UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C.  20549





(Mark One)


Form 10-K/ A


(Amendment No. 1)





[√]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





For the Fiscal year ended December 31, 2008


or


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





For the transition period from __________________ to __________________________Commission file number: 0-31497





CHINA LOGISTICS GROUP, INC.(Exact name of registrant as specified in its charter)





Florida
65-1001686(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)





23F. Gutai Beach Building No. 969, Zhongshan Road (South), Shanghai, China
200011(Address of principal executive offices)
(Zip Code)





Registrant's telephone number, including area code:
86-21-63355100


7300 Alondra Boulevard, Suite 108, Paramount, California 90723


(Former name, former address and former fiscal year, if changed since last report)


Securities registered under Section 12(b) of the Act:





Title of each class
Name of each exchange on which registeredNone
Not applicable





Securities registered under Section 12(g) of the Act:





Common Stock(Title of class)





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





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





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 [ ] No [ X ]





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





Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company:





Large accelerated filer
[ ]
Accelerated filer
[ ]Non-accelerated filer
(Do not check if smaller reporting company)
[ ]
Smaller reporting company
[X]





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





State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked prices of such common equity, as of the last business day of the registrant's most recently completed second fiscal quarter. $13,656,130 on June
30, 2008.





Indicated the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date.  34,508,203 shares of common stock are issued and outstanding as of May 18, 2009.





DOCUMENTS INCORPORATED BY REFERENCE





List hereunder the following documents if incorporated by reference and the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: None.











Explanatory Paragraph





China Logistics Group, Inc. (“we”, “us”, “our”, or the “Company”) is filing this amendment No.1 to amend our Annual Report on Form 10-K for the year ended December 31, 2008 filed on May 18, 2009 to correct the accounting treatment previously accorded certain transactions
and to restate our consolidated balance sheets as of December 31, 2008 and December 31, 2007 and our consolidated statements of cash flows for the year ended December 31, 2008.





The balance sheet at December 31, 2008 was restated to properly record the changes in the components of equity as a result of the reverse recapitalization transaction with Shandong Jiajia completed December 31, 2007.





Additionally, the Company has restated and expanded the disclosures in our consolidated statements of cash flows for the year ended December 31, 2008 to correct and better describe advances from, and repayments of, advances from related parties.





Further, the consolidated balance sheets, consolidated statements of operations, consolidated statement of stockholders’ equity (deficit), and consolidated statement of cash flows for the year ended December 31, 2007 have been restated to correct the accounting treatment previously accorded certain transactions,





Corrections made as of December 31, 2007 included:





•
the recognition of the Company’s capital transaction with Shandong Jiajia resulting in a 51% interest in Shandong Jiajia implemented through a reverse recapitalization;•
the recognition of an agreement to issue 450,000 shares of Series B preferred stock with a fair value of $3,780,000;•
the correction of the accounting treatment accorded a convertible note payable to a related party and principal shareholder, Mr. David Aubel;•
the restatement of historical balance sheets and related disclosures to give retraction effort to a 1 for 40 reverse stock split completed on March 11, 2008;•
the recognition of an accrued for certain professional fees, totaling $141,800 in expense, which were erroneously omitted; and•
The adjustment of the initially reported carrying values of assets and liabilities of MediaReady, Inc, as of December 31, 2007, the effective date of the reverse recapitalization transaction with Shandong Jiaija.





Additional information on the effect of the correction in our financial statements as a result of this most recent restatement is contained in Note 2 – Restatement of Financial Statements and Basis of Presentation appearing elsewhere in this report.





As a result of these additional corrections to our financial statements and related disclosures for the years ended December 31, 2008 and December 31, 2007, we are filing this Amendment No. 1 to our Form 10-K to reflect additional changes to our financial statements necessitated by these restatements.  We
have also made certain changes in the disclosure in response to comments from the staff of the Securities and Exchange Commission.





The items in the Form 10-K/A (Amendment No. 1) which are amended and restated as a result of the foregoing are:





Part I

Part II
• Item 2.
Properties.• Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations,• Item 8.
Financial Statements and Supplementary Data including consolidated balance sheets, consolidated statements of operations, consolidated statements of stockholders’ deficit, consolidated statements of cash flows and notes to consolidated audited financial statements, and• Item 9A (T)
Controls and Procedures.Part IIIItem 10.
Directors, Executive Officers and Corporate Governance.Item 11.
Executive CompensationItem 13.
Certain Relationships and Related Transacations.





This Form 10-K/A (Amendment No. 1) also contains currently dated certifications as Exhibits 31.1, 31.2 and 32.1 hereof.  The remaining Items in this Form 10-K/A (Amendment No. 1) consist of all other items originally contained in our Form 10-K for the year ended December 31, 2007 as filed on May 18, 2008.
This Form 10-K/A (Amendment No. 1) supersedes in its entirety our Annual Report on Form 10-K for the year ended December 31, 2008 filed on May 18, 2008.





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TABLE OF CONTENTS





Page No.Part IItem 1.
Business.
1Item 1A.
Risk Factors
6Item 1B.
Unresolved Staff Comments.
12Item 2.
Properties.
12Item 3.
Legal Proceedings.
12Item 4.
Submission of Matters to a Vote of Security Holders.
13Part IIItem 5.
Stockholder Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
13Item 6.
Selected Financial Data.
14Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operation.
14Item 7A.
Quantative and Qualitative Disclosures About Market Risk.
25Item 8.
Financial Statements and Supplementary Data.
25Item 9.
Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.
25Item 9A.(T)
Controls and Procedures.
25Item 9B.
Other Information.
26Part IIIItem 10.
Directors, Executive Officers and Corporate Governance.
2727Item 11.
Executive Compensation.
28Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
30Item 13.
Certain Relationships and Related Transactions, and Director Independence.
31Item 14.
Principal Accountant Fees and Services.
33Part IVItem 15.
Exhibits, Financial Statement Schedules.
34











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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION





Various statements in this report contain or may contain forward-looking statements that are subject to known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking
statements. These forward-looking statements were based on various factors and were derived utilizing numerous assumptions and other factors that could cause our actual results to differ materially from those in the forward-looking statements. These factors include, but are not limited to:





•
risks from Securities and Exchange Commission litigation;•
risks from liquidated damages related to warrants sold in our 2008 Unit Offering;•
the loss of the services of any of our executive officers or the loss of services of any of our employees responsible for the management, sales, marketing and operations efforts of our subsidiaries;•
our ability to successfully transition the internal operations of our subsidiary as a privately held Chinese company to a subsidiary of a publicly-held U.S. company;•
liabilities related to prior acquisitions,•
continuing material weaknesses in our disclosure controls and procedures and internal control over financial reporting which may lead to additional restatements of our financial statements,•
difficulties in raising capital in the future as a result of the terms of our 2008 Unit Offering;•
our ability to effectively integrate our acquisitions and manage our growth;•
the lack of various legal protections customary in certain agreements to which we are party and which are material to our operations which are customarily contained in similar contracts prepared in the United States;•
intense competition in the freight forwarding and logistics industries;•
the impact of economic downturn in the PRC on our revenues from our operations in the PRC;•
our lack of significant financial reporting experience, which may lead to delays in filing required reports with the Securities and Exchange Commission and suspension of quotation of our securities on the OTCBB, which will make it more difficult for you to sell your securities;•
the impact of changes in the political and economic policies and reforms of the Chinese government; fluctuations in the exchange rate between the U.S. dollars and Chinese Renminbi;•
the limitation on our ability to receive and use our revenue effectively as a result of restrictions on currency exchange in China;•
the impact of changes to the tax structure in the PRC;•
our inability to enforce our legal rights in China due to policies regarding the regulation of foreign investments;•
the existence of extended payment terms which are customary in China; and,•
uncertainties related to PRC regulations relating to acquisitions of PRC companies by foreign entities that could restrict or limit our ability to operate, and could negatively affect our acquisition strategy.





Most of these factors are difficult to predict accurately and are generally beyond our control. You should consider the areas of risk described in connection with any forward-looking statements that may be made herein. Readers are cautioned not to place undue reliance on these forward-looking statements and readers should carefully review
this report in its entirety, including the risks described in Part I., Item 1A. Risk Factors.  Except for our ongoing obligations to disclose material information under the Federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events. These forward-looking statements speak only as of the date of this report, and you should not rely on these statements without also considering
the risks and uncertainties associated with these statements and our business.





OTHER PERTINENT INFORMATION





We maintain our web site at www. chinalogisticsinc.com. Information on this web site is not a part of this annual report . All share and per share information contained in this annual report gives proforma effect to the 1:40 reverse stock split of our outstanding common stock which was effective on March 11, 2008.





Unless specifically set forth to the contrary, when used in this Form 10-K the terms “China Logistics", "we", "us", "our", the "Company", and similar terms refer to China Logistics Group, Inc., a Florida corporation formerly known as MediaReady, Inc., and its subsidiaries.








- iii -





PART I





ITEM 1.                      BUSINESS.





Overview





Our subsidiary, Shandong Jiajia, was established in November 1999 and acts as an agent for international freight and shipping companies. Through this subsidiary, we sell cargo space and arrange international transportation via land, maritime, and air routes primarily for clients seeking to export goods from China. We are a non-asset
based freight forwarder and we do not own any containers, trucks, aircraft or ships. We contract with companies owning these assets to provide transportation services required for shipping freight on behalf of our customers.





Shandong Jiajia’s headquarters are in Qingdao, China, and it has branches in Shanghai, Tianjin and Xiamen with an additional office in Lianyungang.  We coordinate with agents in North America, Europe, Australia, Asia, and Africa. Approximately 60% of our revenues are generated from existing, repeat customers with the remaining
40% generated from new customers. About half of our sales generated from new customers are derived from our own sales force and the other half is derived from third party agent referrals.





Prior to our  reverse recapitalization transaction involving Shandong Jiajia, our historical business model from 2003 to 2007 was to provide products and services in the home entertainment and media-on-demand marketplace.  We produced and distributed interactive consumer electronics equipment
to provide streaming digital media and video on demand (“VOD”) services. While we devoted significant time and resources to the development of this business model, significant competition in our target segment prevented our continued success. Like many small public companies, we encountered significant difficulties in raising adequate capital while at the same time professional fees associated with our reporting obligations under Federal securities laws continued to increase.





On December 31, 2007 we entered into a transaction with the owners of Shandong Jiajia International Freight & Forwarding Co., Ltd. (“Shandong Jiajia”), whereby we acquired a 51% interest in that entity in exchange for a combination of cash and equity.  For accounting purposes, we treated this transaction as a capital
transaction, effected through a reverse recapitalization with Shandong Jiajia being the accounting acquirer and the Company being the legal survivor; this transaction is described in greater detail later in this section under “History of our Company”.  Shandong Jiajia’s operations now constitute 100% of the operations of the Company.  The decision to enter into the transaction with Shandong Jiajia was heavily influenced on its geographic location.  Our
management believed a freight forwarder based in China would be in a position to take advantage of economic growth while our status as a U.S. public company could provide access to the capital markets for investment capital to expand the freight forwarding operations and thus enable the newly merged entity to compete more effectively.  There are no assurances, however, that these assumptions will prove correct.





The Chinese Freight Forwarding Industry





In China, the freight forwarding industry began to develop in the early 1980’s following the China Reform policy. In 1983, Sinotrans Ltd. was the only international freight forwarder registered with the China Ministry of Foreign Trade and Economic Cooperation. By 2006, China had approximately 6,000 international freight forwarders registered
with China Ministry of Commerce and approximately 30,000 unregistered freight forwarders operated by individuals or small businesses. The industry boom is attributed to increasing international trade and relaxed regulation by the Chinese government. China surpassed the United States as the world's second-largest exporter in the middle of 2006, according to figures released by the World Trade Organization1.
For the full year of 2007, the international trade reached $2.1 trillion in 2007 an increase of 23.5% from 20062, which finished above the US in the 2007 totals. The value of exports was $1,218 billion, up by 25.7%, while that of imports went up by 20.8% to reach $955.8 billion3. Since joining
the WTO in 2002, China has enjoyed an annual increase rate above 20% for the successively six years4.  In 2008, China remained as the world’s second biggest exporter5. According to preliminarily statistics of Customs, China's total import and export in January 2008 through November
2008 amounted to $2.4 trillion, up by 20.9% from the previous year. Of this amount, exports accounted for $1.3 trillion and imports accounted for $1.1 trillion, up by 19.3% and 22.8%%, respectively6.





1  http://www.chinadaily.com.cn/china/2007-04/12/content_849420.htm


2  http://www.igovernment.in/site/china%E2%80%99s-gdp-growth-swings-up-by-114/


3  http://www.igovernment.in/site/china%E2%80%99s-gdp-growth-swings-up-by-114/


4  http://www.igovernment.in/site/china%E2%80%99s-gdp-growth-swings-up-by-114/


5  http://news/xinhuanet.com/english/2008-12/19/content_10528088.htm








- 1 -





Our services





The typical freight forwarding service package provided by Shandong Jiajia includes goods reception, space reservation, transit shipment, traffic consolidating, storage, multimodal transport and large scale transport such as export of large mechanical equipment. We provide freight forwarding services for a wide variety of merchandise and
we have experience in handling various types of freight such as refrigerated merchandise, hazardous merchandise and perishable agricultural products.





To accommodate our customers shipping needs, we can either facilitate the shipment of a full container or, if the shipment is less than a full container-load, we will co-load a customer's merchandise with other customers or freight forwarders to create a full container. Containers are in sizes of either 20 foot or 40 foot, each are used for
ocean freight, and a 20 foot container can carry 17.5 metric tons of merchandise while a 40 foot container can carry 22 metric tons of merchandise. For full container loads, as part of our normal services we will deliver the empty container to a customer’s factory and the customer loads the merchandise. We then transport the container to the port of departure for customs clearance. Once the clearance is obtained, the containers are loaded onto the ship and we then issue the bill of lading and service invoice
to our customer.





For shipments of less than full container loads, merchandise which will be co-loaded with merchandise from other customers or freight forwarders, our customers may either request that the merchandise be picked up at their factory or deliver the merchandise directly to a warehouse in Shanghai. Upon receipt at the warehouse, we will store the
merchandise until a sufficient quantity of other merchandise is received to fill the particular container. Generally, the merchandise is in storage for 30 days or less. An unrelated third party owns the warehouse and we pay for space on an as-used basis depending upon the size, quantity and duration. The cost of storage is included in the amount charged the customer for the shipment.





Typically payment is delineated in the initial order. We will either collect payment for our services from:





•
the shipper when the merchandise departs if the trade pricing term is on a CIF (cost, insurance and freight) or CFR (cost and freight) basis; or•
from the recipient when merchandise arrives at destination port if the trade pricing term is on a FOB (free on board) basis.





We employ 25 full time sales persons.  These sales persons solicit business through a variety of means including personal visits, sales calls, and faxes.  Our customers sign annual or project-based contracts with us and the terms of the contract determine the merchandise, price, and delivery instructions. Sales persons
are compensated with base salary and earn a sales commission based on net profit generated in excess of predetermined benchmarks. Sales persons are required to meet monthly profit benchmarks established by us, and the base salaries, profit benchmarks, and commission percentages paid to the sales persons vary across our branches.





Customers, transaction currencies and credit terms





We generate revenues through sales to existing customers as well as new customers. Existing customers initiate historically approximately 60% of our revenues, 20% are from new customers generated by our sales persons, and the remaining 20% are referrals from third party agents.The focus
of products shipped by our customers varies across our branches. In the Qingdao area, the major export is agricultural products to Australian-Zelanian line and Southeast Asia line. Clothing and electronics products to Europe and U.S. are the focus of the Shanghai branch and the Xiamen branch carries daily merchandise and hardware products to Europe and Africa. The rate we charge our customers fluctuates with market prices. We may elect to lower the rates, when a particular order involves a large quantity of freight,
the customer has a good credit rating, and/or the customer has a record of prompt payment.





We do not require a deposit to engage our services. Sales of our freight forwarding services are generally made on credit. Fees are denominated in RMB, the functional currency of the PRC, and shipping costs charged by the various shipping companies are denominated in U.S. dollars. Historically, our existing customers generally settle their
accounts receivable within 30 days after they receive a commercial invoice. In the pricing terms of CIF and CFR, new customers are required to make the payment in order to obtain one original copy of a bill of lading from us. The customer submits the bill of lading to the bank to settle the foreign exchange in its account. In FOB pricing term, we issue a delivery order to our agent at the port of destination.





We are a designated agent of several cargo carriers including Nippon Yusen Kaisha (“NYK Line”), P&O Nedlloyd, CMA CGM Group, Safmarine Container Lines, Regional Container Lines (“RCL”), and Compaснa Sud Americana de Vapores (“CSAV”).  We
are also a member in the China Cargo Alliance (CCA), an independent network of air and sea freight forwarders serving international trade of China. Currently CCA has 120 members including 80 overseas forwardersoperating in 53 countries and 40








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Chinese forwarders. In this alliance, all members are free to trade their services with peer members. Overseas agents forward orders to us for the services of handling and/or space purchase. If agents only request procedural handling, we usually charge $30 to $40 per order as a service fee. If agents choose to purchase the shipping spaces
reserved by Shandong Jiajia, the profits from the order are evenly shared between agents and our company.





We generally receive 30 days terms from the airlines and shipping lines with which we transact business. For the shipping lines to North America, we enter into annual sales contracts in order to ensure a sufficient amount of shipping and air cargo space is available at pre-determined prices. In these contracts, we are assigned a certain amount
of cargo space but we are not required to either pre-purchase the cargo space or otherwise required to provide a deposit. The number of available spaces is determined based on negotiation between Shandong Jiajia and the shipping company. If we do not re-sell the cargo space, we would be required to pay a penalty, which is approximately $400 per container.  We usually reserve a relatively small amount of cargo space in order to avoid overbooking. Because of the long-term relationships with the various
shipping companies we use, Shandong Jiajia, however, has never experienced any difficulties in obtaining sufficient cargo space to meet our customer’s needs.





Competition





We are one of approximately 6,000 registered cargo companies in China. Only registered companies can purchase cargo space and establish foreign currency accounts. There are also an estimated 30,000 unregistered forwarding companies and individual agents. These smaller competitors generally do not have the financial wherewithal to meet the
minimum registered capital requirements to permit the formation as an independent international freight forwarding company. The industry is dominated by a few state-owned companies. Our primary competitors are state owned Tianjin Zhenhua Logistics Group Co., Ltd., foreign joint ventures Qingdao Ocean & Great Asia Transportation Co., Ltd., and Air Sea Transport, Inc. These competitors each have developed a service network nationwide and internationally and have proprietary warehouses and transportation departments.





While the requirement to register as a cargo company to obtain a business license in China was amended in 2004 to eliminate the requirement for approval from the Ministry of Commerce, we believe our ability to market our company as a registered cargo company provides various competitive advantages. We have been operating since 1999 and we
believe that our experience is a competitive advantage and serves as a benefit to exporters as well to shipping agencies seeking to sell cargo space.  We have developed stable shipping volume since 1999, which allows us to make a commitment to shipping agencies for cargo space, which in turn permits us to receive advantageous pricing.





A significant number of our competitors have more capital, longer operating histories, greater brand recognition, larger customer bases and significantly greater financial and marketing resources than we do. These competitors may also offer a more comprehensive package of freight forwarding services than Shandong Jiajia does, or may provide
value added services such as customs brokerage, and distribution. For these and other reasons, our competitors' services may achieve greater acceptance in the marketplace than our company, limiting our ability to gain market share and customer loyalty and increase our revenues.





Government Regulation





We are required to comply with the Customs Law established by the People's Republic of China, which establishes regulations related to import/export of merchandise from or to China. The regulations define the criteria for the supervision of the transport of merchandise to and from China.





We are subject to the United States Foreign Corrupt Practices Act, which generally prohibits United States companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices occur from time-to-time
in the PRC. We can make no assurance, however, that our employees or other agents will not engage in such conduct for which we might be held responsible. If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties and other consequences that may have a material adverse effect on our business, financial condition and results of operations and could cause our company to cease operations.





Employees





As of May 18, 2009 we had 118 full-time, salaried employees who are all located in China.  Our employees are organized into a union under the labor laws of China and receive labor insurance. These employees can bargain collectively with us. We believe we maintain good relations with our employees.





We are required to contribute a portion of our employees’ total salaries to the Chinese government’s social insurance funds, including medical insurance, unemployment insurance and job injuries insurance, and a housing assistance fund, in accordance with relevant regulations.








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History of our Company





We were incorporated in the State of Florida in March 1999 originally under the name ValuSALES, Inc. to create a single-source Internet solutions company providing internet and technology products and services to various sized customers.  We had no operations until July 1999 when we purchased assets consisting of property and equipment
and inventory for an aggregate purchase price of $75,000.  In December 1999, we sold shares of our common stock and used the proceeds to acquire September Project II Corp., an inactive entity. For accounting purposes, the  transaction was treated as a capital transaction rather than a business combination. In conjunction therewith, we merged with September Project II Corp. with that entity as the surviving entity named ValuSALES.com, Inc. Following this transaction,
we provided Internet and technology products and services for clients ranging from small to medium sized customers looking for a solution to develop and integrate a web site, advertising and marketing, technology products, and streaming video into their business. Our divisions included e-business solutions, marketing and advertising, streaming video technology, and Internet mortgage banking.  In November 2001 we changed our name to Video Without Boundaries, Inc.





Prior to the end of 2001 we began operating in only one segment.  During 2002 we discontinued our previous operations and began to reposition our company within the home entertainment media-on-demand marketplace to become a producer and distributor of interactive consumer electronic equipment to provide streaming digital media and
video on demand (“VOD”) services.





On August 11, 2004 (with an effective date of June 1, 2004) we entered into a stock purchase agreement with Mr. James Joachimczyk, the sole shareholder of Graphics Distribution, Inc., a privately held company engaged in the business of selling and distributing electronic products. The principal terms of the agreement provided that we would
acquire all of the issued and outstanding shares of Graphics Distribution, Inc. for a purchase price of $1,500,000 plus the issuance of 25,000 shares of our common stock.  Additional consideration included in this stock purchase agreement required our company to collateralize an existing line of credit in the amount of $2,500,000 as well as retain the services of the selling shareholder, pursuant to a consulting agreement dated August 11, 2004, for a term consistent with the fulfillment of the payment
terms under the stock purchase agreement. At closing, we tendered our initial deposit of $350,000, but thereafter we defaulted on the remaining balance due and as well as the collateralization provision under the purchase agreement. In October, 2008, we obtained a general release from Mr. Joachimczyk and Graphics Distribution, Inc. ., without payment of any consideration by us, releasing us from any and all liability and causes of action that Mr. Joachimczyk and Graphics Distribution, Inc. had or may have against
us as of October 14, 2008.





In August 2006 we changed our name to MediaREADY, Inc. in an effort to provide better corporate branding for our company.





In early 2007 we had engaged China Direct Investments, Inc. to provide introductions and advice to us as related to general business activities, including mergers and acquisitions, business combinations and financial management.  China Direct Investments, Inc., a subsidiary of China Direct, Inc. (NasdaqGM: CDII), provides consulting
services to both Chinese entities seeking access to the U.S. capital markets and North American entities seeking business opportunities in the PRC.  As a result of the advisory services provided to our management, it determined to concentrate its focus on a potential business combination with a Chinese company as a means of benefiting from the continued economic expansion of the PRC in general and of businesses in various industries within that country.  In September 2007, we engaged Capital
One Resource Co., Ltd., also a subsidiary China Direct, Inc., to provide introductions and advice to us as it related to general business activities, including mergers and acquisitions, business combinations and financial management.





Shandong Jiajia was initially identified as a PRC based company in search of capital to expand its operations by Mr. Weidong Wang.  Mr. Wang, who had a business relationship with Dragon Venture (Shanghai) Capital Management Co., Ltd., brought the company to the attention of that entity that in turn brought it to the attention of
Capital One Resource Co., Ltd.  Thereafter, China Direct, Inc. assisted us with the negotiations with Messrs. Chen and Liu, the principals of Shandong Jiajia, and under the terms of a December 31, 2007 consulting agreement it agreed to provide translation services as well as advice on the restructure of our balance sheet, and coordinated the efforts of legal, accounting and auditing service providers related to the completion of the  reverse recapitalization
transaction involving Shandong Jiajia.  The definitive terms of the transaction were reached after negotiations by us with Messrs. Chen and Liu.  Messrs. Chen and Liu, who were unrelated parties to us prior to the transaction, are unrelated parties to both China Direct, Inc. and Capital One Resource Co., Ltd.





On December 31, 2007 we entered into an acquisition agreement with Shandong Jiajia and its sole shareholders Messrs. Hui Liu and Wei Chen, pursuant to which we acquired a 51% interest in Shandong Jiajia. At closing, we issued Messrs. Liu and Chen an aggregate of 1,000,000 shares of our Series A Convertible Preferred Stock and we agreed contribute
$2,000,000 to increase the registered capital of Shandong Jiajia subject to:





•
the prior receipt of all regulatory approvals and licenses from the necessary governmental agencies in China related to this transaction , and•
the receipt of two years of audited financial statements of Shandong Jiajia together with the interim period for the nine months ended September 30, 2007.








- 4 -





For accounting purposes, we treated this transaction as a capital transaction, effected through a reverse recapitalization with Shandong Jiajia being the accounting acquirer and the Company being the legal survivor.


Under the terms of an assumption agreement dated December 31, 2007 and as contemplated by the terms of the acquisition agreement for Shandong Jiajia, Mr. David Aubel, a principal shareholder of our company, agreed to personally assume liabilities in the aggregate amount of $1,987,895 which may result from a stock purchase agreement we entered
into in August 2004 with Graphics Distribution, Inc.  Mr. Aubel’s agreement to assume this liability was the result of negotiations preceding the execution of the acquisition agreement for Shandong Jiajia as Messrs. Liu and Chen were unwilling to proceed with the transaction if the company remained exposed to the potential liability related to the Graphics Distribution, Inc. stock purchase agreement.  In addition, the acquisition agreement contemplated that the accrued compensation and
convertible note payable-related party included in our current liabilities at September 30, 2007 would be converted into shares of our common stock at conversion rates of $0.72 and $0.80 per share after the 1:40 reverse stock split.  When we entered into the December 31, 2007 purchase agreement we did not have sufficient authorized but unissued shares of our common stock to allow for the conversion of these liabilities, requiring the issuance of 3,445,853 shares of our common stock. Included in these
liabilities which were to be converted was approximately $419,000 of accrued compensation due Mr. Jeffrey Harrell, our former CEO and President, and $2,521,380 due to Mr. David Aubel under a convertible note and a loan. Effective on the close of business on March 11, 2008 we amended our articles of incorporation to increase our authorized capital which provided sufficient shares to permit these conversions.





