<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                           FORM 10-KSB/Amendment No. 2
(Mark One)

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

                                    For the fiscal year ended: December 31, 2004

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

                                               Commission file number: 001-12671

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

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

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

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

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

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

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

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

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

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

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





<PAGE>

                          THE HARTCOURT COMPANIES, INC.

                                   FORM 10-KSB

                                TABLE OF CONTENTS


                                                                            PAGE

PART I

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

PART II

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

PART III

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


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





<PAGE>

                                     PART I

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

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

ITEM 1.  DESCRIPTION OF BUSINESS

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

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

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

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


                                      -1-




<PAGE>

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

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

      Most international and domestic manufacturers of computer components and
computer products in China rely on distributors, such as Hartcourt, to augment
their sales and marketing operations. As a stocking, marketing, and financial
intermediary, the distributor relieves manufacturers of a portion of the costs
and personnel associated with stocking and selling their products (including
otherwise sizable investments in finished goods inventories, accounts
receivables, and distribution networks), while providing geographically
dispersed selling, order processing, and delivery capabilities. At the same
time, the distributor offers a broad range of customers the convenience of
accessing from a single source with multiple products and rapid or scheduled
deliveries, as well as other value-added services such as after sales service.
The growth of the IT distribution industry in China has been fostered by many
manufacturers who recognize that distributors are essential extensions of their
marketing organizations.

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

      We source our products from Samsung. As of December 31, 2004,
approximately 99% of our inventory consisted of Samsung monitors. It is the
policy of the manufacturer to protect its distributors, such as the Company,
against the potential write-down of such inventories due to technological
changes or the manufacturer's price reductions. Under the terms of the related
distributor agreements, and assuming the distributor complies with certain
conditions, the supplier is required to credit the distributor for inventory
losses incurred through reductions in manufacturers' list prices of the items.
We maintain less than a month's worth of Samsung inventory and management does
not believe that we have any material risk of inventory loss if the manufacturer
elects to terminate the distributor agreement.


                                      -2-




<PAGE>

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

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

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

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

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

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

CORPORATE STRUCTURE

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

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

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

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

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

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

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

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


                                      -3-




<PAGE>

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

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

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

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

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

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

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

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

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

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

ACQUISITIONS AND DISPOSITIONS

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


                                      -4-




<PAGE>

      SHANGHAI PENG YANG COMPUTER CO., LTD. (PENGYANG). On November 21, 2003,
Hartcourt and Huaqing jointly signed an agreement to purchase all of the
interests of Pengyang. The purchase price was RMB 14.85 Million ($1.8 million),
payable in the form of 1,530,000 restricted shares of our common stock,
calculated at $0.60 per share and a small percentage of interest in Huaqing. Due
to various outstanding legal and financial performance issues, we, together with
our subsidiary Shanghai Huaqing, decided not to complete the acquisition of
Pengyang in August 2004. We did not include any of the Pengyang's operating
results into our 2004 financial statements. No penalty for not completing the
transaction was incurred by either party.

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

      On July 16, 2004, Hartcourt and the minority owners of Wenzhou Zhongnan
Group (Wenzhou) reached an agreement to rescind the original acquisition
contract entered into on June 28, 2003 to purchase a 51% equity ownership of
Wenzhou for a total consideration of $5,011,352. The acquisition was paid for
entirely by the issuance of 8,415,370 shares of our common stock. Wenzhou's
financial results were consolidated with ours from October 2003 to June 2004.
All of the shares issued pursuant to this acquisition have been returned and
cancelled.

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

      On September 16, 2004, Huaqing, a 51% Hartcourt owned subsidiary signed a
definitive agreement to sell all of its 55% equity interest in Hangzhou Huaqing
to a PRC citizen for $760,870.

      On October 19, 2004, we revised the record date for the spin-off of
Financial Telecom Limited (USA) ("FTL") from October 17, 2003 to October 25,
2004 pursuant to a Rule 10b-17 notice filed with NASDAQ in order to comply with
the notice period for the setting of the record date as required by NASDAQ. In
the spin-off, our shareholders of record as of October 25, 2004 received
0.087965218 share of FTL common stock for each share of our common stock held by
such shareholders.

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

      In December 2004, our board of directors authorized the sale of the entire
51% equity interest in Beijing Challenger Group ("Challenger") due to adverse
market conditions and the declining Hartcourt share price. On December 9, 2003,
we signed a definitive agreement with the shareholders of Challenger to purchase
51% of Challenger for RMB 31.3 million ($3.8 million) payable in 6,824,748
restricted shares of our common stock, plus a cash investment of RMB 5 million
($610,000). We consolidated Challenger's financial results beginning January,
2004.

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


                                      -5-




<PAGE>

EXTRAORDINARY ITEMS

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

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

SUBSEQUENT EVENTS

      On February 25, 2005, we completed all legal procedures to acquire 90% of
the capital stock of Control Tech. Due to the recent decline of our share price,
the purchase price was revised as $1.96 million payable in 19,588,875 shares of
our common stock.

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

      On March 15, 2005, we reached an agreement with the minority shareholders
of GuoWei to sell the 50.5% of Hartcourt equity back to its original owners for
a total consideration of $1,036,816 in a combination of cash and stock
transaction where GuoWei paid cash consideration of $795,352 and returned
2,951,800 shares of Hartcourt common stock.

CHANGE OF OFFICERS

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

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


                                      -6-




<PAGE>

                                  RISK FACTORS

      IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS ANNUAL REPORT,
INCLUDING THE REPORTS WE INCORPORATE BY REFERENCE, YOU SHOULD CONSIDER THE
FOLLOWING FACTORS THAT MAY AFFECT OUR FUTURE RESULTS AND FINANCIAL CONDITION
BEFORE INVESTING IN OUR SECURITIES. ALTHOUGH WE BELIEVE THAT THE EXPECTATIONS
REFLECTED IN THE FORWARD-LOOKING STATEMENTS ARE REASONABLE, WE CANNOT GUARANTEE
FUTURE RESULTS, LEVELS OF ACTIVITY, PERFORMANCE OR ACHIEVEMENTS. WE ARE UNDER NO
DUTY TO UPDATE ANY OF THE FORWARD-LOOKING STATEMENTS AFTER THE DATE OF THIS
PROSPECTUS TO CONFORM SUCH STATEMENTS TO ACTUAL RESULTS OR TO CHANGES IN OUR
EXPECTATIONS.

RISKS RELATING TO OUR BUSINESS

WE FACE SIGNIFICANT COMPETITION WHICH COULD REDUCE OUR MARKET SHARE AND
ADVERSELY AFFECT OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

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

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

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

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

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

      o     compete effectively with existing and potential competitors;

      o     further develop our business activities;

      o     manage expanding operations; and

      o     attract and retain qualified personnel.

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


                                      -7-




<PAGE>

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

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

WE DEPEND ON OUR KEY PERSONNEL AND OUR BUSINESS AND GROWTH PROSPECTS MAY BE
SEVERELY DISRUPTED IF WE LOSE THEIR SERVICES. OUR FUTURE SUCCESS IS HEAVILY
DEPENDENT UPON THE CONTINUED SERVICE OF OUR KEY EXECUTIVES AND OTHER KEY
EMPLOYEES.

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

WE HAVE A LIMITED OPERATING HISTORY, WHICH MAY MAKE IT DIFFICULT TO EVALUATE OUR
BUSINESS, AND OUR LIMITED RESOURCES MAY AFFECT OUR ABILITY TO MANAGE THE GROWTH
WE EXPECT TO ACHIEVE.

      Our anticipated further expansion of our operations will continue to place
a significant strain on our management, systems and resources. In addition to
training and managing our workforce, we will need to continue to develop and
improve our financial and management controls and our reporting systems and
procedures. We cannot assure you that we will be able to efficiently or
effectively manage the growth of our operations, and any failure to do so may
limit our future growth and materially and adversely affect our business,
financial condition and results of operations.

