**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


Washington,
      D.C. 20549





**FORM
      10-K**





xAnnual
      report pursuant
      to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal
      year ended June 30, 2006 or


oTransition
      report
      pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for
      the
      transition period from __ to
      __ .





**Commission
      file number:**  **0-29754**





**TARGET
      LOGISTICS, INC.**


(Exact
      name of registrant as specified in its charter)





DELAWARE
            11-3309110(State
                or other jurisdiction of incorporation or
                organization)
            (I.R.S.
                Employer Identification
                No.)500
                Harborview Drive, Third Floor, Baltimore,
                Maryland
            21230(Address
                of principal executive
                offices)
            (Zip
                Code)Registrant’s telephone number, including area
              code
            (410)
                332-1598





Securities
      registered pursuant to Section 12(b) of the Act:




Title
                of Each Class
            Name
                of Each Exchange on Which
                Registered**Common
                Stock, $0.01 par
                value**
            **American
                Stock
                Exchange**





Securities
      registered pursuant to Section 12(g) of the Act:


None


Title
      of
      Class





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





Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or 15(d) of the Act.


Yes oNo
x


Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
      during the preceding 12 months (or for such shorter period that the
      registrant was required to file such reports), and (2) has been subject to
      such filing requirements for the past 90 days.


Yes
x  No o





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





Indicate
      by check mark if the registrant is a large accelerated filer, an accelerated
      filer, or a non-accelerated filer. See definition of “accelerated filer and
      large accelerated filer” in Rule 12b-2 of the Exchange Act.


Large
      Accelerated o   Filer Accelerated  o 
Filer Non-Accelerated
      Filer  x





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


Yes oNo
x





The
      aggregate market value of Common Stock, $.01 par value, held by non-affiliates
      of the registrant based on the closing sales price of the Common Stock on the
      OTC Bulletin Board on December 31, 2005, was $2.05.





The
      number of shares of common stock outstanding as of August 31, 2006 was
      17,986,735.





DOCUMENTS
      INCORPORATED BY REFERENCE





To
      the
      extent specified, Part III of this Form 10-K incorporates information by
      reference to the Registrant’s definitive proxy statement for its 2006 Annual
      Meeting of Shareholders (to be filed).








**TARGET
      LOGISTICS, INC.**


2006
      Annual REPORT ON FORM 10-K





Table
      of Contents


PagePART
                  IItem
                  1.
              Business
              3Item
                  1A.
              Risk
                  Factors
              5Item
                  1B.
              Unresolved
                  Staff Comments
              9Item
                  2.
              Properties
              9Item
                  3.
              Legal
                  Proceedings
              9Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              10Executive
                  Officers of the Registrant
              10PART
                  IIItem
                  5.
              Market
                  for Registrant’s Common Equity, RelatedStockholder
                  Matters and Issuer Purchases of Equity Securities
              11Item
                  6.
              Selected
                  Financial Data
              12Item
                  7.
              Management’s
                  Discussion and Analysis of Financial Conditions and Results of
                  Operations
              12Item
                  7A.
              Quantitative
                  and Qualitative Disclosures About Market Risk
              17Item
                  8.
              Financial
                  Statements and Supplementary Data
              17Item
                  9.
              Changes
                  in and Disagreements with Accountants on Accounting and Financial
                  Disclosures
              17Item
                  9A.
              Controls
                  and Procedures
              17Item
                  9B.
              Other
                  Information
              17PART
                  IIIItem
                  10.
              Directors
                  and Executive Officers of the Registrant
              18Item
                  11.
              Executive
                  Compensation
              18Item
                  12.
              Security
                  Ownership of Certain Beneficial Owners and Managementand
                  Related Stockholder Matters
              18Item
                  13.
              Certain
                  Relationships and Related Transactions
              18Item
                  14.
              Principal
                  Accountant Fees and Services
              19PART
                  IVItem
                  15.
              Exhibits
                  and Financial Statement Schedules
              20Signatures
              22
  -
            2 -


**PART
      I**





**ITEM
      1.** **BUSINESS**





**Background**





Target
      Logistics, Inc. (“we” or “the Company”) provides freight forwarding services and
      logistics services, through our wholly owned subsidiary, Target Logistic
      Services, Inc. (“Target”). Our principal executive office is located at 500
      Harborview Drive, Third Floor, Baltimore, Maryland 21230, and our telephone
      number is 410-332-1598. Information about us may be obtained from our website www.targetlogistics.com. Copies
      of our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current
      reports on Form 8-K, are available free of charge on the website as soon as
      they
      are filed with the Securities and Exchange Commission (SEC) through a link
      to
      the SEC’s EDGAR reporting system. Simply select the “Investors” menu item, then
      click on the “SEC Filings” link. The SEC’s EDGAR reporting system can also be
      accessed directly at www.sec.gov .
      The
      Company was incorporated in Delaware in January 1996 as the successor to
      operations commenced in 1970.





**Description
      of Business** :





We
      are a
      non-asset based third party logistics services company providing time definite
      and value added supply chain solutions on a global basis to over 3,000 accounts.
      We have a large network of 34 offices throughout the United States, including
      exclusive agency relationships in 20 cities. We also have a worldwide agent
      network with coverage in over 70 countries which allows us to provide logistics
      services on a global basis. We offer a wide range of domestic shipping and
      distribution options to meet our customers’ schedules, managing and arranging
      for the total transport of our customers’ freight from the shippers’ locations
      to the designated recipients, including the preparation of shipping documents
      and providing handling, packing and containerization services. We also offer
      a
      full range of international logistics services including international air
      and
      ocean transportation. We concentrate on cargo shipments weighing more than
      50
      pounds requiring time specific delivery, and our average shipment weighs
      approximately 1,700 pounds. Each of our stations is linked in real-time through
      our proprietary information system, by online communications that speeds the
      two-way flow of shipment data and related logistics information between origin
      and destination. All of our services are provided through our Target subsidiary.





We
      have
      completed four acquisitions since 2001 and intend to continue seeking additional
      accretive acquisitions. We believe that our fragmented industry offers
      opportunity to continue making acquisitions of smaller freight forwarders where
      we can benefit from redundant expenses and the greater purchasing leverage
      we
      have from our much higher freight volumes.





**Operations**





*Movement
      of Freight.* We do
      not own any airplanes or significant trucking equipment and we rely on
      independent contractors for the movement of our cargo. At the core of our
      business model is price and space leverage. We use our large and growing freight
      volume to obtain price leverage in the form of discounts from our transportation
      providers. On an annual basis we are able to negotiate discounted prices based
      on our volumes from the previous year. Due to the high volume of freight in
      our
      system, we are often able to obtain shipping leverage in the form of freight
      space at times when available capacity is limited. On a daily basis, we
      consolidate shipments between city pairs increasing our total shipment size
      to a
      vendor qualifying us for lower rates due to the higher daily volume. As our
      freight volumes continue to grow these leverages increase and our consolidations
      improve. We utilize our expertise to provide forwarding services that are
      tailored to meet our customers’ requirements. We arrange for transportation of
      customers’ shipments via commercial airlines, air cargo carriers, steamship
      lines, and, if delivery schedules permit, we make use of lower cost inter-city
      truck transportation services. We select the carrier for particular shipments
      on
      the basis of cost, delivery time and cargo availability. Additionally, we
      provide cargo assembly, warehousing and cargo insurance services. Through our
      advanced data processing system, we can provide, at no additional cost to the
      customer, value added services such as automatic electronic data interchange,
      web based shipping and tracking systems, e-mail status notification and
      customized generated reports.




-
          3-





The
      rates
      we charge our customers are based on destination, shipment weight and required
      delivery time. We offer graduated discounts for shipments with later scheduled
      delivery times and rates generally decrease in inverse proportion to the
      increasing weight of shipments.




*Information
      Systems.*  An
      important part of our business strategy is to provide accurate and timely
      information to our management and customers. Accordingly we have invested years
      of time and millions of dollars in developing our Target Realtime Air Cargo
      System (“TRACS”) proprietary freight forwarding software. Management is
      committed to continue the investment of substantial management and financial
      resources in developing these systems. TRACS is a fully integrated freight
      forwarding and financial reporting system providing our employees with a (i)
      full range of tracking and alerting capabilities, (ii) automatic quoting and
      customer specific revenue calculations, (iii) automatic calculation of
      transportation costs between shipping points for all transportation providers
      (iv) centralized invoicing and (v) accurate cost accruals for our transportation
      expense. The fully integrated real time performance provides us with accurate
      and timely financial information.





TRACS
      is
      also made available to our customers and provides them, at no additional cost,
      added value with customized information access and reports. Customers can access
      TRACS via the internet and obtain (i) full tracking of their shipments, (ii)
      e-mail status notification to them or their customers based on their selection
      (iii) detailed customized report generating tools to provide the specific
      information desired by our customers (iv) on line booking capability and (v)
      online tools to simplify preparation of shipping documents.





*International
      Operations.* Our
      international operations consist of air and ocean freight movements imported
      to
      and exported from our Target subsidiary’s network of offices in the United
      States. During the fiscal year ended June 30, 2006, our international freight
      forwarding accounted for 32.6% of our operating revenue.





**Customers
      and Marketing**





Our
      principal customers include large manufacturers and distributors of computers
      and other electronic and high-technology equipment, computer software and
      wearing apparel. As of June 30, 2006, we had approximately 3,000
      accounts.





We
      market
      our services through an organization of approximately 45 full-time salespersons
      and 52 independent sales agents supported by the sales efforts of senior
      management, and the operations staff in our Target subsidiary’s offices. We
      strongly promote team selling, wherein the salesperson is able to utilize
      expertise from other departments in the Company to provide value-added services
      to gain a specific account. We staff each of our Target subsidiary’s offices
      with operational employees to provide support for the sales team, develop
      frequent contact with the customer’s traffic department, and maintain customer
      service. We believe that it is important to maintain frequent contact with
      our
      customers to assure satisfaction and to immediately react to resolve any problem
      as quickly as possible.





We
      have
      and continue to develop expertise in freight movement for the fashion and
      entertainment media industries. Our fashion services division targets chain
      retail and department store customers and provides specific expertise in
      handling fashion-related shipments. The fashion services division specializes
      in
      the movement of wearing apparel from manufacturing vendors to their department
      store customers located throughout the United States. Our Entertainment Media
      Logistics (EML) service provides logistic solutions to the film, entertainment
      and broadcast industries.





Many
      of
      our customers utilize more than one transportation provider. In soliciting
      new
      accounts, we use a strategy of becoming an approved carrier in order to
      demonstrate the quality and cost-effectiveness of our services. Using this
      approach, we have advanced our relationships with several of our major
      customers, from serving as a back-up freight services provider to primary
      freight forwarder.





**Competition**





Although
      there are no weight restrictions on our shipments, we focus primarily on cargo
      shipments weighing more than 50 pounds and requiring second-day delivery. As
      a
      result, we do not directly compete for most of our business with overnight
      couriers and integrated shippers of principally small parcels, such as United
      Parcel Service of America, Inc., Federal Express Corporation, DHL Worldwide
      Express, Inc. and the United States Postal Service. However, some integrated
      carriers, such as BAX Global, Inc. (a subsidiary of Deutsch Bahn AG), primarily
      solicit the shipment of heavy cargo in competition with forwarders.
      Additionally, there is a developing trend among integrated shippers of primarily
      small parcels to solicit the shipment of heavy cargo.




-
          4-





There
      is
      intense competition within the freight forwarding industry. While the industry
      is highly fragmented, we most often compete with a relatively small number
      of
      forwarders who have nationwide networks and the capability to provide a full
      range of services similar to those we offer. These include EGL, Inc., Pilot
      Air
      Freight, Inc., SEKO Worldwide and Stonepath Group, Inc. There is also
      competition from passenger and cargo air carriers and trucking companies. On
      the
      international side of the business, we compete with forwarders that have a
      predominantly international focus, such as Exel plc, DHL and Kuehne Nagal
      International. All of these companies, as well as many other competitors, have
      substantially greater facilities, resources and financial capabilities than
      we
      have. We also face competition from regional and local air freight forwarders,
      cargo sales agents and brokers, surface freight forwarders and carriers and
      associations of shippers organized for the purpose of consolidating their
      members’ shipments to obtain lower freight rates from carriers.





**Employees**





We
      and
      our Target subsidiary had approximately 256 full-time employees as of June
      30,
      2006. None of these employees are currently covered by a collective bargaining
      agreement. We have experienced no work stoppages and consider our relations
      with
      our employees to be good.





**Regulation**





Our
      freight forwarding business as an indirect air cargo carrier is subject to
      regulation by the United States Department of Transportation under the Federal
      Aviation Act, and by the Department of Homeland Security and the Transportation
      Security Administration (TSA). However, air freight forwarders (including
      Target) are exempted from most of that Act’s requirements by the Economic
      Aviation Regulations promulgated thereunder, but must adhere to certain rules,
      such as security requirements. Our overseas independent agents’ air freight
      forwarding operations are subject to regulation by the regulatory authorities
      of
      the respective foreign jurisdictions. The air freight forwarding industry is
      subject to regulatory and legislative changes which can affect the economics
      of
      the industry by requiring changes in operating practices or influencing the
      demand for, and the costs of providing, services to customers.








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





**An
      investment in our Common Stock is subject to risks inherent to our business.
      The
      material risks and uncertainties that management believes affect the Company
      are
      described below. Additional risks and uncertainties that management is not
      aware
      of or focused on or that management currently deems immaterial may also impair
      the Company’s business operations.**





**Risk
      Factors Relating To Our Business Generally**





***We
      have incurred historic losses and only recently achieved
      profitability.***





Until
      June 30, 2002, we and our wholly-owned subsidiary Target Logistic Services,
      Inc.
      (“Target”), have incurred operating losses for each operating period. For the
      fiscal year ended June 30, 2006, we generated, on a consolidated basis,
      approximately $160 million in operating revenues, and net income of
      approximately $2,705,600. As of June 30, 2006, total stockholders’ equity was
      $21,681,010, and excluding intangible assets such as goodwill, we had a tangible
      net worth of $9,808,037. We will be unable to sustain profitability unless
      we
      maintain our improved operating results. Management continues to believe that
      we
      must focus on increasing revenues and must maintain gross profit margin to
      continue profitability. While we intend to continue to work on growing revenue
      by increasing sales, by strategic acquisitions, and by continuing to work on
      maintaining our Target subsidiary’s gross profit margins by reducing
      transportation costs, there can be no assurance that we will be able to increase
      revenues or maintain profitability.




-
          5-





***We
      face aggressive competition from freight carriers with greater financial
      resources and with companies that operate in areas that we plan on expanding
      to
      in the future.***





We
      face
      intense competition within the freight industry on a local, regional and
      national basis. Many of our competitors have much larger facilities and far
      greater financial resources than ours. In the freight forwarding industry,
      we
      compete with a large and diverse group of national freight forwarding concerns,
      commercial air and ocean carriers and a large number of locally established
      companies in geographic areas where we do business or intend to do business
      in
      the future. The loss of customers, agents or employees to competitors could
      adversely impact our ability to maintain profitability.





***We
      may have to compete with inner-city truckers that have greater goodwill, name,
      resources and trade recognition than us.***





Insofar
      as inter-city trucking is a portion of our method of freight transport, we
      compete with a large number of long-haul, medium-haul, truckload and less than
      truckload carriers, and railroads. While we do not consider ourselves to be
      competing with traditional small package delivery services such as Federal
      Express Corporation, United Parcel Service of America, Inc. and DHL Worldwide
      Express, Inc., in the event that any of these established businesses, with
      their
      goodwill, name, resources and trade recognition, decide to further expand into
      the heavy freight business, such circumstances could have a material adverse
      effect upon our business.





***We
      rely on other carriers to provide transportation
      facilities.***





We
      do not
      own or operate any trucks, nor do we own or operate any aircraft for the
      movement of either domestic or international freight. We do not have any present
      or anticipated future plans to acquire, by lease or otherwise, or own or operate
      any freight transportation equipment. Our ability to service customers depends
      on the availability of space on air passenger and cargo airlines and trucking
      carriers. The quality and timeliness of our freight forwarding services will
      be
      dependent upon the services of these independent contractors, over which we
      have
      no control.





