The following discussion and analysis of our financial condition and results of operations for the three months ended March 31, 2012 should be read in conjunction with the Financial Statements and corresponding notes included in this Quarterly Report on Form 10-Q. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations, and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the Risk Factors and Special Note Regarding Forward-Looking Statements in this report. We use words such as "anticipate," "estimate," "plan," "project," "continuing," "ongoing," "expect," "believe," "intend," "may," "will," "should," "could," "target", "forecast" and similar expressions to identify forward-looking statements.

Overview

Our Business

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

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

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

Wholesale Business

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

Retail Business

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

Business Objectives

Wholesale Business

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

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

Ÿ Expand the global sourcing network

Ÿ Expand our overseas low-cost manufacturing base (outside of mainland China);

Ÿ Focus on high value-added products and continue our strategy to produce mid to high end apparel

Ÿ Continue to emphasize on product design and technology utilization.

Ÿ Seek strategic acquisitions of international distributors that could enhance global sales and our distribution network

Ÿ Maintain stable revenue increase in the markets while shifting focus to higher margin wholesale markets such as mainland China.

Retail Business

The business objective for our retail segment is to establish a leading brand of women's apparel and to build a nationwide retail network in China. As of March 31, 2012, we have 484 stores (including store-in-stores) which included 26 stores that were opened and 9 stores that were closed in first quarter of 2012.

We believe that our growth opportunities and continued investment initiatives include:

Ÿ Build the LA GO GO brand to be recognized as a major player in the mid-end women's apparel market in China;

Ÿ Expand the LA GO GO retail network throughout China

Ÿ Improve the LA GO GO retail stores' efficiency and increase same-store sales

Ÿ Continue to launch LA GO GO flagship stores in Tier-1 Cities and increase penetration and coverage in Tier-2 and Tier-3 Cities

Ÿ Become a multi-brand operator by seeking opportunities for long-term cooperation with reputable international brands and by facilitating international brands entry into the Chinese market.

Seasonality of Business

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

Collection Policy

Wholesale business

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

Retail business

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

Global Economic Uncertainty

Our business is dependent on consumer demand for our products. We believe that the significant uncertainty in the global economy and a slowdown in the United States and European economies have increased our clients' sensitivity to the cost of our products. We have experienced continued pricing pressure. If the global economic environment continues to be weak, these worsening economic conditions could have a negative impact on our sales growth and operating margins in our wholesale segment in 2012.

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

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

Summary of Critical Accounting Policies

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

Revenue Recognition

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

Estimates and Assumptions

In preparing our consolidated financial statements, we use estimates and assumptions that affect the reported amounts and disclosures. Our estimates are often based on complex judgments, probabilities and assumptions that we believe to be reasonable, but that are inherently uncertain and unpredictable. We are also subject to other risks and uncertainties that may cause actual results to differ from estimated amounts. Significant estimates in 2012 and 2011 include the assumptions used to value warrants and the estimates of the allowance for deferred tax assets.

Results of Operations

The following table summarizes our results of operations for the three months
ended March 31, 2012 and 2011. The table and the discussion below should be read
in conjunction with the condensed consolidated financial statements and the
notes thereto appearing elsewhere in this report.

                                        Three Months Ended March 31,
                                     2012                           2011
                                  (in U.S. Dollars, except for percentages)
Sales                     $  53,226,173       100.0 %    $ 53,208,237       100.0 %
Gross Profit              $  11,602,988        21.8 %    $  9,112,012        17.1 %
Operating Expense         $   8,839,468        16.6 %    $  5,800,947        10.9 %
Income From Operations    $   2,763,520         5.2 %    $  3,311,065         6.2 %
Other Expenses (Income)   $    (117,454 )      (0.1 )%   $    (20,048 )      (0.1 )%
Income Tax Expense        $     524,856         1.0 %    $    679,021         1.3 %
Net Income                $   2,121,210         4.0 %    $  2,611,996         4.9 %

Revenue

The following table sets forth a breakdown of our total sales, by region, for
the three months ended March 31, 2012 and 2011.

