U.S. Securities and Exchange Commission Washington, D.C. 20549    FORM 10-QSB    x
        QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended September 30, 2006
  o
        TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from _______ to _______
  Commission file number: 0-28806  EVER-GLORY INTERNATIONAL GROUP, INC. (Exact name of small business issuer as specified in its charter)   Florida
        65-0420146(State or other jurisdiction of
        (IRS Employer identification No.)incorporation or organization)
  17870 Castleton Street, #335 City of Industry, California 91748 (Address of principal executive offices)  (626) 839-9116  (Issuers telephone number)  Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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. YesxNo
o  Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
oNox  Number of shares of common stock outstanding as of November 10, 2006: 19,971,758  Transitional Small Business Disclosure Format: Yes
oNox  
   1    EVER-GLORY INTERNATIONAL GROUP, INC.

FORM10-QSB

INDEX


PageSPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
        
        3PARTI. FINANCIAL INFORMATION
        
        5Item 1.
        Financial Statements (Unaudited)
        
        5Condensed Consolidated Balance Sheet as of September 30, 2006
        
        5Condensed Consolidated Statements of Operations and Comprehensive income for three and nine months ended September 30, 2006 and 2005
        
        6Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2006 and 2005
        
        7Notes to the Condensed Consolidated Financial Statements as of September 30, 2006
        
        8Item 2.
        Managements Discussion and Analysis of Financial Condition and Results of Operations
        
        15Item 3.
        Controls and Procedures
        
        26PARTII. OTHER INFORMATION
        
        26Item 1.
        Legal proceedings
        
        26Item 4.
        Submission of Matters to A Vote of Security Holders
        
        27.Item 6.
        Exhibits and Reports on form 8-K
        
        28SIGNATURES
        
        30





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SPECIAL NOTE REGARDING FORWARDLOOKING STATEMENTS

On one or more occasions, we may make forward-looking statements in this Quarterly Report on Form 10-QSB regarding our assumptions, projections, expectations, targets, intentions or beliefs about future events. Words or phrases such as anticipates, may, will, should, believes, estimates, expects, intends, plans, predicts, projects, targets, will likely result, will continue or similar expressions identify forward-looking statements. These forward-looking statements are only our predictions and involve numerous assumptions, risks and uncertainties, including, but not limited to those listed below and those business risks and factors described elsewhere in this report and our other Securities and Exchange Commission filings.

Forward-looking statements involve risks and uncertainties which could cause actual results or outcomes to differ materially from those expressed. We caution that while we make such statements in good faith and believe such statements are based on reasonable assumptions, including without limitation, managements examination of historical operating trends, data contained in records and other data available from third parties, we cannot assure you that our projections will be achieved. Factors that may cause such differences include but are not limited to:



        the ability to timely and accurately complete product orders;




        the ability to coordinate product design with its customers;




        its dependence on a limited number of larger customers;




        political and economic factors in the Peoples Republic of China;




        the ability of the Companys internal production operations to increase production volumes on finished goods in a timely fashion in response to increasing demand and enable the Company to achieve timely delivery of finished goods to its customers;




        the Companys ability to expand and grow its distribution channels;




        unanticipated changes in general market conditions or other factors, which may result in cancellations of advance orders or a reduction in the rate of reorders;




        a weakening of economic conditions which would reduce demand for products sold by the Company and could adversely affect profitability;




        the effect of terrorist acts, or the threat thereof, on consumer confidence and spending, or the production and distribution of product and raw materials which could, as a result, adversely affect the Companys operations and financial performance;




        the acceptance in the marketplace of the Companys new products and changes in consumer preferences;




        reductions in sales of products, either as the result of economic or other conditions, or reduced consumer acceptance of a product, could result in a buildup of inventory;




        the ability to source raw materials and finished products at favorable prices to the Company;




        the potential impact of power crises on the Companys operations including temporary blackouts at the Companys facilities;




        foreign currency exchange rate fluctuations;




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Table of Contents






        earthquakes or other natural disasters;




        the Companys ability to identify and successfully execute cost control initiatives;




        the impact of quotas, tariffs, or safeguards on the importation or exportation of the Companys products;




        our ability to fund and execute our business plan;




        our ability to maintain an effective internal control structure.




        other risks outlined above and in the Companys other filings made periodically by the Company.


We have attempted to identify, in context, certain of the factors that we believe may cause actual future experience and results to differ materially from our current expectation regarding the relevant matter or subject area. In addition to the items specifically discussed above, our business and results of operations are subject to the uncertainties described under the caption Risk Factors which is a part of the disclosure included in Item 2 of this Report entitled Managements Discussion and Analysis of Financial Condition and Results of Operations.

From time to time, oral or written forward-looking statements are also included in our reports on Forms 10-KSB, 10-QSB and 8-K, Proxy Statements on Schedule 14A, press releases, analyst and investor conference calls, and other communications released to the public. Although we believe that at the time made, the expectations reflected in all of these forward-looking statements are and will be reasonable, any or all of the forward-looking statements in this quarterly report on Form 10-QSB, our reports on Forms 10-KSB and 8-K, our Proxy Statements on Schedule 14A and any other public statements that are made by us may prove to be incorrect. This may occur as a result of inaccurate assumptions or as a consequence of known or unknown risks and uncertainties. Many factors discussed in this Quarterly Report on Form 10-QSB, certain of which are beyond our control, will be
important in determining our future performance. Consequently, actual results may differ materially from those that might be anticipated from forward-looking statements. In light of these and other uncertainties, you should not regard the inclusion of a forward-looking statement in this Quarterly Report on Form 10-QSB or other public communications that we might make as a representation by us that our plans and objectives will be achieved, and you should not place undue reliance on such forward-looking statements.

We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. However, your attention is directed to any further disclosures made on related subjects in our subsequent annual and periodic reports filed with the SEC on Forms 10-KSB, 10-QSB and 8-K and Proxy Statements on Schedule 14A.

Unless the context requires otherwise, references to we, us, our, the Company and Ever-Glory refer specifically to Ever-Glory International Group, Inc. and its subsidiaries.



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PART I - FINANCIAL INFORMATION



Item 1  Financial Statements (Unaudited)

EVER-GLORY INTERNATIONAL GROUP, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEET

AS OF SEPTEMBER 30, 2006 (UNAUDITED)



ASSETSCURRENT ASSETSCash and cash equivalents

$
1,076,947Accounts receivable, net


384,088Inventories, net


326,403Value added tax recoverable


19,010Other receivables and prepaid expenses


91,138Total Current Assets


1,897,586PROPERTY AND EQUIPMENT, NET


7,687,851LAND USE RIGHTS, NET


2,305,733TOTAL ASSETS

$
11,891,170LIABILITIES AND STOCKHOLDERS' EQUITYCURRENT LIABILITIESAccounts payable

$
265,563Accounts payable - related companies


110,046Other payables and accrued liabilities


465,539Due to a related company


3,574,891Other tax payables


133,127Total Current Liabilities


4,549,166COMMITMENTS AND CONTINGENCIES


-STOCKHOLDERS' EQUITYPreferred stock ($.0001 par value, authorized 5,000,000 shares,Nil shares issued and outstanding)


-Series A Convertible Preferred Stock ($.0001 par value,authorized 10,000 shares, 7,883 shares issued and outstanding)


1Common stock ($.0001 par value, authorized 100,000,000 shares,issued and outstanding 19,971,758 shares)


1,997Additional paid-in capital


1,263,749Retained earningsUnappropriated


3,792,728Appropriated


2,012,041Accumulated other comprehensive income


271,488Total Stockholders' Equity


7,342,004TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

$
11,891,170

The accompanying notes are an integral part of these condensed consolidated financial statements