Our
      reliance on independent contractors subjects us to risks such as:


·
            shortages
                of freight space which are most likely to develop around holidays
                and on
                routes upon which traffic is especially
                heavy;


·
            competition
                with other companies for the availability and utilization of freight
                space;


·
            fluctuations
                in the availability of air cargo space on passenger airlines due
                to
                changes in the types of aircraft or decreases in the number of passenger
                airlines serving particular routes at particular times which could
                occur
                as a result of economic conditions and other factors beyond our
                control.





While
      we
      have not experienced shortages of freight space in the past, significant
      shortages of suitable space in the future and associated increases in rates
      charged by carriers could have a material adverse affect on our future operating
      results.





***Our
      failure to comply with, or the costs of complying with, government regulation
      could negatively affect our results of operation.***





Our
      freight forwarding business as an indirect air cargo carrier is subject to
      regulation by the United States Department of Transportation (DOT) under the
      Federal Aviation Act, and by the Department of Homeland Security and the
      Transportation Security Administration (TSA). Our overseas independent agents’
air freight forwarding operations are subject to regulation by the regulatory
      authorities of the respective foreign jurisdictions. The air freight forwarding
      industry is subject to regulatory and legislative changes which can affect
      the
      economics of the industry by requiring changes in operating practices or
      influencing the demand for, and the costs of providing, services to customers.
      We do not believe that costs of regulatory compliance have had a material
      adverse impact on our operations to date. However, our failure to comply with
      any applicable regulations could have an adverse effect. There can be no
      assurance that the adoption of future regulations would not have a material
      adverse effect on our business.




-
          6-





***Terrorist
      attacks and other acts of violence or war may affect any market on which our
      shares trade, the markets in which we operate, our operations and our
      profitability.***





Terrorist
      acts or acts of war or armed conflict could negatively affect our operations
      in
      a number of ways. Primarily, any of these acts could result in increased
      volatility in or damage to the U.S. and worldwide financial markets and economy
      and could lead to increased regulatory requirements with respect to the security
      and safety of freight shipments and transportation. They could also result
      in a
      continuation of the current economic uncertainty in the United States and
      abroad. Acts of terrorism or armed conflict, and the uncertainty caused by
      such
      conflicts, could cause an overall reduction in worldwide sales of goods and
      corresponding shipments of goods. This would have a corresponding negative
      effect on our operations. Also, terrorist activities similar to the type
      experienced on September 11, 2001 could result in another halt of trading of
      securities, which could also have an adverse affect on the trading price of
      our
      shares and overall market capitalization.





***We
      intend to continue expansion through acquisition.***





We
      have
      grown through the acquisitions of other freight forwarders and intend to
      continue our program of business expansion through acquisitions. There can
      be no
      assurance that our:





·
            financial
                condition will be sufficient to support the funding needs of an expansion
                program;


·
            that
                acquisitions will be successfully consummated or will enhance
                profitability; or


·
            that
                any expansion opportunities will be available upon reasonable terms.





We
      expect
      future acquisitions to encounter risks similar to the risks that past
      acquisitions have had such as:





·
            difficulty
                in assimilating the operations and personnel of the acquired businesses;


·
            potential
                disruption of our ongoing business;


·
            the
                inability of management to realize the projected operational and
                financial
                benefits from the acquisition or to maximize our financial and strategic
                position through the successful incorporation of acquired personnel
                and
                clients;


·
            the
                maintenance of uniform standards, controls, procedures and policies;
                and


·
            the
                impairment of relationships with employees and clients as a result
                of any
                integration of new management personnel.





We
      expect
      that any future acquisitions could provide for consideration to be paid in
      cash,
      stock or a combination of cash and stock. There can be no assurance that any
      of
      these acquisitions will be accomplished. If an entity we acquire is not
      efficiently or completely integrated with us, then our business, financial
      condition and operating results could be materially adversely
      affected.





***We
      are dependent upon key officers.***





The
      success of our operations will be largely dependent upon the efforts of Stuart
      Hettleman, our President and Chief Executive Officer, and Christopher A.
      Coppersmith, the President of our Target subsidiary. The loss of the services
      of
      either Mr. Hettleman or Mr. Coppersmith could have a material adverse effect
      on
      our operating results. Currently there is no “key person” life insurance in
      place for Messrs. Hettleman and Coppersmith.





***Economic
      and other conditions in the markets in which we operate can affect demand for
      services and results of operations.***





Our
      future operating results are dependent upon the economic environments of the
      markets in which we operate. Demand for our services could be adversely affected
      by economic conditions in the industries of our customers. Many of our principal
      customers are in the fashion, computer and electronics industries. Adverse
      conditions in any one of these industries or loss of the major customers in
      such
      industries could have a material adverse impact upon us. We expect the demand
      for our services (and consequently our results of operations) to continue to
      be
      sensitive to domestic and, increasingly, global economic conditions and other
      factors beyond our control.




-
          7-





In
      addition, the transport of freight, both domestically and internationally,
      is
      highly competitive and price sensitive. Changes in the volume of freight
      transported, shippers preferences as to the timing of deliveries as a means
      to
      control shipping costs, economic and political conditions, both in the United
      States and abroad, work stoppages, United States and foreign laws relating
      to
      tariffs, trade restrictions, foreign investments and taxation may all have
      significant impact on our overall business, growth and
      profitability.





***Substantially
      all of our assets are pledged to secure indebtedness.***





Substantially
      all of our assets are pledged to secure indebtedness. If our secured creditor
      forecloses upon security interest in our assets, such action would, in all
      likelihood, result in our inability to continue in business. We may also be
      required to obtain the consent of our secured creditor in order to complete
      future financings, and there can be no assurance that consent would be
      forthcoming.





***A
      substantial portion of our voting stock is controlled by
      TIA.***





TIA,
      Inc.
      (“TIA”) beneficially owns approximately 47% of our voting stock. As a result,
      TIA is in a position to control us through its ability to determine the outcome
      of elections of our directors and to prevail in matters submitted to a vote
      of
      stockholders. While, under Delaware corporate law, a majority stockholder owes
      certain fiduciary duties to minority stockholders, there may be circumstances
      in
      which these different relationships create material conflicts of interest which
      TIA is under no obligation to resolve in favor of us or other stockholders.
      Stuart Hettleman, one of our directors and our President, and David E. Swirnow,
      one of our directors, each owns a non-controlling indirect minority interest
      in
      TIA. In addition, Mr. Hettleman is an executive officer of, TIA. Our officers
      and directors owe a fiduciary duty to us and our shareholders to act in our
      best
      interest and the best interest of our shareholders.





**Risk
      Factors Relating to our Articles of Incorporation and our
      Stock**





***The
      liability of our directors is limited.***





Our
      Articles of Incorporation limit the liability of directors to the maximum extent
      permitted by Delaware law.





***It
      is unlikely that we will issue dividends on our Common Stock in the foreseeable
      future.***





We
      have
      never declared or paid dividends on our Common Stock and do not intend to pay
      dividends in the foreseeable future. The payment of dividends in the future
      will
      be at the discretion of our board of directors.





***The
      exercise of outstanding options and conversion rights will dilute the percentage
      ownership of our stockholders, and any sales in the public market of shares
      of
      our Common Stock underlying such options and conversion rights may adversely
      affect prevailing market prices for our Common Stock.***





As
      of
      June 30, 2006, there are outstanding options to purchase an aggregate of 520,000
      shares of our Common Stock at per share exercise prices ranging from $0.50
      to
      $1.125. Furthermore, outstanding shares of Class F Preferred Stock may be
      converted into an aggregate of 3,073,650 shares of our Common Stock at any
      time.
      In addition, we may issue additional shares of our Common Stock in respect
      of
      dividends paid on outstanding shares of our Class F Preferred Stock. The
      exercise of such outstanding options and conversion rights will dilute the
      percentage ownership of our stockholders, and any sales in the public market
      of
      shares of our Common Stock underlying such options and conversion rights may
      adversely affect prevailing market prices for our Common Stock.





***Future
      sales of our Common Stock by existing shareholders could negatively affect
      the
      market price of our Common Stock and make it more difficult for us to sell
      shares of our Common Stock in the future.***





Sales
      of
      our common stock in the public market, or the perception that such sales could
      occur, could result in a drop in the market price of our Common Stock and make
      it more difficult for us to complete future equity financings. We have in effect
      registration statements under the Securities Act registering shares of Common
      Stock on behalf of certain selling stockholders. If these stockholders sell
      large portions of their holdings in a relatively short time, for liquidity
      or
      other reasons, the market price of our Common Stock could drop
      significantly.




-
          8-





***The
      price of our Common Stock has historically been
      volatile.***





The
      market price of our Common Stock has in the past been, and may in the future
      continue to be, volatile. A variety of events, including quarter to quarter
      variations in operating results or news announcements by us or our competitors
      as well as market conditions in the freight forwarding industry or changes
      in
      earnings estimates by securities analysts may cause the market price of our
      Common Stock to fluctuate significantly. In addition, the stock market in recent
      months has experienced significant price and volume fluctuations which have
      particularly affected the market prices of equity securities of many companies
      and which often have been unrelated to the operating performance of such
      companies. These market fluctuations may adversely affect the price of our
      Common Stock.





***The
      issuance of Preferred Stock may have the effect of delaying, deterring or
      preventing a change in our control.***





Pursuant
      to our Certificate of Incorporation, we have authority to issue 2,500,000 shares
      of Preferred Stock which may be issued by our board of directors with such
      preferences, limitations and relative rights as the Board may determine without
      any vote of the stockholders. As of the date of this Prospectus, 122,946 shares
      of preferred stock are outstanding. Issuance of additional shares of preferred
      stock, depending upon the preferences, limitations and relative rights thereof,
      may have the effect of delaying, deterring or preventing a change in our
      control.





**ITEM
      1B.** **UNRESOLVED
      STAFF COMMENTS**





Not
      applicable.





**ITEM
      2.** **PROPERTIES**





As
      of
      June 30, 2006, Target leased terminal facilities consisting of office and
      warehouse space in 14 cities located in the United States, and also utilized
      20
      offices operated by exclusive agents. These leased facilities range in size
      from
      approximately 1,000 square feet to approximately 108,000 square feet and consist
      of offices and warehouses with loading bays. All of these properties are leased
      from third parties. Our executive offices are located in Baltimore, Maryland.
      Target’s headquarters are located within the terminal facility in Los Angeles,
      California, and consists of approximately 108,000 square feet of floor space
      leased pursuant to the terms of a lease which expires in September 2015.
      Management believes that our current Company wide facilities are sufficient
      for
      our planned growth.





We
      have
      an additional 13 terminal facilities in the following locations:





Atlanta,
                Georgia
            Houston,
                TexasCharlotte,
                North Carolina
            Memphis,
                TennesseeChicago,
                Illinois
            Miami,
                FloridaColumbus,
                Ohio
            Newark,
                New JerseyDallas,
                Texas
            New
                York, New YorkGreensboro,
                North Carolina
            Seattle,
                WashingtonIndianapolis,
                Indiana





**ITEM
      3.** **LEGAL
      PROCEEDINGS**





In
      connection with our Target subsidiary’s recent acquisition of certain assets of
      Discovery Cargo, Inc. (“DCI”; see *Management’s
      Discussion and Analysis of Financial Condition and Results of Operations -
      Overview* ),
      on
      June 5, 2006 Seko Worldwide, LLC (“Seko”) filed a civil action in the United
      States District Court for the Northern District of Illinois (Case No. 06C3072)
      against DCI, DCI’s principals, and our Target subsidiary, seeking a temporary
      restraining order and permanent injunction against the proposed sale of certain
      assets by DCI to Target. Prior to the transaction, DCI acted as an independent
      agent in Seko’s freight forwarding system serving the John F. Kennedy
      International Airport area. In connection with that relationship, DCI had
      entered into certain agreements with Seko which Seko claimed contained
      restrictive covenants which prohibited the asset sale to Target. On June 30,
      2006, following a hearing, the court denied Seko’s requested
      relief.




-
          9-





On
      July
      31, 2006, following the close of last fiscal year, Seko filed a civil suit
      against our Target subsidiary in the Circuit Court of Cook County, Illinois
      (Case No. 06L8015), alleging that Target tortiously interfered with DCI’s
      contractual relationships with Seko and with Seko’s economic relationships with
      DCI’s customers. Seko further alleges that Target’s actions in acquiring certain
      assets of DCI violated certain provisions of New York law with respect to
      deceptive trade practices. In its complaint, Seko is seeking unspecified damages
      and a court order enjoining Target from using the assets acquired from DCI
      or
      soliciting DCI’s freight forwarding customers for the restrictive periods which
      Seko alleges are contained in its agreements with DCI. Target has removed the
      matter to the United States District Court for the Northern District of Illinois
      and filed an answer to the complaint denying all allegations and asserting
      affirmative defenses. We and our counsel believe that Seko’s suit is without
      merit and we are vigorously defending the suit. In the event of an unfavorable
      outcome, the amount of any potential loss to us is not yet
      determinable.





From
      time
      to time, our Target subsidiary is involved in legal matters or named as a
      defendant in legal actions arising from normal operations, or is presented
      with
      claims for damages arising out of its actions. Management believes that these
      matters will not have a material adverse effect on our financial
      statements.








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





None.








**EXECUTIVE
      OFFICERS OF THE REGISTRANT**





The
      following is a listing of our executive officers as of June 30, 2006. There
      are
      no family relationships between any Directors and Officers of the
      Company.





**NAME**
              **AGE**
              **POSITION**Stuart Hettleman
              56
              President and Chief Executive OfficerPhilip J. Dubato
              50
              Vice President, Chief Financial Officer
                and
                SecretaryChristopher Coppersmith
              56
              President and Chief Executive
                Officer,Target Logistic Services,
                Inc.





STUART
      HETTLEMAN has been President, Chief Executive Officer and a director of the
      Company since February 7, 1996, and a director and Chairman of Target since
      May
      8, 1997.





PHILIP
      J.
      DUBATO has been Vice President, Chief Financial Officer and Secretary of the
      Company since February 3, 1997 and a director of the Company since
      September 18, 1998. From 1984 through 1996, Mr. Dubato was employed by LEP
      Profit International, Inc. and its predecessor, a domestic and international
      freight forwarder, where he held successive positions as Controller, Chief
      Financial Officer and Executive Vice President.





CHRISTOPHER
      COPPERSMITH has been President and Chief Executive Officer of Target Logistic
      Services, Inc. (acquired by the Company in May 1997) since 1995, and a director
      of the Company since May 1997. From 1974 to 1985 Mr. Coppersmith was a director,
      and from 1985 through 1995 Mr. Coppersmith was Executive Vice President and
      Chief Operating Officer of Target Airfreight, Inc.




-
          10-


**PART
      II**








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





Prior
      to
      June 15, 2006, our common stock, $.01 par value (the “Common Stock”) traded on
      the Over-The-Counter (OTC) market under the symbol TARG. On June 15, 2006,
      the
      Common Stock began trading on the American Stock Exchange under the symbol
      TLG.





The
      following table sets forth the high and low prices for the Common Stock for
      each
      full quarterly period during the fiscal years indicated. With respect to periods
      through the third quarter of the fiscal year ended June 30, 2006, the prices
      reflect the high and low bid prices as available through the OTC market and
      represent prices between dealers and do not reflect the retailer markups,
      markdowns or commissions, and may not represent actual transactions. Beginning
      with the third quarter of the fiscal year ended June 30, 2006, the prices
      reflect the high and low sales prices as reported by the American Stock
      Exchange.





*Fiscal
                Year Ended June 30, 2006*First
                Quarter
            
            
            High
            
            $
            1.80Low
            
            $
            1.15Second
                Quarter
            
            
            High
            
            $
            2.80Low
            
            $
            1.05Third
                Quarter
            
            
            High
            
            $
            3.15Low
            
            $
            2.01Fourth
                Quarter
            
            
            High
            
            $
            3.60Low
            
            $
            2.00*Fiscal
                Year Ended June 30, 2005*First
                Quarter
            
            
            High
            
            $
            0.90Low
            
            $
            0.62Second
                Quarter
            
            
            High
            
            $
            1.80Low
            
            $
            0.60Third
                Quarter
            
            
            High
            
            $
            1.76Low
            
            $
            0.98Fourth
                Quarter
            
            
            High
            
            $
            1.70Low
            
            $
            1.02








On
      August
      31, 2006 there were 637 shareholders of record of our Common Stock. The
      closing price of the Common Stock on that date was $2.83 per share.





