Ever-Glory International Group, Inc. (AMEX: EVK)(“Ever-Glory”) was incorporated in Florida on October 19, 1994. All of its businesses are operated through its three subsidiaries in the People’s Republic of China.China (“PRC”).

Perfect Dream Limited (“Perfect Dream”), a wholly owned subsidiary of EVK,Ever-Glory, was incorporated in the British Virgin Islands on July 1, 2004.

Goldenway Nanjing Garments Co. Ltd. (“Goldenway”), a wholly owned subsidiary of Perfect Dream, was incorporated in the People’s Republic of China (“PRC”)PRC on December 31, 1993. Goldenway is principally engaged in the manufacturing and sale of garments.

Nanjing New-Tailun Garments Co. Ltd. (“New-Tailun’), a wholly owned subsidiary of Perfect Dream, was incorporated in the PRC on March 27, 2006. New-Tailun is principally engaged in the manufacturing and sale of garments.

Nanjing Catch-Luck Garments Co, Ltd. (“Catch-Luck”), a wholly owned subsidiary of Perfect Dream, was incorporated in the PRC on December 21, 1995. On January 18, 2006, Catch-Luck became a wholly owned foreign enterprise after its acquisition by Perfect Dream. Catch-Luck is principally engaged in the manufacture and sale of garments to customers located in Europe and Japan.

Shanghai LA GO GO Fashion Company Limited (“La Go Go”LA GO GO”), a joint venture of Goldenway and Shanghai La Chapelle Garment and Accessories Company Limited (“Shanghai La Chapelle”), was incorporated in the PRC on January 24, 2008. Goldenway invested approximately $826,200 (RMB 6.0 million) in cash, and La Chapelle invested approximately $553,040 (RMB 4.0 million) in cash, for a 60% and 40% ownership interest, respectively, in the joint venture. The business objective of the joint venture is to establish and create a leading brand of ladies’ garments for the mainland Chinese market. La Go GoAs of September 30, 2008, LA GO GO opened 3955 retail stores to develop retail market in China for sellingto sell its own brand clothing.

The accompanying consolidated financial statements of Ever-Glory International Group, Inc. reflect the activities of EVK,include our parent company and its 100% ownedall subsidiaries Perfect Dream, Goldenway, New-Tailun, Catch-Luck and its 60% owned subsidiary La Go Go. These consolidated financial statements have beenare prepared in accordance with accounting principles generally accepted in the United States of America.America (“GAAP”). All significant inter-company balances and transactions among our businesses have been eliminated in consolidation.eliminated.

Management has included all normal recurring adjustments that we considered necessary to give a fair presentation of our operating results for the periods presented. Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with information included in the 2007 annual report filed on Form 10-K.

For purpose of the statements of cash flows, cash and cash equivalents include cash on hand and demand deposits with a bank with original maturities of less thanwithin three months.

The Company extends unsecured credits to its customers in the ordinary course of business but mitigates the associated risks by performing credit checks and actively pursuing past due accounts. An allowance for doubtful accounts is established and recorded based on managements’ assessment of the credit history with the customer and current business relationships with them. The Company writes off accounts receivable when amounts are deemed uncollectible and will remove the receivable and the related reserve at that time. 

As of JuneSeptember 30, 2008 and December 31, 2007, the Company considers all its accounts receivable to be collectable and no provision for doubtful accounts has been made in the consolidated financial statements.

The manufacturingManufactured inventories are stated at lower of cost or market value, cost being determined on a specific identification method. The Company manufactures products upon receipt of orders from its customers. All the products must pass the customers’ quality assurance procedures before its delivery. Therefore, the products are rarely returned by theour customers after delivery.

The retailRetail merchandise inventories are stated at the lower of average cost or market.market The Company has a limited history of retail operations, but to date, returns have been insignificant. The Company will continue to evaluate the need for a returns reserve each reporting period.

The Company accounts for long-lived assets under the Statements of Financial Accounting Standards Nos.(“SFAS”) No. 142 and 144 “Accounting for Goodwill and Other Intangible Assets” and SFAS No. 144 “Accounting for Impairment or Disposal of Long-Lived Assets” (“SFAS No. 142 and 144”). In accordance with SFAS No. 142 and 144,SFAS No.144, long-lived assets, goodwill and certain identifiable intangible assets held and used by the Company are reviewed for impairment at least annually or more often whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. For purposes of evaluating the recoverability of long-lived assets, when undiscounted future cash flows will not be sufficient to recover an asset’s carrying amount, the asset is written down to its fair value. As of JuneSeptember 30, 2008, the Company expected these assets to be fully recoverable.

Property and equipment are stated at cost, less accumulated depreciation. Expenditures for additions, major renewals and betterments are capitalized and expenditures for maintenance and repairs are charged to expense as incurred.

Depreciation is provided on a straight-line basis, less an estimated residual value over the assets’ estimated useful lives. The estimated useful lives are as follows:

All land in the People’s Republic of ChinaPRC is owned by the government and cannot be sold to any individual or company. However, the government may grant “land use right” to firms or individualsrights” to occupy, develop and use land. The Company records the land use rights obtained as intangible assets.

