Ever-Glory International Group, Inc. - Quarter Report: 2008 September (Form 10-Q)

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U. S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

	þ		Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
			For the quarterly period ended September 30, 2008

	¨	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
		For the transition period from ___________ to ___________.

Commission File Number 0-28806

Ever-Glory International Group Inc.

(Exact name of issuer as specified in its charter)

Florida

(State or other jurisdiction of

incorporation or organization)

65-0420146

(I.R.S. employer

identification number)

100 N. Barranca Ave. #810

West Covina, California 91791

(Address of principal executive offices and zip code)

(626) 839-9116

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:	None
Securities registered pursuant to Section 12(g) of the Act:	Common Stock, par value $0.001 per share

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

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

	Large Accelerated Filer o	Accelerated Filer o
	Non-accelerated filer o	Smaller reporting company þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ

APPLICABLE ONLY TO CORPORATE ISSUERS:

As of September 30, 2008, the Registrant had 12,350,839 shares of common stock outstanding.

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EVER-GLORY INTERNATIONAL GROUP, INC.

FORM 10-Q

INDEX

		Page Number

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS		3

PART I. FINANCIAL INFORMATION		4

Item 1.	Financial Statements	4

	Consolidated Balance Sheet as of September 30, 2008 (unaudited) and December 31, 2007	4

	Consolidated Statement of Operations and Comprehensive Income for the Three and Nine Months Ended September 30, 2008 and 2007 (unaudited)	5

	Consolidated Statement of Cash Flows for the Nine Months Ended September 30, 2008 and 2007 (unaudited)	6

	Notes to the Consolidated Financial Statements (unaudited)	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	46

Item 4.	Controls and Procedures	47

PART II. OTHER INFORMATION		48

Item 1.	Legal Proceedings	48

Item 1A.	Risk Factors	48

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	57

Item 3.	Defaults Upon Senior Securities	57

Item 4.	Submission of Matters to a Vote of Security Holders	57

Item 5.	Other Information	57

Item 6.	Exhibits	58

SIGNATURES		59

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This document contains certain statements of a forward-looking nature. Such forward-looking statements, including but not limited to projected growth, trends and strategies, future operating and financial results, financial expectations and current business indicators are based upon current information and expectations and are subject to change based on factors beyond the control of the Company. Forward-looking statements typically are identified by the use of terms such as “look,” “may,” “will,” “should,” “might,” “believe,” “plan,” “expect,” “anticipate,” “estimate” and similar words, although some forward-looking statements are expressed differently. The accuracy of such statements may be impacted by a number of business risks and uncertainties that could cause actual results to differ materially from those projected or anticipated, including but not limited to the following, which are discussed in further detail on page 48 of this report:

	·	the ability to timely and accurately complete product orders;
	·	the ability to coordinate product design with its customers;
	·	its dependence on a limited number of larger customers;
	·	political and economic factors in the Peoples’ Republic of China;
	·	the ability of the Company’s internal production operations to increase production volumes on finished goods in a timely fashion in response to increasing demand, and to enable the Company to achieve timely delivery of finished goods to its customers;
	·	the Company’s ability to expand and grow its distribution channels;
	·	unanticipated changes in general market conditions or other factors, which may result in cancellations of advance orders or a reduction in the rate of reorders;
	·	a weakening of economic conditions which would reduce demand for products sold by the Company and could adversely affect profitability;
	·	the effect of terrorist acts, or the threat thereof, on consumer confidence and spending, or the production and distribution of product and raw materials which could, as a result, adversely affect the Company’s operations and financial performance;
	·	the acceptance in the marketplace of the Company’s new products and changes in consumer preferences;
	·	reductions in sales of products, either as the result of economic or other conditions, or reduced consumer acceptance of a product, which could result in an unplanned buildup of inventory;
	·	the ability to source raw materials and finished products at favorable prices to the Company;
	·	the potential impact of power shortages on the Company’s operations including temporary blackouts at the Company’s facilities;
	·	foreign currency exchange rate fluctuations;
	·	earthquakes or other natural disasters;
	·	the Company’s ability to identify and successfully execute cost control initiatives (including management of the cost of labor);
	·	the impact of quotas, tariffs, or safeguards on the importation or exportation of the Company’s products; or
	·	other risks outlined above and in the Company’s other filings made periodically by the Company.

Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to update this forward-looking information. Nonetheless, the Company reserves the right to make such updates from time to time by press release, periodic report or other method of public disclosure without the need for specific reference to this Report. No such update shall be deemed to indicate that other statements not addressed by such update remain correct or create an obligation to provide any other updates.

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PART I. FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS.

EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

AS OF SEPTEMBER 30, 2008 AND DECEMBER 31, 2007

	September 30, 2008		December 31, 2007
	(Unaudited)
ASSETS

CURRENT ASSETS
Cash and cash equivalents	$	882,548	$	641,739
Accounts receivable		17,296,013		13,035,299
Accounts receivable - related parties		—		158,235
Inventories		2,633,859		1,897,023
Other receivable		621,866		150,855
Other receivable - related parties		38,596		—
Advances on inventory purchase		339,794		—
Advances on inventory purchase - related parties		6,882,463		2,568,040
Refundable deposit and prepaid expenses		182,008		—
Total Current Assets		28,877,147		18,451,191

DEFERRED FINANCING COSTS		3,881		191,995
LAND USE RIGHT, NET		2,863,124		2,729,183
PROPERTY AND EQUIPMENT, NET		13,055,017		12,140,903
INVESTMENT IN SUBSIDIARY		1,463,000		—
TOTAL ASSETS	$	46,262,169	$	33,513,272

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
Accounts payable	$	5,910,711	$	1,796,655
Accounts payable - related parties		155,917		245,589
Other payables - related party		903,715		650,000
Other payables and accrued liabilities		1,582,121		1,069,682
Trade notes payable		419,967		—
Value added tax payable		589,078		378,898
Income tax payable and other taxes payable		429,856		146,226
Bank loans		5,793,480		4,798,500
Convertible notes payable, net of unamortized discount of $40,469 and $1,974,497 at September 30, 2008 and December 31, 2007, respectively		9,531		25,503
Total Current Liabilities		15,794,376		9,111,053

LONG-TERM LOAN FROM PARTY RELATED BY COMMON CONTROL		2,630,821		4,474,985

Total Liabilities		18,425,197		13,586,038

COMMITMENTS AND CONTINGENCIES		—		—
MINORITY INTEREST		551,623		—

STOCKHOLDERS' EQUITY
Preferred stock ($.001 par value, authorized 5,000,000 shares, 10,000 shares designated as "Series A Preferred Stock")		—		—
Series A Convertible Preferred Stock (no shares issued and outstanding as of September 30, 2008 and December 31, 2007		—		—
Common stock ($.001 par value, authorized 50,000,000 shares, 12,350,839 and 11,379,309 shares issued and outstanding as of September 30, 2008 and December 31, 2007, respectively)		12,351		11,379
Additional paid-in capital		4,499,027		2,154,368
Retained earnings		15,441,526		12,247,748
Statutory reserve		3,437,379		3,437,379
Accumulated other comprehensive income		3,895,066		2,076,360
Total Stockholders' Equity		27,285,349		19,927,234

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	46,262,169	$	33,513,272

The accompanying notes are an integral part of these statements.

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EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

(UNAUDITED)

	Three months ended						Nine months ended
	September 30,						September 30,
	2008			2007			2008			2007

NET SALES
Related parties	$	17,582		$	486,318		$	510,145		$	940,334
Third parties		31,867,994			18,991,475			75,191,036			49,060,893
Total net sales		31,885,576			19,477,793			75,701,181			50,001,227

COST OF SALES
Related parties		10,989			456,689			472,373			878,673
Third parties		27,284,216			15,948,006			62,563,564			41,418,315
Total cost of sales		27,295,205			16,404,695			63,035,937			42,296,988

GROSS PROFIT		4,590,371			3,073,098			12,665,244			7,704,239

OPERATING EXPENSES
Selling expenses		563,971			167,976			1,210,063			493,686
General and administrative expenses		1,626,375			852,424			4,625,257			2,558,587
Total operating expenses		2,190,346			1,020,400			5,835,320			3,052,273

INCOME FROM OPERATIONS		2,400,025			2,052,698			6,829,924			4,651,966

OTHER INCOME (EXPENSES)
Interest expense		(1,468,592	)		(680,644	)		(2,677,546	)		(942,534	)
Other income (expense)		(15,715	)		21,891			(118,167	)		31,555
Total other income (expenses)		(1,484,307	)		(658,753	)		(2,795,713	)		(910,979	)

INCOME BEFORE INCOME TAXES AND MINORITY INTEREST		915,718			1,393,945			4,034,211			3,740,987

INCOME TAX EXPENSE		(273,203	)		(72,880	)		(841,850	)		(155,203	)

INCOME BEFORE MINORITY INTEREST		642,515			1,321,065			3,192,361			3,585,784

LESS MINORITY INTEREST		(4,666	)		—			(1,417	)		—

NET INCOME		647,181			1,321,065			3,193,778			3,585,784

OTHER COMPREHENSIVE INCOME
Foreign currency translation gain		107,469			269,424			1,818,706			720,130

COMPREHENSIVE INCOME	$	754,650		$	1,590,489		$	5,012,484		$	4,305,914

EARNINGS PER SHARE
Net income per share
Basic	$	0.05		$	0.25		$	0.27		$	0.67
Diluted	$	0.05		$	0.16		$	0.27		$	0.36

Weighted average shares outstanding during the period
Basic		11,914,825			5,388,201			11,692,604			5,388,201
Diluted		12,002,908			11,962,285			11,715,332			11,575,752

The accompanying notes are an integral part of these statements.

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EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

(UNAUDITED)

	Nine months ended September 30,
	2008			2007
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	3,193,778		$	3,585,784
Adjustments to reconcile net income to cash provided by operating activities:
Minority interest		(1,417	)		—
Depreciation		666,233			629,793
Amortization		48,213			38,926
Beneficial conversion feature		—			454,545
Amortization of discount on convertible notes		1,934,028			113,754
Amortization of deferred financing costs		318,196			20,210
Common stock issued for interest		2,155			—
Stock Compensation		12,855			—
Changes in operating assets and liabilities
Accounts receivable		(3,306,125	)		89,336
Accounts receivable - related parties		153,420			1,476,411
Inventories		(597,330	)		82,364
Other receivable and prepaid expenses		(631,466	)		(75,327	)
Other receivable - related parties		(37,823	)		—
Advance on inventory purchase		(332,988	)		—
Advance on inventory purchase - related party		(4,059,141	)		—
Accounts payable		3,913,514			305,706
Accounts payable - related companies		(104,027	)		(1,522,087	)
Trade notes payable		411,556			—
Other payables and accrued liabilities		435,963			(1,638,729	)
Value added tax payables		181,054			(19,821	)
Income tax and other tax payables		268,334			52,964
Net cash provided by operating activities		2,468,982			3,593,829

CASH FLOWS FROM INVESTING ACTIVITIES
Investment in New Tailun		—			(2,000,000	)
Investment in La Chapelle		(1,397,700	)		—
Purchase of property and equipment		(800,669	)		(527,254	)
Proceeds from sale of equipment		37,019			714,213
Net cash used in investing activities		(2,161,350	)		(1,813,041	)

CASH FLOWS FROM FINANCING ACTIVITIES
Proceed from sales of convertible notes, net		—			1,757,480
Advances from related parties		453,715			980,544
Repayment to related parties		(200,000	)		(740,984	)
Contribution from minority shareholders		553,040			—
Proceeds from bank loan		11,354,904			5,211,183
Repayment of bank loan		(10,695,402	)		(7,165,377	)
Repayment of long term loan - related party under common control		(1,844,164	)		—
Exercise of warrants		219,635			—
Net cash (used in) provided by financing activities		(158,272	)		42,846

EFFECT OF EXCHANGE RATE ON CASH		91,449			(570,896	)

NET INCREASE IN CASH AND CASH EQUIVALENTS		240,809			1,252,738

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		641,739			897,093

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	882,548		$	2,149,831

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest expense	$	295,562		$	198,890
Income taxes	$	573,557		$	102,955

The accompanying notes are an integral part of these statements.

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EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2008 (UNAUDITED)

NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION

Ever-Glory International Group, Inc. (“Ever-Glory”) was incorporated in Florida on October 19, 1994. All of its businesses are operated through its subsidiaries in the People’s Republic of China (“PRC”).

Perfect Dream Limited (“Perfect Dream”), a wholly owned subsidiary of Ever-Glory, was incorporated in the British Virgin Islands on July 1, 2004.

Goldenway Nanjing Garments Co. Ltd. (“Goldenway”), a wholly owned subsidiary of Perfect Dream, was incorporated in the PRC on December 31, 1993. Goldenway is principally engaged in the manufacturing and sale of garments.

Nanjing New-Tailun Garments Co. Ltd. (“New-Tailun’), a wholly owned subsidiary of Perfect Dream, was incorporated in the PRC on March 27, 2006. New-Tailun is principally engaged in the manufacturing and sale of garments.

Nanjing Catch-Luck Garments Co, Ltd. (“Catch-Luck”), a wholly owned subsidiary of Perfect Dream, was incorporated in the PRC on December 21, 1995. On January 18, 2006, Catch-Luck became a wholly owned foreign enterprise after its acquisition by Perfect Dream. Catch-Luck is principally engaged in the manufacture and sale of garments to customers located in Europe and Japan.

Shanghai LA GO GO Fashion Company Limited (“LA GO GO”), a joint venture of Goldenway and Shanghai La Chapelle Garment and Accessories Company Limited (“La Chapelle”), was incorporated in the PRC on January 24, 2008. Goldenway invested approximately $826,200 (RMB 6.0 million) in cash, and La Chapelle invested approximately $553,040 (RMB 4.0 million) in cash, for a 60% and 40% ownership interest, respectively, in the joint venture. The business objective of the joint venture is to establish and create a leading brand of ladies’ garments for the mainland Chinese market. As of September 30, 2008, LA GO GO opened 55 retail stores in China to sell its own brand clothing.

Ever-Glory, Perfect Dream, Goldenway, New-Tailun, Catch-Luck, and LA GO GO are hereinafter referred to as (the ”Company”).

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements include our parent company and all subsidiaries are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). All significant transactions among our businesses have been eliminated.

Use of Estimates and Assumptions

In preparing the consolidated financial statements in conformity with GAAP, we use certain estimates and assumptions that affect the reported amount and disclosure. For example, the Company estimates its potential losses on uncollectible receivables. Management believes that the estimates utilized in preparing its financial statements are reasonable and prudent. Actual results could differ from these estimates.

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EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2008 (UNAUDITED)

Management has included all normal recurring adjustments considered necessary to give a fair presentation of operating results for the periods presented. Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with information included in the 2007 annual report filed on Form 10-K.

Cash and Cash Equivalents

For purpose of the statements of cash flows, cash and cash equivalents include cash on hand and demand deposits with a bank with original maturities within three months.

Accounts Receivable

The Company extends unsecured credits to its customers in the ordinary course of business but mitigates the associated risks by performing credit checks and actively pursuing past due accounts. An allowance for doubtful accounts is established and recorded based on managements’ assessment of the credit history with the customer and current business relationships with them. The Company writes off accounts receivable when amounts are deemed uncollectible and will remove the receivable and the related reserve at that time.

As of September 30, 2008 and December 31, 2007, the Company considers all its accounts receivable to be collectable and no provision for doubtful accounts has been made in the consolidated financial statements.

Inventories

Manufactured inventories are stated at lower of cost or market value, cost being determined on a specific identification method. The Company manufactures products upon receipt of orders from its customers. All the products must pass the customers’ quality assurance procedures before its delivery. Therefore, the products are rarely returned by our customers after delivery.

Retail merchandise inventories are stated at the lower of average cost or market The Company has a limited history of retail operations, but to date, returns have been insignificant. The Company will continue to evaluate the need for a returns reserve each reporting period.

Long-Lived Assets

The Company accounts for long-lived assets under the Statements of Financial Accounting Standards (“SFAS”) No. 142 “Accounting for Goodwill and Other Intangible Assets” and SFAS No. 144 “Accounting for Impairment or Disposal of Long-Lived Assets”. In accordance with SFAS No. 142 and SFAS No.144, long-lived assets, goodwill and certain identifiable intangible assets held and used by the Company are reviewed for impairment at least annually or more often whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. For purposes of evaluating the recoverability of long-lived assets, when undiscounted future cash flows will not be sufficient to recover an asset’s carrying amount, the asset is written down to its fair value. As of September 30, 2008, the Company expected these assets to be fully recoverable.

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EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2008 (UNAUDITED)

Property and Equipment

Property and equipment are stated at cost, less accumulated depreciation. Expenditures for additions, major renewals and betterments are capitalized and expenditures for maintenance and repairs are charged to expense as incurred.

Depreciation is provided on a straight-line basis, less an estimated residual value over the assets’ estimated useful lives. The estimated useful lives are as follows:

Property and plant	15-20 Years
Leasehold improvements	10 Years
Machinery & Equipment	10 Years
Office equipment and furniture	5 Years
Motor vehicles	5 Years

Intangible Assets

All land in the PRC is owned by the government and cannot be sold to any individual or company. However, the government may grant “land use rights” to occupy, develop and use land. The Company records the land use rights obtained as intangible assets.

Investment in Subsidiary

Investment in equity ownership lower than 20% is recorded using the cost method. The carrying value of the investments is reviewed periodically for impairment. As of September 30, 2008, the Company expected the long-term investment to be fully recoverable.