-
          11-


**ITEM
      6.** **SELECTED
      FINANCIAL DATA**





**TARGET
      LOGISTICS, INC.**


**(in
      thousands, except per share data)**




2006
            
            2005
            
            2004
            
            2003
            
            2002**Statement
                of Operations Data:**Operating
                revenue
            
            $
            160,369
            
            $
            138,392
            
            $
            126,089
            
            $
            113,381
            
            $
            93,484Cost
                of transportation
            
            
            110,098
            
            
            93,913
            
            
            84,802
            
            
            75,773
            
            
            63,174Gross
                profit
            
            
            50,271
            
            
            44,479
            
            
            41,287
            
            
            37,608
            
            
            30,310Selling,
                general & administrative expenses
            
            
            44,880
            
            
            41,025
            
            
            39,526
            
            
            36,941
            
            
            29,969Depreciation
                and Amortization
            
            
            616
            
            
            600
            
            
            434
            
            
            428
            
            
            1,017Operating
                income (loss)
            
            $
            4,775
            
            $
            2,854
            
            $
            1,327
            
            $
            239
            
            $
            (676
            )Other
                Income
            
            
            -
            
            
            -
            
            
            -
            
            
            1,448
            
            
            -Net
                income (loss)
            
            $
            2,706
            
            $
            1,561
            
            $
            540
            
            $
            840
            
            $
            (935
            )Net
                income (loss) per common share
            
            $
            0.15
            
            $
            0.08
            
            $
            0.02
            
            $
            0.04
            
            $
            (0.10
            )**Balance
                Sheet Data:**Total
                assets
            
            $
            45,345
            
            $
            42,600
            
            $
            41,176
            
            $
            37,191
            
            $
            37,388Working
                capital
            
            
            6,783
            
            
            5,727
            
            
            4,615
            
            
            863
            
            
            57Current
                liabilities
            
            
            23,109
            
            
            23,062
            
            
            23,282
            
            
            21,551
            
            
            22,293Long-term
                liabilities
            
            
            555
            
            
            378
            
            
            75
            
            
            61
            
            
            34Shareholders’
                equity
            
            $
            21,681
            
            $
            19,160
            
            $
            17,818
            
            $
            15,579
            
            $
            15,061





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





**Forward-Looking
      Statements**





When
      used
      in this discussion and elsewhere in this Annual Report on Form 10-K, the words
      or phrases “will likely result,” “are expected to,” “will continue,” “is
      anticipated,” “estimate,” “project” or similar expressions are intended to
      identify “forward-looking statements” within the meaning of the Private
      Securities Litigation Reform Act of 1995, and reflect our current expectations
      with respect to our operations, performance, financial condition, and other
      developments. Such statements are necessarily estimates reflecting our best
      judgment based upon current information and involve a number of risks and
      uncertainties. We caution readers not to place undue reliance on any such
      forward-looking statements, which speak only as of the date made, and readers
      are advised that various factors could cause our actual results for future
      periods to differ materially from those anticipated or projected. While it
      is
      impossible to identify all such factors, they include (i) our ability to
      increase operating revenue, improve gross profit margins and reduce selling,
      general and administrative costs as a percentage of revenue,
      (ii) competitive practices in the industries in which we compete, (iii) our
      dependence on current management, (iv) the impact of current and future laws
      and
      governmental regulations affecting the transportation industry in general and
      our operations in particular, (v) general economic conditions, and (vi) other
      factors which may be identified from time to time in our Securities and Exchange
      Commission (SEC) filings and other public announcements. We do not undertake
      and
      specifically disclaim any obligation to update any forward-looking statements
      to
      reflect occurrence of anticipated or unanticipated events or circumstances
      after
      the date of such statements.





**Overview**





We
      generated operating revenues of $160.4 million, $138.4 million, and $126.1
      million, and had net profits of $2.7 million, $1.6 million, and $.05 million
      for
      the fiscal years ended June 30, 2006, 2005, and 2004, respectively.




-
          12-





We
      had
      earnings before interest, taxes, depreciation and amortization (EBITDA) of
      $5,391,621, $3,454,132 and $1,760,276, for the fiscal years ended June 30,
      2006,
      2005, and 2004, respectively. EBITDA, is a non-GAAP measure of income and does
      not include the effects of interest and taxes, and excludes the “non-cash”
effects of depreciation and amortization on current assets. Companies have
      some
      discretion as to which elements of depreciation and amortization are excluded
      in
      the EBITDA calculation. We exclude all depreciation charges related to property,
      plant and equipment, and all amortization charges, including amortization,
      leasehold improvements and other intangible assets. While management considers
      EBITDA useful in analyzing our results, it is not intended to replace any
      presentation included in our consolidated financial statements.





For
      the
      fiscal year ended June 30, 2006, the revenue of our Target subsidiary increased
      by 15.9% when compared to the fiscal year ended June 30, 2005. Target’s gross
      profit margin ( *i.e.* ,
      gross
      operating revenue less cost of transportation expressed as a percentage of
      gross
      operating revenue) decreased to 31.3% for the fiscal year ended June 30, 2006
      from 32.1% for the prior fiscal year. This decrease is primarily due to
      decreased gross profit margins on both international and domestic freight
      movements. Management continues to believe that we must focus on increasing
      revenues and must maintain gross profit margin to continue profitability.
      Management intends to continue to work on growing revenue by recruiting
      additional sales professionals, increasing sales generated both by our employed
      sales staff and by our exclusive forwarders, and through strategic acquisitions.
      Management also intends to continue to work on improving Target’s gross profit
      margins by reducing transportation costs.





On
      July
      14, 2006 (subsequent to the close of our fiscal year) our Target subsidiary
      acquired certain assets of Discovery Cargo, Inc. (“DCI”), a Queens, New York
      based freight forwarder. We expect to realize approximately $7 million of
      additional revenue in fiscal 2007 as a result of this acquisition.





**Results
      of Operations**





***Years
      ended June 30, 2006 and 2005***





*Operating
      Revenue.* ** Operating
      revenue increased to $160.4 million for the year ended June 30, 2006 from $138.4
      million for the year ended June 30, 2005, a 15.9% increase. Domestic revenue
      increased by 17.2% to $108,037,189 for the year ended June 30, 2006 from
      $92,204,367 for the prior fiscal year, due to the acquisition by the Company
      (the “ACI Acquisition”) of the stock of Air Cargo International and Domestic,
      Inc. (“ACI”) and internal sales growth. In addition, international revenue
      increased by 13.3% to $52,331,381 for the 2006 fiscal year from $46,188,008
      for
      the 2005 fiscal year, mainly due to increased international freight
      volume.





*Cost
      of Transportation.* ** Cost
      of
      transportation increased to 68.7% of operating revenue for the year ended June
      30, 2006 from 67.9% of operating revenue for the 2005 fiscal year. This increase
      was primarily due to the movement of less domestic premium services in the
      year
      ended June 30, 2006 than in the prior fiscal year.





*Gross
      Profit* .  As
      a
      result of the factors described above, gross profit for the 2006 fiscal year
      decreased to 31.3% from 32.1% of operating revenue for the 2005 fiscal year,
      a
      2.5% decrease.





*Selling,
      General and Administrative Expenses* .  Selling,
      general and administrative expenses decreased to 28.4% of operating revenue
      for
      the year ended June 30, 2006 from 30.1% of operating revenue for the 2005 fiscal
      year. Within our Target subsidiary, selling, general and administration expenses
      (excluding exclusive forwarder commission expense) were 17.2% of operating
      revenue for the 2006 fiscal year and 17.3% for the 2005 fiscal year, a 0.6%
      decrease. Exclusive forwarder commission expense (which are primarily
      commissions to our agents and earn-out expenses from our acquisitions) was
      9.9%
      and 11.5% of operating revenue for the 2006 and 2005 fiscal years, respectively,
      a 13.9% decrease resulting from a reduction in forwarder agent freight volume
      as
      a percentage of Target’s overall freight volume.





*Effective
      Tax Rate* .
      The
      effective income tax rate for the fiscal year ended June 30, 2006 was 41.8%
      compared to 43.6% for the fiscal year ended June 30, 2005. The change in the
      effective tax rate is due to changes in the components of the deferred income
      tax provision when compared to the prior year.





*Net
      Profit.* ** As
      a
      result of the factors discussed above, we realized a net profit of $2,705,598
      for the year ended June 30, 2006, compared to a net profit of $1,561,138 for
      the
      year ended June 30, 2005, a 73.3% increase.




-
          13-





***Years
      ended June 30, 2005 and 2004***





*Operating
      Revenue.* ** Operating
      revenue increased to $138.4 million for the year ended June 30, 2005 from $126.1
      million for the year ended June 30, 2004, a 9.8% increase. Domestic revenue
      increased by 4.0% to $92,204,367 for the year ended June 30, 2005 from
      $88,621,984 for the prior fiscal year, due to the movement of larger size
      shipments. In addition, international revenue increased by 23.3% to $46,188,008
      for the 2005 fiscal year from $37,467,077 for the 2004 fiscal year, mainly
      due
      to increased international ocean import freight volume.





*Cost
      of Transportation.* ** Cost
      of
      transportation increased to 67.9% of operating revenue for the year ended June
      30, 2005 from 67.3% of operating revenue for the 2004 fiscal year. This increase
      was primarily due to increased international ocean import freight volume which
      historically reflects a higher cost of transportation as a percentage of
      sales.





*Gross
      Profit* .  As
      a
      result of the factors described above, gross profit for the 2005 fiscal year
      decreased to 32.1% from 32.7% of operating revenue for the 2004 fiscal year,
      a
      1.8% decrease.





*Selling,
      General and Administrative Expenses* .  Selling,
      general and administrative expenses decreased to 30.1% of operating revenue
      for
      the year ended June 30, 2005 from 31.7% of operating revenue for the 2004 fiscal
      year. Within our Target subsidiary, selling, general and administration expenses
      (excluding exclusive forwarder commission expense) were 17.3% of operating
      revenue for the 2005 fiscal year and 18.0% for the 2004 fiscal year, a 3.9%
      decrease. This decrease in selling, general and administrative expense as a
      percent of operating revenue was partially due to higher revenue and variable
      costs which did not increase at the same rate as sales. Exclusive forwarder
      commission expense (which are primarily commissions to our agents and earn-out
      expenses from our acquisitions) was 11.5% and 12.7% of operating revenue for
      the
      2005 and 2004 fiscal years, respectively, a 9.4% decrease resulting from a
      reduction in forwarder agent gross profit margin.





*Net
      Profit.* ** As
      a
      result of the factors discussed above, we realized a net profit of $1,561,138
      for the year ended June 30, 2005, compared to a net profit of $540,142 for
      the
      year ended June 30, 2004.





**Liquidity
      and Capital Resources**





*General.* During
      the 2006 fiscal year, net cash provided by operating activities was $5,145,611.
      Cash used in investing activities was $2,408,298 representing capital
      expenditures and the ACI Acquisition. Cash used for financing activities was
      $2,247,872, which primarily consisted of repayments under our line of
      credit.





*Capital
      expenditures.* Capital
      expenditures for the 2006 fiscal year were $2,408,298 representing
      (i) capital expenditures of $1,858,298 primarily for property, equipment,
      and leasehold improvements at the Target subsidiary’s new Los Angeles
      headquarters and terminal facility, and (ii) a $550,000 deferred payment made
      pursuant to the terms of the ACI Acquisition.





Capital
      expenditures for property, equipment, and leasehold improvements were much
      higher than historical levels in fiscal year ended June 30, 2006 due to the
      relocation of Target’s Los Angeles headquarters and terminal facility on October
      1, 2005 to a new facility consisting of 108,000 square feet of floor space
      leased pursuant to the terms of a lease which expires on September 2015. In
      the
      fiscal years ended June 30, 2005 and 2004 capital expenditures for property,
      equipment, and leasehold improvements were $243,107 and $135,569,
      respectively.





*GMAC
      Facility* .
      On May
      3, 2004, the Company’s Target subsidiary amended its January 1997 $15 million
      revolving credit facility (“GMAC Facility”) with GMAC Commercial Finance LLC
      (“GMAC”), guaranteed by the Company, and extended the GMAC Facility for a
      three-year term ending March 31, 2007. Under the terms of the GMAC Facility,
      Target can borrow (i) the lesser of $13 million or 85% of eligible accounts
      receivable for the period beginning May 3, 2004 through December 31, 2005,
      and
      (ii) the lesser of $15 million or 85% of eligible accounts receivable for the
      period beginning April 1, 2005 through March 31, 2007. The interest rate of
      the
      facility, which can be adjusted quarterly, is either (i) prime plus
      three-quarters of one percent (0.75%), or (ii) upon the achievement of certain
      financial milestones (measured quarterly), prime plus one-half of one percent
      (0.50%). The borrowings under the GMAC Facility are secured by a first lien
      on
      all of the Company’s and its subsidiaries’ assets. As of June 30, 2006, there
      were outstanding borrowings of $2,493,787 under the GMAC Facility (which
      represented 18.1% of the amount available thereunder) out of a total amount
      available for borrowing under the GMAC Facility of approximately $13,768,144,
      net of a standby letter of credit issued by GMAC in the amount of $136,668.
      We
      entered into the GMAC Facility on January 16, 1997, and subsequently extended
      the facility for an additional three-year term and on September 20, 2002 for
      an
      additional two-year term. On May 3, 2004, the GMAC Facility was extended for
      an
      additional three-year term ending March 31, 2007.




-
          14-





*Stock
      Purchase Acquisition* .
      On
      March 15, 2005, the Company acquired the stock of ACI for a combination of
      cash,
      a deferred payment based on the ACI shareholder’s equity after winding down the
      ACI balance sheet, and an earn-out structure based on future gross profit
      achievements over the next five years. A portion of the purchase price could
      be
      repaid to the Company if certain gross profit goals for the ACI business are
      not
      met. Any payments from the earn-out structure will be considered an increase
      to
      the purchase price in the period such amount is determinable. The Company has
      no
      minimum commitment or obligation under the earn-out or the wind down of the
      balance sheet. The Company does not expect that the earn-out payments will
      have
      a material impact on its liquidity. For additional detail, please refer to
      Note
      6 to our Notes to the Audited Consolidated Financial Statements contained in
      this Annual Report.




*Working
      Capital Requirements* .
      The
      Company’s and Target’s cash needs are currently met by the accounts receivable
      financing facility and cash on hand. As of June 30, 2006, we had $11,274,357
      available under our $15 million accounts receivable financing facility and
      $7,015,018 in cash from operations and cash on hand. We believe that our current
      financial resources will be sufficient to finance our operations and obligations
      (current and long-term liabilities) for the long and short terms. However,
      our
      actual working capital needs for the long and short terms will depend upon
      numerous factors, including our operating results, the cost of increasing the
      Company’s sales and marketing activities, competition, and the availability of a
      revolving credit facility, none of which can be predicted with
      certainty.





**Inflation**





We
      do not
      believe that the relatively moderate rates of inflation in the United States
      in
      recent years have had a significant effect on our operations.





**Contractual
      Obligations and Commitments**





**Contractual
      Obligations and Commitments.** The
      following table presents, as of June 30, 2006, our significant fixed and
      determinable contractual obligations to third parties by payment date. Further
      discussion of the nature of each obligation is included in Note 10 to the
      consolidated financial statements.




Payments
              Due by
              Fiscal Year(in
              thousands)2007
            
            2008
            
            2009
            
            2010
            
            2011
                and
              thereafter
            
            TotalAmounts
                reflected in Balance Sheet:Capital
                lease obligations (1)
            
            $
            161
            
            $
            128
            
            $
            126
            
            $
            52
            
            
            -
            
            $
            467Other
                amounts not reflected in Balance Sheet:Operating
                leases (2)
            
            
            1,938
            
            
            2,037
            
            
            2,074
            
            
            1,998
            
            
            3,785
            
            
            11,832Total
            
            $
            2,099
            
            $
            2,165
            
            $
            2,200
            
            $
            2,050
            
            $
            3,785
            
            $
            12,299





(1)
            Capital
                lease obligations represent principal and interest
                payments.


