**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-K/A**


**Amendment
      No. 1**




[_]
            Annual
                Report pursuant to Section 13 or 15(d) of the Securities Exchange
                Act of
                1934




or




[x]
            Transition
                report pursuant to Section 13 or 15(d) of the Securities Exchange
                Act of
                1934For
                the transition period from January 1, 2005 to May 31,
                2005.




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)




(011)
      (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. [X ]




Indicate
      by check mark whether the registrant is an accelerated filer (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 second fiscal quarter (based on the closing price of US$0.10) was
      approximately US$18 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 193,848,137 shares of voting common stock with a par
      value of US$0.001 outstanding at August 25, 2005.










________________





This
      Amendment No. 1 to the Annual Report on Form 10-K is being filed to include
      a
      restatement of the Company’s financial statements for the 5 month transition
      period ended May 31, 2005, revised Selected Financial Data, revised Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations and to include revised disclosure regarding our internal controls.




Except
      as described above, no other changes have been made to the Form 10-K, as
      previously filed.





_________________








Hartcourt
      Companies, Inc





Restatement
      of Financial Statements and


Amended
      Form 10-K for the 5 month transition period ended May 31, 2005





Subsequent
      to the issuance of the Company's financial statements for the year ended
      December 31, 2003, the Company determined that a certain transaction and
      presentation in the financial statements had not been accounted for
      properly in the Company's financial statements.




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




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




Kabani
      & Company Inc., Certified Public Accountants, had audited
      the consolidated the financial statements for the year ended December 31,
      2003, after the above-mentioned restatements, and express their opinion
      "the financial statements referred to above present fairly, in all material
      respects, the financial position of the Hartcourt Companies, Inc. as of
      December 31, 2003, in conformity with accounting principals generally
      accepted in the United States of America."




Accordingly,
      we re-filed Form 10-KSB for the year ended December 31, 2003 with United
      States Securities and Exchange Commission to reflect the changes.




The
      changes have caused adjustments to the financial statements for the year
      ended December 31, 2004 and May 31, 2005. As a result, we re-file Form 10-K
      for
      the 5 month transition period ended May 31, 2005 herein to reflect the
      adjustments.  We have included these adjustments in our Form 10-K for
      the year ended May 31, 2006.








/s/
      Yungeng Hu


Chief
      Financial Officer & President










THE
      HARTCOURT COMPANIES, INC.


FORM
      10-K/A




INDEX








Item
            PagePART
                IIITEM
                6: Selected Financial Data
            1ITEM
                7: Management's Discussion and Analysis of Financial Condition and
                Results
                of Operations
            1ITEM
                8: Financial Statements and Supplementary Data
            5ITEM
                9A:Controls and Procedures
            37PART
                IIIITEM
                14: Principal Accountant Fees and Services
            37Signatures
            39










As
      used
      in this Transition period 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.





This
      report contains forward-looking statements that involve risks and uncertainties.
      Please see the section entitled "Caution Regarding Forward-Looking Statements"
      in Item 7 of this report for important information to consider
      when evaluating such statements.












**PART
      II**




**ITEM
      6. SELECTED FINANCIAL DATA.**


Period
                  Ended May 31
              
              Year
                  Ended
                December
                  312005
              
              2004
              
              2003
              
              2002
              
              2001***Thousands
                  of US Dollars, except per share amount*****Statement
                  of income Data**Net
                  Revenue
              
              
              19,678
              
              
              74,563
              
              
              131,699
              
              
              1,137
              
              
              10,621Operating
                  income (losses) from continuing operations
              
              
              345
              
              
              (4,322
              )
              
              (92
              )
              
              (3,934
              )
              
              (7,779
              )Income
                  (losses) from continuing operations
              
              
              287
              
              
              (4,423
              
              
              (1,453
              )
              
              (4,158
              )
              
              (8,517
              )Net
                  income (loss)
              
              
              123
              
              
              (13,373
              )
              
              (571
              )
              
              (2,559
              )
              
              (5,391
              )Basic
                  and diluted earnings (losses) per weighted average share
              
              
              0.001
              
              
              (0.08
              )
              
              (0.004
              )
              
              (0.032
              )
              
              (0.078
              )**Balance
                  Sheet Data**Cash
                  and cash equivalents
              
              
              1,370
              
              
              1,745
              
              
              3,792
              
              
              80
              
              
              282Total
                  assets
              
              
              17,165
              
              
              19,732
              
              
              33,808
              
              
              4,472
              
              
              9,267Net
                  current assets
              
              
              2,407
              
              
              2,530
              
              
              3,041
              
              
              (2,155
              )
              
              (3,890
              )Net
                  assets
              
              
              5,489
              
              
              4,672
              
              
              14,909
              
              
              909
              
              
              5,481Long-term
                  debt
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              462**Common
                  Stock Data**Shares
                  of Common Stock (Year-End)
              
              
              193,739
              
              
              171,659
              
              
              171,157
              
              
              88,518
              
              
              73,886Shares
                  of Common Stock (Average)
              
              
              191,504
              
              
              175,646
              
              
              135,565
              
              
              80,416
              
              
              68,880Dividends
                  Paid per Share
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --Book
                  Value Per Share (Year End)
              
              
              0.03
              
              
              0.03
              
              
              0.09
              
              
              0.01
              
              
              0.07




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




We
      begin
      our Management's Discussion and Analysis of Financial Condition and Results
      of
      Operations (MD&A) with a discussion of the Critical Accounting Policies that
      we believe are important to understanding the assumptions and judgments
      underlying our financial statements. This is followed by a discussion of our
      Results of Operations that begins with an Overview followed by a more detailed
      discussion of our revenue and expenses. We then provide an analysis of our
      Liquidity and Capital Resources with a discussion of key aspects of our
      statements of cash flows, changes in our balance sheets, and our financial
      commitments. Following these discussions is the section entitled Risks That
      Could Affect Future Results which details some important factors that may
      significantly impact our future financial performance. You should also note
      that
      this MD&A discussion contains forward-looking statements that involve risks
      and uncertainties. Please see the section entitled "Caution Regarding
      Forward-Looking Statements" at the end of this Item 7 for important information
      to consider when evaluating such statements.




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




1





**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.




**Results
      of Operations**




Our
      operations for the five months period 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. Our restated operations for the five
      months period ended May 31, 2004 consisted of the operations of Huaqing (51%
      indirect ownership interest), Hartcourt China Inc. (100% ownership interest),
      Ai-Asia Inc. (100% ownership interest), and Hartcourt Capital Inc. (100%
      ownership interest) and Hartcourt's investments in other entities located in
      China and Hong Kong.




***Operating
      revenue:***




We
      recorded operating revenue of $19.7 million for the five months ended May 31,
      2005, compare to US$29.2 million for the same period in 2004, or a 33% decrease.
      Our sales during the five months ended May 31, 2005 mainly represented revenues
      derived from the sale of Samsung monitors and notebooks in Shanghai and sales
      of
      multimedia products in China, while operating revenue during the five months
      ended May 31, 2004 mainly represented revenues derived from sales of Samsung
      monitors in Zhejiang and Shanghai area.




