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 March 31, 2010




 ̈
            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.)




100
N. Barranca Ave. #810


West
Covina, California 91791


(Address
of principal executive offices)




(626)
859-6638


(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  ̈    No
x




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).     ̈Yes   ̈No




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
                   ̈
                  Accelerated
      filer
                   ̈Non-accelerated
      filer
                   ̈
                  Smaller
      reporting company
                  x





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


Yes 
 ̈  No
x


As of May
13, 2010, 14,720,720 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
                  4Condensed
      Consolidated Balance Sheets as of March 31, 2010 (unaudited) and December
      31, 2009
                  4Condensed
      Consolidated Statements of Income and Comprehensive Income for the Three
      Months Ended March 31, 2010 and 2009 (unaudited)
                  5Condensed
      Consolidated Statements of Cash Flows for the Three Months Ended March 31,
      2010 and 2009 (unaudited)
                  6Notes
      to the Condensed Consolidated Financial Statements
      (unaudited)
                  7Item
      2.
                  Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                  16Item
      3.
                  Quantitative
      and Qualitative Disclosures About Market Risk
                  25Item
      4.
                  Controls
      and Procedures
                  25PART II.  OTHER
      INFORMATION
                  26Item
      1.
                  Legal
      Proceedings
                  26Item
      1A.
                  Risk
      Factors
                  26Item
      2.
                  Unregistered
      Sales of Equity Securities and Use of Proceeds
                  26Item
      3.
                  Defaults
      Upon Senior Securities
                  26Item
      4.
                  Removed
      and Reserved
                  26Item
      5.
                  Other
      Information
                  26Item
      6.
                  Exhibits
                  27SIGNATURES
                  27


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 infuture
      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 MARCH 31, 2010 (UNAUDITED) AND DECEMBER 31, 2009
 
 2010
                                
                                
                                2009ASSETSCURRENT
      ASSETSCash
      and cash equivalents
                                
                                $
                                8,052,322
                                
                                
                                $
                                3,555,745Accounts
      receivable
                                
                                
                                13,456,886
                                
                                
                                
                                12,751,579Inventories
                                
                                
                                8,296,046
                                
                                
                                
                                12,419,622Value
      added tax receivable
                                
                                
                                568,631
                                
                                
                                
                                730,724Other
      receivables and prepaid expenses
                                
                                
                                847,265
                                
                                
                                
                                601,842Advances
      on inventory purchases
                                
                                
                                690,771
                                
                                
                                
                                443,331Amounts
      due from related party
                                
                                
                                11,994,927
                                
                                
                                
                                13,354,884Total
      Current Assets
                                
                                
                                43,906,848
                                
                                
                                
                                43,857,727LAND
      USE RIGHT, NET
                                
                                
                                2,772,287
                                
                                
                                
                                2,788,731PROPERTY
      AND EQUIPMENT, NET
                                
                                
                                12,284,452
                                
                                
                                
                                12,540,856INVESTMENT,
      AT COST
                                
                                
                                1,467,000
                                
                                
                                
                                1,467,000TOTAL
      ASSETS
                                
                                $
                                60,430,587
                                
                                
                                $
                                60,654,314LIABILITIES
      AND EQUITYCURRENT
      LIABILITIESBank
      loans
                                
                                $
                                6,865,560
                                
                                
                                $
                                7,305,660Loans
      from related party
                                
                                
                                2,602,024
                                
                                
                                
                                2,575,759Accounts
      payable
                                
                                
                                10,979,070
                                
                                
                                
                                13,241,962Accounts
      payable and other payables - related parties
                                
                                
                                969,479
                                
                                
                                
                                782,606Other
      payables and accrued liabilities
                                
                                
                                2,029,957
                                
                                
                                
                                2,287,356Value
      added and other taxes payable
                                
                                
                                878,622
                                
                                
                                
                                186,895Income
      tax payable
                                
                                
                                306,077
                                
                                
                                
                                3,745Deferred
      tax liabilities
                                
                                
                                348,548
                                
                                
                                
                                421,899Total
      Current Liabilities
                                
                                
                                24,979,337
                                
                                
                                
                                26,805,882LONG-TERM
      LIABILITIESDerivative
      liability
                                
                                
                                1,543,320
                                
                                
                                
                                1,627,839Total
      Long-term Liabilities
                                
                                
                                1,543,320
                                
                                
                                
                                1,627,839TOTAL
      LIABILITIES
                                
                                
                                26,522,657
                                
                                
                                
                                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, 13,566,874 and
      13,560,240 shares issued and outstanding as of March 31,2010 and December
      31, 2009, respectively)
                                
                                
                                13,567
                                
                                
                                
                                13,560Additional
      paid-in capital
                                
                                
                                3,634,178
                                
                                
                                
                                3,615,357Retained
      earnings
                                
                                
                                21,981,920
                                
                                
                                
                                20,406,245Statutory
      reserve
                                
                                
                                3,585,448
                                
                                
                                
                                3,585,448Accumulated
      other comprehensive income
                                
                                
                                3,968,550
                                
                                
                                
                                3,934,437Total
      Stockholders' Equity of the Company
                                
                                
                                33,183,663
                                
                                
                                
                                31,555,047Noncontrolling
      interest
                                
                                
                                724,267
                                
                                
                                
                                665,546Total
      Equity
                                
                                
                                33,907,930
                                
                                
                                
                                32,220,593TOTAL
      LIABILITIES AND EQUITY
                                
                                $
                                60,430,587
                                
                                
                                $
                                60,654,314
  See the accompanying notes to thecondensed consolidated financial statements.
  4
 
 EVER-GLORY
INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
 FOR
THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009 (UNAUDITED)
 
 2010
                  
                  
                  2009NET
      SALES
                  
                  $
                  26,139,546
                  
                  
                  $
                  20,507,822COST
      OF SALES
                  
                  
                  20,710,524
                  
                  
                  
                  15,793,667GROSS
      PROFIT
                  
                  
                  5,429,022
                  
                  
                  
                  4,714,155OPERATING
      EXPENSESSelling
      expenses
                  
                  
                  1,689,173
                  
                  
                  
                  940,474General
      and administrative expenses
                  
                  
                  1,911,418
                  
                  
                  
                  1,856,122Total
      Operating Expenses
                  
                  
                  3,600,591
                  
                  
                  
                  2,796,596INCOME
      FROM OPERATIONS
                  
                  
                  1,828,431
                  
                  
                  