Fair Value of Financial Instruments

On January 1, 2008, the Company adopted SFAS No. 157. SFAS No. 157, Fair Value Measurements, defines fair value, establishes a three-level valuation hierarchy for disclosures of fair value measurement and enhances disclosures requirements for fair value measures. The carrying amounts reported in the balance sheets for current assets and current liabilities qualify as financial instruments are a reasonable estimate of fair value because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest. The three levels are defined as follow:

Level 1 - inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2 - inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments.

Level 3 - inputs to the valuation methodology are unobservable and significant to the fair value.

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EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2008 (UNAUDITED)

The carrying value of cash and cash equivalents, accounts receivable (trade and others), accounts payable (trade and related party) and accrued liabilities approximate their fair value because of the short-term nature of these instruments. The Company places its cash and cash equivalents with what it believes to be high credit quality financial institutions. The Company has a diversified customer base, most of which are in Europe, Japan, the United States (U.S.) and the PRC. The Company controls credit risk related to accounts receivable through credit approvals, credit limit and monitoring procedures. The Company routinely assesses the financial strength of its customers and, based upon factors surrounding the credit risk, establishes an allowance, if required, for uncollectible accounts and, as a consequence, believes that its accounts receivable credit risk exposure beyond such allowance is limited.

The Company analyzes all financial instruments with features of both liabilities and equity under SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity,” SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” and EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock.” During 2007, the Company issued 6% secured convertible debentures in a face amount of $2,000,000 which are due and payable in full in 2 years from their issuance. As fixed prices are set for the conversion prices of such convertible debentures and the attached warrants, the Company is in a position to be sure it had adequate authorized shares for the future conversion of convertible debentures and warrants. Therefore, no embedded derivatives or warrants were required to be recorded at fair value and marked-to-market at each reporting period.

Beneficial Conversion Feature of Convertible Notes

The Company accounted for the secured convertible notes issued pursuant to the subscription agreement discussed in Note 9 under EITF 00-27, ‘‘Application of Issue 98-5 to Certain Convertible Instruments’’. Based on EITF 00-27, the Company has determined that the convertible notes contained a beneficial conversion feature because at August 2, 2007, the effective conversion price of the convertible notes was $1.10 when the market value per share was $2.70.

A discount was recorded on the secured convertible notes. The amount of the discount was calculated to be the intrinsic value of the beneficial conversion feature and the fair value of the warrants issued pursuant to the terms of the subscription agreement discussed in Note 11.

Revenue and Cost Recognition

The Company recognizes revenue, net of value added taxes, upon delivery for local sales and upon shipment of the products for export sales, at which time title passes to the customer provided that there are no uncertainties regarding customer acceptance, persuasive evidence of an arrangement exists, the sales price is fixed and determinable; and collectability is deemed probable.

Local transportation and unloading charges and product inspection charges are included in selling expenses and totaled $15,973 and $42,650 for the three month period ended September 30, 2008 and 2007, respectively, and $82,267 and $158,940 for the nine month period September 30, 2008 and 2007, respectively.

Cost of goods sold includes the direct raw material cost, direct labor cost, manufacturing overheads including depreciation of production equipment and rent consistent with the revenue earned.

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EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2008 (UNAUDITED)

Income Taxes

The Company accounts for income taxes under the SFAS No. 109, “Accounting for Income Taxes”. Under SFAS No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that included the enactment date.

The Company adopted FASB Interpretation 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”) as of January 1, 2007. A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The adoption had no effect on the Company’s consolidated financial statements.

The charge for taxation is based on the results for the year as adjusted for items, which are non-assessable or disallowed. It is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. Deferred tax is accounted for using the balance sheet liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax basis used in the computation of assessable tax profit. In principle, deferred tax liabilities are recognized for all taxable temporary differences, and deferred tax assets are recognized to the extent that it is probably that taxable profit will be available against which deductible temporary differences can be utilized.

Deferred tax is calculated at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled. Deferred tax is charged or credited in the income statement, except when it related to items credited or charged directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the Company intends to settle its current tax assets and liabilities on a net basis.

China Income Tax

The Company’s subsidiaries are governed by the Income Tax Law of the PRC concerning Foreign Investment Enterprises and Foreign Enterprises and various local income tax laws (the Income Tax Laws).

Beginning January 1, 2008, the new Enterprise Income Tax (“EIT”) law has replaced the old laws for Domestic Enterprises (“DES”) and Foreign Invested Enterprises (“FIEs”).

The key changes are:

The new standard EIT rate of 25% replaces the 33% rate applicable to both DES and FIEs, except for High Tech companies that pay a reduced rate of 15%;

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EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2008 (UNAUDITED)

Companies established before March 16, 2007 continue to enjoy tax holiday treatment approved by local government for a grace period of either for the next 5 years or until the tax holiday term is completed, whichever is sooner.

The Company and its subsidiaries were established before March 16, 2007 and therefore are qualified to continue enjoying the reduced tax rate as described above.

Upon approval by the PRC tax authorities, FIEs' scheduled to operate for a period of 10 years or more and engaged in manufacturing and production may by exempt from income taxes for two years, commencing with their first profitable year of operations, after taking into account any losses brought forward from prior years, and thereafter with a 50% reduction for the subsequent three years.

Goldenway has profit for more than five years, so from this year its income tax rate is 25%.

New-Tailun and Catch-Luck were approved as wholly foreign-owned enterprises in 2006. This entity status allows New-Tailun and Catch-Luck a two-year income tax exemption beginning from the first year of profitability, and a 50% income tax reduction for the three years thereafter. New Tailun and Catch-Luck are entitled to the income tax exemptions for 2006 and 2007 and 50% income tax reduction that is 12.50% for the calendar years ended December 31, 2008, 2009 and 2010.

LA GO GO was established on January 24, 2008, its income tax rate is 25%.

Other Comprehensive Income

The reporting currency of the Company is the U.S. dollar. The functional currency of Ever-Glory and Perfect Dream is the US dollar. The functional currency of Goldenway, New-Tailun Catch-Luck and LA GO GO is the Chinese RMB.

For the subsidiaries with the functional currency of RMB, all assets and liabilities accounts were translated at the exchange rate on the balance sheet date; stockholder's equity are translated at the historical rates and items in the statement of operations items are translated at the average rate for the period. Translation adjustments resulting from this process are included in accumulated other comprehensive income in the statement of stockholders’ equity. The resulting translation gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred. Items in the cash flow statement are translated at the average exchange rate for the period.

Translation adjustments resulting from this process included in accumulated other comprehensive income in the consolidated statement of stockholders’ equity amounted to $3,895,066 and $2,076,360 as of September 30, 2008 and December 31, 2007, respectively. Assets and liabilities at September 30, 2008 and December 31, 2007 were translated at 6.84 RMB and 7.29 RMB to $1.00, respectively. The average translation rates applied to income statement accounts and statement of cash flows for the three months ended September 30, 2008 and 2007 were 6.83 RMB and 7.57 RMB to $1.00, respectively, and for the nine months ended September 30, 2008 and 2007 were 6.97 RMB and 7.68 RMB to $1.00, respectively. 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.

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EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2008 (UNAUDITED)

Earnings Per Share

The Company reports earnings per share in accordance with the provisions of SFAS No. 128, "Earnings Per Share" (SFAS 128). SFAS 128 requires presentation of basic and diluted earnings per share in conjunction with the disclosure of the methodology used in computing such earnings per share. Basic earnings per share excludes dilution and is computed by dividing income available to common stockholders by the weighted average common shares outstanding during the period. Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock. Further, according to SFAS 128, if the number of common shares outstanding increase as a result of a stock dividend or stock split or decrease as a result of a reverse stock split, the computations of a basic and diluted EPS shall be adjusted retroactively for all periods presented to reflect that change in capital structure.

Minority Interest

Minority interest consists of Shanghai La Chapelle Garment and Accessories Company Limited’s (“La Chapelle”) 40% interest in LA GO GO. As of September 30, 2008 and December 31, 2007, minority interest amounted to $551,623 and $0, respectively.

Recent Accounting Pronouncements

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS 159) which permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The SFAS 159 became effective for us on January 1, 2008. The Company chose not to elect the option to measure the fair value of eligible financial assets and liabilities.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements - an amendment of Accounting Research Bulletin No. 51” (“SFAS 160”), which establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest and the valuation of retained non-controlling equity investments when a subsidiary is deconsolidated. The Statement also establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the non-controlling owners. SFAS 160 is effective for fiscal years beginning after December 15, 2008. The Company has not determined the effect that the application of SFAS 160 will have on its consolidated financial statements.

In December 2007, the FASB issued SFAS 141R, “Business Combinations,” which applies to all transactions or other events in which an entity obtains control of one or more businesses, including those sometimes referred to as “true mergers” or “mergers of equals” and combinations achieved without the transfer of consideration. This statement replaces FASB Statement No. 141 and applies to all business entities, including mutual entities that previously used the pooling-of-interests method of accounting for some business combinations. The Company believes that adoption of the SFAS 141R will have a material effect on future acquisitions.

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EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2008 (UNAUDITED)

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” This Statement identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP in the United States (the GAAP hierarchy). This Statement will not have any impact on the Company’s consolidated financial statements.

In May 2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee Insurance Contracts, an interpretation of FASB Statement No. 60.” The scope of this Statement is limited to financial guarantee insurance (and reinsurance) contracts, as described in this Statement, issued by enterprises included within the scope of Statement 60. Accordingly, this Statement does not apply to financial guarantee contracts issued by enterprises excluded from the scope of Statement 60 or to some insurance contracts that seem similar to financial guarantee insurance contracts issued by insurance enterprises (such as mortgage guaranty insurance or credit insurance on trade receivables). This Statement also does not apply to financial guarantee insurance contracts that are derivative instruments included within the scope of FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities.” This Statement will not have any impact on the Company’s consolidated financial statements.

In June 2008, the FASB issued Emerging Issues Task Force Issue 07-5 “Determining whether an Instrument (or Embedded Feature) is indexed to an Entity’s Own Stock” (“EITF No. 07-5”). This Issue is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early application is not permitted. Paragraph 11(a) of Statement of Financial Accounting Standard No 133 “Accounting for Derivatives and Hedging Activities” (“SFAS 133”) specifies that a contract that would otherwise meet the definition of a derivative but is both (a) indexed to the Company’s own stock and (b) classified in stockholders’ equity in the statement of financial position would not be considered a derivative financial instrument. EITF No.07-5 provides a new two-step model to be applied in determining whether a financial instrument or an embedded feature is indexed to an issuer’s own stock and thus able to qualify for the SFAS 133 paragraph 11(a) scope exception. This standard triggers liability accounting on all options and warrants exercisable at strike prices denominated in any currency other than the functional currency of the operating entity in China (Renminbi). The Company is currently evaluating the impact of adoption of EITF No. 07-5 on the Company’s consolidated financial statements.

In June 2008, FASB issued EITF Issue No. 08-4, “Transition Guidance for Conforming Changes to Issue No. 98-5 (“EITF No. 08-4”)”. The objective of EITF No.08-4 is to provide transition guidance for conforming changes made to EITF No. 98-5, “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios”, that result from EITF No. 00-27 “Application of Issue No. 98-5 to Certain Convertible Instruments”, and SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. This Issue is effective for financial statements issued for fiscal years ending after December 15, 2008. Early application is permitted. Management is currently evaluating the impact of adoption of EITF No. 08-4 on the accounting for the convertible notes and related warrants transactions.

On October 10, 2008, the FASB issued FASB Staff Position (FSP) No.157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active,” which clarifies the application of SFAS 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. FSP 157-3 became effective October 10, 2008, and its adoption did not have a material impact on the Company’s financial position or results for the quarter ended September 30, 2008.

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EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2008 (UNAUDITED)

Reclassifications

Certain prior period amounts have been reclassified to conform to current period presentation. These reclassifications did not have a material effect on the accompanying financial statements.

Note 3 – SUPPLEMENTAL DISCLOSURE OF CASH FLOW

The Company prepares its statements of cash flows using the indirect method as defined under the SFAS 95. The following information relates to non-cash investing and financing activities for the nine months ended September 2008 and 2007.

During the nine months ended September 30, 2008, investors of the convertible notes (See Note 11 for details) converted $1,950,000 of principal plus accrued interest of $2,155 into 887,348 shares of common stock of the Company. The Company issued warrants valued at $130,082 to the private placement agent in January 2008 in conjunction with the convertible notes.

NOTE 4 - ACCOUNTS RECEIVABLE

Accounts receivable at September 30, 2008 and December 31, 2007 consisted of the following:

	2008		2007
	(unaudited)
Accounts receivable	$	17,296,013	$	13,035,299
Less: allowance for doubtful accounts		—		—
Accounts receivable	$	17,296,013	$	13,035,299

As of September 30, 2008 and December 31, 2007, the Company considered all accounts receivable collectable and did not record a provision for doubtful accounts.

NOTE 5 - INVENTORIES

Inventories at September, 30 2008 and December 31, 2007 consisted of the following:

	2008		2007
	(unaudited)
Raw materials	$	192,173	$	304,178
Work-in-progress		311,824		338,599
Finished goods		2,129,862		1,254,246
Inventories	$	2,633,859	$	1,897,023

NOTE 6 –INVESTMENT IN SUBSIDIARY

On January 9, 2008, Goldenway entered into a Capital Contribution Agreement (“Capital Contribution Agreement”) with La Chapelle, a Shanghai-based garment maker, and several shareholders of La Chapelle. Under the terms of the Capital Contribution Agreement, Goldenway agreed to invest approximately $1.46 million in cash (10 million RMB) for a 10% ownership interest in La Chapelle. This investment is accounted for using the cost method.

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EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2008 (UNAUDITED)

NOTE 7 - LAND USE RIGHTS

On September 24, 2006, the Company obtained a fifty-year land use right on 112,442 square meters of land in the Nanjing Jiangning Economic and Technological Development Zone.

Land use rights at September 30, 2008 and December 31, 2007 consisted of the following:

	2008			2007
	(Unaudited)
Land use rights	$	3,060,445		$	2,867,991
Less: accumulated amortization		(197,321	)		(138,808	)
Land use rights, net	$	2,863,124		$	2,729,183

Amortization expense was $16,414 and $11,669 for the three months ended September 30, 2008 and 2007 respectively, and $48,213 and $38,926 for the nine months ended September 30, 2008 and 2007, respectively.

NOTE 8 - PROPERTY AND EQUIPMENT

The following is a summary of property and equipment at September 30, 2008 and December 31, 2007:

	2008		2007
	(Unaudited)
Property and plant	$	11,824,887	$	11,354,623
Equipment and machinery		4,065,134		3,128,928
Office equipment and furniture		275,092		208,327
Motor vehicles		208,728		165,393
Leasehold improvement		362,107		—
Construction in progress		18,386		3,519
		16,754,334		14,860,790
Less: accumulated depreciation		3,699,317		2,719,887
Property and equipment, net	$	13,055,017	$	12,140,903

Depreciation expense was $212,033 and $219,858 for the three months ended September 30, 2008 and 2007 respectively and $666,233 and $629,793 for the nine months ended September 30, 2008 and 2007 respectively. For the three and nine months ended September 30, 2008 and 2007, no interest was capitalized.

NOTE 9 - OTHER PAYABLES AND ACCRUED LIABILITIES

Other payables and accrued liabilities at September 30, 2008 and December 31, 2007 consisted of the following:

	2008		2007
	(Unaudited)
Building construction costs payable	$	672,244	$	390,207
Accrued professional fees		291,277		252,495
Accrued wages and welfare		468,296		337,995
Other payables		150,304		88,985
Other payables and accrued liabilities	$	1,582,121	$	1,069,682

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EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2008 (UNAUDITED)

NOTE 10 - BANK LOANS

Bank loans represent amounts due to various banks and are due on demand or normally within one year. These loans generally can be renewed with the banks. As of September 30, 2008 and December 31, 2007, Short term bank loans consisted of the following:

	2008		2007
	(Unaudited)
Bank loan, interest rate at 0.5442% per month
due February 9, 2008; paid in full, January 2008.	$	—	$	1,371,000
Bank loan, interest rate at 0.58482% per month
due May 11, 2008		—		685,500
Bank loan, interest rate at 0.58482% per month
due June 2, 2008		—		1,371,000
Bank loan, interest rate at 0.58482% per month
due June 12, 2008		—		1,371,000
Bank loan, interest rate at 0.60225% per month
due Feb 18, 2009		5,793,480		—
Total bank loans	$	5,793,480	$	4,798,500

These bank loans are with Nanjing Bank, and are all collateralized by land use rights and buildings of the Company.

Total interest expense on the bank loans was $76,481 and $49,761 for the three months ended September 30, 2008 and 2007, respectively, and $220,827 and $177,822 for the nine months ended September 30, 2008 and 2007, respectively.

NOTE 11 - CONVERTIBLE NOTES PAYABLE

On August 2, 2007, the Company consummated a private placement of $2,000,000 principal amount of 6% secured convertible notes with five-year common stock warrants to six accredited investors. Financing cost of $242,520 was paid out of the gross proceeds. Pursuant to APB 21, financing cost is amortized over the life of the notes to interest expense using the effective interest method. For the three and nine months ended September 30, 2008, the Company amortized $128,839 and $189,469 of financing costs to interest expense.

The secured convertible notes are due August 2, 2009 and were originally convertible into 9,090,909 shares of common stock of the Company at a conversion price of $0.22 per share. In November 2007, a 10:1 reverse stock split was made effective on its common stock. Accordingly, the number of shares of common stock convertible from the notes was adjusted to 909,091 at a conversion price of $2.20 per share.

