**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, 2006.




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.)





306
      Yong
      Teng Plaza, 1065 Wuzhong Road, Shanghai, China 201103


(Address
      of principal executive offices, including zip code)





(86
      21)
      5152 1577


(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 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 [ ] No [X]





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 whether 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 outstanding common stock held by non-affiliates
      of
      the registrant as of the last business day of the registrant's most recently
      completed fiscal year (based on the closing price of US$0.05 as of August 22,
      2006) was approximately US $ 9 million. All executive officers and directors
      of
      the registrant and all persons filing a Schedule 13D with the Securities
      and Exchange Commission in respect to registrant’s common stock have been
      deemed, solely for the purpose of the foregoing calculation, to be “affiliates”
of the registrant. There were 197,325,263 shares of voting common stock with
      a
      par value of US$0.001 outstanding at August 25, 2006.





THE
      HARTCOURT COMPANIES, INC.


FISCAL
      2006 FORM 10-K





INDEX




Item
            PagePART
                I
            3ITEM
                1: Business
            3ITEM
                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
            19ITEM
                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
            58ITEM
                9A: Controls and Procedures
            58ITEM
                9B: Other Information
            59PART
                IIIITEM
                10: Directors and Executive Officers of the Registrant
            59ITEM
                11: Executive Compensation
            62ITEM
                12: Security Ownership of Certain Beneficial Owners and Management
                and
                Related Stockholder Matters
            66ITEM
                13: Certain Relationships and Related Transactions
            68ITEM
                14: Principal Accountant Fees and Services
            68PART
                IVITEM
                15: Exhibits and Financial Statement Schedules
            70Signatures
            75





2


**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.**




**PART
      I**





**ITEM
      1. BUSINESS.**





**General**





We
      were
      incorporated in Utah in 1983. Historically, we have been a business development
      company specializing in the Chinese information technology, or IT, market.
      Typically, we would acquire equity ownership or assets in the targeted companies
      to be part of our investment portfolio. On an on-going basis, we sought to
      maximize growth, profitability and liquidity of all of our operating
      subsidiaries under the Hartcourt umbrella.





In
      August
      2006, the Company decided to add to its existing IT business by also focusing
      on
      the post-secondary education market in China. While we develop this new line
      of
      business, we will continue to operate in the Chinese IT.





**Change
      in Fiscal Year End**




We
      changed our fiscal year for financial reporting purposes from a calendar year
      to
      the 12-month period commencing June 1 and ending May 31.





**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 450
      Fifth Street NW, 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 Web site at http://www.sec.gov that contains reports,
      proxy
      and information statements and other information regarding issuers that file
      electronically with the SEC. Through a link to the SEC Web site, we make
      available free of charge on the Investor Relations section of our corporate
      Web
      site all of the reports we file with the SEC as soon as reasonably practicable
      after the reports are filed. Copies of Hartcourt's fiscal 2006 Form 10-K may
      also be obtained without charge by contacting Ms. Ni Ting Ting, The Hartcourt
      Companies, Inc., Suite 306, Yong Teng Plaza, 1065 Wuzhong Road, Shanghai, China
      201103 or by calling (86 21) 5152 1577.


3


**Business
      Overview**





Historically,
      we have been a distributor of internationally well known brand named IT hardware
      products and related software and services. The main products are Samsung
      branded notebooks and monitors. We also distribute audio and video conference
      products. Almost all of our revenue for the last two fiscal years was attributed
      to distribution revenues from sales of IT products in China.





Our
      Samsung distribution business began in March , 2003,
      through the acquisition of a Chinese company named Huaqing Shanghai, which
      was
      the distributor of Samsung monitors in the Eastern part of China. In August
      2004, Huaqing Shanghai obtained additional distribution rights from Samsung
      for
      its notebook product line in the same geographic area. In February 2005, we
      acquired major assets from a Chinese company named Beijing Control Tech, which
      was the distributor of ClearOne audio products and Radvision video
      conference products and services in China. Effective January 1, 2006, Control
      Tech ceased its operations.





Most
      international and domestic manufacturers of IT products in China rely on
      distributors, such as Hartcourt, to augment their sales and marketing
      operations. As a stocking, marketing, and financial intermediary, the
      distributor relieves manufacturers of a portion of the costs and personnel
      associated with stocking and selling their products (including otherwise sizable
      investments in finished goods inventories, accounts receivables and distribution
      networks), while providing geographically dispersed selling, order processing,
      and delivery capabilities. At the same time, the distributor offers a broad
      range of customers the convenience of accessing from a single source with
      multiple products and rapid or scheduled deliveries, as well as other
      value-added services such as after sales service. The growth of the IT
      distribution industry in China has been fostered by many manufacturers that
      recognize that distributors are essential extensions of their marketing
      organizations. Most of our customers require delivery of the products they
      have
      ordered on schedules that are generally not available on direct purchases from
      manufacturers, and frequently their orders are of insufficient size to be placed
      directly with manufacturers.




Our
      sales
      organization is divided by product lines, such as the monitor group and notebook
      group. We have a centralized online Enterprise Resources Planning (ERP) system
      to support the daily operations, connecting order taking, inventory management,
      distribution, credit, accounting and other related functions.





We
      have
      distribution rights with respect to Samsung monitors, notebooks and certain
      digital products covering the consumer and commercial product distribution
      channels in Shanghai, a metropolitan city with a population of 20 million
      people. The distribution agreement between Huaqing Shanghai, a 51% owned
      subsidiary, and Samsung has one-year term and is renewed on an annual basis.
      In
      exchange for this distribution right, as well as purchase price protection
      and
      reimbursed advertising and promotion expenses from Samsung, we are required
      to
      achieve quarterly purchase targets set by Samsung and perform sales promotion
      and advertising activities under Samsung's direction, in addition to meeting
      other Samsung operational requirements. Approximately 94% of our sales for
      the
      fiscal year ended on May 31, 2006 comprised of Samsung products, of which,
      monitors accounted for 70% of the revenue and notebooks accounted for the
      remaining 30% revenue.


4


The
      IT
      markets in which we compete are dynamic and highly competitive. We expect
      competition in the IT markets to intensify in the future. Current and potential
      competitors in these markets include the local distributors of Philip and LG
      monitors in the Shanghai region, as well as other distributors of notebooks
      made
      by multinational and leading Chinese notebook manufacturers





The
      principal competitive factors that affect the IT market are available working
      capital to finance the revenue growth in terms of inventory and trade
      receivable; the ability to contain operating costs, as well as adding new
      product lines to our distribution list.





Although
      Huaqing Shanghai has been the exclusive distributor for select Samsung IT
      products in the Shanghai region for the last 5 years, much of the services
      we
      provide can be performed by our competitors. In addition, there is a risk that
      Samsung may allow our competitors or new entrants to the market to take a
      portion of our Samsung distributor business which would have an adverse impact
      on our business and revenues.




We
      sell
      Samsung monitors, notebooks and digital devices to large regional retail stores
      and to second-tier distributors who then resell to smaller retail stores. To
      promote Samsung's upscale product image, we also manage several Samsung image
      stores in Shanghai, selling a full range of Samsung consumer electronic products
      in Shanghai's downtown shopping districts in partnership with Samsung. For
      the
      Samsung products for which we have distribution rights, we provide product
      warranty services to retail consumers on behalf of Samsung. In addition, we
      provide and charge for after-sales repair, maintenance and service. Our largest
      customer during the fiscal year ended May 31, 2006 for the Samsung products
      was
      Guowei, a chain store with more than a dozen retail outlets in Shanghai,
      accounting for 15% of our total revenues. Aiwei, a second-tier distributor,
      accounted for 10% of our total revenue. Huahai Computer, a local PC producer
      and
      OEM of Inter in Shanghai, made up 5% of revenue. No other customer or
      distributor made up more than 5% of our total sales for this fiscal year. In
      2005, GuoWei accounted for 9% of revenue, Aiwei made up 6% of our sales while
      no
      other customer made up more than 5% of our revenue.





We
      have
      traditionally sourced our products from Samsung. As of May 31, 2006,
      approximately 77% of our Samsung inventory consisted of monitors and the
      remaining 23% consisted of notebooks. It is the current practice of Samsung
      to
      protect its distributors, such as the Company, against the potential write-down
      of such inventories due to technological changes or Samsung's price reductions.
      Under the terms of the distributor agreement, and assuming the distributor
      complies with certain conditions, Samsung is required to credit us for inventory
      losses incurred through reductions in manufacturers' list prices of the items.
      Because most of our business is on an as-needed basis and varies slightly,
      we
      have no customer orders extending more than a week into the future.




After
      reviewing Hartcourt's current business condition, its competitive edge, and
      opportunities in China, the new management team has submitted to the Board
      of
      Directors a two-year business plan. Going forward, the Company plans diversify
      its business by focusing on the post-secondary education market in China to
      take
      advantage of the on-going demand of skilled workers and growing post-secondary
      age population. The Company has not made any investment in this new
      business.


5


**CORPORATE
      STRUCTURE**





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





As
      of May
      31, 2006, 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. 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). These two companies are located in Shanghai,
      China. AI-Asia, Inc., the third holding company, owns 100% of the equity of
      AI-Asia (Shanghai) Information Technology, Inc of China (“AI”), located in
      Shanghai, China. The Company owns 51% equity interest through Jiumeng in
      Shanghai Huaqing Corporation Development Ltd. Huaqing is located in Shanghai.
      The Company owns 90% of the equity interest in Control Tech Electronics
      (Shanghai) Co., Ltd through Hartcourt Capital, Inc. Control Tech is located
      in
      Shanghai, China.





Through
      Jiumeng, we own 51% of the equity of Shanghai Huaqing, 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, a Chinese legal entity owned by
      its
      employees, as the registered owner of a 51% equity stake of Shanghai Huaqing
      in
      China. Of our 51% shareholdings in Jiumeng, The Company is currently in the
      process of transferring all the equity interest invested in Jiumeng held
      previously by Mr. Kang Bin and Ms. Tingting Ni, the previous nominees of the
      Company to Mr. Victor Zhou, the Chief Executive Officer of the Company who
      is a
      citizen of the People’s Republic of China, (PRC). Mr. Zhou will serve as our
      nominee, replacing Mr. Kang and Ms. Ni. Mr. Zhou has signed a nominee agreement
      to pledge all his rights in Jiumeng to Hartcourt.





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





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





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





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





6





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





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





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





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





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





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





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





·
            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 the Company, 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.


7


**Intellectual
      Property**





None.







**Employees**





As
      of
      August 22, 2006, we had approximately 80 employees all of which are 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.








**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 10K 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 ENGAGING IN NEW 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 add to our business by focusing on the 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; 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 adversely affect
      our operating results or financial condition.


