**U.
      S. SECURITIES AND EXCHANGE COMMISSION**


**WASHINGTON,
      DC 20549**





**FORM
      10-Q**





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





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




Commission
      File Number 0-28806









**Ever-Glory
      International Group Inc.**


(Exact
      name of issuer as specified in its charter)





**Florida**
              (State
                or other jurisdiction of
              incorporation
                or organization)
            **65-0420146**
              (I.R.S.
                employer
              identification
                number)





**100
      N. Barranca Ave. #810**


**West
      Covina, California 91791**


(Address
      of principal executive offices and zip code)




**(626)
      839-9116**


(Registrant’s
      telephone number, including area code)





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




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




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




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




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




APPLICABLE
      ONLY TO CORPORATE ISSUERS:




As
      of
      June 30, 2008, the Registrant had 11,747,316 shares of common stock outstanding.















**EVER-GLORY
      INTERNATIONAL GROUP, INC.**


**FORM 10-Q**




**INDEX**




Page
              Number**SPECIAL
                NOTE REGARDING FORWARD-LOOKING STATEMENTS**
            3**PART
                I. FINANCIAL INFORMATION**
            4Item
                1.
            Financial
                Statements
            4Consolidated
                Balance Sheet as of June 30, 2008 (unaudited) and December 31,
                2007
            4Consolidated
                Statement of Operations and Comprehensive Income for the Three and
                Six
                Months Ended June 30, 2008 and 2007 (unaudited)
            5Consolidated
                Statement of Cash Flows for the Six Months Ended June 30, 2008 and
                2007
                (unaudited)
            6Notes
                to the Consolidated Financial Statements (unaudited)
            7Item
                2.
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            26Item
                3.
            Quantitative
                and Qualitative Disclosures About Market Risk
            40Item
                4.
            Controls
                and Procedures
            41**PART
                II. OTHER INFORMATION**
            42Item
                1.
            Legal
                Proceedings
            42Item
                1A.
            Risk
                Factors
            42Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            51Item
                3.
            Defaults
                Upon Senior Securities
            51Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            51Item
                5.
            Other
                Information
            51Item
                6.
            Exhibits
            51**SIGNATURES**
            52


2


**SPECIAL
      NOTE REGARDING FORWARD-LOOKING STATEMENTS**





This
      document contains certain statements of a forward-looking nature. Such
      forward-looking statements, including but not limited to projected growth,
      trends and strategies, future operating and financial results, financial
      expectations and current business indicators are based upon current information
      and expectations and are subject to change based on factors beyond the control
      of the Company. Forward-looking statements typically are identified by the
      use
      of terms such as “look,” “may,” “will,” “should,” “might,” “believe,” “plan,”
“expect,” “anticipate,” “estimate” and similar words, although some
      forward-looking statements are expressed differently. The accuracy of such
      statements may be impacted by a number of business risks and uncertainties
      that
      could cause actual results to differ materially from those projected or
      anticipated, including but not limited to the following, which are discussed
      in
      further detail on page 42 of
      this
      report:





·
            the
                ability to timely and accurately complete product orders;·
            the
                ability to coordinate product design with its customers;





·
            its
                dependence on a limited number of larger customers;·
            political
                and economic factors in the Peoples’ Republic of China;





·
            the
                ability of the Company’s internal production operations to increase
                production volumes on finished goods in a timely fashion in response
                to
                increasing demand and enable the Company to achieve timely delivery
                of
                finished goods to its customers;·
            the
                Company’s ability to expand and grow its distribution channels;





·
            unanticipated
                changes in general market conditions or other factors, which may
                result in
                cancellations of advance orders or a reduction in the rate of reorders;·
            a
                weakening of economic conditions which would reduce demand for products
                sold by the Company and could adversely affect profitability;





·
            the
                effect of terrorist acts, or the threat thereof, on consumer confidence
                and spending, or the production and distribution of product and raw
                materials which could, as a result, adversely affect the Company’s
                operations and financial performance;·
            the
                acceptance in the marketplace of the Company’s new products and changes in
                consumer preferences;





·
            reductions
                in sales of products, either as the result of economic or other
                conditions, or reduced consumer acceptance of a product, which could
                result in an unplanned buildup of inventory;·
            the
                ability to source raw materials and finished products at favorable
                prices
                to the Company;





·
            the
                potential impact of power shortages on the Company’s operations including
                temporary blackouts at the Company’s facilities;·
            foreign
                currency exchange rate fluctuations;





·
            earthquakes
                or other natural disasters;·
            the
                Company’s ability to identify and successfully execute cost control
                initiatives;





·
            the
                impact of quotas, tariffs, or safeguards on the importation or exportation
                of the Company’s products; or·
            other
                risks outlined above and in the Company’s other filings made periodically
                by the Company.





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




3


**PART
      I. FINANCIAL INFORMATION**





**ITEM
                1.**
            **FINANCIAL
                STATEMENTS.**




**EVER-GLORY
                  INTERNATIONAL GROUP, INC. AND SUBSIDIARIES****CONSOLIDATED
                  BALANCE SHEETS****AS
                  OF JUNE 30, 2008 AND DECEMBER 31, 2007****ASSETS****June
                  30,**
                **2008**
              ****
              **December
                  31,**
                **2007**(Unaudited)**CURRENT
                  ASSETS**Cash
                  and cash equivalents
              
              $
              1,643,493
              
              $
              641,739Accounts
                  receivable
              
              
              17,771,678
              
              
              13,035,299Accounts
                  receivable - related parties
              
              
              7,335
              
              
              158,235Inventories
              
              
              2,282,368
              
              
              1,897,023Other
                  receivables and prepaid expenses
              
              
              433,296
              
              
              150,855Advances
                  on inventory purchase
              
              
              203,217
              
              
              —Advances
                  on inventory purchase - related parties
              
              
              2,391,009
              
              
              2,568,040**Total
                  Current Assets**
              
              
              24,732,396
              
              
              18,451,191**DEFERRED
                  FINANCING COSTS**
              
              
              201,826
              
              
              191,995**LAND
                  USE RIGHT, NET**
              
              
              2,871,651
              
              
              2,729,183**PROPERTY
                  AND EQUIPMENT, NET**
              
              
              12,807,385
              
              
              12,140,903**INVESTMENT
                  IN SUBSIDIARY**
              
              
              1,459,000
              
              
              —**TOTAL
                  ASSETS**
              
              $
              42,072,258
              
              $
              33,513,272**LIABILITIES
                  AND STOCKHOLDERS' EQUITY****CURRENT
                  LIABILITIES**Accounts
                  payable
              
              $
              4,073,647
              
              $
              1,796,655Accounts
                  payable - related parties
              
              
              276,307
              
              
              245,589Other
                  payables - related party
              
              
              980,575
              
              
              650,000Other
                  payables and accrued liabilities
              
              
              1,362,080
              
              
              1,069,682Trade
                  notes payable
              
              
              115,364
              
              
              —Value
                  added tax payable
              
              
              754,273
              
              
              378,898Income
                  tax payable and other taxes payable
              
              
              344,726
              
              
              146,226Bank
                  loans
              
              
              5,777,640
              
              
              4,798,500Convertible
                  notes payable,net of unamortized discount of $1,192,696 and$1,974,497
                  at June 30, 2008 and December 31, 2007, respectively
              
              
              57,304
              
              
              25,503**Total
                  Current Liabilities**
              
              
              13,741,916
              
              
              9,111,053**LONG-TERM
                  LOAN FROM PARTY RELATED BY COMMON CONTROL**
              
              
              2,601,556
              
              
              4,474,985**Total
                  Liabilities**
              
              
              16,343,472
              
              
              13,586,038**COMMITMENTS
                  AND CONTINGENCIES**
              
              
              —
              
              
              —**MINORITY
                  INTEREST**
              
              
              586,942
              
              
              —**STOCKHOLDERS'
                  EQUITY**Preferred
                  stock ($.001 par value, authorized 5,000,000 shares,10,000
                  shares designated as "Series A Preferred Stock")
              
              
              —
              
              
              —Series
                  A Convertible Preferred Stock (no shares issued andoutstanding
                  as of June 30, 2008 and December 31, 2007
              
              
              —
              
              
              —Common
                  stock ($.001 par value, authorized 50,000,000 shares,11,747,316
                  and 11,379,309 shares issued and outstandingas
                  of June 30, 2008 and December 31, 2007, respectively)
              
              
              11,747
              
              
              11,379Additional
                  paid-in capital
              
              
              3,110,776
              
              
              2,154,368Retained
                  earnings
              
              
              14,782,225
              
              
              12,247,748Statutory
                  reserve
              
              
              3,449,498
              
              
              3,437,379Accumulated
                  other comprehensive income
              
              
              3,787,598
              
              
              2,076,360**Total
                  Stockholders' Equity**
              
              
              25,141,844
              
              
              19,927,234**TOTAL
                  LIABILITIES AND STOCKHOLDERS' EQUITY**
              
              $
              42,072,258
              
              $
              33,513,272
 
 4
  **EVER-GLORY
                    INTERNATIONAL GROUP, INC. AND SUBSIDIARIES****CONSOLIDATED
                    STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME****FOR
                    THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2008 AND 2007**(UNAUDITED)**Three
                    months ended**
                ****
                **Six
                    months ended**
                ********
                ****
                **June
                    30,**
                ****
                **June
                    30,**
                ********
                ****
                **2008**
                ****
                **2007**
                ****
                **2008**
                ****
                **2007**Restated
                
                
                
                Restated**NET
                    SALES**To
                    related parties
                
                $
                67,461
                
                $
                407,188
                
                $
                492,563
                
                $
                454,016To
                    third parties
                
                
                24,000,936
                
                
                13,690,847
                
                
                43,323,042
                
                
                30,069,418**Total
                    net sales**
                
                
                24,068,397
                
                
                14,098,035
                
                
                43,815,605
                
                
                30,523,434**COST
                    OF SALES**From
                    related parties
                
                
                58,636
                
                
                377,110
                
                
                461,384
                
                
                421,984From
                    third parties
                
                
                19,655,924
                
                
                11,482,470
                
                
                35,279,348
                
                
                25,470,309**Total
                    cost of sales**
                
                
                19,714,560
                
                
                11,859,580
                
                
                35,740,732
                
                
                25,892,293**GROSS
                    PROFIT**
                
                
                4,353,837
                
                
                2,238,455
                
                
                8,074,873
                
                
                4,631,141**OPERATING
                    EXPENSES**Selling
                    expenses
                
                
                368,564
                
                
                149,812
                
                
                646,092
                
                
                325,710General
                    and administrative expenses
                
                
                1,777,395
                
                
                933,275
                
                
                2,998,882
                
                
                1,706,163**Total
                    Operating Expenses**
                
                
                2,145,959
                
                
                1,083,087
                
                
                3,644,974
                
                
                2,031,873**INCOME
                    FROM OPERATIONS**
                
                
                2,207,878
                
                
                1,155,368
                
                
                4,429,899
                
                
                2,599,268**OTHER
                    INCOME (EXPENSES)**Interest
                    income
                
                
                48,590
                
                
                2,405
                
                
                80,564
                
                
                4,219Interest
                    expense
                
                
                (631,126
                )
                
                (129,600
                )
                
                (1,208,954
                )
                
                (261,890
                )Other
                    income
                
                
                53,085
                
                
                5,474
                
                
                53,085
                
                
                5,570Other
                    expenses
                
                
                (44,934
                )
                
                (41
                )
                
                (236,101
                )
                
                (125
                )**Total
                    Other Expenses**
                
                
                (574,385
                )
                
                (121,762
                )
                
                (1,311,406
                )
                
                (252,226
                )**INCOME
                    BEFORE INCOME TAXES AND MINORITY INTEREST**
                
                
                1,633,493
                
                
                1,033,606
                
                
                3,118,493
                
                
                2,347,042**INCOME
                    TAX EXPENSE**
                
                
                (284,809
                )
                
                (6,629
                )
                
                (568,647
                )
                
                (82,323
                )**INCOME
                    BEFORE MINORITY INTEREST**
                
                
                1,348,684
                
                
                1,026,977
                
                
                2,549,846
                
                
                2,264,719**LESS
                    MINORITY INTEREST**
                
                
                (620
                )
                
                —
                
                
                3,249
                
                
                —**NET
                    INCOME**
                
                
                1,349,304
                
                
                1,026,977
                
                
                2,546,597
                
                
                2,264,719**OTHER
                    COMPREHENSIVE INCOME**Foreign
                    currency translation gain
                
                
                611,354
                
                
                291,573
                
                
                1,711,238
                
                
                450,706**COMPREHENSIVE
                    INCOME**
                
                $
                1,960,658
                
                $
                1,318,550
                
                $
                4,257,835
                
                $
                2,715,425**EARNINGS
                    PER SHARE**Net
                    income per shareBasic
                
                $
                0.12
                
                $
                0.25
                
                $
                0.22
                
                $
                0.56Diluted
                
                $
                —
                
                $
                0.10
                
                $
                0.10
                
                $
                0.22Weighted
                    average shares outstanding during the periodBasic
                
                
                11,710,865
                
                
                4,080,509
                
                
                11,580,273
                
                
                4,080,509Diluted
                
                
                12,528,595
                
                
                10,072,008
                
                
                12,291,758
                
                
                10,072,008
 
 5
  **EVER-GLORY
                    INTERNATIONAL GROUP, INC. AND SUBSIDIARIES****CONSOLIDATED
                    STATEMENTS OF CASH FLOWS****FOR
                    THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007**(UNAUDITED)**Six
                    months ended**
                  **June
                    30,**
                ********
                **2008**
                ****
                **2007**
                ****Restated**CASH
                    FLOWS FROM OPERATING ACTIVITIES**Net
                    income
                
                $
                2,546,597
                
                $
                2,264,719Adjustments
                    to reconcile net income to cash providedby
                    operating activities:Minority
                    interest
                
                
                3,249
                
                
                —Depreciation
                
                
                454,200
                
                
                409,935Amortization
                
                
                31,799
                
                
                27,257Amortization
                    of discount on convertible notes
                
                
                841,422
                
                
                —Amortization
                    of deferred financing costs
                
                
                60,630
                
                
                —Common
                    stock issued for interest
                
                
                2,155
                
                
                —Changes
                    in operating assets and liabilitiesAccounts
                    receivable
                
                
                (3,791,168
                )
                
                (199,390
                )Accounts
                    receivable - related parties
                
                
                156,574
                
                
                (257,435
                )Inventories
                
                
                (256,247
                )
                
                (175,168
                )Other
                    receivables and prepaid expenses
                
                
                (266,453
                )
                
                (132,021
                )Advance
                    on inventory purchase
                
                
                (197,562
                )
                
                —Advance
                    on inventory purchase - related party
                
                
                332,352
                
                
                —Accounts
                    payable
                
                
                2,101,517
                
                
                898,230Accounts
                    payable - related companies
                
                
                131,108
                
                
                1,121,901Trade
                    notes payable
                
                
                112,153
                
                
                —Other
                    payables and accrued liabilities
                
                
                220,172
                
                
                (1,803,659
                )Value
                    added tax payables
                
                
                341,285
                
                
                (19,985
                )Income
                    tax and other tax payables
                
                
                183,853
                
                
                (41,007
                )Net
                    cash provided by operating activities
                
                
                3,007,636
                
                
                2,093,377**CASH
                    FLOWS FROM INVESTING ACTIVITIES**Investment
                    in La Chapelle
                
                
                (1,397,700
                )
                
                —Purchase
                    of property and equipment
                
                
                (357,695
                )
                
                (350,501
                )Proceeds
                    from sale of equipment
                
                
                13,161
                
                
                6,308Net
                    cash used in investing activities
                
                
                (1,742,234
                )
                
                (344,193
                )**CASH
                    FLOWS FROM FINANCING ACTIVITIES**Due
                    to related parties
                
                
                330,575
                
                
                —Contribution
                    from minority shareholders
                
                
                553,040
                
                
                —Proceeds
                    from bank loan
                
                
                5,616,864
                
                
                2,587,322Repayment
                    of bank loan
                
                
                (4,964,400
                )
                
                (5,174,644
                )Repayment
                    of long term loan-related party under common control
                
                
                (1,990,000
                )
                
                —Exercise
                    of warrants
                
                
                43,635
                
                
                —Net
                    cash used in by financing activities
                
                
                (410,286
                )
                
                (2,587,322
                )**EFFECT
                    OF EXCHANGE RATE ON CASH**
                
                
                146,638
                
                
                390,357**NET
                    INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS**
                
                
                1,001,754
                
                
                (447,781
                )**CASH
                    AND CASH EQUIVALENTS AT BEGINNING OF PERIOD**
                
                
                641,739
                
                
                897,093**CASH
                    AND CASH EQUIVALENTS AT END OF PERIOD**
                
                $
                1,643,493
                
                $
                449,312**SUPPLEMENTAL
                    DISCLOSURE OF CASH FLOW INFORMATION**Cash
                    paid during the period for:Interest
                    expense
                
                $
                200,086
                
                $
                128,061Income
                    taxes
                
                $
                395,233
                
                $
                124,373
 
 6
  EVER-GLORY
          INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
 NOTES
          TO
          THE CONSOLIDATED FINANCIAL STATEMENTS
 
 JUNE
          30,
          2008 (UNAUDITED
 
 **NOTE
        1 - ORGANIZATION AND BASIS OF PRESENTATION**
 
 Ever-Glory
        International Group, Inc. (AMEX: EVK) was incorporated in Florida on October
        19,
        1994. All of its businesses are operated through its three subsidiaries in
        the
        People’s Republic of China.
 