As contemplated by the acquisition agreement for Shandong Jiajia, on March 20, 2008 we entered into a conversion agreement with Mr. V. Jeffrey Harrell, then our CEO and President, which converted $448,985 of accrued compensation due him into 581,247 shares of our common stock at an effective conversion price of $0.77245 per share.  In
addition and as also contemplated by the terms of the acquisition agreement for Shandong Jiajia, on March 20, 2008 we entered into a conversion agreement with Mr. Aubel whereby he converted a $2,521,380 loan due him by us into 2,864,606 shares of our common stock at an effective conversion price of $0.88 per share.  The effective conversion price on the date we entered into the conversion agreements with Mr. Aubel was greater than the fair market value of our common stock on the date of the agreement
which was $0.85 per share.  The variance resulted from a decline in the trading price of our common stock from December 31, 2007 when the conversion rates were informally agreed to with Mr. Aubel and the actual dates of conversion.





This number of shares issued to Mr. Aubel was established in the December 31, 2007 Shandong Jiajia acquisition agreement and was derived from the September 30, 2007 balance then owed to Mr. Aubel in the amount of $2,291,685 divided by an agreed upon prior to the 1 for 40 reverse stock split price of $0.02 per share ($2,291,685/$0.02 per share/40
= 2,864,606 shares).





As of the settlement date in March 2008, Mr. Aubel was owed $2,521,380 by us, an increase in the amount owed from September 30, 2007 resulting from additional advances made by Mr. Aubel, reduced by the issuance of 10,000,000 shares during the interim period.  The final conversion price of Mr. Aubel’s note was $0.88 per share,
resulting from the final note balance of $2,521,380 divided by an agreed upon fixed number of shares of 2,864,606 ($2,521,379/2,864,606 =$0.88 per share).  The fair market value of our common stock on March 31, 2008 was $0.85 per share.  We are evaluating any rights we may have to seek damages against Mr. Aubel as a result of the uncertainty as to the validity of the amount of his note and other matters as a result of the September 24, 2008 lawsuit filed against us, Mr. Aubel, and Mr. Harrell
by the Securities and Exchange Commission. See Part I. Item 3. Legal Proceedings appearing later in this report.





In connection with the  reverse recapitalization transaction with Shandong Jiajia, we issued Capital One Resource Co., Ltd. 450,000 shares of Series B Convertible Preferred Stock valued at $3,780,000, and Mr. Weidong Wang 35,000 shares of Series B Preferred Stock valued at $294,000, as compensation for assistance
in the transaction. In addition, we agreed to issue an aggregate of 352,500 shares of Series B Convertible Preferred Stock valued at $2,961,000 to Dragon Venture (Shanghai) Capital Management Co., Ltd. as finder's fees. Dragon Venture (Shanghai) Capital Management Co., Ltd. is a subsidiary of Dragon Capital Group Corp. (Pink Sheets: DRGV). Mr. Lawrence Wang, the CEO of Dragon Capital Group Corp., is the brother of Dr. James Wang, the CEO of China Direct, Inc. China Direct, Inc. owns approximately 20% of the issued
and outstanding shares Dragon Capital Group Corp.  In January 2008 we amended the finder’s agreement with Dragon Venture (Shanghai) Capital Management Co., Ltd. to reduce the fee to 240,000 shares of Series B Convertible Preferred Stock which were valued at $2,016,000.  Finally, we were obligated to issue China Direct, Inc. an additional 450,000 shares of our Series B Convertible Preferred Stock valued at $3,780,000 as compensation for its services under the terms of the December 31,
2007 consulting agreement which were to be issued prior to June 30, 2008.  These shares were issued in June 2008.





On January 28, 2008 the acquisition agreement with Sha n dong Jiajia was amended to provide that as additional consideration we issue Mr. Chen 120,000 shares of our Series B Convertible Preferred Stock with a fair value of $960,000 and three year stock purchase
warrants to purchase an additional 2,000,000 shares of our common stock at an exercise price of $0.30 per share with a fair value of $480,000.  We agreed to pay Mr. Chen the additional consideration at his request because he believed that the purchase price we paid for our interest in Shandong Jiajia was more favorable to us.  At the time of the amendment, Mr. Chen, a minority owner of Shandong Jiajia and who now serves as our Chairman, CEO and President, was General Manager of Shandong
Jiajia and his continued active involvement in its operations was crucial to the integration of Shandong Jiajia into our company.  We determined that








- 5 -





it would be in our long-term best interests to agree to Mr. Chen’s request, particularly as the operations of Shandong Jiajia represented all of our business and operations following the transaction.





In order to facilitate the approval by the Chinese authorities of the acquisition of Shandong Jiajia, effective March 13, 2008 the parties further amended the acquisition agreement to provide that:





•
instead of contributing all $2,000,000 to Shandong Jiajia's registered capital, we agreed to contribute $1,040,816 to increase the registered capital and the remaining $959,184 will be made available to Shandong Jiajia for working capital purposes; and•
the date by which Shandong Jiajia is required to satisfy various conditions to the delivery of such funds was extended to April 30, 2008.





On April 25, 2008 Shandong Jiajia received its Certificate of Approval from the Department of Foreign Trade and Economic Cooperation of the Shandong Province.  Thereafter, in April 2008 following the sale of the units described elsewhere herein, we used $2,000,000 of the proceeds from that offering to satisfy our capital commitment
to Shandong Jiajia.





In March 2008 we changed our name to China Logistics Group, Inc.





ITEM 1A.                      RISK FACTORS





An investment in our common stock involves a significant degree of risk. You should not invest in our common stock unless you can afford to lose your entire investment. You should consider carefully the following risk factors and other information in this annual report before deciding to invest in our common stock.





IN DECEMBER 2007 WE CHANGED OUR BUSINESS THROUGH THE ACQUISITION OF A MAJORITY OWNERSHIP INTEREST IN SHANDONG JIAJIA WHICH IS LOCATED IN THE PRC. OUR MANAGEMENT WHO ARE ALSO LOCATED IN THE PRC MAY NOT BE SUCCESSFUL IN TRANSITIONING THE INTERNAL OPERATIONS OF A PRIVATELY HELD CHINESE COMPANY TO A SUBSIDIARY OF A U.S. PUBLICLY
HELD COMPANY.





On December 31, 2007 we entered into an agreement to acquire a 51% interest in Shandong Jiajia. Following this transaction which was treated as a reverse  recapitalization for accounting purposes, the business and operations of Shandong Jiajia represent all of our business and operations.  The original
owners of Shandong Jiajia continue to own the remaining minority interest, and since July 2008, have served as our sole executive officers and directors. Our acquisition of Shandong Jiajia provides various challenges for our company, including, among others:





•
none of the members of our management have any experience in operating a U.S. public company and the associated costs may adversely impact the operating results of Shandong Jiajia, and•
we will need to upgrade the internal accounting systems at Shandong Jiajia, as well as educating its staff as to the proper collection and recordation of financial data to ensure that we can continue to file our annual, quarterly and other reports with the Securities and Exchange Commission on a timely basis.





There can be no assurance that there will not be substantial costs associated with upgrading of the accounting systems at Shandong Jiajia and the establishment of disclosure controls necessary to ensure that the reports we file with the Securities and Exchange Commission are filed on a timely basis, either of which could have a material adverse
effect on our future operating results. If we are unable to properly and timely integrate and upgrade the disclosure and accounting operations of Shandong Jiajia into our company, our ability to timely file our annual and quarterly reports, as well as other information we are required to file with the Securities and Exchange Commission, could be in jeopardy. Any failure on our part to meet the prescribed filing deadlines could lead to a delisting of our common stock from the OTC Bulletin Board, which could adversely
affect a shareholder’s ability to resell their investment in our company.





OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM HAS EXPRESSED CONCERN ABOUT OUR ABILITY TO CONTINUE AS GOING CONCERN.  IF WE ARE UNABLE TO CONTINUE AS A GOING CONCERN YOU WILL LOSE YOUR ENTIRE INVESTMENT IN OUR COMPANY.





For the year ended December 31, 2008 we reported net loss of $2,086,618 and cash used in operations of $1,643,461.  At December 31, 2008 we had cash on hand of approximately $3,156,362.  For the year ended December 31, 2007 we reported net income of $275,630 and had cash on hand at December 31, 2007 of $1,121,605.  The
increase of cash during the 2008 period is reflective of proceeds from the 2008 Unit Offering described elsewhere herein.





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The report of our independent registered public accounting firm on our financial statements for the year ended December 31, 2008 contains an explanatory paragraph regarding our ability to continue as a going concern based upon our recurring losses from operations, net cash used in operations, working capital deficit, stockholders’ deficiency
and accumulated deficit.  Our ability to continue as a going concern is dependent upon our ability to continue to increase our sales, maintain profitable operations and increase our net income in future periods.





We believe our current level of working capital and cash generated from operations may not be sufficient to meet our cash requirements for 2009 without an increase in our net income.  Given the global economic slowdown which is impacting our revenues, we are uncertain as to our results during 2009 and it is likely we will seek to
obtain additional working capital during 2009.  However, we have no firm commitments from any third party to provide this financing and we cannot assure you we will be successful in raising working capital as needed, particularly in light of the current economic crisis which is adversely impacting the ability of most small U.S. public companies to raise capital through equity or a combination of equity and debt transactions.  In addition, the terms of our 2008 Unit Offering described elsewhere
herein contain certain restrictive covenants which could hinder our ability to raise additional capital.  There are no assurances that we will have sufficient funds necessary to expand our company, pay our operating expenses and obligations as they become due or generate positive operating results.  If we are unable to maintain profitable operations and increase our net profit in sufficient amounts to fund our operating expenses, and if we are unable to obtain additional capital as needed,
it is possible that we would be required to curtail some or all of our planned operations, in which event our results of operations in future periods would be adversely impacted.  Any significant decrease in our sales in future periods or our failure to report profitable operations could be result in a decline in the price of our common stock.  In addition, if we were forced to curtail all of our operations you could lose your entire investment in our company.





WE RECENTLY SIGNED A CONSENT ORDER WITH THE SECURITIES AND EXCHANGE COMMISSION WHICH COULD RESULT IN DISGORGEMENT AND CIVIL MONETARY PENALTIES.





As described later in this report under Part I., Item 3. Legal Proceedings, on September 24, 2008 the Securities and Exchange Commission filed a complaint against us and Messrs. Harrell and Aubel which related to events which occurred prior to our acquisition of 51% of Shandong Jiajia and the change in our management.  We have been
cooperating with the Securities and Exchange Commission in this proceeding and in February 2009 we consented to the entry of a Permanent Injunction and Other Relief to resolve the liability aspects of the complaint.  As part of the complaint the Securities and Exchange Commission was seeking disgorgement by us of unspecified amounts.  The consent order provides that the court will determine whether it is appropriate to order disgorgement and, if so, the amount of the disgorgement.  If
we are ordered to pay disgorgement, the amount of such disgorgement could have a material adverse effect on our business, financial condition, results of operations and cash flows in future periods.  In addition, the consent order may result in additional claims by shareholders, regulatory proceedings, government enforcement actions and related investigations and litigation.  Any continued litigation would result in significant expenses, management distraction and potential damages, penalties,
other remedies, or adverse findings.  In addition, the consent order which grants the Securities and Exchange Commission injunctive relief restraining us from future violations of Federal securities laws which may make future financing efforts more difficult and costly.





IF WE FAIL TO MAINTAIN AN EFFECTIVE SYSTEM OF INTERNAL CONTROL OVER FINANCIAL REPORTING, WE MAY NOT BE ABLE TO ACCURATELY REPORT OUR FINANCIAL RESULTS. AS A RESULT, CURRENT AND POTENTIAL SHAREHOLDERS COULD LOSE CONFIDENCE IN OUR FINANCIAL REPORTING, WHICH WOULD HARM OUR BUSINESS AND THE TRADING PRICE OF OUR STOCK.





Our management has determined that as of December 31, 2008, we did not maintain effective internal controls over financial reporting based on criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework as a result of identified material weaknesses
in our internal control over financial reporting related to cash management and related party transactions.  A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis.  For a detailed description of these material weaknesses and our remediation efforts and
plans, see “Part II — Item 9A (T) — Controls and Procedures.”  If the result of our remediation of the identified material weaknesses is not successful, or if additional material weaknesses are identified in our internal control over financial reporting, our management will be unable to report favorably as to the effectiveness of our internal control over financial reporting and/or our disclosure controls and procedures, and we could be required to further implement expensive
and time-consuming remedial measures and potentially lose investor confidence in the accuracy and completeness of our financial reports which could have an adverse effect on our stock price and potentially subject us to litigation.








- 7 -





We do not have a Chief Financial Officer or similarly titled executive officer who is a financial professional and we have historically relied upon the services of outside accountants. In addition, we have an inadequate number of personnel with the requisite expertise in U.S. generally accepted accounting principles to ensure the proper application
thereof.  PRC companies have historically not adopted a Western style of management and financial reporting concepts and practices, which includes strong corporate governance, internal controls and, computer, financial and other control systems. As a result of these factors, we may experience difficulty in establishing management, legal and financial controls, collecting financial data and preparing financial statements, books of account and corporate records and instituting business practices that
meet Western standards. Until such time as we are able to supplement our accounting staff, it is possible that accounting errors will continue to occur which are not prevented or detected. Accordingly, due to the nature of the material weaknesses in our internal control over financial reporting, there is more than a remote likelihood that additional material misstatements of our annual or interim financial statements could occur.





WE ARE DEPENDENT ON THIRD PARTIES FOR EQUIPMENT AND SERVICES ESSENTIAL TO OPERATE OUR BUSINESS, AND WE COULD LOSE CUSTOMERS AND REVENUES IF WE FAIL TO SECURE THIS EQUIPMENT AND THESE SERVICES.





We are a non-asset based freight forwarding company and we rely on third parties to transport the freight we have arranged to ship. Thus, our ability to forward this freight and the costs we incur in connection therewith is dependent on our ability to find carriers willing to ship such freight at acceptable prices. This, in turn, depends
on a number of factors beyond our control, including availability of cargo space, which depend on the season of the year, the shipment’s transportation lane, the number of transportation providers and the availability of equipment. An increase in the cost of cargo space due to supply shortages, increases in fuel cost or other factors would increase costs and may reduce our profits, which will adversely impact our results of operations in future periods.





WE RELY ON OVERSEAS CARGO AGENTS TO PROVIDE SERVICES TO US AND TO OUR CUSTOMERS, AND OUR ABILITY TO CONDUCT BUSINESS SUCCESSFULLY MAY BE AFFECTED IF WE ARE UNABLE TO MAINTAIN OUR RELATIONSHIPS WITH THESE OVERSEAS CARGO AGENTS.





We rely on the services of independent cargo agents, who may also be providing services to our competitors, which may include consolidating and deconsolidating various shipments. Although we believe our relationships with our cargo agents are satisfactory, we may not be able to maintain these relationships. If we were unable to maintain these
relationships or develop new relationships, our service levels, operating efficiency, future freight volumes and operating profits may be reduced which will adversely impact our results of operations in future periods.





WE INCUR SIGNIFICANT CREDIT RISKS IN THE OPERATION OF OUR BUSINESS WHICH COULD REDUCE OUR OPERATING PROFITS.





Various aspects of freight forwarding involve significant credit risks. It is standard practice for exporters to expect freight forwarders to offer 30 days or more credit on payment of their invoices from the time cargo has been delivered for shipment. Competitive conditions require that we offer 30 days or more credit to many of our customers.
In order to avoid cash flow problems and bad debts, we attempt to maintain tight credit controls and to avoid doing business with customers we believe may not be creditworthy. However, we may not be able to avoid periodic cash flow problems or be able to avoid losses in the event customers to whom we have extended credit either delay their payments to us or become unable or unwilling to pay our invoices after we have completed shipment of their goods or rendered other services to them, all of which could reduce
our operating profits.





RISKS RELATED TO DOING BUSINESS IN CHINA





YOU MAY EXPERIENCE DIFFICULTIES IN EFFECTING SERVICE OF LEGAL PROCESS, ENFORCING FOREIGN JUDGMENTS OR BRINGING ORIGINAL ACTIONS IN CHINA BASED ON UNITED STATES OR OTHER FOREIGN LAWS.





All of our operations and substantially all of our assets are in China. In addition, all of executive officers and directors reside within China. As a result, it may not be possible to effect service of process within the United States upon these executive officers or directors, or enforce within the United States any judgments obtained against
us or our officers or directors, including judgments predicated upon the civil liability provisions under U.S. federal securities laws or applicable state securities laws. Consequently, you may be effectively prevented from pursuing remedies under U.S. federal securities laws against them.








- 8 -





FLUCTUATION IN THE VALUE OF THE RENMINBI (RMB) MAY HAVE A MATERIAL ADVERSE EFFECT ON YOUR INVESTMENT.





The value of RMB against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions.  Our revenues and costs and our assets are denominated in RMB. Any significant fluctuation in value of RMB may materially and adversely affect our cash flows, revenues,
earnings and financial position in future periods. For example, an appreciation of RMB against the U.S. dollar would make any new RMB denominated investments or expenditures more costly to us, to the extent that we might need to convert U.S. dollars into RMB for such purposes.  These increased costs would result in greater operating expenses to us and could increase our operating loss in future periods.





SUBSTANTIALLY ALL OF OUR ASSETS AND ALL OF OUR OPERATIONS ARE LOCATED IN THE PRC AND ARE SUBJECT TO CHANGES RESULTING FROM THE POLITICAL AND ECONOMIC POLICIES OF THE CHINESE GOVERNMENT.





Our business operations could be restricted by the political environment in the PRC. The PRC has operated as a socialist state since 1949 and is controlled by the Communist Party of China. In recent years, however, the government has introduced reforms aimed at creating a "socialist market economy" and policies have been implemented to allow
business enterprises greater autonomy in their operations. Changes in the political leadership of the PRC may have a significant effect on laws and policies related to the current economic reform programs, other policies affecting business and the general political, economic and social environment in the PRC, including the introduction of measures to control inflation, changes in the rate or method of taxation, the imposition of additional restrictions on currency conversion and remittances abroad, and foreign
investment. Moreover, economic reforms and growth in the PRC have been more successful in certain provinces than in others, and the continuation or increases of such disparities could affect the political or social stability of the PRC. Although we believe that the economic reform and the macroeconomic measures adopted by the Chinese government have had a positive effect on the economic development of China, the future direction of these economic reforms is uncertain and the uncertainty may decrease the attractiveness
of our company as an investment, which may in turn result in a decline in the trading price of our common stock.





THE CHINESE GOVERNMENT EXERTS SUBSTANTIAL INFLUENCE OVER THE MANNER IN WHICH WE MUST CONDUCT OUR BUSINESS ACTIVITIES.





The PRC only recently has permitted provincial and local economic autonomy and private economic activities. The government of the PRC has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy through regulation and state ownership. Accordingly, government actions in the future, including
any decision not to continue to support recent economic reforms and to return to a more centrally planned economy or regional or local variations in the implementation of economic policies, could have a significant effect on economic conditions in the PRC or particular regions thereof, and could require us to divest ourselves of any interest we then hold in Shandong Jiajia. If that should occur, as Shandong Jiajia represents all of our current operations, it is likely that we would be forced to cease operations.





A SLOWDOWN IN THE CHINESE ECONOMY OR AN INCREASE IN ITS INFLATION RATE MAY ADVERSELY IMPACT OUR REVENUES.





The Chinese economy has grown at an approximately 9% rate for more than 25 years, making it the fastest growing major economy in recorded history. In 2007, China’s economy grew by 11.4%, the fastest pace in 11 years. While China’s economy has grown, inflation has also recently become a major issue of concern. In March 2007, China’s
central bank, the People’s Bank of China, announced that the bank reserve ratio would rise half a percentage point to 15.5% in an effort to reduce inflation pressures hours after Premier Wen Jiabao highlighted inflation as a major concern for the government. China’s consumer price index growth rate reached 8.7% year over year in 2008.





We cannot assure you that growth of the Chinese economy will be steady, that inflation will be controllable or that any slowdown in the economy or uncontrolled inflation will not have a negative effect on our business. Several years ago, the Chinese economy experienced deflation, which may recur in the future. More recently, the Chinese government
announced its intention to continuously use macroeconomic tools and regulations to slow the rate of growth of the Chinese economy, the results of which are difficult to predict. Adverse changes in the Chinese economy will likely impact the financial performance of a variety of industries in China that use or would be candidates to use our services.








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RESTRICTIONS ON CURRENCY EXCHANGE MAY LIMIT OUR ABILITY TO RECEIVE AND USE OUR REVENUES EFFECTIVELY.





Because all of our revenues are in the form of RMB, any future restrictions on currency exchanges may limit our ability to use revenue generated in RMB to fund any future business activities outside China or to make dividend or other payments in U.S. dollars. Although the Chinese government introduced regulations in 1996 to allow greater
convertibility of the RMB for current account transactions, significant restrictions still remain, including primarily the restriction that foreign-invested enterprises may only buy, sell or remit foreign currencies, after providing valid commercial documents, at those banks authorized to conduct foreign exchange business. In addition, conversion of RMB for capital account items, including direct investment and loans, is subject to government approval in China, and companies are required to open and maintain
separate foreign exchange accounts for capital account items. We cannot be certain that the Chinese regulatory authorities will not impose more stringent restrictions on the convertibility of the RMB, especially with respect to foreign exchange transactions.





CHINESE LAWS AND REGULATIONS GOVERNING OUR BUSINESS OPERATIONS ARE SOMETIMES VAGUE AND UNCERTAIN. ANY CHANGES IN SUCH CHINESE LAWS AND REGULATIONS MAY HAVE A MATERIAL AND ADVERSE EFFECT ON OUR BUSINESS.





China’s legal system is a civil law system based on written statutes, in which system decided legal cases have little value as precedents unlike the common law system prevalent in the United States. There are substantial uncertainties regarding the interpretation and application of Chinese laws and regulations, including but not limited
to the laws and regulations governing the enforcement and performance of contractual arrangements with customers in the event a dispute, as well as the imposition of statutory liens, death, bankruptcy and criminal proceedings. The Chinese government has been developing a comprehensive system of commercial laws, and considerable progress has been made in introducing laws and regulations dealing with economic matters such as foreign investment, corporate organization and governance, commerce, taxation and trade.
However, because these laws and regulations are relatively new, and because of the limited volume of published cases and judicial interpretation and their lack of force as precedents, interpretation and enforcement of these laws and regulations involve significant uncertainties. New laws and regulations that affect existing and proposed future businesses may also be applied retroactively. We cannot predict what effect the interpretation of existing or new Chinese laws or regulations may have on our businesses.
If the relevant authorities find us in violation of Chinese laws or regulations, they would have broad discretion in dealing with such a violation, including, without limitation: levying fines; revoking our business and other licenses; requiring that we restructure our ownership or operations; and requiring that we discontinue any portion or all of our business.





WE MAY BE UNABLE TO ENFORCE OUR RIGHTS DUE TO POLICIES REGARDING THE REGULATION OF FOREIGN INVESTMENTS IN CHINA.





China's regulations and policies with respect to foreign investments are evolving with respect to such matters as the permissible percentage of foreign investment and permissible rates of equity returns. Statements regarding these evolving policies have been conflicting and any such policies, as administered, are likely to be subject to broad
interpretation and discretion and to be modified, perhaps on a case-by-case basis. Any inability to enforce legal rights we may have under our contracts or otherwise could be limited which could result in a loss of revenue in future periods which would impact our ability to continue as a going concern.





RISKS RELATED TO HOLDING OUR SECURITIES





THE EXERCISE OF OUTSTANDING WARRANTS AND THE POSSIBLE CONVERSION OF OUR SERIES B CONVERTIBLE PREFERRED STOCK WILL BE DILUTIVE TO OUR EXISTING SHAREHOLDERS.





At May 18, 2009 we had 34,508,203 shares of our common stock issued and outstanding and the following securities, which are convertible or exercisable into shares of our common stock, were outstanding:





•
up to 4,500,000 shares of our common stock issuable upon the possible conversion of 450,000 shares of Series B Convertible Preferred Stock which we are obligated to issue under the terms of an agreement;•
31,676,000 shares of our common stock issuable upon the exercise of common stock purchase warrants at an exercise price of $.35 per share to $52.00 per share; and•
2,000,000 stock purchase warrants exercised at $0.30 per share.











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The Series B Convertible Preferred Stock is convertible at the option of the holder at any time.  Assuming we do not issue any additional shares of our common stock, the issuance of the shares of common stock underlying the Series B Convertible Preferred Stock will increase our issued and outstanding by approximately 13%.  In
the event of the exercise of the warrants, the number of our outstanding common stock will increase by almost 100% and will have a dilutive effect on our existing shareholders.  In addition, because warrants to purchase an aggregate of 31,676,000 shares of our common stock are exercisable on a cashless basis, if the cashless exercise feature was to be used by the holder, while we would issue a fewer number of shares of common stock we would not receive any proceeds for
these issuances.





WE HAVE NOT VOLUNTARILY IMPLEMENTED VARIOUS CORPORATE GOVERNANCE MEASURES, IN THE ABSENCE OF WHICH, SHAREHOLDERS MAY HAVE MORE LIMITED PROTECTIONS AGAINST INTERESTED DIRECTOR TRANSACTIONS, CONFLICTS OF INTEREST AND SIMILAR MATTERS.





Recent Federal legislation, including the Sarbanes-Oxley Act of 2002, has resulted in the adoption of various corporate governance measures designed to promote the integrity of the corporate management and the securities markets. Some of these measures have been adopted in response to legal requirements. Others have been adopted by companies
in response to the requirements of national securities exchanges, such as the NYSE or the NASDAQ Stock Market, on which their securities are listed. Among the corporate governance measures that are required under the rules of national securities exchanges are those that address board of directors' independence, audit committee oversight, and the adoption of a code of ethics. While we have adopted a Code of Business Conduct and Ethics, none of the members of our board of directors are considered independent directors
and we have not adopted corporate governance measures such as an audit or other independent committees of our board of directors. It is possible that if we were to expand our board of directors to include independent director and adopt some or all of these corporate governance measures, shareholders would benefit from somewhat greater assurances that internal corporate decisions were being made by disinterested directors and that policies had been implemented to define responsible conduct.  However,
because our current board of directors is comprised of our executive officers, subject to their fiduciary duty obligations these individuals have the ability to make decisions regarding their compensation packages, transactions with related parties and corporate actions that could involve conflicts of interest.  Prospective investors should bear in mind our current lack of independent directors and corporate governance measures in formulating their investment decisions.





BECAUSE OUR STOCK CURRENTLY TRADES BELOW $5.00 PER SHARE, AND IS QUOTED ON THE OTC BULLETIN BOARD, OUR STOCK IS CONSIDERED A "PENNY STOCK" WHICH CAN ADVERSELY AFFECT ITS LIQUIDITY.