Samsung
      monitor sales in Zhejiang province did not sell through Huaqin
      Shanghai from the beginning of 2005. Huaqin Shanghai disposed of its equity
      interest in Huaqin Hangzhou in August 2004 and Huaqin Hangzhou signed a separate
      distribution agreement with Samsung at the beginning of 2005. Huaqin Shanghai
      sales increased 25% compared to same period last year over the same geographic
      area. The increase comes from the addition of Samsung notebook sales.




Our
      multi-media products sales were consolidated in our financial statements
      beginning March 1, 2005.




Our
      cost
      of sales amounted to $18.4 million for the five months ended May 31, 2005,
      compared to $27.6 million for the same period in 2004, excluding the
      discontinued operations. Cost of sales for the five months ended May 31, 2005
      represented the cost of Samsung products and multimedia products. Cost of sales
      for the five months ended May 31, 2004 represented the costs of Samsung
      monitors.




2




Gross
      profit was $1.2 million, or 6.3%, for the five months ended May 31, 2005
      compared to $1.6 million, or 5.5%, for the same period in 2004, a decrease
      of
      23.1%. The decrease in our operating margin was mainly due to fierce market
      competition during recent years in the IT retail market. The declining gross
      margin in the China IT hardware distribution sector has been a broad and
      continuing trend in the past five years, which we believe will continue over
      the
      next foreseeable years.





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




Our
      selling, general and administrative expenses were $862 thousand for the five
      months ended May 31, 2005 compared to $1,003 thousand for the same period in
      2004, a decrease of US$141 thousand, or 14%, due to lower operating expenses.




***Depreciation
      and amortization expenses:***




Our
      depreciation and amortization expenses were $30 thousand for the five months
      ended May 31, 2005 compared to $23 thousand for the same periods in 2004, a
      30%
      increase. The increase was primarily due to our acquisition of Control Tech
      assets.




***Interest
      income:***




Interest
      income was $47 thousand and $89 thousand for the five month period ended May
      31,
      2005 and 2004, respectively. The $42 thousand decrease was mainly due to lower
      cash balances.




***Interest
      expenses*** *:*




Interest
      expenses were $200 thousand and $195 thousand for the five months period ended
      May 31, 2005 and 2004, respectively. All the interest expenses were incurred
      by
      Huaqing, a 51% owned subsidiary, from short term bank loans to finance the
      Samsung distribution business.




***Income
      from Continuing Operations:***




Income
      from continuing operations for the five months ended May 31, 2005 was $345
      thousand, compared to $583 thousand for the same period a year ago. The decrease
      was primarily due to the decline of operating revenue in the five month period
      ended May 31, 2005.




3




***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 2004 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 $78,378 and $82,670 for the five months ended
      May 31, 2005 and 2004, respectively. 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:**




Our
      principal capital requirements during 2005 have been primarily funded by
      issuance of securities and, to a lesser extent, short-term bank
      loans.




As
      shown
      in our accompanying financial statements, we had a net income of $123,082 for
      the five months ended May 31, 2005 as compared to a net income of $ 546,021
      for
      the same period in 2004. As of May 31, 2005, our current assets exceeded our
      current liabilities by $2.4 million .




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 five month period ended May 31, 2005, net cash used in operating activities
      was $1.3 million, compared to net cash provided by operating activities of
      $1.6
      million during the same period in 2004. The decrease in cash generated from
      operating activities resulted mainly from decrease of deferred
      revenue.




***Investing
      activities:***




Net
      cash
      provided by investing activities during the five months ended May 31, 2005,
      was
      $0.8 million compared to net cash used in investing activities $0.7 million
      for
      the same period in 2004. The cash provided by investment activities in the
      five
      months ended May 31, 2005 was mostly due to proceeds from disposal of our
      interest in Guowei. The $0.7 million cash used in investment activities in
      2004
      mainly resulted from the net effect of (a) the investment in Guowei of $0.1
      million and (b) investment of $0.06 million in Beijing Challenge, (c) Huaqing’s
      payment of dividends to its minority shareholder of $0.3 million (d) recovery
      of
      notes receivable of $0.3 million.







4




***Financing
      activities:***




Net
      cash
      provided by financing activities during the five months ended May 31, 2005
      equaled $46 thousand, compared to cash provided by financing activities of
      $26
      thousand during the same period in 2004. Net cash provided by financing
      activities in the five months ended May 31, 2005 was mostly due to the net
      effect of (a) payment of an SEC judgment in the amount of $1.1 million. Please
      refer to details of the SEC litigation in the Part I, Item 3, Legal Proceedings
      of this document, (b) bank loans of $0.2 million borrowed by Huaqing from local
      bank and (3) funds raised from a private offering in the amount of $1 million.
      Cash provided by financing activities during same period in 2004 was mainly
      due
      to proceeds from sales of our common stock totaling approximately $1.4 million,
      payments to related parties of $0.4 million, repayment of notes payables and
      bank loans totaling $0.9 million.




As
      a
      result of the above activities, we experienced a net decrease in cash of $0.3
      million for the five months ended May 31, 2005.




**Research
      and Development**




Presently
      the Company is not undertaking any significant research and development
      efforts.




**Off-Balance
      Sheet Arrangements**




During
      the transition period ended May 31, 2005, the Company did not engage in any
      off-balance sheet arrangements.




**Caution
      Regarding 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. 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.




**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.




5




**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, 2005 and the related
      consolidated statement of operations, consolidated stockholders’ equity and
      comprehensive income and consolidated statement of cash flows for 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 audit.




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





In
      our
      opinion, the financial statements referred to above present fairly, in all
      material respects, the financial position of The Hartcourt Companies, Inc as
      of
      May 31, 2005 and the results of its operations and its cash flows for the
      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 $64,874,414 as of May 31,
      2005
      and negative cash flow from operations amounting $1,256,734 for the transitional
      period ended May 31, 2005. These factors as discussed in Note 2 to the financial
      statements, raises substantial doubt about the Company’s ability to continue as
      a going concern. Management’s plans in regard to these matters are also
      described in Note 2. The financial statements do not include any adjustments
      that might result from the outcome of this uncertainty.





As
      discussed in Note 28, the financial statements for the transition period ended
      May 31, 2005 have been restated.





/s/
      Kabani & Company, Inc.


KABANI
      & COMPANY, INC.


