UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549


FORM
10-Q




x
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934


For the
quarterly period ended June 30, 2010




o
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934


For the
transition period from ____________ to ____________




Commission
file number:  0-28806




Ever-Glory
International Group Inc.


(Exact
name of registrant as specified in its charter)




Florida
            
            65-0420146(State or other jurisdiction of
              incorporation or organization)
            
            (I.R.S. Employer
              Identification No.)




Ever-Glory
Commercial Center,


509
Chengxin Road, Jiangning Development Zone,


Nanjing, Jiangsu
Province,


People’s Republic ofChina


(Address
of principal executive offices)




(8625)
5209-6875


(Registrant’s
telephone number, including area code)




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 x   Noo




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files).    oYes   oNo




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 definition of “large accelerated filer,” “accelerated
filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. o




Large
      accelerated filer
              o
              Accelerated
      filer
              oNon-accelerated
      filer
              o
              Smaller
      reporting company
              x





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).


Yes 
o  No
x


As of
August 10, 2010, 14,750,783 shares of the Company’s common stock,
$0.001 par value, were issued and
outstanding.








EVER-GLORY
INTERNATIONAL GROUP, INC.


FORM 10-Q





INDEX




Page
                                  NumberSPECIAL NOTE REGARDING FORWARD-LOOKING
      STATEMENTS
                                
                                3PART I.  FINANCIAL
      INFORMATION
                                
                                4Item 1.
                                Financial Statements
                                
                                4CondensedConsolidated Balance
      Sheetsas of June 30, 2010(unaudited) and December 31, 2009
                                
                                4CondensedConsolidated Statementsof
      Operations and Comprehensive Income for the Threeand SixMonths Ended June 30, 2010and
      2009(unaudited)
                                
                                5CondensedConsolidated Statementsof Cash
      Flows for theSixMonths Ended June 30, 2010and
      2009(unaudited)
                                
                                6Notes to theCondensedConsolidated Financial Statements
      (unaudited)
                                
                                7Item 2.
                                Management’s Discussion
      and Analysis of Financial Condition and Resultsof Operations
                                
                                19Item 3.
                                Quantitative and Qualitative Disclosures About
      Market Risk
                                
                                31Item 4.
                                Controls and
    Procedures
                                
                                31PART II.  OTHER
      INFORMATION
                                
                                32Item 1.
                                Legal Proceedings
                                
                                32Item 1A.
                                Risk Factors
                                
                                32Item 2.
                                Unregistered Sales of Equity Securities and Use of
      Proceeds
                                
                                32Item 3.
                                Defaults Upon Senior
      Securities
                                
                                32Item 4.
                                (Removed
      and Reserved)
                                
                                32Item 5.
                                Other Information
                                
                                32Item 6.
                                Exhibits
                                
                                33SIGNATURES
                                
                                33


2





Note
Regarding Forward-Looking Statements




Statements
contained in this Quarterly Report on Form 10-Q, which are not historical facts,
are forward-looking statements, as the term is defined in the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements, whether
expressed or implied, are subject to risks and uncertainties which can cause
actual results to differ materially from those currently anticipated, due to a
number of factors, which include, but are not limited to:





·
            Competition within
      our industry;


·
            Seasonality
      of our sales;


·
            Success of
      our investments in new product
  development;


·
            Our plans to
      open new retail stores;


·
            Success of
      our acquired businesses;


·
            Our
      relationships with our major
customers;


·
            The
      popularity of our
      products;


·
            Relationships
      with suppliers and cost of
supplies;


·
            Financial and
      economic conditions in Asia, Japan, Europe and the
      U.S.;


·
            Anticipated
      effective tax rates in future
years;


·
            Regulatory
      requirements affecting our
business;


·
            Currency
      exchange rate
      fluctuations;


·
            Our future
      financing needs; and


·
            Our ability
      to attract additional investment capital on attractive
      terms.




Forward-looking
statements also include the assumptions underlying or relating to any of the
foregoing or other such statements. When used in this report, the words “may,”
“will,” “should,” “could,” “expect,” “plan,” “anticipate,” “believe,”
“estimate,” “predict,” “continue,” and similar expressions are generally
intended to identify forward-looking statements.




Readers
are cautioned not to place undue reliance on these forward-looking statements,
which reflect management’s opinions only as of the date hereof. We undertake no
obligation to revise or publicly release the results of any revision to these
forward-looking statements. Readers should carefully review the factors
described in the Section entitled “Risk Factors” on Form 10-K and
other documents we file from time to time with the Securities and Exchange
Commission (‘SEC’).


3




PART
I.  FINANCIAL INFORMATION


ITEM
1. Financial Statements





EVER-GLORY
INTERNATIONAL GROUP, INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED BALANCE SHEETS


AS
OF JUNE 30, 2010 (UNAUDITED) AND DECEMBER 31, 2009





2010
                            
                            
                            2009ASSETSCURRENT
      ASSETSCash
      and cash equivalents
                            
                            $
                            4,758,558
                            
                            
                            $
                            3,555,745Accounts
      receivable
                            
                            
                            16,901,728
                            
                            
                            
                            12,751,579Inventories
                            
                            
                            13,078,394
                            
                            
                            
                            12,419,622Value
      added tax receivable
                            
                            
                            1,239,365
                            
                            
                            
                            730,724Other
      receivables and prepaid expenses
                            
                            
                            2,589,129
                            
                            
                            
                            601,842Advances
      on inventory purchases
                            
                            
                            880,224
                            
                            
                            
                            443,331Amounts
      due from related party
                            
                            
                            5,462,222
                            
                            
                            
                            13,354,884Total
      Current Assets
                            
                            
                            44,909,620
                            
                            
                            
                            43,857,727LAND
      USE RIGHT, NET
                            
                            
                            2,767,114
                            
                            
                            
                            2,788,731PROPERTY
      AND EQUIPMENT, NET
                            
                            
                            12,197,353
                            
                            
                            
                            12,540,856INVESTMENT,
      AT COST
                            
                            
                            -
                            
                            
                            
                            1,467,000TOTAL
      ASSETS
                            
                            $
                            59,874,087
                            
                            
                            $
                            60,654,314LIABILITIES
      AND EQUITYCURRENT
      LIABILITIESBank
      loans
                            
                            $
                            2,440,040
                            
                            
                            $
                            7,305,660Loans
      from related party
                            
                            
                            1,970,575
                            
                            
                            
                            2,575,759Accounts
      payable
                            
                            
                            14,567,548
                            
                            
                            
                            13,241,962Accounts
      payable and other payables - related parties
                            
                            
                            522,030
                            
                            
                            
                            782,606Advances
      from customers
                            
                            
                            174,676
                            
                            
                            
                            -Other
      payables and accrued liabilities
                            
                            
                            2,908,917
                            
                            
                            
                            2,287,356Value
      added and other taxes payable
                            
                            
                            932,163
                            
                            
                            
                            186,895Income
      tax payable
                            
                            
                            102,480
                            
                            
                            
                            3,745Deferred
      tax liabilities
                            
                            
                            690,627
                            
                            
                            
                            421,899Total
      Current Liabilities
                            
                            
                            24,309,056
                            
                            
                            
                            26,805,882LONG-TERM
      LIABILITIESDerivative
      liability
                            
                            
                            1,556,637
                            
                            
                            
                            1,627,839Total
      Long-term Liabilities
                            
                            
                            1,556,637
                            
                            
                            
                            1,627,839TOTAL
      LIABILITIES
                            
                            
                            25,865,693
                            
                            
                            
                            28,433,721COMMITMENTS
      AND CONTINGENCIESEQUITYStockholders'
      equity of the Company:Preferred
      stock ($.001 par value, authorized 5,000,000 shares, no shares issued and
      outstanding)
                            
                            
                            -
                            
                            
                            
                            -Common
      stock ($.001 par value, authorized 50,000,000 shares, 14,748,285 and
      13,560,240 shares issued and outstanding as of June 30, 2010 and December
      31, 2009, respectively)
                            
                            
                            14,748
                            
                            
                            
                            13,560Additional
      paid-in capital
                            
                            
                            3,518,619
                            
                            
                            
                            3,615,357Retained
      earnings
                            
                            
                            22,782,694
                            
                            
                            
                            20,406,245Statutory
      reserve
                            
                            
                            3,585,448
                            
                            
                            
                            3,585,448Accumulated
      other comprehensive income
                            
                            
                            4,106,885
                            
                            
                            
                            3,934,437Total
      Stockholders' Equity of the Company
                            
                            
                            34,008,394
                            
                            
                            
                            31,555,047Noncontrolling
      interest
                            
                            
                            -
                            
                            
                            
                            665,546Total
      Equity
                            
                            
                            34,008,394
                            
                            
                            
                            32,220,593TOTAL
      LIABILITIES AND EQUITY
                            
                            $
                            59,874,087
                            
                            
                            $
                            60,654,314





4





EVER-GLORY
INTERNATIONAL GROUP, INC. AND SUBSDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME


FOR
THE THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009 (UNAUDITED)





Three months ended
                            
                            
                            Six months endedJune 30,
                            
                            
                            June 30,2010
                            
                            
                            2009
                            
                            
                            2010
                            
                            
                            2009NET
      SALESRelated
      parties
                            
                            $
                            -
                            
                            
                            $
                            9,351
                            
                            
                            $
                            -
                            
                            
                            $
                            9,351Third
      parties
                            
                            
                            23,102,498
                            
                            
                            
                            21,116,143
                            
                            
                            
                            49,242,044
                            
                            
                            
                            41,623,965Total
      net sales
                            
                            
                            23,102,498
                            
                            
                            
                            21,125,494
                            
                            
                            
                            49,242,044
                            
                            
                            
                            41,633,316COST
      OF SALESRelated
      parties
                            
                            
                            -
                            
                            
                            
                            9,013
                            
                            
                            
                            -
                            
                            
                            
                            9,013Third
      parties
                            
                            
                            18,594,515
                            
                            
                            
                            16,608,920
                            
                            
                            
                            39,305,039
                            
                            
                            
                            32,402,587Total
      cost of sales
                            
                            
                            18,594,515
                            
                            
                            
                            16,617,933
                            
                            
                            
                            39,305,039
                            
                            
                            
                            32,411,600GROSS
      PROFIT
                            
                            
                            4,507,983
                            
                            
                            
                            4,507,561
                            
                            
                            
                            9,937,005
                            
                            
                            
                            9,221,716OPERATING
      EXPENSESSelling
      expenses
                            
                            
                            2,059,712
                            
                            
                            
                            865,341
                            
                            
                            
                            3,748,885
                            
                            
                            
                            1,805,815General
      and administrative expenses
                            
                            
                            1,747,882
                            
                            
                            
                            2,289,282
                            
                            
                            
                            3,659,300
                            
                            
                            
                            4,145,404Total
      Operating Expenses
                            
                            
                            3,807,594
                            
                            
                            
                            3,154,623
                            
                            
                            
                            7,408,185
                            
                            
                            
                            5,951,219INCOME
      FROM OPERATIONS
                            
                            
                            700,389
                            
                            
                            
                            1,352,938
                            
                            
                            
                            2,528,820
                            
                            
                            
                            3,270,497OTHER
      INCOME (EXPENSES)Interest
      income
                            
                            
                            25,639
                            
                            
                            
                            161,481
                            
                            
                            
                            93,747
                            
                            
                            
                            265,028Interest
      expense
                            
                            
                            (113,781
                            )
                            
                            
                            (115,234
                            )
                            
                            
                            (232,820
                            )
                            
                            
                            (238,884
                            )Change
      in fair value of derivative liability
                            
                            
                            (13,317
                            )
                            
                            
                            484,702
                            
                            
                            
                            71,202
                            
                            
                            
                            (581,792
                            )Other
      income
                            
                            
                            29,583
                            
                            
                            
                            42,610
                            
                            
                            
                            32,792
                            
                            
                            
                            44,983Gain
      on sale of investment
                            
                            
                            346,188
                            
                            
                            
                            -
                            
                            
                            
                            346,188
                            
                            
                            
                            -Total
      Other Income (Expenses)
                            
                            
                            274,312
                            
                            
                            
                            573,559
                            
                            
                            
                            311,109
                            
                            
                            
                            (510,665
                            )INCOME
      BEFORE INCOME TAX EXPENSE
                            
                            
                            974,701
                            
                            
                            
                            1,926,497
                            
                            
                            
                            2,839,929
                            
                            
                            
                            2,759,832INCOME
      TAX EXPENSE
                            
                            
                            (173,928
                            )
                            
                            
                            (272,656
                            )
                            
                            
                            (404,780
                            )
                            
                            
                            (561,727
                            )NET
      INCOME
                            
                            
                            800,773
                            
                            
                            
                            1,653,841
                            
                            
                            
                            2,435,149
                            
                            
                            
                            2,198,105ADD(LESS):
      NET LOSS(INCOME) ATTRIBUTABLE TO THE NONCONTROLING
INTEREST
                            
                            
                            -
                            
                            
                            
                            5,861
                            
                            
                            
                            (58,701
                            )
                            
                            
                            17,459NET
      INCOME ATTRIBUTABLE TO THE COMPANY
                            
                            $
                            800,773
                            
                            
                            $
                            1,659,702
                            
                            
                            $
                            2,376,448
                            
                            
                            $
                            2,215,564NET
      INCOME
                            
                            $
                            800,773
                            
                            
                            $
                            1,653,841
                            
                            
                            $
                            2,435,149
                            
                            
                            $
                            2,198,105Foreign
      currency translation gain (loss)
                            
                            
                            138,315
                            
                            
                            
                            (39,103
                            )
                            
                            
                            172,448
                            
                            
                            
                            (83,311
                            )COMPREHENSIVE
      INCOME
                            
                            
                            939,088
                            
                            
                            
                            1,614,738
                            
                            
                            
                            2,607,597
                            
                            
                            
                            2,114,794COMPREHENSIVE
      LOSS (INCOME) ATTRIBUTABLE TOTHE NONCONTROLING
      INTEREST
                            
                            
                            -
                            
                            
                            
                            3,109
                            
                            
                            
                            (58,721
                            )
                            
