China Logistics (CHLO) 10-Q 2010 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: June 30, 2010
or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM: _____________ TO _____________
COMMISSION FILE NUMBER: 000-31497

CHINA LOGISTICS GROUP, INC.

(Exact name of registrant as specified in its charter)

Florida	65-1001686
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

23F. Gutai Beach Building No. 969 Zhongshan Road (South), Shanghai, China	200011
(Address of principal executive offices)	(Zip Code)

86-21-63355100

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

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.

þYes oNo 

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

oYes  oNo 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer	o	Accelerated filer	o
Non-accelerated filer	o	Smaller reporting company	þ
(Do not check if smaller reporting company)

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

oYes  þNo 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 39,508,203 shares of common stock are issued and outstanding as of August 12, 2010.

CHINA LOGISTICS GROUP, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

		Page No.
PART I. - FINANCIAL INFORMATION
Item 1.	Financial Statements.	1
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations.	17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	24
Item 4.	Controls and Procedures.	24
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings.	25
Item 1A.	Risk Factors.	27
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	27
Item 3.	Defaults Upon Senior Securities.	27
Item 4.	(Removed and Reserved).	27
Item 5.	Other Information.	27
Item 6.	Exhibits.	27

OTHER PERTINENT INFORMATION

We maintain our web site at www. chinalogisticsinc.com. Information on this web site is not a part of this report

INDEX OF CERTAIN DEFINED TERMS USED IN THIS REPORT

The terms are used in this report:

 “China Logistics,” “we,” “us,” “our,” the company,” and similar terms refer to China Logistics Group, Inc., a Florida corporation formerly known as mediaReady, Inc., and its subsidiary,

 “Shandong Jiajia” refers to Shandong Jiajia International Freight & Forwarding Co., Ltd., a Chinese company and a majority owned subsidiary of China Logistics, and its branches in Shanghai, Qingdao, Tianjin, Xiamen, and Lianyungang,

 “China” or the “ PRC” refers to the People’s Republic of China, and

 “RMB” refers to the renminbi, which is the currency of mainland PRC of which the yuan is the principal currency.

i

PART 1 - FINANCIAL INFORMATION

ITEM 1.   FINANCIAL STATEMENTS

CHINA LOGISTICS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
	June 30, 2010			December 31, 2009
	Unaudited
ASSETS
Current assets:
Cash	$	1,078,577		$	1,720,838
Accounts receivable, net		3,257,683			2,923,990
Other Receivables		1,435,692			1,100,662
Advance to vendors and other prepaid expenses		210,782			146,062
Due from related parties		464,689			447,032
Total current assets		6,447,423			6,338,584
Property and equipment, net		25,052			39,748
Total assets	$	6,472,475		$	6,378,332
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade		2,756,601			2,733,820
Accrued registration rights penalty		1,597,000			1,597,000
Other accruals and current liabilities		683,020			535,576
Advances from customers		771,244			475,358
Due to related parties		411,237			814,226
Foreign tax payable		18,555			18,784
Total current liabilities		6,237,657			6,174,764
Derivative liability		-			2,535,505
Total liabilities		6,237,657			8,710,269
Equity:
China Logistics Group, Inc. shareholders' equity
Preferred stock - $0.001 par value, 10,000,000 shares authorized
Series B convertible preferred stock - 450,000 issued and
outstanding at June 30, 2010 and December 31, 2009		450			450
Common stock, $.001 par value, 500,000,000 shares authorized; 39,508,203 and
34,508,203 shares issued and outstanding  at June 30, 2010 and December 31, 2009		39,508			34,508
Additional paid-in capital		20,498,979			17,057,203
Accumulated deficit		(20,453,837	)		(19,541,703	)
Accumulated other comprehensive loss		(169,902	)		(178,505	)
Total China Logistics Group, Inc. shareholders' equity (deficit)		(84,802	)		(2,628,047	)
Noncontrolling interest		319,620			296,110
Total equity		234,818			(2,331,937	)
Total liabilities and equity	$	6,472,475		$	6,378,332
See notes to unaudited consolidated financial statements.

- 1 -

CHINA LOGISTICS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2010			2009			2010			2009
	Unaudited			Restated			Unaudited			Restated
Sales	$	5,788,599		$	4,607,989		$	11,212,756		$	7,806,561
Cost of sales		5,755,453			4,293,127			10,768,978			7,582,716
Gross profit		33,146			314,862			443,778		$	223,845
Operating expenses:
Selling, general and administrative		676,080			201,880			874,959			518,288
Depreciation and amortization		2,248			4,735			5,146			7,085
Bad debt expense (recovery of bad debt)		-			-			-			1,244
Total operating expenses		678,328			206,615			880,105			526,617
(Loss) income from operations		(645,182	)		108,247			(436,327	)		(302,772	)
Other income (expenses):
Realized exchange gain (loss)		-			35,957			-			35,957
Other income		(69,427	)		-			(68,152	)		-
(Loss) gain on change in fair value of derivative liability		(214,873	)		(5,293	)		(447,059	)		3,383,700
Interest (expense) income		(2,253	)		(210	)		(3,282	)		813
Total other (expenses) income		(286,553	)		30,454			(518,493	)		3,420,470
(Loss) income before income taxes		(931,350	)		138,701			(954,821	)		3,117,698
Foreign taxes		5,615			6,314			10,808			8,140
Net (loss) income		(937,350	)		132,387			(965,629	)		3,109,558
Less: Net income (loss) attributable to the noncontrolling interest		122,031			72,670			15,213			(71,909	)
Net (loss) income attributable to China Logistics Group, Inc.	$	(1,059,381	)	$	59,717		$	(980,841	)	$	3,181,467
Earnings (loss) per common share:
Basic	$	(0.03	)	$	0.00		$	(0.02	)	$	0.09
Diluted	$	(0.03	)	$	0.00			(0.02	)	$	0.08
Weighted average number of shares outstanding:
Basic		38,815,895			34,508,203			36,673,949			34,508,203
Diluted		38,815,895			39,008,203			36,673,949			39,008,203
See notes to unaudited consolidated financial statements.

- 2 -

CHINA LOGISTICS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
	For the Six Months Ended June 30,
	2010			2009
	Unaudited			Restated
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income	$	(965,629	)	$	3,109,558
Adjustments to reconcile net (loss) income  to net cash used in operating activities:
Depreciation expense		5,146			7,085
Allowance for doubtful accounts/bad debts expenses, net		5,488			1,244
Change in fair value of derivative liability		447,059			(3,383,700	)
Stock based compensation		464,000
Changes in assets and liabilities:
(Increase) in accounts receivable		(339,180	)		(502,824	)
(Increase) decrease in prepaid expenses and other current assets		(335,030	)		(136,762	)
Increase in accounts payable		22,781			57,614
Increase in other accruals and current liabilities		147,444			260,601
Decrease increase in taxes payable		(229	)		(25,331	)
Increase in advances to vendors		(64,720	)		(134,513	)
Increase (decrease)  in advances from customers		295,886			(97,435	)
NET CASH (USED IN) OPERATING ACTIVITIES		(316,984	)		(844,463	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in short-term loan receivable		-			(1,614,000	)
Repayment of Loans Receivable		-			1,614,000
Advances to related parties		(17,657	)		(418,062	)
Collection of repayments of advances to related parties		-			131,410
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES		(17,657	)		(286,652	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from related parties		(402,989	)		552,886
Repayment of advances from related parties		-			(191,118	)
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES		(402,989	)		361,768
EFFECT OF EXCHANGE RATE ON CASH		95,369			8,454
NET (DECREASE)  IN CASH		(642,261	)		(760,893	)
CASH  - beginning of year		1,720,838			3,156,362
CASH - end of year	$	1,078,577		$	2,395,469
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for foreign taxes	$	6,767		$	31,361
See notes to unaudited consolidated financial statements.

- 3 -

CHINA LOGISTICS GROUP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2010

NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS

China Logistics Group, Inc. (“we”, “us”, “our” or the “Company”) is a Florida corporation and was incorporated on March 19, 1999 under the name of ValuSALES.com, Inc. We changed our name to Video Without Boundaries, Inc. on November 16, 2001. On August 31, 2006 we changed our name from Video Without Boundaries, Inc. to MediaReady, Inc. and on February 14, 2008, we changed our name from MediaReady, Inc. to China Logistics Group, Inc.

During 2002, we began to reposition our company within the home entertainment media-on-demand marketplace.  It was our intent to become a producer and distributor of interactive consumer electronics and provide streaming digital media and video on demand services. However, we were unable to successfully or profitably penetrate the market.

On December 31, 2007 we entered into an acquisition agreement with Shandong Jiajia International Freight and Forwarding Co., Ltd. (“Shandong Jiajia”) and its sole shareholders Messrs. Hui Liu and Wei Chen, through which we acquired a 51% interest in Shandong Jiajia. The transaction was accounted for as a capital transaction, implemented through a reverse recapitalization.  

Shandong Jiajia, formed in 1999 as a Chinese limited liability company, is an international freight forwarder and logistics management company. Shandong Jiajia acts as an agent for international freight and shipping companies. Shandong Jiajia sells cargo space and arranges land, maritime, and air international transportation for clients seeking to import or export merchandise from or into China.  Headquartered in Qingdao, Shandong Jiajia has branches in Shanghai and Xiamen with two additional offices in Lianyungang and Rizhao. Shandong Jiajia is a designated agent of cargo carriers including Nippon Yusen Kaisha, P&O Nedlloyd, CMA CGM Group, Safmarine Container Lines, Chilean carrier CSAV Group, and Regional Container Lines.

NOTE 2- RESTATEMENT OF FINANCIAL STATEMENTS AND BASIS OF PRESENTATION

The June 30, 2009 financial statements included in our Form 10-Q filed on August 19, 2009 contained errors and were restated to correct the previous accounting treatment to:

• properly record common stock purchase warrants which were not indexed to our stock as a derivative liability at January 1, 2009 upon adoption of EITF 07-05 and properly record the subsequent accounting for the changes in the fair value of the associated liability at June 30, 2009;

• correct the presentation of the indirect method for presenting cash flows from operating activities in our unaudited consolidated statements of cash flows to begin with net income or loss rather than net income or loss attributable to China Logistics Group, Inc.