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EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2008 (UNAUDITED)

The secured convertible notes are subject to full-ratchet anti-dilution protection, i.e. if the Company issues shares at an average per-share price below $2.20 per share, the conversion price of the notes shall be adjusted downward to match the lower per-share price. Under the terms of the notes, the full-ratchet anti-dilution adjustments do not apply to (i) shares issued upon conversion of options under for a future stock option plan (ii) shares issued to third parties for acquisitions valued above $8 million; (iii) shares issued to non-affiliates for services rendered to the Company. The holders of the notes may convert the unpaid principal amount of the notes into common stock of the Company at any time prior to maturity, at the applicable conversion price. The Company may at any time at its option, redeem the notes by paying 125% of the unpaid principal and accrued interest.

The Company issued warrants to the investors in the note financing, for the purchase of up to a total of 909,091 shares of common stock at an exercise price of $3.20. The warrants are exercisable through September 29, 2013. The warrants are also subject to full-ratchet anti-dilution protection in the event that the Company issues shares (with certain exceptions) at an average per-share price below $3.20 per share, same as the notes. The registration statement was effective June 6, 2008. As of September 30, 2008, 68,636 shares of common stock were issued for exercise of warrants.

The secured convertible notes are secured by all of the assets of the Company, excluding its subsidiaries. Pursuant to a security agreement, the Company’s performance of the notes and other obligations in connection with the financing is also secured by a pledge of 390 shares Preferred Stock (was converted into 2,961,720 shares of common stock on November 30, 2007) personally held by the current CEO of the Company pursuant to a stock pledge agreement. Upon any event of default (as defined in the notes, the security agreement and the stock pledge agreement), the investors will be entitled to exercise their respective rights under the security agreement and stock pledge agreement. In addition, the subsidiaries of the Company, Perfect Dream and Goldenway, each guaranteed the performance of the Company’s obligations under the notes and the subscription agreement under a guaranty agreement.

On the issuance date, the Company recorded a discount on the note related to the intrinsic value of the beneficial conversion feature totaling $943,797 and $1,056,203 for the fair value of the warrants issued. The fair value of warrants was calculated using the Binomial model with the following assumptions: (i) risk-free interest rate of 4.62%; (ii) expected life (in years) of 6; (iii) expected volatility of 112%; (iv) expected dividend yield of 0.00%; and (v) stock market price of $2.70. The discount on notes payable is amortized using effective interest method over 2 years. For the three months and nine months ended September 30, 2008, the Company recorded amortization of $1,152,227 and $1,934,028 as interest expense and for the three and nine months ended September 30, 2007, the Company recorded amortization of $568,299 and $568,299 as interest expense in the statement of operations.

As of September 30, 2008, the note holders had converted $1,950,000 of principal plus accrued interest of $2,155 into 887,348 shares of common stock of the Company. Due to the conversion, the Company recorded $1,152,227 of unamortized discount as interest expense for the period ended September 30, 2008.

The secured convertible notes bear a 6% annual interest rate payable in arrears on the last business day of each calendar quarter thereafter and on the maturity date. For the three and nine months ended September 30, 2008, $12,674 and $58,659 were recorded as interest expense,and for the three and nine months ended September 30, 2007, $19,068 and $19,068 were recorded as interest expense respectively.

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EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2008 (UNAUDITED)

On January 4, 2008, the Company issued 72,728 warrants to the placement agent with an exercise price of $3.20 per share (“Warrants”). The Warrants expire January 4, 2011. These warrants were issued in connection with the private placement described above. The warrants were valued at $130,082 using the Black Scholes Model and will be amortized to interest expense over the life of the convertible notes. For the three months and nine months ended September 30, 2008, the Company recorded $69,106 and $128,727 for amortization of the debt issuance costs as interest expense in the statement of operations, respectively.

On October 1, 2008, the last convertible notes holder converted $50,000 of the notes into 22,728 shares of common stock.

NOTE 12 - INCOME TAX

Ever-Glory was incorporated in the U.S. and has incurred net operating losses for income tax purposes for 2008 and 2007. As of September 30, 2008, the net operating loss carry forwards for U.S. income taxes was $526,131 which may be available to reduce future years’ taxable income. These carry forwards will expire, if not utilized, through 2028. Management believes that the realization of the benefits from these losses appears uncertain due to the Company’ limited operating history and continuing losses for United States income tax purposes. Accordingly, the Company has provided a 100% valuation allowance on the deferred tax asset benefit to reduce the asset to zero. The valuation allowance at September 30, 2008 was approximately $179,000. Management will review this valuation allowance periodically and make adjustments as warranted.

Perfect Dream was incorporated in the British Virgin Islands and under the current laws of the British Virgin Islands, is not subject to tax on income or on capital.

Goldenway was incorporated in the PRC and is subject to PRC income tax laws and regulations. The applicable tax rate has been 24%. In 2007, Goldenway is entitled to a refund of 50% of any income taxes paid for achieving export sales in excess of 70% of the total sales in a calendar year. In 2008, Goldenway’s income tax rate is 25%.

New-Tailun and Catch-Luck were incorporated in the PRC and are subject to PRC income tax laws and regulations. According to the relevant laws and regulations in the PRC, enterprises with foreign investment in the PRC are entitled to full exemption from income tax for two years beginning from the first year the enterprises become profitable and has accumulated profits and a 50% income tax reduction for the subsequent three years. New-Tailun and Catch-Luck were approved as wholly foreign-owned enterprises in 2006 and are entitled to the income tax exemptions in 2006 and 2007. In 2007, no income tax was recorded by New-Tailun and Catch-Luck as these entities were entitled to full exemption from income tax. Starting from 2008 to 2010, New-Tailun and Catch-Luck are entitled to a 50% reduction of the income tax rate of 25%. Therefore these two subsidiaries are taxed at 12.5% for the years of 2008, 2009 and 2010.

LA GO GO was established on January 24, 2008, its income tax rate is 25%.

Provision for income tax for the nine months ended September 31, 2008 and 2007 amounted to $841,850 and $155,203, respectively.

The following table reconciles the statutory rates to the Company’s effective tax rate for the nine months ended September 30, 2008 and 2007:

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EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2008 (UNAUDITED)

	2008			2007
U.S. Statutory rate		34.0	%		34.0	%
Foreign income not recognized in USA		(34.0	)		(34.0	)
China income taxes		25.0			33.0
China income tax exemption		(12.4	)		(29.0	)
Effective income tax rate		12.6	%		4.0	%

Value Added Tax

Enterprises or individuals who sell commodities, engage in repair and maintenance or import and export goods in the PRC are subject to a value added tax, VAT, in accordance with Chinese laws. The VAT standard rate is 17% of the gross sales price. A credit is available whereby VAT paid on the purchases of semi-finished products or raw materials used in the production of the Company’s finished products can be used to offset the VAT due on sales of the finished product.

VAT on sales and VAT on purchases amounted to $5,499,390 and $4,803,033 for the three months ended September 30, 2008 and $3,502,331 and $3,041,517 for the three months ended September 30, 2007, respectively.

VAT on sales and VAT on purchases amounted to $12,151,375 and $10,496,886 for the nine months ended September 30, 2008 and $7,634,927 and $6,814,646 for the nine months ended September 30, 2007, respectively.

Sales and purchases are recorded net of VAT collected and paid as the Company acts as an agent because the VAT taxes are not impacted by the income tax holiday.

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EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2008 (UNAUDITED)

NOTE 13 - EARNINGS PER SHARE

As discussed in Note 2, all share and per share amounts used in the Company's consolidated financial statements and notes thereto have been retroactively restated to reflect the 10-for-1 reverse stock split, which occurred on November 20, 2007.

The following demonstrates the calculation for earnings per share for the three months and nine months ended September 30:

	For the three months ended					For the nine months ended
	September 30,					September 30,
	2008			2007		2008			2007
Net income	$	647,181		$	1,321,065	$	3,193,778		$	3,585,784
Add: interest expense related to convertible notes		756			587,367		2,252			587,367
Subtract: Unamortized issuance costs and discount on convertible notes		(44,350	)		—		(44,350	)		—
Adjusted net income (loss) for calculating EPS-diluted	$	603,587		$	1,908,432	$	3,151,680		$	4,173,151

Weighted average number of common stock – Basic		11,914,825			5,388,201		11,692,604			5,388,201
Effect of dilutive securities:
Convertible notes		88,083			583,004		22,728			196,471
Series A Convertible preferred stock		—			5,991,080		—			5,991,080
Weighted average number of common stock – Diluted		12,002,908			11,962,285		11,715,332			11,575,752

Earnings per share - basic	$	0.05		$	0.25	$	0.27		$	0.67
Earnings per share -diluted	$	0.05		$	0.16	$	0.27		$	0.36

As of September 30, 2008, the Company included all shares issuable upon conversion of the convertible notes and warrants in diluted earnings per share.

NOTE 14 - STOCKHOLDERS’ EQUITY

Stock Issued for Acquisitions Under Common Control

In September 2007, the Company issued 2,083,333 shares of restricted common stock at a market price of $4.80 per share totaling $10,000,000 as part of the consideration to a related company in the acquisition of New-Tailun.

In September 2007, the Company issued 1,307,693 shares of restricted common stock at a market price of $2.6 per share totaling $3,400,000 as part of the consideration to a related company in the acquisition of Catch-Luck.

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EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2008 (UNAUDITED)

Conversion of Convertible Notes to Common Stock

On January 16, 2008, January 22, 2008 and February 6, 2008, the Company issued 12,478 shares of common stock to pay fourth quarter interest of 2007 to six investors in connection with the senior convertible notes dated August 2, 2007.

During the nine months ended September 30, 2008, five investors converted $1,950,000 of the convertible notes and $2,155 in accrued interest expense, into 887,348 shares of common stock.

Stock Issued for Salary

On September 2, 2008, the Company issued 3,068 shares of common stock to pay the salaries for second quarter of 2008 to the three independent directors.

Statutory Reserve

The Company’s PRC subsidiaries are required to make appropriations to reserve funds, comprising the statutory surplus reserve, statutory public welfare fund and discretionary surplus reserve, based on after-tax net income determined in accordance with generally accepted accounting principles of the People’s Republic of China (the “PRC GAAP”). Appropriation to the statutory surplus reserve should be at least 10% of the after tax net income determined in accordance with PRC GAAP until the reserve is equal to 50% of the entities’ registered capital. Appropriations to the statutory public welfare fund are at 10% of the after tax net income determined in accordance with PRC GAAP. The statutory public welfare fund is established for the purpose of providing employee facilities and other collective benefits to the employees and is non-distributable other than in liquidation. Appropriations to the discretionary surplus reserve are made at the discretion of the Board of Directors. Effective January 1, 2006, the Company is only required to contribute to one statutory reserve fund at 10% of net income after tax per annum, such contributions not to exceed 50% of the respective companies’ registered capital.

As of September 30, 2008, New Tailun and Catch-Luck had fulfilled the 50% statutory reserve contribution requirement; therefore no further transfers are required for those entities. Goldenway and LA GO GO did not generate material net income in the current period; therefore no funds were transferred.

As of September 30, 2008 and December 31, 2007, the Company recorded $3,437,379 and $3,437,379, respectively, in the statutory reserve.

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EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2008 (UNAUDITED)

Warrants

Following is a summary of the warrant activity:

	Number of Shares
Outstanding as of January 1, 2007		—
Granted		909,091
Forfeited		—
Exercised		—
Outstanding as of December 31, 2007		909,091
Granted		72,728
Forfeited		—
Exercised		(68,636	)
Outstanding as of September 30, 2008		913,183

Following is a summary of the status of warrants outstanding at September 30, 2008:

Outstanding Warrants					Exercisable Warrants
Exercise Price	Number of Shares		Average Remaining Contractual Life		Average Exercise Price		Number of Shares		Average Remaining Contractual Life
$3.20		840,455		4.68	$	3.20		840,455		4.68
$3.20		72,728		2.26	$	3.20		72,728		2.26
Total		913,183						913,183

NOTE 15 - RELATED PARTY TRANSACTIONS

Mr. Edward Yihua Kang is the Company’s Chairman and Chief Executive Officer. The Company purchased materials, sub-contracted certain manufacturing work, and sold products to companies under the control of Mr. Kang, and the detail is listed below. All related party outstanding balances are short-tem in nature and are expected to be settled in cash.

Sales and Cost of Sales to Related Parties

The Company sells products to Nanjing High-Tech Knitting & Weaving Technology Development Co., Ltd (“Nanjing Knitting”), a company controlled by Ever-Glory Hong Kong.

For the three months ended September 30, 2008, sales and related cost of sales in connection with Nanjing Knitting amounted to $17,582 and $10,989, respectively. For the same period of 2007, sales and related cost of sales in connection with Nanjing Knitting was $486,318 and $456,689, respectively.

For the nine months ended September 30, 2008, sales and related cost of sales in connection with Nanjing Knitting amounted $510,145 and $472,372, respectively. For the same period of 2007, sales and related cost of sales in connection with Nanjing Knitting was $940,334 and $878,673, respectively.

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EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2008 (UNAUDITED)

Purchases from and Sub-contracts with Related Parties

The Company purchased raw materials from Nanjing Knitting. For the three months ended September 30, 2008 and 2007, raw materials amounted to $1,212,491 and $212,874, respectively, were purchased. For the nine months ended September 30, 2008 and 2007, $1,903,440 and $500,005, respectively, were purchased. The Company provided raw materials to the sub-contractors who charged the Company a fixed labor charge for the sub-contracting work.

In addition, the Company sub-contracted certain manufacturing work valued at $291,122 and $102,483 for the nine months ended September 30, 2008 and 2007, respectively, to Nanjing Knitting.

Accounts Receivable – Related Parties

As of September 30, 2008 and 2007, accounts receivable from related parties amounted to $0 and $158,235, respectively, for sub-contracting services provided. Account receivables – related parties were as follows:

Receivable from	September 30, 2008		December 31, 2007
	(Unaudited)
Ever-Glory Enterprises (Chuzhou) Co., Ltd	$	—	$	12,052
Nanjing High-Tech Knitting & Woving Technology Development Co., Ltd		—		146,183
Total accounts receivable – related parties	$	—	$	158,235

Other Receivable – Related Parties

As of September 30, 2008 and 2007, other receivable from related parties amounted to $38,596 and $0, respectively, for products sold. Other receivables – related parties were as follows:

Receivable from	September 30, 2008		December 31, 2007
	(Unaudited)
Shanghai La Chapelle Garment and Accessories Company Limited	$	38,596	$	—

Advance on Inventory Purchase – Related Party

As of September 30, 2008, the Company advanced funds to Jiangsu Ever-Glory International Group Corp. to purchase raw material inventory in amount of $6,882,463. Interest is charged at 0.5% per month according to the balance at the end of each month. Interest income earned for the three months ended September 30, 2008 and 2007, was $37,752 and $43,267, respectively, and for the nine months ended September 30, 2008 and 2007 was $113,216 and $82,597, respectively.

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EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2008 (UNAUDITED)

Accounts Payable – Related Parties

The Company purchases raw material from and subcontracts some of its production to related parties which are under control of Mr. Kang.

As of September 30, 2008 and December 31, 2007, the Company owed $155,917 and $245,589 to the related parties

Due to	September 30, 2008		December 31, 2007
	(Unaudited)
Kunshan Enjin Fashion Co.,Ltd.	$	—	$	245,589
Nanjing Ever-Kyowa Garment Washing Co.,		71,179		—
Nanjing High-Tech Knitting & Woving Technology Development Co., Ltd		84,738		—
Accounts payable – related parties	$	155,917	$	245,589

Other Payables – Related Parties

As of September 30, 2008 and December 31, 2007, amounts due to Ever-Glory Enterprises (HK) Ltd. were $903,715 and $650,000, respectively.

In the amount of $903,715 due to Ever-Glory Enterprises (HK) Ltd. as of September 30, 2008, $600,000 was due for the purchase of Catch-Luck and $303,715 was due for the Company’s going public fees paid by Ever-Glory Enterprises (HK) Ltd..

In the amount of $650,000 due to Ever-Glory Enterprises (HK) Ltd. as of December 31, 2007, $600,000 was due for the purchase of Catch-Luck and $50,000 was due for the Company’s going public fees paid by Ever-Glory Enterprises (HK) Ltd..

Long Term Liability – Related Party

As of September 30, 2008 and December 31, 2007 the Company owed $2,630,821 and $4,474,985, respectively to Blue Power Holdings Limited., a company controlled by the Company’s CEO Mr. Kang before December 31, 2007, for various advances received. Interest is charged at 6% per annum on the amounts due. The loans are due between July 2010 and April 2011. For the nine months ended Sep 30, 2008 and 2007, the Company accrued interest expense of $145,836 and $177,344, respectively. The accrued interest is included in the carrying amount of the loan in the accompanying balance sheets. On June 26, 2008, the Company repaid $1,990,000 to Blue Power Holdings Limited.

Lease from a Related Party

The Company leased factory and office space from Jiangsu Ever-Glory International Group Corp., an entity controlled by the Company’s CEO Mr. Kang. See Note 16 for the operating lease commitment.

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EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2008 (UNAUDITED)

NOTE 16 – COMMITMENTS AND CONTINGENCIES

Capital Commitment

According to the Articles of Association of Goldenway, Goldenway has to fulfill its registered capital requirements of $17,487,894 within three years from February 2, 2005. As of September 30, 2008, the Company had fulfilled $5,630,000 of its registered capital requirements and had a registered capital commitment of $11,857,894 payable by February 1, 2008. In July 2008, the Company obtained an extension to April 25, 2009 to fulfill the remaining capital contribution of $11,857,894.

Operating Lease Commitment

The Company leases factory and office space from Jiangsu Ever-Glory International Group Corp. under an operating lease which expired on March 31, 2008 at an annual rental of $26,056 and an operating lease which expires on December 31, 2009 at an annual rental of $50,180.

For the three months ended September 30, 2008 and 2007, the Company recognized rental expense of $12,813 and $6,412, respectively. $37,635 and $19,541 were recorded as rental expense for the nine months ended September 30, 2008 and 2007, respectively.