THE DISCONTINUATION OF ANY OF THE PREFERENTIAL TAX TREATMENTS CURRENTLY
AVAILABLE TO US IN THE PRC COULD MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS,
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

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

      Although we believe that the current capital structure of the Company will
be sufficient to allow us to consummate acquisitions, we cannot ascertain the
capital requirements for any particular transaction. If the current financial
resources prove to be insufficient, either because of the size of the business
acquisition or the depletion of the available financial resources in search of
acquisitions, we will be required to seek additional financing. We cannot assure


                                      -8-




<PAGE>

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

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

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

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

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

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

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


                                      -9-




<PAGE>

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

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

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

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

      o     taking other regulatory or enforcement actions, including levying
            fines, that could be harmful to our business.

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

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

RISKS RELATING TO THE PEOPLE'S REPUBLIC OF CHINA

SUBSTANTIALLY ALL OF OUR ASSETS ARE LOCATED IN CHINA AND SUBSTANTIALLY ALL OF
OUR REVENUES ARE DERIVED FROM OUR OPERATIONS IN CHINA. ACCORDINGLY, OUR
BUSINESS, FINANCIAL CONDITION, RESULTS OF OPERATIONS AND PROSPECTS ARE SUBJECT
TO A SIGNIFICANT EXTENT, TO ECONOMIC, POLITICAL AND LEGAL DEVELOPMENTS IN CHINA.

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

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

WHERE YOU CAN FIND MORE INFORMATION

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


ITEM 2.  DESCRIPTION OF PROPERTY

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


                                      -10-




<PAGE>

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


ITEM 3.  LEGAL PROCEEDINGS

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

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

      On December 17, 2004, the court granted partial summary judgment to the
SEC. Subsequently, on March 11, 2005, the court entered final judgment in this
case. The court found that in 1999, the Company violated Sections 5 and 17(a) of
the Securities Act of 1933 and Rule 10b-5 under the Securities Exchange Act of
1934 in connection with sales of securities using a Form S-8 Registration
Statement. The court enjoined the Company from future violations of the
registration and antifraud provisions of the federal securities laws. The court
also issued an order directing that civil penalties be imposed against the
Company in the amount of $275,000 and ordered that the amount of $819,363 from
the stock sales be disgorged and both be paid directly to the SEC. As of April
12, 2005, the Company has satisfied the entire $1.1 million monetary portion of
the judgment.

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

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

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

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


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

      None.


                                      -11-




<PAGE>

                                     PART II


ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET INFORMATION

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

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

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

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

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

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

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

      On October 19, 2004, Hartcourt revised the record date for the spin-off of
its subsidiary Financial Telecom Limited (USA) from October 17, 2003 to October
25, 2004 pursuant to a Rule 10b-17 notice filed with NASDAQ in order to comply
with the notice period for the setting of the record date as required by NASDAQ.
In the spin-off, Hartcourt shareholders of record as of October 25, 2004
received 0.087965218 share of FTL common stock for each share of Hartcourt
common stock held by such shareholders.

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

RECENT SALES OF UNREGISTERED SECURITIES

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


                                      -12-




<PAGE>

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

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

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

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

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

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

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

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

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

      On September 30, 2004, we cancelled 8,417,350 shares of our common stock
valued at $2,187,996 in connection with the rescission of our acquisition
agreement with Wenzhou Zhongnan Group.

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

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

      On March 29, 2005, we entered into a share purchase agreement to issue and
sell 8,500,000 shares of our common stock in an offshore transaction under
Regulation S of the Securities and Exchange Commission to five Chinese investors
at $0.05 per share for total gross proceeds of $425,000. On March 29, 2005, we
entered into a share purchase agreement to sell 17,142,857 shares of our common
stock in an offshore transaction under Regulation S to Ever Growth Holdings Ltd
at $0.035 per share for total gross proceeds of $600,000.

WARRANTS

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


                                      -13-




<PAGE>

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


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

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

PRO FORMA CONDENSED AND COMBINED FINANCIAL STATEMENTS

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

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

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

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

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


                                      -14-




<PAGE>

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



                                      -15-




<PAGE>

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


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

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

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

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


                                      -16-




<PAGE>

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

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

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

OTHER REVENUE                                            215,154         83,771

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

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

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

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

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

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

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

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


RESULTS OF OPERATIONS
NET SALES

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


                                      -17-




<PAGE>

OPERATING MARGINS

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

OTHER REVENUE

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

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

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

DEPRECIATION

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

IMPAIRMENT

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

INTEREST EXPENSES

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


                                      -18-




<PAGE>

PROVISION FOR INVESTMENTS

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

LOCAL PRC INCOME TAX

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

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

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

LIQUIDITY AND CAPITAL RESOURCES

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

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

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

DISCONTINUED OPERATIONS

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


                                      -19-




<PAGE>

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

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

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

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

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

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

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


                                      -20-




<PAGE>

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

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

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

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

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

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

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


                                      -21-




<PAGE>

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

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


CHANGES IN ACCOUNTING PRINCIPLES

None.


ITEM 7.  FINANCIAL STATEMENTS

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


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

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

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

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

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

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


                                      -22-




<PAGE>

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

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

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

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


ITEM 8A. CONTROLS AND PROCEDURES

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

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


ITEM 8B. OTHER INFORMATION

      None.


                                    PART III


ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS

DIRECTORS AND EXECUTIVE OFFICERS

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


                                      -23-




<PAGE>

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

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

DIRECTORS

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

      GEOFFREY WEI, CICPA, age 37. Mr. Wei is a partner of WHCD Joint CPAs. From
September 2002 to September 2004, Mr. Wei was the CFO of GreenWare Technologies
Ltd. Mr. Wei was the interim CFO, Vice president and Chief Accountant for
Netease.com Inc (Nasdaq NM: NTES) from 2000 to 2002. He also worked in audit,
tax and business advisory divisions at PriceWaterhouseCoopers and KPMG for an
extensive period of time both in China and abroad. Mr. Wei received his Bachelor
of Arts degree from Beijing Polytechnic University.

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

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

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

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


                                      -24-




<PAGE>

EXECUTIVE OFFICER

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

AUDIT COMMITTEE

      Two members of our board of directors serve on our Audit Committee. Until
March 8, 2005, Geoffrey Wei and Billy Wang served as members of our Audit
Committee. Mr. Wei is the chairman of the committee and qualified as an
independent director and an audit committee financial expert, as defined by Item
401(e)(2) of Regulation S-B. On March 8, 2005, Billy Wang relinquished his
duties as a member of the Audit Committee and was replaced by another board
member, Victor Zhou.

COMPENSATION COMMITTEE

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

NOMINATION COMMITTEE

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

SECTION 16(a) BENEFICIAL OWNERSHIP COMPLIANCE

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

CODE OF ETHICS

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


ITEM 10. EXECUTIVE COMPENSATION

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


                                      -25-




<PAGE>

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

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

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

(2)   On December 1, 2003, the date on which Ms. Hartwick's employment began, we
      entered into an employment agreement with her. This agreement had a
      one-year term, from December 1, 2003 to November 30, 2004. The agreement
      provides for an annual salary of $120,000, plus the grant of an option to
      purchase up to 1 million shares of our common stock at a price of $0.65 a
      share for a 12-month period from the date of grant and upon completion of
      her one-year term. Fifty percent (50%) of Ms Hartwick's annual salary is
      payable in cash and the balance is payable in shares of our common stock.
      The conversion price is the average 20-day trading price prior to the
      first of each month for the salary owed that month.