CERTIFIED
      PUBLIC ACCOUNTANTS





Huntington
      Beach, California


August
      2,
      2005 except for note 2, 3, 13, 17, 23, and 27 which are as of August 28,
      2006







6


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


**CONSOLIDATED
      BALANCE SHEET - RESTATED**


**May
      31, 2005**





**ASSET****CURRENT
                ASSETS**Cash
                and cash equivalents
            
            $
            1,369,914Restricted
                Cash
            
            
            1,558,630Accounts
                receivable, net
            
            
            2,655,199Inventories,
                net
            
            
            3,638,674Notes
                receivable, net
            
            
            483,793Advances
                to suppliers
            
            
            1,586,540Prepaid
                expenses and other assets
            
            
            2,028,722Due
                from related party
            
            
            331,892**TOTAL
                CURRENT ASSETS**
            
            
            13,653,364**PROPERTY
                & EQUIPMENT - NET**
            
            
            461,041**INVESTMENTS**
            
            
            60,412**INTANGIBLE
                ASSET**Goodwill
            
            
            2,990,475**TOTAL
                ASSETS**
            
            $
            17,165,292**LIABILITIES
                AND SHAREHOLDERS' EQUITY****CURRENT
                LIABILITIES**Bank
                loans
            
            $
            1,800,278Loan
                from employees
            
            
            1,058,828Accounts
                payable
            
            
            1,122,902Advance
                from customers
            
            
            3,363,180Accrued
                expenses and other current liabilities
            
            
            3,434,945Due
                to shareholders
            
            
            260,807Due
                to related party
            
            
            205,370**TOTAL
                CURRENT LIABILITIES**
            
            
            11,246,310**MINORITY
                INTERESTS**
            
            
            429,939







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


7


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


**CONSOLIDATED
      BALANCE SHEET - RESTATED**


**May
      31, 2005**


**(-Continued-)**





**SHAREHOLDERS'
                EQUITY****Preferred
                Stock:**Original
                preferred stock, $0.01 par value, 1,000 sharesauthorized,
                issued and cancelled
            
            
            -Class
                A preferred stock, 10,000,000 shares authorized,none
                issued and outstanding
            
            
            -**Common
                stock**:$0.001
                par value, 239,999,000authorized,
                193,738,462 common sharesissued
                and outstanding
            
            
            193,739Additional
                paid in capital
            
            
            70,303,423Treasury
                stock, at cost, 48,728 shares
            
            
            (48,728
            )Other
                comprehensive income
            
            
            (84,977
            )Accumulated
                deficit
            
            
            (64,874,414
            )**TOTAL
                SHAREHOLDERS' EQUITY**
            
            
            5,489,043**TOTAL
                LIABILITIES AND SHAREHOLDERS' EQUITY**
            
            $
            17,165,292







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








8


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


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**





**For
                the Five Month Periods Ended May 31****2005**
            
            **2004****(Unaudited)**
              **RESTATED**Net
                sales
            
            $
            19,677,794
            
            $
            29,160,027Cost
                of sales
            
            
            18,440,692
            
            
            27,550,867Gross
                profit
            
            
            1,237,102
            
            
            1,609,160Operating
                expenses:Selling,
                general and administrative
            
            
            862,216
            
            
            1,002,917Depreciation
                and amortization
            
            
            29,764
            
            
            23,006Total
                operating expenses
            
            
            891,980
            
            
            1,025,923Income
                from continuing operationsbefore
                other income/(expenses) & minority interest
            
            
            345,122
            
            
            583,237Other
                income/(expense):Interest
                expense
            
            
            (199,566
            )
            
            (194,619
            )Interest
                income
            
            
            46,756
            
            
            89,175Other
            
            
            94,476
            
            
            127,279Total
                other income/(expense)
            
            
            (58,334
            )
            
            21,835Income
                from continuing operations before minority interest
            
            
            286,788
            
            
            605,072Less:
                Minority Interest
            
            
            (138,453
            )
            
            (531,134
            )Income
                before discontinued operations & income tax
            
            
            148,335
            
            
            73,938Discontinued
                operations:Gain
                from discontinued operations
            
            
            -
            
            
            554,753Gain
                on disposal of discontinued operations
            
            
            53,125
            
            
            -Income
                before income tax
            
            
            201,460
            
            
            628,691Income
                tax
            
            
            78,378
            
            
            82,670NET
                INCOME
            
            $
            123,082
            
            $
            546,021






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




9







**THE
                HARTCOURT COMPANIES, INC. AND SUBSIDIARIES**
              **CONSOLIDATED
                STATEMENTS OF OPERATIONS**
              **CONTINUED****For
                the Five Month Periods Ended May 31****2005**
            
            **2004****(Unaudited)**
              **RESTATED**BASIC
                AND DILUTED EARNINGS/(LOSSES)PER
                COMMON SHARE:Earnings
                from continuing operations
            
            $
            0.001
            
            $
            0.000Earnings
                from discontinued operations
            
            $
            0.000
            
            $
            0.003Earnings
                per share
            
            $
            0.001
            
            $
            0.003Basic
                and fully diluted (weighted average)
            
            
            191,503,585
            
            
            175,597,691







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





10





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


**CONSOLIDATED
      STATEMENTS OF SHAREHOLDERS' EQUITY - RESTATED**


**FOR
      THE FIVE MONTHS PERIOD ENDED May 31, 2005 AND 2004
      (Unaudited)**




**Common
                Stock**
            
            **Preferred
                Stock**
            
            **Additional**
              **Paid
                In**
            
            
            **Common**
              **Stock**
              **Subscriptions**
            
            
            **Treasury
                Stock**
            
            **Other**
              **Compre-hensive**
            **Accumulated**
            
            **Total**
              **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
            )
            $
            5,489,043








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





11





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


**CONSOLIDATED
      STATEMENTS OF SHAREHOLDERS' EQUITY - RESTATED**


**FOR
      THE FIVE MONTHS PERIOD ENDED MAY 31, 2005 AND 2004
      (Unaudited)**


**(continued)**




**Common
                Stock**
            
            **Preferred
                Stock**
            
            **Additional
                Paid In**
            
            **Common**
              **Stock
                Subscriptions**
            
            **Treasury
                Stock**
            
            **Compre-hensive**
            
            **Accumulated**
            
            **Total**
              **Shareholders'****Shares**
            
            
            **Amount**
            
            **Shares**
            
            **Amount**
            
            **Capital**
            
            **Receivable**
            
            **Shares**
            
            **Amount**
            
            **Loss**
            
            **Deficit**
            
            **Equity**Balance
                - December 31, 2003
            171,157,104
            
            
            $
            171,157
            
            1,000
            
            $
            10
            
            $
            68,338,297
            
            
            $
            (1,842,326
            )
            
            48,728
            
            $
            (48,728
            )
            
            $
            (85,582
            )
            
            $
            (51,624,284
            )
            
            $
            14,908,544Shares
                issued for consulting
              services
            239,200
            
            
            
            239
            
            --
            
            
            --
            
            
            88,761
            
            
            
            --
            
            
            --
            
            
            -
            
            
            
            --
            
            
            
            --
            
            
            
            89,000Shares
                issued for
              compensation
            115,426
            
            
            
            116
            
            --
            
            
            --
            
            
            61,135
            
            
            
            --
            
            
            --
            
            
            -
            
            
            
            --
            
            
            
            --
            
            
            
            61,251Shares
                issued for executions
              of
                cashless option
            841,270
            
            
            
            841
            
            --
            
            
            --
            
            
            (841
            )
            
            
            --
            
            
            --
            
            
            -
            
            
            
            --
            
            
            
            --
            
            
            
            --Shares
                issued for acquisition
              of
                Challenger Group
            6,824,748
            
            
            
            6,825
            
            --
            
            
            --
            
            
            3,787,735
            
            
            
            --
            
            
            --
            
            
            -
            
            
            
            --
            
            
            
            --
            
            
            
            3,794,560Subscriptions
                receivable
            --
            
            
            
            --
            
            --
            
            
            --
            
            
            --
            
            
            
            1,386,382
            
            
            --
            
            
            -
            
            
            
            --
            
            
            
            --
            
            
            
            1,386,382Net
                income
            --
            
            
            
            --
            
            --
            
            
            --
            
            
            --
            
            
            