8


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





The
      Company will face competition from non-profit private entities and from the
      public school system and public colleges, including those that offer
      distance-learning programs. Many of the Company's competitors in both the
      private and public sector have greater financial and other resources than the
      Company. Many public and private colleges and universities, as well as other
      private career-oriented schools in the market, offer programs similarly, which
      intense 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. Some of our competitors in both the public and private
      sectors also have substantially greater financial and other
      resources.





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





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, instead of
      adding one or two schools to make Harcourt more diversified. 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 intend to sell their shares, 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 Bachelor 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 training during their vacations, we expect our
      education business to be highly seasonal. During the first and third fiscal
      quarters (vacations), we may receive students and earn most of the revenues.
      To
      the extent we do not provide trainings to students during the peak seasons,
      many
      of such opportunities will be lost and will not be available in the subsequent
      quarters. This seasonality may cause our operating results to vary considerably
      from quarter to quarter and significantly impacts our liquidity
      position.





9


**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 5 years. As of May 31, 2006, we had an accumulated
      deficit of approximately US$68 million. As we add the education business to
      our
      IT business, 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, cannot be
      accurately predicted. 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 as a result of our operating
      expenses.





**RISKS
      ASSOCIATED WITH OUR IT 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.**





Over
      90%
      of our revenue in this fiscal year ended on May 31, 2006, 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 or profit
      decline.





10


**WE
      HAVE INCURRED SIGNIFICANT LOSSES IN THE PAST AND HAVE A HISTORY OF NEGATIVE
      CASH
      FLOW FOR 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 containing an explanatory
      paragraph that describes doubt about our ability to continue as a going concern
      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 5 years. As of May 31, 2006, we had an accumulated deficit of
      approximately US$68 million. As we shift our business from volume driven
      computer hardware products to more profitable market segments with products
      low
      in volume and revenue but high in profit, our revenue will decrease 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, cannot be
      accurately predicted. 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 as a result of our operating
      expenses.





**IF
      WE ARE UNABLE TO COMPETE SUCCESSFULLY IN THE HIGHLY COMPETITIVE MARKETS FOR
      THE
      NOTEBOOK COMPUTER AND PRODUCTS FOR ANY REASON, INCLUDING CURRENT OR POTENTIAL
      COMPETITORS GAIN COMPETITIVE ADVANTAGE THROUGH PARTNERING OR ACQUISITION, OUR
      BUSINESS WILL FAIL.**





Our
      business is extremely competitive, particularly with respect to prices, quantity
      and in certain instances, customer relationship. We compete with numerous
      regional and local distributors of similar products with different brand names.
      Many of our competitors, as well as certain potential competitors, have longer
      operating histories in the industry, greater name recognition, larger customer
      base and significantly greater financial, technical and marketing resources
      than
      ours. Any of our present or future competitors may provide services with
      significant performance, price, creativity or other advantages over those
      offered by us. We can provide no assurance that we will be able to compete
      successfully against our current or future competitors.





11


**IF
      WE ARE UNABLE TO ANTICIPATE THE EVER CHANGING OF TECHNOLOGY TRENDS AND CUSTOMER
      NEEDS, OUR BUSINESS MAY BECOME OBSOLETE AND IRRELEVANT AND WE WILL
      FAIL.**





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.




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




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





**IF
      WE ARE ABLE TO EXPAND OUR OPERATIONS PURSUANT TO OUR ACQUISITION STRATEGY,
      OUR
      FAILURE TO MANAGE GROWTH COULD HARM OUR BUSINESS AND ADVERSELY AFFECT OUR
      RESULTS OF OPERATIONS AND FINANCIAL CONDITION.**





Our
      ability to manage growth will not only be dependent on our ability to
      successfully integrate newly acquired IT businesses, but also on our ability
      to:





·
            hire,
                train and manage additional qualified
                personnel;





·
            establish
                new relationships or expand existing relationships with IT
                suppliers;





·
            secure
                adequate capital;





·
            identify
                and acquire or lease suitable premises on competitive
                terms;





·
            maintain
                the supply of IT from IT suppliers;
                and





·
            compete
                successfully in the Chinese IT
                sector.





Our
      inability to control or manage these growth factors effectively could have
      a
      material adverse effect on our results of operations and financial
      condition.


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


13


**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 will 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.





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





We
      are a
      U.S. registered company and we conduct our operations solely in China through
      our directly owned subsidiaries and indirectly majority-owned subsidiary. In
      order to comply with foreign ownership restrictions, we operate our business
      in
      China through a subsidiary which is majority owned by Kang Bin, our financial
      controller, and Ni Ting Ting, an employee of the Company, both of whom are
      PRC
      citizens (our nominees). Currently, we are in the process of transferring our
      nominees from Kang Bin and Tingting Ni 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.




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


14


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.





**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.**





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





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





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.








**ITEM
      1B. UNRESOLVED STAFF COMMENTS**





None





15


**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
            350
            August
                2007





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 IT needs, and that we will be able to locate additional facilities
      as
      needed. See Note 21 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.**





None








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





None.


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.OB". 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 DECEMBER 31, 2003March
                31, 2003
            US$.10
            US$.05June
                30, 2003
            US$1.12
            US$.08September
                30, 2003
            US$.92
            US$.52December
                31, 2003
            US$.86
            US$.52YEAR
                ENDED DECEMBER 31, 2004March
                31, 2004
            US$0.79
            US$0.47June
                30, 2004
            US$0.58
            US$0.20September
                30, 2004
            US$0.28
            US$0.17December
                31, 2004
            US$0.26
            US$0.14PERIOD
                FROM JAN. 1, 2005 TO MAY 31, 2005March
                31, 2005
            US$0.17
            US$0.08May
                31, 2005
            US$0.14
            US$0.09YEAR
                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
      22,
      2006 was US$0.05. As of August 22, 2006 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.





17


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,
      2006 and the five month transition period ended May 31, 2005 and fiscal year
      ended on December 31, 2004. We do not anticipate paying any cash dividends
      on
      our common stock in the foreseeable future. We currently intend to retain future
      earnings, if any, to finance operations and the expansion of our business.





*Recent
      Sales of Unregistered Securities*





The
      following information sets forth the outstanding shares the Company sold without
      registration under the Securities Act of 1933 during the last quarter of the
      fiscal year ended on May 31, 2006. All transactions were effected in reliance
      on
      various exemptions from registration under the Securities Act of 1933 for
      transactions not involving a public offering. There are two primary exemptions
      under Regulation S: Rule 903 relates to offerings of securities by issuers
      and
      Rule 904 relates to secondary offerings of securities. There were no
      underwriters in any of these transactions.





On
      Apr
      10, 2006 & May 19, 2006, in accordance with Regulation S under the
      Securities Act, we issued an aggregate of 162,578 shares of our common stock
      valued at US$11,185 to our directors and certain of employees in lieu of cash
      compensation.





On
      Apr
      10, 2006, in accordance with Regulation S under the Securities Act, we issued
      600,000 shares of our common stock valued at US$30,000 to a consultant for
      his
      consulting service rendered to the Company.







WARRANTS





None







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





None.







**Use
      of proceeds**





None.


18


**ITEM
      6. SELECTED FINANCIAL DATA.**





Year
              EndedMay
                31
            
            
            Period
                EndedMay
                31
            
            
            Year
                Ended
              December
                312006
            
            
            2005
            
            
            2004
            
            
            2003
            
            
            2002
            
            
            2001***Thousands
                of US Dollars, except per share amount*****Statement
                of income Data**Net
                Revenue
            
            
            42,090
            
            
            19,678
            
            
            74,563
            
            
            131,699
            
            
            1,137
            
            
            10,621Operating
                income (losses) from continuing operations
            
            
            58
            
            
            345
            
            
            (3,883
            )
            
            (92
            )
            
            (3,934
            )
            
            (7,779
            )Income
                (losses) from continuing operations
            
            
            331
            
            
            287
            
            
            (4,423
            )
            
            (1,453
            )
            
            (4,158
            )
            
            (8,517
            )Net
                income (loss)
            
            
            (2,834
            )
            
            123
            
            
            (13,373
            )
            
            (571
            )
            
            (2,559
            )
            
            (5,391
            )Basic
                and diluted earnings (losses) per weighted average share
            
            
            (0.01
            )
            
            0.001
            
            
            (0.076
            )
            
            (0.004
            )
            
            (0.032
            )
            
            (0.078
            )**Balance
                Sheet Data**Cash
                and cash equivalents
            
            
            401
            
            
            1,370
            
            
            1,745
            
            
            3,792
            
            
            80
            
            
            282Total
                assets
            
            
            9,533
            
            
            17,414
            
            
            19,732
            
            
            33,808
            
            
            4,472
            
            
            9,267Net
                current assets
            
            
            1,516
            
            
            4,409
            
            
            2,530
            
            
            3039
            
            
            (2,155
            )
            
            (3,890
            )Net
                assets
            
            
            2,866
            
            
            6,761
            
            
            4,672
            
            
            14,909
            
            
            909
            
            
            5,481Long-term
                debt
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            462**Common
                Stock Data**Shares
                of Common Stock (Year-End)
            
            
            194,844
            
            
            193,739
            
            
            171,659
            
            
            171,157
            
            
            88,518
            
            
            73,886Shares
                of Common Stock (Average)
            
            
            194,049
            
            
            191,504
            
            
            175,646
            
            
            135,565
            
            
            80,416
            
            
            68,880Dividends
                Paid per Share
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --Book
                Value Per Share (Year End)
            
            
            0.015
            
            
            0.03
            
            
            0.03
            
            
            0.09
            
            
            0.01
            
            
            0.07








**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, 2006 and the twelve months ended May 31,
      2005 (unaudited). The results for the 12 months ended May 31, 2005, include
      audited figures for the transitional five month period ended May 31, 2005,
      and
      the seven months ended December 31, 2004, which are not audited. The Company
      believes that the use of results of the 12 months ended May 31, 2005 in
      comparing against the results of operations for the twelve months ended May
      31,
      2006 represents a more meaningful analysis and better information for our
      investors than a comparison of the twelve months ended May 31, 2006 against
      the
      five months ended May 31, 2005.