As the trading price of our common stock is less than $5.00 per share, our common stock is considered a "penny stock," and trading in our common stock is subject to the requirements of Rule 15g-9 under the Securities Exchange Act of 1934. Under this rule, broker/dealers who recommend low-priced securities to persons other than established
customers and accredited investors must satisfy special sales practice requirements. The broker/dealer must make an individualized written suitability determination for the purchaser and receive the purchaser’s written consent prior to the transaction.





Securities and Exchange Commission regulations also require additional disclosure in connection with any trades involving a "penny stock," including the delivery, prior to any penny stock transaction, of a disclosure schedule explaining the penny stock market and its associated risks. These requirements severely limit the liquidity of our
common stock in the secondary market because few broker or dealers are likely to undertake these compliance activities.  Purchasers of our common stock may find it difficult to resell the shares in the secondary market.





CERTAIN OF OUR OUTSTANDING WARRANTS CONTAIN CASHLESS EXERCISE PROVISIONS WHICH MEANS WE WILL NOT RECEIVE ANY CASH PROCEEDS UPON THEIR EXERCISE.





The Class A warrants and Class B warrants issued in our 2008 Unit Offering contain a cashless exercise provision. At any time after the required effective date of the registration statement the warrants are exercisable on a cashless basis if on the exercise date the shares of common stock issuable upon the exercise of the warrants are not
covered by an effective registration statement. This means that the holders, rather than paying the exercise price in cash, may surrender a number of warrants equal to the exercise price of the warrants being exercised. The utilization of this cashless exercise feature will deprive us of additional capital which might otherwise be obtained if the warrants did not contain a cashless feature.








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ITEM 1B.                   UNRESOLVED STAFF COMMENTS.





Not applicable to a smaller reporting company.





ITEM 2.                      PROPERTIES.





We lease 668 square feet of office space from an unrelated third party at 7300 Alondra Boulevard, Suite 108, Paramount, California 90723 for a two-year term expiring April 30, 2010. This office serves as our United States office.  The monthly rate for the facility and comprehensive, bundled service package is
$5,000, which includes the shared use of staff who answers telephone inquiries together with all costs associated with voice and data communications, office furniture, supplies, equipment and utility services. This office is used to receive inquiries we receive in the U.S. and communicate these inquiries to our China offices. Other than these contracted services provided to us we do not conduct any business from this U.S. office.   We
have not determined if we will renew this arrangement when the current term expires.





Our China headquarters occupy approximately 1,776 square feet of leased office space in Qingdao, China, which is leased from an unrelated third party under a lease expiring on December 31, 2009. The annual rent is approximately $20,346 (RMB 150,562). We expect to renew this lease upon expiration upon similar terms.





We also rent various office spaces throughout China as set forth in the following table:





Location

Approximate Square Feet

Annual Rent

Additional Charges

Expiration of LeaseShanghai Branch (1)


7,008

$43,700
(RMB 300,000)

$20,440
(RMB 140,622)

May 31, 2009Xiamen Branch, Xiamen City, Fujian Province (2)


1,026

$1,459
(RMB 10,800)

$0

December 31, 2009Lianyuangang Branch, Lianyuangang City, Jiangsu Province (3)


1,184

$4,054
(RMB 30,000)

$0

March 15, 2010Tianjin Branch, Tianjin City (4)


3,014

$21,962
(RMB 150,000)

$0

May 31, 2013





(1) We lease the offices for our Shanghai Branch from Mr. Wei Chen, our Chairman and CEO.  The additional charges represent a monthly management fee paid to an unrelated third party.





(2)We lease the offices for our Xiamen Branch from Mr. Xiangfen Chen, its General Manager.





(3)We lease the offices for our Lianyuangang Branch from an unrelated third party.





(4)We lease the offices for our Tianjin Branch from Mr. Bin Liu, its General Manager.





ITEM 3.                      LEGAL PROCEEDINGS





On September 24, 2008, the Securities and Exchange Commission filed a civil complaint in the U.S. District Court for the Southern District of Florida (Case No. 08-61517-CIV-GOLD MCALILEY) against Mr. V. Jeffrey Harrell, our former CEO and principal and financial accounting officer, Mr. David Aubel, previously our largest shareholder and formerly
a consultant to us, and our company based upon the alleged improper conduct of Messrs. Harrell and Aubel that occurred at various times between in or about April 2003 and September 2006.  The Securities and Exchange Commission’s complaint alleges that Mr. Harrell filed annual and quarterly reports with the Securities and Exchange Commission that, among other things, materially overstated our revenues and assets and understated our net losses.  The complaint also alleges that Mr. Harrell
falsely certified numerous annual and quarterly reports we filed with the Securities and Exchange Commission that he knew, or was severely reckless in not knowing, contained material misstatements and omissions.  The complaint further alleges that from November 2003 to September 2006, Mr. Harrell and Mr. Aubel issued a series of false and misleading press releases announcing our acquisition of another company, the availability of large credit facilities, and an international operating subsidiary. Taking
advantage of our artificially inflated stock price, the complaint alleges that Mr. Aubel dumped millions of shares of our stock, acquired at steep discount from us, into the public market in transactions that were not registered under federal securities laws.  The complaint alleges that the conduct of Messrs. Harrell and Aubel and our company constituted violations of various sections of the Securities Act of 1933 and the Securities Exchange Act of 1934. The complaint seeks, among other things, to permanently
enjoin the Messrs. Harrell and Aubel and us from engaging in the wrongful conduct alleged in the complaint, disgorgement, civil monetary penalties, and a penny stock bar against Mr. Aubel, civil monetary penalties, a penny stock bar, and an officer and director bar against Mr. Harrell and disgorgement against us.








- 12 -





Our current management had no knowledge of Messrs. Harrell and Aubel’s improper conduct as alleged in the complaint which relate to their actions prior to 2007 involving us when our company was known as Video Without Boundaries, Inc. In December 2007, control of our company, which at the time had changed its name to MediaREADY, Inc.,
was acquired by principals and other parties unrelated to Messrs. Harrell and Aubel in connection with the  reverse recapitalization transaction and financing of Shandong Jiajia. After the acquisition of a 51% interest in Shandong Jiajia, we changed our name to China Logistics Group, Inc. Messrs. Harrell and Aubel remain minority shareholders of our company.





We cooperated with the Securities and Exchange Commission in its action against us and, despite our lack of knowledge of any wrongdoing, in February 2009 we entered into a consent to the entry of a Permanent Injunction and Other Relief to resolve the liability aspects of the complaint.  The Permanent Injunction among other things,
permanently restrains and enjoins us from violation of Sections 5(a) and 5(c) of the Securities Act of 1933, 15 U.S.C. §§ 77e(a) and 77e(c); violations of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule l0b-5 promulgated thereunder, 17 C.F.R. §240.l0b-5; violations of Section 13(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78m(a), and Rules 12b-20, 13a-l, and 13a-13 thereunder, 17 C.F.R. §§ 240.12b-20, 240.13a-l, and 240. 13a-13;
and violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78m(b )(2)(A) and 8m(b )(2)(B). The consent also provides that the Court will determine whether it is appropriate to order disgorgement and, if so, the amount of the disgorgement.





While we cannot predict the ultimate outcome of the issue of disgorgement and prejudgment interest, continued litigation would result in significant expenses, management distraction and potential damages, penalties, other remedies, or adverse findings, which could have a material adverse effect on our business, financial condition, results
of operations and cash flows.





We are evaluating filing a separate lawsuit for damages we suffered against Messrs. Harrell and Aubel and other parties involved in the improper conduct alleged in the Securities and Exchange Commission September 24, 2008 complaint as a result of their conduct.  In addition, we are evaluating filing a lawsuit against Mr. Aubel as
a result of the uncertainty as to the validity of the amount of the note payable in the amount of $2,521,379 which we redeemed for 2,864,606 shares of our common stock in March 2008 pursuant to the terms of the December 2007 agreement to a acquire a 51% interest in Shandong Jiajia.





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





None.





PART II





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





Our common stock is quoted on the OTCBB under the symbol CHLO. The reported high and low sales prices for the common stock as reported on the OTCBB are shown below for the periods indicated. The quotations reflect inter-dealer prices, without retail mark-up, markdown or commission, and may not represent actual transactions.





High


Low2007First quarter ended March 31, 2007

$
6.80


$
2.40Second quarter ended June 30, 2007

$
3.60


$
1.60Third quarter ended September 30, 2007

$
2.80


$
0.80Fourth quarter ended December 31, 2007

$
2.00


$
0.402008First quarter ended March 31, 2008

$
1.20


$
0.40Second quarter ended June 30, 2008

$
1.05


$
0.50Third quarter ended September 30, 2008

$
0.65


$
0.35Fourth quarter ended December 31, 2008

$
0.62


$
0.10





On May 14, 2009, the last sale price of our common stock as reported on the OTCBB was $0.045.  As of May 14, 2009, there were approximately 252 record owners of our common stock.








- 13 -





Transfer Agent





Our transfer agent is Interwest Transfer Co., Inc. which is located at 1981 East Murray Holladay Rd., Ste. 100, Salt Lake City, UT 84117. The phone number is (801) 272-9294 and its website is www.interwesttc.com.





Dividend Policy





Payment of dividends will be within the sole discretion of our Board of Directors and will depend, among other factors, upon our earnings, capital requirements and our operating and financial condition. We have never paid cash dividends on our common stock and it is highly unlikely that we will pay dividends in the foreseeable future. Under
Florida law, we may declare and pay dividends on our capital stock either out of our surplus, as defined in the relevant Florida statutes, or if there is no such surplus, out of our net profits for the year in which the dividend is declared and/or the preceding year. If, however, the capital of our company, computed in accordance with the relevant Florida statutes, has been diminished by depreciation in the value of our property, or by losses, or otherwise, to an amount less than the aggregate amount of the capital
represented by the issued and outstanding stock of all classes having a preference upon the distribution of assets, we are prohibited from declaring and paying out of such net profits any dividends upon any shares of our capital stock until the deficiency in the amount of capital represented by the issued and outstanding stock of all classes having a preference upon the distribution of assets shall have been repaid.





Finally, under the terms of the Subscription Agreement for the 2008 Unit Offering, we are prohibited from paying dividends on our common stock until the earlier of two years from the closing date of the offering or the date on which all shares of common stock sold in the offering have been resold.





Purchases of Equity Securities by the Issuer and Affiliated Purchasers





None.





Securities Authorized for Issuance under Equity Compensation Plans





We have not adopted any equity compensation or similar plans.





Recent Sales of Unregistered Securities





None.





ITEM 6.
SELECTED FINANCIAL DATA.





Not applicable to a smaller reporting company.





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





We maintain our financial records and report on a calendar year basis; as such the twelve month period ending December 31, 2008 is referred to as “2008”, the year ended December 31, 2007 is referred to as “2007”, and the coming year ending December 31, 2009 is referred to as “2009”.





OVERVIEW





Beginning in 2003, we sought to position our company within the entertainment and home broadband marketplace to develop our MediaREADYTM product line and provide products and services in the converging digital media on demand, enhanced home entertainment and emerging interactive consumer electronics markets. We were, however, unable
to successfully penetrate these markets, due in great part to our limited financial resources.. In the fourth quarter of 2007 our management elected to pursue a business combination with an operating company in an effort to improve shareholder value.





On December 31, 2007 we entered into an acquisition agreement with Shandong Jiajia International Freight and Forwarding Co., Ltd. (“Shandong Jiajia”) and its sole shareholders Messrs. Hui Liu and Wei Chen, through which we acquired a 51%  interest in Shandong Jiajia. At closing, we issued Messrs. Liu and
Chen an aggregate of 1,000,000 shares of our Series A Convertible Preferred Stock and agreed to contribute $2,000,000 to increase the registered capital of Shandong Jiajia subject to:


•

the prior receipt of all regulatory approvals and licenses from the necessary governmental agencies in China related to this acquisition, and•

the receipt of two years of audited financial statements of Shandong Jiajia together with the interim period for the nine months ended September 30, 2007.








- 14 -





Under the terms of an assumption agreement dated December 31, 2007 and as contemplated by the terms of the acquisition agreement for Shandong Jiajia, Mr. David Aubel, a principal shareholder of our company, agreed to personally assume contingent liabilities in the aggregate amount of $1,987,895 which may result from a stock purchase agreement
we entered into in August, 2004 with Graphics Distribution, Inc.  Mr. Aubel’s agreement to assume this liability was the result of negotiations preceding the execution of the acquisition agreement for Shandong Jiajia as Messrs. Liu and Chen were unwilling to proceed with the transaction if the company remained exposed to the potential liability related to the Graphics Distribution, Inc. stock purchase agreement.  In addition, the acquisition agreement contemplated that the accrued compensation
and convertible note payable-related party included in our current liabilities at September 30, 2007 would be converted into shares of our common stock at conversion rates of $0.72 and $0.80 per share (post 1:40 reverse stock split).  At the time of the agreement we did not have sufficient authorized but unissued shares of our common stock to provide for the conversion of these liabilities, respectively, resulting in the issuance of approximately 3,445,853 shares of our common stock. Included in
these liabilities which were to be converted was approximately $419,000 of accrued compensation due Mr. Jeffrey Harrell, our former CEO and President, and approximately $2,521,380 due to Mr. David Aubel under a convertible note and a loan. Effective on the close of business on March 11, 2008 we amended our articles of incorporation to increase our authorized capital which provided sufficient shares to permit these conversions.





As contemplated by the acquisition agreement for Shandong Jiajia, on March 20, 2008 we entered into a conversion agreement with Mr. Jeffrey Harrell, then our CEO and President, who converted $448,985 of accrued compensation due him into 581,247 shares of our common stock at an effective conversion price of $0.77245 per share.  In
addition and as also contemplated by the terms of the acquisition agreement for Shandong Jiajia, on March 20, 2008 we entered into a conversion agreement with Mr. Aubel whereby he converted the $2,521,380 loan due him by us into 2,864,606 shares of our common stock at an effective conversion price of $0.88 per share.  The effective conversion price on the date we entered into the conversion agreements with Mr. Aubel was greater than the fair market value of our common stock on the date of the agreement
which was $0.85 per share.  The variance resulted from a decline in the trading price of our common stock from December 31, 2007 when the conversion rates were informally agreed to with Mr. Aubel and the actual dates of conversion.





The number of shares issued to Mr. Aubel was established in the December 31, 2007 Shandong Jiajia acquisition agreement and was derived from the September 30, 2007 liability reflected on our books owed to Mr. Aubel in the amount of $2,291,685 divided by an agreed upon prior to the 1 for 40 reverse stock split price of $0.02 per share ($2,291,685/$0.02
per share/40 = 2,864,606 shares).





As of the settlement date in March 2008, Mr. Aubel was owed $2,521,380 by us, an increase in the amount owed from September 30, 2007 resulting from additional advances made by Mr. Aubel, reduced by the issuance of 10,000,000 shares during the interim period.  The final conversion price of Mr. Aubel’s note was $0.88 per share,
resulting from the final note balance of $2,521,380 divided by an agreed upon fixed number of shares of 2,864,606 ($2,521,379/2,864,606 =$0.88 per share).  The fair market value of our common stock on March 31, 2008 was $0.85 per share.  We are evaluating any rights we may have to seek damages against Mr. Aubel as a result of the uncertainty as to the validity of the amount of his note. See “Legal Proceedings” appearing elsewhere in this report.





In connection with the  reverse recapitalization transaction  with Shandong Jiajia, we issued Capital One Resource Co., Ltd. 450,000 shares of Series B Convertible Preferred Stock valued at $3,780,000, and Mr. Weidong Wang 35,000 shares of Series B Convertible Preferred Stock valued at
$294,000, as compensation for their assistance in the transaction. In addition, we agreed to issue an aggregate of 352,500 shares of Series B Convertible Preferred Stock valued at $2,961,000 to Dragon Venture (Shanghai) Capital Management Co., Ltd. as finder's fees. Dragon Venture (Shanghai) Capital Management Co., Ltd. is a subsidiary of Dragon Capital Group Corp. (Pink Sheets: DRGV). Mr. Lawrence Wang, the CEO of Dragon Capital Group Corp., is the brother of Dr. James Wang, the CEO of China Direct,
Inc. China Direct, Inc. owns approximately 20% of the issued and outstanding shares Dragon Capital Group Corp. In January 2008 we amended the finder’s agreement with Dragon Venture (Shanghai) Capital Management Co., Ltd. to reduce the fee to 240,000 shares of Series B Convertible Preferred Stock which were valued at $2,016,000.  Finally, we were obligated to issue China Direct, Inc. an additional 450,000 shares of our Series B Convertible Preferred Stock valued at $3,780,000 as compensation
for its services under the terms of the December 31, 2007 consulting agreement which were to be issued prior to June 30, 2008.  These shares were issued in June 2008.








- 15 -





On January 28, 2008 the acquisition agreement was amended to provide that as additional consideration we issued Mr. Chen 120,000 shares of our Series B Convertible Preferred Stock with a fair value of $960,000 and three year stock purchase warrants to purchase an additional 2,000,000 shares of
our common stock at an exercise price of $0.30 per share with a fair value of $480,000.  We agreed to pay Mr. Chen the additional consideration at his request because he believed that the purchase price we paid for our interest in Shandong Jiajia was more favorable to us.  At the time of the amendment, Mr. Chen, a minority owner of Shandong Jiajia and who now serves as our Chairman, CEO and President, was General Manager of Shandong Jiajia and his continued active involvement in its operations
was crucial to the integration of Shandong Jiajia into our company.  We determined that it would be in our long-term best interests to agree to Mr. Chen’s request, particularly as the operations of Shandong Jiajia represented all of our business and operations following the transaction.





The accompanying consolidated financial statements contain the audited balance sheet at December 31, 2007, statement of operations and statements of stockholders’ equity (deficit) which have been restated to account for the acquisition of a 51% interest in Shandong Jiajia as a capital transaction, implemented through a reverse recapitalization ,
effective December 31, 2007.  Accordingly, the historical cost basis of the assets and liabilities of Shandong Jiajia have been carried forward and the historical information presented, including the consolidated statements of operation, consolidated statement of stockholders’ equity (deficit) and consolidated statements of cash flows prior to December 31, 2007, are those of Shandong Jiajia.3





The capital structure following the transaction differs from the historical capital structure of Shandong Jiajia in that shareholders’ equity of the combined enterprise is presented based on the historical equity of the accounting acquirer (Shandong Jiajia) prior to the merger retroactively restated to reflect the number of shares received
in the transaction.





Shandong Jiajia, formed in 1999 as a Chinese limited liability company, is an international freight forwarder and logistics management company. Shandong Jiajia, acts as an agent for international freight and shipping companies. Shandong Jiajia sells cargo space and arranges land, maritime, and air international transportation for clients
seeking to import or export merchandise from or into China.  Headquartered in Qingdao, Shandong Jiajia has branches in Shanghai and Xiamen with two additional offices in Lianyungang and Rizhao. Shandong Jiajia is a designated agent of cargo carriers including Nippon Yusen Kaisha, P&O Nedlloyd, CMA CGM Group, Safmarine Container Lines, and Regional Container Lines.





The accompanying consolidated financial statements include accounts of the Company and its 51% owned subsidiary, Shandong Jiajia. Intercompany transactions and balances have been eliminated in consolidation.  All share and per share information contained in this report gives retroactive effect to the 1 for 40 reverse stock split
of the Company’s outstanding common stock effective at the close of business on March 11, 2008.





Shandong Jiajia will seek to develop new business opportunities by utilizing new shipping routes and expanding its scope of services to provide a full suite of comprehensive logistics management solutions. Shandong Jiajia management believes that as they expand their logistics management solutions business and gain market share they will
be able to obtain more container space thereby increasing potential revenues. We believe that due to the larger volume of products to be shipped they can negotiate a more favorable rate from their vendors and suppliers and ultimately increase our profit margins.





The additional investment in Shandong Jiajia will be applied as registered capital and will be utilized for general working capital purposes and for expanded operations, new business development for new shipping routes, and the development of new logistics services as well as negotiating favorable pricing from their suppliers based on a greater
capacity of shipping volumes.





In expanding these operations, Shandong Jiajia faces the challenges of:





•
effective consolidation of resources among relatively independent affiliates;•
maintaining the balance between the collection of accounts receivable and the extension of longer credit terms offered to our current and prospective clients in an effort to boost sales; and•
our ability to effectively handle the increases in costs due to soaring fuel prices and the weak U.S. dollar.





Additionally, Shandong Jiajia also faces the challenges related to the management and streamlining of the logistical aspect of the new shipping routes that our company plans to undertake and the possibility that our new routes will not be met with acceptance by our present and prospective clients. To accomplish their growth goals, Shandong
Jiajia will utilize a portion of the additional registered capital to invest in an information sharing and personnel training system among our affiliates, to recruit highly qualified professionals to join us; and to promote new shipping routes and new services. In addition, we will rely upon our long-term partnerships with shipping companies, storage management companies, inland transportation companies, and port logistics companies in our efforts to develop a comprehensive logistics solution that we do not believe
is currently available on the market today.








- 16 -





During the remainder of 2008 and beyond, we face a number of challenges in growing our business as a result of the weak global economy. We cannot predict when global economic conditions will improve. We forecast continued weak demand within our shipping business due to reduced levels of exports from China until global economic conditions
improve.





It should be noted the report of our independent registered public accounting firm in connection this annual report on Form 10-K for the year ended December 31, 2008 to be filed by us with the Securities and Exchange Commission contains an explanatory paragraph that raised substantial doubt as to our ability to continue as a going concern
based on our recurring losses from operations, net working capital deficiency and accumulated deficit.  The accompanying consolidated condensed financial statements do not include any adjustments relating to the recoverability and classification of assets carrying amounts or the amount and classification of liabilities that might result from the outcome of these uncertainties.





Recent Accounting Pronouncements





In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 157, "Fair Value Measurements " ("SFAS 157"). This Statement defines fair value as used in numerous accounting pronouncements, establishes
a framework for measuring fair value in generally accepted accounting principles and expands disclosure related to the use of fair value measures in financial statements. In February 2008, the FASB issued FASB Staff Position (“FSP”) No. 157-2, “Effective Date f FASB No. 157”, which delays the effective date of FASB 157 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair
value in the consolidated financial statements on a recurring basis (that is, at least annually), until years beginning after November 15, 2008.





In October 2008, the FASB issued 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.  FSP No. 157-3 was effective upon issuance,
including prior periods for which financial statements have not been issued.





The adoption of SFAS 157 did not have an effect on the Company’s consolidated financial statements.  The Company does not expect the adoption of the remaining provisions of SFAS 157 to have a material effect on its consolidated financial statements.





In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities-including an amendment of FAS 115 ” (“SFAS 159”). SFAS 159 allows entities to choose, at specified election dates, to measure eligible
financial assets and liabilities at fair value that are not otherwise required to be measured at fair value. If a company elects the fair value option for an eligible item, changes in that item’s fair value in subsequent reporting periods must be recognized in current earnings. The Company adopted SFAS 159 effective January 1, 2008.  The adoption of SFAS 159 did not have an effect on the Company’s financial statements.





In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business Combinations" ("SFAS No. 141R"). SFAS No. 141R is a revision to SFAS No. 141 and includes substantial changes to the acquisition method used to account for business combinations (formerly
the "purchase accounting" method), including broadening the definition of a business, as well as revisions to accounting methods for contingent consideration and other contingencies related to the acquired business, accounting for transaction costs, and accounting for adjustments to provisional amounts recorded in connection with acquisitions. SFAS No.141R retains the fundamental requirement of SFAS No. 141 that the acquisition method of accounting be used for all business combinations and for
an acquirer to be identified for each business combination. SFAS No. 141R is effective for periods beginning on or after December 15, 2008, and will apply to all business combinations occurring after the effective date. SFAS 141R will have an impact on the accounting for the Company’s business combinations, if any, once adopted, but the effect depends on the terms of the Company’s business combinations subsequent to January 1, 2009.





In December 2007, the FASB also issued SFAS No. 160, "Non-controlling Interests in Consolidated Financial Statements - an amendment of Accounting Research Bulletin No. 51, Consolidated Financial Statements ". This Statement amends ARB No. 51 to establish new standards
that will govern the (1) accounting for and reporting of non-controlling interests in partially owned consolidated subsidiaries and (2) the loss of control of subsidiaries. Non-controlling interest will be reported as part of equity in the consolidated financial statements. Losses will be allocated to the non-controlling interest, and, if control is maintained, changes in ownership interests will be treated as equity transactions. Upon a loss of control, any gain or loss on the interest sold will be recognized
in earnings. SFAS No. 160 is effective for periods beginning after December 15, 2008. Early adoption is prohibited.  The Company does not expect the adoption of SFAS 160 to have a material effect on its consolidated financial statements.





- 17 -





In March 2008, FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities”.  The new standard is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures
to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. It is effective for financial statements issued for years and interim periods beginning after November 15, 2008, with early application encouraged. The Company does not expect the adoption of SFAS 161 to have a material effect on its consolidated financial statements.  The Company does not currently have any derivative instruments.





In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles (“SFAS No. 162”), which identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements
in conformity with generally accepted accounting principles in the United States.  SFAS No. 162 will become effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Sections 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.  The Company does not expect that the adoption of SFAS No. 162 will have a material effect on its consolidated
financial statements.





In June 2008, the FASB ratified EITF Issue No. 07-5, Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock.  EITF No. 07-5 provides that an entity should use a two step approach to evaluate whether equity-linked financial instrument
(embedded feature) is indexed to its own stock, including evaluating the instrument’s contingent exercise and settlement provisions. It also clarifies on the impact of foreign currency denominated strike prices and market-based employee stock option valuation instruments on the evaluation.  EITF No. 07-5 is effective for years beginning after December 15, 2008.  The Company does not expect that the adoption of EITF No. 07-5 will have a material effect on its consolidated financial statements.





A variety of proposed or otherwise potential accounting standards are currently under study by standard-setting organizations and various regulatory agencies.  Because of the tentative and preliminary nature of these proposed standards, management has not determined whether implementation of such proposed standards would be material
to the Company’s consolidated financials statements.





Revenue Recognition





We provide freight forwarding services generally under contract with our customers.  Our business model involves placing our customers’ freight on prearranged contracted transport.





We follow the guidance of the Securities and Exchange Commission’s Staff Accounting Bulletin No. 104 in our revenue recognition policy.  In general, we record revenue when persuasive evidence of an arrangement exists, services have been rendered or product delivery has occurred, the sales price to the customer is filed or
determinable, and collectability is reasonably assured.