                                                                                                        Growth in 2012
                                                                                                        compared with
                           2012          % of total sales          2011          % of total sales            2011
Wholesales business
The People's                                                                                                      (39.9
Republic of China      $   7,942,831                  14.9 %   $ 13,220,587                   24.8 %                    )%
Germany                    5,464,693                  10.3        8,740,575                   16.4                (37.5 )
Europe-Other               7,929,592                  14.9        7,585,136                   14.3                  4.5
Japan                      6,107,149                  11.5        5,952,088                   11.2                  2.6
United States              3,216,258                   6.0        5,110,970                    9.6                (37.1 )
Total wholesales                                                                                                  (24.5
business                  30,660,523                  57.6       40,609,356                   76.3                      )
Retail business           22,565,650                  42.4       12,598,881                   23.7                 79.1
Total                  $  53,226,173                 100.0 %   $ 53,208,237                  100.0 %                0.0 %

Sales for the three months ended March 31, 2012 and 2011 were both $53.2 million.

Sales generated from our wholesale business contributed 57.6% or $30.7 million of our total sales for the three months ended March 31, 2012, a decrease of 24.5% compared to $40.6 million in the three months ended March 31, 2011. This decrease was primarily attributable to decreased sales in the PRC, Germany, and the United States. The reduced sales in the wholesale segment was primarily due to the following factors (i) due to the worsening European debt crisis, high unemployment rates in the United States, and global economic uncertainty and instability, the advanced economies represented by Europe and the US are recovering slowly, which seriously impacted China's apparel exports, so, our overseas wholesale business also faced declining orders; (ii) domestic apparel market demand was hurt by the warmer than expected weather in the typical peak season in the fourth quarter of 2011 and the first quarter of 2012, which caused purchases by retailers to drop significantly in the first quarter of 2012. Therefore, our wholesale business declined in the first quarter of 2012.

Sales generated from our retail business contributed 42.4% or $22.6 million of our total sales for the three months ended March 31, 2012, an increase of 79.1% compared to 23.7% or $12.6 million in the three months ended March 31, 2011. This increase was primarily due to the increase in same store sales and new stores opened. We had 484 LA GO GO stores as of March 31, 2012, compared to 305 LA GO GO stores at March 31, 2011.

Costs and Expenses

Cost of Sales and Gross Margin

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

The following table sets forth the components of our cost of sales and gross profit both in amounts and as a percentage of total sales for the three months ended March 31, 2012 and 2011.

                                                                                                    Growth
                                                                                                 (Decrease) in
                                           Three months ended March 31,                          2012 compared
                                      2012                                 2011                    with 2011
                            (in U.S. dollars, except for percentages)
Net Sales for
Wholesale Sales        $     30,660,523              100.0 %   $ 40,609,356           100.0 %            (24.5) %
Raw Materials                14,236,635               46.4       20,330,231            50.1               (30.0 )
Labor                           908,738                3.0          846,510             2.1                 7.4
Outsourced
Production Costs              9,640,526               31.4       13,450,308            33.1               (28.3 )
Other and Overhead              230,751                0.8          197,618             0.5                16.8
Total Cost of Sales
for Wholesale                25,016,650               81.6       34,824,667            85.8               (28.2 )
Gross Profit for
Wholesale                     5,643,873               18.4        5,784,689            14.2                (2.4 )
Net Sales for Retail         22,565,650              100.0       12,598,881           100.0                79.1
Production Costs              7,869,084               34.9        4,326,318            34.3                81.9
Rent                          8,737,451               38.7        4,945,240            39.3                76.7
Total Cost of Sales
for Retail                   16,606,535               73.6        9,271,558            73.6                79.1
Gross Profit for
Retail                        5,959,115               26.4        3,327,323            26.4                79.1
Total Cost of Sales          41,623,185               78.2       44,096,225            82.9                (5.6 )
Gross Profit           $     11,602,988               21.8 %   $  9,112,012            17.1 %              27.3 %

Raw material costs for our wholesale business were 46.4% of our total wholesale business sales in the three months ended March 31, 2012, a decrease of 3.7% compared to 50.1% in the three months ended March 31, 2011. The decrease was mainly due to decreased raw materials prices.