 Perfect
        Dream Limited (“Perfect Dream”), a wholly owned subsidiary of EVK, was
        incorporated in the British Virgin Islands on July 1, 2004.
 
 Goldenway
        Nanjing Garments Co. Ltd. (“Goldenway”), a wholly owned subsidiary of Perfect
        Dream, was incorporated in the People’s Republic of China (“PRC”) on December
        31, 1993. Goldenway is principally engaged in the manufacturing and sale
        of
        garments.
 
 Nanjing
        New-Tailun Garments Co. Ltd. (“New-Tailun’), a wholly owned subsidiary of
        Perfect Dream, was incorporated in the PRC on March 27, 2006. New-Tailun
        is
        principally engaged in the manufacturing and sale of garments.
 
 Nanjing
        Catch-Luck Garments Co, Ltd. (“Catch-Luck”), a wholly owned subsidiary of
        Perfect Dream, was incorporated in the PRC on December 21, 1995. On January
        18,
        2006, Catch-Luck became a wholly owned foreign enterprise after its acquisition
        by Perfect Dream. Catch-Luck is principally engaged in the manufacture and
        sale
        of garments to customers located in Europe and Japan.
 
 Shanghai
        LA GO GO Fashion Company Limited (“La Go Go”), a joint venture of Goldenway and
        Shanghai La Chapelle Garment and Accessories Company Limited (“Shanghai La
        Chapelle”), was incorporated in the PRC on January 24, 2008. Goldenway invested
        approximately $826,200 (RMB 6.0 million) in cash, and La Chapelle invested
        approximately $553,040 (RMB 4.0 million) in cash, for a 60% and 40% ownership
        interest, respectively, in the joint venture. The business objective of the
        joint venture is to establish and create a leading brand of ladies’ garments for
        the mainland Chinese market. La Go Go opened 39 retail stores to develop
        retail
        market in China for selling its own brand clothing.
 
 EVK,
        Perfect Dream, Goldenway, New-Tailun, Catch-Luck, and La Go Go are hereinafter
        referred to as (the “Company”).
 
 **NOTE
        2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**
 
 **Principles
        of consolidation**
 
 The
        accompanying consolidated financial statements of Ever-Glory International
        Group, Inc. reflect the activities of EVK, and its 100% owned subsidiaries
        Perfect Dream, Goldenway, New-Tailun, Catch-Luck and its 60% owned subsidiary
        La
        Go Go. These consolidated financial statements have been prepared in accordance
        with accounting principles generally accepted in the United States of America.
        All significant inter-company balances and transactions have been eliminated
        in
        consolidation.
 
 We
        have
        included all normal recurring adjustments that we considered necessary to
        give a
        fair presentation of our operating results for the periods presented. Interim
        results are not necessarily indicative of results for a full year. The
        information included in this Form 10-Q should be read in conjunction with
        information included in the 2007 annual report filed on Form 10-K.
 
 **Business
        combinations between entities under common control**
 
 The
        Company entered into a purchase agreement, dated November 9, 2006, with
        Ever-Glory Enterprises (HK) Limited (“Ever-Glory Hong Kong”) to acquire 100%
        interest of New-Tailun (the “New-Tailun transaction”). Pursuant to the terms of
        the purchase agreement, the Company paid to Ever-Glory Hong Kong an amount
        of
        $2,000,000 in cash and issued 20,833,333 shares of the Company’s restricted
        common stock having a value of $10,000,000, such value of shares were based
        on
        the preceding 30-day average of high bid and the low ask price for the common
        stock on the date of the transfer within 90 days of the closing of New-Tailun
        transaction. The New-Tailun transaction closed on December 30, 2006.
 
 7
  EVER-GLORY
          INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
 NOTES
          TO
          THE CONSOLIDATED FINANCIAL STATEMENTS
 
 JUNE
          30,
          2008 (UNAUDITED)
 The
        Company entered into a purchase agreement, dated June 26, 2006, with Ever-Glory
        Enterprises (HK) Limited (“Ever-Glory Hong Kong”) to acquire 100% interest of
        Catch-Luck (the “Catch-Luck transaction”). Pursuant to the terms of the purchase
        agreement, the Company agreed to pay to Ever-Glory Hong Kong an amount of
        $600,000 in cash and issue 1,307,693 shares of the Company’s restricted common
        stock having a value of $3,400,000 such value of shares were based on the
        preceding 30-day average of high bid and the low ask price for the common
        stock
        on the date of the transfer within 90 days of the closing of the Catch-Luck
        transaction. On August 31, 2006, the Company entered into an amendment to
        the
        Agreement (“the Amendment”) whereupon the terms of payment on the purchase
        consideration was amended as follows:
 
 1.
        The
        Company will pay to Ever-Glory Hong Kong an amount of $600,000 in cash and
        issued 1,307,693 shares of the Company’s restricted common stock having a value
        of $3,400,000 on the date of the transfer within 90 days of the closing of
        the
        transaction;
 
 2.
        At the
        end of the year ending December 31, 2008 in which Catch-Luck generates gross
        revenues of at least $19,000,000 and net profit of $1,500,000, Perfect Dream
        will issue 1,153,846 shares of the Company’s restricted common stock having a
        value of $3,000,000; and
 
 3.
        At the
        end of the year ending December 31, 2009 in which Catch-Luck generates gross
        revenues of at least $19,000,000 and net profit of $1,500,000, Perfect Dream
        will issue 1,153,846 shares of the Company’s restricted common stock having a
        value of $3,000,000.
 
 The
        number of shares of common stock to be delivered to Ever-Glory Hong Kong
        in
        satisfaction of the Stock Purchase Price shall be calculated based on the
        preceding 30-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 closing.
 
 On
        August
        1, 2007, the Company filed a definitive 14C information statement to report
        stockholder approval of the acquisition of Catch-Luck. The Information Statement
        was mailed to the shareholders on August 7, 2007. The Catch-Luck transaction
        closed on August 27, 2007.
 
 Because
        New-Tailun and Catch-Luck are also under ownership and management control
        by Mr.
        Kang, Yihua, the Company’s CEO, these transactions were accounted for as a
        merger of entities under common control, accordingly, the operation results
        of
        New-Tailun and Catch-Luck for the six months and three months ended June
        30,
        2007 were restated to include in the consolidated financial statements as
        if the
        transactions had occurred at the beginning of the first period presented.
        The
        balance sheet accounts were stated at its historical cost.
 
 **Use
        of estimates**
 
 The
        preparation of the consolidated financial statements in conformity with
        generally accepted accounting principles requires management to make estimates
        and assumptions that affect the reported 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. For example, the Company estimates its potential losses
        on
        uncollectible receivables. Management believes that the estimates utilized
        in
        preparing its financial statements are reasonable and prudent. Actual results
        could differ from these estimates.
 
 **Cash
        and cash equivalents**
 
 For
        purpose of the statements of cash flows, cash and cash equivalents include
        cash
        on hand and demand deposits with a bank with original maturities of less
        than
        three months.
 
 8
  EVER-GLORY
          INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
 NOTES
          TO
          THE CONSOLIDATED FINANCIAL STATEMENTS
 
 JUNE
          30,
          2008 (UNAUDITED)
  **Accounts
        receivable**
 
 The
        Company extends unsecured credits to its customers in the ordinary course
        of
        business but mitigates the associated risks by performing credit checks and
        actively pursuing past due accounts. An allowance for doubtful accounts is
        established and recorded based on managements’ assessment of the credit history
        with the customer and current relationships with them.
 
 As
        of
        June 30, 2008 and December 31, 2007, the Company considers all its accounts
        receivable to be collectable and no provision for doubtful accounts has been
        made in the financial statements.
 
 **Inventories**
 
 The
        manufacturing inventories are stated at lower of cost or market value, cost
        being determined on a specific identification method. The Company manufactures
        products upon receipt of orders from its customers. All the products must
        pass
        the customers’ quality assurance procedures before its delivery. Therefore, the
        products are rarely returned by the customers after delivery.
 
 The
        retail merchandise inventories are stated at the lower of average cost or
        market.
  **Long-lived
        assets**
 
 The
        Company accounts for long-lived assets under the Statements of Financial
        Accounting Standards Nos. 142 and 144 “Accounting for Goodwill and Other
        Intangible Assets” and “Accounting for Impairment or Disposal of Long-Lived
        Assets” (“SFAS No. 142 and 144”). In accordance with SFAS No. 142 and 144,
        long-lived assets, goodwill and certain identifiable intangible assets held
        and
        used by the Company are reviewed for impairment at least annually or more
        often
        whenever events or changes in circumstances indicate that the carrying amount
        of
        an asset may not be recoverable. For purposes of evaluating the recoverability
        of long-lived assets, when undiscounted future cash flows will not be sufficient
        to recover an asset’s carrying amount, the asset is written down to its fair
        value. As of June 30, 2008, the Company expected these assets to be fully
        recoverable.
 
 **Property
        and equipment**
 
 Property
        and equipment are stated at cost, less accumulated depreciation. Expenditures
        for additions, major renewals and betterments are capitalized and expenditures
        for maintenance and repairs are charged to expense as incurred.
 
 Depreciation
        is provided on a straight-line basis, less an estimated residual value over
        the
        assets’ estimated useful lives. The estimated useful lives are as
        follows:
 
 Property
                  and plant
              15-20
                  YearsLeasehold
                  improvements
              10
                  YearsMachinery
                  & Equipment
              10
                  YearsOffice
                  equipment and furniture
              5
                  YearsMotor
                  vehicles
              5
                  Years
 
 **Intangible
        assets**
 
 All
        land
        in the People’s Republic of China is owned by the government and cannot be sold
        to any individual or company. However, the government may grant “land use right”
to firms or individuals to occupy, develop and use land. The Company records
        the
        land use rights obtained as intangible assets.
  9
 EVER-GLORY
          INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
 NOTES
          TO
          THE CONSOLIDATED FINANCIAL STATEMENTS
 
 JUNE
          30,
          2008 (UNAUDITED)
  **Investment
        in subsidiary**
 
 Investment
        in equity ownership lower than 20% is recorded using the cost method. The
        carrying value of the investments is reviewed periodically for impairment.
        As of
        June 30, 2008, the Company expected the long-term investment to be fully
        recoverable.
 
 **Fair
        value of financial instruments**
 
 On
        January 1, 2008, the Company adopted SFAS No. 157. SFAS No. 157, Fair Value
        Measurements, defines fair value, establishes a three-level valuation hierarchy
        for disclosures of fair value measurement and enhances disclosures requirements
        for fair value measures. The carrying amounts reported in the balance sheets
        for
        current assets and current liabilities qualify as financial instruments are
        a
        reasonable estimate of fair value because of the short period of time between
        the origination of such instruments and their expected realization and their
        current market rate of interest. The three levels are defined as
        follow:
 
 ·
              Level
                  1 inputs to the valuation methodology are quoted prices (unadjusted)
                  for
                  identical assets or liabilities in active
                  markets.
 
 ·
              Level
                  2 inputs to the valuation methodology include quoted prices for
                  similar
                  assets and liabilities in active markets, and inputs that are observable
                  for the assets or liability, either directly or indirectly, for
                  substantially the full term of the financial
                  instruments.
 
 ·
              Level
                  3 inputs to the valuation methodology are unobservable and significant
                  to
                  the fair value.
 
 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 analyzes all financial instruments with features of both liabilities
        and
        equity under SFAS 150, “Accounting for Certain Financial Instruments with
        Characteristics of Both Liabilities and Equity,” SFAS No 133, “Accounting for
        Derivative Instruments and Hedging Activities” and EITF 00-19, “Accounting for
        Derivative Financial Instruments Indexed to, and Potentially Settled in,
        a
        Company’s Own Stock.” During 2007, the Company issued 6% secured convertible
        debentures in a face amount of $2,000,000 which are due and payable in full
        in 2
        years from their issuance. As fixed prices are set for the conversion prices
        of
        such convertible debentures and the attached warrants, the Company is in
        a
        position to be sure it had adequate authorized shares for the future conversion
        of convertible debentures and warrants. Therefore, no embedded derivatives
        and
        warrants are required to be recorded at fair value and marked-to-market at
        each
        reporting period.
  **Beneficial
        conversion feature of convertible notes**
 
 The
        Company accounted for the secured convertible notes (the “Notes”) issued
        pursuant to the subscription agreement discussed in Note 9 under EITF 00-27,
        ‘‘Application of Issue 98-5 to Certain Convertible Instruments’’.  
Based on EITF 00-27, the Company has determined that the convertible notes
        contained a beneficial conversion feature because at August 2, 2007, the
        effective conversion price of the convertible notes was $1.10 when the market
        value per share was $2.70.
  10
  EVER-GLORY
          INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
 NOTES
          TO
          THE CONSOLIDATED FINANCIAL STATEMENTS
 
 JUNE
          30,
          2008 (UNAUDITED)
  **Discount
        on notes payable**
 
 A
        discount with respect to the Notes issued on August 2, 2007 was recorded
        by the
        Company. The amount of the discount was calculated to be the intrinsic value
        of
        the beneficial conversion feature and the fair value of the warrants included
        among the securities issued pursuant to the terms of the subscription agreement
        discussed in Note 11.
 
 **Revenue
        and cost recognition**
 
 The
        Company recognizes revenue, net of value added taxes, upon delivery for local
        sales and upon shipment of the products for export sales, at which time title
        passes to the customer provided that: there are no uncertainties regarding
        customer acceptance; persuasive evidence of an arrangement exists; the sales
        price is fixed and determinable; and collectibility is deemed probable.
 
 Local
        transportation and unloading charges and product inspection charges are included
        in selling expenses and totaled $66,294 and $116,290 for the six month period,
        and $27,149 and $57,339 for the three month period ended June 30, 2008 and
        2007,
        respectively.
 
 Cost
        of
        goods sold includes direct raw material, direct labor cost and manufacturing
        overheads including depreciation of production equipment consistent with
        the
        revenue earned.
 
 **Income
        taxes**
 
 The
        Company accounts for income taxes under the Statement of Financial Accounting
        Standards No. 109, “Accounting for Income Taxes” (“Statement 109”). Under
        Statement 109, deferred tax assets and liabilities are recognized for the
        future
        tax consequences attributable to differences between the financial statement
        carrying amounts of existing assets and liabilities and their respective
        tax
        bases. Deferred tax assets and liabilities are measured using enacted tax
        rates
        expected to apply to taxable income in the years in which those temporary
        differences are expected to be recovered or settled. Under Statement 109,
        the
        effect on deferred tax assets and liabilities of a change in tax rates is
        recognized in income in the period that included the enactment date.
 
 The
        Company adopted FASB Interpretation 48, “Accounting for Uncertainty in Income
        Taxes” (“FIN 48”) as of January 1, 2007. A tax position is recognized as a
        benefit only if it is “more likely than not” that the tax position would be
        sustained in a tax examination, with a tax examination being presumed to
        occur.
        The amount recognized is the largest amount of tax benefit that is greater
        than
        50% likely of being realized on examination. For tax positions not meeting
        the
“more likely than not” test, no tax benefit is recorded. The adoption had no
        effect on the Company’s financial statements.
 
 The
        charge for taxation is based on the results for the year as adjusted for
        items,
        which are non-assessable or disallowed. It is calculated using tax rates
        that
        have been enacted or substantively enacted by the balance sheet date. Deferred
        tax is accounted for using the balance sheet liability method in respect
        of
        temporary differences arising from differences between the carrying amount
        of
        assets and liabilities in the financial statements and the corresponding
        tax
        basis used in the computation of assessable tax profit. In principle, deferred
        tax liabilities are recognized for all taxable temporary differences, and
        deferred tax assets are recognized to the extent that it is probably that
        taxable profit will be available against which deductible temporary differences
        can be utilized.
 
 Deferred
        tax is calculated at the tax rates that are expected to apply to the period
        when
        the asset is realized or the liability is settled. Deferred tax is charged
        or
        credited in the income statement, except when it related to items credited
        or
        charged directly to equity, in which case the deferred tax is also dealt
        with in
        equity. Deferred tax assets and liabilities are offset when they relate to
        income taxes levied by the same taxation authority and the Company intends
        to
        settle its current tax assets and liabilities on a net basis.
  11
  EVER-GLORY
          INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
 NOTES
          TO
          THE CONSOLIDATED FINANCIAL STATEMENTS
 
 JUNE
          30,
          2008 (UNAUDITED)
  **China
        income tax**
 
 The
        Company’s subsidiaries are governed by the Income Tax Law of the People’s
        Republic of China (PRC) concerning Foreign Investment Enterprises and Foreign
        Enterprises and various local income tax laws (the Income Tax
        Laws).
 