19





**THE
                HARTCOURT COMPANIES, INC. AND SUBSIDIARIES****CONSOLIDATED
                STATEMENTS OF OPERATIONS****Fiscal
                year ended**
            
            **Transition
                period ended**
            
            **Fiscal
                year ended****May
                31**
              **(12
                months)**
            
            **May
                31**
              **(five
                months)**
            
            **May
                31**
              **(12
                months)****2006**
            
            **2005**
            
            **2005
                (Unaudited)**Net
                sales
            
            $
            42,089,683
            
            $
            19,677,794
            
            $
            65,081,226Cost
                of sales
            
            
            40,598,971
            
            
            18,440,692
            
            
            63,737,326Gross
                profit
            
            
            1,490,712
            
            
            1,237,102
            
            
            1,343,900Operating
                expenses:Selling,
                general and administrative
            
            
            1,384,950
            
            
            862,216
            
            
            1,531,645Depreciation
                and amortization
            
            
            48,157
            
            
            29,764
            
            
            64,754Impairment
                on notes receivable
            
            
            
            
            
            
            
            
            4,083,876Total
                operating expenses
            
            
            1,433,107
            
            
            891,980
            
            
            5,680,275Income/(loss)
                from continuing operations before other income/(expenses)
            
            
            57,605
            
            
            345,122
            
            
            (4,336,375
            )Other
                income/(expense):Interest
                expense
            
            
            (250,048
            )
            
            (199,566
            )
            
            (557,494
            )Interest
                income
            
            
            140,232
            
            
            46,756
            
            
            195,863Gain
                on disposal of fixed assets
            
            
            312,401
            
            
            -
            
            
            97,888Provision
                for investments
            
            
            -
            
            
            -
            
            
            (223,816
            )Other
            
            
            71,039
            
            
            94,476
            
            
            82,351Total
                other income/(expense)
            
            
            273,624
            
            
            (58,334
            )
            
            (405,208
            )Income
                from continuing operations before minority interest and discontinued
                operations
            
            
            331,229
            
            
            286,788
            
            
            (4,741,583
            )Less:
                Minority Interest
            
            
            (432,701
            )
            
            (138,453
            )
            
            166,661Loss
                before discontinued operations
            
            
            (101,472
            )
            
            148,335
            
            
            (4,908,244
            )Discontinued
                operations:Loss
                from discontinued operations
            
            
            (596,353
            )
            
            -
            
            
            (186,038
            )Provision
                for assets pending for sales
            
            
            (1,827,990
            )
            
            -
            
            
            (5,914,848
            )Gain
                on disposal of discontinued operations
            
            
            -
            
            
            53,125
            
            
            (2,575,734
            )Gain/(loss)
                from discontinued operations
            
            
            (2,424,343
            )
            
            53,125
            
            
            (8,676,620
            )Income/(loss)
                before income tax
            
            
            (2,525,815
            )
            
            201,460
            
            
            (13,584,864
            )Income
                tax
            
            
            (309,145
            )
            
            (78,378
            )
            
            (211,287
            )NET
                INCOME/(LOSS)
            
            $
            (2,834,960
            )
            $
            123,082
            
            $
            (13,796,151
            )





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.





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.


21


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





In
      December 2002, the FASB issued SFAS No. 148 - ACCOUNTING FOR STOCK-BASED
      COMPENSATION - TRANSITION AND Disclosure. This statement amends SFAS No. 123
      -
      ACCOUNTING FOR STOCK-BASED COMPENSATION, providing alternative methods of
      voluntarily transitioning to the fair market value based method of accounting
      for stock based employee compensation. FAS 148 also require disclosure of the
      method used to account for stock-based employee compensation and the effect
      of
      the method in both the annual and interim financial statements. The provisions
      of this statement related to transition methods are effective for fiscal years
      ending after December 15, 2002, while provisions related to disclosure
      requirements are effective in financial reports for interim periods beginning
      after December 31, 2002.





For
      stock
      options, we elected to continue to account for stock-based compensation plans
      using the intrinsic value-based method of accounting prescribed by APB No.
      25,
      "Accounting for Stock Issued to Employees," and related interpretations. Under
      the provisions of APB No. 25, compensation expense is measured at the grant
      date
      for the difference between the fair value of the stock and the exercise
      price.





For
      other
      items paid for by common stock, the value of the transaction is determined
      by
      the value of the goods or services received, measured at the time of the
      transaction. The corresponding stock value, used to determine the number of
      share to be issued, is the value of the average price for the 20 to 30 days
      prior to the transaction date.


23


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.







**Results
      of Operations**





Our
      operations for the fiscal 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. Our operations for the fiscal years
      ended May 31, 2005 consisted of operations of Huaqing (51% indirect ownership
      interest), Control Tech (90% 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. While our operations for the five
      months transition period ended May 31, 2005 and for the fiscal year ended May
      31, 2005 consisted of operations of Huaqing (51% indirect ownership interest),
      Control Tech (Consolidated from March 2005, 90% direct 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 only our IT business. As noted above, the Company plans
      to add to its traditional IT business by entering the growing Chinese vocational
      training marketplace. The business transformation from relying solely on the
      IT
      industry to include the education industry likely will materially change the
      Company’s business operation, the operating revenue, selling ,
      general
      and administrative expenses, the cash flows and other financial information
      in
      the future. As a result, any predictions of the future financial trends based
      on
      the discussion and analysis below are risky and the readers of this report
      shall
      caution about this factor.


24


***Operating
      revenue:***





We
      recorded operating revenue of US$42.1 million for the fiscal year ended May
      31,
      2006, compared to US$65.1 million for the same period in 2005, or a 35%
      decrease. The decrease is mainly due to the decline of sales revenue form
      Huaqing during this fiscal year. Two factors attribute to the decline of sales
      revenue from Huaqing. One factor is the Company faces more severe completions
      from its rivals and the other factor is that Huaqing focused on the more
      lucrative high-end products with higher margin. Our operating revenue for the
      five months transition period ended on May 31, 2005 was US$19.7 million. The
      sales revenue for the five months transition period and the fiscal year ended
      May 31, 2005 included US$ 1.2 million form Control Tech. Our sales during the
      fiscal years ended May 31 mainly represented revenues derived from sale of
      Samsung monitors and notebooks in Shanghai and sales of multimedia products
      in
      China. In the forthcoming fiscal year, the Company will try to focus more on
      those high margin products rather than add those thin margin
      products.





Our
      cost
      of sales amounted to US$40.6 million for the fiscal years ended May 31, 2006,
      compared to US$63.7 million for the same period in 2005 and US$18.4 million
      for
      the five months transition period ended May 31, 2005, excluding the discontinued
      operations. The decline of cost of sales is in line with the decline of sales
      revenue. The cost of sales for the five months transition period and the fiscal
      year ended May 31, 2005 included US$ 0.7 million from Control Tech.





Gross
      profit was US$1.5 million, or 3.5%, for the fiscal year ended May 31, 2006
      compared to US$1.3 million, or 2.1%, for the same period in 2005, an increase
      of
      11%, and the gross profit for the five months transition period ended May 31,
      2005 was US$1.2 million. The gross profit for the five months transition period
      and the fiscal year ended May 31, 2005 included US$ 0.5 million from Control
      Tech. The increase of the gross margin is mainly contributed to the higher
      margin operation results of Huaqing, which is focused more on high-margin
      product, such as note books.








***Selling,
      general and administrative expenses:***





Our
      selling, general and administrative expenses were US$1,385 thousand for the
      fiscal year ended May 31, 2006 compared to US$1,532 thousand for the same
      periods in 2005, a decrease of US$147 thousand, or 10%. The expenses for five
      months transition period ended May 31, 2005 was US$ 862 thousand. The gross
      profit for the five months transition period and the fiscal year ended May
      31,
      2005included US$ 229 thousand from Control Tech. The selling, general and
      administrative expenses were slightly changed excluding the effects of Control
      Tech.


25


***Depreciation
      and amortization expenses:***





Our
      depreciation and amortization expenses were US$48 thousand for the fiscal year
      ended May 31, 2006 compared to US$65 thousand for the same periods in 2005,
      a
      26% decrease. The decrease was primarily due to our exclusion of the
      depreciation charges from Control Tech’s business in this consolidated financial
      statement and the disposal of fixed assets during the fiscal year ended May
      31,
      2006. The depreciation and amortization expenses for five months transition
      period ended May 31, 2005 were US$ 30 thousand.








***Interest
      income:***





Interest
      income was US$140 thousand and US$196 thousand for the fiscal year ended May
      31,
      2006 and 2005. The US$56 thousand decrease was mainly due to lower cash
      balances. Interest income for five months transition period ended May 31, 2005
      was US$ 47 thousand.








***Interest
      expenses*** :





Interest
      expenses were US$250 thousand and US$557 thousand for the fiscal years ended
      May
      31, 2006 and 2005. All the interest expenses were incurred by Huaqing, a 51%
      owned subsidiary, from short-term bank loans to finance the Samsung distribution
      business. The decrease of interest expenses was due to the decrease of
      short-term loan credit and note payable in the fiscal year 2006. Interest
      expenses for five months transition period ended May 31, 2005 were US$ 200
      thousand.








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





Income
      from continuing operations for the fiscal year ended May 31, 2006 was US$331
      thousand, compared to a loss of US$4,742 thousand for the same period a year
      ago. The sharp decrease of the loss is mainly due to 4 million provisions on
      note receivable during the fiscal year ended 31 May 2005. Income
      from continuing operations for five
      months transition period ended May 31, 2005 were US$ 287 thousand.








***Discontinued
      operations:***





During
      the fiscal year ended May 31, 2006, the discontinued operations represent the
      provision and operation results of Control Tech, which was determined by the
      management to be disposed. During the fiscal year ended May 31, 2005, the
      discontinued operations represent the provision, disposal gain or loss and
      operation results 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.


26


***Minority
      interest:***





Minority
      interest represented the profit shared by the minority shareholders of Huaqing
      (49%) during the fiscal year ended May 31, 2006, while minority interest during
      same period ended May 31, 2005 comprised of the profit shared by the minority
      shareholders of Huaqing (49%) and Control Tech (10%). The minority interest
      for the fiscal years ended May 31, 2006 and 2005 and the five months transition
      period ended May 31, 2005 were US$433 thousand of loss, US$167 thousand of
      profit and US$138 thousand of loss, respectively.








***Income
      tax:***





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





Chinese
      local tax authorities had not yet conducted annual tax audits of our
      subsidiaries and affiliates in China for the 2005 tax year. Management believes
      that there are no outstanding tax issues or liabilities at the time of this
      transition period report. All tax liabilities, if any, prior to the acquisition
      by us of our various Chinese subsidiaries or affiliates are solely the
      responsibility of the selling shareholders, as stipulated in each acquisition
      agreement.





We
      made
      provision for PRC income taxes of US$309 thousand and US$211 thousand for the
      fiscal year ended May 31, 2006 and 2005, respectively. We made provision for
      PRC
      income taxes of US$78 thousand for the five months transition period ended
      May
      31, 2005. This provision for taxes relates to the estimated amount of taxes
      that
      would be imposed by tax authorities in the PRC. None of our income is subject
      to
      taxation by any U.S. governmental authority.








**Liquidity
      and Capital Resources:**





As
      shown
      in our accompanying financial statements, we had a net loss of US$2.8 million
      for the fiscal year ended May 31, 2006 as compared to a net loss of US$13.8
      million for the same periods in 2005. Loss from discontinued operations for
      the
      fiscal years ended May 31, 2006 and May 31, 2005 are US$2.4 million and US$8.7
      million respectively. Our current assets exceeded our current liabilities by
      US$1.5 million as of May 31, 2006.