(3)   On May 7, 2003, we entered into an employment agreement with David Y.
      Chen, Chief Executive Officer, regarding the terms of his employment. This
      agreement has a one-year term from June 1, 2003 to May 31, 2004. The
      agreement provides for an annual salary of $150,000, plus the grant of an
      option to purchase up to 3 million shares of our common stock at a price
      of $0.48 a share over a 12-month term from the date of grant. Fifty
      percent (50%) of Mr. Chen's annual salary was payable in cash and the
      balance was payable in shares of our common stock. The conversion price is
      the average 20-day trading price prior to the first of each month for the
      salary owed that month.

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

(4)   On June 1, 2002, we entered into an employment agreement with David Y.
      Chen, Acting Executive Officer, regarding the terms of his employment.
      This agreement had a one-year term from June 1, 2002 to May 31, 2003. The
      agreement provided for an annual salary of $120,000, plus the grant of an
      option to purchase up to 2 million shares of our common stock at a price
      of 10 cents per share, applicable for a 12-month period from the date of
      grant upon completion of his one-year term to the satisfaction of our
      board of directors. Fifty percent (50%) of Mr. Chen's annual salary was
      payable in cash and the balance was payable in shares of our common stock.
      The conversion price is the average 20-day trading price prior to the
      first of each month for the salary owed that month.

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


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

      The following table provides certain information with respect to stock
options exercised by the Named Executive Officers during the twelve-month period
that ended on December 31, 2004. The table also provides the number of shares
covered by stock options as of December 31, 2004 and the value of "in-the-money"
stock options, which represents the positive difference between the exercise
price of a stock option and the market price of the shares subject to such
option on December 31, 2004. No stock appreciation rights were outstanding
during the last year.


                                      -26-




<PAGE>

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

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

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


COMPENSATION OF DIRECTORS

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


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

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

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

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

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


                                      -27-




<PAGE>

EQUITY COMPENSATION PLAN INFORMATION

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

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

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

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


ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

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

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

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

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

2004 RELATED PARTY TRANSACTIONS

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


                                      -28-




<PAGE>

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

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

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

ITEM 13.   EXHIBITS

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

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


                                      -29-




<PAGE>

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


                                                               -30-
</TABLE>




<PAGE>

<TABLE>
--------------------------------------------------------------------------------------------------------------------------------
     EXHIBIT NO.                                            DESCRIPTION                                        PREVIOUSLY FILED
--------------------------------------------------------------------------------------------------------------------------------
<S>                  <C>                                                                                             <C>
        10.17        Lease Termination Agreement, dated March 24, 1998, between Hartcourt Investment (USA)           (2)
                     Corporation and Scripto-Tokai Corporation.
--------------------------------------------------------------------------------------------------------------------------------
        10.18        Share Purchase Agreement with Enova Holdings, Inc., dated February 1, 1999, Exchange            (7)
                     Agreement , dated March 23, 1999, and Distribution
                     Agreement, dated March 24, 1999, File # 99579493.
--------------------------------------------------------------------------------------------------------------------------------
        10.19        1999 Agreement with Beijing UAC Stock Trading Online Co. Ltd.                                   (8)
--------------------------------------------------------------------------------------------------------------------------------
        10.19        A Financial Statements of Beijing UAC Stock Exchange Online Co. Ltd. for the period from        (8)
                     October 18, 1999 (date of inception) to December 31, 1999.
--------------------------------------------------------------------------------------------------------------------------------
        10.20        Agreement with GoCall.com                                                                       (8)
--------------------------------------------------------------------------------------------------------------------------------
        10.21        FTL Stock Purchase Agreement                                                                    (8)
--------------------------------------------------------------------------------------------------------------------------------
        10.22        Advisory Agreement and 1999 Stock Plan with NuVen Advisors, Inc. and Hartcourt dated            (9)
                     March 18, 1999, File No. 333-74933.
--------------------------------------------------------------------------------------------------------------------------------
        10.23        Consulting Agreement with Fred G. Luke, dba NuVen Advisors, File No. 99768860.                  (10)
--------------------------------------------------------------------------------------------------------------------------------
        10.24        Consulting Agreement with Archer & Weed, File No. 99768860.                                     (10)
--------------------------------------------------------------------------------------------------------------------------------
        10.25        On December 8, 1999, Hartcourt filed a report on Form 8-K to disclose the resignations          (11)
                     of Fred Luke and Jon L. Lawver Directors and Officers, File No. 99770546.
--------------------------------------------------------------------------------------------------------------------------------
        10.26        February 4, 2000, Hartcourt completed a private placement of 227,445 Units and a                (12)
                     class II Warrants to PYR Management LLC for $3,000,000 pursuant to a regulation D
                     Subscription Agreement, File No. 524390.
--------------------------------------------------------------------------------------------------------------------------------
        10.27        Interim CFO Employment Agreement, dated January 5, 2005                                         (17)
--------------------------------------------------------------------------------------------------------------------------------
        10.28        CEO Employment Agreement, dated March 9, 2005
--------------------------------------------------------------------------------------------------------------------------------
        14.01        Code of Ethics                                                                                  (13)
--------------------------------------------------------------------------------------------------------------------------------
        16.01        Letter from Loral International CPA & Advisor, LLC, to the Company resigning as                 (15)
                     independent auditor, dated December 29, 2004.
--------------------------------------------------------------------------------------------------------------------------------
        16.02        Letter from Loral International CPA & Advisor, LLC, to the Company indicating                   (16)
                     disagreement with the Company's Form 8-K filing regarding Loral's resignation, dated
                     January 3, 2005.
--------------------------------------------------------------------------------------------------------------------------------
        21.01        Subsidiaries of the registrant
--------------------------------------------------------------------------------------------------------------------------------
        27.01        Financial Data Schedule. Pursuant to Rule 12b-32 under Securities and Exchange Act of
                     1934, as amended.
--------------------------------------------------------------------------------------------------------------------------------
        31.01        Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of
                     the Sarbanes-Oxley Act of 2002
--------------------------------------------------------------------------------------------------------------------------------
        31.02        Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of
                     the Sarbanes-Oxley Act of 2002
--------------------------------------------------------------------------------------------------------------------------------
        32.01        Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
                     the Sarbanes-Oxley Act of 2002
--------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

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


                                                              -31-
</TABLE>




<PAGE>

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

(6) Previously filed as an exhibit to Hartcourt's Form 10-KSB, dated April 15,
2003, as amended by Hartcourt's Form 10-KSB/A, dated April 25, 2003,
incorporated herein by reference.

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

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

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

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

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

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

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

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

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

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

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

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


ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES

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

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

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


                                      -32-




<PAGE>

                                   SIGNATURES

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

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


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

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

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

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

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





<PAGE>


                       Report on the Financial Statements

                                       Of

                          The Hartcourt Companies, Inc.
                                And Subsidiaries






<PAGE>


                          The Hartcourt Companies, Inc.
                                And Subsidiaries



                    Audited Consolidated Financial Statements

                 For the Years Ended December 31, 2004 and 2003


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

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM            F-1

Balance Sheet                                                F-2 - F-4

Statements of Operations                                     F-4 - F-5

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

Statements of Cash Flows                                     F-8 - F-9

Notes to Financial Statements                              F-10 - F-36






<PAGE>


            REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Stockholders and Board of Directors
The Hartcourt Companies, Inc.

We have audited the accompanying consolidated balance sheet of The Hartcourt
Companies, Inc., a Utah Corporation (the "Company") as of December 31, 2004 and
the related consolidated statements of operations, consolidated stockholders'
equity and comprehensive income and consolidated statements of cash flows for
the year ended December 31, 2004. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Hartcourt Companies, Inc as
of December 31, 2004 and the results of its operations and its cash flows for
the year ended December 31, 2004, in conformity with accounting principles
generally accepted in the United States of America.