Typically our recognition of revenue is determined by our shipment/payment terms as follows:






•
When merchandise departs the shipper’s location when the trade pricing terms are CIF (cost, insurance and freight),
•
When merchandise departs the shipper’s location when the trade pricing terms are CFR (cost and freight cost), or
•
When the merchandise arrives at the destination port if the trade pricing terms are FOB (free on board) destination.”





The Company recognizes direct shipping costs concurrently with the recognition of the related revenue for each shipment.  Essentially, the costs, which are isolated by billings as the Company does not own the containers, ships, etc., are readily matched to the related billings.





Use of Estimates





The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions, including estimates of the allowance for doubtful accounts and stock based compensation that affect the reported amount of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amounts of revenue and expenses during the reported period.





Significant estimates for the periods reported include the allowance for doubtful accounts which is based on an evaluation of our outstanding accounts receivable including the age of amounts due, the financial condition of our specific customers and knowledge of our industry segment in Asia.  We also rely on certain assumptions
when deriving the fair value of share-based compensation and calculations underlying our provision for taxes in China.  Assumptions and estimates employed in the areas are material to our reported financial conditions and results of operations.  Actual results could differ from these estimates.





The recovery of bad debt recognized in 2008 reflected an adjustment in our estimate of bad debt expense reflected in the allowance account. This credit did not stem from the recovery of a previously written-off account or accounts.  It had been our policy to reserve for bad debt expense based principally on
the age of our receivables. Experience proved we had over reserved and an adjustment was indicated.





- 18 -








Stock Based Compensation





The Company accounts for stock options issues to employees in accordance with SFAS 123R, “Share-Based Payment, on Amendment of FASB Statement No. 123” (“SFAS 123R”).  SFAS 123R requires companies to measure the grant-date fair value of stock options and other equity based compensation issued to employees
and recognize the costs in the financial statements over the period during which the employees are required to provide services.  The Company adopted SFAS 123R in the second quarter of fiscal 2006.





Earnings (Losses) Per Share





Under the provisions of SFAS 128, “Earnings Per Share”, basic income (loss) per common share is computed by dividing income (loss) available to common shareholders by the weighted average number of shares of common stock outstanding for the periods presented. Diluted income
per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that would then share in the income of the company, subject to anti-dilution limitations.





Earnings per share presented for the years ended December 31, 2007 have been restated due to the reverse  recapitalization transaction with Shandong Jiajia.  The retroactive restatement is based on historical average number of weighted-average shares outstanding for the periods presented, adjusted
for shares underlying convertible securities issued in the reverse  recapitalization transaction.





Year ended December 31,2008


2007Numerator:

Restated


RestatedNet income (loss) applicable to common stockholders (A)

$
(2,086,618
)

$
275,630Denominator:Denominator for basic earnings per shareWeighted average shares outstanding (B)


26,823,216



13,697Denominator for diluted earnings per shareTreasury Stock methodStock purchase warrants


-



1,871,245Series A and B Convertible Preferred Stock


-



3,732,192Adjusted weighted average shares outstanding (C)


26,823,216



5,617,192Basic and Diluted (Loss) Earnings Per Common Share:Earnings per share- basic (A)/(B)

$
(0.08
)

$
20.12Earnings per share- diluted (A)/(C)

$
(0.08
)

$
0.05





Potentially issuable shares at December 31, 2008 and 2007 which were anti-dilutive and not included in diluted earnings per share included:





Year ended December 31,2008


2007Restated


RestatedWarrants issued to Mr. Chen


2,000,000



-Warrants


117,500



117,500Class A and B Warrants


31,558,500



-Series B Convertible Preferred Stock


4,500,000



-38,176,000



117,500





Accounts Receivable





The Company provides an allowance for doubtful accounts equal to the estimated uncollectible portion of accounts receivable. This estimate is based on the historical collection experience and a review of the current status of trade receivables. There is no set threshold amount or age for accounts receivable write-offs; any decision is made
by senior management on an account-by-account basis.





Property and Equipment





Property plant and equipment are carried at cost less accumulated depreciation and includes expenditures, which substantially increase the useful lives of property and equipment. Maintenance and repairs are charged to expense as incurred. When property and equipment are retired or otherwise disposed of, the related costs and accumulated depreciation
are removed from the respective accounts and any gain or loss on the disposition is credited or charged to income.





Depreciation is computed using the straight-line method based on the estimated useful lives of the individual assets, which range from 3-5 years.





- 19 -





Income Taxes





The Company follows Statement of Financial Accounting Standards No. 109 “Accounting for Income Taxes” (SFAS No. 109). Under the asset and liability method of SFAS No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributed
to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax base. 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 includes the enactment date. If it is more
likely than not that some portion of a deferred tax asset will not be realized, a valuation allowance is recognized.





In July 2006, the Financial Accounting Standard Board (FASB) issued FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes”. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial
statements in accordance with SFAS NO. 109, “Accounting for Income Taxes”. FIN 48 requires a company to evaluate whether tax position taken by a company will more likely than not be sustained upon examination by the appropriate taxing authority. It also provides guidance on how a company should measure the amount of benefit that the company is to recognize in its financial statements. FIN 48 also provides guidance on de-recognition, classification,
interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for years beginning after December 15, 2006.





The Company adopted FIN 48 as of January 1, 2007. As a result of the implementation of FIN 48, the Company concluded that it has not taken any uncertain tax positions on any of its open income tax returns that would materially distort its financial statements. The Company’s methods of accounting are based on established income
tax principles approved in the Internal Revenue Code (IRC) and are properly calculated and reflected within its income tax returns.





The Company periodically reassesses the validity of its conclusions regarding uncertain income tax positions to determine if facts or circumstances have arisen that might cause the Company to change its judgment regarding the likelihood of a tax position’s sustainability under audit. The impact of this reassessment for the years ended
December 31, 2008 and 2007 did not have any impact on its results of operations, financial conditions or liquidity.





The Company is not currently under examination by any federal or state taxing authority.





Cash and Cash Equivalents





The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The carrying value of these instruments approximates fair value.





Long-Lived Assets





The Company periodically evaluates the carrying value of long-lived assets to be held and used in the business, other than assets held for sale when events and circumstances warrant, generally in conjunction with the annual business planning cycle. If the carrying value of a long-lived asset is considered impaired, a loss is recognized based
on the amount by which the carrying value exceeds the fair market value for assets to be held and used. Fair market value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Long-lived assets to be disposed of other than by sale are considered held and used until disposed of.





Customer Advances





Prepayments and advance deposits consist of prepayments by Shandong Jiajia for contracted cargo that has not yet been shipped to the recipient and for other advance deposits. These amounts are recognized as revenue as customers take delivery of goods, in compliance with its revenue recognition policy. At December 31, 2008 and 2007 customer
advances totaled $1,133,283 and $683,436, respectively.





Foreign Currencies





Transactions and balances in other currencies are converted into U.S. dollars in accordance with Statement of Financial Accounting Standard (SFAS) No. 52, “Foreign Currency Translation”, and are included in determining comprehensive income or loss.





For foreign operations with the local currency as the functional currency, assets and liabilities are translated from the local currency into U.S. dollars at the exchange rate prevailing at the balance sheet date. Revenues and expenses are translated at weighted average exchange rates for the period to approximate translation at the exchange
rates prevailing at the dates those elements are recognized in the financial statements. Translation adjustments resulting from the process of translating the local currency financial statements into U.S. dollars are included in determining comprehensive income or loss.





The reporting currency is the U.S. dollar. The functional currency of Shandong Jiajia is the local currency, the Chinese dollar or Renminbi (“RMB”).





- 20 -





Comprehensive Income





We follow Statement of Financial Accounting Standards No. 130 (SFAS 103) “Reporting Comprehensive Income” to recognize the elements of comprehensive income.  Comprehensive income is comprised of net income and all changes to the statement of stockholders’
equity, except those due to investments by stockholders, changes in paid-in capital and distributions to stockholders.  Comprehensive income included net income and foreign currency translation adjustments.





Minority Interest





Under generally accepted accounting principles when losses applicable to the minority interest in a subsidiary exceed the minority interest in the equity capital of the subsidiary, the excess is not charged to the majority interest since there is no obligation of the minority interest to make good on such losses.  We, therefore,
absorbed all losses applicable to a minority interest where applicable.  If future earnings do materialize, we shall be credited to the extent of such losses previously absorbed.








Results of Operations





The following table provides certain comparative information based on our consolidated results of operations for the year ended December 31, 2008 as compared to the year ended December 31, 2007:








Year ended December 31, 2008


Year ended December 31, 2007


$ Change


% ChangeRestated


RestatedSales

$
35,561,833



35,298,453


$
263,380



1
%Cost of Sales


34,552,938



34,036,196



516,742



2
%Gross Profit


1,008,896



1,262,257



(253,361
)


20
%Total Operating Expenses


1,003,330



678,177



325,153



48
%Income (Loss) from Operations


5,566



584,080



(578,514
)


99
%Total Other Income (Loss)


(1,666,094
)


13,575



(1,679,669
)


N/MNet Income (Loss)


(2,086,618
)

$
275,630


$
(2,362,248
)


857
%Comprehensive income (loss)

$
(2,047,723
)

$
46,654


$
(2,094,377
)


4,489
%





N/M- Not Meaningful





Sales





Our sales for 2008 remained relatively consistently with the prior year, increasing approximately 1% to $35,561,833.  However, sales for the fourth quarter of 2008, totaling $7,808,374 decreased from $10,723,247 for the fourth quarter of 2007.  This decrease, representing a year-over-year reduction in fourth quarter revenues
of 27%, reflects the overall decline in demand for our transport  services.  We believe this decline is due to the overall global economic slowdown with the corresponding reduction in demand for Chinese sourced raw materials and finished goods.  While the Company has taken, and will continue to take, steps to minimize the negative impact of these conditions, we are unable to reliably predict either the depth or duration of this economic trend.





- 21 -





Cost of sales





Our cost of sales represents the cost of the cargo space we obtain for our customers from third parties.  Cost of sales as a percentage of sales increased to 97% in 2008 from 96% in 2007.  This increase is related to (i) small increases in the price of cargo space, and (ii) the impact of unused reserved cargo space triggered
by a lower demand for our services the initially anticipated.





Total operating expenses





Total operating expenses increased $325,153 or 48% to $1,003,330 in 2008 as compared to operating expenses of  $678,177 in 2007.  This increase is primarily due to approximately $540,000 of general and administrative expenses related to the parent company, formerly MediaReady, Inc.; these expenses were not included in
the prior year pursuant to the accounting treatment accorded the reverse merger and recapitalization at December 31, 2007.  In addition, we incurred professional fees to respond to a complaint filed by the Securities and Exchange Commission against us and Messrs. Harrell and Aubel which related to events which occurred prior to our acquisition of 51% of Shandong Jiajia and the change in our management.  We have been cooperating with the Securities and Exchange Commission in this proceeding
and in February 2009 we consented to the entry of a Permanent Injunction and Other Relief to resolve the liability aspects of the complaint.





While operating expenses increased in total, operating expenses as a percentage of sales for Shandong Jiajia decreased to 1% during the current year from 2% during the prior year.  This decrease is primarily attributable to increased efficiencies in the operating structure of Shandong Jiajia on an annualized basis.  Additionally,
during 2008 we recognized one-time recovery of bad debt of approximately $400,000 for which there was no comparable gain in 2007.  If we had not recovered this amount, our operating expenses would have increased approximately $725,000 or 10%.   The recovery of bad debt recognized in 2008 reflected an adjustment in our estimate of bad debt expense reflected in the allowance account. This credit did not stem from the recovery of a previously written-off account or accounts.  It
had been our policy to reserve for bad debt expense based principally on the age of our receivables. Experience proved we had over reserved and an adjustment was indicated.





Total other income (expense)





Total other non-operating expenses increased sharply in 2008 over the prior year.  Overall, these expenses totaled $1,666,094 in 2008 compared to income of $13,575 recognized 2007.  This increase in expense was due to the recognition of approximately $86,000 in bad debt from Mr. David Aubel deemed uncollectible and the
recognition of $1,597,000 in expense under a registration payment arrangement related to our 2008 Unit Offering completed in April 2008.





Other comprehensive income (loss)





As described elsewhere herein, our functional currency is the Chinese Renminbi (“RMB”); however the accompanying consolidated financial statements have been translated and presented in U.S. dollars using period-end rates of exchange for assets and liabilities, and average rates of exchange for the period for revenues, costs, and
expenses.  Net realized gains and losses resulting from foreign exchange transactions are included in the consolidated statements of operations and can have a significant effect on our financial statements.  We reported a gain on foreign currency translations of $38,895 in 2008 as compared to a loss of $228,976 in 2007.  Including these non-cash gains and losses, we reported comprehensive loss of $2,047,723 for 2008 and comprehensive income of $46,654 for 2007.





Liquidity and capital resources





Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations and otherwise operate on an ongoing basis. At December 31, 2008, we had working capital of $1,698,227, including cash of $3,156,362, as compared to a working capital deficit of $2,775,652, including cash of $1,121,605,
at December 31, 2007. This significant increase in working capital was attributable primarily to the completion of our 2008 Unit Offering completed in April 2008 with net proceeds of $3,359,188.  We believe, however, that our current working capital and cash generated from operations may not be sufficient to meet our cash requirements for the current year without the ability to attain profitable operations and/or obtain additional financing. Additionally, the terms of the 2008 Unit Offering contains
restrictive covenants which may hamper our ability to raise additional capital. If we are not successful in generating sufficient cash flows from operations or in raising additional capital when required in sufficient amounts and on acceptable terms, these failures could have a material adverse effect on our business, results of operations and financial condition. There can be no assurance that we will be able to raise any required capital necessary to achieve our targeted growth rates and future continuance
on favorable terms or at all.





The report of our independent registered public accounting firm on our financial statements for the year ended December 31, 2008 contains an explanatory paragraph regarding our ability to continue as a going concern based upon our recurring losses from operations, net cash used in operations, and accumulated deficit.





As a result of the weak global economy, the demand for exported Chinese products has also declined, resulting in a significant drop in the demand for our freight and transport services.  In response to the sharp decline in our revenues, we plan to reduce the controllable portions of our cost of sales
where possible.  We anticipate these efforts to result in a positive gross profit in the future year.  We believe our cost reduction program can have the desired result and should assist to return the Company to a positive cash flow position, even at the reduced revenue levels which we anticipate for the foreseeable future.





If our cost reduction efforts related to our cost of sales are notsuccessful to a level which enables us to generate sufficient cash flows from operations to fund our needs we may need to raise additional working
capital.  We do not have any commitments for any additional capital and both the terms of our 2008 Unit Offering which contain certain restrictive covenants and the overall softness of the capital markets could hinder our efforts. In that event, it would be necessary for us to take additional steps to further reduce our operating expenses including personnel reductions and the possible consolidation of our offices.   We believe this cost containment approach is a viable response to the
current market conditions and, coupled with our cash on-hand, should allow us to maintain our operations for the foreseeable future.




- 22 -





The following table provides certain selected balance sheet comparisons between December 31, 2008 and December 31, 2007.




December 31, 2008


December 31, 2007

Increase/ Decrease($)


($)

($)


% ChangeRestated


RestatedCash

$
3,156,362


$
1,121,605


$
2,034,757



181
%Accounts receivable, net


2,739,173



3,131,831



(392,658
)


(13
%)Accounts receivable - related party


-



7,000



(7,000
)


(100
%)Due from related parties


518,433



511,435



6,998



1
%Prepayments and other current assets


327,951



328,065



(114
)


N/MTotal current assets

$
6,741,920


$
5,099,936


$
1,641,984



32
%Cash overdraft

$
-


$
12,633


$
(12,633
)


(100
%)Accounts payable - trade


1,752,862



3,608,885



(1,856,023
)


(51
%)Accrued compensation - related party


-



446,985



(446,985
)


(100
%)Other accruals and current liabilities


1,743,953



485,101



1,258,852



260
%Convertible note payable/related party


-



2,373,179



(2,373,179
)


(100
%)Advances from customers


1,133,283



683,436



449,847



66
%Due to related parties


378,697



229,252



149,445



65
%Foreign tax payable


34,897



36,117



(1,219
)


(3
%)Total current liabilities

$
5,043,693


$
7,875,588


$
(2,831,895
)


(36
% )





N/M – Not Meaningful





We maintain cash balances in the United States and China. At December 31, 2008 and December 31, 2007, our cash by geographic area was as follows:


December 31, 2008


December 31, 2007United States

$
201,605



6
%

$
215



0.02
%China


2,954,757



94
%


1,121,390



99.98
%$
3,156,362



100
%

$
1,121,605



100
%





For the foreseeable future we anticipate that a substantial portion of our cash balances will be held in the form of RMB held in bank accounts at financial institutions located in the PRC. Cash held in banks in the PRC is not insured. In 1996, the Chinese government introduced regulations, which relaxed restrictions on the conversion of the
RMB; however restrictions still remain, including but not limited to restrictions on foreign invested entities. Foreign invested entities may only buy, sell or remit foreign currencies after providing valid commercial documents at only those banks authorized to conduct foreign exchanges. Furthermore, the conversion of RMB for capital account items, including direct investments and loans, is subject to PRC government approval. Chinese entities are required to establish and maintain separate foreign exchange accounts
for capital account items. We cannot be certain Chinese regulatory authorities will not impose more stringent restrictions on the convertibility of the RMB, especially with respect to foreign exchange transactions. Accordingly, cash on deposit in banks in the PRC is not readily deployable by us for purposes outside of China.





Total current assets increased approximately $1,641,984 or 32% at December 31, 2008 over December 31, 2007. This increase was due primarily to our completion of our 2008 Unit Offering in April 2008 with net proceeds to us of approximately $3,360,000. Current assets also reflected a decline in accounts receivable of $392,658 or 13% due to
increased collection efforts within Shandong Jiajia during the period.








- 23 -





Trade accounts payable declined substantially at December 31, 2008 from our 2007 year end balances. This decline of $1,856,023 resulted from the satisfaction of obligations using funds made available from our 2008 Unit Offering as well as timing difference in payables as of the year end.





Advances from customers totaled $1,133,283 at December 31, 2008, an increase of approximately $449,847 or 66% over the prior yearend balance.  This sharp increase is due to an increase in our overall level of operations and represents advance payment by our customers for contracted cargo shipments that have not been shipped as of
December 31, 2008. Upon shipment of these goods and compliance with the related contract terms, these advances will be taken into income in accordance with our revenue recognition policy.





Accrued registration rights penalty increased approximately $1.6 million as we accrued this penalty during the quarter ended September 30, 2008 in accordance with SFAS 5 Accounting for Contingencies.





In addition, in March 2008 under the terms of our agreement with Shandong Jiajia, we:





•
satisfied $448,985 of accrued compensation due our then president and CEO, Mr. Jeffrey Harrell, through the issuance of 581,247 shares of our common stock, and•
converted a $2,521,379 note payable due a principal shareholder of our company, Mr. David Aubel, into 2,864,606 shares of our common stock.





These transactions had the effect of reducing our liabilities at December 31, 2008 as compared to December 31, 2007.





Related Party





From time to time Shandong Jiajia has entered into transactions with related parties.  At December 31, 2008, we were owed $518,433 by Shandong Huibo Import & Export Co., Ltd., a 24.3% shareholder in Shandong Jiajia.  Shandong Huibo Import & Export Co., Ltd. is a Chinese limited liability company owned by PeiXiang
Wang (31.7%) and PengXiang Liu (68.3%).  The loan, which was provided in 2005, is unsecured, non-interest bearing and payable on demand.  At December 31, 2008, our balance sheet also reflected (i) $123,458 due to Xiangfen Chen, general manager of the Xiamen Branch of Shandong Jiajia, (ii) $62,652 due to Liu Bin, general manager of Tianjin Branch of Shandong Jiajia, and (iii) $183,448 due to Tianjin Sincere Logistics Co., Ltd., a Chinese limited liability company 90% owned by Bin Liu.  The
loans were provided for working capital purposes are unsecured, non-interest bearing and repayable on demand.





Statement of Cash Flows





Net cash used in operating activities totaled $1,643,461 for the year ended December 31, 2008 as compared to cash provided of $691,569 for the year ended December 31, 2007.  This overall increase in cash used by operating activities is primarily attributable to a reduction of accounts payable. The largest sources of cash include
$723,098 from customer cash receipts from account receivable, $449,848 from customer receipts from advances from customers; and $1,458,488 non-cash adjustments to net income.  These sources of cash were offset primarily by a decrease of $1,856,023 in accounts payable, a decrease of $338,148 in accruals and current liabilities, and an increase of $298,422 in other receivables.





Net cash used in investing activities for the year ended December 31, 2008 decreased $389,200 from the comparable period in 2007.  This decrease is primarily due to the decrease in advances to related parties of $6,998 in 2008 compared to $433,444 in 2007, partially offset by increases in funds used for capital
expenditures .  In both periods funds used for capital expenditures related to addition s of property and equipment.





Net cash provided by financing activities for the year ended December 31, 2008 was primarily attributable to proceeds from our 2008 Unit Offering, net of expenses.    Additionally, in 2008 we received advances from related parties of $256,879 which were offset by repayments of advances to related parties of
$105,794 during the year.  During 2008, we also received proceeds under a convertible note agreement from Mr. David Aubel, a related party.  While not reflected in the statement of cash flows due to the accounting treatment of the reverse recapitalization effective December 31, 2007, d uring the prior periods, proceeds from financing activities was attributable to loans made to us by a principal shareholder, Mr. David Aubel, which such amounts were satisfied in full in
March 2008 through the issuance of 2,864,606 shares of our common stock as described elsewhere herein.





Commitments




The table below presents our commitments for our various office leases in the U.S. and China for the years ended December 31, 2009 and thereafter:





Period

TotalPeriod Ended December 31, 2009

$
121,000Period Ended December 31, 2010


48,000Period Ended December 31, 2011


23,000Period Ended December 31, 2012


23,000Period Ended December 31, 2013


23,000Thereafter


--$
238,000





Off Balance Sheet Arrangements





We do not have any off-balance sheet arrangements that we are required to disclose pursuant to these regulations. In the ordinary course of business, we enter into operating lease commitments, purchase commitments and other contractual obligations. These transactions are recognized in our financial statements in accordance with generally
accepted accounting principles in the United States.








- 24 -





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





Not applicable to a smaller reporting company.





ITEM 8.                      FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.





Our financial statements are contained in pages F-1 through F-X, which appear at the end of this annual report.





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





None.





ITEM 9A(T).                                CONTROLS AND PROCEDURES.





Disclosure Controls and Procedures





Under the supervision and with the participation of our management, including our Chief Executive Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) under the Securities Exchange Act of 1934, as amended, as of December 31, 2008, the
end of the period covered by this report (the “Evaluation Date”).  Our management, solely being our Chief Executive Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource
constraints and the benefits of controls must be considered relative to their costs. Due to 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 our company have been detected.





Based on this evaluation, our Chief Executive Officer who serves as our principal executive officer and principal financial officer concluded that as of December 31, 2008 our disclosure controls and procedures were not effective such that the information relating to our company, including our consolidating subsidiaries, required to be disclosed
in our Securities and Exchange Commission reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and (ii) is accumulated and communicated to our management, including our Chief Executive Officer, to allow timely decisions regarding required disclosure. Our management concluded that our disclosure controls and procedures were not effective as described in more detail below. A material weakness is a control deficiency, or combination of control deficiencies,
that results in more than a remote likelihood that a material misstatement of our annual or interim financial statements would not be prevented or detected.





The specific material weaknesses identified by our management were as follows:





As of December 31, 2007, we did not have appropriate policies and procedures in place to ensure that the number of shares of common stock issued and outstanding would not exceed the number of common stock shares authorized. This material weakness was reported in our December 31, 2007 Form 10-K, as amended.  In addition, as of December
31, 2007, we did not have appropriate policies and procedures in place to ensure that the recognition of the fair value of 450,000 shares of our Series B Convertible preferred stock to be issued for consulting services rendered during the year ended December 31, 2007 would be accounted for in 2007.





Subsequent to the filing of the first amendment to our 2007 Form 10-K (Amendment No. 1) on May 19, 2008, we discovered that, as of December 31, 2007, we did not have appropriate policies and procedures in place to ensure that we: (i) accounted for our acquisition of a 51% interest in Shandong Jiajia as a capital transaction instead of using
the purchase method of accounting, (ii) properly determine that we were a public shell company prior to the Shandong Jiajia transaction , and (iii) account for certain costs related to the Shandong Jiajia transaction as costs directly associated with the recapitalization .





Subsequent to the filing of the December 31, 2007 Form 10-K/A (Amendment No. 2) on December 24, 2008, it was further determined that, as of December 31, 2007, we did not have appropriate policies and procedures in place to ensure that the Company; (i) properly accounted for the fair value of assets and liabilities of the accounting acquire
(formerly MediaReady, Inc.) recognized in connection with the acquisition of a 51% interest in Shandong Jiajia, and (ii) properly classify $64,945 in advances to related parties in the consolidated statements of cash flows, and (iii) recognize the accrual of certain professional fees totaling $141,800.








- 25 -








Further, in our 2008 interim reports, the Company: (i) failed to properly recognize and record $25,060 in professional fees expense attributable to that period, (ii) correctly classify approximately $400,000 in recovery of bad debts in the consolidated statements of operations from a component of other income (expense) to a component of operating
income, (iii) failed to recognize an overall accrual of $137,149 in expenses, and (iv) failed to recognize an accrued loss of $1,597,000 due under a registration payment arrangement entered into in connection with the Company’s financing completed in April 2008.  We have also amended our Annual Report on Form 10-K as originally filed by this amendment to include restated financial statements which correct the following previous errors in our financial statements: (i) we
did not properly record the reverse recapitalization transaction and its effects on equity, and (ii) we did not properly classify and present cash flows related to advances from, and repayments of advances from related parites.





We have an inadequate number of personnel with the requisite expertise in generally accepted accounting principles to ensure the proper application thereof. Our Chief Executive Officer who serves as our Chief Financial Officer is not an accountant and we have historically relied upon the services of outside accountants. Our internal accounting
staff is primarily engaged in ensuring compliance with PRC accounting and reporting requirements and their U.S. GAAP knowledge is limited. As a result, a majority of our internal accounting staff is relatively inexperienced with U.S. GAAP and the related internal control procedures required of U.S. public companies. Although our accounting staff is professional and experienced in accounting requirements and procedures generally accepted in the PRC, management has determined that they require additional training
and assistance in U.S. GAAP matters. Management has determined that our internal audit function is also significantly deficient due to insufficient qualified resources to perform internal audit functions. Finally, management determined that the lack of an Audit Committee of our Board of Directors also contributed to insufficient oversight of our accounting and audit functions.