(2)
            Operating
                leases represent future minimum lease payments under non-cancelable
                operating leases (primarily the rental of premises) at June 30, 2006.
                In
                accordance with accounting principles generally accepted in the United
                States, our operating leases are not recorded in our balance
                sheet.





**Critical
      Accounting Policies**





Management’s
      Discussion and Analysis of Financial Condition and Results of Operations
      discusses the Company’s consolidated financial statements, which have been
      prepared in accordance with accounting principles generally accepted in the
      United States of America. The preparation of these financial statements requires
      management to make estimates and assumptions about future events that affect
      the
      amounts reported in the financial statements and accompanying notes. Since
      future events and their effects cannot be determined with absolute certainty,
      the determination of estimates requires the exercise of judgment. Actual results
      could differ from those estimates, and such difference may be material to the
      financial statements. The most significant accounting estimates inherent in
      the
      preparation of our financial statements include estimates as to the appropriate
      carrying value of certain assets and liabilities which are not readily apparent
      from other sources, primarily allowance for doubtful accounts, accruals for
      transportation and other direct costs, accruals for cargo insurance, the
      determination of share based compensation expense, and the classification of
      tax
      credit carryforwards between current and long-term assets. Management bases
      its
      estimates on historical experience and on various assumptions which are believed
      to be reasonable under the circumstances. We reevaluate these significant
      factors as facts and circumstances change. Historically, actual results have
      not
      differed significantly from our estimates. These accounting policies are more
      fully described in Note 3 of the Notes to the Consolidated Financial Statements,
      starting on page F-7.




-
          15-





Our
      balance sheet includes an asset in the amount of $11,872,973 for purchased
      goodwill. In accordance with accounting pronouncements, the amount of this
      asset
      must be reviewed annually for impairment, written down and charged to results
      of
      operations in the period(s) in which the recorded value of goodwill is more
      than
      its fair value. We obtained an independent valuation analysis completed in
      January 2006, and based on the valuation, we determined that the goodwill was
      not impaired. Had the determination been made that the goodwill asset was
      impaired, the value of this asset would have been reduced by an amount ranging
      from zero to $11,872,973, and our financial statements would reflect the
      reduction. For additional description, please refer to Note 3 to our Notes
      to
      the audited Consolidated Financial Statements contained in this Annual
      Report.





**New
      Accounting Pronouncements**





In
      June
      2005, the Emerging Issues Task Force (EITF) reached a consensus on Issue 05-6 ,
      “ *Determining
      the Amortization Period for Leasehold Improvements* ”,
      which
      requires that leasehold improvements acquired in a business combination or
      purchased subsequent to the inception of a lease be amortized over the lesser
      of
      the useful life of the assets or a term that includes renewals that are
      reasonably assured at the date of the business combination or purchase. EITF
      05-6 is effective for periods beginning after July 1, 2005. The Company does
      not
      expect the provisions of this consensus to have any impact on its financial
      position, results of operations or cash flows.





In
      May
      2005, the FASB issued SFAS No.154, “ *Accounting
      Changes and Error Corrections* ”
(“SFAS
      154”) which replaces Accounting Principles Board Opinions No. 20 “ *Accounting
      Changes* ”
and
      SFAS No. 3, “ *Reporting
      Accounting Changes in Interim Financial Statements - An Amendment of APB Opinion
      No. 28* .”
SFAS
      154 provides guidance on the accounting for and reporting of accounting changes
      and error corrections. It establishes retrospective application, for the latest
      practicable date, as the required method for reporting a change in accounting
      principle and the reporting of a correction of an error. SFAS 154 is effective
      for accounting changes and corrections of errors made in fiscal years beginning
      after December 15, 2005. The Company does not expect the adoption of SFAS 154
      to
      have any impact on its financial position, results of operations or cash
      flows.





In
      February 2006, the FASB decided to move forward with the issuance of a final
      FSP
      FAS 123R-4 “Classification of Options and Similar Instruments Issued as Employee
      Compensation That Allow for Cash Settlement upon the Occurrence of a Contingent
      Event”. The guidance in FSP FAS 123R-4 amends paragraphs 32 and A229 of FASB
      Statement No. 123R to incorporate the concept articulated in footnote 16 of
      FAS
      123R. That is, a cash settlement feature that can be exercised only upon the
      occurrence of a contingent event that is outside the employees control does
      not
      meet the condition in paragraphs 32 and A229 until it becomes probable that
      the
      event will occur. Originally under FAS 123R, a provision in a share-based
      payment plan that required an entity to settle outstanding options in cash
      upon
      the occurrence of any contingent event required classification and accounting
      for the share based payment as a liability. This caused an issue under certain
      awards that require or permit, at the holders election, cash settlement of
      the
      option or similar instrument upon (a) a change in control or other liquidity
      event of the entity or (b) death or disability of the holder. With this new
      FSP,
      these types of cash settlement features will not require liability accounting
      so
      long as the feature can be exercised only upon the occurrence of a contingent
      event that is outside the employees control (such as an initial public offering)
      until it becomes probable that the event will occur. The guidance in this FSP
      shall be applied upon initial adoption of Statement 123(R). An entity that
      adopted Statement 123(R) prior to the issuance of the FSP shall apply the
      guidance in the FSP in the first reporting period beginning after February
      2006.
      Early application of FSP FAS 123R-4 is permitted in periods for which financial
      statements have not yet been issued. The Company does not expect that this
      new
      FSP will have any impact upon its financial position, results of operations
      or
      cash flows.




-
          16-





In
      June
      2006, the FASB issued FASB Interpretation (FIN) No. 48, “Accounting for
      Uncertainty in Income Taxes,” that provides guidance on the accounting for
      uncertainty in income taxes recognized in financial statements. The
      interpretation will be adopted by us on January 1, 2007. We are currently
      evaluating the impact of adopting FIN 48; however, we do not expect the adoption
      of this provision to have a material effect on our financial position, results
      of operations or cash flows.




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





Our
      principal financial instrument is long-term debt under the GMAC Facility which
      provides for an interest rate, that can be adjusted quarterly, of either (i)
      prime plus three-quarters of one percent (0.75%), or (ii) upon the
      achievement of certain financial milestones (measured quarterly), prime plus
      one-half of one percent (0.50%). We are affected by market risk exposure
      primarily through the effect of changes in interest rates on amounts payable
      under the GMAC Facility. A significant rise in the prime rate could materially
      adversely affect our business, financial condition and results of operations.
      At
      June 30, 2006, an aggregate principal amount of $2,493,787 was outstanding
      under
      the GMAC Facility bearing interest at an annual rate of 8.75%. If principal
      amounts outstanding under the GMAC Credit Facility remained at this year-end
      level for an entire year and the prime rate increased or decreased,
      respectively, by 0.5%, we would pay or save, respectively, an additional $12,469
      in interest in that year. We do not utilize derivative financial instruments
      to
      hedge against changes in interest rates or for any other purpose.




**ITEM
      8.** **FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA**





The
      financial statements and supplementary data required by this Item 8 are included
      in our Consolidated Financial Statements and set forth in the pages indicated
      in
      Item 15(a) of this Annual Report.





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





None.





**ITEM
      9A.** **CONTROLS
      AND PROCEDURES**





We
      maintain a system of disclosure controls and procedures that is designed to
      provide reasonable assurance that information, which is required to be disclosed
      by the Company in the reports that it files or submits under the Securities
      and
      Exchange Act of 1934, as amended, is recorded, processed, summarized and
      reported within the time periods specified in the rules and forms of the
      Securities and Exchange Commission, and is accumulated and communicated to
      management in a timely manner. Our Chief Executive Officer and Chief Financial
      Officer have evaluated this system of disclosure controls and procedures as
      of
      the end of the period covered by this annual report, and believe that the system
      is effective. There have been no changes in our internal control over financial
      reporting during the most recent fiscal year that have materially affected,
      or
      are reasonably likely to materially affect, the Company’s internal control over
      financial reporting.





**ITEM
      9B.** **OTHER
      INFORMATION**





None.




-
          17-


**PART
      III**








**ITEM
      10.** **DIRECTORS
      AND EXECUTIVE OFFICERS OF THE REGISTRANT**





The
      information with respect to the identity and business experience of the
      directors of the Company and their remuneration set forth in the section
      captioned “Election of Directors” in the Company’s definitive Proxy Statement to
      be filed pursuant to Regulation 14A and issued in conjunction with the 2006
      Annual Meeting of Stockholders (the “Proxy Statement”) is incorporated herein by
      reference. The information with respect to the identity and business experience
      of executive officers of the Company is set forth in Part I of this Form 10-K.
      The information with respect to the Company’s Audit Committee is incorporated
      herein by reference to the section captioned “Meetings and Committees of the
      Board of Directors” in the Proxy Statement. The information with respect to
      compliance with Section 16(a) of the Exchange Act is incorporated herein by
      reference to the section captioned “Compliance With Section 16(a) of the
      Exchange Act” in the Proxy Statement. The information with respect to the
      Company’s Code of Ethics is incorporated herein by reference to the section
      captioned “Code of Ethics” in the Proxy Statement.








**ITEM
      11.** **EXECUTIVE
      COMPENSATION**





The
      information required by this item is incorporated herein by reference to the
      sections captioned “Director Compensation” and “Executive Compensation” in the
      Proxy Statement.








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





*Equity
      Compensation Plan Information.* The
      following table provides information, as of June 30, 2006, with respect to
      all
      compensation arrangements maintained by the Company under which shares of Common
      Stock may be issued:





Plan
                Category
            
            Number
                of securities to be issued upon exercise of outstanding options,
                warrants
                and rights
            
            Weighted-average
                exercise price of outstanding options, warrants and rights
            
            Number
                of securities remaining available for future issuance under equity
                compensation plans (excluding securities reflected in column
                (a))(a)
            
            (b)
            
            (c)Equity
                compensation plans approved by security holders
            
            
            520,000*
            
            $
            0.59
            
            
            1,500,000**Equity
                compensation plans not approved by security holders
            
            
            0
            
            
            0
            
            
            0Total
            
            
            520,000*
            
            $
            0.59
            
            
            1,500,000**





*
      Shares
      are issuable pursuant to options granted under the Company’s 1996 Stock Option
      Plan.





**
      Represents shares available for issuance under the Company’s 2005 Stock Option
      Plan.





The
      balance of the information required by this item is incorporated herein by
      reference to the sections captioned “Beneficial Ownership” and “Information
      Regarding Share Ownership of Management” in the Proxy Statement.





**ITEM
      13.** **CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS**





The
      information required by this item is incorporated herein by reference to the
      section captioned “Transactions with Management” in the Proxy
      Statement.




-
          18-





**ITEM
      14.** **PRINCIPAL
      ACCOUNTANT FEES AND SERVICES**





The
      information required by this item is incorporated herein by reference to the
      section captioned “Independent Public Accountants” in the Proxy
      Statement.




-
          19-


**PART
      IV**








**ITEM
      15.** **EXHIBITS
      AND FINANCIAL STATEMENT SCHEDULES**





**(a)
      1.**  **Financial
      Statements**


PageReport
                  of Registered Independent Public Accounting Firm
              F-1Consolidated
                  Balance Sheets as of June 30, 2006 and 2005
              F-2Consolidated
                  Statements of Operations for the Years Ended June 30, 2006, 2005,
                  and
                  2004
              F-3Consolidated
                  Statements of Shareholders’ Equity for the Years EndedJune
                  30, 2006, 2005, and 2004
              F-4Consolidated
                  Statements of Cash Flows for the Years Ended June 30, 2006, 2005,
                  and
                  2004
              F-5Notes
                  to Consolidated Financial Statements
              F-7





**(a)
      2.**  **Financial
      Statement Schedules**





Schedule
      II - Schedule of Valuation and Qualifying Accounts       S-1





All
      other
      schedules are omitted because they are not applicable, are not required, or
      because the required information is included in the consolidated financial
      statements or notes thereto.





**(a)
      3.**  **Exhibits
      required to be filed by Item 601 of Regulation S-K**





Exhibit
      No.


3.1
            
            Certificate
                of Incorporation of Registrant, as amended (incorporated by reference
                to
                Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q for the
                Quarter Ended March 31, 2004, File No.
                0-29754)


3.2
            
            By-Laws
                of Registrant, as amended (incorporated by reference to Exhibit 3.2
                to the
                Registrant’s Quarterly Report on Form 10-Q for the Quarter Ended December
                31, 1998, File No. 0-29754)


4.1
            
            Certificate
                of Designations with respect to the Registrant’s Class C Preferred Stock
                (contained in Exhibit 3.1)


4.2
            
            Certificate
                of Designations with respect to the Registrant’s Class F Preferred Stock
                (contained in Exhibit 3.1)


10.1
            
            1996
                Stock Option Plan (incorporated by reference to Exhibit 10.1 to the
                Registrant’s Quarterly Report on Form 10-Q for the Quarter Ended March 31,
                2003, File No. 0-29754)


10.2
            
            2005
                Stock Option Plan (incorporated by reference to Exhibit 10.2 to the
                Registrant’s Quarterly Report on Form 10-Q for the Quarter Ended December
                31, 2005, File No. 0-29754)


10.3
            
            Restated
                and Amended Accounts Receivable Management and Security Agreement,
                dated
                as of July 13, 1998 by and between GMAC Commercial Credit LLC, as
                Lender,
                and Target Logistic Services, Inc., as Borrower, and guaranteed by
                the
                Registrant (“GMAC Facility Agreement”) (incorporated by reference to
                Exhibit 10.2 to the Registrant’s Annual Report on Form 10-K for the Fiscal
                Year Ended June 30, 1999, File No.
                0-29754)


10.4
            
            Letter
                amendment to GMAC Facility Agreement, dated January 25, 2001 (incorporated
                by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form
                10-Q for the Quarter Ended December 31, 2000, File No.
                0-29754)


10.5
            
            Amendment
                to GMAC Facility Agreement, dated September 20, 2002 (incorporated
                by
                reference to Exhibit 10.4 to the Registrant’s Annual Report on Form 10-K
                for the Fiscal Year Ended June 30, 2002, File No. 0-29754)


10.6
            
            Amendment
                to GMAC Facility Agreement, dated February 12, 2003 (incorporated
                by
                reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form
                10-Q for the Quarter Ended March 31, 2003, File No.
                0-29754)


10.7
            
            Amendment
                to GMAC Facility Agreement, dated May 3, 2004 (incorporated by reference
                to Exhibit 10.6 to the Registrant’s Quarterly Report on Form 10-Q for the
                Quarter Ended March 31, 2004, File No.
                0-29754)  -
            20-




10.8
            
            Lease
                Agreement for Los Angeles Facility (incorporated by reference to
                Exhibit
                10.9 to the Registrant’s Quarterly Report on Form 10-Q for the Quarter
                Ended March 31, 2005, File No.
                0-29754)


14
            
            Code
                of Business Conduct and Ethics (incorporated by reference to Exhibit
                14 to
                the Registrant’s Annual Report on Form 10-K for the Year Ended June 30,
                2004, File No. 0-29754)


21
            
            Subsidiaries
                of Registrant (incorporated by reference to Exhibit 21 to the Registrant’s
                Annual Report on Form 10-K for the Year Ended June 30, 2005, File
                No.
                0-29754) 23
            
            Consent of Stonefield Josephson,
              Inc.*


31.1
            
            Rule
                15d-14(a) Certification of Chief Executive
                Officer*


31.2
            
            Rule
                15d-14(a) Certification of Chief Financial
                Officer*


32.1
            
            Section
                1350 Certifications*


99.1
            
            Press
                Release issued September 6, 2006*





*
      Filed
      herewith





-
          21-


**SIGNATURES**





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




TARGET
              LOGISTICS,
              INC.Date: 
              September 6, 2006
            By:
            /s/ 
Stuart
              HettlemanStuart
              HettlemanPresident


Pursuant
      to the requirements of the Securities Exchange Act of 1934, this report has
      been
      signed below by the following persons on behalf of the Registrant and in the
      capacities and on the dates indicated.




