education and vocational training service provider
      located in Wenzhou, Zheijiang PRC. The remaining 49% of the equity interests
      in
      Yucai will be held by Yucai’s current shareholders. Under the terms of the
      purchase agreement, the purchase price that we agreed to pay for the acquisition
      is $2,000,000 cash and 5,500,000 shares of our restricted common stock. Pursuant
      to the purchase agreement, the $2,000,000 cash will be payable in three
      installments within one year after closing of the acquisition and the 5,500,000
      shares will be payable upon closing of the acquisition. The lead selling
      shareholder and his fellow selling shareholders together with Yucai have jointly
      guaranteed that we will receive a minimum of $554,487 (RMB 4,325,000) in terms
      of profit and management fees for each of the three years following closing
      (2007-2009).  In the event that the net profit is less than the
      guaranteed amount to the Company, the lead selling shareholder and his fellow
      selling shareholders shall make up the discrepancy before December 31 of each
      year in respect thereof.  We have guaranteed that the average 3-day
      closing price of our shares on the days immediately prior to the one year
      anniversary of the closing date will be not less than $0.50 per
      share.  In the event that the share price is less than $0.50, we shall
      credit additional cash or issue new restricted shares. The transaction is
      subject to government approval. We cannot predict whether or when such approval
      will be obtained.




On
      May 15, 2007 we closed the purchase of 100% of the equity interests in
      China Princely Education Technology Development Company Limited (“China
      Princely”), an authorized accrediting organization for China vocational
      education located in Beijing, PRC. Under the terms of the purchase agreement,
      we
      paid to the shareholders of China Princely 5,400,000 shares of our restricted
      common stock.  The cash consideration of $39,180 (RMB300,000) and a
      $274,258 (RMB2,100,000) of capital injection in China Princely was also due
      at
      closing.  As of the date of filing the 10-K, by mutual agreement of
      the parties, we have not paid this amount.  The primary current
      shareholder of China Princely has personally guaranteed that the net profit
      of
      China Princely will be not less than $256,000 (RMB2,000,000) for the calendar
      year 2007, while we have guaranteed that the average 3-day closing price of
      our
      shares on the days immediately prior to the one year anniversary of the closing
      date will be not less than $0.50 per share. In the event that the share price
      is
      less than $0.50, we shall credit additional cash or issue new restricted shares.
      China Princely has since changed its name to Hartcourt Princely Education
      Technology Development (Beijing) Co., Ltd.




6







*IT
      Distribution Business*




Historically,
      through our subsidiaries, Shanghai Huaqing Enterprise Development Co., Ltd
      (“Huaqing Shanghai”) and Shanghai Control Tech, we have been a distributor of
      internationally well-known brand-named IT hardware products and related software
      and services. The main products distributed are Samsung branded notebooks and
      monitors. We also provided audio and video conference products and related
      services. Almost all of our revenue for the last two fiscal years was attributed
      to distribution revenues from sales of IT products in China.




As
      a
      result of our business decision to move away from the IT distribution business,
      in September 2006, we entered into a definitive sales and purchase agreement
      to
      sell our interest in Besteffort Investments Ltd (“Besteffort”). In October 2006,
      the Company has completed the transfer of legal ownership  of Bestefffort
      to the purchaser. The Company already received $200,000 selling consideration
      and the rest balance of $100,600 net is expected to be received not later
      November 30, 2007. Prior to this sale, Besteffort Investments Ltd held
      indirectly 90% equity interest in Shanghai Control Tech, which was the
      distributor of Radvision video conference products in China. Shanghai Control
      Tech ceased its operations on January 1, 2006 primarily because Radvision
      terminated its distribution agreement with it.  The revenue of
      Shanghai Control Tech was derived almost exclusively from the Radvision
      business.




We
      have
      entered into a nonbinding Memorandum of Understanding (the "MOU") to sell our
      51% interest in Shanghai Huaqing Corporation Development Co.,
      Ltd.  The MOU is nonbinding, subject to execution of a definitive
      agreement, and subject to the receipt of required third party consents and
      approvals.  The contemplated purchase price is US$525,491. In
      addition, a shareholder of Huaqing Shanghai will return 997,550 shares of our
      common stock to the individual or entity designated by us. This sale, if
      consummated, will complete our transition from the information technology
      distribution business to the business of operating vocational and technical
      educational schools.




**Corporate
      Structure**




We
      are
      incorporated in Utah and conduct business solely in China through wholly and
      majority owned subsidiaries and indirectly majority owned subsidiaries in order
      to comply with China's foreign ownership restrictions.




As
      of May
      31, 2007, we owned 100% of three British Virgin Island (“BVI”) incorporated
      companies: (1) Hartcourt China Inc., (2) Hartcourt Capital Inc., and (3) AI-Asia
      Inc. All three of these BVI subsidiaries are holding companies for assets
      located in China.  Hartcourt Capital Inc. owns 100% of Hartcourt
      Hi-Tech Investment (Shanghai) Inc. Hartcourt Hi-Tech Investment (Shanghai)
      Inc.,
      through its employees as nominees, owns 100% of Shanghai Jiumeng Information
      Technology Co., Ltd. (“Jiumeng Shanghai”). Hartcourt Hi-Tech Investment
      (Shanghai) Inc., and Shanghai Jiumeng Information Technology Co., Ltd. are
      located in Shanghai, China. AI-Asia, Inc. owns 100% of Hartcourt Education
      Investment Management Consulting (Shanghai) Co., Ltd (former name is AI-Asia
      (Shanghai) Information Technology, Inc), located in Shanghai, China. The Company
      owns 51% equity interest in Huaqing Shanghai through Jiumeng Shanghai. Huaqing
      Shanghai is located in Shanghai, China.




7







Through
      Jiumeng Shanghai, we own 51% of the equity interests of Huaqing Shanghai, our
      main operating subsidiary for the Samsung distribution business. Chinese
      investment regulations do not explicitly allow foreign companies such as
      Hartcourt to own Chinese entities. As such, Hartcourt uses Jiumeng Shanghai,
      a
      Chinese legal entity owned by its employees, as the registered owner of a 51%
      equity stake of Huaqing Shanghai in China. In 2006, we transferred all of our
      equity interest invested in Jiumeng Shanghai held previously by certain
      employees who acted as nominees to Mr. Victor Zhou, the Chief Executive Officer
      of the Company who is a citizen of PRC. Now, Mr. Zhou serves as our nominee.
      He
      has signed a nominee agreement to pledge all his rights in Jiumeng Shanghai
      to
      us.




We
      have
      entered into a series of contractual agreements with our subsidiary Huaqing
      Shanghai, its shareholders and our nominees. As a result of these contractual
      agreements, we are considered the majority beneficiary of all of our
      subsidiaries and, accordingly, we consolidate all of our subsidiaries' results
      of operations in our financial statements.  The contractual agreements
      provide us with substantial ability to control Huaqing Shanghai. Pursuant to
      these contractual agreements:




·
            our
                nominees have granted to us an irrevocable proxy and power of attorney
                to
                exercise the right to appoint the majority of directors in Huaqing
                Shanghai;·
            the
                shareholders of Huaqing Shanghai may not enter into any transactions
                that
                may materially affect its assets, liabilities, equity or operations
                without our prior written consent;·
            any
                dividend or other payment for shareholder benefits received by our
                nominees from Huaqing Shanghai 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 Huaqing Shanghai held by our nominees on our behalf for a purchase
                price of the lower of RMB 1 or the lowest price permitted under PRC
                law
                when and if such purchase is permitted by PRC law or our nominees
                cease to
                be directors of Huaqing Shanghai or employees of
                Hartcourt;·
            our
                nominees have pledged their equity interest in Huaqing Shanghai to
                us to
                secure the payment obligations of acquisitions of controlling interests
                in
                Huaqing Shanghai, under the sales and purchase agreements between
                us and
                the shareholders of Huaqing Shanghai;·
            our
                nominees will not transfer, sell, pledge, dispose of or create any
                encumbrance on their equity interest in Huaqing Shanghai without
                our prior
                written consent.





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




8





In
      the
      opinion of our PRC legal counsel:




·
            the
                ownership structures of our subsidiaries****are in
                compliance with existing PRC laws and regulations;·
            our
                contractual agreements with Huaqing Shanghai, its shareholders and
                our
                nominees are valid and binding, and will not result in any violation
                of
                PRC laws or regulations currently in effect;·
            the
                business operations of our subsidiary are in compliance with existing
                PRC
                laws and regulations in all material aspects; and·
            the
                enforcement of foreign judgments made by courts outside of the PRC
                has no
                direct and automatic affect in the PRC, but these judgments may be
                recognized and enforced by a PRC court in accordance with the bilateral
                or
                international treaties to which the PRC is a party, or subject to
                the
                principles of reciprocity upon finding the judgment does not conflict
                with
                the fundamental principles, sovereignty, security and public interests
                of
                the PRC.





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




In
      April,
      2004, the China Ministry of Commerce officially announced that foreign investors
      such as us, would be allowed to establish wholly or majority foreign-owned
      wholesale and retail enterprises in the PRC starting from December 11, 2004.
      We
      have engaged a PRC law firm to study the newly effective regulations and the
      steps we could take to apply for the relevant business license in view of the
      relaxed foreign equity ownership rules in the wholesale sector in regard to
      our
      Samsung distribution business.




**Intellectual
      Property**




None.




**Employees**




As
      of
      August 22, 2007, we had approximately 80 employees, all of which were located
      in
      China. We believe our future success and growth will depend on our ability
      to attract and retain qualified employees in all areas of our business. We
      do
      not currently have any collective bargaining agreements with our employees,
      and
      we believe employee relations are generally good. Although we have
      employment-related agreements with a number of key employees, these agreements
      do not guarantee continued service. We believe we offer reasonable compensation
      and a good working environment. However, we face intense competition for
      qualified employees, and we expect to face continuing challenges in recruiting
      and retention.


9





**ITEM
      1A.  RISK FACTORS.**




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




In
      addition to the other information contained in this 10-K report, you should
      carefully read and consider the following risk factors. If any of these risks
      actually occur, our business, financial condition or operating results could
      be
      materially adversely affected and the trading price of our common stock could
      decline.




**RISKS
      RELATING TO THE VOCATIONAL TRAINING BUSINESS**




**WE
      EXPECT TO MAKE A SIGNIFICANT INVESTMENT IN OUR NEW BUSINESS STRATEGIES AND
      INITIATIVES, INCLUDING ACQUISITIONS, WHICH COULD DISRUPT OUR BUSINESS AND HAVE
      ADVERSE EFFECT ON OUR OPERATING RESULTS.**




Our
      decision to change****our business by focusing on the
      vocational/training and education market in China will require us to invest
      in
      new business strategies and engage in acquisitions that complement our strategic
      direction. Such endeavors involve significant risks and uncertainties, including
      distraction of management’s attention away from normal business operations;
      inability to raise the funds needed to close acquisitions; insufficient revenue
      generation to offset liabilities assumed and expenses associated with the
      strategy; difficulty in the integration of new employees, business systems
      and
      technology; inability to adapt to challenges of a new market; exposure to new
      regulations; and issues not discovered in our due diligence process. These
      factors could materially adversely affect our operating results or financial
      condition.




**WE
      EXPECT TO EXPERIENCE SIGNIFICANT COMPETITION FROM BOTH PRIVATE AND PUBLIC
      EDUCATION INSTITUTIONS.**




We
      will
      face competition from non-profit private entities and from the public school
      system and public colleges, including those that offer distance-learning
      programs.  Most of our competitors in both the private and public
      sector have greater financial and other resources than us. Many public and
      private colleges and universities, as well as other private career-oriented
      schools in the market, offer programs similarly, which intensifies the
      competition.




Public
      institutions often receive government subsidies, government and foundation
      grants, tax-deductible contributions and other financial resources generally
      not
      available to private schools. Accordingly, public institutions may have
      facilities and equipment superior to those in the private sector, and can offer
      lower tuition prices.




In
      addition, we may be subject to a variety of regulations which may adversely
      affect our ability to operate profitably.




**IF
      WE CANNOT FIND AND ACQUIRE THE TARGET SCHOOLS, OUR STRATEGY WILL LIKELY
      FAIL.**




10


As
      we
      expand our education business, our growth and success will depend upon
      attracting students and generating revenue through tuition. Moreover, we intend
      to implement our strategy through an aggressive acquisition plan. We intend
      to
      develop our educational operation assets by acquiring existing schools,
      especially those ones which were built around, or used the faculty capacity
      of,
      the Ministry of Education (MOE) universities and colleges. However, as the
      profitable schools may not desire to be sold, such acquisitions may be more
      expensive or be impossible to effect. Moreover, although MOE has set a timeline
      to privatize all vocational schools and educational institutions that offer
      degrees lower than a Bachelor’s degree by 2010, there are still a number of
      political barriers for foreign invested companies, such as Hartcourt, to engage
      in the education business. Thus, if we cannot find and acquire the target
      schools, our strategy may fail.




**OUR
      EDUCATION BUSINESS WILL BE HIGHLY SEASONAL.**




Because
      most students want their vocational training during already established vacation
      periods, generally during the first and third fiscal quarters, we expect our
      education business to be highly seasonal. We may have more students attending
      courses and as a result earn most of our revenues during that time. To the
      extent we do not provide training to students during the peak seasons, we will
      lose opportunities. This seasonality may cause our operating results to vary
      considerably from quarter to quarter and significantly impact our liquidity
      position.




**WE
      HAVE INCURRED SIGNIFICANT LOSSES IN THE PAST AND HAVE A HISTORY OF NEGATIVE
      CASH
      FLOW FROM OPERATIONS AND MAY NOT ACHIEVE OR SUSTAIN CONSISTENT PROFITABILITY,
      WHICH COULD RESULT IN A DECLINE IN THE VALUE OF OUR COMMON STOCK OR OUR
      INABILITY TO SUPPORT OUR OPERATIONS OR FUTURE CAPITAL
      REQUIREMENTS.**




We
      have
      received a report from our independent auditors expressing a “going concern”
qualification due to our historical operating losses and recurring negative
      working capital. We have incurred net losses and experienced negative cash
      flows
      from operations in the last 6 years. As of May 31, 2007, we had an accumulated
      deficit of approximately US$69 million. As we move out of IT business and into
      the education business, our losses likely will increase in the near
      future.




Whether
      we can achieve cash flow levels sufficient to support our operations, and
      whether we will then be able to maintain positive cash flow, we cannot predict.
      Unless such cash flow levels are achieved, we will need to borrow additional
      funds or sell debt or equity security, or some combination thereof, to provide
      funding for our operations. There can be no assurances that any additional
      debt
      or equity financing will be available to us on acceptable terms, if at all.
      The
      inability to obtain debt or equity financing could have a material adverse
      effect on our operating results, and as a result we could be required to cease
      or significantly reduce our operations, seek a merger partner or sell additional
      securities on terms that may be disadvantageous to shareholders. In addition,
      irrespective of our revenue, we may not achieve or sustain profitability in
      future periods.




**WE
      MAY HAVE TO ISSUE ADDITIONAL STOCK PURSUANT TO OUR ACQUISITION AGREEMENTS IF
      OUR
      STOCK IS NOT QUOTED AT AT LEAST $0.50 PER SHARE, RESULTING IN DILUTION TO
      SHAREHOLDERS.**


11


**RISKS
      ASSOCIATED WITH OUR IT DISTRIBUTION BUSINESS.**




Until
      we
      sell what remains of our IT distribution business, we will continue to be
      subject to various risks associated with the IT business, including the
      following:




**IF
      WE CANNOT MAINTAIN DISTRIBUTION AGREEMENTS WITH OUR KEY VENDORS DURING THE
      TRANSITION PERIOD TO OUR NEW BUSINESS, OUR ON-GOING BUSINESS WILL BE SEVERELY
      IMPACTED OR FAIL.**




All
      of
      our revenue in the previous fiscal years was generated from sales of Samsung
      products. We sign an annual distribution contract with Samsung. There is no
      guarantee the distribution contract will be renewed. If our relationship with
      Samsung is severed, we will experience major revenue and profit
      reductions.




**IF
      WE ARE UNABLE TO COMPETE SUCCESSFULLY IN THE HIGHLY COMPETITIVE MARKETS FOR
      THE
      NOTEBOOK COMPUTER AND PRODUCTS, INCLUDING OUR CURRENT OR POTENTIAL COMPETITORS
      GAINING COMPETITIVE ADVANTAGE THROUGH PARTNERING OR ACQUISITION, OUR BUSINESS
      WILL MATERIALLY BE ADVERSELY AFFECTED.**




Our
      IT
      distribution business is extremely competitive, particularly with respect to
      prices, quantity and in certain instances, customer relationships. We compete
      with numerous regional and local distributors of similar products with different
      brand names. Many of our 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.




**IF
      WE ARE UNABLE TO ANTICIPATE CHANGING TECHNOLOGY TRENDS AND CUSTOMER NEEDS,
      OUR
      BUSINESS MAY BECOME OBSOLETE AND IRRELEVANT AND OUR BUSINESS WILL BE MATERIALLY
      ADVERSELY AFFECTED.**




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




**IF
      SAMSUNG DOES NOT RENEW OR TERMINATES OUR DISTRIBUTION AGREEMENT, WE WILL NOT
      HAVE A IT DISTRIBUTION BUSINESS TO SELL.**




12


**GENERAL** **RISKS
      ASSOCIATED WITH OUR BUSINESS**




**THE
      LIQUIDITY OF OUR COMMON STOCK IS AFFECTED BY ITS LIMITED TRADING
      ABILITY.**




Shares
      of
      our common stock are traded on the OTC Bulletin Board under the symbol "HRCT".
      There is currently no broadly followed established trading market for our common
      stock. An "established trading market" may never develop or be maintained.
      The
      absence of an active trading market reduces the liquidity of our shares. The
      trading volume of our common stock historically has been limited and sporadic.
      As a result of this trading inactivity, the quoted price for our common stock
      on
      the OTC Bulletin Board is not necessarily a reliable indicator of its fair
      market value. Further, if we cease to be quoted, holders would find it more
      difficult to dispose of, or obtain accurate quotations as to the market value
      of
      our common stock, and the market value of our common stock would likely
      decline.




**THE
      LACK OF BUSINESS INSURANCE COVERAGE IN CHINA COULD MATERIALLY AND ADVERSELY
      AFFECT OUR BUSINESS, FINANCIAL  CONDITION AND RESULTS OF OPERATION
      SHOULD ANY MAJOR CATASTROPHIC DISASTER OCCURS.**




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




**OUR
      CURRENT CAPITAL STRUCTURE MAY NOT BE SUFFICIENT FOR US TO ACQUIRE NEW BUSINESS
      OR MAINTAIN ON GOING OPERATIONS.**




Although
      we believe that the current capital structure of the Company will be sufficient
      to allow us to consummate acquisitions, we cannot ascertain the capital
      requirements for any particular transaction. If our 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 need 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 is unavailable when needed to consummate an acquisition,
      we
      could be compelled to restructure the transaction or abandon that particular
      business acquisition. In addition, if we consummate a business combination,
      we
      may require additional financing to fund the operations or growth of the
      business. The failure to secure additional financing could have a material
      adverse effect on the continued development or growth of our business. None
      of
      our officers, directors or shareholders is required to provide any financing
      to
      us in connection with or after an acquisition.




**COMPLIANCE
      WITH NEW RULES AND REGULATIONS CONCERNING CORPORATE GOVERNANCE MAY BE COSTLY
      AND
      TIME CONSUMING.**




The
      Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley, requires, among other things,
      that companies adopt new corporate governance measures and imposes comprehensive
      reporting and disclosure requirements, sets stricter independence and financial
      expertise standards for board and audit committee members and imposes increased
      civil and criminal penalties for companies, their chief executive officers
      and
      chief financial officers for securities law violations. These laws, rules and
      regulations increase the scope, complexity and cost of our corporate governance,
      reporting and disclosure practices, which could harm our results of operations
      and divert management's attention from business operations. These new rules
      and
      regulations may also make it more difficult and more expensive for us to obtain
      director and officer liability insurance and make it more difficult for us
      to
      attract and retain qualified members of our board of directors, particularly
      to
      serve on our audit committee.




13


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




We
      are a
      U.S. corporation and we conduct our operations solely in China through our
      directly owned subsidiaries and indirectly majority-owned subsidiary. To comply
      with foreign ownership restrictions, we operate our business in China through
      a
      subsidiary which is majority owned by our employees who are PRC citizens (our
      nominees). The nominees have been transferred from certain employees to Victor
      Zhou, our Chief Executive Officer. We have entered into a series of contractual
      arrangements with our indirectly owned subsidiary, its shareholders and our
      nominees. As a result of these contractual arrangements, we are considered
      the
      majority beneficiary of all of our subsidiaries and accordingly we consolidate
      all of our subsidiaries' results of operations in our financial
      statements.




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




There
      are, however, substantial uncertainties regarding the interpretation and
      application of current or future PRC laws and regulations. In addition, there
      is
      the possibility that current PRC laws and regulations could change and have
      an
      adverse affect on our business operations.  Accordingly, we cannot
      assure you that the PRC regulatory authorities will not ultimately take a view
      that is contrary to the opinion of our PRC legal counsel.




**RISKS
      RELATING TO THE PEOPLE'S REPUBLIC OF CHINA.**




**SUBSTANTIALLY
      ALL OF OUR ASSETS ARE LOCATED IN CHINA AND SUBSTANTIALLY ALL OF OUR REVENUES
      ARE
      DERIVED FROM OUR OPERATIONS IN CHINA. ACCORDINGLY, THE CHINESE LAWS, RULES
      AND
      REGULATIONS WHICH CAN BE DIFFERENT FROM THE US LAWS, ARE PREVALENT IN GOVERNING
      OUR BUSINESS ACTIVITIES IN CHINA.**




14


Chinese
      law and regulations strictly limit the repatriation of assets of Chinese
      companies. Payments to parties outside of the PRC are governed by the Foreign
      Exchange Bureau and its Regulations on Foreign Exchange Control (the
“Regulations”). Pursuant to the Regulations, a Chinese enterprise may only make
      payments overseas in very limited circumstances. Chinese enterprises are
      prohibited from sending payment abroad to cover the liabilities incurred by
      affiliated entities located overseas.