                  1,917,559OTHER
      INCOME (EXPENSES)Interest
      income
                  
                  
                  68,108
                  
                  
                  
                  103,547Interest
      expense
                  
                  
                  (119,039
                  )
                  
                  
                  (123,650
                  )Change
      in fair value of derivative liability
                  
                  
                  84,519
                  
                  
                  
                  (1,066,494
                  )Other
      income
                  
                  
                  3,209
                  
                  
                  
                  2,373Total
      Other Income (Expenses)
                  
                  
                  36,797
                  
                  
                  
                  (1,084,224
                  )INCOME
      BEFORE INCOME TAX EXPENSE
                  
                  
                  1,865,228
                  
                  
                  
                  833,335INCOME
      TAX EXPENSE
                  
                  
                  (230,852
                  )
                  
                  
                  (289,071
                  )NET
      INCOME
                  
                  
                  1,634,376
                  
                  
                  
                  544,264NET
      (INCOME)LOSS ATTRIBUTABLE TO THE NONCONTROLLING INTEREST
                  
                  
                  (58,701
                  )
                  
                  
                  11,598NET
      INCOME ATTRIBUTABLE TO THE COMPANY
                  
                  $
                  1,575,675
                  
                  
                  $
                  555,862NET
      INCOME
                  
                  $
                  1,634,376
                  
                  
                  $
                  544,264Foreign
      currency translation gain (loss)
                  
                  
                  34,133
                  
                  
                  
                  (44,208
                  )COMPREHENSIVE
      INCOME
                  
                  
                  1,668,509
                  
                  
                  
                  500,056COMPREHENSIVE
      INCOME ATTRIBUTABLE TO THE NONCONTROLLING INTEREST
                  
                  
                  58,721
                  
                  
                  
                  (12,392
                  )COMPREHENSIVE
      INCOME ATTRIBUTABLE TO THE COMPANY
                  
                  $
                  1,609,788
                  
                  
                  $
                  512,448NET
      INCOME PER SHAREAttributable
      to the Company's common stockholdersBasic
                  
                  $
                  0.11
                  
                  
                  $
                  0.04Diluted
                  
                  $
                  0.11
                  
                  
                  $
                  0.04Weighted
      average number of shares outstandingBasic
                  
                  
                  14,720,425
                  
                  
                  
                  13,531,225Diluted
                  
                  
                  14,835,197
                  
                  
                  
                  13,531,225
 See the accompanying notes to thecondensed consolidated financial statements.
  5
 
 EVER-GLORY
INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009 (UNAUDITED)
 
 2010
                  
                  
                  2009CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      income
                  
                  $
                  1,634,376
                  
                  
                  $
                  544,264Adjustments
      to reconcile net income to cash provided by operating
      activities:Depreciation
      and amortization
                  
                  
                  558,648
                  
                  
                  
                  484,005Change
      in fair value of derivative liability
                  
                  
                  (84,519
                  )
                  
                  
                  1,066,494Deferred
      income tax
                  
                  
                  (73,327
                  )
                  
                  
                  96,194Interest
      on loans from related party
                  
                  
                  26,265
                  
                  
                  
                  29,265Stock
      based compensation
                  
                  
                  18,828
                  
                  
                  
                  -Changes
      in operating assets and liabilitiesAccounts
      receivable
                  
                  
                  (705,287
                  )
                  
                  
                  (3,488,612
                  )Accounts
      receivable - related parties
                  
                  
                  -
                  
                  
                  
                  (73,905
                  )Inventories
                  
                  
                  4,122,170
                  
                  
                  
                  874,121Value
      added tax receivable
                  
                  
                  162,037
                  
                  
                  
                  -Other
      receivables and prepaid expenses
                  
                  
                  (245,338
                  )
                  
                  
                  (227,276
                  )Advances
      on inventory purchases
                  
                  
                  (247,356
                  )
                  
                  
                  78,547Amounts
      due from related party
                  
                  
                  1,359,038
                  
                  
                  
                  795,181Accounts
      payable
                  
                  
                  (2,228,395
                  )
                  
                  
                  1,675,077Accounts
      payable and other payables- related parties
                  
                  
                  186,809
                  
                  
                  
                  151,164Other
      payables and accrued liabilities
                  
                  
                  (257,252
                  )
                  
                  
                  151,499Value
      added and other taxes payable
                  
                  
                  691,850
                  
                  
                  
                  288,298Income
      tax payable
                  
                  
                  301,871
                  
                  
                  
                  (50,047
                  )Net
      cash provided by operating activities
                  
                  
                  5,220,418
                  
                  
                  
                  2,394,269CASH
      FLOWS FROM INVESTING ACTIVITIESPurchase
      of property and equipment
                  
                  
                  (285,892
                  )
                  
                  
                  (65,719
                  )Proceeds
      from sale of equipment
                  
                  
                  -
                  
                  
                  
                  3,778Net
      cash used in investing activities
                  
                  
                  (285,892
                  )
                  
                  
                  (61,941
                  )CASH
      FLOWS FROM FINANCING ACTIVITIESProceeds
      from bank loans
                  
                  
                  2,757,020
                  
                  
                  
                  5,860,400Repayment
      of bank loans
                  
                  
                  (3,196,970
                  )
                  
                  
                  (5,801,796
                  )Net
      cash (used in) provided by financing activities
                  
                  
                  (439,950
                  )
                  
                  
                  58,604EFFECT
      OF EXCHANGE RATE CHANGES ON CASH
                  
                  
                  2,001
                  
                  
                  
                  (2,695
                  )NET
      INCREASE IN CASH AND CASH EQUIVALENTS
                  
                  
                  4,496,577
                  
                  
                  
                  2,388,237CASH
      AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
                  
                  
                  3,555,745
                  
                  
                  
                  1,445,363CASH
      AND CASH EQUIVALENTS AT END OF PERIOD
                  
                  $
                  8,052,322
                  
                  
                  $
                  3,833,600SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION:Cash
      paid during the period for:Interest
                  