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EVER-GLORY INTERNATIONAL GROUP, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND 
COMPREHENSIVE INCOME

(UNAUDITED)

For the three


For the three



For the nine



For the ninemonths ended


months ended



months ended



months endedSeptember 30, 2006


September 30, 2005



September 30, 2006



September 30, 2005NET SALESTo related parties

$
53,173

$
-

$

66,192

$

512,401To third parties


6,067,091


4,060,499



17,462,947



6,367,969Total net sales


6,120,264


4,060,499



17,529,139



6,880,370COST OF SALESFrom related parties


(751,639)


(160,594)



(2,708,481)



(1,687,246)From third parties


(4,144,981)


(3,273,221)



(11,690,591)



(4,015,904)Total Cost of Sales


(4,896,620)


(3,433,815)



(14,399,072)



(5,703,150)GROSS PROFIT


1,223,644


626,684



3,130,067



1,177,220OPERATING EXPENSESSelling expenses


118,435


23,470



231,278



56,935Export quota charges


4,984


-



151,458



-Professional fees


79,105


80,795



425,625



293,295General and administrative expenses


257,815


75,585



580,949



165,874Depreciation and amortization


21,179


13,437



34,072



20,425Total Operating Expenses


481,518


193,287



1,423,382



536,529INCOME FROM OPERATIONS


742,126


433,397



1,706,685



640,691OTHER INCOME (EXPENSES)Interest income


2,295


114,106



3,500



114,520Interest expenses


(59,544)


(2,921)



(117,674)



(4,486)Other income


6,194


-



18,277



-Other expenses


-


(2,336)



-



(6,205)Total
	Other Income (Expenses), net


(51,055)


108,849



(95,897)



103,829INCOME BEFORE INCOME TAX EXPENSE
691,071


542,246



1,610,788



744,520INCOME TAX EXPENSE


(113,352)


(119,269)



(255,883)



(222,607)NET INCOME


577,719


422,977



1,354,905



521,913OTHER COMPREHENSIVE INCOMEForeign currency translation gain


-


21,415



238,060



21,415COMPREHENSIVE INCOME

$
577,719

$
444,392

$

1,592,965

$

543,328Net income share-basic

$
0.03

$
0.05

$

0.07

$

0.06Net income share-diluted

$
0.01

$
0.05

$

0.02

$

0.06Weighted average number of sharesoutstanding during the period-basic


19,971,758


8,876,427



19,971,758



8,083,270Weighted average number of sharesoutstanding during the period-diluted


79,886,746


8,876,427



79,886,746



8,083,270The accompanying notes are an integral part of
these condensed consolidated financial statements











































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EVER-GLORY INTERNATIONAL GROUP, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005.

(UNAUDITED)


For the nine months


For the nine monthsended September 30, 2006


ended September 30, 2005CASH FLOWS FROM OPERATING ACTIVITIESNet income

$
1,354,905

$
521,913Adjusted to reconcile net income to cash (used in) provided

            by operating activities:Stock issued for services


-


42,045Depreciation and amortization - cost of sales


153,278


98,806Depreciation and amortization


34,072


20,425Loss on disposal of fixed assets


2,467


-Changes in operating assets and liabilities(Increase)decrease in:Accounts receivable


(147,799)


161,395Accounts receivable - related companies


-


(2,064,854)Other receivables and prepaid expenses


(70,183)


(203,343)Inventories


69,804


164,249Due from a related company


-


2,350,500Increase (decrease) in:Accounts payable


181,263


(48,761)Accounts payable - related companies


(376,429)


78,670Other payables and accrued liabilities


(589,403)


(1,307,712)Value added tax payables


(68,286)


29,535Income tax and other tax payables


192,148


32,436Net cash provided by (used in) operating activities


735,837


(124,696)CASH FLOWS FROM INVESTING ACTIVITIESPurchase of property and equipment


(4,156,750)


(650,309)Net cash used in investing activities


(4,156,750)


(650,309)CASH FLOWS FROM FINANCING ACTIVITIESDue to a related company


3,574,891


-Proceed from note payable


-


616,523Repayment of note payable


(611,247)


-Net cash provided by financing activities


2,963,644


616,523EFFECT OF EXCHANGE RATE ON CASH


66,971


21,415NET DECREASE IN CASH AND CASH EQUIVALENTS


(390,298)


(137,067)CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD


1,467,245


160,612CASH AND CASH EQUIVALENTS AT END OF PERIOD

$
1,076,947

$
23,545SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATIONCash paid during the period for:Interest expenses

$
26,491

$
4,486Cash paid during the period for:Income taxes

$
227,487

$
252,040

The accompanying notes are an integral part of these condensed consolidated financial statements



7




Table of Contents



EVER-GLORY INTERNATIONAL GROUP, INC.

AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF SEPTEMBER 30, 2006 (UNAUDITED)




NOTE 1.
        ORGANIZATION AND BASIS OF PRESENTATION




Ever-Glory International Group, Inc. (EGLY) was incorporated in Florida on October 19, 1994.



Perfect Dream Limited (Perfect Dream) was incorporated in the British Virgin Islands on July 1, 2004. Goldenway Nanjing Garments Company Limited (Goldenway), a Peoples Republic of China (PRC) limited liability company was incorporated on December 31, 1993. Goldenway is principally engaged in the manufacturing and sale of garments.



During 2004, Perfect Dream acquired 100% of Goldenway for a cash consideration of $1,338,404. The transaction was accounted for as a reorganization of entities under common control as the companies were beneficially owned by principally identical stockholders and shared common management.



On July 29, 2005, EGLY entered into an Agreement and Plan of Reorganization with the stockholders of Perfect Dream whereby the stockholders of Perfect Dream exchanged 100% of their shares of Perfect Dream for 7,673,325 shares of restricted common stock of EGLY.



On completion of the reorganization, the merger of EGLY and Perfect Dream was treated for accounting purposes as a capital transaction and recapitalization by Perfect Dream (the accounting acquirer) and reorganization by EGLY (the accounting acquiree). The financial statements have been prepared as if the reorganization had occurred retroactively.



Accordingly, the financial statements include the following:




(1)
        The balance sheet consists of the net assets of the acquirer at historical cost and the net assets of the acquiree at historical cost.





(2)
        The statement of operations includes the operations of the acquirer for the periods presented and the operations of the acquiree from the date of the merger.




EGLY, Perfect Dream and Goldenway are hereinafter referred to as (the Company).



The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.



In the opinion of management, the unaudited condensed consolidated financial statements contain all adjustments consisting only of normal recurring accruals considered necessary to present fairly the Companys financial position at September 30, 2006, the results of operations for the three-month and nine-month periods ended September 30, 2006 and 2005, and cash flows for the nine months ended September 30, 2006 and 2005. The results for the period ended September 30, 2006 are not necessarily indicative of the results to be expected for the entire fiscal year ending December 31, 2006.




NOTE 2.
        PRINCIPLES OF CONSOLIDATION




The accompanying September 30, 2006 unaudited condensed consolidated financial statements include the accounts of EGLY, its 100% owned subsidiary Perfect Dream and its 100% owned subsidiary Goldenway. All significant inter-company balances and transactions have been eliminated in consolidation.


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EVER-GLORY INTERNATIONAL GROUP, INC.

AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF SEPTEMBER 30, 2006 (UNAUDITED)




NOTE 3.
        USE OF ESTIMATES




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




NOTE 4.
        CASH AND CASH EQUIVALENTS




For purpose of the unaudited condensed consolidated statements of cash flows, cash and cash equivalents include cash on hand and demand deposits with a bank with a maturity of less than 3 months.