                            
                            15,501COMPREHENSIVE
      INCOME ATTRIBUTABLE TOTHE
      COMPANY
                            
                            $
                            939,088
                            
                            
                            $
                            1,617,847
                            
                            
                            $
                            2,548,876
                            
                            
                            $
                            2,130,295EARNINGS
      PER SHAREAttributable
      to the Company's common stockholdersBasic
                            
                            $
                            0.05
                            
                            
                            $
                            0.12
                            
                            
                            $
                            0.16
                            
                            
                            $
                            0.16Diluted
                            
                            $
                            0.05
                            
                            
                            $
                            0.12
                            
                            
                            $
                            0.16
                            
                            
                            $
                            0.16Weighted
      average number of shares outstandingBasic
                            
                            
                            14,729,807
                            
                            
                            
                            13,548,498
                            
                            
                            
                            14,725,142
                            
                            
                            
                            13,539,909Diluted
                            
                            
                            14,729,807
                            
                            
                            
                            13,548,498
                            
                            
                            
                            14,852,791
                            
                            
                            
                            13,539,909





5





EVER-GLORY
INTERNATIONAL GROUP, INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


FOR
THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009 (UNAUDITED)





2010
                                            
                                            
                                            2009CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      income
                                            
                                            $
                                            2,435,149
                                            
                                            
                                            $
                                            2,198,105Adjustments
      to reconcile net income to cash provided by operating
      activities:Depreciation
      and amortization
                                            
                                            
                                            1,111,878
                                            
                                            
                                            
                                            987,141Change
      in fair value of derivative liability
                                            
                                            
                                            (71,202
                                            )
                                            
                                            
                                            581,792Deferred
      income tax
                                            
                                            
                                            265,895
                                            
                                            
                                            
                                            152,868Interest
      on loans from related party
                                            
                                            
                                            44,848
                                            
                                            
                                            
                                            58,529Stock
      issued for services
                                            
                                            
                                            71,699
                                            
                                            
                                            
                                            -Stock-based
      compensation
                                            
                                            
                                            18,828
                                            
                                            
                                            
                                            -Gain
      on sale of investment
                                            
                                            
                                            (346,188
                                            )
                                            
                                            
                                            -Changes
      in operating assets and liabilitiesAccounts
      receivable
                                            
                                            
                                            (4,088,471
                                            )
                                            
                                            
                                            (5,718,775
                                            )Inventories
                                            
                                            
                                            (605,459
                                            )
                                            
                                            
                                            819,734Value
      added tax receivable
                                            
                                            
                                            (503,558
                                            )
                                            
                                            
                                            (241,441
                                            )Other
      receivables and prepaid expenses
                                            
                                            
                                            (163,518
                                            )
                                            
                                            
                                            (467,251
                                            )Advances
      on inventory purchases
                                            
                                            
                                            (433,278
                                            )
                                            
                                            
                                            (33,835
                                            )Amounts
      due from related party
                                            
                                            
                                            6,827,465
                                            
                                            
                                            
                                            1,391,643Accounts
      payable
                                            
                                            
                                            1,299,914
                                            
                                            
                                            
                                            2,519,292Accounts
      payable and other payables- related parties
                                            
                                            
                                            816,923
                                            
                                            
                                            
                                            178,745Other
      payables and accrued liabilities
                                            
                                            
                                            (122,437
                                            )
                                            
                                            
                                            263,858Value
      added and other taxes payable
                                            
                                            
                                            741,420
                                            
                                            
                                            
                                            337,762Income
      tax payable
                                            
                                            
                                            98,310
                                            
                                            
                                            
                                            (44,974
                                            )Net
      cash provided by operating activities
                                            
                                            
                                            7,398,218
                                            
                                            
                                            
                                            2,983,193CASH
      FLOWS FROM INVESTING ACTIVITIESPurchase
      of property and equipment
                                            
                                            
                                            (714,859
                                            )
                                            
                                            
                                            (122,879
                                            )Proceeds
      from sale of property and equipment
                                            
                                            
                                            29,028
                                            
                                            
                                            
                                            6,810Net
      cash used in investing activities
                                            
                                            
                                            (685,831
                                            )
                                            
                                            
                                            (116,069
                                            )CASH
      FLOWS FROM FINANCING ACTIVITIESProceeds
      from bank loans
                                            
                                            
                                            7,125,584
                                            
                                            
                                            
                                            6,595,650Repayment
      of bank loans
                                            
                                            
                                            (11,999,242
                                            )
                                            
                                            
                                            (9,908,132
                                            )Repayment
      of loans from related party
                                            
                                            
                                            (650,030
                                            )
                                            
                                            
                                            -Net
      cash used in financing activities
                                            
                                            
                                            (5,523,688
                                            )
                                            
                                            
                                            (3,312,482
                                            )EFFECT
      OF EXCHANGE RATE CHANGES ON CASH
                                            
                                            
                                            14,114
                                            
                                            
                                            
                                            (6,136
                                            )NET
      INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
                                            
                                            
                                            1,202,813
                                            
                                            
                                            
                                            (451,494
                                            )CASH
      AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
                                            
                                            
                                            3,555,745
                                            
                                            
                                            
                                            1,445,363CASH
      AND CASH EQUIVALENTS AT END OF PERIOD
                                            
                                            $
                                            4,758,558
                                            
                                            
                                            $
                                            993,869SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION:Cash
      paid during the period for:Interest
                                            
                                            $
                                            187,972
                                            
                                            
                                            $
                                            180,355Income
      taxes
                                            
                                            $
                                            26,197
                                            
                                            
                                            $
                                            436,106SUPPLEMENTAL
      DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:Other
      receivable arising on sale of investment
                                            
                                            $
                                            1,813,088
                                            
                                            
                                            
                                            -Other
      payable for acquisition of noncontrolling interest
                                            
                                            $
                                            906,544
                                            
                                            
                                            
                                            -





6




EVER-GLORY
INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
 NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 JUNE 30,
2010 (UNAUDITED)
 
 NOTE
1 BASIS OF PRESENTATION
 
 Ever-Glory
International Group, Inc. (the “Company”), together with its subsidiaries, is an
apparel manufacturer, supplier and retailer in China, with a wholesale segment
and a retail segment. The Company’s wholesale business consists of recognized
brands for department and specialty stores located in Europe, Japan and the
United States. The Company’s retail business consists of flagship stores and
store-in-stores for the Company’s own-brand products. The Company’s wholesale
operations are provided primarily through the Company’s wholly-owned PRC
subsidiaries, Goldenway Nanjing Garments Co. Ltd. (“Goldenway”), Nanjing
Catch-Luck Garments Co. Ltd. (“Catch-Luck”) and Nanjing New-Tailun Garments Co.
Ltd (“New-Tailun”). The Company’s retail operations are provided through its
wholly owned subsidiary, Shanghai LA GO GO Fashion Company Limited (“LA GO
GO”).
 
 In the
opinion of management, the accompanying unaudited condensed consolidated
financial statements of Ever-Glory International Group, Inc. and its
subsidiaries (the “Company”) contain all adjustments, consisting of normal
recurring adjustments, considered necessary for a fair presentation of the
condensed consolidated balance sheets as of June 30, 2010 and December
31, 2009, the condensed consolidated statements of operations and comprehensive
income for the three and six months ended June 30, 2010 and 2009, and
the condensed consolidated statements of cash flows for the six months ended
June 30, 2010 and 2009. The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (“GAAP”) for interim
financial information and the instructions to Rule 10-01 of
Regulation S-X of the Securities and Exchange Commission (the “SEC”).
Accordingly, they have been condensed and do not include all of the information
and footnotes required by GAAP for complete financial statements. The results of
operations for the three and six months ended June 30, 2010 are not
necessarily indicative of the results of operations to be expected for the full
fiscal year. These financial statements should be read in conjunction with the
Company’s Annual Report on Form 10-K for the year ended December
31, 2009.
 
 In April,
2010, Goldenway sold its 10% equity interest in Shanghai La Chapelle Garment and
Accessories Company Limited (“La Chapelle”) to two unrelated third parties
for approximately RMB12 million (US$1.8 million) and recorded a gain on the sale
of approximately RMB2 million(US$300,000).
 
 Also in
April , 2010, Ever-Glory Apparel Inc. acquired 100% of the noncontrolling
interest in LA GO GO from La Chapelle for approximately RMB6 million (
US$900,000) which in accordance with ASC 810-10-45-23, was allocated
to the reduction of the noncontrolling interest balance of approximately US$0.7
million and additional paid in capital of approximately US$0.2
million.
 
 NOTE
2 SIGNIFICANT ACCOUNTING POLICIES
 
 Financial
Instruments
 
 Management
has estimated that the carrying amounts of non-related party financial
instruments approximate their fair values due to their short-term maturities.
The fair value of amounts due from (to) related parties is not practicable to
estimate due to the related party nature of the underlying
transactions.
  7
  EVER-GLORY
INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
 NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 JUNE 30,
2010 (UNAUDITED)
  Fair Value
Accounting
  Accounting
Standards Codification (“ASC”) 820 “Fair Value Measurements and
Disclosures”, previously FAS No.157, establishes a fair value
hierarchy that prioritizes the inputs to valuation techniques used to measure
fair value. The hierarchy gives the highest priority to unadjusted quoted prices
in active markets for identical assets or liabilities (Level 1
measurements) and the lowest priority to unobservable inputs (Level 3
measurements). The three levels of the fair value hierarchy under ASC 820 are
described below:
 
 Level 1
              Unadjusted
      quoted prices in active markets that are accessible at the measurement
      date for identical, unrestricted assets or
  liabilities;
 
 Level 2
              Quoted
      prices in markets that are not active, or inputs that are observable,
      either directly or indirectly, for substantially the full term of the
      asset or liability;
  Level 3
              Prices
      or valuation techniques that require inputs that are both significant to
      the fair value measurement and unobservable (supported by little or no
      market activity).
 
 At June
30, 2010, the Company’s financial assets consist of cash placed with financial
institutions management considers to be of a high quality, which management
considers to be a Level 1 measurement.
  The
Company also applies ASC 825-10 “Financial Instruments”, previously SFAS No.
159, “The Fair Value Option
for Financial Assets and Financial Liabilities—Including an Amendment of FASB
Statement No. 115”, which allows an entity to choose to measure certain
financial instruments and liabilities at fair value on a contract-by-contract
basis. Subsequent fair value measurement for the financial instruments and
liabilities an entity chooses to measure will be recognized in earnings. As of
June 30, 2010, the Company did not elect such option for its financial
instruments and liabilities.
 
 Foreign Currency Translation
and Other Comprehensive Income
 
 The
reporting currency of the Company is the U.S. dollar. The functional currency of
Ever-Glory, Perfect Dream and Ever-Glory HK is the U.S. dollar. The functional
currency of Goldenway, New Tailun, Catch-luck, LA GO GO and Ever-Glory Apparel
is the Chinese RMB.
  For
subsidiaries whose functional currency is the RMB, all assets and liabilities
were translated at the exchange rate on the balance sheet date; equity was
translated at historical rates and items in the statement of income were
translated at the average rate for the period. Translation adjustments resulting
from this process are included in accumulated other comprehensive income. 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.
  8
  EVER-GLORY
INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
 NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 JUNE 30,
2010 (UNAUDITED)
 
 NOTE
3 INVENTORIES
 
 Inventories
at June 30, 2010 and December 31, 2009 consisted of the following:
 
 2010
                    
                    
                    2009Raw
      materials
                    
                    $
                    1,142,492
                    
                    
                    $
                    735,891Work-in-progress
                    
                    
                    6,369,576
                    
                    
                    
                    6,212,767Finished
      goods
                    
                    
                    5,680,823
                    
                    
                    
                    5,529,72613,192,891
                    
                    
                    
                    12,478,384Less:
      allowance for obsolete inventories
                    
                    
                    (114,497
                    )
                    
                    
                    (58,762
                    )Total
      inventories
                    
                    $
                    13,078,394
                    
                    
                    $
                    12,419,622
 
 NOTE
4 BANK LOANS
 
 Bank
loans represent amounts due to various banks and are generally due on demand or
within one year. These loans can be renewed with the banks. Short term bank
loans consisted of the following at June 30, 2010 and December 31,
2009:
 
 2010
                              
                              
                              2009Bank
      loan, interest rate at 0.2610% per month, due September
      2010
                              
                              $
                              260,000Bank
      loan, interest rate at 0.4050% per month, due September
      2010
                              
                              
                              265,140Bank
      loan, interest rate at 0.4455% per month, due November
      2010
                              
                              
                              1,178,400Bank
      loan, interest rate at 0.4425% per month, due December
      2010
                              
                              
                              736,500
                              
                              
                              $
                              733,500Bank
      loan, interest rate at 0.44583% per month, paid in full, May
      2010
                              
                              
                              
                              
                              
                              
                              3,374,100Bank
      loan, interest rate at 0.44583% per month, paid in full, January
      2010
                              
                              
                              
                              
                              
                              
                              1,467,000Bank
      loan, interest rate at 0.44583% per month, paid in full, March
      2010
                              
                              
                              
                              
                              
                              
                              1,026,900Bank
      loan, interest rate at 0.4455% per month, paid in full, March
      2010
                              
                              
                              
                              
                              
                              
                              440,100Bank
      loan, interest rate at 0.4050% per month,paid in full, March
      2010
                              
                              
                              
                              
                              
                              
                              264,060Total
      bank loans
                              
                              $
                              2,440,040
                              
                              
                              $
                              7,305,660
 
 On July
31, 2008, Goldenway entered into a two-year revolving line of credit agreement
with Nanjing Bank, which allows the Company to borrow up to approximately $7.3
million (RMB50million). As of June 30, 2010, we repaid all loans under
this agreement. On July 6, 2010, Goldenway entered into a new two-year revolving
line of credit agreement with Nanjing Bank, which also allows the Company to
borrow up to approximately $7.3 million (RMB50million). On July 29, 2010 we
borrowed approximately $1.5 million under this agreement. These borrowings are
guaranteed by Jiangsu Ever-Glory, an entity controlled by Mr. Kang, the
Company’s Chairman and Chief Executive Officer. These borrowings are also
collateralized by the Company’s property and equipment.
 