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


KABANI & COMPANY, INC.
CERTIFIED PUBLIC ACCOUNTANTS

Huntington Beach, California
April 2, 2005



                                      F-1




<PAGE>

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

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

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

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

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

LIABILITIES AND SHAREHOLDERS' EQUITY

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


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

MINORITY INTERESTS                                                   1,171,779


                                      F-2




<PAGE>

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

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

TOTAL PREFERRED STOCK                                                        -

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

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

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


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


                                      F-3




<PAGE>

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

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

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

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

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

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

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

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

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

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

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

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


                                      F-4




<PAGE>

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

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

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

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

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

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

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


                                           F-5
</TABLE>




<PAGE>

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


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

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

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

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

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

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


                                                                F-6
</TABLE>




<PAGE>

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

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

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

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

<CAPTION>

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

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

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

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


                                                                F-7
</TABLE>




<PAGE>

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

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


                                            F-8
</TABLE>




<PAGE>

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

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

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds due to related parties                                $  1,167,842    $  2,691,620
Proceeds from issuance of common stock                            1,386,382         130,000
Proceeds from sale of treasury stock                                      -          48,813
Proceed on note payables                                                  -       1,432,245
Proceeds on debt                                                  5,546,867         168,243
                                                               ------------    ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES                      $  8,101,091    $  4,470,921
                                                               ------------    ------------
FOREIGN CURRENCY TRANSLATION                                            650          (9,500)
                                                               ------------    ------------

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


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


                                            F-9
</TABLE>




<PAGE>

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

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

NOTE 1  GENERAL

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

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

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

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

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

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

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

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

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

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


                                      F-10




<PAGE>

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

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

NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

a)    Basis of Consolidation

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

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

b)    Use of Estimates

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

c)    Cash and Cash Equivalents

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

d)    Accounts Receivable

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


                                      F-11




<PAGE>

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

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

NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

e)    Inventory

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

f)    Property and Equipment

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

g)    Intangible Assets

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

h)    Impairment of Long-Lived Assets

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


                                      F-12




<PAGE>

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

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

NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

i)    Revenue Recognition

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

j)    Income Taxes

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

k)    Stock-Based Compensation

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

l)    Foreign Currencies Translation

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


                                      F-13




<PAGE>

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

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

NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

m)    Fair Value of Financial Instruments

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

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

n)    Basic and diluted net loss per share

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

o)    Statement of Cash Flows

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

p)    Segment Reporting

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


                                      F-14




<PAGE>

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

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

NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

q)    Going Concern

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

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

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



                                      F-15




<PAGE>

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

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

NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

r)    Recently Issued Accounting Standards

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

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

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


                                      F-16




<PAGE>

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

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

NOTE 3  ACQUISITION AND INVESTMENTS

ACQUISITION

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

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

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

                                                              $  4,404,879

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

                                                              $  4,404,879


      OTHER INVESTMENTS

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

                                                                      2004

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

     Total investment                                              684,228

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

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


                                      F-17




<PAGE>

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

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

NOTE 3  ACQUISITION AND INVESTMENTS (CONTINUED)

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

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

NOTE 4  CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS

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


NOTE 5  ACCOUNTS RECEIVABLE

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

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


NOTE 6  INVENTORIES

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

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


NOTE 7  TRADE DEPOSIT

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


                                      F-18




<PAGE>

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

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

NOTE 8  RECEIVABLES FROM RELATED PARTIES

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

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

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

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

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

NOTE 9  ASSETS PENDING FOR SALES

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

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


                                      F-19




<PAGE>

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

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

NOTE 10  NOTES RECEIVABLE

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

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

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

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

Total                                                              $5,460,792

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

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

Summary of notes receivable:

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

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


                                      F-20




<PAGE>

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

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

NOTE 10  NOTES RECEIVABLE (CONTINUED)

(a) Notes receivable from EDDA

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

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

(b) Notes receivable from Shen Zhen Raiser

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

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


                                      F-21




<PAGE>

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

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

NOTE 11  RELATED PARTY TRANSACTIONS

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

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


NOTE 12  PROPERTIES AND EOUIPMENT

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

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

                                                          482,689

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

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

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


                                      F-22




<PAGE>

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

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

NOTE 13  INTANGIBLES

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


      Goodwill Arising from acquisition of Huaqing             2,160,101


NOTE 14  DISCONTINUED OPERATIONS

(1) Wenzhou Zhongnan Group

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

(2) Guangzhou NewHuaSun Computer Co., Ltd.

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

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


                                      F-23




<PAGE>

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

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

NOTE 14  DISCONTINUED OPERATIONS

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

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

(4) Hopeful Internet Technologies Limited.

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

(5) Beijing Challenge Group

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

(6) Shanghai Guowei Science and Technology Ltd.

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

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


                                      F-24




<PAGE>

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

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

NOTE 14  DISCONTINUED OPERATIONS

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

Gain on discontinued operations

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

Loss on disposal of discontinued operations

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


NOTE 15  LOAN FROM EMPLOYEES

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


                                      F-25




<PAGE>

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

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

NOTE 16  ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

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

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


NOTE 17  DUE TO SHAREHOLDERS

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

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


NOTE 18  MINORITY INTEREST

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


                                      F-26




<PAGE>

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

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

NOTE 19  COMMITMENTS AND CONTINGENCIES

A) Employment Agreements

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

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

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

Ms Hartwick was granted an option to purchase 15 million shares of common stock
at 0.10 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 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.


                                      F-27




<PAGE>

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

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

NOTE 19  COMMITMENTS AND CONTINGENCIES

B) Operating Leases

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

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

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

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


(c) Legal Proceedings

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

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

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


                                      F-28




<PAGE>

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

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

NOTE 19  COMMITMENTS AND CONTINGENCIES

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

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

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

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


NOTE 20  SHAREHOLDERS' EQUITY

(A)   Capitalization

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


                                      F-29




<PAGE>

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

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

NOTE 20  SHAREHOLDERS' EQUITY (continued)

(B)   Original Preferred Stock

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

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

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

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

(C)   Class A Preferred Stock

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

(D)   Series A 9% Convertible Preferred Stock

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

(E)   Series B 9% Convertible Preferred Stock

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


                                      F-30




<PAGE>

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

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

NOTE 20  SHAREHOLDERS' EQUITY (continued)

(F)   Series C Redeemable Preferred Stock

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

(G)   Series D Convertible Preferred Stock

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

(H)   Series AB Convertible Preferred Stock

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

(I)   Common Stock Issued for Cash

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


                                      F-31




<PAGE>

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

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

NOTE 20  SHAREHOLDERS' EQUITY (continued)

(J)   Common Stock Issued for Services

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

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

(K)   Common Stock Issued for Warrants

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

(L)   Common Stock Issued for Stock Options

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

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

(M)   Common stocks issued for investment and acquisition

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

(N)   Cancellation of shares

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

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


                                      F-32




<PAGE>

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

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

NOTE 21  INCOME TAXES

In the year ended December 31, 2004, the Company incurred net operating losses
for tax purposes of approximately $5,894,378. The net operating loss carry
forward may be used to reduce taxable income through the year 2019.

The gross defefrred tax asset balance as of December 31, 2004 was $4,353,702. A
100% valuation allowance has been established against the deferred tax assets,
as the utilization of the loss carry forward cannot reasonably be assured.

The components of the net deferred tax asset are summarized below:

     Deferred tax asset                         December 31, 2004

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

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

                                               December 31, 2004
                                               -----------------

     Tax expense (credit) at statutory rate-federal      (34)%
     State tax expense net of federal tax                 (6)
     Changes in valuation allowance                       40
                                                       -----

     Tax expense at actual rate                            -
                                                       =====


Income tax expense consisted of the following for the year ended December 31,
2004:


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

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

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


                                      F-33




<PAGE>

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

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

NOTE 22  STOCK OPTION PLAN AND WARRANTS

(A) Stock Option Plan

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

The following table summarizes the activity of stock options:

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


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


                                      F-34




<PAGE>

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

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

NOTE 22  STOCK OPTION PLAN AND WARRANTS (CONTINUED)

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

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

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


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

(B) Warrants

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

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

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

In connection with signing a private placement of Hartcourt shares with Enlight
Corporation Ltd., on October 23, 2002, Hartcourt granted Enlight warrants to
purchase 29,010,239 shares at the price doubling the current trading price on
the issuance date. expired on October 22, 2005. On March 11, 2004, 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.