NOTE 5.
        FAIR VALUE OF FINANCIAL INSTRUMENTS




Statement of Financial Accounting Standards No. 107, Disclosure About Fair Value of Financial Instruments, requires certain disclosures regarding the fair value of financial instruments. Trade accounts receivable, accounts payable, and accrued liabilities are reflected in the financial statements at fair value because of the short-term maturity of the instruments. As these estimates are subjective in nature, involving uncertainties and matters of significant judgment, they cannot be determined with precision. Changes in assumptions can significantly affect estimated fair values.



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

The Companys major operation is in the PRC, which may give rise to significant foreign currency risks from fluctuations and the degree of volatility of foreign exchange rates between the United States dollars (US$) and the Chinese Renminbi (RMB). On July 21, 2005, the PRC let the RMB fluctuate thereby ending its decade-old valuation peg to the US$. The new RMB rate reflects an approximately 2% increase in value against the US$. Historically, the PRC government has benchmarked the RMB exchange ratio against the US$, thereby mitigating the associated foreign currency exchange rate fluctuation risk. The Company does not believe that its foreign currency exchange rate fluctuation risk is significant, especially if the PRC government continues to benchmark the RMB against the US$.




NOTE 6.
        REVENUE AND COST RECOGNITION




The Company recognizes revenue upon delivery for local sales and upon shipment of the products for export sales, at which time title passes to the customer provided that: there are no uncertainties regarding customer acceptance; persuasive evidence of an arrangement exists; the sales price is fixed and determinable; and collectability is deemed probable.
Transportation and unloading charges and product inspection charges are included in selling expenses.
Cost of goods sold includes the appropriate materials purchasing, receiving and inspection costs, inbound freight where applicable, direct labor cost and manufacturing overheads consistent with the revenue earned.





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EVER-GLORY INTERNATIONAL GROUP, INC.

AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF SEPTEMBER 30, 2006 (UNAUDITED)




NOTE 7.
        FOREIGN CURRENCY TRANSACTIONS




EGLY, Perfect Dream and Goldenway maintain their accounting records in their functional currencies of US$, US$ and RMB respectively.



Foreign currency transactions during the year are translated to the functional currency at the approximate rates of exchange on the dates of transactions. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the approximate rates of exchange at that date. No-monetary assets and liabilities are translated at the rates of exchange prevailing at the time the asset or liability was acquired. Exchange gains or losses are recorded in the statement of operations.




NOTE 8.
        FOREIGN CURRENCY TRANSLATION




The financial statements of Goldenway (whose functional currency is the RMB) are translated into US$ using the closing rate method. The balance sheet items are translated into US$ using the exchange rates at the respective balance sheet dates. The capital and various reserves are translated at historical exchange rates prevailing at the time of the transactions while income and expenses items are translated at the average exchange rate for the year. All exchange differences are recorded within equity. Translation gain for the periods ended September 30, 2006 and 2005 were $238,060 and $21,415 respectively.




NOTE 9.
        COMPREHENSIVE INCOME




The foreign currency translation gain or loss resulting from translation of the financial statements  expressed in RMB to United States Dollar is reported as other comprehensive income in the statements of operations and stockholders equity.




NOTE 10.
        RECLASSIFICATION





Certain 2005 balances in the Statement of Operation have been reclassified to confirm with 2006 presentation.




NOTE 11.
        INCOME PER SHARE




Basic earnings per share are computed by dividing income available to common stockholders by the weighted average number common shares outstanding during the period. Diluted earnings per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive.




NOTE 12.
        SEGMENTS




The Company adopted Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information (SFAS 131). SFAS establishes standards for operating information regarding operating segments in annual financial statements and requires selected information for those segments to be presented in interim financial reports issued to stockholders. SFAS 131 also establishes standards for related disclosures about products and services and geographic areas. Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision making group, in making decision how to allocate resources and assess performance. The information disclosed herein, materially represents all of the financial information related to the
Companys principal operating segments. The Company operates in a single segment.





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EVER-GLORY INTERNATIONAL GROUP, INC.

AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF SEPTEMBER 30, 2006 (UNAUDITED)




NOTE 13.
        NET INCOME PER SHARE




The following is net income per share information at September 30:2006


2005Net income
$
1,354,905

$
521,913Basic weighted-average common stock outstanding

19,971,758


8,083,270Effect of dilutive securitiesSeries A Convertible
Preferred Stock

59,914,988


-Diluted weighted-average common stock outstanding

79,886,746


8,083,270Net income per share - basic
$
0.07

$
0.06Net income per share - diluted
$
0.02

$
0.06




NOTE 14.
        STOCKHOLDERS EQUITY





(A)
        Series A Convertible Preferred stock



The Company authorized 10,000 shares of Series A Convertible Preferred Stock, with a par value of $0.0001 per share.



Each share of the Series A Convertible Preferred Stock had upon issuance the same voting, dividend and liquidation rights as 1,000 shares of common stock and will convert back into common stock at such time as the Company is able to increase the number of authorized shares of common stock. Effective November 8, 2005, the Company effected a 7.6-for-1 forward stock split on the remaining outstanding 2,627,861 shares, which increased the number of outstanding shares to 19,971,743 shares. Under the adjustment provisions of the Series A Convertible Preferred Stock, the conversion, voting, dividend and liquidation ratios of the Series A Convertible Preferred Stock were all increased by the forward stock split from 1,000 for one to 7,600 for one (a total of 59,914,988 shares of common stock fully converted). The Series A Convertible Preferred Stock will be converted back
into common stock at such time as the number of shares of authorized common stock is increased to 100,000,000 or more via a proposed amendment to the Articles of Incorporation. The relative voting and equity ownership of the Companys stockholders was unchanged by the exchange for Series A Convertible Preferred Stock and the forward stock split. If all the Series A Convertible Preferred Stock were converted as of September 30, 2006, there would be 79,886,746 outstanding shares of common stock.




(B)
        Appropriated retained earnings



The Company is required to make appropriations to reserves funds, comprising the statutory surplus reserve, statutory public welfare fund and discretionary surplus reserve, based on after-tax net income determined in accordance with generally accepted accounting principles of the Peoples Republic of China (the PRC GAAP). Appropriation to the statutory surplus reserve should be at least 10% of the after tax net income determined in accordance with the PRC GAAP until the reserve is equal to 50% of the entities registered capital. Appropriations to the discretionary surplus reserve are made at the discretion of the Board of Directors.



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Table of Contents


EVER-GLORY INTERNATIONAL GROUP, INC.

AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF SEPTEMBER 30, 2006 (UNAUDITED)




NOTE 15.
        RELATED PARTY TRANSACTIONS




During the nine months ended September 30, 2006 and 2005, the Company sub-contracted certain manufacturing work valued at $2,619,464 and 1,687,246, respectively to certain of its related companies. The Company provided the raw materials to the sub-contractor who charged the Company a fixed labor charge for the sub-contracting work.



During the nine months ended September 30, 2006 and 2005, the Company purchased raw materials of $89,017 and $Nil, respectively from certain related companies.



As of September 30, 2006, the Company owed $110,046 to related companies for sub-contracting work done and raw materials purchased.



During the nine months ended September 30, 2006 and 2005, the Company sold products and provided sub-contracting services totaling $66,192 and 512,401, respectively to certain related companies.



A related company provides treasury services to the Company free of service charges by negotiating all of the Companys letters of credit and receiving proceeds thereon and paying creditors for purchases made by the Company.



As of September 30, 2006, the Company owed a related company $3,574,891 for advances made. Interest charged on these advance was 6% per annum. During 2006, the Company paid interest of $91,183 to a related company.



During 2006, the Company received rental income of $14,063 for the lease of factory space to a related company.