Signature
                Title
                Date/s/
                    Stuart Hettleman
                President,
                    Chief Executive
                September
                    6, 2006Stuart
                    Hettleman
                Officer
                    and Director/s/
                    Michael Barsa
                Director
                September
                    6, 2006Michael
                    Barsa/s/
                    Stephen J. Clearman
                Director
                September
                    6, 2006Stephen
                    J. Clearman/s/
                    Brian K. Coventry
                Director
                September
                    6, 2006Brian
                    K. Coventry/s/
                    Christopher Coppersmith
                Director
                September
                    6, 2006Christopher
                    Coppersmith/s/
                    Philip J. Dubato
                Vice
                    President, Chief
                September
                    6, 2006Philip
                    J. Dubato
                Financial
                    Officer,Principal
                  Accounting
                  Officerand
                    Director/s/
                    David E. Swirnow
                Director
                September
                    6, 2006David
                    E. Swirnow





-
          22-


**REPORT
      OF REGISTERED INDEPENDENT PUBLIC ACCOUNTING FIRM**







The
      Board
      of Directors


Target
      Logistics, Inc.


Baltimore,
      Maryland





We
      have
      audited the consolidated balance sheets of Target Logistics, Inc. (a Delaware
      corporation) and subsidiaries, as of June 30, 2006 and 2005, and the related
      consolidated statements of operations, shareholders’ equity and cash flows for
      each of the three years in the period ended June 30, 2006. These consolidated
      financial statements are the responsibility of the Company’s management. Our
      responsibility is to express an opinion on these financial statements based
      on
      our audits.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. We were not engaged to perform
      an
      audit of the Company's internal control over financial reporting. Our audits
      included consideration of internal control over financial reporting as a basis
      for designing audit procedures that are appropriate in the circumstances, but
      not for the purpose of expressing an opinion on the effectiveness of the
      Company's internal control over financial reporting. Accordingly, we express
      no
      such opinion. An audit also includes examining, on a test basis, evidence
      supporting the amounts and disclosures in the financial statements, assessing
      the accounting principles used and significant estimates made by management,
      as
      well as evaluating the overall financial statement presentation. We believe
      that
      our audits provide a reasonable basis for our opinion.





In
      our
      opinion, the financial statements referred to above present fairly, in all
      material respects, the financial position of Target Logistics, Inc. and
      subsidiaries, as of June 30, 2006 and 2005, and the results of its operations
      and their consolidated cash flows for each of the three years in the period
      ended June 30, 2006, in conformity with accounting principles generally accepted
      in the United States of America.







Our
      audits were made for the purpose of forming an opinion on the basic consolidated
      financial statements taken as a whole. The schedule listed in the index of
      financial statements is presented for purposes of complying with the Securities
      and Exchange Commission’s rules and are not part of the basic consolidated
      financial statements. This schedule has been subjected to the auditing
      procedures applied in the audits of the basic consolidated financial statements
      and, in our opinion, fairly states in all material respects the financial data
      required to be set forth therein in relation to the basic consolidated financial
      statements taken as a whole.








/s/
      Stonefield Josephson, Inc.


CERTIFIED
      PUBLIC ACCOUNTANTS





Los
      Angeles, California


July
      25,
      2006




F-1


**TARGET
      LOGISTICS, INC.**


**CONSOLIDATED
      BALANCE SHEETS**








**ASSETS**
            
            June
                30, 2006
            
            June
                30, 2005CURRENT
                ASSETS:Cash
                and cash equivalents
            
            $
            7,015,018
            
            $
            6,525,577Accounts
                receivable, net of allowance for doubtful accounts of
              $503,288
                and $900,571, respectively
            
            
            21,595,301
            
            
            20,934,908Deferred
                income taxes
            
            
            882,244
            
            
            1,034,339Prepaid
                expenses and other current assets
            
            
            305,177
            
            
            294,562Total
                current assets
            
            
            29,797,740
            
            
            28,789,386PROPERTY
                AND EQUIPMENT, NET
            
            
            2,300,306
            
            
            337,031OTHER
                ASSETS
            
            
            1,279,862
            
            
            1,747,478DEFERRED
                INCOME TAXES
            
            
            -
            
            
            -GOODWILL,
                net of accumulated amortization of $3,715,106
            
            
            11,872,973
            
            
            11,725,823Total
                assets
            
            $
            45,250,881
            
            $
            42,599,718**LIABILITIES
                AND SHAREHOLDERS’ EQUITY**CURRENT
                LIABILITIES:Accounts
                payable
            
            
            6,499,771
            
            
            5,534,452Accrued
                expenses
            
            
            2,933,536
            
            
            3,051,871Accrued
                transportation expenses
            
            
            9,952,452
            
            
            8,960,734Line
                of credit
            
            
            2,493,787
            
            
            4,348,649Deferred
                purchase price liability (Note 6)
            
            
            207,840
            
            
            757,840Dividends
                payable
            
            
            60,801
            
            
            109,916Taxes
                payable
            
            
            678,000
            
            
            154,321Deferred
                tax liability
            
            
            57,143
            
            
            57,143Lease
                obligation - current portion
            
            
            131,342
            
            
            87,122Total
                current liabilities
            
            
            23,014,672
            
            
            23,062,048LEASE
                OBLIGATION -- LONG TERM
            
            
            283,772
            
            
            36,539DEFERRED
                TAX LIABILITY - LONG TERM
            
            
            271,427
            
            
            341,372Total
                liabilities
            
            $
            23,569,871
            
            $
            23,439,959COMMITMENTS
                AND CONTINGENCIESSHAREHOLDERS’
                EQUITY:Preferred
              Stock, $10
              par value; 2,500,000 shares authorized, 122,946and
                319,946 shares issued and outstanding, respectively
            
            
            1,229,460
            
            
            3,199,460Common
              Stock, $.01
              par value; 30,000,000 shares authorized,18,621,686
                and 16,569,729 shares issued and outstanding, respectively
            
            
            186,217
            
            
            165,697Paid-in
                capital
            
            
            28,289,402
            
            
            26,293,190Accumulated
                deficit
            
            
            (7,379,264
            )
            
            (9,853,783
            )Less:
                Treasury stock, 734,951 shares held at cost
            
            
            (
                644,805
            )
            
            (
                644,805
            )Total
                shareholders’ equity
            
            
            21,681,010
            
            
            19,159,759Total
                liabilities and shareholders’ equity
            
            $
            45,250,881
            
            $
            42,599,718





*The
      accompanying notes are an integral part of these consolidated balance
      sheets.*





F-2


**TARGET
      LOGISTICS, INC.**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**




Year
                Ended
              June
                30, 2006
            
            Year
                Ended
              June
                30, 2005
            
            Year
                Ended
              June
                30, 2004OPERATING
                REVENUES:
            
            $
            160,368,570
            
            $
            138,392,375
            
            $
            126,089,061COST
                OF TRANSPORTATION:
            
            
            110,098,043
            
            
            93,913,264
            
            
            84,801,806GROSS
                PROFIT:
            
            
            50,270,527
            
            
            44,479,111
            
            
            41,287,255SELLING,
                GENERAL AND ADMINISTRATIVE EXPENSES (“SG&A”):SG&A
                - Target subsidiary
            
            
            27,620,391
            
            
            24,002,255
            
            
            22,673,868SG&A
                - Target subsidiary (Exclusive forwarder commissions)
            
            
            15,874,335
            
            
            15,920,706
            
            
            16,019,795SG&A
                - Corporate
            
            
            1,384,180
            
            
            1,102,018
            
            
            833,316Depreciation
                and amortization
            
            
            616,310
            
            
            600,155
            
            
            433,544Selling,
                general and administrative expenses
            
            
            45,495,216
            
            
            41,625,134
            
            
            39,960,523Operating
                income
            
            
            4,775,311
            
            
            2,853,977
            
            
            1,326,732OTHER
                EXPENSE:Interest
                expense
            
            
            (126,516
            )
            
            (85,717
            )
            
            (346,517
            )Income
                before income taxes
            
            
            4,648,795
            
            
            2,768,260
            
            
            980,215Provision
                for income taxes
            
            
            1,943,197
            
            
            1,207,122
            
            
            440,073Net
                income
            
            $
            2,705,598
            
            $
            1,561,138
            
            $
            540,142Income
                per share attributable to common shareholders:Basic
            
            $
            0.15
            
            $
            0.08
            
            $
            0.02Diluted
            
            $
            0.13
            
            $
            0.07
            
            $
            0.03Weighted
                average shares outstanding:Basic
            
            
            16,223,353
            
            
            15,830,915
            
            
            12,815,859Diluted
            
            
            21,490,369
            
            
            21,489,990
            
            
            18,622,651








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




F-3





**TARGET
      LOGISTICS, INC.**


**CONSOLIDATED
      STATEMENTS OF SHAREHOLDERS’ EQUITY**


**FOR
      THE YEARS ENDED JUNE 30, 2006, 2005 AND 2004**






StockAdditional
            
            SubscriptionPreferred
                Stock
            
            Common
              Stock
            
            Paid-In
            
            Note
            
            Treasury
                Stock
            
            AccumulatedShares
            
            Amount
            
            Shares
            
            Amount
            
            Capital
            
            Receivable
            
            Shares
            
            Amount
            
            Deficit
            
            TotalBalance,
                June 30, 2003
            
            
            320,696
            
            $
            3,206,960
            
            
            12,913,953
            
            $
            129,139
            
            $
            24,202,248
            
            
            -
            
            
            (734,951
            )
            $
            (644,805
            )
            $
            (11,314,210
            )
            $
            15,579,332Cash
                dividends associated with the
              Class
                A, C and F Preferred Stock
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (321,305
            )
            
            (321,305
            )Common
                Stock issued in conjunction
              with
                a private placement
            
            
            -
            
            
            -
            
            
            3,448,276
            
            
            34,483
            
            
            1,965,517
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            2,000,000Common
                Stock issued pursuant to
              Subscription
                Agreement
            
            
            -
            
            
            -
            
            
            200,000
            
            
            2,000
            
            
            118,000
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            120,000Stock
                subscription note receivable
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (100,000
            )
            
            -
            
            
            -
            
            
            -
            
            
            (100,000
            )Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            540,142
            
            
            540,142Balance,
                June 30, 2004
            
            
            320,696
            
            $
            3,206,960
            
            
            16,562,229
            
            $
            165,622
            
            $
            26,285,765
            
            $
            (100,000
            )
            
            (734,951
            )
            $
            (644,805
            )
            $
            (11,095,373
            )
            $
            17,818,169Cash
                dividends associated with the
              Class
                C and F Preferred Stock
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (319,548
            )
            
            (319,548
            )Common
                Stock issued in conjunction
              with
                the conversion of Class C
              Preferred
                Stock
            
            
            (750
            )
            
            (7,500
            )
            
            7,500
            
            
            75
            
            
            7,425
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Stock
                subscription note receivable
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            100,000
            
            
            -
            
            
            -
            
            
            -
            
            
            100,000Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            1,561,138
            
            
            1,561,138Balance,
                June 30, 2005
            
            
            319,946
            
            $
            3,199,460
            
            
            16,569,729
            
            $
            165,697
            
            $
            26,293,190
            
            
            -
            
            
            (734,951
            )
            $
            (644,805
            )
            $
            (9,853,783
            )
            $
            19,159,759Cash
                dividends associated with the
              Class
                C and F Preferred Stock
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (231,079
            )
            
            (231,079
            )Common
                Stock issued in conjunction
              with
                the conversion of Class C
              Preferred
                Stock
            
            
            (197,000
            )
            
            (1,970,000
            )
            
            1,970,000
            
            
            19,700
            
            
            1,950,300
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Stock
                options exercised
            
            
            -
            
            
            -
            
            
            81,957
            
            
            820
            
            
            37,015
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            37,835Stock
                option expense
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            8,897
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            8,897Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            2,705,598
            
            
            2,705,598Balance,
                June 30, 2006
            
            
            122,946
            
            $
            1,229,460
            
            
            18,621,686
            
            $
            186,217
            
            $
            28,289,402
            
            
            -
            
            
            (734,951
            )
            $
            (644,805
            )
            $
            (7,379,264
            )
            $
            21,681,010




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




F-4


**TARGET
      LOGISTICS, INC.**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**




Year
                  Ended
                June
                  30, 2006
              
              Year
                  Ended
                June
                  30, 2005
              
              Year
                  Ended
                June
                  30, 2004CASH
                  FLOWS FROM OPERATING ACTIVITIES:Net
                  income
              
              $
              2,705,598
              
              $
              1,561,138
              
              $
              540,142Bad
                  debt expense
              
              
              220,154
              
              
              409,679
              
              
              941,791Depreciation
                  and amortization
              
              
              616,310
              
              
              600,155
              
              
              433,544Decrease
                  in deferred tax liability
              
              
              (69,945
              )
              
              -
              
              
              -Decrease
                  in deferred tax asset
              
              
              152,095
              
              
              1,047,120
              
              
              360,933Employee
                  stock option expense
              
              
              8,897
              
              
              -
              
              
              -Services
                  performed pursuant to stock subscription agreement
              
              
              -
              
              
              100,000
              
              
              20,000Adjustments
                  to reconcile net income to net cash usedin
                  operating activities-(Increase)
                  in accounts receivable
              
              
              (880,547
              )
              
              (805,964
              )
              
              (3,847,016
              )(Increase)
                  decrease in prepaid expenses and other current assets
              
              
              (10,615
              )
              
              4,142
              
              
              45,981Decrease
                  (increase) in other assets
              
              
              188,433
              
              
              (137,852
              )
              
              113,830(Increase)
                  in goodwill resulting from earn-out due under ACI
                  Acquisition
              
              
              (147,150
              )
              
              -
              
              
              -Increase
                  in accounts payable and accrued expenses
              
              
              2,362,381
              
              
              1,769,724
              
              
              1,583,514Net
                  cash provided by operating activities
              
              
              5,145,611
              
              
              4,548,142
              
              
              192,719CASH
                  FLOWS FROM INVESTING ACTIVITIES:Purchases
                  of property and equipment
              
              
              (1,858,298
              )
              
              (243,107
              )
              
              (135,569
              )Payment
                  for purchase of ACI, net of cash acquired (Note 6)
              
              
              (550,000
              )
              
              (124,283
              )
              
              -Net
                  cash used for investing activities
              
              
              (2,408,298
              
              
              (367,390
              )
              
              (135,569
              )CASH
                  FLOWS FROM FINANCING ACTIVITIES:Proceeds
                  from Private Placement
              
              
              -
              
              
              -
              
              
              2,000,000Dividends
                  paid
              
              
              (280,194
              )
              
              (320,104
              )
              
              (321,103
              )Stock
                  options exercised
              
              
              37,835
              
              
              -
              
              
              -Borrowing
                  from line of credit
              
              
              157,302,143
              
              
              139,317,134
              
              
              118,933,320Repayment
                  of line of credit
              
              
              (159,157,005
              )
              
              (142,540,601
              )
              
              (118,816,403
              )(Payment)
                  proceeds of lease obligations
              
              
              (150,651
              )
              
              (8,482
              )
              
              44,869Net
                  cash (used for) provided by financing activities
              
              
              (2,247,872
              )
              
              (3,552,053
              )
              
              1,840,683Net
                  increase in cash and cash equivalents
              
              
              489,441
              
              
              628,699
              
              
              1,897,833CASH
                  AND CASH EQUIVALENTS, beginning of year
              
              
              6,525,577
              
              
              5,896,878
              
              
              3,999,045CASH
                  AND CASH EQUIVALENTS, end of year
              
              $
              7,015,018
              
              $
              6,525,577
              
              $
              5,896,878SUPPLEMENTAL
                  DISCLOSURE OF CASH FLOW INFORMATION:Cash
                  paid during the year for:Interest
              
              $
              149,826
              
              $
              258,348
              
              $
              385,823Income
                  taxes
              
              $
              1,337,320
              
              $
              30,792
              
              $
              148,120










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




F-5


**TARGET
      LOGISTICS, INC.**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS -- (Continued)**





SUPPLEMENTAL
      SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:





Year
                Ended
              June
                30, 2006
            
            Year
                Ended
              June
                30, 2005
            
            Year
                Ended
              June
                30, 2004Conversion
                of 197,000 and 750 Class C Preferred Shares, respectively
            
            $
            (1,970,000
            )
            $
            (7,500
            )
            
            -Issuance
                of Common Stock for Conversion of 197,000 and 750 Class C Preferred
                Shares, respectively
            
            $
            1,970,000
            
            $
            7,500
            
            
            -Purchase
                of property and equipment under capital lease obligations
            
            $
            442,104
            
            
            -
            
            
            -Accrued
                purchase price liability - ACI
            
            
            -
            
            $
            757,840
            
            
            -Deferred
                tax liability - ACI
            
            
            -
            
            $
            400,000
            
            
            -Issuance
                of 200,000 shares of Common Stock pursuant to Subscription
                Agreement
            
            
            -
            
            
            -
            
            $
            120,000
















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





F-6


**TARGET
        LOGISTICS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **YEAR
        ENDED JUNE 30, 2006**


1 . BUSINESS





Target
      Logistics, Inc. (“Company”) provides freight forwarding services and logistics
      services, through its wholly owned subsidiary, Target Logistic Services, Inc.
      (“Target”). The Company has a network of offices in 34 cities throughout the
      United States. The Company was incorporated in Delaware in January 1996 as
      the
      successor to operations commenced in 1970. On March 15, 2005, the Company
      acquired the stock of Air Cargo International and Domestic, Inc. (“ACI”). Refer
      to Note 6 for a further description of the ACI Acquisition.