As of September 30, 2008, the outstanding commitments of this non-cancelable lease for the years ended December 31, 2008 and 2009 are $50,180 and $100,360, respectively.

Contingent Shares to be Issued

Pursuant to the terms of the purchase agreement on acquisition of Catch-Luck, the Company will issue additional common shares to the original shareholder as follows:

o	At the end of the first full fiscal year ending December 31, 2008 in which Catch-Luck generates gross revenues of at least $19,000,000 and net profit of $1,500,000, Perfect Dream will issue 1,153,846 shares of the Company’s restricted common stock having a value of $3,000,000; and

o	At the end of the next full fiscal year ending December 31, 2009 in which Catch-Luck generates gross revenues of at least $19,000,000 and net profit of $1,500,000, Perfect Dream will issue 1,153,846 shares of the Company’s restricted common stock having a value of $3,000,000.

Legal Proceedings

The Company was named as a defendant in an action pending in the U.S. District Court for the Northern District of Ohio. The action was filed on February 22, 2006 by Plaintiff Douglas G. Furth. The other principal parties are named defendants John Zanic, Wilson-Davis & Co., and Godwin, Pappas, Longley & Ronquillo, LLP. The action alleges that the Company breached an agreement to provide 1,000,000 shares of common stock in exchange for certain assistance in marketing and financial public relations services. The action seeks an award of damages in excess of $75,000. The Company denies they we were a party to such an agreement, or were are otherwise liable. The Company intends to vigorously defend its position. The complaint was dismissed without prejudice from an action pending in the U.S. District Court for the Northern District of Ohio. In May 2007, Plaintiff Douglas G. Furth filed a Second Amended Complaint asserting claims against the Company. The Company denies all the claims, filed objections and asked for dismissal with prejudice. No payment was made to plaintiff and no settlement has been discussed between us and the Plaintiff. On November 29, 2007, we made a motion to dismiss the action for lack of personal jurisdiction, and a decision on this matter is pending.

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EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2008 (UNAUDITED)

NOTE 17 - CONCENTRATIONS AND RISKS

Cash includes cash on hand and demand deposits in accounts maintained with state owned banks within the PRC and Hong Kong. Total cash deposited with these banks at September 30, 2008 and December 31, 2007 amounted to $882,548 and $641,739, respectively, of which no deposits are covered by insurance. The Company has not experienced any losses in such accounts and believes it is not exposed to any risks on its cash in bank accounts.

During the three and nine months ended September 30, 2008 and 2007, the Company did not rely on any single raw material supplier. For the three months ended September 30, 2008 and 2007, the Company relied on one manufacturer for 19.0% and 9.8% of purchased finished goods. For the nine months ended September 30, 2008 and 2007, respectively, this largest contract manufacturer represented approximately 17% and 14% of purchased finished goods. The Company does not have long-term written agreements with this manufacturer and does not anticipate entering into any such agreements in the near future. However, the Company always executes a written agreement for each order placed. Management does not believe that the loss of this manufacturer would have a material adverse effect on the Company’s ability to obtain finished goods manufacturer essential to the business because the management believes that the Company can locate other manufacturers in a timely manner.

The Company has one major customer which represents approximately 25.7% and 29.9% of the Company’s total sales for the three months ended September 30, 2008 and 2007, respectively. For the nine months ended September 30, 2008 and 2007, this major customer represent approximately 29.4% and 33.9% of the Company’s total Sales, respectively. This customer accounted for 2.5% of total accounts receivable as of September 30, 2008.

The following is geographic information of the Company’s revenue for the three and nine months ended September 30:

	(Unaudited)				(Unaudited)
	Three months September, 30				Nine months September, 30
	2008		2007		2008		2007
China	$	2,897,857	$	1,669,649	$	6,594,818	$	3,464,453
Europe		14,923,858		10,813,012		42,178,290		29,365,688
Japan		6,925,551		2,962,062		12,739,050		6,543,188
United States		6,056,882		4,033,070		12,734,839		10,627,898
Others		43,284		—		43,284		—
Revenue from Original design manufacturing		30,847,432		19,477,793		74,290,281		50,001,227
Revenue from retail sales-China		1,038,144		—		1,410,900		—
Total revenue	$	31,885,576	$	19,477,793	$	75,701,181	$	50,001,227

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, and by the general state of the economy in the regions where the Company’s customers are located. The Company's operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in the North America and Western Europe. These include risks associated with, among others, the political, economic and legal environments and foreign currency exchange. The Company's results may be adversely affected 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.

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ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations for the three and nine months ended September 30, 2008 should be read in conjunction with the Financial Statements and corresponding notes included in this Quarterly Report on Form 10-Q. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations, and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the Risk Factors and Special Note Regarding Forward-Looking Statements in this report. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” “target”, “forecast” and similar expressions to identify forward-looking statements.

Overview

We are a leading apparel manufacturer and supplier in China, and the first Chinese apparel company listed on the American Stock Exchange. We have a focus on well-known, middle-to-high grade casual wear, sportswear, and outerwear brands. We have global strategic business partners in Europe, the United States (“U.S.”), Japan and the People’s Republic of China (PRC), including famous brands and retail chain stores. We also manufacture, market and distribute our own branded products in the PRC domestic market.

We manufacture our products in the PRC, including our three factories located in the Nanjing Jiangning Economic and Technological Development Zone and Shang Fang Town in the Jiangning District in Nanjing. We conduct our original design manufacturing (ODM) operations through three wholly-owned subsidiaries: Goldenway Nanjing Garments Company Limited (“Goldenway”), Nanjing New-Tailun Garments Company Limited (“New Tailun”), and Nanjing Catch-Luck Garments Co., Ltd. (“Catch-Luck”).

We incorporated Shanghai LA GO GO Fashion Company Limited (“LA GO GO”), a joint venture of Goldenway and Shanghai La Chapelle Garment and Accessories Company Limited (“La Chapelle”) in the PRC on January 24, 2008. The business objective of the joint venture is to establish and create a leading brand of ladies’ garments and to build a nationwide retail distribution channel in China.

Although we have our own manufacturing facilities, we currently outsource most of our manufacturing to contract manufacturers as part of our overall business strategy. Outsourcing allows us to maximize our production capacity and maintain production flexibility while reducing capital expenditures and costs associated with keeping skilled workers on production lines during seasonal slowdowns. We inspect products manufactured by our long-term contractors to ensure that they meet our high quality control standards.

For the nine months ended September 30, 2008, approximately 56% of our net sales came from Europe, 17% from the U.S., 17% from Japan, and 10% from the PRC. For the nine months ending September 30, 2007, approximately 59% of our net sales came from Europe, 21% from the U.S, 13% from Japan, and 7% from the PRC. We believe our Company maintains a good relationship with our customers.

We purchase the majority of our raw materials directly from numerous local fabric and accessories suppliers. We also purchase finished goods from contract manufacturers. For the nine months ended September 2008 and 2007, purchases from our five largest suppliers accounted for 21% and 24% of total purchases, respectively. For the nine months ended September 30, 2008 and 2007, no single supplier provided more than 10% of our total purchases. We have not experienced difficulty in obtaining raw materials essential to our business, and we believe our Company has maintained a good relationship with our suppliers.

As of September 30, 2008, our three manufacturing facilities in Nanjing had over 1,800 employees, with an annual production capacity of over 12 million pieces. As of September 30, 2008, our new LA GO GO joint venture had approximately 230 employees. We consider our relationship with our employees to be excellent.

We hold a fifty-year land use right on 112,442 square meters of land in the Nanjing Jiangning Economic and Technological Development Zone until April 2056. The land contains an existing facility of 26,629 square meters, which includes the manufacturing facility and office space. By the end of 2006, we completed the construction of our new office building and adjoining factory. We moved our headquarters into our new office building and consolidated part of our operation into our new manufacturing facility in January 2007. The new manufacturing facility occupies an area of 10,000 square meters and is equipped with state-of-the-art equipment.

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Our four operating subsidiaries, all of which are incorporated in the PRC, are governed by the PRC income tax laws and are subject to the PRC enterprise income tax. Each of our consolidating entities files its own separate tax return. In addition, in 2007, Goldenway enjoyed a 50% reduction in its income tax as a foreign invested enterprise that exports over 70% of its output, and was entitled a lowered income tax rate of 12%. In 2008, the income tax rate for Goldenway was 25%. New-Tailun and Catch-Luck were entitled to two-year income tax exemptions effective for the 2006 and 2007 tax years, and for the three years thereafter (2008, 2009 and 2010) based on current income tax laws these entities will be entitled to a 50% reduction in enterprise income tax rate of 25%. LA GO GO was incorporated on January 24, 2008, and its income tax rate is 25%. All of our income before income taxes, and the income taxes we pay are related to our operations in the PRC.

Private Placement Financing

On August 2, 2007, we completed a $2 million private placement involving the issuance of our secured convertible notes and warrants pursuant to subscription agreements (“Subscription Agreements”) with six accredited investors. This private placement financing closed on August 6, 2007. Under the terms of the financing, we issued and sold two-year secured convertible notes in the principal amount of $2,000,000 to investors, secured by all of the assets of Ever-Glory excluding its subsidiaries. As of September 30, 2008, the note holders had converted the entire principal amount of these notes, plus accrued interest, into an aggregate of 909,091 shares of common stock of the Company.

Recent Events

On July 16, 2008, our shares of common stock began trading on the American Stock Exchange (“AMEX”) under the trading symbol “EVK.” We are the first Chinese apparel company to have its securities listed on AMEX.

According to the Articles of Association of Goldenway, Goldenway had to fulfill registered capital requirements of $17,487,894 within three years from February 2, 2005. As of February 1, 2008, the Company fulfilled $3,630,000 of its registered capital requirements and had a registered capital commitment of $13,857,894 payable by February 1, 2008. In April 2008, we obtained approval from the government granting an extension to make the required capital contribution by July 25, 2008. As of July 10, 2008, the Company fulfilled $5,630,000 of its registered capital requirements and had a registered capital commitment of $11,857,894 payable by July 25, 2008. In July 2008, the Company obtained the approval from the government granting a further extension to make the required capital contribution until April 25, 2009.

In July 2008, we renewed our credit facility with Nanjing Bank, which provides us with short-term lending of up to $7.3 million for a two year term. The credit facility is used to fund daily operations, and is available until July 31, 2010. As of September 30, 2008, we had an outstanding balance of $5.8 million, on which we pay interest at the rate of 7.22%. The loans with Nanjing Bank are secured by our land use rights and buildings.

Sales and Expenses

We market and sell our products through a combination of international distributors and direct sales to brands and retail chain stores primarily in Europe, the United States and Japan. We also manufacture, market, and distribute our own branded products in our domestic market through our LA GO GO joint venture.

For our new customers, we ordinarily accept orders backed by a letter of credit. For our established customers, we generally accept payment within 30 to 120 days following delivery of finished goods to the customer.

Cost of goods sold includes direct material cost, direct labor cost and manufacturing overheads, including depreciation of production equipment consistent with the revenue earned, and rent paid by our retail business.

Our selling expenses consist primarily of transportation and unloading charges and product inspection charges.

Our general and administrative expenses consist primarily of executive, finance, accounting, facilities and human resources personnel, office expenses and professional fees.

CRITICAL ACCOUNTING POLICIES

We have identified critical accounting policies that, as a result of judgments, uncertainties, uniqueness and complexities of the underlying accounting standards and operation involved could result in material changes to our financial position or results of operations under different conditions or using different assumptions.

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The preparation of our financial statements in conformity with generally accepted accounting principles (GAAP) in the United States of America requires management to make estimates and assumptions that affect the reported amounts and disclosures. We are also subject to other risks and uncertainties that may cause actual results to differ from estimated amounts. Significant estimates in 2008 and 2007 include the estimated residual value and useful life of property and equipment and the assumptions made when we used the Black-Scholes option price model to value the warrants we have issued.

Inventories, consisting of raw materials, work-in progress, and finished goods related to our products are stated at the lower of cost or market utilizing the specific identification method.

We recognize revenue, net of value added taxes, upon delivery for local sales and upon shipment of the products for export sales, at which time title passes to the customer provided that: there are no uncertainties regarding customer acceptance; persuasive evidence of an arrangement exists; the sales price is fixed and determinable; and collectability is deemed probable.

Details regarding our use of these policies and the related estimates are described in the accompanying notes to our Consolidated Financial Statements as of and for the three months and nine months ended September 30, 2008. There have been no material changes to our critical accounting policies that impacted our consolidated financial condition or results of operations.

RECENT ACCOUNTING PRONOUNCEMENTS

In September 2006, FASB issued Statement 157, Fair Value Measurements. This statement defines fair value and establishes a framework for measuring fair value in GAAP. More precisely, this statement sets forth a standard definition of fair value as it applies to assets or liabilities, the principle market (or most advantageous market) for determining fair value (price), the market participants, inputs and the application of the derived fair value to those assets and liabilities. The effective date of this pronouncement is for all full fiscal and interim periods beginning after November 15, 2008. The Company does not expect the adoption of SFAS 157 to have an impact on the Company’s results of operations or financial condition.

In December 2007, the FASB issued SFAS 141R, “Business Combinations,” which applies to all transactions or other events in which an entity obtains control of one or more businesses, including those sometimes referred to as “true mergers” or “mergers of equals” and combinations achieved without the transfer of consideration. This statement replaces FASB Statement No. 141 and applies to all business entities, including mutual entities that previously used the pooling-of-interests method of accounting for some business combinations. The Company believes that adoption of the FAS 141R will have a material effect on future acquisitions.

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In June 2008, the FASB issued Emerging Issues Task Force Issue 07-5 “Determining whether an Instrument (or Embedded Feature) is indexed to an Entity’s Own Stock” (“EITF No. 07-5”). This Issue is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early application is not permitted. Paragraph 11(a) of Statement of Financial Accounting Standard No 133 “Accounting for Derivatives and Hedging Activities” (“SFAS 133”) specifies that a contract that would otherwise meet the definition of a derivative but is both (a) indexed to the Company’s own stock and (b) classified in stockholders’ equity in the statement of financial position would not be considered a derivative financial instrument. EITF No.07-5 provides a new two-step model to be applied in determining whether a financial instrument or an embedded feature is indexed to an issuer’s own stock and thus able to qualify for the SFAS 133 paragraph 11(a) scope exception. Management is currently evaluating the impact of adoption of EITF No. 07-5 on the Company ’ s financial statements.

On October 10, 2008, the FASB issued FASB Staff Position (FSP) No.157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active,” which clarifies the application of SFAS 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. FSP 157-3 became effective on October 10, 2008, and its adoption did not have a material impact on the Company’s financial position or results for the quarter ended September 30, 2008.

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Results of Operations

The following is a discussion and analysis of our results of operations, comparing the three and nine months ended September 30, 2008 and 2007.

Three Months Ended September 30, 2008 Compared to Three Months Ended September 30, 2007

The following table summarizes our results of operations for the three months ended September 30, 2008 and 2007. The table and the discussion below should be read in conjunction with the unaudited financial statements and the notes thereto appearing elsewhere in this report.

	Three Months Ended September 30,
	2008				2007				Increase		% Increase
Sales	$	31,885,576	100.0	%	$	19,477,793	100.0	%	$	12,407,783		63.7	%
Cost of Sales	$	27,295,205	85.6	%	$	16,404,695	84.2	%	$	10,890,510		66.4	%
Gross Profit	$	4,590,371	14.4	%	$	3,073,098	15.8	%	$	1,517,273		49.4	%
Operating Expense	$	2,190,346	6.9	%	$	1,020,400	5.2	%	$	1,169,946		114.7	%
Income From Operations	$	2,400,025	7.5	%	$	2,052,698	10.5	%	$	347,327		16.9	%
Other Expenses	$	-1,484,307	-4.7	%	$	-658,753	-3.4	%	$	-825,554		125.3	%
Income before income tax expenses	$	915,718	2.9	%	$	1,393,945	7.2	%	$	-478,227		-34.3	%
Income tax expenses	$	273,203	0.9	%	$	72,880	0.4	%	$	200,323		274.9	%
Minority interest	$	-4,666	0.0	%		—	—		$	-4,666		—

Net Income	$	647,181	2.0	%	$	1,321,065	6.8	%	$	-673,884		-51.0	%

Sales

The following table sets forth a breakdown of our total sales revenue, by region, for the periods indicated:

	Three Months Ended September 30,
	2008					2007
	$		% of total revenues			$		% of total revenues			Growth in 2008 Compared to 2007
	(in U.S. dollars, except for percentages)
ODM Sales

Europe		14,923,858		46.8	%		10,813,012		55.5	%		+ 38.0	%

U.S.		6,056,882		19.0	%		4,033,070		20.7	%		+ 50.2	%

Japan		6,925,551		21.7	%		2,962,062		15.2	%		+ 133.8	%

China		2,897,857		9.1	%		1,669,649		8.6	%		+ 73.6	%

Other		43,284		0.1	%		—		—			—

Domestic Retail Sales

Retail		1,038,144		3.3	%		—		—			—

Total revenues		31,885,576		100.0	%		19,477,793		100.0	%		+ 63.7	%

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We generate revenues primarily from our ODM business mainly for the international markets. In 2008, we entered into our domestic retail market, with a focus on designing, manufacturing and selling our own branded garments. Total sales for the three months ended September 30, 2008 were $31,885,576, an increase of 63.7% compared to the same period during 2007. This increase was primarily attributable to an operating growth in ODM sales to customers in Europe, U.S., Japan and the PRC, and revenue contributions from our newly launched retail business “LA GO GO” in 2008.

Sales to customers in Europe accounted for 46.8% of our net revenue for the three months ended September 30, 2008. Sales to our European customers increased 38.0% in the third quarter of 2008, as compared to the third quarter of 2007. The increase for the three months ended September 30, 2008 was primarily attributable to higher demand and increased order volume from several of our large European customers.