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




Accordingly,
      we may not be able to repatriate any profits we realize to the United States
      so
      that our shareholders can receive dividends or other distributions from
      us.




Because
      our directors and officers reside outside of the United States, it may be
      difficult for you to enforce your rights against them or enforce United States
      court judgments again them in the PRC. After the consummation of acquisitions,
      all of our assets are located outside of the United States. It may be difficult
      for investors in the United States to enforce their legal rights, to effect
      service of process upon our directors or officers or to enforce judgments of
      United States courts predicated upon civil liabilities and criminal penalties
      of
      our directors and officers under Federal securities laws. Further, it is unclear
      if extradition treaties now in effect between the United States and the PRC
      would permit effective enforcement of criminal penalties of the Federal
      securities laws.


15


**ITEM
      1B. UNRESOLVED STAFF COMMENTS**




None




**ITEM
      2. PROPERTIES.**




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






Approximate
            LeaseSquare
            ExpirationLocation
            Purpose
            Meters
            DatesShanghai,
                China
            Principal
                offices and corporate headquarters
            390
            July
                2009







We
      also
      lease warehouse distribution centers and administrative facilities in the
      markets that we serve. Our management believes that our facilities are
      well-maintained, adequate for our current needs, and that we will be able to
      locate additional facilities as needed. See Note 14 to the financial statements
      for more information about our lease commitments.




However,
      we may need to lease other facilities for our education business




**ITEM
      3. LEGAL PROCEEDINGS.**




Hartcourt
      Hi-Tech Investment (Shanghai) Inc. filed a compliant against Beijing Yi Zhi
      He
      Lian Information Technology Co., Ltd for returning RMB 1,000,000
      (US$131,844)****which they owed to us. On December 19, 2006,
      Beijing Shi Jing Shan District Court entered the Judgment in this case. The
      court found that Hartcourt Hi-Tech Investment (Shanghai) Inc. had no right
      to
      file the compliant against Beijing Yi Zhi He Lian Information Technology Co.,
      Ltd. unless such complaint was designated by Hartcourt Capital, Inc., which
      signed and bound by the acquisition agreement. The court issued an order
      overruling the compliant from Hartcourt Hi-Tech Investment (Shanghai), Inc.
      as
      the plaintiff. After reviewing the case with attorney, Hartcourt Capital, Inc.,
      as the plaintiff, has filed the compliant on Aug 10,
      2007****against Beijing Yi Zhi He Lian Information Technology
      Co., Ltd for returning RMB1,000,000 which they owed.




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




A
      meeting
      of the shareholders was held on February 24, 2007. A proposal to amend the
      2005
      Stock Option Plan to increase the number of shares of common stock reserved
      and
      available under the 2005 Stock Option Plan from 35,000,000 to 70,000,000 was
      voted on at the meeting. The proposal received
      103,986,442****affirmative votes and 683,083 negative votes,
      163,904 abstained votes, no withheld votes and no broker
      non-votes.


16







**PART
      II**




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




*Market
      Information for Common Stock*




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






COMMON
                STOCKBY
                QUARTER ENDED
            HIGH
            LOWYEAR
                ENDED MAY 31, 2007August
                31, 2006
            US$0.07
            US$0.03November
                30, 2006
            US$0.08
            US$0.05February
                28, 2007
            US$0.1
            US$0.07May
                31, 2007
            US$0.09
            US$0.06YEAR
                ENDED MAY 31, 2006August
                31, 2005
            US$0.07
            US$0.08November
                30, 2005
            US$0.10
            US$0.09February
                28, 2006
            US$0.07
            US$0.07May
                31, 2006
            US$0.05
            US$0.04







The
      last
      reported sale price of our common stock on the OTC Bulletin Board on August
      15,
      2007 was US$0.06. As of August 16, 2007 we had approximately 800 shareholders
      of
      record. This number does not include shareholders whose shares are held in
      trust
      by other entities. The actual number of shareholders is greater than this number
      of holders of record.




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




We
      did
      not pay any cash dividends on our common stock for fiscal year ended on May
      31,
      2007. We do not anticipate paying any cash dividends on our common stock in
      the
      foreseeable future. We currently intend to retain future earnings, if any,
      to
      finance operations and the expansion of our business.




*Recent
      Sales of Unregistered Securities*




The
      following information sets forth the outstanding shares we sold without
      registration under the Securities Act of 1933 during the year ended May 31,
      2007. All transactions were effected in reliance on exemptions from registration
      under the Securities Act of 1933 for transactions not involving a public
      offering. We relied upon Regulation S, Rule 903 for all issuances of
      unregistered securities described below, because all the unregistered securities
      were issued to individuals who do not reside in the United States.




17


On
      June
      20, 2006, we issued 200,000 shares of our common stock to Jian Zhou valued
      at
      $6,000 in lieu of cash payment for consulting services, which were approximately
      equal to the fair market value of the stock at issue date.




On
      July
      5, 2006, we issued 232,000 shares of our common stock to Geoffrey Wei, Victor
      Zhou and Wilson Li valued at $9,875 in lieu of cash payment for director service
      compensation, which were approximately equal to the fair market value of the
      stock at issue date.




On
      October 1, 2006, we issued 253,168 shares of our common stock to Geoffrey Wei
      and Wilson Li valued at $14,000 in lieu of cash payment for director service
      compensation, which were approximately equal to the fair market value of the
      stock at issue date.




On
      December 4, 2006, we issued 3,709,118 shares of our common stock in an offshore
      transaction under Regulation S to Mr. Gang Liu and Mr. Jun Xu at US$0.068 per
      share for gross proceeds of US$252,372. Proceeds will be used for working
      capital.




On
      January 1, 2007, we issued 196,450 shares of our common stock to Geoffrey Wei
      and Wilson Li valued at $140,000 in lieu of cash compensation for director
      service compensation, which were approximately equal to the fair market value
      of
      the stock at issue date.




On
      January 1, 2007, we issued 95,474 shares of our common stock valued to Grophia
      Zhang, Mingdian Chen, Tingting Ni, Feng Wang, Faming Zhang, Yanjin Qiu, Yuekang
      Wang and Xianghua Qi at $6,492 in lieu of cash payment for employee service
      compensation, which were approximately equal to the fair market value of the
      stock at the issuance date.




On
      April
      1, 2007, we issued 151,252 shares of our common stock to Geoffrey Wei and Wilson
      Li valued at $13,000 in lieu of cash compensation for director service
      compensation, which were approximately equal to the fair market value of the
      stock at issue date.




On
      May
      21, 2007, we issued 5,400,000 shares of our common stock to Haisheng Zhou and
      Gang Liu****valued at $378,000 for acquisition of China
      Princely, which were approximately equal to the fair market value of the stock
      at issue date.




*Warrants*




None.




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




None.





18










**Performance
      Graph**




The
      graph
      below compares the cumulative total return to shareholders on our common stock
      with the cumulcative total return on NASDAQ Stock Market Index – U.S. (“NASDAQ
      US Index”) and Morgan Stanley High-Tech Index for the period commencing on
      January 1, 2002, and ending August 24, 2007. The following graph assumes the
      investment of US$100 in the Company’s common stock and in the two other indices,
      and reinvestment of all dividends.




The
      comparisons shown in the graph below are based upon historical data. The stock
      price performance shown in the graph below is not indicative of, nor intended
      to
      forecast, the potential future performance of our common stock.














**ITEM
      6. SELECTED FINANCIAL DATA.**





Year
                Ended
              May
                31
            
            
            Year
                Ended
              May
                31
            
            
            Period
                Ended
              May
                31
            
            
            
            Year
                Ended
              December
                312007
            
            
            2006
            
            
            2005
            
            
            
            2004
            
            
            
            2003
            
            
            
            2002***Thousands
                of US Dollars, except per share amount*****Statement
                of income Data**Net
                Revenue
            
            
            --
            
            
            
            
            
            
            
            
            
            74,563
            
            
            
            131,699
            
            
            
            1,137Operating
                income (losses) from continuing operations
            
            
            (1,347
            )
            
            
            (866
            )
            
            
            (286
            )
            
            
            (3,883
            )
            
            
            (92
            )
            
            
            (3,934
            )Income
                (losses) from continuing operations
            
            
            (1,347
            )
            
            
            (861
            )
            
            
            123
            
            
            
            (4,423
            )
            
            
            (1,453
            )
            
            
            (4,158
            )Net
                income (loss)
            
            
            (3,786
            )
            
            
            (2,835
            )
            
            
            123
            
            
            
            (13,373
            )
            
            
            (571
            )
            
            
            (2,559
            )Basic
                and diluted earnings (losses) per weighted average share
            
            
            (0.02
            )
            
            
            (0.01
            )
            
            
            0.001
            
            
            
            (0.076
            )
            
            
            (0.004
            )
            
            
            (0.032
            )**Balance
                Sheet Data**Cash
                and cash equivalents
            
            
            21
            
            
            
            123
            
            
            
            599
            
            
            
            1,745
            
            
            
            3,792
            
            
            
            80Total
                assets
            
            
            1,416
            
            
            
            3667
            
            
            
            8,009
            
            
            
            19,732
            
            
            
            33,808
            
            
            
            4,472Net
                current assets
            
            
            (1,157
            )
            
            
            (467
            )
            
            
            (141
            )
            
            
            2,530
            
            
            
            3039
            
            
            
            (2,155
            )Net
                assets
            
            
            196
            
            
            
            2,866
            
            
            
            6,761
            
            
            
            4,672
            
            
            
            14,909
            
            
            
            909Long-term
                debt
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --**Common
                Stock Data**Shares
                of Common Stock (Year-End)
            
            
            205,082
            
            
            
            194,844
            
            
            
            193,739
            
            
            
            171,659
            
            
            
            171,157
            
            
            
            88,518Shares
                of Common Stock (Average)
            
            
            197,513
            
            
            
            194,049
            
            
            
            191,504
            
            
            
            175,646
            
            
            
            135,565
            
            
            
            80,416Dividends
                Paid per Share
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --Book
                Value Per Share (Year End)
            
            
            (0.02
            )
            
            
            (0.02
            )
            
            
            0.00
            
            
            
            0.03
            
            
            
            0.09
            
            
            
            0.01


19







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




Management
      discussion and analysis contains comparisons of the results of our operations
      for the twelve months ended May 31, 2007, the results for the 12 months ended
      May 31, 2006 and 5 months transitional period ended May 31, 2005.






**THE
                HARTCOURT COMPANIES, INC. AND SUBSIDIARIES****CONSOLIDATED
                STATEMENTS OF OPERATIONS****Fiscal
                year ended**
            
            
            **Fiscal
                year ended**
            
            
            **Fiscal
                year ended****May
                31**
              **(12
                months)**
            
            
            **May
                31**
              **(12
                months)**
            
            
            **May
                31**
              **(5
                months)****2007**
            
            
            **2006**
            
            
            **2005**Operating
                expenses:General
                and administrative
            
            
            1,330,560
            
            
            
            850,592
            
            
            
            279,999Depreciation
                and amortization
            
            
            16,776
            
            
            
            15,431
            
            
            
            5,845Total
                operating expenses
            
            
            1,347,336
            
            
            
            866,023
            
            
            
            285,844Loss
                from continuing operations before other income/(expenses)
            
            
            (1,347,336
            )
            
            
            (866,023
            )
            
            
            (285,844
            )Other
                income/(expense):Interest
                income
            
            
            688
            
            
            
            1,789
            
            
            
            3,543Other
            
            
            -
            
            
            
            3,256
            
            
            
            2,017Total
                other income/(expense)
            
            
            688
            
            
            
            5,045
            
            
            
            5,560Loss
                from continuing operations
            
            
            (1,346,648
            )
            
            
            (860,978
            )
            
            
            (280,284
            )Discontinued
                operations:Gain(
                Loss)  from discontinued operations
            
            
            (90,156
            )
            
            
            (145,992
            )
            
            
            350,241Provision
                for loss on disposal of assets pending for sales
            
            
            (2,349,637
            )
            
            
            -
            
            
            
            -Gain(loss)
                on disposal of discontinued operations
            
            
            -
            
            
            
            (1,827,990
            )
            
            
            53,125Gain/(loss)
                from discontinued operations
            
            
            (2,439,793
            )
            
            
            (1,973,982
            )
            
            
            403,366NET
                INCOME/(LOSS)
            
            $
            (3,786,441
            )
            
            $
            (2,834,960
            )
            
            $
            123,082OTHER
                COMPREHENSIVE ITEM:Foreign
                currency translation gain/(loss)
            
            
            (60,973
            )
            
            
            111,352
            
            
            
            -NET
                COMPREHENSIVE LOSS
            
            $
            (3,847,414
            )
            
            
            (2,723,608
            )
            
            $
            123,082


20





The
      following discussion contains forward-looking statements. Forward looking
      statements are identified by words and phrases such as “anticipate”, “intend”,
“expect” and words and phrases of similar import. We caution investors that
      forward-looking statements are only predictions based on our current
      expectations about future events and are not guarantees of future performance.
      Our actual results, performance or achievements could differ materially from
      those expressed or implied by the forward-looking statements due to risks,
      uncertainties and assumptions that are difficult to predict, including those
      set
      forth in Item 1A above. We encourage you to read those risk factors carefully
      along with the other information provided in this Report and in our other
      filings with the SEC before deciding to invest in our stock or to maintain
      or
      change your investment. We undertake no obligation to revise or update any
      forward-looking statement for any reason, except as required by
      law.




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




**Critical
      Accounting Policies**




In
      preparing our financial statements, we make estimates, assumptions and judgments
      that can have a significant impact on our net revenue, operating income or
      loss
      and net income or loss, as well as on the value of certain assets and
      liabilities on our balance sheet. We believe that the estimates, assumptions
      and
      judgments involved in the accounting policies described below have the greatest
      potential impact on our financial statements, so we consider these to be our
      critical accounting policies. Senior management has discussed the development
      and selection of these critical accounting policies and their disclosure in
      this
      Report with the Audit Committee of our Board of Directors.  We believe
      the following critical accounting policies involve the most complex, difficult
      and subjective estimates and judgments: revenue recognition; allowance for
      doubtful accounts; income taxes; stock-based compensation; asset
      impairment.




*Revenue
      Recognition*




In
      accordance with generally accepted accounting principles ("GAAP") in the United
      States, revenue is recognized only when the price is fixed or determinable,
      persuasive evidence of an arrangement exists, the service is performed, and
      collection of the resulting receivable is reasonably assured. Noted below are
      brief descriptions of the product or service revenues that the Company
      recognizes in the financial statements contained herein.




Revenue
      from the trading of commodities is recognized as the cash is
      received.  Such revenues are cash basis only, and are not
      accrued.




21


Revenue
      from service contracts associated with the investment portfolio is recognized
      as
      the cash is received. Such revenues carry significant credit risk, and accrued
      only when collection is reasonably assured. Payments received in advance are
      deferred until the service is provided.




Amounts
      collected prior to satisfying the above revenue recognition criteria are
      included in advance from customers.




*Allowance
      for doubtful accounts* We
      maintain an allowance for doubtful accounts to reduce amounts to their estimated
      realizable value. A considerable amount of judgment is required when we assess
      the realization of accounts receivables, including assessing the probability
      of
      collection and the current credit-worthiness of each customer. If the financial
      condition of our customers were to deteriorate, resulting in an impairment
      of
      their ability to make payments, an additional provision for doubtful accounts
      could be required. We initially record a provision for doubtful accounts based
      on our historical experience, and then adjust this provision at the end of
      each
      reporting period based on a detailed assessment of our accounts receivable
      and
      allowance for doubtful accounts. In estimating the provision for doubtful
      accounts, we consider: (i) the aging of the accounts receivable; (ii) trends
      within and ratios involving the age of the accounts receivable; (iii) the
      customer mix in each of the aging categories and the nature of the receivable;
      (iv) our historical provision for doubtful accounts; (v) the credit worthiness
      of the customer; and (vi) the economic conditions of the customer's industry
      as
      well as general economic conditions, among other factors.




*Income
      taxes*




We
      account for income taxes in accordance with SFAS No. 109, ACCOUNTING FOR INCOME
      TAXES. SFAS 109 prescribes the use of the liability method. Under this method,
      deferred tax assets and liabilities are recognized for the future tax
      consequences attributable to temporary differences between the financial
      statement carrying amounts and the tax basis of assets and liabilities. Deferred
      tax assets and liabilities are measured using the enacted tax rates expected
      to
      apply to taxable income in the years in which those temporary differences are
      expected to be recovered or settled. We then assess the likelihood that our
      deferred tax assets will be recovered from future taxable income and to the
      extent we believe that recovery is not likely, we establish a valuation
      allowance. To the extent we establish a valuation allowance, or increase or
      decrease this allowance in a period, we increase or decrease our income tax
      provision in our statement of operations. If any of our estimates of our prior
      period taxable income or loss prove to be incorrect, material differences could
      impact the amount and timing of income tax benefits or payments for any
      period.




The
      Company operates in several countries. As a result, we are subject to numerous
      domestic and foreign tax jurisdictions and tax agreements and treaties among
      the
      various taxing authorities. Our operations in these jurisdictions are taxed
      on
      various bases: income before taxes, deemed profits and withholding taxes based
      on revenue. The calculation of our tax liabilities involves consideration of
      uncertainties in the application and interpretation of complex tax regulations
      in a multitude of jurisdictions across our global operations.




22





We
      recognize potential liabilities and record tax liabilities for anticipated
      tax
      audit issues in the U.S. and other tax jurisdictions based on our estimate
      of
      whether, and the extent to which, additional taxes will be due. The tax
      liabilities are reflected net of realized tax loss carry forwards. We adjust
      these reserves upon specific events; however, due to the complexity of some
      of
      these uncertainties, the ultimate resolution may result in a payment that is
      different from our current estimate of the tax liabilities. If our estimate
      of
      tax liabilities proves to be less than the ultimate assessment, an additional
      charge to expense would result. If payment of these amounts ultimately proves
      to
      be less than the recorded amounts, the reversal of the liabilities would result
      in tax benefits being recognized in the period when the contingency has been
      resolved and the liabilities are no longer necessary.




Changes
      in tax laws, regulations, agreements and treaties, foreign currency exchange
      restrictions or our level of operations or profitability in each taxing
      jurisdiction could have an impact upon the amount of income taxes that we
      provide during any given year.




*Stock-Based
      Compensation*




The
      Company adopted SFAS No. 123 (Revised 2004), Share Based Payment (“SFAS
      No. 123R”), under the modified-prospective transition method on June 1,
      2006. SFAS No. 123R requires companies to measure and recognize the cost of
      employee services received in exchange for an award of equity instruments based
      on the grant-date fair value. Share-based compensation recognized under the
      modified-prospective transition method of SFAS No. 123R includes
      share-based compensation based on the grant-date fair value determined in
      accordance with the original provisions of SFAS No. 123, Accounting for
      Stock-Based Compensation, for all share-based payments granted prior to and
      not
      yet vested as of June 1, 2006 and share-based compensation based on the
      grant-date fair-value determined in accordance with SFAS No. 123R for all
      share-based payments granted after June 1, 2006. SFAS No. 123R eliminates
      the ability to account for the award of these instruments under the intrinsic
      value method prescribed by Accounting Principles Board (“APB”) Opinion
      No. 25, Accounting for Stock Issued to Employees, and allowed under the
      original provisions of SFAS No. 123. Prior to the adoption of SFAS
      No. 123R, the Company accounted for the Company’s stock option plans using
      the intrinsic value method in accordance with the provisions of APB Opinion
      No. 25 and related interpretations.




*Asset
      Impairment*




We
      periodically evaluate the carrying value of other long-lived assets, including,
      but not limited to, property and equipment and intangible assets, when events
      and circumstances warrant such a review. The carrying value of a long-lived
      asset is considered impaired when the anticipated undiscounted cash flows from
      such asset is less than its carrying value. In that event, a loss is recognized
      based on the amount by which the carrying value exceeds the fair value of the
      long-lived asset. Fair value is determined primarily using the anticipated
      cash
      flows discounted at a rate commensurate with the risk involved. Significant
      estimates are utilized to calculate expected future cash flows utilized in
      impairment analyses. We also utilize judgment to determine other factors within
      fair value analyses, including the applicable discount rate.


23


**Results
      of Operations**




Our
      operations for the fiscal years ended May 31, 2007 and years ended May 31,
      2006
      consisted of operations of Huaqing (51% indirect ownership interest), Hartcourt
      Capital Inc. (100% ownership interest), Hartcourt China, Inc. (100% ownership
      interest), and Ai-Asia Inc. (100% ownership interest), and Hartcourt’s
      investments in other entities located in Hong Kong and China.




The
      following discussion and analysis are based on the historical figures and
      information and reflect not only our IT business but also our education
      business.  As noted above, the Company is in the process of selling
      its traditional IT business and investing in the growing Chinese vocational
      training market. On December 29, 2006, the Company entered into a definitive
      agreement to purchase 100% of the equity interests in China Princely, an
      authorized accrediting organization for China vocational education. On May
      15,
      2007, the Company completed this acquisition. This business transformation
      from
      relying solely on the IT industry to include the education industry materially
      changed the Company’s business operation, the operating revenue, selling,
      general and administrative expenses, the cash flows and other financial
      information.  This effect is included in our operations for the fiscal
      years ended May 31, 2007.




***Fiscal
      Year 2007 Compared to Fiscal Year 2006***




***Operating
      revenue:***




On
      June
      13, 2007, the Company entered into a nonbinding Memorandum of Understanding
      to
      sell its 51% interest in Shanghai Huaqing Corporation Development Ltd. (“Huaqing
      Shanghai”).  As such, the IT distribution business was reclassified as
      discontinued operations in the financial statements. As a result, there is
      no
      operating revenue or cost of sale for the fiscal year ended May 31, 2007 and
      year ended May 31, 2006.