- 4 -

CHINA LOGISTICS GROUP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2010

Accordingly, our consolidated balance sheet at June 30, 2009, which is included in this report, has been restated to properly record our common stock purchase warrants that were not indexed to our stock as derivative liability. The effect of correcting these errors in our balance sheet at June 30, 2009, our income statement for the three and six months ended June 30, 2009, and statements of cash flows for the six months ended June 30, 2009 was as follows:

Balance Sheet Data	June 30, 2009
	As filed			Adjustment to Restate			Restated
Derivative Liability		-			2,472,032			2,472,032
Total Liabilities		5,600,910			2,472,032			8,072,942
China Logistics Group, Inc. stockholders’ equity (deficit)
Series B Convertible Preferred Stock- 450,000 shares issued  and outstanding at June 30, 2009	$	450			-		$	450
Common Stock, $0.001 par value,  500,000,000 shares authorized, 34,508,203 shares issued and outstanding June 30, 2009		34,508			-			34,508
Additional Paid-in-capital		19,229,513			(2,172,310	)		17,057,203
Accumulated Deficit		(18,331,724	)		(299,722	)		(18,631,446)
Accumulated other comprehensive income loss		(183,697)			-			(183,697)
Total China Logistics Group, Inc. stockholders’ equity (deficit)		749,050			(2,472,032	)		(1,722,982	)
Noncontrolling interest		726,626			-			726,626
Total equity (deficit)		1,475,676			(2,472,032	)		(996,356	)
Total liabilities and equity (deficit)	$	7,076,586			-		$	7,076,586

Income Statement Data	For the Six Months Ended June 30, 2009
	As filed			Adjustment to Restate		Restated
Other income (expense)
Realized exchange gain		35,957			-		35,957
Gain on change in fair value of derivative liability		-			3,383,700		3,383,700
Interest income		813			-		813
Total other income (expense)		36,770			3,383,700		3,420,470
(Loss) income from continuing operations, before tax		(266,002	)		3,383,700		3,117,698
Net (loss) income		(274,142	)		3,383,700		3,109,558
Net (loss) income attributable to China Logistics Group, Inc.		(202,233	)		3,383,700		3,181,467
Earnings (loss) per share:
Basic		(0.01	)		0.10		0.09
Diluted		(0.01	)		0.09		0.08
Basic weighted average shares outstanding		34,508,203			-		34,508,203
Diluted weighted average shares outstanding		34,508,203			4,500,000		39,008,203

Additionally, we have restated and modified the disclosure in the Consolidated Statement of Cash Flows to accurately present the indirect method of reporting cash flows from operating activities and effect of the treatment accorded the derivative liability on cash flows in operating activities.

- 5 -

CHINA LOGISTICS GROUP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2010

Components of this restatement include:

Statement of Cash Flow Data	For the Six Months Ended June 30, 2009
	As filed			Adjustment to Restate			Restated
Net income		(202,233)			3,311,791			3,109,558
Gain on change in fair value of derivative liability		-			(3,383,700	)		(3,383,700	)
Noncontrolling interest		(71,909	)		71,909
Net cash used in operating activities		(844,463	)		-			(844,463	)

The December 31, 2008 financial statements included in our Form 10-K filed on May 18, 2009, contained errors including the method of recording the reverse recapitalization transaction with Shandong Jiajia completed on December 31, 2007.  Accordingly, our consolidated balance sheet at December 31, 2008, which is included in this report, has been restated to properly record the transaction. The effect of correcting these errors in our balance sheet at December 31, 2008 was as follows:

	As filed		Adjustment to Restate		Restated
Equity
Series B Convertible Preferred Stock- 450,000 shares issued and outstanding at December 31, 2008		450		-		450
Common Stock, $0.001 par value 500,000,000 shares authorized, 34,508,203 shares issued and outstanding December 31, 2008		34,508		-		34,508
Additional Paid-in-capital	$	3,572,042	$	15,657,471	$	19,229,513
Accumulated Deficit		(2,472,020)		(15,657,471)		(18,129,491)
Accumulated other comprehensive income loss		(187,495)		-		(187,495)
Total China Logistics Group, Inc.    shareholders equity		947,485		-		947,485
Noncontrolling Interest		794,886		-		794,886
Total equity		1,742,371		-		1,742,371
Total liabilities and equity	$	6,786,064		-	$	6,786,064

Certain amounts in Notes 5 have been restated to reflect the restatement adjustments described above.

NOTE 3 – GOING CONCERN

The accompanying unaudited consolidated financial statements have been prepared on a going concern basis.  Our ability to continue as a going concern is dependent upon our ability to maintain profitable operations in the future and to obtain the necessary financing to meet our obligations and repay our liabilities arising from normal business operations when they become due and pay disgorgement to the SEC if it prevails in its case against us. The SEC is seeking disgorgement from us of $1,078,490 and this amount has not been accrued as of June 30, 2010 or December 31, 2009.  See Note 10 - Contingencies and Commitments.

These matters, among others, raise substantial doubt about our ability to continue as a going concern. These financial statements do not include any adjustments to the amounts and classification of assets and liabilities that may be necessary should we be unable to continue as a going concern.

Higher sales in the first six months of 2010 and gross margins in the first three months of 2010, and lower operating expenses resulted in net operating income in the first six months of 2010 and an improvement in our liquidity.  However, our profit margins continue to fluctuate and even if we are able to maintain profitable operations, funds from operations may not be sufficient to generate sufficient cash flows to fund all of our needs and we may need to raise additional working capital.  We do not have any commitments for any additional capital and the overall softness of the capital markets could hinder our efforts. In that event, it would be necessary for us to take additional steps to further reduce our operating expenses including personnel reductions and the possible consolidation of our offices.  &# 160;We believe that our return to profitable operations and, coupled with our cash on-hand, should allow us to maintain our operations for the foreseeable future subject to the outcome of the SEC’s efforts to seek disgorgement from us.

- 6 -

CHINA LOGISTICS GROUP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2010

NOTE 4 –BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited consolidated financial statements for the six month periods ended June 30, 2010 and 2009 have been prepared in conformity with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q.  Certain information or footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the SEC’s rules and regulations.

The capital structure of the combined enterprise following the reverse recapitalization transaction, effective December 31, 2007 is the historical equity of the accounting acquirer (Shandong Jiajia) prior to the transaction retroactively restated to reflect the number of shares received in the transaction.

In the opinion of management, the accompanying unaudited interim consolidated financial statements contain all adjustments necessary to present fairly the financial position and results of operations of the Company as of the dates and for the periods presented.  While we believe that the disclosures presented are adequate to keep the information from being misleading, we suggest that these accompanying financial statements be read in conjunction with our audited financial statements and notes for the year ended December 31, 2009 included in our Form 10-K filed with the SEC on April 15, 2010.

Operating results for the six month period ended June 30, 2010 are not necessarily indicative of the results that may be expected for the remainder of the year ending December 31, 2010.

The accompanying consolidated financial statements include our accounts and the accounts of our 51% owned subsidiary, Shandong Jiajia. Inter-company transactions and balances have been eliminated in consolidation. Shandong Jiajia maintains its records and prepares its financial statements in accordance with accounting principles generally accepted in China. Certain adjustments and reclassifications have been incorporated in the accompanying unaudited consolidated financial statements to conform to accounting principles generally accepted in the United States of America.

Revenue Recognition

We provide freight forwarding services generally under contract with our customers.  Our business model involves placing our customers’ freight on prearranged contracted transport.

In general, we record revenue when persuasive evidence of an arrangement exists, services have been rendered or product delivery has occurred, the sales price to the customer is fixed or determinable, and collectability is reasonably assured. We provide transportation services, generally under contract, by third parties with whom we have contracted these services.

Typically we recognize revenue in connection with our freight forwarding service when the payment terms are as follows:

• When the cargo departs the shipper's destination if the trade pricing term is on a CIF (cost, insurance and freight) or CFR (cost and freight cost) basis;

• When the cargo departs the shipper’s location when the trade pricing terms are CFR (cost and freight cost); or

• When merchandise arrives at the destination port if the trade pricing term is on a FOB (free on board) basis.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions, including estimates of the allowance for doubtful accounts and assumptions associated with our derivative liability and stock based compensation recognized that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amounts of revenue and expenses during the reported periods.

- 7 -

CHINA LOGISTICS GROUP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2010

Significant estimates for the periods reported include the allowance for doubtful accounts which is based on an evaluation of our outstanding accounts receivable including the age of amounts due, the financial condition of our specific customers, knowledge of our industry segment in Asia, and historical bad debt experience.  This evaluation methodology has proved to provide a reasonable estimate of bad debt expense in the past and we intend to continue to employ this approach in our analysis of collectability.  However, we are aware that given the current global economic situation, including that of China, meaningful time horizons may change.  We intend to enhance our focus on the evaluation of our customers' sustainability and adjust our estimates as may be indicted.

We also rely on certain assumptions when deriving the fair value of share-based compensation, derivative liability and calculations underlying our provision for taxes in China.  Assumptions and estimates employed in the areas are material to our reported financial conditions and results of operations.  Actual results could differ from these estimates.

Stock Based Compensation

We account for stock options issued to employees by measuring the grant-date fair value of stock options and other equity based compensation issued to employees and recognize the costs in the financial statements over the period during which the employees are required to provide services.

Earnings (Loss) Per Share

Basic per share results for all periods presented were computed based on the net earnings (loss) for the periods presented. The weighted average number of common shares outstanding during the period was used in the calculation of basic earnings per share. Diluted earnings per share reflects the potential dilution that could occur if securities were exercised or converted into common stock or other contracts to issue common stock resulting in the issuance of common stock that would then share in our income subject to anti-dilution limitations.

Cash and Cash Equivalents

We consider all highly liquid investments with original maturities of three months or less to be cash equivalents. The carrying value of these instruments approximates their fair value.

Concentration of Credit Risk

Financial instruments that potentially subject us to concentration of credit risk consist primarily of cash and accounts receivable. We place our cash with high quality financial institutions in China. At June 30, 2010, we had deposits of $ 1,078,577 in banks in China. In China, there is no equivalent federal deposit insurance as in the United States; as such these amounts held in banks in China are not insured. We have not experienced any losses in such bank accounts through June 30, 2010.

Accounts Receivable

We provide an allowance for doubtful accounts equal to the estimated uncollectible portion of accounts receivable. This estimate is based on the historical collection experience and a review of the current status of trade receivables. The allowance for doubtful accounts totaled $ 1,311,891 and $1,306,403 at June 30, 2010 and December 31, 2009, respectively.

