UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly period ended ~~December~~ March 31, ~~2004~~2006

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

Commission file number 0-29754

TARGET LOGISTICS, INC.

(Exact name of registrant as specified in its charter)

Delaware	~~11-3309110~~	11-3309110
(State or other jurisdiction of	(I.R.S. Employer
(State or other jurisdiction of incorporation or organization		(I.R.S. Employer Identification No.)
incorporation or organization	Identification No.)
500 Harborview Drive, Third Floor Baltimore, Maryland		21230
500 Harborview Drive, Third Floor
(Address of principal executive offices)		(Zip Code)
Baltimore, Maryland	21230
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (410) 332-1598

Inapplicable

(Former name, former address and former fiscal year if changed from 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. Yes √ þ No __ o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act. Yes o No √_ þ

At May ~~January 25~~1, ~~2005~~ 2006, the number of shares outstanding of the registrant’s common stock was 15 17,~~834~~886,~~778~~735.

TABLE OF CONTENTS

Part I - Financial Information			~~Page~~	Page
Item 1.	~~Item 1.~~	Financial Statements:
		Consolidated Balance Sheets,
		Consolidated Balance Sheets, March 31, 2006 (unaudited) and June 30, 2005 (audited)		3
		December 31, 2004 (unaudited) and June 30, 2004 (audited)	3
		Consolidated Statements of Income for the Three Months Ended March 31, 2006 and 2005 (unaudited)		4
		Consolidated Statements of Income
		Consolidated Statements of Income for the Nine months Ended March 31, 2006 and 2005 (unaudited)		5
		for the Three Months Ended
		Consolidated Statements of Shareholders’ Equity for the Year Ended June 30, 2005 (audited) and the Nine months Ended March 31, 2006 (unaudited)		6
		December 31, 2004 and 2003 (unaudited)	4
		Consolidated Statements of Cash Flows for the Nine months Ended March 31, 2006 and 2005 (unaudited)		7
		Consolidated Statements of Income	5
		Notes to Unaudited Consolidated Financial Statements		9
		for the Six Months Ended
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		13
		December 31, 2004 and 2003 (unaudited)
Item 3.		Quantitative and Qualitative Disclosure about Market Risk		16
		Consolidated Statements of Shareholders’	6
Item 4.		Controls and Procedures		16
		Equity for the Year Ended June 30, 2004 (audited)
Part II - Other Information
		and the Six Months Ended December 31, 2004 (unaudited)
Item 6.		Exhibits		17
		Consolidated Statements of Cash Flows	7
		Signatures		18
		for the Six Months Ended December 31,
		2004 and 2003 (unaudited)
		Notes to Unaudited Consolidated Financial	8
		Statements
	Item 2.	Management’s Discussion and Analysis of	11
		Financial Condition and Results of
		Operations
	Item 3.	Quantitative and Qualitative Disclosure about Market Risk	13
	Item 4.	Controls and Procedures	14
Part II - Other Information
	Item 4.	Submission of Matters to a Vote of Security Holders	15
	Item 6.	Exhibits	15
		Signatures	16

- 2 -

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TARGET LOGISTICS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	December 31, 2004			June 30, 2004
	March 31, 2006			June 30, 2005
ASSETS	(unaudited)			(audited)
CURRENT ASSETS:
Cash and cash equivalents	$	6,~~075~~056,~~493~~681		$	56,~~896~~525,~~878~~577
Accounts receivable, net of allowance for doubtful accounts of $946,952 and $989,974, respectively		20,923,329			20,505,947
Accounts receivable, net of allowance for doubtful accounts of $694,858 and $900,571, respectively		22,643,887			20,934,908
Deferred income taxes		~~761~~976,~~787~~536			1,~~394~~034,~~000~~339
Prepaid expenses and other current assets		~~440~~183,~~401~~462			~~100~~294,~~348~~562
Total current assets		2829,~~201~~860,~~010~~566			2728,~~897~~789,~~173~~386
PROPERTY AND EQUIPMENT, net		~~287~~2,~~718~~279,021			~~386~~337,~~138~~031
OTHER ASSETS		~~825~~1,~~018~~344,859			~~977~~1,~~700~~747,478
DEFERRED INCOME TAXES		674,658			674,658
GOODWILL, net of accumulated amortization of $3,715,106		11,837,417			11,725,823
GOODWILL, net of accumulated amortization of $3,715,106		11,239,917			11,239,917
Total assets	$	45,321,863		$	42,599,718
Total assets	$	41,228,321		$	41,175,586
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	56,~~049~~190,~~541~~570		$	45,~~492~~534,~~664~~452
Accrued expenses		2,~~713~~458,~~339~~106			13,~~814~~051,~~628~~871
Accrued transportation expenses		9,~~953~~477,~~144~~386			98,~~214~~960,~~874~~734
Line of credit		4,~~747~~300,~~883~~681			74,~~572~~348,~~116~~649
Dividends payable		111,349			110,472
Deferred purchase price liability		207,840			757,840
Taxes payable		54,928			20,520
Dividends payable		-			109,916
Lease obligation-current portion		40,930			57,193
Taxes payable		855,144			154,321
Total current liabilities		22,671,114			23,282,467
Deferred tax liability		57,143			57,143
LEASE OBLIGATION--LONG-TERM		49,131			74,950
Lease obligation-current portion		133,171			87,122
Total liabilities	$	22,720,245		$	23,357,417
Total current liabilities		23,680,041			23,062,048
LEASE OBLIGATION--LONG-TERM		257,801			36,539
DEFERRED TAX LIABILITY - LONG TERM		285,713			341,372
Total liabilities	$	24,223,555		$	23,439,959
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS’ EQUITY:
Preferred stock, $10 par value; 2,500,000 shares authorized, 320,696 shares issued and outstanding		3,206,960			3,206,960
Preferred stock, $10 par value; 2,500,000 shares authorized,
Common stock, $.01 par value; 30,000,000 shares authorized, 16,562,229 and 16,562,229 shares issued and outstanding, respectively		165,622			165,622
122,946 and 319,946 shares issued and outstanding, respectively		1,229,460			3,199,460
Paid-in capital		26,285,765			26,285,765
Common stock, $.01 par value; 30,000,000 shares authorized,
Stock subscription note receivable		(40,000	)		(100,000	)
18,621,686 and 16,569,729 shares issued and outstanding, respectively		186,217			165,697
Accumulated deficit		(10,465,466	)		(11,095,373	)
Paid-in capital		28,288,463			26,293,190
Accumulated deficit		(7,961,027	)		(9,853,783	)
Less: Treasury stock, 734,951 shares held at cost		(644,805	)		(644,805	)
Total shareholders’ equity		1821,~~508~~098,~~076~~308			1719,~~818~~159,~~169~~759
Total liabilities and shareholders’ equity	$	4145,~~228,~~321,863		$	4142,~~175~~599,~~586~~718
The accompanying notes are an integral part of these consolidated financial statements.

-The accompanying 3notes -are an integral part of these consolidated financial statements.