Investment in equity ownership lower than 20% is recorded using the cost method. The carrying value of the investments is reviewed periodically for impairment. As of JuneSeptember 30, 2008, the Company expected the long-term investment to be fully recoverable.

On January 1, 2008, the Company adopted SFAS No. 157. SFAS No. 157, Fair Value Measurements, defines fair value, establishes a three-level valuation hierarchy for disclosures of fair value measurement and enhances disclosures requirements for fair value measures. The carrying amounts reported in the balance sheets for current assets and current liabilities qualify as financial instruments are a reasonable estimate of fair value because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest. The three levels are defined as follow:

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

The Company analyzes all financial instruments with features of both liabilities and equity under SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity,” SFAS NoNo. 133, “Accounting for Derivative Instruments and Hedging Activities” and EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock.” During 2007, the Company issued 6% secured convertible debentures in a face amount of $2,000,000 which are due and payable in full in 2 years from their issuance. As fixed prices are set for the conversion prices of such convertible debentures and the attached warrants, the Company is in a position to be sure it had adequate authorized shares for the future conversion of convertible debentures and warrants. Therefore, no embedded derivatives andor warrants arewere required to be recorded at fair value and marked-to-market at each reporting period.

The Company accounted for the secured convertible notes (the “Notes”) issued pursuant to the subscription agreement discussed in Note 9 under EITF 00-27, ‘‘Application of Issue 98-5 to Certain Convertible Instruments’’.   Based on EITF 00-27, the Company has determined that the convertible notes contained a beneficial conversion feature because at August 2, 2007, the effective conversion price of the convertible notes was $1.10 when the market value per share was $2.70.

A discount with respect to the Notes issued on August 2, 2007 was recorded byon the Company.secured convertible notes. The amount of the discount was calculated to be the intrinsic value of the beneficial conversion feature and the fair value of the warrants included among the securities issued pursuant to the terms of the subscription agreement discussed in Note 11.

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

Local transportation and unloading charges and product inspection charges are included in selling expenses and totaled $66,294$15,973 and $116,290 for the six month period, and $27,149 and $57,339$42,650 for the three month period ended JuneSeptember 30, 2008 and 2007, respectively, and $82,267 and $158,940 for the nine month period September 30, 2008 and 2007, respectively.

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

The Company accounts for income taxes under the Statement of Financial Accounting StandardsSFAS No. 109, “Accounting for Income Taxes” (“Statement 109”). Under StatementSFAS 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 respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under StatementSFAS No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that included the enactment date.

The Company adopted FASB Interpretation 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”) as of January 1, 2007. A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The adoption had no effect on the Company’s consolidated financial statements.

The charge for taxation is based on the results for the year as adjusted for items, which are non-assessable or disallowed. It is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. Deferred tax is accounted for using the balance sheet liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax basis used in the computation of assessable tax profit. In principle, deferred tax liabilities are recognized for all taxable temporary differences, and deferred tax assets are recognized to the extent that it is probably that taxable profit will be available against which deductible temporary differences can be utilized.

Deferred tax is calculated at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled. Deferred tax is charged or credited in the income statement, except when it related to items credited or charged directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the Company intends to settle its current tax assets and liabilities on a net basis.

The Company’s subsidiaries are governed by the Income Tax Law of the People’s Republic of China (PRC)PRC concerning Foreign Investment Enterprises and Foreign Enterprises and various local income tax laws (the Income Tax Laws).

Beginning January 1, 2008, the new Enterprise Income Tax (“EIT”) law has replaced the old laws for Domestic Enterprises (“DES”) and Foreign Invested Enterprises (“FIEs”).

The key changes are:

The Company and its subsidiaries were established before March 16, 2007 and therefore are qualified to continue enjoying the reduced tax rate as described above.

Upon approval by the PRC tax authorities, FIE'sFIEs' scheduled to operate for a period of 10 years or more and engaged in manufacturing and production may by exempt from income taxes for two years, commencing with their first profitable year of operations, after taking into account any losses brought forward from prior years, and thereafter with a 50% reduction for the subsequent three years.

Goldenway has profit for more than five years, so from this year its income tax rate is 25%.

New-Tailun and Catch-Luck were approved as wholly foreign-owned enterprises in 2006. This entity status allows New-Tailun and Catch-Luck a two-year income tax exemption beginning from the first year of profitability, and a 50% income tax reduction for the three years thereafter. New Tailun and Catch-Luck are entitled to the income tax exemptions for 2006 and 2007 and 50% income tax reduction that is 12.50% for the calendar years ended December 31, 2008, 2009 and 2010.

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

The reporting currency of the Company is the USU.S. dollar. The functional currency of EVKEver-Glory and Perfect Dream is the US dollar. The functional currency of Goldenway, New Tailun Catch-luckNew-Tailun Catch-Luck and La Go GoLA GO GO is the Chinese Renminbi (RMB).RMB.