NOTE 16.
        COMMITMENTS





(A)
        Employee Benefits



The full time employees of the Company are entitled to employee benefits including medical care, welfare subsidies, unemployment insurance and pension benefits through a Chinese government mandated multi-employer defined contribution plan. The Company is required to accrue for those benefits based on certain percentages of the employees salaries and make contributions to the plans out of the amount accrued for medical and pension benefits. The Chinese government is responsible for the medical benefits and the pension liability to be paid to these employees.




(B)
        Commitments



According to the Articles of Association of Goldenway, Goldenway has to fulfill registered capital requirements of $17,487,894 within three years from February 2, 2005. As of September 30, 2006, the Company has fulfilled $2,630,000 of its registered capital requirements and has a registered capital commitment of $14,857,894, which is payable by February 1, 2008.



At September 30, 2006, the Company had commitments for capital projects in progress of approximately $2,510,000.



12




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EVER-GLORY INTERNATIONAL GROUP, INC.

AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF SEPTEMBER 30, 2006 (UNAUDITED)




NOTE 17.
        CONTINGENCIES


The Company accounts for loss contingencies in accordance with SFAS 5 Accounting for Loss Contingencies, and other related guidance. Set forth below is a description of certain loss contingencies as of September 30, 2006 and managements opinion as to the likelihood of loss in respect of each loss contingency.

On April 17, 2006, Mark B. Aronson filed a Complaint against the Company in the United States Court of common pleas of Allegheny County Pennsylvania. The action alleges that Company violated the Pennsylvania Unsolicited Telecommunication Advertisement Act to spam emails to plaintiff to purchase its shares of common stock. The action seeks an award of damages in excess of $12,100. The Company denies that it was a party to such email spamming activities and intends to vigorously defend its legal position.

In September 2006, the Company filed responses to plaintiff's interrogatories
with the court of common pleas of Allegheny County in Pennsylvania to vigorously
defend Mr. Aronson's accusation that the company has used faxes to promote its
stock.

Accordingly, no provision has been made to the above claim as of September 30, 2006.




NOTE 18.
        CONCENTRATIONS AND RISKS


During 2006, 100% of the Companys assets are located in China.



The Company principally relied on four customers for its revenue during 2006 and on two customers  for its revenue during 2005, details of which are as follows:

Customer A

Customer B

Customer C

Customer DDuring2006

24%

20%

16%

12%2005

24%

16%

At of September 30, 2006, accounts receivable to those customers totaled $294,939.

The Company relied on one supplier for`17% and 38% respectively for its raw
materials during 2006 and 2005.



The following is geographic information of the Companys revenue earned for the period ended   September 30:

2006


2005Europe
$
11,253,387

$
3,389,643United States

3,912,712


1,214,979Japan

937,919


1,550,232The People Republic of China

940,378


725,516Others

484,743


-$
17,529,139

$
6,880,370





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EVER-GLORY INTERNATIONAL GROUP, INC.

AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF SEPTEMBER 30, 2006 (UNAUDITED)






NOTE 19.
        SUBSEQUENT EVENT




On June 26, 2006, The Companys wholly owned subsidiary, Perfect Dream entered into an Agreement for the purchase and sale of stock (the Agreement) with Ever-Glory Enterprises (HK) Limited (Seller) and Nanjing Catch-Luck Garments Co, Limited (Catch-Luck) for the sale of all of Sellers ownership interest in Catch-Luck to Perfect Dream (the Transaction). Pursuant to the terms of the Agreement, Perfect Dream will pay to the Seller an amount of $600,000 in cash and common stock of Ever-Glory International Group Inc. equivalent to $9,400,000 on the date of the transfer within 90 days of the closing of the transaction.



On August 31, 2006, PerfectDream entered into an amendment to the Agreement (the Amendment) whereupon the terms of payment on the purchase consideration was amended as follows:




1.
        Perfect Dream will pay to the Seller an amount of $600,000 in cash and common stock of Ever-Glory equivalent to $3,400,000 on the date of the transfer within 90 days of the closing of the transaction. The number of shares of common stock to be issued to the Seller in satisfaction of the Stock Purchase Price shall be calculated based on the preceding 30 day-average high and low price for the Companys common stock as quoted on the Over-the-Counter Bulletin Board as of the date of the closing;





2.
        At the end of the first full fiscal year ending December 31, 2006 in which the Company generates gross revenues of at least $19,000,000 and net profit of at least $1,500,000, Perfect Dream will pay to Seller that number of shares of Ever-Glorys common stock having an aggregate fair market value of $3,000,000; and





3.
        At the end of the second full fiscal year ending
December 31, 2007 in which Catch-Luck generates gross revenues of at
least $19,000,000 and net profit of $1,500,000, Perfect Dream will
issue to the Seller that number of shares of Ever-Glory's common
stock having an aggregate fair market value of $3,000,000.




The Transaction is expected to close in the fourth quarter.



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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.



Overview



Ever-Glory and its subsidiaries (the Company) manufacture apparel for men, women and children for primarily middle to high-grade well-known casual wear, outerwear and sportswear brands and for a variety of companies. Most of our products are exported to Japan, the United Kingdom, Germany, Denmark, France and the United States. The Companys customers include large retailers and well-known brands. The Company was formed as a result of a merger of Andean Development Corporation, a corporation organized under the laws of the State of Florida (Andean); and Perfect Dream Limited, a corporation organized under the laws of British Virgin Islands (Perfect Dream). Andean was formed on October 19, 1994 and engaged in the business of providing engineering and project management services and electrical and mechanical equipment for energy and private works projects. As of
September 30, 2005, Andean had zero assets and liabilities of $57,000. Perfect Dream was incorporated on July 1, 2004 in the British Virgin Islands. In December of 2004, Perfect Dream acquired 100% of Goldenway Nanjing Garments Co., Ltd (Goldenway).



Goldenway is a limited liability company, which was incorporated in the Peoples Republic of China (the PRC) on December 31, 1993. Until December 2004, Goldenway was a subsidiary of Jiangsu
Ever-Glory International Group Corporation ("Jiangsu Ever-Glory"). After its acquisition by Perfect Dream, Goldenway changed its status to that of a wholly foreign owned enterprise and increased its registered capital from $2,512,106 to $20,000,000. The increased registered capital will be paid-in in installments within three years of the issuance of Goldenways updated business license. As of September 30, 2006, the Company has paid $2.63million of its registered capital requirements. The remaining $14.86 million is due on February 1, 2008.



In the nine months ended September 30, 2006, approximately64% of the Companys revenues came from customers in Europe, 22%from customers in the United States, 5% from customers in Japan, 5% from customers in China, 3% from customers in other countries. In the nine months ended September 30, 2006, four customers represented approximately 72% of the Companys sales. Management believes that the relationship with these customers is good.



The Company purchases the majority of its raw materials directly from numerous local fabric and accessories suppliers. The Company may also purchase finished goods from other contract manufacturers. One supplier represented approximately 17 % of the Companys raw materials purchases in the nine months ended September 30, 2006.The Company has not experienced difficulty in obtaining raw materials essential to its business and management believes that the relationship with its suppliers is good.



The Company currently operates one factory in the Nanjing Jiangning Economic and Technological Development Zone of mainland, China. The factory covers an area of 10,000 square meters and is equipped with highly advanced, state-of-the-art equipment. The factory employs a staff of over 400 people with an annual production capacity of over 700,000 pieces. All of the Companys work force is non-union, and the Company considers its relations with its employees to be satisfactory.



The Company has put a deposit on 112,442 square meters of land in Nanjing Jiangning Economic and Technological Development Zone, which includes an existing facility of 26,629 square meters, which includes manufacturing and office space. On April 7, 2006, the Company completed the purchase procedures with the local government of Nanjing City. On June 24, 2006, the Company obtained the title to the land for the land use rights for 50 years. The Company expects the new manufacturing facility to be in full production by the end of March 2007 which will replace the Companys current manufacturing facility.