-3-

TARGET LOGISTICS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

	Three months ended December 31,
	Three months ended March 31,
	2004			2003
	2006			2005
Operating revenues	$	37,~~223~~114,~~219~~144		$	3331,~~033~~394,~~922~~399
Cost of transportation		25,~~526~~393,~~615~~650			2221,~~092~~010,~~400~~858
Gross profit		11,~~696~~720,~~604~~494			10,~~941~~383,~~522~~541
Selling, general and administrative expenses (“SG&A”):
Exclusive Forwarder Commissions - Target subsidiary		43,~~335~~306,~~279~~961			43,~~820~~692,~~432~~913
SG&A - Target subsidiary		56,~~913~~807,~~876~~242			5,~~469~~840,~~440~~371
SG&A - Corporate		~~310~~333,~~122~~221			~~174~~269,~~426~~478
Depreciation and amortization		~~114~~165,~~624~~888			~~105~~109,~~844~~463
Selling, general and administrative expenses		10,~~673~~613,~~901~~312			109,~~570~~912,~~142~~225
Operating income		1,~~022~~107,~~703~~182			~~371~~471,~~380~~316
Other income (expense):
Other expense:
Interest expense		(1440,~~337~~611	)		(9210,~~332~~954	)
Income before income taxes		1,~~008~~066,~~366~~571			~~279~~460,~~048~~362
Provisions for income taxes		~~463~~456,~~125~~929			~~125~~195,~~146~~468
Net income	$	~~545~~609,~~241~~642		$	~~153~~264,~~902~~894
Income per share attributable to common shareholders:
Basic:	$	0.0304		$	-0.01
Diluted:	$	0.03		$	0.01
Weighted average shares outstanding:
Basic:		1516,~~827~~692,~~278~~679			1215,~~179~~834,~~002~~445
Diluted:		21,~~469~~490,~~959~~385			1921,~~717~~510,~~041~~082
The accompanying notes are an integral part of these consolidated financial statements.

-The accompanying 4notes -are an integral part of these consolidated financial statements

-4-

TARGET LOGISTICS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

	Six Months ended December 31,
	Nine months ended March 31,
	2004			2003
	2006			2005
Operating revenues	$	70119,~~259~~964,~~796~~069		$	61101,~~622~~654,~~078~~195
Cost of transportation		4882,~~213~~196,~~747~~489			4069,~~913~~224,~~134~~605
Gross profit		2237,~~046~~767,~~049~~580			2032,~~708~~429,~~944~~590
Selling, general and administrative expenses (“SG&A”):
Exclusive Forwarder Commissions - Target Subsidiary		812,~~270~~092,~~975~~788			811,~~571~~963,~~792~~888
SG&A - Target subsidiary		1120,~~468~~475,~~334~~522			1117,~~033~~308,~~577~~705
SG&A - Corporate		~~557~~997,~~912~~728			~~339~~827,~~439~~390
Depreciation and amortization		~~226~~446,~~189~~724			~~209~~335,~~985~~652
Selling, general and administrative expenses		2034,~~523~~012,~~410~~762			2030,~~154~~435,~~793~~635
Operating income		13,~~522~~754,~~639~~818			~~554~~1,~~151~~993,955
Other income (expense):
Other expense:
Interest expense		(52118,~~853~~519	)		(~~182~~63,~~416~~807	)
Income before income taxes		13,~~469~~636,~~786~~299			~~371~~1,~~735~~930,148
Provision for income taxes		~~678~~1,~~822~~573,265			~~169~~874,~~472~~290
Net income	$	~~790~~2,~~964~~063,034		$	~~202~~1,~~263~~055,858
Income per share attributable to common shareholders:
Basic:	$	0.0412		$	-0.05
Diluted:	$	0.0410		$	0.0105
Weighted average shares outstanding:
Basic:		1516,~~827~~203,~~278~~763			1215,~~179~~829,~~002~~632
Diluted:		21,~~470~~490,~~028~~361			1821,~~929~~489,~~966~~936

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

- 5 -

TARGET LOGISTICS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

FOR THE YEAR ENDED JUNE 30, ~~2004~~2005 AND THE

~~SIX~~ NINE MONTHS ENDED ~~DECEMBER~~MARCH 31, ~~2004~~2006 (UNAUDITED)

	Preferred Stock						Common Stock				Additional Paid in		Stock Subscription Note			Treasury Stock						Accumulated
	Shares			Amount			Shares		Amount		Capital		Receivable			Shares			Amount			Deficit			Total
Balance, June 30, 2003		320,696		$	3,206,960			12,913,953	$	129,139	$	24,202,248		-			(734,951	)		($644,805	)		($11,314,210	)	$	15,579,332
Balance, June 30, 2004		320,696		$	3,206,960			16,562,229	$	165,622	$	26,285,765	$	(100,000	)		(734,951	)	$	(644,805	)	$	(11,095,373	)	$	17,818,169
Cash dividends associated with the Class A, C and F Preferred Stock		-			-			-		-		-		-			-			-			(321,305	)		(321,305	)
Cash dividends associated with the Class C and F Preferred Stock		—			—			—		—		—		—			—			—			(319,548	)		(319,548	)
Common Stock issued in conjunction with a private placement		-			-			3,448,276		34,483		1,965,517		-			-			-			-			2,000,000
Common Stock issued in conjunction with the conversion of Class C Preferred Stock		(750	)		(7,500	)		7,500		75		7,425		—			—			—			—			—
Common Stock issued pursuant to Subscription Agreement		-			-			200,000		2,000		118,000		-			-			-			-			120,000
Stock subscription note receivable		—			—			—		—		—		100,000			—			—			—			100,000
Stock subscription note receivable		-			-			-		-		-		(100,000	)		-			-			-			(100,000	)
Net income		—			—			—		—		—		—			—			—			1,561,138			1,561,138
Net income		-			-			-		-		-		-			-			-			540,142			540,142
Balance, June 30, 2005		319,946		$	3,199,460			16,569,729	$	165,697	$	26,293,190		—			(734,951	)	$	(644,805	)	$	(9,853,783	)	$	19,159,759
Balance, June 30, 2004		320,696		$	3,206,960			16,562,229	$	165,622	$	26,285,765		(100,000	)		(734,951	)		($644,805	)		($11,095,373	)	$	17,818,169
Cash dividends associated with the Class C and F Preferred Stock		—			—			—		—		—		—			—			—			(170,278	)		(170,278	)
Cash dividends associated with the Class C Preferred Stock		-			-			-		-		-		-			-			-			(161,057	)		(161,057	)
Common Stock issued in conjunction with the conversion of Class C Preferred Stock		(197,000	)		(1,970,000	)		1,970,000		19,700		1,950,300		—			—			—			—			—
Stock subscription note receivable		-			-			-		-		-		60,000			-			-			-			60,000
Stock options exercised		—			—			81,957		820		37,015		—			—			—			—			37,835
Net income		-			-			-		-		-		-			-			-			790,964			790,964
Stock option expense		—			—			—		—		7,958		—			—			—			—			7,958
Balance, December 31, 2004 (unaudited)		320,696		$	3,206,960			16,562,229	$	165,622	$	26,285,765		(40,000	)		(734,951	)		($644,805	)		($10,465,466	)	$	18,508,076
Net income		—			—			—		—		—		—			—			—			2,063,034			2,063,034
Balance, March 31, 2006 (unaudited)		122,946		$	1,229,460			18,621,686	$	186,217	$	28,288,463		—			(734,951	)		($644,805	)		($7,961,027	)	$	21,098,308