                                      F-35




<PAGE>

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

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

NOTE 23  SEGMENT AND BUSINESS RELATED INFORMATION

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

NOTE 24  SUBSEQUENT EVENTS

On January 5, 2005, the Company appointed Mr. Richard Hyland as its Interim
Chief Financial Officer. Mr. Hyland replaced Ms. Carrie Hartwick who
relinquished the title of CFO but continue as CEO and President of the Company.

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

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

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

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

NOTE 25  RECLASSIFICATIONS

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


                                      F-36








<PAGE>





                       Report on the Financial Statements

                                       Of

                          The Hartcourt Companies, Inc.
                                And Subsidiaries





























                                      F-i



<PAGE>







                          The Hartcourt Companies, Inc.
                                And Subsidiaries



                    Audited Consolidated Financial Statements

                 For the Years Ended December 31, 2003 and 2002


Contents                                                             Pages

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

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

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

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

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

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



























                                      F-ii



<PAGE>



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

                          Independent Auditor's Report

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

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

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

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

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

The  accompanying  financial  statements  have been  prepared  assuming that the


                                       F-1



<PAGE>




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









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


































                                       F-2



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

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

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

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

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

Bills payables                                        1,553,038                0

Notes payable - current portion                               0           18,988

Due to shareholders                                     229,936                0

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



<PAGE>



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


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

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

MINORITY INTERESTS                                       4,021,833       561,720

COMMITMENTS AND CONTINGENCIES                            1,300,000
                                                                               0

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


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



<PAGE>


                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

                           DECEMBER 31, 2003 AND 2002
                                  (-Continued-)

                                                        2003             2002

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

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

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



























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



                                       F-5



<PAGE>

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

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

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

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

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

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

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

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

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

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

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

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



<PAGE>




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

                                  - Continued -

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

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

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

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

BASIC AND DILUTED LOSS PER COMMON SHARE

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



















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


                                       F-7



<PAGE>







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

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

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

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

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

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

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

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

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

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

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

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

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








                                       F-8



<PAGE>





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

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

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

Shares issued for consulting
     services                   -- --   2,174,667    2,175        --    160,246        --        --       --          --    162,421
Shares issued to executive and
staffs in
 Of compensation and services   -- --   1,268,440    1,268   196,127    197,395
Stock subscriptions, received   -- --  31,298,535   31,299(1,842,326) 2,620,195        --        --       --          --    809,168
Shares issued to directors
     in lieu of compensation
     & services                 -- --     589,460      589        --     64,161        --        --       --          --     64,750
Shares issued for execution of
stock option                            1,000,000     1,000       --     99,000        --        --       --          --    100,000
Cancel of treasury stocks              (4,756,058)   (4,756)      -- (3,170,444)(4,756,058)3,175,200      --          --         --
Sale of treasury stock          -- --          --      --         --   (451,187) (805,802)   500,000      --          --     48,813

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

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

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


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

</TABLE>



                                       F-9



<PAGE>




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

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

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

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



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



<PAGE>




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

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

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

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

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











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




                                      F-11



<PAGE>


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

1)   GENERAL

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

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

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

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

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






                                      F-12



<PAGE>




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

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

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

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

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

2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

                a)  Calendar year ending December 31

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




                                      F-13



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

                b)  Basis of Consolidation

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

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

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

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

                                      F-14



<PAGE>



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


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

                d)  Cash and Cash Equivalents

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

                e)  Accounts Receivable

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

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

                f)  Inventory

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



                                      F-15



<PAGE>




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

                g)  Property and Equipment

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

                h)  Intangibles

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

                i)  Impairment of Long-Lived Assets

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

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









                                      F-16



<PAGE>




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

                j)  Revenue Recognition

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

                k)  Income Taxes

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

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

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

                l)  Stock-Based Compensation

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





                                      F-17



<PAGE>





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

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

                m)  Foreign Currencies Translation

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

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

                n)  Fair Value of Financial Instruments

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

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

                                      F-18



<PAGE>




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

                o)  Loss per Common Share

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

                p)  Going Concern

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

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

                q)  Recently Issued Accounting Standards

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

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



                                      F-19



<PAGE>



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


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

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

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

                                      F-20



<PAGE>




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

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

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

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

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

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






                                      F-21



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

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

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

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



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

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

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

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

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


<PAGE>

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

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

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

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

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

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

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



                                      F-24



<PAGE>

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

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

SHAREHOLDERS EQUITIES
  Common stock                                   1,328,791

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

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


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

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









                                      F-25



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

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

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

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


                                      F-26



<PAGE>

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



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

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

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


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

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

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

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

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

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

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

     h) Investments-Under Cost method

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



                                      F-27



<PAGE>

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


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

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

NOTE 4  FOREIGN OPERATING RISKS

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

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

Note 5  COST OF GOODS SOLD

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



                                      F-28



<PAGE>

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


NOTE 6  NET OPERATING LOSS

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


NOTE 7 ACCOUNTS RECEIVABLE

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

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

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

NOTE 8   RECEIVABLES FROM RELATED PARTIES

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

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








                                      F-29



<PAGE>

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

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

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

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

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

     Note receivable from Edda Ltd.,  interest
     at 6% per annum,  quarterly  payments  of
     $50,000 plus   interest  with  a  balloon
     payment of  $2,715,772  due  December  1,
     2006,   secured  by  the   tangible   and
     intangible assets of Edda, Ltd.                  $2,027,509   $1,956,012

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

     Loan   receivable   from  Beijing   Total
     Solutions  System,   Ltd.,   non-interest
     bearing,  due on demand,  convertible  by
     the  company  into 5% of the  outstanding
     common stock, unsecured                              70,000       70,000
                                                      ----------   ----------
     Total                                            $2,436,082   $2,465,771

     Summary of notes receivable:

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

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

                                      F-30



<PAGE>

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


NOTE 10  RELATED PARTY TRANSACTIONS

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

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

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

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

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

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

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

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



















                                      F-31



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

NOTE 11  PROPERTIES AND EOUIPMENT

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

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

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

NOTE 12  INTANGIBLES

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

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

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

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

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



                                      F-33


<PAGE>


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


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

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

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

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

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

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

NOTE 13  DISCONTINUED OPERATIONS

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







                                      F-34



<PAGE>


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



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

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

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

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

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














                                      F-35



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

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

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

NOTE 14   BANK LOANS

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

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

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

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

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

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

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


<PAGE>





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


NOTE 15   SHORT-TERM LOANS

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

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



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


NOTE 16  LOAN FROM STAFF

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

NOTE 17  NOTES PAYABLE

     Notes payable are summarized as follows:

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



                                      F-37



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

NOTE 18  PAYABLES TO RELATED PARTIES

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

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

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

NOTE 19  ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

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

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

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

NOTE 20   DUE TO SHAREHOLDERS

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


                                      F-38



<PAGE>






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


NOTE 21  COMMITMENTS AND CONTINGENCIES

     A) Employment Agreements

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

     On June 1, 2003,  the Company  renewed  his  employment  contract  with its
     Chairman and CEO,  Mr. David Chen to provide  salary,  shares  option,  and
     other fringe benefits  through May 31, 2004.  Minimum salary payments under
     the  contract  amounted to $150,000  per year.  Payments to the CEO will be
     made in equal monthly  installments  of $6,250 cash and $6,250 worth of the
     Company's  common  shares  at fair  market  value on the  first day of each
     month.  The average 20 days trading price of the Company prior to the first
     day of each  month  will be used to  calculate  this  compensation  amount.
     During  the year of 2003,  Mr.  Chen  received  112,133  shares  (valued at
     $11,750)  and $68,750 cash for his  compensation.  As of December 31, 2003,
     there is no long-term  employment agreement for Mr. Chen as of December 31,
     2003. As a result, Mr. Chen's employment contract will be expired on May 31
     2004.