                  $
                  92,774
                  
                  
                  $
                  144,646Income
      taxes
                  
                  $
                  2,307
                  
                  
                  $
                  242,924
  See the accompanying notes to thecondensed consolidated financial statements.
  6
  EVER-GLORY
INTERNATIONAL GROUP, INC AND SUBSIDIARIES
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 MARCH
31, 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 contain all adjustments, consisting of normal recurring
adjustments, considered necessary for a fair presentation of the condensed
consolidated balance sheet as of March 31, 2010, the condensed consolidated
statements of income and comprehensive income for the three months ended
March 31, 2010 and 2009, and the condensed consolidated statements of cash
flows for the three months ended March 31,2010 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 months ended March 31, 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.
The
Company has made certain reclassifications to the prior year’s consolidated
financial statements to conform to classifications in the current year. These
reclassifications had no impact on previously reported results of
operations.
  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.
  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 March
31, 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..
  7
  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
March 31, 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
currencyisthe RMB, all assets and liabilities
were translated at the exchange rate on the balance sheet date; equitywastranslated at historical rates and
items in the statement ofincomeweretranslated 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.
  NOTE
3 INVENTORIES
  Inventories
at March 31, 2010 and December 31, 2009 consisted of the following:
 
 2010
                      
                      
                      2009Raw
      materials
                      
                      $
                      722,819
                      
                      
                      $
                      735,891Work-in-progress
                      
                      
                      3,287,503
                      
                      
                      
                      6,212,767Finished
      goods
                      
                      
                      4,344,486
                      
                      
                      
                      5,529,7268,354,808
                      
                      
                      
                      12,478,384Less:
      allowance for obsolete inventories
                      
                      
                      (58,762
                      )
                      
                      
                      (58,762
                      )Total
      inventories
                      
                      $
                      8,296,046
                      
                      
                      $
                      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 March 31, 2010 and December 31,
2009:
 
 2010
                                              
                                              
                                              2009Bank
      loan, interest rate at 0.44583% per month,due
      May 2010
                                              
                                              $
                                              3,374,100
                                              
                                              
                                              $
                                              3,374,100Bank
      loan, interest rate at 0.4455% per month,due
      June 2010
                                              
                                              
                                              2,493,900Bank
      loan, interest rate at 0.4050% per month,due
      June 2010
                                              
                                              
                                              264,060Bank
      loan, interest rate at 0.4425% per month,due
      December 2010
                                              
                                              
                                              733,500
                                              
                                              
                                              
                                              733,500Bank
      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
                                              
                                              $
                                              6,865,560
                                              
                                              
                                              $
                                              7,305,660
 
 On July
31, 2008, Goldenway entered into a two-year revolving line of credit agreement
with a PRC Bank, which allows the Company to borrow up to approximately $7.3
million (RMB50million). 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. As of March 31, 2010, $5.9 million of bank loans were
outstanding under this agreement and approximately $1.4 million was unused and
available. Other bank loans are not collateralized. In April 2010, the Company
repaid approximately $4.8 million and subsequently borrowed approximately $2.9
million under this agreement.
  8
  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. 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. The loan is
guaranteed by Jiangsu Ever-Glory and Goldenway. To date nothing has been
drawn down on this line of credit.
 
 Total
interest expense on bank loans for the three months ended March 31, 2010 and
2009 amounted to $92,774 and $94,385, 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 new
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 March
31, 2010 and 2009, resulting in a decrease in the liability and an increase in
other income of $84,519 for the three months ended March 31, 2010, and an
increase in the liability and a decrease in other income of $1,066,494 for the
three months ended March 31, 2009.
 
 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:
 
 March 31, 2010
                            
                            
                            March 31, 2009Expected
      term
                            
                            3.18 years
                            
                            
                            4.18 yearsVolatility
                            
                            
                            108
                            %
                            
                            
                            114
                            %Risk-free
      interest rate
                            
                            
                            1.375
                            %
                            
                            
                            1.75
                            %Dividend
      yield
                            
                            
                            0
                            %
                            
                            
                            0
                            %
  NOTE
6 INCOME TAX
  Pre-tax
income for the three months ended March 31 2010 and 2009 was taxable in the
following jurisdictions:
  2010
                          
                          
                          2009PRC
                          
                          $
                          1,322,600
                          
                          
                          $
                          1,938,897Others
                          
                          
                          542,628
                          
                          
                          
                          (1,105,562
                          )$
                          1,865,228
                          
                          
                          $
                          833,335
  The Company’s operating subsidiaries are governed
by the Income Tax Law of the PRC concerningForeign 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%.
  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 2010and 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 months ended March 31, 2010 and 2009:
  2010
                      
                      
                      2009PRC
      Statutory Rate
                      
                      
                      25.0
                      %
                      
                      
                      25.0
                      %Income
      tax exemption
                      
                      
                      (3.1
                      )
                      
                      
                      (14.2
                      )Other
                      
                      
                      (4.4
                      )
                      
                      
                      4.1Effective
      income tax rate
                      
                      
                      17.5
                      %
                      
                      
                      14.9
                      %
  9
  Income
tax expense for the three months ended March 31, 2010 and 2009 is as
follows:
  2010
                      
                      
                      2009Current
                      
                      $
                      304,204
                      
                      
                      $
                      192,877Deferred
                      
                      
                      (73,352
                      )
                      
                      
                      96,194Income
      tax expense
                      
                      $
                      230,852
                      
                      
                      $
                      289,071
  NOTE
7 EARNINGS PER SHARE
  The
following demonstrates the calculation for earnings per share for the three
months ended March 31:
  2010
                    
                    
                    2009Net
      income attributable to the Company
                    
                    $
                    1,575,675
                    
                    
                    $
                    555,862Weighted
      average number of common stock shares – Basic
                    
                    
                    14,720,425
                    
                    
                    
                    13,531,225Effect
      of dilutive securities:Warrants
                    
                    
                    114,772Weighted
      average number of common stock shares – Diluted
                    
                    
                    14,835,197
                    
                    
                    
                    13,531,225Earnings
      per share – basic
                    
                    $
                    0.11
                    
                    
                    $
                    0.04Earnings
      per share – diluted
                    
                    $
                    0.11
                    
                    
                    $
                    0.04
  Included
in basic earnings per share at March 31, 2010 are 1,153,846 shares that were
issued in May 2010 in conjunction with the Company's 2006 acquisition of
Catch-Luck. The shares were issued as a result of Catch-Luck's achievement of
earnings targets in 2009.
  As of
March 31, 2010, the Company included 913,182 warrants outstanding in diluted
earnings per share because the average trading price of
$3.96 exceeded the exercise price of $3.20 for the three months ended
March 31, 2010, making these warrants dilutive. As of March 31, 2009, the
Company excluded the 913,182 warrants outstanding from diluted earnings per
share because the exercise price of $3.20 exceeded the average trading price of
$1.88 for the three months ended March 31, 2009, making these warrant
anti-dilutive.
 