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

- 6 -

TARGET LOGISTICS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	Six months Ended December 31,
	Nine months Ended March 31,
	2004			2003
	2006			2005
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	~~790~~2,~~964~~063,034		$	~~202~~1,~~263~~055,858
Bad debt expense		~~280~~264,~~895~~884			~~413~~316,~~300~~523
Depreciation and amortization		~~226~~446,~~189~~724			~~209~~335,~~985~~652
Decrease in deferred tax asset		632,213			139,472
Employee Stock option expense		7,958			—
Services performed pursuant to stock subscription agreement		60,000			-
Decrease in deferred tax asset		57,803			792,681
Decrease in deferred tax liability		(55,659	)		—
Services performed pursuant to stock subscription agreement		—			90,000
Adjustments to reconcile net income to net cash used in operating activities -
Decrease in accounts receivable		(698,277	)		(4,523,630	)
(Increase) decrease in accounts receivable		(1,973,863	)		2,522,681
Increase in prepaid expenses and other current assets		(340,053	)		(190,259	)
Decrease (increase) in prepaid expenses and other current assets		111,100			(125,612	)
Decrease in other assets		62193,~~282~~234			~~126~~80,~~496~~542
Decrease in accounts payable and accrued expenses		2,214,268			2,951,904
(Increase) in goodwill resulting from earn-out due under ACI acquisition		(111,594	)		—
Net cash provided by (used for) operating activities		3,228,481			(670,469	)
Increase (decrease) in accounts payable and accrued expenses		1,279,828			(1,130,922	)
Net cash provided by operating activities		2,283,449			3,937,403
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(371,~~369~~805,931	)		(~~109~~76,~~944~~237	)
Net cash used for investing activities		(37,369	)		(109,944	)
Payment for purchase of ACI, net of cash acquired (Note 8)		(550,000	)		(338,146	)
Net cash used for investing activities		(2,355,931	)		(414,383	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid		(~~160~~280,~~180~~194	)		(~~160~~271,~~114~~529	)
Borrowing from note payable to bank		66,297,968			55,963,909
Stock options exercised		37,835			—
Repayment of note payable to bank		(69,122,201	)		(56,061,930	)
Borrowing from note payable to bank		118,211,629			104,690,599
Proceeds from (payment of) lease obligations		(28,084	)		71,969
Repayment of note payable to bank		(118,259,597	)		(107,975,258	)
Net cash (used for) provided by financing activities:		(3,012,497	)		(186,166	)
Payment of lease obligations		(106,087	)		(42,508	)
Net increase (decrease) in cash and cash equivalents		178,615			(966,579	)
Net cash used for financing activities:		(396,414	)		(3,598,696	)
CASH AND CASH EQUIVALENTS, beginning of the period		5,896,878			3,999,045
Net decrease in cash and cash equivalents		(468,896	)		(75,676	)
CASH AND CASH EQUIVALENTS, end of the period	$	6,075,493		$	3,032,466
CASH AND CASH EQUIVALENTS, beginning of the period		6,525,577			5,896,878
CASH AND CASH EQUIVALENTS, end of the period	$	6,056,681		$	5,821,202
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash payments for:
Interest	$	~~101~~294,~~688~~213		$	~~197~~189,~~323~~844
Income Taxes	$	24869,~~439~~084		$	6930,~~225~~792

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

- 7 -

TARGET LOGISTICS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued

(unaudited)

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTMENT AND FINANCING ACTIVITIES:

	Nine months Ended March 31,
	2006			2005

Conversion of 197,000 and 750 Class C Preferred Shares, respectively		(1,970,000	)		(7,500	)

Issuance of Common Stock for Conversion of 197,000 and 750 Class C Preferred Shares, respectively		1,970,000			7,500

Purchase of property and equipment under capital lease obligations		373,398			—

-8-

TARGET LOGISTICS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 - Notes to Unaudited Consolidated Financial Statements

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q and Regulation S-X related to interim period financial statements and, therefore, do not include all information and footnotes required by generally accepted accounting principles. However, in the opinion of management, all adjustments (consisting of normal recurring adjustments and accruals) considered necessary for a fair presentation of the consolidated financial position of the Company and its subsidiaries at March ~~December~~ 31, ~~2004~~2006 and their consolidated results of operations and cash flows for the ~~six~~nine months ended ~~December~~March 31, ~~2004~~2006 have been included. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the entire year. Reference should be made to the annual financial statements, including footnotes thereto, included in the Target Logistics, Inc. (the “Company”) Form 10-K for the year ended June 30, ~~2004~~ 2005.

Note 2 - Use of Estimates

In the process of preparing our consolidated financial statements, management estimates the appropriate carrying value of certain assets and liabilities which are not readily apparent from other sources. Management bases its estimates on historical experience and on various assumptions which are believed to be reasonable under the circumstances. The primary estimates underlying our consolidated financial statements include allowance for doubtful accounts, accruals for transportation and other direct costs, accruals for cargo insurance, the determination of share based compensation expense, and the classification of ~~NOL~~net operating loss and tax credit carry forwards between current and long-term assets.

Note 3 - Goodwill

In July 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets”, which requires the use of a non-amortization approach to account for purchased goodwill and certain intangibles. We adopted this statement on July 1, 2002. Under the non-amortization approach, goodwill and certain intangibles are not amortized into results of operations, but instead are reviewed for impairment, written down and charged to results of operations only in periods in which the recorded value of goodwill and certain intangibles is more than its fair value. The last annual independent valuation analysis was completed in January ~~2005~~2006, and based on the valuation, we determined that the goodwill was not impaired.

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

The discounted cash flow analysis is dependent on the Company’s Target Logistic Services, Inc. (“Target”) subsidiary achieving certain future results. These include the following major assumptions: (a) Revenue growth of 1015.0% for fiscal ~~2005~~ 2006, 7.5% for fiscal ~~2006~~2007 thru ~~2007~~2008 and 4.5% for fiscal ~~2008~~2009 thru ~~2011~~2012; (b) Gross Profit percentage ~~increasing~~of ~~from~~ 32.04% in fiscal ~~2005 to 32.2% in fiscal~~ 2006, ~~to 32.4% in fiscal 2007~~ and thereafter; (c) Operating expenses (excluding forwarder commissions) reducing from 16.26% in fiscal ~~2005 and~~ 2006, to 16.13% in fiscal 2007, ~~2008~~to ~~and~~16.1% in fiscal 2008, 2009 and 2010, and to 16.0% in fiscal ~~2010~~2011 and ~~2011~~2012; and (d) a 16~~.00~~% discount rate. While management believes that these are achievable, any downward variation in these major assumptions or in any other portion of the discounted cash flow analysis could negatively impact the overall valuation analysis.