 On July
3, 2009, Ever-Glory Apparel entered into a one-year line of credit agreement for
approximately $5.9 million (RMB40 million) with Nanjing Bank. All amounts
borrowed have been repaid as of June 30, 2010. On March 11, 2010, Ever-Glory
Apparel entered into a new one-year line of credit agreement for approximately
$7.3 million (RMB50 million) with Nanjing Bank.Theloanis guaranteed by Jiangsu
Ever-Glory and Goldenway.As
of June 30, 2010, $1.2 million of bank loans were outstanding under this
agreement and approximately $6.1 million was unused and
available.
  9
  EVER-GLORY
INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
 NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 JUNE 30,
2010 (UNAUDITED)
 
 On June
29, 2010, Ever-Glory Apparel borrowed $260,000 from Bank of
Communications which wasguaranteed by Jiangsu
Ever-Glory, Mr Kang and the approximately $330,000 accounts
receivable from wholesale customers. The maturity date for this loan is
September 27, 2010. If the Company receives a certain payment
from customers before September 27,2010 the Company is to repay this loan
at the same time the payment is received.
 
 On
December 7, 2009, Ever-Glory Apparel borrowed approximately $0.7 million
(RMB5 million) from Bank of Jiangsu. The loan is due in December 2010, bears
interest at 5.31% and is guaranteed by Jiangsu Ever-Glory.
 
 Total
interest expense on bank loans amounted to $95,198, $187,972, $85,970
and $180,355 for the three and six months ended June 30,2010 and
2009, respectively,
 
 Note
5 DERIVATIVE WARRANT LIABILITY
 (Included
in ASC 815 “Derivatives and Hedging”, previously SFAS 133)
  The
Company has outstanding certain warrants that, in accordance
with accounting guidance effective January 1,2009, require liability
classification because of certain provisions that may result in an adjustment to
their exercise price. Accordingly, these warrants were retroactively
reclassified as liabilities at January 1, 2009, resulting in a decrease in paid
in capital of $976,000, an increase in retained earnings of $494,000, and the
recognition of a liability of $482,000. The liability has been adjusted to fair
value as of June 30, 2010 and 2009, resulting in a (decrease) increase in
the liability of ($13,317), $71,202, $484,702 and ($581,792) for the
three and six months ended June 30, 2010 and 2009, respectively.
 
 The
Company uses the Black-Scholes pricing model to calculate fair value of its
warrant liabilities. Key assumptions used to apply these models are as
follows:
 
 June30,2010
                        
                        
                        June30,2009Expected
      term
                        
                        2.93
      years
                        
                        
                        3.94
      yearsVolatility
                        
                        
                        103
                        %
                        
                        
                        115
                        %Risk-free
      interest rate
                        
                        
                        1.125
                        %
                        
                        
                        2.625
                        %Dividend
      yield
                        
                        
                        0
                        %
                        
                        
                        0
                        %
 
 NOTE
6 INCOME TAX
 
 PRC
Pre-tax income for the three and six months ended June 30 2010 and 2009 was
taxable in the following jurisdictions.
 
 Threemonthsended
                          
                          
                          SixmonthsendedJune30,
                          
                          
                          June30,2010
                          
                          
                          2009
                          
                          
                          2010
                          
                          
                          2009PRC
                          
                          $
                          673,443
                          
                          
                          $
                          1,452,153
                          
                          
                          $
                          1,996,043
                          
                          
                          $
                          3,391,050Others
                          
                          
                          301,258
                          
                          
                          
                          474,344
                          
                          
                          
                          843,886
                          
                          
                          
                          (631,218
                          )$
                          974,701
                          
                          
                          $
                          1,926,497
                          
                          
                          $
                          2,839,929
                          
                          
                          $
                          2,759,832
  The
Company’s operating subsidiaries are governed by the Income Tax Law of the PRC
concerning Foreign Investment Enterprises and Foreign Enterprises and various
local income tax laws (“the Income Tax Laws”).
 
 In 2010
and 2009, Goldenway’s income tax rate was 25%.
  10
  EVER-GLORY
INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
 NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 JUNE 30,
2010 (UNAUDITED)
 
 New-Tailun
and Catch-Luck were approved as wholly foreign-owned enterprises in 2006 and,
for 2010 and 2009, are entitled to a 50% reduction to the income tax rate of
25%. Therefore these two subsidiaries are taxed at 12.5%.
  ’
  In 2010
and 2009, LA GO GO’s income tax rate was 25%.
 
 The
following table reconciles the PRC statutory rates to the Company’s effective
tax rate for the three and six months ended June 30, 2010 and
2009, respectively:
 
 Threemonthsended
                        
                        
                        SixmonthsendedJune30,
                        
                        
                        June30,2010
                        
                        
                        2009
                        
                        
                        2010
                        
                        
                        2009PRC
      statutory rate
                        
                        
                        25.0
                        
                        
                        
                        25.0
                        
                        
                        
                        25.0
                        
                        
                        
                        25.0Income
      tax exemption
                        
                        
                        (3.0
                        )
                        
                        
                        (7.8
                        )
                        
                        
                        (2.1
                        )
                        
                        
                        (11.4
                        )Other
                        
                        
                        3.8
                        
                        
                        
                        1.6
                        
                        
                        
                        (2.6
                        )
                        
                        
                        3.0Effective
      income tax rate
                        
                        
                        25.8
                        %
                        
                        
                        18.8
                        %
                        
                        
                        20.3
                        %
                        
                        
                        16.6
                        %
  Income
tax expense for the three and six months ended June 30, 2010 and 2009 is as
follows:
 
 ForthethreemonthsendedJune30
                    
                    
                    ForthesixmonthsendedJune302010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009Current
                    
                    $
                    (168,152
                    )
                    
                    $
                    216,047
                    
                    
                    $
                    136,052
                    
                    
                    $
                    329,032Deferred
                    
                    
                    342,080
                    
                    
                    
                    56,609
                    
                    
                    
                    268,728
                    
                    
                    
                    232,695Income
      tax expense
                    
                    $
                    173,928
                    
                    
                    $
                    272,656
                    
                    
                    $
                    404,780
                    
                    
                    $
                    561,727
  NOTE
7 EARNINGS PER SHARE
 
 Earnings
per share is calculated as follows:
  11
  EVER-GLORY
INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
 NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 JUNE 30,
2010 (UNAUDITED)
 
 ForthethreemonthsendedJune30
                    
                    
                    ForthesixmonthsendedJune302010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009Net
      income attributable to the Company
                    
                    $
                    800,773
                    
                    
                    $
                    1,659,702
                    
                    
                    $
                    2,376,448
                    
                    
                    $
                    2,215,564Weighted
      average number of common stock – Basic
                    
                    
                    14,729,807
                    
                    
                    
                    13,548,498
                    
                    
                    
                    14,725,142
                    
                    
                    
                    13,539,909Effect
      of dilutive securities:Warrants
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    127,649Weighted
      average number of common stock – Diluted
                    
                    
                    14,729,807
                    
                    
                    
                    13,548,498
                    
                    
                    
                    14,852,791
                    
                    
                    
                    13,539,909Earnings
      per share - basic
                    
                    $
                    0.05
                    
                    
                    $
                    0.12
                    
                    
                    $
                    0.16
                    
                    
                    $
                    0.16Earnings
      per share -diluted
                    
                    $
                    0.05
                    
                    
                    $
                    0.12
                    
                    
                    $
                    0.16
                    
                    
                    $
                    0.16
 
 For the
three months ended June 30, 2010, the Company excluded 913,182 warrants
outstanding from diluted earnings per share because the exercise price of $3.20
exceeded the average trading price of $3.07, making these warrants
anti-dilutive. For the six months ended June 30, 2010, the Company included
913,182 warrants outstanding in diluted earnings per share because the average
trading price of $3.72 exceeded the exercise price of $3.20, making these
warrants dilutive. For the three and six months ended June 30, 2009, the
Company excluded 913,182 warrants outstanding from diluted earnings per
share because the exercise price of $3.20 exceeded the average trading price of
$2.19 and $2.08, respectively, making these warrants
anti-dilutive.
 
 NOTE
8 STOCKHOLDERS’ EQUITY
 
 On
January 5, 2010, the Company issued 6,634 shares of common stock to the
Company’s three independent directors as compensation for their services in the
third and fourth quarters of 2009. The shares were valued at $2.84 per
share, which was the average market price of the common stock for the
five days before the grant date.
 
 On May 3, 2010, the Company issued
1,153,846 shares of restricted common stock to a related party as part of the
consideration for theacquisition of Catch-Luck.
 
 On June
1,2010, the Company issued 27,565
shares of restricted common stock to a third party as part of the consideration
for theacquisition of Catch-Luck and New-Tailun.
 
 NOTE
9 RELATED PARTY TRANSACTIONS
 
 Mr. Kang
is the Company’s Chairman and Chief Executive Officer. Ever-Glory Hong Kong is
the Company’s major shareholder. All transactions associated with the following
companies controlled by Mr. Kang and Ever-Glory Hong Kong are considered to
be related party transactions. All related party outstanding balances are
short-tem in nature and are expected to be settled in cash.
  12
  EVER-GLORY
INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
 NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 JUNE 30,
2010 (UNAUDITED)
 
 Sales and Cost of Sales to
Related Parties
 
 The
Company sells products to Nanjing High-Tech Knitting & Weaving Technology
Development Co., Ltd (“Nanjing Knitting”), a company controlled by Ever-Glory
Hong Kong. Sales and related cost of sales in connection with Nanjing
Knitting for the three and six months ended June 30, 2010 and 2009 are as
follows:
 
 ThreemonthsendedJune30
                          
                          
                          SixmonthsendedJune302010
                          
                          
                          2009
                          
                          
                          2010
                          
                          
                          2009Sales to Nanjing Knitting
                          
                          $
                          -
                          
                          
                          $
                          9,351
                          
                          
                          $
                          -
                          
                          
                          $
                          9,351Cost of Sales
                          
                          $
                          -
                          
                          
                          $
                          9,013
                          
                          
                          $
                          -
                          
                          
                          $
                          9,013
 
 Purchases of raw materials
and sub contractor agreements with Related Parties
 
 For the
three and six months ended June 30 2010 and 2009, the Company purchased raw
materials of $561,611, $900,845, $102,504, and $356,149, respectively, from
Nanjing Knitting.
 
 In
addition, the Company sub-contracted certain manufacturing work to related
parties totaling $543,126, $1,740,901, $677,007 and $903,658 for the three and
six months ended June 30, 2010 and 2009, respectively. The Company provided raw
materials to the sub-contractors and was charged a fixed fee for labor provided
by the sub-contractors.
 
 Sub-contracts
with related parties included in cost of sales for the three and six months
ended June 30, 2010 and 2009 are as follows:
 
 ThreeMonthsEndedJune30
                                      
                                      
                                      SixMonthsEndedJune302010
                                      
                                      
                                      2009
                                      
                                      
                                      2010
                                      
                                      
                                      2009Nanjing High-Tech
                                      
                                      $
                                      1,302
                                      
                                      
                                      $
                                      334,364
                                      
                                      
                                      $
                                      47,800
                                      
                                      
                                      $
                                      408,944Nanjing Ever-Kyowa
                                      
                                      
                                      223,441
                                      
                                      
                                      
                                      342,643
                                      
                                      
                                      
                                      512,186
                                      
                                      
                                      
                                      494,714Jiangsu
      Ever-Glory
                                      
                                      
                                      61,102
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      94,678Ever-Glory Vietnam
                                      
                                      
                                      216,748
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      721,508Ever-Glory Cambodia
                                      
                                      
                                      40,533
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      364,729$
                                      543,126
                                      
                                      
                                      $
                                      677,007
                                      
                                      
                                      $
                                      1,740,901
                                      
                                      
                                      $
                                      903,658
  13
  EVER-GLORY
INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
 NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 JUNE 30,
2010 (UNAUDITED)
 
 AmountsDueFromRelatedParty
 
 Jiangsu
Ever-Glory International Group Corp., (“Jiangsu Ever-Glory”) is an entity
engaged in importing/exporting, apparel-manufacture, real-estate development,
car sales and other activities. Jiangsu Ever-Glory is controlled by the
Company’s Chief Executive Officer. Because of restrictions on the
Company’s ability to directly import and export products, the Company
utilizes Jiangsu Ever-Glory as its agent, to assist the Company with its import
and export transactions and its international transportation projects. Import
transactions primarily consist of purchases of raw materials and accessories
designated by the Company’s customers for use in garment manufacture. Export
transactions consist of the Company’s sales to foreign markets such as Japan,
Europe and the United States. As the Company’s agent, Jiangsu Ever-Glory’s
responsibilities include managing customs, inspection, transportation, insurance
and collections on behalf of the Company. Jiangsu Ever-Glory also manages
transactions denominated in currencies other than the Chinese RMB at rates of
exchange agreed between the Company and Jiangsu Ever-Glory and based upon rates
of exchange quoted by the People’s Bank of China. In return for these services,
Jiangsu Ever-Glory charges the Company a fee of approximately 3% of export
sales.  For import transactions, the Company may make advance
payments, through Jiangsu Ever-Glory, for the raw material purchases, or Jiangsu
Ever-Glory may make advance payments on the Company’s behalf. For export
transactions, accounts receivable for export sales are remitted by the Company’s
customers through Jiangsu Ever-Glory, who forwards the payments to the Company.
The Company and Jiangsu Ever-Glory have agreed that balances from import and
export transactions may be offset.  Amounts due to (from) Jiangsu
Ever-Glory are typically settled within 60-90 days. Interest of 0.5% is charged
on net amounts due at each month end. Interest (expense)/income for the three
and six months ended June 30, 2010 and 2009 was ($14,071),
$52,348, $160,912 and $263,491, respectively. Following is a summary of
import and export transactions for the six months ended June 30,
2010:
 
 AccountsReceivable
                      
                      
                      AccountsPayable
                      
                      
                      NetAs
      of January 1, 2010
                      
                      $
                      15,745,543
                      
                      
                      $
                      2,390,659
                      
                      
                      $
                      13,354,884Sales/Purchases
                      
                      $
                      23,937,421
                      
                      
                      $
                      2,674,473Payments
      Received/Made
                      
                      $
                      29,459,265
                      
                      
                      $
                      303,655As
      of June 30, 2010
                      
                      $
                      10,223,699
                      
                      
                      $
                      4,761,477
                      
                      
                      $
                      5,462,222
 
 Approximately 48%
of the receivable balance at June 30, 2010 was settled by August 6,
2010.
 