As
      disclosed in Item 1 Business of this 10K, the Company has decided to add to
      its
      existing IT business by expanding into the growing Chinese vocational training
      marketplace. This addition likely will have enormous demand on our capital
      resources in the near future.


27


In
      addition to our working capital on hand, we intend to obtain required capital
      through a combination of bank loans, staff loans and the sale of our equity
      securities. However, there are no commitments or agreements on the part of
      anyone at this time to provide us with additional bank financing or purchase
      of
      securities.





If
      we are
      unable to raise the necessary additional working capital, our operations and
      financial condition may be adversely affected.








***Operating
      activities:***





During
      the fiscal year ended May 31, 2006, net cash used in operating activities was
      US$1.6 million, compared to net cash used by operating activities of US$10
      million during the same period in 2005. The decrease in cash used from operating
      activities resulted mainly from net loss of $2.8 million, decrease of restricted
      cash $1.6 million, increase of accounts receivable of $0.4 million, increase
      of
      prepayment of $0.5 million, and decrease of advance from customers of $3.3
      million, by netting off loss on discontinued operations of 0.6 million,
      provision on assets pending for sale of $1.8 million and decrease of advance
      to
      suppliers of $0.9 million. The net cash used in the operating activities was
      US$1.3 million during the five months transition period ended May 31,
      2005.








***Investing
      activities:***





Net
      cash
      provided by investing activities during the fiscal year ended May 31, 2006,
      was
      US$0.9 million compared to net cash used in investing activities US$0.2 million
      for the same period in 2005. The cash provided by investment activities in
      the
      fiscal year ended May 31, 2006 was due to proceeds from disposal of property
      and
      equipment of $ 0.5 million and proceeds from notes receivable of $0.4 million.
      While the cash used in the fiscal year ended May 31 2005 is mainly resulted
      from
      the disposal of subsidiary of $3.5 million, by netting off (a) cash increased
      from acquiring new subsidiary of $2.0 million, (b) cash proceeds on assets
      pending for sale of $1 million, and (c) cash proceeds on disposal of property
      of
      $0.3 million. The net cash provided in the investing activities was US$0.8
      million during the five months transition period ended May 31,
      2005.







***Financing
      activities:***





Net
      cash
      used by financing activities during the fiscal year ended May 31, 2006 equaled
      to US$0.4 million compared to cash provided by financing activities of US$8.1
      million during the same period in 2005. Net cash used by financing activities
      during the fiscal year ended May 31, 2006 was primarily due to payments on
      notes
      payable of $1.6 million, netting of the net payment got from related party
      of $1
      million and proceeds on loans or credit of $0.2 million. Net cash provided
      in
      year 2005 by financing activities was mostly due to the net effect of (a)
      payment of SEC judgment in the amount of US$1.1 million.(b) bank loans of US$5.5
      million borrowed by Huaqing from local bank and (3) funds raised from private
      offering in the amount of US$2.4 million.  The
      net
      cash provided in the financing activities was US$46 thousand during the five
      months transition period ended May 31, 2005.


28


**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, 2006, 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.











**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,
      2006,
      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 0.72% to
      1.62%
      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 because the
      relative stability of the exchange rates between Chinese Yuan, Hong Kong Dollar
      and US dollar. 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, 2006, 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 sheet of The Hartcourt Companies,
      Inc., a Utah Corporation (the “Company”) as of May 31, 2006 and the related
      consolidated statements of operations, stockholders’ equity and cash flows for
      the year ended May 31, 2006 and the transitional 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, 2006 and the results of its operations and its cash flows for the year
      ended May 31, 2006 and transitional 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 $67,709,374 as of May 31,
      2006
      and negative cash flow from operations amounting $1,630,966 for the year ended
      May 31, 2006. 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
      4,
      2006.


30





**THE
                HARTCOURT COMPANIES, INC. AND SUBSIDIARIES****CONSOLIDATED
                BALANCE SHEET****May
                31, 2006****ASSET****CURRENT
                ASSETS**Cash
                and cash equivalents
            
            $
            400,672Accounts
                receivable
            
            
            1,703,640Inventories,
                net
            
            
            1,731,573Prepaid
                expenses and other assets
            
            
            2,458,478Advances
                to suppliers
            
            
            713,621Assets
                pending for sale
            
            
            300,000Other
                assets
            
            
            136,264**TOTAL
                CURRENT ASSETS**
            
            
            **7,444,248****PROPERTY
                & EQUIPMENT - NET**
            
            
            115,166**INVESTMENTS**
            
            
            62,353**INTANGIBLE
                ASSET**Goodwill
            
            
            1,911,466**TOTAL
                ASSETS**
            
            $
            9,533,233**LIABILITIES
                AND SHAREHOLDERS' EQUITY****CURRENT
                LIABILITIES**Accounts
                payable
            
            $
            558,140Loan
                from employees
            
            
            1,496,723Due
                to directors
            
            
            49,869Accrued
                expenses and other current liabilities
            
            
            3,823,969**TOTAL
                CURRENT LIABILITIES**
            
            
            **5,928,701****MINORITY
                INTERESTS**
            
            
            738,977**SHAREHOLDERS'
                EQUITY****Preferred
                Stock:**Original
                preferred stock, $0.01 par value, 1,000 sharesauthorized,
                none issued and outstanding
            
            
            -Class
                A preferred stock, 10,000,000 shares authorized,none
                issued and outstanding
            
            
            -**Common
                stock**:$0.001
                par value, 239,999,000authorized,
                194,844,535 common sharesissued
                and outstanding
            
            
            194,846Additional
                paid in capital
            
            
            70,402,436Treasury
                stock, at cost, 48,728 shares
            
            
            (48,728
            )Other
                comprehensive income
            
            
            26,375Accumulated
                deficit
            
            
            (67,709,374
            )**TOTAL
                SHAREHOLDERS' EQUITY**
            
            
            **2,865,555****TOTAL
                LIABILITIES AND SHAREHOLDERS' EQUITY**
            
            $
            9,533,233








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


31





**THE
                HARTCOURT COMPANIES, INC. AND SUBSIDIARIES****CONSOLIDATED
                STATEMENTS OF OPERATIONS**For
                the year ended May 31, 2006 and for the five month period ended May
                31,
                2005**Year
                ended**
              **May
                31,**
            
            **Five
                month period ended****2006**
            
            **2005**Net
                sales
            
            $
            42,089,683
            
            $
            19,677,794Cost
                of sales
            
            
            40,598,971
            
            
            18,440,692Gross
                profit
            
            
            1,490,712
            
            
            1,237,102Operating
                expenses:Selling,
                general and administrative
            
            
            1,384,950
            
            
            862,216Depreciation
                and amortization
            
            
            48,157
            
            
            29,764Total
                operating expenses
            
            
            1,433,107
            
            
            891,980Income
                from continuing operations before other income/(expenses), minority
                interest and discontinued operations
            
            
            57,605
            
            
            345,122Other
                income/(expense):Interest
                expense
            
            
            (250,048
            )
            
            (199,566
            )Interest
                income
            
            
            140,232
            
            
            46,756Gain
                on disposal of fixed assets
            
            
            312,401
            
            
            -Other
            
            
            71,039
            
            
            94,476Total
                other income/(expense)
            
            
            273,624
            
            
            (58,334
            )Income
                from continuing operations before minority interest and discontinued
                operations
            
            
            331,229
            
            
            286,788Less:
                Minority Interest
            
            
            (432,701
            )
            
            (138,453
            )Income
                (Loss) before discontinued operations
            
            
            (101,472
            )
            
            148,335Discontinued
                operations:Loss
                from discontinued operations
            
            
            (596,353
            )
            
            -Provision
                for assets pending for sales
            
            
            (1,827,990
            )
            
            -Gain
                on disposal of discontinued operations
            
            
            -
            
            
            53,125Gain/(loss)
                from discontinued operations
            
            
            (2,424,343
            )
            
            53,125Income/(loss)
                before income tax
            
            
            (2,525,815
            )
            
            201,460Income
                tax
            
            
            (309,145
            )
            
            (78,378
            )NET
                INCOME/(LOSS)
            
            $
            (2,834,960
            )
            $
            123,082OTHER
                COMPREHENSIVE INCOMEForeign
                currency translation income
            
            
            111,352
            
            
            -COMPREHENSIVE
                INCOME (LOSS)
            
            $
            (2,723,608
            )
            $
            123,082BASIC
                AND DILUTED LOSS PER COMMON SHARE:Earnings
                from continuing operations
            
            $
            0.002
            
            $
            0.001Earnings
                (Loss) from discontinued operations
            
            $
            (0.012
            )
            $
            0.000Earnings
                (Loss) per share
            
            $
            (0.01
            )
            $
            0.001Basic
                and diluted weighted average number of shares
            
            
            194,049,240
            
            
            191,503,585






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


32


**THE
                HARTCOURT COMPANIES, INC. AND SUBSIDIARIES****CONSOLIDATED
                STATEMENTS OF SHAREHOLDERS' EQUITY****FOR
                THE YEAR ENDED MAY 31, 2006 AND FIVE MONTH PERIOD ENDED MAY 31, 2005****Common**
            
            
            
            **Other****Additional**
            
            **Stock**
              **Subscrip-**
            
            
            
            **Compre-  **hensive****
            
            
            
            **Total****Common
                Stock**
            
            **Preferred
                Stock**
            
            **Paid
                In**
            
            **tions**
            
            **Treasury
                Stock**
            
            **Income**
            
            **Accumulated**
            
            **Shareholders'****Shares**
            
            **Amount**
            
            **Shares**
            
            **Amount**
            
            **Capital**
            
            **Receivable**
            
            **Shares**
            
            **Amount**
            
            **(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 consulting services
            
            
            5,900
            
            
            6
            
            
            --
            
            
            --
            
            
            1,485
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            1,491Shares
                issued for compensation
            
            
            387,777
            
            
            388
            
            
            --
            
            
            --
            
            
            62,918
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            63,306Shares
                issued for acquisition of Control Tech
            
            
            19,588,875
            
            
            19,589
            
            
            --
            
            
            --
            
            
            1,939,299
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            1,958,888Shares
                issued for private offering
            
            
            25,642,857
            
            
            25,643
            
            
            --
            
            
            --
            
            
            999,357
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            1,025,000Treasury
                shares received
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            23,545,704
            
            
            (2,354,571
            )
            
            --
            
            
            --
            
            
            (2,354,571
            )Cancellation
                of treasury shares
            
            
            (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 in lieu of compensation and service
            
            
            1,106,073
            
            
            1,107
            
            
            --
            
            
            --
            
            
            71,013
            
            
            --
            
            
            --
            
            
            -
            
            
            --
            
            
            --
            
            
            72,120Other
                comprehensive income (foreign currency translation)
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            
            