     On  December 1, 2003,  the Company  recruited  Ms.  Carrie  Hartwick as its
     President & CFO. The contract  provides  salary,  shares option,  and other
     fringe benefits  through  November 30, 2004.  Minimum salary payments under
     the  contract  amounted to $100,000  per year.  Payments to the CFO will be
     made in equal monthly  installments  of $5,000 cash and $5,000 worth of the
     Company's common shares on the first day of each month. The average 20 days
     trading  price of the Company  prior to the first day of each month will be
     used to calculate this  compensation  amount.  During the year of 2003, Ms.
     Hartwick  received  $5,000  cash  for  her   compensation.   Ms  Hartwick's
     employment  will be  expired  in  November  of 2004.  One  year  employment
     contract  may  not  attract  and  retain  qualified  persons for the senior
     positions, thus can be a potential contingency to Hartcourt.






                                      F-39



<PAGE>




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

     B) Operating Leases

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

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

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

     (C) Consulting Agreement

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

     (D) Legal Proceedings

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

                                      F-41



<PAGE>



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


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

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

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

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

                                      F-42



<PAGE>


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

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

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

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

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

NOTE 22  SHAREHOLDERS' EQUITY

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

                                      F-43



<PAGE>

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


     (B) Original Preferred Stock

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

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

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

     (C) Class A Preferred Stock

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

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

     (E) Series B 9% Convertible Preferred Stock

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




                                      F-44



<PAGE>

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


     (F) Series C Redeemable Preferred Stock

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

     (G) Series D Convertible Preferred Stock

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

     (H) Series AB Convertible Preferred Stock

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

     (I) Common Stock Issued for Cash

     During 2003, the Company issued 31,298,535 shares of common stocks for cash
     of $809,168 for working capital.










                                      F-45


<PAGE>




                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2003 AND 2002


     During  2002,  the  Company  issued  7,417,520  shares of  common  stock to
     individuals for cash of $670,833.

     (J) Common Stock Issued for Services

     During 2003,  Hartcourt  issued  2,174,667 shares of common stock valued at
     $162,421 to various consultants for their professional and legal services.

     Of the total shares issued  589,460  shares of common stock for services to
     four  Directors  of the  Board,  and two Member of Audit  Committee  of the
     Company with a fair value of $64,750.  The Company issued  3,443,107 shares
     of common  stock to Hartcourt  CEO and CFO,  and a consultant  (who was the
     Chairman, founder of the Company) in lieu of compensation for services with
     a fair value of $359,816.

     During 2003,  Hartcourt  issued  1,857,900 shares of common stock valued at
     $262,145 to staff,  officers,  former  officers  and  directors  in lieu of
     compensation and services.

     During the year of 2002,  the  Company  issued  1,280,364  shares of common
     stock to Directors for services  rendered  having a fair value of $144,000.
     During the year of 2001,  the Company issued 295,206 shares of common stock
     to directors for services rendered having a fair value of $118,240.

     During  2002,  the  Company  issued  2,494,149  shares of  common  stock to
     officers for  services  rendered  having a fair value of  $390,400.  During
     2001,  the Company  issued  511,764  shares of common stock to officers for
     services rendered having a fair value of $221,600.

     During  2002,  the  Company  issued  3,440,334  shares of  common  stock to
     consultants for services  rendered having a fair value of $359,810.  During
     2001,  the Company issued  1,136,054  shares of common stock to consultants
     for services rendered having a fair value of $374,173.

     (K) Common Stock Issued for Warrants

     During the year of 2003, 714,794 common stocks were issued for warrant.










                                      F-46



<PAGE>



                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2003 AND 2002


     During the year of 2002, no common stock was issued for warrants.

     Swartz Private Equity,  LLC exercised its 800,000 warrants through cashless
     exercise and converted into 714,794 common stocks.

     (L) Common Stock Issued for Stock Options

     During 2003,  David Y. Chen,  exercised his 1 million stock options and the
     Board of  Directors  agreed to  extend  one more  year of his  remaining  1
     million  stock options  granted in June 2002,  which was expired on May 31,
     2003.

     During the year of 2002, no common stock was issued for stock options.

     (M) Common stocks issued for investment and acquisition

     During  2003,  the  Company  issued  50,349,243  shares of common  stock in
     connection with the acquisition of Huaqing, GuoWei, NewHuaSun and ZhongNan.

     (N) Cancellation of shares

     On December 30, 2003,  Hartcourt  cancelled 4,756,058 shares collected from
     Elephant Talk.

NOTE 23      INCOME TAXES


             Hartcourt,  a US company, is doing business mainly through its four
             foreign  subsidiaries  located in China for the year ended December
             31,  2003.  The Company is subject to both US taxes and China taxes
             for its overseas  operations.  As of December 31, 2003, the Company
             has not filed its US Federal  corporate  tax  returns  for the year
             ended on December 31, 2002 and 2003.  Management claims it does not
             have tax liabilities to the US government in 2002 and 2003, because
             Hartcourt has recurring losses in the past years.  Auditor takes an
             exception  to the  claim.  As noted in Note#  21,  Commitments  and
             Contingencies,  that auditors were not provided enough  information
             to verify the tax records of the Hartcourt  operations  both in the
             US and overseas.  The management agrees to take an exception on the
             tax  issues.  As a  result,  we  disclose  that we were  unable  to
             reconcile  the  tax  records  of  Hartcourt's  operations  and  the
             accompanying financial statements does not include any provision to
             this potential tax liabilities to different taxing authorities thus
             qualify these tax issues. (See the Independent Auditor Report).





                                      F-47



<PAGE>


                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2003 AND 2002


             The Company  should have deferred tax assets for the tax effects of
             temporary  differences  between  financial and tax reporting  years
             ended  December 31, 2003 and 2002.  The deferred tax assets  should
             consist  primarily  of net  operating  losses  and  impairments  of
             investments  and  goodwill.  The  Company  should  be  eligible  to
             establish  a 100%  valuation  allowance  against the  deferred  tax
             assets at December 31, 2003 and 2002,  because management is unable
             to determine if it is more likely than not that these net operating
             losses  and   impairments  of  investments  and  goodwill  will  be
             realized.

             Impairment of  investments  and goodwill may not deductible in 2003
             or 2002 for income tax purposes.  Losses on investments  for income
             tax purposes may be taken in the year the  respective  transactions
             are  completed.  Goodwill can be amortized  over fifteen  years for
             income  tax  purposes  or until the  Company  has  disposed  of its
             ownership in the entity in which the goodwill relates.  Due to lack
             of sufficient tax  information,  the following  analysis  cannot be
             performed to reconcile the tax differences.