 Beginning
        January 1, 2008, the new Enterprise Income Tax (“EIT”) law has replaced the old
        laws for Domestic Enterprises (“DES”) and Foreign Invested Enterprises
        (“FIEs”).
 
 The
        key
        changes are:
 
 a.
              The
                  new standard EIT rate of 25% replaces the 33% rate applicable to
                  both DES
                  and FIEs, except for High Tech companies that pay a reduced rate
                  of
                  15%;
 
 b.
              Companies
                  established before March 16, 2007 continue to enjoy tax holiday
                  treatment
                  approved by local government for a grace period of either for the
                  next 5
                  years or until the tax holiday term is completed, whichever is
                  sooner.
 
 The
        Company and its subsidiaries were established before March 16, 2007 and
        therefore are qualified to continue enjoying the reduced tax rate as described
        above.
 
 Upon
        approval by the PRC tax authorities, FIE's scheduled to operate for a period
        of
        10 years or more and engaged in manufacturing and production may by exempt
        from
        income taxes for two years, commencing with their first profitable year of
        operations, after taking into account any losses brought forward from prior
        years, and thereafter with a 50% reduction for the subsequent three
        years.
  Goldenway
        has profit for more than five years, so from this year its income tax rate
        is
        25%.
 
 New-Tailun
        and Catch-Luck were approved as wholly foreign-owned enterprises in 2006.
        This
        entity status allows New-Tailun and Catch-Luck a two-year income tax exemption
        beginning from the first year of profitability, and a 50% income tax reduction
        for the three years thereafter. New Tailun and Catch-Luck are entitled to
        the
        income tax exemptions for 2006 and 2007 and 50% income tax reduction that
        is
        12.50% for the calendar years ended December 31, 2008, 2009 and
        2010.
 
 La
        Go Go
        was established on January 24, 2008, its income tax rate is 25%.
 
 **Other
        comprehensive income**
 
 The
        reporting currency of the Company is the US dollar. The functional currency
        of
        EVK and Perfect Dream is the US dollar. The functional currency of Goldenway,
        New Tailun Catch-luck and La Go Go is the Chinese Renminbi (RMB).
 
 For
        the
        subsidiaries with the functional currency of RMB, all assets and liabilities
        accounts were translated at the exchange rate on the balance sheet date;
        stockholder's equity are translated at the historical rates and items in
        the
        statement of operations items are translated at the average rate for the
        period.
        Translation adjustments resulting from this process are included in accumulated
        other comprehensive income in the statement of stockholders’ equity. The
        resulting translation gains and losses that arise from exchange rate
        fluctuations on transactions denominated in a currency other than the functional
        currency are included in the results of operations as incurred. Items in
        the
        cash flow statement are translated at the average exchange rate for the
        period.
 
 Translation
        adjustments resulting from this process included in accumulated other
        comprehensive income amounted to $3,787,598 and $2,076,360 as of June 30,
        2008
        and December 31, 2007, respectively. Assets and liabilities at June 30, 2008
        and
        December 31, 2007 were translated at 6.85 RMB and 7.29 RMB to $1.00,
        respectively. The average translation rates applied to income statement accounts
        and statement of cash flows for the six months ended June 30, 2008 and 2007
        were
        7.05 RMB and 7.73 RMB to $1.00, respectively. For the three months ended
        June
        30, 2008 and 2007 were 7.17 RMB and 7.77 RMB to $1.00, respectively. As a
        result, amounts related to assets and liabilities reported on the statement
        of
        cash flows will not necessarily agree with changes in the corresponding balances
        on the balance sheet.
 12
  EVER-GLORY
          INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
 NOTES
          TO
          THE CONSOLIDATED FINANCIAL STATEMENTS
 
 JUNE
          30,
          2008 (UNAUDITED)
 **Earnings
        per share**
 
 The
        Company reports earnings per share in accordance with the provisions of SFAS
        No.
        128, "Earnings Per Share." SFAS No. 128 requires presentation of basic and
        diluted earnings per share in conjunction with the disclosure of the methodology
        used in computing such earnings per share. Basic earnings per share excludes
        dilution and is computed by dividing income available to common stockholders
        by
        the weighted average common shares outstanding during the period. Diluted
        earnings per share takes into account the potential dilution that could occur
        if
        securities or other contracts to issue common stock were exercised and converted
        into common stock. Further, according to SFAS No. 128, if the number of common
        shares outstanding increase as a result of a stock dividend or stock split
        or
        decrease as a result of a reverse stock split, the computations of a basic
        and
        diluted EPS shall be adjusted retroactively for all periods presented to
        reflect
        that change in capital structure.
 
 **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 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, represents all material financial information
        related to the Company’s principal operating segment. As of June 30, 2008, the
        Company operates in a single segment.
 
 **Minority
        interest**
  Minority
        interest consists of the interest of minority shareholders in the subsidiary
        of
        the Company. As of June 30, 2008 and December 31, 2007, minority interest
        amounted to $586,942 and $0, respectively.
 
 **Recent
        accounting pronouncements**
 
 In
        September 2006, FASB issued Statement 157, Fair Value Measurements. This
        statement defines fair value and establishes a framework for measuring fair
        value in GAAP. More precisely, this statement sets forth a standard definition
        of fair value as it applies to assets or liabilities, the principle market
        (or
        most advantageous market) for determining fair value (price), the market
        participants, inputs and the application of the derived fair value to those
        assets and liabilities. The effective date of this pronouncement is for all
        full
        fiscal and interim periods beginning after November 15, 2008. The Company
        does
        not expect the adoption of SFAS 157 to have an impact on the Company’s results
        of operations or financial condition.
 
 In
        February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
        Financial Assets and Financial Liabilities” (SFAS 159) which permits entities to
        choose to measure many financial instruments and certain other items at fair
        value that are not currently required to be measured at fair value. The SFAS
        159
        became effective for us on January 1, 2008. The Company chose not to elect
        the
        option to measure the fair value of eligible financial assets and
        liabilities.
  In
        December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
        Consolidated Financial Statements - an amendment of Accounting Research Bulletin
        No. 51” (“SFAS 160”), which establishes accounting and reporting standards for
        ownership interests ** in
        subsidiaries held by parties other than the parent, the amount of consolidated
        net income attributable to the parent and to the noncontrolling interest,
        changes in a parent’s ownership interest and the valuation of retained
        non-controlling equity investments when a subsidiary is deconsolidated. The
        Statement also establishes reporting requirements that provide sufficient
        disclosures that clearly ** identify
        and distinguish between the interests of the parent and the interests of
        the
        non-controlling owners. SFAS 160 is effective for ** fiscal
        years beginning after December 15, 2008. The Company has not determined the
        effect that the application of SFAS 160 will ** have
        on
        its consolidated financial statements.
  13
  EVER-GLORY
          INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
 NOTES
          TO
          THE CONSOLIDATED FINANCIAL STATEMENTS
 
 JUNE
          30,
          2008 (UNAUDITED)
  In
        December 2007, the FASB issued SFAS 141R, “Business Combinations,” which applies
        to all transactions or other events in which an entity obtains control of
        one or
        more businesses, including those sometimes referred to as “true mergers” or
“mergers of equals” and combinations achieved without the transfer of
        consideration. This statement replaces FASB Statement No. 141 and applies
        to all
        business entities, including mutual entities that previously used the
        pooling-of-interests method of accounting for some business combinations.
        The
        Company believes that adoption of the FAS 141R will have a material effect
        on
        future acquisitions.
 
 In
        May
        2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
        Accounting Principles.” This Statement identifies the sources of accounting
        principles and the framework for selecting the principles to be used in the
        preparation of financial statements of nongovernmental entities that are
        presented in conformity with GAAP in the United States (the GAAP hierarchy).
        This Statement will not have any impact on the Company’s consolidated financial
        statements.
  In
        May
        2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee
        Insurance Contracts, an interpretation of FASB Statement No. 60.” The scope of
        this Statement is limited to financial guarantee insurance (and reinsurance)
        contracts, as described in this Statement, issued by enterprises included
        within
        the scope of Statement 60. Accordingly, this Statement does not apply to
        financial guarantee contracts issued by enterprises excluded from the scope
        of
        Statement 60 or to some insurance contracts that seem similar to financial
        guarantee insurance contracts issued by insurance enterprises (such as mortgage
        guaranty insurance or credit insurance on trade receivables). This Statement
        also does not apply to financial guarantee insurance contracts that are
        derivative instruments included within the scope of FASB Statement No. 133,
        “Accounting for Derivative Instruments and Hedging Activities.” This Statement
        will not have any impact on the Company’s consolidated financial
        statements.
 
 In
        June
        2008, the FASB issued Emerging Issues Task Force Issue 07-5 “Determining whether
        an Instrument (or Embedded Feature) is indexed to an Entity’s Own Stock” (“EITF
        No. 07-5”). This Issue is effective for financial statements issued for fiscal
        years beginning after December 15, 2008, and interim periods within those
        fiscal
        years. Early application is not permitted. Paragraph 11(a) of Statement of
        Financial Accounting Standard No 133 “Accounting for Derivatives and Hedging
        Activities” (“SFAS 133”) specifies that a contract that would otherwise meet the
        definition of a derivative but is both (a) indexed to the Company’s own
        stock and (b) classified in stockholders’ equity in the statement of
        financial position would not be considered a derivative financial instrument.
        EITF No.07-5 provides a new two-step model to be applied in determining whether
        a financial instrument or an embedded feature is indexed to an issuer’s own
        stock and thus able to qualify for the SFAS 133 paragraph 11(a) scope exception.
        Management is currently evaluating the impact of adoption of EITF No. 07-5
        on
        the Company’s consolidated financial statements.
 
 In
        June
        2008, FASB issued EITF Issue No. 08-4, “Transition Guidance for Conforming
        Changes to Issue No. 98-5 (“EITF No. 08-4”)”. The objective of EITF No.08-4
        is to provide transition guidance for conforming changes made to EITF No.
        98-5,
“Accounting for Convertible Securities with Beneficial Conversion Features
        or
        Contingently Adjustable Conversion Ratios”, that result from EITF No. 00-27
“Application of Issue No. 98-5 to Certain Convertible Instruments”, and SFAS No.
        150, “Accounting for Certain Financial Instruments with Characteristics of both
        Liabilities and Equity”. This Issue is effective for financial statements issued
        for fiscal years ending after December 15, 2008. Early application is
        permitted. Management is currently evaluating the impact of adoption of
        EITF No. 08-4 on the accounting for the convertible notes and related warrants
        transactions.
   14
  EVER-GLORY
          INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
 NOTES
          TO
          THE CONSOLIDATED FINANCIAL STATEMENTS
 
 JUNE
          30,
          2008 (UNAUDITED)
 **Reclassifications
        and restatements**
 
 Certain
        prior period amounts have been reclassified to conform to current period
        presentation. These reclassifications have no effect on net income or cash
        flows.
 
 In
        addition, due to the acquisition of Catch-Luck, an entity under common control,
        operating results of Catch-Luck for the six months and three months ended
        June
        30, 2007 were included in the consolidated financial statements as if the
        transactions had occurred at the beginning of the first period presented.
        In
        this regard, the prior period’s financial statements and financial information
        have been restated to furnish comparative information.
 
 **NOTE
        3 - SUPPLEMENTAL DISCLOSURE OF CASH**
 
 The
        Company prepares its statements of cash flows using the indirect method as
        defined under the SFAS No. 95. The following information relates to non-cash
        investing and financing activities for the six months ended June 2008 and
        2007.
 
 During
        the six month ended June 30, 2008, investors of the Convertible notes (See
        Note
        11 for details) converted $750,000 of principal plus accrued interest of
        $2,155
        into 341,893 shares of common stock of the Company.
 
 **NOTE
        4 - ACCOUNTS RECEIVABLE**
 
 Accounts
        receivable at June 30, 2008 and December 31, 2007 consisted of the following:
 
 2008
              
              2007Accounts
                  receivable
              
              $
              17,771,678
              
              $
              13,035,299Less:
                  allowance for doubtful accounts
              
              
              —
              
              
              —Accounts
                  receivable, net of allowance
              
              $
              17,771,678
              
              $
              13,035,299
 
 As
        of
        June 30, 2008 and December 31, 2007, the Company considered all accounts
        receivable collectable and did not record a provision for doubtful accounts.
 
 **NOTE
        5 - INVENTORIES**
 
 Inventories
        at June, 30 2008 and December 31, 2007 consisted of the following:
 
 June
                  30,
              
              December
                  31,2008
              
              2007(Unaudited)Raw
                  materials
              
              $
              209,442
              
              $
              304,178Work-in
                  -progress
              
              
              403,418
              
              
              338,599Finished
                  goods
              
              
              1,669,508
              
              
              1,254,2462,282,368
              
              
              1,897,023Less:
                  provision of obsolescence
              
              
              —
              
              
              —Inventories,
                  net
              
              $
              2,282,368
              
              $
              1,897,023
 
 **NOTE
        6 -INVESTMENT IN SUBSIDIARY**
 
 On
        January 9, 2008, Goldenway entered into a Capital Contribution Agreement
        (“Capital Contribution Agreement”) with Shanghai La Chapelle Garment and
        Accessories Company Limited (“La Chapelle”), a Shanghai-based garment retailer,
        and several shareholders of La Chapelle. Under the terms of the Capital
        Contribution Agreement, Goldenway agreed to invest approximately $1.46 million
        in cash (RMB10 million) in La Chapelle for a 10% ownership interest in La
        Chapelle. This investment is accounted for using the cost method.
   15
 EVER-GLORY
          INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
 NOTES
          TO
          THE CONSOLIDATED FINANCIAL STATEMENTS
 
 JUNE
          30,
          2008 (UNAUDITED)
  **NOTE
        7 - LAND USE RIGHTS**
 
 On
        September 24, 2006, the Company obtained a fifty-year land use right on 112,442
        square meters of land in the Nanjing Jiangning Economic and Technological
        Development Zone.
 
 Land
        use
        rights at June 30, 2008 and December 31, 2007 consisted of the
        following:
 
 2008
              
              2007Land
                  use rights
              
              $
              3,052,078
              
              $
              2,867,991Less:
                  accumulated amortization
              
              
              (180,427
              )
              
              (138,808
              )Land
                  use rights, net
              
              $
              2,871,651
              
              $
              2,729,183
 
 Amortization
        expense for the six months ended June 30, 2008 and 2007 amounted to $31,799
        and
        $27,257, respectively, and were $16,132 and $12,833 for the three months
        ended
        June 30, 2008 and 2007, respectively.
 
 **NOTE
        8 - PROPERTY AND EQUIPMENT**
 
 The
        following is a summary of property and equipment at June 30, 2008 and December
        31, 2007:
 2008
              
              2007Property
                  and plant
              
              $
              11,688,379
              
              $
              11,354,623Equipment
                  and machinery
              
              
              4,103,787
              
              
              3,128,928Office
                  equipment and furniture
              
              
              267,139
              
              
              208,327Motor
                  vehicles
              
              
              208,157
              
              
              165,393Construction
                  in progress
              
              
              18,335
              
              
              3,51916,285,797
              
              
              14,860,790Less:
                  accumulated depreciation
              
              
              3,478,412
              
              
              2,719,887Property
                  and equipment, net
              
              $
              12,807,385
              
              $
              12,140,903
 
 Depreciation
        expense for the six months ended June 30, 2008 and 2007 was $454,200 and
        $409,935, respectively, and was $231,433 and $202,523 for the three months
        ended
        June 30, 2008 and 2007, respectively. For the six months and three months
        ended
        June 30, 2008 and 2007, no interest was capitalized.
 
 **NOTE
        9 - OTHER PAYABLES AND ACCRUED LIABILITIES**
 
 Other
        payables and accrued liabilities at June 30, 2008 and December 31, 2007
        consisted of the following:
 
 June
                  30,
              
              December
                  31,2008
              
              2007(Unaudited)Building
                  construction costs payable
              
              $
              658,573
              
              $
              390,207Accrued
                  professional fees
              
              
              164,862
              
              
              252,495Accrued
                  wages and welfare
              
              
              415,184
              
              
              337,995Other
                  payables
              
              
              123,461
              
              
              88,985Total
                  other payables and accrued liabilities
              
              $
              1,362,080
              
              $
              1,069,682
  16
  EVER-GLORY
          INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
 NOTES
          TO
          THE CONSOLIDATED FINANCIAL STATEMENTS
 
 JUNE
          30,
          2008 (UNAUDITED)
  **NOTE
        10 - BANK LOANS**
 
 Bank
        loans represent amounts due to various banks and are due on demand or normally
        within one year. These loans generally can be renewed with the banks. As
        of June
        30, 2008 and December 31, 2007, Short term bank loans consisted of the
        following:
 
 June
                  30,
              
              December
                  31,2008
              
              2007(Unaudited)Loan
                  from a bank, interest rate at 0.5442% per monthdue
                  February 9, 2008; paid in full, January 2008.
              