The Company performs an annual valuation analysis. Based on the results of these annual valuation analyses, our financial results could be impacted by impairment of goodwill, which could result in periodic write-downs ranging from zero to $11,~~239~~837,~~917~~417.

Note 4 - Per Share Data

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

- 8 9-

TARGET LOGISTICS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

There were outstanding options to purchase ~~706~~595,~~957~~000 and ~~596~~706,957 shares of common stock for the ~~six~~nine months ended ~~December~~March 31, ~~2004~~2006 and ~~2003~~2005, respectively. Options to purchase 9575,000 and ~~590~~75,000 were not included in the computation of diluted EPS for the ~~six~~nine months ended ~~December~~March 31, ~~2004~~2006 and ~~2003~~2005, respectively, because the exercise prices of those options were greater than the average market price of the common shares, and thus are anti-dilutive. The options were still outstanding at the end of the period.

Note 5 - ~~Stock-~~Share Based Compensation

~~The~~In December ~~Company~~2004, ~~accounts for its employee stock option plan in accordance with~~ the ~~provisions~~Financial of Accounting ~~Principles~~Standards Board (“~~APB~~FASB”) ~~Opinion~~issued SFAS No. 25 123R, “~~Accounting~~Share Based ~~for~~Payment: ~~Stock~~An ~~Issued~~Amendment toof ~~Employees”,~~FASB ~~and~~Statements ~~related interpretations~~No. ~~Compensation~~123 ~~expense~~and ~~relating~~95” (“SFAS 123R”). toThis ~~employee~~statement ~~stock~~requires ~~options~~that isthe ~~recorded~~cost ~~only~~resulting ~~if,~~from onall ~~the~~share ~~date~~based payment oftransactions ~~grant,~~be recognized in the ~~fair~~Company’s ~~value~~consolidated offinancial statements. In ~~the~~addition, ~~underlying~~in ~~stock~~March ~~exceeds~~2005 the ~~exercise~~Securities ~~price.~~and ~~The~~Exchange Commission ~~Company~~(“SEC”) ~~adopted~~released ~~the~~SEC ~~disclosure-only~~Staff ~~requirements~~Accounting ofBulletin ~~SFAS~~ No. ~~123~~107, “~~Accounting for Stock~~Share-Based ~~Compensation~~ Payment”, (“SAB 107”). ~~and~~SAB ~~SFAS~~107 ~~No.~~provides ~~148,~~the ~~“Accounting~~SEC ~~for~~staff’s ~~Stock-Based~~position ~~Compensation~~regarding -the ~~Transition~~application of SFAS 123R and ~~Disclosure”,~~certain ~~which~~SEC ~~allows~~rules ~~entities~~and toregulations, ~~continue~~and toalso ~~apply~~provides the ~~provisions~~staff’s views regarding the valuation of ~~APB~~share ~~Opinion~~based ~~No.~~payment 25arrangements for ~~transactions~~public companies. Generally, ~~with~~the ~~employees~~approach ~~and~~in ~~provide~~SFAS ~~pro~~123R ~~forma~~is ~~net~~similar ~~income~~to ~~and~~the ~~pro~~approach described ~~forma~~in ~~earnings~~SFAS ~~per~~123. However, SFAS 123R requires all share-based ~~disclosures~~payments to employees, ~~for~~including grants of employee stock options, asto ifbe recognized in the statement ~~fair~~of ~~value~~operations based ~~method~~on oftheir ~~accounting~~fair invalues. ~~SFAS~~Pro ~~No.~~forma ~~123~~disclosure ~~had~~of fair value ~~been~~recognition, ~~applied~~as toprescribed ~~these~~under ~~transactions.~~SFAS 123, is no longer an alternative.

Effective July 1, 2005, the Company adopted the fair value measurement provisions of SFAS 123R and accordingly has adopted the modified prospective application method. Under the provisions of FASB Statement No. 123(R) the compensation cost relating to share-based payment transactions (in the company’s case, the employee stock option plan) is to be recognized in the financial statements. For the nine months ending March 31, 2006, the Company has recognized as expense outstanding, unvested employee stock options over the remaining vesting period that remained on such options based on the fair value at the date the employee stock options were granted. Under the modified-prospective-transition method, results for the prior periods have not been restated.

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

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

	Six months ended
	Nine months ended
	12/31/04			12/31/03
	3/31/06			3/31/05
Net income as reported	$	~~790~~2,~~964~~063,034		$	~~202~~1,~~263~~055,858
Add: Total stock-based employee compensation expense included in the determination of net income, net of tax effect		-			-
Total stock-based employee compensation expense included in the determination of net income, net of tax effect (SFAS No. 123R)		7,958			—
Deduct: total stock-based employee compensation expense determined using a fair value based method for fixed plan awards, net of tax effect		(45,000	)		(9,738	)
Total stock-based employee compensation expense determined using a fair value based method for fixed plan awards, net of tax effect (SFAS No. 123)		—			(45,000	)
Pro forma net income	$	~~745,964~~N/A		$	~~192~~1,~~525~~010,858
Basic earnings per share	$	0.0412		$	0.0005
Pro forma basic earnings per share	$	~~0.04~~N/A		$	0.0005
Diluted earnings per share	$	0.0410		$	0.0105
Pro forma diluted earnings per share	$	~~0.03~~N/A		$	0.0105

~~The fair value of options was estimated at the grant date using a Black~~-Scholes option pricing model, which requires the input of subjective assumptions. Because the Company's common stock and stock options have characteristics significantly different from listed securities and traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, the existing models do not necessarily provide a reliable single measure of the fair value of stock options. There were 110,000 options granted during the six months ended December 31, 2004 and no options granted during the six months ended December 31, 2003. Weighted average assumptions used in the valuation model include risk-free interest rates of 4.29% and 4.05%; and expected stock price volatility of 270.47% and 477.00% in 2004 and 2003, respectively; and, dividend yields of 0.00%; and, expected lives of options of 10 ~~years in 2004 and 2003.~~-

See Note 8 for a recent accounting pronouncement which will impact the way the Company reports the information set forth above.

- 9 -

TARGET LOGISTICS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

The fair value of options was estimated at the grant date using a Black-Scholes option pricing model, which requires the input of subjective assumptions. No options were granted during the nine months ended March 31, 2006 and there were 110,000 options granted during the nine months ended March 31, 2005. Weighted average assumptions used in the valuation model include risk-free interest rates of 4.35% and 4.29%; and expected stock price volatility of 368.23% and 270.47% in 2006 and 2005, respectively; and, dividend yields of 0.00%; and, expected lives of options of 10 years in 2006 and 2005.