The
      Company’s freight forwarding services involve arranging for the total transport
      of customers’ freight from the shipper’s location to the designated recipients,
      including the preparation of shipping documents and the providing of handling,
      packing and containerization services. The Company concentrates on cargo
      shipments weighing more than 50 pounds requiring time definite delivery, and
      has
      an average shipment weighing approximately 1,700 pounds. The Company also
      assembles bulk cargo and arranges for insurance. The Company has a network
      of
      offices in 34 cities throughout the United States, including exclusive agency
      relationships in 20 cities. The Company has international freight forwarding
      operations with a worldwide agent network providing coverage in over 70
      countries. The Company has developed several niches including fashion services,
      the distribution of materials for the entertainment industry, and an expertise
      in material supply logistics to manufacturing concerns.





2. SUBSEQUENT
      EVENT





On
      July
      14, 2006 (subsequent to the close of our fiscal year) our Target subsidiary
      acquired certain assets of Discovery Cargo, Inc. (“DCI”), a Queens, New York
      based freight forwarder. We expect to realize approximately $7 million of
      additional revenue in fiscal 2007 as a result of this acquisition.





3. SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES





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





*Principles
      of Consolidation*





For
      the
      fiscal year ended June 30, 2006 and 2005, the consolidated financial statements
      include the accounts of the Company, Target, ACI, and other inactive
      subsidiaries. For the fiscal year ended June 30, 2004, the consolidated
      financial statements include the accounts of the Company, Target, and other
      inactive subsidiaries. All significant intercompany balances and transactions
      have been eliminated upon consolidation.





*Use
      of Estimates*





In
      the
      process of preparing its consolidated financial statements, the Company
      estimates the appropriate carrying value of certain assets and liabilities
      which
      are not readily apparent from other sources. Management bases its estimates
      on
      historical experience and on various assumptions which are believed to be
      reasonable under the circumstances. The primary estimates underlying the
      Company’s consolidated financial statements include allowance for doubtful
      accounts, accruals for transportation and other direct costs, accruals for
      cargo
      insurance, and the classification of tax credit carryforwards between current
      and long-term assets.





*Property
      and Equipment*





Property
      and equipment are stated at cost. Depreciation is computed under the
      straight-line method over estimated useful lives ranging from 3 to 8 years.
      Assets under capital leases are depreciated over the shorter of the estimated
      useful life of the asset or the lease term. The Company utilizes a half-year
      convention for assets in the
      year
      of acquisition and disposal. Leasehold improvements are amortized using the
      straight-line method over the shorter of the life of the asset or the remaining
      lease term.




F-7




**TARGET
        LOGISTICS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)**
 **YEAR
        ENDED JUNE 30, 2006**


*Accounting
      for Long-Lived Assets*





The
      Company accounts for long-lived assets in accordance with the provisions of
      Statement of Financial Accounting Standards (“SFAS”) No. 144, “ *Accounting
      for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
      Of* .”
This
      statement establishes financial accounting and reporting standards for the
      impairment or disposal of long-lived assets. The statement requires that
      long-lived assets be reviewed for impairment whenever events or changes in
      circumstances indicate that its carrying amount may be not be recoverable and
      is
      measured by a comparison of the carrying amount of an asset to undiscounted
      future net cash flows expected to be generated by the asset. If the carrying
      amount of an asset exceeds its estimated future undiscounted cash flows, an
      impairment charge is recognized for the amount by which the carrying amount
      of
      the asset exceeds the fair value of the asset. SFAS No. 144 requires companies
      to separately report discontinued operations and extends that reporting to
      a
      component of an entity that either has been disposed of (by sales, abandonment
      or in a distribution to owners) or is classified as held for sale. Assets to
      be
      disclosed are reported at the lower of the carrying amount or fair value less
      costs to sell. The Company adopted SFAS No. 144 on July 1, 2002. Management
      has
      performed a review of all long-lived assets and has determined that no
      impairment of the respective carrying value has occurred as of June 30, 2006.





*Goodwill*





Goodwill
      represents the excess of cost over net assets acquired and was amortized on
      a
      straight-line basis over 25 years.





In
      July
      2001, the FASB issued SFAS No. 142, “ *Goodwill
      and Other Intangible Assets* ”,
      which
      requires the use of a non-amortization approach to account for purchased
      goodwill and certain intangibles. The Company adopted this statement on July
      1,
      2002. Under the non-amortization approach, goodwill and certain intangibles
      are
      not amortized into results of operations, but instead are reviewed for
      impairment, written down and charged to results of operations only in periods
      in
      which the recorded value of goodwill and certain intangibles is more than its
      fair value. The last annual independent valuation analysis was completed in
      January 2006, and based on the valuation, the Company determined that the
      goodwill was not impaired.





The
      independent valuation analysis is dependent on a discounted seven-year cash
      flow
      analysis.





The
      discounted cash flow analysis is dependent on the Company’s Target Logistic
      Services, Inc. (“Target”) subsidiary achieving certain future results. These
      include the following major assumptions: (a) Revenue growth of 15.0% for fiscal
      2006, 7.5% for fiscal 2007 thru 2008 and 4.5% for fiscal 2009 thru 2012; (b)
      Gross Profit percentage of 32.4% in fiscal 2006 and thereafter;
      (c) Operating expenses (excluding forwarder commissions) reducing from
      16.6% in fiscal 2006, to 16.3% in fiscal 2007 to 16.1% in fiscal 2011 and 2012;
      and (d) a 16% discount rate. While management believes that these are
      achievable, any downward variation in these major assumptions or in any other
      portion of the discounted cash flow analysis could negatively impact the overall
      valuation analysis.





The
      Company performs an annual valuation analysis. Based on the results of these
      annual valuation analyses, the Company’s financial results could be impacted by
      impairment of goodwill, which could result in periodic write-downs ranging
      from
      zero to $11,872,973.





Refer
      to
      Note 6 for a discussion of the goodwill associated with the ACI
      acquisition.





*Income
      Taxes*





The
      Company accounts for income taxes under SFAS No. 109, “ *Accounting
      for Income Taxes* ”.
      Under
      SFAS No. 109, deferred tax assets and liabilities are recognized for the future
      tax consequences attributable to differences between the financial statement
      carrying amounts of existing assets and liabilities and their tax bases.
      Deferred tax assets and liabilities are measured using enacted tax rates
      expected to apply to taxable income in the years in which those temporary
      differences are expected to be recovered or settled. The effect on deferred
      tax
      assets or liabilities of a change in tax rates is recognized in the period
      that
      the tax change occurs.




F-8




**TARGET
          LOGISTICS, INC.**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)**
 **YEAR
          ENDED JUNE 30, 2006**


*Share
      Based Compensation*





In
      December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
      123R, “Share Based Payment: An Amendment of FASB Statements No. 123 and 95”
(“SFAS 123R”). This statement requires that the cost resulting from all share
      based payment transactions be recognized in the Company’s consolidated financial
      statements.  In addition, in March 2005 the Securities and Exchange
      Commission (“SEC”) released SEC Staff Accounting Bulletin No. 107, “Share-Based
      Payment” (“SAB 107”). SAB 107 provides the SEC staff’s position regarding the
      application of SFAS 123R and certain SEC rules and regulations, and also
      provides the staff’s views regarding the valuation of share based payment
      arrangements for public companies.  Generally, the approach in SFAS 123R is
      similar to the approach described in SFAS 123. However, SFAS 123R requires
      all
      share-based payments to employees, including grants of employee stock options,
      to be recognized in the statement of operations based on their fair values.
      Pro
      forma disclosure of fair value recognition, as prescribed under SFAS 123, is
      no
      longer an alternative.





Effective
      July 1, 2005, the Company adopted the fair value measurement provisions of
      SFAS
      123R and accordingly has adopted the modified prospective application method.
      Under the provisions of FASB Statement No. 123(R) the compensation cost relating
      to share-based payment transactions (in the company’s case, the employee stock
      option plan) is to be recognized in the financial statements. For the year
      ending June 30, 2006, the Company has recognized as expense outstanding,
      unvested employee stock options over the remaining vesting period that remained
      on such options based on the fair value at the date the employee stock options
      were granted. Under the modified-prospective-transition method, results for
      the
      prior periods have not been restated.





Prior
      to
      July 1, 2005, the Company accounted for its employee stock option plan in
      accordance with the provisions of Accounting Principles Board (“APB”) Opinion
      No. 25, “Accounting for Stock Issued to Employees”, and related interpretations.
      Compensation expense relating to employee stock options is recorded only if,
      on
      the date of grant, the fair value of the underlying stock exceeds the exercise
      price. The Company adopted the disclosure-only requirements of SFAS No. 123,
      “Accounting for Stock-Based Compensation”, and SFAS No. 148, “Accounting for
      Stock-Based Compensation - Transition and Disclosure”, which allows entities to
      continue to apply the provisions of APB Opinion No. 25 for transactions with
      employees and provide pro forma net income and pro forma earnings per share
      disclosures for employee stock options as if the fair value based method of
      accounting in SFAS No. 123 had been applied to these transactions.




The
      following table illustrates the effect on net income and earnings per share
      if
      compensation expense had been determined for fixed plan awards based on an
      estimate of fair value of the option at the date of grant consistent with SFAS
      No. 123, “Accounting for Stock Based Compensation,” as
      amended.





Year
                Ended
              June
                30, 2006
            
            Year
                Ended
              June
                30, 2005
            
            Year
                Ended
              June
                30, 2004Net
                income as reported
            
            $
            2,705,598
            
            $
            1,561,138
            
            $
            540,142Total
                stock-based employee compensation expense included in the determination
                of
                net income, net of tax effect (SFAS No. 123R)
            
            
            5,338
            
            
            N/A
            
            
            N/ATotal
                stock-based employee compensation expense determined using a fair
                value
                based method for fixed plan awards, net of tax effect (SFAS No.
                123)
            
            
            -
            
            
            (53,399
            )
            
            (19,360
            )Pro
                forma net income
            
            
            N/A
            
            $
            1,507,739
            
            
            ($520,782
            )Basic
                earnings per share
            
            $
            0.15
            
            $
            0.08
            
            $
            0.02Pro
                forma basic earnings per share
            
            
            N/A
            
            $
            0.08
            
            $
            0.02Diluted
                earnings per share
            
            $
            0.13
            
            $
            0.07
            
            $
            0.03Pro
                forma diluted earnings per share
            
            
            N/A
            
            $
            0.07
            
            $
            0.03





The
      effects of applying SFAS No. 123 in the 2005 and 2004 pro forma are not
      indicative of future amounts as additional awards in future years are
      anticipated.





On
      November 30, 2005, the Company’s shareholders approved the Company’s 2005 Stock
      Option Plan. The new Plan replaces the Company’s 1996 Stock Option Plan which
      expired in June 2006. Under the new Plan, 1,500,000 shares of Common Stock
      are
      reserved for issuance.





F-9


**TARGET
          LOGISTICS, INC.**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)**
 **YEAR
          ENDED JUNE 30, 2006**


*Revenue
      Recognition*





In
      accordance with EITF 91-9 “ *Revenue
      and Expense Recognition for Freight Services in Process* ”,
      revenue from freight forwarding is recognized upon completed delivery of goods,
      and direct expenses associated with the cost of transportation are accrued
      concurrently. Ongoing provision is made for doubtful receivables, discounts,
      returns and allowances.





The
      Company recognizes revenue on a gross basis, in accordance with Emerging Issues
      Task Force (EITF) 99-19, “Reporting Revenue Gross versus Net”, as a result of
      the following: Target is the primary obligor responsible for providing the
      service desired by the customer and is responsible for fulfillment, including
      the acceptability of the service(s) ordered or purchased by the customer. The
      prices charged by Target to its customers are set by Target in its sole
      discretion and Target is not required to obtain approval or consent from any
      other party in establishing its prices. Target has multiple suppliers for the
      services it sells to a customer and Target has the absolute and complete
      discretion and right to select the supplier that will provide the product(s)
      or
      service(s) ordered by a customer, including changing the supplier on a shipment
      by shipment basis. Target, in most cases, does determine the nature, type,
      characteristics, and specifications of the service(s) ordered by the customer.
      Target assumes credit risk for the amount billed to the customer.





*Cash
      and Cash Equivalents*





The
      Company considers all highly liquid investments that are not held as collateral,
      and which are purchased with an original maturity of three months or less,
      to be
      cash equivalents.





*Per
      Share Data*





Basic
      income (loss) per share is calculated by dividing net income (loss) attributable
      to common shareholders less preferred stock dividends, by the weighted average
      number of shares of common stock outstanding during the period. Diluted income
      per share is calculated by dividing net income attributable to common
      shareholders by the weighted average number of common shares outstanding,
      adjusted for potentially dilutive securities.





Options
      to purchase 75,000 and 95,000, shares of common stock for the years ended June
      30, 2005 and 2004, respectively, were not included in the computation of diluted
      EPS because the exercise prices of those options were greater than the average
      market price of the common shares, thus they are anti-dilutive. The options
      were
      still outstanding at the end of the period.





*Fair
      Value of Financial Instruments*





Cash
      equivalents are reflected at cost which approximate their fair values. The
      fair
      value of notes and loans payable outstanding is estimated by discounting the
      future cash flows using the current rates offered by lenders for similar
      borrowings with similar credit ratings. The carrying amounts of the accounts
      receivable and debt approximate their fair value.





*Foreign
      Currency Transactions*





In
      the
      normal course of business the Company has accounts receivable and accounts
      payable that are transacted in foreign currencies. The Company accounts for
      transaction differences in accordance with Statement of Financial Accounting
      Standard Number 52, “ *Foreign
      Currency Translation* ”,
      and
      accounts for the gains or losses in operations. For all periods presented,
      these
      amounts were immaterial to the Company’s operations.





*Reclassifications*





Certain
      amounts in the 2005 consolidated financial statements have been reclassified
      to
      conform with the 2006 presentation.




F-10




**TARGET
          LOGISTICS, INC.**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)**
 **YEAR
          ENDED JUNE 30, 2006**


*Recent
      Accounting Pronouncements*





In
      June
      2005, the Emerging Issues Task Force (EITF) reached a consensus on Issue 05-6 ,
      “ *Determining
      the Amortization Period for Leasehold Improvements* ”,
      which
      requires that leasehold improvements acquired in a business combination or
      purchased subsequent to the inception of a lease be amortized over the lesser
      of
      the useful life of the assets or a term that includes renewals that are
      reasonably assured at the date of the business combination or purchase. EITF
      05-6 is effective for periods beginning after July 1, 2005. The Company does
      not
      expect the provisions of this consensus to have any impact on its financial
      position, results of operations or cash flows.