***General
      and administrative expenses:***




Our general
      and administrative expenses were US$1,331 thousand for the fiscal year ended
      May
      31, 2007 compared to US$851 thousand for the same periods in 2006, an increase
      of US$480 thousand  or 56% compared to the fiscal year ended May 31,
      2006. The increased expenses for the fiscal year ended May 31, 2007 and year
      ended May 31, 2006 were related to the intensified efforts to search for
      acquisition targets and looking for fund resources to finance the acquisition
      deals and working capital.




***Depreciation
      and amortization expenses:***




Our
      depreciation and amortization expenses were US$17 thousand for the fiscal year
      ended May 31, 2007 compared to US$15 thousand for the same periods in 2006
      or
      13% increase.  The increase was primarily due to the purchase of fixed
      assets during the fiscal year ended May 31, 2007 and year ended May 31,
      2006.




24







***Interest
      income:***




Interest
      income was US$1 thousand and US$2 thousand for the fiscal year ended May 31,
      2006 and 2005. The US$1 thousand decrease was mainly due to lower cash
      balances.




***Interest
      expenses***:




All
      the
      interest expenses were incurred by Huaqing, a 51% owned subsidiary, from
      short-term bank loans to finance the Samsung distribution business. The
      operation of Huaqing was reclassified as discontinued operations in the
      financial statements and therefore there was no interest expenses during the
      fiscal year ended May 31, 2007 and year ended May 31, 2006.




***Income(
      Loss) from Continuing Operations:***




Loss
      from
      continuing operations for the fiscal year ended May 31, 2007 was US$1,347
      thousand, compared toUS$861 thousand for the same period of year
      2006.  The significant loss mainly because there is no revenue when
      the IT distribution business was reclassified as discontinued
      operations.




***Discontinued
      operations:***




During
      the fiscal year ended May 31, 2007, the discontinued operations represent the
      provision and operation results of Huaqing, which was determined by the
      management to be disposed.  During the fiscal year period ended May
      31, 2006, the discontinued operations represent the operation results of Huaqing
      and Control Tech and the loss on disposal of discontinued operation of Control
      Tech.




***Minority
      interest:***




Minority
      interest represented the profit shared by the minority shareholders of Huaqing
      (49%). The operation of Huaqing was reclassified as discontinued operations
      in the financial statements and therefore there was no Minority interest during
      the fiscal year ended May 31, 2007 and year ended May 31, 2006




***Income
      tax:***




The
      Company had no revenue during the fiscal year ended May 31, 2007 and year ended
      May 31, 2006. As a result, none of income tax was paid during the same
      period.








25


*Fiscal Year ended May 31, 2006 Compared to 5
      month Transitional Period ended May 31, 2005*




***Operating
      revenue:***




On
      June
      13, 2007, the Company entered into a nonbinding Memorandum of Understanding
      to
      sell its 51% interest in Shanghai Huaqing Corporation Development Ltd.
      (“Huaqing”).  As such, the IT distribution business was reclassified
      as discontinued operations in the financial statements. As a result, there
      is no
      operating revenue or cost of sale for the fiscal year ended May 31, 2006 and
      5
      month transitional period ended May 31, 2005.




***General
      and administrative expenses:***




Our general
      and administrative expenses were US$851 thousand for the fiscal year ended
      May
      31, 2006 compared to US$280 thousand for the 5 month transitional period ended
      May 31,  2005, an increase of US$571 thousand, or 204%. The increase
      was mainly due to our efforts to search for acquisition targets and looking
      for
      fund resources to finance the acquisition deals and working
      capital.




***Depreciation
      and amortization expenses:***




Our
      depreciation and amortization expenses were US$15 thousand for the fiscal year
      ended May 31, 2006 compared to US$6 thousand for the 5 month transitional period
      ended May 31, 2005, a 150% increase. The increase was primarily due to our
      purchase of fixed assets during the fiscal year ended May 31, 2006.




***Interest
      income:***




Interest
      income was US$2 thousand and US$4 thousand for the fiscal year ended May 31,
      2006 and 5 month transitional period ended May 31, 2005. The US$2 thousand
      decrease was mainly due to lower cash balances.




***Interest
      expenses:***




All
      the
      interest expenses were incurred by Huaqing, a 51% owned subsidiary, from
      short-term bank loans to finance the Samsung distribution business. The
      operation of Huaqing was reclassified as discontinued operations in the
      financial statements and therefore there was no interest expenses during the
      fiscal year ended May 31, 2006 and 5 month transitional period ended May 31,
      2005.




***Income(
      Loss) from Continuing Operations:***




Loss
      from
      continuing operations for the fiscal year ended May 31, 2006 was US$866
      thousand, compared to US$286 thousand for the 5 month transitional period ended
      May 31, 2005. The sharp increase of the loss is mainly due to 4 million
      provisions on note receivable during the 5 month transitional period ended
      31
      May 2005.






26


***Discontinued
      operations:***




During
      the fiscal year period ended May 31, 2006, the discontinued operations represent
      the operation results of Huaqing and Control Tech and the loss on disposal
      of
      discontinued operation of Control Tech.   During the 5 month
      transitional period ended May 31, 2005, the gain on disposal of discontinued
      operation represent the disposal gain or loss of Guangzhou NewHuaSun Computer
      Co., Ltd, Shanghai GuoWei Since and Technology Co., Ltd, Wenzhou ZhongNan Group,
      Beijing Challenger Group and Hangzhou Huaqing Monitoring Technology Co.,
      Ltd.  The gain from discontinued operation during the 5 month
      transitional period ended May 31, 2005 represent the operation result of Huaqing
      and Control Tech.




***Minority
      interest:***




Minority
      interest represented the profit shared by the minority shareholders of Huaqing
      (49%) and Control Tech (10%).  The operation of Huaqing and Control Tech
      was reclassified as discontinued operations in the financial statements and
      therefore there was no Minority interest during the fiscal year ended May 31,
      2006 and 5 month transitional period ended May 31, 2005.




***Income
      tax:***




The
      Company had no revenue during the fiscal year ended May 31, 2006 and 5 month
      transitional period ended May 31, 2005. As a result, none of income tax was
      paid
      during the same period.




**Liquidity
      and Capital Resources:**




As
      shown
      in our accompanying financial statements, we had a net loss of US$3.8 million
      for the fiscal year ended May 31, 2007 as compared to a net loss of US$2.8
      million for the same periods in 2006. Our current liabilities exceeded our
      current assets by US$481 thousand as of May 31, 2007.




As
      disclosed before, the Company entered into a Memorandum of Understanding to
      sell
      its Samsung business, the only IT business that the Company has remaining,
      and
      focus on the growing Chinese vocational training marketplace. This change likely
      will have a very significant demand on our capital resources in the near
      future.





The
      accompanying consolidated financial statements have been prepared assuming
      that
      the Company will continue as a going concern. This basis of accounting
      contemplates the recovery of the Company’s assets and the satisfaction of
      liabilities in the normal course of business.







The
      Company has taken certain restructuring steps to provide the necessary capital
      to continue its operations. These steps included:






·
              Look
                  for growth opportunities through acquisitions and mergers with
                  profitable
                  education businesses;
 
 ·
              Raising
                  additional capital; and
 
 ·
              Take
                  measures to control cost and operating
                  expenses


27


***Operating
      activities:***




During
      the fiscal year ended May 31, 2007, net cash used in operating activities was
      US$0.6 million, compared to net cash used by operating activities of US$0.7
      million during the same period in 2006. The cash used in operation activities
      in
      the fiscal year ended May 31, 2007 resulted mainly from loss of US$3.8 million
      by netting off stock option costs of US$0.5 million, provision of assets pending
      for sale of $2.3 million, increase of prepaid expenses and other receivables
      of
      US$0.3 million. The cash used in operating activities in the same period of
      year
      2006 was mainly resulted from net loss of $2.8 million and increase of prepaid
      expenses of $0.2 million by netting off provision on assets pending for sale
      of
      1.8 million and stock option costs and stock issued for services of $0.1
      million, increase of account payable of 0.2 million and discontinued operation
      of 0.2 million.




***Investing
      activities:***




Cash
      used
      by investing activities during the fiscal year ended May 31, 2007, was US$82
      thousand compared to net cash used in investing activities of US$311 thousand
      for the same period in 2006. The cash used by investment activities in the
      fiscal year ended May 31, 2007 was due to cash decreased due to cease (disposal)
      of operation of subsidiary of US$278 thousand and purchase of property and
      equipment of US$5 thousand by netting off the proceeds from disposal of assets
      pending for sale of US$199 thousand and.  While the cash used in the
      fiscal year ended May 31 2006 is mainly resulted from cash decreased due to
      cease (disposal) of operation of subsidiaries of US$771 thousand and purchase
      of
      property and equipment of US$23 thousand by netting off the proceeds on notes
      receivable of US$484 thousand.




***Financing
      activities:***




Cash
      provided by financing activities during the fiscal year ended May 31, 2007
      equaled to US$276 thousand compared to net cash used by financing activities
      of
      US$210 thousand during the year 2006. Cash Provided by financing activities
      during the fiscal year ended May 31, 2007 was primarily due to proceed from
      to
      related parties of $24 thousand and proceed on sale of common stock of $252
      thousand.  Cash used in year 2006 by financing activities was mostly
      due to the payment to related parties.




**Research
      and Development**




Presently
      the company is not undertaking any significant Research and Development
      efforts.




**Off-Balance
      Sheet Arrangements**




During
      the fiscal year ended on May 31, 2007, the Company did not engage in any
      off-balance sheet arrangements as defined in Item 303(a)(4) of the SEC's
      Regulation S-K.


28


**ITEM
      7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK.**




**Short-Term
      Investment Portfolio**




We
      do not
      hold derivative financial instruments in our portfolio of short-term
      investments. Our short-term investments consist of instruments that meet quality
      standards consistent with our investment policy. This policy specifies that,
      except for direct obligations of the United States government, securities issued
      by agencies of the United States government, and money market or cash management
      funds, we diversify our holdings by limiting our short-term investments and
      funds held for payroll customers with any individual issuer. As of May 31,
      2007,
      all our cash equivalents represent cash on hand and cash deposit in PRC banks,
      the interest rate earned on our money market accounts ranged from 0.81% to
      1.71%
      per annum.




**Interest
      Rate Risk**




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




**Impact
      of Foreign Currency Rate Changes**




Since
      we
      translate foreign currencies (primarily Chinese Yuans and Hong Kong Dollars)
      into US dollars for financial reporting purposes, currency fluctuations can
      have
      an impact on our financial results. The historical impact of currency
      fluctuations has generally been immaterial. We believe that our exposure to
      currency exchange fluctuation risk is not significant primarily. Although the
      impact of currency fluctuations on our financial results has generally been
      immaterial in the past and we believe that for the reasons cited above currency
      fluctuations will not be significant in the future, there can be no guarantee
      that the impact of currency fluctuations will not be material in the future.
      As
      of May 31, 2007, we did not engage in foreign currency hedging
      activities.


29


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




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






**REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
  
 To
        the
        Stockholders and Board of Directors
 The
        Hartcourt Companies, Inc.
 
 We
        have
        audited the accompanying consolidated balance sheets of The Hartcourt Companies,
        Inc., a Utah Corporation (the “Company”) as of May 31, 2007 and 2006 and the
        related consolidated statements of operations, stockholders’ equity and cash
        flows for the years ended May 31, 2007, 2006 and for the transition five
        month
        period ended May 31, 2005. These financial statements are the responsibility
        of
        the Company’s management. Our responsibility is to express an opinion on these
        financial statements based on our audits.
  We
        conducted our audits of these statements in accordance with the standards
        of the
        Public Company Accounting Oversight Board (United States). Those standards
        require that we plan and perform the audit to obtain reasonable assurance
        about
        whether the financial statements are free of material misstatement. An audit
        includes examining, on a test basis, evidence supporting the amounts and
        disclosures in the financial statements. An audit also includes assessing
        the
        accounting principles used and significant estimates made by management,
        as well
        as evaluating the overall financial statement presentation. We believe that
        our
        audits provide a reasonable basis for our opinion.
 
 In
        our
        opinion, the financial statements referred to above present fairly, in all
        material respects, the financial position of The Hartcourt Companies, Inc
        as of
        May 31, 2007 and 2006 and the results of its operations and its cash flows
        for
        the years ended May 31, 2007, 2006 and for the transition five month period
        ended May 31, 2005, in conformity with accounting principles generally accepted
        in the United States of America.
 
 The
        Company’s financial statements are prepared using the generally accepted
        accounting principles applicable to a going concern, which contemplates the
        realization of assets and liquidation of liabilities in the normal course
        of
        business. The Company has accumulated deficit of $71,495,815 as of May 31,
        2007
        and negative cash flow from operations amounting $639,882 for the year ended
        May
        31, 2007. These factors as discussed in Note 2 to the financial statements,
        raises substantial doubt about the Company’s ability to continue as a going
        concern. Management’s plans in regard to these matters are also described in
        Note 2. The financial statements do not include any adjustments that might
        result from the outcome of this uncertainty.
 
 
 /s/
        Kabani & Company, Inc.
 CERTIFIED
        PUBLIC ACCOUNTANTS
 
 Los
        Angeles, California
 
 August
        31, 2007.




30







**THE
                HARTCOURT COMPANIES, INC. AND SUBSIDIARIES****CONSOLIDATED
                BALANCE SHEETS**





**May
                31,****2007**
            
            
            **2006****ASSET****CURRENT
                ASSETS**Cash
                and cash equivalents
            
            $
            20,611
            
            
            $
            123,117Prepaid
                expenses and other assets
            
            
            41,549
            
            
            
            193,818**TOTAL
                CURRENT ASSETS**
            
            ****
            **62,160**
            
            
            ****
            **316,935****PROPERTY
                & EQUIPMENT - NET**
            
            
            26,423
            
            
            
            34,564ASSETS
                HELD FOR DISPOSITION - NET
            
            
            575,369
            
            
            
            3,315,162**OTHER
                RECEIVABLE**
            
            
            100,600
            
            
            
            -**GOODWILL**
            
            
            651,082
            
            
            
            -**TOTAL
                ASSETS**
            
            **$**
            **1,415,634**
            
            
            **$**
            **3,666,661****LIABILITIES
                AND SHAREHOLDERS' EQUITY****CURRENT
                LIABILITIES**Accounts
                payable
            
            $
            510,203
            
            
            
            558,141Due
                to directors
            
            
            136,452
            
            
            
            49,869Accrued
                expenses and other current liabilities
            
            
            572,792
            
            
            
            193,097**TOTAL
                CURRENT LIABILITIES**
            
            
            1,219,447
            
            
            
            801,107**SHAREHOLDERS'
                EQUITY****Preferred
                Stock:**Original
                preferred stock, $0.01 par value, 1,000 sharesauthorized,
                issued and cancelled
            
            
            -
            
            
            
            -Class
                A preferred stock, 10,000,000 shares authorized,none
                issued and outstanding
            
            
            -
            
            
            
            -**Common
                stock**:$0.001
                par value, 239,999,000 authorizedMay
                31, 2007: 207,130,725 issued  205,081,997
                outstandingMay
                31, 2006: 196,893,263 issued 194,844,535 outstanding
            
            
            205,082
            
            
            
            194,845Additional
                paid in capital
            
            
            71,570,246
            
            
            
            70,402,436Treasury
                stock, at cost, 48,728 shares
            
            
            (48,728
            )
            
            
            (48,728
            )Other
                comprehensive loss
            
            
            (34,598
            )
            
            
            26,375Accumulated
                deficit
            
            
            (71,495,815
            )
            
            
            (67,709,374
            )**TOTAL
                SHAREHOLDERS' EQUITY**
            
            
            196,187
            
            
            
            2,865,554**TOTAL
                LIABILITIES AND SHAREHOLDERS' EQUITY**
            
            **$**
            **1,415,634**
            
            
            **$**
            **3,666,661**





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








31





**THE
                HARTCOURT COMPANIES, INC. AND SUBSIDIARIES****CONSOLIDATED
                STATEMENTS OF OPERATIONS**





**For
                The Years Ended May 31**
            
            
            **For
                The**
              **Transition**
              **Period
                Ended****2007**
            
            
            **2006**
            
            
            **May
                31, 2005**Net
                sales
            
            $
            -
            
            
            $
            -
            
            
            $
            -Operating
                expenses:General
                and administrative
            
            
            1,330,560
            
            
            
            850,592
            
            
            
            279,999Depreciation
                and amortization
            
            
            16,776
            
            
            
            15,431
            
            
            
            5,845Total
                operating expenses
            
            
            1,347,336
            
            
            
            866,023
            
            
            
            285,844Loss
                from continuing operationsbefore
                other income/(expenses)
            
            
            (1,347,336
            )
            
            
            (866,023
            )
            
            
            (285,844
            )Other
                income/(expense):Interest
                income
            
            
            688
            
            
            
            1,789
            
            
            
            3,543Other
            
            
            -
            
            
            
            3,256
            
            
            
            2,017Total
                other income/(expense)
            
            
            688
            
            
            
            5,045
            
            
            
            5,560Loss
                from continuing operations
            
            
            (1,346,648
            )
            
            
            (860,978
            )
            
            
            (280,284
            )Discontinued
                operations:Gain
                (loss)  from discontinued operations
            
            
            (90,156
            )
            
            
            (145,992
            )
            
            
            350,241Provision
                for loss on disposal of assets pending for sales
            
            
            (2,349,637
            )
            
            
            -
            
            
            
            -Gain
                (loss) on disposal of discontinued operations
            
            
            -
            
            
            
            (1,827,990
            )
            
            
            53,125Income
                (loss) from discontinued operations
            
            
            (2,439,793
            )
            
            
            (1,973,982
            )
            
            
            403,366NET
                INCOME/(LOSS)
            
            
            (3,786,441
            )
            
            
            (2,834,960
            )
            
            
            123,082OTHER
                COMPREHENSIVE ITEM:Foreign
                currency translation gain/(loss)
            
            
            (60,973
            )
            
            
            111,352
            
            
            
            -NET
                COMPREHENSIVE LOSS
            
            $
            (3,847,414
            )
            
            $
            (2,723,608
            )
            
            $
            123,082BASIC
                AND DILUTED EARNINGS/(LOSSES)PER
                COMMON SHARE:Loss
                from continuing operations
            
            $
            (0.01
            )
            
            $
            (0.00
            )
            
            $
            (0.00
            )Earnings
                (loss) from discontinued operations
            
            $
            (0.01
            )
            
            $
            (0.01
            )
            
            $
            0.00Earnings
                (loss) per share
            
            $
            (0.02
            )
            
            $
            (0.01
            )
            
            $
            0.00*
                Basic and fully diluted (weighted average)
            
            
            197,512,791
            
            
            
            194,049,240
            
            
            
            191,503,585





The
                accompanying notes form an integral part of these consolidated financial
                statements.*
                Weighted average number of shares used to compute basic and diluted
                loss
                per share is the same as the effect of dilutive securities are anti
                dilutive.