              $
              —
              
              $
              1,371,000Loan
                  from a bank, interest rate at 0.58482% per monthdue
                  May 11, 2008
              
              
              —
              
              
              685,500Loan
                  from a bank, interest rate at 0.58482% per monthdue
                  June 2, 2008
              
              
              —
              
              
              1,371,000Loan
                  from a bank, interest rate at 0.58482% per monthdue
                  June 12, 2008
              
              
              —
              
              
              1,371,000Loan
                  from a bank, interest rate at 0.60225% per monthdue
                  July 31, 2008
              
              
              5,777,640
              
              
              —Total
                  bank loans
              
              $
              5,777,640
              
              $
              4,798,500
 
 These
        bank loans are all collateralized by land use rights and buildings of the
        Company. The Company repaid the outstanding bank loan in full on July 25,
        2008.
 
 Total
        interest expense on the bank loans for the six months ended June 30, 2008
        and
        2007 amounted to $144,346 and $128,061, respectively, and were $75,487 and
        $54,466 for the three months ended June 30, 2008 and 2007,
        respectively.
 
 **NOTE
        11 - CONVERTIBLE NOTES PAYABLE**
 
 On
        August
        2, 2007, the Company consummated a private placement of $2,000,000 principal
        amount of 6% secured convertible notes with five-year common stock warrants
        to
        six accredited investors. Financing cost of $242,520 was paid out of the
        gross
        proceeds. Pursuant to APB 21, financing cost is amortized over the life of
        the
        notes to interest expense using the effective interest method. For the six
        months and three months ended June 30, 2008, the Company amortized $60,630
        and $
        30,315 of financing costs to interest expense.
 
 The
        secured convertible notes are due August 2, 2009 and were originally convertible
        into 9,090,909 shares of common stock of the Company at a conversion price
        of
        $0.22 per share. In November 2007, a 10:1 reverse stock split was made effective
        on its common stock. Accordingly, the number of share of common stock
        convertible from the notes was adjusted to 909,091 at a conversion price
        of
        $2.20 per share.
 
 The
        notes
        are subject to full-ratchet anti-dilution protection, i.e. if the Company
        issues
        shares at an average per-share price below $2.20 per share, the conversion
        price
        of the notes shall be adjusted downward to match the lower per-share price.
        Under the terms of the notes, the full-ratchet anti-dilution adjustments
        do not
        apply to (i) shares issued upon conversion of options under for a future
        stock
        option plan (ii) shares issued to third parties for acquisitions valued above
        $8
        million; (iii) shares issued to non-affiliates for services rendered to the
        Company. The holders of the notes may convert the unpaid principal amount
        of the
        notes into common stock of the Company at any time prior to maturity, at
        the
        applicable conversion price. The Company may at any time at its option, redeem
        the notes by paying 125% of the unpaid principal and accrued interest.
  The
          Company issued warrants to the investors in the note financing, for the
          purchase
          of up to a total of 909,091 shares of common stock at an exercise price
          of
          $3.20.  The warrants are exercisable through September 29, 2013. The
          warrants are also subject to full-ratchet anti-dilution protection in the
          event
          that the Company issues shares (with certain exceptions) at an average
          per-share
          price below $3.20 per share, same as the notes. A registration statement
          covering the resale of the warrant shares was declared effective June 6,
          2008. On April 14, 2008, 13,636 shares of common stock were issued for
          exercise
          of warrants.
 
 The
          notes
          are secured by all of the assets of the Company, excluding its subsidiaries.
          Pursuant to a security agreement, the Company’s performance of the notes and
          other obligations in connection with the financing is also secured by a
          pledge
          of 2,961,720 shares of common stock personally held by the current CEO of
          the Company pursuant to a stock pledge agreement. Upon any event of default
          (as
          defined in the notes, the security agreement and the stock pledge agreement),
          the investors will be entitled to exercise their respective rights under
          the
          security agreement and stock pledge agreement. In addition, the subsidiaries
          of
          the Company, Perfect Dream and Goldenway, each guaranteed the performance
          of the
          Company’s obligations under the notes and the subscription agreement under a
          guaranty agreement.
 17
  EVER-GLORY
          INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
 NOTES
          TO
          THE CONSOLIDATED FINANCIAL STATEMENTS
 
 JUNE
          30,
          2008 (UNAUDITED)
 On
        the
        issuance date, the Company recorded a discount on the note related to the
        intrinsic value of the beneficial conversion feature totaling $943,797 and
        $1,056,203 for the fair value of the warrants issued. The fair value of warrants
        was calculated using the Binomial model with the following assumptions: (i)
        risk-free interest rate of 4.62%; (ii) expected life (in years) of 6; (iii)
        expected volatility of 112%;(iv) expected dividend yield of 0.00%; and (v)
        stock
        market price of $2.70. The discount on notes payable is amortized using
        effective interest method over 2 years. For the six months and three months
        ended June 30, 2008, the Company recorded amortization of $31,801 and $22,164
        as
        interest expense in the statement of operations.
 
 As
        of
        June 30, 2008, the note holders had converted $750,000 of principal plus
        accrued
        interest of $2,155 into 341,893 shares of common stock of the Company. Due
        to
        the conversion, the Company recorded $750,000 of unamortized discount as
        interest expense for the period ended June 30, 2008.
 
 The
        notes
        bear a 6% annual interest rate payable in arrears on the last business day
        of
        each calendar quarter thereafter and on the maturity date. For the six months
        and three months ended June 30, 2008, $45,985 and $19,143 were recorded as
        interest expense.
 
 On
        January 4, 2008, the Company issued 72,728 warrants to the placement agent
        with
        an exercise price of $3.20 per share (“Warrants”). The Warrants expire January
        4, 2011. These warrants were issued in connection with the private placement
        described above. The warrants were valued at $130,082 using the Black Scholes
        Model and will be amortized over the life of the convertible notes. For the
        six
        months and three months ended June 30, 2008, the Company recorded $59,621
        and
        $16,260 for amortization of the debt issuance costs as interest expense in
        the
        statement of operations.
 
 **NOTE
        12 - INCOME TAX**
 
 Ever-Glory
        International Group, Inc. was incorporated in the United States and has
        incurred net operating losses for income tax purposes for 2008 and
        2007.
 
 Perfect
        Dream was incorporated in the British Virgin Islands and under the current
        laws
        of the British Virgin Islands, is not subject to tax on income or on
        capital.
 
 Goldenway
        was incorporated in the PRC and is subject to PRC income tax laws and
        regulations. The applicable tax rate has been 24%. In 2007, Goldenway is
        entitled to a refund of 50% of any income taxes paid for achieving export
        sales
        in excess of 70% of the total sales in a calendar year. In 2008, Goldenway’s
        income tax rate is 25%.
 
 New-Tailun
        and Catch-Luck were incorporated in the PRC and are subject to PRC income
        tax
        laws and regulations. According to the relevant laws and regulations in the
        PRC,
        enterprises with foreign investment in the PRC are entitled to full exemption
        from income tax for two years beginning from the first year the enterprises
        become profitable and has accumulated profits and a 50% income tax reduction
        for
        the subsequent three years. New-Tailun and Catch-Luck were approved as wholly
        foreign-owned enterprises in 2006 and are entitled to the income tax exemptions
        in 2006 and 2007. In 2007, no income tax was recorded by New-Tailun and
        Catch-Luck as these entities were entitled to full exemption from income
        tax.
        Starting from 2008 to 2010, New-Tailun and Catch-Luck are entitled to a 50%
        reduction of the income tax rate of 25%. Therefore these two subsidiaries
        are
        taxed at 12.5% for the years of 2008, 2009 and 2010.
 
 La
        Go Go
        was established on January 24, 2008, its income tax rate is 25%.
  18
  EVER-GLORY
        INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 
 JUNE
        30,
        2008 (UNAUDITED)
 
 Provision
        for income tax for the six months ended June 31, 2008 and 2007 amounted to
        $568,647 and $82,323, respectively.
 
 The
        following table reconciles the statutory rates to the Company’s effective tax
        rate for the six months ended June 30, 2008 and 2007:
  2008
                
                2007U.S.
                    Statutory rate
                
                
                34.0
                %
                
                34.0
                %Foreign
                    income not recognized in USA
                
                
                (34.0
                )
                
                (34.0
                )China
                    income taxes
                
                
                25.0
                
                
                33.0China
                    income tax exemption
                
                
                (12.0
                )
                
                (29.0
                )Effective
                    income tax rate
                
                
                13.0
                %
                
                4.0
                %
 
 Ever-Glory
        International Group Inc. was incorporated in the United States and has incurred
        net operating losses for income tax purposes up to June 30, 2008. The net
        operating loss carry forwards for United States income taxes amounted to
        $566,375 which may be available to reduce future years’ taxable income. These
        carry forwards will expire, if not utilized, through 2028. Management believes
        that the realization of the benefits from these losses appears uncertain
        due to
        the Company’ limited operating history and continuing losses for United States
        income tax purposes. Accordingly, the Company has provided a 100% valuation
        allowance on the deferred tax asset benefit to reduce the asset to zero.
        The
        valuation allowance at June 30, 2008 was approximately $193,000. Management
        will
        review this valuation allowance periodically and make adjustments as
        warranted.
 
 Value
        added tax
 
 Enterprises
        or individuals who sell commodities, engage in repair and maintenance or
        import
        and export goods in the PRC are subject to a value added tax, VAT, in accordance
        with Chinese laws. The VAT standard rate is 17% of the gross sales price.
        A
        credit is available whereby VAT paid on the purchases of semi-finished products
        or raw materials used in the production of the Company’s finished products can
        be used to offset the VAT due on sales of the finished product.
 
 VAT
        on
        sales and VAT on purchases amounted to $6,651,985 and $5,693,853 for the
        six
        months ended June 30, 2008 and $4,132,596 and $3,773,129 for the six months
        ended June 30, 2007, respectively.
 
 VAT
        on
        sales and VAT on purchases amounted to $3,706,892 and $3,194,510 for the
        three
        months ended June 30, 2008 and $1,634,020 and $1,585,516 for the three months
        ended June 30, 2007, respectively.
 
 Sales
        and
        purchases are recorded net of VAT collected and paid as the Company acts
        as an
        agent because the VAT taxes are not impacted by the income tax
        holiday.
  19
  EVER-GLORY
          INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
 NOTES
          TO
          THE CONSOLIDATED FINANCIAL STATEMENTS
 
 JUNE
          30,
          2008 (UNAUDITED)
  **NOTE
        13 - EARNINGS PER SHARE**
 
 As
        discussed in Note 2, all share and per share amounts used in the Company's
        financial statements and notes thereto have been retroactively restated to
        reflect the 10-for-1 reverse stock split, which occurred on November 20,
        2007.
 
 The
        following demonstrates the calculation for earnings per share for the six
        months
        and three months ended June 30:
 **For
                          the six months ended**
                      
                      **For
                          the three months ended****June
                          30,**
                      
                      **June
                          30,**2008
                      
                      2007
                      
                      2008
                      
                      2007Net
                          income
                      
                      $
                      2,546,597
                      
                      $
                      2,264,719
                      
                      $
                      1,349,304
                      
                      $
                      1,026,977Add:
                          interest expense related to convertible notes
                      
                      
                      45,985
                      
                      
                      —
                      
                      
                      19,143
                      
                      
                      —Subtract:
                          Unamortized issuance costs and discount on convertible
                          notes
                      
                      
                      (1,394,522
                      )
                      
                      —
                      
                      
                      (1,394,522
                      )
                      
                      —Adjusted
                          net income (loss) for calculating EPS-diluted
                      
                      $
                      1,198,060
                      
                      $
                      2,264,719
                      
                      $
                      (26,075
                      )
                      $
                      1,026,977Weighted
                          average number of common stock - Basic
                      
                      
                      11,580,273
                      
                      
                      4,080,509
                      
                      
                      11,710,865
                      
                      
                      4,080,509Effect
                          of dilutive securities:Convertible
                          notes
                      
                      
                      711,485
                      
                      
                      —
                      
                      
                      817,730
                      
                      
                      —Series
                          A Convertible preferred stock
                      
                      
                      —
                      
                      
                      5,991,499
                      
                      
                      —
                      
                      
                      5,991,499Weighted
                          average number of common stock - Diluted
                      
                      
                      12,291,758
                      
                      
                      10,072,008
                      
                      
                      12,528,595
                      
                      
                      10,072,008Earnings
                          per share - basic
                      
                      $
                      0.22
                      
                      $
                      0.56
                      
                      $
                      0.12
                      
                      $
                      0.25Earnings
                          per share -diluted
                      
                      $
                      0.10
                      
                      $
                      0.22
                      
                      $
                      —
                      
                      $
                      0.10
  As
        of
        June 30, 2008, the Company included all shares issuable upon conversion of
        the
        convertible notes and warrants in diluted earnings per share.
 
 **NOTE
        14 - STOCKHOLDERS’ EQUITY**
 
 **Authorized
        Shares of Common Stock**
 
 On
        August
        10, 2006, holders of a majority of the capital stock of the Company approved
        an
        amendment to the Company’s articles of incorporation, to increase the number of
        authorized shares of common stock from 100,000,000 to 500,000,000. On October
        3,
        2007, the Company filed a Certificate of Amendment to the articles of
        incorporation to effect the amendment. Further in November, a 10-to-1 reverse
        stock split became effective. The 10-to-1 reverse stock split reduced both
        the
        number of outstanding shares and the number of authorized shares of common
        stock
        to 1/10 th of the
        amount immediately prior to the reverse stock split. As a result of the reverse
        split of the Company’s common stock, the conversion price of the convertible
        notes was changed from $0.22 to $2.20 per share. The exercise price of the
        warrants issued in connection with the convertible notes was also changed
        from
        $0.32 to $3.20 per share. As of June 30, 2008, the authorized number of common
        shares was 50,000,000 with a par value of $0.001 per share.
 
 **Series
        A Convertible Preferred stock**
 
 On
        October 3, 2007, effective upon the filing of an amendment to its articles
        of
        incorporation, 789 shares of the Company’s Series A Preferred Stock were
        automatically converted into 5,991,080 common shares, after the effect of
        the
        10-for-1 reverse split. There was no outstanding shares of Series A
        convertible preferred stock at June 30, 2008.
  **Stock
        issued for acquisitions under common control**
 
 In
        September 2007, the Company issued 2,083,333 shares of restricted common
        stock
        at a market price of $4.80 per share totaling $10,000,000 as part of the
        consideration to a related company in the acquisition of
        New-Tailun.
 
 In
        September 2007, the Company issued 1,307,693 shares of restricted common
        stock
        at a market price of $2.6 per share totaling $3,400,000 as part of the
        consideration to a related company in the acquisition of
        Catch-Luck.
  20
  EVER-GLORY
          INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
 NOTES
          TO
          THE CONSOLIDATED FINANCIAL STATEMENTS
 
 JUNE
          30,
          2008 (UNAUDITED)
 **Conversion
        of convertible notes to common stock**
 
 On
        January 16, 2008, January 22, 2008 and February 6, 2008, the Company issued
        12,478 shares of common stock to pay fourth quarter interest of 2007 to six
        investors in connection with the senior convertible notes dated August 2,
        2007.
 
 During
        the six months ended June 30, 2008, four investors converted $750,000 of
        the
        convertible notes and $2,155 in accrued interest expense, into 341,893 shares
        of
        common stock.
 
 **Statutory
        reserve**
 
 The
        Company’s PRC subsidiaries are required to make appropriations to reserve funds,
        comprising the statutory surplus reserve, statutory public welfare fund and
        discretionary surplus reserve, based on after-tax net income determined in
        accordance with generally accepted accounting principles of the People’s
        Republic of China (the “PRC GAAP”). Appropriation to the statutory surplus
        reserve should be at least 10% of the after tax net income determined in
        accordance with PRC GAAP until the reserve is equal to 50% of the entities’
registered capital. Appropriations to the statutory public welfare fund are
        at
        10% of the after tax net income determined in accordance with PRC GAAP. The
        statutory public welfare fund is established for the purpose of providing
        employee facilities and other collective benefits to the employees and is
        non-distributable other than in liquidation. Appropriations to the discretionary
        surplus reserve are made at the discretion of the Board of Directors. Effective
        January 1, 2006, the Company is only required to contribute to one statutory
        reserve fund at 10% of net income after tax per annum, such contributions
        not to
        exceed 50% of the respective companies’ registered capital.
 
 As
        of
        June 30, 2008 and December 31, 2007, the Company recorded $3,449,498 and
        $3,437,379, respectively, in the statutory reserve.
 