            
            --
            
            
            --
            
            
            -
            
            
            111,352
            
            
            --
            
            
            111,352Stock
                option costs
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            28,000
            
            
            --
            
            
            --
            
            
            -
            
            
            --
            
            
            --
            
            
            28,000Net
                income
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            -
            
            
            --
            
            
            (2,834,960
            )
            
            (2,834,960
            )Balance
                -May 31, 2006
            
            $
            194,844,535
            
            $
            194,846
            
            
            -
            
            $
            -
            
            $
            70,402,436
            
            $
            -
            
            
            48,728
            
            $
            (48728
            )
            $
            26,375
            
            $
            (67,709,374
            )
            $
            2,865,555





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


33





**THE
                HARTCOURT COMPANIES, INC. AND SUBSIDIARIES****CONSOLIDATED
                STATEMENTS OF CASH FLOWS******For
                the year ended May 31, 2006 and for the five month period ended May
                31,
                2005






**Year
                ended**
              **May
                31,**
            
            **Five
                month**
              **period
                ended****2006**
            
            **2005****CASH
                FLOWS FROM OPERATING ACTIVITIES:**Net
                income (loss)
            
            $
            (2,834,960
            )
            $
            123,082Adjustments
                to reconcile net income (loss) to net cash used in operating activities:Gain
                on abandonment of property and equipment
            
            
            (312,401
            )
            
            -Gain
                on disposal of discontinued operations
            
            
            -
            
            
            (53,125
            )Depreciation
            
            
            48,157
            
            
            29,764Loss
                on discontinued operation
            
            
            596,353
            
            
            -Provision
                on assets pending for sale
            
            
            1,827,990
            
            
            -Minority
                interest
            
            
            432,701
            
            
            138,453Stock
                issued for services and compensations
            
            
            72,120
            
            
            64,797Stock
                option costs
            
            
            28,000
            
            
            -Changes
                in operating assets and liabilities:Restricted
                cash
            
            
            1,558,630Accounts
                receivable
            
            
            (365,178
            )
            
            2,587,196Advances
                to suppliers
            
            
            872,919
            
            
            2,205,387Inventories
            
            
            (16,666
            )
            
            (556,986
            )Prepaid
                expenses and other receivables
            
            
            (492,682
            )
            
            (549,546
            )Accounts
                payable
            
            
            215,018
            
            
            (323,725
            )Accrued
                expenses and other current liabilities
            
            
            102,213
            
            
            362,356Advances
                from customers
            
            
            (3,363,180
            )
            
            (5,284,387
            )**NET
                CASH USED IN OPERATING ACTIVITIES**
            
            
            (1,630,966
            )
            
            (1,256,734
            )**CASH
                FLOWS FROM INVESTING ACTIVITIES:**Purchase
                of property and equipment
            
            
            (23,395
            )
            
            (13,613
            )Proceeds
                on disposal of property and equipment
            
            
            522,238
            
            
            789,441Cash
                decreased due to cease(disposal) of operation of subsidiaries
            
            
            (36,604
            )
            
            -Cash
                acquired in acquisition of a subsidiary
            
            
            -
            
            
            59,670Proceeds
                on notes receivable, net
            
            
            483,793
            
            
            -**NET
                CASH PROVIDED BY INVESTING ACTIVITIES**
            
            
            946,032
            
            
            835,498





34





**THE
                HARTCOURT COMPANIES, INC. AND SUBSIDIARIES****CONSOLIDATED
                STATEMENTS OF CASH FLOWS******For
                the year ended May 31, 2006 and for the five month period ended May
                31,
                2005
              (Continued)








**CASH
                FLOWS FROM FINANCING ACTIVITIES**Proceeds
                from (payments to) related parties-net
            
            $
            966,722
            
            $
            (118,216
            )Proceeds
                on sale of common stock
            
            
            -
            
            
            1,025,000Proceeds
                on loans and lines of credit-net
            
            
            196,248
            
            
            -Proceeds
                (payments) on notes payable-net
            
            
            (1,558,630
            )
            
            248,049Payment
                of SEC disgorgement
            
            
            -
            
            
            (1,108,535
            )**NET
                CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES**
            
            
            (395,660
            )
            
            46,298Foreign
                currency translation
            
            
            111,352
            
            
            -**NET
                DECREASE IN CASH & CASH EQUIVALENTS**
            
            
            (969,242
            )
            
            (374,938
            )**CASH
                AND CASH EQUIVALENTS -****BEGINNING
                OF PERIOD**
            
            
            1,369,914
            
            
            1,744,852**CASH
                AND CASH EQUIVALENTS - END OF PERIOD**
            
            $
            400,672
            
            $
            1,369,914





**SUPPLEMENTAL
      DISCLOSURE OF CASH FLOWS**


The
      Company prepares its statements of cash flows using the indirect method as
      defined under the Financial Accounting Standard No. 95.





**SUPPLEMENTAL
                DISCLOSURE OF CASH FLOWS**Cash
                paid for interest
            
            $
            250,048
            
            $
            128,500Cash
                paid for income taxes, net of refund received
            
            $
            309,145
            
            $
            40,837SUPPLEMENTAL
                DISCLOSURE OFNON-CASH
                INVESTING AND FINANCING ACTIVITIESIn
                Conjunction with acquisition of subsidiariesFair
                value of net assets acquired
            
            $
            -
            
            $
            879,879Cash
                paid for acquisitions (net of cash acquired)
            
            $
            -
            
            $
            (59,670
            )Fair
                value of shares issued for acquisition
            
            $
            -
            
            $
            1,958,888






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


35


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


**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS**


**MAY
      31, 2006 AND 2005**





**NOTE
      1**  **GENERAL**





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





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





As
      of May
      31, 2006, 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, 2006, the Company owns 51% equity interest in Shanghai Huaqing Corporation
      Development Ltd. Huaqing is located in Shanghai, China. As the Chinese laws
      may
      prohibit foreign companies involved in the distribution industry, Hartcourt,
      uses its employees, as nominee to hold the shares of Huaqing.





As
      of May
      31, 2006, Hartcourt Capital Inc. owns 90% equity interest in Control Tech
      Electronics (Shanghai) Co., Ltd. Control Tech is located in Shanghai,
      China.





As
      of May
      31, 2006, 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.





As
      of May
      31, 2006, AI-Asia, Inc., the third holding company, owns 100% equity of AI-Asia
      (Shanghai) Information Technology, Inc of China (“AI”), located in Shanghai,
      China.


36


**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 2006 and 2005 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. The management of the Company determined that the accounts
      receivable at May 31, 2006 are recoverable.


37


e)  Advances
      to suppliers





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


f)
        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 and 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 $16,803 at
      May
      31, 2006 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.


38


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, 2006, 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 collectability is reasonably assured.
      Payments received before all of the relevant criteria for revenue recognition
      are satisfied are recorded as advances from customers.




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.


39


m)  Stock-Based
      Compensation





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





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 currency of the Company is Chinese Renminbi.





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.


40


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.





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)  Going
      Concern





As
      shown
      in the accompanying consolidated financial statements, the Company incurred
      accumulated losses of $67,709,374 and $64,874,414as of May 31, 2006 and May
      31,
      2005, respectively. Negative cash flows from the operations of $1,630,966 and
      $1,256,734 were noted for the fiscal years ended May 31, 2006 and the five
      months transition period ended May 31, 2005, respectively. These matters raise
      substantial doubt about the Company’s ability to continue as a going
      concern.


41


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





The
      Company has taken certain restructuring steps to provide the necessary capital
      to continue its operations. These steps included: 1) acquire profitable
      operations through issuance of equity instruments, 2) disposal of unprofitable
      or unfavourable return-on-investment operations, 3) The new management is
      focused on creating shareholder value by seeking higher margin business,
      initially in the Chinese vocational training marketplace. The Company has
      planned to continue actively seeking additional funding and restructure the
      acquired subsidiaries to increase profits and minimize the liabilities.





t)  Recently
      Issued Accounting Standards





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





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


42


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





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





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.


43


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





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








**NOTE
      3**  **ACQUISITION
      & INVESTMENT**





**Acquisition**





During
      the five months 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.





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





AmountCurrent
                assets
            
            $
            2,416,288Good
                will
            
            
            1,079,009Property
                & equipment
            
            
            113,343Current
                liabilities
            
            
            (1,551,988
            )Minority
                Interest
            
            
            (97,764
            )$
            1,958,888Consideration
                paid:Common
                Stock
            
            $
            1,958,888







44




Pro
      forma
      income statements for the Company in relation to the acquisition of Control
      Tech
      for  five-month
      period ended May 31, 2005 is as follows:




**For
                the Five**
              **Month
                Period**
              **Ended
                May 31****2005**Net
                sales
            
            $
            19,971,240Cost
                of sales
            
            
            18,578,626Gross
                profit
            
            
            1,392,614Operating
                expenses
            
            
            1,097,368Income
                from continuing operations before other income/(expense) & minority
                interest
            
            
            295,246Other
                income/(expenses)
            
            
            (56,208Income
                from continuing operations before minority interest
            
            
            239,038Less:
                Minority Interest
            
            
            133,678Income
                before discontinued operations & income tax
            
            
            105,360Gain
                on disposal of discontinued operations
            
            
            53,125Income
                before income tax
            
            
            158,485Income
                tax
            
            
            78,378Net
                income
            
            $
            80,107





**Investment
      in Shanghai Jin’an Fuhuaqi**





During
      year 2004, Huaqing, a 51% owned subsidiary, invested $62,353 to a local
      enterprise for 10% equity interest. No provision was made for such
      investment.







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





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





**NOTE
      5**  **INVENTORIES**




Inventories
      as of May 31, 2006 consisted of the following:




AmountMonitors
            
            $
            1,120,993Laptops
            
            
            398,858Others
            
            
            220,182Less:
                provisions for obsolete inventories
            
            
            (8,460
            )Net
            
            $
            1,731,573




45


**NOTE
      6**   **ADVANCES
      TO SUPPLIERS**





The
      Company made prepayments to Samsung to purchase inventory as required by
      Samsung. This amount represents the advances paid by Huaqing a 51% owned
      subsidiary to Samsung of $713,621 at May 31, 2006.






**NOTE
      7**   **RELATED
      PARTY TRANSACTIONS**




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.




Following
      related parties transactions incurred in five months period ended May 31, 2005:





a)
            During
                the five months period ended May 31, 2005, Huaqing, a 51% owned subsidiary
                of the Company, sold $594,049 monitors and laptops to its minority
                shareholder (Shanghai Chengqing Electronics Co., Ltd., formerly known
                as
                Shanghai Huaqing Economic Development Co., Ltd).b)
            During
                the five months period ended May 31, 2005, Control Tech, a 90% owned
                subsidiary of the Company, purchased $81,946 video and audio conferences
                accessories from its minority shareholder (Beijing Control Tech Co.,
                Ltd.)
                pursuant to business transactions in the ordinary
                course.





c)
            During
                the five months period ended May 31, 2005, Hartcourt issued 387,777
                shares
                of our common stock valued at $63,305 to its officers, employees
                and all
                directors in lieu of cash compensation.