- 8 -

CHINA LOGISTICS GROUP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2010

Other receivables

Other receivables at June 30, 2010 were $ 1,435,692 and are comprised of advances to other entities with which we have a strategic or other business relationship, a deposit we made as required by a Chinese court for potential payment to a former customer in the event we are unsuccessful in a lawsuit we filed against them for amounts owed to us, and deferred expenses.  The amounts advanced to our strategic partners are unsecured, repayable on demand, and bear no interest.  We also advance money to employees for travel expenditures which are then expensed upon conclusion of the trip and the processing of an expense report.  The components of other receivables at June 30, 2010 and December 31, 2009 were as follows:

	June 30, 2010		December 31, 2009
	Unaudited
Loans receivable	$	1,082,552	$	960,215
Deferred expense		101,129		131,366
Other		252,011		9,081
	$	1,435,692	$	1,100,662

Advance to Vendors

Advance to vendors consists of prepayment or deposits from us for contracted shipping arrangements that have not been used by our customers. These amounts are recognized as cost of revenues as shipments are completed and customers utilize the shipping arrangement. This policy follows the matching principle to match the cost of revenue in the same period as when the associated revenue is earned in accordance with our revenue recognition policy. Advances to vendors totaled $210,782 and $146,062, at June 30, 2010 and December 31, 2009, respectively.

Property and Equipment

We periodically evaluate the carrying value of long-lived assets to be held and used in the business, other than assets held for sale when events and circumstances warrant, generally in conjunction with the annual business planning cycle. If the carrying value of a long-lived asset is considered impaired, a loss is recognized based on the amount by which the carrying value exceeds the fair market value for assets to be held and used. Fair market value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risks involved. Long-lived assets to be disposed of other than by sale are considered held and used until disposed. There was no impairment recognized for the three month periods ended June 30, 2010 or June 30, 2009, respectively.

Other Accruals and current liabilities

Accruals and other current liabilities at June 30 , 2010 were $683,020 and is comprised of i) payables due to non-interest bearing payable on demand advances from unrelated parties used for working capital purposes, ii) accruals for professional fees that have not yet been billed, rent, and other operating expenses, and iii) in accrued salaries.  The components of accruals and other current liabilities at June 30, 2010 and December 31, 2009 were as follows:

	June 30, 2010		December 31, 2009
	Unaudited
Loans payable	$	394,877	$	289,603
Accruals		243,309		193,306
Accrued salaries		44,834		52,667
	$	683,020	$	535,576

Advances from Customers

Advances from customers consist of prepayments to us for contracted cargo that has not yet been shipped to the recipient and for other advance deposits. These amounts are recognized as revenue as shipments are completed and customers take delivery of goods, in compliance with the related contract and our revenue recognition policy. Advances from customers totaled $ 771,244 and $ 475,358, at June 30, 2010 and December 31, 2009, respectively.

- 9 -

CHINA LOGISTICS GROUP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2010

Modification of Derivative Liability

We issued a total of 31,558,500 common stock purchase warrants in connection with our 2008 Unit Offering comprised of 16,445,500 Class A warrants exercisable at $0.35 per share and 15,113,000 Class B warrants exercisable at $0.50 per share.  Other than the exercise price of the warrants, the terms of the Class A and Class B warrants are identical and expire April 30, 2013.  The exercise price of the warrants and the number of shares issuable upon exercise is subject to reset adjustment in the event of stock splits, stock dividends, recapitalization and similar corporate events.  If we issue or sell shares of our common stock after the 2008 Unit Offering for an amount less than the original exercise price per share, the exercise price of the warrants is reduced to equal the new issuance price of those shares.

Upon our retroactive adoption of the Derivative and Hedging Topic of the FASB Accounting Standards Codification (“ASC 815”) on January 1, 2009, we determined that the warrants did not qualify for a scope exception under ASC 815 as they were determined to not be indexed to our stock as prescribed by ASC 815.  Retroactively effective January 1, 2009, the warrants, under ASC 815, were reclassified from equity to a derivative liability for the then relative fair market value of $5,855,732 and marked to market.  The value of the warrants increased by $3,683,422 from the warrants issuance date to the adoption date of ASC 815, January 1, 2009.  As of January 1, 2009, the cumulative effect in adopting ASC 815 was a reduction to additional paid in capital of $2,172,310 to reclassify the warrants from equity to derivative liability and a decrease in retained earnings of $3,683,422 as a cumulative effect of a change in accounting principle to reflect the change in the value of the warrants between their issuance date and January 1, 2009.  Under ASC 815, the warrants will be carried at fair value and adjusted at each reporting period, we record the change in fair value of derivative liability in order to mark to market increase or decrease in fair value of the warrants during the periods presented.

In order to enhance our balance sheet by treating the warrants as equity rather than a derivative liability, we entered into an amendment with the original subscribers to waive the most favored nations provision from the subscription agreement. The amendment also included a one-time reduction in the exercise price of the warrants from $0.5 or $0.35 per share to $0.20 per share. To date all warrant holders covering all outstanding warrants (16,445,500 Class A warrants and 15,113,000 Class B warrants) have agreed to this amendment, As a result of this amendment, we treated this reduction in exercise price prospectively as a modification of terms and an exchange of the original equity instrument, and valued this exchange as an increase in additional paid in capital – warrants, as described in FASB ASC paragraph 718-20-35-3 “Incr emental compensation cost shall be measured as the excess, if any, of the fair value of the modified award over the fair value of the original award immediately before its terms are modified, measured based on the share price and other pertinent factors at that date.” We believe this amendment closely ties the exercise price of the warrants to the fluctuations of our common stock price, or indexed to our stock, and therefore makes them eligible for the scope exception provided under paragraph 11(a) of SFAS 133 (FASB ASC 815-10-15-74), and to be classified as equity.

As a result of the fore-mentioned amendment and the reduction in exercise price, we reclassified $2,982,776 from derivative liability to additional paid in capital – warrants and recognized other expenses – betterment of warrants of $68,643 and loss on change in fair value of derivative liability of $146,442 for the three months ended June 30, 2010.

We determined the fair value of the warrants at each reporting date using the Black Scholes Option Pricing Model based on the following assumptions and key inputs for each Class of warrants and reporting date:

	Class A Warrants			Class B Warrants
	June 30, 2010	December 31, 2009		June 30, 2010	December 31, 2009
	Unaudited			Unaudited
Dividend Yield	0%		0%	0%		0%
Volatility	244%		284%	244%		284%
Risk Free Rate	1.00%		1.43%	1.00%		1.43%
Expected Term	2.84		3.33	2.84		3.33
Asset Price	$0.10	$	0.08	$0.10	$	0.08
Exercise Price	$0.20	$	0.35	$0.20	$	0.50

- 10 -

CHINA LOGISTICS GROUP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2010

Foreign Currency Translation`

The accompanying unaudited consolidated financial statements are presented in United States dollars. The functional currency of Shandong Jiajia is the Renminbi (“RMB”), the official currency of the People’s Republic of China.  Transactions and balances initially recorded in RMB are converted into US dollars in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 52 “ Foreign Currency Translations ” and are included in determining comprehensive income or loss. Capital accounts of the unaudited consolidated financial statements are translated into United States dollars from RMB at their historical exchange rates when the capital transactions occurred. Assets and liabilities are translated at the exchange rates as of the balance sheet date. Income and expenditures are translated at the average exchange rate for the period presented.

The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through PRC authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into U.S. dollars at the rates used in translation.

Unless otherwise noted, the rate presented below per U.S. $1.00 the interbank rate as quoted by OANDA Corporation (www.oanda.com ) contained in our consolidated financial statements.  Translations do not imply that the RMB amounts actually represent, or have been or could be converted into, equivalent amounts in U.S. dollars.  Translation of amounts from RMB into United States dollars (“US$”) has been made at the following exchange rates for the respective periods:

	June 30, 2010		June 30, 2009
Balance sheet		6.8086		6.8448
Statement of operations		6.8347		6.8432

Income Taxes

We follow the asset and liability method of accounting for taxes.  Deferred tax assets and liabilities are recognized for the future tax consequences attributed to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax base. 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 and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. If it is more likely than not that some portion of a deferred tax asset will not be realized, a valuation allowance is recognized. 

We evaluate whether tax position taken by a company will more likely than not be sustained upon examination by the appropriate taxing authority. We have concluded that we have not taken any uncertain tax positions on any of its open income tax returns that would materially distort its financial statements. The Company’s methods of accounting are based on established income tax principles approved in the Internal Revenue Code (IRC) and are properly calculated and reflected within its income tax returns.

We periodically reassess the validity of our conclusions regarding uncertain income tax positions to determine if facts or circumstances have arisen that might cause us to change our judgment regarding the likelihood of a tax position’s sustainability under audit. The impact of this reassessment for the March 31, 2010 and 2009 did not have any impact on our results of operations, financial condition or liquidity.

Noncontrolling Interest

Noncontrolling interests in our subsidiaries are recorded as a component of our equity, separate from the parent’s equity.  Purchase or sale of equity interests that do not result in a change of control are accounted for as equity transactions.  Results of operations attributable to the noncontrolling interest are included in our consolidated results of operations and, upon loss of control, the interest sold, as well as interest retained, if any, will be reported at fair value with any gain or loss recognized in earnings.

- 11 -

CHINA LOGISTICS GROUP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2010

Recent Accounting Pronouncements

There are no recently issued accounting standards that are expected to have a material effect on our financial condition, results of operations or cash flows.

NOTE 5 – EARNINGS (LOSS) PER SHARE

Under the provisions of SFAS 128, “Earnings Per Share”, basic income (loss) per common share is computed by dividing income (loss) available to common shareholders by the weighted average number of shares of common stock outstanding for the periods presented. Diluted income per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that would then share in our income , subject to anti-dilution limitations.

	Three Months Ended June 30,					Six Months Ended June 30,
	2010			2009		2010			2009
	Unaudited			Unaudited		Unaudited			Unaudited
Numerator:
Net Income (loss) applicable to common stockholders (A)	$	(1,059,381	)	$	59,717	$	(980,841	)	$	3,181,467
Denominators:
Denominator for basic earnings per share:
Weighted average shares outstanding (B)		38,815,895			34,508,203		36,673,949			34,508,203
Denominator for diluted earnings per share
Series B preferred stock - unconverted		-			4,500,000		-			-
Denominator for diluted earnings (loss) per share:
adjusted weighted average shares outstanding (C)		38,815,895			39,008,203		36,673,949			34,508,203
Basic and diluted earnings per common share:
Earnings (loss) per share- basic (A)/(B)	$	(0.03	)	$	0.00	$	(0.02	)	$	0.09
Earnings (loss) per share- diluted (A)/(C)	$	(0.03	)	$	0.00	$	(0.02	)	$	0.08

- 12 -

CHINA LOGISTICS GROUP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2010

Potentially issuable shares at June 30, 2010 and 2009 which could result in dilution in the future but were not included in diluted earnings per share for the periods presented as they are anti-dilutive, included:

	Six Months Ended June 30,
	2010		2009
	Unaudited		Unaudited
Warrants issued to Mr. Wei Chen		2,000,000		2,000,000
Warrants		5,000		5,000
Class A and B warrants		31,558,500		31,558,500
Series B convertible preferred stock		4,500,000		4,500,000
		38,063,500		38,063,500

NOTE 6 – PROPERTY AND EQUIPMENT

Property and equipment at June 30, 2010 and December 31, 2009 consisted of the following:

	Useful Lives	June 31,  2010		December 31, 2009
		Unaudited
Computer equipment	4 years	$	37,246	$	37,246
Furniture and equipment	4-5 years		91,802		101,351
			129,048		138,597
Less: accumulated depreciation			(103,995)		(98,849)
		$	25,052	$	39,748

For the six months ended June 30, 2010, and 2009, depreciation expense totaled $5,146 and $7,085, respectively.