 **Warrants**
 
 Following
        is a summary of the warrant activity:
 
 Outstanding
                  as of January 1, 2007
              
              
              —Granted
              
              
              909,091Forfeited
              
              
              —Exercised
              
              
              —Outstanding
                  as of December 31, 2007
              
              
              909,091Granted
              
              
              72,728Forfeited
              
              
              —Exercised
              
              
              (13,636
              )Outstanding
                  as of June 30, 2008
              
              
              968,183
 
 Following
        is a summary of the status of warrants outstanding at June 30, 2008:
 
 Outstanding
                  Warrants
              
              Exercisable
                  WarrantsExercise
                  Price
              
              Number
              
              Average
                  Remaining Contractual Life
              
              Average
                  Exercise Price
              
              Number
              
              Average
                  Remaining Contractual Life$3.20
              
              
              895,455
              
              
              4.93
              
              
              $3.20
              
              
              895,455
              
              
              4.93$3.20
              
              
              72,728
              
              
              2.51
              
              
              $3.20
              
              
              72,728
              
              
              2.51Total
              
              
              968,183
              
              
              
              
              
              
              
              
              968,183
  21
  EVER-GLORY
        INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 
 JUNE
        30,
        2008 (UNAUDITED)
 
 **NOTE
        15 - OTHER EXPENSE**
 
 Other
        expense consists primarily of foreign currency transaction loss due to the
        exchange rate fluctuation between the Company’s functional currency RMB and the
        foreign currency in which the transaction is denominated. For the six months
        and
        three months ended June 30, 2008, foreign currency exchange loss amounted
        to
        $217,506 and $27,288, respectively. The foreign currency exchange loss was
        immaterial for the six months and three months ended June 30, 2007.
 
 **NOTE
        16 - RELATED PARTY TRANSACTIONS**
 
 Mr.
        Kang
        is the Company’s chairman and chief executive officer. The Company purchased
        materials, sub-contracted certain manufacturing work, and sold products to
        companies under the control of Mr. Kang, and are detailed below. All related
        party outstanding balances are short term in nature and are expected to be
        settled in cash.
 
 **Sales
        and Cost of Sales to Related Parties**
  The
        Company sells products to Nanjing High-Tech Knitting & Weaving Technology
        Development Co., Ltd (“Nanjing Knitting”), a company controlled by Ever-Glory
        Enterprises (HK) Ltd.
  For
        the
        six months ended June 30, 2008, sales revenue and related cost of sales in
        connection with Nanjing Knitting amounted $492,562 and $461,384, respectively.
        For the same period of 2007, sales revenue and related cost of sales in
        connection with Nanjing Knitting were $454,016 and $421,984, respectively.
  For
        the
        three months ended June 30, 2008, sales revenue and related cost of sales
        in
        connection with Nanjing Knitting amounted to $67,461 and $58,636, respectively.
        For the same period of 2007, sales revenue and related cost of sales in
        connection with Nanjing Knitting were $407,188 and $377,110, respectively.
  **Purchases
        from and Sub-contracts with Related Parties**
 
 For
        the
        six months ended June 30, 2008 and 2007, the Company purchased raw materials
        of
        $690,949 and $287,131, respectively, from Nanjing Knitting. The Company provided
        raw materials to the sub-contractors who charged the Company a fixed labor
        charge for the sub-contracting work. For the three months ended June 30,
        2008
        and 2007, raw materials amounted to $20,404 and $104,876, respectively, were
        purchased from Nanjing Knitting.
  In
        addition, the Company sub-contracted certain manufacturing work valued at
        $68,919 and $56,501 for the six months and three months ended June 30, 2008,
        respectively, to Nanjing Knitting. No manufacturing work was sub-contracted
        to
        any related parties for the same periods of 2007.
  **Accounts
        receivable - related parties**
 
 As
        of
        June 30, 2008 and 2007, accounts receivable from entities controlled by Mr.
        Kang
        amounted to $7,335 and $158,235 for products sold and sub-contracting services
        provided. Account receivables - related parties were as follows:
 
 Receivable
                  from
              
              June
                  30, 2008
              
              December
                  31, 2007UnauditedEver-Glory
                  Enterprises (Chuzhou) Co., Ltd.
              
              $
              —
              
              $
              12,052Nanjing
                  High-Tech Knitting & Weaving Technology Development Co.,
                  Ltd.
              
              
              7,335
              
              
              146,183Total
                  accounts receivable - related parties
              
              $
              7,335
              
              $
              158,235
 
 
 22
  EVER-GLORY
        INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 
 JUNE
        30,
        2008 (UNAUDITED)
 
 **Advance
        on inventory purchase - related party**
  As
        of
        June 30, 2008, the Company advanced funds to Jiangsu Ever-Glory International
        Group Corp. to purchase raw material inventory in amount of $2,391,009. Interest
        is charged at 0.5% per month according to the balance at the end of each
        month.
        Interest income earned for the six months and three months ended June 30,
        2008
        were $75,464 and $45,197, respectively.
  **Accounts
        payable - related parties**
 
 The
        Company purchases raw material from and subcontracts some of its production
        to
        related parties which are under control of Mr. Kang. 10% of the ownership
        of
        Shanghai La Chapelle is owned by the Company. Shanghai La Chapelle also has
        a
        40% ownership interest in the joint venture La Go Go in which the Company
        has
        the rest of the 60% ownership. Balance of payables to Shanghai La Chapelle
        represents lease improvement expense for the new retail stores paid by Shanghai
        La Chapelle.
  As
        of
        June 30, 2008 and December 31, 2007, the Company owed $276,307 and $245,589
        to
        the related parties
 
 Due
                  to
              
              June
                  30, 2008
              
              December
                  31, 2007UnauditedKunshan
                  Enjin Fashion Co.,Ltd.
              
              $
              —
              
              $
              245,589Nanjing
                  Ever-kyowa Garment Washing Co.,
              
              
              252,857Nanjing
                  High-Tech Knitting & Woving Technology Development Co.,
                  Ltd
              
              
              11,085
              
              
              —Shanghai
                  La Chapelle Garment and Accessories Company Limited
              
              
              12,365
              
              
              —Total
                  accounts payable - related parties
              
              $
              276,307
              
              $
              245,589
 
 **Other
        payables - related parties**
 
 As
        of
        June 30, 2008 and December 31, 2007, amounts due to Ever-Glory Enterprises
        (HK)
        Ltd. were $980,575 and $650,000.
 
 For
        the
        amount of $980,575 due to Ever-Glory Hong Kong Limited as of June 30, 2008,
        $600,000 was due for the purchase of Catch-Luck while $380,575 was due for
        the
        Company’s going public fees paid by Ever-Glory Enterprises (HK)
        Ltd.
 
 For
        the
        amount of $650,000 due to Ever-Glory Hong Kong Limited as of December 31,
        2007,
        $600,000 was due for the purchase of Catch-Luck while $50,000 was due for
        the
        Company’s going public fees paid by Ever-Glory Hong Kong Limited.
 
 **Long
        term liability - related party**
 
 As
        of
        June 30, 2008 and December 31, 2007 the Company owed $2,601,556 and $4,474,985,
        respectively to Blue Power Holdings Limited., a company controlled by the
        Company’s CEO before December 31, 2007, for various advances received. Interest
        is charged at 6% per annum on the amounts due. The loans are due between
        July
        2010 and April 2011. For the six months ended June 30, 2008 and 2007, the
        Company accrued interest expense of $116,571 and $118,229, respectively.
        The
        accrued interest is included in the carrying amount of the loan in the
        accompanying balance sheets. On June 26, 2008, the Company repaid $1,990,000
        to
        Blue Power Holdings Limited.
  **Lease
        from a related party**
 
 The
        Company leased factory and office spaces from Jiangsu Ever-Glory International
        Group Corp., an entity controlled by the Company’s CEO. See Note 17 for the
        operating lease commitment.
  23
  EVER-GLORY
          INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
 NOTES
          TO
          THE CONSOLIDATED FINANCIAL STATEMENTS
 
 JUNE
          30,
          2008 (UNAUDITED)
  **NOTE
        17 - COMMITMENTS AND CONTINGENCIES**
 
 **Capital
        commitment**
 
 According
        to the Articles of Association of Goldenway, Goldenway had to fulfill its
        registered capital requirements of $17,487,894 within three years from February
        2, 2005. As of June 30, 2008, the Company had fulfilled $3,630,000 of its
        registered capital requirements and had a registered capital commitment of
        $13,857,894 payable by February 1, 2008. In March 2008, the Company obtained
        from the government an extension to July 25, 2008. On July 10, 2008, the
        Company
        injected $2,000,000 of registered capital to Goldenway. In July 2008, the
        Company obtained an extension to April 25, 2009 to fulfill the remaining
        capital contribution of $11,857,894.
  **Operating
        lease commitment**
 
 The
        Company leases factory and office space from Jiangsu Ever-Glory International
        Group Corp. under an operating lease which expired on March 31, 2008 at an
        annual rental of $26,256 and an operating lease which expires on December
        31,
        2009 at an annual rental of $49,644.
 
 For
        the
        six months ended June 30, 2008 and 2007, the Company recognized rental expense
        of $24,822 and $13,129, respectively. $12,411 and $6,564 were recorded as
        rental
        expense for the three months ended June 30, 2008 and 2007, respectively.
 
 As
        of
        June 30, 2008, the outstanding commitments of this non-cancelable lease for
        the
        years ended December 31, 2008 and 2009 were $49,644 and $99,288, respectively.
 
 **Contingent
        shares to be issued**
 
 Pursuant
        to the terms of the purchase agreement on acquisition of Catch-Luck, the
        Company
        will issue additional common shares to the original shareholder as
        follows:
 
 o
              At
                  the end of the first full fiscal year ending December 31, 2008
                  in which
                  Catch-Luck generates gross revenues of at least $19,000,000 and
                  net profit
                  of $1,500,000, Perfect Dream will issue 1,153,846 shares of the
                  Company’s
                  restricted common stock having a value of $3,000,000;
                  and
 
 o
              At
                  the end of the next full fiscal year ending December 31, 2009 in
                  which
                  Catch-Luck generates gross revenues of at least $19,000,000 and
                  net profit
                  of $1,500,000, Perfect Dream will issue 1,153,846 shares of the
                  Company’s
                  restricted common stock having a value of
                  $3,000,000.
 
 **Legal
        Proceedings**
 
 The
        Company was named as a defendant in an action pending in the U.S. District
        Court
        for the Northern District of Ohio. The action was filed on February 22, 2006
        by
        Plaintiff Douglas G. Furth. The other principal parties are named defendants
        John Zanic, Wilson-Davis & Co., and Godwin, Pappas, Longley & Ronquillo,
        LLP. The action alleges that the Company breached an agreement to provide
        1,000,000 shares of common stock in exchange for certain assistance in marketing
        and financial public relations services. The action seeks an award of damages
        in
        excess of $75,000. The Company denies they we were a party to such an agreement,
        or were are otherwise liable. The Company intends to vigorously its position.
        The complaint was dismissed without prejudice from an action pending in the
        U.S.
        District Court for the Northern District of Ohio. In May 2007, Plaintiff
        Douglas
        G. Furth filed a Second Amended Complaint asserting claims against the Company.
        The Company denies all the claims, filed objections and asked for dismissal
        with
        prejudice. No payment was made to plaintiff and no settlement has been discussed
        between us and the Plaintiff.   On November 29, 2007, we made a motion to
        dismiss the action for lack of personal jurisdiction, and a decision on this
        matter is pending.
  24
  EVER-GLORY
          INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
 NOTES
          TO
          THE CONSOLIDATED FINANCIAL STATEMENTS
 
 JUNE
          30,
          2008 (UNAUDITED)
  **NOTE
        18 - CONCENTRATIONS AND RISKS**
 
 Cash
        includes cash on hand and demand deposits in accounts maintained with
        state **** owned
        banks within the People’s Republic of China and Hong Kong. Total cash deposited
        with these banks at June 30, 2008 and December 31, 2007 amounted to $1,633,730
        and $641,739, respectively, of which no deposits are covered by insurance.
        The
        Company has not experienced any losses in such accounts and believes it is
        not
        exposed to any risks on its cash in bank accounts.
 
 The
        Company has two major customers which represent approximately 43.3 % and
        51.0%
        of the Company’s total sales for the six months ended June 30, 2008 and 2007,
        respectively. For the three months ended June 30, 2008 and 2007, two major
        customers represent approximately 46.2% and 48.4%, respectively. Two customers
        accounted for 29.5% of total accounts receivable as of June 30,
        2008.
 
 During
        the six months and three months ended June 30, 2008, the Company did not
        rely on
        any supplier. For the six months and three months ended June 30, 2007, one
        supplier represented 11% of the Company’s raw material purchase.
 
 The
        following is geographic information of the Company’s revenue for the three and
        six months ended June 30:
 **Three
                    months ended June 30,**
                
                **Six
                    months ended June 30,****2008**
                
                **2007**
                
                **2008**
                
                **2007**China
                
                $
                1,902,394
                
                $
                873,689
                
                $
                3,696,961
                
                $
                1,794,804Europe
                
                
                14,279,799
                
                
                7,927,943
                
                
                27,254,432
                
                
                18,552,676Japan
                
                
                3,313,527
                
                
                1,631,222
                
                
                5,813,499
                
                
                3,581,126United
                    States
                
                
                4,320,119
                
                
                3,665,181
                
                
                6,677,957
                
                
                6,594,828Revenue
                    from Original design manufacturing
                
                
                23,815,839
                
                
                14,098,035
                
                
                43,442,849
                
                
                30,523,434Revenue
                    from retail sales - China
                
                
                252,558
                
                
                
                
                
                372,756Total
                    revenue
                
                $
                24,068,397
                
                $
                14,098,035
                
                $
                43,815,605
                
                $
                30,523,434
 The
        Company's operations are carried out in the PRC. Accordingly, the Company's
        business, financial condition and results of operations may be influenced
        by the
        political, economic and legal environments in the PRC, and by the general
        state
        of the economy in the regions where the Company’s customers are located. The
        Company's operations in the PRC are subject to specific considerations and
        significant risks not typically associated with companies in the North America
        and Western Europe. These include risks associated with, among others, the
        political, economic and legal environments and foreign currency exchange.
        The
        Company's results may be adversely affected by changes in governmental policies
        with respect to laws and regulations, anti-inflationary measures, currency
        conversion and remittance abroad, and rates and methods of taxation, among
        other
        things.
 
 **NOTE
        19 - SUBSEQUENT EVENTS**
 
 According
        to the Articles of Association of Goldenway, Goldenway was obligated to fulfill,
        i.e., pay in, registered capital of $17,487,894 within three years from
        February 2, 2005. As of July 10, 2008, the Company had fulfilled $5,630,000
        of
        its registered capital requirements and had a registered capital commitment
        of
        $11,857,894 due by July 25, 2008. In July 2008, the Company obtained the
        approval from the government granting the extension to make the required
        capital
        contribution on or before April 25, 2009.
 
 On
        July
        16, 2008, the Company’s common stock began trading on the American Stock
        Exchange market under the trading symbol “EVK”.




On July 25, 2008, the Company paid off a bank loan in the
      amount of $5,777,640.




25





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





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





**Overview**




As
        the
        first Chinese apparel company listed on the American Stock Exchange, we are
        a
        leading apparel manufacturer and an apparel supplier to well-known, middle-
        to
        high-grade casual, outerwear and sportswear brands. We have strategic business
        partners in the U.S., Europe, Japan and China, including famous brands and
        retail chain stores. We
        also
        manufacture, market, and distribute our own branded products in our domestic
        market. We manufacture our apparel products in the People’s Republic of China
        (PRC) at our three factories located in the Nanjing Jiangning Economic and
        Technological Development Zone and Shangfang Town in the Jiangning District
        in
        Nanjing, China. We conduct our operations through three wholly-owned
        subsidiaries: Goldenway Nanjing Garments Company Limited (“Goldenway”), Nanjing
        New-Tailun Garments Company Limited (“New Tailun”), and Nanjing Catch-Luck
        Garments Co., Ltd. (“Catch-Luck”).





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





Although
      we have our own manufacturing capacity, we currently outsource most of our
      manufacturing to strategic alliances as a part of our overall business strategy.
      Outsourcing much of the manufacturing work allows us to maximize production
      capacity and maintain flexibility while managing capital expenditures and
      maintenance costs. We inspect products manufactured by our contractors to ensure
      that they meet our rigorous quality control standards.





For
      the
      six months ended June 30, 2008, approximately 62% of our revenues came from
      customers in Europe, 15% from customers in the United States, 13% from customers
      in Japan, and 10% from customers in China. For the six months ended June 30,
      2007, approximately 61% of our revenues came from customers in Europe, 22%
      from
      customers in the United States, 12% from customers in Japan, and 5% from
      customers in China. We believe that our Company currently maintains good
      relationships with our customers.





We
      purchase a majority of our raw materials directly from numerous local fabric
      and
      accessories suppliers. We **** also
      purchase finished goods from other contract manufacturers. For the six months
      ended June 30, 2008 and 2007, purchases from our five largest suppliers
      accounted for 24% and 32% of our total purchases, respectively. For the six
      months ended June 30, 2008, no purchases from a single supplier exceeded 10%
      of
      our total purchase amount. For the same period in 2007, purchases from our
      largest supplier accounted for 11% of our total purchases. We have not
      experienced difficulty in obtaining raw materials essential to our business,
      and
      we believe that our Company currently maintains good relationships with our
      suppliers.