**NOTE
      8**   **PROPERTIES
      AND EOUIPMENT**





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




AmountOffice
                equipment and computers
            
            $
            53,354Vehicle
            
            
            218,112271,466Less:
                accumulated depreciation
            
            
            (156,300
            )Property
                and equipment, net
            
            $
            115,166







**NOTE
      9**   **GOODWILL**





Goodwill
      resulting from the acquisition of Huaqing amounted to $1,911,466, as of May
      31,
      2006.





46


**NOTE
      10**    **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.







**NOTE
      11**  **LOAN
      FROM EMPLOYEES**





Huaqing,
      a 51% owned subsidiary of the Company, issued short-term bond to its employees
      to raise additional working capital. The bond is 8% interest bearing and payable
      at December 31, 2006.







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





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





AmountAccrued
                directors’ compensations
            
            $
            7,250Accrued
                interest
            
            
            191,985Accrued
                professional fees
            
            
            249,474Accrued
                employees compensations
            
            
            1,821,715Accrued
                tax payable
            
            
            202,669Interest
                free loan
            
            
            1,066,239Other
                current liabilities
            
            
            284,637Total
            
            $
            3,823,969




47


**NOTE
      13**  **DUE TO DIRECTORS**





The
      amount due to directors as of May 31, 2006 represents director fee due to the
      Company’s director.





**NOTE
      14**  **MINORITY INTEREST**





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





**NOTE
      15 COMMITMENTS AND CONTINGENCIES**





a)
      Employment Agreements





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





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 and 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 vesting schedule
      is
      as following:





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.





During
      the three months period ended Aug 31, 2006 when Mr. Victor Zhou serving as
      the
      acting Chief Executive Officer, none of the above options was
      vested.


48


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. Victor 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 according to the following vesting schedule and subject
      to
      number of shares available for option approved by shareholders.





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
      May
      31, 2006, the Board of Directors of the Company appointed Mr. Yungeng Hu to
      be
      the President and the 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 according to the following vesting schedule
      and subject to number of shares available for option approved by shareholders.





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, 2006 and for the five month period
      ended May 31, 2005 were $100,389 and $34,757, respectively.


49


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





Year
                Ending May 31
            
            Payments2007
            
            $
            70,602







c)
      Legal
      Proceedings





**Securities
      and Exchange Commission v. The Hartcourt Companies, Inc., et al., United States
      District Court for the Central District of California Case
      No. CV03-3698LGB(PLAX)**





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





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





**John
      A. Furutani vs. The Hartcourt Companies, Inc.**





John
      A.
      Furutani, Hartcourt’s former attorney, filed a complaint against the Company for
      alleged breach of contract in the amount of $54,441 arising out of legal
      representation of the Company and its co-defendant Alan Phan with respect to
      the
      SEC litigation. As of May 31, 2005, both parties had reach out of court
      settlement and Hartcourt had fully paid the consideration as agreed on out-of
      court settlement on July 1, 2005.


50


**NOTE
      16**  **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 issued and outstanding as of May
      31, 2006 and May 31, 2005 are 194,844,535 and 193,738,462
      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)
      Common
      Stock Issued for Services





During
      the fiscal year ended May 31, 2006, Hartcourt issued 617,885 shares of common
      stock valued at $31,809 to consultants for consulting services.


51


During
      the five month period ended May 31, 2005, Hartcourt issued 5,900 shares of
      common stock valued at $1,491 to a consultant for consulting services.





e)
      Common
      Stock Issued for compensation





During
      the fiscal year ended May 31, 2006, Hartcourt issued 488,188 shares of our
      common stock valued at $40,311 to our officers, employees and directors in
      lieu
      of cash compensation.





During
      the five month period ended May 31, 2005, Hartcourt issued 387,777 shares of
      our
      common stock valued at $63,306 to our officers, employees and directors in
      lieu
      of cash compensation.





f)
      Common
      Stock Issued for Warrants





During
      the fiscal year ended May 31, 2006 and five month period ended May 31, 2005,
      no
      common stock was issued for warrants.





g)
      Common
      Stock Issued for Stock Options





On
      July
      25, 2006, we granted total 1,000,000 stock options to our ex-vice president
      Zhou
      Jingjing at excise price of US$0.10 based on our employee compensation plan,
      of
      which 500,000 options vest on July 25, 2006 and the rest 500,000 options vest
      on
      July 25, 2007 subject to his continuing service to the Company. Mr. Zhou
      resigned from the Company on June 9, 2006. Based on his employment contract,
      the
      1,000,000 stock options have been terminated upon his resignation.





During
      the five months period ended May 31, 2005, no common stock was issued for stock
      options.








**NOTE
      17**  **INCOME TAXES**





At
      May
      31, 2006, the Company had net operating losses for tax purposes of approximately
      $3,373,000. The net operating loss carry forward may be used to reduce taxable
      income through the year 2019.





52


The
        gross
        deferred tax asset balance as of May 31, 2006 was $2,304,000. A 100% valuation
        allowance has been established against the deferred tax assets, as the
        utilization of the loss carry forward cannot reasonably be assured. Components
        of deferred tax asset are as follows:


May
                31, 2006
            
            May
                31, 2005Net
                operating loss
            
            $
            2,304,000
            
            $
            2,159,161Less:
                valuation allowance
            
            
            (2,304,000
            )
            
            (2,159,161
            )$
            --
            
            $
            --








The
      following is a reconciliation of the provision for income taxes at the U.S.
      federal income tax rate to the income taxes reflected in the Statement of
      Operations:





May
                31, 2006
            
            May
                31, 2005Tax
                expense (credit) at statutory rate-federal
            
            
            (34)%
            
            
            (34)%State
                tax expense net of federal tax
            
            
            (6)
            
            
            (6)Changes
                in valuation allowance
            
            
            40
            
            
            40Foreign
                income tax
            
            
            33
            
            
            33Tax
                expense at actual rate
            
            
            33%
            
            
            33%





Income
      tax expense for the year ended May 31, 2006 is $309,145 and for the five month
      period ended May 31, 2005 was $78,378 consists of tax on income of the Company’s
      subsidiary in China.








**NOTE
      18**  **STOCK OPTION PLAN AND WARRANTS**





a)
      Stock
      Option Plan





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


53


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 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. 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
      following table summarizes the activity of stock options:





WeightedAverageNumber
                of
            
            ExerciseShares
            
            PriceShares
                under option at December 31, 2004
            
            
            7,300,000
            
            $
            0.28Granted
            
            
            20,300,000
            
            $
            0.09Exercised
            
            
            -
            
            
            -Expired
            
            
            -
            
            
            -Cancelled
            
            
            -
            
            
            -Shares
                under option at May 31, 2005
            
            
            27,600,000
            
            $
            0.14Granted
            
            
            1,000,000
            
            $
            0.09Exercised
            
            
            -
            
            
            -Expired
            
            
            (4,000,000
            )
            $
            0.207-Cancelled
            
            
            -
            
            
            -Shares
                under option at May 31, 2006
            
            
            24,600,000
            
            $
            0.127




54


During
      the fiscal year ended May 31, 2006 there were 2,800,000 stock options vested
      has
      an exercise price of US$0.09 per share which was US$0.01 lower than the market
      price of the Company’s common stock on the date of grant. In accordance with the
      accounting for such options utilizing the intrinsic value method, the Company
      recorded $28,000 as compensation expense for the fiscal year ended May 31,
      2006.
      Other stock options issued to employees have an exercise price not less than
      the
      market price of the Company’s common stock on the date of grant.





Had
      the
      Company determined employee stock based compensation cost based on a fair value
      model at the grant date for its stock options under SFAS 123, the Company's
      net
      earnings per share would have been adjusted to the pro forma amounts for the
      fiscal years ended May 31, as follows ($ in thousands, except per share
      amounts):





(in
                000’s)2006
            
            2005(five
                months)Net
                income - as reported
            
            $
            (2,835
            )
            $
            123Stock-Based
                employee compensationexpense
                included in reported netincome,
                net of tax
            
            
            28
            
            
            --Total
                stock-based employeecompensation
                expense determinedunder
                fair-value-based method for allrewards,
                net of tax
            
            
            (153
            )
            
            (969
            )Pro
                forma net profit (loss)
            
            $
            (2,960
            )
            $
            (846
            )







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


2006
            
            2005Risk-free
                interest rate
            
            
            2.8%
            
            
            2.8%Expected
                life of the options
            
            
            5
                years
            
            
            5
                yearsExpected
                volatility
            
            
            57*.*93%
            
            
            57*.*93%Expected
                dividend yield
            
            
            -
            
            
            -




55


Additional
      information relating to stock options outstanding and exercisable at May 31,
      2006 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
            
            2006
            
            Life
            
            Price
            
            2006
            
            Price$0.06
                - $0.65
            
            24,600,000
            
            0.5
                - 4.8 Year
            
            $0.127
            
            13,600,000
            
            $0.17





On
      July
      25, 2006, the Company grated total 1,000,000 stock option to our ex-vice
      president Zhou Jingjing at excise price of US$0.10 based on our employee
      compensation plan.





b)
      Warrants





There
      are
      no warrants outstanding as of 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 expire 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, 2006.








**NOTE
      19  SEGMENT AND BUSINESS RELATED INFORMATION**





The
      Company has only one reportable segment (computer hardware trading) for the
      five
      months period ended May 31, 2005 and 2004, as other segment of business are
      not
      material to the consolidated financial statements of the Company.







**NOTE
      20  SUBSEQUENT EVENTS**





After
      reviewing Hartcourt's current business operation, its competitive edge, and
      opportunities available in China, in June 2006 the management of the Company
      has
      submitted to the Board of Directors a two-year business plan in which the
      Company plans to diversify its business by focusing on the more lucrative
      post-secondary education market in China to take advantage of the on-going
      demand of skilled workers and growing post-secondary age population. The Company
      has not made any investment in this new business.


56


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. Victor 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 according to the following vesting schedule and subject
      to
      number of shares available for option approved by shareholders.





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
      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 according to the following vesting schedule
      and subject to number of shares available for option approved by shareholders.





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





In
      August
      2006, the Company granted 1 million shares of stock options to each independent
      Director for the compensation of their services with exercise price of US$0.05
      per share, 1 year vesting period and exercisable within 5 years time after
      vesting.





On
      July
      4, 2006, the Company granted 5 million shares of stock options with exercise
      price of US$0.04 per share to Dr. Billy 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 Sept 28, 2007 and exercisable within 5 years time after
      vesting.