NOTE 7 – STOCKHOLDERS’ EQUITY

Preferred Stock

At June 30, 2010 and December 31, 2009, 450,000 Series B convertible preferred stock remain issued and outstanding.

At June 30, 2010 and December 31, 2009, no Series A convertible preferred stock was issued and outstanding.

The Series A Convertible Preferred Stock and Series B Convertible Preferred Stock are convertible as follows:

One share of Series A Convertible Preferred Stock converts into 2.5 shares of common stock

One share of Series B Convertible Preferred Stock converts into 10 shares of common stock

Common Stock

On April 7, 2010, pursuant to the Consent of the Board of Directors, we issued 2,000,000 shares of our common stock to Mr. Wei Chen, our CEO, valued at $200,000 as an incentive bonus and 1,000,000 shares of our common stock to Mr. Hui Liu, our director, valued at $100,000, as an incentive bonus.

On April 14, pursuant to the Consent of the Board of Director, we issued 2,000,000 shares of our common stock to China Direct Investments, Inc., valued at $164,000  as compensation for consulting services for management, accounting, and reporting services they provide to us.

- 13 -

CHINA LOGISTICS GROUP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2010

Common Stock Purchase Warrants issued to Mr. Wei Chen, Chairman and Chief Executive Officer

A summary of our the common stock warrant activity with Mr. Chen during the three month periods ended June 30, 2010 is as follows:

	No. of Shares Underlying Wrrants		Weighted Average Exercise Price		Weighted Average Contractual Term (years)		Aggregate Intrinsic Value
	Unaudited		Unaudited		Unaudited		Unaudited
Outstanding at December 31, 2009		2,000,000	$	0.30		1.75		$	-
Granted		-		-		-			-
Exercised		-		-		-			-
Outstanding at June 30, 2010		2,000,000	$	0.30		1.75		$	-

Common Stock Purchase Warrants

A summary of our common stock warrant activity during the six month periods ended June 30, 2010 is as follows:

	Shares Underlying Warrants	Weighted Average xercise Price
	Unaudited	Unaudited
Outstanding at December 31, 2009	33,563,500	$	0.42
Granted	-		-
Exercised	-		-
Outstanding at June 30, 2010	33,563,500	$	0.42

The 31,558,500 warrants issued in connection with the 2008 Unit Offering and comprised of 16,445,500 Class A warrants exercisable at $0.35 per share and 15,113,000 Class B warrants exercisable at $0.50 per share, which were decreased to $0.20 per share in connection with the modification of the warrants discussed in Note 1.  Other than the exercise price of the warrants, the terms of the Class A and Class B warrants are identical.

These warrants are exercisable through the last calendar day of the month in which the fifth anniversary of the issue date occurs and are exercisable in whole or in part at any time following the issue date.

The exercise price of the warrants and the number of shares issuable upon exercise is subject pre-note adjustment in the event of stock splits, stock dividends, recapitalization and similar corporate events.  At any time after the required effective date of the related registration statement the warrants are exercisable on a cashless basis, which currently is the case. The exercise of the warrants is subject to a 4.99% cap on the beneficial ownership that each warrant holder may have while the securities are outstanding.  This provision is waived during the final 45 days the warrants are exercisable.

NOTE 8 –RELATED PARTY TRANSACTIONS

Due to Related Parties

The following advances from related parties are used for working capital and are all unsecured, non-interest bearing and repayable on demand.

- 14 -

CHINA LOGISTICS GROUP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2010

On June 30, 2010 and December 31, 2009, due to related parties consisted of the following:

		June 30,  2010	December 31,  2009
		Unaudited
Due to Xiangfen Chen	$	132,700	$	109,871
Due to Bin Liu		233,433		99,381
Due to Tianjin Sincere Logistics Co., Ltd.		104		559,974
Due to China Direct Industries, Inc.		45,000		45,000
	$	411,237	$	814,226

There are no assurances that the terms of the transactions with these related parties are comparable to terms we could have obtained from unaffiliated third parties.

Due From Related Parties

These following advances to related parties described below are unsecured, non-interest bearing and payable on demand.

At June 30, 2010 and December 31, 2009 our due from related party amounted to $464,689 and $447,032, respectively.  This is due from Shandong Huibo Import & Export Co., Ltd., a Chinese limited liability company which is a minority owner of our company.  Shandong Huibo Import & Export Co., Ltd. is owned by PeiXiang Wang (31.7%) and PengXiang Liu (68.3%), unrelated third parties. 

NOTE 9 – FOREIGN OPERATIONS

The tables below present information by operating region for the three and six months ended June 30,2010.

	For the Three Months Ended
	June 30, 2010						June 30, 2009
	Unaudited			Unaudited			Unaudited			Unaudited
	Revenues			Assets			Revenues			Assets
United States		$	--		$	9,710		$	--		$	6,409
People’s Republic of China			5,788,599			6,467,765			4,607,989			7,070,177
Totals		$	5,788,599		$	6,477,475		$	4,607,989		$	7,076,586

	For the Six Months Ended
	June 30, 2009						June 30, 2009
	Unaudited			Unaudited			Unaudited			Unaudited
	Revenues			Assets			Revenues			Assets
United States		$	--		$	9,710		$	--		$	6,409
People’s Republic of China			11,212,756			6,467,765			7,806,561			7,070,177
Totals		$	11,212,756		$	6,477,475		$	7,806,561		$	7,076,586

NOTE 10 – CONTINGENCIES AND COMMITMENTS

As a result of the September 24, 2008 complaint filed by the SEC against us and Messrs. Harrell and Aubel as described in Part I, Item 3, “Legal Proceedings” of this Form 10-Q, we consented to the entry of a Permanent Injunction and Other Relief to resolve the liability aspects of the complaint.  The Permanent Injunction, among other things, permanently restrains and enjoins us from violation of Sections 5(a) and 5(c) of the Securities Act of 1933, 15 U.S.C. §§ 77e(a) and 77e(c); violations of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule l0b-5 promulgated thereunder, 17 C.F.R. §240.l0b-5; violations of Section 13(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78m(a), and Rules 12b-20, 13a-l, and 13a-13 thereunder, 17 C.F.R. §§ 240.12b-2 0, 240.13a-l, and 240. 13a-13; and violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78m(b )(2)(A) and 8m(b )(2)(B).

- 15 -

CHINA LOGISTICS GROUP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2010

On February 24, 2010 the Securities and Exchange Commission filed a motion and memorandum of law to set disgorgement and civil penalty amounts as to our company and Messrs. Harrell and Aubel.  The SEC’s motion alleges that as a result of a fraudulent arrangement between our company and Mr. Aubel, he was permitted to convert his loans to our common stock at $0.01 per share which allowed us to benefit by writing off $930,000 in debt we owed to Mr. Aubel.  The SEC seeks disgorgement from us of $931,000 representing the principal amount of the loans converted plus prejudgment interest in the amount of $147,489 for a total disgorgement obligation of $1,078,489.  

We have filed a memorandum of law in opposition to the SEC's motion along with a supplement to that memorandum of law and an evidentiary hearing on the SEC’s motion was conducted by the Magistrate Judge on May 20, 2010.  Upon conclusion of the May 20, 2010 hearing, we submitted proposed findings of fact and conclusions of law for the Magistrate Judge’s consideration pursuant to her order.  Thereafter, the Magistrate Judge will issue a report and recommendation to the District Court Judge for his consideration in making a final ruling on the SEC’s motion for disgorgement. The amount of disgorgement sought by the SEC has not been accrued nor have we established a loss reserve for the amounts sought as of June 30, 2010 or December 31, 2009 as we have objected to the SEC’s motion and we cannot dete rmine that it would be probable that a final judgment would be awarded to the SEC for the amounts it seeks.

The amount sought by the SEC has not been accrued nor have we established a loss reserve for the amounts sought as of March 31, 2010 or December 31, 2009 as we have objected to the SEC’s motion and we cannot determine that it would be probable that a final judgment would be to our detriment.  The SEC’s motion also seeks disgorgement and prejudgment interest from Mr. Aubel of $6,012,244.30 and civil penalties of $130,000 against Mr. Harrell and $250,000 against Mr. Aubel.

In addition, the pending lawsuit with the SEC may result in additional claims by stockholders, regulatory proceedings, government enforcement actions and related investigations and litigation. We cannot predict the ultimate outcome of this litigation and any continued litigation would result in significant expenses, management distraction and potential damages, penalties, other remedies, or adverse findings, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.  In addition, our agreement to entry of a consent order granting the SEC injunctive relief restraining us from future violations of Federal securities laws may make future financing efforts more difficult and costly.

We are evaluating filing a lawsuit against Messrs. Harrell and Aubel and other parties involved in the improper conduct alleged by the SEC for damages we suffered as a result of their conduct.  In addition, we are evaluating filing a lawsuit against Mr. Aubel as a result of the uncertainty as to the validity of the amount of the note payable in the amount of $2,521,380 which we redeemed for 2,864,606 shares of our common stock in March, 2008 pursuant to the terms of the December 2007 agreement we entered into to a acquire a 51% interest in Shandong Jiajia. Once the Court makes a final determination of the SEC’s motion for disgorgement, we will make a final decision whether we will proceed with the filing of a lawsuit.

Rent expense from our office leases for the three months ended June 30, 2010 was approximately $29,000.  We did not have any minimum, contingent, or sublease arrangements in these leases.

The table below presents our commitments for our various office leases in the U.S. and China for the years ended December 31, 2010 and thereafter:

Period	Total
	Unaudited
Period Ended December 31, 2010	$	95,000
Period Ended December 31, 2011		26,000
Period Ended December 31, 2012		22,000
Period Ended December 31, 2013		22,000
Period Ended December 31, 2013		22,000
Thereafter		--
	$	187,000

NOTE 11 – SUBSEQUENT EVENTS

We have evaluated all events that occurred after the balance sheet date but before our financial statements were available through August 16, 2010 to determine if they must be reported. Our management determined that there were no reportable subsequent events to be disclosed.