 Accounts Payable andOther Payables–RelatedParties
 
 As of
June 30, 2010 and December 31, 2009, accounts payable and other payables
due to related
parties were as follows:.
 
 2010
                      
                      
                      2009Nanjing
      High-Tech
                      
                      $
                      212,503
                      
                      
                      
                      153,660Nanjing
      Ever-Kyowa
                      
                      
                      309,527
                      
                      
                      
                      335,546Shanghai
      La Chapelle Garment and Accessories Company Limited
                      
                      
                      
                      
                      
                      
                      293,400Total
                      
                      $
                      522,030
                      
                      
                      $
                      782,606
 
 The
Company purchases raw materials from and subcontracts some of its production to
related parties. Accounts payable to related parties was $522,030 at June 30,
2010.
 
 In February,
July and August 2009, LA GO GO borrowed $293,400 (RMB 2 million) from
La Chapelle for operations. This loan is interest free and due on
demand.
 
 On April
2, 2010, Goldenway sold its 10% equity interest in La Chapelle to two third
parties. Accordingly, at June 30, 2010, the amount owed to La
Chapelle of $294,600(RMB 2 million) was reclassified to other
payables.
  14
  EVER-GLORY
INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
 NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 JUNE 30,
2010 (UNAUDITED)
 
 Loans from Related
Party
 
 As of
June 30, 2010 and December 31, 2009 the Company owed $1,970,575 and $2,575,759,
respectively to Blue Power Holdings Limited, a company controlled by the
Company’s Chief Executive Officer, Mr. Kang. Interest is charged at 6% per annum
on the amounts due. The loans are due between July 2010 and April 2011. For the
three and six months ended June 30, 2010 and 2009, the Company incurred interest
expense of $18,583, $44,848, $29,264, and $58,529, respectively. The accrued
interest is included in the carrying amount of the loan in the accompanying
balance sheets. During 2010, the Company repaid $650,030 to Blue Power Holdings
Limited.
 
 NOTE10 CONCENTRATIONS
AND RISKS
 
 The
Company extends unsecured credit to its customers in the normal course of
business and generally does not require collateral. As a result, management
performs ongoing credit evaluations, and the Company maintains an allowance for
potential credit losses based upon its loss history and its aging analysis.
Based on management’s assessment of the amount of probable credit losses, if
any, in existing accounts receivable, management has concluded that no allowance
for doubtful accounts is necessary at June 30, 2010 and December 31, 2009
.. Management reviews the allowance for doubtful accounts each reporting
period based on a detailed analysis of accounts receivable. In the analysis,
management primarily considers the age of the customer’s receivable and also
considers the credit worthiness of the customer, the economic conditions of
the customer’s industry, and general economic conditions and trends, among other
factors. If any of these factors change, the Company may also change its
original estimates, which could impact the level of the Company’s future
allowance for doubtful accounts.  If judgments regarding the
collectability of accounts receivable were incorrect, adjustments to the
allowance may be required, which would reduce profitability.
  For the
six-month period ended June 30, 2010, the Company had two wholesale customers
that represented approximately 30% and 10% of the Company’s
revenues. For the three-month period ended June 30, 2010, the Company had
two wholesale customers that represented approximately 30% and 14% of the
Company’s revenues. For the six-month period ended June 30, 2009, the
Company had one wholesale customer that represented approximately 34% of
the Company’s revenues. For the three-month period ended June 30, 2009, the
Company had one wholesale customer that represented approximately 31% of
the Company’s revenues.
  For the
Company’s wholesale business during the three and six months ended June 30, 2010
and 2009, no supplier represented more than 10% of the total raw materials
purchased.
  For the
Company’s retail business, no one supplier supplied more than 10% of raw
materials during the six months ended June 30, 2010. The Company purchased
10% of its raw materials from one supplier during the three months ended June
30, 2010, and 11% of its raw materials from one supplier during the six months
ended June 30, 2009. No one supplier supplied more than 10% of raw materials
during the three months ended June 30, 2009.
  For the
wholesale business, during the six months ended June 30, 2010 and 2009, the
Company relied on one manufacturer for 15% and 20% of purchased finished goods,
respectively. During the three months ended June 30, 2010 and 2009, the Company
relied on one manufacturer for 11% and 18% of purchased finished
goods.
  15
  EVER-GLORY
INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
 NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 JUNE 30,
2010 (UNAUDITED)
 
 For the
retail business, during the six months ended June 30, 2010 , the Company relied
on one manufacturer for 12% of purchased finished goods. During the three months
ended June 30, 2010 , the Company relied on one manufacturer for 16% of
purchased finished goods. During the six months ended June 30, 2009, the
Company relied on two manufacturers for 12% each of purchased finished goods.
During the three months ended June 30, 2009, the Company relied on one
manufacturer for 16% of purchased finished goods.
 
 The
Company’s revenue for the three and six months ended June 30, 2010 and 2009 were
earned in the following geographic areas:
 
 ThreemonthsendedJune30
                          
                          
                          SixmonthsendedJune302010
                          
                          
                          2009
                          
                          
                          2010
                          
                          
                          2009The
      People’s republic of China
                          
                          $
                          7,976,339
                          
                          
                          $
                          2,778,644
                          
                          
                          $
                          15,481,577
                          
                          
                          $
                          6,127,694Germany
                          
                          
                          5,426,488
                          
                          
                          
                          5,844,172
                          
                          
                          
                          11,199,952
                          
                          
                          
                          12,558,174United
      Kingdom
                          
                          
                          2,485,937
                          
                          
                          
                          3,471,902
                          
                          
                          
                          6,195,159
                          
                          
                          
                          6,744,937France
                          
                          
                          1,957,919
                          
                          
                          
                          1,767,920
                          
                          
                          
                          5,149,809
                          
                          
                          
                          2,716,410Europe-Other
                          
                          
                          944,112
                          
                          
                          
                          1,155,674
                          
                          
                          
                          2,055,540
                          
                          
                          
                          1,457,605Japan
                          
                          
                          1,804,761
                          
                          
                          
                          2,551,998
                          
                          
                          
                          4,581,618
                          
                          
                          
                          7,241,702United
      States
                          
                          
                          2,506,942
                          
                          
                          
                          3,555,184
                          
                          
                          
                          4,578,389
                          
                          
                          
                          4,786,794Total
                          
                          $
                          23,102,498
                          
                          
                          $
                          21,125,494
                          
                          
                          $
                          49,242,044
                          
                          
                          $
                          41,633,316
 
 NOTE
11 SEGMENTS
 
 The
Company reports financial and operating information in the following two
segments:
 
 (a)  Wholesale
segment
 
 (b)  Retail
segment
 
 The
Company also provides general corporate services to its segments and these
costs are reported as "corporate and others."
  16
  EVER-GLORY
INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
 NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 JUNE 30,
2010 (UNAUDITED)
 
 Wholesale
                                                    segment
                                                  
                                                  
                                                  Retailsegment
                                                  
                                                  
                                                  Corporateand
                                                    others
                                                  
                                                  
                                                  TotalSix
      months ended June 30, 2010Segment
      profit or loss:Net
      revenue from external customers
                                                  
                                                  $
                                                  37,655,966
                                                  
                                                  
                                                  $
                                                  11,586,078
                                                  
                                                  
                                                  $
                                                  -
                                                  
                                                  
                                                  $
                                                  49,242,044Income
      from operations
                                                  
                                                  $
                                                  2,314,270
                                                  
                                                  
                                                  $
                                                  535,928
                                                  
                                                  
                                                  $
                                                  (321,378
                                                  )
                                                  
                                                  $
                                                  2,528,820Interest
      income
                                                  
                                                  $
                                                  92,292
                                                  
                                                  
                                                  $
                                                  1,454
                                                  
                                                  
                                                  $
                                                  1
                                                  
                                                  
                                                  $
                                                  93,747Interest
      expense
                                                  
                                                  $
                                                  181,770
                                                  
                                                  
                                                  $
                                                  6,202
                                                  
                                                  
                                                  $
                                                  44,848
                                                  
                                                  
                                                  $
                                                  232,820Depreciation
      and amortization
                                                  
                                                  $
                                                  491,625
                                                  
                                                  
                                                  $
                                                  620,253
                                                  
                                                  
                                                  $
                                                  -
                                                  
                                                  
                                                  $
                                                  1,111,878Income
      tax expense
                                                  
                                                  $
                                                  267,951
                                                  
                                                  
                                                  $
                                                  136,829
                                                  
                                                  
                                                  $
                                                  -
                                                  
                                                  
                                                  $
                                                  404,780Segment
      assets:Additions
      to property, plant and equipment
                                                  
                                                  $
                                                  239,928
                                                  
                                                  
                                                  $
                                                  474,931
                                                  
                                                  
                                                  $
                                                  -
                                                  
                                                  
                                                  $
                                                  714,859Total
      assets
                                                  
                                                  $
                                                  72,535,457
                                                  
                                                  
                                                  $
                                                  8,700,176
                                                  
                                                  
                                                  $
                                                  58,262,119
                                                  
                                                  
                                                  $
                                                  139,497,752Six
      months ended June 30, 2009Segment
      profit or loss:Net
      revenue from external customers
                                                  
                                                  $
                                                  37,058,183
                                                  
                                                  
                                                  $
                                                  4,565,782
                                                  
                                                  
                                                  $
                                                  -
                                                  
                                                  
                                                  $
                                                  41,623,965Net
      revenue from related parties
                                                  
                                                  $
                                                  9,351
                                                  
                                                  
                                                  $
                                                  -
                                                  
                                                  
                                                  $
                                                  -
                                                  
                                                  
                                                  $
                                                  9,351Income
      from operations
                                                  
                                                  $
                                                  3,309,516
                                                  
                                                  
                                                  $
                                                  (48,121
                                                  )
                                                  
                                                  $
                                                  9,102
                                                  
                                                  
                                                  $
                                                  3,270,497Interest
      income
                                                  
                                                  $
                                                  264,686
                                                  
                                                  
                                                  $
                                                  341
                                                  
                                                  
                                                  $
                                                  1
                                                  
                                                  
                                                  $
                                                  265,028Interest
      expense
                                                  
                                                  $
                                                  180,355
                                                  
                                                  
                                                  $
                                                  -
                                                  
                                                  
                                                  $
                                                  58,529
                                                  
                                                  
                                                  $
                                                  238,884Depreciation
      and amortization
                                                  
                                                  $
                                                  503,338
                                                  
                                                  
                                                  $
                                                  483,803
                                                  
                                                  
                                                  $
                                                  -
                                                  
                                                  
                                                  $
                                                  987,141Income
      tax expense
                                                  
                                                  $
                                                  561,727
                                                  
                                                  
                                                  $
                                                  -
                                                  
                                                  
                                                  $
                                                  -
                                                  
                                                  
                                                  $
                                                  561,727Segment
      assets:Additions
      to property, plant and equipment
                                                  
                                                  $
                                                  62,943
                                                  
                                                  
                                                  $
                                                  59,936
                                                  
                                                  
                                                  $
                                                  -
                                                  
                                                  
                                                  $
                                                  122,879Total
      assets
                                                  
                                                  $
                                                  50,164,239
                                                  
                                                  
                                                  $
                                                  4,114,506
                                                  
                                                  
                                                  $
                                                  46,622,794
                                                  
                                                  
                                                  $
                                                  100,901,539
  The
reconciliations of segment information to the Company’s consolidated totals were
as follows:
 
 June 30,2010
                            
                            
                            June 30,2009Total
      assets:Total
      segments
                            
                            $
                            139,497,752
                            
                            
                            $
                            100,901,539Elimination
      of intersegment receivables
                            
                            $
                            (79,623,665
                            )
                            
                            $
                            (53,768,652
                            )Total
      consolidated
                            
                            $
                            59,874,087
                            
                            
                            $
                            47,132,887
  17
  EVER-GLORY
INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
 NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 JUNE 30,
2010 (UNAUDITED)
 
 Wholesale segment
                                          
                                          
                                          Retail segment
                                          
                                          
                                          Corporate and
                                            others
                                          
                                          
                                          TotalThree
      months ended June 30, 2010Segment
      profit or loss:Net
      revenue from external customers
                                          
                                          $
                                          18,273,367
                                          
                                          
                                          $
                                          4,829,131
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          23,102,498Income
      from operations
                                          
                                          $
                                          393,029
                                          
                                          
                                          $
                                          337,833
                                          
                                          
                                          $
                                          (30,473
                                          )
                                          
                                          $
                                          700,389Interest
      income
                                          
                                          $
                                          24,753
                                          
                                          
                                          $
                                          886
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          25,639Interest
      expense
                                          
                                          $
                                          91,989
                                          
                                          
                                          $
                                          3,209
                                          
                                          
                                          $
                                          18,583
                                          
                                          
                                          $
                                          113,781Depreciation
      and amortization
                                          
                                          $
                                          244,361
                                          
                                          
                                          $
                                          308,869
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          553,230Income
      tax expense
                                          
                                          $
                                          86,016
                                          
                                          
                                          $
                                          87,912
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          173,928Segment
      assets:Additions
      to property, plant and equipment
                                          
                                          $
                                          93,293
                                          
                                          
                                          $
                                          335,674
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          428,967Total
      assets
                                          
                                          $
                                          72,535,457
                                          
                                          
                                          $
                                          8,700,176
                                          
                                          
                                          $
                                          58,262,119
                                          
                                          
                                          $
                                          139,497,752Three
      months ended June 30, 2009Segment
      profit or loss:Net
      revenue from external customers
                                          