 NOTE
8 STOCKHOLDERS’ EQUITY
  On
January 22, 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.
  10
 
 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.
 
 Purchases from and
Sub-contracts with Related Parties
  For the
three months ended March 31, 2010 and 2009, the Company purchased raw materials
of $339,234 and $253,645, respectively, from Nanjing Knitting.
  In
addition, the Company sub-contracted certain manufacturing work to related
companies totaling $1,197,775 and $226,651 for the three months ended March 31,
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 months ended March
31, 2010 and 2009 are as follows:
  2010
                      
                      
                      2009Nanjing
      High-Tech
                      
                      $
                      46,498
                      
                      
                      $
                      74,580Nanjing
      Ever-Kyowa
                      
                      
                      288,745
                      
                      
                      
                      152,071Jiangsu
      Ever-Glory
                      
                      
                      33,576Ever-Glory
      Vietnam
                      
                      
                      504,760Ever-Glory
      Cambodia
                      
                      
                      324,196Total
                      
                      $
                      1,197,775
                      
                      
                      $
                      226,651
  Accounts Receivable–Related
Parties
  Accounts
receivable from related parties were nil and $73,900 for products sold and
sub-contracting services provided for the three months ended March 31, 2010 and
2009.
 
 Accounts Payable – Related
Parties
 
 The
Company purchases raw materials from and subcontracts some of its production to
related parties. Accounts payable to related parties are as
follows:
 2010
                                
                                
                                2009Nanjing
      Knitting
                                
                                $
                                255,551
                                
                                
                                $
                                153,660Nanjing
      Ever-Kyowa
                                
                                
                                420,528
                                
                                
                                
                                335,546Total
                                
                                $
                                676,079
                                
                                
                                $
                                489,206
 
 Other Payables–RelatedParties
 
 In February,
July and August 2009, LA GO GO borrowed $293,400 (RMB 2 million) from
Shanghai La Chapelle Garment and Accessories Company Limited (“Shanghai La Chapelle”)for operations. This loan is
interest free and due on demand. Management expects to repay this loan in cash
from operations in 2010.
  11
  Amounts Due From Related
Party
  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 its 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 at 0.5% per month is charged
on net amounts due at each month end when the amounts are outstanding more
than 60 days. Interest income for the three months ended March 31, 2010 and 2009
was $66,419 and $102,579, respectively. Following is a summary of import and
export transactions for the three months ended March 31, 2010:
 
 Accounts Receivable
                    
                    
                    Accounts Payable
                    
                    
                    NetAs
      of January 1, 2010
                    
                    $
                    15,745,543
                    
                    
                    $
                    2,390,659
                    
                    
                    $
                    13,354,884Sales/Purchases
                    
                    $
                    15,696,889
                    
                    
                    $
                    297,836Payments
      Received/Made
                    
                    $
                    17,866,528
                    
                    
                    $
                    1,107,518As
      of March 31, 2010
                    
                    $
                    13,575,904
                    
                    
                    $
                    1,580,977
                    
                    
                    $
                    11,994,927
 
 Approximately
42% of the receivable balance at March 31, 2010 was settled by May 13,
2010.
 
 LoansfromRelated
Party
  As of
March 31, 2010 and December 31, 2009 the Company owed $2,602,024 and $2,575,759,
respectively to Blue Power Holdings Limited., a company controlled by the
Company’s Chief Executive Officer. Interest is charged at 6% per annum on the
amounts due. The loans are due between July 2010 and April 2011. For the three
months ended March 31, 2010 and 2009, the Company incurred interest expense
of $26,265 and $29,265, respectively. The accrued interest is included in the
carrying amount of the loans in the accompanying balance sheets.
 
 NOTE
10 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 March 31, 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 receivables are incorrect, adjustments to the
allowance may be required, which would reduce profitability.
  For the
three-month period ended March 31, 2010, the Company had two wholesale customers
that represented approximately 22% and 11% of the Company’s revenues. For
the three-month period ended March 31, 2009, the Company had two wholesale
customers that represented approximately 37% and 10% of the Company’s
revenues.
  For the
wholesale business, during the three months ended March 31, 2010 and 2009, one
supplier represented 10% and 13% of the Company’s raw material purchases, in
each period.
  For the retail business,the Companydid notrelyonanyraw material suppliers during the
three months ended March 31 2010 whileduring the three months ended
March 31 2009the Company principally relied on three
raw material suppliers as follows:
  Supplier
                      A
                    
                    
                    Supplier
                      B
                    
                    
                    Supplier
                      C14
                    %
                    
                    
                    12
                    %
                    
                    
                    12
                    %
  For the
wholesale business, during the three months ended March 31, 2010, the Company
relied on two manufacturers for 19% and 10% of purchased finished goods, and
during the three months ended March 31, 2009, the Company relied on one
manufacturer for 22% of purchased finished goods. For the retail business, the
Company did not rely on any supplier of purchased finished goods in excess of
10% of total purchases during 2010 and 2009.
  12
  The
Company’s revenues for the three months ended March 31, 2010 and 2009 were
earned in the following geographic areas:
  2010
                            
                            
                            2009The
      People’s Republic of China
                            
                            $
                            7,505,237
                            
                            
                            $
                            3,349,050Germany
                            
                            
                            5,773,464
                            
                            
                            
                            6,714,002United
      Kingdom
                            
                            
                            3,709,221
                            
                            
                            
                            3,273,036France
                            
                            
                            3,191,889
                            
                            
                            
                            948,490Europe-Other
                            
                            
                            1,111,431
                            
                            
                            
                            301,930Japan
                            
                            
                            2,776,857
                            
                            
                            
                            4,689,704United
      States
                            
                            
                            2,071,447
                            
                            
                            
                            1,231,610Total
                            
                            $
                            26,139,546
                            
                            
                            $
                            20,507,822
 
 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”:
  13
  Wholesale
                      segment
                    
                    
                    Retail segment
                    
                    
                    Corporate and others
                    
                    
                    TotalMarch
      31,2010Segment
      profit or loss:Net
      revenue
                    
                    $
                    19,382,599
                    
                    
                    $
                    6,756,947
                    
                    
                    $
                    -
                    
                    
                    $
                    26,139,546Income
      (loss) from operations
                    
                    $
                    1,921,241
                    
                    
                    $
                    198,095
                    
                    
                    $
                    (290,905
                    )
                    
                    $
                    1,828,431Interest
      income
                    
                    $
                    67,539
                    
                    
                    $
                    569
                    
                    
                    