- 16 -

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

The following discussion should be read in conjunction with the information contained in our unaudited consolidated financial statements and the notes thereto appearing elsewhere herein and in conjunction with the Management’s Discussion and Analysis set forth in our Annual Report on Form 10-K, for the year ended December 31, 2009 as filed with the SEC.

We maintain our financial records and report on a calendar year basis, as such the three month period ended June 30, is our second quarter. The year ended December 31, 2009 is referred to as “2009” and the year ending December 31, 2010 is referred to as “2010”.

OVERVIEW

All of our business and operations are conducted in China though our subsidiary, Shandong Jiajia.  Shandong Jiajia acts as an agent for international freight and shipping companies. Through this subsidiary, we sell cargo space and arrange international transportation via land, maritime, and air routes primarily for clients seeking to export goods from China. We are a non-asset based freight forwarder and we do not own any containers, trucks, aircraft or ships. We contract with companies owning these assets to provide transportation services required for shipping freight on behalf of our customers.  Shandong Jiajia’s headquarters are in Qingdao, China, and it has branches in Shanghai, Tianjin, Xiamen, and Lianyungang.  We coordinate with agents in North America, Europe, Australia, Asia, and Africa.

Our Performance

Our revenues for the three and six months ended June 30, 2010 increased $1.2 million or 25.6% and $3.4 million or 43.6%, respectively, compared to the same periods of 2009 as a result of a strong rebound of import and export in China, in part due to the Chinese Government’s effective economic stimulus measures undertaken in 2009. However, our gross profit margins decreased 6 percentage points in the second quarter of 2010 compared to the same period of 2009 while our gross profit margins increased 1 percentage points in the first six months of 2010 compared to the first six months of 2009 as a result of our pricing concessions in the second quarter of 2010 due to increased competitions in China’s shipping and logistics market. 

Beginning in the first quarter of 2010 the Chinese Government implemented a plan to curtail lending, control bad loans, and discourage real estate speculation, in an effort to keep China’s growth rate at a sustainable level. Since then China’s growth domestic product (GDP) grew by 10.3% during the second quarter of 2010, down from 11.9% seen in the first quarter of 2010. In mid June 2010, China’s Central Bank pledged to introduce greater flexibilities to its exchange rate or a gradual appreciation of its currency, which may result in a 5% appreciation in the valuation of the RMB and an increase of oil and transportation costs in China. Despite these uncertainties, we anticipate China’s import and export for the rest of 2010 to maintain at the 2008 level as we continue to work to improve both our net revenues and g ross profit margins in an increasingly competitive shipping and logistics marketplace in the second half of 2010.

Our Outlook

 As part of Chinese Government's broad policies to combat a widespread global economic slowdown, which adversely impacted its export-driven economy, and balance the trade with its international trading partners, the Chinese Government implemented measures to stimulate domestic consumptions in lieu of its traditional export driven economic model. As a result we foresee improved import shipping activities to continue due to a rise in China’s domestic consumptions. Additionally we have witnessed a rebound in container and cargo shipments outbound for the North American markets, particularly with increased outbound bookings for shipments to the United States. Our recently signed long-term cooperative agreement with South America’s shipping giant, CSAV, would help us to solidify our position on those routes for our expanded s hipping services catering to our export customers for shipping to both the North and South American markets.   

During the first six months of 2010 and beyond, we face a number of challenges in growing our business, which is tied to the global economic recovery. While we have witnessed improved quoting and booking activities and an increase in our total sales revenues in the second quarter of 2010 we foresee continued competitions in the marketplace that may negatively impact our gross profit margins. Beyond 2010 our visibility is limited as uncertainties remain regarding the long-term health of our global economy, and as a result we are unable to predict whether the current recovery of imports and exports of China will maintain the momentum beyond 2010.  

- 17 -

It should be noted the report of our independent registered public accounting firm in connection with our annual report on Form 10-K for the year ended December 31, 2009 filed with the SEC contains an explanatory paragraph that raised substantial doubt as to our ability to continue as a going concern based on our recurring losses from operations, limited working capital and an accumulated deficit.  The accompanying unaudited consolidated financial statements do not include any adjustments relating to the recoverability and classification of assets carrying amounts or the amount and classification of liabilities that might result from the outcome of these uncertainties.

RESULTS OF OPERATIONS

The following tables provide certain comparative information based on our consolidated results of operations for the three and six months ended June 30, 2010 as compared to the three and six months ended June 30, 2009:

	Three Months Ended June 30,
	2010			2009		$ Change			% Change
		Unaudited		Unaudited			Unaudited		Unaudited
Sales	$	5,788,599		$	4,607,989	$	1,180,610			26	%
Cost of Sales		5,755,453			4,293,127		1,462,326			34	%
Gross Profit		33,146			314,862		(281,717	)		(90)	%
Total Operating Expenses		678,328			206,615		471,713			228	%
Income (Loss) from Operations		(645,183	)		108,247		(753,430	)		NA
Total Other Income		(286,553	)		30,454		(317,007	)		NA
Net Income (Loss) attributable to China Logistics Group, Inc.	$	(1,059,381	)	$	59,717	$	(1,119,098	)		NA

	Six Months Ended June 30,
	2010			2009			$ Change			% Change
		Unaudited		Unaudited				Unaudited			Unaudited
Sales	$	11,212,756		$	7,806,561		$	3,406,195			44	%
Cost of Sales		10,768,978			7,582,716			3,186,262			42	%
Gross Profit		443,778			223,845			219,932			98	%
Total Operating Expenses		880,105			526,617			353,488			67	%
Income (Loss) from Operations		(436,327	)		(302,772	)		(133,555	)		44	%
Total Other Income (expenses)		(518,493	)		3,420,470			(3,938,963	)		NA
Net Income (Loss) attributable to China Logistics Group, Inc.	$	(980,841	)	$	3,181,467		$	(4,162,308	)		NA

OTHER KEY INDICATORS

	Three Months Ended June 30,						Six Months Ended June 30,
	2010			2009			2010			2009
Other Key Indicators:	Unaudited			Unaudited			Unaudited			Unaudited
Cost of sales as a percentage of revenues		99	%		93	%		96	%		97	%
Gross profit margin		1	%		7	%		4	%		3	%
Total operating expenses (income) as a percentage of revenues		12	%		4	%		8	%		7	%

Revenues

Revenues for the second quarter of 2010 increased $1.2 million or 25.6% compared to the second quarter of 2009; and revenues for the first six months of 2010 increased $3.4 million or 43.6% compared to the same period of 2009. The increase in revenues was primarily due to the economic stimulus measures undertaken by the Chinese government beginning in early 2009, which led to an economic rebound and an increase in both import activities and domestic consumption in the second half of 2009. According to the General Administration of customs of the PRC, total import and export increased 43% during the first six months of 2010, compared to the same period in 2009. Our growth in sales revenues was in line with a broad rebound in China’s import and export activities and an increase in its domestic consumptions. However, beginning in the second quarter of 2010, we experienced a slower growth in revenues as a result of a lower shipping demand due to the Chinese Central Bank’s regulatory policies to tighten bank lending and contain inflation.  

- 18 -

Cost of Sales and Gross Profit Margins

     Cost of sales of $5.7 million decreased by $1.5 million, a gross profit margin of 0.57%, in the second quarter of 2010 compared to $0.3 million, a gross profit margin of 6.8%, in the same period in 2009.  Cost of goods sold of $10.8 million increased $3.2 million, a gross profit margin of 3.9%, in the first quarter of fiscal 2010 compared to $23.3 million, a gross profit margin of 16.6%, in the same period in 2009.   The decrease in gross profit margin was primarily a result of a higher average shipping cost due to intensified pricing competition. Our cost of revenues as a percentage of revenues in the first six months of 2010 totaled 96.0%, a de crease of 1.1 percentage points compared to the same period of 2009, which equally increased our gross profit margins by the same amount. It was primarily a result of an increase in higher shipping activities and therefore we were able to negotiate for more favorable pricing from the carriers and shipping lines. In the coming quarters of 2010, we anticipate intense competition while facing the uncertainty on the pace of global economic recovery as well as how the Chinese government would contain its overheating domestic economy and hence affect the demand level of import and export between China and other economic entities. As a result, our gross profit margin will be dependent on the macro-economic environment as well as our pricing power based on our strategy to partner with major carriers and develop new shipping routes in the emerging regains that have booming import and export with China.

Total Operating Expenses

Total operating expenses during the second quarter of 2010 increased $0.5 million, or 228%, over the second quarter of 2009, primarily due to an increase of $0.5 million in stock based compensation expenses paid to one of our officer and one director as well as a consultant that provides management and advisory services to us.  Included in these increases in the second quarter of 2010 was $300,000 of one-time expense associated with the issuance of shares of our common stock as incentive compensation to the officer and director and $164,000 associated with the one-time issuance of securities to China Direct, Inc. as a discretionary award under the terms of a consulting agreement.  For the six months ended June 30, 2010, total operating expens es increased $0.4 million, or 67%, compared to the same period in 2009 mainly due to an increase of $0.5 million in stock based compensation expenses, partially offset by a decrease of $0.1 million in professional fees associated with SEC regulatory compliance in the 2009 period. As we continue to implement our program to curtail operating expenses, we anticipate a decrease of operating expenses as a percentage of total revenues. However, the actual result will depend on if our fore-mentioned strategy leads to significant increase in revenues.

Total Other Income (Expenses)

Total other income (expense) consists of interest expense, change in fair value of derivative liability, and miscellaneous other income. Total other expense in the second quarter of 2010 amounted to $0.3 million, compared to an other income of $0.03 million in the comparable period in 2009, mainly due to, an increase of $0.2 million in loss on change in fair value of derivatives, which is a non-cash item associated with the valuation of the warrants we issued in our 2008 unit offering, and an increase of $0.07 million in other expense.

For the six months ended June 30, 2010, total other expenses amounted to $0.5 million, compared to total other income of $3.4 million in the same period of 2009. This increase was mainly due to the increase of $3.8 million in loss on change in fair value of derivative liabilities.

Net Income (Loss)

Net loss for the three and six months ended June 30, 2010 totaled $0.9 million and $1.0 millions respectively, compared to net income of $0.1 million and $3.1 million for the comparative periods in 2009, respectively. The increase was mainly due to the non-cash loss from the change in fair value of our derivative liability in the 2010, and the non-cash gain from the change in fair value of derivative liability in the first quarter of 2009 as well as the non-cash stock based compensation expense incurred in the second quarter of 2010.  