32





**THE
                HARTCOURT COMPANIES, INC. AND SUBSIDIARIES****CONSOLIDATED
                STATEMENTS OF SHAREHOLDERS' EQUITY****FOR
                THE FISCAL YEARS ENDED MAY 31, 2007 AND 2006 AND FOR THE FIVE MONTH
                PERIOD
                ENDED MAY 31, 2005**







**Common**
              **Stock**
            
            
            
            ****
              **Additional**
              **paid
                In**
            
            
            
            **Treasury
                Stock**
            
            
            
            **Compre-**
              **hensive**
            
            
            
            **Accumulated**
            
            
            
            **Total**
              **Shareholders'****Shares**
            
            
            
            **Amount**
            
            
            
            **Capital**
            
            
            
            **Shares**
            
            
            
            **Amount**
            
            
            
            **Income
                (Loss)**
            
            
            
            **Deficit**
            
            
            
            **Equity**Balance
                - December 31, 2004
            
            
            171,658,757
            
            
            
            $
            171,659
            
            
            
            $
            69,631,389
            
            
            
            
            48,728
            
            
            
            
            (48,728
            )
            
            
            $
            (84,977
            )
            
            
            $
            (64,997,496
            )
            
            
            $
            4,671,847Share
                issued for consultingservices
            
            
            5,900
            
            
            
            
            6
            
            
            
            
            1,485
            
            
            
            
            --
            
            
            
            
            --
            
            
            
            
            --
            
            
            
            
            --
            
            
            
            
            1,491Shares
                issued forcompensation
            
            
            387,777
            
            
            
            
            388
            
            
            
            
            62,918
            
            
            
            
            --
            
            
            
            
            --
            
            
            
            
            --
            
            
            
            
            --
            
            
            
            
            63,306Shares
                issued for acquisitionof
                Control Tech
            
            
            19,588,875
            
            
            
            
            19,589
            
            
            
            
            1,939,299
            
            
            
            
            --
            
            
            
            
            --
            
            
            
            
            --
            
            
            
            
            --
            
            
            
            
            1,958,888Shares
                issued for privateoffering
            
            
            25,642,857
            
            
            
            
            25,643
            
            
            
            
            999,357
            
            
            
            
            --
            
            
            
            
            --
            
            
            
            
            --
            
            
            
            
            --
            
            
            
            
            1,025,000Treasury
                shares received
            
            
            --
            
            
            
            
            --
            
            
            
            
            --
            
            
            
            
            23,545,704
            
            
            
            
            (2,354,571
            )
            
            
            
            --
            
            
            
            
            --
            
            
            
            
            (2,354,571
            )Cancellation
                of treasuryshares
            
            
            (23,545,704
            )
            
            
            
            (23,546
            )
            
            
            
            (2,331,025
            )
            
            
            
            (23,545,704
            )
            
            
            
            2,354,571
            
            
            
            
            --
            
            
            
            
            --
            
            
            
            
            --Net
                income
            
            
            -
            
            
            
            
            --
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            --
            
            
            
            
            123,082
            
            
            
            
            123,082Balance
                -May 31,2005
            
            
            193,738,462
            
            
            
            
            193,739
            
            
            
            
            70,303,423
            
            
            
            
            48,728
            
            
            
            
            (48,728
            )
            
            
            
            (84,977
            )
            
            
            
            (64,874,414
            )
            
            
            
            5,489,043Shares
                issued for compensation and service
            
            
            1,106,073
            
            
            
            
            1,106
            
            
            
            
            71,013
            
            
            
            
            --
            
            
            
            
            --
            
            
            
            
            --
            
            
            
            
            --
            
            
            
            
            72,119Other
                comprehensive loss (foreign currency translation)
            
            
            
            
            
            
            
            
            
            
            
            
            --
            
            
            
            
            --
            
            
            
            
            --
            
            
            
            
            111,352
            
            
            
            
            --
            
            
            
            
            111,352Stock
                options issued for services
            
            
            
            
            
            
            
            
            
            
            
            
            28,000
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            28,000Net
                loss
            
            
            --
            
            
            
            
            --
            
            
            
            
            --
            
            
            
            
            --
            
            
            
            
            --
            
            
            
            
            --
            
            
            
            
            (2,834,960
            )
            
            
            
            (2,834,960
            )Balance
                -May 31,2006
            
            
            194,844,535
            
            
            
            
            194,845
            
            
            
            
            70,402,436
            
            
            
            
            48,728
            
            
            
            
            (48,728
            )
            
            
            
            26,375
            
            
            
            
            (67,709,374
            )
            
            
            
            2,865,554Shares
                issued for compensation and service
            
            
            1,128,344
            
            
            
            
            1,128
            
            
            
            
            62,239
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            63,367Shares
                issued for acquisition of China Princely
            
            
            5,400,000
            
            
            
            
            5,400
            
            
            
            
            372,600
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            378,000Shares
                issued for cash
            
            
            3,709,118
            
            
            
            
            3,709
            
            
            
            
            248,663
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            252,372Other
                comprehensive loss (foreign currency translation)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (60,973
            )
            
            
            
            
            
            
            
            (60,973
            )Stock
                options issued for services
            
            
            
            
            
            
            
            
            
            
            
            
            484,308
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            484,308Net
                loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (3,786,441
            )
            
            
            
            (3,786,441
            )Balance
                -May 31,2007
            
            
            205,081,997
            
            
            
            $
            205,082
            
            
            
            $
            71,570,246
            
            
            
            
            48,728
            
            
            
            $
            (48,728
            )
            
            
            $
            (34,598
            )
            
            
            $
            (71,495,815
            )
            
            
            $
            196,187








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





33








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





**For
                The Fiscal Years
                Ended**
              **May
                31**
            
            
            **For
                the**
              **transition**
              **period
                ended****2007**
            
            
            **2006**
            
            
            **May
                31, 2005****CASH
                FLOWS FROM OPERATING ACTIVITIES:**Net
                income (loss)
            
            $
            (3,786,441
            )
            
            $
            (2,834,960
            )
            
            $
            123,082Adjustments
                to reconcile net income (loss) tonet
                cash used in operating activities:(Gain)
                loss on disposal /assets pending for sale
            
            
            2,349,637
            
            
            
            1,827,990
            
            
            
            (53,125
            )Depreciation
            
            
            16,776
            
            
            
            15,431
            
            
            
            5,845Stock
                options issued for services
            
            
            484,308
            
            
            
            28,000
            
            
            
            -Stock
                issued for services and compensations
            
            
            63,367
            
            
            
            72,119
            
            
            
            64,797Changes
                in operating assets and liabilities:Prepaid
                expenses and other receivables
            
            
            155,477
            
            
            
            (174,523
            )
            
            
            4,516Accounts
                payable
            
            
            (47,930
            )
            
            
            220,613
            
            
            
            (258,094
            )Accrued
                expenses and other current liabilities
            
            
            34,768
            
            
            
            (39,185
            )
            
            
            107,250NET
                CASH USED IN CONTINUED OPERATIONS
            
            
            (730,038
            )
            
            
            (884,515
            )
            
            
            (5,729
            )NET
                CASH PROVIDED BY (USED IN) DISCONTINUED OPERATIONS
            
            
            90,156
            
            
            
            145,991
            
            
            
            (350,241
            )**NET
                CASH USED IN****OPERATING
                ACTIVITIES**
            
            
            (639,882
            )
            
            
            (738,524
            )
            
            
            (355,970
            )**CASH
                FLOWS FROM INVESTING ACTIVITIES:**Purchase
                of property and equipment
            
            
            (4,684
            )
            
            
            (23,395
            )
            
            
            (774
            )Proceeds
                on acquisition of Subsidiary
            
            
            275
            
            
            
            -
            
            
            
            -Proceeds
                on notes receivable, net
            
            
            -
            
            
            
            483,793
            
            
            
            -**NET
                CASH PROVIDED BY (USED IN) CONTINUED OPERATIONS**
            
            
            (4,409
            )
            
            
            460,398
            
            
            
            (774
            )**NET
                CASH USED IN DISCONTINUED OPERATIONS**
            
            
            (77,855
            )
            
            
            (771,073
            )
            
            
            (705,734
            )**NET
                CASH USED IN****INVESTING
                ACTIVITIES**
            
            
            (82,264
            )
            
            
            (310,675
            )
            
            
            (706,508
            )The
                accompanying notes form an integral part of these consolidated financial
                statements.


34





**THE
                HARTCOURT COMPANIES, INC. AND SUBSIDIARIES****CONSOLIDATED
                STATEMENTS OF CASH FLOWS****(continued)**










**For
                The Fiscal Years Ended**
              **May
                31**
            
            
            **For
                the transition**
              **period
                ended****2007**
            
            
            **2006**
            
            
            **May
                31, 2005****CASH
                FLOWS FROM FINANCING ACTIVITIES**Proceeds
                on sale of common stock
            
            
            252,372
            
            
            
            -
            
            
            
            1,025,000Proceeds
                on stock subscriptions
            
            
            -
            
            
            
            -
            
            
            
            -Proceeds
                from (payments to) related parties-net
            
            
            24,286
            
            
            
            (210,938
            )
            
            
            -Payment
                of SEC disgorgement
            
            
            -
            
            
            
            -
            
            
            
            (1,108,535
            )**NET
                CASH PROVIDED BY (USED IN) CONTINUED OPERATIONS**
            
            
            276,658
            
            
            
            (210,938
            )
            
            
            (83,535
            )**NET
                CASH PROVIDED BY (USED IN) DISCONTINUED
                OPERATIONS**
            
            
            -
            
            
            
            -
            
            
            
            -**NET
                CASH USED IN FINANCING ACTIVITIES**
            
            
            276,658
            
            
            
            (210,938
            )
            
            
            (83,535
            )EFFECT
                OF EXCHANGE DIFFERENCE
            
            
            65,427
            
            
            
            13,340
            
            
            
            2**NET
                (DECREASE)/INCREASE IN CASH**
            
            
            (380,061
            )
            
            
            (1,246,797
            )
            
            
            (1,146,011
            )**CASH
                AND CASH EQUIVALENTS -****BEGINNING
                OF PERIOD**
            
            
            400,672
            
            
            
            1,369,914
            
            
            
            1,744,852**CASH
                AND CASH EQUIVALENTS - END OF PERIOD**
            
            $
            20,611
            
            
            
            123,117
            
            
            
            598,841**SUPPLEMENTAL
                DISCLOSURE OF CASH FLOWS**Cash
                paid for interest
            
            $
            -
            
            
            $
            -
            
            
            $
            -Cash
                paid for income taxes, net of refund received
            
            $
            -
            
            
            $
            -
            
            
            $
            -NON-CASH
                INVESTING AND FINANCING ACTIVITIES:In
                Conjunction with acquisition of subsidiariesFair
                value of shares issued for acquisition
            
            $
            378,000
            
            
            $
            -
            
            
            $
            --
            
            
            
            --
            
            
            
            -The
                accompanying notes form an integral part of these consolidated financial
                statements.







35


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


**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS**


**May
      31, 2007 AND 2006**








**NOTE
      1** **GENERAL**





The
      Hartcourt Companies, Inc. ("Hartcourt" or the "Company"), was incorporated
      in
      Utah in 1983.  Previously, we were a distributor of internationally well
      known brand named IT hardware products and related services in the People’s
      Republic of China. In August 2006, we announced our intention to change our
      business by focusing on the vocational/training and education marketplace in
      the
      People’s Republic of China.





On
      December 28, 2006, the Company entered into a definitive agreement to acquire
      a
      51% equity interest in Taishun Yucai Senior School in Zhejiang Province China
      (“Yucai”), a high school education and vocational training service provider in
      Wenzhou, Zheijiang, the People’s Republic of China. The remaining 49% of the
      equity interests in Yucai will be held by its current shareholders led by Mr.
      Shunsheng Dong. Under the terms of the purchase agreement, the purchase price
      that the Company agreed to pay for the acquisition is $2,000,000 cash and
      5,500,000 shares of the Company’s restricted common stock. Pursuant to the
      purchase agreement, the $2,000,000 cash will be payable in three installments
      within one year time after closing of the acquisition and the 5,500,000 shares
      will be payable upon closing of the acquisition. Mr. Dong and his fellows
      together with Yucai have jointly guaranteed that the Company will receive a
      minimum of $554,487 (RMB 4,325,000) in terms of profit and management fee each
      year for the three years following closing (2007-2009), in the event that the
      net profit is less than the guaranteed amount to the Company, Mr. Dong and
      his
      fellows shall make up for the difference before May 31 of each year in respect
      thereof. The Company has guaranteed that the average 3-day closing price of
      its
      shares on the days immediately prior to the one year anniversary of the closing
      date will be not less than $0.50 per share, in the event that the share price
      is
      less than $0.50, the Company shall credit additional cash or issue new
      restricted shares to make it up. As of May 31, 2007 the transaction has not
      been
      consummated.





On
      May
      15, 2007, the Company completed the acquisition of 100% of the equity interest
      in China Princely pursuant to the purchase agreement. China Princely has changed
      its name to Hartcourt Princely Education Technology Development (Beijing) Co.,
      Ltd (“Hartcourt Princely”). The purchase price is US$38,462 (RMB300,000) and
      5,400,000 shares of the Company’s restricted common stock. Additional capital of
      US$269,230 (RMB2,100,000) will also be injected to Hartcourt
      Princely.





As
      of May
      31, 2007, the Company owns 100% of three (3) British Virgin Island (“BVI”)
      incorporated companies: (1) Hartcourt China Inc., (2) Hartcourt Capital Inc.,
      and (3) AI-Asia Inc. All three of these BVI subsidiaries are holding companies
      for assets located in China.





As
      of May
      31, 2007, Hartcourt Capital Inc. owns 100% of Hartcourt Hi-Tech Investment
      (Shanghai) Inc. while Hartcourt Hi-Tech Investment (Shanghai) Inc., use its
      employees as nominees, owns 100% of Shanghai Jiumeng Information Technology
      Co.,
      Ltd. These two companies are located in Shanghai, China. In Apr 2007, the
      Company decided to wind up Hartcourt Hi-Tech Investment (Shanghai) Inc. The
      wind-up process is expected to be completed by Oct 2007.





As
      of May
      31, 2007, AI-Asia, Inc., the third holding company, owns 100% equity of
      Hartcount Education Investment Management Consulting (Shanghai) Co., Ltd (former
      name is AI-Asia (Shanghai) Information Technology, Inc),, located in Shanghai,
      China, and owns 100% equity of China Princely Education Technology Development
      Company Limited (“China Princely”).





As
      of May
      31, 2007, Hartcourt Education Investment Management Consulting (Shanghai) Co.,
      Ltd owns 100% equity of Hartcourt Princely Education Technology Development
      (Beijing) Co., Ltd. Hartcourt Princely is located in Beijing,
      China.





On
      February 26, 2007, the Board of Directors approved the resolution to dispose
      off
      the operations of Shanghai Jiumeng Information Technology Co., Ltd. (“Shanghai
      Jiumeng”) and entered into a definitive agreement with Shanghai Shiheng
      Architecture Consulting Co., Ltd to sell its 100% equity interests in Shanghai
      Jiumeng Information Technology Co., Ltd. (“Shanghai Jiumeng”), which holds 51%
      equity interest in Shanghai Huaqing Corporation Development Ltd. (“Shanghai
      Huaqing”).


36





On
      June
      11, 2007, Shanghai Shiheng Architecture Consulting Co., Ltd (the “Purchaser”)
      terminated the Sales & Purchase Agreement it had entered into with The
      Hartcourt Companies, Inc. (the “Company”) on February 26, 2007.  The
      Purchaser refused to consummate the transaction for the agreed upon purchase
      price.  Pursuant to that agreement, the Company would have sold its
      interest in Shanghai Jiumeng Information Technology Co., Ltd, which holds a
      51%
      equity interest in Shanghai Huaqing Corporation Development Ltd.





In
      June
      2007 we have entered into a nonbinding Memorandum of Understanding (the “MOU”)
      to sell our 51% interest in Shanghai Huaqing Corporation Development Co., Ltd.
      The MOU is subject to execution of a definitive agreement, and subject to the
      receipt of required third party consents and approvals. The contemplated
      purchase price is RMB 4,000,000(US$525,491). In addition, a shareholder of
      Huaqing Shanghai will return 997,550 shares of our common stock to the
      individual or entity designated by us. This sale, if consummated, will complete
      our transition from the information technology distribution business to the
      business of operating vocational and technical educational schools.





As
      of May
      31, 2007, the Company has classified the Shanghai Huaqing Corporation
      Development Ltd business as discontinued operation. (See note 13)







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




a) Basis
      of
      Consolidation




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




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 2007 and 2006
      consolidated  financial statements for the Company includes the
      accounts balances of its majority owned subsidiaries.




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




b) Use
      of Estimates




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




c) Cash
      and Cash
      Equivalents




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




d) Accounts
      Receivable




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




e) Advances
      to
      suppliers




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




37


f)Prepaid
      expenses




Prepaid
      expenses are expenses that are allocated into the period in which they are
      incurred and in subsequent periods, and be amortized within one year
      (inclusive). They include amortization of low-valued consumables, prepaid
      insurance expenses, lump-sum payment for stamps in large amount that need to
      be
      amortized.




Prepaid
      expenses generally will be amortized in equal installments and charged as costs
      or expenses of periods benefiting within one year. If certain prepaid expense
      item cannot benefit the company any more, its un-amortized amount is recorded
      as
      an expense for the current period. Prepaid expenses amounted to $496 at May
      31,
      2007 and is included in “Prepaid expenses and other assets” in the accompanying
      financial statements.




g) Inventories




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




h) Property
      and
      Equipment




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




i) Intangible
      Assets




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




j) Impairment
      of Long-Lived
      Assets




Effective
      January 1, 2002, the Company adopted Statement of Financial Accounting Standards
      No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
      144"), which addresses financial accounting and reporting for the impairment
      or
      disposal of long-lived assets and supersedes SFAS No. 121, "Accounting for
      the
      Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
      and the accounting and reporting provisions of APB Opinion No. 30, "Reporting
      the Results of Operations for a Disposal of a Segment of a Business." The
      Company periodically evaluates the carrying value of long-lived assets to be
      held and used in accordance with SFAS 144. SFAS 144 requires impairment losses
      to be recorded on long-lived assets used in operations when indicators of
      impairment are present and the undiscounted cash flows estimated to be generated
      by those assets are less than the assets' carrying amounts. In that event,
      a
      loss is recognized based on the amount by which the carrying amount exceeds
      the
      fair market value of the long-lived assets. Loss on long-lived assets to be
      disposed of is determined in a similar manner, except that fair market values
      are reduced for the cost of disposal. Based on its review, the Company believes
      that, as of May 31, 2007, there were no significant impairments of its
      long-lived assets used in operations.




k) Revenue
      Recognition




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




38







l) Income
      Taxes




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




m) Stock-Based
      Compensation




The
      Company adopted SFAS No. 123 (Revised 2004), Share Based Payment (“SFAS
      No. 123R”), under the modified-prospective transition method on June 1,
      2006. SFAS No. 123R requires companies to measure and recognize the cost of
      employee services received in exchange for an award of equity instruments based
      on the grant-date fair value. Share-based compensation recognized under the
      modified-prospective transition method of SFAS No. 123R includes
      share-based compensation based on the grant-date fair value determined in
      accordance with the original provisions of SFAS No. 123, Accounting for
      Stock-Based Compensation, for all share-based payments granted prior to and
      not
      yet vested as of June 1, 2006 and share-based compensation based on the
      grant-date fair-value determined in accordance with SFAS No. 123R for all
      share-based payments granted after June 1, 2006. SFAS No. 123R eliminates
      the ability to account for the award of these instruments under the intrinsic
      value method prescribed by Accounting Principles Board (“APB”) Opinion
      No. 25, Accounting for Stock Issued to Employees, and allowed under the
      original provisions of SFAS No. 123. Prior to the adoption of SFAS
      No. 123R, the Company accounted for the Company’s stock option plans using
      the intrinsic value method in accordance with the provisions of APB Opinion
      No. 25 and related interpretations.




n) Foreign
      Currencies
      Translation




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




o)            Fair
      Value of Financial Instruments




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




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




p) Basic
      and diluted earning per
      share




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




39







q) Statement
      of Cash
      Flows




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




r) Segment
      Reporting




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




s) Recently
      Issued Accounting
      Standards




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




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




This
      Statement:




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


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


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


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


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




This
      Statement is effective as of the beginning of the Company's first fiscal year
      that began after September 15, 2006. Management is currently evaluating the
      effect of adoption of this statement on the financial statements.




40





In
      September 2006, FASB issued SFAS 157 ‘Fair Value Measurements’.
      This Statement defines fair value, establishes a framework for measuring fair
      value in generally accepted accounting principles (GAAP), and expands
      disclosures about fair value measurements. This Statement applies under other
      accounting pronouncements that require or permit fair value measurements, the
      Board having previously concluded in those accounting pronouncements that fair
      value is the relevant measurement attribute. Accordingly, this Statement does
      not require any new fair value measurements. However, for some entities, the
      application of this Statement will change current practice. This Statement
      is
      effective for financial statements issued for fiscal years beginning after
      November 15, 2007, and interim periods within those fiscal years. The management
      is currently evaluating the effect of this pronouncement on financial
      statements.




In
      September 2006, FASB issued SFAS 158 ‘Employers’ Accounting for Defined Benefit
      Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87,
      88, 106, and 132(R)’ This Statement improves financial reporting by requiring an
      employer to recognize the over funded or under funded status of a defined
      benefit postretirement plan (other than a multiemployer plan) as an asset or
      liability in its statement of financial position and to recognize changes in
      that funded status in the year in which the changes occur through comprehensive
      income of a business entity or changes in unrestricted net assets of a
      not-for-profit organization. This Statement also improves financial reporting
      by
      requiring an employer to measure the funded status of a plan as of the date
      of
      its year-end statement of financial position, with limited exceptions. An
      employer with publicly traded equity securities is required to initially
      recognize the funded status of a defined benefit postretirement plan and to
      provide the required disclosures as of the end of the fiscal year ending after
      December 15, 2006. An employer without publicly traded equity securities is
      required to recognize the funded status of a defined benefit postretirement
      plan
      and to provide the required disclosures as of the end of the fiscal year ending
      after June 15, 2007. However, an employer without publicly traded equity
      securities is required to disclose the following information in the notes to
      financial statements for a fiscal year ending after December 15, 2006, but
      before June 16, 2007, unless it has applied the recognition provisions of this
      Statement in preparing those financial statements:







a)
            A
                brief description of the provisions of this
                Statement





b)
            The
                date that adoption is required





c)
            The
                date the employer plans to adopt the recognition provisions of this
                Statement, if earlier.







The
      requirement to measure plan assets and benefit obligations as of the date of
      the
      employer’s fiscal year-end statement of financial position is effective for
      fiscal years ending after December 15, 2008. The management is currently
      evaluating the effect of this pronouncement on financial
      statements.




In
      February 2007, FASB issued FASB Statement No. 159, The Fair Value Option for
      Financial Assets and Financial Liabilities. FASB 159 is effective for fiscal
      years beginning after November 15, 2007. Early adoption is permitted subject
      to
      specific requirements outlined in the new Statement. Therefore, calendar-year
      companies may be able to adopt FASB 159 for their first quarter 2007 financial
      statements.




The
      new
      Statement allows entities to choose, at specified election dates, to measure
      eligible financial assets and liabilities at fair value that are not otherwise
      required to be measured at fair value. If a company elects the fair value option
      for an eligible item, changes in that item's fair value in subsequent reporting
      periods must be recognized in current earnings. FASB 159 also establishes
      presentation and disclosure requirements designed to draw comparison between
      entities that elect different measurement attributes for similar assets and
      liabilities. The management is currently evaluating the effect of this
      pronouncement on financial statements.


41





**NOTE
      3                                EARNINGS/(LOSSES)
      PER SHARE**





Basic
      and
      diluted (loss) income per common share is computed as follows:




May 31,
              2007
            
            
            May 31,
              2006
            
            
            May 31,
              2005Net
                income (loss)
            
            $
            (3,786,441
            )
            
            $
            (2,834,961
            )
            
            
            123,082Effects
                of dilutive securities
            
            
            -
            
            
            
            -Weighted
                average shares outstanding
            
            
            197,512,791
            
            
            
            194,049,240
            
            
            
            191,503,585Basic
                and dilutive earnings/(losses) per share
            
            $
            (0.01
            )
            
            $
            (0.01
            )
            
            
            0.00





As
      of May
      31, 2007, we had 34,600,000 options outstanding, each exercisable for one share
      of our common stock. These instruments were not included in the computation
      of
      diluted earnings per share for any of the periods presented, due to their
      anti-dilutive effects.