            --
            
            
            --
            
            
            -
            
            
            
            --
            
            
            
            546,021
            
            
            
            546,021Balance
                -May 31, 2004
              (Unaudited)
            179,177,748
            
            
            $
            179,178
            
            1,000
            
            $
            10
            
            $
            72,275,087
            
            
            $
            (455,944
            )
            
            48,728
            
            $
            (48,728
            )
            
            $
            (85,582
            )
            
            $
            (51,078,263
            )
            
            $
            20,785,758








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








12




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


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**





**For
                the Five Month Periods Ended May 31****2005**
            
            **2004****(Unaudited)**
              **RESTATED****CASH
                FLOWS FROM OPERATING ACTIVITIES:**Net
                income
            
            $
            123,082
            
            $
            546,021Adjustments
                to reconcile net income tonet
                cash provided by (used in) operating activities:Gain
                on disposal of assets
            
            
            (53,125
            )
            
            -Gain
                on disposal of property and equipment
            
            
            -
            
            
            (97,925
            )Depreciation
            
            
            29,764
            
            
            23,006Unrealized
                investment gain
            
            
            -
            
            
            (554,753
            )Minority
                interest
            
            
            138,453
            
            
            531,134Stock
                issued for services and compensations
            
            
            64,797
            
            
            150,251Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            2,587,196
            
            
            (187,200
            )Advances
                to suppliers
            
            
            2,205,387
            
            
            (934,341
            )Inventories
            
            
            (556,986
            )
            
            32,233Prepaid
                expenses and other receivables
            
            
            (549,546
            )
            
            (1,915,897
            )Accounts
                payable
            
            
            (323,725
            )
            
            (20,934
            )Accrued
                expenses and other current liabilities
            
            
            362,356
            
            
            411,417Advances
                from customers
            
            
            (5,284,387
            )
            
            3,656,205**NET
                CASH PROVIDED BY (USED IN)****OPERATING
                ACTIVITIES**
            
            
            (1,256,734
            )
            
            1,639,217**CASH
                FLOWS FROM INVESTING ACTIVITIES:**Purchase
                of property and equipment
            
            
            (13,613
            )
            
            (44,583
            )Proceeds
                on disposal of property and equipment
            
            
            -
            
            
            53,104Proceeds
                on disposal of assets pending for sale
            
            
            789,441
            
            
            -Cash
                acquired in acquisition of a subsidiary
            
            
            59,670
            
            
            -Dividends
                paid to minority investors of a subsidiary
            
            
            -
            
            
            (325,662
            )Cash
                paid for investments
            
            
            -
            
            
            (731,186
            )Proceeds
                on notes receivable, net
            
            
            -
            
            
            339,351**NET
                CASH PROVIDED BY (USED IN)****INVESTING
                ACTIVITIES**
            
            
            835,498
            
            
            (708,976
            )






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


13


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


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**(continued)**





**For
                the Five Month Periods Ended May 31****2005**
            
            **2004****(Unaudited)**
              **RESTATED****CASH
                FLOWS FROM FINANCING ACTIVITIES**Payments
                to related parties-net
            
            $
            (118,216
            )
            $
            (397,907
            )Proceeds
                on sale of common stock
            
            
            1,025,000
            
            
            -Proceeds
                on stock subscriptions
            
            
            -
            
            
            1,386,382Proceeds
                /(repayment) on loans and lines of credit-net
            
            
            248,049
            
            
            (134,400
            )Proceeds
                (payments) on notes payable-net
            
            
            -
            
            
            (828,094
            )Payment
                of SEC disgorgement
            
            
            (1,108,535
            )
            
            -**NET
                CASH PROVIDED BY FINANCING ACTIVITIES**
            
            
            46,298
            
            
            25,981**NET
                (DECREASE)/INCREASE IN CASH & CASH EQUIVALENT**
            
            
            (374,938
            )
            
            956,222**CASH
                AND CASH EQUIVALENTS -****BEGINNING
                OF PERIOD**
            
            
            1,744,852
            
            
            823,639**CASH
                AND CASH EQUIVALENTS - END OF PERIOD**
            
            $
            1,369,914
            
            $
            1,779,861




**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 CASHFLOWSCash
                paid for interest
            
            $
            128,500
            
            $
            100,938Cash
                paid for income taxes, net of refund received
            
            $
            40,837
            
            $
            34,240NON-CASH
                INVESTING AND FINANCING ACTIVITIESIn
                Conjunction with acquisition of subsidiariesFair
                value of net assets acquired
            
            $
            879,879
            
            $
            --Cash
                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.


14


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


**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS**


**MAY
      31, 2005 AND 2004**





**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, 2005, 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, 2005, 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, 2005, 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, 2005, 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, 2005, AI-Asia, Inc., the third holding company, owns 100% equity of AI-Asia
      (Shanghai) Information Technology, Inc of China (“AI”), located in Shanghai,
      China.





During
      the five months period ended May 31, 2005, the Company acquired 90% equity
      interest in Control Tech Electronics (Shanghai) Co., Ltd. (See Note #3,
      Acquisition and Investments).





During
      the five months period ended May 31, 2005, the Company disposed of two (2)
      subsidiaries, Beijing Challenge Group and Shanghai Guowei Science and Technology
      Ltd. (See Note # 14, Discontinued Operations).





The
      Company changed its fiscal year end for financial reporting purposes from a
      calendar year end to the twelve months period commencing June 1 and ending
      May
      31.






15


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


**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS**


**MAY
      31, 2005 AND 2004**





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





a)  Basis
      of Consolidation





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





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





b)  Use
      of Estimates





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





c)  Cash
      and Cash Equivalents





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





d)  Accounts
      Receivable





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





e)  Advances
      to suppliers





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




16





f)  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 there market value,
      if
      lower.





g)  Property
      and Equipment





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





h)  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.





i)  Impairment
      of Long-Lived Assets





Effective
      January 1, 2002, the Company adopted Statement of Financial Accounting Standards
      No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
      144"), which addresses financial accounting and reporting for the impairment
      or
      disposal of long-lived assets and supersedes SFAS No. 121, "Accounting for
      the
      Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
      and the accounting and reporting provisions of APB Opinion No. 30, "Reporting
      the Results of Operations for a Disposal of a Segment of a Business." The
      Company periodically evaluates the carrying value of long-lived assets to be
      held and used in accordance with SFAS 144. SFAS 144 requires impairment losses
      to be recorded on long-lived assets used in operations when indicators of
      impairment are present and the undiscounted cash flows estimated to be generated
      by those assets are less than the assets' carrying amounts. In that event,
      a
      loss is recognized based on the amount by which the carrying amount exceeds
      the
      fair market value of the long-lived assets. Loss on long-lived assets to be
      disposed of is determined in a similar manner, except that fair market values
      are reduced for the cost of disposal. Based on its review, the Company believes
      that, as of May 31, 2005, there were no significant impairments of its
      long-lived assets used in operations.




17





j)  Revenue
      Recognition





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




k)  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.





l)  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.





m)  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.




n)  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.