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

Note 6 - Stock Options

The following summarizes the Company’s stock option activity and related information:

	~~Shares~~	~~Range of Exercise Price~~Shares	~~Weighted average Exercise Price~~	Range of Exercise Price		Weighted average Exercise Price
Outstanding at June 30, 2004	596,957	$0.04 - 6.00	1.22
Outstanding at June 30, 2005			686,957	$	0.04 - 6.00	$	1.16
Granted	~~110,000~~	~~$0.75 - 0.75~~	~~0.75~~—		—		—
Exercised	-	-	-81,957	$	0.04 - 0.50	$	0.46
Forfeited	-	-	-
Forfeited (by terminated employee)			10,000	$	0.50	$	0.50
Cancelled	-	-	-—		—		—
Outstanding at December 31, 2004	706,957	$0.04 - 6.00	1.15
Outstanding at March 31, 2006			595,000	$	0.50 - 6.00	$	1.27
Exercisable at December 31, 2004	546,957	$0.04 - 6.00	1.28
Exercisable at March 31, 2006			586,000	$	0.50 - 6.00	$	1.28

There were 81,957 stock options exercised for $37,835 during the nine months ended March 31, 2006.

Note 7 - Reclassifications

Certain amounts in the ~~prior~~fiscal year’s 2005 consolidated financial statements ~~of income~~ have been reclassified to conform with the ~~2004~~fiscal ~~presentation.~~year ~~These~~2006 changes resulted from an internal reclassification of how the Target subsidiary allocates expenses arising from freight handled by one station on behalf of another station. These reclassifications are reflected primarily within the Company’s presentation ~~of selling, general and administrative expenses and had no impact on operating income or net income~~.

Note 8 - ~~Recent~~Stock Purchase ~~Accounting Pronouncements~~Acquisition

~~In December 2004~~On March 15, ~~the FASB issued SFAS No.123 (revised 2004)~~2005, ~~“Share-Based Payment”. This statement will provide investors and other users of financial statements with more complete and neutral financial information by requiring that~~ the ~~compensation~~Company ~~cost~~acquired ~~relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on~~ the ~~fair~~stock ~~value~~ of ~~the~~Air ~~equity~~Cargo orInternational liability instruments issued. This statement covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and ~~employee share~~ ~~purchase plans~~ Domestic, ~~and replaces FASB SFAS No~~Inc. ~~123,~~ (“~~Accounting for Stock-Based Compensation~~ACI”,) ~~and supersedes APB Opinion No. 25, “Accounting~~ for ~~Stock~~a ~~Issued~~combination toof ~~Employees”.~~(i) ~~Statement 123~~$1, ~~as originally issued in 1995~~000,000 ~~established~~cash aspayment ~~preferable~~on ~~a fair-value-based method~~ date of ~~accounting~~closing, ~~for~~(ii) ~~share-based~~cash payment ~~transactions~~based ~~with~~on ~~employees. However, that statement permitted entities~~ the ~~option~~ACI ofshareholder’s ~~continuing~~equity toafter winding ~~apply~~down the ~~guidance~~ACI inbalance ~~APB No. 25~~sheet, asand ~~long~~(iii) asan ~~the~~earn-out ~~footnotes~~structure tobased ~~financial~~on certain ~~statements~~future ~~disclosed~~gross ~~what~~profit ~~net~~achievement ~~income~~over ~~would have been had~~ the ~~preferable~~next ~~fair-value-based~~five ~~method been used~~years. ~~Public~~Any ~~entities~~payments from ~~(other~~the ~~than~~earn-out ~~those~~structure ~~filing as small business issuers)~~ will be ~~required~~considered toan ~~apply~~increase ~~SFAS~~to ~~No.~~the ~~123(R)~~purchase price in ~~as of~~ the ~~first interim or annual reporting~~ period ~~that~~such ~~begins~~amount ~~after~~is ~~June 15, 2005~~determinable. The Company has ~~evaluated~~no minimum commitment or obligation under the ~~impact~~earn-out ofor the ~~adoption~~wind down of ~~SFAS~~the Nobalance sheet. ~~123(R),~~The Company ~~and~~ does not ~~believe~~expect ~~the~~that ~~impact will be significant to~~ the ~~Company’s~~earn-out ~~overall~~payments ~~results~~will ofhave ~~operations~~a ormaterial ~~financial~~impact on ~~position~~its liquidity.

Note 9 - 10Segment -Information

The Company’s revenue includes both domestic and international freight movements. Domestic freight movements originate and terminate within the United States, and never leave the United States. International freight movements are either exports from the United States or imports to the United States. A reconciliation of the Company’s domestic and international segment revenues and gross profits for the three and nine months ended March 31, 2006 and 2005 is as follows:

-11-

TARGET LOGISTICS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

	Three Months Ended March 31,				Nine Months Ended March 31,
	2006		2005		2006		2005

Domestic revenue	$	25,031,494	$	20,964,477	$	80,496,150	$	66,484,839
International revenue		12,082,650		10,429,922		39,467,919		35,169,356
Total revenue	$	37,114,144	$	31,394,399	$	119,964,069	$	101,654,195

Domestic gross profit	$	9,374,868	$	8,230,811	$	30,338,105	$	25,729,487
International gross profit		2,345,626		2,152,730		7,429,475		6,700,103
Total gross profit	$	11,720,494	$	10,383,541	$	37,767,580	$	32,429,590

Note 10 - Recent Accounting Pronouncements

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

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

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

-12-

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

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

OVERVIEW

We generated operating revenues of $~~126~~138.14 million, $~~113~~126.41 million, and $93113.5 4 million, and had a net ~~profit~~profits of $01.56 million, $0.85 million, and ~~a net loss of~~ $0.9 8 million, for the fiscal years ended June 30, ~~2004~~2005, ~~2003~~2004 and ~~2002~~2003, respectively. Net ~~The~~income ~~results~~ for the ~~fiscal~~ year ended June 30, 2003 ~~include~~includes $1.4,447,699 ~~million~~in ~~of other income resulting from a~~ non-recurring reversal of accruals for expenses, accruals for contingencies, and accruals for accounts payable of previously closed and sold subsidiaries. We had earnings before interest, taxes, depreciation and amortization (EBITDA) of approximately $13,~~760~~454,~~000~~132, and $21,~~115~~760,~~000,~~276 and $~~340~~2,~~000~~114,530 for the fiscal years ended June 30, 2005, 2004, ~~2003,~~ and ~~2002~~2003 respectively. EBITDA is a non-GAAP measure of income and does not include the effects of interest and taxes, and excludes the “non-cash” effects of depreciation and amortization on current assets. Companies have some discretion as to which elements of depreciation and amortization are excluded in the EBITDA calculation. We exclude all depreciation charges related to property, plant and equipment, and all amortization charges, including amortization of goodwill, leasehold improvements and other intangible assets. While management considers EBITDA useful in analyzing the Company’s results, it is not intended to replace any presentation included in the Company’s consolidated financial statements.