**NOTE
      4** **SHAREHOLDERS’ EQUITY**





a)
      Capitalization




The
      total
      number of shares of stock which the Company has the authority to issue is
      250,000,000 consisting of 239,999,000 shares of common stock, $0.001 par value,
      1,000 shares of original preferred stock, $0.01 par value (the Original
      Preferred Stock), and 10,000,000 shares of Class A preferred stock. The total
      number of shares of the Company’s common stock outstanding as of May 31, 2007
      and May 31, 2006 are 205,081,997 and 194,844,535 respectively.





b)
      Original Preferred Stock





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





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





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





On
      July,
      14, 2004, the founder of Hartcourt, Dr. Alan V Phan, converted his 1,000 shares
      of Original Preferred Stock into 2,000,000 shares of Hartcourt common stock.
      After the conversion, no Original Preferred Stock was outstanding as of May
      31,
      2006.





c)
      Class
      A Preferred Stock





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





d)
      Equity
      Transactions during the Year





Following
      is the summary of equity transactions during the year ended May 31,
      2007.





On
      June
      20, 2006, we issued 200,000 shares of our common stock valued at $6,000 in
      lieu
      of cash payment for consulting service, which were approximately equal to the
      fair market value of the stock at issue date.





On
      July
      5, 2006, we issued 232,000 shares of our common stock valued at $9,875 in lieu
      of cash payment for director service compensation, which were approximately
      equal to the fair market value of the stock at issue date.


42





On
      October 1, 2006, we issued 253,168 shares of our common stock valued at $14,000
      in lieu of cash payment for director service compensation, which were
      approximately equal to the fair market value of the stock at issue
      date.





On
      December 4, 2006, we issued 3,709,118 shares of our common stock in an offshore
      transaction under Regulation S to Mr. Gang Liu and Mr. Jun Xu at US$0.068 per
      share for gross proceeds of US$252,372. Proceeds will be used for working
      capital.





On
      January 1, 2007, we issued 196,450 shares of our common stock valued at $14,000
      in lieu of cash compensation for director service compensation, which were
      approximately equal to the fair market value of the stock at issue
      date.




On
      January 1, 2007, we issued 95,474 shares of our common stock valued at $6,492
      in
      lieu of cash payment for employee service compensation, which were approximately
      equal to the fair market value of the stock at the issuance date.





On
      Apr 1,
      2007, we issued 151,252 shares of our common stock valued at $13,000 in lieu
      of
      cash compensation for director service compensation, which were approximately
      equal to the fair market value of the stock at issue date.





On
      May 21, 2007, we issued 5,400,000 shares of our common stock valued at $378,000
      for acquisition of China Princely, which were approximately equal to the fair
      market value of the stock at issue date.





Following
      is the summary of equity transactions during the year ended May 31,
      2006.





On
      August
      15, 2005, we issued 109,675 shares of our common stock valued at $10,875 in
      lieu
      of cash payment for director service compensation, which were approximately
      equal to the fair market value of the stock at issue date.





On
      October 1, 2005, we issued 127,100 shares of our common stock valued at $10,375
      in lieu of cash payment for director service compensation, which were
      approximately equal to the fair market value of the stock at issue
      date.





On
      January 1, 2006, we issued 88,835 shares of our common stock valued at $7,875
      in
      lieu of cash payment for director service compensation, which were approximately
      equal to the fair market value of the stock at issue date.





On
      January 1, 2006, we issued 17,885 shares of our common stock valued at $1,809
      in
      lieu of cash payment for consulting service, which were approximately equal
      to
      the fair market value of the stock at issue date.





On
      January 1, 2006, we issued 33,523 shares of our common stock valued at $1,810
      in
      lieu of cash payment for employee service compensation, which were approximately
      equal to the fair market value of the stock at the issuance date.





On
      April
      1, 2006, we issued 129,055 shares of our common stock valued at $9,375 in lieu
      of cash payment for director service compensation, which were approximately
      equal to the fair market value of the stock at issue date.





On
      April
      24, 2006, we issued 600,000 shares of our common stock valued at $30,000 in
      lieu
      of cash payment for consulting service, which were approximately equal to the
      fair market value of the stock at issue date.





**Stock
      Option Plan**


In
      April
      1995, the Company adopted a stock option plan (the Plan) to attract and retain
      qualified persons for positions of substantial responsibility as officers,
      directors, consultants, legal counsel, and other positions of significance
      to
      the Company, the Plan provides for the issuance of both Incentive Stock Options
      and Non-Qualified Stock Options. The Plan, which is administered by the Board
      of
      Directors, provides for the issuance of a maximum of 2,000,000 options to
      purchase shares of common stock at the market price thereof on the date of
      grant. Such options are generally exercisable over a 10-year period from the
      date of grant. Each option lapses 90 days after the optionee has terminated
      his
      continuous activity with the Company, except that if his continuous activity
      with the Company terminates by reason of his death, such option of the deceased
      optionee may be exercised within one year after the death of such optionee.
      Options granted under the Plan are restricted as to sale or transfer. All
      options granted at not less than fair value at the date of grant and have terms
      of 10 years. The stock option plan adopted in year 1995 expired in March 2005
      pursuant to its terms.




43







The
      board
      of directors has proposed a new stock option plan in year 2005 to attract and
      retain qualified persons for positions of substantial responsibility as
      officers, directors, consultants, legal counsel, and other positions of
      significance to the Company. The 2005 plan provides for the issuance of stock
      options, stock appreciation rights, restricted stock, stock units, bonus stock,
      dividend equivalents, other stock-related awards and performance awards that
      may
      be settled in cash, stock, or other property. The total number of shares of
      our
      common stock that may be subject to awards under the 2005 plan is equal to
      35,000,000 shares, plus (i) the number of shares with respect to which awards
      previously granted under the 2005 Plan that terminates without the issuance
      of
      the shares or where the shares are forfeited or repurchased; (ii) with respect
      to awards granted under the 2005 Plan, the number of shares which are not issued
      as a result of the award being settled for cash or otherwise not issued in
      connection with the exercise or payment of the award and (iii) the number of
      shares that are surrendered or withheld in payment of the exercise price of
      any
      award or any tax withholding requirements in connection with any award granted
      under the 2005 Plan. Unless earlier terminated by our Board of Directors, the
      2005 plan will terminate on the earlier of (1) ten years after the later of
      (x)
      its adoption by our Board of Directors, and (y) the approval of an increase
      in
      the number of shares reserved under the 2005 plan by our Board of Directors
      (contingent upon such increase being approved by our shareholders) and (2)
      such
      time as no shares of our common stock remain available for issuance under the
      2005 plan and we have no further rights or obligations with respect to
      outstanding awards under the 2005 plan. Options granted under the Plan are
      restricted as to sale or transfer.




The
      2005
      stock option plan was approved on Nov 23, 2005 during the annual shareholders
      meeting.




The
      number of shares of common stock reserved and available under the 2005 Stock
      Option Plan was approved to increase from 35,000,000 to 70,000,000 at the annual
      meeting of shareholders on February 24, 2007.




On
      May
      31, 2006, the Board of Directors of the Company appointed Mr. Victor Zhou to
      be
      the acting Chief Executive Officer, effective June 1, 2006. Mr. Victor Zhou’s
      employment agreement was signed on June 1, 2006. The compensation includes
      a
      monthly salary of $8,333. In addition, Mr. Victor Zhou was granted an option
      to
      purchase 10,000,000 shares of our common stock with excise price of $0.04.
      The
      stock option vesting schedule is as following:




-
            Option
                to purchase 6,000,000 shares of our common stock to be vested with
                three
                installments of 2,000,000 each upon each successful new business
                acquisition of the Company; and-
            Option
                to purchase 2,000,000 shares of our common stock to be vested upon
                each
                full profitable year.





On
      June
      1, 2006, the Company granted Yungeng Hu, CFO & President of the Company, an
      option to purchase total 11,000,000 shares of the Company’s common stock at
      excise price of $0.04 according to the following vesting schedule and based
      on
      the Company’s employee compensation plan.




-
            7,500,000
                stock options vest pro rata over the two years of the employment
                contract
                period in equal installments of every six months.-
            2,000,000
                stock options vest upon each successful new business acquisition
                of the
                Company.-
            1,500,000
                stock options vest upon each full profitable
                year





Following
      assumption is used to calculate the fair value of the options
      granted.




Risk-free
                interest rate
            4.92%Weighted
                average expected life of the options
            6.25
                yearsExpected
                volatility
            57.93%Expected
                dividend yield
            0





44





On
      July
      4, 2006, the Company granted Billy Wang, Chairman of the Board, an option to
      purchase 5,000,000 shares of the Company’s common stock at excise price of
      $0.05. The option will vest on September 28, 2007 and is exercisable within
      five
      years time after vesting.




Following
      assumption are used to calculate the fair value of the options
      granted.




Risk-free
                interest rate
            4.92%Weighted
                average expected life of the options
            5.00
                yearsExpected
                volatility
            57.93%Expected
                dividend yield
            0





On
      August
      23, 2006, the Company granted Geoffrey Wei and Wilson Li, independent directors
      of the Company each an option to purchase 1,000,000 shares of the Company’s
      common stock at excise price of $0.05. Each option will vest on August 23,
      2007
      and is exercisable within five years time after vesting.




Following
      assumption are used to calculate the fair value of the options
      granted.




Risk-free
                interest rate
            4.92%Expected
                life of the options
            6.00
                yearsExpected
                volatility
            57.93%Expected
                dividend yield
            0





On
      September 1, 2006, the Board of Directors made Victor Zhou the permanent CEO
      of
      the Company, and in connection of this decision granted to Mr. Zhou options
      to
      purchase a total of 11,000,000 shares of the Company’s common stock at excise
      price of $0.05 according to the following vesting schedule and based on the
      employee compensation plan. These options replace the options that were granted
      on May 31, 2006, which compensated Mr. Zhou for his service as Acting Chief
      Executive Officer. None of the options vested during the term when Mr. Zhou
      was
      acting CEO of the Company.




-
            7,500,000
                stock options vested pro rata over 2 years of the employment contract
                period.-
            2,000,000
                stock options vested upon each successful new business acquisition
                of the
                Company.-
            1,500,000
                stock options vested upon each full profitable
                year.





Following
      assumption are used to calculate the fair value of the options
      granted.




Risk-free
                interest rate
            4.92%Weighted
                average expected life of the options
            6.25
                yearsExpected
                volatility
            57.93%Expected
                dividend yield
            0







The
      stock
      option granted to ex-CEO Carrie Hartwick to purchase total 15,000,000 shares
      of
      the Company’s common stock was terminated 90 days after her departure on June 1,
      2006 from the Company. The stock option granted to ex-Vice President Zhou Jing
      Jing to purchase 1,000,000 shares of the Company’s common stock was terminated
      90 days after his departure on June 9, 2006 from the Company.




45





The
      following table summarizes the activity of stock options:





WeightedAverage
            
            
            
            AggregateNumber
                of
            
            
            
            Exercise
            
            
            
            IntrinsicShares
            
            
            
            Price
            
            
            
            ValueShares
                under option at Dec 31, 2004
            
            
            7,300,000
            
            
            $
            0.28
            
            
            
            270,000Granted
            
            
            20,300,000
            
            
            $
            0.09ExercisedExpiredCancelledShares
                under option at May 31, 2005
            
            
            27,600,000
            
            
            $
            0.14
            
            
            $
            323,000Granted
            
            
            1,000,000
            
            
            $
            0.09ExercisedExpired
            
            
            4,000,000
            
            
            $
            0.207CancelledShares
                under option at May 31, 2006
            
            
            24,600,000
            
            
            $
            0.127
            
            
            $
            0-Granted
            
            
            29,000,000
            
            
            $
            0.05Exercised
            
            
            -
            
            
            
            -Expired
            
            
            3,000,000
            
            
            $
            0.30Cancelled
            
            
            16,000,000
            
            
            $
            0.09Share
                under option at May 31, 2007
            
            
            34,600,000
            
            
            $
            0.06
            
            
            $
            690,000







Additional
      information relating to stock options outstanding and exercisable at May 31,
      2007 summarized by exercise price is as follows:




WeightedNumber
                of
            
            Average
            
            Weighted
            
            Number
            
            WeightedRange
                of
            
            Outstanding
                at
            
            Remaining
            
            Average
            
            Exercisable
                at
            
            AverageExercise
            
            May
                31,
            
            Contractual
            
            Exercise
            
            May
                31,
            
            ExercisePrice
            
            2007
            
            Life
            
            Price
            
            2007
            
            Price$0.04
                - $0.05
            
            29,000,000
            
            5.3
                Year
            
            $0.05
            
            3,750,000
            
            $0.05$0.09
            
            5,300,000
            
            3.83
                Year
            
            $0.09
            
            5,300,000
            
            $0.09$1.00
            
            300,000
            
            1.04
                Year
            
            $1.00
            
            300,000
            
            $1.00







During
      the year ended May 31, 2007, a total of 3,750,000 options vested and the Company
      recorded $484,308 in stock based compensation expense.




b)
      Warrants




There
      are
      no warrants outstanding for the year ended May 31, 2007 and the year ended
      May
      31, 2006.




As
      of May
      31, 2005, there were 29,010,239 outstanding warrants to purchase 29,010,239
      shares of common stock at $0.001 par value at $0.058 per share.





In
      connection with signing a private placement of Hartcourt shares with Enlight
      Corporation Ltd., on October 23, 2002, Hartcourt granted Enlight warrants to
      purchase 29,010,239 shares at the price doubling the trading price on the
      issuance date. The warrants expired 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. The Company has not extended the validity of warrants and
      these warrants expired as of May 31, 2007.


46





**NOTE
      5                                 GOING
      CONCERN**





As
      shown
      in the accompanying consolidated financial statements, the Company has suffered
      recurring losses from operations and has an accumulated deficit of $71,495,815
      and $67,709,374 as of May 31, 2007 and May 31, 2006. These factors, among
      others, raise substantial doubt about the Company’s ability to continue as a
      going concern. The Company’s need for working capital is a key issue for
      management and necessary for the Company to meet its goals and objectives.
      The
      Company continues to pursue additional capitalization opportunities. There
      is no
      assurance, however, that the Company will be successful in meeting its goals
      and
      objectives in the future.





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





The
      Company has taken certain restructuring steps to provide the necessary capital
      to continue its operations. These steps included: 1) acquire profitable
      operations through issuance of equity instruments, 2) disposal of unprofitable
      or unfavorable return-on-investment operations, and 3) continue actively seeking
      additional funding through offshore private placement to satisfy working capital
      requirements.





**NOTE
      6                                PREPAID
      EXPENSES AND OTHER ASSETS**




Deposit,
      other debtors and prepaid expenses as of May 31, 2007 and 2006 are summarized
      as
      follows:




May
                31, 2007
            
            
            May
                31, 2006Prepaid
                expenses
            
            
            496
            
            
            
            405Deposits
            
            $
            41,053
            
            
            
            193,413Total
            
            $
            41,549
            
            
            
            193,818





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




Accrued
      expenses and other current liabilities as of May 31, 2007 and 2006 are
      summarized as follows:






Amount
            
            
            AmountMay
                31, 2007
            
            
            May
                31, 2006$
            
            
            
            $Accrued
                directors’ compensations
            
            
            196,500
            
            
            
            7,250Accrued
                rental fee
            
            
            3,412
            
            
            
            -Accrued
                professional fees
            
            
            83,235
            
            
            
            129,136Accrued
                other expenses
            
            
            34,631
            
            
            
            40,073Tax
                payable
            
            
            904
            
            
            
            204Payroll
                payable
            
            
            21,690
            
            
            
            -Welfare
            
            
            9,588
            
            
            
            -Other
                payable
            
            
            222,832
            
            
            
            16,434_______
            
            
            _______Total
            
            $
            572,792
            
            
            $
            193,097







47


**NOTE
      8                                PROPERTIES
      AND EQUIPMENT**




The
      Company’s property and equipment as of May 31, 2007 and 2006 are summarized as
      follows:






May
                31, 2007
            
            
            May
                31, 2006Office
                equipment and computers
            
            
            $
            61,172
            
            
            $
            69,631Less:
                accumulated depreciation
            
            
            
            (34,749
            )
            
            
            (35,067
            )Property
                and equipment, net
            
            
            $
            26,423
            
            
            $
            34,564







**NOTE
      9                   ACQUISITION**




On
      May
      15, 2007, the Company closed the purchase of 100% interest in China Princely
      Education Technology Development Company Limited (“China Princely”), an
      authorized accrediting organization for China vocational education located
      in
      Beijing, the People’s Republic of China. Under the terms of the purchase
      agreement, the purchase price that the Company agreed to pay to the shareholders
      of China Princely is $39,180 (RMB300,000) and 5,400,000 shares of the Company’s
      restricted common stock. In addition, a $274,258 (RMB2,100,000) of capital
      injection in China Princely was also due at closing. As of May 31, 2007, we
      haven’t paid the cash consideration of $39,180 and the $274,258 capital
      injection.




A
      summary
      of China Princely assets acquired, liabilities assumed and consideration paid
      for is as follows:




AmountCurrent
                assets
            
            $
            8,345Good
                will
            
            
            651,082Property
                & equipment
            
            
            4,155Current
                liabilities
            
            
            (246,000
            )$
            417,180Consideration
                paidCash
            
            $
            39,180Common
                Stock
            
            
            378,000$
            417,180





The
      following un-audited pro forma consolidated financial information for the years
      ended December 31, 2007 and 2006, as presented below, reflects the results
      of
      operations of the Company assuming the acquisition occurred on June 1, 2005
      and
      2006 respectively, and after giving effect to the purchase accounting
      adjustments. These pro forma results have been prepared for information purposes
      only and do not purport to be indicative of what operating results would have
      been had the acquisitions actually taken place on June 1, 2005 and 2006
      respectively, and may not be indicative of future operating
      results.







China
                Princely
            
            Years
                ended May 31
            
            
            Five
                months period ended2007
            
            
            2006
            
            
            May
                31, 2005(UN-AUDITED
                AND IN U.S. DOLLARS)Operating
                loss
            
            $
            (1,430,039
            )
            
            $
            (1,003,952
            )
            
            $
            (330,284
            )Net
                income (loss)
            
            $
            (3,869,146
            )
            
            $
            (2,972,880
            )
            
            $
            73,082Earnings
                (loss) per share - basic
            
            $
            (0.02
            )
            
            $
            (0.02
            )
            
            $
            0.00Earnings
                (loss) per share - diluted
            
            $
            (0.02
            )
            
            $
            (0.02
            )
            
            $
            0.00







48


**NOTE
      10                                DUE
      TO DIRECTORS**




The
      amount due to directors as of May 31, 2007 and 2006 represents director fee
      due
      to the Company’s directors. The amount due to directors is interest free without
      maturity date.




**NOTE
      11                                 RELATED
      PARTY TRANSACTION**





Following
      is the summary of related parties transactions for the year ended May 31,
      2007:


During
      the year ended May 31, 2007, Hartcourt issued 832,870 shares of common stock
      valued at $50,875 to its directors for services rendered. The stocks were valued
      at the average market price for the period for which service were
      provided.




During
      the year ended May 31, 2007, Hartcourt issued 95,474 shares of the Company’s
      common stock valued at $6,492 for employee service compensation. The stock
      were
      valued at the average market price for the period for which service were
      provided.





Following
      is the summary of related parties transactions for the year ended May 31,
      2006:





a)
            During
                the fiscal year ended May 31, 2006, Huaqing, a 51% owned subsidiary
                of the
                Company, sold $4,375,660 monitors and laptops to its minority shareholder
                (Shanghai Chengqing Electronics Co., Ltd., formerly known as Shanghai
                Huaqing Economic Development Co.,
                Ltd).





b)
            During
                the fiscal year ended May 31, 2006, Hartcourt issued 1,106,073 shares
                of
                our common stock valued at $72,120 to its officers, employees and
                all
                directors in lieu of cash
                compensation.








**NOTE
      12**  **GOODWILL**





Goodwill
      resulting from the acquisition of China Princely amounted to $651,082 as of
      May
      31, 2007.





**NOTE
      13                      DISCONTINUED
      OPERATIONS**





***Control
      Tech Electronics (Shanghai) Co., Ltd.***





During
      the transition period ended May 31, 2005, the Company, via its BVI subsidiary,
      Hartcourt Capital, Inc., acquired Control Tech, located and operated in China.
      Control Tech is the distributor of video and audio conference products in
      mainland China. On November 1, 2004, the Company signed a definitive agreement
      to purchase a 90% equity interest in Control Tech for a total consideration
      of
      $1.96 million. Pursuant to the definitive purchase agreement, the purchase
      price
      was to be paid by the issuance of 8,516,902 shares of the Company’s common stock
      at a value of 0.23 per share. On February 25, 2005, the Company completed all
      legal procedures to acquire 90% of the capital stock of Control Tech. Due to
      Company’s share price decline, the purchase price was revised as $1.96 million
      payable in 19,588,875 shares of Company’s common stock.





Since
      January 1, 2006, the Company decided to cease the operation of Control Tech
      due
      to the unsatisfied operating results.





The
      Company has made a provision for the future disposal of Control Tech of
      US$1,827,990 during the fiscal year ended May 31, 2006.





Loss
      from
      the discontinued operation of Control Tech during the fiscal year ended May
      31,
      2006 was US$596,352.





The
      investment in Control Tech US$300,000 has been classified as assets pending
      for
      sale on the accompanying consolidated balance sheet as of May 31,
      2006.


49





Following
      is the summary of net assets held for disposition as of May 31:





2007
            2006Assets
                held for disposition
            -
            $2,724,342Loss
                from discontinued operations
            -
            (596,352)Provision
                against assets held for disposition
            -
            (1,827,990)Net
                assets held for disposition
            -
            $300,000





In
      September 2006, the Company entered into a definitive sales & purchase
      agreement to sell its interest in Control Tech. During the fiscal year ended
      May
      31, 2007, US$199,400 was collected, and the remaining balance of $100,600 has
      been reclassified to other receivable.





***Shanghai
      Huaqing Corporation Development Co., Ltd.***





On
      February 26, 2007, the Board of Directors approved the resolution to dispose
      off
      the operations of Shanghai Jiumeng Information Technology Co., Ltd. (“Shanghai
      Jiumeng”) and entered into a definitive agreement with Shanghai Shiheng
      Architecture Consulting Co., Ltd to sell its 100% equity interests in Shanghai
      Jiumeng Information Technology Co., Ltd. (“Shanghai Jiumeng”), which holds 51%
      equity interest in Shanghai Huaqing Corporation Development Ltd. (“Shanghai
      Huaqing”).