In 2006, all Chinese manufacturers of certain garments were subject to aggregate export quotas, or limitations, to the United States and Europe. Although certain of the Companys apparel products fall within the categories subject to the quotas with respect to exports to the United States and Europe, the Chinese government allocated a portion of the aggregate export quota to the Company based upon the amount of product that the Company exported in the prior year. The imposition of such quotas did not have a material affect on the Companys net sales, although it did impact its net margin. See Results of Operations below. As a result of the Companys prior export performance, it was awarded a sufficient portion of the export quotas to enable it to increase its sales to customers in Europe and the U.S. despite the reinstitution of export quotas. In order to increase the Companys



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allocation of future export quotas, however, the Company accepted more orders for lower margin products, which had an adverse affect on the Companys gross margins. The Company believes that its customer mix and its ability to adjust the types of apparel it manufactures will mitigate its exposure to such trade restrictions in the future.



Under the laws of the PRC, as a wholly foreign owned enterprise, in the fiscal year ended December 31, 2004, Goldenway was entitled to a 50% reduction in its income tax rate, from 24% to 12%. In the fiscal year ended December 31, 2005, Goldenway as a wholly foreign owned enterprise that exported over 70% of its products outside the PRC, is eligible for a 50% reduction in its tax rate from 24% to 12%. From 2006, Goldenway has an income tax rate of 12%.



The Company markets and sells its products through a combination of international distributors and direct sales primarily in Europe, the United States and in Japan.



Our cost of net revenues consists of the appropriate materials purchasing, receiving and inspection costs, inbound freight where applicable, garment finishing fees, direct labor, and manufacturing overhead, including the Companys contributions to a government mandated multi-employer defined contribution plan, packing materials and others. In addition, from time to time we subcontract manufacturing, which costs are included in our cost of net revenues.



Selling expenses consist primarily of transportation, unloading charges and product inspection charges.



General and administrative expenses consist primarily of salaries and related expenses for executive, finance, accounting, facilities and human resources personnel, office expenses and professional fees.



Results of Operations



Three Months Ended September 30, 2006 Compared To Three Months Ended September 30, 2005



Revenues, Cost of Revenues and Gross Margin



Revenues for the quarter ended September 30, 2006 were $6,120,264, an increase of 51 % from $4,060,499 for same quarter in 2005. Our increase in revenues was primarily attributable to an overall increase in sales to customers in Europe and the U.S. As of September 30, 2006, sales to customers in Europe increased by $2,947,809or 154%, sales to customers in the U.S. increased by $47,681 or 6% as compared to 2005.



Cost of revenues for the quarter ended September 30, 2006 was $4,896,620, an increase of $1,462,805 from $3,433,815 for the quarter ended September 30, 2005. Cost of revenues primarily consisted of the purchase cost of materials, receiving and inspection costs, inbound freight, direct labor cost and manufacturing overheads. As a percentage of revenues, cost of revenues decreased to approximately 80% for the three months ended September 30, 2006 from approximately 85% for the quarter ended September 30, 2005. Consequently, gross margin as a percentage of revenues increased to approximately 20% for the three months ended September 30, 2006 from approximately 15% for the three months ended September 30, 2005. The decrease in costs of revenues in a percentage of revenues and the increase of gross margin
were primarily attributable to a 2.58% decrease in the purchase cost of materials and a 1.28% decrease in direct labor cost.



Selling, General and Administrative Expenses



Selling expenses as of September 30, 2006 increased by 404% from $23,470 in 2005 to $118,435 in 2006. The increase in selling expenses was mainly attributable to an increase in transportation and logistic costs as well as the product inspection charges.



Export quota charges as of September 30, 2006 and 2005 were $4,984 and $ nil respectively. The increase of the export quota charges was due to the reinstallment of the export quotas on hot categories to EU and United States.



General and Administrative expenses totaled $257,815 for the three months ended September 30, 2006, an increase of $182,230 from $75,585 for the three months ended September 30, 2005. The increase was attributable to the expansion of our business which required additional costs such as administrative and management salaries.



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Legal and Professional fees associated with our trading activities on the OTCBB market totaled $79,105 for the three months ended September 30, 2006, an decrease of $1,690 from $80,795 for the three months ended September 30, 2005. The decrease was mainly due to the decrease in stock issued for services.



Income before taxes for the three months ended September 30, 2006 was $691,071, an increase of $148,825 from $542,246 for the three months ended September 30, 2005 which was due largely to the increase of our net sales.



Nine months Ended September 30, 2006 Compared To Nine months Ended September 30, 2005



Revenues, Cost of Revenues and Gross Margin



Revenues for the nine months ended September 30, 2006 were $ 17,529,139, an increase of 155% from $6,880,370 for same period in 2005. Our increase in revenues was primarily attributable to an overall increase in sales to our major customers in Europe, U.S. and China.  For the nine months ended September 30, 2006, sales to customers in Europe increased by $7,863,744 or 232 %, sales to customers in the U.S. increased by $ 2,697,733 or 222 %, sales to customers in China increased by $214,862 or 30 % as compared to the same period in 2005.



Cost of revenues for the nine months ended September 30, 2006 was $14,399,072 as compared to cost of revenues of $5,703,150 for the same period in 2005, an increase of $8,695,922. As a percentage of revenues, cost of revenues decreased slightly to approximately 82% for the nine months ended September 30, 2006 from approximately 83% for the same period in September 30, 2005. Consequently, gross margin as a percentage of revenues increased slightly to approximately 18% for the nine months ended September 30, 2006 from approximately 17% for the nine months ended September 30, 2005. The decrease in costs of sales as a percentage of revenues and the increase of gross margin were primarily attributable to the decrease in the purchase cost of material and direct labor cost.



Selling, General and Administrative Expenses



Selling expenses for the nine months ended September 30, 2006 was
$231,278 as compared to selling expenses of $56,935 for the same period in 2005, an increase of $174,343, or 306 %. The increase in selling expenses was mainly attributable to an increase in transportation and logistic costs as well as the product inspection charges.



Export quota charges for the nine months ended September 30, 2006 and 2005 were $151,458 and $nil   respectively. The increase of the export quota charges was due to the reinstallment of the export quotas on hot categories to EU and United States.



General and Administrative expenses totaled $580,949 for the nine months ended September 30, 2006, an increase of $415,075 from $165,874 for the nine months ended September 30, 2005. The increase was attributable to the expansion of our business which required additional costs such as administrative and management salaries.



Legal and Professional fees associated with our trading activities on the OTCBB market totaled $425,625 for the nine months ended September 30, 2006,
an increase of $132,330 from $293,295 for the nine months ended September 30,
2005. The increase was mainly associated with the fees paid for investor
relations, public relations and legal services.



Income before taxes for the nine months ended September 30, 2006 was $1,610,788, an increase of $866,268 from $744,520 for the nine months ended September 30, 2005. The increase was mainly attributable to the increase of our net sales.



LIQUIDITY AND CAPITAL RESOURCES



As of September 30, 2006, the Company had cash and cash equivalents of $1,076,947, other current assets of $820,639 and current liabilities of $4,549,166. To date, the Company has financed its operations primarily from operations and cash flow from operations is expected to continue to be the Companys primary source of funds to finance its short-term cash needs.



Net cash provided by operating activities as of September 30, 2006 was $735,837, compared with $(124,696) for the same period in 2005. The Companys primary source of operating cash flow was our net income. The



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increase in our net cash was mainly attributable to a significant increase in our net income of $832,992 for the nine months ended September 30, 2006 from the same period in 2005.



Net cash used in investing activities was approximately $4,156,750 as of September 30, 2006, compared with $650,309 for the same period in 2005. The increase was primarily attributable to construction costs of approximately $4 million associated with our new office building and factory.