                    
                    
                    
                    $
                    68,108Interest
      expense
                    
                    $
                    89,781
                    
                    
                    $
                    2,993
                    
                    
                    $
                    26,265
                    
                    
                    $
                    119,039Depreciation
      and amortization
                    
                    $
                    247,264
                    
                    
                    $
                    311,384
                    
                    
                    
                    
                    
                    
                    $
                    558,648Income
      tax expense
                    
                    $
                    181,935
                    
                    
                    $
                    48,917
                    
                    
                    
                    
                    
                    
                    $
                    230,852Segment
      assets:Additions
      to property and equipment
                    
                    $
                    146,635
                    
                    
                    $
                    139,257
                    
                    
                    
                    
                    
                    
                    $
                    285,892Total
      assets
                    
                    $
                    68,560,299
                    
                    
                    $
                    8,688,294
                    
                    
                    $
                    50,086,819
                    
                    
                    $
                    127,335,412March
      31,2009Segment
      profit or loss:Net
      revenue
                    
                    $
                    17,975,623
                    
                    
                    $
                    2,532,199
                    
                    
                    $
                    -
                    
                    
                    $
                    20,507,822Income
      (loss) from operations
                    
                    $
                    1,959,048
                    
                    
                    $
                    (31,685
                    )
                    
                    $
                    (9,804
                    )
                    
                    $
                    1,917,559Interest
      income
                    
                    $
                    103,228
                    
                    
                    $
                    319
                    
                    
                    $
                    -
                    
                    
                    $
                    103,547Interest
      expense
                    
                    $
                    94,385
                    
                    
                    $
                    -
                    
                    
                    $
                    29,265
                    
                    
                    $
                    123,650Depreciation
      and amortization
                    
                    $
                    250,876
                    
                    
                    $
                    233,129
                    
                    
                    $
                    -
                    
                    
                    $
                    484,005Income
      tax expense
                    
                    $
                    289,071
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    289,071Segment
      assets:Additions
      to property and equipment
                    
                    $
                    52,725
                    
                    
                    $
                    12,994
                    
                    
                    $
                    -
                    
                    
                    $
                    65,719Total
      assets
                    
                    $
                    47,766,068
                    
                    
                    $
                    4,364,528
                    
                    
                    $
                    40,054,976
                    
                    
                    $
                    92,185,572
 
 The
reconciliations of segment information to the Company’s consolidated totals were
as follows:
  March 31,2010
                                
                                
                                March 31,2009Total
      assets:Total
      segments
                                
                                $
                                127,335,412
                                
                                
                                $
                                92,185,572Elimination
      of intersegment receivables
                                
                                $
                                (66,904,825
                                )
                                
                                $
                                (43,955,040
                                )Total
      consolidated
                                
                                $
                                60,430,587
                                
                                
                                $
                                48,230,532
  14
  NOTE
12 SUBSEQUENT EVENTS
 
 On April 2, 2010, Goldenway entered into equity transfer
agreements to sell its 10% equity interest in Shanghai La Chapelle to two third
parties for a total of approximately RMB 12 million (US $1.8 million). The
proceeds are to be received in May 2010.
 
 On April
23, 2010, Ever-Glory Apparel entered into an equity transfer agreement to
acquire an additional 40%  equity interest in LA GO GO from Shanghai
La Chapelle for approximately RMB6 million (US $0.9 million). The payment is to
be made by May 23, 2010.
  15




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 ended March 31, 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, and are listed on
the NYSE Amex.




We
classify our businesses into two segments: Wholesale and Retail. Our wholesale
business consists of wholesale-channel sales made principally to 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”), awholly owned subsidiaryof Ever-Glory Apparel. The business
objective of the joint venture is to establish a leading brand of
ladies’garments and to build a retail and
wholesale distribution channel for the mainland Chinese market.




Business
Objectives





Wholesale
Business





We
believe the enduring strength of our wholesale business is due mainly 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, and a
strong and experienced management team.





The
primary business objective for our wholesale segment is to expand our portfolio
into higher class brands, expand our customer base and improve margins.
Opportunities and continued investment initiatives include:


16





··
            Expandourglobal sourcing
      network;


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


·
            Focus on value and continueouraveragesellingpriceuptrend;


·
            Emphasize product design andnewtechnologyutilization;
  and


·
            Seek 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 further a leading brand of
women’s apparel and to build a nationwide retail distribution channel in China.
As of March 31, 2010, we have 195 stores including 13 new stores in 2010. We
expect to open additional 80-100 stores in 2010. Opportunities and
continued investment initiatives include:





·
            BuildtheLA GO GObrandto become a major Chinese
      mid-end mass marketinwomen's
    wear;


·
            ExpandtheLA GO GO retail
      network;


·
            ImprovetheLA GO GO retail store efficiency
      and increase same store
sales


·
            StrengthentheLA GO GO brand promotion;
      and


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


·
            Become
      a multi-brand operator, seek opportunities for long-term cooperation with
      reputable international brands toexpand
      our retail business, and facilitate the entry of international brands into
      the PRC retail 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 result primarily 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
60-90 days following the time of register receipt. For our own stores, we
receive payments at the same time of 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
economy 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 point in 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.


17


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
which time title passes to the customer provided that there are no uncertainties
regarding customer acceptance, persuasive evidence of an arrangement exists, the
sales price is fixed and determinable and collectability is deemed probable. 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 there are no
uncertainties regarding customer acceptance, persuasive evidence of an
arrangement exists, the sales price is fixed and determinable and collectability
is deemed probable. 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 warrant and the estimates of the allowance for
deferred tax assets.




Subsequent
Events





On April
2, 2010, Goldenway entered into Equity Transfer Agreements with each of Mr.
Jiaxing Xing and Shanghai Hexia Investment Co., Ltd, respectively (“Goldenway
Equity Transfer Agreements”).  Pursuant to the Goldenway Equity
Transfer Agreements, Goldenway agreed to transfer  five percent of
its  equity interest in Shanghai La Chapelle Garment and Accessories
Company Limited (“Shanghai La Chapelle”) to each of Mr.
Jiaxing Xing and Shanghai Hexia Investment Co., Ltd,
respectively.  Pursuant to the Goldenway Equity Transfer Agreements,
Goldenway will receive an aggregate of RMB 12 million (US $1.8 million) in cash
from Mr. Jiaxing Xing and Shanghai Hexia Investment Co., Ltd. We expect
to receive the payment in May 2010.