Sales to customers in the U.S. accounted for 19.0% of our net revenue for the three months ended September 30, 2008. Sales to our U.S. customers increased 50.2% in the third quarter of 2008, as compared to the third quarter of 2007. This increase was due to our acquisition of new customers in the U.S.

Sales to customers in Japan accounted for 21.7% of our net revenue for the three months ended September 30, 2008. Sales to our Japanese customers increased 133.8% for the third quarter of 2008, compared to the third quarter of 2007. This increase was attributable to our success in establishing a long-term relationship with premium brands in the Japanese market, and strong demand in the third quarter of 2008 in anticipation of the holiday season.

Sales to customers in the PRC accounted for 9.1% of our net revenue for the three months ended September 30, 2008. Sales to our PRC customers increased 73.6% in the third quarter of 2008, compared to the third quarter of 2007. The increase was attributable to a greater number of orders placed by our existing customers in Hong Kong,

Sales generated by our LA GO GO retail division accounted for 3.3% of our net revenue for the three months ended September 30, 2008. As of September 30, 2008, we have opened and established 55 LA GO GO retail stores, generating average sales of $8,500 per month per store.

The table below breaks down our total revenues generated from related-party and unrelated-party during the periods indicated:

	Three Months Ended September 30,
Net Sales	2008				2007				Increase (Decrease)			% Change
To related parties	$	17,582	0.1	%	$	486,318	2.5	%	$	(468,736	)		-96.4	%
To third parties	$	31,867,994	99.9	%	$	18,991,475	97.5	%	$	12,876,519			67.8	%
Total	$	31,885,576	100.0	%	$	19,477,793	100.0	%	$	12,407,783			63.7	%

Net sales to related parties accounted for 0.1% of our total sales for the three months ended September 30, 2008, a decrease from 2.5% for the same period of 2007. We expect sales to related parties will continue to constitute a relatively minor portion of our total sales.

Cost of Sales and Gross Profit

The following table sets forth the components of our cost of sales and gross profit both as a dollar amount and as a percentage of total net sales for the periods indicated.

	Three Months Ended September 30,
	2008				2007				Change		% Change
Total Net Sales	$	31,885,576	100.0	%	$	19,477,793	100.0	%	$	12,407,783		63.7	%
Raw materials		13,735,548	43.1	%		9,211,986	47.3	%		4,523,562		49.1	%
Labor		849,187	2.7	%		626,082	3.2	%		223,105		35.6	%
Outsource Production Costs		11,237,388	35.2	%		5,826,534	29.9	%		5,410,854		92.9	%
Overhead and Other		805,447	2.5	%		740,093	3.8	%		65,354		8.8	%
Retail-purchase finished garments from other factories		667,635	2.1	%		0	0.0			667,635		—
Total Cost of Sales	$	27,295,205	85.6	%	$	16,404,695	84.2	%	$	10,890,510		66.4	%
Gross Profit	$	4,590,371	14.4	%	$	3,073,098	15.8	%	$	1,517,273		49.4	%

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Raw material costs for the three months ended September 30, 2008 increased 49.1% compared to the same period in 2007 while revenues increased 63.7% compared to the same period in 2007. These costs, as a percentage of total net sales, decreased from 47.3% to 43.1%. In the third quarter of 2008, we centralized our purchasing function to increase our negotiation power, and management believes this enabled us to control and reduce our raw material costs.

Labor costs accounted for 2.7% of our total net sales for the three months ended September 30, 2008, which decreased from 3.2% for the same period in 2007. This decrease was mainly due to an internal headcount reduction. In 2008, after performing a comprehensive review of our processes and organization, management decided to increase outsourcing to independent contractors to improve performance and efficiency as well as better manage our labor costs.

Outsource production costs accounted for 35.2% of our total net sales for the three months ended September 30, 2008, which increased from 29.9% for the same period in 2007. This increase was primarily attributable to increased costs of outsourcing in the third quarter of 2008, linked to general inflation in the cost of goods and services in China.

Overhead and other expenses accounted for 2.5% of our total net sales for the three months ended September 30, 2008, compared to 3.8% in the same period of 2007. This decrease was also due to a reduction in our employee headcount as a result of increased outsourcing.

Our retail business cost accounted for 2.1% of our total net sales for the three months ended September 30, 2008. This consisted of purchases of finished goods from other suppliers for resale in our LA GO GO stores.

Total cost of sales for the three months ended September 30, 2008 was $27,295,205, an increase of 66.4% compared to the same period in 2007. As a percentage of total net sales, cost of sales for the three months ended September 30, 2008, increased slightly to 85.6% in the third quarter of 2008, up from 84.2% in the same period in 2007. Consequently, the gross margin as a percentage of net sales decreased to approximately 14.4% in the three months ended September 30, 2008, from 15.8% in the same period of 2007. The decrease in gross margin was primarily attributable to the increased outsourcing costs and salary increases for existing production line employees in the third quarter of 2008. Management increased pay for our workers in order to retain skilled tailors and professionals in a competitive environment in which, in recent quarters, salaries and the cost of labor have been rising.

The following table sets forth our total net sales, gross profit and gross margin of the geographic market segments for the three months ended September 30, 2008 and 2007:

	For the Three Months Ended							For the Three Months Ended
	September 30, 2008							September 30, 2007
			Gross		Gross					Gross		Gross
	Net Sales		Profit		Margin			Net Sales		Profit		Margin

ODM Sales
Europe	$	14,924,436	$	1,991,898		13.3	%	$	10,813,012	$	1,910,695		17.7	%
U.S.		6,056,882		400,026		6.6	%		4,033,070		350,254		8.7	%
Japan		6,925,551		1,460,963		21.1	%		2,962,062		360,564		12.2	%
China		2,897,279		368,109		12.7	%		1,669,649		451,585		27.0	%
Other		43,284		-2,644		-6.1	%		—		—		—

Domestic Sales
Retail		1,038,144		372,019		35.8	%		—		—		—
Total	$	31,885,576	$	4,590,371		14.4	%	$	19,477,793	$	3,073,098		15.8	%

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Gross margin in Europe was 13.3% for the three months ended September 30, 2008, compared to 17.7% for the same period in 2007. Although we have changed our product mix to improve our gross margin, this move toward higher-margin products was offset by higher price sensitivity on the part of our European customers, high inflation in China and the effect of an appreciating renminbi against currencies of importing nations. First, many of our customers have been negotiating for lower contract prices, as the retail environment has become more competitive, which we believe may be associated with a slowing economy in Europe. Also, inflation has persisted in China especially in early 2008, which has increased the prices of labor and materials, and this has added downward pressure to our margins. Finally, the Chinese renminbi has been appreciating against other world currencies, making Chinese imports more expensive, particularly to customers in Europe and the U.S., and this has put pressure on us to reduce prices in order to continue to be a top supplier to many of our customers.

Gross margin in U.S. was 6.6% for the three months ended September 30, 2008, compared to 8.7% for the same period in 2007. In 2008, we adjusted our customer mix in the U.S., as we moved away from lower end mass market products, and entered higher quality upper market segments to improve our gross profit percentage. Generally, at the present time, we consider “upper market” or “premium” products as garments that we sell at an average cost to our customers of higher than US$8.00 per unit. In the third quarter of 2008, however, we believe that due to unfavorable economic conditions in the U.S., including an emerging credit crisis, our customers have become more cautious and price sensitive, and they are beginning to shift their buying patterns accordingly. In order to continue to achieve sales to our U.S. customers, we cut our prices in order to remain competitive with other suppliers. Currently, we are seeking to expand and acquire new customer relationships with middle-to upper market or premium retailers in the U.S. in order to offset this trend.

Gross margin in Japan was 21.1% for the three months ended September 30, 2008, compared to 12.2% for the same period of 2007. In the third quarter of 2008, we were able to successfully shift our product mix into premium brands in Japan, in order to achieve these higher margins. Specifically, one upper market Japanese casual wear retailer who we recently added as a customer generated approximately $1.9 million in sales in the three quarters ending September 30, 2008. Since our sales to Japan became more heavily weighted toward higher-end garments with very favorable margins, our overall gross margin on sales to Japanese customers increased.

Gross margin in China, excluding our retail operations, was 12.7% for the three months ended September 30, 2008, compared to 27.1% for the same period of 2007. This reduction in gross margin was due to higher-than-expected inflation in the PRC and appreciation of the Chinese renminbi relative to the U.S. dollar. We managed to negotiate mild increases our contract prices with our Hong Kong customers, based on and to adjust for our internal forecasts regarding domestic inflation and Chinese renminbi appreciation, however, actual domestic inflation and appreciation in the renminbi turned out to be higher than we had originally forecast. As a result, we experienced a decline in gross margin on our PRC sales.

Gross margin in retail for our new brand LA GO GO, which operates retail stores in the PRC, was 35.8% for the three months ended September 30, 2008. Since it was launched in the early part of 2008, our LA GO GO division did not operate during the third quarter of 2007.

Overall gross margin for the three months ended September 30, 2008 was 14.4%, decrease from 15.8% for the same period of 2007. Management generally attributes this to higher inflation in the PRC, and a rising Chinese renminbi. We countered this trend, in some regions more than others as discussed above, by moving toward higher-margin products in those markets. Management expects that continued efforts to move toward upper-market premium products, if successful, will enable the company to combat the effects of inflation and an appreciating Chinese renminbi, and maintain and increase our overall gross profit margins. In addition, management expects that as the company’s domestic retail operation grows and becomes a larger part of our business, if this growth is realized, this would eventually have the effect of increasing the company’s overall profit margins.

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Operating Expenses

	For the Three Months Ended September 30,
	2008					2007
			% of Total					% of Total					%
	$		Net Sales			$		Net Sales			change		change
	(in U.S. Dollars, except for percentages)
Gross Profit	$	4,590,371		14.4	%	$	3,073,098		15.8	%	$	1,517,273		49.4	%
Operating Expenses:
Selling Expenses		563,971		1.8	%		167,976		0.9	%	$	395,995		235.7	%
General and Administrative Expenses		1,626,375		5.1	%		852,424		4.4	%	$	773,951		90.8	%
Total		2,190,346		6.9	%		1,020,400		5.2	%	$	1,169,946		114.7	%
Income from Operations		2,400,025		7.5	%		2,052,698		10.5	%	$	347,327		16.9	%

Selling expenses in 2008 increased by 235.7% to $563,971 for the three months ended September 30, 2008 as compared with the same period in 2007. The increase was attributable to increased travel and marketing expenses incurred by our international sales force to obtain new customers. In addition, we incurred increased export expenses, such as customs duties, port fees, export document fees, inspection fees, and other related costs. We also spent $247,786 during the third quarter of 2008 to promote LA GO GO, our domestic retail brand, which is reflected in our selling expenses for the third quarter of 2008, but no such expenses applied during the same period in 2007.

General and administrative expenses increased by 90.8% from $852,424 for the three months ended September 30, 2007 to $1,626,375 for the three months ended September 30, 2008. However, as a percentage of net sales, G&A expenses for the third quarter of 2008 increased modestly from 4.4% to 5.1%, as compared to the same quarter in 2007. The increase was mainly due to increases in salary expense, employee benefits, professional fees and depreciation expenses relating to our new office facilities. Payroll increased by approximately $250,000 in the third quarter of 2008, over the same quarter last year, as we hired more management professionals to handle our business expansion. An increase in direct expenses incurred by our US parent company relating to investor relations activities also added to our total general and administrative expenses for the third quarter of 2008.

Income from Operations

Income from operations increased by 16.9% from $2,052,698 for the three months ended September 30, 2007 to $2,400,025 for the three months ended September 30, 2008, as we expanded market exposure, increased our sales volume and managed our costs during the current reporting period.

Interest Expenses

	Three Months Ended September 30,
	2008		2007		Increase		% Increase
Bank Loans	$	76,481.00	$	34,161.00	$	42,320.00		123.88	%
Related party		29,265.00		59,115.00		-29,850.00		-50.49	%
Convertible notes interest		12,674.00		—		12,674.00
Convertible notes-amortization of discount		1,350,172.00		587,368.00		762,804.00		129.87	%
Total	$	1,468,592.00	$	680,644.00	$	787,948.00		115.77	%

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Interest expense was $1,468,592 for the three months ended September 30, 2008 compared to $680,644 for the same period of 2007.

This increase was mainly due to the interest expense incurred related to the convertible notes issued in August 2007. As disclosed in the note 11 to the accompanying financial statements, the Company consummated a private placement of $2,000,000 principal amount of 6% secured notes with five-year common stock warrants which were convertible to 909,091 shares of common stock of the Company at a conversion price of $2.20 per share. On the issuance date, the Company recorded a discount on the note related to the intrinsic value of the beneficial conversion feature totaling $943,797 and $1,056,203 for the fair value of the warrants issued. Financing cost related to this private placement was $372,602 in which $242,520 was paid out of the gross proceeds and $130,082 was the value of the warrants granted to the replacement agents.

Pursuant to the APB 21, financing cost is amortized over the life of the notes to interest expense using the effective interest method. Also according to the paragraph 21 of EITF 00-27, all unamortized discount at the time of the conversion must be recognized as interest expense. During the three months ended September 30, 2008, $1,200,000 in convertible notes had been converted to the Company’s common shares. Accordingly, for the three months ended September 30, 2008, $197,946 of financing cost and $1,152,226 of amortization of discount was recorded as interest expense.

Income Tax Expenses

Income tax expense for the three months ended September 30, 2008 and 2007 amounted to $273,203 and $72,880, respectively. The increase in our income tax expenses were mainly due to the expiration of Goldenway’s tax holiday on December 31, 2007. In addition, Catch-Luck and New-Tailun were subject to higher preferential tax rates since the beginning of 2008.

Our PRC subsidiaries were subject to various preferential tax policies and were entitled to the following income tax rates:

	2008			2007
Goldenway		25.0	%		12.0	%
Catch-Luck		12.5	%		0.0	%
New-Tailun		12.5	%		0.0	%
LA GO GO		25.0	%		0.0	%

Goldenway was incorporated in the PRC and is subject to PRC income tax laws and regulations. Goldenway is presently subject to an income tax rate of 25%.

New-Tailun and Catch-Luck were incorporated in the PRC and are subject to PRC income tax laws and regulations. According to the relevant laws and regulations in the PRC, enterprises with foreign investment in the PRC are entitled to full exemption from income tax for two years beginning from the first year the enterprises become profitable and has accumulated profits and a 50% income tax reduction for the subsequent three years. New-Tailun and Catch-Luck were approved as a wholly foreign-owned enterprise in 2006 and are entitled to 100% income tax exemptions in 2006 and 2007 and a 50% reduction for the next three years. In 2008, New-Tailun and Catch-Luck are subject to a 12.5% income tax rate.

LA GO GO was established on January 24, 2008, and it is subject to an income tax rate of 25%.

Perfect Dream Limited (“Perfect Dream”), was incorporated in the British Virgin Islands on July 1, 2004, its income tax rate is 0%.

Ever-Glory International Group Inc., our parent corporation, was incorporated in the State of Florida, and it has incurred net operating losses for income tax purposes through September 30, 2008. The net operating loss carry forwards for United States income taxes may be available to reduce ad offset the company’s taxable income in future years. These carry forwards will expire, if not utilized, through 2028. Management believes that the realization of the benefits from these losses is uncertain due to our limited operating history and continuing losses for United States income tax purposes. Accordingly, we have provided a 100% valuation allowance on the deferred tax asset benefit to reduce the asset to zero. Management will review this valuation allowance periodically and make adjustments as warranted.

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Net Income

Net income for the three months ended September 30, 2008 was $647,181, a decrease of 51.0% compared to the $1,321,065 of net income reported for the third quarter of 2007. Even though our income from operations increased 16.9% from the third quarter of 2007 to the third quarter of 2008, our net income decreased partly due to $1,350,172 in amortization costs which we recorded in the third quarter of 2008, related to our convertible note financing. In the third quarter of 2008, a majority of the holders of the convertible notes we issued in August 2007 converted their notes into common stock, requiring us to record this amortization expense in the third quarter of 2008. For further details concerning these amortization costs, see “Interest Expenses” above.

Minority interest

On January 9, 2008, our subsidiary Goldenway entered into an Agreement with La Chapelle, to form a joint venture to develop, promote and market a new line of women’s wear in China, referred to as “LA GO GO”. We agreed to initially invest 6 Million RMB (approximately $826,200) in cash, and our joint venture partner La Chapelle agreed to invest 4 Million RMB (approximately $553,040) in cash, for 60% and 40% stakes, respectively, in the joint venture. The LA GO GO joint venture is consolidated in our financial statements, while the 40% stake held by La Chapelle is classified as a “minority interest”. As of September 30, 2008, we recorded $551,623 as minority interest. For the three month period ending September 30, 2008, we recorded a loss of $4,666, which represents La Chapelle’s 40% of LA GO GO’s net loss for the third quarter of 2008.

Nine months Ended September 30, 2008 Compared to Nine months Ended September 30, 2007

The following table summarizes our results of operations for the nine months ended September 30, 2008 and 2007. The table and the discussion below should be read in conjunction with the unaudited financial statements and the notes thereto appearing elsewhere in this report.