These material weaknesses at December 31, 2007 continue at December 31, 2008.  To correct these ongoing material weaknesses we plan to implement changes in our disclosure controls and procedures and internal control over financial reporting to correct these material weaknesses before. Specifically, for issuances of common stock,
management plans to implement improved policies and procedures that will include a review of issuances of common stock by appropriate personnel. For issuances of preferred stock, management plans to implement improved policies and procedures that will include a review of the accounting for preferred stock to be issued for consulting services by appropriate personnel. In addition, we will make sure that we have an adequate number of personnel involved in the preparation of the financial statements and disclosures
with the requisite expertise in generally accepted accounting principles to ensure the proper application thereof.





Once fully implemented, management believes that these new policies and procedures will be effective in remediating the identified material weaknesses. We expect the material weakness will be remediated prior to December 31, 2009.   As we improve our internal control over financial reporting and implement remediation measures,
we may supplement or modify the remediation measures described above.





Management’s Report on Internal Control over Financial Reporting





Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934.  Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2008.  In making this assessment,
our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework.  Our management has concluded that, as of December 31, 2008 our internal control over financial reporting was not effective based on this criteria.





This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting.  Our management's report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit
us to provide only management's report in this annual report.





Changes in Internal Control over Financial Reporting





There was no change in our internal control over financial reporting identified in connection with our evaluation that occurred during our last quarter (our fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, our internal control over financial
reporting





ITEM 9B.                       OTHER INFORMATION.





None.




- 26 -





PART III





ITEM 10.                      DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.





Directors and Executive Officers


Name

Age

PositionsWei Chen

39

Chairman of the Board, Chief Executive Officer, President, Secretary and TreasurerHui Liu

47

Director, Chief Executive Officer of Shandong Jiajia





Wei Chen.  Mr. Chen has been a member of our Board of Directors and Chief Executive Officer since June 2008, and he has served as Chairman of the Board, President, Secretary and Treasurer since July 2008.  Mr. Chen, a minority owner and co-founder of Shandong Jiajia,
has been the General Manager of Shandong Jiajia’s Shanghai Branch since February 2002. Prior to joining Shandong Jiajia, Mr. Chen was a shipping department manager at the Shanghai Branch of Beijing Sunshine International Freight Co., Ltd. from October 1998 to February 2002.  Previously, Mr. Chen was the chief representative of Shanghai office, Mitrans International Shipping Co., Ltd. from June 1995 to October 1998.  Mr. Chen started his career as a sales representative at Asian Development
International Transportation Corporation between September 1992 and May 1995.  Mr. Chen obtained a Bachelor’s Degree in International Shipping from Shanghai Maritime University in 1992.





Hui Liu.  Mr. Liu has been a member of our Board of Directors since July 2008.  Mr. Liu co-founded Shandong Jiajia in 1999 and is a minority owner of the company.  Since 1999 Mr. Liu has served as Chief Executive Officer of Shandong Jiajia.  From
1997 to 1999, Mr. Liu was the storage and delivery department manager at Shandong Jiajia Import and Export Corp., Ltd. and from 1989 to 1997 he managed customs declaration, inspection declaration, shipping arrangement, and bulk cargo logistics at Cosco International Freight Co., Ltd.  From 1986 to 1989 Mr. Liu was employed as a sailor with Qingdao Ocean Shipping Co., Ltd.  Mr. Liu obtained an Associate Degree in Vessel Driving from Qingdao Ocean Shipping Mariner College in 1986.





Each director is elected at our annual meeting of shareholders and holds office until the next annual meeting of shareholders, or until his successor is elected and qualified.





Director Compensation





We have not established standard compensation arrangements for our directors and the compensation payable to each individual for their service on our Board is determined from time to time by our Board of Directors based upon the amount of time expended by each of the directors on our behalf.  None of our directors were compensated
for their services as members of our Board of Directors for the year ended December 31, 2008.





Code of Ethics





We have adopted a Code of Business Conduct and Ethics to provide guiding principles to all of our employees. Our Code of Business Conduct and Ethics does not cover every issue that may arise, but it sets out basic principles to guide our employees and provides that all of our employees must conduct themselves accordingly and seek to avoid
even the appearance of improper behavior. Any employee which violates our Code of Business Conduct and Ethics will be subject to disciplinary action, up to an including termination of his or her employment.





Generally, our Code of Business Conduct and Ethics provides guidelines regarding:





•
compliance with laws, rules and regulations,•
conflicts of interest,•
insider trading,•
corporate opportunities,•
competition and fair dealing,•
discrimination and harassment,•
health and safety,•
record keeping,•
confidentiality,•
protection and proper use of company assets,•
payments to government personnel,•
waivers of the Code of Business Conduct and Ethics,•
reporting any illegal or unethical behavior, and•
compliance procedures.








- 27 -





In addition, we have also adopted a Code of Ethics for our Chief Executive Officer and senior financial officers who are also subject to specific policies regarding:





•
disclosures made in our filings with the Securities and Exchange Commission,•
deficiencies in internal controls or fraud involving management or other employees who have a significant role in our financial reporting, disclosure or internal controls,•
conflicts of interests, and•
knowledge of material violations of securities or other laws, rules or regulations to which we are subject.





A copy of our Code of Business Conduct and Ethics is filed as an exhibit to this report.  In addition, we will provide a copy, without charge, to any person desiring a copy of the Code of Business Conduct and Ethics, by written request to us at our U.S. representative offices at 7300 Alondra Boulevard,
Suite 108, Paramount, CA  90723, Attention: Corporate Secretary.





Committees of the Board of Directors





Our Board of Directors has not established any committees, including an Audit Committee, a Compensation Committee or a Nominating Committee, any committee performing a similar function. Further, as we are currently quoted on the OTC Bulletin Board, we are not subject to any exchange rule which includes qualitative requirements mandating the
establishment of any particular committees.





We do not have a policy regarding the consideration of any director candidates which may be recommended by our shareholders, including the minimum qualifications for director candidates, nor has our Board of Directors established a process for identifying and evaluating director nominees. We have not adopted a policy regarding the handling
of any potential recommendation of director candidates by our shareholders, including the procedures to be followed. Our Board has not considered or adopted any of these policies as we have never received a recommendation from any shareholder for any candidate to serve on our Board of Directors. Given the nature of our operations and lack of directors and officers insurance coverage, we do not anticipate that any of our shareholders will make such a recommendation in the near future. While there have been no
nominations of additional directors proposed, in the event such a proposal is made, all members of our Board will participate in the consideration of director nominees.





Neither of our directors is an “audit committee financial expert” within the meaning of Item 401(e) of Regulation S-B. In general, an “audit committee financial expert” is an individual member of the audit committee or Board of Directors who:





•
understands generally accepted accounting principles and financial statements,•
is able to assess the general application of such principles in connection with accounting for estimates, accruals and reserves,•
has experience preparing, auditing, analyzing or evaluating financial statements comparable to the breadth and complexity to our financial statements,•
understands internal controls over financial reporting, and•
understands audit committee functions.





Neither of our directors have the requisite professional background necessary to be considered an audit committee financial expert.  The OTC Bulletin Board on which our common stock is quoted does not impose any qualitative standards requiring companies to have independent directors or requiring that one or more of its directors
be audit committee financial experts.





ITEM 11.                       EXECUTIVE COMPENSATION.





The following table summarizes all compensation recorded by us in the last completed year for:





•
our principal executive officer or other individual serving in a similar capacity,•
our two most highly compensated executive officers other than our principal executive officer who were serving as executive officers at December 31, 2008 as that term is defined under Rule 3b-7 of the Securities Exchange Act of 1934, and•
up to two additional individuals for whom disclosure would have been required but for the fact that the individual was not serving as an executive officer at December 31, 2008.





For definitional purposes, these individuals are sometimes referred to as the "named executive officers." The value attributable to any option awards in the following table is computed in accordance with FAS 123R.








- 28 -





SUMMARY COMPENSATION TABLE





NAME AND PRINCIPAL POSITION
(A)
YEAR
(B)

SALARY
($)
(C)


BONUS
($)
(D)


STOCK
AWARDS
($)
(E)


OPTION
AWARDS
($)
(F)


NON-EQUITY
INCENTIVE
PLAN
COMPENSATION
($)
(G)


NONQUALIFIED
DEFERRED
COMPENSATION
EARNINGS ($)
(H)


ALL
OTHER
COMPENSATION
($)
(I)


TOTAL
($)
(J)V. Jeffrey Harrell (1)
2008


61,500



—



—



—



—



—



—



61,5002007


200,000



—



—



—



—



—



—



200,000Hui Liu (2)
2008


25,854



—



—



—



—



—



—



25,8542007


3,732



14,785



—



—



—



—



11,500



30,017Wei Chen
2008


25,854



-—



—



—



—



—



—



25,8542007


26,642



—



—



—



—



—



—



26,642





(1)
Mr. Harrell served as our Chief Executive Officer from 1999 until July 2008.  During 2007 Mr. Harrell converted $193,500 of accrued but unpaid compensation into 135,000 shares of our common stock. At December 31, 2007 we owned Mr. Harrell an aggregate of approximately $419,000 of accrued but unpaid compensation. As contemplated by
the acquisition agreement for Shandong Jiajia, in March 2008 he converted all amounts due him into 581,247 shares of our common stock in full satisfaction of those obligations.(2)
In 2007 Mr. Liu received a $14,785 bonus. All other compensation included $10,958 for travel allowance and $542 for a car allowance





Employment Agreement with our Executive Officers





We currently have no employment agreements with any of our executive officers, nor any compensatory plans or arrangements resulting from the resignation, retirement or any other termination of any of our executive officers, from a change-in-control, or from a change in any executive officer's responsibilities following a change-in-control.





How Mr. Harrell's Compensation was Determined





During 2007 and 2008, our Board of Directors unilaterally fixed the amount of compensation payable to Mr. Harrell. Mr. Harrell was the sole member of the Board of Directors until Mr. Chen joined the Board on June 25, 2008. The Board of Directors did not consult with any experts or other third parties in fixing the amount of Mr. Harrell's
compensation. During 2008 Mr. Harrell's compensation package included a base salary of $200,000.  On July 22, 2008 Mr. Harrell resigned all positions with our company and he did not receive any severance or similar benefits upon his resignation.





How Mr. Liu's and Mr. Chen's Compensation was Determined





During 2008 Mr. Liu and Mr. Chen served solely as executive officers and directors of our Shandong Jiajia subsidiary and as such were responsible for its day-to-day operations.  While they remain in those positions with Shandong Jiajia, both individuals are now members of our Board of Directors and Mr. Chen serves as our Chief Executive
Officer.  Neither Mr. Liu nor Mr. Chen is a party to an employment agreement with Shandong Jiajia. The compensation for each of these individuals is determined by Shandong Jiajia's Board of Directors of which they are members and is based upon a number of factors including the scope of each of their duties and responsibilities to Shandong Jiajia and the time each devotes to its business. Such deliberations are not arms-length. Shandong Jiajia did not consult with any experts or other third parties in
fixing the amount of either Mr. Liu's or Mr. Chen's compensation.  The amount of compensation payable to either Mr. Liu or Mr. Chen can be increased at any time upon the determination of Shandong Jiajia's Board of Directors.








- 29 -





Outstanding Equity Awards at Fiscal Year-End





The following table provides information concerning unexercised options, stock that has not vested and equity incentive plan awards for each named executive officer outstanding as of December 31, 2008:





OPTION AWARDS


STOCK AWARDSName

(a)

Number of securities underlying unexercised options
(#) exercisable

(b)


Number of
Securities
Underlying
Unexercised
options
(#)
unexercisable

(c)


Equity
Incentive
plan awards:
Number of
Securities
Underlying
Unexercised
Unearned
options
(#)

(d)


Option
Exercise
price
($)

(e)


Option
Expiration
date

(f)


Number
of shares
or units
of stock
that
have not vested
(#)

(g)


Market value of shares or units of stock that have not vested ($)

(h)


Equity incentive plan awards: Number of unearned shares, units or other rights that have not vested (#)

(i)


Equity incentive plan awards: Market or payout value of unearned shares, units or other rights that have not vested (#)

(j)V. Jeffrey Harrell


—



—



—



—



—



—



—



—



—Hiu Liu


—



—



—



—



—



—



—



—



—Wei Chen


----



—



—


$
---


----



—



—



—



—





Compliance with Section 16(a) of the Exchange Act





Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to us under Rule 16a-3(d) of the Securities Exchange Act during fiscal 2008 and Forms 5 and amendments thereto furnished to us with respect to 2008, as well as any written representation from a reporting person that no Form 5 is required, we are not aware that any
officer, director or 10% or greater stockholder failed to file on a timely basis, as disclosed in the aforementioned Forms, reports required by Section 16(a) of the Securities Exchange Act during fiscal 2008, except as follows:





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





At May 18, 2009 we had 34,508,203 shares of our common stock issued and outstanding. The following table sets forth information regarding the beneficial ownership of our common stock as of May 18, 2009 by:





•
each person known by us to be the beneficial owner of more than 5% of our common stock;•
each of our directors;•
each of our named executive officers; and•
our named executive officers, directors and director nominees as a group.





Unless otherwise indicated, the business address of each person listed is in care of 7300 Alondra Boulevard, Suite 108, Paramount, California 90723. The percentages in the table have been calculated on the basis of treating as outstanding for a particular person, all shares of our common stock outstanding on that date and all shares of our
common stock issuable to that holder in the event of exercise of outstanding options, warrants, rights or conversion privileges owned by that person at that date which are exercisable within 60 days of that date. Except as otherwise indicated, the persons listed below have sole voting and investment power with respect to all shares of our common stock owned by them, except to the extent that power may be shared with a spouse.








- 30 -





Amount and Nature of Beneficial Ownership (1)Name

# of Shares


% of ClassWei Chen (2)


4,762,500



13.0
%Hui Liu


312,500



*All named executive officers and directors as a group (two persons) (2)


5,075,000



13.9
%China Direct, Inc. (3)


9,512,500



24.3
%





*  represents less than 1%





(1) The inclusion of any shares as deemed beneficially owned does not constitute an admission of beneficial ownership by the named shareholder.





(2) The number of shares beneficially owned by Mr. Chen includes 2,000,000 shares of our common stock issuable upon the exercise of warrants with an exercise price of $0.30 per share.





(3) The shares of our common stock shown beneficially owned by China Direct, Inc. includes:





•
4,750,000 shares of common stock held of record by Capital One Resource Co., Ltd., a wholly owned subsidiary of CDI China, Inc., which is in turn a wholly owned subsidiary of China Direct, Inc.,•
62,500 shares of common stock held of record by China Direct Investments, Inc., a wholly owned subsidiary of China Direct, Inc.,•
200,000 shares of our common stock underlying Class A warrants; and•
450,000 shares of Series B Convertible Preferred Stock held of record by China Direct Investments, Inc. which has no voting rights but is convertible at the option of the holder into 4,500,000 shares of common stock.





China Direct, Inc.'s address is 431 Fairway Drive, Deerfield Beach, Florida 33441. Dr. James Wang, Chief Executive Officer of China Direct, Inc. holds voting and dispositive control over securities owned by China Direct, Inc. in his capacity of Chief Executive Officer.





ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.





Up until March 2008, we relied heavily on advances from Mr. David Aubel, formerly a principal shareholder of our company, to fund our operations.  Mr. Aubel has, over the years, executed a number of convertible debt agreements and related amendments addressing the collateral arrangements and repayment terms covering his advances.  These
agreements and related amendments, provided for the repayment of these obligations through the issuance of our common stock at substantial discounts from the then prevailing market price.





On December 3, 2005, we entered into an agreement with Mr. Aubel which provided for the conversion of his obligation:





•
for the first and second quarters of 2005 at $0.01 per share;•
for the third quarter 2005 at 20% of the closing price on the date of conversion; and•
for the fourth quarter 2005 and beyond at 40% of the closing price on the date of conversion.





Under the provision of Emerging Issue Task Force (“EITF”) 98-5 and EITF 00-27, we determined that the agreement with Mr. Aubel contained an embedded conversion feature which should be valued separately at issuance.  Further, as Mr. Aubel’s December 3, 2005 agreement with us contained no stated redemption date (due
on demand) and the notes were convertible at the option of the investor, the resulting discount from market was recognized immediately.





The intrinsic value of each advance is the difference between the conversion price to which Mr. Aubel was entitled and the fair value of the Company’s common stock on the commitment date (the date the funds were advanced) multiplied by the number of shares to which Mr. Aubel was entitled. A summary of the funds
advanced and intrinsic value of each advance commencing December 3, 2005, is as follows:





Funds


IntrinsicAdvanced


Value2005

$
160,000


$
240,0002006


1,730,168



2,595,2512007


874,164



1,311,2462008


148,200



223,300Totals

$
2,912,532


$
4,368,797




- 31 -





The intrinsic value of the shares actually paid to Mr. Aubel represents the difference between the conversion price to which Mr. Aubel was entitled and the fair value of the Company’s common stock on the date of conversion multiplied by the number of shares converted by Mr. Aubel.  A summary of the intrinsic
value of shares actually paid to Mr. Aubel against his note for the periods beginning December 3, 2005 through final settlement on March 20, 2008 is as follows:





Year

Number of Shares Converted


Amount of Note Reduction


Intrinsic Value2005


802,500


$
698,000


$
14,829,0002006


592,500



1,442,000



2,319,0002007


1,795,000



1,751,720



2,821,2802008


2,864,606



2,521,379



659,4326,054,606


$
6,416,100


$
20,628,712





Based on our review of the facts and circumstances surrounding the agreements with Mr. Aubel and in connection with the earlier restatement of our financial statements, we believe the appropriate accounting treatment was to record a receivable due from Mr. Aubel for the intrinsic value of the shares tendered due to uncertainty as to the validity
of the amount of the note payable and the potential for a lack of consideration for the issuance of such shares.  The receivable recorded was subsequently expensed as impaired as collection was not reasonably assured.





During the first quarter of 2008, we issued Mr. Aubel 2,864,606 shares of our common stock in full payment of the then $2,521,380 balance of his note.  The shares issued to Mr. Aubel had a fair value $659,432 less than the obligation settled.  This difference was recorded as a contribution to capital rather than a gain
on the debt settlement.





We are evaluating filing a separate lawsuit for damages we suffered against Messrs. Harrell and Aubel and other parties involved in the improper conduct alleged in the Securities and Exchange Commission September 24, 2008 complaint as a result of their conduct.  In addition, we are evaluating filing a lawsuit against Mr. Aubel as
a result of the uncertainty as to the validity of the amount of the note payable in the amount of $2,521,379 which we redeemed for 2,864,606 shares of our common stock in March 2008 pursuant to the terms of the December 2007 agreement to a acquire a 51% interest in Shandong Jiajia.





From time to time we enter into transactions with related parties, including:





At December 31, 2008 we were owed $518,433 representing amounts due under a loan from Shandong Huibo Import & Export Co., Ltd., a Chinese limited liability company owned which is a minority owner of our company.  Shandong Huibo Import & Export Co., Ltd. is owned by PeiXiang Wang (31.7%) and PengXiang Liu (68.3%), unrelated
third parties.  This loan is unsecured, non-interest bearing and due on demand, and





At December 31, 2008 we owed Mr. Xiangfen Chen, an employee, $123,458 representing amounts loaned to us. This loan is unsecured, non-interest bearing and due on demand. We used the funds for general working capital.





At December 31, 2008 we owed Bin Liu, the general manager of Shandong Jiajia Tianjin branch $62,652.  We also owed Tianjin Sincere Logistics Co., Ltd. where Mr. Liu is a 90% owner, $183,448.  These loans were unsecured, non-interest bearing and repayable on demand. Shandong Jiajia used the funds for general working capital.





On March 20, 2008 we entered into a conversion agreement with Mr. V. Jeffrey Harrell, then our CEO and President, whereby he converted $448,985 of accrued compensation due him into 581,247 shares of our common stock at an effective conversion price of $0.77245 per share.





On June 1, 2008, we entered into a lease with Mr. Chen for a term of one year for office space for our Shanghai Branch.  Under the terms of the lease, we pay Mr. Chen a base annual rent of approximately $43,700 for the use of such office space.  We also lease office space for our Xiamen Branch from its General Manager,
Mr. Xiangfen Chen, under a lease expiring on December 31, 2009 at an annual rent of approximately $1,459 (RMB 10,800), and we lease office space for our Tianjian Branch from Mr. Bin Liu, its General Manager, under a lease expiring on May 31, 2013 at an annual rent of approximately $21,962 (RMB 150,000).








- 32 -





There are no assurances that the terms of the transactions with the related parties are comparable to terms we could have obtained from unaffiliated third parties.





Director Independence





Neither of our directors is independent within The NASDAQ Stock Market's director independence standards pursuant to Marketplace Rule 4200.





ITEM 14.                       PRINCIPAL ACCOUNTANT FEES AND SERVICES.





Sherb & Co., LLP served as our independent registered public accounting firm for 2008 and 2007.  The following table shows the fees that were billed for the audit and other services provided by such firm for 2008 and 2007:





2008


2007Restated


RestatedAudit Fees

$
72,000


$
65,000Audit-Related Fees


-



-Tax Fees


-



-All Other Fees


-



18,000Total

$
72,000


$
83,000





Audit Fees — This category includes the audit of our annual financial statements, review of financial statements included in our Form 10-Q Quarterly Reports and services that are normally provided by the independent auditors in connection with engagements for those years. This
category also includes advice on audit and accounting matters that arose during, or as a result of, the audit or the review of interim financial statements.





Audit-Related Fees — This category consists of assurance and related services by the independent auditors that are reasonably related to the performance of the audit or review of our financial statements and are not reported above under “Audit Fees.” The services for
the fees disclosed under this category include consultation regarding our correspondence with the SEC and other accounting consulting.





Tax Fees — This category consists of professional services rendered by our independent auditors for tax compliance and tax advice. The services for the fees disclosed under this category include tax return preparation and technical tax advice.





All Other Fees — This category consists of fees for other miscellaneous items.





Our Board of Directors has adopted a procedure for pre-approval of all fees charged by the our independent auditors.  Under the procedure, the Board approves the engagement letter with respect to audit, tax and review services.  Other fees are subject to pre-approval by the Board, or, in the period between meetings, by
a designated member of Board.  Any such approval by the designated member is disclosed to the entire Board at the next meeting.  The audit and tax fees paid to our independent registered public accounting firm with respect to 2008 were pre-approved by the entire Board of Directors.








- 33 -





PART IV





ITEM 15.                       EXHIBITS, FINANCIAL STATEMENT SCHEDULES.





a)The following documents are filed as a part of this report or are incorporated by reference to previous filings, if so indicated:





Exhibit No.

Description3.1

Articles of Incorporation (1)3.2

Articles of Amendment (1)3.3

Articles of Amendment (5)3.4

Articles of Amendment (2)3.5

Form of Articles of Amendment (10)3.6

Bylaws (1)4.1

Trilogy Capital Partners, Inc. Warrant Agreement dated June 1, 2006(3)4.2

Form of common stock purchase warrant issued to Mr. Chen (12)4.3

Form of common stock purchase warrant issued in the 2008 Unit Offering (13)10.1

Debt Conversion Agreement with David Aubel dated December 3, 2005 (4)10.2

Amendment to Debt Conversion Agreement with David Aubel dated May 15, 2006 (6)10.3

Consulting and Management Agreement dated May 22, 2007 with China Direct Investments, Inc. (7)10.4

Consulting and Management Agreement dated September 5, 2007 with Capital One Resource Co., Ltd (8)10.5

Acquisition Agreement dated as of December 31, 2007 between MediaREADY, Inc., Shandong Jiajia International Freight & Forwarding (Logistics Co.) Ltd., and Messrs. Hui Liu and Wei Chen (2)10.6

Finder's Agreement dated as of December 31, 2007 between MediaREADY, Inc. and Dragon Venture (Shanghai) Capital Management Co., Ltd. (2)10.7

Consulting Agreement dated as of December 31, 2007 between MediaREADY, Inc. and China Direct, Inc. (2)10.8

Form of Amendment to Acquisition Agreement dated as of January 28, 2008 between MediaREADY, Inc., Shandong Jiajia International Freight & Forwarding Co., Ltd., and Messrs. Hui Liu and Wei Chen (9)10.9

Form of Amendment to Finder's Agreement dated as of January 28, 2008 between MediaREADY, Inc. and Dragon Venture (Shanghai) Capital Management Co., Ltd. (9)10.10

Form of Amendment to Acquisition Agreement dated as of March 13, 2008 between MediaREADY, Inc., Shandong Jiajia International Freight & Forwarding Co., Ltd., and Messrs. Hui Liu and Wei Chen (11)10.11

Lease Agreement between China Logistics Group, Inc. and ETI International, Inc. (17)10.12

Form of Subscription Agreement for 2008 Unit Offering (13)10.13

Lease Agreement between Wei Chen and Shandong Jiajia International Freight & Forwarding Co., Ltd.(14)10.14

Lease Agreement dated December 31, 2008 between Shandong Jiajia International & Freight Forwarding Co., Ltd. and Shandong Import & Export Co., Ltd. (17)10.15

Assumption Agreement dated December 31, 2007 between David Aubel and MediaReady, Inc. (17)10.16

Conversion Agreement dated March 20, 2008 between V. Jeffrey Harrell and China Logistics Group, Inc. (16)10.17

Conversion Agreement dated March 20, 2008 between David Aubel and China Logistics Group, Inc. (16)10.18

Form of promissory note in the principal amount of $561,517.27 dated January 1, 2003 issued by Video Without Boundaries, Inc. to Mr. David Aubel (15)10.19

Form of Security Agreement dated May 23, 2001 between Valusales.com, Inc. and Mr. David Aubel (15)14.1

Code of Business Conduct and Ethics (12)21.1

Subsidiaries of the Registrant (12)31.1

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *31.2

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *32.1

Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *





*  filed herewith








- 34 -





(1
)
Incorporated by reference to the registration statement on Form 10-SB, SEC File No. 0-31497 as filed with the Securities and Exchange Commission on September 11, 2000, as amended.(2
)
Incorporated by reference to the Current Report on Form 8-K as filed on January 7, 2008.(3
)
Incorporated by reference to the Current Report on Form 8-K as filed on June 2, 2006.(4
)
Incorporated by reference to the Annual Report on Form 10-KSB for the year ended December 31, 2004.(5
)
Incorporated by reference to the Current Report on Form 8-K as filed on September 27, 2006.(6
)
Incorporated by reference to the Quarterly Report on Form 10-QSB for the period ended September 30, 2006.(7
)
Incorporated by reference to the Current Report on Form 8-K as filed on May 23, 2007.(8
)
Incorporated by reference to the Current Report on Form 8-K as filed on September 10, 2007.(9
)
Incorporated by reference to the Current Report on Form 8-K as filed on January 31, 2008.(10
)
Incorporated by reference to the definitive information statement on Schedule 14C as filed on February 14, 2008.(11
)
Incorporated by reference to the Current Report on Form 8-K as filed on March 18, 2008.(12
)
Incorporated by reference to the Annual Report on Form 10-K for the year ended December 31, 2007.(13
)
Incorporated by reference to the Current Report on Form 8-K as filed on April 24, 2008.(14
)
Incorporated by reference to the Quarterly Report on Form 10-Q/A (Amendment No. 1) for the period ended June 30, 2008.(15
)
Incorporated by reference to the Quarterly Report on Form 10-Q for the period ended September 30, 2008.(16
)
Incorporated by reference to the Quarterly Report on Form 10-Q/A (Amendment No. 1) for the period ended March 31, 2008.(17
)
Incorporated by reference to the registration statement on Form S-1, SEC File No. 333-151783, as amended.