In
      May
      2005, the FASB issued SFAS No.154, “ *Accounting
      Changes and Error Corrections* ”
(“SFAS
      154”) which replaces Accounting Principles Board Opinions No. 20 “ *Accounting
      Changes* ”
and
      SFAS No. 3, “ *Reporting
      Accounting Changes in Interim Financial Statements - An Amendment of APB Opinion
      No. 28* .”
SFAS
      154 provides guidance on the accounting for and reporting of accounting changes
      and error corrections. It establishes retrospective application, for the latest
      practicable date, as the required method for reporting a change in accounting
      principle and the reporting of a correction of an error. SFAS 154 is effective
      for accounting changes and corrections of errors made in fiscal years beginning
      after December 15, 2005. The Company does not expect the adoption of SFAS 154
      to
      have any impact on its financial position, results of operations or cash
      flows.





In
      February 2006, the FASB decided to move forward with the issuance of a final
      FSP
      FAS 123R-4 *“Classification
      of Options and Similar Instruments Issued as Employee Compensation That Allow
      for Cash Settlement upon the Occurrence of a Contingent Event”* .
      The
      guidance in FSP FAS 123R-4 amends paragraphs 32 and A229 of FASB Statement
      No.
      123R to incorporate the concept articulated in footnote 16 of FAS 123R. That
      is,
      a cash settlement feature that can be exercised only upon the occurrence of
      a
      contingent event that is outside the employees control does not meet the
      condition in paragraphs 32 and A229 until it becomes probable that the event
      will occur. Originally under FAS 123R, a provision in a share-based payment
      plan
      that required an entity to settle outstanding options in cash upon the
      occurrence of any contingent event required classification and accounting for
      the share based payment as a liability. This caused an issue under certain
      awards that require or permit, at the holders election, cash settlement of
      the
      option or similar instrument upon (a) a change in control or other liquidity
      event of the entity or (b) death or disability of the holder. With this new
      FSP,
      these types of cash settlement features will not require liability accounting
      so
      long as the feature can be exercised only upon the occurrence of a contingent
      event that is outside the employees control (such as an initial public offering)
      until it becomes probable that event will occur. The guidance in this FSP shall
      be applied upon initial adoption of Statement 123(R). An entity that adopted
      Statement 123(R) prior to the issuance of the FSP shall apply the guidance
      in
      the FSP in the first reporting period beginning after February 2006. Early
      application of FSP FAS 123R-4 is permitted in periods for which financial
      statements have not yet been issued. The Company does not expect that this
      new
      FSP will have any impact upon its financial position, results of operations
      or
      cash flows.




In
      June
      2006, the FASB issued FASB Interpretation (FIN) No. 48, “Accounting for
      Uncertainty in Income Taxes,” that provides guidance on the accounting for
      uncertainty in income taxes recognized in financial statements. The
      interpretation will be adopted by us on January 1, 2007. We are currently
      evaluating the impact of adopting FIN 48; however, we do not expect the adoption
      of this provision to have a material effect on our financial position, results
      of operations or cash flows.




4. STOCK
      OPTION PLAN





On
      November 30, 2005, the Company’s shareholders approved the Company’s 2005 Stock
      Option Plan (“2005 Plan). The 2005 Plan replaces the Company’s 1996 Stock Option
      Plan (“1996 Plan”), which expired in June 2006. The 2005 Plan authorizes the
      granting of awards, the exercise of which would allow up to an aggregate of
      1,500,000 shares of the Company’s common stock to be acquired by the holders of
      said awards. The 1996 Plan, which is now expired, authorized the granting of
      awards, the exercise of which would allow up to an aggregate of 1,000,000 shares
      of the Company’s common stock to be acquired by the holders of said awards. For
      both the 2005 Plan and the 1996 Plan the awards can take the form of incentive
      stock options (“ISOs”) or nonqualified stock options (“NSOs”) and may be granted
      to key employees, officers, directors and consultants. Any plan participant
      who
      is granted an Incentive Stock Option and possesses more than 10% of the voting
      rights of the Company’s outstanding common stock must be granted an option price
      at least 110% of the fair market value on the date of grant and the option
      must
      be exercised within five years from the date of grant. Under the 2005 Plan,
      no
      stock options have been granted. Under the 1996 Plan, stock options have been
      granted to employees and directors for terms of up to 10 years at exercise
      prices ranging from $.50 to $1.125 and are exercisable in whole or in part
      at
      stated times from the date of grant up to ten years from the date of grant.
      At
      June 30, 2006, 520,000 stock options granted to employees and directors were
      exercisable under the 1996 Plan.




F-11




**TARGET
          LOGISTICS, INC.**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)**
 **YEAR
          ENDED JUNE 30, 2006**


Prior
      to
      the adoption of the 1996 Plan, there were 224,399 options granted to purchase
      common stock at exercise prices ranging from $0.048 to $0.408. These options
      were granted pursuant to the terms of the Asset Exchange Agreement. At each
      of
      June 30, 2005 and 2004, 6,957 of these options were outstanding and
      exercisable.





The
      following table reflects activity under the plan for the three-year period
      ended
      June 30, 2006:




Year
                Ended June 30, 2006
            
            Year
                Ended June 30, 2005
            
            Year
                Ended June 30, 2004Shares
            
            Weighted
                AverageExercise
                Price
            
            Shares
            
            Weighted
                AverageExercise
                Price
            
            Shares
            
            Weighted
                AverageExercise
                PriceOutstanding
                at beginning of year
            
            
            686,957
            
            $
            1.16
            
            
            596,957
            
            $
            1.22
            
            
            596,957
            
            $
            1.22Granted
            
            
            -
            
            
            -
            
            
            110,000
            
            $
            0.75
            
            
            -
            
            
            -Exercised
            
            
            81,957
            
            $
            0.05-0.50
            
            
            -
            
            
            -
            
            
            -
            
            
            -Forfeited
                (by terminated employee)
            
            
            10,000
            
            
            0.50
            
            
            20,000
            
            $
            0.50
            
            
            -
            
            
            -Cancelled
            
            
            75,000
            
            
            6.00
            
            
            -
            
            
            -
            
            
            -
            
            
            -Outstanding
                at end of year
            
            
            520,000
            
            $
            0.59
            
            
            686,957
            
            $
            1.16
            
            
            596,957
            
            $
            1.22Exercisable
                at end of year
            
            
            520,000
            
            $
            0.59
            
            
            657,957
            
            $
            1.19
            
            
            522,957
            
            $
            1.32





There
      were 81,957 stock options exercised for $37,835 during the year ended June
      30,
      2006.





No
      stock
      options were granted during 2006 and 2004. The per share weighted average fair
      value of stock options granted during 2005 was $0.75.


The
      fair
      value of each stock option grant is estimated as of the date of grant using
      the
      Black-Scholes option pricing model with the following weighted average
      assumptions:





2005Risk-Free
                Interest Rates
            
            
            4.67
            %Expected
                Lives
            
            
            5Expected
                Volatility
            
            
            270
            %Expected
                Dividend Yields
            
            
            0.00
            %





No
      stock
      options were granted during 2006 and 2004 so the Black-Scholes information
      has
      not been presented.




F-12


**TARGET
          LOGISTICS, INC.**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)**
 **YEAR
          ENDED JUNE 30, 2006**


The
      following table summarizes information about stock options outstanding at June
      30, 2006:




Options
              Outstanding
            
            
            
            Options
                ExercisableExercise
                Prices
            
            Number
                Outstanding
              at
                6/30/06
            
            Weighted
                Average RemainingContractual
                Life
            
            Weighted
                AverageExercise
                Price
            
            Number
                Exercisable
              at
                6/30/06
            
            Weighted
                AverageExercise
                Price$0.50
                - $0.50
            
            
            370,000
            
            
            4.00
            
            $
            0.50
            
            
            370,000
            
            $
            0.50$0.75
                - $1.125
            
            
            150,000
            
            
            4.60
            
            $
            0.81
            
            
            150,000
            
            $
            0.81$0.50
                - $1.125
            
            
            520,000
            
            
            4.30
            
            $
            0.59
            
            
            520,000
            
            $
            0.59





5. PROPERTY
      AND EQUIPMENT, NET





June
                30, 2006
            
            June
                30, 2005Property
                and Equipment consists of the following:Furniture
                and fixtures
            
            $
            542,011
            
            $
            936,320Furniture
                and fixtures - Capital Lease
            
            
            671,014
            
            
            257,713Computer
                Equipment
            
            
            460,090
            
            
            420,668Computer
                Equipment - Capital Lease
            
            
            623,134
            
            
            623,134Computer
                Software
            
            
            492,232
            
            
            462,125Leasehold
                Improvements
            
            
            1,598,852
            
            
            404,179Vehicles
            
            
            2,500
            
            
            2,5004,389,833
            
            
            3,106,639Less:
                Accumulated depreciation and amortization (a)
            
            
            (2,089,527
            )
            
            (2,769,608
            )$
            2,300,306
            
            $
            337,031





(a)
            Includes
                accumulated depreciation and amortization of capital lease assets
                of
                $795,844 and $700,395 for the year ended June 30, 2006 and 2005,
                respectively.





6. STOCK
      PURCHASE ACQUISITION





On
      March
      15, 2005 the Company acquired the stock of Air Cargo International and Domestic,
      Inc. (“ACI”) for a combination of (i) $1,000,000 cash payment on date of
      closing, (ii) cash payment based on the ACI shareholder’s equity after winding
      down the ACI balance sheet, and (iii) an earn-out structure based on certain
      future gross profit achievements over the next five years (the “ACI
      Acquisition”). A portion of the purchase price could be repaid to the Company if
      certain gross profit goals for the ACI business are not met. The first year’s
      gross profit goals are currently under review. Any payments from the earn-out
      structure will be considered an increase to the purchase price in the period
      such amount is determinable. The Company has no minimum commitment or obligation
      under the earn-out or the wind down of the balance sheet. The Company does
      not
      expect that the earn-out payments will have a material impact on its
      liquidity.





The
      purchase price was allocated as follows:


Purchase
                    Price:Cash
                    paid on closing date
                
                $
                1,000,000Estimated
                    additional cash payment to be paid based upon final ACI shareholder
                    equity
                    after wind down of balance sheet
                
                
                757,840Expenses
                    related to acquisition: legal and accounting
                
                
                40,059Total
                    purchase price
                
                $
                1,797,899Assets
                    Purchased:Cash
                
                $
                686,795Accounts
                    receivable
                
                
                1,644,756Prepaid
                    expenses and other current assets
                
                
                221,464Property
                    and equipment, net
                
                
                26,065Intangible
                    assets:Customer
                    relationships/non-compete agreements
                
                
                1,000,000Goodwill
                
                
                485,906Total
                    assets purchased
                
                $
                4,064,986Less
                    Liabilities Assumed:Accounts
                    payable
                
                
                (913,604
                )Accrued
                    expenses
                
                
                (953,483
                )Deferred
                    tax liabilities
                
                
                (400,000
                )Total
                    liabilities assumed
                
                $
                (2,267,087
                )
  F-13
  **TARGET
            LOGISTICS, INC.**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)**
 **YEAR
            ENDED JUNE 30, 2006**
 The
          combination is being accounted for as a purchase as defined by Statement
          of
          Financial Accounting Standards No. 141, Business Combinations. The final
          allocation of the excess purchase price over net tangible assets was determined
          based on management’s internal valuation of the assets purchased. The values
          assigned to intangible assets, aside from goodwill, are subject to amortization.
          The intangible assets were assigned the following lives for amortization
          purposes:





Intangible
                Assets
            
            Life
                in YearsCustomer
                relationships/non-compete agreements
            
            
            7.0





Goodwill
      was not assigned a life and will be tested for impairment as defined by
      Statement of Financial Accounting Standards No. 144, Accounting for Impairment
      of Disposal of Long Lived Assets.




7. OTHER
      ASSETS




June
                30, 2006
            
            June
                30, 2005Asset
                purchase acquisitions (a)
            
            $
            127,461
            
            $
            263,793Stock
                purchase acquisition (b)
            
            
            821,427
            
            
            964,286Note
                receivable (c)
            
            
            185,502
            
            
            200,000Security
                deposits (d)
            
            
            145,472
            
            
            319,399Total
            
            $
            1,279,862
            
            $
            1,747,478








(a)
            Represents
              the remaining amortization associated with asset purchase
              acquisitions. (b)
            Represents
                the remaining amortization of intangible assets (customer relationships
                and non-compete agreements) associated with the ACI stock purchase
                acquisition (refer to Note 6).


(c)
            Represents
                a note receivable due from an independent sales organization representing
                the Company’s Target subsidiary. The note receivable is subject to
                interest at the prime rate with principal repayments made once the
                monthly
                commission payments earned exceed an established threshold defined
                in the
                agreement between Target and the independent sales organization,
                upon
                termination of the agreement, or upon the sale of the rights under
                the
                agreement to Target.


(d)
            Represents
                outstanding security deposits under lease
                obligations.





8. DEBT





As
      of
      June 30, 2006 and 2005, long-term and short-term debt consisted of the
      following:





June
                30, 2006
            
            June
                30, 2005Asset-based
                financing
            
            $
            2,493,787
            
            $
            4,348,649




F-14




**TARGET
        LOGISTICS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)**
 **YEAR
        ENDED JUNE 30, 2006**


During
      the years ended June 30, 2006 and 2005, the Company’s Target subsidiary
      (“Borrower”) maintained an Accounts Receivable Management and Security Agreement
      with GMAC Commercial Credit LLC (“GMAC”) whereby the Borrower can receive
      advances of up to 85% of the net amounts of eligible accounts receivable
      outstanding to a maximum of $15,000,000 since April 1, 2005, $13,000,000 since
      May 3, 2004 and $10,000,000 prior to that date. Since May 3, 2004, the credit
      line (“GMAC Facility”) is subject to interest at a rate of either (i) prime plus
      three-quarters of one percent (0.75%), or (ii) upon the achievement of certain
      financial milestones (measured quarterly), prime plus one-half of one percent
      (0.50%), and prior to May 3, 2004 at a rate of prime plus one percent (1.0%).
      The prevailing prime rate as defined by GMAC was 8.25% as of June 30, 2006
      and
      4.0% as of June 30, 2005. Under the GMAC Facility and prior to May 3, 2004,
      the
      interest rate could not be less than 5.0% per annum (and not less than 6.0%
      prior to September 20, 2002). At June 30, 2006 and 2005, the outstanding balance
      on the GMAC Facility was $2,493,787 and $4,348,649 which represented 18% and
      30%
      of the approximate $13,768,144 and $14,605,614 available thereunder,
      respectively. At June 30, 2006, the remaining amount available under the GMAC
      Facility was approximately $11,274,357. In addition, GMAC issued a standby
      letter of credit for the benefit of the Borrower in the amount of $136,668.
      GMAC
      has a security interest in all present and future accounts receivable, machinery
      and equipment and other assets of the Borrower and the GMAC Facility is
      guaranteed by the Company. The GMAC Facility expires on March 31,
      2007.





9. SHAREHOLDERS’
      EQUITY




*Preferred
      Stock*




As
      of
      June 30, 2006, the authorized preferred stock of the Company is 2,500,000
      shares. As of June 30, 2006, 122,946 shares of preferred stock are outstanding
      as follows:





Class
                A (a)
            
            Class
                C (b)
            
            Class
                F (c)
            
            TotalBalance
                at June 30, 2003
            
            
            122,946
            
            
            197,750
            
            
            -
            
            
            320,696Issuances
            
            
            -
            
            
            -
            
            
            122,946
            
            
            122,946Conversions
            
            
            (122,946
            )
            
            -
            
            
            -
            
            
            (122,946
            )Balance
                at June 30, 2004
            
            
            -
            
            
            197,750
            
            
            122,946
            
            
            320,696Issuances
            
            
            -
            
            
            -
            
            
            -
            
            
            -Conversions
            
            
            -
            
            
            (750
            )
            
            -
            
            
            (750
            )Balance
                at June 30, 2005
            
            
            -
            
            
            197,000
            
            
            122,946
            
            
            319,946Issuances
            
            
            -
            
            
            -
            
            
            -
            
            
            -Conversions
            
            
            -
            
            
            (197,000
            )
            
            -
            
            
            (197,000
            )Balance
                at June 30, 2006
            
            
            -
            
            
            -
            
            
            122,946
            
            
            122,946





(a) *Class
      A Preferred Stock.* On July
      3, 1996, the Company issued 200,000 shares of Class A, non-voting, cumulative,
      convertible preferred stock with a par value of $10.00 in exchange for a paydown
      of $2,000,000 on the $10,000,000 promissory note.