LIQUIDITY AND CAPITAL RESOURCES

Liquidity is the ability of a company to generate adequate amounts of cash to meet its needs for cash.

At June 30, 2010, we had working capital of $0.21 million compared to $0.16 million at December 31, 2009, which remained at a lower level in relation to our working capital needs. 

The report of our independent registered public accounting firm on our financial statements for the year ended December 31, 2009 contains an explanatory paragraph regarding our ability to continue as a going concern based upon our recurring losses from operations, net cash used in operations, and accumulated deficit.

Although our results for the second quarter of 2010 reflect a substantial reduction in gross margins, higher sales, higher gross margins, and lower operating expenses as a percentage of sales resulted in net operating income (excluding non-cash expenses) in the six months ended June 30, 2010.  If we are able to maintain sales at current levels, improve our gross profit margins and control costs as a percentage sales our liquidity will improve.

- 19 -

If we are unable to achieve these goals during the balance of 2010 or in the event the SEC prevails in its motion to seek disgorgement from us in the amount of $1.1 million, we will need to raise additional working capital.  See Note 10 – Contingencies and Commitments included in this report. As of June 30, 2010 we have not accrued the amount of disgorgement sought by the SEC and we do not have sufficient funds available to pay this amount should the Court rule in the SEC’s favor. We do not have any commitments for any additional capital and have been relying on advances from related parties to supplement our working capital needs.  Both the terms of our 2008 Unit Offering which contain certain restrictive covenants, our operating results, the risk of having to pay disgorgement to the SEC and the uncertain ty of the capital markets could hinder our efforts. If it is necessary for us to raise additional working capital there are no assurances such funds will be available to us.

Net cash used in operating activities in the first six months of 2010 totaled $0.3 million compared to $0.8 million for the comparable period in 2009.  The cash used in operating activities during this period was mainly due to our net loss of $1.0 million, an increase in our accounts receivable of $0.3 million, and an increase in prepaid expenses and other current assets of $0.3 million. These cash outflows were partially offset by stock based compensation of $0.5 million, an increase in advance from customers of $0.3 million, a loss on change in fair value of derivative liabilities of $0.4 million, and an increase in other accruals and current liabilities of $0.2 million.

Net cash used in operating activities in the first six months of 2009 totaled $0.8 million, which was mainly due to an increase in our accounts receivable of $0.5 million, an increase in prepaid expenses and other current assets of $0.1 million, and an increase in advances to vendors of $0.1 million. These cash outflows were partially offset by an increase in our other accruals and current liabilities of $0.3 million. The aforementioned cash flows were further adjusted by a non-cash gain on change in fair value of derivative liability of $3.4 million as well as our net income of $3.1 million in the period.

    Cash used in investing activities during the first six months of 2010 consists of $0.02 million advance to related parties.

Net cash used in investing activities during the first six months of 2009 in the amount of $0.3 million was primarily derived from advances to related parties of $0.4 million, offset by repayment from related parties of $0.1 million. On March 31, 2009 Shandong Jiajia lent $1.6 million to Shanghai Yudong Logistics Co., Ltd., a strategic partner. This unsecured loan was lent on a 21-day term bearing no interest and was timely repaid in April 2009.

Cash used in financing activities during the first six months of 2010 in the amount of $0.4 million was comprised of advance from related parties

Net cash provided by financing activities during the first six months of 2009 in the amount of $0.4 million was comprised of $0.6 million in advances from related parties, partially offset by $0.2 million in repayment of amounts due to related parties.

We maintain cash balances in the United States and China. At June 30, 2010 and December 31, 2009, our cash by geographic area was as follows:

		June 30, 2010		December 31, 2009
		Unaudited
United States	$	4,710	0.4%	$	10,755	1%
China		1,073,867	99.6%		1,710,083	99%
	$	1,078,577	100%	$	1,720,838	100%

In future periods we anticipate a substantial portion of our cash balances will continue to be held in the form of RMB held in bank accounts at financial institutions located in the PRC. Cash held in banks in the PRC is not insured. While the Chinese government introduced regulations which relaxed restrictions on the conversion of the RMB, restrictions still remain, including but not limited to, restrictions on foreign invested entities. Foreign invested entities may only buy, sell or remit foreign currencies after providing valid commercial documents at only those banks authorized to conduct foreign exchanges. Furthermore, the conversion of RMB for capital account items, including direct investments and loans, is subject to PRC government approval. Chinese entities are required to establish and maintain separate foreign exchange account s for capital account items. We cannot be certain Chinese regulatory authorities will not impose more stringent restrictions on the convertibility of the RMB, especially with respect to foreign exchange transactions. Accordingly, cash on deposit in banks in the PRC is not readily deployable by us for purposes outside of China.

- 20 -

The following tables provide certain comparative information based on our consolidated balance sheets at June 30, 2010 as compared to December 31, 2009:

	June 30, 2010		December 31, 2009		$ Change			% Change
		Unaudited		(Restated)
Cash	$	1,078,577	$	1,720,838	$	(642,261	)		(37)	%
Accounts receivable, net		3,257,683		2,923,990		333,693			11	%
Other Receivables		1,435,692		1,100,662		335,030			30	%
Advance to vendors and other prepaid expenses		210,782		146,062		64,720			44	%
Due from related parties		464,689		447,032		17,657			4	%
Total current assets		6,447,423		6,338,584		108,839			2	%
Accounts payable - trade		2,756,601		2,733,820		22,781			1	%
Other accruals and current liabilities		683,020		535,756		147,444			28	%
Advances from customers		771,244		457,358		295,886			62	%
Due to related parties		411,237		814,226		(402,992	)		(49)	%
Total current liabilities		6,237,657	$	6,174,764		62,893			1	%

Total current assets increased 2% at June 30, 2010 from December 31, 2009 primarily due to an increase in other receivables, net accounts receivable and advance to vendors and other prepaid expenses, partially offset by a decrease of 37% ($0.6 million) in cash.

Total current liabilities increased 1% at June 30, 2010 from December 31, 2009 primarily due to an increase in advance from customers and other accruals and current, liabilities, partially offset by a decrease in due to related parties.

Other receivables at June 30, 2010 were $1.4 million and were comprised of $1.08 million loans receivable to other entities with which we have a strategic or other relationship with, deferred expenses of $0.10 million and $0.25 million other prepays and deposit.

Due from related parties was $0.5 million at June 30, 2010, which consisted of due from Shandong Huibo Import & Export Co., Ltd., a Chinese limited liability company which is a minority owner of our company.  At December 31, 2009 we were owed $0.4 million representing amounts due under a loan from Shandong Huibo Import & Export Co., Ltd., a Chinese limited liability. 

These advances to related parties described above are unsecured, non-interest bearing and payable on demand and were loaned to related parties for working capital purposes.

Due to related parties totaled $0.4 million at June 30, 2010, a decrease of 49% from that at December 31, 2009. We obtain advances from related parties for working capital purposes, such advances bear no interest and are payable on demand. The decrease in due to related parties is due to the following:

• At June 30, 2010 and December 31, 2009, we owed $132,700 and $109,871, respectively, to Xiangfen Chen, general manager of the Xiamen branch of Shandong Jiajia.  

• At June 30, 2010 and December 31, 2009, we owed $233,433 and $99,381, respectively, to Bin Liu general manger of the Tianjin branch of Shandong Jiajia and a 90% owner of Tianjin Sincere Logistics Co., Ltd. (“Tianjin Sincere").

• At June 30, 2010 and December 31, 2009, we owed $104 and $559,974, respectively, to Tianjin Sincere. These loans are unsecured, non-interest bearing and repayable on demand and are included in due to related parties.

- 21 -

Commitments

Rent expenses from our office leases for the second quarter and the first six months of 2010 were $29,000 and $58,000, respectively.  We did not have any minimum, contingent, or sublease arrangements in these leases.  The table below reflects our minimum commitments for our various office leases in the U.S. and China for the years ended December 31, 2010 and thereafter:

Period	Total
	Unaudited
Period Ended December 31, 2010	$	95,000
Period Ended December 31, 2011		26,000
Period Ended December 31, 2012		22,000
Period Ended December 31, 2013		22,000
Period Ended December 31, 2014		22,000
Thereafter
	$	187,000

OFF BALANCE SHEET ARRANGEMENTS

We do not have any off-balance sheet arrangements that we are required to disclose. In the ordinary course of business, we enter into operating lease commitments, purchase commitments and other contractual obligations. These transactions are recognized in our financial statements in accordance with generally accepted accounting principles in the United States.

CRITICAL ACCOUNTING POLICIES

The Preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions, including estimates of the allowance for doubtful accounts and stock based compensation that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements.  Estimates also affect the reported amounts of revenue and expenses during the reported period.

Significant estimates for the periods reported include the allowance for doubtful accounts which is based on an evaluation of our outstanding accounts receivable including the age of amounts due, the financial condition of our specific customers and knowledge of our industry segment in Asia.  We also rely on certain assumptions when deriving the fair value of share-based compensation and calculations underlying our provision for taxes in China.  Assumptions and estimates employed in the areas are material to our reported financial conditions and results of operations.  Actual results could differ from these estimates.

Recent Accounting Pronouncements

In June 2009 the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting, or SFAS 168. SFAS 168 represents the last numbered standard to be issued by FASB under the old (pre-Codification) numbering system, and amends the GAAP hierarchy established under SFAS 162. On July 1, 2009 the FASB launched FASB’s new Codification entitled The FASB Accounting Standards Codification, or FASB ASC. The Codification will supersede all existing non-SEC accounting and reporting standards. SFAS 168 is effective in the first interim and annual periods ending after September 15, 2009. This pronouncement will have no effect on our consolidated financial stat ements upon adoption other than current references to GAAP which will be replaced with references to the applicable codification paragraphs. 

In May 2009 the FASB issued SFAS No. 165, Subsequent Events, or SFAS 165. SFAS 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS 165 requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, that is, whether the date represents the date the financial statements were issued or were available to be issued. SFAS 165 is effective in the first interim period ending after June 15, 2009. We expect SFAS 165 will have an impact on disclosures in our consolidated financial statements, but the nature and magnitude of the specific effects will depend upon the nature, terms and value of the any subsequent events occurring after adoption.

In September 2009, the FASB issued the FASB Accounting Standards Update No. 2009-08 “Earnings Per Share – Amendments to Section 260-10-S99”, which represents technical corrections to topic 260-10-S99, Earnings per share, based on EITF Topic D-53,  Computation of Earnings Per Share for a Period that includes a Redemption or an Induced Conversion of a Portion of a Class of Preferred Stock  and EITF Topic D-42,  The Effect of the Calculation of Earnings per Share for the Redemption or Induced Conversion of Preferred Stock . We have adopted this update and it did not have a material impact on our consolidated financial position, results of operations or cash flows.