For the subsidiaries with the functional currency of RMB, all assets and liabilities accounts were translated at the exchange rate on the balance sheet date; stockholder's equity are translated at the historical rates and items in the statement of operations items are translated at the average rate for the period. Translation adjustments resulting from this process are included in accumulated other comprehensive income in the statement of stockholders’ equity. The resulting translation gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred. Items in the cash flow statement are translated at the average exchange rate for the period.

Translation adjustments resulting from this process included in accumulated other comprehensive income in the consolidated statement of stockholders’ equity amounted to $3,787,598$3,895,066 and $2,076,360 as of JuneSeptember 30, 2008 and December 31, 2007, respectively. Assets and liabilities at JuneSeptember 30, 2008 and December 31, 2007 were translated at 6.856.84 RMB and 7.29 RMB to $1.00, respectively. The average translation rates applied to income statement accounts and statement of cash flows for the sixthree months ended JuneSeptember 30, 2008 and 2007 were 7.056.83 RMB and 7.737.57 RMB to $1.00, respectively. Forrespectively, and for the threenine months ended JuneSeptember 30, 2008 and 2007 were 7.176.97 RMB and 7.777.68 RMB to $1.00, respectively. As a result, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet.

The Company reports earnings per share in accordance with the provisions of SFAS No. 128, "Earnings Per Share."Share" (SFAS 128). SFAS No. 128 requires presentation of basic and diluted earnings per share in conjunction with the disclosure of the methodology used in computing such earnings per share. Basic earnings per share excludes dilution and is computed by dividing income available to common stockholders by the weighted average common shares outstanding during the period. Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock. Further, according to SFAS No. 128, if the number of common shares outstanding increase as a result of a stock dividend or stock split or decrease as a result of a reverse stock split, the computations of a basic and diluted EPS shall be adjusted retroactively for all periods presented to reflect that change in capital structure.

Minority interest consists of theShanghai La Chapelle Garment and Accessories Company Limited’s (“La Chapelle”) 40% interest of minority shareholders in the subsidiary of the Company.LA GO GO. As of JuneSeptember 30, 2008 and December 31, 2007, minority interest amounted to $586,942$551,623 and $0, respectively.

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

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

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

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

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

Certain prior period amounts have been reclassified to conform to current period presentation. These reclassifications did not have noa material effect on net income or cash flows.

During the six monthnine months ended JuneSeptember 30, 2008, investors of the Convertibleconvertible notes (See Note 11 for details) converted $750,000$1,950,000 of principal plus accrued interest of $2,155 into 341,893887,348 shares of common stock of the Company. The Company issued warrants valued at $130,082 to the private placement agent in January 2008 in conjunction with the convertible notes.

Accounts receivable at JuneSeptember 30, 2008 and December 31, 2007 consisted of the following:

As of JuneSeptember 30, 2008, the Company included all shares issuable upon conversion of the convertible notes and warrants in diluted earnings per share.

In September 2007, the Company issued 2,083,333 shares of restricted common stock at a market price of $4.80 per share totaling $10,000,000 as part of the consideration to a related company in the acquisition of New-Tailun.

In September 2007, the Company issued 1,307,693 shares of restricted common stock at a market price of $2.6 per share totaling $3,400,000 as part of the consideration to a related company in the acquisition of Catch-Luck.

On January 16, 2008, January 22, 2008 and February 6, 2008, the Company issued 12,478 shares of common stock to pay fourth quarter interest of 2007 to six investors in connection with the senior convertible notes dated August 2, 2007.

During the sixnine months ended JuneSeptember 30, 2008, fourfive investors converted $750,000$1,950,000 of the convertible notes and $2,155 in accrued interest expense, into 341,893887,348 shares of common stock.

The Company’s PRC subsidiaries are required to make appropriations to reserve funds, comprising the statutory surplus reserve, statutory public welfare fund and discretionary surplus reserve, based on after-tax net income determined in accordance with generally accepted accounting principles of the People’s Republic of China (the “PRC GAAP”). Appropriation to the statutory surplus reserve should be at least 10% of the after tax net income determined in accordance with PRC GAAP until the reserve is equal to 50% of the entities’ registered capital. Appropriations to the statutory public welfare fund are at 10% of the after tax net income determined in accordance with PRC GAAP. The statutory public welfare fund is established for the purpose of providing employee facilities and other collective benefits to the employees and is non-distributable other than in liquidation. Appropriations to the discretionary surplus reserve are made at the discretion of the Board of Directors. Effective January 1, 2006, the Company is only required to contribute to one statutory reserve fund at 10% of net income after tax per annum, such contributions not to exceed 50% of the respective companies’ registered capital.

As of JuneSeptember 30, 2008, New Tailun and Catch-Luck had fulfilled the 50% statutory reserve contribution requirement; therefore no further transfers are required for those entities. Goldenway and LA GO GO did not generate material net income in the current period; therefore no funds were transferred.

As of September 30, 2008 and December 31, 2007, the Company recorded $3,449,498$3,437,379 and $3,437,379, respectively, in the statutory reserve.