As
      of
      June 30, 2008, our three factories in Nanjing employed over 1,800
      people and had an annual production capacity of over 12 million
      pieces.  As
      of
      June 30, 2008, La Go Go employed nearly 170 people. We consider relations with
      our employees to be satisfactory.





On
      April
      7, 2006, we acquired a fifty-year land use right on 112,442 square meters of
      land in the Nanjing Jiangning Economic and Technological Development Zone.
      The
      land contains an existing facility of 26,629 square meters, which includes
      manufacturing and office space. At the end of 2006, we completed construction
      of
      a new office building and adjoining factory. We consolidated our operations
      to
      our new headquarters and manufacturing facility in January 2007. The new
      manufacturing facility occupies an area of 10,000 square meters and is equipped
      with state-of-the-art equipment **.** The new
      land and building were used as collateral to obtain a two-year loan amounting
      to
      RMB 50,000,000 from Nanjing Bank. This loan matured on July 31, 2008, and the
      loan has been fully repaid as of the maturity date.




26




Our
      four
      operating subsidiaries, all of which are incorporated in the PRC, are governed
      by PRC income tax laws and are subject to the PRC enterprise income tax. Each
      of
      our consolidating entities files its own separate tax return, and we do not
      file
      a consolidated tax return. In 2007, Goldenway enjoyed a 50% reduction in its
      income tax as a foreign invested enterprise that exports over 70% of its output
      and was entitled a lower income tax rate of 12%. In 2008, the income tax rate
      for Goldenway was 25%. New-Tailun and Catch-Luck were entitled to two-year
      income tax exemptions effective for the 2006 and 2007 tax years, and for the
      three years thereafter (2008, 2009 and 2010), and, based on current income
      tax
      laws, these entities will be entitled to a 50% reduction in enterprise income
      tax rate of 25%. La
      Go Go
      was established on January 24, 2008, and its income tax rate is 25%. All
      of
      our income before income taxes and the income taxes that we pay are related
      to
      our operations in China.





*Private
      Placement Financing*





On
      August
      2, 2007, we completed a $2 million private placement involving the issuance
      of
      our secured convertible notes and warrants pursuant to subscription agreements
      (“Subscription Agreements”) with six accredited investors. This private
      placement financing closed on August 6, 2007. Under the terms of the financing,
      we issued and sold two-year secured convertible notes in the principal amount
      of
      $2,000,000 to investors, secured by all of the assets of Ever-Glory excluding
      its subsidiaries. As of
      June 30, 2008, the note holders converted $750,000 of principal plus accrued
      interest of $2,155 to 341,893 shares of common stock of the Company.





*Other
      Events*





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




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





**Sales and
      Expenses**




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





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





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




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





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





**CRITICAL
      ACCOUNTING POLICIES**





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





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




27




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





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





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





**RECENT
      ACCOUNTING PRONOUNCEMENTS**





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





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





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





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





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




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




28




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





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





**Results
      of Operations**





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




*Three
      Months Ended June 30, 2008 Compared to Three Months Ended June 30,
      2007*





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




Three
                    Months Ended June 30,2008
                
                2007
                
                Increase
                
                %
                    IncreaseSales
                
                $
                24,068,397
                
                
                100.0
                %
                $
                14,098,035
                
                
                100.00
                %
                $
                9,970,362
                
                
                70.7
                %Gross
                    Profit
                
                $
                4,353,837
                
                
                18.1
                %
                $
                2,238,455
                
                
                15.9
                %
                $
                2,115,382
                
                
                94.5
                %Operating
                    Expense
                
                $
                2,145,959
                
                
                8.9
                %
                $
                1,083,087
                
                
                7.7
                %
                $
                1,062,872
                
                
                98.1
                %Income
                    From Operations
                
                $
                2,207,878
                
                
                9.2
                %
                $
                1,155,368
                
                
                8.2
                %
                $
                1,052,510
                
                
                91.1
                %Other
                    Expenses
                
                $
                (574,385
                )
                
                -2.4
                %
                $
                (121,762
                )
                
                -0.9
                %
                $
                (452,623
                )
                
                371.7
                %Income
                    before income tax expenses
                
                $
                1,633,493
                
                
                6.8
                %
                $
                1,033,606
                
                
                7.3
                %
                $
                599,887
                
                
                58.0
                %Income
                    tax expenses
                
                $
                284,809
                
                
                1.2
                %
                $
                6,629
                
                
                0.0
                %
                $
                278,180
                
                
                4196.4
                %Minority
                    interest
                
                $
                (620
                )
                
                —
                
                
                —
                
                
                —
                
                $
                (620
                )
                
                —Net
                    Income
                
                $
                1,349,304
                
                
                5.6
                %
                $
                1,026,977
                
                
                7.3
                %
                $
                322,327
                
                
                31.4
                %




29




Revenue





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




**Three
                Months Ended June 30,**2008
            
            2007$
            
            %
                of total
              revenues
            
            $
            
            %
                of total
              revenues
            
            Growth
                in 2008
              Compared
                to 2007(in
                U.S. dollars, except for percentages)ODM
                SalesEurope
            
            
            14,279,799
            
            
            59.3
            %
            
            7,927,943
            
            
            56.2
            %
            
            80.1
            %U.S.
            
            
            4,320,119
            
            
            18.0
            %
            
            3,665,181
            
            
            26.0
            %
            
            17.9
            %Japan
            
            
            3,313,527
            
            
            13.8
            %
            
            1,631,222
            
            
            11.6
            %
            
            103.1
            %China
            
            
            1,902,394
            
            
            7.9
            %
            
            873,689
            
            
            6.2
            %
            
            117.8
            %Domestic
                Retail SalesRetail
            
            
            252,558
            
            
            1.0
            %
            
            —
            
            
            —
            
            
            —Total
                revenues
            
            
            24,068,397
            
            
            100.0
            %
            
            14,098,035
            
            
            100.0
            %
            
            70.7
            %





We
      generate revenues primarily from the original design manufacturing (ODM) of
      garments mainly for the export markets. In 2008, we entered the domestic retail
      market focusing on our own branded garments. Total sales for the three months
      ended June 30, 2008 were $24,068,397, an increase of 70.7% from $14,098,035
      for
      2007. The increase was primarily attributable to an overall increase in ODM
      sales to customers in Europe, U.S., Japan and the PRC.





ODM
      sales
      to customers in Europe **** accounted
      for 59.3% of our revenue for the three months ended June 30, 2008, up 80.1%
      as
      compared to the same period in 2007, mainly due to two new European customers,
      which increased our orders during the first two quarters of 2008.





ODM
      sales
      to customers in the U.S. **** accounted
      for 18.0% of our revenue for the three months ended June 30, 2008, up 17.9%
      compared to the same period in 2007, mainly due to orders from a new U.S.
      customer we attracted in 2008.





ODM
      sales
      to customers in Japan accounted for 13.8% of our revenue for the three months
      ended June 30, 2008, up 103.1% compared to the same period in 2007, as we became
      more successful with the premium brands in the Japanese market.





ODM
      sales
      to customers in China accounted for 7.9% of our revenue for the three months
      ended June 30, 2008, up 117.8% compared to the same period in 2007, as we
      received an increase in orders from our customers in Hong Kong.




Sales
      generated from the domestic retail market accounted for 1.0% of our revenue
      in
      2008.





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


**Three
                  Months Ended June 30,****Net
                  Sales**
              
              **2008**
              
              **2007**
              
              **Increase
                  (Decrease)**
              
              **%
                  Change**To
                  related parties
              
              $
              67,461
              
              
              0.3
              %
              $
              407,188
              
              
              2.
                  9
              %
              $
              (339,728
              )
              
              (83.4
              )%To
                  third parties
              
              $
              24,000,936
              
              
              99.7
              %
              $
              13,690,847
              
              
              97.1
              %
              $
              10,310,090
              
              
              75.3
              %Total
              
              $
              24,068,397
              
              
              100.0
              %
              $
              14,098,035
              
              
              100.0
              %
              $
              9,970,362
              
              
              70.7
              %






30





Net
      sales
      to related parties accounted for 0.3% of our total sales for the three months
      ended June 30, 2008, a decrease from 2.9% for the same period in 2007.
      Management expects sales to related parties will continue to constitute a small
      portion of our total sales.





Cost
      of Sales and Gross Margin





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


**Three
                  Months Ended June 30,****2008**
              
              **2007**
              
              **Change**
              
              **%
                  Change**Total
                  Net Sales
              
              $
              24,068,397
              
              
              100.0
              %
              $
              14,098,035
              
              
              100.0
              %
              $
              9,970,362
              
              
              70.7
              %Raw
                  materials
              
              $
              11,513,571
              
              
              47.8
              %
              $
              6,655,759
              
              
              47.2
              %
              $
              4,857,812
              
              
              73.0
              %Labor
              
              $
              778,921
              
              
              3.2
              %
              $
              827,425
              
              
              5.9
              %
              $
              (48,504
              )
              
              (5.9
              )%Outsource
                  Production Costs
              
              $
              7,071,341
              
              
              29.4
              %
              $
              4,115,411
              
              
              29.2
              %
              $
              2,955,930
              
              
              71.8
              %Other
                  and Overhead
              
              $
              268,475
              
              
              1.1
              %
              $
              260,985
              
              
              1.9
              %
              $
              7,490
              
              
              2.9
              %Retail-purchase
                  finishing garments from other factories
              
              $
              82,252
              
              
              0.4
              %
              
              —
              
              
              —
              
              
              —
              
              
              —Total
                  Cost of Sales
              
              $
              19,714,560
              
              
              81.9
              %
              $
              11,859,580
              
              
              84.1
              %
              $
              7,854,980
              
              
              66.2
              %Gross
                  Profit
              
              $
              4,353,837
              
              
              18.1
              %
              $
              2,238,455
              
              
              15.9
              %
              $
              2,115,382
              
              
              94.5
              %





Raw
      materials costs accounted for 47.8% of our total net sales for the three months
      ended June 30, 2008, an increase of 73.0% compared to the same period in the
      prior year. These costs, as a percentage of our total net sales, increased
      from
      47.2% to 47.8%. This slight increase was due to price increases of raw
      materials, particularly fabric.





Labor
      costs accounted for 3.2% of our total net sales for the three months ended
      June
      30, 2008, a 5.9% decrease from the same period in the prior year. This decrease
      was mainly due to a workforce reduction. In 2008, Goldenway increased
      outsourcing to independent contract manufacturers and reduced the number of
      its
      own line employees with the intention to better manage its labor
      costs.





Outsourcing
      production costs increased 71.8% for the three months ended June 30, 2008
      compared to the same period in the prior year. These costs, as a percentage
      of
      our total net sales, increased from 29.2% to 29.4%.





Overhead
      and other expenses accounted for 1.1% of our total net sales for the three
      months ended June 30, 2008, compared to 1.9% for the same period in 2007. This
      decrease was due to a reduction in our workforce.




Total
      cost of sales for the three months ended June 30, 2008 was $19,714,560, an
      increase of 66.2%, or $7,854,980, from $11,859,580 for the same period in 2007.
      As a percentage of total net sales, cost of sales for the three months ended
      June 30, 2008 decreased from 84.1% for the same period in 2007 to 81.9%.
      Consequently, gross margin as a percentage of revenues increased to
      approximately 18.1% from 15.9% for the same period in 2007. The increase in
      gross margin was attributable to better control of our manufacturing overhead
      and improvements in production efficiency.





The
      following table sets forth our total net sales, cost of sales, gross profit
      and
      gross margin of the geographic market segments indicated for the periods
      indicated.





**For
                the Three Months Ended**
            
            **For
                the Three Months Ended****June
                30, 2008**
            
            **June
                30, 2007****Net
                Sales**
            
            **Cost
                of**
              **sales**
            
            **Gross**
              **profit**
            
            **Gross**
              **margin**
            
            **Net
                Sales**
            
            **Cost
                of**
              **sales**
            
            **Gross**
              **profit**
            
            **Gross**
              **margin**ODM
                SalesEurope
            
            
            14,279,799
            
            
            11,683,442
            
            
            2,596,357
            
            
            18.2
            %
            
            7,927,943
            
            
            6,388,318
            
            
            1,539,625
            
            
            19.4
            %U.S.
            
            
            4,320,119
            
            
            3,808,467
            
            
            511,652
            
            
            11.8
            %
            
            3,665,181
            
            
            3,317,757
            
            
            347,424
            
            
            9.5
            %Japan
            
            
            3,313,527
            
            
            2,605,618
            
            
            707,909
            
            
            21.4
            %
            
            1,631,222
            
            
            1,352,741
            
            
            278,481
            
            
            17.1
            %China
            
            
            1,902,394
            
            
            1,533,271
            
            
            369,123
            
            
            19.4
            %
            
            873,689
            
            
            800,764
            
            
            72,925
            
            
            8.4
            %Domestic
                SalesRetail
            
            
            252,558
            
            
            83,762
            
            
            168,796
            
            
            66.8
            %
            
            —
            
            
            —
            
            
            —
            
            
            —Total
            
            
            24,068,397
            
            
            19,714,560
            
            
            4,353,837
            
            
            18.1
            %
            
            14,098,035
            
            
            11,859,580
            
            
            2,238,455
            
            
            15.9
            %




31




Gross
      margin in the EU was 18.2% for the three months ended June 30, 2008, compared
      to
      19.4% for the same period in 2007. Although we received more repeat orders
      in
      the second quarter of 2008, our gross margin decreased slightly due to an
      increase in the purchasing price of raw materials.





Gross
      margin in the U.S. was 11.8% for the three months ended June 30, 2008, compared
      to 9.5% for the same period in 2007, as we adjusted our customer structure
      and shifted from
      targeting mass markets to higher quality market segments. As a result, gross
      margin in the U.S. market improved.





Gross
      margin in Japan was 21.4% for the three months ended June 30, 2008, compared
      to
      17.1% for the same period in 2007, as we became more successful with premium
      brands. During the second quarter of 2008, 50% of our sales revenues came from
      two premiums, each of which had higher gross margins than work uniforms that
      we
      sold in the Japanese market.





Gross
      margin in China was 19.4% for the three months ended June 30, 2008, compared
      to
      8.4% for the same period in 2007, as we adjusted our customer structure and
      shifted from targeting mass markets to higher quality market
      segments





Overall
      gross margin for the three months ended June 30, 2008 was 18.1%, up from 15.9%
      for the same period in 2007, mainly as a result of improved gross profit margins
      that we achieved in most of our geographic markets but especially in the
      Japanese and Chinese markets.





Selling,
      and General and Administrative Expenses




**For
                  the Three Months Ended June 30,****2008**
              
              **2007****$**
              
              **%
                  of Total**
                **Net
                  Sales**
              
              **$**
              
              **%
                  of Total**
                **Net
                  Sales**
              
              **change**
              
              **%
                  change**(in
                  U.S. Dollars, except for percentages)Gross
                  Profit
              
              $
              4,353,837
              
              
              18.1
              %
              $
              2,238,455
              
              
              15.9
              %
              $
              2,115,382
              
              
              94.5
              %Operating
                  Expenses:Selling
                  Expenses
              
              
              368,564
              
              
              1.5
              %
              
              149,812
              
              
              1.1
              %
              $
              218,752
              
              
              146.0
              %General
                  and Administrative Expenses
              
              
              1,777,395
              
              
              7.4
              %
              
              933,275
              
              
              6.6
              %
              $
              844,120
              
              
              90.4
              %Total
              
              
              2,145,959
              
              
              8.9
              %
              
              1,083,087
              
              
              7.7
              %
              $
              1,062,872
              
              
              98.1
              %Income
                  from Operations
              
              
              2,207,878
              
              
              9.2
              %
              
              1,155,368
              
              
              8.2
              %
              $
              1,052,510
              
              
              91.1
              %





Selling
      expenses in 2008 increased by 146.0% from $149,812 in the three months ended
      June 30, 2007 to $368,564 in the three months ended June 30, 2008. This was
      due
      to increased traveling expenses and reception expenses incurred by our
      international sales force in efforts to attract new customers, increased export
      expenses, and $63,572 expended to promote our domestic La Go Go retail
      brand.





General
      and administrative expenses (G&A) increased by 90.4% from $933,275 in the
      three months ended June 30, 2007 to $1,777,395 in the three months ended June
      30, 2008. However, as a percentage of net sales, G&A expenses for the three
      month period increased slightly from 6.6% in 2007 to 7.4% in 2008. The increase
      is partially explained by the higher depreciation and amortization of our office
      facilities. Payroll also increased in the second quarter of 2008 as we hired
      more management staff to handle our business expansion. The increased in
      expenses incurred by our U.S. parent company for investor relations also
      affected our total G&A expenses.