- 22 -

In September 2009, the FASB issued the FASB Accounting Standards Update No. 2009-09 “Accounting for Investments-Equity Method and Joint Ventures and Accounting for Equity-Based Payments to Non-Employees”.  This update represents a correction to Section 323-10-S99-4,  Accounting by an Investor for Stock-Based Compensation Granted to Employees of an Equity Method Investee . Additionally, it adds observer comment  Accounting Recognition for Certain Transactions Involving Equity Instruments Granted to Other Than Employees  to the Codification. We have adopted this update and it did not have a material impact on our consolidated financial position, results of operations or cash flows.

In September 2009, the FASB issued the FASB Accounting Standards Update No. 2009-12 “Fair Value Measurements and Disclosures Topic 820 – Investment in Certain Entities That Calculate Net Assets Value Per Share (or Its Equivalent)”, which provides amendments to Subtopic 820-10, Fair Value Measurements and Disclosures-Overall, for the fair value measurement of investments in certain entities that calculate net asset value per share (or its equivalent). The amendments in this update permit, as a practical expedient, a reporting entity to measure the fair value of an investment that is within the scope of the amendments in this update on the basis of the net asset value per share of the investment (or its equivalent) if the net asset value of the investment (or its equivalent) is calculated in a manner consistent with the measurement principles of Topic 946 as of the reporting entity’s measurement date, including measurement of all or substantially all of the underlying investments of the investee in accordance with Topic 820. The amendments in this update also require disclosures by major category of investment about the attributes of investments within the scope of the amendments in this update, such as the nature of any restrictions on the investor’s ability to redeem its investments at the measurement date, any unfunded commitments (for example, a contractual commitment by the investor to invest a specified amount of additional capital at a future date to fund investments that will be make by the investee), and the investment strategies of the investees. The major category of investment is required to be determined on the basis of the nature and risks of the investment in a manner consistent with the guidance for major security types in U.S. GAAP on investments in debt and equity securities in paragraph 32 0-10-50-1B. The disclosures are required for all investments within the scope of the amendments in this update regardless of whether the fair value of the investment is measured using the practical expedient. We have adopted this update and it did not have a material impact on our consolidated financial position, results of operations or cash flows.

A variety of proposed or otherwise potential accounting standards are currently under study by standard setting organizations and various regulatory agencies. Due to the tentative and preliminary nature of those proposed standards, management has not determined whether implementation of such proposed standards would be material to our consolidated financial statements.

Cautionary Note Regarding Forward-Looking Information and Factors That May Affect Future Results

This report contains forward-looking statements. The Securities and Exchange Commission encourages companies to disclose forward-looking information so that investors can better understand a company's future prospects and make informed investment decisions. This Quarterly Report on Form 10-Q and other written and oral statements that we make from time to time contain such forward-looking statements that set out anticipated results based on management's plans and assumptions regarding future events or performance. We have tried, wherever possible, to identify such statements by using words such as "anticipate," "estimate," "expect," "project," "intend," "plan," "believe," "will" and similar expressions in connection with any discussion of future operating or financial performance. In particular, these include statements relating to f uture actions, future performance or results of current and anticipated sales efforts, expenses, the outcome of contingencies, such as legal proceedings, and financial results. A list of factors that could cause our actual results of operations and financial condition to differ materially includes:

• risks from Securities and Exchange Commission litigation;

• risks from liquidated damages related to warrants sold in our April 2008 offering;

• the loss of the services of any of our executive officers or the loss of services of any of our key persons responsible for the management, sales, marketing and operations efforts of our subsidiaries;

• our ability to successfully transition the internal operations of companies which we acquired in the PRC from their prior status as privately held Chinese companies to their current status as subsidiaries of a publicly-held U.S. company;

• our acquisition efforts in the future, if any, may result in significant dilution to existing holders of our securities;

• liabilities related to prior acquisitions,

• continuing material weaknesses in our disclosure controls and procedures and internal control over financial reporting which may lead to additional restatements of our financial statements,

• difficulties in raising capital in the future as a result of the terms of our April 2008 unit offering;

• our ability to effectively integrate our acquisitions and manage our growth;

- 23 -

• the lack of various legal protections customary in certain agreements to which we are party and which are material to our operations which are customarily contained in similar contracts prepared in the United States;

• our dependence upon advisory services provided by a U.S. company due to our management’s location in the PRC;

• intense competition in the freight forwarding and logistics industries;

• the impact of economic downturn in the PRC on our revenues from our operations in the PRC;

• our lack of significant financial reporting experience, which may lead to delays in filing required reports with the Securities and Exchange Commission and suspension of quotation of our securities on the OTCBB, which will make it more difficult for you to sell your securities;

• the impact of changes in the political and economic policies and reforms of the Chinese government; fluctuations in the exchange rate between the U.S. dollars and Chinese Renminbi;

• the limitation on our ability to receive and use our revenue effectively as a result of restrictions on currency exchange in China;

• the impact of changes to the tax structure in the PRC;

• our inability to enforce our legal rights in China due to policies regarding the regulation of foreign investments;

• the existence of extended payment terms which are customary in China;

• uncertainties related to PRC regulation relating to acquisitions of PRC companies by foreign entities that could restrict or limit our ability to operate, and could negatively affect our acquisition strategy; and 

• PRC regulations related to our loans and advances. 

These factors are discussed in greater detail under Item 1. Description of Business-Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2008 filed with the SEC on May 18, 2009.

 We caution that the factors described herein and other factors could cause our actual results of operations and financial condition to differ materially from those expressed in any forward-looking statements we make and that investors should not place undue reliance on any such forward-looking statements. Further, any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of anticipated or unanticipated events or circumstances. New factors emerge from time to time, and it is not possible for us to predict all of such factors. Further, we cannot assess the impact of each such factor on our results of operations or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable for a smaller reporting company.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) that are designed to ensure that information required to be disclosed by us in reports that we file under the Exchange Act is recorded, processed, summarized and reported as specified in the SEC’s rules and forms and that such information required to be disclosed by us in reports that we file under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer (CEO), and our Chief Financial Officer (CFO), to allow timely decisions regarding required disclosure. Management, with the participation of our CEO and CFO, performed an evaluation of the effectiveness of our disclosure controls and procedures as of June 30, 2010.

- 24 -

Based on this evaluation we concluded that as of June 30, 2010 our disclosure controls and procedures were not effective such that the information relating to our company, including our consolidated subsidiaries, required to be disclosed in our SEC reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure as a result of continuing significant deficiencies or material weaknesses previously identified in our Annual Report on Form 10-K for the year ended December 31, 2009.

A “significant deficiency” is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of a registrant's financial reporting. A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of our annual or interim financial statements would not be prevented or detected.

Remediation of Material Weakness in Internal Control

We believe the remediation actions set forth in our Annual Report on Form 10-K for the year ended December 31, 2009 will be sufficient to remediate the material weaknesses described above.  Furthermore, through continued training and improved retention of qualified accounting staff, a better awareness of the importance of such controls and procedures has been achieved.  However, a substantial improvement needs to be made throughout the remainder of 2010 in order to achieve our overall remediation target and objectives.

As we improve our internal control over financial reporting and implement remediation measures, we may supplement or modify the remediation measures described above.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting identified in connection with our evaluation that occurred during our first quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

On September 24, 2008, the Securities and Exchange Commission filed a civil complaint in the U.S. District Court for the Southern District of Florida (Case No. 08-61517-CIV-GOLD MCALILEY) against Mr. V. Jeffrey Harrell, our former CEO and principal and financial accounting officer, Mr. David Aubel, previously our largest shareholder and formerly a consultant to us, and our company based upon the alleged improper conduct of Messrs. Harrell and Aubel that occurred at various times between in or about April 2003 and September 2006.  The Securities and Exchange Commission’s complaint alleges that Mr. Harrell filed annual and quarterly reports with the Securities and Exchange Commission that, among other things, materially overstated our revenues and assets and understated our net losses.  The complaint also alleges that Mr. Harrell falsely certified numerous annual and quarterly reports we filed with the Securities and Exchange Commission that he knew, or was severely reckless in not knowing, contained material misstatements and omissions.  The complaint further alleges that from November 2003 to September 2006, Mr. Harrell and Mr. Aubel issued a series of false and misleading press releases announcing our acquisition of another company, the availability of large credit facilities, and an international operating subsidiary. Taking advantage of our artificially inflated stock price, the complaint alleges that Mr. Aubel dumped millions of shares of our stock, acquired at steep discount from us, into the public market in transactions that were not registered under federal securities laws.  The complaint alleges that the conduct of Messrs. Harrell and Aubel and our company constituted violations of various sections of the Securities Act of 1933 and the Securities Exchange Act of 1934. The complaint seek s, among other things, to permanently enjoin the Messrs. Harrell and Aubel and us from engaging in the wrongful conduct alleged in the complaint, disgorgement, civil monetary penalties, and a penny stock bar against Mr. Aubel, civil monetary penalties, a penny stock bar, and an officer and director bar against Mr. Harrell and disgorgement against us.

- 25 -

Our current management had no knowledge of Messrs. Harrell and Aubel’s improper conduct as alleged in the complaint which relate to their actions prior to 2007 involving us when our company was known as Video Without Boundaries, Inc. In December 2007, control of our company, which at the time had changed our name to MediaREADY, Inc., was acquired by principals and other parties unrelated to Messrs. Harrell and Aubel in connection with the acquisition and financing of Shandong Jiajia. After the acquisition of a 51% interest in Shandong Jiajia, we changed our name to China Logistics Group, Inc. Messrs. Harrell and Aubel remain minority shareholders of our company.

We cooperated with the Securities and Exchange Commission in this proceeding and while current management assumed control of the Company following the events that gave rise to the lawsuit in February 2009 we entered into a consent to the entry of a Permanent Injunction and Other Relief to resolve the liability aspects of the complaint.  The Permanent Injunction permanently restrains and enjoins us from violation of Sections 5(a) and 5(c) of the Securities Act of 1933, 15 U.S.C. §§ 77e(a) and 77e(c); violations of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule l0b-5 promulgated thereunder, 17 C.F.R. §240.l0b-5; violations of Section 13(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78m(a), and Rules 12b-20, 13a-l, and 13a-13 thereunder, 17 C.F.R. §240.12b- 20, 240.13a-l, and 240. 13a-13; and violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78m(b )(2)(A) and 8m(b)(2)(B). The consent also provides that the Court will determine whether it is appropriate to order disgorgement and, if so, the amount of the disgorgement.