On
      June
      11, 2007, Shanghai Shiheng Architecture Consulting Co., Ltd (the “Purchaser”)
      terminated the Sales & Purchase Agreement it had entered into with The
      Hartcourt Companies, Inc. (the “Company”) on February 26, 2007.  The
      Purchaser refused to consummate the transaction for the agreed upon purchase
      price.  Pursuant to that agreement, the Company would have sold its
      interest in Shanghai Jiumeng Information Technology Co., Ltd, which holds a
      51%
      equity interest in Shanghai Huaqing Corporation Development Ltd.





In
      June
      2007 we have entered into a nonbinding Memorandum of Understanding (the “MOU”)
      to sell our 51% interest in Shanghai Huaqing Corporation Development Co., Ltd
      to
      its minority shareholders. The MOU is subject to execution of a definitive
      agreement, and subject to the receipt of required third party consents and
      approvals. The contemplated purchase price is RMB 4,000,000(US$525,491). In
      addition, a shareholder of Huaqing Shanghai will return 997,550 shares of our
      common stock to the individual or entity designated by us, while the shares
      are
      expected to be sold for US$49,878 (RMB379,668) cash.





Following
      is the summary of net assets held for disposition as of May 31:





2007
            2006Assets
                held for disposition
            $3,015,161
            $2,564,799Income
                (loss) from discontinued operations
            (90,156)
            450,362Provision
                against assets held for disposition
            (2,349,637)
            -Net
                assets held for disposition
            $575,368
            $3,015,161





**NOTE
      14                                COMMITMENTS
      AND CONTINGENCIES**





a)
      Employment Agreements




The
      current senior management consists of a Chief Executive Officer (“CEO”) and an
      President & Chief Financial Officer (“CFO”). Each of the Company’s executive
      employment agreements stipulate that senior executives, CEO and President &
CFO of the Company, can be terminated without causes with a written notice
      of 90
      days or less.




Effective
      from June 1, 2004, Carrie Hartwick was added to her responsibilities as
      President and CFO the responsibility of CEO. The new employment agreement was
      signed on March 9, 2005. The compensation was US$150,000 payable in equal
      monthly installment of US$12,500 cash.Ms
      Hartwick was granted an option to purchase 15 million shares of common stock
      at
      0.09 per share.




Subsequent
      to the year, on May 31, 2006, the Board of Directors of the Company accepted
      the
      resignation of Ms. Carrie Hartwick from CEO & President as well as the
      director, due to her personal reasons.




On
      May
      31, 2006, the Board of Directors of the Company appointed Mr. Victor Zhou to
      be
      the acting Chief Executive Officer, effective on June 1, 2006. Mr. Victor Zhou’s
      employment agreement was signed on June 1, 2006. The compensation includes
      a
      monthly salary of $8,333. In addition, Mr. Victor Zhou was granted 10,000,000
      stock options with excise price of $0.04. The stock option veting schedule
      is as
      following:


50







n
            2,000,000
                stock options vested on August 30,
                2006.


n
            6,000,000
                stock options with three installments of 2,000,000 options each vested
                upon each successful new business acquisition of the
                Company.


n
            2,000,000
                stock options vested upon each full profitable
                year.




On
      September 1, 2006, the Board of Directors of the Company promoted Mr. Victor
      Zhou to be the Chief Executive Officer. The Company signed the new employment
      contract with Mr. Zhou on September 1, 2006. The compensation includes an annual
      base salary of $100,000, payable by equal monthly installment of US$8,333 cash.
      In addition, Mr. Victor Zhou was granted 11,000,000 stock options with excise
      price of $0.05. The stock option vesting schedule is as following. These options
      replace the options that were granted on June 1, 2006.:




n
            7,500,000
                stock options vested pro rata over 2 years of the employment contract
                period.


n
            2,000,000
                stock options vested upon each successful new business acquisition
                of the
                Company.


n
            1,500,000
                stock options vested upon each full profitable
                year.




On
      December 5, 2006, the Compensation Committee increased Mr. Zhou’s annual base
      salary to $150,000 effective September 1, 2006. The options remain
      unchanged.




On
      May
      31, 2006, the Board of Directors of the Company appointed Mr. Yungeng Hu to
      be
      the President & Chief Financial Officer, effective on June 1,
      2006.




Mr.
      Yungeng Hu’s employment agreement was signed on June 1, 2006. The compensation
      includes an annual base salary of $150,000, payable by equal monthly installment
      of US$12,500 cash. In addition, Mr. Yungeng Hu was granted 11,000,000 stock
      options with excise price of $0.04. The stock option vesting schedule is as
      following:




n
            7,500,000
                stock options vested pro rata over 2 years of the employment contract
                period.


n
            2,000,000
                stock options vested upon each successful new business acquisition
                of the
                Company.


n
            1,500,000
                stock options vested upon each full profitable
                year




b)
      Operating Leases




The
      Company leases its offices and facilities under long-term, non-cancelable lease
      agreements expiring at various dates through August 4, 2007. The non-cancelable
      operating lease agreements provide that the Company pays certain operating
      expenses applicable to the leased premises according to the Chinese Law. Rental
      expense for the fiscal year ended May 31, 2007 and 2006 were $38,240 and
      $36,716, respectively.




In
      July
      2007, the Company moved its principal office to a new place and entered into
      a
      2-year non-cancelable lease agreement.




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




Year
                Ending May 31
            
            Payments2008
            
            $
            108,690







c)
      Legal
      Proceedings




Hartcourt
      Hi-Tech Investment (Shanghai) Inc. filed a compliant against Beijing Yi Zhi
      He
      Lian Information Technology Co., Ltd for returning RMB 1,000,000 which they
      owed
      the Company. On December 19, 2006, Beijing Shi Jing Shan District Court entered
      the Judgment in this case. The court found that Hartcourt Hi-Tech Investment
      (Shanghai) Inc. has no rights to file the compliant against Beijing Yi Zhi
      He
      Lian Information Technology Co., Ltd. unless designated by Hartcourt Capital,
      Inc., which signed and bound by the acquisition agreement. The courts issued
      an
      order overruling the compliant from Hartcourt Hi-Tech Investment (Shanghai).,
      Inc. as the plaintiff. The plaintiff can appeal to Beijing No. 1 Intermediate
      People’s Court if objecting to the rule. The Company has prepared additional
      lawsuit material and lodged the petition to appeal to Beijing No. 1 Intermediate
      People’s Court.




On
      August
      10, 2007, Hartcourt Capital Inc filed law suit in the Beijing No. 1 Intermediate
      People’s Court against Beijing Yi Zhi He Lian Information Technology Co., Ltd
      for returning RMB 1,000,000 which they owed the Company. The law suit is in
      the
      initial stage and the outcome cannot be estimated as of May 31,
      2007.


51


**NOTE
      15** **INCOME TAXES**





At
      May
      31, 2007 and 2006, the Company had net operating loss for tax purposes of
      approximately $3,377,000 and $3,373,000. The net operating loss carry forward
      may be used to reduce taxable income through the year 2027.





The
      gross
      deferred tax asset balance as of May 31, 2007 and 2006 was $1,306,000 and
      $1,305,000 respectively. A 100% valuation allowance has been established against
      the deferred tax assets, as the utilization of the loss carry forward cannot
      reasonably be assured. Components of deferred tax asset are as
      follows:




May
                31, 2007
            
            
            May
                31, 2006Deferred
                tax asset
            
            $
            1,306,000
            
            
            $
            1,305,000Less:
                valuation allowance
            
            
            (1,306,000
            )
            
            
            (1,305,000
            )$
            -----------
            
            
            $
            ------------





The
      following is a reconciliation of the income tax rate to the income taxes
      reflected in the Statement of Operations:





May
                31, 2007
            
            
            May
                31, 2006Tax
                expense (credit) at statutory rate-federal
            
            $
            (1,188,000
            )
            
            $
            (1,187,000
            )State
                tax expense (credit) net of federal tax
            
            
            (118,000
            )
            
            
            (118,000
            )Valuation
                allowance
            
            
            1,306,000
            
            
            
            1,305,000Foreign
                income tax
            
            
            -
            
            
            
            309,000Tax
                expense at actual rate
            
            $
            -
            
            
            $
            309,000





Income
      tax expense for the year ended May 31, 2007 and 2006 is $0 and $309,000
      respectively consists of tax on income of the Company’s subsidiary in China
      which is now part of discontinued operations as of May 31, 2007.





**NOTE
      16                      CURRENT
      VULNERABILITY DUE TO CERTAIN CONCENTRATIONS**





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





**NOTE
      17                      SUBSEQUENT
      EVENTS (UNAUDITED)**





In
      June
      2007, the Company entered into a memorandum of understanding to sell its 51%
      equity interest in Shanghai Huaqing to its minority shareholders. Pursuant
      to
      the MOU, the cash proceeds from the sale will be RMB4,000,000 (US$525,491).
      In
      addition, a shareholder of Huaqing Shanghai will also return 997,550 shares
      of
      our common stock to the individual or entity designated by the Company, while
      the shares is expected to be sold for US$49,878 (RMB379,668) cash. The
      transaction must be approved by the Company’s stockholders. The Company is in
      the process of filing the proxy statement to secure such approval with the
      United States Securities and Exchange Commission and will distribute the proxy
      statement and seek to obtain the necessary stockholders approval following
      the
      effectiveness of such proxy statement.


52





In
      June
      2007, the Company entered into a Memorandum of Understanding with Chongqing
      Zhengda Software Group Co., Ltd to acquire 100% equity interests in its two
      subsidiaries: Chongqing Zhengda Education Group and Chongqing Zhengda Hengling
      Co., Ltd. We have conducted due diligence for the proposed acquisition and
      a
      proxy statement for this transaction will be sent out to the selling
      shareholders for approval.





**NOTE
      18                      RECLASSIFICATION**




Certain
      prior period amounts have been reclassified to conform to the year ended May
      31,
      2007 presentation.















53







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





None.





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






We
      maintain disclosure controls and procedures that are designed to ensure that
      information required to be disclosed by us in the reports that we file or submit
      to the Securities and Exchange Commission under the Securities Exchange Act
      of
      1934, as amended, is recorded, processed, summarized and reported within the
      time periods specified by the Securities and Exchange Commission’s rules and
      forms, and that information is accumulated and communicated to our management,
      including our Chief Executive Officer and our Chief Financial Officer, as
      appropriate to allow timely decisions regarding required disclosure. The
      effectiveness of our disclosure controls and procedures is subject to certain
      limitations, including the exercise of judgment in designing, implementing
      and
      evaluating the controls and procedures, the assumptions used in identifying
      the
      likelihood of future events, and the inability to eliminate errors or misconduct
      completely. As a result, there can be no assurance that our disclosure controls
      and procedures will detect all errors or fraud. By their nature, any system
      of
      internal control, including our system, can provide only reasonable assurance
      regarding management’s control objectives.




Under
      the
      supervision and with the participation of our management, including our Chief
      Executive Officer and our Chief Financial Officer, we evaluated the
      effectiveness of the design and operation of our disclosure controls and
      procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act
      of
      1934) as of May 31, 2007, the end of the period covered by this report. Based
      on
      that evaluation, the Chief Executive Officer and Chief Financial Officer
      concluded that our disclosure controls and procedures were effective as of
      May
      31, 2007.





Management
      does not expect that the Company’s disclosure controls and procedures or its
      internal control over financial reporting will prevent or detect all errors
      and
      all fraud. A control system, no matter how well conceived and operated, can
      provide only reasonable, not absolute, assurance that the objectives of the
      control systems are met. Further, the design of a control system must reflect
      the fact that there are resource constraints, and the benefits of controls must be considered
      relative to their costs. Because of the inherent limitations in a cost-effective
      control system, no evaluation of internal control over financial reporting
      can
      provide absolute assurance that misstatements due to error or fraud will not
      occur or that all control issues and instances of fraud, if any, within the
      Company have been detected.





These
      inherent limitations include the realities that judgments in decision-making
      can
      be faulty and that breakdowns can occur because of a simple error or mistake.
      Controls can also be circumvented by the individual acts of some persons, by
      collusion of two or more people, or by management override of the controls.
      The
      design of any system of controls is based in part on certain assumptions about
      the likelihood of future events, and there can be no assurance that any design
      will succeed in achieving its stated goals under all potential future
      conditions. Projections of any evaluation of controls effectiveness to future
      periods are subject to risks. Over time, controls may become inadequate because
      of changes in conditions or deterioration in the degree of compliance with
      policies or procedures.





**Changes
      in Internal Control over Financial Reporting**




During
      the fiscal year ended May 31, 2007, there was no change in our internal control
      and procedures over financial reporting (as defined in Rule 13a-15(f) under
      the
      Exchange Act) that has materially affected, or is reasonably likely to
      materially affect, our internal control over financial reporting.




**Management’s
      Report on Internal Control Over Financial Reporting**




Our
      management’s report on internal control over financial reporting included in
      Part II, Item 9A, on page 56, of this Form 10-K.




54





**ITEM
      9B. OTHER INFORMATION.**




None.






**PART
      III**






**ITEM
      10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
      GOVERNANCE.**




**Board
      of Directors**




The
      following table sets forth certain information regarding our Board of Directors
      and Executive Officers, as of August 17, 2007:




Director
                Name
            Age
            PositionVictor
                Zhou
            38
            Chief
                Executive Officer and DirectorYungeng
                Hu
            42
            Chief
                Financial Officer, President and DirectorWilson
                W. S. Li(1)
            45
            DirectorBilly
                Y.N. Wang(1)(2)
            43
            DirectorGeoffrey
                Wei (2)
            40
            Director







There
      are
      no family relationships between any director or executive officer and any other
      director or executive officer of Hartcourt.  With the exception of Mr.
      Zhou and Mr. Hu, all directors are independent under the independence standards
      applicable to the Company.




(1)
            Member
                of the Audit Committee


(2)
            Member
                of the Compensation Committee




Set
      forth
      below is the biographical information on all directors.




VICTOR
      ZHOU, age 38 Victor Zhou has been a director of the Company since
      2004.  Mr. Zhou was acting Chief Executive Officer from June 1, 2006
      to August 31, 2006.  On September 1, 2006 Mr. Zhou was appointed Chief
      Executive Officer of the Company.  Previously, Mr. Zhou was the
      President of Fixed Assets Investment of Huatai Securities, one of the top ten
      securities firms in China, since November 2003. He was with Huatai Securities
      since 1997 and served in other senior management positions with increasing
      responsibilities. Before joining Huatai Securities, Mr. Zhou was the General
      Manager with Jiangsu Securities from 1993 until 1997. Mr. Zhou has extensive
      experiences in securities trading, private equity investment, and asset
      management. Mr. Zhou received his B.A. in Economics from Hunan University and
      EMBA degree from China Europe International Business School.




YUNGENG
      HU, age 42. Yungeng Hu has been a director of the Company since
      2006.  Mr Hu has serves as President and Chief Financial Officer of
      the Company since June 1, 2006.  Mr. Hu was a senior banker with
      several financial institutions. Before joining Hartcourt, Dr. Hu served as
      a
      Managing Director of Investment Banking at CLSA, bringing his substantial
      experience to the firm’s China operations, in the areas of ECM and M&A.
      Prior to CLSA, Mr. Hu was the General Manager of Hangzhou Hyatt Hotel for two
      years. Mr. Hu holds an MBA from Helsinki School of Economics and a Ph.D from
      New
      York University.




WILSON
      W.S. LI, age 45. Wilson W.S. Li has been a director of Company since
      2004.  Dr. Li has been the First Vice President of Shenzhen Capital
      Group, the largest Chinese investment holding company, since August 1999. Prior
      to that, he served in the Shenzhen Planning Bureau. Dr. Li has extensive
      experience in fund management, risk control, investment, and international
      business. Dr. Li received his Masters degree in Social Science from Zhongshan
      University, Ph.D. in Management Science from Xian Jiaotong University and Ph.D.
      in Public Administration & Government Policy from the Chinese Academy of
      Social Science.


55





BILLY
      Y.N. WANG, age 43. Dr. Billy Y.N. Wang has been a director of the Company since
      2002. Dr. Wang has been the Country Manager of NCH Corp China, a multi-national
      chemical company with more than three subsidiaries in China, since 1997. From
      1994 to 1997, Dr. Wang was the President of Xibic Enterprises Ltd. and Senior
      Consultant at WCE, specializing in international business development and
      technology transfer. From 1991 to 1997, Dr. Wang served as the Advisor for
      the
      Office of International Trade of Washington D.C. Dr. Wang obtained his Masters
      and Doctorate degrees in Chemical Engineering from the University of Virginia,
      and Bachelors degree from the University of Massachusetts.




GEOFFREY
      WEI, CICPA, age 40.  Geoffrey has been a director of the Company since
      2002. Mr. Wei is a principle partner of WHCD, a Chinese CPA firm. From September
      2002 to September 2004, Mr. Wei was the CFO of GreenWare Technologies, A Chinese
      company. Mr. Wei was the interim CFO, Vice President and Chief Accountant for
      Netease.com Inc (Nasdaq NM: NTES) from February 2000 to September 2001. He
      also
      worked in audit, tax, and business advisory divisions of PriceWaterhouseCoopers
      and KPMG, both in China and abroad. Mr. Wei received his Bachelors degree from
      Beijing Polytechnic University.




**Audit
      Committee and Audit Committee Financial Expert**




On
      February 27, 2006, the Board of Directors of the Company accepted the
      resignation of Mr. Geoffrey Wei as the Chairman of Audit Committee due to
      personal reasons. Currently our Audit Committee is comprised of two members
      of
      our Board of Directors: Wilson Li & Billy Y.N. Wang, both of whom are
      independent under applicable securities laws and regulations. Wilson Li is
      the
      Chairman of the Audit Committee and the Committee’s financial
      expert.





**Board
      Meetings and Committee Meetings**




During
      the year ended May 31, 2007, the Board held****seven board
      meetings.  All directors attended all meetings except Geoffrey Wei
      absent from two Board meetings.




The
      Compensation Committee held two meetings, with no member absent.




The
      Audit
      Committee held one meeting, with no member absent.




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




None.




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




The
      officers and directors of The Hartcourt Companies, Inc. listed below, failed
      to
      file on a timely basis reports required by Section 16(a) of the Exchange Act
      during the most recent fiscal year or prior fiscal years.





Number
                of late
              reports.
            Number
                of
              transactions
                that were
              not
                reported on a
              timely
                basis.
            Any
                known failure to
              file
                a required Form.Yungeng
                Hu
            3
            1
            Failed
                to file an initial Form 3 and a Form 4 for each transaction for which
                it
                was requiredWilson
                Li
            5
            13
            Failed
                to file an initial Form 3 and a Form 4 for each transaction for which
                it
                was requiredBilly
                Y.N. Wang
            5
            2
            Failed
                to file an initial Form 3 and a Form 4 for each transaction for which
                it
                was requiredGeoffrey
                Wei
            7
            16
            Failed
                to file an initial Form 3 and a Form 4 for each transaction for which
                it
                was requiredVictor
                Zhou
            5
            6
            Failed
                to file an initial Form 3 and a Form 4 for each transaction for which
                it
                was required





56





**Code
      of Ethics**




We
      have
      adopted a corporate code of ethics, which is applicable to our principal
      officers. A copy of the code of ethics is filed as an exhibit to this annual
      report. We believe that our code of ethics is reasonably designed to deter
      wrongdoing and promote honest and ethical conduct; provide full, fair, accurate,
      timely and understandable disclosure in public reports; comply with applicable
      laws; ensure prompt internal reporting of violations of our code of ethics;
      and
      provide accountability for adherence to our code of ethics.  A copy of
      the code of ethics is available without charge to any person who submits a
      written request Ms. Ni Tingting, The Hartcourt Companies, Inc., Room 1405,
      China
      Enterprise Tower Complex, No. 2, Hua Shan Road, Shanghai, China
      200040.

















57







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




**Compensation
      Discussion and Analysis**




**Overview
      of Compensation Program**




The
      Company’s executive compensation program is administered by the Compensation
      Committee of the Board of Directors. The Compensation Committee ensures that
      the
      total compensation paid to executive officers and other senior employees of
      the
      Company is reasonable and competitive.




**Compensation
      Objectives**




The
      Compensation Committee reviews compensation levels of the executive officers
      to
      confirm that compensation is in line with performance and industry practices.
      The executive compensation program is designed by the Committee to (i) enable
      the Company to attract, retain and motivate the most qualified talent who
      contribute to the long-term success of the Company; (ii) align compensation
      with
      business objectives and performance; and (iii) align incentives for executive
      officers with the interest of shareholders in maximizing shareholder value.
      The
      Committee emphasizes performance-based compensation that is competitive with
      the
      marketplace, and the importance of clearly communicating performance
      objectives.




**Elements
      of Compensation**




The
      Company’s compensation program includes both cash and equity-based elements.
      Because it is directly linked to the interest of our shareholders, equity-based
      compensation is emphasized in the design of the Company’s compensation
      programs.




*Salary*:


The
      Compensation Committee sets a base salary range for each executive officer,
      including Chief Executive Officer, Chief Financial Officers & President, by
      reviewing the base salary for comparable positions of a broad peer group,
      including companies similar in size and business that compete with the Company
      in the recruitment and retention of senior personnel. Individual salaries for
      each executive officer are set based on experience, performance and contribution
      to the Company’s development of acquisitions related to the vocational/training
      business, as well as our financial performance. The maximum amount that may
      be
      earned by any one participant as a Performance Award (payable in cash) or other
      cash award for a performance period is US$5,000,000.   We do not
      currently have a cash bonus program, and no cash bonuses have been given to
      executive officers to date.