For the nine ~~six~~ months ended ~~December~~March 31, ~~2004~~2006, the revenue of our Target subsidiary increased by 1418.0%, when compared to the prior year’s corresponding period. Target’s gross profit margin (i.e., gross operating revenues less cost of transportation expressed as a percentage of gross operating revenue) for the ~~six~~nine months ended ~~December~~March 31, ~~2004~~2006 decreased to 31.45% from 3331.69% for the ~~six~~nine months ended ~~December~~March 31, ~~2003~~2005. The decrease is primarily due to ~~increased~~decreased ~~international ocean import freight volume which historically reflects a lower~~ gross profit ~~margin~~margins ason aboth ~~percentage~~international ofand domestic ~~sales~~freight movements. ~~Management~~ Management continues to believe that we must focus on increasing revenues and must increase gross profit margin to increase profitability. Management intends to continue to work on growing revenue by increasing sales through expanding our sales force, increasing sales generated by the Company’s employed sales personnel, ~~sales~~and sales generated by exclusive forwarders, and by strategic acquisitions. Management also intends to continue to work on improving Target’s gross profit margins by reducing transportation costs.

RESULTS OF OPERATIONS

Three months ended ~~December~~March 31, ~~2004~~2006 and ~~2003~~2005

Operating Revenue. Operating revenue increased to $37.21 million for the three months ended ~~December~~March 31, ~~2004~~ 2006 from $3331.04 million for the three months ended ~~December~~March 31, ~~2003~~2005, a 1218.72% increase. The Company’s operating revenue consists of domestic freight revenue and international freight revenue. Domestic revenue increased by 219.74% to $2425,~~386~~031,~~422~~494 from $2320,~~747~~964,~~771~~477 for the three months ended ~~December~~March 31, ~~2003~~2005. ~~International~~This increase is due to the ACI Acquisition and internal sales growth. International revenue increased by 3815.28% to $12,~~836~~082,~~797~~650 for the three months ended ~~December~~ March 31, 2006 ~~2004~~ from $910,~~286~~429,~~151~~922 for the three months ended ~~December~~March 31, ~~2003~~2005, primarily due to increased international ~~ocean import~~ freight volume.

Cost of Transportation. Cost of transportation increased to 68.6% of operating revenue for the three months ended December 31, 2004 from 66.9% of operating revenue for the three months ended December 31, 2003. This increase was primarily due to increased international ocean import freight volume which historically reflects a higher cost of transportation, as a percentage of sales.-13-

-Cost of 11Transportation. -Cost of transportation increased to 68.4% of operating revenue for the three months ended March 31, 2006 from 66.9% of operating revenue for the three months ended March 31, 2005. This increase was primarily due to (i) an increase in international freight costs as a percentage of sales, and (ii) a higher than usual level of domestic premium services in the three months ending March 31, 2005 which was not repeated in the three months ended March 31, 2006.

Gross Profit Margin. As a result of the factors described above, gross profit margin for the three months ended ~~December~~March 31, ~~2004~~2006 decreased to 31.46% from 33.1% of operating revenue for the three months ended ~~December~~March 31, ~~2003~~2005, a 54.15% decrease.

Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased to 28.76% of operating revenue for the three months ended ~~December~~March 31, ~~2004~~2006 from 3231.06% of operating revenue for the three months ended ~~December~~March 31, ~~2003~~2005. Within our Target subsidiary, selling, general and administration expenses (excluding exclusive forwarder commission ~~expense~~expenses) were 1518.93% of operating revenue for the three months ended March ~~December~~ 31, ~~2004~~2006 and 1618.6% for the three months ended ~~December~~March 31, ~~2003~~2005, a 41.26% decrease. Exclusive forwarder commission ~~expense~~expenses ~~was~~(which 11are primarily commissions to our agents and earn-out expenses from our acquisitions) were 8.69% and 1411.68% of operating revenue for the three months ended ~~December~~March 31, ~~2004~~2006 and ~~2003~~ 2005, respectively, a 20 24.56% decrease resulting from a reduction in forwarder agent freight volume as a percentage of Target’s overall freight volume and a reduction in forwarder agent gross profit margin.

~~Net~~Effective Tax ~~Profit~~Rate. ~~For~~The effective income tax rate for the three months ended ~~December~~March 31, ~~2004,~~2006 wewas ~~realized~~42.8% compared ato ~~net~~42.5% ~~profit~~for ofthe ~~$545~~three months ended March 31,~~241,~~ ~~compared~~2005. The change in the effective tax rate is due to achanges ~~net~~in ~~profit~~the components of ~~$153,902~~the ~~for~~deferred ~~the~~income tax ~~three~~provision ~~months~~when ~~ended~~compared ~~December~~to ~~31,~~the ~~2003.~~prior year.

~~Six~~Net Profit. ~~Months~~For the three months ended ~~December~~March 31, ~~2004~~2006, ~~and~~we ~~2003~~realized a net profit of $609,642, compared to a net profit of $264,894 for the three months ended March 31, 2005, a 130.2% increase.

~~Operating Revenue. Operating revenue increased to $70.3 million for the six~~ Nine months ended ~~December~~March 31, ~~2004~~2006 ~~from $61.6 million for the six months ended December 31, 2003, a 14.0% increase. The Company’s operating revenue consists of domestic freight revenue~~ and international freight revenue. Domestic revenue increased by 1.4% to $45,520,362 for the six months ended December 31, 2004 from $44,880,499 for the corresponding 2003 period. International revenue increased by 47.8% to $24,739,434 for the six months ended December 31, 2004 from $16,741,579 for the 2003 period, mainly due to increased international ocean import freight volume.2005

~~Cost~~Operating Revenue. ofOperating revenue ~~Transportation~~increased to $120.0 million for ~~Cost~~the ofnine ~~transportation~~months ~~increased~~ended toMarch ~~68.6%~~31, of2006 ~~operating~~from ~~revenue~~$101.7 million for the ~~six~~nine ~~month period~~ months ended ~~December~~March 31, ~~2004~~2005, ~~from~~a 6618.40% ofincrease. The Company’s operating revenue consists of domestic freight revenue and international freight revenue. Domestic revenue increased by 21.1% to $80,496,150 for the ~~six~~nine ~~month~~months ~~period~~ended March 31, 2006 from $66,484,839 for the nine months ended ~~December~~March 31, ~~2003~~2005. This increase ~~was~~is ~~primarily~~ due to the ACI Acquisition and internal sales growth. International revenue increased by ~~international~~12.2% ~~ocean~~to ~~import~~$39,467,919 ~~freight~~for ~~volume~~the ~~which~~nine ~~historically~~months ~~reflects~~ended aMarch ~~higher~~31, ~~cost~~2006 offrom $35,169,356 ~~transportation~~for asthe anine ~~percentage~~months ofended ~~sales~~March 31, 2005, primarily due to increased international freight volume.