On April
23, 2010, Ever-Glory Apparel entered into an Equity Transfer Agreement with
Shanghai La Chapelle (“La Chapelle Equity Transfer
Agreement”).  Pursuant to the La Chapelle Equity Transfer Agreement,
Shanghai La Chapelle agreed to transfer its forty percent (40%) equity interest
in Shanghai La Go Go Fashion Company Limited to Ever-Glory
Apparel.  Pursuant to the La Chapelle Equity Transfer Agreement,
Ever-Glory Apparel will pay a total of RMB6 million (approximately US$0.9
million) in cash to La Chapelle, all of which is payable within thirty (30) days
from the execution of the La Chapelle Equity Transfer Agreement. We expect to
make the payment by May 23, 2010.





As a
result of the Goldenway Equity Transfer Agreements and the La Chapelle Equity
Transfer Agreement, LA GO GO will be 100% owned by Ever-Glory
Apparel.





Results
of Operations




The
following table summarizes our results of operations for the three months
ended March 31, 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.


18





Three months ended March
31,2010
                      
                      
                      2009(in U.S. Dollars, except for
      percentages)Sales
                      
                      $
                      26,139,546
                      
                      
                      
                      100.0
                      %
                      
                      $
                      20,507,822
                      
                      
                      
                      100.0
                      %Gross
      Profit
                      
                      
                      5,429,022
                      
                      
                      
                      20.8
                      %
                      
                      
                      4,714,155
                      
                      
                      
                      23.0
                      %Operating
      Expense
                      
                      
                      3,600,591
                      
                      
                      
                      13.8
                      %
                      
                      
                      2,796,596
                      
                      
                      
                      13.6
                      %Income
      From Operations
                      
                      
                      1,828,431
                      
                      
                      
                      7.0
                      %
                      
                      
                      1,917,559
                      
                      
                      
                      9.4
                      %Other
      Income (Expenses)
                      
                      
                      36,797
                      
                      
                      
                      0.1
                      %
                      
                      
                      (1,084,224
                      )
                      
                      
                      -5.3
                      %Income
      tax expenses
                      
                      
                      230,852
                      
                      
                      
                      0.9
                      %
                      
                      
                      289,071
                      
                      
                      
                      1.4
                      %Net
      Income
                      
                      $
                      1,634,376
                      
                      
                      
                      6.3
                      %
                      
                      $
                      544,264
                      
                      
                      
                      2.7
                      %




Revenue




The
following table sets forth a breakdown of our total sales, by region, for the
three months ended March 31, 2010 and 2009.





2010
                      
                      
                      % of total
                        sales
                      
                      
                      2009
                      
                      
                      % of total
                        sales
                      
                      
                      Growth in 2010
                        compared with
                        2009Wholesales
      businessThe
      People’s Republic of China
                      
                      $
                      748,290
                      
                      
                      
                      2.9
                      %
                      
                      $
                      816,851
                      
                      
                      
                      4.0
                      %
                      
                      
                      (8.4
                      )%Germany
                      
                      
                      5,773,464
                      
                      
                      
                      22.1
                      
                      
                      
                      6,714,001
                      
                      
                      
                      32.7
                      
                      
                      
                      (14.0
                      )United
      Kingdom
                      
                      
                      3,709,221
                      
                      
                      
                      14.2
                      
                      
                      
                      3,273,036
                      
                      
                      
                      16.0
                      
                      
                      
                      13.3France
                      
                      
                      3,191,889
                      
                      
                      
                      12.2
                      
                      
                      
                      948,490
                      
                      
                      
                      4.6
                      
                      
                      
                      236.5Europe-Other
                      
                      
                      1,111,431
                      
                      
                      
                      4.3
                      
                      
                      
                      301,931
                      
                      
                      
                      1.5
                      
                      
                      
                      268.1Japan
                      
                      
                      2,776,857
                      
                      
                      
                      10.6
                      
                      
                      
                      4,689,704
                      
                      
                      
                      22.9
                      
                      
                      
                      (40.8
                      )United
      States
                      
                      
                      2,071,447
                      
                      
                      
                      7.9
                      
                      
                      
                      1,231,610
                      
                      
                      
                      6.0
                      
                      
                      
                      68.2Total
      wholesales business
                      
                      
                      19,382,599
                      
                      
                      
                      74.2
                      
                      
                      
                      17,975,623
                      
                      
                      
                      87.7
                      
                      
                      
                      7.8Retail
      business
                      
                      
                      6,756,947
                      
                      
                      
                      25.8
                      
                      
                      
                      2,532,199
                      
                      
                      
                      12.3
                      
                      
                      
                      166.8Total
                      
                      $
                      26,139,546
                      
                      
                      
                      100.0
                      %
                      
                      $
                      20,507,822
                      
                      
                      
                      100.0
                      %
                      
                      
                      27.5
                      %





We
generate revenues primarily from our wholesale business 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 three months ended March 31, 2010 were $26,139,546, an increase of 27.5%
from the three months ended March 31, 2009. The increase in our sales was
primarily attributable to the increased sales in our retail
business




Sales
generated from our wholesales business contributed 74.2% or $19.4 million of our
total sales for the three months ended March 31, 2010, an increase of 7.8%
compared to $18.0 million in the three months ended March 31, 2009. The increase
in our wholesales business was primarily attributable to:





·
            Increased
      sales orders from one customer in the United
  Kingdom





·
            Increased
      sales orders from one customer in
France





·
            Increased
      sales orders from one customer in the United
  States





Sales
growth was partially offset by:





·
            Decreased
      sales orders from one customer in
Germany





·
            Decreased
      CMT (“Cutting, Making and Trim”) orders from customers in
      Japan


19


Sales generated from our retail
business contributed25.8% or $6.8million of our total sales for the
three months ended March 31, 2010, compared to $2.5 millionin the three months ended March 31,
2009. In the first three months of
2010we opened13new LA GO GO stores. As of March 31,
2010, we had 195LA 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,
manufacturing overheads 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
March 31, 2010 and 2009.