32





Income
      from Operations




Income
      from operations increased by 91.1% from $1,155,368 in the three months ended
      June 30, 2007 to $2,207,878 in the three months ended June 30 2008 as we
      expanded market exposure, increased our sales volume and improved cost
      management during the current reporting period.





Interest
      Expenses


Three
                  Months Ended June 30,2008
              
              2007
              
              Increase
              
              %
                  IncreaseBank
                  Loans
              
              $
              75,489
              
              $
              70,066
              
              $
              5,423
              
              
              7.7
              %Related
                  party
              
              $
              57,455
              
              $
              59,534
              
              $
              (2,079
              )
              
              (3.5
              )%Convertible
                  notes interest
              
              $
              19,143
              
              
              —
              
              $
              19,143
              
              
              —Convertible
                  notes-amortization of discount
              
              $
              479,039
              
              
              —
              
              $
              479,039
              
              
              —Total
              
              $
              631,126
              
              $
              129,600
              
              $
              501,526
              
              
              387.0
              %





Interest
      expense was $631,126 for the three months ended June 30, 2008 compared to
      $129,600 for the same period in 2007. This increase was mainly due to the
      interest expense incurred related to the convertible notes issued in August
      2007.





Other
      Expenses





Other
      expenses increased $44,893 from $41 in the three months ended June 30, 2007
      to
      $44,934 in the three months ended June 30, 2008. **** This
      increase was mainly
      attributable to the foreign currency transaction loss due to the exchange rate
      fluctuation between our functional currency (RMB) and the foreign currency
      in
      which transactions were denominated .





Income
      Tax Expenses




Income
      tax expenses for the three months ended June 30, 2008 and 2007 amounted to
      $284,809 and $6,629, respectively. This increase was due to the expiration
      of
      Goldenway’s tax holiday, resulting in Goldenway becoming subject to a 25%
      Chinese enterprise income tax rate on January 1, 2008. Catch Luck and New-Tailun
      are subject to a preferential tax rate of 12.5% for three years beginning with
      2008.




Net
      Income





Net
      income for the three months ended June 30, 2008 was $1,349,304, an increase
      of
      $322,327 or 31.4% from net income of $1,026,977 in the same period in
      2007.





*Six
      Months Ended June 30, 2008 Compared to Six Months Ended June 30,
      2007*





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





Six
                  Months Ended June 30,2008
              
              2007
              
              Increase
              
              %
                  IncreaseSales
              
              $
              43,815,605
              
              
              100.0
              %
              $
              30,523,434
              
              
              100.0
              %
              $
              13,292,171
              
              
              43.6
              %Gross
                  Profit
              
              $
              8,074,873
              
              
              18.4
              %
              $
              4,631,141
              
              
              15.2
              %
              $
              3,443,732
              
              
              74.4
              %Operating
                  Expense
              
              $
              3,644,974
              
              
              8.3
              %
              $
              2,031,873
              
              
              6.7
              %
              $
              1,613,101
              
              
              79.4
              %Income
                  From Operations
              
              $
              4,429,899
              
              
              10.1
              %
              $
              2,599,268
              
              
              8.5
              %
              $
              1,830,631
              
              
              70.4
              %Other
                  Expenses
              
              $
              (1,311,406
              )
              
              -3.0
              %
              $
              (252,226
              )
              
              -0.8
              %
              $
              (1,059,180
              )
              
              419.9
              %Income
                  before income tax expenses
              
              $
              3,118,493
              
              
              7.1
              %
              $
              2,347,042
              
              
              7.7
              %
              $
              771,451
              
              
              32.9
              %Income
                  tax expenses
              
              $
              568,647
              
              
              1.3
              %
              $
              82,323
              
              
              0.3
              %
              $
              486,324
              
              
              590.8
              %Minority
                  interest
              
              $
              3,249
              
              
              —
              
              
              —
              
              
              —
              
              $
              3,249
              
              
              —Net
                  Income
              
              $
              2,546,597
              
              
              5.8
              %
              $
              2,264,719
              
              
              7.4
              %
              $
              281,878
              
              
              12.5
              %




33




Revenue





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





**Six
                Months Ended June 30,**2008
            
            2007$
            
            %
                of total
              revenues
            
            $
            
            %
                of total
              revenues
            
            Growth
                in 2008
              compared
                to 2007(in
                U.S. dollars, except for percentages)ODM
                SalesEurope
            
            
            27,254,432
            
            
            62.2
            %
            
            18,552,676
            
            
            60.8
            %
            
            46.9
            %U.S.
            
            
            6,677,957
            
            
            15.2
            %
            
            6,594,828
            
            
            21.6
            %
            
            1.3
            %Japan
            
            
            5,813,499
            
            
            13.3
            %
            
            3,581,126
            
            
            11.7
            %
            
            62.3
            %China
            
            
            3,696,961
            
            
            8.4
            %
            
            1,794,804
            
            
            5.9
            %
            
            106.0
            %Domestic
                Retail SalesRetail
            
            
            372,756
            
            
            0.9
            %
            
            —
            
            
            —
            
            
            —Total
                revenues
            
            
            43,815,605
            
            
            100.0
            %
            
            30,523,434
            
            
            100.0
            %
            
            43.6
            %





We
      generate revenues primarily from the original design manufacturing (ODM) of
      garments mainly for the export markets and have entered into the domestic retail
      market focusing on our own branded garments during 2008. Sales for the six
      months ended June 30, 2008 were $43,815,605, an increase of 43.6% from
      $30,523,434 for 2007. The increase was primarily attributable to an overall
      increase in ODM sales to customers in Europe, U.S., Japan and the PRC.





ODM
      sales
      to customers in Europe **** accounted
      for 62.2% of our revenue in the six months ended June 30, 2008, up 46.9% as
      compared to the same period in 2007. In 2008, we attracted two new customers
      in
      Europe, which increased orders during the first six months of 2008, and we
      also
      received an increase in orders from our largest customer in Europe.





ODM
      sales
      to customers in the U.S. **** accounted
      for 15.2% of our revenue in the six months ended June 30, 2008. Sales revenues
      were consistent between the six months ended June 30, 2008 and 2007. Due to
      the
      increase in sales in other geographic markets, however, sales generated in
      the
      U.S. market as a percentage of total global sales decreased by
      6.4%.





Sales
      to
      customers in Japan accounted for 13.3% of our revenue in the six months ended
      June 30, 2008, up 62.3% compared to the same period in 2007, as we were more
      successful with premium brands in the Japanese market.





Sales
      to
      customers in the PRC market accounted for 8.4% of our revenue in 2008, up 106.0%
      compared to the same period in 2007, as we received an increase in orders from
      our customers in Hong Kong.





Sales
      from the domestic retail market accounted for 0.9% of our revenue in 2008.
      La Go
      Go was incorporated on January
      24, 2008 and obtained its retail license on April 3, 2008. As of June 30, 2008,
      we have 39 stores leased and/or managed with an average store size of 80 square
      meters. We continue to develop new retail stores, and, as of July 31, 2008,
      the
      number of retail stores increased to 44 stores located in 22
      cities.




34





Below
      is
      a breakdown of total revenues generated from related-parties and unrelated
      third
      parties during the periods indicated:




**Six
                  Months Ended June 30,****Net
                  Sales**
              
              **2008**
              
              **2007**
              
              **Increase**
              
              **%
                  Change**To
                  related parties
              
              $
              492,562
              
              
              1.1
              %
              $
              454,016
              
              
              1.5
              %
              $
              38,546
              
              
              8.5
              %To
                  third parties
              
              $
              43,323,043
              
              
              98.9
              %
              $
              30,069,418
              
              
              98.5
              %
              $
              13,253,625
              
              
              44.1
              %Total
              
              $
              43,815,605
              
              
              100.0
              %
              $
              30,523,434
              
              
              100.0
              %
              $
              13,292,171
              
              
              43.6
              %










Net
      sales
      to related parties accounted for 1.1% of our total sales in the six months
      ended
      June 30, 2008, a decrease from 1.5% compared to the same period in 2007.
      Management expects sales to related parties will continue to constitute a small
      portion of our total sales.





Cost
      of Sales and Gross Margin





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




**Six
                  Months Ended June 30,****2008**
              
              **2007**
              
              **Change**
              
              **%
                  Change**Total
                  Net Sales
              
              $
              43,815,605
              
              
              100.
                  0
              %
              $
              30,523,434
              
              
              100.0
              %
              $
              13,292,171
              
              
              43.6
              %Raw
                  materials
              
              $
              21,124,898
              
              
              48.2
              %
              $
              13,782,346
              
              
              45.1
              %
              $
              7,342,552
              
              
              53.3
              %Labor
              
              $
              1,383,333
              
              
              3.2
              %
              $
              1,806,165
              
              
              5.9
              %
              $
              (422,832
              )
              
              (23.4
              )%Outsource
                  Production Costs
              
              $
              12,553,965
              
              
              28.6
              %
              $
              9,602,660
              
              
              31.5
              %
              $
              2,951,305
              
              
              30.7
              %Overhead
                  and Other
              
              $
              560,210
              
              
              1.3
              %
              $
              701,122
              
              
              2.3
              %
              $
              (140,912
              )
              
              (20.1
              )%Retail-purchase
                  finishing garments from other factories
              
              $
              118,326
              
              
              0.3
              %
              
              —
              
              
              —
              
              
              —
              
              
              —Total
                  Cost of Sales
              
              $
              35,740,732
              
              
              81.6
              %
              $
              25,892,293
              
              
              84.8
              %
              $
              9,848,439
              
              
              38.0
              %Gross
                  Profit
              
              $
              8,074,873
              
              
              18.4
              %
              $
              4,631,141
              
              
              15.2
              %
              $
              3,443,732
              
              
              74.4
              %





Cost
      of
      raw materials accounted for 48.2% of our total net sales in 2008, an increase
      of
      53.3% compared to the prior year. These costs, as a percentage of our total
      net
      sales, increased from 45.1% to 48.2% for the six months ended June 30, 2008
      and
      2007, respectively. This increase was mainly due to the higher annualized
      inflation rate of approximately 8-9%. In addition, gasoline prices
      increased in China by 20% on June 1, 2008. These factors pushed suppliers
      to increase the prices of raw materials.





Labor
      costs accounted for 3.2% of our total net sales in the six months ended June
      30,
      2008, down from 5.9% in the same period in 2007. This decrease was mainly
      due to a workforce reduction. In 2008, Goldenway began to increase outsourcing
      to independent contract manufacturers and reduced the number of its own line
      employees with an intention to manage its labor costs better.





Outsource
      production costs accounted for 28.6% of our total net sales in the six months
      ended June 30, 2008, down from 31.5% in the same period last year.





Overhead
      and other expenses accounted for 1.3% of our total net sales in the first six
      months of 2008, compared to 2.3% for the same period in 2007. This decrease
      was
      a result of a reduction in the number of our employees.




35




Total
      cost of sales for the six months ended June 30, 2008 was $35,740,732, an
      increase of 38.0% from $25,892,293 in the same period in 2007. This increase
      was
      attributable to increased production volume and sales. As a percentage of
      total net sales, our cost of sales decreased from 84.8% to 81.6% for the six
      months ended June 30, 2008 and 2007, respectively. Consequently, gross margins
      as a percentage of revenues increased from 15.2% for the six months ended June
      30, 2007 to 18.4% for the same period in 2008. The 3.2% increase was
      attributable to better control of our manufacturing overhead and improvements
      in
      production efficiency.





The
      following table sets forth our total net sales, cost of sales, gross profit
      and
      gross margin for the geographic market segments indicated and for the periods
      indicated.





**Six
                Months Ended June 30,****2008**
            
            **2007****Net
                Sales**
            
            **Cost
                of sales**
            
            **Gross
                profit**
            
            **Gross
                margin**
            
            **Net
                Sales**
            
            **Cost
                of sales**
            
            **Gross
                profit**
            
            **Gross
                margin**ODM
                SalesEurope
            
            
            27,254,432
            
            
            22,258,799
            
            
            4,995,633
            
            
            18.3
            %
            
            18,552,676
            
            
            15,319,388
            
            
            3,233,288
            
            
            17.4
            %U.S.
            
            
            6,677,957
            
            
            5,756,111
            
            
            921,846
            
            
            13.8
            %
            
            6,594,828
            
            
            6,280,426
            
            
            314,402
            
            
            4.8
            %Japan
            
            
            5,813,499
            
            
            4,717,790
            
            
            1,095,709
            
            
            18.9
            %
            
            3,581,126
            
            
            3,062,933
            
            
            518,193
            
            
            14.5
            %China
            
            
            3,696,961
            
            
            2,888,196
            
            
            805,765
            
            
            21.9
            %
            
            1,794,804
            
            
            1,229,546
            
            
            565,258
            
            
            31.5
            %Domestic
                SalesRetail
            
            
            372,756
            
            
            119,836
            
            
            252,920
            
            
            67.9
            %
            
            —
            
            
            —
            
            
            —
            
            
            —Total
            
            
            43,815,605
            
            
            35,740,732
            
            
            8,074,873
            
            
            18.4
            %
            
            30,523,434
            
            
            25,892,293
            
            
            4,631,141
            
            
            15.2
            %





Gross
      margin in the EU was 18.3% for the six months ended June 30, 2008, compared
      to
      17.4% for the same period in 2007, as we shifted from targeting mass markets
      to
      higher quality market segments, and we received an increase in repeat orders
      in
      2008. Since there no longer is a sales quote for exporting goods to most
      European countries, we have greater flexibility to develop and select customers
      who are willing to offer better purchase prices for high quality
      products.





Gross
      margin in U.S. was 13.8% for the six months ended June 30, 2008, compared to
      4.8% for the same period in 2007 as we shifted from targeting mass markets
      to
      higher quality market segments. We attracted several new customers willing
      to
      offer competitive purchase prices, but we also cut sales orders with customers
      asking for lower prices.





Gross
      margin in Japan was 18.9% for the six months ended June 30, 2008, compared
      to
      14.5% for the same period in 2007, as we became more successful with premium
      brands in the Japanese market, where the major exported product used to be
      uniforms. In the six months ended June 30, 2008, 50% of our Japanese sales
      came
      from two premium brands, both of which had higher gross margins.





Gross
      margin in China was 21.9% for the first six months of 2008, compared to
      31.5% for the same period in 2007, as we received an increase in repeat orders
      in 2008. In
      connection with these repeat orders, we were not able to fully pass on our
      increased production costs to our repeat customers within China, and as a result
      our gross margin in China decreased for the six month period ending June 30,
      2008, as compared with the same period last year.





Overall
      gross margin in 2008 was 18.4%, up from 15.2% in 2007, mainly as a result of
      increased gross profit margins achieved in most of our geographic markets.




36




Selling,
      and General and Administrative
      Expenses  **For
                    the Six Months Ended June 30,****2008**
                
                **2007****$**
                
                **%
                    of Total Sales**
                
                **$**
                
                **%
                    of Total Sales**
                
                **change**
                
                **%
                    change**(in
                    U.S. Dollars, except for percentages)Gross
                    Profit
                
                $
                8,074,873
                
                
                18.4
                %
                $
                4,631,141
                
                
                15.2
                %
                $
                3,443,732
                
                
                74.4
                %Operating
                    Expenses:Selling
                    Expenses
                
                
                646,092
                
                
                1.5
                %
                
                325,710
                
                
                1.1
                %
                $
                320,382
                
                
                98.4
                %General
                    and Administrative
                
                
                2,998,882
                
                
                6.8
                %
                
                1,706,163
                
                
                5.6
                %
                $
                1,292,719
                
                
                75.8
                %Total
                
                
                3,644,974
                
                
                8.3
                %
                
                2,031,873
                
                
                6.7
                %
                $
                1,613,101
                
                
                79.4
                %Income
                    from Operations
                
                
                4,429,899
                
                
                10.1
                %
                
                2,599,268
                
                
                8.5
                %
                $
                1,830,631
                
                
                70.4
                %





Selling
      expenses in 2008 increased by 98.4% from $325,710 in the six months ended June
      30, 2007 to $646,092 in the six months ended June 30, 2008. This was due to
      an
      increase in traveling expenses and marketing expenses incurred by our
      international sales force to attract new customers, increased export expenses,
      and $122,559 expended by La Go Go to promote our domestic retail
      brand.





General
      and administrative expenses increased by 75.8% from $1,706,163 in the six months
      ended June 30, 2007 to $2,998,882 in the six months ended June 30, 2008.
      However, as a percentage of net sales, general and administrative expenses
      increased from 5.6% to 6.8% for the six months ended June 30, 2008 and 2007,
      respectively. The increase is partially explained by an increase in depreciation
      and amortization of our office facilities. Payroll also increased during the
      six
      months ended June 30, 2008 as compared to the same period in 2007 as a result
      of
      the increase in our management staff to handle expansion of our business. The
      increase in general and administrative expenses is also attributable to the
      increase in expenses incurred by our U.S. parent company for investor
      relations.