18





o)  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.





p)  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.




q)  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.





r)  Going
      Concern





As
      shown
      in the accompanying consolidated financial statements, the Company incurred
      accumulated losses of $64,874,414 and $64,997,496 as of May 31, 2005 and
      December 31, 2004, respectively. Negative cash flows from the operations of
      $1,256,734 and $7,119,947 were noted for the five months period ended May 31,
      2005 and years ended December 31, 2004, respectively. These matters raise
      substantial doubt about the Company’s ability to continue as a going
      concern.




19





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 settlement of certain
      matters of litigation and/or disputes. The Company has planned to continue
      actively seeking additional funding and restructure the acquired subsidiaries
      to
      increase profits and minimize the liabilities.





s)  Recently
      Issued Accounting Standards





In
      December 2004, the FASB issued FASB Statement No. 123R, "Share-Based Payment,
      an
      Amendment of FASB Statement No. 123" ("FAS No. 123R"). FAS No. 123R requires
      companies to recognize in the statement of operations the grant- date fair
      value
      of stock options and other equity-based compensation issued to employees. FAS
      No. 123R is effective beginning in the Company's first quarter of fiscal 2006.
      The Company is in process of evaluating if the adoption of this standard will
      have any material impact on its financial statements.





In
      December 2004, the FASB issued SFAS Statement No. 153, "Exchanges of Nonmonetary
      Assets." The Statement is an amendment of APB Opinion No. 29 to eliminate the
      exception for nonmonetary exchanges of similar productive assets and replaces
      it
      with a general exception for exchanges of nonmonetary assets that do not have
      commercial substance. The Company believes that the adoption of this standard
      will have no material impact on its financial statements.





In
      March
      2004, the Emerging Issues Task Force ("EITF") reached a consensus on Issue
      No.
      03-1, "The Meaning of Other-Than-Temporary Impairment and its Application to
      Certain Investments." The EITF reached a consensus about the criteria that
      should be used to determine when an investment is considered impaired, whether
      that impairment is other-than-temporary, and the measurement of an impairment
      loss and how that criteria should be applied to investments accounted for under
      SFAS No. 115, "ACCOUNTING IN CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES."
      EITF 03-01 also included accounting considerations subsequent to the recognition
      of an other-than-temporary impairment and requires certain disclosures about
      unrealized losses that have not been recognized as other-than-temporary
      impairments. Additionally, EITF 03-01 includes new disclosure requirements
      for
      investments that are deemed to be temporarily impaired. In September 2004,
      the
      Financial Accounting Standards Board (FASB) delayed the accounting provisions
      of
      EITF 03-01; however the disclosure requirements remain effective for annual
      reports ending after June 15, 2004. The Company will evaluate the impact of
      EITF
      03-01 once final guidance is issued.




20




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





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





In
      February 2006, FASB issued SFAS No. 155, "Accounting for Certain Hybrid
      Financial Instruments". SFAS No. 155 amends SFAS No 133, "Accounting for
      Derivative Instruments and Hedging Activities", and SFAF No. 140, "Accounting
      for Transfers and Servicing of Financial Assets and Extinguishments of
      Liabilities". SFAS No. 155, permits fair value remeasurement for any hybrid
      financial instrument that contains an embedded derivative that otherwise would
      require bifurcation, clarifies which interest-only strips and principal-only
      strips are not subject to the requirements of SFAS No. 133, establishes a
      requirement to evaluate interest in securitized financial assets to identify
      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.





21





This
      Statement:





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





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





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





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





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




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






**NOTE
      3** **** **ACQUISITION
      AND INVESTMENTS - RESTATED**





**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




22




Pro
      forma
      income statements for the Company in relation to the acquisition of Control
      Tech
      for five month periods ended May 31, 2005 and May 31, 2004 are as
      follows:




**For
                the Five Month**
              **Periods
                Ended May 31****2005**
            
            **2004**Net
                sales
            
            $
            19,971,240
            
            $
            31,003,714Cost
                of sales
            
            
            18,578,626
            
            
            28,861,139Gross
                profit
            
            
            1,392,614
            
            
            2,142,575Operating
                expenses
            
            
            1,097,368
            
            
            1,309,128Income
                from continuing operations before other income/(expense) & minority
                interest
            
            
            295,246
            
            
            833,447Other
                income/(expenses)
            
            
            (56,208
            )
            
            21,835Income
                from continuing operations before minority interest
            
            
            239,038
            
            
            855,282Less:
                Minority Interest
            
            
            133,678
            
            
            531,134Income
                before discontinued operations & income tax
            
            
            105,360
            
            
            324,148Gain
                on disposal of discontinued operations
            
            
            53,125
            
            
            554,753Income
                before income tax
            
            
            158,485
            
            
            878,901Income
                tax
            
            
            78,378
            
            
            100,555Net
                income
            
            $
            80,107
            
            $
            778,346




Pursuant
      to the agreement, the consideration shares will be released within three years
      by installment, based on the performance results of Control Tech.





Pursuant
      to the agreement, the vendors provide guarantees to the Company that if they
      are
      unable to meet the revenue and net profit target during the three years after
      acquisition, the purchase consideration shall be adjusted proportionally.





Pursuant
      to the agreement, the Company provides guarantees to the vendors that if the
      average closing price of Hartcourt shares for the 20 trading days immediately
      prior to the expiry of the First Restricted Year, the Second Restricted Year
      and
      the Third Restricted Year respectively is below $0.10, then the Vendors have
      the
      right to request the Purchaser to procure the Company to issue and allot to
      the
      Vendors additional new Hartcourt Shares.





**Other
      investments**





The
      following is a summary of investments under the cost method as of May 31,
      2005:





Investment
                in First Information
            
            $
            223,816Investment
                in Shanghai Jin’an Fuhuaqi
            
            
            60,412





Total
                investment
            
            
            284,228Provision
                on other investment
            
            
            (223,816
            )Investments,
                net
            
            $
            60,412





**a)
      Investment in First information Technology Inc. (“First
      information”)**





During
      year 2004, Hartcourt China, Inc disposed its 58.53% owned subsidiary, Hopeful
      Internet Technology Limited in exchange for the 10.5% (1,050 shares at value
      of
      $0.001 each, amounted to $223,816) interest in First information Technology
      Inc., a BVI company. A 100% provision was proposed based on the review of its
      carrying value and its fair value.




23





**b)
      Investment in Shanghai Jin’an Fuhuaqi**





During
      year 2004, Huaqing, a 51% owned subsidiary, invested $60,412 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** **** **RESTRICTED
      CASH**





Cash
      of
      $1,558,630 were pledged to the bank as collateral for bank bills of $1,558,630
      as of May 31, 2005.





**NOTE
      6** **** **ACCOUNTS
      RECEIVABLE**




Accounts
      receivable as of May 31, 2005 consisted of the following:





AmountAccounts
                receivables
            
            $
            2,798,109Less:
                allowance for doubtful accounts
            
            
            (142,910
            )Net
            
            $
            2,655,199





Three
      major customers accounted for 24% and 46% of the net revenue for the five month
      period ended May 31, 2005 and May 31, 2004, respectively. At May 31, 2005,
      the
      total receivable balance due from these three customers was $305,870.