                Current:                         2003                  2002
                                          ----------------   -------------------
                Federal                   $           N/A    $            N/A
                State                                 N/A                 N/A
                Deferred-Federal and State            N/A                 N/A
                Change in Valuation Allowance         N/A                 N/A
                Income tax expense (benefit)          N/A                 N/A
                                          ----------------   -------------------
                                          $           N/A   $             N/A
                                          ================   ===================



             The Company's tax expense  differs from the  "expected" tax expense
             for the years ended  December  31, 2003 and 2002,  is  estimated as
             follows:
                                                           2003        2002
                                                        ---------  -----------

             U.S. Federal income tax provision benefit  $    N/A   $ (196,138)
             Effect of net operating loss carry-forward      N/A      196,138
                                                        ---------  -----------
                                                        $    N/A   $        0
                                                        =========  ===========






                                      F-48



<PAGE>




                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2003 AND 2002


             Auditors  make a disclosure  on these  potential  tax  liabilities,
             possibly  due to both the US and  foreign  tax  authorities  in the
             accompanying  financial  statements.  (See  the  Independent  Audit
             Report) The tax effects of temporary  differences that gave rise to
             significant  portions of  deferred  tax assets and  liabilities  at
             December 31 are as follows:

                                                   2003                2002
                                             -----------------   ---------------
        Deferred tax assets:
        Net operating loss carry-forward     $           N/A     $  4,554,438
        Total gross deferred tax assets                  N/A        4,554,438
        Less valuation allowance                         N/A       (4,554,438)
                                             -----------------   ---------------
        Net deferred tax assets              $           N/A      $          0
                                             =================   ===============


             The Company may have the US Federal  and State net  operating  loss
             carry-forwards.  The regular  net  operating  loss  carry-forwards,
             which are approximately the same as the alternative minimum tax net
             operating  loss  carry-forwards,  if not  utilized,  will expire in
             varying  amounts from 2004 through 2024,  respectively  for Federal
             and State.  The  realization of any future income tax benefits from
             the utilization of net operating losses may be limited. Federal and
             state  tax  laws  provide  that  when a more  than  50%  change  in
             ownership of a company occurs within a three-year  period.  The net
             operating loss may be limited.  It has not been  determined if such
             change has occurred.

             The  valuation  allowance  at January 1, 2003 and the net change in
             the valuation allowance during the year ended December 31, 2003 has
             not been determined at this time.















                                      F-49



<PAGE>



                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2003 AND 2002

NOTE 24       STOCK OPTION PLAN AND WARRANTS

             (A)  Stock Option Plan

               In April 1995, the Company adopted a stock option plan (the Plan)
               to  attract  and  retain  qualified   persons  for  positions  of
               substantial responsibility as officers,  directors,  consultants,
               legal  counsel,  and  other  positions  of  significance  to  the
               Company,  The Plan  provides for the  issuance of both  Incentive
               Stock Options and Non-Qualified Stock Options. The Plan, which is
               administered by the Board of Directors, provides for the issuance
               of a maximum of  2,000,000  options to purchase  shares of common
               stock at the  market  price  thereof  on the date of grant.  Such
               options are generally  exercisable over a 10-year period from the
               date of grant.  Each option lapses 90 days after the optionee has
               terminated his continuous activity with the Company,  except that
               if his continuous  activity with the Company terminates by reason
               of his  death,  such  option  of  the  deceased  optionee  may be
               exercised  within  one year  after  the  death of such  optionee.
               Options  granted  under  the  Plan are  restricted  as to sale or
               transfer. All options were granted at not less than fair value at
               the date of grant and have terms of 10 years.

             The following table summarizes the activity in the plan:

                                                                       Weighted
                                                                        Average
                                                          Number of    Exercise
                                                            Shares       Price

Shares under option at December 31, 2001                    320,000       1.30
Granted                                                   5,000,000       0.27
                                                      ---------------  ---------
Shares under option at December 31, 2002                  5,320,000       0.33

Granted                                                   8,000,000       0.29
Exercised                                                 1,000,000       0
Expired                                                      20,000       0
Canceled                                                  1,000,000       0
                                                      ---------------  ---------
Shares under option at December 31, 2003                 11,300,000       0.34
                                                      ===============  =========








                                      F-50



<PAGE>


                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2003 AND 2002

             All stock options  issued to employees  have an exercise  price not
             less than the market  value of the  Company's  common  stock on the
             date of  grant,  and in  accordance  with the  accounting  for such
             options  utilizing the  intrinsic  value method there is no related
             compensation   expense   recorded   in  the   Company's   financial
             statements. Had compensation cost for stock-based compensation been
             determined based on the fair value at the grant dates in accordance
             with the method  delineated  in SFAB # 123, the  Company's net loss
             and loss per share for the year ended  December  31,  2003 and 2002
             would not have changed.

             During the year of 2003,  the  Executive of the Company,  exercised
             his 1 million stock options, and the Board of Directors resolved to
             extend his  remaining 1 million  stock  options  granted in June of
             2002, to May 31, 2004.

             Additional  information  relating to stock options  outstanding and
             exercisable at December 31, 2002 summarized by exercise price is as
             follows:

                          Options outstanding        Option Exercisable
--------------------------------------------------------------------------------
                               Weighted
                Number of       Average       Weighted     Number       Weighted
 Range of    Outstanding at   Remaining       Average  Exercisable at  Average
 Exercise     December 31,   Contractual     Exercise   December 31,   Exercise
   Price          2003            Life         Price        2003         Price

--------------------------------------------------------------------------------
$0.10 - 0.65     11,300,000     0.3 - 4.5 Year  $0.34     11,300,000      $0.34



              In connection with a fee agreement for introduction  services with
              two  individuals,  (collectively  referred  to as  "Introducers"),
              Hartcourt  agreed to grant the Introducers  options to purchase up
              to 2,500,000  shares of Hartcourt common stock at a price of $5.50
              per share. On May 4, 2000, the Introducers  exercised their option
              to acquire  2,500,000  shares of  Hartcourt  common  stock.  As of
              December  31,  2001,  Hartcourt  received  $2,275,000  towards the
              exercise  price of 500,000  options  into shares  exercised by the
              Introducers.  The remaining 2,000,000 options and the subscription
              receivable  balance of  $11,000,000  were cancelled in 2001 due to
              non-payment.







                                      F-51



<PAGE>

                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2003 AND 2002

             In connection with providing consulting services, on July 21, 2000,
             Hartcourt granted to a consultant options to purchase 20,000 shares
             of  Hartcourt  stock at a price of $5.75  per  share.  The  options
             expire on July 20, 2003.  The options were issued at the fair value
             on the date of issuance as required by SFAS #123.  The value of the
             options was not material.

             In connection  with providing  consulting  services,  on January 1,
             2002, Hartcourt granted to Alan Phan, options to purchase 3,000,000
             shares  of  Hartcourt  stock  at a price of $0.38  per  share.  The
             options  expired on December 31,  2004.  The options were issued at
             the fair value on the date of  issuance  as  required by SFAS #123.
             The value of the options was not material.

             To attract  qualified  persons  as  substantial  responsibility  of
             officers, on June 1, 2002, Hartcourt granted to Mr. D. Chen, Acting
             Chief Executive  Officer,  options to purchase  2,000,000 shares of
             Hartcourt stock at a price of $0.10 per share.  The options expired
             on May 31,  2003.  The options were issued at the fair market value
             on the date of issuance therefore, no expense was recorded.

             Employment  contract with Mr. D. Chen,  Acting  Chairman & CEO, was
             renewed and on June 1, 2003,  options to purchase  3,000,000 shares
             of Hartcourt  stock at a price of $0.48 per share was  granted.  On
             December 1, 2003,  Hartcourt  granted to Ms. Carrie Hartwick,  CFO,
             options to purchase  1,000,000 shares of Hartcourt stock at a price
             of $0.65 per  shares.  The  options  were issued at the fair market
             value on the date of issuance therefore, no expenses was recorded.

             (B) Warrants

             As of December 31, 2003, there were 800,000 outstanding warrants to
             purchase  33,023,769  shares of common  stock at $0.001  par value,
             ranging  from  $0.058 - $15.52  per  share.  During  2003,  800,000
             warrants were converted into 714,794 shares of common stock through
             cashless exercise.