SIGNATURES





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





China Logistics Group, Inc.Date: September 25, 2009
By: /s/ Wei ChenWei Chen, Chairman, Chief Executive Officer and President (Principal Executive Officer)





Pursuant to the requirements of the Securities Act of 1933, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.





Signature
Title
Date/s/ Wei Chen
Chairman of the Board, Chief Executive Officer and President (Principal Executive Officer)
September 25, 2009Wei Chen/s/ Wei Chen
Chief Financial Officer (Principal Financial and Accounting Officer)
September 25, 2009Wei Chen/s/ Hui Liu
Director
September 25, 2009Hui Liu














- 35 -





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the Stockholders and Board of Directors


China Logistics Group, Inc.





We have audited the accompanying consolidated balance sheets of China Logistics Group, Inc (the “Company”) as of December 31, 2008 and 2007 and the related consolidated statement of operations and comprehensive income, stockholders' equity and cash flows for the years ended December 31, 2008 and 2007. These consolidated financial
statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.





We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged
to perform, an audit of its internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.





In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2008 and 2007 and the results of their operations and their cash flows for the years ended December 31, 2008 and 2007, in conformity with accounting principles generally
accepted in the United States of America.





The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has incurred a loss and has negative cash flows from operations for the year ended December 31, 2008 as fully described in Note 3. These issues raise substantial doubt about the Company's ability to
continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.





We also audited the adjustments described in Note 2 that were applied to restate the year ended December 31, 2007 and 2008 financial statements. In our opinion, such adjustments are appropriate and have been properly applied.





/s/Sherb & Co., LLP


Certified Public Accountants


Boca Raton, Florida


May 18, 2009


(Except as to Note 2 as to the effects of the Restatement of the Financial Statements as to which the date is September 25, 2009)










F - 1





CHINA LOGISTICS GROUP, INC. AND SUBSIDIARIES


CONSOLIDATED BALANCE SHEETS


DECEMBER 31, 2008 AND 2007





December 31,2008


2007Restated


RestatedASSETSCurrent assets:Cash
$
3,156,362


$
1,121,605Accounts receivable, net

2,739,173



3,131,831Accounts receivable - related party

-



7,000Due from related parties

518,433



511,435Prepaid expense and other current assets

327,952



328,065Total current assets

6,741,920



5,099,936Property and equipment, net

44,144



42,336Total assets
$
6,786,064


$
5,142,272LIABILITIES AND SHAREHOLDERS' EQUITYCurrent liabilities:Cash overdraft
$
-


$
12,633Accounts payable - trade

1,752,862



3,608,885Accrued compensation - related party

-



446,985Accrued registration rights penalty

1,597,000



-Other accruals and current liabilities

146,953



485,101Convertible note payable/related party

-



2,373,179Advances from customers

1,133,283



683,436Due to related parties

378,697



229,252Foreign tax payable

34,898



36,117Total current liabilities

5,043,693



7,875,588Minority interest

794,886



601,028Shareholders' deficit:Preferred stock - $0.001 par value, 10,000,000 shares authorizedSeries A Convertible Preferred Stock - 1,000,000 shares issuedand oustanding at December 2007

-



1,000Series B Convertible Preferred Stock - 450,000 and 1,295,000 sharesissued and oustanding at December 31, 2008 and 2007, respectively

450



1,295Common stock, $.001 par value, 500,000,000 shares authorized;34,508,203 shares and 4,999,350 shares issued and outstandingat December 31, 2008 and 2007, respectively

34,508



4,999Additional paid-in capital

19,229,513



12,927,625Accumulated deficit

(18,129,491
)


(16,042,873
)Accumulated other comprehensive loss

(187,495
)


(226,390
)Total shareholders' equity (deficit)

947,485



(3,334,344
)Total liabilities and shareholders' equity
$
6,786,064


$
5,142,272





The accompanying notes are an integral part of these financial statements




F - 2








CHINA LOGISTICS GROUP, INC.


AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF OPERATIONS


FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007





For the Years Ended December 31,2008


2007Restated


RestatedSales

$
35,561,833


$
35,298,453Cost of sales


34,552,938



34,036,196Gross profit


1,008,895



1,262,257Operating expenses:Selling expenses


-



37,546General and administrative


1,333,769



640,631Recovery of bad debt


(330,439
)


-Total operating expenses


1,003,330



678,177Income from operations


5,565



584,080Other income (expenses):Other income


15,218



13,575Registration rights penalty


(1,597,000
)


-Non-operating bad debt expense


(85,844
)


-Interest income


1,532



-Total other income (expenses)


(1,666,094
)


13,575Income (loss) before income taxes and minority interest


(1,660,529
)


597,655Foreign taxes


269,600



57,205Income (loss) before minority interest


(1,930,129
)


540,450Minority interest in income of subsidiary


156,489



264,820Net income (loss)


(2,086,618
)


275,630Other comprehensive income (loss):Foreign currency translation adjustments


38,895



(228,976
)Comprehensive (loss) income

$
(2,047,723
)

$
46,654Net loss per common share per common share:Basic

$
(0.08
)

$
20.12Diluted

$
(0.08
)

$
0.05Weighted average number of shares outstanding:Basic


26,823,216



13,697Diluted


26,823,216



5,617,314





The accompanying notes are an integral part of these financial statements




F - 3


CHINA LOGISTICS GROUP, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY


FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007





AccumulatedAdditional



OtherPreferred A Stock

Preferred B Stock

Common Stock

Paid-In

Accumulated

ComprehensiveShares

Amount

Shares

Amount

Shares

Amount

Capital

Deficit

Income/Loss

TotalRestated

Restated

Restated

Restated

Restated

Restated

RestatedBalance December 31, 2006


1,000,000

$
1,000


120,000

$
120


-

$
-

$
3,058,800

$
(661,032
)
$
2,586

$
2,401,474Recapitalization for reverse merger


-


-


1,175,000


1,175


4,999,350


4,999


9,868,825


(15,657,471
)

-


(5,782,472
)Foreign currency translation adjustments


-


-


-


-


-


-


-


-


(228,976
)

(228,976
)Net loss for the year


-


-


-


-


-


-


-


275,630


-


275,630Balance December 31, 2007


1,000,000


1,000


1,295,000


1,295


4,999,350


4,999


12,927,625


(16,042,873
)

(226,390
)

(3,334,344
)Convertible note payable to related party converted to capital


-


-


-


-


2,864,606


2,865


2,518,514


-


-


2,521,379Conversion of Series A Preferred to common stock


(1,000,000
)

(1,000
)




-


2,500,000


2,500


(1,500
)

-


-


-Conversion of Series B Preferred to common stock


-


-


(845,000
)

(845
)

8,450,000


8,450


(7,605
)

-


-


-Accrued salary for president converted to stock


-


-


-


-


581,247


581


448,404


-


-


448,985Private placement


-


-


-


-


15,113,000


15,113


3,344,075


-


-


3,359,188Foreign currency translation adjustment


-


-


-


-


-


-


-


-


38,895


38,895Net loss for the period


-


-


-


-


-


-


-


(2,086,618
)

-


(2,086,618
)Balance December 31, 2008


-

$
-


450,000

$
450


34,508,203

$
34,508

$
19,229,513


(18,129,491
)
$
(187,495
)
$
947,485





The accompanying notes are an integral part of these financial statements








F - 4











CHINA LOGISTICS GROUP, INC.


AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH FLOWS


FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007





For the Year EndedDecember 31,2008


2007CASH FLOWS FROM OPERATING ACTIVITIES:

Restated


RestatedNet (loss) income

$
(2,086,618
)

$
275,630Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:Depreciation expense


35,438



18,406Minority interest


156,489



264,820Allowance for doubtful accounts


(330,439
)


68,149Registration rights penalty


1,597,000Changes in assets and liabilities:(Increase) decrease in accounts receivable


723,098



(1,227,947
)(Increase) in accounts receivable - related party


7,000



-(Increase) decrease  in other receivables


-



114,158Decrease in other assets


-



(419
)Decrease (increase) in prepaid expenses and other current assets


114



(313,237
)(Decrease) increase in accounts payable


(1,856,023
)


1,054,327(Decrease) in other accruals and current liabilities


(338,148
)


(162,440
)(Decrease) increase in taxes payable


(1,220
)


27,245Increase in advances from customers


449,848



572,877NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES


(1,643,461
)


691,569CASH FLOWS FROM INVESTING ACTIVITIES:Capital expenditures


(37,246
)


(13,504
)Advances to related parties


(6,998
)


(419,940
)NET CASH USED IN FINANCING ACTIVITIES


(44,244
)


(433,444
)CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from 2008 Unit Offering


3,778,250



-2008 Unit Offering expenses


(420,863
)


-Proceeds from convertible note payable - related party


148,200



-Repayment of short-term financing


(12,633
)


-Advances from related parties


256,879Repayments of advances from related parties


(105,794
)


-NET CASH PROVIDED BY FINANCING ACTIVITIES


3,644,039



-EFFECT OF EXCHANGE RATE ON CASH


78,423



40,572NET INCREASE IN CASH


2,034,757



298,697CASH  - beginning of year


1,121,605



822,908CASH - end of year

$
3,156,362


$
1,121,605SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid during the period for foreign taxes

$
34,524


$
31,361Convertible note payable converted to common stock -related party

$
2,521,379


$
-Accrued compensation converted to common stock - related party

$
448,985


$
-





The accompanying notes are an integral part of these financial statements








F - 5




CHINA LOGISTICS GROUP, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER 31, 2008 AND 2007





NOTE 1 – SUMMARY OF BUSINESS AND ORGANIZATION





China Logistics Group, Inc. (“we”, “us”, “our” or the “Company”) is a Florida corporation and was incorporated on March 19, 1999 under the name of ValuSALES.com, Inc. The Company changed its name to Video Without Boundaries, Inc. on November 16, 2001. On August 31, 2006 the Company
changed its name from Video Without Boundaries, Inc. to MediaREADY, Inc. and on February 14, 2008, the Company changed its name from MediaREADY, Inc. to China Logistics Group, Inc.





We are on a year concurrent with the calendar year; as such the twelve month period ending December 31, is our year. The year ended December 31, 2008 is referred to as “2008”, the year ended December 31, 2007 is referred to as “2007”, and the coming year ending December 31, 2009 is referred to as “2009”.





Beginning in 2003, we sought to position our company within the entertainment and home broadband marketplace to develop our MediaREADYTM product line and provide products and services in the converging digital media on demand, enhanced home entertainment and emerging interactive consumer electronics markets. We were, however, unable
to successfully penetrate these markets, due in great part to our limited financial resources.. In the fourth quarter of 2007 our management elected to pursue a business combination with an operating company in an effort to improve shareholder value.





On December 31, 2007 we entered into an acquisition agreement with Shandong Jiajia International Freight and Forwarding Co., Ltd. (“Shandong Jiajia”) and its sole shareholders Messrs. Hui Liu and Wei Chen, through which we acquired a 51%  interest in Shandong Jiajia. At closing, we issued Messrs. Liu and
Chen an aggregate of 1,000,000 shares of our Series A Convertible Preferred Stock and agreed to contribute $2,000,000 to increase the registered capital of Shandong Jiajia subject to:





•
the prior receipt of all regulatory approvals and licenses from the necessary governmental agencies in China related to this acquisition, and•
the receipt of two years of audited financial statements of Shandong Jiajia together with the interim period for the nine months ended September 30, 2007.





Under the terms of an assumption agreement dated December 31, 2007 and as contemplated by the terms of the acquisition agreement for Shandong Jiajia, Mr. David Aubel, a principal shareholder of our company, agreed to personally assume contingent liabilities in the aggregate amount of $1,987,895 which may result from a stock purchase agreement
we entered into in August, 2004 with Graphics Distribution, Inc.  Mr. Aubel’s agreement to assume this liability was the result of negotiations preceding the execution of the acquisition agreement for Shandong Jiajia as Messrs. Liu and Chen were unwilling to proceed with the transaction if the company remained exposed to the potential liability related to the Graphics Distribution, Inc. stock purchase agreement.  In addition, the acquisition agreement contemplated that the accrued compensation
and convertible note payable-related party included in our current liabilities at September 30, 2007 would be converted into shares of our common stock at conversion rates of $0.72 and $0.80 per share (post 1:40 reverse stock split).  At the time of the agreement we did not have sufficient authorized but unissued shares of our common stock to provide for the conversion of these liabilities, respectively, resulting in the issuance of approximately 3,445,853 shares of our common stock. Included in
these liabilities which were to be converted was approximately $419,000 of accrued compensation due Mr. Jeffrey Harrell, our former CEO and President, and approximately $2,521,380 due to Mr. David Aubel under a convertible note and a loan. Effective on the close of business on March 11, 2008 we amended our articles of incorporation to increase our authorized capital which provided sufficient shares to permit these conversions.





As contemplated by the acquisition agreement for Shandong Jiajia, on March 20, 2008 we entered into a conversion agreement with Mr. Jeffrey Harrell, then our CEO and President, who converted $448,985 of accrued compensation due him into 581,247 shares of our common stock at an effective conversion price of $0.77245 per share.  In
addition and as also contemplated by the terms of the acquisition agreement for Shandong Jiajia, on March 20, 2008 we entered into a conversion agreement with Mr. Aubel whereby he converted the $2,521,380 loan due him by us into 2,864,606 shares of our common stock at an effective conversion price of $0.88 per share.  The effective conversion price on the date we entered into the conversion agreements with Mr. Aubel was greater than the fair market value of our common stock on the date of the agreement
which was $0.85 per share.  The variance resulted from a decline in the trading price of our common stock from December 31, 2007 when the conversion rates were informally agreed to with Mr. Aubel and the actual dates of conversion.








F - 6
 CHINA LOGISTICS GROUP, INC.   AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER 31, 2008 AND 2007 - Continued





The number of shares issued to Mr. Aubel was established in the December 31, 2007 Shandong Jiajia acquisition agreement and was derived from the September 30, 2007 liability reflected on our books owed to Mr. Aubel in the amount of $2,291,685 divided by an agreed upon prior to the 1 for 40 reverse stock split price of $0.02 per share ($2,291,685/$0.02
per share/40 = 2,864,606 shares).





As of the settlement date in March 2008, Mr. Aubel was owed $2,521,380 by us, an increase in the amount owed from September 30, 2007 resulting from additional advances made by Mr. Aubel, reduced by the issuance of 10,000,000 shares during the interim period.  The final conversion price of Mr. Aubel’s note was $0.88 per share,
resulting from the final note balance of $2,521,380 divided by an agreed upon fixed number of shares of 2,864,606 ($2,521,379/2,864,606 =$0.88 per share).  The fair market value of our common stock on March 31, 2008 was $0.85 per share.  We are evaluating any rights we may have to seek damages against Mr. Aubel as a result of the uncertainty as to the validity of the amount of his note. See “Legal Proceedings” appearing elsewhere in this report.





In connection with the  reverse recapitalization transaction with Shandong Jiajia, we issued Capital One Resource Co., Ltd. 450,000 shares of Series B Convertible Preferred Stock valued at $3,780,000, and Mr. Weidong Wang 35,000 shares of Series B Convertible Preferred Stock valued at $294,000,
as compensation for their assistance in the transaction. In addition, we agreed to issue an aggregate of 352,500 shares of Series B Convertible Preferred Stock valued at $2,961,000 to Dragon Venture (Shanghai) Capital Management Co., Ltd. as finder's fees. Dragon Venture (Shanghai) Capital Management Co., Ltd. is a subsidiary of Dragon Capital Group Corp. (Pink Sheets: DRGV). Mr. Lawrence Wang, the CEO of Dragon Capital Group Corp., is the brother of Dr. James Wang, the CEO of China Direct, Inc. China
Direct, Inc. owns approximately 20% of the issued and outstanding shares Dragon Capital Group Corp. In January 2008 we amended the finder’s agreement with Dragon Venture (Shanghai) Capital Management Co., Ltd. to reduce the fee to 240,000 shares of Series B Convertible Preferred Stock which were valued at $2,016,000.  Finally, we were obligated to issue China Direct, Inc. an additional 450,000 shares of our Series B Convertible Preferred Stock valued at $3,780,000 as compensation for its
services under the terms of the December 31, 2007 consulting agreement which were to be issued prior to June 30, 2008.  These shares were issued in June 2008.





On January 28, 2008 the acquisition agreement was amended to provide that as additional consideration we issued Mr. Chen 120,000 shares of our Series B Convertible Preferred Stock with a fair value of $960,000 and three year purchase warrants to purchase an additional 2,000,000 shares of our common
stock at an exercise price of $0.30 per share with a fair value of $480,000.  We agreed to pay Mr. Chen the additional consideration at his request because he believed that the purchase price we paid for our interest in Shandong Jiajia was more favorable to us.  At the time of the amendment, Mr. Chen, a minority owner of Shandong Jiajia and who now serves as our Chairman, CEO and President, was General Manager of Shandong Jiajia and his continued active involvement in its operations was crucial
to the integration of Shandong Jiajia into our company.  We determined that it would be in our long-term best interests to agree to Mr. Chen’s request, particularly as the operations of Shandong Jiajia represented all of our business and operations following the transaction.





The finder’s fees and consulting fees were incremental to the transaction and payable contingent upon closing.  Accordingly were classified as directly related to the acquisition.  All transactions related fees were determined through arms length negotiations between the parties.





The accompanying consolidated financial statements contain the audited balance sheet at December 31, 2007, statement of operations and statements of stockholders’ equity (deficit) which have been restated to account for the acquisition of a 51% interest in Shandong Jiajia as a capital transaction, implemented through a reverse recapitalization ,
effective December 31, 2007.  Accordingly, the historical cost basis of the assets and liabilities of Shandong Jiajia have been carried forward and the historical information presented, including the consolidated statements of operation, consolidated statement of stockholders’ equity (deficit) and consolidated statements of cash flows prior to December 31, 2007, are those of Shandong Jiajia.3





The capital structure following the transaction differs from the historical capital structure of Shandong Jiajia in that shareholders’ equity of the combined enterprise is presented based on the historical equity of the accounting acquirer (Shandong Jiajia) prior to the merger retroactively restated to reflect the number of shares received
in the transaction.




F - 7
 CHINA LOGISTICS GROUP, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER 31, 2008 AND 2007 - Continued




Shandong Jiajia, formed in 1999 as a Chinese limited liability company, is an international freight forwarder and logistics management company. Shandong Jiajia, acts as an agent for international freight and shipping companies. Shandong Jiajia sells cargo space and arranges land, maritime, and air international transportation for clients
seeking to import or export merchandise from or into China.  Headquartered in Qingdao, Shandong Jiajia has branches in Shanghai and Xiamen with two additional offices in Lianyungang and Rizhao. Shandong Jiajia is a designated agent of cargo carriers including Nippon Yusen Kaisha, P&O Nedlloyd, CMA CGM Group, Safmarine Container Lines, and Regional Container Lines.





The accompanying consolidated financial statements include accounts of the Company and its 51% owned subsidiary, Shandong Jiajia. Intercompany transactions and balances have been eliminated in consolidation.  All share and per share information contained in this report gives retroactive effect to the 1 for 40 reverse stock split
of the Company’s outstanding common stock effective at the close of business on March 11, 2008.





Shandong Jiajia will seek to develop new business opportunities by utilizing new shipping routes and expanding its scope of services to provide a full suite of comprehensive logistics management solutions. Shandong Jiajia management believes that as they expand their logistics management solutions business and gain market share they will
be able to obtain more container space thereby increasing potential revenues. We believe that due to the larger volume of products to be shipped they can negotiate a more favorable rate from their vendors and suppliers and ultimately increase our profit margins.





The additional investment in Shandong Jiajia will be applied as registered capital and will be utilized for general working capital purposes and for expanded operations, new business development for new shipping routes, and the development of new logistics services as well as negotiating favorable pricing from their suppliers based on a greater
capacity of shipping volumes.





In expanding these operations, Shandong Jiajia faces the challenges of:





•
effective consolidation of resources among relatively independent affiliates;•
maintaining the balance between the collection of accounts receivable and the extension of longer credit terms offered to our current and prospective clients in an effort to boost sales; and•
our ability to effectively handle the increases in costs due to soaring fuel prices and the weak U.S. dollar.





Additionally, Shandong Jiajia also faces the challenges related to the management and streamlining of the logistical aspect of the new shipping routes that our company plans to undertake and the possibility that our new routes will not be met with acceptance by our present and prospective clients. To accomplish their growth goals, Shandong
Jiajia will utilize a portion of the additional registered capital to invest in an information sharing and personnel training system among our affiliates, to recruit highly qualified professionals to join us; and to promote new shipping routes and new services. In addition, we will rely upon our long-term partnerships with shipping companies, storage management companies, inland transportation companies, and port logistics companies in our efforts to develop a comprehensive logistics solution that we do not believe
is currently available on the market today.





NOTE 2- RESTATEMENT OF FINANCIAL STATEMENTS





The December 31, 2008 financial statements included in our Form 10-K filed on May 18, 2009, contained errors including the method of recording the reverse recapitalization transaction with Shandong Jiajia completed on December 31, 2007.  Accordingly, our consolidated balance sheet at December 31, 2008, which
is included in this report, has been restated to properly record the transaction. The effect of correcting these errors in our balance sheet at December 31, 2008 was as follows:





Balance Sheet Data
December 31, 2008

As filed


Adjustment to Restate


RestatedShareholders’ equity(deficit)Series B Convertible Preferred Stock- 450,000 shares issued  and outstanding at December 31, 2008

$
450



-


$
450Common Stock, $0.001 par value,  500,000,000 shares authorized, 34,508,203 shares issued and outstanding December 31, 2008


34,508



-



34,508Additional Paid-in-capital


3,572,042



15,657,471



19,229,513Accumulated Deficit


(2,472,020)



(15,657,471)



(18,129,491)Accumulated other comprehensive income loss


(187,495)



-



(187,495)Total shareholders’ equity(deficit)


947,485



-



947,485Total liabilities and shareholders’ equity

$
6,786,064



-


$
6,786,064


F - 8
 CHINA LOGISTICS GROUP, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER 31, 2008 AND 2007 - Continued


Additionally, the Company has restated and expanded the disclosure in the Consolidated Statement of Cash Flows-Cash Flows from financing activities to better describe advances from, and repayments of advances from related parties.





Components of this restatement include:





Consolidated Statements of Cash Flows Data
December 31, 2008

As filed


Adjustment to Restate


RestatedCash flows from financing activities:Proceeds from 2008 Unit Offering


3,778,250



-



3.778.2502008 Unit Offering expenses


(420,863
)


-



(420,863
)Proceeds from convertible note payable-related party


-



148,200



148,200Repayment of short-term financing


(12,633
)


-



(12,633
)Advances from related parties


299,285



(42,406
)


256,879Repayments of advances from related parties


-



(105,794
)


(105,795
)Net cash provided by financing activities


3,644,039



-



3,644,039





The consolidated balance sheets, consolidated statements of operations, consolidated statement of stockholders’ equity (deficit), and consolidated statement of cash flows for the year ended December 31, 2007 have been restated to correct the accounting treatment
previously accorded certain transactions.





Corrections made as of December 31, 2007 included:





·
the recognition of the Company’s capital transaction with Shandong Jiajia resulting in a 51% interest in Shandong Jiajia implemented through a reverse recapitalization;·
the recognition of an agreement to issue 450,000 shares of Series B preferred stock with a fair value of $3,780,000;·
the correction of the accounting treatment accorded a convertible note payable to a related party and principal shareholder, Mr. David Aubel;·
the restatement of historical balance sheets and related disclosures to give retraction effort to a 1 for 40 reverse stock split completed on March 11, 2008;·
the recognition of an accrued for certain professional fees, totaling $141,800 in expense, which were erroneously omitted; and·
the adjustment of the initially reported carrying values of assets and liabilities of MediaReady, Inc. as of December 31, 2007, the effective date of the reverse recapitalization transaction with Shandong Jiajia.