**NOTE
      7** **** **NOTES
      RECEIVABLE**




Notes
      receivables as of May 31, 2005 are summarized as follows:




AmountNotes
                receivable from Beijing Challenge Group, non-interest bearing, 4
                installment payments, secured by one shareholder of Beijing Challenge
                Group(see
                Note 13, Discontinued Operations)
            
            $
            610,289





Less:
                provisions
            
            
            (126,496
            )Notes
                receivables, net
            
            
            483,793Summary
                of notes receivable:Current
                portion
            
            
            483,793Non-current
                portion
            
            
            --Total
            
            $
            483,793




24





**NOTE
      8** **** **INVENTORIES**




Inventories
      as of May 31, 2005 consisted of the following:




AmountMonitors
            
            $
            1,281,475Laptops
            
            
            385,573Video-conferences
            
            
            1,806,422Audio-conferences
            
            
            117,345Others
            
            
            54,497Less:
                provisions for obsolete inventories
            
            
            (6,638
            )Net
            
            $
            3,638,674




**NOTE
      9** **** **ADVANCES
      TO SUPPLIERS**





This
      amount represents the advances paid by Huaqing a 51% owned subsidiary to Samsung
      of $1,586,540 .





Samsung,
      the Company’s key vendor supplied 92% and 98% of the Company’s purchase for the
      five month period ended May 31, 2005 and 31 May 2004, respectively. The Company
      made prepayments to Samsung to purchase inventory as required by Samsung. The
      prepayment balance was $1,586,540 at May 31, 2005.




**NOTE
      10           RECEIVABLES FROM
      A RELATED PARTY**





Receivables
      from related parties as of May 31, 2005 represent amount due from Huaqing (51%
      owned subsidiary)’s minority shareholders pursuant to business transactions in
      the ordinary course.   All the balances are unsecured, interest free
      and payable on demand.





**NOTE
      11           RELATED PARTY
      TRANSACTIONS**




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.




25




**NOTE
      12** **** **PROPERTIES
      AND EOUIPMENT**





The
      balances of Company property and equipment as of May 31, 2005 are summarized
      as
      follows:




AmountBuilding
            
            $
            236,612Office
                equipment and computers
            
            
            139,394Furniture
                and fixtures
            
            
            2,254Vehicle
            
            
            234,453612,713Less:
                accumulated depreciation
            
            
            (151,672
            )Property
                and equipment, net
            
            $
            461,041





**NOTE
      13** **** **INTANGIBLES
      - RESTATED**





Goodwill
      resulting from the acquisition amounted to as per follows, as of May 31,
      2005:





Goodwill
                Arising from acquisition of Huaqing
            
            $
            1,911,466Goodwill
                Arising from acquisition of Control Tech
            
            
            1,079,009Total
            
            $
            2,990,475





**NOTE
      14** **** **DISCONTINUED
      OPERATIONS**





1)  Beijing
      Challenge Group





In
      December 2004, the Board of Directors of Hartcourt authorized the sale of entire
      51% equity interest in Beijing Challenger Group ("Challenger") due to adverse
      market environment and the declining Hartcourt share price. We reached
      agreements with the minority shareholders of Challenge that Hartcourt will
      not
      have any control in Challenge effective from January 1, 2005 by sale the 51%
      Hartcourt equity back to its original owners in a combination of cash and stock
      transaction where Challenge shareholders will return 6,824,748 shares of
      Hartcourt common stock and notes with net value of 490,289. As of May 31, 2005,
      Hartcourt had received all consideration shares and the notes. The consideration
      shares had been returned for cancellation.





2)  Shanghai
      Guowei Science and Technology Ltd.





In
      December 2004, the Board of Directors of Hartcourt authorized the sale of entire
      50.5% equity interest in Shanghai Guowei Science and Technology Ltd. due to
      adverse market environment. We reached agreements with the minority shareholders
      of GuoWei that Hartcourt will not have any control in Guowei effective from
      January 1, 2005 by selling the 50.5% of Hartcourt equity back to its original
      owners in a combination of cash and stock transaction where GuoWei shareholders
      paid cash consideration of $789,441 and returned 2,951,800 shares of Hartcourt
      common stock. As of May 31, 2005, we had received the share and all cash
      consideration. The consideration shares had been returned for
      cancellation.




26




Gain
      on
      disposal of discontinued operations






Guowei
            
            Challenge
            
            TotalNet
                book value
            
            $
            1,031,496
            
            $
            1,172,764
            
            $
            2,204,260Less:
                disposal consideration
            
            
            (1,084,621
            )
            
            (1,172,764
            )
            
            (2,151,135
            )Gain
                on disposal of discontinued operations
            
            $
            53,125
            
            $
            --
            
            $
            53,125





**NOTE
      15** **** **BANK
      LOANS**





AmountShort-term
                loan from local bank, interest rate of 6.696% per annum, maturity
                at
                February 8, 2006, secured by a third party
            
            $
            241,648Notes
                payable to local bank, interest free, maturity on various dates from
                June
                21 to June 28, 2006, fully secured by cash deposit of
                US$1,558,630
            
            
            1,558,630Total
            
            $
            1,800,278





**NOTE
      16** **** **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, 2005.





**NOTE
      17** **** **ACCRUED
      EXPENSES AND OTHER CURRENT LIABILITIES - RESTATED**





Accrued
      expenses and other current liabilities as of May 31, 2005 are summarized as
      follows:





AmountAccrued
                officers and employees compensations
            
            $
            221,147Accrued
                directors’ compensations
            
            
            9,583Accrued
                interest
            
            
            138,079Accrued
                professional fees
            
            
            439,117Tax
                payables
            
            
            202,669Amount
                due to employees
            
            
            1,798,887Other
                current liabilities
            
            
            625,463Total
            
            $
            3,434,945




27




**NOTE
      18** **** **DUE
      TO SHAREHOLDERS**





AmountDue
                to Alan Phan, former CEO (a)
            
            $
            30,871Due
                to Enlight (b)
            
            
            150,000Due
                to Chateau D’orly (b)
            
            
            79,936Total
            
            $
            260,807





(a)  Alan
      Phan incurred expenses of $30,871 on behalf of Hartcourt during 2003 while
      acted
      as a consultant to the Company.


(b)  The
      Company signed stock purchase agreements with Enlight Corporation Ltd.
      ("Enlight") and Chateau D'orly Ltd. ("Chateau") to raise working capital for
      its
      operation in the years 2002 and 2003, respectively. There is $150,000 of dispute
      between Hartcourt and Englight with respect to the agreement. The stock purchase
      contract with Chateau is not fully executed and there is $79,936 outstanding.





**NOTE
      19** **** **DUE
      TO A RELATED PARTY**





The
      amount due to a related party as of May 31, 2005 represents amount due to
      Control Tech (90% owned subsidiary)’s minority shareholder pursuant to business
      transactions in the ordinary course. Payable to a related party is unsecured,
      interest free and with no fixed term of repayment.





**NOTE
      20** **** **MINORITY
      INTEREST**





The
      amount represents the minority shareholders' interest in Huaqing, a 51%
      subsidiary, and Control Tech, a 90% subsidiary.





**NOTE
      21** **** **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 is US$150,000 payable in equal monthly
      installment of US$12,500 cash. During the five months period ended May 31,
      2005,
      Ms Carrie Hartwick received $25,000 cash for her compensation and the remaining
      $37,500 had not yet paid to Ms Hartwick.





Ms
      Hartwick was granted an option to purchase 15 million shares of common stock
      at
      0.09 per share.