Labor costs for our wholesale business were 3.0% of our total wholesale business sales in the three months ended March 31, 2012, an increase of 0.9% compared to 2.1% in the three months ended March 31, 2011. The increase was mainly due to decreased outsourced production.

Outsourced manufacturing costs for our wholesale business were 31.4% of our total wholesale business sales in the three months ended March 31, 2012, a decrease of 1.7% compared to 33.1% in the three months ended March 31, 2012. This decrease was primarily attributable to: (i) the outsourced manufacturing costs in the PRC decreased because we had available domestic capacity in the three months ended March 31, 2012, compared with limited capacity in the three months ended March 31, 2011, and our Chinese suppliers were willing to lower their prices due to their excess production capacity (ii) outsourced orders to our related entities in Vietnam and Cambodia, which have lower labor costs compared to orders outsourced to Chinese factories.

Overhead and other expenses for our wholesale business accounted for 0.8% of our total wholesale business sales for the three months ended March 31, 2012, an increase of 0.3% compared to 0.5% of total sales for the three months ended March 31, 2011. This increase was mainly because of decreased outsourced production.

For our wholesale business gross profit for the three months ended March 31, 2012 was $5.6 million, a decrease of 2.4% compared to the three months ended March 31, 2011. Gross margin was 18.4% for the three months ended March 31, 2012, an increase of 4.2% compared to 14.2% for the three months ended March 31, 2011. The increase was mainly due to decreased raw materials prices and outsourced manufacturing costs.

Production costs for our retail business were $7.9 million during the three months ended March 31, 2012 compared to $4.3 million during the three months ended March 31, 2011. As a percentage of retail sales, retail production costs accounted for 34.9% of our total retail sales in the three months ended March 31, 2012, compared to 34.3% of total retail sales in the three months ended March 31, 2011. The increase was due to reduced sales prices for increased sales volume.

Rent costs for our retail business were $8.7 million for the three months ended March 31, 2012 compared to $4.9 million for the three months ended March 31, 2011. As a percentage of sales, rent costs accounted for 38.7% of our total retail sales for the three months ended March 31, 2012, compared to 39.3% of total retail sales for the three months ended March 31, 2011. Total rent costs increased as a result of the increase in the number of our stores. The decrease in rent costs as a percentage of total retail sales was due to an increase in same store sales in 2012.

Gross profit in our retail business for the three months ended March 31, 2012 was $6.0 million and gross margin was 26.4%. Gross profit in our retail business for the three months ended March 31, 2011 was $3.3 million and gross margin was 26.4%.

Total cost of sales for the three months ended March 31, 2012 was $41.6 million, compared to $44.1 million for the three months ended March 31, 2011, a decrease of 5.6%. As a percentage of total sales, cost of sales decreased to 78.2% of total sales for the three months ended March 31, 2012, compared to 82.9% of total sales for the three months ended March 31, 2011. Consequently, gross margin increased to 21.8% for the three months ended March 31, 2012 from 17.1% for the three months ended March 31, 2011.

Selling, General and Administrative Expenses

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

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

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

                                       Three Months Ended March 31,
                                   2012                              2011                    Increase
                                 (in U.S. Dollars, except for percentages)
Gross Profit            $   11,602,988            21.8 %   $ 9,112,012            17.1 %           27.3 %
Operating Expenses:                  ?               ?
Selling Expenses             5,834,192            11.1 %     3,589,105             6.7             62.6
General and
Administrative
Expenses                     3,005,276             5.6 %     2,211,842             4.2             35.9
Total                   $    8,839,468            16.6 %   $ 5,800,947            10.9             52.4
Income from
Operations              $    2,763,520             5.2 %   $ 3,311,065             6.2 %          (16.5 )%

Selling expenses increased 62.6% to $5.8 million for the three months ended March 31, 2012 from $3.6 million for the three months ended March 31, 2011. The increase was attributable to the increased number of retail employees and increased average salaries, as well as increased store decoration and marketing expenses associated with the promotion of the LA GO GO brand.