On October 19, 2009, the Court in this case entered a Default Judgment of Permanent Injunction and Other Relief against Mr. Aubel. The default judgment enjoins Mr. Aubel from violating Sections 5(a), and 5(c) of the Securities Act of 1933, and Sections 10(b), 13(d), and 16(a) of the Securities Exchange Act of 1934, and Rules 10b-5, 13d-1, and 16a-3, thereunder. In addition, the default judgment also bars Mr. Aubel from participating in any offering of a Penny Stock, pursuant to Section 21(d) of the Securities Exchange Act of 1934.

On February 24, 2010 the Securities and Exchange Commission filed a motion and memorandum of law to set disgorgement and civil penalty amounts as to our company and Messrs. Harrell and Aubel.  The SEC’s motion alleges that as a result of a fraudulent arrangement between our company and Mr. Aubel, he was permitted to convert his loans to our common stock at $0.01 per share which allowed us to benefit by writing off $930,000 in debt we owed to Mr. Aubel.  The SEC seeks disgorgement from us of $931,000 representing the principal amount of the loans converted plus prejudgment interest in the amount of $147,489.77 for a total disgorgement obligation of $1,078,489.77.  The SEC’s motion also seeks disgorgement and prejudgment interest from Mr. Aubel of $6,012,244.30 and civil penalties of $130,000 against Mr. Harrell and $250,000 against Mr. Aubel.

We filed a memorandum of law in opposition to the SEC's motion along with a supplement to that memorandum of law and an evidentiary hearing on the SEC’s motion was conducted by the Magistrate Judge in this case on May 20, 2010.  Upon conclusion of the May 20, 2010 hearing, we submitted proposed findings of fact and conclusions of law for the Magistrate Judge’s consideration pursuant to her order.  Thereafter, the Magistrate Judge will issue a report and recommendation to the District Court Judge for his consideration in making a final ruling on the SEC’s motion for disgorgement. We do not know when a ruling will be made in this case. The amount of disgorgement sought by the SEC has not been accrued nor have we established a loss reserve for the amounts sought as of March 31, 2010 or December 31, 2009 as we cannot determine that it would be probable that a final judgment would be  awarded to the SEC for the amounts it seeks.  

While we cannot predict the ultimate outcome of the issue of disgorgement and prejudgment interest, continued litigation will result in significant expenses, management distraction and potential damages, penalties, other remedies, or adverse findings, which could have a material adverse effect on our business, financial condition, results of operations and cash flows and our ability to continue as a going concern.

We are evaluating filing a separate lawsuit against Messrs. Harrell and Aubel and other parties involved in the improper conduct alleged by the Securities and Exchange Commission for damages we suffered as a result of their conduct.  In addition, we are evaluating filing a lawsuit against Mr. Aubel as a result of the uncertainty as to the validity of the amount of the note payable in the amount of $2,521,380 which we redeemed for 2,864,606 shares of our common stock in March, 2008 pursuant to the terms of the December 2007 agreement we entered into to a acquire a 51% interest in Shandong Jiajia. Once the Court makes a final determination of the SEC’s motion for disgorgement, we will make a final decision whether we will proceed with the filing of a lawsuit.

- 26 -

ITEM 1A.  RISK FACTORS.

Loans and advances may be subject to PRC regulations.

     We currently have several company loans and advances to third parties and we may continue to make loans or advances to third parties for strategic and other business related purposes such as $0.5 million due from Shandong Huibo Import and Export Co., Ltd., a Chinese limited liability company which is a minority owner of our company. The loans bear no interest and are repayable on demand.  PRC laws generally do not permit companies that do not possess a financial service business license to extend loans directly to other companies, including affiliates, without proceeding through a financial agency. The enforcement of these restrictions remains unpredictable, an d government authorities may declare these loans and advances void, require the forfeiture of any interest paid (although our loans and advances are interest free) and levy fines or other penalties upon the parties involved, among other remedies.

Other than the risk factor included above, there have been no material developments related to the disclosure in “Part I - Item 3. Legal Proceedings” of our Annual Report on Form 10-K for the year ended December 31, 2009.

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

On April 7, 2010, pursuant to the Consent of the Board of Directors, we issued 2,000,000 shares of our common stock to Mr. Wei Chen, our CEO, valued at $200,000 as an incentive bonus and 1,000,000 shares of our common stock to Mr. Hui Liu, our director, valued at $100,000, as an incentive bonus.

On April 14, pursuant to the Consent of the Board of Director, we issued 2,000,000 shares of our common stock to China Direct Investments, Inc., valued at $164,000  as a discretionary award based on the performance of consultant services provided to us during fiscal year 2009.

In each of these issuances the recipients were accredited investors and the issuance of these shares were exempt from registration under the Securities Act of 1933 in reliance on exemptions provided by Section 4(2) of that act. 

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES.

     None.

ITEM 4.  (REMOVED AND RESERVED).

    None.

ITEM 5.  OTHER INFORMATION.

    None.

ITEM 6.  EXHIBITS.

Exhibit No.		Description
	3.1	Articles of Incorporation (1)
	3.2	Articles of Amendment (1)
	3.3	Articles of Amendment (5)
	3.4	Articles of Amendment (2)
	3.5	Form of Articles of Amendment (10)
	3.6	Bylaws (1)
	4.1	Trilogy Capital Partners, Inc. Warrant Agreement dated June 1, 2006(3)
	4.2	Form of common stock purchase warrant issued to Mr. Chen (12)
	4.3	Form of common stock purchase warrant issued in the 2008 Unit Offering (13)
	10.1	Debt Conversion Agreement with David Aubel dated December 3, 2005 (4)
	10.2	Amendment to Debt Conversion Agreement with David Aubel dated May 15, 2006 (6)
	10.3	Consulting and Management Agreement dated May 22, 2007 with China Direct Investments, Inc. (7)
	10.4	Consulting and Management Agreement dated September 5, 2007 with Capital One Resource Co., Ltd (8)
	10.5	Acquisition Agreement dated as of December 31, 2007 between MediaReady, Inc., Shandong Jiajia International Freight & Forwarding (Logistics Co.) Ltd., and Messrs. Hui Liu and Wei Chen (2)

- 27 -

10.6	Finder's Agreement dated as of December 31, 2007 between MediaReady, Inc. and Dragon Venture (Shanghai) Capital Management Co., Ltd. (2)
10.7	Consulting Agreement dated as of December 31, 2007 between MediaReady, Inc. and China Direct, Inc. (2)
10.8	Form of Amendment to Acquisition Agreement dated as of January 28, 2008 between MediaReady, Inc., Shandong Jiajia International Freight & Forwarding Co., Ltd., and Messrs. Hui Liu and Wei Chen (9)
10.9	Form of Amendment to Finder's Agreement dated as of January 28, 2008 between MediaReady, Inc. and Dragon Venture (Shanghai) Capital Management Co., Ltd. (9)
10.10	Form of Amendment to Acquisition Agreement dated as of March 13, 2008 between MediaReady, Inc., Shandong Jiajia International Freight & Forwarding Co., Ltd., and Messrs. Hui Liu and Wei Chen (11)
10.11	Lease Agreement between China Logistics Group, Inc. and ETI International, Inc. (17)
10.12	Form of Subscription Agreement for 2008 Unit Offering (13)
10.13	Lease Agreement between Wei Chen and Shandong Jiajia International Freight & Forwarding Co., Ltd.(14)
10.14	Lease Agreement dated December 31, 2008 between Shandong Jiajia International & Freight Forwarding Co., Ltd. and Shandong Import & Export Co., Ltd. (17)
10.15	Assumption Agreement dated December 31, 2007 between David Aubel and MediaReady, Inc. (17)
10.16	Conversion Agreement dated March 20, 2008 between V. Jeffrey Harrell and China Logistics Group, Inc. (16)
10.17	Conversion Agreement dated March 20, 2008 between David Aubel and China Logistics Group, Inc. (16)
10.18	Form of promissory note in the principal amount of $561,517.27 dated January 1, 2003 issued by Video Without Boundaries, Inc. to Mr. David Aubel (15)
10.19	Form of Security Agreement dated May 23, 2001 between Valusales.com, Inc. and Mr. David Aubel (15)
10.20	Promissory note from Shanghai Yudong Logistics Co., Ltd. to Shandong Jiajia International Freight & Forwarding Co., Ltd., dated March 30, 2009 (18)
14.1	Code of Business Conduct and Ethics (12)
21.1	Subsidiaries of the Registrant (12)
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *
32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *

*  filed herewith

(1	)	Incorporated by reference to the registration statement on Form 10-SB, SEC File No. 0-31497 as filed with the Securities and Exchange Commission on September 11, 2000, as amended.
(2	)	Incorporated by reference to the Current Report on Form 8-K as filed on January 7, 2008.
(3	)	Incorporated by reference to the Current Report on Form 8-K as filed on June 2, 2006.
(4	)	Incorporated by reference to the Annual Report on Form 10-KSB for the year ended December 31, 2004.
(5	)	Incorporated by reference to the Current Report on Form 8-K as filed on September 27, 2006.
(6	)	Incorporated by reference to the Quarterly Report on Form 10-QSB for the period ended September 30, 2006.
(7	)	Incorporated by reference to the Current Report on Form 8-K as filed on May 23, 2007.
(8	)	Incorporated by reference to the Current Report on Form 8-K as filed on September 10, 2007.
(9	)	Incorporated by reference to the Current Report on Form 8-K as filed on January 31, 2008.
(10	)	Incorporated by reference to the definitive information statement on Schedule 14C as filed on February 14, 2008.
(11	)	Incorporated by reference to the Current Report on Form 8-K as filed on March 18, 2008.
(12	)	Incorporated by reference to the Annual Report on Form 10-K for the year ended December 31, 2007.
(13	)	Incorporated by reference to the Current Report on Form 8-K as filed on April 24, 2008.
(14	)	Incorporated by reference to the Quarterly Report on Form 10-Q/A (Amendment No. 1) for the period ended June 30, 2008.
(15	)	Incorporated by reference to the Quarterly Report on Form 10-Q for the period ended September 30, 2008.
(16	)	Incorporated by reference to the Quarterly Report on Form 10-Q/A (Amendment No. 1) for the period ended March 31, 2008.
(17	)	Incorporated by reference to the registration statement on Form S-1, SEC File No. 333-151783, as amended.
(18	)	Incorporated by reference to the Quarterly Report on Form 10-Q for the period ended March 31, 2009.

- 28 -

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: August 16, 2010	CHINA LOGISTICS GROUP, INC.
	By:	/s/ Wei Chen
		Wei Chen
		Chairman, Chief Executive Officer and President (Principal Executive Officer and Principal Financial and Accounting Officer)

- 29 -