                                          $
                                          19,082,560
                                          
                                          
                                          $
                                          2,033,583
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          21,116,143Net
      revenue from related parties
                                          
                                          $
                                          9,351
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          9,351Income
      from operations
                                          
                                          $
                                          1,350,468
                                          
                                          
                                          $
                                          (16,436
                                          )
                                          
                                          $
                                          18,906
                                          
                                          
                                          $
                                          1,352,938Interest
      income
                                          
                                          $
                                          161,458
                                          
                                          
                                          $
                                          23
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          161,481Interest
      expense
                                          
                                          $
                                          85,970
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          29,264
                                          
                                          
                                          $
                                          115,234Depreciation
      and amortization
                                          
                                          $
                                          252,462
                                          
                                          
                                          $
                                          250,674
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          503,136Income
      tax expense
                                          
                                          $
                                          272,656
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          272,656Segment
      assets:Additions
      to property, plant and equipment
                                          
                                          $
                                          10,218
                                          
                                          
                                          $
                                          46,942
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          57,160Total
      assets
                                          
                                          $
                                          50,164,239
                                          
                                          
                                          $
                                          4,114,506
                                          
                                          
                                          $
                                          46,622,794
                                          
                                          
                                          $
                                          100,901,539
  The
reconciliations of segment information to the Company’s consolidated totals were
as follows:
 
 June 30,2010
                        
                        
                        June 30,2009Total
      assets:Total
      segments
                        
                        $
                        139,497,752
                        
                        
                        $
                        100,901,539Elimination
      of intersegment receivables
                        
                        $
                        (79,623,665
                        )
                        
                        $
                        (53,768,652
                        )Total
      consolidated
                        
                        $
                        59,874,087
                        
                        
                        $
                        47,132,887
  NOTE
12 SUBSEQUENT EVENT
 
 On July
19 , 2010, the Company issued 2,498 shares of common stock to the Company’s
three independent directors as compensation for their services in the first and
second quarters of 2010. The shares were valued at $2.98 per share, being the
average market price of the common stock for the five trading days prior to the
June 30, 2010, grant date.
  18




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





The
following discussion and analysis of our financial condition and results of
operations for the three months and six months ended June 30, 2010 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




Our
Business




We are a
leading apparel supply-chain manager and retailer in China. We are listed
on the NYSE Amex under the symbol of “EVK”.




We
classify our businesses into two segments: Wholesale and Retail. Our wholesale
business consists of wholesale-channel sales made principally to owners of
famous brands, department stores and specialty stores located throughout Europe,
the U.S., Japan and the People’s Republic of China (“PRC”). We have a focus on
well-known, middle-to-high grade casual wear, sportswear, and outerwear brands.
Our retail business consists of retail-channel sales directly to consumers
through full-price retail stores located throughout the PRC.




Although
we have our own manufacturing facilities, we currently outsource most of the
manufacturing to our strategic alliances as part of our overall business
strategy. Outsourcing allows us to maximize our production capacity and maintain
flexibility while reducing capital expenditures and the costs of keeping skilled
workers on production lines during low season. We oversee our long-term
contractors with our advanced management solutions and inspect products
manufactured by them to ensure that they meet our high quality control
standards and timely delivery.




Wholesale
Business




We
conduct our original design manufacturing (“ODM”) operations through four
wholly-owned subsidiaries which are located in the Nanjing Jiangning Economic
and Technological Development Zone and Shang Fang Town in the Jiangning District
in Nanjing, China: Ever-Glory International Group Apparel Inc. (“Ever-Glory
Apparel”), Goldenway Nanjing Garments Company Limited (“Goldenway”), Nanjing
New-Tailun Garments Company Limited (“New Tailun”), and Nanjing Catch-Luck
Garments Co., Ltd. (“Catch-Luck”).





Retail
Business




We
conduct our retail operations through Shanghai LA GO GO Fashion Company Limited
(“LA GO GO”), a wholly-owned subsidiary of Ever-Glory Apparel.




Business
Objectives





Wholesale
Business





We
believe the enduring strength of our wholesale business is mainly due to our
consistent emphasis on innovative and distinctive product designs that stand for
exceptional styling and quality. We maintain long-term, satisfactory
relationships with a portfolio of well-known, mid-class global
brands.




The
primary business objective for our wholesale segment is to expand our portfolio
into higher-class brands, expand our customer base and improve our profit. We
believe that our growth opportunities and continued investment initiatives
include:


19




··
            toexpandourglobal sourcing
      network;


·
            toinvest inouroverseas low-cost manufacturing
      base(outside of
      mainland China);


·
            tofocus onhighvalueadded productsand continueourstrategy to produce mid to high
      end garment;


·
            toemphasize product design andnewtechnologyutilization;
  and


·
            toseek strategic acquisitions of
      international distributors that could enhance global sales and our
      distribution network




Retail
Business




The
business objective for our retail segment is to establish a leading brand of
women’s apparel and to build a nationwide retail network in China. As of June
30, 2010, we have 210 stores which include 40 stores that were opened
in the first half of 2010. We expect to open additional 50-70 stores
in the second half of 2010. We believe that our growth opportunities and
continued investment initiatives include:





·
            tobuildtheLA GO GObrandto berecognized asa majorplayer in themid-endwomen's apparelmarketinChina;


·
            toexpandtheLA GO GO retail
      network;


·
            to improvetheLA GO GO retail stores’efficiency and increase
      same-storesales


·
            tolaunch LA GO GO flagship stores in Tier-1 Cities and increase
      penetration and coverage in Tier-2 and Tier-3
  Cities


·      tobecome a multi-brand operator by seeking opportunities for long-term
cooperation with reputable international brands and by facilitating
international brands entry into the Chinese market;




Seasonality
of Business




Our
business is affected by seasonal trends, with higher levels of wholesale sales
in our third and fourth quarters and higher retail sales in our first and fourth
quarters. These trends primarily result from the timing of seasonal wholesale
shipments and holiday periods in the retail segment.




Collection
Policy




Wholesale
business




For our
new customers, we generally require orders placed to be backed by letters of
credit. For our long-term and established customers with a good payment track
record, we generally provide payment terms between 30 to 120 days following
delivery of finished goods.




Retail
business




For
store-in-store shops, we generally receive payments from the stores between 60
and 90 days following the date of the register receipt. For our own flagship
stores, we receive payments on the same date as the register
receipt.




Global
Economic Uncertainty




Our
business is dependent on consumer demand for our products. We believe that the
significant uncertainty in the global economy and a slowdown in the U.S. and EU
economies have increased our clients’ sensitivity to the cost of our products.
We have experienced continued pricing pressure this year. If the global economic
environment continues to be weak, these worsening economic conditions could have
a negative impact on our sales growth and operating margins in our wholesale
segment in 2010.




In
addition, economic conditions in the United States and in foreign markets in
which we operate could substantially affect our sales and profitability and our
cash position and collection of accounts receivable.  Global credit
and capital markets have experienced unprecedented volatility and disruption.
Business credit and liquidity have tightened in much of the world. Some of our
suppliers and customers may face credit issues and could experience cash flow
problems and other financial hardships. These factors currently have not had an
impact on the timeliness of receivable collections from our customers. We
cannot predict at this time how this situation will develop and whether accounts
receivable may need to be allowed for or written off in the coming
quarters.





Despite
the various risks and uncertainties associated with the current global economy,
we believe our core strengths will continue to allow us to execute our strategy
for long-term sustainable growth in revenue, net income and operating cash
flow.


20





Summary
of 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.





Revenue
Recognition




We
recognize wholesale revenue from product sales, net of value-added taxes, upon
delivery for local sales and upon shipment of the products for export sales, at
such time title passes to the customer provided however that (i) there are no
uncertainties regarding customer acceptance (ii) persuasive evidence of an
arrangement exists (iii) the sales price is fixed and determinable, and (iv)
collectability is deemed probable. We recognize wholesale revenue from
manufacturing fees charged to buyers for the assembly of garments from materials
provided by the buyers upon completion of the manufacturing process and upon
delivery to the buyer for local sales and upon shipment of the products for
export sales, provided that (i)there are no uncertainties regarding customer
acceptance (ii) persuasive evidence of an arrangement exists (iii) the sales
price is fixed and determinable, and (iv)  collectability is deemed
probable. Retail sales are recorded at the time of register
receipt.




Estimates
and Assumptions




In
preparing our consolidated financial statements, we use estimates and
assumptions that affect the reported amounts and disclosures. Our estimates are
often based on complex judgments, probabilities and assumptions that we believe
to be reasonable, but that are inherently uncertain and unpredictable. We are
also subject to other risks and uncertainties that may cause actual results to
differ from estimated amounts. Significant estimates in 2010 and 2009 include
the assumptions used to value warrants and the estimates of the allowance for
deferred tax assets.





Results
of Operations for the three months ended June 30, 2010 and 2009





The
following table summarizes our results of operations for the three months ended
June 30, 2010 and 2009. The table and the discussion below should be read in
conjunction with our condensed consolidated financial statements and the notes
thereto appearing elsewhere in this report.





Three months ended June 302010
                        
                        
                        2009(in U.S. Dollars, except for percentages)Sales
                        
                        $
                        23,102,498
                        
                        
                        
                        100.0
                        %
                        
                        $
                        21,125,494
                        
                        
                        
                        100.0
                        %Gross
      Profit
                        
                        $
                        4,507,983
                        
                        
                        
                        19.5
                        
                        
                        $
                        4,507,561
                        
                        
                        
                        21.3Operating
      Expenses
                        
                        $
                        3,807,594
                        
                        
                        
                        16.5
                        
                        
                        $
                        3,154,623
                        
                        
                        
                        14.9Income
      From Operations
                        
                        $
                        700,389
                        
                        
                        
                        3.0
                        
                        
                        $
                        1,352,938
                        
                        
                        
                        6.4Other
      Income (Expenses)
                        
                        $
                        274,312
                        
                        
                        
                        1.2
                        
                        
                        $
                        573,559
                        
                        
                        
                        2.7Income
      Tax Expense
                        
                        $
                        173,928
                        
                        
                        
                        0.8
                        
                        
                        $
                        272,656
                        
                        
                        
                        1.3Net
      Income
                        
                        $
                        800,773
                        
                        
                        
                        3.5
                        %
                        
                        $
                        1,653,841
                        
                        
                        
                        7.8
                        %





Revenue





The
following table sets forth a breakdown of our total sales, by region, for the
three months ended June 30, 2010 and
2009.


21





The three
                          months ended
                          June 30, 2010
                        
                        
                        % oftotal
                          sales
                        
                        
                        The three
                          months ended
                          June 30, 2009
                        
                        
                        % of total
                          sales
                        
                        
                        Growth in the
                          three months
                          ended June
                          30,2010 compared
                          with three months
                          ended June 30,
                          2009Wholesale
      businessThe
      People’s Republic of China
                        
                        $
                        3,147,208
                        
                        
                        
                        13.6
                        %
                        
                        $
                        745,061
                        
                        
                        
                        3.5
                        %
                        
                        
                        322.4
                        %Germany
                        
                        
                        5,426,488
                        
                        
                        
                        23.5
                        
                        
                        
                        5,844,172
                        
                        
                        
                        27.7
                        
                        
                        
                        (7.1
                        )United
      Kingdom
                        
                        
                        2,485,937
                        
                        
                        
                        10.8
                        
                        
                        
                        3,471,902
                        
                        
                        
                        16.4
                        
                        
                        
                        (28.4
                        )France
                        
                        
                        1,957,919
                        
                        
                        
                        8.5
                        
                        
                        
                        1,767,920
                        
                        
                        
                        8.4
                        
                        
                        
                        10.7Europe-Other
                        
                        
                        944,112
                        
                        
                        
                        4.0
                        
                        
                        
                        1,155,674
                        
                        
                        
                        5.5
                        
                        
                        
                        (18.3
                        )Japan
                        
                        
                        1,804,761
                        
                        
                        
                        7.8
                        
                        
                        
                        2,551,998
                        
                        
                        
                        12.1
                        
                        
                        
                        (29.3
                        )United
      States
                        
                        
                        2,506,942
                        
                        
                        
                        10.9
                        
                        
                        
                        3,555,184
                        
                        
                        
                        16.8
                        
                        
                        
                        (29.5
                        )Total
      wholesale business
                        
                        
                        18,273,367
                        
                        
                        
                        79.1
                        
                        
                        
                        19,091,911
                        
                        
                        
                        90.4
                        
                        
                        
                        (4.3
                        )Retail
      business
                        
                        
                        4,829,131
                        
                        
                        
                        20.9
                        
                        
                        
                        2,033,583
                        
                        
                        
                        9.6
                        
                        
                        
                        137.5Total
                        
                        $
                        23,102,498
                        
                        
                        
                        100.0
                        %
                        
                        $
                        21,125,494
                        
                        
                        
                        100.0
                        %
                        
                        
                        9.4
                        %





Revenues
from our wholesale business mainly come from international markets. We also
generate revenues from our retail business from Chinese domestic markets
focusing on our own brand, LA GO GO.





Sales for
the three months ended June 30, 2010 were $23,102,498, an increase of 9.4% from
the three months ended June 30, 2009. The increase in our sales was primarily
attributable to the increased sales in our retail business.





Sales
generated from our wholesale business contributed 79.1% or $18.3 million of our
total sales for the three months ended June 30, 2010, a decrease of 4.3%
compared to $19.1 million in the three months ended June 30, 2009. This decrease
was primarily due to our discontinuing some of our lower margin orders in the
fourth quarter of 2009. The majority of our sales in the second quarter of 2010
resulted from orders taken in the fourth quarter of 2009, at which time some of
our customers sought significant discounts due to the economic slowdown. In view
of the discounts being sought we voluntarily discontinued some lower margin
orders.





Sales generated from our retail
business contributed20.9% or $4.8million of our total salesfor the three months endedJune30, 2010, compared to $2.0millionin the three months endedJune30, 2009. In thesecondquarterof 2010we opened26new LA GO GO stores. As of June
30, 2010, we had210LA GO GO retail stores.