	Nine months Ended September 30,
	2008				2007				Increase		% Increase
Sales	$	75,701,181	100.0	%	$	50,001,227	100.0	%	$	25,699,954		51.4	%
Cost of Sales	$	63,035,937	83.3	%	$	42,296,988	84.6	%	$	20,748,949		49.0	%
Gross Profit	$	12,665,244	16.7	%	$	7,704,239	15.4	%	$	4,961,005		64.4	%
Operating Expense	$	5,835,320	7.7	%	$	3,052,273	6.1	%	$	2,783,047		91.2	%
Income From Operations	$	6,829,924	9.0	%	$	4,651,966	9.3	%	$	2,177,958		46.8	%
Other Expenses	$	-2,795,713	-3.7	%	$	-910,979	-1.8	%	$	-1,884,734		206.9	%
Income before income tax expenses	$	4,034,211	5.3	%	$	3,740,987	7.5	%	$	293,224		7.8	%
Income tax expenses	$	841,850	1.1	%	$	155,203	0.3	%	$	686,647		442.4	%
Minority interest	$	-1,417	0.0	%		0	0.0		$	-1,417		—
Net Income	$	3,193,778	4.2	%	$	3,585,784	7.2	%	$	-392,006		-10.9	%

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Sales

The following table sets forth a breakdown of our total sales revenue, by region, for the periods indicated:

	Nine months Ended September 30,
	2008					2007
	$		% of total revenues			$		% of total revenues			Growth in 2008 compared to 2007
	(in U.S. dollars, except for percentages)
ODM Sales

Europe		42,178,290		55.7	%		29,365,688		58.7	%		43.6	%

U.S.		12,734,839		16.8	%		10,627,898		21.3	%		19.8	%

Japan		12,739,050		16.8	%		6,543,188		13.1	%		94.7	%

China		6,594,818		8.7	%		3,464,453		6.9	%		90.4	%

Other		43,284		0.1	%		—		—			—

Domestic Retail Sales

Retail		1,410,900		1.9	%		—		0.0	%		—

Total revenues		75,701,181		100.0	%		50,001,227		100.0	%		51.4	%

We generate revenues primarily from our ODM business mainly for the international markets. In 2008, we entered into our domestic retail market, focusing on our own branded garments. Total sales for the nine months ended September 30, 2008 were $75,701,181, an increase of 51.4% compared to the same period of 2007. This increase was primarily attributable to an operating growth in ODM sales to customers in Europe, U.S., Japan and the PRC, and revenue contributions from our newly launched retail “LA GO GO” in 2008.

Sales to customers in Europe accounted for 55.7% of our net revenue for the nine months ended September 30, 2008, an increase of 43.6% compared to the same period of 2007. This increase was primarily attributable to higher demand and increased order volume from our several largest Europe customers.

Sales to customers in the U.S. accounted for 16.8% of our net revenue for the nine months ended September 30, 2008, an increase of 19.8% compared to the same period of 2007, which was primarily due to the expansion of our customer base in the United States.

Sales to customers in Japan accounted for 16.8% of our net revenue for the nine months ended September 30, 2008, an increase of 94.7% compared to the same period of 2007. The increase was attributable to our success with establishing a long-term relationship with premium brands in the Japanese market, and strong demand in the third quarter of 2008 for the upcoming holiday season.

Sales to customers in the PRC accounted for 8.7% of our net revenue for the nine months ended September 30, 2008, an increase of 90.4% compared to the same period of 2007. The increase was attributable to an increase in order volume from our existing customers in Hong Kong, especially in the first two quarters of 2008.

Sales generated from LA GO GO accounted for 1.9% of our net revenue for the nine months ended September 30, 2008. As of September 30, 2008, we have opened 55 LA GO GO retail stores, generating average sales of $8,500 per month per store.

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Below is a breakdown of our total revenues generated from related parties and third parties for the nine months ended September 30, 2008 and 2007.

	Nine months Ended September 30,
Net Sales	2008				2007				Increase			% Change
To related parties	$	510,145	0.7	%	$	940,334	1.9	%	$	(430,189	)		-45.7	%
To third parties	$	75,191,036	99.3	%	$	49,060,893	98.1	%	$	26,130,143			53.3	%
Total	$	75,701,181	100.0	%	$	50,001,227	100.0	%	$	25,699,954			51.4	%

Net sales to related parties accounted for 0.7% of our total sales for the nine months ended September 30, 2008, a decrease from 1.9% for the same period in 2007. We expect sales to related parties will continue to constitute a small portion of our total sales.

Cost of Sales and Gross Margin

The following table sets forth the components of our cost of sales and gross profit both as an amount and as a percentage of total net sales for the periods indicated.

	Nine months Ended September 30,
	2008				2007				Change		% Change
Total Net Sales	$	75,701,181	100.0	%	$	50,001,227	100.0	%	$	25,699,954		51.4	%
Raw materials		34,860,446	46.1	%		22,994,332	46.0	%		11,866,114		51.6	%
Labor		2,232,520	2.9	%		2,432,246	4.9	%		-199,726		-8.2	%
Outsource Production Costs		23,791,931	31.4	%		15,429,194	30.9	%		8,362,737		54.2	%
Overhead and Other		1,365,079	1.8	%		1,441,216	2.9	%		-76,137		-5.3	%
Retail-purchase finishing garments from other factories		785,961	1.0	%		0	0.0			785,961		—
Total Cost of Sales	$	63,035,937	83.3	%	$	42,296,988	84.6	%	$	20,738,949		49.0	%
Gross Profit	$	12,665,244	16.7	%	$	7,704,239	15.4	%	$	4,961,005		64.4	%

Raw material costs, as a percentage of total net sales, remained flat for the nine months ended September 30, 2008 compared to the same period of 2007. In the third quarter of 2008, we took effective measures to control the cost of raw materials by centralizing our purchasing function.

Labor costs accounted for 2.9% of our total net sales for the nine months ended September 30, 2008, which decreased from 4.9% for the same period in 2007. This decrease was mainly due to an internal headcount reduction. In 2008, after performing a comprehensive review of our processes and organization, management decided to increase outsourcing from our Goldenway subsidiary to independent contractors to improve performance and efficiency as well as better manage our labor costs.

Outsource production costs accounted for 31.4% of our total net sales for the nine months ended September 30, 2008, which increased from 30.9% for the same period in 2007. This increase was primarily attributable to the increased cost of outsourcing in relation to the output from outsourcing, especially in the third quarter of 2008. During 2008, there was a general increase in inflation, which included both wages and goods.

Overhead and other expenses accounted for 1.8% of our total net sales for the nine months ended September 30, 2008, compared to 2.9% for the same period of 2007. This decrease was also due to reduction in our employee headcount as a result of increased outsourcing.

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Our retail business costs accounted for 1.0% of our total net sales for the nine months ended September 30, 2008. This consisted of purchases of finished goods from other suppliers for resale in our LA GO GO stores.

Total cost of sales for the nine months ended September 30, 2008 was $63,035,937, an increase of 49.0% compared to the same period in 2007. As a percentage of total net sales, cost of sales for the nine months ended September 30, 2008, decreased from 84.6% to 83.3%, compared to the same period in 2007. Consequently, the gross margin as a percentage of sales increased to approximately 16.7% from 15.4% for the same period in 2007. The increase in gross margin was attributable to better control in our manufacture overhead and the improvement in our production efficiency in 2008.

The following table sets forth our total net sales, gross profit and gross margin of the geographic market segments for the nine months ended September 30, 2008 and 2007:

	Nine months Ended September 30,
	2008							2007
	Net Sales		Gross profit		Gross margin			Net Sales		Gross profit		Gross margin
ODM Sales
Europe		42,178,290		6,986,953		16.6	%		29,365,688		5,143,983		17.5	%
U.S.		12,734,839		1,321,872		10.4	%		10,627,898		664,656		6.3	%
Japan		12,739,050		2,556,672		20.1	%		6,543,188		878,757		13.4	%
China		6,594,818		1,177,452		17.9	%		3,464,453		1,016,843		29.4	%
Other		43,284		-2,644		-6.1	%		—		—		—
Domestic Sales
Retail		1,410,900		624,939		44.3	%		—		0		—
Total		75,701,181		12,665,244		16.7	%		50,001,227		7,704,239		15.4	%

Gross margin in Europe was 16.6% for the nine months ended September 30, 2008, compared to 17.5% for the same period of 2007. As in the third quarter of 2008, our gross margin experienced mild reduction in the nine month period ending September 30, 2008, as compared with the same nine month period in 2007. In the last nine months we changed our product mix to improve our gross margin, however, this was offset by other countervailing factors, such as higher price sensitivity on the part of our customers, inflation in China and the effect of an appreciating renminbi against currencies of importing nations. Many of our customers have been negotiating for lower contract prices, as the retail environment has become more competitive, which we believe may be associated with a slowing economy in Europe. Also, inflation has persisted in China in recent months, which has increased the prices of labor and materials, and this has added downward pressure to our margins. Finally, the Chinese renminbi has been appreciating against other world currencies, making Chinese imports more expensive, particularly to customers in Europe and the U.S., and this has put pressure on us to reduce prices in order to continue to be a top supplier to many of our customers.

Gross margin in U.S. was 10.4% for the nine months ended September 30, 2008, compared to 6.3% for the same period of 2007. In 2008, we adjusted our customers mix in the U.S., we moved away from mass markets and entering into high quality upper market segments to improve our gross profit percentage. During the nine months ending September 30, 2008, particularly in the third quarter of 2008 as a financial crisis unfolded, consumers became more sensitive to price, we had to decrease our prices in order to compete with rival manufacturers. We are continuing to seek more business opportunities with middle- to upper market premium retailers in order to maintain or gross profit margins.

Gross margin in Japan was 20.1% for the nine months ended September 30, 2008, compared to 13.4% for the same period in 2007 as we shifted toward the premium brand market. For the nine months ended September 30, 2008, we were able to shift our production to upper market premium garments which yielded higher gross margin than our previous product mix. As discussed in our quarterly analysis above, one upper market Japanese casual wear retailer who we recently added as a customer increased their order volume from approximately $14,000 in 2007, up to approximately $1.9 million as of September 30, 2008. Since our sales to Japan became more heavily weighted toward higher-end garments with very favorable margins, our overall gross margin on sales to Japanese customers increased.

Gross margin in China, excluding our retail operations, was 17.9% for the nine months ended September 30, 2008, compared to 29.4% for the same period in 2007. This reduction in gross margin was due to higher-than-expected inflation in the PRC and appreciation of the Chinese renminbi relative to the U.S. Dollar. We managed to negotiate mild increases our contract prices with our Hong Kong customers, based on and to adjust for our internal forecasts regarding domestic inflation and Chinese renminbi appreciation, however, actual domestic inflation and appreciation in the renminbi turned out to be higher than we had originally forecast. As a result, we experienced a decline in gross margin on our sales in China.

Gross margin for our recently launched retail brand, LA GO GO, was 44.3% for the nine months ended September 30, 2008. The decrease in gross margin between the three months ended September 30, 2008 as compared to the nine months ended September 30, 2008 was primarily due to lower margins for summer clothing sold in the third quarter, in contrast to spring clothing sold in the second quarter of 2008 which tends to carry a higher gross margin. Also, as is typical in the retail business, we often discount items during the summer season, which leads to lower margins for items sold in the third quarter of the year.

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Overall gross margin for the nine months ended September 30, 2008 was 16.7%, increase from 15.4% for the same period in 2007. Management generally attributes this to higher inflation in the PRC, and a rising Chinese renminbi. We countered this trend, in some regions more than others as discussed above, by moving toward higher-margin products in those markets. Management expects that continued efforts to move toward upper-market premium products, if successful, will enable the company to combat the effects of inflation and an appreciating Chinese renminbi, and maintain and increase our overall gross profit margins. In addition, management expects that as the company’s domestic retail operation grows and becomes a larger part of our business, if this growth is realized, this would eventually have the effect of increasing the company’s overall profit margins.

Selling, and General and Administrative Expenses

	For the Nine months Ended September 30,
	2008					2007
	$		% of Total Sales			$		% of Total Sales			change		% change
	(in U.S. Dollars, except for percentages)
Gross Profit	$	12,665,244		16.7	%	$	7,704,239		15.4	%	$	4,961,005		64.4	%
Operating Expenses:
Selling Expenses		1,210,063		1.6	%		493,686		1.0	%		716,377		145.1	%
General and Administrative		4,625,257		6.1	%		2,558,587		5.1	%		2,066,670		80.8	%
Total		5,835,320		7.7	%		3,052,273		6.1	%		2,783,047		41.2	%
Income from Operations	$	6,829,924		9.0	%	$	4,651,966		9.3	%	$	2,177,958		46.8	%

Selling expenses in 2008 increased by 145.1% to $1,210,063 for the nine months ended September 30, 2008. The increase was attributable to increased travel and marketing expenses incurred by the international sales force to obtain new customers, and also the increased export expenses such as customs duties, port fees, export document fees, inspection fees, and other related costs, and promotion of our domestic brand, LA GO GO.

General and administrative expenses increased by 80.8% from $2,558,587 for the nine months ended September 30, 2007 to $4,625,257 for the nine months ended September 30, 2008. However, as a percentage of net sales, general and administrative expenses for the nine month period slightly increased from 5.1% to 6.1%. The increase was mainly due to increases in salary expense, employee benefits, professional fees and depreciation expenses relating to our new office facilities. Payroll also increased by approximately $1.1 million in the nine months ended September 30, 2008, as compared to the same period last year, as we hired more management professionals as our business continued its expansion. The increase of the expenses incurred by the US parent company for investor relationship was also affect out total general and administrative expenses.

Income from Operations

Income from operations increased by 46.8% from $4,651,966 for the nine months ended September 30, 2007 to $6,829,924 for the nine months ended September 30 2008, as we expanded our market exposure, increased our sales volume and improved cost management during this period.

Interest Expenses

	Nine months Ended September 30,
	2008		2007		Increase (Decrease)		% Increase
Bank Loans	$	220,827.00	$	177,822.00	$	43,005.00		24.18	%
Related party		145,836.00		177,344.00		-31,508.00		-17.77	%
Convertible notes interest		58,659.00		—		58,659.00		—
Convertible notes-amortization of discount		2,252,224.00		587,368.00		1,664,856.00		283.44	%
Total	$	2,677,546.00	$	942,534.00	$	1,735,012.00		184.08	%

Interest expense was $2,677,546 for the nine months ended September 30, 2008 compared to $942,534 for the same period in 2007.

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Pursuant to the APB 21, financing cost is amortized over the life of the notes to interest expense using the effective interest method. Also according to the paragraph 21 of EITF 00-27, all unamortized discount at the time of the conversion must be recognized as interest expense. During the nine months ended September 30, 2008, $1,950,000 in convertible notes had been converted to the Company’s common shares. Accordingly, for the nine months ended September 30, 2008, $318,196 of financing cost and $1,934,028 amortization of discount were recorded as interest expense.

Income Tax Expenses

Income tax expense for the nine months ended September 30, 2008 and 2007 amounted to $841,850 and $155,203, respectively. Our effective income tax rates were 20.9% and 4.1% for the nine months ended September 30, 2008 and 2007, respectively. The increase in our income tax expenses were mainly due to the expiration of Goldenway’s tax holiday on December 31, 2007. In addition, Catch-Luck and New-Tailun were subject to higher preferential tax rates since the beginning of 2008.

Our PRC subsidiaries were subject to various preferential tax policies and were entitled to the following income tax rates:

	2008			2007

Goldenway		25.0	%		12.0	%
Catch-Luck		12.5	%		0.0	%
New-Tailun		12.5	%		0.0	%
LA GO GO		25.0	%		0.0	%

Goldenway was incorporated in the PRC and is subject to PRC income tax laws and regulations. Goldenway is presently subject to an income tax rate of 25%.

New-Tailun and Catch-Luck were incorporated in the PRC and are subject to PRC income tax laws and regulations. According to the relevant laws and regulations in the PRC, enterprises with foreign investment in the PRC are entitled to full exemption from income tax for two years beginning from the first year the enterprises become profitable and has accumulated profits and a 50% income tax reduction for the subsequent three years. New-Tailun and Catch-Luck were approved as a wholly foreign-owned enterprise in 2006 and are entitled to 100% income tax exemptions in 2006 and 2007 and a 50% reduction for the next three years. In 2008, New-Tailun and Catch-Luck are subject to a 12.5% income tax rate.

LA GO GO was established on January 24, 2008, and it is subject to an income tax rate of 25%.

Perfect Dream Limited (“Perfect Dream”), was incorporated in the British Virgin Islands on July 1, 2004, its income tax rate is 0%.

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Net Income

Net income for the nine months ended September 30, 2008 was $3,193,778, a decrease of 10.9% compared to the same period of 2007.

Minority Interest

On January 9, 2008, our subsidiary Goldenway entered into an Agreement with La Chapelle, to form a joint venture to develop, promote and market a new line of women’s wear in China, referred to as “LA GO GO”. We agreed to initially invest 6 Million RMB (approximately $826,200) in cash, and our joint venture partner La Chapelle agreed to invest 4 Million RMB (approximately $553,040) in cash, for 60% and 40% stakes, respectively, in the joint venture. The LA GO GO joint venture is consolidated in our financial statements, while the 40% stake held by La Chapelle is classified as a “minority interest”. As of September 30, 2008, we recorded $551,623 as minority interest. For the nine month period ending September 30, 2008, we recorded a loss of $1,417, which represents La Chapelle’s 40% of LA GO GO’s net loss for the nine months ended September 30, 2008.

LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 2008, we had cash and cash equivalents of $882,548, other current assets of $28,877,147 and current liabilities of $15,794,376. We presently finance our operations primarily from the cash flow from our operations, and we anticipate that this will continue to be our primary source of funds to finance our short-term cash needs.

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Net cash provided by operating activities for the nine months ended September 30, 2008 was $2,468,982 compared with net cash provided by operating activities of $3,593,829 in the same period of 2007. This decrease was mainly attributable to the increase of our account receivable and advance on raw material purchases due to the increase of our sales.