Net cash provided by financing activities as of September 30, 2006 was $2,963,644, compared with same period in 2005 of $616,523. The increase was attributable to advances from a related company.



Capital Commitments



The Company has a continuing program for the purpose of improving its manufacturing quality. As of September 30, 2006, the Company had commitments for capital projects in progress of approximately $2.5 million.While pursuant to the Articles of Association of Goldenway, registered capital of approximately $17.49 million must be paid into Goldenway by February 1, 2008. The increased registered capital will be paid-in in installments within three years of the issuance of Goldenways updated business license. As of September 30, 2006, the Company has paid $2.63 millionof its registered capital requirements. The remaining$14.86 million is due on February 1, 2008.



The Company has put a deposit on 112,442.3 square meters of land in Nanjing Jiangning Economic and Technological Development Zone, which includes an existing manufacturing facility of 26,629 square meters. On April 7, 2006, the Company completed the purchase procedures with the local government of Nanjing City. On June 24, 2006, the company was given title to the land for the land use rights of 50 years. The Company expects the new manufacturing facility to be in production by the end of March 2007, which will replace the Companys current manufacturing facility. The Company expects to invest approximately$7 million by the first quarter of 2007for improvements to this new facility, which the Companys expects to fund from cash from operations.



Uses of Liquidity



The Companys cash requirements as of September 30, 2006 are primarily to fund operations and to complete the construction of its new manufacturing facility in Nanjing. The Company also plans to acquire additional manufacturing capacity in the future to strengthen and stabilize its manufacturing base. The Company is also looking to establish its own distribution and logistics channels in overseas markets and to launch its own brand directly to the Chinese market. In addition, the Company will need to make the required capital contributions to its subsidiary, Goldenway.



On August 23, 2005, the Companys subsidiary, Goldenway Nanjing Garments Company Limited, entered into a short-term loan agreement with Shanghai Pudong Development Bank Nanjing Branch pursuant to which we borrowed approximately $625,000 at an interest rate of 6.138% per annum calculated on the adjusted exchange rate of 8 compared to the 8.18 in 2005. The loan matures on August 23, 2006. The funds were used for the purchase of raw materials. On August 23, 2006, the loan was paid off to the bank by the Company.



Sources of Liquidity



The Companys primary source of liquidity for its short-term cash needs is expected to be cash flow generated from operations, and cash and cash equivalents currently on hand. The Company believes that will be able to borrow additional funds if needed.



The Company believes its cash flow from operations together with its cash and cash equivalents currently on hand will be sufficient to meet its working capital, capital expenditure and other commitments through December 2006. For its long-term cash needs, the Company is currently considering a number of different financing opportunities including debt and equity financing. Adequate funds may not be available on terms acceptable to it. If additional funds are raised through the issuance of equity securities, dilution to existing stockholders may result. However, the Company does not believe that failure to obtain any such financing will have a material adverse effect on its financial position, results of operations and cash flows. If funding is insufficient at any time in the future, the Company may be unable to accelerate its business expansion and growth on a faster and higher standard.



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As of September 30, 2006, the Companys subsidiary, Goldenway, had no outstanding borrowings in the bank.



Foreign Currency Translation Risk.



The Companys major operations are in the PRC, which may give rise to significant foreign currency risks from fluctuations and the degree of volatility of foreign exchange rates between the United States dollar and the Chinese Renminbi. Sales of the Companys products are in dollars. During 2003 and 2004 the exchange rate of RMB to the dollar remained constant at 8.26 RMB to the dollar. On July 21, 2005, the Chinese government adjusted the exchange rate from 8.26 to 8.09 RMB to the dollar. As a result, orders received prior to the adjustment were at prices based on the prior exchange rate, which negatively impacted our gross margins for the year ended December 31, 2005. We now negotiate price adjustments with most of our customers, which we believe will reduce our exposure to exchange rate fluctuations in the future. However, if in the future the Chinese government should decide to adjust the RMB
to dollar exchange rate unexpectedly, our gross margins and results of operations and cash flows could be adversely affected.



The financial statements of Goldenway (whose functional currency is the RMB) are translated into U.S. Dollars using the closing rate method. The balance sheet items are translated into U.S. Dollars using the exchange rates at the respective balance sheet dates. The capital and various reserves are translated at historical exchange rates prevailing at the time of the transactions while income and expenses items are translated at the average exchange rate for the year. All exchange differences are recorded within equity. Translation gain for the periods ended September 30, 2006 and 2005 were $238,060 and $21,415 respectively.



RISK FACTORS



Our business is subject to certain risks, and we want you to review these risks while you are evaluating our business and our historical results. Please keep in mind that any of the following risks discussed below and elsewhere in this Quarterly Report could materially and adversely affect us, our operating results, our financial condition and our projections and beliefs as to our future performance. As such, our results could differ materially from those projected in our forward-looking statements.



Risks Relating to the Industry in Which We Compete.



Our sales are influenced by general economic cycles.



Apparel is a cyclical industry that is dependent upon the overall level of consumer spending. Our customers anticipate and respond to adverse changes in economic conditions and uncertainty by reducing inventories and canceling orders. As a result, any substantial deterioration in general economic conditions, increases in energy costs or interest rates, acts of war, acts of nature or terrorist or political events that diminish consumer spending and confidence in any of the regions in which we compete, could reduce our sales and adversely affect our business and financial condition.



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



We face a variety of competitive challenges from other apparel manufacturers both in China and elsewhere. Some of these competitors have greater financial and marketing resources than we do and may be able to adapt to changes in consumer preferences or retail requirements more quickly, devote greater resources to the marketing and sale of their products or adopt more aggressive pricing policies than we can. As a result, we may not be able to compete successfully with them.



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



The worldwide apparel industry is characterized by constant product innovation due to changing consumer preferences and by the rapid replication of new products by competitors. As a result, our success depends in large part on our ability to continuously and rapidly respond to customer requirements for innovative and stylish products at a competitive pace, intensity, and price. Failure on our part to regularly and rapidly



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respond to customer requirements could adversely affect our ability to retain our existing customers or to acquire new customers which would limit our sales growth.



The worldwide apparel industry is subject to ongoing pricing pressure.



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





        require us to reduce wholesale prices on existing products;




        result in reduced gross margins across our product lines;




        increase pressure on us to further reduce our production costs and our operating expenses.




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



Increases in the price of raw materials or their reduced availability could increase our cost of goods and decrease our profitability.



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



One supplier represented approximately 17% of the Companys raw materials purchases in the nine months ended September 30, 2006, two suppliers represented approximately 12% and 10%, respectively of the Companys raw materials purchases in the fiscal year ended December 31, 2005, and one supplier represented approximately 17% of the Companys raw materials purchases in the fiscal year ended December 31, 2004. We do not have long-term written agreements with any of these suppliers and do not anticipate entering into any such agreements in the near future. However, we always execute a written agreement for each order placed with our suppliers. We do not believe that loss on
any of these suppliers would have a material adverse affect on our ability to obtain finished goods or raw materials essential to its business because we believe that we can locate other suppliers in a timely manner.



Risks Relating to Our Business



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



In the nine months ended September 30, 2006, four customers represented approximately 72% of the Companys sales.Net sales to our ten largest customers totaled approximately 81% and 74% of total net sales in 2005 and 2004, respectively. Our largest customer accounted for approximately 22% and 12% of net sales in 2005 and 2004. The garment manufacturing industry has experienced substantial consolidation in recent years, which has resulted in increased customer leverage over suppliers, greater exposure for suppliers to credit risk and an increased emphasis by customers on inventory management and productivity.