*Equity-Based
      Compensation*


Stock
      options are granted to executive officers when they first join the Company.
      In
      addition, restricted stock may be sold to certain executive officers when they
      first join the Company. Thereafter, options may be granted and restricted stock
      may be sold to each executive officer from time to time based on performance.
      No
      performance based restricted stock grants have been made to date. To enhance
      retention, options granted and restricted stock sold to executive officers
      are
      subject to vesting restrictions that generally lapse over the period of
      employment contract. The vesting schedule is generally two years, to coincide
      with the employment period for the Chief Executive Officer and the Chief
      Financial Officer and President with one quarter vesting every six
      months.****The amount of actual options granted depends on
      the individual’s level of responsibility and a review of stock option grants of
      positions at a broad peer group.  The 2005 Stock Option Plan imposes
      individual limitations on certain awards, in part to comply with Section 162(m).
      Under these limitations, no more than 15,000,000 shares of stock may be granted
      to an individual during any fiscal year pursuant to any awards granted under
      the
      2005 plan.




58







The
      following table provides information concerning the compensation received for
      services rendered to our company in all capacities during the fiscal year ended
      May 31, 2007, May 31, 2006 and 5 month transitional period ended May 31, 2005
      by
      each person who served as Chief Executive Officer, Chief Financial Officer
      and
      by our other most highly compensated executive officer whose aggregate
      compensation exceeded US$100,000 during the fiscal year.  This table
      is based on earned compensation.







**SUMMARY
                COMPENSATION TABLE**






Name
                and Principal Position
            Year
            Salary
                (US$)
            Bonus
                (US$)
            Stock
                Awards
              (US$)
            Option
                Awards (US$)
            Non-equity
                Incentive Plan Compensation
              (US$)
            Change
                in Pension Value and Nonqualified Deferred Compensation
                Earnings
              (US$)
            All
              Other
                Compensation (US$)
            TotalMr.
                Victor Zhou, Acting CEO and CEO
            2007
            137,500(1)
            --
            3,625(2)
            225,350(3)
            --
            --
            --
            362,850Mr.
                Yungeng Hu,
              CFO
                and President
            2007
            150,000(4)
            --
            --
            180,238(5)
            --
            --
            --
            330,238Billy
                Y.N. Wang, Chairman of the Board
            2007
              2006
              2005
            50,000(6)
              50,000(8)
              20,833(9)
            --
              --
              --
            --
              --
            150,313(7)
              
              253,584(10)
            --
              --
              --
            --
              --
              --
            --
              --
              --
            200,313
              50,000
              274,417Carrie
                Hartwick
              CEO
                & President,
              Interim
                CFO
            2006
              2005
            150,000(11)
              62,500(12)
            --
              --
            --
              --
            --
              352,400(13)
            --
              --
            --
              --
            --
              --
            150,000
              414,900




**Explanatory
      Notes:**




(1)
            On
                June 1, 2006, the Board of Directors of the Company appointed Mr.
                Zhou to
                be the acting Chief Executive Officer with annual base salary of
                US$100,000 payable by equal monthly installment of US$8,333. On September
                1, 2006, the Board of Directors of the Company promoted Mr. Victor
                Zhou to
                be the Chief Executive Officer. The Company signed the employment
                contract
                with Mr. Zhou on September 1, 2006. The compensation includes an
                annual
                base salary of $150,000, payable by equal monthly installment of
                US$12,500
                cash.




(2)
            On
                July 5, 2006, the Company issued 84,681 fully vested restricted shares
                of
                common stock of the Company to Mr. Zhou for his previous director
                service.
                Effective June 1, 2006, the Company stopped paying director fee to
                Mr.
                Zhou due to his appointment as acting Chief Executive
                Officer.




(3)
            On
                September 1, 2006 Mr. Zhou was granted 11,000,000 stock options with
                an
                exercise price of $0.05 under the 2005 Stock Option Plan. The stock
                option
                vesting schedule is as follows: a) 7,500,000 stock options vest one
                fourth
                (1⁄4) every six months for 2 years of the employment contract period;
                b)
                2,000,000 stock options vested upon each successful new business
                acquisition of the Company; and c) 1,500,000 stock options vested
                upon
                each full profitable year. ****The grant date fair
                value was computed in accordance with FAS 123R.  (See
                footnote****4 in the Notes to Consolidated Financial
                Statements).




(4)
            On
                May 31, 2006, the Board of Directors of the Company appointed Mr.
                Hu to be
                the President & Chief Financial Officer, effective on June 1, 2006.
                Mr. Hu’s employment agreement was signed on June 1, 2006. The compensation
                includes an annual base salary of $150,000, payable by equal monthly
                installment of US$12,500 cash.




(5)
            On
                June 1, 2006,****Mr. Hu was granted 11,000,000 stock
                options with exercise price of $0.04 under the 2005 Stock Option
                Plan. The
                stock option vesting schedule is as follows: a) 7,500,000 stock options
                vest one fourth (1⁄4) every six months for 2 years of the employment
                contract period; b) 2,000,000 stock options vested upon each successful
                new business acquisition of the Company; and c) 1,500,000 stock options
                vested upon each full profitable year. The grant date fair value
                was
                computed in accordance with FAS 123R.  (See footnote 4 in the
                Notes to Consolidated Financial
                Statements).




(6)****
            ****On
                July 4, 2006,****the Board of Directors decided Mr.
                Wang should receive $50,000 as compensation for fiscal year 2007
                for his
                position as Chairman of the Board.  However, due to the
                stringent cash constraints of the Company, we did not pay him this
                amount
                for the fiscal year ended May 31,
                2007.






59




(7)
            On
                July 4, 2006, the Company granted 5,000,000 stock options with exercise
                price of US$0.04 per share under the 2005 Stock Option Plan to Mr.
                Wang.  The options will vest on September 28, 2007 and will be
                exercisable within 5 years time after vesting.  The grant date
                fair value was computed in accordance with FAS 123R.  (See
                footnote 4 in the Notes to Consolidated Financial
                Statements).




(8)
            Since
                October 1, 2004, we started to compensate the Chairman of the Board,
                Mr.
                Wang, $50,000 each year as for his service on Board. For the year
                ended
                May 31, 2006, Mr. Wang’s annual cash salary is
                $50,000.




(9)
            For
                the 5 months transitional period ended May 31, 2005, Mr. Wang’s 5 months
                cash salary was US$20,833.




(10)
            On
                March 9, 2005, the Company granted 5,000,000 stock options with exercise
                price of US$0.09 per share under the 2005 Stock Option Plan to Mr.
                Wang.
                The stock option vesting schedule is as follows: (a) 2,500,000 stock
                options vested on September 28, 2005 and (b) the remaining 2,500,000
                stock
                options vested on September 28,
                2006.




(11)
            For
                the year ended May 31, 2006, when Carrie Hartwick served as Chief
                Executive Officer & President and Interim Chief Financial Officer, the
                annual cash salary for Ms. Hartwick was
                US$150,000.




(12)
            For
                the 5 months period ended May 31, 2005, the 5 months cash salary
                for Ms.
                Hartwick was US$62,500.




(13)
            On
                March 9, 2005, the Company granted Ms. Hartwick 15,000,000 stock
                options
                with exercise price of US$0.09 per share under the 2005 Stock Option
                Plan.
                The stock option vesting schedule is as follows: (a) 7,500,000 stock
                options vested on April 3, 2005; (b) 6,000,000 stock options vest
                in two
                equal installments of 3,000,000 options each upon each new business
                acquisition of the Company and (c) 1,500,000 stock options vest upon
                a
                full profitably year of the Company. These 15,000,000 stock options
                expired after Ms. Hartwick resigned from the Company on June 1,
                2006.  The stock  options are no longer
                outstanding.







60










**GRANTS
      OF PLAN-BASED AWARDS**




Estimated
                  Future Payouts Under Non-Equity Incentive Plan Awards
              Estimated
                  Future Payouts Under Equity Incentive Plan Awards
              All
                  Other Stock Awards:
                Number
                  of Shares of Stock or Units
                (#)
              All
                  Other Option Awards:
                Number
                  of Securities Underlying Options
                (#)
              Exercise
                  or Base Price of Option Awards
                ($/Sh)
              Grant
                  Date Fair Value of Stock and Option Awards
                ($)Name
              Grant
                  Date
              Threshold
                ($)
              Target
                ($)
              Maximum
                ($)
              Threshold
                (#)
              Target
                (#)
              Maximum
                (#)Mr.
                  Victor Zhou, Acting CEO and CEO
              2006-9-1
              
              
              
              
              
              4,000,000(1)
              
              11,000,000(3)
              0.05
              225,3502006-7-5
              
              
              
              
              
              
              84,681(2)
              
              
              3,625Mr.
                  Yungeng Hu, CFO and President
              2006-6-1
              
              
              
              
              
              4,000,000(1)11,000,000(4)
              0.04
              180,238Mr.
                  Billy Y.N. Wang, Chairman
              2006-7-4
              
              
              
              
              
              
              
              5,000,000(5)
              0.05
              150,313
  **Explanatory
      Notes:**




(1)
            A
                maximum of 15,000,000 options to purchase common stock may be granted
                to
                Messrs. Zhou and Yungeng per fiscal year if they meet the thresholds
                described below for successful new business acquisitions and full
                profitable years.




(2)
            On
                July 5, 2006, the Company issued 84,681 restricted shares Mr. Zhou
                of the
                Company’s common stock for his previous director service. Effective June
                1, 2006 when he was appointed as the acting Chief Executive Officer,
                the
                Company stopped paying any fee for his director
                service.




(3)
            Mr.
                Zhou was granted 11,000,000 stock options with exercise price of
                $0.05.
                The stock option vesting schedule is as follows: a) 7,500,000 stock
                options vested pro rata over 2 years of the employment contract period;
                b)
                2,000,000 stock options vested upon each successful new business
                acquisition of the Company; and c) 1,500,000 stock options vested
                upon
                each full profitable year.




(4)
            Mr.
                Hu was granted 11,000,000 stock options with exercise price of $0.04.
                The
                stock option vesting schedule is as follows: a) 7,500,000 stock options
                vested pro rata over 2 years of the employment contract period; b)
                2,000,000 stock options vested upon each successful new business
                acquisition of the Company; and c) 1,500,000 stock options vested
                upon
                each full profitable year.




(5)
            On
                July 4, 2006, the Company granted 5 million shares of stock options
                with
                exercise price of US$0.04 per share to Mr. Wang and US$50,000 per
                year for
                his service on Chairman of the Board for fiscal year 2007. The options
                are
                to be vested on September 28, 2007 and exercisable within 5 years
                time
                after vesting.




**Stock
      Option Plan**




The
      material features of the 2005 plan are outlined below. This summary is qualified
      in its entirety by reference to the complete text of the 2005 plan.




***Background
      and Purpose***




The
      terms
      of the 2005 plan provide for the grant of stock options, stock appreciation
      rights, restricted stock, stock units, bonus stock, dividend equivalents, other
      stock-related awards and performance awards that may be settled in cash, stock,
      or other property.




61




The
      purpose of the 2005 plan is to provide a means by which employees, directors,
      and consultants of our company and those of our subsidiaries and other
      designated affiliates, which we refer to together as our affiliates, may be
      given an opportunity to purchase our common stock, to assist in retaining the
      services of such persons, to secure and retain the services of persons capable
      of filling such positions, and to provide incentives for such persons to exert
      maximum efforts for our success and the success of our affiliates.




***Shares
      Available for Awards***




The
      total
      number of shares of our common stock that may be subject to awards under the
      2005 plan is equal to 70,000,000 shares, plus (i) the number of shares with
      respect to which awards previously granted under the 2005 Plan that terminates
      without the issuance of the shares or where the shares are forfeited or
      repurchased; (ii) with respect to awards granted under the 2005 Plan, the number
      of shares which are not issued as a result of the award being settled for cash
      or otherwise not issued in connection with the exercise or payment of the award
      and (iii) the number of shares that are surrendered or withheld in payment
      of
      the exercise price of any award or any tax withholding requirements in
      connection with any award granted under the 2005 Plan.




***Limitations
      on Awards***




The
      2005
      plan imposes individual limitations on certain awards, in part to comply with
      Section 162(m). Under these limitations, no more than 15,000,000 shares of
      stock
      may be granted to an individual during any fiscal year pursuant to any awards
      granted under the 2005 plan. The maximum amount that may be earned by any one
      participant as a Performance Award (payable in cash) or other cash award for
      a
      performance period is US$5,000,000.




***Eligibility***




The
      persons eligible to receive awards under the 2005 plan consist of officers,
      directors, employees, and independent contractors of our company and those
      of
      our affiliates. However, incentive stock options may be granted under the 2005
      plan only to our employees, including officers, directors and those of our
      affiliates.




***Administration***




Our
      Board
      of Directors will administer the 2005 plan unless our Board of Directors
      delegates administration of the 2005 plan to a committee of our Board of
      Directors. Together, our Board of Directors and any committee(s) delegated
      to
      administer the 2005 plan, including the compensation committee, are referred
      to
      as the plan administrator. Our Board of Directors may require, in its
      discretion, that the committee members to be “non-employee directors” as defined
      by Rule 16b-3 of the Securities Exchange Act, “outside directors” for purposes
      of Section 162(m), and independent as defined by the Nasdaq or any other
      national securities exchange on which any of our securities may be listed for
      trading in the future. Subject to the terms of the 2005 plan, the plan
      administrator is authorized to select eligible persons to receive awards,
      determine the type and number of awards to be granted and the number of shares
      of our common stock to which awards will relate, specify times at which awards
      will be exercisable or may be settled (including performance conditions that
      may
      be required as a condition thereof), set other terms and conditions of awards,
      prescribe forms of award agreements, interpret and specify rules and regulations
      relating to the 2005 plan, and make all other determinations that may be
      necessary or advisable for the administration of the 2005 plan. The plan
      administrator may amend the terms of outstanding awards, in its discretion;
      provided that any amendment that adversely affects the rights of the award
      recipient must receive the approval of such recipient and any amendment to
      reduce the exercise price of stock options or stock appreciation rights will
      be
      subject to shareholder approval.




***Stock
      options and stock appreciation rights***




The
      plan
      administrator is authorized to grant stock options, including both incentive
      stock options, which we refer to as ISOs, and non-qualified stock options.
      In
      addition, the plan administrator is authorized to grant stock appreciation
      rights, which entitle the participant to receive the appreciation in our common
      stock between the grant date and the exercise date of the stock appreciation
      right. The plan administrator determines the exercise price per share subject
      to
      an option and the grant price of a stock appreciation right. However, the per
      share exercise price of an option or stock appreciation right must not be less
      than the fair market value of a share of our common stock on the grant date.
      The
      plan administrator generally will fix the maximum term of each option or stock
      appreciation right, the times at which each stock option or stock appreciation
      right will be exercisable, and provisions requiring forfeiture of unexercised
      stock options or stock appreciation rights at or following termination of
      employment or service, except that no ISO may have a term exceeding ten years.
      Stock options may be exercised by payment of the exercise price in any form
      of
      legal consideration specified by the plan administrator, including cash, shares
      (so long as the plan administrator determines that the payment with shares
      will
      not cause a financial accounting charge), and outstanding awards or other
      property having a fair market value equal to the exercise price. The plan
      administrator determines methods of exercise and settlement and other terms
      of
      the stock appreciation rights.






62




***Amendment
      and Termination***




Our
      Board
      of Directors may amend, alter, suspend, discontinue, or terminate the 2005
      plan
      or the plan administrator’s authority to grant awards without further
      shareholder approval, except shareholder approval must be obtained for any
      amendment or alteration if such approval is required by law or regulation or
      under the rules of any stock exchange or quotation system on which shares of
      our
      common stock are then listed or quoted. Shareholder approval will not be deemed
      to be required under laws or regulations, such as those relating to ISOs, that
      condition favorable treatment of participants on such approval, although our
      Board of Directors may, in its discretion, seek shareholder approval in any
      circumstance in which it deems such approval advisable. Unless earlier
      terminated by our Board of Directors, the 2005 plan will terminate on the
      earlier of (1) ten years after the later of (x) its adoption by our Board of
      Directors, and (y) the approval of an increase in the number of shares reserved
      under the 2005 plan by our Board of Directors (contingent upon such increase
      being approved by our shareholders) and (2) such time as no shares of our common
      stock remain available for issuance under the 2005 plan and we have no further
      rights or obligations with respect to outstanding awards under the 2005 plan.
      Amendments to the 2005 plan or any award require the consent of the affected
      participant if the amendment has a material adverse effect on the
      participant.




63


.









**OUTSTANDING
      EQUITY AWARDS AT FISCAL YEAR-END**


Option
                Awards
            Stock
                AwardsName
            Number
                of Securities Underly-ing Unexer-cised Options
              (#)
                Exercis-able
            Number
                of Securities Underlying Unexer-cised Options
              (#)
              UnExercis-able
            Equity
                Incentive Plan Awards: Number of Securities Underlying Unexercised
                Unearned Options
              (#)
            Option
                Exercise Price
              ($)
            Option
                Expiration
              Date
            Number
                of Shares or Units of Stock That Have Not Vested
              (#)
            Market
                Value of Shares or Units of Stock That Have Not Vested
              ($)
            Equity
                Incentive Plan Awards: Number of Unearned Shares, Units or Other
                Rights
                That Have Not
              Vested
              (#)
            Equity
                Incentive Plan Awards: Market or Payout Value of Unearned Shares,
                Units or
                Other Rights That Have Not Vested
              ($)Mr.
                Victor Zhou, Acting CEO and CEO (1)
            100,000
            
            
            0.09
            2011-3-81,875,000
            
            
            0.05
            2012-2-291,875,000
              1,875,000
              1,875,000
            
            0.05
              0.05
              0.05
            2012-8-31
              2013-2-28
              2013-8-313,500,000
            0.05
            (5)Mr.
                Yungeng Hu, CFO and President (2)
            1,875,000
            
            
            0.04
            2011-11-301,875,000
              1,875,000
              1,875,000
            
            0.04
              0.04
              0.04
            2012-5-31
              2012-11-30
              2013-5-313,500,000
            0.04
            (5)Billy
                Y. N. Wang, Chairman of the Board
            5,000,000(3)
            
            
            0.09
            2010-9-27
              2011-9-275,000,000(4)
            
            0.05
            2012-9-27





**Explanatory
      Notes:**




(1)
            7,500,000
                options were granted to Mr. Zhou on September 1, 2006 and vest pro
                rata
                every half year over the two years employment contract period. 2,000,000
                options granted to Mr. Zhou will vest upon each successful new acquisition
                of the Company and 1,500,000 options will vest upon each full profitable
                year.  All the options are exercisable within 5 years time after
                vesting.




(2)
            7,500,000
                options were granted to Mr. Hu on June 1, 2006 and vest pro rata
                every
                half year over the two years employment contract period. 2,000,000
                options
                granted to Mr. Hu will vest upon each successful new acquisition
                of the
                Company and 1,500,000 options will vest upon each full profitable
                year.
                All the options are exercisable within 5 years time after
                vesting.




(3)
            2,500,000
                options granted to Mr. Wang on March 9, 2005 vested on September
                28, 2005
                and will expire on September 27, 2010; the remaining 2,500,000 options
                vested on September 28, 2006 and will expire on September 27,
                2011.




(4)
            5,000,000
                options granted to Mr. Wang on July 4, 2006 will vest on September
                28,
                2007 and will expire on September 27,
                2012.




(5)
            The
                expiration date for this grant is contingent upon the vesting
                date.  When the conditions have been met, and the shares vest,
                then the expiration date will be five years after the vesting
                date.




64




**Potential
      Payments Upon Termination or Change in Control**




Under
      the
      2005 Stock Option Plan, the plan administrator, in its discretion, may
      accelerate the vesting, exercisability, lapsing of restrictions, or expiration
      of deferral of any award, including if we undergo a “change in control,” as
      defined in the 2005 plan. In addition, the plan administrator may provide in
      an
      award agreement that the performance goals relating to any performance-based
      award will be deemed to have been met upon the occurrence of any “change in
      control.” The award agreement may provide for the vesting of an award upon a
      change of control, including vesting if a participant is terminated by us or
      our
      successor without “cause” or terminates for “good reason.”




Below
      potential payments are
      stipulated in the employment contract with Chief Executive Officer and Chief
      Financial Officer & President:




In
      the event of termination of the
      employment upon death, the Company will pay the executive officer or other
      designated beneficiary any base salary earned but unpaid as of the date of
      death; accrued but unused vacation time as of the date of death; and benefits
      that he is entitled to receive as of the date of death, less standard
      withholdings for tax and social security purpose.




In
      the event of termination of the
      employment upon disability, the Company shall pay the executive officer any
      base
      salary earned but unpaid as of the termination date; accrued but unused vacation
      time as of the end of the month of disability; and benefits that he is entitled
      to receive as of the date of termination; and a severance payment of an amount
      equal to six months of his base salary, less standard withholdings for tax
      and
      social security purposes in a lump sum on the termination date.




In
      the event of voluntary termination
      by the executive officer, the Company shall pay the executive officer any cash
      salary earned but unpaid as of the termination date; accrued but unused vacation
      time; and benefits that he is entitled to receive under benefits plans of the
      Company, less standard withholdings for tax and social security
      purposes.




In
      the event of termination for causes,
      i.e. a material breach by the executive officer of the terms of employment
      contract, etc.,  the Company shall pay the executive officer any cash
      salary earned but unpaid as of the termination date; accrued but unused vacation
      time; and benefits that he is entitled to receive as of the termination date,
      less standard withholdings for tax and social security purposes.




In
      the event of termination without
      cause, the Company shall pay the executive officer any base salary earned but
      unpaid as of the termination date; accrued but unused vacation time; and
      benefits that he is entitled to receive as of the termination date, less
      standard withholdings for tax and social security purposes. The Company shall
      also provide him as severance (1) the payment of an mount equal to two months
      of
      his base salary, less standard withholdings for tax and social security purposes
      in a lump sum on the termination date; (2) continuation of all benefits he
      is
      entitled to receive under benefit plans of the Company for a period of six
      months; and (3) Acceleration of vesting of unvested stock options effective
      upon
      such termination date.