Net cash used in investing activities for the nine months ended September 30, 2008 was $2,161,350, compared with $1,813,041 for the same period of 2007. On January 9, 2008, Goldenway entered into a Capital Contribution Agreement (“Capital Contribution Agreement”) with La Chapelle, a Shanghai-based garment maker, and several shareholders of La Chapelle. Pursuant to the terms of the Capital Contribution Agreement, Goldenway invested $1,397,700 in cash (10 million RMB) in La Chapelle for a 10% ownership interest in La Chapelle.

Net cash used in financing activities for the nine months ended September 30, 2008 was $158,272, compared with net cash provided by financing activities of $42,846 for the same period of 2007. The decrease was mainly due to pay back $1,844,164 to Blue Power Holding Ltd, partially offset by $553,040 received from La Chapelle for incorporating LA GO GO, and $219,635 received from two convertible notes holders for exercising the warrants.

On July 31, 2008, Goldenway entered into credit agreements with Nanjing Bank which allow the Company to borrow a principal amount up to $7.30 million (RMB 50 million) within a 24 month period. Bank loans are secured by our facilities and used to fund daily operations. As of September 30, 2008, we had borrowed approximately $5.8 million which matures on February 18, 2009 at an interest rate of 7.227% per annum. We plan to repay the loans with cash flow from operations. In the event we do not have available cash flow from operations to repay these loans, we will seek to consolidate and refinance the loans at maturity.

On August 2, 2007, we consummated a private placement of $2,000,000 of our secured convertible notes. The net proceeds were $1,757,480 excluding financing costs. The purpose of the financing was primarily working capital.

In addition, as of September 30, 2008, we had borrowed $2,630,821 from a related party for the main purpose of funding the increased registered capital of Goldenway. Interest to be paid to this related party totaled $145,836 for the nine months ended September 30, 2008.

Capital Commitments

We have a continuing program for the purpose of improving our manufacturing facilities. We anticipate that cash flows from operations and bank borrowings will be used to pay for these capital commitments. The Articles of Association of our Goldenway subsidiary required that registered capital of approximately $17.5 million be paid into Goldenway by February 1, 2008. The increased registered capital is to be paid in installments within three years of the issuance of Goldenway’s updated business license. As of February 1, 2008, the Company had fulfilled $3.6 million of its registered capital requirements and had a registered capital commitment of $13.9 million payable by February 1, 2008. In April 2008, the Company obtained the approval from the government granting the extension to make the required capital contribution by July 25, 2008. As of July 20, 2008, the Company had fulfilled $5.6 million of its registered capital requirements and had a registered capital commitment of $11.9 million payable by July 25, 2008. In July 2008, the Company obtained the approval from the government granting the extension to make the required capital contribution by April 25, 2009.

On August 2, 2007, the Company issued 6% secured convertible debentures in a face amount of $2,000,000. The notes had a two year term, unless sooner converted by the notes holders into our common stock. As of September 30 2008, the notes holders converted $1,950,000 of principal plus accrued interest of $2,155 to 887,348 shares of common stock of the Company. On October 1, 2008, all of the 6% convertible notes, face amount $2,000,000, had been converted into shares of common stock.

Uses of Liquidity

Our cash requirements through the end of fiscal 2008 will be primarily to fund daily operations for the growth of our business. In addition, we will be required to fund our required capital contributions to Goldenway as discussed above in “Capital Commitments.”

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Sources of Liquidity

Our primary sources of liquidity for our short-term cash needs are expected to be from cash flows generated from operations and cash and cash equivalents currently on hand. We believe that we will be able to borrow additional funds if needed.

We believe our cash flow from operations together with our cash and cash equivalents currently on hand will be sufficient to meet our needs for working capital, capital expenditure and other commitments through the end of 2008. No assurance can be made that such financing will be available to us, and adequate funds may not be available on terms acceptable to us. If funding is insufficient at any time in the future, we will develop or enhance our products or services and expand our business through our own cash flows from operations.

As of September 30, 2008, we had access to $7,315,000 of line of credit. Of this line of credit, $1,521,520 is available and unused, of which our lender has committed to loan to us upon request. This credit facility does not contain any covenants or impose any other restrictions on our operations.

Foreign Currency Translation Risk

Our operations are, for the most part, located in the PRC, which may give rise to significant foreign currency risks from fluctuations and the degree of volatility of foreign exchange rates between the United States dollar and the Chinese RMB. We price our exported products, and enter into sales contracts, based on the U.S. dollar. During 2003 and 2004 the exchange rate of RMB to the dollar remained constant at 8.26 RMB to the dollar. On July 21, 2005, the Chinese government adjusted the exchange rate from 8.26 to 8.09 RMB to the dollar. In 2008, the RMB continued to appreciate against the U.S. dollar. As of September 30, 2008, the market foreign exchanges rate was increased to 6.85 RMB to one U.S. dollar. As a result, the ongoing appreciation of RMB to U.S. dollar negatively impacted our gross margins for the nine months and three months ended September 30, 2008. We are always negotiating order price adjustments with most of our customers based on the daily market foreign exchange rates, which we believe will reduce our exposure to exchange rate fluctuations in the future and pass some of the increase in cost to our customers.

In addition, the financial statements of Goldenway, New-Tailun, Catch-Luck and LA GO GO (whose functional currency is the RMB) are translated into US dollars using the closing rate method. The balance sheet items are translated into US dollars using the exchange rates at the respective balance sheet dates. The capital and various reserves are translated at historical exchange rates prevailing at the time of the transactions while income and expenses items are translated at the average exchange rate for the period. All exchange differences are recorded within equity. The foreign currency translation gain for the nine months ended September 30, 2008 and 2007 were $1,818,706 and $720,130, respectively.

OFF-BALANCE SHEET ARRANGEMENTS

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our investors.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We do not use derivative financial instruments in our investment portfolio and have no foreign exchange contracts. Our financial instruments consist of cash and cash equivalents, trade accounts receivable, accounts payable and long-term obligations. We consider investments in highly-liquid instruments purchased with an original maturity of 90 days or less at the date of purchase to be cash equivalents.

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Interest Rates. Our exposure to market risk for changes in interest rates relates primarily to our short-term investments and short-term obligations; thus, fluctuations in interest rates would not have a material impact on the fair value of these securities. At September 30, 2008, we had approximately $0.9 million in cash and cash equivalents. A hypothetical 5% increase or decrease in either short-term or long-term interest rates would not have any material impact on our earnings or loss, or the fair market value or cash flows of these instruments.

Foreign Exchange Rates. We pay our suppliers and employees in Chinese RMB, however, we sell to customers in the U.S., Japan and Europe and we generate sales in U.S. dollars and Euros. Accordingly, our business has substantial exposure to changes in exchange rates between and among the Chinese RMB, the U.S. dollar and the Euro. In the last decade, the RMB has been pegged at 8.2765 yuan to one U.S. dollar. On July 21, 2005 it was revalued to 8.11 per U.S. dollar. Following the removal of the peg to the U.S. dollar and pressure from the U.S., the People’s Bank of China also announced that the RMB would be pegged to a basket of foreign currencies, rather than being strictly tied to the U.S. dollar, and would be allowed to float trade within a narrow 0.3% daily band against this basket of currencies. The PRC government has stated that the basket is dominated by the U.S. dollar, Euro, Japanese Yen and South Korean Won, with a smaller proportion made up of the British Pound, Thai Baht, Russian Ruble, Australian Dollar, Canadian Dollar and Singapore Dollar. There can be no assurance that the relationship between the RMB and these currencies will remain stable over time, especially in light of the significant political pressure on the Chinese government to permit the free flotation of the RMB, which could result in greater and more frequent fluctuations in the exchange rate between the RMB, the U.S. dollar and the Euro. At September 30, 2008, the exchange rate between the RMB and dollar was 6.84 RMB to one U.S. dollar. For additional discussion regarding our foreign currency risk, see the section titled “Risk Factors — Fluctuation in the value of Chinese RMB relative to other currencies may have a material adverse effect on our business and/or an investment in our shares.”

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

As of September 30, 2008, we carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and our chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) were effective.

Remediation of Material in Internal Control over Financial Reporting

Management, including our chief executive officer and our chief financial officer, does not expect that our disclosure controls and internal controls will prevent all error or all fraud, even as the same are improved to address any deficiencies and/or weaknesses. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control.

Our financial reporting process includes extensive procedures we undertake in order to obtain assurance regarding the reliability of our published financial statements, notwithstanding the material weaknesses in internal control. We expanded our review of accounting for business combinations to help compensate for our material weaknesses in order to provide assurance that the financial statements are free of material inaccuracies or omissions of material fact. As a result, management, to the best of its knowledge, believes that (i) this Quarterly Report on Form 10-Q does not contain any untrue statements of a material fact or omit any material fact and (ii) the financial statements and other financial information included in this report have been prepared in conformity with GAAP and fairly present in all material aspects our financial condition, results of operations, and cash flows.

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Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934) during the quarter ended September 30, 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

There have been no material developments in any of our legal proceedings since the last date covered by our quarterly report for the period ending June 30, 2008.

ITEM 1A. RISK FACTORS

You should carefully consider the risks described below together with all of the other information included in this report before making an investment decision with regard to our securities. The statements contained in or incorporated into this report that are not historic facts are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by forward-looking statements. If any of the following events described in these risk factors actually occurs, our business, financial condition or results of operations could be harmed. In that case, the trading price of our common stock could decline.

Risks Relating to Our Industry

Our sales are influenced by general economic cycles. A prolonged period of depressed consumer spending would have a material adverse effect on our profitability.

Apparel is a cyclical industry that is dependent upon the overall level of consumer spending. Purchase of apparel generally decline during recessionary periods when disposable income is low. Our customers anticipate and respond to adverse changes in economic conditions and uncertainty by reducing inventories and canceling orders. As a result, any substantial deterioration in general economic conditions, increases in energy costs or interest rates, acts of war, acts of nature or terrorist or political events that diminish consumer spending and confidence in any of the regions in which we compete, could reduce our sales and adversely affect our business and financial condition. We currently sell to customers in the U.S., the EU and Japan. Accordingly, economic conditions and consumer spending patterns in these regions could affect our sales, and an economic down turn in one or more of these regions could have an adverse effect on our business.

Intense competition in the worldwide apparel industry could reduce our sales and prices.

We face a variety of competitive challenges from other apparel manufacturers both in China and other countries. Some of these competitors have greater financial and marketing resources than we do and may be able to adapt to changes in consumer preferences or retail requirements more quickly, devote greater resources to the marketing and sale of their products or adopt more aggressive pricing policies than we can. As a result, we may not be able to compete successfully with them if we cannot continue enhancing our marketing and management strategies, quality and value or responding appropriately to consumers’ needs.

The success of our business depends upon our ability to offer innovative and upgraded products at attractive price points.

The worldwide apparel industry is characterized by constant product innovation due to changing consumer preferences and by the rapid replication of new products by competitors. As a result, our success depends in large part on our ability to continuously and rapidly respond to customer requirements for innovative and stylish products at a competitive pace, intensity, and price. Failure on our part to regularly and rapidly respond to customer requirements could adversely affect our ability to retain our existing customers or to acquire new customers which would limit our sales growth.

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The worldwide apparel industry is subject to ongoing pricing pressure.

The apparel market is characterized by low barriers to entry for both suppliers and marketers, global sourcing through suppliers located throughout the world, trade liberalization, continuing movement of product sourcing to lower cost countries, ongoing emergence of new competitors with widely varying strategies and resources, and an increasing focus on apparel in the mass merchant channel of distribution. These factors contribute to ongoing pricing pressure throughout the supply chain. This pressure has and may continue to:

	·	require us to reduce wholesale prices on existing products;
	·	result in reduced gross margins across our product lines;
	·	increase pressure on us to further reduce our production costs and our operating expenses.

Any of these factors could adversely affect our business and financial condition.

Fluctuation in the price, availability and quality of raw materials could increase our cost of goods and decrease our profitability.

We purchase raw materials directly from local fabric and accessory suppliers. We may also import specialty fabrics to meet specific customer requirements. We also purchase finished goods from other contract manufacturers. The prices we charge for our products are dependent in part on the market price for raw materials used to produce them. The price, availability and quality of our raw materials may fluctuate substantially, depending on a variety of factors, including demand, crop yields, weather patterns, supply conditions, transportation costs, government regulation, economic climates and other unpredictable factors. Any raw material price increases could increase our cost of goods and decrease our profitability unless we are able to pass higher prices on to our customers.

We do not rely on any single source for our supplies, and we do not believe that loss of any of our suppliers would have a material adverse effect on our ability to obtain finished goods or raw materials essential to our business because we believe we can locate other suppliers in a timely manner.

Risks Relating to Our Business

We are increasingly relying upon contract manufacturers, to whom we outsource a significant amount of our manufacturing. An interruption our business relationship these contract manufacturers may disrupt our operations.

During the three months and nine months ended September 30, 2008 and 2007, we relied on one contract manufacturer for 17% and 14% of our outsourcing production, respectively. For the three months ended September 30, 2008 and 2007, respectively, this contract manufacturer handled approximately 19.0% and 9.8% of our outsourced production. We do not believe that loss of the relationship with our highest volume contract manufacturer would have any long term material adverse effect on our business, as we believe that we would be able to promptly find and engage an alternative manufacturer within a reasonable amount of time. However, a prolonged interruption with our contract manufacturers may cause an interruption in our operations, which could adversely affect our results.

We depend on some key customers for a significant portion of our sales. A significant adverse change in a customer relationship or in a customer’s performance or financial position could harm our business and financial condition.

For the nine months ended September 30, 2008 and 2007, respectively, our one largest customer represented approximately 29.4% and 33.9% of our total net sales. For the three months ended September 30, 2008 and 2007, respectively, this largest customer represented approximately 25.7% and 29.9% of our total net sales. As of September 30, 2008, this customer accounted for 2.5% of total accounts receivable. The garment manufacturing industry has experienced substantial consolidation in recent years, which has resulted in increased customer leverage over suppliers, greater exposure for suppliers to credit risk and an increased emphasis by customers on inventory management and productivity.

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A decision by a major customer, whether motivated by competitive considerations, strategic shifts, financial requirements or difficulties, economic conditions or otherwise, to decrease its purchases from us or to change its manner of doing business with us, could adversely affect our business and financial condition. In addition, while we have long-standing customer relationships, we do not have long term contracts with any of our customers.

As a result, purchases generally occur on an order-by-order basis, and the relationship, as well as particular orders, can generally be terminated by either party at any time. We do not believe that there is any material risk of loss of any of these customers during the next 12 months. We also believe that the unexpected loss of these customers could have material adverse effect on our earnings or financial condition. While we believe that we could replace these customers within 12 months, the loss of which will not have material adverse effect on our financial condition in the long term. None of our affiliates are officers, directors, or material shareholders of any of these customers.

Our internal controls and procedures have been materially deficient, and, although we have corrected our internal control deficiencies, if our internal controls and procedures are found to be materially deficient in the future, or if we fail to implement required new or improved controls and procedures, our operating results could be harmed by increased regulatory compliance or remedial costs, and in addition, the price of our stock could decline.

In the second quarter of 2007, resulting from comments by and discussions with the staff of the SEC related to our Preliminary Information Statement on Form 14C, we and our independent registered public accounting firm recognized that our internal controls had material weaknesses. We restated our results of operations for the year ended December 31, 2006 and our financial results for the three months and six months ended June 30, 2007 as a result of our purchase accounting for the acquisition of New-Tailun completed on December 30, 2006.

In 2006 and 2007, we did not maintain effective controls to ensure the completeness, accuracy, and valuation over the accounting for business combinations, including the inability to prepare financial statements and footnotes in accordance with SEC rules and regulations and with our 2006 acquisition of New-Tailun. We misapplied generally accepted accounting principles whereby we did not value the acquisitions and record the resulting purchase accounting in accordance with SFAS 141 and EITF 02-5. As a result, we were required to restate our financial results for the year ended December 31, 2006 and for the three months and six months ended June 30, 2007.

During the two quarters of 2008, we corrected our internal control deficiencies, but we cannot be certain that the measures we took will ensure that we implement and maintain adequate internal controls in the future. If we fail to maintain adequate internal controls and if we cannot rectify the material weaknesses through remedial measures and improvements to our systems and procedures, management may encounter difficulties in timely assessing business performance and identifying incipient strategic and oversight issues. Such focus will require management from time to time to devote its attention away from other planning, oversight and performance functions. Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations.

We will be required to evaluate our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act.

Failure to timely comply with the requirements of Section 404 or any adverse results from such evaluation could result in a loss of investor confidence in our financial reports and have an adverse effect on the trading price of our debt and equity securities.

We currently are not an “accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended. Beginning with our Annual Report for the year ended December 31, 2007, Section 404 of the Sarbanes-Oxley Act of 2002 requires us to include an internal control report with our Annual Report on Form 10-K. That report must include management’s assessment of the effectiveness of our internal control over financial reporting as of the end of the fiscal year. This report must also include disclosure of any material weaknesses in internal control over financial reporting that we have identified. Additionally, for the fiscal year ended December 31, 2009, our independent registered public accounting firm will be required to issue reports on management’s assessment of our internal control over financial reporting and their evaluation of the operating effectiveness of our internal control over financial reporting. Our assessment requires us to make subjective judgments and our independent registered public accounting firm may not agree with our assessment.

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Achieving compliance with Section 404 within the prescribed period may require us to incur significant costs and expend significant time and management resources. If we are not able to complete our assessments as required under Section 404 in a timely manner, we would be unable to conclude that our internal control over financial reporting is effective as of December 31, 2008. As a result, investors could lose confidence in our reported financial information, which could have an adverse effect on the trading price of our debt securities.

We must successfully maintain and/or upgrade our information technology systems.