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



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



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



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



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



Achieving compliance with Section 404 within the prescribed period may require us to incur significant costs and expend significant time and management resources. We cannot assure you that we will be able to complete the work necessary for our management to issue its management report in a timely manner, or that we will be able to complete any work required for our management to be able to conclude that our internal control over financial reporting is operating effectively. If we are not able to complete the assessment under Section 404 in a timely manner, we and our independent registered public accounting firm would be unable to conclude that our internal control over financial reporting is effective as of December 31, 2007. As a result, investors could lose confidence in our reported financial information, which could have an adverse effect on the trading price of our debt securities. In
addition, our independent registered public accounting firm may not agree with our managements assessment or conclude that our internal control over financial reporting is operating effectively. We expect to consistently improve our internal control over the financial reporting with our best efforts and with the assistance from outside experts.



As the Company is listed on the over-the-counter bulletin board, the Company is subject to less stringent corporate governance requirements than a company listed on a national exchange. Specifically, the Company is not required to have a majority of independent directors or a separate audit committee. This provides less protection to our investors.



The Companys board of directors currently does not have a separate audit committee or a member that qualifies as an audit committee financial expert or an independent director. The Companys management and board of directors are considering the addition of an independent director who qualified as a financial expert but there can be no assurance the Company will be able to attract one or more qualified independent directors or that any such directors can be added to the Companys board as it may require us to increase the number of director on the Companys board of directors, seek the resignation of directors who are not independent, or some combination thereof. If the Company is unable to attract qualified independent directors or nominate or elect such directors, the Companys security holders will not have the protections provided by having independent directors
or audit committee members. Although we believe that all actions taken by our directors on our behalf will be in our best interests, whether or not they are deemed to be independent, we cannot assure you that this will actually be the case. If actions are taken, or expenses are incurred that are not in our best interests, it could have a material adverse effect on our business and operations and the price of our stock held by our stockholders.



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



We rely on various information technology systems to manage our operations and we regularly evaluate these systems against our current and expected requirements. Although we have no current plans to implement modifications or upgrades to our systems, we will eventually be required to make changes to legacy systems and acquiring new systems with new functionality..We do anticipate that the aggregate cost of updating such systems will be approximately USD 600,000 over the next 36 months. We will also continue to self-develop and update our information systems on a timely basis to meet our business expansion needsAny information technology system disruptions, if not anticipated and appropriately mitigated, could have an
adverse effect on our business and operations.



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



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



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





        incur significant unplanned expenses and personnel costs;




        issue stock that would dilute our current shareholders percentage ownership;



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




        incur debt;




        assume liabilities; and




        spend resources on unconsummated transactions.




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



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




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




        unanticipated costs, litigation and other contingent liabilities;




        diversion of managements attention from our core business;




        adverse effects on existing business relationships with suppliers and customers;



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



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




        potential loss of our key employees or the key employees of an
acquired organization.




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



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



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





        negatively affect the reliability and cost of transportation;



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



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




        require us to take extra security precautions for our operations.




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



Business interruptions could adversely affect our business.



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



The market for the Companys common stock is illiquid.



The Companys common stock is traded on the Over-the-Counter Bulletin Board. It is thinly traded compared to larger more widely known companies in its industry. Thinly traded common stock can be more volatile than stock trading in an active public market. The Company cannot predict the extent to which an active public market for its common stock will develop or be sustained.The high and low bid price of Ever-Glorys common stock during the past 52 week period is $4.90 and $0.15 respectively.



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Our stock is a penny stock. Trading of our stock may be restricted by the SECs penny stock regulations which may limit a stockholders ability to buy and sell our stock.



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



NASD sales practice requirements may also limit a stockholders ability to buy and sell our stock.



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



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



Our assets are, for the most part, located in the PRC. Because the Companys assets are located overseas, the assets of the Company may be outside of the jurisdiction of U.S. courts to administer if the Company was the subject of an insolvency or bankruptcy proceeding. As a result, if the Company was declared bankrupt or insolvent, the Companys stockholders may not receive the distributions on liquidation that they are otherwise entitled to under U.S. bankruptcy law.



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



Pursuant to the World Trade Organization (WTO) Agreement, effective January 1, 2005, the United States and other WTO member countries removed quotas from WTO members. In certain instances, the elimination of quotas affords the Company greater access to foreign markets; however, as the removal of quotas resulted in an import surge from China, the U.S. took action in May 2005 and imposed safeguard quotas on seven categories of goods. Exports of each specified product category will continue to be admitted into the United States in the ordinary course until the restraint level for that category is reached, after which further exports will be embargoed and will not be cleared until after January 2006. Additionally, on September 10, 2005, in response to the surge of Chinese imports into the European Union (EU), the EU Commission signed a Memorandum of Understanding (MOU) with China in which ten
categories of textiles and apparel will be subject to restraints.



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Although certain of the Companys apparel products fall within the categories subject to the quotas with respect to exports to the United States and Europe, the Chinese government allocated a portion of the aggregate export quota to the Company based upon the amount of product that the Company exported in the prior year. The imposition of such quotas did not have a material affect on the Companys net sales, although it did impact its gross margin. See Results of Operations above. As a result of the Companys prior export performance, it was awarded a sufficient portion of the export quotas to enable it to increase its sales to customers in Europe and the U.S. despite the reinstitution of export quotas. In order to increase the Companys allocation of future export quotas, however, the Company accepted more orders for lower margin products, which had an
adverse affect on the Companys gross margins. The Company believes that its customer mix and its ability to adjust the types of apparel it manufactures will mitigate its exposure to such trade restrictions in the future. However, there can be no assurance that additional trade restrictions will not be imposed on the exports of the Companys products in the future. Such actions could result in increases in the cost of its products generally and may adversely affect the Companys results of operations. The Company continues to monitor the developments described above.

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



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



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





        receipt of substantial orders or order cancellations of products;




        quality deficiencies in services or products;



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




        changes in recommendations of securities analysts;




        shortfalls in the Companys backlog, revenues or earnings in any given period relative to the levels expected by securities analysts or projected by the Company;




        government regulations, including stock option accounting and tax regulations;




        energy blackouts;




        acts of terrorism and war;




        widespread illness;




        proprietary rights or product or patent litigation;




        strategic transactions, such as acquisitions and divestitures;




        rumors or allegations regarding the Companys financial disclosures or practices; or




        earthquakes or other natural disasters concentrated in Nanjing,
China where a significant portion of the Company's operations are
based.




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



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ITEM 3.CONTROLS AND PROCEDURES

As required by Rule 13a-15 under the Exchange Act, as of the end of the period covered by this quarterly report, being September 30, 2006, we have carried out an evaluation of the effectiveness of the design and operation of our companys disclosure controls and procedures. This evaluation was carried out under the supervision and with the participation of our companys management, including our companys Chief Executive Officer along with our companys Chief Financial Officer. Based upon that evaluation, our companys Chief Executive Officer along with our companys Chief Financial Officer concluded that our companys disclosure controls and procedures are effective as at the end of the period covered by this report. There have been no significant changes in our companys internal controls over financial reporting that occurred during our most recent fiscal quarter that
have materially affected, or are reasonably likely to materially affect our internal controls over financial reporting.



Disclosure controls and procedures and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time period specified in the Securities and Exchange Commissions rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer as appropriate, to allow timely decisions regarding required disclosure.



PART II - OTHER INFORMATION



ITEM 1.    LEGAL PROCEEDINGS



The Company is a named defendant in an action pending in the U.S. District Court for the Northern District of Ohio. The action was filed on February 22, 2006 by Plaintiff Douglas G. Furth. The other principal parties are named defendants John Zanic, Wilson-Davis & Co., and Godwin, Pappas, Longley & Ronquillo, LLP. The action alleges that Company breached an agreement with the plaintiff under which it had promised to provide plaintiff 1,000,000 shares of its common stock in exchange for certain assistance in marketing and financial public relations services. The action seeks an award of damages in excess of $75,000. The Company denies that it was a party to such an agreement, that it breached the agreement or that it is otherwise liable. The Company intends to vigorously defend its legal position. After vigorously defending itself, the Company was voluntarily dismissed by the
Plaintiff without prejudice from an action pending in the U.S. District Court for the Northern District of Ohio. No payment was made to plaintiff and no settlement agreement was entered into between the Company and plaintiff.