Costs
and Expenses




Cost of Sales and Gross
Margin




Cost of
goods sold includes the direct raw material cost, direct labor cost, and
manufacturing overhead including depreciation of production equipment and rent,
consistent with the revenue earned. Cost of goods sold excludes warehousing
costs, which historically have not been significant.




The
following table sets forth the components of our cost of sales and gross profit
both in amounts and as a percentage of total sales for the three months ended
June 30, 2010 and 2009.


22





Three months ended June 30,
                                    
                                    
                                    Growth(Decrease) in the three
                                      months ended June 30, 20102010
                                    
                                    
                                    2009
                                    
                                    
                                    compared with the three(in U.S. dollars, except for percentages)
                                    
                                    
                                    months ended June 30, 2009Net
      Sales for Wholesale Sales
                                    
                                    $
                                    18,273,367
                                    
                                    
                                    
                                    100.0
                                    %
                                    
                                    $
                                    19,091,911
                                    
                                    
                                    
                                    100.0
                                    %
                                    
                                    
                                    (4.3
                                    )%Raw
      Materials
                                    
                                    
                                    8,596,709
                                    
                                    
                                    
                                    47.1
                                    
                                    
                                    
                                    8,891,598
                                    
                                    
                                    
                                    46.6
                                    
                                    
                                    
                                    (3.3
                                    )Labor
                                    
                                    
                                    864,860
                                    
                                    
                                    
                                    4.7
                                    
                                    
                                    
                                    827,463
                                    
                                    
                                    
                                    4.3
                                    
                                    
                                    
                                    4.5Outsourced
      Manufacturing Costs
                                    
                                    
                                    6,121,624
                                    
                                    
                                    
                                    33.5
                                    
                                    
                                    
                                    5,547,458
                                    
                                    
                                    
                                    29.1
                                    
                                    
                                    
                                    10.4Other
      and Overhead
                                    
                                    
                                    144,784
                                    
                                    
                                    
                                    0.8
                                    
                                    
                                    
                                    230,298
                                    
                                    
                                    
                                    1.2
                                    
                                    
                                    
                                    (37.1
                                    )Total
      Cost of Sales for Wholesale
                                    
                                    
                                    15,727,977
                                    
                                    
                                    
                                    86.1
                                    
                                    
                                    
                                    15,496,817
                                    
                                    
                                    
                                    81.2
                                    
                                    
                                    
                                    1.5Gross
      Profit for Wholesale
                                    
                                    
                                    2,545,390
                                    
                                    
                                    
                                    13.9
                                    
                                    
                                    
                                    3,595,094
                                    
                                    
                                    
                                    18.8
                                    
                                    
                                    
                                    (29.2
                                    )Net
      Sales for Retail
                                    
                                    
                                    4,829,131
                                    
                                    
                                    
                                    100.0
                                    
                                    
                                    
                                    2,033,583
                                    
                                    
                                    
                                    100.0
                                    
                                    
                                    
                                    137.5Production
      Costs
                                    
                                    
                                    1,715,889
                                    
                                    
                                    
                                    35.6
                                    
                                    
                                    
                                    474,603
                                    
                                    
                                    
                                    23.3
                                    
                                    
                                    
                                    261.5Rent
                                    
                                    
                                    1,150,649
                                    
                                    
                                    
                                    23.8
                                    
                                    
                                    
                                    646,513
                                    
                                    
                                    
                                    31.8
                                    
                                    
                                    
                                    78.0Total
      Cost of Sales for Retail
                                    
                                    
                                    2,866,538
                                    
                                    
                                    
                                    59.4
                                    
                                    
                                    
                                    1,121,116
                                    
                                    
                                    
                                    55.1
                                    
                                    
                                    
                                    155.7Gross
      Profit for Retail
                                    
                                    
                                    1,962,593
                                    
                                    
                                    
                                    40.6
                                    
                                    
                                    
                                    912,467
                                    
                                    
                                    
                                    44.9
                                    
                                    
                                    
                                    115.1Total
      Cost of Sales
                                    
                                    
                                    18,594,515
                                    
                                    
                                    
                                    80.5
                                    
                                    
                                    
                                    16,617,933
                                    
                                    
                                    
                                    78.7
                                    
                                    
                                    
                                    11.9Gross
      Profit
                                    
                                    $
                                    4,507,983
                                    
                                    
                                    
                                    19.5
                                    %
                                    
                                    $
                                    4,507,561
                                    
                                    
                                    
                                    21.3
                                    %
                                    
                                    
                                    0.0
                                    %





Raw
material costs for our wholesale business were 47.0% of our total sales in
the three months ended June 30, 2010, compared to 46.6% in the three months
ended June 30, 2009.The
increase was mainly due to increased raw materials prices.




Labor
costs for our wholesale business were 4.7% of our total sales in the three
months ended June 30, 2010, representing a  0.4% increase
from the 4.3% for the three months ended June 30, 2009. The increase was
mainly due to increased salaries for our workers.




Outsourced manufacturing
costs for our wholesale business were 33.5% of our total sales in the three
months ended June 30, 2010, and increased by 10.4% compared to the three months
ended June 30, 2009. The increase was mainly due to increased salaries for
employees of the manufacturers.




Overhead
and other expenses for our wholesale business accounted for 0.8% of our total
sales for the three months ended June 30, 2010, compared to 1.2% of total sales
for the three months ended June 30, 2009. This decrease was due to improved
control over these expenses.




Gross
profit in our wholesale business for the three months ended June 30, 2010 was
$2.5 million, a decrease of 29.2% compared to the three months ended June
30, 2009. Gross margin was 13.9% for our wholesale business for the three
months ended June 30, 2010, a decrease of 4.9% compared to 18.8% for the
three months ended June 30, 2009. This decrease was primarily due to
an increase in labor and raw material prices. When customers placed orders with
us in the fourth quarter of 2009, the negotiated sales prices were based on the
labor costs and raw materials costs at that time. In the second quarter of 2010,
when we fulfilled the orders placed in the fourth quarter of 2009, the average
labor and raw material costs increased significantly. Therefore, the margin on
these orders decreased.




Production
costs for our retail business were $1.7 million or 35.5% of our total retail
sales during the three months ended June 30, 2010 versus $0.5 million or 23.3%
during the three months ended June 30, 2009. As a percentage of total retail
sales the increase in the production costs was due to reduced sales prices
for increased sales volume. Rent costs for our retail business were $1.2 million
or 23.8% of our total retail sales during the three months ended June 30, 2010
versus $0.6million or 31.8% during the three months ended June 30, 2009.The
increase in rent costs resulted from an increase in the number of our
stores.




Gross
profit in our retail business for the three months ended June 30, 2010 was $2.0
million and gross margin was 40.6%. Gross profit in our retail business for the
three months ended June 30, 2009 was $0.9 million and gross margin was 44.9%.
The decrease was primarily due to the fact that we reduced our sales prices in
order to increase our sales volume.




Total
cost of sales for the three months ended June 30, 2010 was $18.6 million, an
increase of 11.9% compared to the three months ended June 30, 2009. As a
percentage of total sales, our cost of sales increased to 80.5% of total sales
for the three months ended June 30, 2010, compared to 78.7% of
total sales for the three months ended June 30, 2009. Consequently, gross
margins decreased to 19.5% for the three months ended June 30, 2010 from
21.3% for the three months ended June 30, 2009.


23




Selling,
General and Administrative) Expenses




Our
selling expenses consist primarily of local transportation, unloading charges,
product inspection charges, salaries for retail staff and decoration and
marketing expenses associated with our retail business.





Our
general and administrative expenses include administrative salaries, office
expense, certain depreciation and amortization charges, repairs and maintenance,
legal and professional fees, warehousing costs and other expenses that are not
directly attributable to our revenues.





Costs of
our distribution network that are excluded from cost of sales consist of local
transportation and unloading charges, and product inspection charges.
Accordingly our gross profit amounts may not be comparable to those of other
companies who include these amounts in cost of sales.





For
      the three months ended June 30,
                    
                    
                    Increase

                      (Decrease)2010
                    
                    
                    2009
                    
                    
                    %(in
      U.S. Dollars, except for percentages)Gross
      Profit
                    
                    $
                    4,507,983
                    
                    
                    
                    19.5
                    %
                    
                    $
                    4,507,561
                    
                    
                    
                    21.3
                    %
                    
                    
                    0.0
                    %Operating
      Expenses:Selling
      Expenses
                    
                    
                    2,059,712
                    
                    
                    
                    8.9
                    
                    
                    
                    865,341
                    
                    
                    
                    4.1
                    
                    
                    
                    138.0
                    %General
      and Administrative Expenses
                    
                    
                    1,747,882
                    
                    
                    
                    7.6
                    
                    
                    
                    2,289,282
                    
                    
                    
                    10.8
                    
                    
                    
                    (23.6
                    )%Total
                    
                    
                    3,807,594
                    
                    
                    
                    16.5
                    
                    
                    
                    3,154,623
                    
                    
                    
                    14.9
                    
                    
                    
                    20.7
                    %Income
      from Operations
                    
                    $
                    700,389
                    
                    
                    
                    3.0
                    %
                    
                    $
                    1,352,938
                    
                    
                    
                    6.4
                    %
                    
                    
                    (48.2)
                    %




Selling
expenses were $2.1 million in the three months ended June 30, 2010, an increase
of 138.0% or $1.2 million compared to the three months ended June 30, 2009. The
increase was attributable to an increase in salaries and the number of retail
staff, as well as the increased decoration and marketing expenses associated
with the promotion of LA GO GO.





General andadministrativeexpenses were $1.7millionin the three months endedJune30, 2010, adecrease of23.6% compared tothe three months endedJune30,2009.As a percentage of total
sales, general andadministrative expenses decreased
to 7.6% of total sales for the three months ended June 30, 2010, compared to
10.8% of total sales for the three months ended June 30, 2009. The decrease
wasdue to better control overtheseexpenses.




Income
from Operations




Income
from operations decreased 48.2% to $0.7 million for the three months ended June
30, 2010 from $1.4 million in three months ended June 30, 2009. The decrease was
mainly due to the substantial increase of selling expenses in association with
the promotion of LA GO GO.





Gain
on sale of investment





In April,
2010, Goldenway sold its 10% equity interest in La Chapelle to two
unrelated third parties for RMB12.36 million (US$1.8 million) and recorded a
gain on the sale of RMB2.36 million(US$346,188).





Interest
Expense




Interest
expense was $113,781 for the three months ended June 30, 2010, a slight decrease
compared to the same period in 2009.




Change
in fair value of derivative liability





Change in
fair value of derivative liability was ($13,317) and $484,702 for the three
months ended June 30, 2010 and 2009, respectively, and was calculated based
on the Black-Scholes pricing model.





Income
Tax Expenses




Income tax expense forthe three months endedJune30, 2010was $173,928, adecreaseof 36.2%compared to the same period of
2009.





Our PRC
subsidiaries are governed by the Income Tax Law of the PRC concerning Foreign
Investment Enterprises and Foreign Enterprises and various local income tax
laws. Each of our consolidating entities files its own separate tax
return.


24





Below is
a summary of the income tax rate for each of our PRC subsidiaries in 2010 and
2009:





Goldenway
                    
                    
                    New-Tailun
                    
                    
                    Catch-Luck
                    
                    
                    LA GO GO
                    
                    
                    Ever-Glory Apparel2010
                    
                    
                    25.0
                    %
                    
                    
                    12.5
                    %
                    
                    
                    12.5
                    %
                    
                    
                    25.0
                    %
                    
                    
                    25.0
                    %2009
                    
                    
                    25.0
                    %
                    
                    
                    12.5
                    %
                    
                    
                    12.5
                    %
                    
                    
                    25.0
                    %
                    
                    
                    25.0
                    %





Perfect
Dream Limited was incorporated in the British Virgin Islands on July 1, 2004,
and has no income tax.





Ever-Glory
International Group Inc. was incorporated in the United States and has incurred
net operating losses for income tax purposes through June 30, 2010. The net
operating loss carry forwards for United States income taxes may be available to
reduce future years’ taxable income. These carry forwards will expire, if not
utilized, through 2030. Management believes that the realization of the benefits
from these losses is uncertain due to our limited operating history and
continuing losses for United States income tax purposes. Accordingly, we have
provided a 100% valuation allowance on the deferred tax asset to reduce the
asset to zero.




Net
Income




Net
income for the three months ended June 30, 2010 was $800,773, a decrease of
51.6% compared to the same period in 2009. Our diluted earnings per share were
$0.05 and $0.12 for the three months ended June 30, 2010 and 2009,
respectively.





Results
of Operations for the six months ended June 30, 2010 and 2009





The
following table summarizes our results of operations for the six months ended
June 30, 2010 and 2009. The table and the discussion below should be read in
conjunction with the consolidated financial statements and the notes thereto
appearing elsewhere in this report.


Six months ended June 302010
                        
                        
                        2009(in U.S. Dollars, except for percentages)Sales
                        
                        $
                        49,242,044
                        
                        
                        
                        100.0
                        %
                        
                        $
                        41,633,316
                        
                        
                        
                        100.0
                        %Gross
      Profit
                        
                        $
                        9,937,005
                        
                        
                        
                        20.2
                        
                        
                        $
                        9,221,716
                        
                        
                        
                        22.1Operating
      Expenses
                        
                        $
                        7,408,185
                        
                        
                        
                        15.0
                        
                        
                        $
                        5,951,219
                        
                        
                        
                        14.3Income
      From Operations
                        
                        $
                        2,528,820
                        
                        
                        
                        5.1
                        
                        
                        $
                        3,270,497
                        
                        
                        
                        7.9Other
      Income (Expenses)
                        
                        $
                        311,109
                        
                        
                        
                        0.6
                        
                        
                        $
                        (510,665
                        )
                        
                        
                        (1.2
                        )Income
      Tax Expense
                        
                        $
                        404,780
                        
                        
                        
                        0.8
                        
                        
                        $
                        561,727
                        
                        
                        
                        1.3Net
      Income
                        
                        $
                        2,435,149
                        
                        
                        
                        4.9
                        %
                        
                        $
                        2,198,105
                        
                        
                        
                        5.3
                        %





Revenue





The
following table sets forth a breakdown of our total sales, by region, for the
six months ended June 30, 2010 and 2009.