Three months ended March
31,
                          
                          
                          Growth(Decrease)2010
                          
                          
                          2009
                          
                          
                          in 2010 compared(in
      U.S. dollars, except for percentages)
                          
                          
                          with 2009Net
      Sales for Wholesale Sales
                          
                          $
                          19,382,599
                          
                          
                          
                          100.0
                          %
                          
                          $
                          17,975,623
                          
                          
                          
                          100.0
                          %
                          
                          
                          7.8
                          %Raw
      Materials
                          
                          
                          9,349,545
                          
                          
                          
                          48.2
                          
                          
                          
                          7,163,583
                          
                          
                          
                          39.9
                          
                          
                          
                          30.5Labor
                          
                          
                          734,993
                          
                          
                          
                          3.8
                          
                          
                          
                          630,264
                          
                          
                          
                          3.5
                          
                          
                          
                          16.6Outsourced
      Manufacturing Costs
                          
                          
                          5,504,504
                          
                          
                          
                          28.4
                          
                          
                          
                          6,129,790
                          
                          
                          
                          34.1
                          
                          
                          
                          (10.2
                          )Other
      and Overhead
                          
                          
                          190,455
                          
                          
                          
                          1.0
                          
                          
                          
                          173,343
                          
                          
                          
                          1.0
                          
                          
                          
                          9.9Total
      Cost of Sales for Wholesale
                          
                          
                          15,779,497
                          
                          
                          
                          81.4
                          
                          
                          
                          14,096,980
                          
                          
                          
                          78.4
                          
                          
                          
                          11.9Gross
      Profit for Wholesale
                          
                          
                          3,603,102
                          
                          
                          
                          18.6
                          
                          
                          
                          3,878,643
                          
                          
                          
                          21.6
                          
                          
                          
                          (7.1
                          )Net
      Sales for Retail
                          
                          
                          6,756,947
                          
                          
                          
                          100.0
                          
                          
                          
                          2,532,199
                          
                          
                          
                          100.0
                          
                          
                          
                          166.8Production
      Costs
                          
                          
                          2,006,301
                          
                          
                          
                          29.7
                          
                          
                          
                          639,918
                          
                          
                          
                          25.3
                          
                          
                          
                          213.5Rent
                          
                          
                          2,924,726
                          
                          
                          
                          43.3
                          
                          
                          
                          1,056,769
                          
                          
                          
                          41.7
                          
                          
                          
                          176.8Total
      Cost of Sales for Retail
                          
                          
                          4,931,027
                          
                          
                          
                          73.0
                          
                          
                          
                          1,696,687
                          
                          
                          
                          67.0
                          
                          
                          
                          190.6Gross
      Profit for Retail
                          
                          
                          1,825,920
                          
                          
                          
                          27.0
                          
                          
                          
                          835,512
                          
                          
                          
                          33.0
                          
                          
                          
                          118.5Total
      Cost of Sales
                          
                          
                          20,710,524
                          
                          
                          
                          79.2
                          
                          
                          
                          15,793,667
                          
                          
                          
                          77.0
                          
                          
                          
                          31.1Gross
      Profit
                          
                          $
                          5,429,022
                          
                          
                          
                          20.8
                          %
                          
                          $
                          4,714,155
                          
                          
                          
                          23.0
                          %
                          
                          
                          15.2
                          %





Raw
materials cost for our wholesale business were 48.2% of our total sales in
the three months ended March 31, 2010, and increased 30.5% compared to the three
months ended March 31, 2009. The increase was mainly due to increased raw
material prices.




Labor
costs for our wholesale business were 3.8% of our total sales in the three
months ended March 31, 2010, and increased 16.6% compared to the three
months ended March 31, 2009. The increase was mainly due to increased salaries
for workers.





Outsourced manufacturing
costs for our wholesale business were 28.4% of our total sales in the three
months ended March 31, 2010, and decreased by 10.2% compared to the three months
ended March 31, 2009. This decrease was primarily attributable to the
outsourced orders of approximately $2.7 million to our related
factories in Vietnam and Cambodia, for lower manufacturing costs.




Overhead
and other expenses for our wholesale business were 1.0% of our total sales
in the three months ended March 31, 2010, a  slight increase compared to
the three months ended March 31, 2009.




Gross
profit in our wholesale business for the three months ended March 31, 2010
was $3.6 million, a decrease of 7.1% compared to the three months ended March
31,2009. Gross margin was 18.6% for our wholesale business for the three months
ended March 31,2010, a decrease of 3.0% compared to 21.6% for the three months
ended March 31,2009. The decrease in our gross margin was primarily due to
increased raw material prices.





Production
costs for our retail business were $2.0 million or 29.7% of our total retail
sales during the three months ended March 31, 2010 versus $0.64 million or 25.3%
during the three months ended March 31, 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 $2.9 million or 43.3% of our
total retail sales during the three months ended March 31, 2010 versus $1.1
million or 41.7% during the three months ended March 31, 2009.The increase
in rent costs resulted from the increase in the number of
stores.


20





Gross
profit in our retail business for the three months ended March 31, 2010 was $1.8
million and gross margin was 27.0%.  Gross profit in our retail
business for the three months ended March 31, 2009 was $0.8 million and gross
margin was 33.0%.





Total
cost of sales for the three months ended March 31, 2010 was $20.7 million, an
increase of 31.1% compared to the three months ended March 31, 2009. As a
percentage of total sales, our cost of sales increased to 79.2% of total sales
for the three months ended March 31, 2010, compared to 77.0% of
total sales for the three months ended March 31, 2009. Consequently, gross
margins decreased to 20.8% for the three months ended March 31, 2010 from
23.0% for the three months ended March 31, 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 23.3% and 33.2% of raw materials
purchases for the three months ended March 31, 2010 and 2009, respectively. One
supplier provided 10.0% and 12.7% of our raw materials purchases for the
three months ended March 31, 2010 and 2009. For our retail business, purchases
from our five largest suppliers represented approximately 17.0% and 53.0% of raw
materials purchases for the three months ended March 31, 2010 and 2009. No
supplier provided more than 10% of our total purchases for the three months
ended March 31, 2010. Three suppliers provided 13.6%, 12.2% and 11.7% of our
total purchases for the three months ended March 31, 2009. We have not
experienced difficulty in obtaining raw materials essential to our business, and
we believe we maintain good relationships with our suppliers.





Wealso purchase finished
goods from contract manufacturers. For our wholesale business, purchases from
our five largest contract manufacturers represented approximately 45.5% and
44.8% of finished goods purchases for the three months ended March 31, 2010 and
2009, respectively. Two contract manufacturers provided approximately 18.6% and
10.0% of our finished goods purchases for the three months ended March 31,
2010. One contract manufacturer provided approximately 21.6% of our
finished goods purchases for the three months ended March 31, 2009. For our
retail business, our five largest contract manufacturers represented
approximately 35.8% and 40.5% of finished goods purchases for the three months
ended March 31, 2010 and 2009, respectively. No single contract
manufacturer provided more than 10% of our finished goods purchases for the
three months ended March 31, 2010 and 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 (SG&A) 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 costs 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
entities who may included these amounts in costs of sales.