We rely on various information technology systems to manage our operations, and we regularly evaluate these systems against our current and expected requirements. Although we have no current plans to implement modifications or upgrades to our systems, we will eventually be required to make changes to legacy systems and acquiring new systems with new functionality. We are considering additional investments in updating our ERP system to help us improve our internal control system and to meet compliance requirements under Section 404. We are also continuing to develop and update our internal information systems on a timely basis to meet our business expansion needs. Any information technology system disruptions, if not anticipated and appropriately mitigated, could have an adverse effect on our business and operations.

We may engage in future acquisitions and strategic investments that dilute the ownership percentage of our shareholders and require the use of cash, incur debt or assume contingent liabilities.

As part of our business strategy, we expect to continue to review opportunities to buy or invest in other businesses or technologies that we believe would enhance our manufacturing capabilities, or that may otherwise offer growth opportunities. If we buy or invest in other businesses in the future, this may require the use of our cash, or we may incur debt or assume contingent liabilities.

As part of our business strategy, we expect to continue to review opportunities to buy or invest in other businesses or technologies that we believe would complement our current products, expand the breadth of our markets or enhance our technical capabilities, or that may otherwise offer growth opportunities. If we buy or invest in other businesses, products or technologies in the future, we could:

	·	incur significant unplanned expenses and personnel costs;

	·	issue stock that would dilute our current shareholders’ percentage ownership;

use cash, which may result in a reduction of our liquidity;

incur debt;

assume liabilities; and

spend resources on unconsummated transactions.

We may not realize the anticipated benefits of past or future acquisitions and strategic investments, and integration of acquisitions may disrupt our business and management.

We may in the future acquire or make strategic investments in additional companies. We may not realize the anticipated benefits of these or any other acquisitions or strategic investments, which involve numerous risks, including:

	·	problems integrating the purchased operations, technologies, personnel or products over geographically disparate locations;

	·	unanticipated costs, litigation and other contingent liabilities;

diversion of management’s attention from our core business;

Adverse effects on existing business relationships with suppliers and customers;

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incurrence of acquisition-related costs or amortization costs for acquired intangible assets that could impact our operating results;

inability to retain key customers, distributors, vendors and other business partners of the acquired business;

potential loss of our key employees or the key employees of an acquired organization; and

If we are not be able to successfully integrate businesses, products, technologies or personnel that we acquire, or to realize expected benefits of our acquisitions or strategic investments, our business and financial results may be adversely affected.

International political instability and concerns about other international crises may increase our cost of doing business and disrupt our business.

International political instability may halt or hinder our ability to do business and may increase our costs. Various events, including the occurrence or threat of terrorist attacks, increased national security measures in the EU, the United States and other countries, and military action and armed conflicts, can suddenly increase international tensions. Increases in energy prices will also impact our costs and could harm our operating results. In addition, concerns about other international crises, such as the spread of severe acute respiratory syndrome (“SARS”), avian influenza, or bird flu, and West Nile viruses, may have an adverse effect on the world economy and could adversely affect our business operations or the operations of our OEM partners, contract manufacturer and suppliers. This political instability and concerns about other international crises may, for example:

negatively affect the reliability and cost of transportation;

negatively affect the desire and ability of our employees and customers to travel;

adversely affect our ability to obtain adequate insurance at reasonable rates;

require us to take extra security precautions for our operations; and

furthermore, to the extent that air or sea transportation is delayed or disrupted, our operations may be disrupted, particularly if shipments of our products are delayed.

Business interruptions could adversely affect our business.

Our operations and the operations of our suppliers and customers are vulnerable to interruption by fire, earthquake, hurricanes, power loss, telecommunications failure and other events beyond our control. In the event of a major natural disaster, we could experience business interruptions, destruction of facilities and loss of life. In the event that a material business interruption occurs that affects us or our suppliers or customers, shipments could be delayed and our business and financial results could be harmed.

Risks Related to Doing Business in China

Because our assets are located overseas, shareholders may not receive distributions that they would otherwise be entitled to if we were declared bankrupt or insolvent.

Our assets are, for the most part, located in the PRC. Because our assets are located overseas, our assets may be outside of the jurisdiction of U.S. courts to administer if we are the subject of an insolvency or bankruptcy proceeding. As a result, if we declared bankruptcy or insolvency, our shareholders may not receive the distributions on liquidation that they would otherwise be entitled to if our assets were to be located within the U.S., under U.S. bankruptcy law.

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Export quotas imposed by the WTO could negatively affect our business and operations, particularly if the Chinese government changes its allocation of such quotas to us.

Pursuant to a World Trade Organization (WTO) agreement, effective January 1, 2005, the United States and other WTO member countries agreed to remove quotas applicable to textiles. However, as the removal of quotas resulted in an import surge from China, the U.S. took action in May 2005 and imposed safeguard quotas on seven categories of goods, including certain classes of apparel products, arousing strong objection from China.

On June 10, 2005, in response to the surge of Chinese imports into the European Union (EU), the EU Commission signed a Memorandum of Understanding (MOU) with China in which ten categories of textiles and apparel are subject to restraints. Additionally, on November 8, 2005, the U.S. and China entered into a Memorandum of Understanding in which 21 categories of textiles and apparel are subject to restraints.

Although certain of our apparel products fall within the categories subject to the safeguards in the U.S. and the EU, which could adversely affect our ability to export and sell these products, the imposition of quotas in 2005 did not have a material effect on our net sales, although it did impact our gross margin. The imposition of quotas have not had a material effect on our net sales or our gross margins from the time the quotas were instituted up to the present. See Management’s Discussion and Analysis of Financial Condition and Results of Operations. We believe that we will be able to obtain a sufficient quota allocation based on our experience in prior years. In addition, we may bid for additional export quota allocation from the government for the U.S. and EU markets. On a longer term basis, we believe that our customer mix and our ability to adjust the types of apparel we manufacture will mitigate our exposure to such trade restrictions in the future.

Nevertheless, there can be no assurance that additional trade restrictions will not be imposed on the exportation of our products in the future. Such actions could result in increases in the cost of our products generally and may adversely affect our results of operations.

Adverse changes in economic and political policies of the PRC government could have a material adverse effect on the overall economic growth of China, which could adversely affect our business.

All of our business operations are currently conducted in the PRC, under the jurisdiction of the PRC government. Accordingly, our results of operations, financial condition and prospects are subject to a significant degree to economic, political and legal developments in China. China’s economy differs from the economies of most developed countries in many respects, including with respect to the amount of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. While the PRC economy has experienced significant growth in the past 20 years, growth has been uneven across different regions and among various economic sectors of China. The PRC government has implemented various measures to encourage economic development and guide the allocation of resources. Some of these measures benefit the overall PRC economy, but may also have a negative effect on us. For example, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations that are applicable to us. Since early 2004, the PRC government has implemented certain measures to control the pace of economic growth. Such measures may cause a decrease in the level of economic activity in China, which in turn could adversely affect our results of operations and financial condition.

Unprecedented rapid economic growth in China may increase our costs of doing business, and may negatively impact our profit margins and/or profitability.

Our business depends in part upon the availability of relatively low-cost labor and materials. Rising wages in China may increase our overall costs of production. In addition, rising raw material costs, due to strong demand and greater scarcity, may increase our overall costs of production. If we are not able to pass these costs on to our customers in the form of higher prices, our profit margins and/or profitability could decline.

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Fluctuation in the value of Chinese Renminbi (RMB) relative to other currencies may have a material adverse effect on our business and/or an investment in our shares.

The value of RMB against the U.S. dollar, the Euro and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions. In the last decade, the RMB has been pegged at 8.2765 Yuan to one U.S. dollar. On July 21, 2005 it was revalued to 8.11 per U.S. dollar. Following the removal of the peg to the U.S. dollar and pressure from the United States, the People’s Bank of China also announced that the RMB would be pegged to a basket of foreign currencies, rather than being strictly tied to the U.S. dollar, and would be allowed to float trade within a narrow 0.3% daily band against this basket of currencies. The PRC government has stated that the basket is dominated by the U.S. dollar, Euro, Japanese Yen and South Korean Won, with a smaller proportion made up of the British Pound, Thai Baht, Russian Ruble, Australian Dollar, Canadian Dollar and Singapore Dollar. There can be no assurance that the relationship between the RMB and these currencies will remain stable over time, especially in light of the significant political pressure on the Chinese government to permit the free flotation of the RMB, which could result in greater and more frequent fluctuations in the exchange rate between the RMB, the U.S. dollar, and the Euro. If the RMB were to increase in value against the U.S. dollar and other currencies, for example, consumers in the U.S., Japan and Europe would experience an increase in the relative prices of goods and services produced by us, which might translate into a decrease in sales. In addition, if the RMB were to decline in value against these other currencies, the financial value of your investment in our shares would also decline.

You may face difficulties in protecting your interests, and your ability to protect your rights through the U.S. federal courts may be limited, because our subsidiaries are incorporated in non-U.S. jurisdictions, we conduct substantially all of our operations in China, and a majority of our officers and directors reside outside the United States.

Although we are incorporated in Florida, we conduct substantially all of our operations in China through our wholly owned subsidiaries in China. The majority of our officers and directors reside outside the United States, and accordingly some or all of the assets of those persons are located outside of the United States. As a result, it may be difficult or impossible for you to bring an action against us or against individuals in China in the event that you believe that your rights have been infringed under the securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the PRC may render you unable to enforce a judgment against our assets or the assets of our directors and officers.

As a result of all of the above, our public shareholders may have more difficulty in protecting their interests through actions against our management, directors or major shareholders than would shareholders of a corporation doing business entirely within the United States.

Risks Related to an Investment in Our Securities

Our common stock has limited liquidity.

Our common stock is traded on the American Stock Exchange, but it is thinly traded compared to larger more widely known companies in the same industry. Thinly traded common stock can be more volatile than stock trading in an active public market. We cannot predict the extent to which an active public market for our common stock will develop or be sustained.

Our stock may be categorized as a penny stock. Trading of our stock may be restricted by the SEC’s penny stock regulations which may limit a shareholder’s ability to buy and sell our stock.

Our stock may categorized as a penny stock. The Securities and Exchange Commission has adopted Rule 15g-9 which generally defines “penny stock” to be any equity security that has a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. Our securities may be covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and accredited investors. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the SEC which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer’s account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer’s confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability of broker-dealers to trade our securities. We believe that the penny stock rules discourage investor interest in and limit the marketability of our common stock.

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FINRA sales practice requirements may also limit a shareholder’s ability to buy and sell our stock.

In addition to the “penny stock” rules described above, FINRA has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. The FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.

We expect to experience volatility in our stock price, which could negatively affect shareholders’ investments.

The market price for shares of our common stock may be volatile and may fluctuate based upon a number of factors, including, without limitation, business performance, news announcements or changes in general market conditions.

Other factors, in addition to the those risks included in this section, that may have a significant impact on the market price of our common stock include, but are not limited to:

receipt of substantial orders or order cancellations of products;

	·	quality deficiencies in services or products;

	·	international developments, such as technology mandates, political developments or changes in economic policies;

	·	changes in recommendations of securities analysts;

shortfalls in our backlog, revenues or earnings in any given period relative to the levels expected by securities analysts or projected by us;

government regulations, including stock option accounting and tax regulations;

energy blackouts;

acts of terrorism and war;

widespread illness;

proprietary rights or product or patent litigation;

strategic transactions, such as acquisitions and divestitures;

rumors or allegations regarding our financial disclosures or practices; or

earthquakes or other natural disasters concentrated in Nanjing, China where a significant portion of our operations are based.

In the past, securities class action litigation has often been brought against a company following periods of volatility in the market price of its securities. Due to changes in the volatility of our common stock price, we may be the target of securities litigation in the future. Securities litigation could result in substantial costs and divert management’s attention and resources.

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Conversion of our issued and outstanding convertible promissory notes into shares of our common stock will dilute the ownership interests of existing shareholders, including holders who will have already converted their notes.

The conversion of some or all of the notes into our shares of our common stock will dilute the ownership interests of existing shareholders. Any sales in the public market of the shares of common stock issuable upon such conversion could adversely affect prevailing market prices of our shares of common stock. In addition, the existence of the notes may encourage short selling by market participants because the conversion of the notes could depress the price of our shares of common stock.

To date, we have not paid any cash dividends and no cash dividends will be paid in the foreseeable future.

We do not anticipate paying cash dividends on our common stock in the foreseeable future and we may not have sufficient funds legally available to pay dividends. Even if the funds are legally available for distribution, we may nevertheless decide not to pay any dividends. We presently intend to retain all earnings for our operations.

Our common shares are not currently traded at high volume, and you may be unable to sell at or near ask prices or at all if you need to sell or liquidate a substantial number of shares at one time.

We cannot predict the extent to which an active public market for our common stock will develop or be sustained.

Our common shares are currently traded, but currently with low volume, based on quotations on the American Stock Exchange, meaning that the number of persons interested in purchasing our common shares at or near bid prices at any given time may be relatively small or non-existent. This situation is attributable to a number of factors, including the fact that we are a small company which is still relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume, and that even if we came to the attention of such persons, they tend to be risk-averse and would be reluctant to follow an unproven company such as ours or purchase or recommend the purchase of our shares until such time as we became more seasoned and viable. As a consequence, there may be periods of several days or more when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. We cannot give you any assurance that a broader or more active public trading market for our common stock will develop or be sustained, or that trading levels will be sustained.

Our corporate actions are substantially controlled by our principal shareholders and affiliated entities.

Our principal shareholders, including our officers and directors, and their affiliated entities own approximately 42% of our outstanding shares of common stock. These shareholders, acting individually or as a group, could exert substantial influence over matters such as electing directors and approving mergers or other business combination transactions. In addition, because of the percentage of ownership and voting concentration in these principal shareholders and their affiliated entities, elections of our board of directors will generally be within the control of these shareholders and their affiliated entities. While all of our shareholders are entitled to vote on matters submitted to our shareholders for approval, the concentration of shares and voting control presently lies with these principal shareholders and their affiliated entities. As such, it would be difficult for shareholders to propose and have approved proposals not supported by management. There can be no assurances that matters voted upon by our officers and directors in their capacity as shareholders will be viewed favorably by all of our shareholders.

The elimination of monetary liability against our directors, officers and employees under Florida law and the existence of indemnification rights to our directors, officers and employees may result in substantial expenditures by our company and may discourage lawsuits against our directors, officers and employees.

Our amended and restated Articles of Incorporation contain a provision permitting us to eliminate the liability of our directors for monetary damages to our company and shareholders to the extent provided by Florida law. We may also have contractual indemnification obligations under our employment agreements with our officers. The foregoing indemnification obligations could result in our company incurring substantial expenditures to cover the cost of settlement or damage awards against directors and officers, which we may be unable to recoup. These provisions and resultant costs may also discourage our company from bringing a lawsuit against directors and officers for breaches of their fiduciary duties, and may similarly discourage the filing of derivative litigation by our shareholders against our directors and officers even though such actions, if successful, might otherwise benefit our company and shareholders.

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Legislative actions, higher insurance costs and potential new accounting pronouncements may impact our future financial position and results of operations.

There have been regulatory changes, including the Sarbanes-Oxley Act of 2002, and there may potentially be new accounting pronouncements or additional regulatory rulings that will have an impact on our future financial position and results of operations. The Sarbanes-Oxley Act of 2002 and other rule changes as well as proposed legislative initiatives following the Enron bankruptcy are likely to increase general and administrative costs and expenses. In addition, insurers are likely to increase premiums as a result of high claims rates over the past several years, which we expect will increase our premiums for insurance policies. Further, there could be changes in certain accounting rules. These and other potential changes could materially increase the expenses we report under generally accepted accounting principles, and adversely affect our operating results.

If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent material misstatements.

We are subject to reporting obligations concerning our internal controls, under the U.S. securities laws. The Securities and Exchange Commission, or the SEC, as required by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules requiring every public company to include a management report on such company’s internal controls over financial reporting in its annual report, which contains management’s assessment of the effectiveness of our internal controls over financial reporting. In addition, an independent registered public accounting firm must attest to management’s assessment of the effectiveness of our internal controls over financial reporting, and report on the effectiveness of these controls. These requirements will first apply to our annual report on Form 10-K for the fiscal year ending December 31, 2007. Our management may conclude that our internal controls over our financial reporting are not effective. Moreover, even if our management concludes that our internal controls over financial reporting are effective, our independent registered public accounting firm may still decline to attest to our management’s assessment or may issue a report that is qualified if it is not satisfied with our controls or the level at which our controls are documented, designed, operated or reviewed, or if it interprets the relevant requirements differently from us. Our reporting obligations as a public company will place a significant strain on our management, operational and financial resources and systems for the foreseeable future. Effective internal controls, particularly those related to sales revenue recognition, are necessary for us to produce reliable financial reports and are important to help prevent material misstatements, or in certain extreme cases, fraud. As a result, our failure to achieve and maintain effective internal controls over financial reporting could result in the loss of investor confidence in the reliability of our financial statements, which in turn could harm our business and negatively impact the trading price of our stock. Furthermore, we anticipate that we will incur considerable costs and use significant management time and other resources in an effort to comply with Section 404 and other requirements of the Sarbanes-Oxley Act.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS

None.

ITEM 5.

OTHER INFORMATION

None.

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ITEM 6.

EXHIBITS

The following exhibits are filed herewith:

Exhibit No.		Description

10.29		Credit Agreement with Nanjing Bank (English Summary Translation)

31.1		Certifications pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *

31.2		Certifications pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *

32.1		Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *

32.2		Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *

*	Filed herewith.

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SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

November 11, 2008	EVER-GLORY INTERNATIONAL GROUP, INC.

	By:	/s/ Edward Yihua Kang
		Edward Yihua Kang
		Chief Executive Officer
		(Principal Executive Officer)

By:	/s/ Yan Guo
	Yan Guo
	Chief Financial Officer
	(Principal Financial and Accounting Officer)