25





Six months
                        ended 2010
                      
                      
                      % oftotal
                        sales
                      
                      
                      Six months
                        ended 2009
                      
                      
                      % of total
                        sales
                      
                      
                      Growth in the six
                        months ended June
                        30, 2010 compared
                        with June
      30, 2009Wholesale
      businessThe
      People’s Republic of China
                      
                      $
                      3,895,499
                      
                      
                      
                      7.9
                      %
                      
                      $
                      1,561,912
                      
                      
                      
                      3.8
                      %
                      
                      
                      149.4
                      %Germany
                      
                      
                      11,199,952
                      
                      
                      
                      22.7
                      
                      
                      
                      12,558,174
                      
                      
                      
                      30.2
                      
                      
                      
                      (10.8
                      )United
      Kingdom
                      
                      
                      6,195,159
                      
                      
                      
                      12.6
                      
                      
                      
                      6,744,937
                      
                      
                      
                      16.2
                      
                      
                      
                      (8.2
                      )France
                      
                      
                      5,149,809
                      
                      
                      
                      10.5
                      
                      
                      
                      2,716,410
                      
                      
                      
                      6.5
                      
                      
                      
                      89.6Europe-Other
                      
                      
                      2,055,540
                      
                      
                      
                      4.2
                      
                      
                      
                      1,457,605
                      
                      
                      
                      3.4
                      
                      
                      
                      41.0Japan
                      
                      
                      4,581,618
                      
                      
                      
                      9.3
                      
                      
                      
                      7,241,702
                      
                      
                      
                      17.4
                      
                      
                      
                      (36.7
                      )United
      States
                      
                      
                      4,578,389
                      
                      
                      
                      9.3
                      
                      
                      
                      4,786,794
                      
                      
                      
                      11.5
                      
                      
                      
                      (4.4
                      )Total
      wholesale business
                      
                      
                      37,655,966
                      
                      
                      
                      76.5
                      
                      
                      
                      37,067,534
                      
                      
                      
                      89.0
                      
                      
                      
                      1.6Retail
      business
                      
                      
                      11,586,078
                      
                      
                      
                      23.5
                      
                      
                      
                      4,565,782
                      
                      
                      
                      11.0
                      
                      
                      
                      153.8Total
                      
                      $
                      49,242,044
                      
                      
                      
                      100.0
                      %
                      
                      $
                      41,633,316
                      
                      
                      
                      100.0
                      %
                      
                      
                      18.3
                      %





Revenues
from our wholesale business are mainly from international markets. We also
generate revenues from our retail business from Chinese domestic markets
focusing on our own brand, LA GO GO.





Sales for
the six months ended June 30, 2010 were $49,242,044, an increase of 18.3% from
the six months ended June 30, 2009. The increase in our sales was primarily
attributable to the increased sales in our retail business.




Sales
generated from our wholesale business contributed 76.5% or $37.7 million of our
total sales for the six months ended June 30, 2010, a slight increase
compared to the same period of 2009. Although sales orders from our
customers in China, France and Europe-other increased during 2010, sales orders
in other areas decreased due to increased raw material and labor costs
which resulted in some lower margin orders which we discontinued.





Sales
generated from our retail business contributed 23.5% or $11.6 million of our
total sales for the six months ended June 30, 2010, compared to $4.6 million in
the six months ended June 30, 2009.





Costs
and Expenses




Cost of Sales and Gross
Margin




Cost of
goods sold includes the direct raw material cost, direct labor cost, and
manufacturing overhead including depreciation of production equipment and rent,
consistent with the revenue earned. Cost of goods sold excludes warehousing
costs, which historically have not been significant.




The
following table sets forth the components of our cost of sales and gross profit
both in amounts and as a percentage of total sales for the six months ended June
30, 2010 and 2009.


26





Six months ended June 30,
                                    
                                    
                                    Growth(Decrease) in the six2010
                                    
                                    
                                    2009
                                    
                                    
                                    months ended June 30, 2010(in U.S. dollars, except for percentages)
                                    
                                    
                                    compared with
      June 30, 2009Net
      Sales for Wholesale Sales
                                    
                                    $
                                    37,655,966
                                    
                                    
                                    
                                    100.0
                                    %
                                    
                                    $
                                    37,067,534
                                    
                                    
                                    
                                    100.0
                                    %
                                    
                                    
                                    1.6
                                    %Raw
      Materials
                                    
                                    
                                    17,946,254
                                    
                                    
                                    
                                    47.7
                                    
                                    
                                    
                                    16,055,181
                                    
                                    
                                    
                                    43.3
                                    
                                    
                                    
                                    11.8Labor
                                    
                                    
                                    1,599,853
                                    
                                    
                                    
                                    4.2
                                    
                                    
                                    
                                    1,457,727
                                    
                                    
                                    
                                    3.9
                                    
                                    
                                    
                                    9.7Outsourced
      Manufacturing Costs
                                    
                                    
                                    11,626,128
                                    
                                    
                                    
                                    30.9
                                    
                                    
                                    
                                    11,677,248
                                    
                                    
                                    
                                    31.5
                                    
                                    
                                    
                                    (0.4
                                    )Other
      and Overhead
                                    
                                    
                                    335,239
                                    
                                    
                                    
                                    0.9
                                    
                                    
                                    
                                    403,641
                                    
                                    
                                    
                                    1.1
                                    
                                    
                                    
                                    (16.9
                                    )Total
      Cost of Sales for Wholesale
                                    
                                    
                                    31,507,474
                                    
                                    
                                    
                                    83.7
                                    
                                    
                                    
                                    29,593,797
                                    
                                    
                                    
                                    79.8
                                    
                                    
                                    
                                    6.5Gross
      Profit for Wholesale
                                    
                                    
                                    6,148,492
                                    
                                    
                                    
                                    16.3
                                    
                                    
                                    
                                    7,473,737
                                    
                                    
                                    
                                    20.2
                                    
                                    
                                    
                                    (17.7
                                    )Net
      Sales for Retail
                                    
                                    
                                    11,586,078
                                    
                                    
                                    
                                    100.0
                                    
                                    
                                    
                                    4,565,782
                                    
                                    
                                    
                                    100.0
                                    
                                    
                                    
                                    153.8Production
      Costs
                                    
                                    
                                    3,722,190
                                    
                                    
                                    
                                    32.1
                                    
                                    
                                    
                                    1,114,521
                                    
                                    
                                    
                                    24.4
                                    
                                    
                                    
                                    234.0Rent
                                    
                                    
                                    4,075,375
                                    
                                    
                                    
                                    35.2
                                    
                                    
                                    
                                    1,703,282
                                    
                                    
                                    
                                    37.3
                                    
                                    
                                    
                                    139.3Total
      Cost of Sales for Retail
                                    
                                    
                                    7,797,565
                                    
                                    
                                    
                                    67.3
                                    
                                    
                                    
                                    2,817,803
                                    
                                    
                                    
                                    61.7
                                    
                                    
                                    
                                    176.7Gross
      Profit for Retail
                                    
                                    
                                    3,788,513
                                    
                                    
                                    
                                    32.7
                                    
                                    
                                    
                                    1,747,979
                                    
                                    
                                    
                                    38.3
                                    
                                    
                                    
                                    116.7Total
      Cost of Sales
                                    
                                    
                                    39,305,039
                                    
                                    
                                    
                                    79.8
                                    
                                    
                                    
                                    32,411,600
                                    
                                    
                                    
                                    77.9
                                    
                                    
                                    
                                    21.3Gross
      Profit
                                    
                                    $
                                    9,937,005
                                    
                                    
                                    
                                    20.2
                                    %
                                    
                                    $
                                    9,221,716
                                    
                                    
                                    
                                    22.1
                                    %
                                    
                                    
                                    7.8
                                    %





Raw material costsfor our wholesale business were47.7% of our total salesin thesixmonths endedJune30, 2010, andincreased11.8% compared to thesixmonths endedJune30, 2009.The increase was mainly due to increased
raw materialsprices.





Labor
costs for our wholesale business were 4.2% of our total sales in the six
months ended June 30, 2010, and increased 9.7% compared to the six months
ended June 30, 2009. The increase was mainly due to increased salaries for our
workers.





Outsourced manufacturing
costs for our wholesale business were 30.9% of our total sales in the six
months ended June 30, 2010, and decreased by 0.4% compared to the six months
ended June 30, 2009. This decrease was primarily attributable to the
outsourced orders of approximately $3.5 million to our related factories in
Vietnam and Cambodia, for lower manufacturing costs.





Overhead
and other expenses for our wholesale business accounted for 0.9% of our total
sales for the six months ended June 30, 2010, compared to 1.1% of total sales
for the six months ended June 30, 2009. This decrease was due to improved
control over these expenses.





Gross
profit in our wholesale business for the six months ended June 30, 2010 was $6.1
million, a decrease of 17.7% compared to the six months ended June 30,2009.
Gross margin was 16.3% for our wholesale business for the six months ended June
30,2010, a decrease of 3.9% compared to 20.2% for the six months ended June
30,2009. The
decrease was mainly due to the increased raw material and labor
costs.




Production
costs for our retail business were $3.7 million or 32.1% of our total retail
sales during the six months ended June 30, 2010 versus $1.1 million or 24.4%
during the six months ended June 30, 2009. As a percentage of total retail sales
the increase was due to reduced sales prices for increasing sales volume.
Rent costs for our retail business were $4.1 million or 35.2% of our total
retail sales during the six months ended June 30, 2010 versus $1.7 million or
37.3% during the six months ended June 30, 2009. The increase in rent costs
resulted from an increase in the number of our stores.





Gross
profit in our retail business for the six months ended June 30, 2010 was $3.8
million and gross margin was 32.7%. Gross profit in our retail business for the
six months ended June 30, 2009 was $1.7 million and gross margin was 38.3%. The
decrease was primarily due to the fact that we reduced our sales prices in order
to increase our sales volume.





Total
cost of sales for the six months ended June 30, 2010 was $39.3 million, an
increase of 21.3% compared to the six months ended June 30, 2009. As a
percentage of total sales, our cost of sales increased to 79.8% of total sales
for the six months ended June 30, 2010, compared to 77.9% of
total sales for the six months ended June 30, 2009. Consequently, gross
margins decreased to 20.2% for the six months ended June 30, 2010 from
22.1% for the six months ended June 30, 2009.





We
purchase the majority of our raw materials directly from numerous local fabric
and accessories suppliers. For our wholesale business, purchases from our five
largest suppliers represented approximately 20.6% and 24.3% of raw material
purchases for the six months ended June 30, 2010 and 2009, respectively. No one
supplier provided more than 10.0% of our raw material purchases for the six
months ended June 30, 2010 and 2009. For our retail business, purchases from our
five largest suppliers represented approximately 30.5% and 39.7% of raw material
purchases for the six months ended June 30, 2010 and 2009. No supplier provided
more than 10% of our total purchases for the six months ended June 30, 2010. One
supplier provided 10.6% of our total purchases for the six months ended June
30, 2009. We have not experienced difficulty in obtaining raw materials
essential to our business, and we believe we maintain good relationships with
our suppliers.


27





Wealso purchase finished
goods from contract manufacturers. For our wholesale business, purchases from
our five largest contract manufacturers represented approximately 39.6% and
41.47% of finished goods purchases for the six months ended June 30, 2010 and
2009, respectively. One contract manufacturer provided approximately 15.5% and
19.8% of our finished goods purchases for the six months ended June 30, 2010 and
2009. For our retail business, our five largest contract manufacturers
represented approximately 32.2% and 39.0% of finished goods purchases for the
six months ended June 30, 2010 and 2009, respectively. One contract
manufacturer provided 12.1% of our finished goods purchases for the six months
ended June 30, 2010. Two contract manufacturers provided 11.7% and 11.6% of our
finished goods purchases for the six months ended June 30, 2009.We have not
experienced difficulty in obtaining finished products from our contract
manufacturers and we believe we maintain good relationships with our
contract manufacturers.





Selling,
General and Administrative Expenses




Our
selling expenses consist primarily of local transportation, unloading charges,
product inspection charges, salaries for retail staff and decoration and
marketing expenses associated with our retail business.





Our
general and administrative expenses include administrative salaries, office
expense, certain depreciation and amortization charges, repairs and maintenance,
legal and professional fees, warehousing costs and other expenses that are not
directly attributable to our revenues.





Costs of
our distribution network that are excluded from cost of sales consist of local
transportation and unloading charges, and product inspection charges.
Accordingly our gross profit amounts may not be comparable to those of other
companies who include these amounts in costs of sales.





For the six months ended June 30,
                    
                    
                    Increase

                      (Decrease)2010
                    
                    
                    2009
                    
                    
                    %(in U.S. Dollars, except for percentages)Gross
      Profit
                    
                    $
                    9,937,005
                    
                    
                    
                    20.2
                    %
                    
                    $
                    9,221,716
                    
                    
                    
                    22.1
                    %
                    
                    
                    7.8
                    %Operating
      Expenses:Selling
      Expenses
                    
                    
                    3,748,885
                    
                    
                    
                    7.6
                    
                    
                    
                    1,805,815
                    
                    
                    
                    4.3
                    
                    
                    
                    107.6
                    %General
      and Administrative Expenses
                    
                    
                    3,659,300
                    
                    
                    
                    7.4
                    
                    
                    
                    4,145,404
                    
                    
                    
                    10.0
                    
                    
                    
                    (11.7
                    )%Total
                    
                    
                    7,408,185
                    
                    
                    
                    15.0
                    
                    
                    
                    5,951,219
                    
                    
                    
                    14.3
                    
                    
                    
                    24.5
                    %Income
      from Operations
                    
                    $
                    2,528,820
                    
                    
                    
                    5.2
                    %
                    
                    $
                    3,270,497
                    
                    
                    
                    7.8
                    %
                    
                    
                    (22.7)
                    %





Selling
expenses were $3.7 million in the six months ended June 30, 2010, an increase of
107.6% or $1.9 million compared to the six months ended June 30, 2009. The
increase was attributable to an increase in salaries and the number of retail
staff, as well as increased decoration and marketing expenses associated with
the promotion of LA GO GO.