For the three months ended March 31,2010
                  
                  
                  2009
                  
                  
                  Increase
                    (Decrease)
                    %(in
      U.S. Dollars, except for percentages)Gross
      Profit
                  
                  $
                  5,429,022
                  
                  
                  
                  20.8
                  %
                  
                  $
                  4,714,155
                  
                  
                  
                  23.0
                  %
                  
                  
                  15,2
                  %Operating
      Expenses:Selling
      Expenses
                  
                  
                  1,689,173
                  
                  
                  
                  6.5
                  
                  
                  
                  940,474
                  
                  
                  
                  4.6
                  
                  
                  
                  79.6
                  %General
      and Administrative Expenses
                  
                  
                  1,911,418
                  
                  
                  
                  7.3
                  
                  
                  
                  1,856,122
                  
                  
                  
                  9.1
                  
                  
                  
                  3.0
                  %Total
                  
                  
                  3,600,591
                  
                  
                  
                  13.8
                  
                  
                  
                  2,796,596
                  
                  
                  
                  13.6
                  
                  
                  
                  28.7
                  %Income
      from Operations
                  
                  $
                  1,828,431
                  
                  
                  
                  7.0
                  %
                  
                  $
                  1,917,559
                  
                  
                  
                  9.4
                  %
                  
                  
                  (4.6
                  )%




Selling
expenses were $1.7 million in the three months ended March 31, 2010, an increase
of 79.6% or $0.7 million compared to the three months ended March 31, 2009. The
increase was attributable to an increase in salaries and total number of retail
staff, as well as the increased decoration and marketing expenses associated
with the promotion of LA GO GO..





General
and administrative expenses were $1.9 million in the three months ended
March 31, 2010, an increase of 3.0% compared to the three months ended March 31,
2009. As a percentage of total
sales,general and administrativeexpenses decreased to 7.3% of total
sales for the three months ended March 31, 2010, compared to 9.1% of total sales
for the three months ended March 31, 2009. The decrease was due to better
control over these expenses.


21




Income
from Operations




Income
from operations decreased 4.6% to $1.8 million for the three months ended March
31, 2010 from $1.9 million in three months ended March 31, 2009.




Interest
Expense




Interest
expense was $119,039 for the three months ended March 31, 2010, a slight
decrease compared to the same period of 2009.




Change
in fair value of derivitive liability





Change in
fair value of derivitive liability was $84,519 and ($1,066,494) for the three
months ended March 31, 2010 and 2009, respectively, and was calculated
based on the Black-Scholes pricing model.





Income
Tax Expenses




Income tax expense for the three months
ended March 31, 2010was $230,852, adecreaseof 20.1%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
(“the Income Tax Laws”). Each of our consolidating entities files its own
separate tax return.





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





Ever-Glory
HK was incorporated in Samoa on September 15, 2009, 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 March 31, 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 March 31, 2010 was $1,634,376, an increase of
200.3% compared to the same period of 2009. Our diluted earnings per share were
$0.11 and $0.04 for the three months ended March 31, 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
executed an agreement to acquire the noncontrolling interest in LA GO GO from
Shanghai La Chapelle for approximately RMB6 million (US $0.9 million), which is
expected to be paid on May 23,2010.




22




Summary
of Cash Flows


Net cash
provided by operating activities for the three months ended March 31, 2010 was
$5,220,418 compared with net cash provided by operating activities of $2,394,269
during the three months ended March 31, 2009. This increase was mainly
attributable to decreased amounts due from Jiangsu Ever-Glory and inventories,
offset by increased accounts receivable as we allow longer collection periods
for our long-term customers with good payment track records, and decreased
accounts payable as we shorten payment periods for suppliers.





Net cash
used in investing activities was $285,892 for the three months ended March 31,
2010, compared with $61,941 during the three months ended March 31, 2009. The
increase was mainly due to increased equipment purchases.




Net cash
used in financing activities was $439,950 for the three months ended March 31,
2010, compared with cash provided by financing activities of $58,604 during the
three months ended March 31, 2009. During the first three months of 2010 we
repaid $3,196,970 of bank loans and received bank loan proceeds of
$2,757,020.




Liquidity
and Capital Resources




As of
March 31, 2010, we had cash and cash equivalents of $8,052,322, other current
assets of $35,854,526 and current liabilities of $24,979,337. 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 a PRC Bank which allow
the Company to borrow up to $7.3 million (RMB50million) for a 24 month period.
Bank loans are secured by our facilities and are used to fund daily operations.
As of March 31, 2010, we had borrowed approximately $5.9 million which matures
in May and June 2010, at an interest rate of 5.35% per annum. The maturity of
these borrowings can be extended at our option.




On June
30, 2009, HSBC approved a revolving credit facility of $2.5 million to
Perfect-Dream. To date nothing has been drawn down on this line of
credit.





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. To
date nothing has been drawn down on this line of credit.





Loans
from related party




As of
March 31, 2010, the amount owing to Blue Power was $2,602,024.
Interest accrued on the loan to Blue power totaled $26,265 for the three
months ended March 31, 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.


23


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
March 31, 2010, we had access to $17.1 million in lines of credit, of which
$11.2 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 March 31, 2010, the market foreign exchange rate had
increased to 6.82 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.


24


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 months ended March 31,
2010 and 2009 was $34,133 and ($44,208), respectively.




OFF-BALANCE
SHEET ARRANGEMENTS




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





ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK





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





Interest Rates: Our
exposure to market risk for changes in interest rates relates primarily to our
short-term investments and short-term obligations; thus, fluctuations in
interest rates would not have a material impact on the fair value of these
securities. On March 31, 2010, we had approximately $8,052,322 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 March 31, 2010, the exchange rate between the RMB and U.S. Dollar was 6.82RMB
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
March 31, 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 the 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.


25




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.





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,
oversaw the preparation of the financial statements included in Item 1 of this
quarterly report on Form 10-Q.  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 March 31, 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 March 31, 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 changes 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





None.




ITEM 3.
            DEFAULTS UPON SENIOR
      SECURITIES





None.




ITEM 4.
            REMOVED AND
      RESERVED




ITEM 5.
            OTHER
      INFORMATION





None.




26




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.
*




*
            Filed
      herewith.




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.




May
      14, 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)


27