             On October 23, 2002, the Company agreed to issue 12 installments of
             2,417,520  shares  each month to  Enlight  valued at  $850,000  for
             raising   working   capital.   The  Company  also  granted  Enlight
             29,010,239 warrants to purchase total of 29,010,239 common stock at
             $0.0586 per share.  However,  Enlight  agreed to not exercise these
             warrants  unless  there is a buy out of the Company  from any third
             party.

             In  connection  with  facilitating  an equity  line of  credit  for
             Hartcourt,  on January 26, 2000, the Company issued to a broker for
             brokerage  services  warrants to purchase  13,530  common shares at
             $15.52 per share that  expires on January 25,  2004.  The  warrants
             were issued at fair value at the fair value on the date of issuance
             as required by SFAS# 123. The warrants were not material.

                                      F-52



<PAGE>


                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2003 AND 2002

             In connection with  completion of a private  placement of Hartcourt
             shares  with PYR  Management  LLC,  on March 6, 2001,  the  Company
             issued  in total  4,000,000  of Class II  warrants  exercisable  at
             $0.69375 per share of common stock and expires on January 26, 2005.
             The  warrants  were  issued at fair  value at the fair value on the
             date of  issuance  as  required  by  SFAS#  123.  The  value of the
             warrants is a direct  offering  expense and  accordingly,  has been
             charged to equity in 2001.

             In  connection  with signing an  investment  agreement  with Swartz
             Private  Equity,  LLC, on January  26,  2000,  Hartcourt  issued to
             Swartz warrants to purchase 400,000 shares at $13,10 per share that
             expire on January 25, 2004.  The warrants were issued at fair value
             at the fair value on the date of  issuance as required by SFAS 123.
             The  value  of  the  warrants  is a  direct  offering  expense  and
             accordingly, charged to equity in 2000.

             During 2003, the  warrant-holders  converted to purchase  1,000,000
             shares of common stock at prices ranging from $0.0488 to $0.049 for
             a total consideration of $38,070.

             During 2000,  the  warrant-holders  converted  to purchase  407,000
             shares of common stock at prices  ranging from $2.50 to $2.80 for a
             total consideration of $101,870.

NOTE 25  SEGMENT AND BUSINESS RELATED INFORMATION

             The  Company has only one  reportable  segment  (computer  hardware
             trading) in the current year of 2003, as the other three segment of
             business are not material to the consolidated  financial statements
             of the  Company.  While in the  2002,  there  are  four  reportable
             segments. Please see the 2003 vs. 2002 comparative table below, for
             details.

             Each  segment is a  strategic  business  that the  Company  manages
             separately  because each business  develops and sells products to a
             specific market. The four reportable segments available in 2002 are
             Computer hardware,  trading and wholesaling of computer components,
             Financial Services, and wireless access systems. During the current
             year of 2003, the company  included a substantial  investments  and
             acquisitions.  The principal  market for the Company's  products is
             China. Foreign sales,  primarily in China amounted to approximately
             $111,397,742 in 2003. The Chinese operations with assets of approx,
             $34,079,543,  account for  majority of the  Company's  consolidated
             assets in 2003.  The  accounting  policies of the  segments are the
             same  as  described  in  the  summary  of  significant   accounting
             policies. The Company evaluates segment performance based on income
             from  prospective  operations.  As  a  result,  the  components  of
             operating  loss for one  segment may not be  comparable  to another
             segment. Segment results for 2003 and 2002 are as follows:

                                      F-53



<PAGE>

                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2003 AND 2002

                      Computer    Financial   Streaming
                      hardware     services     Media      Others      Total
                -------------------------------------------------------------
2003
Net sales          $110,540,456 $         0   $     0   $  857,286 $111,397,742
Loss from
operations            4,461,147           0         0      853,832    5,314,979
Depreciation
and amortization         78,290           0         0       12,778       91,068
Assets               30,229,864     801,865   112,379    3,127,236   34,271,344
Capital expenditures          0           0         0            0            0

              -----------------------------------------------------------------

2002
Net sales            $        0 $   929,567  $ 99,352   $  108,092 $  1,137,011
Loss from
operations                    0  (1,660,724) (414,692)    (474,586)  (2,550,002)
Depreciation
and amortization              0     338,424    21,606       11,749      371,779
Assets                        0   2,838,016   151,360    1,752,436    4,741,812
Capital expenditures          0           0         0            0            0

-------------------------------------------------------------------------------



NOTE 26       SUBSEQUENT EVENTS (un-audited)

                       o The  Company  acquired   additional  5.1%  interest  of
                         Newhuasun via memorandum of  understanding,  instead of
                         sales and purchases agreement.

                       o In February 2004, the Company acquired 5.5% interest of
                         Guowei via a sales agreement.

                       o In February 2004, the Board of Directors of the Company
                         resolved to accept the  resignation of a director,  Mr.
                         X.Y Li, and appoint Mr. Victor Wang to replace Mr. Li.

                       o In  February   2004,   Hartcourt  has  entered  into  a
                         conditional  sales and  purchase  agreement to obtained
                         51%  interest  of  Shanghai  Computer   ServiceNet  Co.
                         ("ServiceNet"),   Ltd.  The  purchase   price  for  51%
                         interest of  ServiceNet  is  US$2.5millions  payable in
                         3,576,751  restricted  common shares of  Hartcourt,  at
                         US$0.61 per share, and an investment of US$364,000 into
                         ServiceNet to strengthen its growth.




                                      F-54



<PAGE>

                 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2003 AND 2002

                       o During the year ended 2003, the Company  entered into a
                         conditional   agreement  for  acquiring  51%  ownership
                         interest of Beijing  Challenger  Group  ("Challenger").
                         The  purchase  price is  US$3.8  millions  payables  in
                         6,324,748  restrict  common shares of Hartcourt  with a
                         promise  to  invest  $610,000  into  one of  Challenger
                         subsidiaries. The significant influence is practiced in
                         the  year  of  2004,   therefore   Challenger  was  not
                         consolidated into the 2003 financial records.

                       o The Management of the Company has properly executed its
                         certification  to  Hartcourt  financial  statements  in
                         accordance with section 302 of The  Sarbanes-Oxley  Act
                         of 2002,  and believes that it has adopted the relevant
                         sections of The Sarbanes-Oxley Act of 2002.  Management
                         also  believes  that  Section  404 will be  complied by
                         Harcourt, when the section becomes applicable in 2005.

                       o To  standardize  and upgrade it operation  and internal
                         controls,  Hartcourt is  centralizing  its  accoutering
                         operations  and purchase an ERP software from E-Tone in
                         March,  2004. The software will be implemented  for all
                         Hartcourt subsidiaries. A team of finance and IT staffs
                         for  the  system  implementation  was  formed  and  the
                         implementation   was  underway  with  a  subsidiary  of
                         Challenger in March,  2004. The ERP system will use the
                         US format on chart of  accounts  and follow the US GAAP
                         in  compiling  the  financial  data.  This  system will
                         replace the  various  systems  currently  in use by the
                         subsidiaries that Hartcourt  inherited when it acquired
                         these  companies.  The new ERP system will  standardize
                         the accounting activities and controls across the board
                         and  speed  up  the  financial  reporting  process.  In
                         addition to the financial  transactions,  the purchase,
                         warehouse   operation,   sales   and   human   resource
                         activities are all to be recorded and managed under the
                         same ERP system.  It will take  approximately 18 months
                         to finish the implementation across all subsidiaries

                       o In March of 2004, the Company  started its procedure to
                         restructure   its   subsidiary,   Guowei   Science  and
                         Technology  Ltd.  It is  intended  to dispose  Guowei's
                         shares while maintaining the assets of this subsidiary.
                         Its  objective  is to form a new  company.  Guowei  was
                         acquired on a long term basis,  by  Hartcourt  in April
                         2003. The restructure is scheduled to complete in 2004.
                         Details will be disclosed when occurred in 2004.


                                      #####


                                      F-55