The Company is also a named defendant in a civil action pending in the U.S. court of common pleas of Allegheny County, Pennsylvania. The civil action was filed on April 17, 2006 by Plaintiff Mark B. Aronson. The action alleges that the Company violated the Pennsylvania Unsolicited Telecommunication Advertisement Act by issuing spam emails soliciting purchasers for its common stock. The action seeks an award of damages in excess of $12,100. The Company denies that it was a party to the alleged conduct. The Company intends to vigorously defend its legal position, with the case now in the initial phase of discovery.



The Company is aware that spam emails soliciting purchasers for its common
stock had originated from unknown sources; the company had never participated nor would it ever participate or authorize in the distribution of spam email to solicit purchasers for its common stock.




The Company has solemnly declared an anti-spamming policy on its website.




ITEM 2.
        UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS



None.




ITEM 3.
        DEFAULTS UPON SENIOR SECURITIES


None.



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



On June 26, 2006, Registrant, through its  wholly owned subsidiary, Perfect Dream Ltd, a British Virgin Islands corporation (Perfect Dream) entered into an Agreement for the Purchase and Sale of Stock  (the  Agreement) with Ever-Glory Enterprises (HK) Ltd (Seller
or "EGLY HK") pursuant to which Registrant has agreed to acquire and Seller has agreed to sell all of the Sellers interest in  Nanjing Catch-Luck Garments Co, Ltd,  a Chinese limited liability company (Catch-Luck). The Seller owns 100% of the total capital of Catch-Luck. A copy of the Purchase Agreement is included as Appendix A to the Companys Preliminary Information Statement on Schedule 14C filed with the Securities and Exchange Commission on June 29, 2006.



On August 31, 2006, the Registrant, Perfect Dream, Seller and Catch-Luck entered into Amendment No. 1 to the Agreement (the Amendment). The Amendment changed the terms of payment on the purchase consideration in the transactions contemplated by the Agreement (the Transaction). A copy of the Amendment No. 1 to the Purchase Agreement is included as Appendix B to the Companys Preliminary Information Statement on Schedule 14C filed with the Securities and Exchange Commission on September 22, 2006



A majority of the members of the Board of Directors of the Company (the Board) and certain of its shareholders, including Mr. Kang Yihua, a majority owner, director, CEO and President of the Company, are either shareholders, officers or directors of EGLY HK, Catch-Luck or its affiliates. Mr Kang is the 100% shareholder and a director and officer of EGLY HK.



The Board was fully informed of the interests of the other directors in EGLY HK, Catch-Luck or their affiliates and on June 1, 2006 and August 31, 2006 unanimously approved the Purchase Agreement, the Purchase Agreement Amendment and the Transaction. The Board conditioned consummation of the transactions contemplated by the Purchase Agreement and the Purchase Agreement Amendment on approval thereof by the shareholders of the Company in accordance with Florida law.

Florida law requires that the Transaction be approved by majority of the shareholders of the Company that do not have a financial interest in EGLY HK or Catch-Luck or their affiliates. The Purchase Agreement, the Purchase Agreement Amendment and the Transaction were approved by shareholders (the Consenting Shareholders) of the Company that do not have any financial interest in EGLY HK, Catch-Luck or their affiliates.



In addition, Mr. Kang, who owns an aggregate of 614,338 shares of Common Stock and 6,238 shares of Series A preferred stock, which constitutes approximately 79% of the voting power, based on an aggregate of 19,971,758 shares of our common stock issued and outstanding and 7,883 shares of our Series A preferred stock issued and outstanding as of August 31, 2006, approved the Purchase Agreement, the Purchase Agreement Amendment and the Transaction on June 2, 2006 and August 31, 2006



The transaction is expected to close in the fourth quarter. The Information Statement has not yet been delivered to the shareholders of the Company.



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ITEM 5.    OTHER INFORMATION



None.



ITEM 6.    EXHIBITS and Reports on Form 8-K




(a)
        The following exhibits are filed herewith:




10.1
        Boundary Drawing of Catch-Luck




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





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





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





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




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(b) Reports on Form 8-K:



On June 26, 2006, Registrant, through its  wholly owned subsidiary, Perfect Dream Ltd, a British Virgin Islands corporation (Perfect Dream) entered into an Agreement for the Purchase and Sale of Stock  (the  Agreement) with Ever-Glory Enterprises (HK) Ltd (Seller
or "EGLY HK") pursuant to which Registrant has agreed to acquire and Seller has agreed to sell all of the Sellers interest in  Nanjing Catch-Luck Garments Co, Ltd,  a Chinese limited liability company (Catch-Luck). The Seller owns 100% of the total capital of Catch-Luck. Registrant filed a Current Report on Form 8-K with the Securities and Exchange Commission on June 29, 2006 with respect to the entry into such Agreement.

On August 31, 2006, the Registrant, Perfect Dream, Seller and Catch-Luck entered into Amendment No. 1 to the Agreement (the Amendment). The Amendment changed the terms of payment of consideration in the transactions contemplated by the Agreement (the Transaction). Pursuant to the Agreement, as amended by the Amendment, Registrant or Perfect Dream shall pay Seller an amount in Renminbi (RMB) equal to USD600,000 within 90 days of the closing of the Transaction (the Cash Purchase Price) and Registrant will issue to Seller an amount in Registrants common stock equal to USD3.4 million within 90 days of the Registrants common stock (the Stock Purchase Price). After the closing of the Transaction, Seller shall be entitled to receive that number of Registrants common stock having an aggregate fair market value of up to USD6.0 Million
determined as follows:


1.
        At the end of the first full fiscal year after the closing of the Transaction in which Catch-Luck generates gross revenues of at least USD19.0 million and net profit of at least USD 1.5million, Registrant shall issue to Seller that number of shares of Registrants common stock having an aggregate fair market value of USD3.0 Million; and



2.
        At the end of the next full fiscal year after the closing of the Transaction in which Catch-Luck generates gross revenues of at least USD19.0 million and net profit of at least USD1.5million, Registrant shall issue to Seller that number of shares of Registrants common stock having an aggregate fair market value of USD3.0 Million.


The number of shares of Registrants common stock to be delivered to Seller as consideration for the Transaction will be calculated based on the fair market value of Registrants common stock based on the preceding 30-day average of the high bid and the low ask price as quoted on the Over-the-Counter Bulletin Board as of the date of the closing of the Transaction.

Seller is owned 100% by Registrants President and Chairman of the Board, Kang Yihua. In addition, a majority of the directors of the Registrant are either shareholders, officers or directors of Seller or its affiliates. The board has been fully informed of the interests of each of the directors, including  Mr. Kang, in the Seller. The board has conditioned consummation of the transactions contemplated by the Agreement, as amended by the Amendment, on approval thereof by a majority of the disinterested shareholders of the Registrant in accordance with the provisions of section 607.0832 of the Florida Business Organizations Code.

The transaction is subject to certain conditions which are customary in such transactions.





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SIGNATURES



In accordance with the requirements of the Exchange Act, the registrant caused this Report on Form 10-QSB to be signed on its behalf by the undersigned, thereunto duly authorized.




EVER-GLORY INTERNATIONAL GROUP, INC.

(Registrant)








Date: November 14, 2006
        By:
        /s/ Guo Yan



Chief Financial Officer



(Principal Financial and Accounting Officer)



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