Balance Sheet Data
December 31, 2007

As Filed


Adjustment to Restate


RestatedAccounts receivable – related party

$
160,350


$
(153,350
)

$
7,000Deferred Costs


5,450



(5,450
)


-Prepayment and other current assets


338,895



(10,830
)


328,065Total current assets


5,269,566



(169,630
)


5,099,936Property and equipment, net


46,622



(4,286
)


42,336Other assets:Intangible assets


3,912,301



(3,912,301
)


-Deposits


12,00



(12,000
)


-Total other assets


3,924,301



(3,924,301
)


-Total assets


9,240,489



(4,098,217
)


5,142,272Accounts payable – trade


4,444,825



(835,940
)


3,608,885Accrued consulting fees


3,780,000



(3,780,000
)


-Other accruals and current liabilities


343,301



141,800



485,101Derivative liabilities


3,856,416



(3,856,416
)


-Total current liabilities


16,206,143



(8,327,555
)


7,878,588Minority interest


781,441



(180,413
)


601,028Stockholders’ deficitSeries B Convertible Preferred Stock


845



450



1,295Common Stock, $.001 par value


199,962



(194,963
)


4,999Additional paid-in capital


20,813,099







12,927,625Accumulated deficit


(28,535,611
)






(16,042,873
)Total stockholders’ equity (deficit)


(7,747,095
)


4,412,751



(3,334,344
)Total liabilities and stockholders’ deficit


9,240,489



(4,098,217
)


5,142,272


F - 9
 CHINA LOGISTICS GROUP, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER 31, 2008 AND 2007 - Continued





Statement of Operations Data
Year ended December 31, 2007

As Filed


Adjustment to Restate


RestatedSales

$
-


$
35,298,453


$
35,298,453Cost of sales


-



34,036,196



34,036,196Gross profit


-



1,262,257



1,262,257Selling, general and administrative


1,317,258



(639,081
)


678,177Provision for obsolete inventory


4,138



(4,138
)


-Depreciation


8,028



(8,028
)


-Fair value of equity instruments


10,424,900



(10,424,900
)


-Bad debt expense


5,917



(5,917
)


-Total operating expenses


11,760,241



(11,082,064
)


678,177Operating income (loss)


(11,760,241
)


12,344,321



584,080Other income (expenses):Change in fair value of derivative liability


662,899



(662,899
)


-Other income

_-



13,515



13,575Interest expense-related party


(201,583
)


201,583



-Total other income (expense)


461,316



(447,741
)


13,575Income (loss) before income taxes and minority interest


(11,298,925
)


11,896,580



597,655Foreign taxes


-



57,205



57,205Income (loss) before minority interest


(11,298,925
)


11,839,375



540,450Minority interest in income of subsidiary


-



264,820



264,820Net income (Loss)


(11,298,925
)


11,574,555



275,630Foreign currency translation adjustment


-



(228,976
)


(228,976
)Comprehensive income (loss)


(11,298,925
)


11,345,579



46,654Basic and Dilued income (loss) per common share:Basic


(0.08
)


0.16



0.08Diluted


(0.08
)


0.16



0.08Weighted average number of shares outstanding:Basic


137,686,070



(134,243,918
)


3,442,152Diluted


137,686,070



(134,196,462
)


3,489,608




F - 10
 CHINA LOGISTICS GROUP, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER 31, 2008 AND 2007 - Continued


Consolidated Statement of Cash Flows Data
Year ended December 31, 2007

As Filed


Adjustment to Restate


RestatedNet Income (loss)

$
(11,298,925
)

$
11,574,555


$
275,630Depreciation


8,028



10,378



18,406Minority Interest


-



264,820



264,820Allowance for doubtful accounts


5,917



62,232



68,149Provision for obsolete inventory


4,138



(4,138
)


-Stock issued for services and compensation


10,633,000



(10,633,000
)


-Stock issued under employment agreement


13,000



(13,000
)


-Stock issued under employment agreement-cancelled


(221,100
)


221,100



-Change in fair value of derivative liability


(662,899
)


662,899



-Interest in convertible note payable-related party


201,583



(201,583
)


-(Increase) decrease in accounts receivable


16,282



(1,244,229
)


(1,227,947
)(Increase) decrease in accounts receivable-related party


600,000



(600,000
)


-(Increase) decrease in other receivables


-



114,158



114,158Decrease in other assets


-



(419
)


(419
)Decrease (increase) in prepaid expenses and other current assets


18,569



(331,806
)


(313,237
)(Decrease) increase in accounts payable


(200,434
)


1,254,761



1,054,327(Decrease) increase in other accruals


18,622



(181,062
)


(162,440
)Increase in accrued compensation


17,487



(17,487
)


-(Decrease) increase in taxes payable


-



27,245



27,245Increase in advances from customers


-



572,877



572,877Net cash (used in) provided by operating activities


(846,732
)


1,538,301



691,569Cash flows from investing activities:Cash acquired purchase of subsidiary


1,121,390



(1,121,390
)


-Capital explanations


-



(13,504
)


(13,504
)Advances to related parties


-



(419,940
)


(419,940
)Net cash provided by (used in ) investing activities


1,121,390



(1,554,834
)


(433,444
)Cash flows from financing activities:Proceeds from convertible notes payable-related party


841,157



(841,157
)Repayment of short-term debt


(43,793
)


43,793



-Proceeds from stockholders loans


52,157



(52,157
)


--Repayment of shareholder loans


(4,000
)


4,000



-Net cash provided by financing


845,521



(845,521
)


-Effect of exchange rate on cash


-



40,572



40,572Net increase in cash


1,120,179



(821,482
)


298,697Cash at beginning of year


1,426



821,482



822,908Cash at end of year


1,121,605



-



1,121,605Cash paid during the period for foreign taxes

-_



31,361



31,361




F - 11
 CHINA LOGISTICS GROUP, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER 31, 2008 AND 2007 - Continued




NOTE 3 – GOING CONCERN





The accompanying consolidated financial statements have been prepared on a going concern basis. The Company has generated minimal revenue since its inception until it acquired of a 51% interest in Shandong Jiajia in December 2007. The Company’s  ability to continue as a going concern is dependent upon the Company’s
ability to obtain the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they become due, to fund possible acquisitions, and to generate profitable operations in the future.





These matters, among others, raise substantial doubt about the Company’s ability to continue as a going concern. These financial statements do not include any adjustments to the amounts and classification of assets and liabilities that may be necessary should the Company be unable to continue as a going concern.





As a result of the weak global economy, the demand for exported Chinese products has also declined, resulting in a significant drop in the demand for our freight and transport services.  In response to the sharp decline in our revenues, we plan to reduce the controllable portions of our cost of sales
where possible.  While there can be no assurance, we anticipate these efforts to result in a positive gross profit in the upcoming fiscal year.  We believe our cost reduction program can have the desired result and should assist to return the Company to a positive cash flow position, even at the reduced revenue levels which we anticipate for the foreseeable future.





If our cost reduction efforts related to our cost of sales are not successful to a level which enables us to generate sufficient cash flows from operations to fund our needs we may need to raise additional working capital.  We do not have any commitments for any additional capital and both the terms of our
2008 Unit Offering which contain certain restrictive covenants and the overall softness of the capital markets could hinder our efforts. In that event, it would be necessary for us to take additional steps to further reduce our operating expenses including personnel reductions and the possible consolidation of our offices.  We believe this cost containment approach is a viable response to the current market conditions and, coupled with our cash on-hand, should allow us to maintain our operations for
the foreseeable future.




NOTE 4 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Recent Accounting Pronouncements





In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 157, "Fair Value Measurements " ("SFAS 157"). This Statement defines fair value as used in numerous accounting pronouncements, establishes
a framework for measuring fair value in generally accepted accounting principles and expands disclosure related to the use of fair value measures in financial statements. In February 2008, the FASB issued FASB Staff Position (“FSP”) No. 157-2, “Effective Date f FASB No. 157”, which delays the effective date of FASB 157 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair
value in the consolidated financial statements on a recurring basis (that is, at least annually), until years beginning after November 15, 2008.





In October 2008, the FASB issued 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.  FSP No. 157-3 was effective upon issuance,
including prior periods for which financial statements have not been issued.





The adoption of SFAS 157 did not have an effect on the Company’s consolidated financial statements.  The Company does not expect the adoption of the remaining provisions of SFAS 157 to have a material effect on its consolidated financial statements.





In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities-including an amendment of FAS 115 ” (“SFAS 159”). SFAS 159 allows entities to choose, at specified election dates, to measure eligible
financial assets and liabilities at fair value that are not otherwise required to be measured at fair value. If a company elects the fair value option for an eligible item, changes in that item’s fair value in subsequent reporting periods must be recognized in current earnings. The Company adopted SFAS 159 effective January 1, 2008.  The adoption of SFAS 159 did not have an effect on the Company’s financial statements.





In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business Combinations" ("SFAS No. 141R"). SFAS No. 141R is a revision to SFAS No. 141 and includes substantial changes to the acquisition method used to account for business combinations (formerly
the "purchase accounting" method), including broadening the definition of a business, as well as revisions to accounting methods for contingent consideration and other contingencies related to the acquired business, accounting for transaction costs, and accounting for adjustments to provisional amounts recorded in connection with acquisitions. SFAS No.141R retains the fundamental requirement of SFAS No. 141 that the acquisition method of accounting be used for all business combinations and for
an acquirer to be identified for each business combination. SFAS No. 141R is effective for periods beginning on or after December 15, 2008, and will apply to all business combinations occurring after the effective date. SFAS 141R will have an impact on the accounting for the Company’s business combinations, if any, once adopted, but the effect depends on the terms of the Company’s business combinations subsequent to January 1, 2009.




F - 12
 CHINA LOGISTICS GROUP, INC.   AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER 31, 2008 AND 2007 - Continued




In December 2007, the FASB also issued SFAS No. 160, "Non-controlling Interests in Consolidated Financial Statements - an amendment of Accounting Research Bulletin No. 51, Consolidated Financial Statements ". This Statement amends ARB No. 51 to establish new standards
that will govern the (1) accounting for and reporting of non-controlling interests in partially owned consolidated subsidiaries and (2) the loss of control of subsidiaries. Non-controlling interest will be reported as part of equity in the consolidated financial statements. Losses will be allocated to the non-controlling interest, and, if control is maintained, changes in ownership interests will be treated as equity transactions. Upon a loss of control, any gain or loss on the interest sold will be recognized
in earnings. SFAS No. 160 is effective for periods beginning after December 15, 2008. Early adoption is prohibited.  The Company does not expect the adoption of SFAS 160 to have a material effect on its consolidated financial statements.





In March 2008, FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities”.  The new standard is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures
to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. It is effective for financial statements issued for years and interim periods beginning after November 15, 2008, with early application encouraged. The Company does not expect the adoption of SFAS 161 to have a material effect on its consolidated financial statements.  The Company does not currently have any derivative instruments.





In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles (“SFAS No. 162”), which identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements
in conformity with generally accepted accounting principles in the United States.  SFAS No. 162 will become effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Sections 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.  The Company does not expect that the adoption of SFAS No. 162 will have a material effect on its consolidated
financial statements.





In June 2008, the FASB ratified EITF Issue No. 07-5, Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock.  EITF No. 07-5 provides that an entity should use a two step approach to evaluate whether equity-linked financial instrument
(embedded feature) is indexed to its own stock, including evaluating the instrument’s contingent exercise and settlement provisions. It also clarifies on the impact of foreign currency denominated strike prices and market-based employee stock option valuation instruments on the evaluation.  EITF No. 07-5 is effective for years beginning after December 15, 2008.  The Company does not expect that the adoption of EITF No. 07-5 will have a material effect on its consolidated financial statements.





A variety of proposed or otherwise potential accounting standards are currently under study by standard-setting organizations and various regulatory agencies.  Because of the tentative and preliminary nature of these proposed standards, management has not determined whether implementation of such proposed standards would be material
to the Company’s consolidated financials statements.





Revenue Recognition





We provide freight forwarding services generally under contract with our customers.  Our business model involves placing our customers’ freight on prearranged contracted transport.





We follow the guidance of the Securities and Exchange Commission’s Staff Accounting Bulletin No. 104 in our revenue recognition policy.  In general, we record revenue when persuasive evidence of an arrangement exists, services have been rendered or product delivery has occurred, the sales price to the customer is filed or
determinable, and collectability is reasonably assured.





Typically our recognition of revenue is determined by our shipment/payment terms as follows:





•
When merchandise departs the shipper’s location when the trade pricing terms are CIF (cost, insurance and freight),•
When merchandise departs the shipper’s location when the trade pricing terms are CFR (cost and freight cost), or•
When the merchandise arrives at the destination port if the trade pricing terms are FOB (free on board) destination.




F - 13
 CHINA LOGISTICS GROUP, INC.   AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER 31, 2008 AND 2007 - Continued





The Company recognizes direct shipping costs concurrently with the recognition of the related revenue for each shipment.  Essentially, the costs, which are isolated by billings as the Company does not own the containers, ships, etc., are readily matched to the related billings.





Use of Estimates





The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions, including estimates of the allowance for doubtful accounts and stock based compensation that affect the reported amount of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amounts of revenue and expenses during the reported period.





Significant estimates for the periods reported include the allowance for doubtful accounts which is based on an evaluation of our outstanding accounts receivable including the age of amounts due, the financial condition of our specific customers and knowledge of our industry segment in Asia.  We also rely on certain assumptions
when deriving the fair value of share-based compensation and calculations underlying our provision for taxes in China.  Assumptions and estimates employed in the areas are material to our reported financial conditions and results of operations.  Actual results could differ from these estimates.





The recovery of bad debt recognized in 2008 reflected an adjustment in our estimate of bad debt expense reflected in the allowance account. This credit did not stem from the recovery of a previously written-off account or accounts.  It had been our policy to reserve for bad debt expense based principally on
the age of our receivables. Experience proved we had over reserved and an adjustment was indicated.





Stock Based Compensation





The Company accounts for stock options issues to employees in accordance with SFAS 123R, “Share-Based Payment, on Amendment of FASB Statement No. 123” (“SFAS 123R”).  SFAS 123R requires companies to measure the grant-date fair value of stock options and other equity based compensation issued to employees
and recognize the costs in the financial statements over the period during which the employees are required to provide services.  The Company adopted SFAS 123R in the second quarter of fiscal 2006.





Earnings (Losses) Per Share





Under the provisions of SFAS 128, “Earnings Per Share”, basic income (loss) per common share is computed by dividing income (loss) available to common shareholders by the weighted average number of shares of common stock outstanding for the periods presented. Diluted income
per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that would then share in the income of the company, subject to anti-dilution limitations.





Earnings per share presented for the years ended December 31, 2007 have been restated due to the reverse  recapitalization transaction with Shandong Jiajia.  The retroactive restatement is based on historical average number of weighted-average shares outstanding for the periods presented, adjusted
for shares underlying convertible securities issued in the reverse  recapitalization transaction.




F - 14
 CHINA LOGISTICS GROUP, INC.   AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER 31, 2008 AND 2007 - Continued





Year endedDecember 31,2008


2007Numerator:

Restated


RestatedNet income (loss) applicable to common stockholders (A)

$
(2,086,618
)

$
275,630Denominator:Denominator for basic earnings per shareWeighted average shares outstanding (B)


26,823,216



13,697Denominator for diluted earnings per shareTreasury Stock methodStock purchase warrants


-



1,871,245Series A and B Convertible Preferred Stock


-



3,732,192Adjusted weighted average shares outstanding (C)


26,823,216



5,617,134Basic and Diluted (Loss) Earnings Per Common Share:Earnings per share- basic (A)/(B)

$
(0.08
)

$
20.12Earnings per share- diluted (A)/(C)

$
(0.08
)

$
0.05





Potentially issuable shares at December 31, 2008 and 2007 which were anti-dilutive and not included in diluted earnings per share included:





Year endedDecember 31,2008

2007Restated

RestatedStock purchase warrants issued to Mr. Chen


2,000,000

-Warrants


117,500

117,500Class A and B Warrants


31,558,500

-Series B Convertible Preferred Stock


4,500,000

-38,176,000

117,500





Accounts Receivable





The Company provides an allowance for doubtful accounts equal to the estimated uncollectible portion of accounts receivable. This estimate is based on the historical collection experience and a review of the current status of trade receivables. There is no set threshold amount or age for accounts receivable write-offs; any decision is made
by senior management on an account-by-account basis.




F - 15
 CHINA LOGISTICS GROUP, INC.   AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER 31, 2008 AND 2007 - Continued





Property and Equipment





Property plant and equipment are carried at cost less accumulated depreciation and includes expenditures, which substantially increase the useful lives of property and equipment. Maintenance and repairs are charged to expense as incurred. When property and equipment are retired or otherwise disposed of, the related costs and accumulated depreciation
are removed from the respective accounts and any gain or loss on the disposition is credited or charged to income.





Depreciation is computed using the straight-line method based on the estimated useful lives of the individual assets, which range from 3-5 years.





Income Taxes





The Company follows Statement of Financial Accounting Standards No. 109 “Accounting for Income Taxes” (SFAS No. 109). Under the asset and liability method of SFAS No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributed
to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax base. 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 includes the enactment date. If it is more
likely than not that some portion of a deferred tax asset will not be realized, a valuation allowance is recognized.





In July 2006, the Financial Accounting Standard Board (FASB) issued FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes”. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial
statements in accordance with SFAS NO. 109, “Accounting for Income Taxes”. FIN 48 requires a company to evaluate whether tax position taken by a company will more likely than not be sustained upon examination by the appropriate taxing authority. It also provides guidance on how a company should measure the amount of benefit that the company is to recognize in its financial statements. FIN 48 also provides guidance on de-recognition, classification,
interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for years beginning after December 15, 2006.





The Company adopted FIN 48 as of January 1, 2007. As a result of the implementation of FIN 48, the Company concluded that it has not taken any uncertain tax positions on any of its open income tax returns that would materially distort its financial statements. The Company’s methods of accounting are based on established income
tax principles approved in the Internal Revenue Code (IRC) and are properly calculated and reflected within its income tax returns.





The Company periodically reassesses the validity of its conclusions regarding uncertain income tax positions to determine if facts or circumstances have arisen that might cause the Company to change its judgment regarding the likelihood of a tax position’s sustainability under audit. The impact of this reassessment for the years ended
December 31, 2008 and 2007 did not have any impact on its results of operations, financial conditions or liquidity.





The Company is not currently under examination by any federal or state taxing authority.





Cash and Cash Equivalents





The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The carrying value of these instruments approximates fair value.





Long-Lived Assets





The Company periodically evaluates the carrying value of long-lived assets to be held and used in the business, other than assets held for sale when events and circumstances warrant, generally in conjunction with the annual business planning cycle. If the carrying value of a long-lived asset is considered impaired, a loss is recognized based
on the amount by which the carrying value exceeds the fair market value for assets to be held and used. Fair market value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Long-lived assets to be disposed of other than by sale are considered held and used until disposed of.








F - 16
 CHINA LOGISTICS GROUP, INC.   AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER 31, 2008 AND 2007 - Continued




Customer Advances





Prepayments and advance deposits consist of prepayments by Shandong Jiajia for contracted cargo that has not yet been shipped to the recipient and for other advance deposits. These amounts are recognized as revenue as customers take delivery of goods, in compliance with its revenue recognition policy. At December 31, 2008 and 2007 customer
advances totaled $1,133,283 and $683,436, respectively.





Foreign Currencies





Transactions and balances in other currencies are converted into U.S. dollars in accordance with Statement of Financial Accounting Standard (SFAS) No. 52, “Foreign Currency Translation”, and are included in determining comprehensive income or loss.





For foreign operations with the local currency as the functional currency, assets and liabilities are translated from the local currency into U.S. dollars at the exchange rate prevailing at the balance sheet date. Revenues and expenses are translated at weighted average exchange rates for the period to approximate translation at the exchange
rates prevailing at the dates those elements are recognized in the financial statements. Translation adjustments resulting from the process of translating the local currency financial statements into U.S. dollars are included in determining comprehensive income or loss.





The reporting currency is the U.S. dollar. The functional currency of Shandong Jiajia is the local currency, the Chinese dollar or Renminbi (“RMB”).





Comprehensive Income





We follow Statement of Financial Accounting Standards No. 130 (SFAS 103) “Reporting Comprehensive Income” to recognize the elements of comprehensive income.  Comprehensive income is comprised of net income and all changes to the statement of stockholders’
equity, except those due to investments by stockholders, changes in paid-in capital and distributions to stockholders.  Comprehensive income included net income and foreign currency translation adjustments.





Minority Interest





Under generally accepted accounting principles when losses applicable to the minority interest in a subsidiary exceed the minority interest in the equity capital of the subsidiary, the excess is not charged to the majority interest since there is no obligation of the minority interest to make good on such losses.  We, therefore,
absorbed all losses applicable to a minority interest where applicable.  If future earnings do materialize, we shall be credited to the extent of such losses previously absorbed.





NOTE 5 – ACCOUNTS RECEIVABLE





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





2008


2007Restated


RestatedTrade receivables

$
3,203,448


$
3,926,546Less: allowance for doubtful accounts


(464,275
)


(794,715
)$
2,739,173


$
3,131,831







F - 17
 CHINA LOGISTICS GROUP, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER 31, 2008 AND 2007 - Continued





NOTE 6 - CONVERTIBLE NOTE PAYABLE-DAVID AUBEL, RELATED PARTY





Prior to our  reverse recapitalization transaction with Shandong Jiajia the Company had relied heavily on advances from Mr. David Aubel, a principal shareholder of the Company, to fund its operations.  Mr. Aubel has never held a position as an officer or director of the Company.  Mr. Aubel
has, over the years, executed a number of convertible debt agreements and related amendments addressing the collateral arrangements and repayment terms covering his advances.  These agreements and related amendments, provided for the repayment of these obligations through the issuance of common stock of the Company at substantial discounts from the then prevailing market price.





On December 3, 2005, the Company entered into an agreement with Mr. Aubel which provided for the conversion of his obligation:





•
For the first and second quarters of 2005 at $0.01 per share;•
For the third quarter 2005 at 20% of the closing price on the date of conversion; and•
For the fourth quarter 2005 and beyond at 40% of the closing price on the date of conversion





In addition, Mr. Aubel was paid 8% interest on his loan balances.  The interest was accrued to his loan balance which ultimately was settled on March 20, 2008 through the issuance of discounted common stock of the Company.





A summary of interest expense accrued under the obligation due Mr. Aubel is as follows:


Year

Interest Expense2005

$
209,1052006


246,3672007


201,5832008


--$
657,055


The final obligation to Mr. Aubel of $2,521,380 was settled in full on March 20, 2008 through the issuance of 2,864,606 shares of common stock.  No interest was accrued in 2008 as, under the terms of the agreements related to the reverse recapitalization transaction
with Shandong Jiajia, Mr. Aubel had agreed to a final settlement of a fixed number of common shares as of December 31, 2007.





Under the provision of Emerging Issue Task Force (“EITF”) 98-5 and EITF 00-27, the Company determined that the agreement with Mr. Aubel contained an embedded conversion feature which should be valued separately at issuance.  Further, as Mr. Aubel’s December 3, 2005 agreement with the Company contained no stated
redemption date (due on demand) and the notes were convertible at the option of investor, the resulting discount from market was recognized immediately.





The intrinsic value of each advance is the difference between the conversion price to which Mr. Aubel was entitled and the fair value of the Company’s common stock on the commitment date (the date the funds were advanced)
multiplied by the number of shares to which Mr. Aubel was entitled. A summary of the funds advanced and intrinsic value of each advance commencing December 3, 2005, is as follows:





Year

Funds Advanced


Intrinsic Value2005

$
160,000


$
240,0002006


1,730,168



2,595,2512007


874,164



1,311,2462008


148,200



222,300$
2,912,532


$
4,368,797


F - 18
CHINA LOGISTICS GROUP, INC.   AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008 AND 2007 - Continued





The intrinsic value of the shares actually paid to Mr. Aubel represents the difference between the conversion price to which Mr. Aubel was entitled and the fair value of the Company’s common stock on the date of conversion multiplied by the number of shares converted by Mr. Aubel .  A summary of
the intrinsic value of shares actually paid to Mr. Aubel against his note for the periods beginning December 3, 2005 through final settlement on March 20, 2008 is as follows:





Year

Number of Shares Converted


Amount of Note Reduction


Intrinsic Value2005


802,500


$
698,000


$
14,829,0002006


592,500



1,445,000



2,319,0002007


1,795,000



1,751,720



2,821,2802008


2,864,606



2,521,380



659,432Total


6,054,606


$
6,416,100


$
20,628,712





Based on the Company’s review of the facts and circumstances surrounding the agreements with Mr. Aubel and in connection with the restatement of the Company’s financial statements, the Company believed the appropriate accounting treatment was to record a receivable due from Mr. Aubel for the intrinsic value of the shares tendered
due to uncertainty as to the validity of the amount of the note payable and the potential for a lack of consideration for the issuance of such shares.  The receivable recorded was subsequently expensed as impaired as collection was not reasonably assured.





During the first quarter of 2008, the Company issued Mr. Aubel 2,864,606 shares of its common stock in full payment of the then $2,521,380 balance of his note.  The shares issued to Mr. Aubel had a fair value $659,432 less than the obligation settled.  This difference was recorded as a contribution to capital rather than
a gain on the debt settlement. We are evaluating any rights we may have to seek damages against Mr. Aubel as a result of the uncertainty as to the validity of the amount of the note payable.





NOTE 7 – PROPERTY AND EQUIPMENT





Property and equipment at December 31, 2008 and 2007, consisted of the following:


Useful Lives

2008


2007Restated


RestatedComputer equipment
4 years

$
37,246


$
228,707Software
3 years


-



361,861Furniture and equipment
4-5 years


89,745



112,297Total:



126,991



702,865Less: accumulated depreciation



(82,847)



(660,529)$
44,144


$
42,336





For the years ended December 31, 2008, and 2007, depreciation expense totaled $35,438 and $18,406, respectively.





NOTE 8 – CONCENTRATION OF CREDIT RISK





Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash and trade accounts receivable. The Company places its cash with high credit quality financial institutions in the United States and China. As of December 31, 2008, bank deposits in the United States did not exceed
federally insured limits. At December 31, 2008, the Company had deposits of approximately $2,954,757 in banks in China. In China, there is no equivalent federal deposit insurance as in the United States; as such these amounts held in banks in China are not insured. The Company has not experienced any losses in its Chinese based bank accounts through December 31, 2008.





NOTE 9 – FAIR VALUE OF FINANCIAL INSTRUMENTS





The Company’s financial instruments consist primarily of cash, accounts receivable, accounts payable and accrued expenses. The recorded values of cash, accounts receivable, accounts payable and accrued expenses, approximates their fair values based on their short-term nature.





NOTE 10 – REVERSE RECAPITALIZATION





On December 31, 2007, the Company entered into an acquisition arg ee ment with the shareholders of Shandong Jiajia to acquire a 51% interest in that company.  This transaction was initially recorded and reported as an acquisition of Shandong Jiajia under the guidance of SFAS 141.  After further
review of the transaction, including post transaction ownership, the transaction was deemed a capital transaction, implemented through a reverse recapitalization .  Accordingly, our financial statements have been restated, with the cost basis of the assets and liabilities of Shandong Jiajia being maintained in the consolidated financial statements and the assets and liabilities of the Company prior to the transaction (then named MediaReady, Inc.), being accounted for at
their carrying value as of December 31, 2007 .  The historical records presented through December 31, 2007, which includes our consolidated statements of operations, consolidated statements of stockholders’ (deficit) equity, and consolidated statements of cash flows, are those of Shandong Jiajia.




F - 19
 CHINA LOGISTICS GROUP, INC.   AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER 31, 2008 AND 2007 - Continued





The value of the Series A Convertible Preferred Stock and Series B Convertible Preferred Stock were based on the fair value of the common stock to be issued upon conversion at December 31, 2007 as follows:





One share of Series A Convertible Preferred Stock converts into 2.5 shares of common stock





One share of Series B Convertible Preferred Stock converts into 10 shares of common stock





On March 28, 2008 shareholders holding the Series A Convertible Preferred Stock converted their 1,000,000 shares into 2,500,000 shares of common stock, no shares Series A Convertible Preferred Stock remained outstanding at December 31, 2008. On March 28, 2008 shareholders holding the Series B Convertible Preferred
Stock converted 845,000 shares into 8,450,000 shares of common stock.





NOTE 11 – STOCKHOLDERS’ EQUITY





On March 11, 2008, the Company:





•
effected a one for 40 reverse stock split of its issued and outstanding common stock,•
increased the number of authorized preferred stock shares from 5,000,000 to 10,000,000 shares, and•
increased the number of common stock shares from 200,000,000 shares to 500,000,000 shares.