On
      January 5, 2005, the Company appointed Mr. Richard Hyland as Interim Chief
      Financial Officer, Ms. Carrie Hartwick, Chief Executive Officer relinquished
      her
      duties as CFO on the same date. Mr. Richard Hyland’s Employment Agreement
      includes an annual base salary of $20,000, payable by equal monthly installment
      of US$833 cash and US$833 worth of the Company’s common shares on the first day
      of each month. The average 20 days trading price of the Company’s common shares
      prior to the first day of each month will be used to calculate this compensation
      amount. In addition, Mr. Hyland was granted 100,000 stock options at $0.15
      per
      share.





28




On
      April
      11, 2005, Mr. Hyland resigned from the position of Interim Chief Financial
      Officer due to cultural and language barriers working in China as well as his
      inability to commit the necessary time in Shanghai, the location of Hartcourt
      headquarters. The Board of Directors appointed Carrie Hartwick as Interim Chief
      Financial Officer, effective April 14, 2005. Mr. Richard Hyland received $2,765
      cash and 21,509 shares of Hartcourt common stock valued at $2,765 for his
      compensation up to April 11, 2005.





b)
      Operating Leases





The
      Company leases its offices and facilities under long-term, non-cancelable lease
      agreements expiring at various dates through May 31, 2005. 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 five months ended May 31, 2005 and 2004 were $60,194 and
      $34,865, respectively.





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





Year
                Ending May 31
            
            Payments2006
            
            $
            226,8632007
            
            
            166,1282008
            
            
            80,974Total
                future lease payments
            
            $
            473,965




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.




29




**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.





d)
      Guarantee




Huaqing,
      a 51% owned subsidiary, provides guarantee to Hangzhou Huaqing Monitor
      Technology Co., Ltd. for bank loan of $6,449,275 as of May 31, 2005. Of which,
      $2,536,231 are pledged by the inventories of Huaqing. As of May 31, 2005,
      Huaqing had a balance due to Hangzhou Huaqing Monitor Technology Co., Ltd.
      of
      $3,228,949. The bank loan will mature on various date from December 05, 2005
      to
      April 06, 2006. Huaqing’s bank guarantee will expire upon the repayment of the
      loan by Hangzhou Huaqing Monitor Technology Co., Ltd.





**NOTE
      22** **** **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, 2005 and May 31, 2004 are 193,738,462 and 179,177,748
      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.




30




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,
      2005.





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 Cash





On
      March
      29, 2005, the Company entered into a share purchase agreement to issue and
      sell
      8,500,000 shares of common stock in an offshore transaction under Regulation
      S
      of the Securities and Exchange Commission to five Chinese investors at $0.05
      per
      share for total gross proceeds of $425,000. Total proceeds of $425,000 had
      been
      fully received as of April 30, 2005.





On
      March
      29, 2005, we entered into a share purchase agreement to sell 17,142,857 shares
      of our common stock in an offshore transaction under Regulation S to Ever Growth
      Holdings Ltd. at $0.035 per share for total gross proceeds of $600,000. Total
      proceeds of $425,000 had been fully received as of April 30, 2005.





e)
      Common
      Stock Issued for Services





During
      the five months period ended May 31, 2005, Hartcourt issued 5,900 shares of
      common stock valued at $1,491 to a consultant for consulting services rendered
      in 2004.





f)
      Common
      Stock Issued for compensation





During
      the five months 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.





g)
      Common
      Stock Issued for Warrants





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





h)
      Common
      Stock Issued for Stock Options





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





i)
      Common
      stocks issued for investment and acquisition





During
      the five months period ended May 31, 2005, Hartcourt issued 19,588,875 shares
      of
      our common stock in connection with the acquisition of Control
      Tech.




31




j)
      Cancellation of shares





During
      the five months period ended May 31, 2005, Hartcourt entered into agreements
      with Guangdong New HuaSun and Shenzhen Raiser, pursuant to which we redeemed
      13,769,156 shares of Harcourt’s common stock held by New HuaSun, New HuaSun
      redeemed a 45% equity interest, and Hartcourt released Shenzhen Raizer of its
      obligation on a $3,403,150 promissory note payable to Hartcourt. Hartcourt
      received and cancelled 13,769,156 shares of our common stock in connection
      with
      the rescission of acquisition agreement with Wenzhou Zhongnan
      Group.





During
      the five months period ended May 31, 2005, Hartcourt received and cancelled
      6,824,748 shares of our common stock in connection with the rescission of
      acquisition agreement with Beijing Challenge Group.





During
      the five months period ended May 31, 2005, Hartcourt received and cancelled
      2,951,800 shares of our common stock in connection with the disposal of Shanghai
      Guowei Science and Technology Co., Ltd.





**NOTE
      23** **** **INCOME
      TAXES - RESTATED**





At
      May
      31, 2005, the Company had net operating losses for tax purposes of approximately
      $5,157,000. The net operating loss carry forward may be used to reduce taxable
      income through the year 2019.





The
      gross
      deferred tax asset balance as of May 31, 2005 was $3,305,000. 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, 2005Net
                operating loss
            
            $
            3,305,000Less:
                valuation allowance
            
            
            (3,305,000
            )$
            -





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





December
                31,
              2004Tax
                expense (credit) at statutory rate-federal
            
            
            (34
            )%State
                tax expense net of federal tax
            
            
            (6
            )Changes
                in valuation allowance
            
            
            40Foreign
                income tax
            
            
            33Tax
                expense at actual rate
            
            
            33
            %




Income
      tax expense for the five months period ended May 31, 2005 is $78,378, consists
      of tax on income of the Company’s subsidiary in China.




32





**NOTE
      24** **** **STOCK
      OPTION PLAN AND WARRANTS**





a)
      Stock
      Option Plan





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





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 is pending for 2005 shareholders meeting
      approvals.




33





The
      following table summarizes the activity of stock options:




Number
                of
              Shares
            
            Weighted
              Average
              Exercise
              PriceShares
                under option at December 31, 2003
            
            
            11,300,000
            
            $
            0.34Granted
            
            
            -
            
            
            -Exercised
            
            
            1,000,000
            
            $
            0.10Expired
            
            
            -
            
            
            -Cancelled
            
            
            -
            
            
            -Shares
                under option at May 31, 2004
            
            
            10,300,000
            
            $
            0.31Granted
            
            
            3,000,000
            
            $
            0.3Exercised
            
            
            -
            
            
            -Expired
            
            
            3,000,000
            
            $
            0.38Cancelled
            
            
            3,000,000
            
            $
            0.48Shares
                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
            
            $
            0.14





All
      stock
      options issued to employees have an exercise price not less than the market
      value of the Company’s common stock on the date of grant, and in accordance with
      the accounting for such options utilizing the intrinsic value method there
      is no
      related compensation expense recorded in the Company’s financial statements.