~~Gross~~Cost of ~~Profit~~Transportation. AsCost of transportation aincreased ~~result~~to 68.5% of operating revenue for the ~~factors~~nine ~~described~~month ~~above~~period ended March 31, ~~gross~~2006, ~~profit~~from ~~margin~~68.1% of operating revenue for the ~~six~~nine month period ended ~~December~~March 31, ~~2004~~2005. ~~decreased~~This toincrease ~~31.4%~~was ~~from~~primarily ~~33.6%~~due to the movement of ~~operating~~more domestic ~~revenue~~premium ~~for~~services in the ~~corresponding~~nine ~~2003~~months ~~period~~ending March 31, a2005 ~~6.8%~~than ~~decrease.~~in the nine months ended March 31, 2006.

~~Selling, General and Administrative Expenses~~Gross Profit. As ~~Selling,~~a result ~~general and administrative expenses decreased to 29.2%~~ of ~~operating revenue for~~ the ~~six~~factors ~~months~~described ~~ended December 31~~above, ~~2004~~gross ~~from~~profit ~~32.7%~~margin ~~of operating revenue~~ for the ~~corresponding~~nine ~~2003~~ month period. ~~Within the Company’s Target subsidiary, selling, general and administration expenses (excluding exclusive forwarder commission expense) were 16.3% of operating revenue for the six months~~ ended ~~December~~March 31, ~~2004~~2006 ~~and~~decreased ~~17.9%~~to ~~for the six months ended December~~ 31~~, 2003, a 8~~.95% ~~decrease.~~from ~~Exclusive forwarder commission expense was 11~~31.~~8% and 13.~~9% of operating revenue for the ~~six~~corresponding ~~months~~2005 ~~ended December 31~~period, ~~2004 and 2003, respectively,~~ a 151.03% ~~decrease~~ ~~resulting from a reduction in forwarder agent gross profit margin~~decrease.

~~Net~~Selling, General ~~Profit~~and Administrative Expenses. Selling, ~~For~~general and administrative expenses decreased to 28.4% of operating revenue for the ~~six~~nine months ended ~~December~~March 31, ~~2004,~~2006 from 29.9% of operating revenue for the ~~Company~~three ~~realized~~months aended ~~net~~March ~~profit~~31, 2005. Within our Target subsidiary, selling, general and administration expenses (excluding exclusive forwarder commission expenses) were 17.1% of ~~$790~~operating revenue for the nine months ended March 31,~~964~~ 2006 and 17.0% for the nine months ended March 31, ~~compared~~2005, a 0.6% increase. Exclusive forwarder commission expenses (which are primarily commissions to aour ~~net~~agents ~~profit~~and earn-out expenses from our acquisitions) were 10.1% and 11.8% of ~~$202,263~~operating revenue for the ~~six~~nine months ended ~~December~~March 31, ~~2003~~2006 and 2005, respectively, a 14.4% decrease resulting from a reduction in forwarder agent freight volume.

Effective Tax Rate. The effective income tax rate for the nine months ended March 31, 2006 was 43.3% compared to 45.3% for the nine months ended March 31, 2005. The change in the effective tax rate is due to changes in the components of the deferred income tax provision when compared to the prior year.

Net Profit. For the nine months ended March 31, 2006, the Company realized a net profit of $2,063,034, compared to a net profit of $1,055,858 for the nine months ended March 31, 2005, a 95.4% increase.

-14-

LIQUIDITY AND CAPITAL RESOURCES

General. During the ~~six~~nine months ended ~~December~~March 31, ~~2004~~2006, net cash provided by operating activities was $32,~~228~~283,~~481~~449. Cash used for investing activities was $372,~~369~~355,931 representing capital expenditures. ~~Cash~~and payments made pursuant to the terms of the ACI Acquisition. Cash used for financing activities was $3396,~~012~~414,~~497,~~ which ~~primarily~~ consisted of ~~repayments~~dividends and payments under ~~our~~lease ~~line of credit~~obligations.

Capital expenditures. Capital expenditures for the ~~six~~nine months ended ~~December~~March 31, ~~2004~~2006 were $372,~~369~~355,931, representing (i) capital expenditures of $1,805,931 primarily for property, equipment, and leasehold improvements at the Target subsidiary’s new Los Angeles headquarters and terminal facility, and (ii) a $550,000 deferred payment made pursuant to the terms of the ACI Acquisition.

GMAC Facility. On ~~The~~May 3, 2004, the Company’s Target subsidiary ~~maintains~~amended aits January 1997 $1315 million revolving credit facility (“GMAC Facility”) with GMAC Commercial Finance LLC (“GMAC”), guaranteed by the Company, and extended the GMAC Facility for a three-year term ending March 31, 2007. Under the terms of the GMAC Facility, Target can borrow (i) the lesser of $13 million or 85% of eligible accounts receivable for the period beginning May 3, 2004 through ~~March~~December 31, 2005, and (ii) the lesser of $15 million or 85% of eligible accounts receivable for the period beginning April 1, 2005 through March 31, 2007. The interest rate of the facility, which can be adjusted quarterly, is either (i) prime plus three-quarters of one percent (0.75%), or (ii) upon the achievement of certain financial milestones (measured quarterly), prime plus one-half of one percent (0.50%). For the period November 1, 2004 through December 31, 2004, interest was at a rate of prime plus 0.50%, and for the period May 3, 2004 through October 31, 2004, interest was at the rate of prime plus 0.75%. Prior to May 3, 2004, the interest rate of the GMAC Facility was prime plus 1%, however, at any time prior to September 20, 2002, the interest rate could not be less than 6.0%, and from September 20, 2002 through May 2, 2004 could not be less than 5.0%. The borrowings under the GMAC Facility are secured by a first lien on all of the Company’s and its subsidiaries’ assets. As of ~~December~~March 31, ~~2004~~2006, there were outstanding borrowings of $4,~~747~~300,~~883~~681 under the GMAC Facility (which represented 3631.5% of the amount available thereunder) out of a total amount available for borrowing under the GMAC Facility of approximately $13,~~000~~655,~~000~~105. We entered into the GMAC Facility on January 16, 1997, and subsequently extended the facility for an additional three-year term and on September 20, 2002 for an additional two-year term. On May 3, 2004, the GMAC Facility was extended for an additional three-year term ending March 31, 2007.

Stock Purchase Acquisition. On March 15, 2005, the Company acquired the stock of Air Cargo International and Domestic, Inc. for a combination of cash, a deferred payment based on the ACI shareholder’s equity after winding down the ACI balance sheet, and an earn-out structure 12based on future gross profit achievement over the next five years. The Company has no minimum commitment or obligation under the earn-out or the wind down of the balance sheet. The Company does not expect that the earn-out payments will have a material impact on its liquidity.

Working Capital Requirements. The Company’s and Target’s cash needs are currently met by the GMAC Facility and cash on hand. As of ~~December~~March 31, ~~2004~~2006, the Company had $89,~~252~~354,~~117~~424 available under its $1315 million GMAC Facility and $6,~~075~~056,~~493~~681 in cash from operations, cash on hand, and cash onbalances ~~hand~~associated with the stock purchase acquisition. We believe that our current financial resources will be sufficient to finance our operations and obligations (current and long-term liabilities) for the long and short terms. However, our actual working capital needs for the long and short terms will depend upon numerous factors, including our operating results, the cost of increasing the Company’s sales and marketing activities, competition, and the availability of a revolving credit facility, none of which can be predicted with certainty.