57


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





Subsequent
      to the issuance of the Company's financial statements for the year ended
      December 31, 2003, the Company determined that a certain transaction and
      presentation in the financial statements had not been accounted for properly
      in
      the Company's financial statements. . As a result, the Company restated the
      financial statements for the years ended December 31, 2003 and 2004 and for
      the
      five month transitional period ended May 31, 2005.








**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, 2006, 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, 2006.





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.


58


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, 2006, 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 report on internal control over financial reporting included in
      Part
      II, Item 9A, on page 60, of this Form 10-K.








**ITEM
      9B. OTHER INFORMATION.**





None.







**PART
      III**





**ITEM
      10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.**





**(a)
      Board of Directors**





The
      following table sets forth certain information regarding our Board of Directors
      as of August 22, 2006, and their ages as of such date:




Director
                Name
            
            Age
            
            Position
            
            SinceBilly
                Y N Wang
            
            
            42
            
            
            Director
            
            
            2002Geoffrey
                Wei
            
            
            39
            
            
            Director
            
            
            2002Victor
                Zhou
            
            
            37
            
            
            Director
            
            
            2004Yungeng
                Hu
            
            
            41
            
            
            Director
            
            
            2006Wilson
                W. S. Li
            
            
            44
            
            
            Director
            
            
            2004




59


Set
      forth
      below is the biographical information on all directors.





BILLY
      Y N
      WANG, age 42. Dr. Billy Y N Wang has been the Country Manager of NCH Corp China,
      a multi-national chemical company with more than three subsidiaries in China,
      since 1997. From 1994 to 1997, Dr. Wang was the President of Xibic Enterprises
      Ltd. and Senior Consultant at WCE, specializing in international business
      development and technology transfer. From 1991 to 1997, Dr. Wang served as
      the
      Advisor for the Office of International Trade of Washington 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 39. 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.





YUNGENG
      HU, age 41, President, Chief Financial Officer and Director of the Company.
      Mr.
      Hu was a senior banker with several financial institutions. Right before
      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
      LI, age 44. 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.





VICTOR
      ZHOU, age 37, Chief Executive Officer and Director of the Company. Prior to
      becoming the Company’s Chief Executive Officer and a Directors of the Company,
      Mr. Zhou was 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 Bachelors degree in Economics from
      Hunan
      University and EMBA degree from China Europe International Business
      School





Ms.
      Carrie Hartwick resigned as a Director effective on June 1
      2006.


60


**(b)
      Executive Officers**





The
      following table shows Hartcourt's executive officers as of August 25, 2006
      and
      their areas of responsibility. Their biographies follow the table. There are
      no
      family relationships between any director or executive officer and any other
      director or executive officer of Hartcourt. Executive officers serve at the
      discretion of the Board of Directors.




**Name**
              **Age**
              **Position**
              **Date
                  Held**Victor
                  Zhou
              37
              Acting
                  Chief Executive Officer
                Chief
                  Executive Officer
              June
                  1 2006 to Aug 31, 2006
                Since
                  Sept 1, 2006Yungeng
                  Hu
              41
              Chief
                  Financial Officer & President
              Since
                  June 1 2006




Victor
      Zhou, Chief Executive Officer, age 37, took his position on June 1, 2006. Mr.
      Zhou was the President of Fixed Assets Investment of Huatai Securities Inc,
      one
      of the top ten securities firms in China since 1997. Before Huatai, Mr. Zhou
      was
      the General Manager with Jiangsu Securities Inc. from 1993 to 1997. Mr. Zhouhas
      has extensive experience in securities trading, private equity investment and
      asset management. Mr. Zhou received his BA in economics from Hunan University
      and EMBA from China Europe International Business School.





Mr.
      Yungeng Hu, became Chief Financial Officer & President effective on June 1,
      2006. Prior to joining Hartcourt, Mr. Hu served as a Managing Director of
      Investment Banking at CLSA Limited, bringing his substantial experience to
      the
      firm’s China operations, in the areas of Equity Capital Market and mergers and
      acquisitions. 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.





As
      of May
      31, 2006, Carrie Hartwick resigned her position as Chief Executive Officer.
      As
      of June 9, 2006, Jingjing Zhou, Vice President, decided to leave the Company
      for
      personal reasons. Their biograghies can be found in our previous 10-K filed
      in
      the SEC on September 12, 2005.








**(c)
      Family Relationships**





None.








**(d)
      Disclosure re 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 his
      personal reasons. Currently our Audit Committee is comprised of two members
      of
      our Board of Directors: Wilson Li & Billy 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.


61


During
      the year ended May 31 2006, the Board held nine board meetings. The committee
      meetings were held together with the Board meetings. All directors attended
      all
      meetings except Geoffrey Wei absent from three Board meetings.








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





None.








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




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








**(g)
      Code of Ethics and Complaint Procedures**




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








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





**Executive
      Compensation and Related Information**





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, 2006, the five month transition period ended May 31, 2005, and the
      years
      ended December 31, 2004, December 31, 2003, by each person who served as Chief
      Executive Officer during the fiscal year ended May 31, 2006 and by each of
      our
      other most highly compensated executive officers whose aggregate compensation
      exceeded US$100,000 during the fiscal year ended May 31, 2006. This table is
      based on earned compensation. All option grants during the fiscal years listed
      were made under our 1995 Stock Option Plan.


62





**SUMMARY
                COMPENSATION TABLE**




Name
                and Principal Position
            Year
            Salary
                (US$)
            Bonus
                (US$)
            Other
                Annual
              Compensation
              (US$)(1)
            Compensation 
                Securities
              Options
                (#)
            Awards
              UnderlyingCarrie
                Hartwick, Chief Executive
            2006
                (2)
            150,000
            --
            --Officer,
                President and Interim
            2005
                (3)
            62,500(4)
            --
            --
            15,000,000(5)Chief
                Financial Officer
            2004
            137,500(6)
            --
            --
            60,000(7)2003
                (8)
            10,000
            --
            --
            1,000,000





(1)
            Excludes
                certain perquisites and other amounts that, for any executive officer,
                in
                the aggregate did not exceed the lesser of US$50,000 or 10% of the
                total
                annual salary and bonus for such executive
                officer.


(2)
            Covers
                the twelve months period from June 1, 2005 through May 31,
                2006.


(3)
            Covers
                the five month transition period from January 1, 2005 through May
                31,
                2005.


(4)
            Total
                salary payment consists of US$31,250 in backpay owed for services
                provided
                in 2005.


(5)
            On
                March 9, 2005, we entered into an employment agreement with Ms. Hartwick.
                The agreement provides for annual salary of US$150,000 in cash, effective
                as of June 3, 2004, plus the grant of an option to purchase up to
                15,000,000 shares of our common stock at a price of US$0.09 per share.
                Pursuant to the terms of the 15,000,000 share option grant to Ms.
                Hartwick, (i) options to purchase 7,500,000 shares of our common
                stock
                vested on April 3, 2005, (ii) options to purchase 6,000,000 shares
                of our
                common stock vest in two equal installments of 3,000,000 options
                each upon
                each new business acquisition of the Company, and (iv) options to
                purchase
                1,500,000 shares of our common stock vest upon a full profitable
                year of
                the Company. The 15,000,000 share option grant to Ms. Hartwick expires
                on
                March 9, 2010.


(6)
            Compensation
                includes (i) cash payments of US$60,000, (ii) restricted stock grant
                of
                45,080 shares of our common stock valued at US$25,000 at the date
                of
                issuance, and (iii) is owed back pay of
                US$52,500.


(7)
            On
                April 1, 2004, Ms. Hartwick was issued 60,000 shares of our common
                stock,
                valued at US$0.50 per share, as her bonus for
                2004.


(8)
            On
                December 1, 2003, the date on which Ms. Hartwick’s employment began, we
                entered into an employment agreement with her. This agreement had
                a
                one-year term, from December 1, 2003 to November 30, 2004. The agreement
                provides for an annual salary of US$120,000, plus the grant of an
                option
                to purchase up to 1 million shares of our common stock at a price
                of
                US$0.65 a share exercisable for a 12-month period from the date of
                grant
                and upon completion of her one-year term. Fifty percent of Ms. Hartwick’s
                annual salary is payable in cash and the balance is payable in shares
                of
                our common stock. The value assigned to shares of common stock payable
                to
                Ms. Hartwick in connection with her annual salary is the average
                20-day
                trading price prior to the first of each month for the salary owed
                that
                month.




63


**Option
      Grants During the Fiscal Year Ended May 31, 2006**





The
      following table shows all grants of stock options to the executive officers
      listed in the Summary Compensation Table during the fiscal year ended May 31,
      2006. These grants are options to purchase the common stock of the
      Company.





**OPTION
      GRANTS IN LAST FISCAL YEAR**


**(INDIVIDUAL
      GRANTS)**





**Name**
            **Number
                of**
              **Securities**
              **Underlying**
              **Options**
              **Granted**
            **Percent
                of**
              **Total
                Options**
              **Granted
                to**
              **Employees
                in**
              **Year
                Ended**
              **May
                31, 2006 (1)**
            **Exercise**
              **or
                Base**
              **Price
                (2)**
            **Expiration**
              **Date**
            **Potential
                Realizable Value At**
              **Assumed
                Annual Rates Of**
              **Stock
                Price Appreciation for**
              **Option
                Term**5%(US$)
            10%(US$)Jingjing
                Zhou, Vice President
            1,000,000(3)
            100%
            US$0.10
            July
                25, 2008/
              July
                25, 2009
            -
            -







(1)
            Based
                on an aggregate of 1,000,000 options granted by us in the fiscal year
                ended May 31, 2006 to our employees, employee directors and consultants,
                including the executive officers and highly compensated employees
                listed
                in the Summary Compensation
                Table.





(2)
            Options
                were granted at an exercise 10% over the fair market value on the
                date of
                grant as determined pursuant to the closing price of our common stock
                on
                the OTCBB on the day immediately preceding the date of grant.





(3)
            This
                option was granted on July 25, 2005 and (i) options to purchase 500,000
                shares of our common stock vest since July 25, 2006 expired on July
                25,
                2008; (ii) options to purchase 500,000 shares of our common stock
                vest
                since July 25, 2007 expired on July 25,
                2009





No
      options were exercised during the fiscal year ended May 31, 2006 and the
      exercisable and unexercisable options held as of the fiscal year ended May
      31,
      2006, by the executive officers and highly compensated employees listed in
      the
      Summary Compensation Table : .