In
      the event of change of control, and
      the employment is terminated without the executive officer’s written consent
      within twelve months after a change of control, the Company shall pay the
      executive officer all earned but unpaid base salary as of the termination date;
      accrued but unused vacation time; and benefits that he is entitled to receive
      as
      of the termination date, less standard withholdings for tax and social security
      purposes. The Company shall also provide the executive officer as severance
      (1)
      the payment of an amount equal to two months of his base salary, less standard
      withholdings for tax and social security purposes in a lump sum on the
      termination date; (2) continuation of all benefits he is entitled to receive
      under benefits plan of the Company for a period of six months; and (3)
      Acceleration of vesting of unvested stock options effective upon such
      termination date.







65







**DIRECTOR
      COMPENSATION**





Name
            Fees
                Earned or Paid in Cash
              ($)
            Stock
                Awards
              ($)
            Option
                Awards ($)
            Non-Equity
                Incentive Plan Compensation ($)
            Change
                in Pension Value and Nonqualified Deferred Compensation
                Earnings
              ($)
            All
                Other Compensation
              ($)
            Total
              ($)Billy
                Y.N. Wang
            50,000(1)
            -
            403,897(2)
            
            
            
            453,897Geoffrey
                Wei
            -
            23,500(3)
            32,584(4)
            
            
            
            56,084Wilson
                W. S. Li
            -
            23,750(5)
            32,584(6)
            
            
            
            56,334





(1)
            On
                July 4, 2006,****the Board of Directors decided Mr.
                Wang should receive $50,000 as compensation for fiscal year 2007
                for his
                position as Chairman of the Board.  However, due to the
                stringent cash constraints of the Company, we have not yet paid him
                this
                amount.





(2)
            5,000,000
                stock options were granted to Mr. Wang on March 9, 2005 with an exercise
                price of US$0.09.  The stock options vested on Sept 28, 2005 and
                2006 with 2,500,000 stock options vesting on each date. The grant
                date
                fair value is US$253,584 computed in accordance with
                FAS123R.  5,000,000 stock options were granted to Mr. Wang on
                July 4, 2006 with an exercise price of US$0.05.  These stock
                options will vest on September 28, 2007.  The grant date fair
                value is US$150,313 computed in accordance with
                FAS123R.





(3)
            During
                the year ended May 31, 2007, the Company issued 374,918 shares of
                the
                Company’s common stock to Mr. Wei valued at US$23,500 for his director
                service.





(4)
            100,000
                stock options were granted to Mr. Wei on March 9, 2005 with an exercise
                prices of US$0.09.  The stock options vested on March 9,
                2006.****The grant date fair value is US$3,020,
                computed in accordance with FAS123R.  1,000,000 stock options
                were granted to Mr. Wei on August 23, 2006 with an exercise price
                of
                US$0.05.  The stock options vested on Aug 23,
                2007.****The grant date fair value is US$29,564,
                computed in accordance with
                FAS123R.





(5)
            During****the
                year ended May 31, 2007, the Company issued 373,271 shares of the
                Company’s common stock to Mr. Li valued at US$23,750 for his director
                service.  The shares are not subject to
                vesting.





(6)
            100,000
                stock options were granted to Mr. Li on March 9, 2005 with an exercise
                price of US$0.09.  The stock options vested on March 9,
                2006.****The grant date fair value is US$3,020,
                computed in accordance with FAS123R.  1,000,000 stock options
                were granted to Mr. Li on August 23, 2006 with an exercise price
                of
                US$0.05.  The stock options vested Aug 23,
                2007.****The grant date fair value is US$29,564
                computed in accordance with
                FAS123R.





Currently,
      our directors serve for a term of two years or until their earlier resignation
      or removal.  Independent directors are compensated US$12,000 each year
      and US$500 for each meeting, through the issuance of restricted shares of common
      stock at the average closing market price of the common shares valued each
      month**.**Additionally, for each committee that a
      non-employee director serves on, we compensate our independent directors
      US$6,000 each year, through the issuance of restricted shares of common stock.
      On August 23, 2006, an additional 1,000,000 stock options were granted to each
      independent director with an exercise price of $0.05 per share and a 5 year
      maturity. The grant is under 2005 Stock Option Plan.





As
      of
      October 1, 2004, we compensated Dr. Wang, our Chairman of the Board, US$50,000
      each year for service on our Board of Directors, pro rated on an annual basis.
      Additionally, as of March 8, 2005, the Board of Directors granted Dr. Wang
      an
      option to purchase 5,000,000 shares of our common stock at an exercise price
      of
      US$0.09 per share, of which 2,500,000 shares vested on September 28, 2005 and
      the remaining shares vested on September 28, 2006. On March 9, 2005, each
      non-employee director, excluding the Chairman of the Board, was granted 100,000
      stock options at an exercise price of US$0.09.  The options granted to
      the non-employee directors vested on the one year anniversary of the date of
      grant.




66





On
      August
      23, 2006, the Board passed a resolution that all the options granted or to
      be
      granted cease to be exercisable after 90 days of termination of continuing
      services by the option holder with the Company.





Ms.
      Hartwick was our only employee director before May 31, 2006. We did not pay
      any
      additional compensation to Ms. Hartwick for her service on our Board or a
      committee of our Board.  Ms. Hartwick resigned as a director effective
      May 31, 2006.




**Compensation
      Committee Interlocks and Insider Participation**




In
      the
      year ended May 31, 2007, Billy Wang and Geoffrey Wei comprise our compensation
      committee, with Mr. Wang being the Chairman. Both are independent directors
      of
      the Company.




**Compensation
      Committee Report**




Both
      Billy Y.N. Wang and Geoffrey Wei, the Compensation Committee members, have
      reviewed and discussed this Compensation Discussion and Analysis with
      management; and based on their review and discussions, they recommend to the
      Board of Directors that the Compensation Discussion and Analysis be included
      in
      the annual report.






COMPENSATION
                COMMITTEE MEMBERS
              Billy
                Y.N. Wang
              Geoffrey
                Wei







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




The
      following table shows shares of our common stock that we believe are owned
      as of
      August 22, 2007 by:




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




We
      calculated the “Percent of Class” based on 205,081,991shares of common stock
      outstanding on August 22, 2007. Shares of common stock subject to options that
      are currently exercisable or exercisable within 60 days of August 22, 2007
      are deemed to be outstanding and to be beneficially owned by the person holding
      such option for the purpose of computing the number of shares of common stock
      beneficially owned by that person, as well as the percentage ownership of that
      person, but they are not treated as outstanding for the purpose of computing
      the
      percentage ownership of any other person.




**Name
                & Address of**
              **Beneficial
                Owner(1)**
            **Amount
                and Nature of**
              **Beneficial
                Ownership(2)**
            **Percent
                of Class**Billy
                Y.N. Wang
            10,193,440(3)
            4.7%Geoffrey
                Wei
            1,928,747
                (4)
            *Victor
                Zhou
            4,093,977(5)
            2.0%Wilson
                Li
            1,784,042(6)
            *Yungeng
                Hu
            4,350,000(7)
            2.1%All
                Executive Officers and Directors as a Group (5 persons)
            22,350,206(8)
            9.9%*




*
            Indicates
                ownership of less than 1%.




(1)
      Unless otherwise indicated, the address for each beneficial owner listed above
      is c/o The Hartcourt Companies, Inc., Room 1405, China Enterprise Tower Complex,
      No. 2, Hua Shan Road, Shanghai, China.




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




67




(3)
      Shares beneficially owned by Billy Y.N. Wang include (a) 193,440 shares of
      common stock held by Dr. Wang; (b) options to purchase 5,000,000 shares of
      our
      common stock that are currently exercisable; and (c) options to purchase
      5,000,000 shares of our common stock that are exercisable within 60 days of
      August 22, 2007, subject to his continuing to provide services to the Company
      on
      such dates.




(4)
      Shares beneficially owned by Geoffrey Wei include (a) 828,747 shares of common
      stock held by Mr. Wei; (b) options to purchase 100,000 shares of our common
      stock that are currently exercisable; and (c) options to purchase 1,000,000
      shares of our common stock that are exercisable within 60 days of August 22,
      2007.




(5)
      Shares beneficially owned by Victor Zhou include (a) 243,977 shares of common
      stock held by Mr. Zhou; (b) options to purchase 100,000 shares of our common
      stock that are currently exercisable; (c) options to purchase 1,875,000 shares
      of our common stock that are currently exercisable; and (d) options to purchase
      1,875,000 shares of our common stock that are exercisable within 60 days of
      August 22, 2007.




(6)
      Shares beneficially owned by Wilson Li include (a) 684,042 shares of common
      stock held by Mr. Li; (b) options to purchase 100,000 shares of our common
      stock
      that are currently exercisable; and (c) options to purchase 1,000,000 shares
      of
      our common stock that are exercisable within 60 days of August 22,
      2007.




(7)
      Shares beneficially owned by Yungeng Hu include (a) 600,000 shares of common
      stock held by Mr. Hu; (b) options to purchase 1,875,000 shares of our common
      stock that are currently exercisable; and (c) options to purchase 1,875,000
      shares of our common stock that are currently exercisable.




(8)
      Shares beneficially owned by all Executive Officers and Directors as a group
      includes the shares held by each and options granted as in above (3), (4),
      (5),
      (6) and (7).




**Equity
      Compensation Plans**




The
      following table gives information about our common stock that may be issued
      upon
      the exercise of options, warrants and rights under all of our existing equity
      compensation plans as of the fiscal year ended May 31, 2007, including the
      2005
      Stock Plan.




**EQUITY
                COMPENSATION PLAN INFORMATION**Number
                of securities to be issued
              upon
                exercise of outstanding
              options,
                warrants and rights (a)
            Weighted
                average exercise
              price
                of outstanding options,
              warrants
                and rights (b)
            Number
                of securities remaining
              available
                for future issuance
              under
                equity compensation
              plansEquity
                compensation plansapproved
                by security holders (1)
            34,600,000
            0.06
            35,400,000Equity
                compensation plans not approved by security holders
            Nil
            Nil
            N/ATotal
            34,600,000
            0.06
            35,400,000




(1)
      Our
      1995 Stock Option Plan expired pursuant to its terms in March, 2005. Our 2005
      Stock Option Plan was approved by our shareholders at our annual meeting of
      shareholders on November 23, 2005. The amendment to increase the number of
      shares reserved and available from 35,000,000 to 70,000,000 for 2005 Stock
      Option Plan was approved at our annual meeting of shareholders on February
      24,
      2007.




68






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




**Review,
      approval or ratification of transactions with related
      persons.**




As
      described in the Code of Ethics, any transactions or relationships of a director
      or executive officer potentially involving any conflict of interest shall be
      prohibited except with the prior written consent of the Audit Committee of
      the
      Company's Board of Directors.  Any such conflicts of interest or
      potential conflicts of interest shall be resolved in an ethical manner with
      due
      consideration being given to the legitimate interests of the
      Company.




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




The
      following table is a summary of the fees billed to us by Kabani & Company,
      Inc. for professional services for the fiscal year ended May 31, 2007 and the
      year ended May 31, 2006 (Kabani & Company, Inc. was selected as our
      independent auditor on December 30, 2004 upon the resignation of our former
      accountants, Loral International LLP):




**FY
                2007**
            **FY
                2006**
            **FY
                2005****Audit
                Fees**
            US$80,000
            US$85,000
            US$90,000**Audit-Related
                Fees**
            
            US$125,000
                (1)
            -**Tax
                Fees**
            
            -
            -**All
                Other Fees**
            
            -
            -**Total**
            US$80,000
            US$210,000
            US$90,000




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




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




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




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




(1)  The
      audit related fee in fiscal year 2006 represent the professional audit fee
      for
      audit our restated financial statements of year ended 2003, 2004 and the
      transition period ended May 31, 2005, as well as the fee related to the review
      of these related filing documents.




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




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







69




**PART
      IV**




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




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




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




3.
            Exhibits




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




**Exhibit
                No.**
            **Description**
            **Previously**
              **Filed**





2.05
            Agreement
                for Sale and Purchase of Certain Interest in the Registered Capital
                of
                Huaqing Corporation Development Co Ltd (“Huaqing”) dated February 14,
                2003 between Hartcourt Capital, Inc. and Huaqing
                shareholders
            (13)2.06
            Agreement
                for Sale and Purchase of Certain Interest in the Registered Capital
                of
                Guandgdong NewHauSun Computer Co. Ltd. (“NewHauSun”) dated April 24,
                2003 between Hartcourt Capital, Inc. and NewHauSun
                shareholders.
            (13)2.07
            Agreement
                for Sale and Purchase of Certain Interest in the Registered Capital
                of
                Shanghai GuoWei Science and Technology Ltd (“GuoWei”) dated April 30,
                2003 between Hartcourt Capital, Inc. and GuoWei
                shareholders.
            (13)2.08
            Agreement
                for the Sale and Purchase of Equity Capital in Shanghai Sinobull
                Information Corporation Limited dated May 20, 2003 between Hopeful
                Internet Technologies Limited and Genius Technology Inc.
            (13)2.09
            Agreement
                for Sale and Purchase of Certain Interest in the Registered Capital
                of
                Zhongnan Group (“Zhongnan”) dated June 25, 2003 between Hartcourt Capital,
                Inc. and Zhongnan shareholders.
            (13)2.10
            Agreement
                for Sale and Purchase of Certain Interest in the Registered Capital
                of
                Shanghai Huaqing Corporation Development Co Ltd (“Shanghai Huaqing”) dated
                June 30, 2003 between Hartcourt Capital, Inc. and Shanghai Huaqing
                shareholders.
            (14)2.11
            Agreement
                for Sale and Purchase of Shanghai PengYang Computer Co., Ltd. dated
                November 21, 2003 between Hartcourt Capital, Inc and PengYang
                shareholders.
            (14)2.12
            Agreement
                for Sale and Purchase of Certain Interest in the Registered Capital
                of
                Beijing Challenger Wanzhong Info Tech Co., LTD (“Challenger”) dated
                December 9, 2003 between Hartcourt Capital, Inc. and Challenger
                shareholders.
            (14)2.13
            Agreement
                for Sale and Purchase of the Entire Issued Share Capital of Besteffort
                Investments Limited, dated November 1, 2004
            (18)2.14
            Agreement
                for Sale and Purchase of Certain Interest in the Registered Capital
                of
                Guangdong NewHuaSun Computer Co., Ltd. ("NewHuaSun") dated August
                30, 2004
                between Hartcourt Capital, Inc and ShenZhen Raiser Industrial and
                Development Co., Ltd.
            (19)2.15
            Agreement
                for Sale and Purchase of Certain Interest in the Registered Capital
                of
                Hopeful Internet Technologies Ltd. ("Hopeful") dated June 29, 2004
                between
                Hartcourt China Inc, Mr. Lee Lu Ping and First Information Technology
                Ltd.
            (19)2.16
            Cooperative
                Agreement on Taishun Yucai Senior School
            (21)2.17
            Cooperative
                Agreement on China Princely Education Technology Development (Beijing)
                Company Limited
            (21)2.18
            Agreement
                for sale and purchase of the entire issued share capital of Besteffort
                Investments Limited, dated November 1, 2004 between Hartcourt Capital,
                Inc. and Great Focus Holdings Limited.
            (21)3.01
            Articles
                of Incorporation of Hartcourt, dated Sept 6, 1983
            (23)3.02
            Bylaws
                of Hartcourt.
            (23)3.03
            Amendment
                to the Bylaws of Hartcourt, dated Dec 2, 1996
            (1)3.04
            Amendment
                to the Bylaws of Hartcourt, dated Oct 25, 20043.05
            Amendment
                to the Articles of Incorporation of Hartcourt, dated Nov 21,
                1994
            (1)3.06
            Amendment
                to the Articles of Incorporation of Harcourt, dated Mar 23,
                1995
            (23)3.07
            Amendment
                to the Articles of Incorporation of Hartcourt, dated Oct
                1997
            (24)3.08
            Amendment
                to the Articles of Incorporation of Hartcourt, dated Mar 13,
                2003
            (25)3.09
            Amendment
                to the Articles of Incorporation of Hartcourt, dated Nov 24,
                2005
            (20)






70





10.01
            Lease
                between Hartcourt and Larry M. Mitobe for Hartcourt’s headquarters
                facility, dated April 9, 1996.
            (1)10.02
            Equipment
                Lease between Hartcourt USA and Anja Engineering Corporation, dated
                April 4, 1994.
            (1)10.03
            Stock
                Exchange Agreement between Hartcourt USA and Eastern Rochester, dated
                August 8, 1994.
            (1)10.04
            1995
                Stock Option Plan.
            (1)10.05
            Purchase
                Contract between The Hartcourt Companies, Inc. and Exceptional Specialty
                Products, Inc., dated March 21, 1996.
            (1)10.06
            Purchase
                and Sale Agreement, dated August 8, 1996, between The Hartcourt Companies,
                Inc. and NuOasis International, Inc., and Addendum to Purchase and
                Sale
                Contract.
            (1)10.07
            Convertible
                Secured Promissory Note, dated August 8, 1996, in connection with
                Purchase
                and Sale Agreement, dated August 8, 1996 between The Hartcourt Companies,
                Inc. and NuOasis International, Inc.
            (1)10.08
            Convertible
                Secured Promissory Note, dated August 8, 1996, in connection with
                Purchase
                and Sale Agreement, dated August 8, 1996 between The Hartcourt Companies,
                Inc. and NuOasis International, Inc., as amended.
            (1)10.09
            Sales
                Agreement, dated September 17, 1996, between The Hartcourt Companies,
                Inc.
                and Promed International, Ltd.
            (1)10.10
            Sales
                Agreement, dated September 17, 1996, between The Hartcourt Companies,
                Inc.
                and Mandarin Overseas Investment Co., Ltd.
            (1)10.11
            Purchase
                and Sale Agreement, dated September 27, 1996, between The Hartcourt
                Companies, Inc. and CKES Acquisitions, Inc.
            (1)10.12
            Secured
                Promissory Note, dated September 27, 1996, in connection with Purchase
                and
                Sale Agreement between The Hartcourt Companies, Inc. and CKES
                Acquisitions, Inc.
            (1)10.13
            Consulting
                Agreement, dated December 30, 1996, between The Hartcourt Companies,
                Inc.
                and American Equities LLC, a California limited liability
                company.
            (3)10.14
            Investment
                Banking Agreement, dated March 1998, between The Hartcourt Companies,
                Inc.
                and DanAllen Investment Group.
            (2)10.16
            Marketable
                Securities Agreement, dated July 31, 1997, between The Hartcourt
                Companies, Inc. and Capital Commerce, Ltd.
            (2)10.17
            Lease
                Termination Agreement, dated March 24, 1998, between Hartcourt Investment
                (USA) Corporation and Scripto-Tokai Corporation.
            (2)10.18
            Share
                Purchase Agreement with Enova Holdings, Inc., dated February 1, 1999,
                Exchange Agreement, dated March 23, 1999, and Distribution Agreement,
                dated March 24, 1999, File # 99579493.
            (7)10.19
            1999
                Agreement with Beijing UAC Stock Trading Online Co. Ltd.
            (8)10.19
            A
                Financial Statements of Beijing UAC Stock Exchange Online Co. Ltd.
                for the
                period from October 18, 1999 (date of inception) to December 31,
                1999.
            (8)10.20
            Agreement
                with GoCall.com
            (8)10.21
            FTL
                Stock Purchase Agreement
            (8)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)10.26
            Regulation  D  Subscription  Agreement
                between PYR Management LLC
              and
                The Hartcourt Companies, Inc, dated January 26, 2000, File
                No. 524390.
            (12)10.27
            Interim
                CFO Employment Agreement, dated January 5, 2005
            (17)10.28
            CEO
                Employment Agreement, dated March 9, 2005
            (19)10.29
            Acting
                CEO Employment Agreement, dated May 31, 2006
            (22)10.30
            CEO
                Employment Agreement, dated August 30, 2006
            (22)10.31
            CFO
                & President Employment Agreement, dated May 31, 2006
            (22)






71





14.01
            Code
                of Ethics16.01
            Letter
                from Loral International CPA & Advisor, LLC, to the Company resigning
                as independent auditor, dated December 29, 2004.
            (15)16.02
            Letter
                from Loral International CPA & Advisor, LLC, to the Company indicating
                disagreement with the Company’s Form 8-K filing regarding Loral’s
                resignation, dated January 3, 2005.
            (16)21.01
            Subsidiaries
                of the registrant23.01
            Consent
                of Kabani & Company, Inc. - Independent Registered Accounting
                Firm24.01
            Power
                of Attorney (See signature page)27.01
            Financial
                Data Schedule. Pursuant to Rule 12b-32 under Securities and Exchange
                Act
                of 1934, as amended.31.01
            Certification
                pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
                Section 302 of the Sarbanes-Oxley Act of 200231.02
            Certification
                pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
                Section 302 of the Sarbanes-Oxley Act of 200232.01
            Certification
                pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
                Section 906 of the Sarbanes-Oxley Act of 2002




(1)Previously
      filed as an
      exhibit to Hartcourt’s Form 10SB12B, dated January 21, 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.




72




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




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




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




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




(16) Previ


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




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




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




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




(20)Previously
      filed as an
      exhibit to Hartcourt’s Form 10-Q, dated April 23, 2007, as amended by
      Hartcourt’ Form 10-Q/A, dated April 24, 2007, incorporated herein by
      reference.




(21)
      Previously filed as an
      exhibit to Hartcourt’s Form 10-Q, dated January 16, 2007 and incorporated herein
      by reference.




(22)  Previously
      filed as an exhibit to Hartcourt’s Form 10-Q, dated September 28, 2006 and
      incorporated herein by reference.




(23)  Previously
      filed as an exhibit to Hartcourt’s Form 10SB12G/A, dated July 3, 1997 and
      incorporated herein by reference.




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




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




73





**SIGNATURES**




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






THE
                HARTCOURT COMPANIES, INC.Dated:
                September 13, 2007
            By:
                /s/ VICTOR ZHOUVictor
                ZhouChief
                Executive OfficerDated:
                September 13, 2007
            By:
                /s/ YUNGENG HUYungeng
                HuChief
                Financial Officer & President