Income
      from Operations





Income
      from operations increased from $2,599,268 in the six months ended June 30,
      2007
      to $4,429,899 in the six months ended June 30, 2008, a 70.4% increase, as we
      expanded our market exposure, increased our sales volume and improved cost
      management during the six months ended June 30, 2008.





Interest
      Expenses




Six
                  Months Ended June 30,2008
              
              2007
              
              Increase
                  (Decrease)
              
              %
                  IncreaseBank
                  Loans
              
              $
              144,346
              
              $
              143,661
              
              $
              685
              
              
              0.5
              %Related
                  party
              
              $
              116,571
              
              $
              118,229
              
              
              ($1,658
              )
              
              (1.4
              )%Convertible
                  notes interest
              
              $
              45,985
              
              
              —
              
              $
              45,985
              
              
              —Convertible
                  notes-amortization of discount
              
              $
              902,052
              
              
              —
              
              $
              902,052
              
              
              —Total
              
              $
              1,208,954
              
              $
              261,890
              
              $
              947,064
              
              
              361.6
              %





Interest
      expense was $1,208,954 for the six months ended June 30, 2008 compared to
      $261,890 for the same period in 2007. This increase was mainly due to interest
      expense incurred related to the convertible notes issued in August 2007.





Other
      Expenses





Other
      expenses increased $235,976 from $125 in the six months ended June 30, 2007
      to
      $236,101 in the six months ended June 30, 2008. This increase was mainly
      attributable to the
      foreign currency transaction loss due to the exchange rate fluctuation between
      the Company’s functional currency (RMB) and the foreign currency in which
      transactions are denominated.




37




Income
      Tax Expenses




Income
      tax expense for the six months ended June 30, 2008 and 2007 amounted to $568,647
      and $82,323, respectively, and our effective income tax rates were 13.1% and
      4.0% for the six months ended June 30, 2008 and 2007, respectively. This
      increase was mainly due to the expiration of Goldenway’s tax holiday on December
      31, 2007. Catch-Luck and New-Tailun are subject to higher preferential tax
      rates
      starting in 2008.





Our
      PRC
      subsidiaries are subject to various preferential tax policies, and the
      following income tax rates apply for 2007 and 2008:





2008
            
            2007Goldenway
            
            
            25.0
            %
            
            12.0
            %Catch-Luck
            
            
            12.5
            %
            
            0.0
            %New-Tailun
            
            
            12.5
            %
            
            0.0
            %La
                Go Go
            
            
            25.0
            %
            
            0.0
            %





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





New-Tailun
      and Catch-Luck were incorporated in the PRC and are subject to PRC income tax
      laws and regulations. According to relevant laws and regulations in the PRC,
      enterprises with foreign investment in the PRC are entitled to full exemption
      from income tax for two years beginning with the first year the enterprise
      becomes profitable and has accumulated profits; such enterprises are entitled
      to
      a 50% income tax reduction for the subsequent three years. New-Tailun and
      Catch-Luck were approved as a wholly foreign-owned enterprise in 2006 and are
      entitled to 100% income tax exemptions in 2006 and 2007 and a 50% tax reduction
      for the next three years. In 2008, New-Tailun and Catch-Luck are subject to
      an
      income tax rate of 12.50%.





La
      Go Go
      was established on January 24, 2008, and its income tax rate is
      25%.





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





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





Net
      Income





Net
      income for the six months ended June 30, 2008 was $2,546,597, an increase of
      $281,877 or 12.4% from $2,264,719 in the first six months of
 2007.





**Minority
      Interest**





On
      January 9, 2008, concurrent with Goldenway’s investment, Goldenway entered into
      an Agreement with La Chapelle, to form a joint venture to develop, promote
      and
      market a new line of women’s wear in China. Goldenway agreed to initially invest
      RMB 6 Million (or approximately $826,000) in cash, and the joint-venture
      partner, La Chapelle, agreed to invest RMB 4 Million (or approximately $553,040)
      in cash, for a 60% and 40% stake in the joint venture, respectively. The joint
      venture is consolidated with the Company’s financial statements in 2008, while
      the 40% stake classified as a minority interest. As of June 30, 2008, we
      recorded $586,942 as minority interest.





**LIQUIDITY
      AND CAPITAL RESOURCES**





As
      of
      June 30, 2008, we had cash and cash equivalents of $1,643,493, other current
      assets of $23,088,903 and current liabilities of $13,741,916. We presently
      finance our operations primarily with cash flows from our operations, and we
      anticipate that this will continue to be our primary source of funds to finance
      our short-term cash needs. If we require additional capital to expand or enhance
      our existing facilities, we will consider debt or equity offerings or
      institutional borrowings as potential means of financing.




38





Net
      cash
      provided by operating activities for the six months ended June 30, 2008 was
      $3,007,636 compared with net cash provided by operating activities of $2,093,377
      in the same period of 2007. This increase was mainly attributable to the
      increase in our income from operations.





Net
      cash
      used in investing activities for the six months ended June 30, 2008 was
      $1,742,234, compared with $344,193 in the same period of 2007. On January 9,
      2008, Goldenway entered into a Capital Contribution Agreement (“Capital
      Contribution Agreement”) with La Chapelle, a Shanghai-based garment maker, and
      several shareholders of La Chapelle. Pursuant to the terms of the Capital
      Contribution Agreement, Goldenway invested $1,397,700 in cash (RMB10 million)
      in
      La Chapelle for a 10% stake in La Chapelle.





Net
      cash
      used in financing activities for the six months ended June 30, 2008 was
      $410,286, compared with $2,587,322 in the same period of 2007. The decrease
      was
      mainly due to repayment of $4,964,400 to Nanjing Bank and $1,990,000 to Blue
      Power Holding Ltd. We also received $553,040 from La
      Chapelle in connection with the formation of La Go Go.





On
      August
      15, 2006, Goldenway entered into credit agreements with Nanjing Bank to borrow
      an aggregate principal amount of up to $7.30 million within 24 months. The
      loans
      were secured by our new facilities and were used to fund construction costs
      as
      well as our daily operations. As of June 30, 2008, we had
      a
      loan with Nanjing Bank with a principal amount of approximately
      $5.8 million at an interest rate of 7.227% per annum. We repaid this loan in
      full on July 25, 2008, prior to
      the loan’s maturity date on July 31, 2008. We continue to have access to our
      credit facility with Nanjing Bank, for up to 50 million RMB (approximately
      $7.3
      million) until August 15, 2008. We are currently in the process of negotiating
      the terms of our credit facility with Nanjing Bank, and will seek to extend
      the
      expiration date of the credit facility. We plan to repay any
      additional loans under these credit agreements with cash flow from operations.
      In the event that we do not have available cash flow from operations to repay
      these additional loans, we will seek to consolidate and refinance the loans
      at
      maturity.





On
      August
      2, 2007, we consummated a private placement of $2,000,000 of our secured
      convertible notes. We received net proceeds of $1,757,480 excluding financing
      costs. The financing was mainly to supplement our working capital.





In
      addition, as of June 30, 2008, we borrowed $2,601,556 from a related party
      for
      the main purpose of funding the increased registered capital of Goldenway.
      Interest to be paid to this related party totaled $116,571 for the half year
      of
      2008.





**Capital
      Commitments**





We
      have a
      continuing program for the purpose of improving our manufacturing facilities.
      We
      anticipate that cash flows from operations and borrowings from banks will be
      used to pay for these capital commitments. The Articles of Association of our
      Goldenway subsidiary required that registered capital of approximately $17.5
      million be paid into Goldenway by February 1, 2008. The increased registered
      capital is to be paid in installments within three years of the issuance of
      Goldenway’s updated business license. As of February 1, 2008, we fulfilled $3.6
      million of our registered capital requirements, and had a registered capital
      commitment of $13.9 million due by February 1, 2008. In April 2008, we
      obtained approval from the government granting us an extension to make the
      required capital contribution by July 25, 2008. As of July 10, 2008, we
      fulfilled the $5.6 million registered capital requirement, and had a registered
      capital commitment of $11.9 million payable by July 25, 2008. In July 2008,
      we
      obtained approval from the government granting us an extension to make the
      required capital contribution on or before April 25, 2009.




On
      August
      2, 2007, the Company consummated a private placement of $2,000,000 senior
      secured convertible notes. The notes mature and become due and payable two
      years
      after the date they were issued, unless they are sooner converted by the note
      holders into our common stock. As
      of
      June 30 2008, the note holders converted $750,000 of principal plus accrued
      interest of $2,155 to 341,893 shares of common stock of the Company. If
      the outstanding balance of the notes is not converted into common
      stock, we will be required to repay the outstanding principal balance of
      $1,250,000 plus accrued interest on August 2, 2009.





**Uses
      of Liquidity**





Our
      cash
      requirements through the end of fiscal 2008 will be primarily to fund daily
      operations for the growth of our business. Management will consider acquiring
      additional manufacturing capacity in the future to strengthen and stabilize
      our
      manufacturing base. We intend to establish our own distribution and logistics
      channels in overseas markets. As discussed above, on January 9, 2008, we entered
      into a joint venture to launch a proprietary brand directly into the Chinese
      market, which was also expected to require additional cash investments in 2008.
      In addition, we must make certain required capital contributions to our
      Goldenway subsidiary in accordance with a timetable to be determined with the
      input of applicable local authorities.




39




**Sources
      of Liquidity**





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





We
      believe our cash flow from operations together with our cash and cash
      equivalents currently on hand will be sufficient to meet our needs for working
      capital, capital expenditure and other commitments through the end of 2008.
      For
      our long-term cash needs, we are currently considering a number of different
      financing opportunities, which may include debt and equity financing. No
      assurance can be made that such financing will be available to us, and adequate
      funds may not be available on terms acceptable to us. If additional funds are
      raised through the issuance of equity securities, dilution to existing
      shareholders may result. If funding is insufficient at any time in the future,
      we will develop or enhance our products or services and expand our business
      through our own cash flows from operations.





As
      of
      June 30, 2008, we had outstanding borrowings under a loan from Nanjing Bank
      of
      $5,777,640, which we repaid in full on July 25, 2008. This credit facility
      does
      not require that we meet or maintain any financial ratios or tests. As of June
      30, 2008, we did not have any standby letters of credit or standby repurchase
      obligations.





**Foreign
      Currency Translation Risk**





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





In
      addition, the financial statements of Goldenway, New-Tailun, Catch-Luck and
      La
      Go Go (whose functional currency is the RMB) are translated into 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 period. All exchange differences
      are recorded within equity. The foreign currency translation gain for the six
      months ended June 30, 2008 and 2007 was $1,711,237 and $450,706,
      respectively.





**OFF-BALANCE
      SHEET ARRANGEMENTS**




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





**ITEM
      3.****QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**





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





*Interest
      Rates* .
      Our
      exposure to market risk for changes in interest rates relates primarily to
      our
      short-term investments and short-term obligations; thus, fluctuations in
      interest rates would not have a material impact on the fair value of these
      securities. At June 30, 2008, we had approximately $1.6 million in cash and
      cash
      equivalents. A hypothetical 5% increase or decrease in either short term or
      long
      term interest rates would not have any material impact on our earnings or loss,
      or the fair market value or cash flows of these instruments.




40




*Foreign
      Exchange Rates* .
      We pay
      our suppliers and employees in Chinese Renminbi (RMB), however, we sell to
      customers in the U.S., Japan and Europe and we generate sales in U.S.
      dollars and Euros. Accordingly, our business has substantial exposure to changes
      in exchange rates between and among the Chinese RMB, the U.S. dollar and the
      Euro. In the last decade, the RMB has been pegged at 8.2765 yuan to one U.S.
      dollar. On July 21, 2005 it was revalued to 8.11 per U.S. dollar. Following
      the
      removal of the peg to the U.S. dollar and pressure from the United States,
      the
      People’s Bank of China also announced that the RMB would be pegged to a basket
      of foreign currencies, rather than being strictly tied to the U.S. dollar,
      and
      would be allowed to float trade within a narrow 0.3% daily band against this
      basket of currencies. The PRC government has stated that the basket is dominated
      by the U.S. dollar, Euro, Japanese Yen and South Korean Won, with a smaller
      proportion made up of the British Pound, Thai Baht, Russian Ruble, Australian
      Dollar, Canadian Dollar and Singapore Dollar. There can be no assurance that
      the
      relationship between the RMB and these currencies will remain stable over time,
      especially in light of the significant political pressure on the Chinese
      government to permit the free flotation of the RMB, which could result in
      greater and more frequent fluctuations in the exchange rate between the RMB,
      the
      U.S. dollar and the Euro. At June 30, 2008, the exchange rate between the RMB
      and dollar was 6.85 RMB to one U.S. dollar. For additional discussion regarding
      our foreign currency risk, see the section titled “ *Risk
      Factors—* **** *Fluctuation
      in the value of Chinese Renminbi (RMB) relative to other currencies may have
      a
      material adverse effect on our business and/or an investment in our
      shares* .”




**ITEM
                4.**
            **CONTROLS
                AND PROCEDURES**





**Disclosure
      Controls and Procedures**





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





**Remediation
      of Material in Internal Control over Financial Reporting**





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





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





**Changes
      in Internal Control over Financial Reporting**





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




41




**PART
                II.**
            **OTHER
                INFORMATION**





**ITEM
                1.**
            **LEGAL
                PROCEEDINGS**





There
      have been no material developments to the Legal Proceedings described in our
      Form 10-Q filed May 6, 2008 and our Form 10-K filed March 12, 2008.





**ITEM 1A.**
            **RISK
                FACTORS**




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





**Risks
      Relating to Our Industry**





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





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





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





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





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





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




**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;




42




·
            result
                in reduced gross margins across our product
                lines;




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





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





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





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




During
        the six and three months ended June 30, 2008, the Company did not rely on any supplier. For the six months and three months ended June 30, 2007, we relied on one supplier for
        11% of our raw material purchases. We do not have any long-term written
        agreements with any 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 effect on our ability to obtain
        finished goods or raw materials essential to our business because we believe
        we
        can locate other suppliers in a timely manner.





**Risks
      Relating to Our Business**





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




For
        the
        six months ended June 30, 2008 and 2007, respectively, our two largest customers
        represented approximately 43.3% and 51.0% of our total net sales. For the
        three
        months ended June 30, 2008 and 2007, respectively, our two largest customers
        represented approximately 46.2% and 48.4% of our total net sales. As of June
        30,
        2008, two customers accounted for 29.5% of total accounts receivable. The
        garment manufacturing industry has experienced substantial consolidation
        in
        recent years, which has resulted in increased customer leverage over suppliers,
        greater exposure for suppliers to credit risk and an increased emphasis by
        customers on inventory management and productivity.





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




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





**Our
      internal controls and procedures have been materially deficient, and, although
      we have corrected our internal control deficiencies, there is no assurance
      that
      our internal controls and procedures will never be materially deficient again
      in
      the future.**  ****





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




43




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





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





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





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





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




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





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





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





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





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




44




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;




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




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




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




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





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




45




·
            negatively
                affect the reliability and cost of
                transportation;




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




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




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




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





**Business
      interruptions could adversely affect our business.**





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





**Risks
      Related to Doing Business in China**





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





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





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





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





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





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




46




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





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




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





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





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




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




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




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




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




47




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




**Risks
      Related to an Investment in Our Securities**




**Our
      common stock has limited liquidity.**





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




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





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





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





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





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





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





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




·
            receipt
                of substantial orders or order cancellations of
                products;




·
            quality
                deficiencies in services or
                products;




48




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




·
            changes
                in recommendations of securities
                analysts;




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




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




·
            energy
                blackouts;




·
            acts
                of terrorism and war;




·
            widespread
                illness;




·
            proprietary
                rights or product or patent
                litigation;




·
            strategic
                transactions, such as acquisitions and
                divestitures;




·
            rumors
                or allegations regarding our financial disclosures or practices;
                or




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




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




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





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





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





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





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





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





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




49





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




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





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





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





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





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




50




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




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





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





None.




**ITEM 3.**
            **DEFAULTS
                UPON SENIOR SECURITIES**





None.





**ITEM 4.**
            **SUBMISSION
                OF MATTERS TO A VOTE OF SECURITYHOLDERS**





None.





**ITEM 5.**
            **OTHER
                INFORMATION**





None.





**ITEM 6.**
            **EXHIBITS**





The
      following exhibits are filed herewith:





**Exhibit No.**
            
            **Description**31.1
            
            Certifications
                pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange
                Act
                of 1934, as amended, as adopted pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002. *31.2
            
            Certifications
                pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange
                Act
                of 1934, as amended, as adopted pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002. *32.1
            
            Certifications
                pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
                906 of
                the Sarbanes-Oxley Act of 2002. *32.2
            
            Certifications
                pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
                906 of
                the Sarbanes-Oxley Act of 2002. *




*
            Filed
                herewith.





51


**SIGNATURES**





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




August
                4, 2008
            EVER-GLORY
                INTERNATIONAL GROUP, INC.By:
            /s/
                Guo YanGuo
                YanChief
                Financial Officer(Principal
                Financial and Accounting Officer)









52