**Aggregated
      Option Exercises During the Fiscal Year Ended May 31, 2006 and May 31, 2006
      Option Values**




**Name**
            **Number
                of Shares**
              **Acquired
                on Exercise**
            **Value**
              **Realized**
            **Number
                of Securities Underlying**
              **Unexercised
                Options at 5/31/05**
            **Value
                of Unexercised In-the-**
              **Money
                Options at 5/31/06****Exercisable**
            **Unexercisable**
            **Exercisable**
            **Unexercisable**Carrie
                Hartwick
            -
            -
            7,500,000
            7,500,000
            -
            -Jingjing
                Zhou
            
            
            
            1,000,000
            -
            -




64


**Compensation
      of Directors**





Currently,
      our directors serve for a term of two years or until their earlier resignation
      or removal. In fiscal year 2006, for attending Board meetings, we compensated
      our non-employee directors US$7,000 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, we compensate
      our other non-employee directors US$3,500 each year for each committee that
      a
      non-employee director serves on. On Aug 23, 2006, the Board unanimously approved
      a new compensation package for independent directors, which is to be implemented
      for fiscal year 2007, 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, we compensate our
      independent directors US$6,000 each year for each committee that a non-employee
      director serves on. Another 1 million stock options will be granted to each
      independent director with exercise prices of $0.05 per share and 1 year vesting
      period and 5 year maturity after vesting.





As
      of
      October 1, 2004, we compensate Dr. Wang, our Chairman of the Board, US$50,000
      each year for service on our Board pro rated on an annual basis. As of May
      31,
      2006, Dr. Wang was owed US$57,536 for his services from Apr 1, 2005 to May
      31,
      2006. Additionally, as of March 8, 2005, the Board granted Dr. Wang an option
      exercisable for 5,000,000 shares of our common stock at an exercise price of
      US$0.09 per share, of which 2,500,000 shares vest on September 28, 2005 and
      the
      remaining shares vest on September 28, 2006, subject to Dr. Wang’s continuing to
      provide services to the Company on such vesting dates. On March 9, 2005, each
      non-employee director, excluding the Chairman of the Board, was granted 100,000
      stock options at exercise price US$0.09. The options granted to the non-employee
      directors vest on the one year anniversary of the date of grant. On July 4,
      2006, the Board approved to grant 5 million stock options with exercise price
      of
      US$0.04 per share to Dr. 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 Sept 28,
      2007
      and exercisable within 5 years time after vesting.





On
      Aug
      23, 2006, the Board resolved 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 is 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.


65


**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 15, 2006 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 197,325,263  shares
      of
      common stock outstanding on August 22, 2006. Shares of common stock subject
      to
      options that are currently exercisable or exercisable within 60 days of
      August 22, 2006 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
                Wang
            5,193,440(3)
            2.6%Carrie
                Hartwick
            7,612,973
                (4)
            3.7%Geoffrey
                Wei
            482,346
                (5)
            *Victor
                Zhou
            343,977(6)
            *Wilson
                Li
            319,573(7)
            *Yungeng
                Hu
            -Jingjing
                Zhou
            -All
                Executive Officers and Directors as a Group
              (5
                persons)
            13,952,309(8)
            7.6%*




*
            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., 306 Yong Teng Plaza, 1065 Wuzhong 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.


(3)
      Shares beneficially owned by Billy Wang include (a) 193,440 shares of common
      stock held by Dr. Wang and (b) options to purchase 5,000,000 shares of our
      common stock, of which 2,500,000 shares vested on September 28, 2005 and the
      remaining shares to be vested on September 28, 2006, subject to Dr. Wang’s
      continuing to provide services to the Company on such vesting dates.


(4)
      Shares beneficially owned by Ms. Hartwick include 112,973 shares of common
      stock
      held by Ms. Hartwick and options to purchase 7,500,000 shares of our common
      stock exercisable within 90 days of June 1, 2006. These options terminated
      upon
      her resignation.


66


(5)
      Shares beneficially owned by Geoffrey Wei include (a) 382,346 shares of common
      stock held by Mr. Wei and (b) an options to purchase 100,000 shares of our
      common stock and exercisable with 5 years time of Mar 9, 2006.


(6)
      Shares beneficially owned by Victor Zhou include (a) 243,977 shares of common
      stock held by Mr. Zhou and (b) options to purchase 100,000 shares of our common
      stock and exercisable with 5 years time of Mar 9, 2006.


(7)
      Shares beneficially owned by Wilson Li include (a) 219,573 shares of common
      stock held by Mr. Li and (b) options to purchase 100,000 shares of our common
      stock and exercisable with 5 years time of Mar 9, 2006.


(8)
      Shares beneficially owned by all Executive Officers and Directors as a group
      include 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, 2006, 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
              plans
                (excluding securities
              reflected
                in column (a)) (c)Equity
                compensation plans
              approved
                by security holders (1)
            24,600,000
            0.127
            N/AEquity
                compensation plans not approved by security holders
            Nil
            Nil
            N/ATotal
            24,600,000
            0.127
            N/A




(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 Nov 23, 2005.


67


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





During
      the fiscal year period ended May 31, 2006, Hartcourt issued an aggregate of
      162,578 shares of our common stock valued at US$11,185 to its officers,
      employees and all directors in lieu of cash compensation.








**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, 2006, five
      month transition period ended May 31, 2005, and the years ended December 31,
      2004 (Kabani & Company, Inc. was selected as our independent auditor on
      December 30, 2004 upon the resignation of our former accountants, Loral
      International LLP):




**FY
                2006**
            **FY
                2005**
            **FY
                2004****Audit
                Fees**
            US$85,000
            US$90,000
            US$165,000**Audit-Related
                Fees**
            US$125,000
                (1)
            -
            -**Tax
                Fees**
            -
            -
            -**All
                Other Fees**
            -
            -
            -**Total**
            US$210,000
            US$90,000
            US$165,000




*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.


68


**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)


70





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





3.01
            Articles
                of Incorporation of Hartcourt, as amended.
            (1)3.02
            Bylaws
                of Hartcourt.
            (1)3.03
            Amendment
                to the Bylaws of Hartcourt.
            (1)3.04
            Amendment
                to the Articles of Incorporation of Hartcourt.
            (6)10.01
            Lease
                between Hartcourt and Larry M. Mitobe for Hartcourt’s headquarters
                facility, dated April 9, 1996.
            (1)10.02
            Equipment
                Lease between Hartcourt USA and Anja Engineering Corporation, dated
                April 4, 1994.
            (1)10.03
            Stock
                Exchange Agreement between Hartcourt USA and Eastern Rochester, dated
                August 8, 1994.
            (1)10.04
            1995
                Stock Option Plan.
            (1)10.05
            Purchase
                Contract between The Hartcourt Companies, Inc. and Exceptional Specialty
                Products, Inc., dated March 21, 1996.
            (1)10.06
            Purchase
                and Sale Agreement, dated August 8, 1996, between The Hartcourt Companies,
                Inc. and NuOasis International, Inc., and Addendum to Purchase and
                Sale
                Contract.
            (1)10.07
            Convertible
                Secured Promissory Note, dated August 8, 1996, in connection with
                Purchase
                and Sale Agreement, dated August 8, 1996 between The Hartcourt Companies,
                Inc. and NuOasis International, Inc.
            (1)10.08
            Convertible
                Secured Promissory Note, dated August 8, 1996, in connection with
                Purchase
                and Sale Agreement, dated August 8, 1996 between The Hartcourt Companies,
                Inc. and NuOasis International, Inc., as amended.
            (1)10.09
            Sales
                Agreement, dated September 17, 1996, between The Hartcourt Companies,
                Inc.
                and Promed International, Ltd.
            (1)10.10
            Sales
                Agreement, dated September 17, 1996, between The Hartcourt Companies,
                Inc.
                and Mandarin Overseas Investment Co., Ltd.
            (1)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)


71





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





10.22
            Advisory
                Agreement and 1999 Stock Plan with NuVen Advisors, Inc. and Hartcourt
                dated March 18, 1999, File No. 333-74933.
            (9)10.23
            Consulting
                Agreement with Fred G. Luke, dba NuVen Advisors, File No. 99768860.
            (10)10.24
            Consulting
                Agreement with Archer & Weed, File No. 99768860.
            (10)10.25
            On
                December 8, 1999, Hartcourt filed a report on Form 8-K to disclose
                the resignations of Fred Luke and Jon L. Lawver Directors and Officers,
                File No. 99770546.
            (11)10.26
            February 4,
                2000, Hartcourt completed a private placement of 227,445 Units and
                a
                class II Warrants to PYR Management LLC for US$3,000,000 pursuant to
                a regulation D Subscription Agreement, 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)14.01
            Code
                of Ethics
            (13)16.01
            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 registrant24.01
            Power
                of Attorney (See signature page)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 10-KSB/A, dated July 3, 1997 and
      incorporated herein by reference.




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




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




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




72


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




(6)  Previously
      filed as an exhibit to Hartcourt’s Form 10-KSB, dated April 15, 2003,
      as amended by Hartcourt’s Form


10-KSB/A,
      dated April 25, 2003, incorporated herein by reference.




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




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




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




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




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




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




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




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




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




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




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




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




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




73





(b)
            Report
                on Form 8-K





On
      August
      8, 2005, the Company decided to postpone its annual meeting of shareholders
      previously scheduled for August 15, 2005. File number 051008589. Incorporated
      here in by reference.





On
      October 28, 2005, The Companies adjourned its annual meeting. file number
      051163057. Incorporated herein by reference.





On
      March
      6, 2006, the Company accepted the resignation of Mr. Geoffrey Wei, as the
      chairman of Audit Committee due to his personal reasons. File number 06668047.
      Incorporated herein by reference.


74


**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 15, 2006
            By:
                /s/ VICTOR
                ZHOUVictor
                ZhouChief
                Executive OfficerDated:
                September 15, 2006
            By:
                /s/ YUNGENG
                HUYungeng
                HuChief
                Financial Officer & President








**POWER
      OF ATTORNEY**





By
      signing this Form 10-K below, I hereby appoint Victor Zhou and Yungeng
      Hu as my attorney-in-fact to sign all amendments to this Form 10-K on my
      behalf, and to file this Form 10-K (including all exhibits and other documents
      related to the Form 10-K) with the Securities and Exchange Commission. I
      authorize each of my attorneys-in-fact to (1) appoint a substitute
      attorney-in-fact for himself and (2) perform any actions that he believes are
      necessary or appropriate to carry out the intention and purpose of this Power
      of
      Attorney. I ratify and confirm all lawful actions taken directly or indirectly
      by my attorneys-in-fact and by any properly appointed substitute
      attorneys-in-fact.





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




Name
            Title
            Date/s/
                WILSON W. S.
                LI
              Wilson
                W. S. Li
            Director
            September
                15, 2006/s/
                BILLY Y N
                WANG
              Billy
                Y N Wang
            Chairman
                of the Board of Directors
            September
                15, 2006/s/
                GEOFFREY
                WEI
              Geoffrey
                Wei
            Director
            September
                15, 2006





75