Had
      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
      five months period ended May 31, 2005, as follows ($ in thousands, except per
      share amounts):





Five
                months period ended2005
            
            2004(in
                thousands $)Net
                income - as reported
            
            $
            123
            
            $
            29Stock-Based
                employee compensationexpense
                included in reported netincome,
                net of tax
            
            
            --
            
            
            --Total
                stock-based employeecompensation
                expense determinedunder
                fair-value-based method for allrewards,
                net of tax
            
            
            (969
            )
            
            --Pro
                forma net profit (loss)
            
            $
            (846
            )
            $
            29







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





Risk-free
                interest rate
            
            
            2.8%
            
            
            ***-***Expected
                life of the options
            
            
            5
                years
            
            
            -Expected
                volatility
            
            
            57.93%
            
            
            -Expected
                dividend yield
            
            
            -
            
            
            -




34





Additional
      information relating to stock options outstanding and exercisable at May 31,
      2005 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
            
            2005
            
            Life
            
            Price
            
            2005
            
            Price$0.06
                - $0.65
            
            27,600,000
            
            0.5
                - 4.8 Year
            
            $0.14
            
            17,300,000
            
            $0.17




On
      March
      9, 2005, the Company entered into an employment agreement with Ms. Hartwick,
      retroactive to June 3, 2004, the date she became Chief Executive officer. The
      agreement provides for annual salary of $150,000 in cash, plus the grant of
      an
      option to purchase up to 15 million shares of our common stock at a price of
      $0.09 per share for a period of five years from the date of grant. The options
      were issued at the fair market value on the date of issuance as required by
      SFAS
      #123.





On
      March
      9, 2005, the board of directors approved the compensation for Chairman of the
      Board $50,000 cash compensation per year, retroactive from October 1, 2004,
      when
      he became the Chairman of the Board, plus the grant of an option to purchase
      up
      to 5 million shares of our common stock at a price of $0.09 per share for a
      period of five years from the date of grant. The options were issued at the
      fair
      market value on the date of issuance as required by SFAS #123.





On
      March
      9, 2005, the board of directors approved an option pool for each director
      excluding the Chairman of the Board and management director, to purchase up
      to
      100,000 shares of our common stock at a price of 0.09 per share for a period
      of
      five years from the date of grant. The options were issued at the fair market
      value on the date of issuance as required by SFAS #123.




b)
      Warrants





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





In
      connection with signing a private placement of Hartcourt shares with Enlight
      Corporation Ltd., on October 23, 2002, Hartcourt granted Enlight warrants to
      purchase 29,010,239 shares at the price doubling the 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.




35




**NOTE
      25** **** **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
      26** **** **RECLASSIFICATIONS**





Certain
      prior period amounts have been reclassified to conform to the five months period
      ended May 31, 2005 presentation.





**NOTE
      27** **** **RESTATEMENT**





Subsequent
      to the issuance of the Company's financial statements for the year ended
      December 31, 2003, the Company determined that a certain transaction and
      presentation in the financial statements had not been accounted for properly
      in
      the Company's financial statements.





During
      the year ended December 31, 2003, the Company acquired four (4) Chinese
      companies located and operated in China.




The
      Company has restated its financial statements based on the fair value of the
      (4)
      companies at the acquisition date. Thus, the adjusted carrying amount of the
      restated items affected the issued financial statements for the transition
      period ended May 31, 2005. As a result, the Company restated the financial
      statements for the five month period ended May 31, 2005.




The
      effect of the restatement is as follows:




BALANCE
      SHEET


As
      of May
      31, 2005




AS
                PREVIOUSLY
              REPORTED
            
            AS
              RESTATEDNONCURRENT
                ASSETS
            
            $
            3,760,563
            
            $
            3,511,928TOTAL
                ASSETS
            
            $
            17,413,927
            
            $
            17,165,292TOTAL
                CURRENT LIABILITIES
            
            $
            9,244,754
            
            $
            11,246,310MINORITY
                INTEREST
            
            $
            1,407,996
            
            $
            429,939SHAREHOLDER’S
                DEFICITTOTAL
                SHAREHOLDERS’ EQUITY
            
            $
            6,761,177
            
            $
            5,489,043TOTAL
                LIABILITIES AND SHAREHOLDERS’ EQUITY
            
            $
            17,413,927
            
            $
            17,165,292








36




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




None.




**Evaluation
      of disclosure controls and procedures**




Our
      management evaluated, with the participation of our Chief Executive Officer
      ("CEO") and our Interim Chief Financial Officer ("CFO"), the effectiveness
      of
      our disclosure controls and procedures as of the end of the period covered
      by
      this Transitional Period Report on Form 10- K. Based on this
      evaluation, our Chief Executive Officer and our Interim Chief Financial Officer
      have concluded that our disclosure controls and procedures are effective as
      of the transition period ended May 31, 2005.




We
      have
      considered the effectiveness of our disclosure controls and procedures as of
      December 31, 2003, December 31, 2004 and May 31, 2005 in light of the
      restatement. We believe our current disclosure controls and procedures are
      adequate to ensure that material information relating to the registrant,
      including its consolidated subsidiaries, is made known to us by others within
      those entities.




**Changes
      in internal control over financial reporting**




There
      was
      no significant changes in our internal control over financial reporting that
      occurred during the period covered by this Annual Report on Form 10-K that
      has materially affected, or is reasonably likely to materially affect, our
      internal control over financial reporting.






**PART
      III**




**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 five month transition period ended May
      31, 2005, and the years ended December 31, 2004 and December 31, 2003 (Kabani
      & Company, Inc. was selected as our independent auditor on December 30, 2004
      upon the resignation of our former accountants, Loral International LLP):




**FY
                2005**
            
            **FY
                2004**
            
            **FY
                2003****Audit
                Fees**
            US$90,000
            
            US$165,000
            
            -**Audit-Related
                Fees**
            -
            
            -
            
            -**Tax
                Fees**
            -
            
            -
            
            -**All
                Other Fees**
            -
            
            -
            
            -**Total**
            US$90,000
            
            US$165,000
            
            -






37




The
      following table is a summary of the fees billed to us by Loral International
      LLP, our former auditors, for professional services for the five month
      transition period ended May 31, 2005 and the years ended December 31, 2004
      and
      December 31, 2003 (Loral International LLP resigned as our independent auditor
      on December 29, 2004):






**FY
                2005**
            
            **FY
                2004**
            
            **FY
                2003****Audit
                Fees**
            -
            
            US$40,000
            
            US$150,000**Audit-Related
                Fees**
            -
            
            US$3,500
            
            -**Tax
                Fees**
            -
            
            -
            
            -**All
                Other Fees**
            -
            
            -
            
            -**Total**
            -
            
            US$43,500
            
            US$150,000






*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.




**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.


38


**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.Date: October
              10, 2006
            By:
            /s/ Victor
              ZhouVictor
                Zhou
              Chief Executive
                Officer


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





Signature
              
              Title
              
              Date/s/
                  Yungeng Hu
                Yungeng
                  Hu
              
              Chief
                  Financial Officer & President
              
              October
                  10, 2006




**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/
                VICTOR ZHOU
              Victor
                Zhou
            Chief
                Executive Officer
            October
                10, 2006/s/
                Yungeng Hu
              Yungeng
                Hu
            Chief
                Financial Officer & President
            October
                10, 2006/s/
                BILLY Y N WANG
              
              Billy
                Y N Wang
            Chairman
                of the Board of Directors
            October
                10, 2006/s/
                Wilson Li
              Wilson
                Li
            Director
            October
                10, 2006/s/
                Geoffrey Wei
              Geoffrey
                Wei
            Director
            October
                10, 2006


39