General andadministrativeexpenses were $3.7millionin thesixmonths endedJune30, 2010, adecrease of11.7% compared tothesixmonths endedJune30,2009.As a percentage of total
sales, general andadministrative expenses decreased
to 7.4% of total sales for the six months ended June 30, 2010, compared to 10.0%
of total sales for the six months ended June 30, 2009. The decrease wasdue to better control overtheseexpenses.




Income
from Operations




Income
from operations decreased 22.7% to $2.5 million for the six months ended June
30, 2010 from $3.3 million in six months ended June 30, 2009. The decrease was
mainly due to the substantial increase of selling expenses in association with
the promotion of LA GO GO.




Interest
Expense




Interest
expense was $232,820 for the six months ended June 30, 2010, a slight decrease
compared to the same period in 2009.




Change
in fair value of derivative liability





Change in
fair value of derivative liability was $71,202 and ($581,792) for the six
months ended June 30, 2010 and 2009, respectively, and was calculated based
on the Black-Scholes pricing model.


28




Income
Tax Expenses





Income tax expense forthesixmonths endedJune30, 2010was $404,780, adecreaseof 27.9%compared to the same period of
2009.





Net
Income




Net
income for the six months ended June 30, 2010 was $2,435,149, an increase of
10.8% compared to the same period in 2009. Our diluted earnings per share were
$0.16 for the six months ended June 30, 2010 and 2009,
respectively.





Noncontrolling
Interest




On
January 9, 2008, 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 (approximately
$826,200) in cash, and La Chapelle agreed to invest RMB 4 Million (approximately
$553,040) in cash, for a 60% and 40% interest in the joint venture,
respectively. The joint venture is included in the Company’s consolidated
financial statements from 2008, and the 40% interest held by La Chapelle is
classified as a noncontrolling interest. As of March 31, 2010, the
noncontrolling interest was $724,267. On April 23, 2010, Ever-Glory Apparel
acquired the noncontrolling interest in LA GO GO from La Chapelle for
approximately RMB6 million (US $0.9 million).




Summary
of Cash Flows




Net cash
provided by operating activities for the six months ended June 30, 2010 was
$7,398,218 compared with net cash provided by operating activities of $2,983,193
during the six months ended June 30, 2009. This increase was mainly attributable
to decreased amounts due from Jiangsu Ever-Glory and increased accounts payable,
offset by increased accounts receivable as we allow longer collection periods
for our long-term customers with good payment track records.





Net cash
used in investing activities was $685,831 for the six months ended
June 30, 2010, compared with used in $116,069 during the six months ended
June 30, 2009. The increase was mainly due to increased equipment
purchases.





Net cash
used in financing activities was $5,523,688 for the six months ended June 30,
2010, compared with cash used in financing activities of $3,312,482 during the
six months ended June 30, 2009. During 2010 we repaid $11,999,242 of bank loans
and received bank loan proceeds of $7,125,584. During 2010 we also repaid
$650,030 of loans from a related party.





Liquidity
and Capital Resources




As of
June 30, 2010, we had cash and cash equivalents of $4,758,558, other current
assets of $40,151,062 and current liabilities of $24,309,056. We presently
finance our operations primarily from cash flows from operations and we
anticipate that this will continue to be our primary source of funds to finance
our short-term cash needs.




Bank
Loan




In 2006,
we acquired a fifty-year land use right for 112,442 square meters (approximately
1,209,876 square feet) of land in the Nanjing Jiangning Economic and
Technological Development Zone, which houses our existing facility of 26,629
square meters (approximately 286,528 square feet), including our manufacturing
facility and office space. In 2006, we completed the construction of
our new facilities and moved our headquarters into the new office building
and consolidated part of our operations into our new manufacturing facility in
January 2007. The new manufacturing facility occupies an area of 10,000 square
meters (approximately 107,600 square feet) and is equipped with state-of-the-art
equipment. The land
and building are being used as collateral for bank loans.





On July
31, 2008, Goldenway entered into credit agreements with Nanjing Bank which allow
the Company to borrow up to $7.3 million (RMB50million) for a 24 month period.
As of June 30, 2010, we repaid all bank loans under this agreement. On July 6,
2010, Goldenway entered into a new two-year line of credit agreement for
approximately $7.3 million (RMB50 million) with Nanjing Bank. On July 29,2010 we
loaned $1.5 million (RMB10 million) under this new agreement. Bank loans are
guaranteed by Jiangsu Ever-Glory and secured by our
facilities.





On July
3, 2009, Ever-Glory Apparel entered into a one-year line of credit agreement for
approximately $5.9 million (RMB40 million) with Bank of Nanjing Co. Ltd. On
March 11, 2010, Ever-Glory Apparel entered into a new one-year line of credit
agreement for approximately $7.3 million (RMB50 million) with Bank of Nanjing
Co. Ltd. The loan is guaranteed by Jiangsu Ever-Glory and
Goldenway. As of June 30, 2010, $1.2 million of bank loans were outstanding
under this agreement and approximately $6.1 million was unused and
available.


29





On June
29, 2010, Ever-Glory Apparel borrowed $260,000 from Bank of Communications which
was guaranteed by Jiangsu Ever-Glory, Mr Kang and the approximately
$330,000 accounts receivable from wholesale customers. The maturity date for
this loan is September 27, 2010. If we receive a certain payment from customers
before September 27,2010 we must repay this loan at the same time the payment is
received.





On December 7, 2009, Ever-GloryApparelborrowed approximately $0.7 million
(RMB5 million) from Bank of Jiangsu. The loan is due in December 2010, bears
interest at 5.31%and is
guaranteed by Jiangsu Ever-Glory.





All bank
loans are used to fund our daily operations.





Loans
from related party




As of
June 30, 2010, the amount owing to Blue Power Holding Ltd, an entity controlled
by Mr. Edward Yihua Kang, was $1,970,575. Interest accrued on the loan to
Blue power totaled $18,583 and $44,848 for the three and six months ended June
30, 2010.




Capital
Commitments




We have a
continuing program for the purpose of improving our manufacturing facilities and
extending our LA GO GO stores. We anticipate that cash flows from operations and
borrowings from banks will be used to pay for these capital
commitments.




Uses
of Liquidity




Our cash
requirements through the end of 2010 will be primarily to fund daily operations
and the growth of our business.




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 equivalents currently on
hand. We believe that we will be able to borrow additional funds if
necessary.





We
believe our cash flows 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 2010. No
assurance can be made that additional financing will be available to us if
required, and adequate funds may not be available on terms acceptable to us. If
funding is insufficient at any time in the future, we will develop or enhance
our products or services and expand our business through our own cash flows from
operations.




As of
June 30, 2010, we had access to $14.6 million in lines of credit, of which $13.4
million was unused and is currently available. These credit facilities do not
include any covenants.




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. Most of our sales are in dollars. During 2003 and 2004 the exchange
rate of RMB to the dollar remained constant at 8.26 RMB to the dollar. On July
21, 2005, the Chinese government adjusted the exchange rate from 8.26 to 8.09
RMB to the dollar. From that time, the RMB continued to appreciate against the
U.S. dollar. As of June 30, 2010, the market foreign exchange rate had increased
to 6.79 RMB to one U.S. dollar. We are continuously negotiating 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 will pass some of the increased cost to our
customers.





In
addition, the financial statements of Goldenway, New-Tailun, Catch-Luck,
Ever-Glory Apparel and LA GO GO (whose functional currency is the RMB) are
translated into US dollars using the closing rate method. The balance sheet
items are translated into US dollars using the exchange rates at the respective
balance sheet dates. The capital and various reserves are translated at
historical exchange rates prevailing at the time of the transactions while
income and expense items are translated at the average exchange rate for the
period. All exchange differences are recorded within equity. The foreign
currency translation  gain (loss) for the three and six months ended
June 30, 2010 and 2009 was $138,315, $172,448, ($39,103) and
($83,311), respectively.


30





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, bank loans 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. On June 30, 2010, we had $4,758,558 in cash and cash equivalents. A
hypothetical 5% increase or decrease in either short term or long term interest
rates would not have any material impact on our earnings or loss, or the fair
market value or cash flows of these instruments.





Foreign Exchange
Rates: We pay our suppliers and employees in Chinese RMB, however, we
sell to customers in the U.S., Japan and Europe and we generate sales in
U.S. Dollars, Euros and British Pounds. Accordingly, our business has
substantial exposure to changes in exchange rates between and among the Chinese
RMB, the U.S. Dollar, the Euro and the British Pound. In the last decade, the
RMB has been pegged at 8.2765 RMB 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.
On June 30, 2010, the exchange rate between the RMB and U.S. Dollar was 6.79RMB
to one U.S. Dollar. For additional discussion regarding our foreign currency
risk, see the section titled Risk Factors in the Annual Report on Form 10-K for
fiscal year ended on December 31, 2009. Fluctuation in the value of Chinese RMB
relative to other currencies may have a material adverse effect on our business
and/or an investment in our shares.





ITEM
4. CONTROLS AND PROCEDURES





Evaluation
of Disclosure Controls and Procedures





We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our reports under the Securities
Exchange Act of 1934, as amended ( the “Exchange Act”)  is recorded,
processed, summarized and reported within the time periods specified in the
SEC’s rules and forms, and that such information is accumulated and communicated
to our management, including our chief executive officer and chief financial
officer, as appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls and procedures,
management recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives, and management necessarily is required to apply its
judgment in evaluating the cost-benefit relationship of possible controls and
procedures.





As of
June 30, 2010, the end of the fiscal quarter covered by this report, we carried
out an evaluation, under the supervision and with the participation of our
management, including our chief executive officer and 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 as a result of material weaknesses in
internal control over financial reporting discussed in item 9A(T) of our annual
report on Form 10-K for the year ended December 31, 2009 (“2009 Form 10-K”), our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Exchange Act) were not effective at the reasonable assurance level to
ensure that information required to be disclosed in our reports under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SEC’s rules and forms, and that such information is
accumulated and communicated to our management, including our chief executive
officer and chief financial officer, as appropriate, to allow timely decisions
regarding required disclosure.





Remediation
Measures for Material Weaknesses





As stated
in our 2009 Form 10-K, our management concluded that, based on the assessment of
our principal executive officer and principal financial officer, our internal
controls over financial reporting were not effective as of December 31,
2009.


31





We are in
the process of taking remedial measures to address the material weaknesses
identified in our 2009 Form 10-K.  In April 2010 we appointed a new
independent director who serves as the Audit Committee Chairman, and who
together with the other members of the Audit Committee, oversees the preparation
of the financial statements included in Item 1 of this quarterly report on Form
10-Q. During the first quarter of 2010, we also reorganized our accounting
department and we now have a dedicated internal control department headed by a
full-time internal control manager. Management believes the measures described
above improved our internal control over financial reporting (as defined in Rule
13a-15(f) of the Securities Exchange Act of 1934) with respect to the
preparation of the financial statements for the quarter ended June 30, 2010. We
will continue to develop and implement our remediation plan to address the
material weaknesses identified in the 2009 Form 10-K.





Changes
in Internal Control over Financial Reporting





Except as
described above, 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, 2010 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.





PART
II.  OTHER INFORMATION





ITEM
1. LEGAL PROCEEDINGS




We know
of no pending legal proceedings to which we are a party which are material or
potentially material, either individually or in the aggregate. We are from time
to time, during the normal course of our business operations, subject to various
litigation claims and legal disputes. We do not believe that the ultimate
disposition of any of these matters will have a material adverse effect on our
financial position, results of operations or liquidity.





ITEM 1A.
RISK FACTORS




There has
been no material change in the information provided in Item 1A of Form 10-K
Annual Report for the year ended December 31, 2009 filed with the SEC on March
31, 2010.




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





On
January 5, 2010, we issued 6,634 shares of common stock to our three
independent directors as compensation for their services in the third and fourth
quarters of 2009. The shares were valued at $2.84 per share, which
was the average market price of the common stock for the five days before
the grant date.





On May 3,
2010, we issued 1,153,846 shares of restricted common stock to
Ever-Glory Enterprises (HK) Ltd,( “Ever-Glory Hong Kong”) which owns more than
10% of our shares of common stock, as part of the consideration for the
acquisition of Catch-Luck. Pursuant to the Agreement for the Purchase and Sale
of Stock dated June 26, 2006, as amended on August 31, 2006 by and between us,
Perfect Dream Ltd., Ever-Glory Hong Kong and Catch-Luck, we agreed
to issue 1,153,846 shares of restricted common stock to Ever Glory Hong
Kong if Catch-Luck achieves certain 2009 financial targets.  As a
result of Catch-Luck’s achievement of the 2009 financial targets, we issued the
above-mentioned shares to Ever Glory Hong Kong.





On June
1,2010, we issued 27,565 shares of restricted common stock to Beijing Zhongheng
Yitai Investment Consulting Co. Ltd ("Zhongheng Yitai") as part of the
compensation to Zhongheng Yitai for their advisory services in relation to
the acquisition of Catch-Luck and New-Tailun.





The above
transactions were not registered under the Securities Act of 1933, as amended
(the “Securities Act”), in reliance upon the exemptions from the registration
requirements of the Securities Act set forth in Section 4(2) thereof and/or Rule
506 of Regulation D promulgated thereunder as transactions by us not involving
any public offering.





ITEM 3.   DEFAULTS UPON SENIOR
SECURITIES





None.





ITEM 4.   (Removed and
Reserved).





ITEM 5.   OTHER INFORMATION





None.


32





ITEM 6.   EXHIBITS





The
following exhibits are filed herewith:




Exhibit No.
                
                Description31.1
                
                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.






33





SIGNATURES





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




August
      12, 2010
                    EVER-GLORY
      INTERNATIONAL GROUP, INC.By:
                    /s/
      Edward Yihua KangEdward
      Yihua KangChief
      Executive Officer(Principal
      Executive
Officer)





By:
                      /s/
      Yan GuoYan
      GuoChief
      Financial Officer(Principal
      Financial and Accounting
Officer)


34