Critical Accounting Policies and Estimates

Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Since future events and their effects cannot be determined with absolute certainty, the determination of estimates requires the exercise of judgment. Actual results could differ from those estimates, and such difference may be material to the financial statements. The most significant accounting estimates inherent in the preparation of our financial statements include estimates as to the appropriate carrying value of certain assets and liabilities which are not readily apparent from other sources, primarily allowance for doubtful accounts, accruals for transportation and other direct costs, accruals for cargo insurance, ~~and~~the determination of share based compensation expense, and the classification of net operating loss and tax credit carryforwards between current and long-term assets. Management bases its estimates on historical experience and on various assumptions which are believed to be reasonable under the circumstances. We reevaluate these significant factors as facts and circumstances change. Historically, actual results have not differed significantly from our estimates. These accounting policies are described at relevant sections in this discussion and analysis and in the notes to the consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended June 30, ~~2004~~2005.

Our balance sheet includes an asset in the amount of $11,239,917 for purchased goodwill. In accordance with accounting pronouncements, the amount of this asset must be reviewed annually for impairment, written down and charged to results of operations in the period(s) in which the recorded value of goodwill is more than its fair value. The last independent annual valuation analysis was completed in January 2005, and based on the valuation, we determined that the goodwill was not impaired. Had the determination been made that the goodwill asset was impaired, the value of this asset would have been reduced by an amount ranging from zero to $11,239,917, and our financial statements would reflect the reduction. For additional description, please refer to Note 3 to the Company’s Notes to the unaudited Consolidated Financial Statements contained in this Quarterly Report. -15-

Our balance sheet includes an asset in the amount of $11,837,417 for purchased goodwill. In accordance with accounting pronouncements, the amount of this asset must be reviewed annually for impairment, written down and charged to results of operations in the period(s) in which the recorded value of goodwill is more than its fair value. The last independent annual valuation analysis was completed in January 2005, and based on the valuation, we determined that the goodwill was not impaired. Had the determination been made that the goodwill asset was impaired, the value of this asset would have been reduced by an amount ranging from zero to $11,837,417, and our financial statements would reflect the reduction. For additional description, please refer to Note 3 to the Company’s Notes to the unaudited Consolidated Financial Statements contained in this Quarterly Report.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Not applicable.

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ITEM 4. CONTROLS AND PROCEDURES

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

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PART II - OTHER INFORMATION

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

On November 30, 2004, the Company held its Annual Meeting of Shareholders. The only matter submitted to the shareholders for a vote was the election of directors.

The nominees submitted for election as directors were Michael Barsa, Stephen J. Clearman, Christopher A. Coppersmith, Brian K. Coventry, Philip J. Dubato and Stuart Hettleman. At least 15,043,702 shares of Common Stock and 122,946 shares of Class F Preferred Stock were voted in favor of each nominee, and no more than 251,400 shares of Common Stock were voted to withhold approval of any director. As a result, Messrs, Barsa, Clearman, Coppersmith, Coventry, Dubato and Hettleman were elected to serve as directors until the next annual meeting of shareholders of the Company and until their successors are duly elected and qualified.

ITEM 6. EXHIBITS

Exhibit No.

3.1

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

3.2

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

4.1

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

4.2

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

10.1

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

10.2 ~~Restated~~2005 ~~and~~Stock ~~Amended~~Option ~~Accounts~~Plan Receivable Management and Security Agreement, dated as of July 13, 1998 by and between GMAC Commercial Credit LLC, as Lender, and Target Logistic Services, Inc., as Borrower, and guaranteed by the Registrant (~~“GMAC Facility Agreement”) (~~incorporated by reference to Exhibit 10.2 to the Registrant’s ~~Annual~~Quarterly Report on Form 10-KQ for the ~~Fiscal~~Quarter ~~Year~~ Ended ~~June~~December 3031, ~~1999~~2005, File No. 0-29754)

10.3 ~~Letter~~Restated ~~amendment~~and toAmended ~~GMAC~~Accounts ~~Facility~~Receivable Management and Security Agreement, dated ~~January~~as 25of July 13, ~~2001~~1998 by and between GMAC Commercial Credit LLC, as Lender, and Target Logistic Services, Inc., as Borrower, and guaranteed by the Registrant (“GMAC Facility Agreement”) (incorporated by reference to Exhibit 10.32 to the Registrant’s ~~Quarterly~~Annual Report on Form 10-QK for the ~~Quarter~~Fiscal Year Ended ~~December~~June 3130, ~~2000~~1999, File No. 0-29754)

10.4 ~~Amendment~~Letter amendment to GMAC Facility Agreement, dated ~~September~~January 2025, ~~2002~~2001 (incorporated by reference to Exhibit 10.43 to the Registrant’s ~~Annual~~Quarterly Report on Form 10-KQ for the ~~Fiscal~~Quarter ~~Year~~ Ended ~~June~~December 3031, ~~2002~~2000, File No. 0-29754)

10.5 Amendment to GMAC Facility Agreement, dated ~~February~~September 1220, ~~2003~~2002 (incorporated by reference to Exhibit 10.4 to the Registrant’s ~~Quarterly~~Annual Report on Form 10-QK for the ~~Quarter~~Fiscal Year Ended ~~March~~June 3130, ~~2003~~2002, File No. 0-29754)

10.6 Amendment to GMAC Facility Agreement, dated ~~May~~February 312, ~~2004~~2003 (incorporated by reference to Exhibit 10.64 to the Registrant’s Quarterly Report on Form 10-Q for the Quarter Ended March 31, ~~2004~~2003, File No. 0-29754)

10.7 ~~(P)~~Amendment ~~Lease~~to GMAC Facility Agreement, ~~for~~dated ~~Los~~May ~~Angeles~~3, ~~Facility~~2004 (incorporated by reference to Exhibit 10.176 to the Registrant’s ~~Annual~~Quarterly Report on Form 10-KQ for the ~~Year~~Quarter Ended ~~June~~March 3031, ~~1997~~2004, File No. 0-29754)

10.8 ~~Amendment to~~ Lease Agreement for new Los Angeles Facility (incorporated by reference to Exhibit 10.9 to the Registrant’s ~~Annual~~Quarterly Report on Form 10-KQ for the ~~Year~~Quarter Ended ~~June~~March 3031, ~~2002~~2005, File No. 0-29754)

31.1

Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer

31.2

Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer

32.1

Section 1350 Certifications

99.1 Press Release dated ~~January~~May 253, ~~2005~~2006

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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.

Dated: January 26, 2005	TARGET LOGISTICS, INC. Registrant
Dated: May 3, 2006
	By:	/s/ Stuart Hettleman
	TARGET LOGISTICS, INC. Registrant
		/s/ Stuart Hettleman
		President, Chief Executive Officer
		/s/ Philip J. Dubato
		Vice President, Chief Financial Officer

-/s/ 16Philip -J. Dubato Vice President, Chief Financial Officer

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