General and administrative expenses increased 35.9% to $3.0 million for the three months ended March 31, 2012 from $2.2 million for the three months ended March 31, 2011. As a percentage of total sales, general and administrative expenses increased to 5.6% of total sales for the three months ended March 31, 2012, compared to 4.2% of total sales for the three months ended March 31, 2011. The increase was attributable to an increase in payroll for additional management and design and marketing staff as a result of our business expansion.

Income from Operations

Income from operations decreased 16.5% to $2.8 million for the three months ended March 31, 2012 from $3.3 million for the three months ended March 31, 2011. As a percentage of sales, income from operations accounted for 5.2% of our total sales for the three months ended March 31, 2012, a decrease of 1.0% compared to the three months ended March 31, 2011 as a result of increasing selling expenses and general and administrative expenses, as well as reduced retail sales prices.

Interest Expense

Interest expense was $0.5 million for the three months ended March 31, 2012, an increase of 108.2% compared to the same period in 2011. The increase was due to the increased bank loans as a result of our business expansion, from $19.5 million at March 31, 2011 to $25.0 million at March 31, 2012.

Change in fair value of derivative liability

Change in fair value of derivative liability was a gain of $0.1 million and $0.2 million, based on the Binnomial Lattice model, for the three months ended March 31, 2012 and 2011, respectively.

Income Tax Expenses

Income tax expense for the three months ended March 31, 2012 was $0.5 million, a decrease of 22.7% compared to the same period of 2011. The decrease was primarily due to lower taxable income.

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

Below is a summary of the income tax rate for each of our PRC subsidiaries in 2011 and 2012:

Ever-Glory Goldenway New-Tailun Catch-Luck LA GO GO Apparel Tai Xin 2011 25.0 % 25.0 % 25.0 % 25.0 % 25.0 % - % 2012 25.0 % 25.0 % 25.0 % 25.0 % 25.0 % 25.0 %

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

Ever-Glory International Group (HK) Ltd was incorporated in Samoa on September 15, 2009, and has no liabilities for income tax.

The Company was incorporated in the United States and has incurred net operating losses for income tax purposes through 2010. The net operating loss carries forwards for United States income taxes may be available to reduce future years' taxable income. These carry forwards will expire, if not utilized, through 2031. Management believes that the realization of the benefits from these losses is uncertain due to our limited operating history and continuing losses for United States income tax purposes. Accordingly, we provided a 100% valuation allowance on the deferred tax asset to reduce the asset to zero.

Net Income

Net income for the three months ended March 31, 2012 was $2.1 million, a decrease of 18.8% compared to the same period in 2011. Our diluted earnings per share were $0.14 and $0.18 for the three months ended March 31, 2012 and 2011, respectively. This decrease was primarily due to the decrease in our net income.

Summary of Cash Flows

Net cash provided by operating activities was $ 8.9 million and $5.2 million for the three months ended March 31, 2012 and 2011. This increase was mainly due to decreased inventories and accounts receivable offset by decreased accounts payable.

Net cash used in investing activities was $0.7 million and $0.5 million for the three months ended March 31, 2012 and 2011. This increase was mainly due to the renovation and construction of LA GO GO's headquarters.

Net cash used in financing activities was $4.3 million for the three months ended March 31, 2012, compared with net cash provided by financing activities of $1.1 million during the three months ended March 31, 2011. During the three months ended March 31, 2012, we repaid $17.8 million of bank loan and received bank loan proceeds of $13.5 million.