2008 Unit Offering





In April 2008, we completed an offering of 15.113 units of our securities at an offering price of $250,000 per unit to 32 accredited investors in a private placement exempt from registration under the Securities Act of 1933 in reliance on exemptions provided by Regulation D and Section 4(2) of that act. Each unit consisted of 1,000,000
shares of common stock, five year Class A warrants to purchase 1,000,000 shares of common stock with an exercise price of $0.35 per share and five year Class B warrants to purchase 1,000,000 shares of common stock with an exercise price of $0.50 per share. We received gross proceeds of $3,778,250 in this offering.





The 31,558,500 warrants issued in connection with the 2008 Unit Offering and comprised of 16,445,500 Class A warrants exercisable at $0.35 per share and 15,113,000 Class B warrants exercisable at $0.50 per share.  Other than the exercise price of the warrants, the terms of the Class A and Class B warrants
are identical.





These warrants are exercisable through the last calendar day of the month in which the fifth anniversary of the issue date occurs and are exercisable in whole or in part at any time following the issue date.





The exercise price of the warrants and the number of shares issuable upon exercise is subject pre-note adjustment in the event of stock splits, stock dividends, recapitalization and similar corporate events.  At anytime after the required effective date of the related registration statement the warrants are
exercisable on a cashless basis, which currently is the case. The exercise of the warrants is subject to a 4.99% cap on the beneficial ownership that each warrant holder may have while the securities are outstanding.  This provision is waived during the final 45 days the warrants are exercisable.





Skyebanc, Inc., a broker-dealer and a member of FINRA, acted as a selling agent for us in the offering.  As compensation for its services, we paid Skyebanc, Inc. a cash commission of $25,938 and issued that firm Class A warrants to purchase 207,500 shares of our common stock. In addition, we paid due diligence fees to an advisor
to our company as well as to two advisors to investors in the offering in connection with this offering which included an aggregate of $315,625 in cash and Class A warrants to purchase 1,125,000 shares of our common stock.  The Company also paid legal fees for both investors' counsel and our counsel of approximately $77,500 . After payment of these fees and costs associated with this offering we received net proceeds of approximately $3.3 million. Approximately $2.0 million of
the net proceeds were used by us as a contribution to the registered capital of our subsidiary Shandong Jiajia and as additional working capital for that company, approximately $140,000 was used to pay accrued professional fees and the balance of the net proceeds from the transaction are being used for working capital purposes. Subsequently, we have provided an additional $500,000 to Shandong Jiajia as working capital.




F - 20
 CHINA LOGISTICS GROUP, INC.   AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER 31, 2008 AND 2007 - Continued




We agreed to file a registration statement with the Securities and Exchange Commission covering the shares of common stock underlying the warrants so as to permit the public resale thereof. We have filed a registration statement covering the resale of all shares of our common stock issuable upon the exercise of the Class A and Class B Warrants
included in the units sold in the offering, together with all shares of our common stock issuable upon exercise of the Class A warrants issued to the selling agent, finders and consultants in the offering.  We will pay all costs associated with the filing of this registration statement. In the event the registration statement was not filed within 60 days of the closing or is not declared effective within 180 days following the closing date, we will be required to pay liquidated damages in an amount
equal to 2% for each 30 days (or such lesser pro rata amount for any period of less than 30 days) of the purchase aggregate exercise price of the warrants, but not to exceed in the aggregate 12% of the aggregate exercise price of the warrants.





Although we filed a registration statement and we have been making a good faith effort to resolve comments on the registration statement we received from the Commission, it has not yet been declared effective.  Accordingly, for the quarter ended September 30, 2008, the Company accrued $1,597,000 due to investors under the provisions
of the registration payment arrangement in accordance with the guidance of SFAS No. 5.





The transaction documents also provide for the payment of liquidated damages to the investors if we should fail to be a current reporting issuer and/or to maintain an effective registration statement covering the resale of the common shares issued or issuable upon exercise of the Class A and B warrants.





The subscription agreement for the offering provides that while the purchasers own any securities sold in the offering such securities are subject to anti-dilution protections afforded to the purchasers. In the event we were to issue any shares of common stock or securities convertible into or exercisable for shares of common stock to any
third party purchaser at a price per share of common stock or exercise price per share which is less than the per share purchase price of the shares of common stock in this offering, or less than the exercise price per warrant share, respectively, without the consent of the subscribers then holding securities issued in this offering, the purchaser is given the right to apply the lowest such price to the purchase price of share purchased and still held by the purchaser and to shares issued upon exercise of the
warrants and still held by the purchaser (which will result in the issuance of additional shares to the purchaser) and to the exercise price of any unexercised warrants. In the event we enter into a transaction which triggers these anti-dilution rights, we will:





•
issue additional shares to the purchasers to take into account the amount paid by the purchaser as of the closing date for the shares included in the units so that the per share price paid by the purchaser equals the lower price in the subsequent issuance,•
reduce the warrant exercise price of any unexercised warrants then held by the purchaser to such lower price, and•
if necessary, issue additional shares to purchaser to take into account the amount paid, whether in cash or by cashless exercise, by the purchaser if the purchaser has exercised any warrants so that the per share exercise price and to the exercise price for the exercised warrants equals the lower price of the subsequent issuance.





In addition, until eight months after the effective date of the registration statement, purchasers will have a right of first refusal with respect to subsequent offers, if any, by us for the sale of our securities or debt obligations. The anti-dilution provisions and the right of first refusal do not apply in limited exceptions, including:





•
strategic license agreements or similar partnering arrangements provided that the issuances are not for the purpose of raising capital and there are no registration rights granted,•
strategic mergers, acquisitions or consolidation or purchase of substantially all of the securities or assets of a corporation or other entity provided that we do not grant the holders of such securities registration rights, and•
the issuance of common stock or options pursuant to stock option plans and employee purchase plans at exercise prices equal to or higher than the closing price of our common stock on the issue/grant date or as a result of the exercise of warrants issued either in the 2008 Unit Offering or which were outstanding prior to the 2008 Unit Offering.




F - 21
 CHINA LOGISTICS GROUP, INC.   AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER 31, 2008 AND 2007 - Continued




Finally, under the terms of the subscription agreement for the offering we agreed that:





•
until the earlier of the registration statement having been effective for 240 days or the date on which all the shares of common stock sold in the offering, including the shares underlying the warrants, have been sold we will not file any additional registration statements, other than a Form S-8, and•
until the earlier of two years from the closing date or the date on which all shares of common stock sold in the offering, including the shares underlying the warrants, have been sold or transferred we agreed we would not:•
amend our articles of incorporation or bylaws so as to adversely affect the rights of the investors,•
repurchase or otherwise acquire any of our securities or make any dividends or distributions of our securities, or•
prepay any financing related or other outstanding debt obligations.





Preferred Stock





We have 10,000,000 shares of preferred stock, par value $.001, authorized of which we designated 1,000,000 as our Series A Convertible Preferred Stock in December 2007. In March 2008 all 1,000,000 shares of our Series A Convertible Preferred Stock were converted into 2,500,000 shares of our common stock.





In December 2007 we designated 1,295,000 shares of Series B Convertible Preferred Stock. In March 2008, 845,000 shares of Series B Convertible Preferred Stock were converted into 8,450,000 shares of common stock.





Common Stock





A summary of common shares issued during the year ended December 31, 2008 is as follows:





SharesSettlement of obligation to former President and CEO


581,247Settlement (conversion) of note payable to principal shareholder


2,864,606Conversion 1,000,000 shares of Series A Convertible Preferred Stock


2,500,000Conversion of 845,000 shares of Series B Convertible Preferred Stock


8,450,0002008 Unit offering


15,113,00029,508,853





On March 20, 2008 a principal shareholder of our company, Mr. David Aubel, converted the full amount of a $2,521,380 convertible note payable into 2,864,606 shares of common stock at $0.88 per share.





On March 20, 2008 our then president and CEO and a principal shareholder of our company, Mr. V. Jeffrey Harrell, converted the full amount of his accrued compensation into 581,247 shares of common stock at $0.77 per share, for a total of $448,985.




F - 22
 CHINA LOGISTICS GROUP, INC.   AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER 31, 2008 AND 2007 - Continued




During the year ended December 31, 2007, the Company completed the following stock transactions:





•

in connection with the acquisition of the 51% interest in Shandong Jiajia effective December 31, 2007:•
issued 250,000 share of common stock to Capital One Resources Co., Ltd. in connection with consulting services rendered in the Shandong Jiajia transaction.  The shares had a fair value at issuance of $380,000,•
issued 1,000,000 of Series A preferred stock to finance, in part, the acquisition of a 51% interest in a company incorporated in the People Republic of China, Shandong Jiajia, at a fair value of $2.10 per preferred share, for a total of $2,100,000,•
issued 120,000 shares of Series B preferred stock as partial compensation in connection with the acquisition of a 51% interest in Shandong Jiajia valued at $8.00 per preferred share, for a total of $960,000,•
issued an additional 725,000 shares of Series B preferred stock to third parties for services rendered in connection with the Shandong Jiajia transaction at a fair value of $8.40 per share, for a total of $6,090,000,•
granted stock purchase warrants to purchase 2,000,000 shares of common stock to finance, in part, the purchase of a 51% interest in a company incorporated in the Peoples Republic of China, Shandong Jiajia, at a fair value of $480,000,•

issued 62,500 shares of common stock to China Direct Investments, Inc. under a management consulting agreement.  The shares had a fair value of $168,000 at issuance,•

issued 2,500 shares of common stock to an employee for services rendered at $2.60 per share, for a total of $6,500,•

issued 16,250 shares of common stock to third parties for services rendered with a fair value of $58,950,•

cancelled 12,500 shares held in treasury at $15.00 per share, for a total of $187,500,•

a related party, Mr. David Aubel, converted $1,751,720 in convertible notes payable into 1,795,000 shares of common stock at prices ranging $0.28 to $2.00 per share,•

the Company president, Mr. V Jeffrey Harrell, converted $193,500 in accrued compensation into 135,000 shares of common stock at $1.44 per share,•

the Company was released from an obligation to issue 18,000 shares of common stock to an employee under an employment agreement. Accordingly, during the year ended December 31, 2007 the Company reversed the amounts expensed for the fair market value of the stock during the years ended December 31, 2006, 2005 and 2004, respectively,
for a total of $221,100,




F - 23
 CHINA LOGISTICS GROUP, INC.   AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER 31, 2008 AND 2007 - Continued





Purchase Warrants issued to Mr. Chen





On December 31, 2007 the Company granted three-year stock purchase warrants to purchase 2,000,000 shares of common stock as partial consideration for the acquisition of a 51% interest in Shandong Jiajia. The warrants were fully vested on the date of grant and are exercisable
within 3 years of the date of grant at an exercise price of $0.30 per share.  These warrants were issued to an owner of Shandong Jiajia and were recognized as a direct cost in the reverse recapitalization transaction.





The Company has adopted the “Black Scholes” pricing model to book the estimated fair value of the purchase warrants totaling $480,000 under the provisions of SFAS No. 123(R).





The following assumptions were made in estimating fair value:





Risk-free rate
2.5%Expected Volatility
175%Life
3 yearsDividend yield
0%





A summary of our stock purchase warrant activity with Mr. Chen during the year ended December 31, 2008 is as follows:





Shares Underlying Warrants


Weighted Average Exercise Price


Weighted Average Contractual Term (years)


Aggregate Intrinsic ValueOutstanding at December 31, 2007


2,000,000


$
0.30



2.0


$
-Granted


-



-Exercised


-



-Outstanding at December 31, 2008


2,000,000


$
0.30



2.0


$
-





Common Stock Purchase Warrants





At December 31, 2008 and 2007, the Company had outstanding warrants to purchase 31,676,000 and 117,500 shares of common stock, at an weighted average exercise price of $0.42  and $9.69 per warrant share, respectively. The Company adopted the provisions of SFAS No. 123R to compute an estimated fair value of $3,877,123
and $527,000 for the stock warrants using the “Black Scholes” model at December 31, 2008 and 2007 and reserved 31,676,000 and 117,500 shares for the exercise of the stock warrants. The following assumptions were made in estimating fair value:





December 31, 2008


December 31, 2007Restated


RestatedRisk-free rate


3.0
%


4.45
%Volatility


100
%


96
%Expected Dividend Yield


0
%


0
%





The following table summarizes the stock warrant activity:





Shares
Underlying
Warrants


Weighted Average
Exercise PriceOutstanding at December 31, 2007 (1)


117,500


$
9.69Granted  (2)


31,558,500



0.42Exercised


—



—Outstanding at December 31, 2008


31,676,000


$
0.46





(1) Includes 110,000 common stock purchase warrants issued to Trilogy Capital Partners, Inc. which expire May 31, 2009


(2) Issued in connection with our 2008 Unit Offering completed in April, 2008.




F - 24
 CHINA LOGISTICS GROUP, INC.   AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER 31, 2008 AND 2007 - Continued





NOTE 12– RELATED PARTIES





Due from related parties





On December 31, 2008 and 2007, the Company held a due from related party in the amount of $518,433 and $511,435, respectively, which reflected advances due from Shandong Huibo Import & Export Co., Ltd., a 24.3% shareholder in Shandong Jiajia.   The loans were unsecured, non-interest bearing and repayable on demand.





Due to related parties





On December 31, 2008 and 2007, due to related parties consist of the following:





2008


2007Restated


RestatedDue to Xiangfen Chen

$
123,458


$
229,252Due to Bin Liu


62,652



-Due to Tianjin Sincere Logistics Co., Ltd.


183,448



-Other


9,139$
378,697


$
229,252





Xiangfen Chen  is the general manager of Shandong Jiajia Xiamen branch. Bin Liu is the general manager of Shandong Jiajia Tianjin branch. Mr. Liu is a 90% owner of Tianjin Sincere Logistics Co., Ltd.. The loans were unsecured, non-interest bearing and repayable on demand. Shandong Jiajia used the funds for general working capital.





On December 31, 2008, the Company had a commitment to Xiangfen Chen for the lease of the Company's branch office in Xiamen City, China, totaling $1,459 per year.





On June 1, 2008 Shandong Jiajia entered into a one year lease the CEO of Shandong Jiajia for a property in the Peoples Republic of China. The base annual rental is $43,700 per annum.





We also rent three office spaces throughout China from related parties as set forth in the following table:





Location

Approximate Square Feet

Annual Rent

Additional Charges

Expiration of LeaseShanghai Branch (1)


7,008

$43,700
(RMB 300,000)

$20,440
(RMB 140,622)

May 31, 2009Xiamen Branch, Xiamen City, Fujian Province (2)


1,026

$1,459
(RMB 10,800)

-

December 31, 2009Tianjin Branch, Tianjin City (3)


3,014

$21,962
(RMB 150,000)

-

May 31, 2013





(1) We lease the offices for our Shanghai Branch from Mr. Wei Chen, our Chairman and CEO.  The additional charges represent a monthly management fee paid to an unrelated third party.





(2)We lease the offices for our Xiamen Branch from Mr. Xiangfen Chen, its General Manager.





(3)We lease the offices for our Tianjin Branch from Mr. Bin Liu, its General Manager.




F - 25
 CHINA LOGISTICS GROUP, INC.   AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER 31, 2008 AND 2007 - Continued





During the years ended December 31, 2007, the Company expensed $200,000 in each year for the salary of Mr. V. Jeffrey Harrell, the former CEO and President. At December 31, 2007 a total of $446,985 for the period January 1, 2002 through December 31, 2007 was unpaid and has been accrued under current liabilities. Additionally,
during the year ended December 31, 2007 a total of $193,500 in accrued salary was converted into 135,000 shares of common stock.  In March 2008, the entire accrued liability was converted into 581,247 shares of common stock.





There are no assurances that the terms of the transactions with these related parties are comparable to terms the Company could have obtained from unaffiliated third parties.





NOTE 13 – INCOME TAXES





The Company’s subsidiary Shandong Jiajia incorporated and operating in China is governed by the Income Tax Law of the People’s Republic of China concerning Foreign Investment Enterprises and Foreign Enterprises and local income tax laws (the “PRC Income Tax Law”). Pursuant to the PRC Income Tax Law, wholly-owned foreign
enterprises are subject to tax at a statutory rate of 33% (30% state income tax plus 3% local income tax). Commencing January 2008, the PRC Income Tax rate was reduced to a maximum of 25% (inclusive of state and local income taxes) for all companies.





The Company's subsidiary Shandong Jiajia incorporated and operating  in China is governed by the Income Tax Law of the Peoples Republic of China concerning Foreign Investment Enterprises and Foreign Enterprises and local income tax laws (the "PRC Income Tax Law"). Pursuant to the PRC Income Tax Law, wholly owned foreign enterprises
are subject to tax at a statutory rate of approximately 33% (30% state income tax plus 3% local income tax) for the calendar year ended December 31, 2007.





Effective January 1, 2008 the Company's subsidiaries in China are governed by the Enterprise Income Tax Law of the Peoples Republic of China and local income tax laws (the "PRC Enterprise Income Tax Law"). Pursuant to the PRC Enterprise Income Tax Law, our Chinese subsidiaries are Resident Enterprises as defined in Chapter 1 Article 2 “...
an enterprise established within the territory of another country or other tax region pursuant to foreign laws, whose actual management or control is located is located in China” and are subject to tax at a statutory rate of approximately 25% for the calendar year ended December 31, 2008.





The components of income (loss) before income tax and minority interest consist of the following:





Year Ended December 31,2008


2007Restated


RestatedUS Operations

$
(2,249, 494
)

$
-Chinese Operations


588,965



597,655$
(1,660,529
)

$
597,655





The components of the provision (benefit) for income taxes are as follows:





Year Ended December 31,2008


2007Restated


RestatedUS Operations

$
-


$
-Chinese Operations


269,600



57,205$
269,600


$
57,205











F - 26
 CHINA LOGISTICS GROUP, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER 31, 2008 AND 2007 - Continued





The table below summarizes the reconciliation of the Company’s income tax provision (benefit) computed at the statutory U.S. Federal rate and the actual tax provision:





Year Ended December 31,2008


2007Restated


RestatedIncome tax provision (benefit) at Federal statutory rate

$
(581,000
)

$
209.000State income taxes, net of Federal Benefit


(76,000
)


27,000Permanent differences


632,000



-Temporary differences


123,000



-U.S. tax rate in excess of foreign tax rate


(86,000
)


(39,000
)Increase in valuation allowance


258,000



-Abatement of foreign income taxes


-



(140,000
)Tax provision (benefit)

$
270,000


$
57,000





The Company has a net operating loss (“NOL”) carryforward for United States income tax purposes at December 31, 2008 and 2007 expiring through the year 2028 of approximately $12,800,000. The utilization of the Company’s NOL’s may be limited because of a possible change in ownership as defined under Section 382 of Internal
Revenue Code.





On December 31, 2007 the Company acquired a 51% interest in Shandong Jiajia. This acquisition was treated as a recapitalization of the Company, with Shandong Jiajia recognized as the accounting acquirer. Accordingly, the tax provisions recorded above are those of
the consolidated entity subsequent to the recapitalization, effective December 31, 2007, for all periods presented. With regards to the year ended December 31, 2007, as the recapitalization occurred on December 31, 2007, the operations of US parent, were $0 for the year ended December 31, 2007. With regards to the year ended December 31, 2008 the loss for US operations was approximately $2,249,000 and is included in consolidated reconciliation of the Company’s tax provision. With regards to permanent differences,
in the afore presented consolidated tax provision reconciliation, these items are primarily related to the Company’s US operations with regards to issuance of equity instruments for services or registration rights penalties, which management has determined that there is no current or future tax benefits to be earned. The temporary difference is related to the Company’s Chinese operations. The Company was obligated to pay an immaterial amount of additional taxes for a year end prior to December 31,
2007. The Company became aware of this obligation in the current year end, and opted to resolve this matter, and it is reflected as a temporary difference for the purposes of thru above tax reconciliation.  The temporary difference is reflected at the effective US statutory rate in the consolidated tax reconciliation above.





Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company has recognized, a valuation allowance for those deferred tax assets for which it is more likely than not that realization
will not occur. The Company’s US parent, China Logistics Group, Inc., deferred tax assets are included below and have been fully reserved with a valuation allowance as management of the Company has not determined if realization of these assets are to occur in the future. In addition, management has determined that the acquisition of 51% of Shandong Jiajia might have limited the utilization of the Company’s NOL for US Federal and State income tax purposes, due to a possible change in ownership as defined
under Section 382 of Internal Revenue Code.





The Company’s deferred tax assets as of December 31, 2008 and 2007 are as follows:





December 31,2008


2007RestatedFederal net operating loss carryforward

$
3,928,000


$
3,700,000State net operating loss carryforward


633,000



600,000Provisions


-



-Timing differences


639,000



167,0005,200,000



4,467,000Valuation allowance


(5,200,000
)


(4,467,000
)$
-


$
-




F - 27
 CHINA LOGISTICS GROUP, INC.   AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER 31, 2008 AND 2007 - Continued





In July 2006, the Financial Accounting Standard Board (FASB) issued FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes”. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial
statements in accordance with SFAS NO. 109, “Accounting for Income Taxes”. FIN 48 requires a company to evaluate whether tax position taken by a company will more likely than not be sustained upon examination by the appropriate taxing authority. It also provides guidance on how a company should measure the amount of benefit that the company is to recognize in its financial statements. FIN 48 also provides guidance on de-recognition, classification,
interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for years beginning after December 15, 2006.





The Company adopted FIN 48 as of January 1, 2007. As a result of the implementation of FIN 48, the Company concluded that it has not taken any uncertain tax positions on any of its open income tax returns that would materially distort its financial statements. The Company’s methods of accounting are based on established income
tax principles approved in the Internal Revenue Code (IRC) and are properly calculated and reflected within its income tax returns.





The Company periodically reassesses the validity of its conclusions regarding uncertain income tax positions to determine if facts or circumstances have arisen that might cause the Company to change its judgment regarding the likelihood of a tax position’s sustainability under audit. The impact of this reassessment for the years ended
December 31, 2008 and 2007 did not have any impact on its results of operations, financial conditions or liquidity.





NOTE 14 – COMMITMENTS





On June 1, 2008 Shandong Jiajia entered into a one year lease with the CEO of Shandong Jiajia for a property in the Peoples Republic of China. The base annual rental is $43,700 per annum. The table below reflects our
minimum commitments for our various office leases in the U.S. and China for the years ended December 31, 2009 and thereafter:





Period

TotalPeriod Ended December 31, 2009

$
121,000Period Ended December 31, 2010


48,000Period Ended December 31, 2011


23,000Period Ended December 31, 2012


23,000Period Ended December 31, 2013


23,000Thereafter


--$
238,000





NOTE 15 – REGIONS





The table below presents information by operating regions for the year ended December 31, 2008 (restated).





Sales


AssetsUnited States

$
—


$
201,605Peoples Republic of China


35,561,833



6,584,459$
35,561,833


$
6,786,064





For the year ended December 31, 2008 all operations were within the Peoples Republic of China.





NOTE 16 – CONTINGENCIES





As a result of the September 24, 2008 complaint filed by the Securities and Exchange Commission against us and Messrs. Harrell and Aubel as described in Item 1, “Legal Proceedings” of this annual report, we have agreed in principle to entry of a consent order granting the Commission the injunctive relief it seeks against us. We
have been cooperating with the Commission in this proceeding and are still in settlement discussions with the Commission regarding disgorgement and prejudgment interest sought by the Commission.  In the event we are unable to reach an agreement with the Commission with respect to disgorgement and prejudgment interest, we have agreed with the Commission to have the court determine the propriety of such amounts, if any.  In addition, the pending lawsuit with the Commission may result in additional
claims by stockholders, regulatory proceedings, government enforcement actions and related investigations and litigation. We cannot predict the ultimate outcome of this litigation and any continued litigation would result in significant expenses, management distraction and potential damages, penalties, other remedies, or adverse findings, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.  In addition, our agreement to entry of a consent
order granting the Commission injunctive relief restraining us from future violations of Federal securities laws may make future financing efforts more difficult and costly.




F - 28
 CHINA LOGISTICS GROUP, INC.   AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER 31, 2008 AND 2007 - Continued





We are evaluating any rights the Company may have to file a lawsuit against Mr. Aubel as a result of the uncertainty as to the validity of the amount of the note payable in the amount of $2,521,380 which the Company redeemed for 2,864,606 shares of its common stock in March, 2008 pursuant to the terms of the December 2007 agreement entered
into by the Company to acquire a 51% interest in Shandong Jiajia.





NOTE 17 - OPERATING RISK





(a) Country risk





The majority of the Company's revenues will be derived from  freight and logistical services in the PRC. The Company hopes to expand its operations to countries outside the PRC, however, such expansion has not been commenced and there are no assurances that the Company will be able to achieve such an
expansion successfully. Therefore, a downturn or stagnation in the economic environment of the PRC could have a material adverse effect on the Company’s financial condition.





(b) Products risk





In addition to competing with other companies, the Company could have to compete with larger US companies who have greater funds available for expansion, marketing, research and development and the ability to attract more qualified personnel if access is allowed into the PRC market. If U.S. companies do gain access to the





PRC markets, they may be able to offer products at a lower price. There can be no assurance that the Company will remain competitive should this occur.





(c) Exchange risk





The Company cannot guarantee that the current exchange rate will remain steady, therefore there is a possibility that the Company could post the same amount of profit for two comparable periods and because of a fluctuating exchange rate actually post higher or lower profit depending on exchange rate of RMB converted to U.S. dollars on that
date. The exchange rate could fluctuate depending on changes in the political and economic environments without notice.





(d) Political risk





Currently, PRC is in a period of growth and is openly promoting business development in order to bring more business into PRC. Additionally, the PRC allows a Chinese corporation to be owned by a United States corporation. If the laws or regulations are changed by the PRC government, the Company's ability to operate the PRC subsidiaries could
be affected.





(e) Key personnel risk





The Company’s future success depends on the continued services of executive management in China. The loss of any of their services would be detrimental to the Company and could have an adverse effect on business development. The Company does not maintain key-man insurance on
the lives of Mr. Wei Chen our CEO and Chairman, or Mr. Hui Liu . Future success is also dependent on the ability to identify, hire, train and retain other qualified managerial and other employees. Competition for these individuals is intense and increasing.




(f) Performance of subsidiaries risk





The vast majority of the Company’s revenues will be derived via the operations of the Company’s wholly owned or majority owned Chinese subsidiaries. Economic, governmental, political, industry and internal company factors outside of the Company’s control affect each of the subsidiaries. If the subsidiaries do not succeed,
the value of the assets and the price of our common stock would decline.





NOTE 18 – SUBSEQUENT EVENTS





On January 9, 2009 Shandong Jiajia added a new branch office to its freight forwarding operations in Lianyungang in Jiangsu province in the PRC.  This branch was formerly a satellite sales office of the Shanghai branch and now will function as an independent branch office.








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