The
      Class
      A Preferred Stock will pay cumulative cash dividends at an annual rate of $1.00
      per share in cash or, at the option of the Company, in shares of Class A
      Preferred Stock, at the rate of $10.00 per share. The Company is prohibited
      from
      paying any cash dividends on common stock unless all required Class A Preferred
      Stock dividends have been paid. Each share of Class A Preferred Stock may be
      converted at any time, at the option of the holder, into common stock at a
      conversion price (subject to adjustment) of the lower of (i) $6.00 per
      share, or (ii) 80% of the average of the closing bid and asked price per
      share of Common Stock on the day prior to the conversion date. Class A Preferred
      Stock holders are entitled to a liquidation preference of $10.00 per share
      plus
      all accrued and unpaid dividends.





On
      April
      23, 2004, all outstanding shares of Class A Preferred Stock were exchanged
      for
      122,946 shares of Class F Preferred Stock.




F-15




**TARGET
        LOGISTICS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)**
 **YEAR
        ENDED JUNE 30, 2006**


(b) *Class C Preferred Stock.* On June
      13, 1997, the Company issued 257,500 shares of Class C, non-voting, cumulative,
      convertible preferred stock with a par value of $10.00 upon completion of a
      $2,575,000 private placement of equity securities to individual investors (the
      “Private Placement”).





The
      Class
      C Preferred Stock will pay cumulative cash dividends at an annual rate of $1.00
      per share payable the last day of each calendar quarter in cash or, at the
      option of the Company, in shares of common stock provided a registration
      statement with respect to the underlying shares of common stock is in effect.
      The Company is prohibited from paying any dividends on common stock or Class
      A
      Preferred Stock unless all required Class C Preferred Stock dividends have
      been
      paid. Each share of Class C Preferred Stock may be converted at any time, at
      the
      option of the holder, into 10 shares of common stock.





Subject
      to the conversion rights, the Company may redeem the Class C Preferred Stock
      at
      any time, upon 30 days written notice, for $10.00 per share plus all accrued
      and
      unpaid dividends through the date of redemption if (i) a registration statement
      registering the resale of the shares of common stock issuable upon conversion
      of
      all the then outstanding shares of Class C Preferred Stock is current and
      effective and (ii) the last sale price of the common stock has been at least
      $2.50 on all 20 of the trading days ending on the third date prior to the date
      on which notice of redemption is given.





There
      were 197,000 and 750 shares of Class C Preferred Stock converted into the
      Company’s Common Stock during fiscal year ending June 30, 2006 and 2005,
      respectively.





(c) *Class F Preferred Stock.* On April
      23, 2004, the Company issued 122,946 shares of Class F, voting, cumulative,
      convertible preferred stock with a par value of $10.00 in exchange for 122,946
      Class A preferred shares. Each share of Class F Preferred Stock is entitled
      to
      25 votes. The Class F Preferred Stock will pay cumulative cash dividends at
      an
      annual rate of $1.00 per share in cash or, at the option of the Company, in
      shares of Class F Preferred Stock, at the rate of $10.00 per share. The Company
      is prohibited from paying any cash dividends on common stock unless all required
      Class F Preferred Stock dividends have been paid. Each share of Class F
      Preferred Stock may be converted at any time, at the option of the holder,
      into
      25 shares of common stock. Class F Preferred Stock holders are entitled to
      a
      liquidation preference of $10.00 per share plus all accrued and unpaid
      dividends.





10. COMMITMENTS
      AND CONTINGENCIES





*Leases*





As
      of
      June 30, 2006, future minimum lease payments for capital leases and operating
      leases relating to equipment and rental premises are as follows:





YEAR
                ENDING
            
            CAPITAL
                LEASES
            
            OPERATING
                LEASES2007
            
            
            160,811
            
            $
            1,937,9692008
            
            
            128,291
            
            
            2,036,5812009
            
            
            125,753
            
            
            2,073,6472010
            
            
            51,858
            
            
            1,998,0352011
                and thereafter
            
            
            -
            
            
            3,785,507Total
                minimum lease payments
            
            
            466,713
            
            $
            11,831,739Less
                - Amount representing interest
            
            
            (46,306
            )$
            420,407





*Employment
      Agreements*





The
      Company has employment agreements with certain employees expiring at various
      times through June 30, 2010. Such agreements provide for minimum salary levels
      and for incentive bonuses which are payable if specified management goals are
      attained. The aggregate commitment for future salaries at June 30, 2006,
      excluding bonuses, was approximately $1,500,000.




F-16




**TARGET
        LOGISTICS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)**
 **YEAR
        ENDED JUNE 30, 2006**


*Litigation*





In
      connection with our Target subsidiary’s recent acquisition of certain assets of
      DCI, on June 5, 2006 Seko Worldwide, LLC (“Seko”) filed a civil action in the
      United States District Court for the Northern District of Illinois (Case No.
      06C3072) against DCI, DCI’s principals, and our Target subsidiary, seeking a
      temporary restraining order and permanent injunction against the proposed sale
      of certain assets by DCI to Target. Prior to the transaction, DCI acted as
      an
      independent agent in Seko’s freight forwarding system serving the John F.
      Kennedy International Airport area. In connection with that relationship, DCI
      had entered into certain agreements with Seko which Seko claimed contained
      restrictive covenants which prohibited the asset sale to Target. On June 30,
      2006, following a hearing, the court denied Seko’s requested
      relief.





On
      July
      31, 2006, following the close of last fiscal year, Seko filed a civil suit
      against our Target subsidiary in the Circuit Court of Cook County, Illinois
      (Case No. 06L8015), alleging that Target tortiously interfered with DCI’s
      contractual relationships with Seko and with Seko’s economic relationships with
      DCI’s customers. Seko further alleges that Target’s actions in acquiring certain
      assets of DCI violated certain provisions of New York law with respect to
      deceptive trade practices. In its complaint, Seko is seeking unspecified damages
      and a court order enjoining Target from using the assets acquired from DCI
      or
      soliciting DCI’s freight forwarding customers for the restrictive periods which
      Seko alleges are contained in its agreements with DCI. Target has removed the
      matter to the United States District Court for the Northern District of Illinois
      and filed an answer to the complaint denying all allegations and asserting
      affirmative defenses. We and our counsel believe that Seko’s suit is without
      merit and we are vigorously defending the suit. In the event of an unfavorable
      outcome, the amount of any potential loss to us is not yet
      determinable.





From
      time
      to time, our Target subsidiary is involved in legal matters or named as a
      defendant in legal actions arising from normal operations, or is presented
      with
      claims for damages arising out of its actions. Management believes that these
      matters will not have a material adverse effect on our financial
      statements.





11.   SEGMENT
      INFORMATION





The
      Company’s revenue includes both domestic and international freight movements.
      Domestic freight movements originate and terminate within the United States,
      and
      never leave the United States. International freight movements are either
      exports from the United States or imports to the United States. With regard
      to
      international freight movements, the accounts receivable can be due from either
      a domestic debtor or from one of the Company’s Target subsidiary’s international
      agents (an international debtor).





A
      reconciliation of the Company’s domestic and international segment revenues,
      gross profit, and accounts receivable for the years ended June 30, 2006, 2005
      and 2004 is as follows:





June
                30, 2006
            
            June
                30, 2005
            
            June
                30, 2004Domestic
                revenue
            
            $
            108,037,189
            
            $
            92,204,367
            
            $
            88,621,984International
                revenue
            
            
            52,331,381
            
            
            46,188,008
            
            
            37,467,077Total
                revenue
            
            $
            160,368,570
            
            $
            138,392,375
            
            $
            126,089,061Domestic
                gross profit
            
            $
            40,373,628
            
            $
            35,678,665
            
            $
            33,504,353International
                gross profit
            
            
            9,896,899
            
            
            8,800,446
            
            
            7,782,902Total
                gross profit
            
            $
            50,270,527
            
            $
            44,479,111
            
            $
            41,287,255Domestic
                accounts receivable
            
            $
            21,119,742
            
            $
            20,594,076
            
            $
            20,050,781International
                accounts receivable
            
            
            978,847
            
            
            1,241,403
            
            
            1,445,140Less:
                allowance for doubtful accounts
            
            
            (503,288
            )
            
            (900,571
            )
            
            (989,974
            )Accounts
                receivable, net ofallowance
                for doubtful accounts
            
            $
            21,595,301
            
            $
            20,934,908
            
            $
            20,505,947







F-17




**TARGET
        LOGISTICS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)**
 **YEAR
        ENDED JUNE 30, 2006**


12. INCOME
      TAXES




The
      Company has tax net operating loss carryforwards of approximately $6.9 million
      that expire from 2010 through 2022. Use of some of the losses is restricted
      due
      to a prior ownership change under certain provisions of the Internal Revenue
      Code. Certain net operating loss carryforwards for the State of California
      were
      suspended for the years ending June 30, 2004 and 2005.





The
      components of current and deferred income tax expense (benefit) are as
      follows:





Year
                Ended
              June
                30, 2006
            
            Year
                Ended
              June
                30, 2005
            
            Year
                Ended
              June
                30, 2004(In
                thousands)Current:State
            
            $
            407
            
            $
            160
            
            $
            80Federal
            
            
            1,454
            
            
            -
            
            
            -Deferred:State
            
            
            -
            
            
            -
            
            
            -Federal
            
            
            82
            
            
            1,047
            
            
            360Net
                income tax expense
            
            $
            1,943
            
            $
            1,207
            
            $
            440





A
      reconciliation of income taxes between the statutory and effective tax rates
      on
      income before income taxes is as follows:




Year
                Ended
              June
                30, 2006
            
            Year
                Ended
              June
                30, 2005
            
            Year
                Ended
              June
                30, 2004(In
                thousands)Income
                tax (benefit) expense at U.S. statutory rate
            
            $
            1,581
            
            $
            941
            
            $
            333Non-deductible
                goodwill
            
            
            -
            
            
            -
            
            
            -Valuation
                Allowance
            
            
            -
            
            
            45
            
            
            -State
                tax (net of federal benefit)
            
            
            259
            
            
            160
            
            
            80Non-deductible
                expenses
            
            
            103
            
            
            61
            
            
            27$
            1,943
            
            $
            1,207
            
            $
            440





The
      components of deferred income taxes are as follows:




Year
                Ended
              June
                30, 2006
            
            Year
                Ended
              June
                30, 2005(In
                thousands)NOLs
            
            $
            2,344
            
            $
            2,344Tax
                credits
            
            
            -
            
            
            306Accrued
                amounts and other
            
            
            720
            
            
            786Acquired
                customer relationships/non-compete agreements
            
            
            (329
            )
            
            (386
            )2,735
            
            
            3,050Depreciation
            
            
            346
            
            
            34Amortization
            
            
            (183
            )
            
            (104
            )2,898
            
            
            2,980Valuation
                allowance
            
            
            (2,344
            )
            
            (2,344
            )$
            554
            
            $
            636




F-18


**TARGET
        LOGISTICS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)**
 **YEAR
        ENDED JUNE 30, 2006**


13. QUARTERLY
      FINANCIAL DATA SCHEDULE (unaudited)





Year
                Ended
              June
                30, 200609/30/05
            
            12/31/05
            
            03/31/06
            
            06/30/06
            
            Fiscal
                YearOperating
                revenue
            
            $
            36,145,785
            
            $
            46,704,140
            
            $
            37,114,144
            
            $
            40,404,501
            
            $
            160,368,570Cost
                of transportation
            
            
            24,305,199
            
            
            32,497,640
            
            
            25,393,650
            
            
            27,901,554
            
            
            110,098,043Gross
                profit
            
            
            11,840,586
            
            
            14,206,500
            
            
            11,720,494
            
            
            12,502,947
            
            
            50,270,527Selling,
                general & administrativeexpense
            
            
            10,960,067
            
            
            12,439,383
            
            
            10,613,312
            
            
            11,482,454
            
            
            45,495,216Interest
                (expense)
            
            
            (34,083
            )
            
            (43,825
            )
            
            (40,611
            )
            
            (7,997
            )
            
            (126,516
            )Provision
                for income taxes
            
            
            369,358
            
            
            746,978
            
            
            456,929
            
            
            369,932
            
            
            1,943,197Net
                income (loss)
            
            $
            477,078
            
            $
            976,314
            
            
            609,642
            
            $
            642,564
            
            $
            2,705,598Income
                (loss) per shareattributable
                to common shareholders:Basic
            
            $
            0.03
            
            $
            0.05
            
            $
            0.04
            
            $
            0.03
            
            $
            0.15Diluted
            
            $
            0.02
            
            $
            0.05
            
            $
            0.03
            
            $
            0.03
            
            $
            0.13Weighted
                average shares outstanding:Basic
            
            
            15,858,427
            
            
            16,070,811
            
            
            16,692,679
            
            
            17,886,735
            
            
            16,223,353Diluted
            
            
            21,470,288
            
            
            21,490,385
            
            
            21,490,385
            
            
            21,490,385
            
            
            21,490,369








Year
                Ended
              June
                30, 200509/30/04
            
            12/31/04
            
            03/31/05
            
            06/30/05
            
            Fiscal
                YearOperating
                revenue
            
            $
            33,036,577
            
            $
            37,223,219
            
            $
            31,394,399
            
            $
            36,738,180
            
            $
            138,392,375Cost
                of transportation
            
            
            22,687,132
            
            
            25,526,615
            
            
            21,010,858
            
            
            24,688,659
            
            
            93,913,264Gross
                profit
            
            
            10,349,445
            
            
            11,696,604
            
            
            10,383,541
            
            
            12,049,521
            
            
            44,479,111Selling,
                general & administrativeexpense
            
            
            9,849,509
            
            
            10,673,901
            
            
            9,912,225
            
            
            11,189,499
            
            
            41,625,134Interest
                (expense)
            
            
            (38,516
            )
            
            (14,337
            )
            
            (10,954
            )
            
            (21,910
            )
            
            (85,717
            )Provision
                for income taxes
            
            
            215,697
            
            
            463,125
            
            
            195,468
            
            
            332,832
            
            
            1,207,122Net
                income (loss)
            
            $
            245,723
            
            $
            545,241
            
            $
            264,894
            
            $
            505,280
            
            $
            1,561,138Income
                (loss) per shareattributable
                to common shareholders:BasicDiluted
            
            $
            0.01
            
            $
            0.03
            
            $
            0.01
            
            $
            0.03
            
            $
            0.08Weighted
                average shares outstanding:
            
            $
            0.01
            
            $
            0.03
            
            $
            0.01
            
            $
            0.02
            
            $
            0.07Basic
            
            
            15,827,278
            
            
            15,827,278
            
            
            15,834,445
            
            
            15,834,778
            
            
            15,830,915Diluted
            
            
            21,469,959
            
            
            21,469,959
            
            
            21,510,082
            
            
            21,490,100
            
            
            21,489,990





F-19


SCHEDULE
      II





SCHEDULE
      OF VALUATION AND QUALIFYING ACCOUNTS


(in
      thousands)





Balance
                at Beginning
              of
                Year
            
            Charged
                to
              Costs
                andExpenses
            
            Charged
                to
              OtherAccounts
            
            Deductions
            
            Balance
                at
              End
                of YearFor
                the fiscal year ended June 30, 2004Allowance
                for doubtful accounts
            
            $
            882
            
            $
            942
            
            $
            -
            
            $
            (834
            )
            $
            990For
                the fiscal year ended June 30, 2005Allowance
                for doubtful accounts
            
            $
            990
            
            $
            410
            
            $
            -
            
            $
            (499
            )
            $
            901For
                the fiscal year ended June 30, 2006Allowance
                for doubtful accounts
            
            $
            901
            
            $
            220
            
            $
            -
            
            $
            (618
            )
            $
            503





S-1